For Private Circulation Only

KCES’s
Institute of Management & Research,
Jalgaon.

STUDY NOTES
M B A SEM-III
Strategic Management
301

! Now Success is in yours Hands…..

Compiled By
Prof. Anilkumar Marthi

Institute disowns any responsibility for copy right infringement.

Notes not for sale. Only for private use.

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 North Maharashtra University, Jalgaon
(NAAC Reaccredited ‘A’ Grade University)
FACULTY OF COMMERCE & MANAGEMENT
Syllabus: M.B.A. w.e.f. AY 2018-19
SEMESTER: III
Paper: 301: Strategic Management
60 + 40 Pattern: External Marks 60 +Internal Marks 40 = Maximum Total Marks: 100
Required Lectures: 60
Objectives:

1. Strategic Management and Strategic Intent (8)

1.1. Introduction to Strategic Management- Evolution, Concept, Phases & Benefits of Strategic
Management.
1.2. Nature, Characteristics of Strategic Intent - Formulation of -Vision, Mission, Goals & Objectives,
1.3. Levels of Strategic Management.
2. Strategy Formulation
2.1. Environmental & Organizational Appraisal (8)
2.1.1. Concept, Reducing Carbon Emission, Environment appraisal
2.1.2. SWOT and PESTLE Analysis
2.1.3. Environmental Scanning-Competitive intelligence
2.1.4. Organisational appraisal - Capability factors, Value chain analysis (Industry & Corporate)
2.2. Corporate & Business Level Strategies (8)
2.2.1. Types- Expansion, Stability, Retrenchment and combination, Integration Diversification Strategies
2.2.2. Porter’s Generic Business Strategies
2.2.3. Strategies for Different Industry conditions (Industry Life Cycle Analysis)
3. Strategic Analysis and Choice (10)
3.1. Selecting the best Strategy, Process of Strategic Choice
3.2. Strategic Analysis- Corporate Portfolio Analysis- BCG Product Portfolio and GE Nine Matrix Cell,
Competitor Analysis
3.3. Industry Analysis- Porter five forces analysis
4. Strategy Implementation (10)
4.1. Procedural Implementation & Resource Allocation
4.2. Behavioural Implementation-Strategic Leadership.
4.3. Structural Implementation - Interrelationship of Structure and Strategy, Structures for Business and
Corporate Strategies
4.4. Functional Implementation.
5. Strategy Evaluation and Control (6)
5.1. Strategic Evaluation- Nature, Importance and Barriers
5.2. Strategic Control and Operational Controls.
5.3. Techniques of Strategic Evaluation and Control
6. Case Studies: (10)

Comprehensive Cases on various strategic situations and at least 10 cases based on application of
strategic management must be discussed & solved.

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REFERENCE BOOKS
1. Strategic Management and Business Policy-Azar Kazmi, The McGraw Hill
2. Strategic Management 4 e - Burgelman McGraw Hill
3. Strategic Management - Dess, Kim - McGraw Hill
4. Business Policy and Strategic Management : Concepts and Applications‐ Vipin Gupta, Kamala
Gollakota, R. Srinivasan -Prentice Hall India
5. Concepts in Strategic Management and Business Policy- Thomas L. Wheelen, J. David Hunger,
Wheelen Thomas L.- Pearson
6. Strategic Management‐ P.Subba Rao – Himalaya Publishing House.
7. Strategic Management–Kachru‐ McGraw Hill
8. Business Policy and Strategic Management: Text and Cases- Francis Cherunilam- Himalaya Publishing
House.
9. Strategic Management‐ Garth Saloner, Andrea Shepard, Joel Podolny– Willey India
10. Strategic Management – B Hiriyappa – New Age International
11. Strategic Management: Concepts: Competitiveness and Globalization- Michael Hitt, R. Duane
Ireland, Robert Hoskisson- Cengage Learning
12. Strategic Management- A dynamic perspective- Mason Carpentor, Wm Gerard Sanders, Prashant
Salwan - Pearson

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 301 Strategic Management
Unit -1- Notes

1. Strategic Management and Establishment of Strategic Intent (6)

1.1 Introduction to Strategic Management- Evolution, Concept, Decision Making Process, Schools of
thoughts, Definition, Process, Model to Strategic Management
1.2 Levels of Strategic Management,
1.3 Strategic Intent-Concept of stretch, Leverage and Fit, Strategies Vs Tactics
1.4 Nature, Characteristics, Formulations of -Vision, Mission, and Goals & Objectives, Balance Score
Card

-----------------

1.1 Evolution of Strategic Management:

In late 500, Sun Tzu authored a book called The Art of War, which contains 13 chapters that
focus on military strategies and tactics. According to Sun Tzu, the positioning of an army was
important and while doing so one should take into account the physical environment and
subjective beliefs of one's opponents on the field. He emphasized the importance of responding
quickly to the environment in order to appropriately meet changing conditions. In a static
environment, planning works successfully, but in a dynamic and changing environment plans
rarely work.

Strategic management slowly blossomed into a distinct and important discipline over a five-
decade period. During the 1950s it was in the embryonic stage, where the focus of the top
management team was on budgetary planning and controls and key concepts revolved around
financial control. To achieve control over the budgeting, management made use of accounting
tools such as capital budgeting and financial planning. At this time companies achieved
competitive advantage through coordination and control of budgetary systems. During the 1960s
through 1970s, management teams started focusing on corporate planning. Most companies
initiated corporate planning departments to plan for growth and diversification and used
forecasting as the primary tool to visualize growth.

Companies embarking on growth attempted to seek opportunities for diversification. By the

1970s, strategic management started evolving on a more serious note, extending beyond the
budgetary planning and control, and corporate planning, to include positioning companies in
relation to competitors. Corporations tried to jockey for power and focused on selecting
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particular market segments and positioning for leadership. During this period, companies
analyzed industry to determine attractiveness in terms of entry barriers, available suppliers, and
potential buyers.

Companies attempted to diversify and expand through entry into the global arena during this
period. To align structure with strategy, companies started slowly moving toward hybrid and
matrix structures. By the late 1980s through 1990s, the growth of strategic management as a
separate discipline started taking its own shape. This can be seen in terms of companies
attempting to secure competitive advantage. The key concepts of the companies concerned the
sources of sustained competitive advantage (i.e., ways and means of gaining success over
potential rivals)

Decision making process:

Decision making is the process of making choices by identifying a decision, gathering

information, and assessing alternative resolutions.

Using a step-by-step decision-making process can help you make more deliberate, thoughtful
decisions by organizing relevant information and defining alternatives. This approach increases
the chances that you will choose the most satisfying alternative possible.

Step 1: Identify the decision

You realize that you need to make a decision. Try to clearly define the nature of the decision you
must make. This first step is very important.

Step 2: Gather relevant information

Collect some pertinent information before you make your decision: what information is needed,
the best sources of information, and how to get it. This step involves both internal and external
“work.” Some information is internal: you’ll seek it through a process of self-assessment. Other
information is external: you’ll find it online, in books, from other people, and from other sources.

Step 3: Identify the alternatives

As you collect information, you will probably identify several possible paths of action, or
alternatives. You can also use your imagination and additional information to construct new
alternatives. In this step, you will list all possible and desirable alternatives.

Step 4: Weigh the evidence

Draw on your information and emotions to imagine what it would be like if you carried out each
of the alternatives to the end. Evaluate whether the need identified in Step 1 would be met or
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resolved through the use of each alternative. As you go through this difficult internal process,
you’ll begin to favor certain alternatives: those that seem to have a higher potential for reaching
your goal. Finally, place the alternatives in a priority order, based upon your own value system.

Step 5: Choose among alternatives

Once you have weighed all the evidence, you are ready to select the alternative that seems to be
best one for you. You may even choose a combination of alternatives. Your choice in Step 5 may
very likely be the same or similar to the alternative you placed at the top of your list at the end of
Step 4.

Step 6: Take action

You’re now ready to take some positive action by beginning to implement the alternative you
chose in Step 5.

Step 7: Review your decision & its consequences

In this final step, consider the results of your decision and evaluate whether or not it has resolved
the need you identified in Step 1. If the decision has not met the identified need, you may want to
repeat certain steps of the process to make a new decision. For example, you might want to
gather more detailed or somewhat different information or explore additional alternatives.

Different Strategic Management Models

Strategic management models help identify and achieve company objectives. Incorporate a
strategic management model utilizing a four-step process of environmental scanning, strategy
formulation, strategy implementation and strategy evaluation. Companies generally select a
strategic management model and modify it to best accommodate the organization. Likewise,
some companies also use a unique combination of multiple strategic management models to
yield an appropriate model fitting its needs.

Goal-based

Determine your company’s mission statement by articulating the basic reasons your company
exists. Identify your vision statement, meaning what and where you want your company to be in
the future. Select goals that will effectively meet those mission and vision statements. Decide
strategies for achieving each goal and action plans to realize those strategies. Assemble mission,
vision, goals, strategies and action plans into a strategic management model to implement.
Monitor and evaluate proper implementation.

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Issues-based

For companies with several major issues, such as those that have limited resources or those that
have had past failures with strategic management, an issues-based model can be ideal. Initially,
this calls for documentation of the major issues facing the company. Determine strategies to
address and correct each issue and any reasonable approaches to take. Compile these into a
strategic management model for enactment. Lastly, monitor implementation and follow-up with
alterations as needed.

Alignment

Use an alignment model to evaluate, assess and correct trouble areas in efficiency or different
internal competence complications. It is utilized to successfully align the company’s resources
and organizational objectives for effective operations. Determine the organization’s mission,
resources, objectives and programs. Identify areas that are successful and those that may need
modifications. Decide what and how to make these adjustments and assemble these actions into a
strategic management model.

Self-organizing or Organic

This model focuses less on methodology and strategy, and more on learning. It is based on a
holistic view of the organization as an organism, rather than a machine. It often includes
considerable dialogue and storyboarding practices. Begin with identifying and assessing the
organizational culture and vision. Compile these into a strategic management model for your
organization. Periodically review and evaluate methods for achieving vision statement.

Scenario

Employ this method to identify and apply proactive strategies for environmental or other external
changes that affect your company. Determine external factors that could require company
objective alterations, such as legislative or regulatory enactments or client demographic
variations. Define three strategies to apply for each change. For example, range strategies to
meet best case to worse case scenarios of each external influence. Isolate action plans to
accomplish each strategy that best responds to the most probable external changes.

1.2 Levels of strategy:

Strategy may operate at different levels of an organization – corporate level, business level, and
functional level. The strategy changes based on the levels of strategy.

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Corporate Level Strategy

Corporate level strategy occupies the highest level of strategic decision making and covers
actions dealing with the objective of the firm, acquisition and allocation of resources and
coordination of strategies of various SBUs for optimal performance.

Top management of the organization makes such decisions. The nature of strategic decisions
tends to be value-oriented, conceptual and less concrete than decisions at the business or
functional level.

Business-Level Strategy.

Business level strategy is – applicable in those organizations, which have different businesses-
and each business is treated as strategic business unit (SBU). The fundamental concept in SBU is
to identify the discrete independent product / market segments served by an organization.

Since each product/market segment has a distinct environment, a SBU is created for each such
segment. For example, Reliance Industries Limited operates in textile fabrics, yarns, fibers, and a
variety of petrochemical products. For each product group, the nature of market in terms of
customers, competition, and marketing channel differs.

Therefore, it requires different strategies for its different product groups. Thus, where SBU
concept is applied, each SBU sets its own strategies to make the best use of its resources (its
strategic advantages) given the environment it faces. At such a level, strategy is a comprehensive
plan providing objectives for SBUs, allocation of resources among functional areas and
coordination between them for making optimal contribution to the achievement of corporate-
level objectives.

Such strategies operate within the overall strategies of the organization. The corporate strategy
sets the long-term objectives of the firm and the broad constraints and policies within which a
SBU operates. The corporate level will help the SBU define its scope of operations and also limit
or enhance the SBUs operations by the resources the corporate level assigns to it. There is a
difference between corporate-level and business-level strategies.

Functional-Level Strategy.

Functional strategy, as is suggested by the title, relates to a single functional operation and the
activities involved therein. Decisions at this level within the organization are often described as
tactical. Such decisions are guided and constrained by some overall strategic considerations.

Functional strategy deals with relatively restricted plan providing objectives for specific
function, allocation of resources among different operations within that functional area and

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coordination between them for optimal contribution to the achievement of the SBU and
corporate-level objectives.

Below the functional-level strategy, there may be operations level strategies as each function
may be divided into several sub functions. For example, marketing strategy, a functional
strategy, can be subdivided into promotion, sales, distribution, pricing strategies with each sub
function strategy contributing to functional strategy.

1.3. Strategic intent Concept of stretch, Leverage and Fit, Strategies Vs Tactics

Strategic Intent

Definition: Strategic Intent can be understood as the philosophical base of strategic management
process. It implies the purpose, which an organization endeavor of achieving. It is a statement,
that provides a perspective of the means, which will lead the organization, reach the vision in the
long run.

Strategic intent gives an idea of what the organization desires to attain in future. It answers the
question what the organization strives or stands for? It indicates the long-term market position,
which the organization desires to create or occupy and the opportunity for exploring new
possibilities.

Strategic Intent Hierarchy

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Strategic Intent Hierarchy

1. Vision: Vision implies the blueprint of the company’s future position. It describes where
the organization wants to land. It is the dream of the business and an inspiration, base for
the planning process. It depicts the company’s aspirations for the business and provides a
peep of what the organization would like to become in future. Every single component of
the organization is required to follow its vision.
2. Mission: Mission delineates the firm’s business, its goals and ways to reach the goals. It
explains the reason for the existence of business. It is designed to help potential
shareholders and investors understand the purpose of the company. A mission statement
helps to identify, ‘what business the company undertakes.’ It defines the present
capabilities, activities, customer focus and business makeup.
3. Business Definition: It seeks to explain the business undertaken by the firm, with respect
to the customer needs, target audience, and alternative technologies. With the help of
business definition, one can ascertain the strategic business choices. The corporate
restructuring also depends upon the business definition.
4. Business Model: Business model, as the name implies is a strategy for the effective
operation of the business, ascertaining sources of income, desired customer base, and
financing details. Rival firms, operating in the same industry relies on the different
business model due to their strategic choice.
5. Goals and Objectives: These are the base of measurement. Goals are the end results, that
the organization attempts to achieve. On the other hand, objectives are time-based
measurable actions, which help in the accomplishment of goals. These are the end results
which are to be attained with the help of an overall plan, over the particular period.

The vision, mission, business definition, and business model explains the philosophy of
business but the goals and objectives are established with the purpose of achieving them.

Strategic Intent is extremely important for the future growth and success of the enterprise,
irrespective of its size and nature.

Stretch Leverage and Fit:

To achieve Strategic Intent – you need to Stretch. As of today there is a misfit between resources
and aspirations. So instead of looking at resources, you will look at resourcefulness. To achieve
you will stretch and make innovative use of your resources.

This leads to Leveraging your resources. Leverage refers to concentrating your resources to your
strategic intent, accumulating learning, experiences and competencies, in a manner that a scarce
resource base can be stretched to meet the aspirations that an organizational resources to its
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environment.

The strategic fit is the traditional way of looking at strategy. Using techniques such as SWOT
analysis, which are used to assess organizational capabilities and environmental opportunities,
Strategy is taken as a compromise between what the environment has got to offer in terms of
opportunities and the counteroffer that the organization makes in the form of its capabilities.

Under fit, the strategic intent is conservative and seems to be more realistic, but you may not be
aware of the potential; under stretch and leverage it could be improbable, even idealistic, but
then you look at something far beyond present possibilities and look at the potential possibilities.

The concepts of leverage, stretch, and fit can have a strong influence on how a company or firm
positions itself in the market.

The main difference is that "fit" strategic management attempts to take a realistic approach,
which is more likely to take off.

Leverage and stretch is more idealistic - and as such is less likely to be successful, but can yield
higher growth and rewards if successful.

Examples of leverage stretch and fit positioning

Stretch - is when a firm doesn't have the resources or capability to take up the position it would
like in the market, so it attempts to augment or alter its capabilities to better fit into the market.

Leverage - is when a firm takes its current resources, and tries to make the most of them in order
to get a "foot in the door" of the market it aspires to command.

The firm will not be able to take control of that market segment, but it will leverage its current
resources to make some headway.

For example, a firm that wants to enter the teen social media market but doesn't have a product
that provides some of the core functionality sought by teens might take the current technology it
owns, and attempt to use that in order to appease some of that demand.

Fit - Is when a firm positions itself in an environment that suits its resources and capabilities.
This is the most realistic approach, based on SWOT analysis and the marketing mix.

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Strategies Vs Tactics:

The Difference between Strategy and Tactics

Strategy Tactics

To utilize specific resources to

To identify clear broader goals that advance the
Purpose achieve sub-goals that support
overall organization and organize resources.
the defined mission.

Specific domain experts

Individuals who influence resources in the
that maneuver limited resources
Roles organization. They understand how a set of
into actions to achieve a set of
tactics work together to achieve goals.
goals.

Held accountable to overall health Held accountable to specific

Accountability
of organization. resources assigned.

All the resources within the organizations, as

A subset of resources used in a
well as broader market conditions including
plan or process. Tactics are
competitors, customers, and economy. Yet
Scope often specific tactics with
don’t over think it, to paraphrase my business
limited resources to achieve
partner Charlene Li, “Strategy is often what
broader goals.
you don’t do”.

Shorter Term, flexible to

Duration Long Term, changes infrequently.
specific market conditions.

Uses experience, research, analysis, thinking, Uses experiences, best practices,

Methods
then communication. plans, processes, and teams.

Produces clear organizational goals, plans, Produces clear deliverables and

Outputs maps, guideposts, and key performance outputs using people, tools,
measurements. time.

Strategy and Tactics Must Work in Tandem

These two must work in tandem, without it your organization cannot efficiently achieve goals. If
you have strategy without tactics you have big thinkers and no action. If you have tactics without
strategy, you have disorder. To quote my former business partner, Lora Cecere, she reminds me
that organizations need big wings (strategic thinking) and feet (capability to achieve).

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Examples:
To illustrate, here’s some specific examples across different industries of how strategic goals can
be communicated with clear tactical elements, in a linear and logical order:

 Strategy: Be the market share leader in terms of sales in the mid-market in our industry.
Tactics: Offer lower cost solutions than enterprise competitors without sacrificing white-
glove service for first 3 years of customer contracts.
 Strategy: Maneuver our brand into top two consideration set of household decision
makers. Tactics: Deploy a marketing campaign that leverages existing customer reviews
and spurs them to conduct word of mouth with their peers in online and real world
events.
 Strategy: Improve retention of top 10% of company performers. Tactics: Offer best in
market compensation plan with benefits as well as sabbaticals to tenured top performers,
source ideas from top talent.
 Strategy: Connect with customers while in our store and increase sales. Tactics: Offer
location based mobile apps on top three platforms, and provide top 5 needed use cases
based on customer desire and usage patterns.
 Strategy: Become a social utility that earth uses on an daily basis. Tactics: Offer a free
global communication toolset that enables disparate personal interactions with your
friends to monitor, share, and interact with.

1.4 Nature, Characteristics, Formulations of -Vision, Mission, and Goals & Objectives,
Balance Scorecard

Vision: The vision statement is the anchor point of any strategic plan.

One definition of vision comes from Burt Nanus, a well-known expert on the subject. Nanus
defines a vision as a realistic, credible, attractive future for [an] organization. Let's disect this
definition:

Realistic: A vision must be based in reality to be meaningful for an organization. For example, if
you're developing a vision for a computer software company that has carved out a small niche in
the market developing instructional software and has a 1.5 percent share of the computer
software market, a vision to overtake Microsoft and dominate the software market is not
realistic!

Credible: A vision must be believable to be relevant. To whom must a vision be credible? Most
importantly, to the employees or members of the organization. If the members of the
organization do not find the vision credible, it will not be meaningful or serve a useful purpose.
One of the purposes of a vision is to inspire those in the organization to achieve a level of

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excellence, and to provide purpose and direction for the work of those employees. A vision
which is not credible will accomplish neither of these ends.

Attractive: If a vision is going to inspire and motivate those in the organization, it must be
attractive. People must want to be part of this future that's envisioned for the organization.

Future: A vision is not in the present, it is in the future. In this respect, the image of the leader
gazing off into the distance to formulate a vision may not be a bad one. A vision is not where
you are now, it's where you want to be in the future. (If you reach or attain a vision, and it's no
longer in the future, but in the present, is it still a vision?)

There are a few common rules that pretty much all good Vision Statements should follow:

1. They should be short – two sentences at an absolute maximum. It’s fine to expand on
your vision statement with more detail, but you need a version that is punchy and easily
memorable.
2. They need to be specific to your business and describe a unique outcome that only you
can provide. Generic vision statements that could apply to any organisation won’t cut it
(see our examples below for more on this point).
3. Do not use words that are open to interpretation. For example, saying you will
‘maximise shareholder return’ doesn’t actually mean anything unless you specify what it
actually looks like.
4. Keep it simple enough for people both inside and outside your organisation to
understand. No technical jargon, no metaphors and no business buzz-words if at all
possible!
5. It should be ambitious enough to be exciting but not too ambitious that it seems
unachievable. It’s not really a matter of time-framing your vision, because that will vary
by organisation, but certainly anything that has a timeframe outside of 3 to 10 years
should be challenged as to whether it’s appropriate.
6. It needs to align to the Values that you want your people to exhibit as they perform their
work. We’ll talk more about Values in a future article – but once you’ve created those
Values later on, revisit your Vision to see how well they gel.

Mission is normally summarized and documented in a mission statement.

The titles of the mission statements are quite varied. They include "corporate philosophy,"
"objectives," "credo," "our way," "guidelines," "our purpose," and so on. For example, the Figure
presents Ford Motor Company's "Mission, Values, and Guiding Principles".

But despite the variety of names, the idea is the same: to define what is important to the
company. Therefore, in formulating its mission, an organization must base on the four elements

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of mission described by Campbell and Nash: purpose, strategy, values, and behavioral standards
(see above).

In practice, mission statements take on a variety of forms and lengths. But each mission
statement has a personality which is unique and reflective of the individuals ideals of the
corporate directors. Although there are differences in the mission statements of various
companies, there are also many similarities.

The kinds of information contained in mission statement vary somewhat from organization to
organization. Most mission statements cover the following major topics:

 Company product or service

 Market
 Technology
 Company objective
 Company philosophy
 Company self-concept
 Public image

The need to assess the quality of a mission statement is a problem that is being faced by many
management teams and consultants.

Goodstein, Nolan and Pfeipher provide the following ten criteria for evaluating mission
statements:

1. The mission statement is clear and understandable to all personnel, including rank-and-
file employees.
2. The mission statement is brief enough for most people to keep it in mind. This typically
means one hundred words or less, which is possible.
3. The mission statement clearly specifies what business the organization is in. This
includes a clear statement about:
o "What" customer or client needs the organization is attempting to fill, not what
products or services are offered;
o "Who" the organization's primary customers or clients are;
o "How" the organization plans to go about its business, that is, what its primary
technologies are; and
o "Why" the organizations exists, that is, the overriding purpose that the
organization is trying to serve and its transcendental goals.
4. The mission statement should identify the forces that drive the organization's strategic
vision.
5. The mission statement should reflect the distinctive competence of the organization.

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 6. The mission statement should be broad enough to allow flexibility in implementation but
not broad enough to permit a lack of focus.
7. The mission statement should serve as a template and be the means by which mananagers
and others in the oragnization can make decisions.
8. The mission statement must reflect the values, beliefs, and philosophy of operations of
the organization.
9. The mission statement should be achievable. It should be realistic enough for
organization members to buy into it.
10. The wording of the mission statement should help it serve as an energy source and
rallying point for the organization.

All ten criteria must met for the mission statement to fully accomplish all that such
statements.The process of writing a mission statement can be broken down into several distinct
steps; these include:

1. Establish the basic parameters;

2. Collect and assemble possible ideas for inclusion;
3. Determine the limits;
4. Set the priorities of each statement;
5. Carefully express each of the ideas;
6. Add explanatory statements;
7. Establish the document's appearance;
8. Gain final approval.

The principal value of mission statement as guide to strategic action is derived from its
specification of the ultimate aims of the firm.

Goals and Objectives:

What Are Goals?

Goals are statements you make about the future for your business. They represent your
aspirations for it. You might say, “We seek to be the most widespread widget maker in the
country.” This statement demonstrates that you have lofty plans for your business, but it does not
say specifically how you can meet your goal.

Importance of Goals

Although the previous goal statement about widgets does not say specifically how your company
can reach it, it does serve an important purpose. Setting goals helps define the direction that a
business will take. Goals should align with your business’ mission and vision statements, which
are even more general and abstract statements of your business’ values and aspirations. The

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language used in goals can be more emotional than is used in objectives. Goals allow business
owners to think conceptually and not be stifled in their creative thought process.

What Are Objectives?

Objectives are the exact steps your company must take to reach its goals. They are written
without emotion, and they are typically measurable and quantifiable. They also are realistic and
attainable and have an associated timeline. For example, an objective for the goal statement of
being the most widespread widget maker in the country might be, “We will increase our sales by
3 percent in each quarter of this year in each region in which we currently operate.” Another
objective might be, “We will open new branches and plants in two states per quarter this year.”

Importance of Objectives

Businesses use objectives to measure their success and progress toward their goals. Without
them, goals seem out of reach. Objectives can be motivational to business owners and
employees, as meeting objectives provides a sense of accomplishment. When your objectives are
easy to write, it is an indication that your overall business strategy is on the right track, according
to business plan writer, Andrew Smith.

Balanced score card:

The Balanced Scorecard (BSC) was originally developed by Dr. Robert Kaplan of Harvard
University and Dr. David Norton as a framework for measuring organizational performance
using a more BALANCED set of performance measures. Traditionally companies used only
short-term financial performance as measure of success. The “balanced scorecard” added
additional non-financial strategic measures to the mix in order to better focus on long-term
success. The system has evolved over the years and is now considered a fully integrated strategic
management system
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The balanced scorecard (BSC) is a strategic planning and management system that organizations
use to:

 Communicate what they are trying to accomplish

 Align the day-to-day work that everyone is doing with strategy
 Prioritize projects, products, and services
 Measure and monitor progress towards strategic targets

The system connects the dots between big picture strategy elements such as mission (our
purpose), vision (what we aspire for), core values (what we believe in), strategic focus areas
(themes, results and/or goals) and the more operational elements such as objectives (continuous
improvement activities), measures (or key performance indicators, or KPIs, which track strategic
performance), targets (our desired level of performance), and initiatives (projects that help you
reach your targets).

References: Educational websites & prescribed reference books

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 UNIT-2 . Strategy Formulation

2.1. Environmental & Organizational Appraisal (8)

2.1.1. Concept, Reducing Carbon Emission, Environment appraisal

2.1.2. SWOT and PESTLE Analysis

2.1.3. Environmental Scanning-Competitive intelligence

2.1.4. Organizational appraisal - Capability factors, Value chain analysis (Industry &
Corporate)
2.2. Corporate & Business Level Strategies (8)
2.2.1. Types- Expansion, Stability, Retrenchment and combination, Integration
Diversification Strategies

2.2.2. Porter’s Generic Business Strategies

2.2.3. Strategies for Different Industry conditions (Industry Life Cycle Analysis)

19
2.1.1. Concept, Reducing Carbon Emission, Environment appraisal

Environmental appraisal (or analysis) is the most vital aspect of strategic decision making,
especially leading to business strategy formulation and/or investment opportunity assessment.

Upon completion of the appraisal, it gives decision makers a comprehensively broad and yet in-
depth understanding of the various critical factors that can affect a business or investment.

Coupled with implications analysis, decision makers get to understand better the long-term
ramifications of their impending decisions.

In principle, it has two parts:

 External Appraisal;
 Internal Appraisal;

The first part generally touches on:

 political, legal and regulatory factors;

 economic and monetary factors;
 social demographic factors;
 technological factors;
 environmental or ecological impact factors;
 ethical factors;

It may also include appraisal of investors’ and business folks’ attitudes, workers’ attitudes,
consumer confidence, etc.

The second part generally touches on:

 market attractiveness (in terms of served market potential and organizational readiness);
 competition intensity;
 strategic fit;

It may include a vulnerability audit.

Understanding and appreciation of these likely impact factors at the early stage give the decision
makers the edge to make good and robust decisions.

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2.1.2. SWOT and PESTLE Analysis

 SWOT and PESTLE analyses are useful tools for decision-makers when evaluating the
pros and cons of a project or initiative. The analysis can be applied to a range of large and
small projects to identify factors may that affect success.

What Is a SWOT Analysis?

A SWOT analysis examines four areas in the business environment:

 Strengths: Identify the advantages that your business has over the competition.
 Weaknesses: Be honest about the weaknesses in your operations.
 Opportunities: Identify the external trends that you can take advantage of.
 Threats: Assess the outside conditions that may be obstacles and have a negative impact
on business.

What Is a PESTLE Analysis?

A PESTLE analysis is used to evaluate the outside factors that affect a business:

 Political: Determine how the current direction of the political parties may influence
business development and growth.
 Economic: Examine the effects of interest rates, taxes, the stock market, consumer
confidence and other economic metrics.
 Social: Acknowledge the changes in lifestyles, advertising targets, ethics, demographics
and culture.
 Technology: Evaluate your company's current technology. Is it up-to-date?
 Legal: Anticipate any new laws and regulations that can impact your operations.
 Environment: Identify the environmental factors that should be considered.

Why Use SWOT and PESTLE Analyses?

SWOT and PESTLE analyses are used to make a systematic and thorough evaluation of a new
business or project. The process gives decision-makers a better awareness and understanding of
the changes that may occur and the impact that these changes may have on their business.

While a SWOT analysis focuses on a company's internal strengths and weaknesses, a PESTLE
analysis concentrates on the external factors. Using both methods together produces a
comprehensive evaluation of a project.

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Benefits of Using SWOT and PESTLE Analyses

When you use the two analyses together, they:

 Provide a simple structure to conduct the analysis.

 Bring together various departmental skills with a common goal.
 Identify potential threats to the organization and helps to reduce the impact.
 Encourage employees to adopt a strategic thinking mindset.
 Create a method to find and exploit new opportunities.
 Evaluate the impact of various decisions before implementation.

SWOT and PESTLE analyses are useful tools for business managers to evaluate the pros and
cons of major decisions. They can be applied to large projects as well as smaller ones such as
marketing campaigns, reorganizations, new production methods and introductions of new
products.

The analysis process brings together the views employees and results in a better understanding,
acceptance and successful implementation of projects.

2.1.3. Environmental Scanning-Competitive intelligence

Environmental Scanning

The purpose of the scan is the identification of opportunities and threats affecting the business
for making strategic business decisions. As a part of the environmental scanning process, the
organization collects information regarding its environment and analyzes it to forecast the impact
of changes in the environment. This eventually helps the management team to make informed
decisions.

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As seen from the figure above, environmental scanning should primarily identify opportunities
and threats in the organization’s environment. Once these are identified, the organization can
create a strategy which helps in maximizing the opportunities and minimizing the threats. Before
looking at the important factors for environmental scanning, let’s take a quick peek at the
components of an organization’s environment.

Components of a Business Environment

As you can see above, the internal environment of an organization consists of various elements
like the value system, mission/objectives of the organization, structure, culture, quality of
employees, labor unions, technological capabilities, etc. These elements lie within the
organization and any changes to them can affect the overall success of the business.

On the other hand, an organization cannot operate in a vacuum. Also, there are many factors
outside the walls of an organization which affects the functions of the business. These factors
constitute the external environment of an organization.

The internal environment offers strengths and weaknesses to business while the external
environment brings opportunities and threats. The four influencing environmental factors known
as SWOT Analysis are:

1. Strength – an inherent capacity of an organization which helps it gain a strategic

advantage over its competitors.
23
 2. Weakness – an inherent constraint or limitation which creates a strategic disadvantage
for a business.
3. Opportunity – a favorable condition in the organization’s environment enabling it to
strengthen its position.
4. Threat – an unfavorable condition in the organization’s environment causing damage to
the organization.

Important Factors for Environmental Scanning

Before scanning the environment, an organization must take the following actors into
consideration:

Events – These are specific occurrences which take place in different environmental sectors
of a business. These are important for the functioning and/or success of the business. Events
can occur either in the internal or the external environment. Organizations can observe and
track them.

Trends – As the name suggests, trends are general courses of action or tendencies along
which the events occur. They are groups of similar or related events which tend to move in a
specific direction. Further, trends can be positive or negative. By observing trends, an
organization can identify any change in the strength or frequency of the events suggesting a
change in the respective area.

Issues – In wake of the events and trends, some concerns can arise. These are Issues.
Organizations try to identify emerging issues so that they can take corrective measures to nip
them in the bud. However, identifying emerging issues is a difficult task. Usually, emerging
issues start with a shift in values or change in which the concern is viewed.

Expectations – Some interested groups have demands based on their concern for issues.
These demands are Expectations.

Approaches and Techniques Used for Environmental Scanning!

The external environment in which an organization exists consists of a bewildering variety of

factors. These factors are events, trends, issues and expectations of different interested
groups. Events are important and specific occurrences taking place in different environmental
sectors.

Trends are the general tendencies or the courses of action along which events take place.
Issues are the current concerns that arise in response to events and trends. Expectations are
the demands made by interested groups in the light of their concern for issues.

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By monitoring the environment through environmental scanning, an organization can
consider the impact of the different eve trends, issues and expectations on its strategic
management process. Similarly any organization-facing environment as a complex the
scanning is absolutely essential, and strategists have to deal cautiously with process
environmental scanning.

The effort has to be to deal with it is such a manner that unnecessary time and effort is not
expended, while important facts are not ignored. For this to take place, it is important to
devise an approach or a combination of different approaches, to environmental scanning.

Approaches to Environmental Scanning:

The experts have suggested three approaches, which could be adopted for, sort out
information for environmental scanning.

1. Systematic Approach:

Under this approach, information for environmental scanning is collected systematically.

Information related to markets and customers, changes in legislation and regulations that
have a direct impact on an organization’s activities, government policy statements pertaining
the organization’s business and industry, etc, could be collected continuous updating such
information is necessary not only for strategic management but also for operational activities.

2. Ad hoc Approach:

Using this approach, an organization may conduct special surveys and studies to deal with
specific environmental issues from time to time. Such studies may be conducted, for
instance, when organization has to undertake special projects, evaluate existing strategy or
devise new strategies. Changes and unforeseen developments may be investigated with
regard to their impact on the organization.

3. Processed-form Approach:

For adopting this approach, the organization uses information in a processed form available
from different sources both inside and outside the organization. When an organization uses
information supplied by government agencies or private institutions, it uses secondary
sources of data and the information is available in processed form.

Sources of Information:

A company can obtain information from different sources, but it should be ensured that the
information is correct. The correct source should be tapped for specific information for more

25
accuracy. Information received form secondary sources may sometimes even misguide
strategy managers.

Hence it is important that information should be verified for correctness before it is processed
and decisions are taken based on it.

The various sources from where information can be gathered include:

1. An internal document viz, files, records, management information system, employees,

standards, drawings, charts, etc.

2. Trade directories, journals, magazines, newspapers, books, newsletters, government

publications, annual reports of companies, case studies, etc.

3. Internet, television, radio news etc.

4. External agencies like customers, suppliers, inspection agencies, marketing intermediaries,

dealers, advertisers, associations, unions, government agencies, share holders, competitors,
etc.

5. Market research reports, consultants, educational institutions, testing laboratories etc.

6. Spying considered as a powerful way of extracting information from other companies.

It is found that chronological order of information is also quite important for strategy
managers. Usually information received from government agencies is quite complex since
processing takes more time. The information received from competitors is quite expensive
but it is usually fresh and is quite useful.

Techniques Used for Environmental Scanning:

The techniques used for environmental scanning may be either very systematic to intuitive.
Selection of a technique depends on data required, source of data, timelines of information,
relevance, cost of information, quantity, quality and availability of information, etc.

Some of the methods widely used can be categorized as follows: Scenario Writing,
Simulation, Single Variable Extrapolation, Morphological Analysis, Cross Impact Analysis,
Field Force Analysis, Game Theory, etc. The techniques are either statistical or mathematical
in nature. However, judgmental and institutive techniques are also widely used.

26
 The entire process consists of following steps:

1. Major events and trends in environment are studied.

2. A cause and effect relationship established with regard to events and trends for long and
short term. This is done through brain storming in a group.

3. Diagrams showing interrelationships amongst various factors are prepared and an attempt
is made to quantify the results.

4. The study is reviewed by a group of experts who deliberate on each aspect and on the
possible strategies that may be decided.

Competitive Intelligence

A broad definition of competitive intelligence is the action of defining, gathering, analyzing, and
distributing intelligence about products, customers, competitors, and any aspect of the
environment needed to support executives and managers in making strategic decisions for an
organization.

Key points of this definition:

 Competitive intelligence is an ethical and legal business practice, as opposed to industrial

espionage which is illegal.
 The focus is on the business environment.
 There is a process involved in gathering information, converting it into intelligence and then
utilizing this in business decision-making.

A more focused definition of competitive intelligence regards it as the organizational function

responsible for the early identification of risks and opportunities in the market before they
become obvious. Experts also call this process the early signal analysis. This definition focuses
attention on the difference between dissemination of widely available factual information (such
as market statistics, financial reports, and newspaper clippings) performed by functions such as
libraries and information centers, and competitive intelligence, which is a perspective on
developments and events aimed at yielding a competitive edge.

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2.1.4. Organizational appraisal - Capability factors, Value chain analysis
(Industry & Corporate)

Organizational capability factors are the strategic strengths and weaknesses existing in different
functional areas within an organization which are of crucial importance to strategy formulation
and implementation. These are divided into six largely accepted and commonly understood
functional areas

An organizational capability is a company's ability to manage resources, such as employees,

effectively to gain an advantage over competitors. The company's organizational capabilities
must focus on the business's ability to meet customer demand. In addition, organizational
capabilities must be unique to the organization to prevent replication by competitors.
Organizational capabilities are anything a company does well that improves business and
differentiates the business in the market. Developing and cultivating organizational capabilities
can help small business owners gain an advantage in a competitive environment by focusing on
the areas where they excel.

Knowledgeable Workforce

The skills and knowledge of a company's workforce allow the organization to direct those skills
to achieve the business's goals. Training programs, education assistance and effective recruiting
and hiring programs are organizational capabilities that ensure a knowledgeable workforce. To
maintain the capability, companies should ensure the workforce has the resources available to
improve continuously. Managing a talented workforce is an organizational capability that
provides a competitive advantage in the marketplace.

Improved Customer Relationships

Good customer relationships ensure the continued growth and competitiveness in the market.
The relationship between the organization and its customers is an organizational capability that
affects sales, reputation and loyalty for future business. Maintaining existing relationships with
customers as well as developing new ones ensures the company will grow and thrive in the
future. A lean manufacturing environment is an organizational capability that focuses on the
voice of the customer and meeting demand. This organizational capability improves the
relationship with the customer for the business.

Capabilities are most often developed in specific functional areas such as marketing or
operations or in a part of a functional area such as distribution or research & development. It is
also feasible to measure and compare capabilities in functional areas. Thus , a company could be
considered as inherently strong in marketing owing to a competence in distribution skills . Or a
company could be competitive in operations owing to superior research and development
infrastructure.

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Organizational capability factors are strategic strengths and weaknesses existing in different
functional areas within an organization, which are of crucial importance to strategy formulation
and implementation. The organization into six largely accepted and commonly understood
functional areas. These are:

 Finance
 Marketing
 Operations
 Personnel
 Information and
 General management

Financial Capability: Financial capability factors relate to the availability, usages and
management of funds and all allied aspects that have a bearing on an organization’s capability to
implement its strategies. Some of the important factors which influence the financial capability
of any organization are as follows:

 Factors related to usage of funds capital structure, procurement of capital, controllership,

financing and relationship with lenders, banks and financial institutions.

 Factors related to usage of funds capital investment, fixed asset acquisition, current assets,
loans and advances, dividend distribution and relationship with shareholders.

 Factors related to management of funds financial, accounting and budgeting systems;

management control system, state of financial health, cash, inflation, credit, return and risk
management; cost reduction and control and tax planning and advantages

Marketing Capability Profile

(a) Product related

(b) Price related

(c) Promotion related

(d) Integrative & Systematic

Operations Capability Factor

(a) Production system

(b) Operation & Control system

(c) R&D system

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Personnel Capability Factor

(a) Personnel system

(b) Organization & employee characteristics

(c) Industrial Relations

General Management Capability

(a) General Management Systems

(b) External Relations (c) Organization climate

EXAMPLES OF ORGANIZATIONAL CAPABILITY PROFILE

Financial Capability

Bajaj - Cash Management

LIC - Centralized payment, decentralized collection

Reliance - high investor confidence

Escorts - Amicable relation with FI’s

Marketing Capability

Hindustan Lever - Distribution Channel

IDBI/ICICI Bank - Wide variety of products

Tata - Company / Product Image

Value chain analysis (VCA)

Is a process where a firm identifies its primary and support activities that add value to its final
product and then analyze these activities to reduce costs or increase differentiation.

Value chain
Represents the internal activities a firm engages in when transforming inputs into outputs.

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize, which activities are the most valuable (i.e. are the source of cost or differentiation
30
advantage) to the firm and which ones could be improved to provide competitive advantage. In
other words, by looking into internal activities, the analysis reveals where a firm’s competitive
advantages or disadvantages are. The firm that competes through differentiation advantage will
try to perform its activities better than competitors would do. If it competes through cost
advantage, it will try to perform internal activities at lower costs than competitors would do.
When a company is capable of producing goods at lower costs than the market price or to
provide superior products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the
internal activities a firm engages in to produce goods and services. VC is formed of primary
activities that add value to the final product directly and support activities that add value
indirectly.

Although, primary activities add value directly to the production process, they are not necessarily
more important than support activities. Nowadays, competitive advantage mainly derives from
technological improvements or innovations in business models or processes. Therefore, such
support activities as ‘information systems’, ‘R&D’ or ‘general management’ are usually the most
important source of differentiation advantage. On the other hand, primary activities are usually
the source of cost advantage, where costs can be easily identified for each activity and properly
managed.

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32
2.2. Corporate & Business Level Strategies

2.2.1. Types- Expansion, Stability, Retrenchment and combination, Integration

Diversification Strategies

CORPORATE LEVEL STRATEGIES

Corporate level strategies are basically about the choice of direction that a firm adopts in order to
achieve its objectives. They are basically about decisions related to allocating resources among
the different businesses of a firm, transferring resources from one set of businesses to others, and
managing and nurturing a portfolio of businesses in such a way that the overall corporate
objectives are achieved.

Major types of grand strategies:

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  Expansion (Growth) Strategies
 Stability Strategies
 Retrenchment Strategies
 Combination Strategies

GROWTH STRATEGIES

Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when
an organization aims at higher growth by broadening its one or more of its business in terms of
their respective customer groups, customers functions, and alternative technologies singly or
jointly – in order to improve its overall performance.
E.g.: A chocolate manufacturer expands its customer groups to include middle aged and old
persons among its existing customers comprising of children and adolescents.

There are five types of expansion (Growth) strategies

 Expansion through concentration

 Expansion through integration
 Expansion through diversification
 Expansion through cooperation

Expansion through concentration

It involves converging resources in one or more of firms businesses in terms of their respective
customer needs, customer functions, or alternative technologies either singly or jointly, in such a
manner that it results in expansions. A firm that is familiar with an industry would naturally like
to invest more in known business rather than unknown business. Concentration can be done
through

Market Penetration: It involves selling more products to the same market by focusing intensely
on existing markets with its present products, increasing usage by existing customers and
increasing market share and restructures a mature market by driving out competitors E.g.: Low
pricing strategies

Market Development: It involves selling the same products to new markets by attracting new
users to its existing products. Market development can be geographic wise and demographic
wise. E.g.: XEROX Company educated small business entrepreneurs to create new markets.

Product Development: It involves selling new products to the same markets by introducing
newer products in existing markets. E.g.: the tourism industry in India has not been able to
attract new customers in significant numbers. New products such as selling India as a golfing or
ayuerveda-based medical treatment destination are some of the product development efforts in
the tourism industry to attract more tourists.

34
 ANSOFF”S PRODUCT-MARKET MATRIX
.

Present Market New Market

Present Market Product

Product Penetration Development

New Market Diversification

Product Development

Market

Advantages of concentration strategies

 Involves minimal organizational changes and is less threatening

 Enables the firm to specialize by gaining the in-depth knowledge of the businesses.

 Enables the firm to develop competitive advantage

 Decision-making can be made easily as there is a high level of productivity

 Systems and processes within the firm become familiar to the people in the organization.
Disadvantages of concentration strategies

 It is dependent on one industry if there is any worse condition in the industry the firm
will be affected.

 Factors such as product obsolescence, fickleness of market, emergence of newer

technologies are threat to concentrated firm

 Mangers may not be able to sustain interest and find the work less challenging

 It may lead to cash flow problems

Expansion through Integration

It is done where the company attempts to widen the scope of its business definition in such a
manner that it results in serving the same set of customers. The alternative technology of the
business undergoes a change. It is combing activities related to the present activity of a firm.
Such a combination may be done through value chain. A value chain is a set of interrelated
activity performed by an organization right from the procurement of basic raw materials down to
the marketing of finished products to the ultimate customers.

35
E.g.: Several process based industry such as petro chemicals, steel, textiles of hydrocarbons have
integrate firm

A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers.
The cost of making the items used in the manufacture of ones owns products are to be evaluated
against the cost of procuring them from suppliers. If the cost of making is less that the cost of
procurement then the firm moves up the value chain to make the item itself. Like wise if the cost
of selling the finished products is lesser than the price paid to the sellers to do the same thing
then the firm would go for direct selling.

Among the integration strategies are of two type’s vertical and horizontal integration.

Vertical Integration: when an organization starts making new products that serve its own needs
vertical integration takes place. Vertical integration could be of two types Back ward and
forward integration.

Backward integration means moving back to the source of raw materials while forward
integration moves the organization nearer to the ultimate customer.

Generally when firms vertically integrate they do so in a complete manner that is they move
backward or forward decisively resulting in a full integration but when a firm does not commit it
fully it is possible to have partial vertical integration strategies too. Two such partial vertical
integration strategies are ‘taper’ integration and ‘quasi’ integration. Taper integration requires
firms to make a part of their own requirements and to buy the rest from outsiders. Through quasi
integration strategies firm purchase most of their requirements from other firms in which they
have an ownership stake. Ancillary industrial units and outsourcing through sub contracting are
adapted forms of quasi integration.

Horizontal Integration: when an organization takes up the same type of products at the same
level of production or marketing process, it is said to follow a strategy of horizontal integration.
When a luggage company takes over its rival luggage company, it is horizontal integration.
Horizontal integration strategy may be frequently adopted with a view to expand geographically
by buying a competitors business, to increase the market share or to benefit from economics of
scale.

Expansion through Diversification

Diversification is a much used and much talked about set of strategies. It involves a substantial
change in the business definition – singly or jointly- in terms of customer groups or alternative
technologies of one or more of a firm’s businesses. . There are two categories, concentric and
conglomerate diversification.

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 DIFFERENT TYPES OF DIVERSIFICATION STRATEGIES

Related Technology Unrelated Technology

Similar Type Marketing- technology related Marketing related

of Product concentric diversification concentric diversification

New Type of Technology- related concentric Conglomerate

Product diversification diversification

Concentric Diversification: when an organization takes up an activity in such a manner that is

related to the existing business definition of one or more of firms businesses, either in terms of
customer groups, customer’s functions or alternative technologies, it is called concentric
diversification. Concentric diversification may be of three types
 Marketing related concentric diversification
 Technology- related concentric diversification
 Marketing- technology related concentric diversification

Marketing related concentric diversification: when a similar type of product is offered with a
help of unrelated technology for e.g., a company in the sewing machine business diversifies in to
kitchen ware and household appliances, which are sold to house wives through a chain of retails
stores.

Technology- related concentric diversification: when a new type of product or service is

provided with the help of related technology, for e.g., a leasing firm offering hire- purchase
services to institutional customers also starts consumer financing for the purchase of durable sot
individual customers.

Marketing- technology related concentric diversification: when a similar type of product is

provided with the help of related technology, for e.g., a rain coat manufacturer makes other
rubber based items, such as water proof shoes and rubber gloves sold through the same retail
outlets

Conglomerate Diversification: when an organization adopts a strategy which requires taking of

those activities which are unrelated to the existing businesses definition of one or more of its
businesses either in terms of their respective customer groups, customer functions or alternative
technologies. Example of Indian company which have adopted apart of growth and expansion
through conglomerate diversification the classic examples is of ITC, a cigarette company
diversifying into the hotel industry

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Expansion through Cooperation

The term cooperation expresses the idea of simultaneous competition and cooperation among
rival firms for mutual benefits. Cooperative strategies could be of the following types

1. Mergers
2. Takeovers
3. Joint ventures
4. Strategic alliances

Mergers Strategies: A merger is a combination of two or more organizations in which one

acquires the assets and liabilities of the other in exchange for shares or cash or both the
organization are dissolved and the assets and liabilities are combined and new stock is issued.
For the organization, which acquires another, it is an acquisition. For the organization, which is
acquired, it is a merger. If both the organization dissolves their identity to create a new
organization, it is consolidation. There are different types of mergers they are horizontal merger,
vertical merger, concentric merger and conglomerate merger.

Horizontal Mergers: it takes place when there is a combination of two or more organizations in
the same business. E.g: A company making footwear combines with another footwear company,
or a retailer of pharmaceutical combines with another retailer in the same businesses.

Vertical Mergers: It takes place when there is a combination of two or more organizations, not
necessarily in the same business, which create complementarities either in terms of supply of raw
materials (input) or marketing of goods and services (outputs). E.g: A footwear company
combines with a leather tannery or with a chain shoe retail stores

Concentric Mergers: It takes place when there is a combination of two or more organizations
related to each other either in terms of customer functions, customer groups, or the alternative
technologies used. E.g: A footwear company combining with a hosiery firm making socks or
another specialty footwear company, or with a leather goods company making purse, hand bags
and so on

Conglomerate Mergers: It takes place when there is a combination of two or more organizations
unrelated to each other, either in terms of customer functions, customer groups, or alternative
technologies used. E.g: A footwear company combining with a pharmaceutical firm.
Reasons for mergers.

Why the buyer wishes to merge:

1. To increase the value of the organization’s stock

2. To increase the growth rate and make a good investment
3. To improve stability of earning and sales
4. To balance, complete, or diversify product line
5. To reduce competition
38
 6. To acquire needed resources quickly
7. To avail tax concessions and benefits
8. To take advantages of synergy

Why the seller wishes to merge

1. To increase the value of the owner’s stock and investment

2. To increase the growth rate
3. To acquire resources to stabilize operations
4. To benefit from tax legislation
5. To deal with top management succession problem

Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by

Indian companies. Acquisitions usually are based on the strong motivation of the buyer firm to
acquire. Takeovers are frequently classified as hostile takeovers (which are against the wishes of
the acquired firm) and friendly takeovers (by mutual consent)

Friendly takeovers are where a takeover is not resisted or opposed, by the existing management
or professionals. E.g: Tata Tea’s takeover of Consolidated Coffee (a grower of coffee beans) and
Asian Coffee (a processor) is an example of a friendly takeover.

Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the existing

management or professionals

Advantages of Takeovers

 Ensure management accountability

 Offer easy growth opportunities

 Create mobility of resources

 Avoid gestation periods and hurdles involved in new projects

 Offer a chance to sick units to survive

 Open up alternatives for selective divestment.

Joint Venture Strategies: Joint ventures are a special case of consolidation where two or more
companies from a temporary form a temporary partnership (also called a consortium) for a
specified purpose. They occur when an independent firm is created by at least two other firms.
Joint ventures may be useful to gain access to a new business mainly under these conditions

 When an activity is uneconomical for an organization to do alone

 When the risk of business has to be shared
 When the distinctive competence of two or more organization can be brought together.

39
 When the organization has to overcome the hurdles, such as import quotas, tariffs,
nationalistic – political interests, and cultural roadblocks

Types of Join ventures

1. Between two firms in one industry

2. Between two firms across different countries
3. Between an Indian firm and a foreign company in India
4. Between an Indian firm and a foreign company in that foreign country
5. Between an Indian firma and a foreign company in a third country

Strategic alliances: They are partnership between firms whereby their resources, capabilities
and core competencies are combined to pursue mutual interest to develop, manufacture, or
distribute goods or services. There are various advantages:

 Two or more firms unite to pursue a set of agreed upon goals but remain independent
subsequent to the formation of the alliances. A pooling of resources, investment and risks
occurs for mutual gain

 The partner firms contribute on a continuing basis in one or more key strategic areas, for
example, technology, product and so forth.

 Strategic alliances offer a growth route in which merging one’s entity, acquiring or being
acquired, or creating a joint venture may not be required

 Global partners can help local firms by developing global quality consciousness, creating
adherence to international quality standards, providing access to state of the art
technology, gaining entry to world wide mass markets, and making funds available for
expansions.

E.g: Ranbaxy Company went into strategic alliance with Elilly of the US to realize its mission
of becoming a research based international pharmaceutical company.

E.g: synergistic benefits arising out of strategic alliance is that of Taj Hotels and British
Airways, where both create advantages for each other through complementarities of airlines and
hotel services

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STABILITY STRATEGIES

The stability grand strategy is adopted by an organization when it attempts at an incremental

improvement of its functional performance by marginally changing one or more of its businesses
in terms of their respective customer groups, customer functions, and alternative technologies –
either singly or collectively

E.g: A copier machine company provides better after sales service to its existing customer to
improve its company product image, and increase the sale of accessories and consumables

This strategy may be relevant for a firm operating in a reasonably certain and predictable
environment. Stability strategy can be of three types –No Change Strategy, Profit Strategy,
Pause/ Proceed – with – caution Strategy.

No-Change Strategy

It is a conscious decision to do nothing new. The firm will continue with its present business
definition. When a firm has a stable internal and external environment the firm will continue
with its present strategy. The firm has no new strengths and weaknesses within the organization
and there is no opportunities or threats in the external environment. Taking into account this
situation the firm decides to maintain its strategy.

Several small and medium sized firm operating in a familiar market- more often a niche market
that is limited in scope – and offering products or services through a time tested technology rely
on the No – Change Strategy.

Profit Strategy

No firm can continue with the No – Change Strategy. Sometimes things do change and the firm
is faced with the situation where it has to do something. A firm may assess the situation and
assume that its problem are short lived and will go away with time. Till then a firm tries to
sustain its profitability by adopting a profit strategy

For instance in a situation when the profit is becoming lower firm takes measures to reduce
investments, cut costs, raise prices, increase productivity and adopt other measures to solve the
temporary difficulties.

The problem arises due to unfavorable situation like economic recession, government attitude,
and industry down turn, competitive pressures and like. During this kind of situation that the firm
assumes to be temporary it would adopt profit strategies

41
Some firms to overcome these difficulties would sell off assets such as prime land in a
commercial area and move to suburbs. Others have removed some of its non-core business to
raise money, while others have decided to provide outsourcing service to other organizations.

Pause/ Proceed with Caution Strategy

It is employed by the firm that wish to test the ground before moving ahead with a full fledged
grand strategy, or by firms that have an intense pace of expansion and wish to rest for a while
before moving ahead. The purpose is to allow all the people in the organization to adapt to the
changes. It is a deliberate and conscious attempt to postpone strategic changes to a more
opportune time.
E.g: In the India shoe market dominated by Bata and Liberty, Hindustan Levers better known for
soaps and detergents, produces substantial quantity of shoes and shoe uppers for the export
market. In late 2000, it started selling a few thousand pairs in the cities to find out the market
reaction. This is a pause proceed with caution strategy before it goes full steam into another
FMCG sector that has a lot of potential

RETRENCHMENT STRATEGIES

A retrenchment grand strategy is followed when an organization aims at a contraction of its

activities through substantial reduction or the elimination of the scope of one or more of its
businesses in terms of their respective customer groups, customer functions, or alternative
technologies either singly or jointly in order to improve its overall performance. E.g: A corporate
hospital decides to focus only on special treatment and realize higher revenues by reducing its
commitment to general case which is less profitable.

The growth of industries and markets are threatened by various external and internal
developments (External developments - government policies, demand saturation, emergence of
substitute products, or changing customer needs. Internal Developments – poor management,
wrong strategies, poor quality of functional management and so on.) In these situations the
industries and markets and consequently the companies face the danger of decline and will go for
adopting retrenchment strategies.

E.g: fountain pens, manual type writers, tele printers, steam engines, jute and jute products, slide
rules, calculators and wooden toys are some products that have either disappeared or face
decline.

There are three types of retrenchment strategies - Turnaround Strategies, Divestment Strategies
and Liquidation strategies.

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Turnaround Strategies

Turn around strategies derives their name from the action involved that is reversing a negative
trend. There are certain conditions or indicators which point out that a turnaround is needed for
an organization to survive. They are

 Persistent Negative cash flows

 Negative Profits
 Declining market share
 Deterioration in Physical facilities
 Over manning, high turnover of employees, and low morale
 Uncompetitive products or services
 Mis management

An organization which faces one or more of these issues is referred to as a ‘sick’ company

There are three ways in which turnarounds can be managed

 The existing chief executive and management team handles the entire turnaround strategy
with the advisory support of a external consultant.

 In another case the existing team withdraws temporarily and an executive consultant or
turnaround specialist is employed to do the job.

 The last method involves the replacement of the existing team specially the chief
executive, or merging the sick organization with a healthy one.

Before a turn around can be formulated for an Indian company, it has to be first declared as a
sick company. The declaration is done on the basis of the Sick Industrial Companies Act (SICA),
1985, which provides for a quasi judicial body called the Board of Industrial and Financial
Reconstruction (BIFR) which acts as the corporate doctor whenever companies fall sick.

Divestment Strategies

A divestment strategy involves the sale or liquidation of a portion of business, or a major

division. Profit centre or SBU. Divestment is usually a part of rehabilitation or restructuring plan
and is adopted when a turnaround has been attempted but has proved to be unsuccessful.
Harvesting strategies a variant of the divestment strategies, involve a process of gradually letting
a company business wither away in a carefully controlled manner

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Reasons for Divestment

 The business that has been acquired proves to be a mismatch and cannot be integrated
within the company. Similarly a project that proves to be in viable in the long term is
divested

 Persistent negative cash flows from a particular business create financial problems for the
whole company, creating a need for the divestment of that business.

 Severity of competition and the inability of a firm to cope with it may cause it to divest.

 Technological up gradation is required if the business is to survive but where it is not

possible for the firm to invest in it. A preferable option would be to divest

 Divestment may be done because by selling off a part of a business the company may be
in a position to survive

 A better alternative may be available for investment, causing a firm to divest a part of its
unprofitable business.

 Divestment by one firm may be a part of merger plan executed with another firm, where
mutual exchange of unprofitable divisions may take place.

 Lastly a firm may divest in order to attract the provisions of the MRTP Act or owing to
oversize and the resultant inability to manage a large business.

E.g: TATA group is a highly diversified entity with a range of businesses under its fold. They
identified their non – core businesses for divestment. TOMCO was divested and sold to
Hindustan Levers as soaps and a detergent was not considered a core business for the Tatas.
Similarly, the pharmaceuticals companies of the Tatas- Merind and Tata pharma – were divested
to Wockhardt. The cosmetics company Lakme was divested and sold to Hindustan Levers, as
besides being a non core business, it was found to be a non- competitive and would have
required substantial investment to be sustained.

44
Liquidation Strategies

A retrenchment strategy which is considered the most extreme and unattractive is the liquidation
strategy, which involves closing down a firm and selling its assets. It is considered as the last
resort because it leads to serious consequences such as loss of employment for workers and other
employees, termination of opportunities where a firm could pursue any future activities and the
stigma of failure

The psychological implications

 The prospects of liquidation create a bad impact on the company’s reputation.

 For many executives who are closely associated firms, liquidation may be a traumatic
experience.

Legal aspects of liquidation

Under the Companies Act 1956, liquidation is termed as winding up. The Act defines winding up
of a company as the process whereby its life is ended and its property administered for the
benefit of its creditors and members. The Act provides for a liquidator who takes control of the
company, collect its assets, pay it debts, and finally distributes any surplus among the members
according to their rights.

Combination (Mixed Strategies)

The combination grand strategy is followed when an organization adopts a mixture of stability,
expansion and retrenchment either at the same time in its different business or at different times
in the same business with the aim of improving its performance. Complicated situations
generally require complex solutions. Combination strategies are the complex solutions that
strategists have to offer when faced with the difficulties of real life businesses.

E.g: A paint company augments its offering of decorative paints to provide a wider variety to its
customers (stability) and expands its product range to include industrial and automotive paints
(expansion). Simultaneously, it decides to close down the division which undertakes large scale
painting contract jobs (retrenchment).

It would be difficult to find an organization that has survived and grown by adopting a single
pure strategy. The complexity of doing business demands that different strategies be adopted to
suit the situational demands made upon the organization. An organisaiton which has followed a
stability strategy for quite some time has to think of expansion. Any organization which has been
on an expansion path for long has to pause to consolidate its businesses.

45
2.2.2. Porter’s Generic Business Strategies

BUSINESS LEVEL STRATEGIES

In this second aspect of a company's strategy, the focus is on how to compete successfully in
each of the lines of business the company has chosen to engage in. The central thrust is how to
build and improve the company's competitive position for each of its lines of business.

Acquiring Core Competencies

A company has competitive advantage whenever it can attract customers and defend against
competitive forces better than its rivals. Companies want to develop competitive advantages that
have some sustainability. Successful competitive strategies usually involve building uniquely
strong or distinctive competencies in one or several areas crucial to success and using them to
maintain a competitive edge over rivals. Some examples of distinctive competencies are
superior technology and/or product features, better manufacturing technology and skills, superior
sales and distribution capabilities, and better customer service and convenience.

Competitive strategy is about being different. It means deliberately choosing to perform

activities differently or to perform different activities than rivals to deliver a unique mix of value.
(Michael E. Porter)

Porter has advocated Porter's three Generic Competitive Strategies that can be implemented at
the business unit level to created a competitive advantage. They are Cost Leadership,
Differentiation and Focus strategies

PORTER’S GENERIC BUSINESS STRATEGIES

Cost Leadership Differentiation

Focused cost Focused

Leadership Differentiation

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LOW COST LEADERSHIP STRATEGIES

Low cost leadership strategies are based on a firm’s ability to offer a product or service at a
lower cost than its rivals. When a firm is able to build a substantial cost advantage over other
competitors it can pass on its benefits to customers and gain a large market share. This requires
being the overall low-cost provider of the products or services (e.g., Costco, among retail stores,
and Hyundai, among automobile manufacturers). Implementing this strategy successfully
requires continual, exceptional efforts to reduce costs without excluding product features and
services that buyers consider essential. It also requires achieving cost advantages in ways that
are hard for competitors to copy or match. Some conditions that tend to make this strategy an
attractive choice are:

 The industry's product is much the same from seller to seller

 The marketplace is dominated by price competition, with highly price-sensitive buyers

 There are few ways to achieve product differentiation that have much value to buyers

 Most buyers use product in same ways -- common user requirements

 Switching costs for buyers are low

 Buyers are large and have significant bargaining power

DIFFERENTIATION STRATEGIES

When firm appeal to a broad cross-section of the market through offering differentiating features
that make customers willing to pay premium prices, e.g., superior technology, quality, prestige,
special features, service, convenience (examples are Nordstrom and Lexus). Success with this
type of strategy requires differentiation features that are hard or expensive for competitors to
duplicate. Sustainable differentiation usually comes from advantages in core competencies,
unique company resources or capabilities, and superior management of value chain activities.
Some conditions that tend to favor differentiation strategies are:

47
There are multiple ways to differentiate the product/service that buyers think have substantial
value

Buyers have different needs or uses of the product/service

Product innovations and technological change are rapid and competition emphasizes the latest
product features

Not many rivals are following a similar differentiation strategy

FOCUS STRATEGIES

Focus strategies aim to sell goods or services to narrow or specific target market, niche or
segment. Focus builds competitive advantage through high specialization and concentration of
resources in a given niche.

Firms can build focus in one of the two ways. Focused Cost Leadership and Focused
Differentiation.

Focused cost Leadership: A market niche strategy, concentrating on a narrow customer

segment and competing with lowest prices, which, again, requires having lower cost structure
than competitors

Focused Differentiation: a second market niche strategy, concentrating on a narrow customer

segment and competing through differentiating features

e.g., a high-fashion women's clothing boutique

Some conditions that tend to favor focus (either cost or differentiation focus) are:

 The business is new and/or has modest resources

 The company lacks the capability to go after a wider part of the total market

 Buyers' needs or uses of the item are diverse; there are many different niches and
segments in the industry

 Buyer segments differ widely in size, growth rate, profitability, and intensity in the five
competitive forces, making some segments more attractive than others

 Industry leaders don't see the niche as crucial to their own success

 Few or no other rivals are attempting to specialize in the same target segment

48
2.2.3. Strategies for Different Industry conditions (Industry Life Cycle Analysis)

A method for analyzing industries based on the idea that they go through a series of identifiable
life cycle phases (e.g., introduction, growth, maturity). The information gained from defining
where an industry is in its life cycle is used to determine the risk/reward ratio of a potential
investment. For example, investing during the introduction phase is high-risk since future growth
is uncertain. However, an early investment also has the potential for the greatest return.

Industry Life-cycle Analysis

A useful tool for analyzing the effects of industry evolution on competitive forces is the
“Industry life cycle” model, which identifies five sequential stages in the evolution of an
industry, viz.,
Embryonic, growth, shakeout, maturity and decline.

The strength and nature of each of Porter’s five competitive forces (particularly, those of ‘risk of
entry by potential competitors’ and ‘rivalry among existing firms’) change as an industry evolves
and managers have to anticipate these changes and formulate appropriate strategies.

The normal stages that a industry goes through during the course of its lifecycle in the market.
An industry lifecycle is broken into five separate phases: Early stages phase, innovation phase,
cost/shakeout phase, maturity phase and decline phase.

During the initial phase, the product may be altered to make a place for it in the industry. The
innovation phase looks to expand the product even further to come up with a concrete design.

The next phase involves companies within the industry establishing a concrete design thus
eliminating some of the smaller companies that do not follow this patter.

At the maturity stage, revenue from the product becomes the main focus of the company. Finally,
the decline phase is marked by decreasing revenue as demand shifts to another product in the
industry.

I. Strategies for Competing in Emerging Industries (Introduction Stage)

1. An emerging industry is one in the formative stage.
2. The business models and strategies of companies in an emerging industry are unproved – what
appears to be a promising business concept and strategy may never generate attractive bottom-
line profitability.
Challenges When Competing in Emerging Industries

49
 1. Competing in emerging industries presents managers with some unique strategy-making
challenges:
a. Because the market is new and unproved, there may be much speculation about how it will
function, how fast it will grow, and how big it will get
b. Much of the technological know-how underlying the products of emerging industries is
proprietary and closely guarded, having been developed in-house by pioneering firms; patents
and unique technical expertise are key factors in securing competitive advantage
c. Often there is no consensus regarding which of several competing technologies will win out
or which product attributes will proves decisive in winning buyer favor
d. Entry barriers tend to be relatively low, even for entrepreneurial start-up companies
e. Strong learning and experience curve effects may be present
f. Since in an emerging industry all buyers are first-time users, the marketing task is to induce
initial purchase and to overcome customer concerns about product features, performance
reliability, and conflicting claims of rival firms
g. Many potential buyers expect first-generation products to be rapidly improved, so they delay
purchase until technology and product design mature
h. Sometimes firms have trouble securing ample supplies of raw materials and components
i. Undercapitalized companies may end up merging with competitors or being acquired by
financially strong outsiders looking to invest in a growth market
2. The two critical strategic issues confronting firms in an emerging industry are:
a. How to finance initial operations until sales and revenues take off
b. What market segments and competitive advantages to go after in trying to secure a front-
runner position
3. A firm with solid resource capabilities, an appealing business model, and a good strategy has a
golden opportunity to shape the rules and establish itself as the recognized industry front-runner.

II. Strategies for Competing in Turbulent, High-Velocity Markets (Growth Stage)

1. More and more companies are finding themselves in industry situations characterized by rapid
technological change, short product life cycles because of entry of important new rivals into the
marketplace, frequent launches of new competitive moves by rivals, and fast-evolving customer
requirements and expectations – all occurring at once.
A. Strategic Postures for Coping with Rapid Change
1. The central strategy-making challenge in a turbulent market environment is managing change.
2. A company can assume any of three strategic postures in dealing with high-velocity change:
a. It can react to change
b. It can anticipate change, make plans for dealing with the expected changes, and follow its
plans as changes occur
c. It can lead change
Reacting to change and anticipating change are basically defensive postures; leading
change is an offensive posture.

50
III. Strategies for Competing in Maturing Industries (Maturity Stage)
1. A maturing industry is one that is moving from rapid growth to significantly slower growth.
2. An industry is said to be mature when nearly all potential buyers are already users of the
industry’s products. In a mature market, demand consists mainly of replacement sales to existing
users with growth hinging on the industry’s ability to attract the few remaining buyers and
convince existing buyers to up their usage.
A. Industry Changes Resulting from Market Maturity
1. An industry’s transition to maturity does not begin on an easily predicted schedule.
2. When growth rates do slacken, the onset of market maturity usually produces fundamental
changes in the industry’s competitive environment:
a. Slowing growth in buyer demand generates more head-to-head competition for market share
b. Buyers become more sophisticated, often driving a harder bargain on repeat purchases
c. Competition often produces a greater emphasis on cost and service
d. Firms have a topping-out problem in adding new facilities
e. Product innovation and new end-use applications are harder to come by
f. International competition increases
g. Industry profitability falls temporarily or permanently
h. Stiffening competition induces a number of mergers and acquisitions among former
competitors, drives the weakest firms out of the industry, and produces industry consolidation
in general
IV. Strategies for Firms in Stagnant or Declining Industries (Decline Stage)
1. Many firms operate in industries where demand is growing more slowly than the economy-wide
average or is even declining.
2. Stagnant demand by itself is not enough to make an industry unattractive. Selling out may or may
not be practical and closing operations is always a last resort.
3. Businesses competing in stagnant or declining industries must resign themselves to performance
targets consistent with available market opportunities.
4. In general, companies that succeed in stagnant industries employ one or more of three strategic
themes:
a. Pursue a focused strategy aimed at the fastest growing market segments within the industry
b. Stress differentiation based on quality improvement and product innovation
c. Strive to drive costs down and become the industry’s low-cost provider
CORE CONCEPT: Achieving competitive advantage in stagnant or declining industries
usually requires pursuing one of three competitive approaches: focusing on growing
market segments within the industry, differentiating on the basis of better quality and
frequent product innovation, or becoming a lower-cost producer.

51
 5. These three strategic themes are not mutually exclusive.
6. The most common strategic mistakes companies make in stagnating or declining markets are:
a. Getting trapped in a profitless war of attrition
b. Diverting too much cash out of the business too quickly
c. Being overly optimistic about the industry’s future and spending too much on improvements
in anticipation that things will get better

End of Unit-2

References: Educational websites & prescribed reference books

52
 Unit-III

3. Strategic Analysis and Choice (10)

3.1. Selecting the best Strategy, Process of Strategic Choice

3.2. Strategic Analysis- Corporate Portfolio Analysis- BCG Product Portfolio and GE Nine
Matrix Cell, Competitor Analysis
3.3. Industry Analysis- Porter five forces analysis

53
3.1. Selecting the best Strategy, Process of Strategic Choice

Focusing on strategic alternatives: It involves identification of all alternatives. The strategist

examines what the organization wants to achieve (desired performance) and what it has really
achieved (actual performance). The gap between the two positions constitutes the background for
various alternatives and diagnosis. This is gap analysis. The gap between what is desired and
what is achieved widens as the time passes if no strategy is adopted.

Evaluating strategic alternatives: The next step is to assess the pros and cons of various
alternatives and their suitability. The tools which may be used are portfolio analysis, GE business
screen and corporate Parenting. [Describe each of these]

Considering decision factors:

(i) Objective factors:-

54
¨ Environmental factors

– Volatility of environment

– Input supply from environment

– Powerful stakeholders

¨ Organizational factors

– Organization’s mission

– Strategic intent

– Business definition

– Strengths and weaknesses

(ii) Subjective factors:-

– Strategies adopted in the previous period;

– Personal preferences of decision- makers;

– Management’s attitude toward risk;

– Pressure from stakeholders;

– Pressure from corporate culture; and

– Needs and desires of key managers.

Constructing Corporate scenario: Corporate scenario consists of proforma balance sheets and
income statement which forecasts the strategic alternative’s impact on various divisions.

First: 3 sets of estimated figures for optimistic, pessimistic and most likely conditions are
manipulated for all economic factors and key external strategic factors.

Second: Common size financial statements with projections are drawn.

55
Third: Based on historical data from previous years balance sheet projection for next 5 years for
Optimistic (O), Pessimistic (P), and Most likely (M) are developed.

Corporate scenario is constructed for every strategic alternative considering both environmental
factors and market conditions. It provides sufficient information for a strategist to make final
decision.

Process of Strategic Choice:

Two techniques are used in the process of selection of a strategy, namely:

(i) Devil’s Advocate – in strategic decision- making is responsible for identifying potential
pitfalls and problems in a proposed strategic alternative by making a formal presentation.

(ii) Dialectical inquiry – involves making two proposals with contrasting assumptions for
each strategic alternative. The merits and demerits of the proposal will be argued by advocates
before the key decision-makers. Finally one alternative will emerge viable for implementation.

3.2. Strategic Analysis- Corporate Portfolio Analysis- BCG Product Portfolio

and GE Nine Matrix Cell, Competitor Analysis

Corporate Portfolio Analysis- BCG Product Portfolio

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BCG matrix
(or growth-share matrix) is a corporate planning tool, which is used to portray firm’s
brand portfolio or SBUs on a quadrant along relative market share axis (horizontal axis)
and speed of market growth (vertical axis) axis.
Growth-share matrix
Is a business tool, which uses relative market share and industry growth rate factors to
evaluate the potential of business brand portfolio and suggest further investment
strategies.

Understanding the tool

BCG matrix is a framework created by Boston Consulting Group to evaluate the strategic
position of the business brand portfolio and its potential. It classifies business portfolio into four
categories based on industry attractiveness (growth rate of that industry) and competitive
position (relative market share). These two dimensions reveal likely profitability of the business
portfolio in terms of cash needed to support that unit and cash generated by it. The general
purpose of the analysis is to help understand, which brands the firm should invest in and which
ones should be divested.

Relative market share. One of the dimensions used to evaluate business portfolio is relative
market share. Higher corporate’s market share results in higher cash returns. This is because a
firm that produces more, benefits from higher economies of scale and experience curve, which
results in higher profits. Nonetheless, it is worth to note that some firms may experience the
same benefits with lower production outputs and lower market share.

Market growth rate. High market growth rate means higher earnings and sometimes profits but
it also consumes lots of cash, which is used as investment to stimulate further growth. Therefore,
business units that operate in rapid growth industries are cash users and are worth investing in
only when they are expected to grow or maintain market share in the future.

There are four quadrants into which firms brands are classified:

Dogs. Dogs hold low market share compared to competitors and operate in a slowly growing
market. In general, they are not worth investing in because they generate low or negative cash
returns. But this is not always the truth. Some dogs may be profitable for long period of time,
they may provide synergies for other brands or SBUs or simple act as a defense to counter
competitors moves. Therefore, it is always important to perform deeper analysis of each brand or
SBU to make sure they are not worth investing in or have to be divested.
Strategic choices: Retrenchment, divestiture, liquidation
57
Cash cows. Cash cows are the most profitable brands and should be “milked” to provide as
much cash as possible. The cash gained from “cows” should be invested into stars to support
their further growth. According to growth-share matrix, corporates should not invest into cash
cows to induce growth but only to support them so they can maintain their current market share.
Again, this is not always the truth. Cash cows are usually large corporations or SBUs that are
capable of innovating new products or processes, which may become new stars. If there would
be no support for cash cows, they would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment

Stars. Stars operate in high growth industries and maintain high market share. Stars are both
cash generators and cash users. They are the primary units in which the company should invest
its money, because stars are expected to become cash cows and generate positive cash flows.
Yet, not all stars become cash flows. This is especially true in rapidly changing industries, where
new innovative products can soon be outcompeted by new technological advancements, so a star
instead of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration, market
development, product development

Question marks. Question marks are the brands that require much closer consideration. They
hold low market share in fast growing markets consuming large amount of cash and incurring
losses. It has potential to gain market share and become a star, which would later become cash
cow. Question marks do not always succeed and even after large amount of investments they
struggle to gain market share and eventually become dogs. Therefore, they require very close
consideration to decide if they are worth investing in or not.
Strategic choices: Market penetration, market development, product development, divestiture

BCG matrix quadrants are simplified versions of the reality and cannot be applied blindly. They
can help as general investment guidelines but should not change strategic thinking. Business
should rely on management judgement, business unit strengths and weaknesses and external
environment factors to make more reasonable investment decisions.

Advantages and disadvantages

Benefits of the matrix:

 Easy to perform;
 Helps to understand the strategic positions of business portfolio;
 It’s a good starting point for further more thorough analysis.

Growth-share analysis has been heavily criticized for its oversimplification and lack of useful
application. Following are the main limitations of the analysis:

58
  Business can only be classified to four quadrants. It can be confusing to classify an SBU
that falls right in the middle.
 It does not define what ‘market’ is. Businesses can be classified as cash cows, while they
are actually dogs, or vice versa.
 Does not include other external factors that may change the situation completely.
 Market share and industry growth are not the only factors of profitability. Besides, high
market share does not necessarily mean high profits.
 It denies that synergies between different units exist. Dogs can be as important as cash
cows to businesses if it helps to achieve competitive advantage for the rest of the
company.

Using the BCG matrix to strategize

Now that you know where each business unit or product stands, you can evaluate them
objectively.

1. Build. Increase investment in a product to increase its market share. For example, you
can push a question mark into a star and, finally, a cash cow.
2. Hold. If you can't invest more into a product, hold it in the same quadrant and leave it be.
3. Harvest. Reduce your investment and try to take out the maximum cash flow from the
product, which increases its overall profitability (best for cash cows).
4. Divest. Release the amount of money already stuck in the business (best for dogs).

Using the tool

Although BCG analysis has lost its importance due to many limitations, it can still be a useful
tool if performed by following these steps:

 Step 1. Choose the unit

 Step 2. Define the market
 Step 3. Calculate relative market share
 Step 4. Find out market growth rate
 Step 5. Draw the circles on a matrix

Step 1. Choose the unit. BCG matrix can be used to analyze SBUs, separate brands, products or
a firm as a unit itself. Which unit will be chosen will have an impact on the whole analysis.
Therefore, it is essential to define the unit for which you’ll do the analysis.

Step 2. Define the market. Defining the market is one of the most important things to do in this
analysis. This is because incorrectly defined market may lead to poor classification. For example,
59
if we would do the analysis for the Daimler’s Mercedes-Benz car brand in the passenger vehicle
market it would end up as a dog (it holds less than 20% relative market share), but it would be a
cash cow in the luxury car market. It is important to clearly define the market to better
understand firm’s portfolio position.

Step 3. Calculate relative market share. Relative market share can be calculated in terms of
revenues or market share. It is calculated by dividing your own brand’s market share (revenues)
by the market share (or revenues) of your largest competitor in that industry. For example, if
your competitor’s market share in refrigerator’s industry was 25% and your firm’s brand market
share was 10% in the same year, your relative market share would be only 0.4. Relative market
share is given on x-axis. It’s top left corner is set at 1, midpoint at 0.5 and top right corner at 0
(see the example below for this).

Step 4. Find out market growth rate. The industry growth rate can be found in industry
reports, which are usually available online for free. It can also be calculated by looking at
average revenue growth of the leading industry firms. Market growth rate is measured in
percentage terms. The midpoint of the y-axis is usually set at 10% growth rate, but this can vary.
Some industries grow for years but at average rate of 1 or 2% per year. Therefore, when doing
the analysis you should find out what growth rate is seen as significant (midpoint) to separate
cash cows from stars and question marks from dogs.

Step 5. Draw the circles on a matrix. After calculating all the measures, you should be able to
plot your brands on the matrix. You should do this by drawing a circle for each brand. The size
of the circle should correspond to the proportion of business revenue generated by that brand.

GE Nine Matrix Cell

GE-McKinsey nine-box matrix

is a strategy tool that offers a systematic approach for the multi business corporation to
prioritize its investments among its business units.
[1]

GE-McKinsey
is a framework that evaluates business portfolio, provides further strategic implications
and helps to prioritize the investment needed for each business unit (BU).
[2]

60
Understanding the tool
In the business world, much like anywhere else, the problem of resource scarcity is affecting the
decisions the companies make. With limited resources, but many opportunities of using them, the
businesses need to choose how to use their cash best. The fight for investments takes place in
every level of the company: between teams, functional departments, divisions or business units.
The question of where and how much to invest is an ever going headache for those who allocate
the resources.

How does this affect the diversified businesses? Multi business companies manage complex
business portfolios, often, with as much as 50, 60 or 100 products and services. The products or
business units differ in what they do, how well they perform or in their future prospects. This
makes it very hard to make a decision in which products the company should invest. At least, it
was hard until the BCG matrix and its improved version GE-McKinsey matrix came to help.
These tools solved the problem by comparing the business units and assigning them to the
groups that are worth investing in or the groups that should be harvested or divested.

61
In 1970s, General Electric was managing a huge and complex portfolio of unrelated products and
was unsatisfied about the returns from its investments in the products. At the time, companies
usually relied on projections of future cash flows, future market growth or some other future
projections to make investment decisions, which was an unreliable method to allocate the
resources. Therefore, GE consulted the McKinsey & Company and as a result the nine-box
framework was designed. The nine-box matrix plots the BUs on its 9 cells that indicate whether
the company should invest in a product, harvest/divest it or do a further research on the product
and invest in it if there’re still some resources left. The BUs are evaluated on two axes: industry
attractiveness and a competitive strength of a unit.

Industry Attractiveness

Industry attractiveness indicates how hard or easy it will be for a company to compete in the
market and earn profits. The more profitable the industry is the more attractive it becomes. When
evaluating the industry attractiveness, analysts should look how an industry will change in the
long run rather than in the near future, because the investments needed for the product usually
require long lasting commitment.

Industry attractiveness consists of many factors that collectively determine the competition level
in it. There’s no definite list of which factors should be included to determine industry
attractiveness, but the following are the most common: [1]

 Long run growth rate

 Industry size
 Industry profitability: entry barriers, exit barriers, supplier power, buyer power, threat of
substitutes and available complements (use Porter’s Five Forces analysis to determine
this)
 Industry structure (use Structure-Conduct-Performance framework to determine this)
 Product life cycle changes
 Changes in demand
 Trend of prices
 Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labor
 Market segmentation

Competitive strength of a business unit or a product

Along the X axis, the matrix measures how strong, in terms of competition, a particular business
unit is against its rivals. In other words, managers try to determine whether a business unit has a
sustainable competitive advantage (or at least temporary competitive advantage) or not. If the

62
company has a sustainable competitive advantage, the next question is: “For how long it will be
sustained?”

The following factors determine the competitive strength of a business unit:

 Total market share

 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to determine this)
 Your business unit strength in meeting industry’s critical success factors (use
Competitive Profile Matrix to determine this)
 Strength of a value chain (use Value Chain Analysis and Benchmarking to determine
this)
 Level of product differentiation
 Production flexibility

Advantages

 Helps to prioritize the limited resources in order to achieve the best returns.
 Managers become more aware of how their products or business units perform.
 It’s more sophisticated business portfolio framework than the BCG matrix.
 Identifies the strategic steps the company needs to make to improve the performance of
its business portfolio.

Disadvantages

 Requires a consultant or a highly experienced person to determine industry’s

attractiveness and business unit strength as accurately as possible.
 It is costly to conduct.
 It doesn’t take into account the synergies that could exist between two or more business
units.

Difference between GE McKinsey and BCG matrices

GE McKinsey matrix is a very similar portfolio evaluation framework to BCG matrix. Both
matrices are used to analyze company’s product or business unit portfolio and facilitate the
investment decisions.

The main differences:

63
 Visual difference. BCG is only a four cell matrix, while GE McKinsey is a nine cell
matrix. Nine cells provide better visual portrait of where business units stand in the
matrix. It also separates the invest/grow cells from harvest/divest cells that are much
closer to each other in the BCG matrix and may confuse others of what investment

decisions to make.


64
  Comprehensiveness. The reason why the GE McKinsey framework was developed is
that BCG portfolio tool wasn’t sophisticated enough for the guys from General Electric.
In BCG matrix, competitive strength of a business unit is equal to relative market share,
which assumes that the larger the market share a business has the better it is positioned to
compete in the market. This is true, but it’s too simplistic to assume that it’s the only
factor affecting the competition in the market. The same is with industry attractiveness
that is measured only as the market growth rate in BCG. It comes to no surprise that GE
with its complex business portfolio needed something more comprehensive than that.

Competitor Analysis
Organizations must operate within a competitive industry environment. They do not exist in
vacuum. Analyzing organization’s competitors helps an organization to discover its weaknesses,
to identify opportunities for and threats to the organization from the industrial environment.
While formulating an organization’s strategy, managers must consider the strategies of
organization’s competitors. Competitor analysis is a driver of an organization’s strategy and
effects on how firms act or react in their sectors. The organization does a competitor analysis to
measure / assess its standing amongst the competitors.

Competitor analysis begins with identifying present as well as potential competitors. It

portrays an essential appendage to conduct an industry analysis. An industry analysis gives
information regarding probable sources of competition (including all the possible strategic
actions and reactions and effects on profitability for all the organizations competing in the
industry). However, a well-thought competitor analysis permits an organization to concentrate on
those organizations with which it will be in direct competition, and it is especially important
when an organization faces a few potential competitors.

The main objectives of doing competitor analysis can be summarized as follows:

To study the market;

To predict and forecast organization’s demand and supply;
To formulate strategy;
To increase the market share;
To study the market trend and pattern;
To develop strategy for organizational growth;
When the organization is planning for the diversification and expansion plan;
To study forthcoming trends in the industry;
Understanding the current strategy strengths and weaknesses of a competitor can suggest
65
 opportunities and threats that will merit a response;
Insight into future competitor strategies may help in predicting upcoming threats and
opportunities.

Competitors should be analyzed along various dimensions such as their size, growth and
profitability, reputation, objectives, culture, cost structure, strengths and weaknesses, business
strategies, exit barriers, etc.

What Competitor Information Should be Collated?

1. Who Are Your Competitors?

The firm should decide on which competitors are likely to impact on their business and
which businesses the firm will be able to compete with. This will depend on the size of
the business and whether it is a national or local business. For example a local shop will
not be able to compete with a national supermarket but they may need to take a "mini"
branch of a supermarket chain into account if it is located near to the shop. There are a
number of models which can be used to identify competitors including Porters Five
Forces model.

2. What Is The Size And Dominance Of Your Competitors Within The Market?

An understanding of the market share each competitor has, will help you identify their
size and dominance. It will also reveal whether there is market share available for your
business.

3. What Customer Base Do Competitors Have?

This will help you identify if a firm is a competitor. If a firm is aimed at a different
customer base to yours they may not be a competitor. However if their success is due to
their customer base should your firm reconsider your customer base? And would you like
to compete directly with the competitor?

4. What Are Market Positioning Strategies of Competitors?

This question is about the perceptions customers have about your competitor's products.
Are they quality products? cheap products or luxury products? Think about how each
competitor's positioning strategy is the same or different to yours?

5. What Objectives Does Each Competitor Have?

66
 This includes future growth plans and company values. For example are they about to
embark on an aggressive growth programme? Or do they believe in recycling and saving
the planet. To gather information about competitor objectives and plans look at their
websites, company reports, press releases and marketing material. It is important to
analyse competitor objectives so that you get an idea of their values and likely strategy.

The process of competitor analysis

Identifying key competitors

Assessing their objectives

Assessing their strengths and weaknesses

Assessing their strategies

Assessing their reaction patterns

Selecting which competitors to attack or avoid.

1. Identifying competitors

(a) Industry basis

(b) Market basis

2. Determining competitors’ objectives

Companies differ on the weights they put on short term and long term profitability and other
objectives. Some competitors might be oriented toward satisfying profits (breaking even) than
maximizing the profits.

The company should be able to know the relative importance that a competitor places on current
profitability, market share, share growth, cash flow, technological leadership etc.

E.g. a company pursuing low cost leadership will react more strongly to a competitor’s cost-
reducing manoeuvres than to the same competitor’s advertising increase.

3. Identifying competitors’ strategies

67
In most industries, competitors can be sorted out into groups pursuing different strategies. A
strategic group is a group of firms in an industry pursuing similar strategy. The company needs to
examine each competitor on the following;

Product quality

Features and product mix

Customer service

Pricing policy

Distribution coverage

Promotion strategy

R & D effectiveness

4. Assessing competitors’ strengths/weaknesses

 Assess the company’s and competitor’s performance on different customer values against
their ranked importance.

 Examine how customers in a specific segment rank the company’s performance against a
specific major competitor on important attributes.

 Monitor changes in customer value over time

5. Estimating competitor’s reaction patterns

Each competitor reacts differently. Some react to certain types of attacks but not to others
i.e. they may respond strongly to

price decreases but may not respond at all to advertising increases. This depends on their
profit and marketing objectives.

6. Selecting competitors to attack or avoid

A company may benefit from some competitors. This may be in the following ways;

Competitors may help increase total demand

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 They share the costs of product and market development

They help to legitimize a new product/ technology

They may serve less attractive segments which may accuse the company of ignoring the
segments

Therefore some companies compete “constructively” while others may compete

“destructively”. Companies will often attack competitors who are destructive, small, or
weak.

3.3. Industry Analysis- Porter five forces analysis

These forces determine an industry structure and the level of competition in that industry. The
stronger competitive forces in the industry are the less profitable it is. An industry with low
barriers to enter, having few buyers and suppliers but many substitute products and competitors
will be seen as very competitive and thus, not so attractive due to its low profitability.

It is every strategist’s job to evaluate company’s competitive position in the industry and to
identify what strengths or weakness can be exploited to strengthen that position. The tool is very

69
useful in formulating firm’s strategy as it reveals how powerful each of the five key forces is in a
particular industry.

Threat of new entrants. This force determines how easy (or not) it is to enter a particular
industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies.
When more organizations compete for the same market share, profits start to fall. It is essential
for existing organizations to create high barriers to enter to deter new entrants. Threat of new
entrants is high when:

 Low amount of capital is required to enter a market;

 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand
reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to
other industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced
or low quality raw materials to their buyers. This directly affects the buying firms’ profits
because it has to pay more for materials. Suppliers have strong bargaining power when:

 There are few suppliers but many buyers;

 Suppliers are large and threaten to forward integrate;
 Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.

Bargaining power of buyers. Buyers have the power to demand lower price or higher product
quality from industry producers when their bargaining power is strong. Lower price means lower
revenues for the producer, while higher quality products usually raise production costs. Both
scenarios result in lower profits for producers. Buyers exert strong bargaining power when:

 Buying in large quantities or control many access points to the final customer;
 Only few buyers exist;
 Switching costs to other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

70
Threat of substitutes. This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch from one product or
service to another with little cost. For example, to switch from coffee to tea doesn’t cost
anything, unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how competitive
and profitable an industry is. In competitive industry, firms have to compete aggressively for a
market share, which results in low profits. Rivalry among competitors is intense when:

 There are many competitors;

 Exit barriers are high;
 Industry of growth is slow or negative;
 Products are not differentiated and can be easily substituted;
 Competitors are of equal size;
 Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry, scholars have suggested
including the sixth force: complements. Complements increase the demand of the primary
product with which they are used, thus, increasing firm’s and industry’s profit potential. For
example, iTunes was created to complement iPod and added value for both products. As a result,
both iTunes and iPod sales increased, increasing Apple’s profits.

References: Educational websites & prescribed reference books

71
 UNIT-IV

Strategy Implementation (10)

4.1. Procedural Implementation & Resource Allocation

4.2. Behavioral Implementation-Strategic Leadership.
4.3. Structural Implementation - Interrelationship of Structure and
Strategy, Structures for Business and Corporate Strategies
4.4. Functional Implementation.

72
4.1. Procedural Implementation & Resource Allocation

PROCEDURAL IMPLEMENTATION :
Any organization which is planning to implement strategies must be aware of the procedural
framework within which the plans, programs, and projects have to be approved by the
government at the central, state and local levels. The procedural framework consists of a number
of legislative enactments and administrative orders, besides the policy guidelines issued by the
Government of India from time to time.
The regulatory mechanisms for trade, commerce, and industry in India span the whole range of
legal structure from the Constitution of India, the Directives Principles, Central laws, State laws,
general laws, sector-specific laws, industry-specific laws and rules and procedures imposed by
the implementing authorities at the local level. The laws lay down elaborate rules and procedures
to be followed.
Following the procedures laid down for project implementation constitutes an important
component of strategy implementation in the Indian context. The Government has an elaborate
set of procedures depending on the type of project to be implemented. Government agencies at
the central and state levels play a major role while some procedures require the involvement of
the local governmental agencies. All the subjects having a bearing on industrial development are
handled by different ministries and departments at the central government level. There are apex
level committees such as the Cabinet Committee on Economic Affairs. Apart from these
agencies, the regulatory agencies, such as, Central Electricity Regulatory Commission (CERC),
Telecom Regulatory Authority of India (TRAI), Insurance Regulatory and Develop¬ment
Authority (IRDA), also play a significant role. At the State level, the Directorate of Industries is
the pivot around which the entire industrial activity in the State revolves.

73
Further in this section, we shall briefly review some of the major elements of the government's
regulatory framework that affects strategy formulation and implementation within organisations.
Government police, laws, rules and regulations, and procedures are constantly under change
special under conditions where India is fast adapting to the international environment aril
incorporating liberalisation and globalisation measures in its policies.
The regulatory elements to be reviewed are as below.
1. Formation of a company
2. Licensing procedures
3. Securities and Exchange Board of India (SEBI) requirements
4. Monopolies and Restrictive Trade Practices (MRTP) requirements
5. Foreign collaboration procedures
6. Foreign Exchange Management Act (FEMA) requirements
7. Import and export requirements
8. Patenting and trademarks requirements
9. Labour legislation requirements
10. Environmental protection and pollution control requirements
11. Consumer protection requirements
12. Incentives and facilities benefits
RESOURCE ALLOCATION :
A strategic plan is the representation of the hopes and aspirations of strategists. Project
implementation is meant for the creation of an infrastructure to enable them to put such a plan
into action. Procedural implementation provides the 'go-ahead' signal. But nothing really happens
until resources are procured and allocated to tasks for the accomplishment of objectives.
Resource allocation deals with the procurement and commitment of financial, physical, and
human resources to strategic tasks for the achievement of organisational objectives. We noted
how organizational resources in tandem with organisational behaviour constitute the foundation
for the creation of strengths and weaknesses, synergistic advantages, core competencies, and
organizational capability, ultimately leading to the competitive advantage that an organisation
has.
Resource allocation is both a one-time and a continuous process. When a new project is
implemented, it would require the allocation of resources. An on-going concern would also
require a continual infusion of resources. Strategy implementation should deal with both these
74
types of resource allocation. Several questions have to be dealt with in resource allocation: what
sources can be tapped for resources? What factors affect resource allocation? What different
approaches could be adopted? How does resource allocation take place? And finally, what are
the difficulties encountered? We deal with these questions in the following sub-sections.

Procurement of Resources :
The different types of resources financial, physical, and human are derived from different
sources. But finance is generally considered to be the primary source; it is used for the creation
and maintenance of other resources. We deal with the sources of finance here. The procurement
of physical and human resources will be dealt with LC operations and personnel functional
strategies to be discussed in a later chapter.
Basically, there are two types of finances: long-term and short-term. Long-term finance is
required for the creation of capital assets. Short-term finance is for working capital. Both types
of finances can be procured from the internal and external sources.
Internal sources include retained earnings, depreciation provisions, taxation provisions, and other
types of reserves, like, development rebate and investment allowance reserves. External sources
consist of capital market sources, such as, equity and loans (generally for long-term finance) and
money market sources, such as, bank credit, hire-purchase debt, trade credit, instalment credit
and fixed deposits (generally for short-term finances). While both internal and external sources
carry benefits as well as disadvantages, given a choice, a business firm would prefer the internal
sources. But much depends on the management policy related to financing. The cost of capital
from different sources has to be considered.
When modernisation, expansion, and diversification strategies lead to the creation of a new
company or require additional investments, and when external sources of financing are tapped,
certain important issues have to be considered. These are the requirements of the SEBI and
financial institutions, and the stipulations of stock exchanges. The SEBI would consider the total
capital cost outlays and the scheme of finance for project, debt-equity ratio, and equity-
preference ratio. The financial institutions (IFCI, ICICI, IDBI, IRCI, LIC, UTI, NSIC, which are
central-level institutions besides the state-level SFCs and SIDCs) have their own norms and
specific areas and types of financing. The primary support for working capital is provided by
commercial banks.
75
Having procured financial resources, the strategists set out to implement the strategies in right
earnest. The first task is to distribute the resources within the organisation to different SBUs,
divisions, departments, functions, tasks and individuals. The next section looks at the approaches
that could be adopted for resource allocation.
.

4.2. Behavioral Implementation-Strategic Leadership.

Strategic leadership refers to a manager’s potential to express a strategic vision for the
organization, or a part of the organization, and to motivate and persuade others to acquire
that vision. Strategic leadership can also be defined as utilizing strategy in the management of
employees. It is the potential to influence organizational members and to execute organizational
change. Strategic leaders create organizational structure, allocate resources and express strategic
vision. Strategic leaders work in an ambiguous environment on very difficult issues that
influence and are influenced by occasions and organizations external to their own.

The main objective of strategic leadership is strategic productivity. Another aim of strategic
leadership is to develop an environment in which employees forecast the organization’s needs in
context of their own job. Strategic leaders encourage the employees in an organization to follow
their own ideas. Strategic leaders make greater use of reward and incentive system for
encouraging productive and quality employees to show much better performance for their
organization. Functional strategic leadership is about inventiveness, perception, and planning to
assist an individual in realizing his objectives and goals.

Strategic leadership requires the potential to foresee and comprehend the work environment. It
requires objectivity and potential to look at the broader picture.

A few main traits / characteristics / features / qualities of effective strategic leaders that do
lead to superior performance are as follows:

Loyalty- Powerful and effective leaders demonstrate their loyalty to their vision by their
words and actions.
Keeping them updated- Efficient and effective leaders keep themselves updated about what
is happening within their organization. They have various formal and informal sources of
information in the organization.
Judicious use of power- Strategic leaders makes a very wise use of their power. They must
play the power game skillfully and try to develop consent for their ideas rather than forcing

76
 their ideas upon others. They must push their ideas gradually.
Have wider perspective/outlook- Strategic leaders just don’t have skills in their narrow
specialty but they have a little knowledge about a lot of things.
Motivation- Strategic leaders must have a zeal for work that goes beyond money and power
and also they should have an inclination to achieve goals with energy and determination.
Compassion- Strategic leaders must understand the views and feelings of their subordinates,
and make decisions after considering them.
Self-control- Strategic leaders must have the potential to control distracting/disturbing
moods and desires, i.e., they must think before acting.
Social skills- Strategic leaders must be friendly and social.
Self-awareness- Strategic leaders must have the potential to understand their own moods
and emotions, as well as their impact on others.
Readiness to delegate and authorize- Effective leaders are proficient at delegation. They
are well aware of the fact that delegation will avoid overloading of responsibilities on the
leaders. They also recognize the fact that authorizing the subordinates to make decisions will
motivate them a lot.
Articulacy- Strong leaders are articulate enough to communicate the vision(vision of where
the organization should head) to the organizational members in terms that boost those
members.
Constancy/ Reliability- Strategic leaders constantly convey their vision until it becomes a
component of organizational culture.

To conclude, Strategic leaders can create vision, express vision, passionately possess vision and
persistently drive it to accomplishment.

4.3. Structural Implementation - Interrelationship of Structure and Strategy,

Structures for Business and Corporate Strategies

STRUCTURAL CONSIDERATIONS :
We usually conceive of organisation structure as a chart consisting of boxes in which the names
of position or designations of personnel (and sometimes the name of the person occupying the
position) are written in a hierarchical order along with the depiction of the relationship that exists
between various positions. To a strategist, an organisation structure is not only a chart but much
more.

77
What is Structure?
An organisation structure is the way in which the tasks and subtasks required to implement a
strategy are arranged. The diagrammatical representation of structure could be an organisation
chart but a chart shows only the 'skeleton'. The 'flesh and blood' that bring to life an organisation
are the several mechanisms that support the structure. All these cannot be depicted on a chart.
But a strategist has to grapple with the complexities of creating the structure, making it work,
redesigning when required, and implementing changes that will keep the structure relevant to the
needs of the strategies that have to be implemented.
Structural Mechanisms :
To find out what the structural mechanisms are, it is useful to consider the case of a new
organisation which has decided to achieve a set of objectives through the implementation of
certain strategies. In the next two paragraphs, we shall relate the 'story" of how structural
mechanisms evolve.
The implementation of strategies would require the performance of tasks. Some of these tasks
are related to the formulation and implementation of programmes and projects. We dealt with
these tasks in the previous chapter which was on activating strategies. Having laid the
foundations of an organisation, the strategists now have to devote their attention to the tasks,
which would have to be performed on a continuing basis for the implementation of strategies. It
would be practically impossible to list all such tasks, so the strategists would attempt to
enumerate the major tasks. These major tasks would have to be grouped on the basis of the
commonality of the skills required to perform them. Having grouped the major tasks, each
category of such tasks will have to be again segregated on the basis of the ability of an individual
to perform a unit of tasks. This is the process by which organisational units, such as.
Departments are created and hierarchies defined.
The total responsibility to implement strategies has to be subdivided and distributed to different
organisational units. The authority to discharge the responsibilities will also have to be delegated
if the tasks have to be performed. To ensure that different organisational units do not work at
cross-purpose, coordination will have to be ensured through communication. The performance
will have to be appraised and controlled so that the tasks are performed in a sequence and
according to a schedule. Desirable behaviour to perform these tasks will have to be encouraged
and undesirable behaviour curbed. For this, rewards and penalties will have to be used. Since the
performance of tasks cannot be left to chance, the creation of motivation will have to be
78
facilitated so that organisational effort is directed towards a common purpose. Further,
individuals will have to be trained so that objective-achieving capability is created and sustained.
The new organisation that has been exemplified will come into being and start functioning in the
manner described above. All the activities mentioned will now have to be performed on a
continuing basis.
We can now derive the different mechanisms on the basis of the above example. These are
summarised as follows:
1. Defining the major tasks required to implement a strategy
2. Grouping tasks on the basis of common skill requirements
3. Subdivision of responsibility and delegation of authority to perform tasks
4. Coordination of divided responsibility
5. Design and administration of the information system
6. Design and administration of the control system
7. Design and administration of the appraisal system
8. Design and administration of the motivation system
9. Design and administration of the development system
10. Design and administration of the planning system
The first four of these mechanisms will lead to the creation of the structure. The other six
mechanisms are devised to hold and sustain the structure. Collectively, we could refer to the last
six mechanisms as organisational systems.
Note that structural mechanisms alone will not fulfill the requirements of strategy
implementation. Structure is the 'hardware' while the other aspects constitute the 'software' of
structural implementation. The other major aspects of implementation relate to the leadership
styles, corporate culture, and other related issues. These will be dealt with in subsequent
chapters. Here, we focus our attention on the structural mechanisms required for the
implementation of strategies. But before we move on to a discussion of structures for strategy
and other aspects, it is essential to understand how environment, strategy and structure are
related, and how a structure evolves.

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STRUCTURES FOR STRATEGIES :
There are several types of structures that are found in organisations. Here, some major types of
'pure' structures are described, with a special emphasis on their appropriateness for the different
types of strategies. In practice, the actual organization a Utructure may be a combination of these
'pure' structures.
Entrepreneurial Structure
The entrepreneurial structure, shown in Exhibit, is the most elementary form of structure and is
appropriate for an organisation that is owned and managed by one person. A small-scale
industrial unit, a small proprietary concern, or a mini-service outlet may exhibit the
characteristics of organisations which are based on an entre¬preneurial structure. Typically,
these organisations are single-business, -product, or -service firms that serve local markets. The
owner-manager looks after all decisions, whether they are day-to-day operational matters or
strategic in nature.

Owner-Manager
Employees
The advantages that the entrepreneurial structure offers are:
■ Quick decision-making, as power is centralised
■ Timely response to environmental changes
■ Informal and simple organisation systems
The disadvantages of the entrepreneurial structure are
■ Excessive reliance on the owner-manager and so proves to be demanding for the owner-
manager
■ May divert the attention of owner-manager to day-to-day operational matters and ignore
strategic decision
■ Increasingly inadequate for future requirements if volume of business expands

Functional Stnicture
As the volume of business expands, the entrepreneurial structure outlives its usefulness. The
need arises for specialised skills and delegation of authority to managers who can look after
different functional areas. A typical functional structure is shown in Exhibit. Note that
specialisation of skills is both according to the line and staff functions.
80
Exhibit
The functional structure seeks to distribute decision-making and operational au¬thority along
functional lines.

Finance

Production

The advantages that a functional structure offers are:

■ Efficient distribution of work through specialisation
■ Delegation of day-to-day operational functions
■ Providing time for the top management to focus on strategic decisions.

The disadvantages of a functional structure are:

■ Creates difficulty in coordination among different functional areas
■ Creates specialists, which results in narrow specialisation, often at the cost of the overall
benefit of the organisation
■ Leads to functional, and line and staff conflicts
Despite the disadvantages, the functional structure is quite common and exists in its original or a
modified form as the organisation evolves from the initial to the mature stages of development.
Divisional Structure
The structural needs of expansion and growth are satisfied by the functional structure but only up
to a limit. There comes a time in the life of organisations when growth and increasing
complexity in terms of geographic expansion, market segmentation, and diversification make the
functional structure inadequate is necessary to deal with such situations. A divisional structure is
shown in Exhibit. Basically, work is divided on the basis of product lines, type, of customers
served, or geographic area covered, and then separate divisions or groups are created and placed
under the divisional-level management. Within divi-sions, the functional structure may still
operate.
The advantages that a divisional structure offers are:
■ Enables grouping of functions required for the performance of activities related to a division

81
■ Generates quick response to environmental changes affecting the businesses of different
divisions
■ Enables the top management to focus on strategic matters
The disadvantages of the divisional structure are:
■ Problems in the allocation of resources and corporate overhead costs-, parti¬cularly if the
business and corporate objectives are ill-defined
■ Inconsistency arising from the sharing of authority between the corporate ani divisional levels
■ Policy inconsistencies between the different divisions

Strategic Business Unit

Strategic business unit (SBU) has been defined by Sharplin as any part of a business organisation
which is treated separately for strategic management purposes. Whea organisations face
difficulty in managing divisional operations due to an increasing diversity, size, and number of
divisions, it becomes difficult for the top management to exercise strategic control. Here, the
concept of an SBU is helpful in creating am SBU-organisational structure.
Conceptually, an SBU is "a discrete element of the business serving specific prod-ucts-markets
with readily identifiable competitors and for which strategic planning can be conducted".7
Essentially, SBUs can be created by adding another level at management in a divisional structure
after the divisions have been grouped under a divisional top management authority on the basis
of common strategic interests. Exhibit provides a diagram of an SBU organisational structure.

SBU-Organisational Structure

CEO

Group Head SBU 1 Group Head SBU 2 Group Head SBU 3

Divisions Divisions Divisions

ABC DEF GHI

The advantages that the SBU-organisational structure offers are:

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■ Establishes coordination between divisions having common strategic interes
■ Facilitates strategic management and control of large, diverse organisations
■ Fixes accountability: the level of distinct business units
The disadvantages of the SBU-organisational structure are:
■ There are too many different SBUs to handle effectively in a large, di organisation
■ Difficulty in assigning responsibility and defining autonomy for SBU beafc
■ Addition of another layer of management between corporate and divi management.

Matrix Structure
In large organisations, there is often a need to work on major products or projects, each of which
is strategically significant. The result is the requirement of a matrix type of organisation
structure. Exhibit illustrates a matrix structure. Essentially, such a type of structure is created by
assigning functional specialists to work on a special project or a new product or service. For the
duration of the project, the spe¬cialists from different areas form a group or team and report to a
team leader. Simul¬taneously, they may also work in their respective parent departments. Once
the project is completed, the team members revert to their parent departments.

Matrix Organisational Structure

CEO

Finance Marketing Personnel Operations

Project Manager A

Project Manager B

Project Manager C
The advantages that the matrix structure offers are:
■ Allows individual specialists to be assigned where their talent is the most needed
■ Fosters creativity because of the pooling of diverse talents
■ Provides good exposure to specialists in general management
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The disadvantages of matrix structure are:
■ Dual accountability creates confusion and difficulty for individual team mem¬bers
■ Requires a high level of vertical and horizontal combination
■ Shared authority may create communication problems

Network Structure
The increasing volatility of the environment, coupled with the emergence of knowledge-based
industries, has led to the creation of a network structure. Also known as the 'spider's web
structure' or the 'virtual organisation', the network structure is "composed of a series of project
groups or collaborations linked by constantly changing non-hierarchical cobweb-like networks".
Exhibit illustrates a network structure. This structure is highly decentralised and organised
around customer groups or geographical regions. Rather than being located in one place, the
business functions are scattered far and wide. The core organisation is only a shell with a small
headquarters acting as a 'broker' connected to the suppliers and the specialised functions
performed by autonomous teams and workforce.
The network structure is most suited to organisations that face a continually changing
environment requiring quick response, high level of adaptability, and strong innovations skills.
This structure makes extensive use of the outsourcing of support services required to produce
and market products or services. There are few internal resources and a network structure firm
relies heavily on outsiders who are specialized in their respective areas.
Other Types of Structures
Besides the six major structures described above, there are several other types of structures that
are used in organisations. We briefly describe five such structures below.
Product-based structures: The grouping of activities on the basis of the product or product lines
is followed by organisations where there is a need to delegate to a division all functions related
to that particular product or product line. Such a need arises when the strategy adopted requires
exclusive attention to a product or a group of products. Expansion and diversification strategies
may require a product-based structure as it facilities the addition or deletion of product divisions.
Besides, a product- based structure offers the advantages of an optimum use of specialized skills
and equipment, increased coordination, and the fixation of responsibility for profit-making and
usage of resources. However, a product-based structure can only be justified where the volume
of sales of the product line is large enough to create an optimum use of resources and skills.
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Customer-based structure: In some organisations, divisions may be created on the basis of the
customer groups served. The rationale for a customer-based structure is that the grouping of
activities on the basis of customers would enable the organisation to provide exclusive attention
to separate and distinct customer groups. Thus, an organisation may have individual sales
divisions and institutional sales divisions to serve consumers and institutions, respectively. The
advantages that a customer-based structure offers are: employing marketing-orientation to serve
customers better; use of specialised skills, especially in marketing; and timely response to
changing customer needs. However, a customer-based structure is useful only when the sales
volume of individual customer groups justifies the creation of separate divisions.
Geographic structure: Multiplant or multiunit organisations which have several factories and
offices dispersed geographically are usually organized on the basis of geographic (or territorial)
structure. This type of structure evolves in the process of expansion and diversification. When an
organisation acquires another firm or wishes to set up additional factories at different sites,
geographic structure is a natural choice. Such a structure offers the advantages of
decentralization to a local level, the use of locally available resources and raw materials, and
nearness to markets. But geographic structure can be put to good use only if there is a high level
of coordination at the top level, and communication between different units and with the central
corporate departments.
Intrapreneurial structure: As described in one of the previous sections in this chapter, the
evolution of organisational structure often starts with the entrepreneurial structure. At the other
extreme, a state is reached when organisations become too large, diverse, and complex. As a
result, they usually become slow-moving, bureaucratic, and resistant to change. It is at this point
that an intrapreneurial structure could prove to be useful and appropriate. The intrapreneurial
structure offers the advantages of revitalizing organisations by creating opportunities for
innovative and talented individuals within organisations to act as intrapreneurs in order to apply
exclusive attention to the development of new ideas, products, or services. Organisational
resources may be allocated to such development efforts, and if they prove to be promising, a new
venture department may be created which can see to further development. In time, the new
products or services can be incorporated within the overall organisation structure in the form of
divisions, or could be spun-off as separate companies to be managed by intrapreneurs. The
advantages of an intrapreneurial structure are obvious: innovation and creativity within
organisations is fostered, new products or services are developed optimally, and work becomes
85
satisfying and motivating for highly-qualified individuals. However, the intrapreneurial structure
benefits only in cases where it is possible to manage and coordinate several small groups and the
organisation is in a position to risk time and resources when projects are not successful.
All the structures described till here have their own advantages and disadvantages. It is the task
of the strategists to choose the type of structure that would suit their strategies best. The search
for a better fitting structure is, therefore, continual. The changing nature of the environment and
the industry dictates in part what type of structure would be adopted. We will shortly take up
these issues for discussion.

4.4. Functional Implementation

Functional strategies must be developed in the key areas of marketing, finance, production /
operations, R&D and personnel. They must be consistent with long-term objectives and grand
strategy. Functional strategies help in implementation of grand strategy by organizing and
activating specific subunits of the company (marketing, finance, production, etc.) to pursue the
business strategy in daily activities. In a sense, functional strategies convert thought into action
designed to accomplish specific annual objectives. For every major subunit of a company,
functional strategies identify and coordinate actions that support the grand strategy and improve
the likelihood of accomplishing annual objectives. To better understand the role of functional
strategies within the strategic management process, they must be differentiated from grand
strategies.

Effective implementation of strategies is crucial for the accomplishment of strategic

Management. Proper strategy implementation requires sound functional policies and plans. The
number of functional areas in which policies and plans are prepared depends on the nature and
size of the
organization. In a small organization, only a few functional policies and plans are needed. But in
a large organization, a large number of functional policies and plans are prepared.

A functional policy is a board guideline indicating the criteria that a functional manager should
use in making decisions in his functional area .A functional plan is a list of activities to be
performed during the plan period. Functional policies and plans are prepared by various
functional heads within the framework of guidelines provided by higher authorities. These
guidelines are developed to make sure that functional policies and plans are in tune with business
and corporate strategies.

Functional policies and plans help strategy implementation in the following way:
i. Top management can guarantee that strategic decisions are implemented by all parts of the
organization.
86
ii. Financial policies and plans identify how things are to be done and limit direction for
managerial action.
iii. Functional mangers can handle similar situations in different functional areas in the consistent
manner.
iv. Coordination among different function is guaranteed.
v. Functional policies and plan serve as bases for controlling activities in different functional
areas.

Financial policies and plans are concerned with raising, usage and management of funds for
business operations. The three aspects are interrelated and interdependent. For example, the
company’s ability to raise funds will control the amount of funds and their usage. Policies and
plans are formulated to ensure that strategies are implemented effectively.

Sources of Funds: Policies and plans concerning sources of funds determine how and from
where funds will be raised for strategy implementation. Funds are needed for both long term and
short term.
There are two board sources of funds – equity and debt. Equity shares, preference shares and
retained earnings provide equity funds. Debentures and borrowings are sources of debt. Policies
and plans concerning sources of funds relate to capital structure, procurement of funds, and
relationships with leaders.

Usage of Funds: Judicious use of funds is necessary for strategy implementation. A company
can distribute funds between fixed assets and current assets depending on its needs. Investment
in fixed assets may be (a) to obtain new fixed asset for expansion and growth, and (b) to
substitute the existing fixed assets. Investment in fixed assets has long term implications because
these assets create benefits over the long period. These benefits or returns must
be more than the cost of capital.

Management of Funds: Sound funds management plays a significant role in strategy

implementation through conservation and optimum utilization of funds. In the management of
funds, policies and plans are developed for accounting and budgeting credit and risk
management, cost reduction and control, tax planning, etc. severe cost control helps to improve a
company’s financial health.

Some of the major marketing strategies and techniques are as follows-

Social Marketing: It refers to the design, implementation and control of programs to increase
the acceptability of social ideas or practice among customers.
Augmented Marketing: It refers to deliberate efforts to get better marketing returns through
additional means. It includes providing additional services and benefits like movies on demand,
on line computer repairing service etc. Such type of services attracts customers to purchase the
products or services.
Direct Marketing: It refers as marketing through advertising media that interact directly with
the customers.

87
Relationship Marketing: It is the process of creating, maintaining and enhancing strong
relationship with customers and other stakeholders. So it will go long way in building
relationship.
Service Marketing: It refers applying the concepts, techniques and tools of marketing to
service. Service is any activity or benefit that one party can offer to another that is intangible and
non-perishing.

Person marketing: - It includes activities undertaken to create, maintain orchange attitudes

or behaviors towards particular people. You example, politicians, sport stars, film stars,
professionals to get votes or promote their career and income.
Organization Marketing: It includes activities to create, maintain or change attitudes or
behaviors of audience towards an organization.
Place Marketing: It includes activities to create, maintain or change attitudes or behaviours
towards a different places like business site marketing, tourism marketing.
Enlightened Marketing: It helps a company to support the best long term performance of
the marketing system. It is based on five principles
(i) Customer oriented marketing
(ii) Innovative marketing
(iii) Value marketing
(iv) sense-of-mission marketing
(v) Societal marketing.
Differential Marketing: A strategy in which a firm decide to target certain market segments
and design separately for each. It can be achieved through variation in size, shape, colour, brand
name and so on.
Synchro Marketing: When the demand of the product is irregular causing idle capacity and
over worked capacity, it can be use to find the ways to alter the pattern of demand so that it is
equally with pattern of supply.
De - marketing: It is the strategy to reduce demand temporarily or permanently the aim is
not to destroy demand but only to reduce or shift it. This strategy is adopted when demand is too
much to handle. Here it can be applied to regulate demand.

References: Educational websites & prescribed reference books

88
 UNIT-5

5. Strategy Evaluation and Control (6)

5.1. Strategic Evaluation- Nature, Importance and Barriers
5.2. Strategic Control and Operational Controls.
5.3. Techniques of Strategic Evaluation and Control

89
5.1. Strategic Evaluation- Nature, Importance and Barriers

The purpose of strategic evaluation is to evaluate the effectiveness of strategy in achieving

organizational objectives. Thus, strategic evaluation and control could be defined as the process
of determining the effectiveness of a given strategy in achieving the organizational objectives
and taking corrective action wherever required.
From this definition, we can infer that the nature of the strategic evaluation and control process is
to test the effectiveness of strategy. During the two preceding phases of the strategic
management process, the strategists formulate the strategy to achieve a set of objectives and then
implement the strategy. Now there has to be a way of finding out whether the strategy being
implemented will guide the organization towards its intended objectives. Strategic evaluation and
control, therefore, performs the crucial task of keeping the organisation on the right track. In the
absence of such a mechanism, there would be no means for strategists to find out whether or hot
the strategy is producing the desired effect. In this manner, through the process of strategic
evaluation and control, the strategists attempt to answer two sets of questions, such as, the ones
below.
1. Are the premises made during strategy formulation proving to be correct? Is the strategy
guiding the organisation towards its intended objectives? Are the organisation and its managers
doing things which ought to be done? Is there a need to change and reformulate the strategy?
2. How is the organisation performing? Are the time schedules being adhered to? Are the
resources being utilised properly? What needs to be done to ensure that resources are utilised
properly and objectives met?
The first set of questions relates to the more generalized and over-arching issues of evaluation
and are dealt with by the use of strategic control. The second set of questions relates to issues
that concern the performance of tasks and are considered under operational control. We will
discuss shortly these two types of evaluation systems. But first we need to be convinced of the
importance of evaluation.
Importance of Strategic Evaluation :
The process of strategic management requires that strategists lay down the objectives of the
organisation and then formulate strategies to achieve them. The process of strategy

90
implementation starts with the identification of the key managerial tasks which form the basis for
the creation of organisational structure and the design of systems. These are the issues that were
discussed in Section. Here, it should be reiterated that the segregation of key managerial tasks
leads to a situation where individual managers are required to perform a small portion each of the
overall tasks required to implement a strategy. The fact that a manager individually performs a
set of functions, which are interrelated to the other tasks that managers elsewhere in the
organisation are performing, makes it clear that the tasks have to be coordinated. The importance
of strategic evaluation lies in its ability to coordinate the tasks performed by individual
managers, and also groups, division or SBUs, through the control of performance in the absence
of coordinating and controlling mechanisms, individual managers may pursue goals which are
inconsistent with the overall objectives of the department, division, SBU or the whole
organisation.
Besides the basic reason given above to show why strategic evaluation is important, there could
be several other factors. These aid the need for feedback, appraisal and reward; check on the
validity of strategic choice; congruence between decisions and intended strategy; successful
culmination of the strategic management process; and creating inputs for new strategic planning
a within an organisation, there is a need to receive feedback on current performance, so that
appraisal can be done and good performance rewarded. This is essential for motivating
employees.
Strategic evaluation helps to keep a check on the validity of a strategic choice. An ongoing
process of evaluation would, in fact, provide feedback on the continued relevance of the strategic
choice made during the formulation phase. This is due to the efficacy of strategic evaluation to
determine the effectiveness of strategy.
During the course of strategy implementation managers are required to take scores of decisions.
Strategic evaluation can help to assess whether the decisions match the intended strategy
requirements. This is due to the inherent nature of any administrative system which leaves some
amount of discretion in the hands of managers. In the absence of such evaluation, managers
would not know explicitly how to exercise such discretion.
Strategic evaluation, through its process of control, feedback, rewards, and review, helps in a
successful culmination of the strategic management process.
Lastly, the process of strategic evaluation provides a considerable amount of information and
experience to strategists that can be useful in new strategic planning.
91
In addition to the obvious reasons described above, there are certain other and not-so-obvious
reasons why managers use strategic evaluation and control. These are: using control systems to
overcome resistance to change, communicating the new strategic agenda, ensuring continuing
attention to new strategic initiatives, formalizing beliefs, setting boundaries on acceptable
strategic behavior, and motivating discussion and debate about strategic uncertainties.
Participants in Strategic Evaluation :
It is important to know who the participants are and what role they will play in strategic
evaluation and control. This will answer the question: who evaluates the strategy and how do
they do it? Going beyond the role of evaluators, we are also interested in knowing who the
appraisers are and how they help in strategic evaluation.
The various participants in strategic evaluation and control and their respective roles are
described below.
Theoretically, every organisation is ultimately responsible to its shareholders— lenders and the
public in the case of private companies, and the government in the public sector companies. The
role of shareholders, in practice, however, is limited. This is especially true of the general public
where the individual holding is too small to be of any effective value in strategic evaluation.
Lenders such as financial institutions and banks which have an equity stake are typically
concerned about the security and returns on their shareholding rather than in the long-term
assessment of strategic success. The government, through its different agencies, does play a
significant role in the strategic evaluation and control of public sector companies. In the next
section, we will present an exhibit to show how performance evaluation is done in public
enterprises.
The Board of Directors enacts the formal role of reviewing and screening executive decisions in
the light of their environmental, business and organisational implications. In this way, the Board
is required to perform the functions of strategic evaluation in more generalized terms. But there
is a lot of variation among Indian companies in the way in which the Board may perform its
control functions. In some companies, the Board may have the real authority to oversee strategic
evaluation, while in other companies its authority may be usurped by others like the chief
executive or a higher de facto authority, such as the family council, in the case of family-owned
companies, the headquarters in the case of MNC subsidiaries, or the controlling ministry in the
case of public sector companies.

92
Chief executives are ultimately responsible for all the administrative aspects of strategic
evaluation and control. Ideally, a chief executive should not sit in judgment over the performance
of the organisation under his or her control. Rather, the chief executive should be evaluated on
the basis of his/her performance. This leads to the question that who should evaluate the chief
executive. Normally, the evaluation of a person should be done by an individual or a group to
whom he reports. In cases where the chief executive is accountable to no one in particular (this is
possible in the case of an entrepreneurial organisation), it is difficult to allocate this
responsibility apart from relying on self-evaluation. But in the other cases, the ownership pattern
can determine who should evaluate the chief executive. Thus, the family council in family-
owned companies and majority shareholders in other cases could evaluate a chief executive's
performance.
The SBU or profit-center heads may be involved in performance evaluation at their levels and
may facilitate evaluation by corporate-level executives.
Financial controllers, company secretaries, and external and internal auditors form the group of
persons who are primarily responsible for operational control based on financial analysis,
budgeting, and reporting.
Audit and executive committees, set up by Jie Board or the chief executive, may be charged with
the responsibility of continuous screening of performance. The corporate planning staff or
department may also be involved in strategic evaluation.
Middle-level managers may participate in strategic evaluation and control as providers of
information and feedback, and as the recipients of directions from above, to take corrective
actions.
In the manner described above, there are several participants in the process of strategic
evaluation and control. But owing to its inherent nature, the evaluation process may face certain
obstacles in its functioning. We next see some major barriers in the evaluation process.
Barriers in Evaluation :
Earlier, in Section, we had described the control system as a component of strategy
implementation. There, the discussion had centered on the perform;, ice of individual managers.
In the present context, the emphasis is on the evaluation of organisational units. In practice,
however, these two types of evaluation cannot be strictly differentiated. While evaluating
organisational units one cannot avoid relying on the performance evaluation of individuals. This
creates certain barriers in strategic evaluation and control. We could point out five major types of
93
barriers in evaluation: the limits of control, difficulties in measurement, resistance to evaluation,
tendency to rely on short-term assessment, and relying on efficiency versus effectiveness.
Limits of controls: By its very nature, any control mechanism presents the dilemma of too much
versus too little control. It is never an easy task for strategists to decide the limits of control. Too
much control may impair the ability of managers, adversely affect initiative and creativity, and
create unnecessary impediments to efficient performance. On the other hand, too less control
may make the strategic evaluation process ineffective and redundant.
Difficulties in measurement: The process of evaluation is fraught with the danger of difficulties
in measurement. These mainly relate to the reliability and validity of the measurement
techniques used for evaluation, lack of quantifiable objectives or performance standards, and the
inability of the information system to provide timely and valid information. The control system
may be distorted and may not evaluate uniformly or may measure attributes which are not
intended to be evaluated.
Resistance to evaluation: The evaluation process involves controlling the behaviour of
individuals and, like any other similar organisational mechanism, is likely to be resisted by
managers.
Short-termism: Managers often tend to rely on short-term implications of activities and try to
measure the immediate results. Often, the long-term impact of performance on strategy and the
extended effect of strategy on performance is ignored. This is so as immediate assessment seems
to be the easy way out and taking the long-term implications into account may be seen as too
tedious.
Relying on efficiency versus effectiveness: It is instructive to remember that efficiency is 'doing
the things rightly' while effectiveness is 'doing the right things'. There is often a genuine
confusion among managers as to what constitutes effective performance. Measuring the wrong
parameters may lead to a situation where the right type of performance does not get rewarded. In
fact, sometimes performance that does not really contribute to the achievement of objectives may
be rewarded if assessed on the basis of efficiency alone.
How can these barriers be avoided? In this context, it is apt to quote Andrews when he says: "the
true function of measurement (or evaluation) is to increase perceptions of the problems limiting
achievement". This is indeed a profound statement. In Andrew's opinion, it is the attitude
towards evaluation that is more important than the process of evaluation itself. For instance,
bureaucratic control often ends up being control just for the sake of control and not for the real
94
purpose of finding out what is obstructing effective performance. The real worth of evaluation
lies in its ability to throw up the problems that are constraining achievement and then doing
something about them so that performance can be made effective. Next, we shall see how
evaluation can be made effective.

5.2. Strategic Control and Operational Controls.

The four basic types of strategic controls are Premise control, Implementation control, Strategic
surveillance Special alert control.
The following subsections address each of these four strategic controls.
Premise Control
As mentioned above, every strategy is based on certain assumptions about environmental and
organizational factors. Some of these factors are highly significant and any change in them can
affect the strategy to a large extent. Premise control is necessary to identify the key assumptions,
and keep track of any change in them so as to assess their impact on strategy and its
implementation. For instance, a company may base its strategy on important assumptions related
to environmental factors (e.g. government policies), industrial factors (e.g. nature of
competition), and organizational factors (e.g. breakthrough in R&D). Premise control serves the
purpose of continually testing the assumptions to find out whether they are still valid or not. This
enables the strategists to take corrective action at the right rather than continuing with a strategy
which is based on erroneous assumption. The responsibility for premise control can be assigned
to the corporate planning staff who can identify key assumptions and keep a regular check on
their validity.
Implementation Control
The implementation of a strategy results in a series of plans, programs, and projects. Resource
allocation is done to implement these. Implementation control is aimed at evaluating whether the
plans, programs, and projects are actually guiding the organization towards its predetermined
objectives or not. If, at any time, it is felt that the commitment of resources to a plan, program or
project would not benefit the organization as envisaged, they have to be revised. In this manner,
implementation control may lead to strategic rethinking.
Implementation control may be put into practice through the identification and monitoring of
strategic thrusts such as an assessment of new product or of a diversification programme, at

95
product launch will really be advantageous or it should be abandoned in favor of another
programme. In the second case, implementation control can help to determine whether a
diversification move will actually succeed or not.
Another method of implementation control is milestone review, through which critical points in
strategy implementation are identified in terms of events, substantial resource allocation, or
significant end-time. This is similar to the identification albeit on a smaller scale of events and
activities in PERT/CPM networks. After the identification of milestones, a comprehensive
review of implementation is made to reassess its continued relevance to the achievement of
objectives.
Strategic Surveillance
The premise and implementation types of strategic controls are specific in nature. Strategic
surveillance, on the other hand, is aimed at a more generalized and overarching control designed
to monitor a broad range of events inside and outside the company that are likely to threaten the
course of a firm's strategy. Strategic surveillance can be done through a Broad-based, general
monitoring on the basis of selected information sources to uncover events that are likely to affect
the strategy of an organization. Aaker has suggested a formal yet simple strategic information
scanning system which can enhance the effectiveness of the scanning effort and preserve much
of the information now lost within the organisation. Organisational learning and knowledge
management systems can capture much of the information that is otherwise lost in an
organisation. This information can be used for strategic sur c lance.
Special Alert Control
The last of the strategic control systems is the special alert control, which is based a trigger
mechanism for rapid response and immediate reassessment of strategy the light of sudden and
unexpected events. Special alert control. Through the formulation of contingency strategies and
assigning at responsibility of handling unforeseen events to crisis management teams. Examples
of such events can be the sudden fall of a government at the central or state instant change in a
competitor's posture, an unfortunate industrial disaster, or a no.
Crises are critical situations that occur unexpectedly and threaten the course of strategy.
Organizations that hope for the best and prepare for the worst are in a vantage position to handle
any crisis. Crisis management follows certain steps, signal detection, preparation/prevention, and
containment/damage limitation leading to organizational learning. The first step of signal
detection can be performed by the special alert control systems.
96
From the description of the four strategic controls it might seem that strategic evaluation is a
complex process and requires the use of sophisticated and system techniques. While this may be
true for large and complex organizations faces turbulent environment, it is not of great concern
for smaller and simpler firms. Face a relatively stable environment. Many of the tasks required
for strategic con may be performed informally in a simple way. For instance, in an entrepreneur
organisation, the owner-manager may perform strategic control through a general awareness of
environmental and industry-related factors and initiate changes ever required. This may be done
through a regular scanning of business new spire magazines, and trade journals; through
attendance at seminars and conference.
General observations. In short, whatever sources are used for environmental appraisal may also
be useful for strategic control. MNCs, on the other hand, would plan for elaborate systems in
order to perform strategic control.
The basic theme of strategic control is to continually assess the changing environment to uncover
events that may significantly affect the course of an organisational strategy. As compared to
strategic control, operational control has a differed purpose. The next section deals with
operational control.

OPERATIONAL CONTROL :
Elibit indicates the difference between strategic and operational control, can be seen that
operational control is aimed at the allocation and use of organisational resources through an
evaluation of the performance of organisational units, such as, divisions, SBUs, so on, to assess
their contribution to the achievement organisational objectives. Operational control is concerned
with action or performance, and this is probably the reason why it is used so extensively in
organizations. In this section we shall see how the process of evaluation is applied to exercise
operational control.
How do Strategic Control and Operational Control Differ :
Attribute Strategic control Operational control
Process of Evaluation
Section (and specifically Exhibit: The control cycle) dealt with the control process as used in the
context of strategy implementation. Here, we take up the issue of evaluation process in greater
detail.
The process' of evaluation basically deals with four steps:
97
 1. Setting standards of performance
2. Measurement of performance
3. Analysing variances
4. Taking corrective action
These four elements of the evaluation process, and the way they relate to each other, are depicted
in Exhibit. The strategy plans, and objectives result in a set of performance standards which form
the basis for evaluation through the measurement of performance. The comparison of actual and
standard performance leads to the analysis of variances. Feedback from this analysis results in
either a check performance, revaluation of standards, or the reformulation of strategy, plans or
objectives. Due to the inherent nature of operational control, corrective action is aimed mainly at
performance and adjustment of standards rather than the reformulation of strategy. The
reformulation task is usually performed on the basis of strategic control, especially
implementation control.
Strategists encounter the following three questions while dealing with standard-setting: what
standards to set? How to set these standards? And, in what terms d express these standards FA
three-pronged basic approach to standard-setting can be used to settle these issues, as given
below:
1. The key managerial tasks, derived from the strategic requirements, can be analysed for finding
out the key areas of performance.
Performance indicators that best express the special requirements could use for evaluation.
Applying this approach in the case of a company which has adopted a development strategy, it
can be said that one of the key managerial tasks is to e market presence and enhance market
visibility. A special requirement is to overall market share, and the two indicators, for instance,
which could satisfy requirements, could be: increase in sales revenue and efficiency of sales
Exhibit provides some illustrative performance indicators in five fun areas across the three
corporate-level strategies of stability, expansion, and retrenchment.
The areas of operational effectiveness that we identified in section could also be used as the areas
in which standards are set. For this to take place, one has to be clear as to how productivity,
processes, people, and pace contribute to the strategy being implemented. In order to capture the
reality of action, performance indicators have to be set on the basis of quantitative (or objective)
as well as qualitative (or subjective) criteria) operational control can be effectively exercised
through a combination of quantitative and qualitative criteria!
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Profitability and activity ratios; dividend and earnings per share Sales revenues and quotas; sales
force productivity; accounts receivable divided by sales; number of customer complaints
Productivity (e.g. man-hours per production unit); capacity utilization; investment in R&D as
compared to revenue; average lead time for purchase Number of man-days lost divided by
number of man-days worked; productivity rate of company versus industry average; employees'
suggestions received, percentage accepted and implemented Utilization of systems resources per
unit time; data error frequency Leverage ratios; credit ratings; break-even point
Sales growth (current sales to base year's sale); new accounts opened per year; new product's
sales divided by total sales Growth in assets; production contribution di-vided by production
assets
Training costs divided by average number of employees; recruitment costs divided by average
number of recruits; overtime costs versus total labor costs; bonus payments versus total labor
costs
Growth in hardware/ software assets; index of end-user satisfaction; total demand for application
programs per unit time
Liquidity and activity ratios
Marketing costs divided by sales; marketing costs divided by orders; sales expenses divided by
total number of sales calls Production costs divided by sales; inventory as percentage of sales or
production; scrap, reject, or waste percentage
Personnel costs divided by average number of employees; separation costs versus total costs;
retraining costs divided by average number of employees
IT costs per employee; maintenance costs divided by total IT investment
Quantitative criteria- On the basis of quantitative criteria performance evaluation can" be done in
"two ways: an organisation can assess how it has performed as compared to its past
achievements^ and it can also compare its performance with the Industry average or that of
major competitors. There are several criteria, mainly Financial in nature, which can be used.
Companies can evaluate their performance on an annual basis for the previous 10 years, or so, on
the basis of criteria like net profit, stock price, dividend rates, earnings per share, return on
capital, return on equity, market share, growth in sales, days lost per employee as a result of
strikes, production costs and efficiency, distribution costs and efficiency, and employee turnover,
absenteeism and satisfaction indexes.10 Companies can also evaluate performance on the basis

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of the industry averages provided in industry reports published in leading business newspapers
and magazines.

5.3. Techniques of Strategic Evaluation and Control

It is necessary for strategists to have an idea about the techniques of strategic evaluation and
control in order to make a choice from among the many available and to use those. Several of the
techniques of evaluation are traditional and have been in usage for long, while there are some
other techniques which are of recent origin. This section briefly describes the techniques for
strategic control and operational control. First we take up the techniques for evaluation in
strategic control and then for operational control.
Evaluation Techniques for Strategic Control :
As we said earlier in this chapter, the essence of strategic control is to continually assess the
changing environment to uncover events that may significantly affect the course of an
organization’s strategy Techniques for strategic control could be classified into two groups on
the basis of the type of environment faced by the organisations. The organisations that operate in
a relatively stable environment may use strategic momentum control, while those which face a
relatively turbulent environment may find strategic leap control more appropriate.
Strategic momentum control these types of evaluation techniques are aimed at assuring that the
assumptions on whose basis strategies were formulated are still valid, and finding out what needs
to be done in order to allow the organisation to maintain its existing strategic momentum. There
are three techniques which could be used to achieve these aims: responsibility control centres,
underlying success factors, and generic strategies.
1. Management control systems
And are four types: revenue, expense, profit, and investment centres. Each of these centres is
designed on the basis of' the measurement of inputs and outputs. The study and application of
responsibility centres is done under the discipline of management control systems.
2. The dying success enable organisations
In order to examine the factors that contributes to the success of strategies. By managing on the
basis of the CSFs, the strategists can continually evaluate the strategies to assess whether or not
these are helping the organisation to achieve its objectives.
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A similar path. In this context, the concept of strategic group is also relevant a strategic group is
a group of firms that adopts similar strategies with similar resources. Firms within a strategic
group, often within the same industry, and sometimes in other industries too, tend to adopt
similar strategies. Strategic leap control where the environment is relatively unstable,
organisations strategic leaps in order to make significant changes. Strategy leap control can assist
such organisations by helping to define the new strategic requirements and to cope with
emerging environmental realities There are four technique of evaluation used to exercise
strategic leap control: strategic issue management, strategic field analysis, systems modelling,
and scenarios.
Strategic issue management is aimed at identifying one or more strategic is their impact on the
organisation. A strategic issue is a forthcoming development, either inside or outside of the
organisation, which if likely to nave an important impact on the ability of the enterprise to meet
its objectives. By managing on the basis of strategic issues, the strategists can avoid being
overtaken by surprising environmental changes and design contingency plans to shift strategies.
Whenever synergies exist the strategists can assess the ability of the firm to take advantage of
those. Alternatively, the strategists can evaluate the firm's ability to generate synergies where
they do not exist. The development of these techniques is an evidence of the expanding body of
knowledge in business policy and strategic management. As the use and application of strategic
management gains approval, it is quite likely that organisations would start using such
techniques. Operational control, however, uses more familiar techniques which have traditionally
been used by strategists. In the next part of this section, we look at techniques for operational
control.
Evaluation Techniques for Operational Control :
As we said in the beginning of Section, operational control is aimed at the allocation and use of
organisational resources. Evaluation techniques for operational control, therefore, are based on
organisational appraisal rather than environmental monitoring, as is the case with strategic
control. But before you read further, it would be helpful if you could review Section where we
described in detail the techniques used for organisational appraisal. These techniques are used for
operational control as well. To help you remember, let us reiterate the classification of evaluation
techniques in the three parts: internal analysis, comparative analysis, and comprehensive
analysis.
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Internal analysis Internal analysis, which consists of value-chain analysis, quantitative (financial
and non-financial) analysis, and qualitative analysis, deals with the identification of the strengths
and weaknesses of a firm in absolute terms.
1. Value chain analysis focusses on a set of inter-related activities performed in a sequence for
producing and marketing a product or service. The utility of value-chain analysis for the purpose
of operational evaluation lies in its ability to segregate the total tasks of a firm into identifiable
activities which can then be evaluated for effectiveness.
2. Quantitative analysis takes up the financial parameters and the non-financial quantitative
parameters, such as, physical units or time, in order to assess performance. The obvious benefit
of using quantitative factors (either financial or physical parameters) is the ease of evaluation and
the verifiability of the assessment done. These are probably the most-used methods for
evaluation for operational control. Among the scores of financial techniques described in all
standard texts in the area of finance are traditional techniques, such as, ratio analysis, or newer
techniques, such as, economic value-added (EVA) and its variations, and activity-based costing
(ABC). These are proven methods so far as their efficacy for evaluating operational effectiveness
is concerned. Apart from the financial quantitative techniques, there are several non-financial
quantitative techniques available for the evaluation for operational control, such as: computation
of absenteeism, market ranking, rate of advertising recall, total cycle time of production, service
call rate, or number of patents registered per period. Many more techniques can be evolved by
firms to suit their specific requirement.
3. Qualitative analysis supplements the quantitative analysis by including those aspects which it
is not feasible to measure on the basis of figures and numbers. The methods that could be used
for qualitative analysis are based on intuition, judgment, and informed opinion. Techniques like
surveys and experimentation can be used for the evaluation of performance for exercising
operational control.
4 Comparative analysis this consists of historical analysis, industry norms, and benchmarking.
It compares the performance of a firm with its own past performance, or with other firms.
1. Historical analysis is a frequently used method for comparing the performance of a firm over
a given period of time. This method has the added benefit of enabling a firm to note how the
performance has taken place over a period of time and to analyze the trend or pattern. Such an
analysis can offer the firm i better perception of its performance as compared to an absolute
assessment.
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2. Industry norms is a comparative method for analyzing performance that has the advantage of
making a firm competitive in comparison to its peers in the same industry. Being a comparative
assessment, evaluation on the basis of industry norms enables a firm to bring its performance at
least up to the level of other firms and then attempt to surpass it.
3. Benchmarking is a comparative method where a firm finds the best practices in an area and
then attempts to bring its own performance in that area in line with the best practice. Best
practices are the benchmarks that should be adopted a firm as the standards to exercise
operational control. Through this method, performance can be evaluated continually till it
reaches the best practice level. In order to excel, a firm shall have to exceed the benchmarks. In
this manner, benchmarking offers firms a tangible method to evaluate performance.
Comprehensive analysis this includes balanced scorecard and key factor rating. This analysis
adopts a total approach rather than focusing on one area of activity, or a function or department.
1. Balanced scorecard method is based on the identification of four key performance measures of
customer perspective, internal business perspective, innovation and learning perspective, and the
financial perspective. This method is balanced approaches to performance measurement as a
range of parameters are taken into account for evaluation.
2. Key factor rating is a method that takes into account the key factors in several areas and then
sets out to evaluate performance on the basis of these. This is quite a comprehensive method as it
takes a holistic view of the performance areas in an organisation.
Besides the several techniques referred to above, we could mention four other techniques that are
used by some companies to assess performance. These are the network techniques, Parta
systems, management by objectives, and the memorandum of understanding.
1. The parta system is an indigenous system adopted usually by Marwari firms to keep track of
daily cash generation. "Parta is the pre-determined budget of the net cash inflows from
operations before tax and dividend". The parta is decided in advance between the family group
and company head, and actual performance is compared to this budgeted parta on a daily basis,
thus making parta an effective operational control device.
2. Network techniques such as programme evaluation and review technique (PERT), critical path
method (CPM), and their variants, are used extensively for the operational controls of scheduling
and resource allocation in projects.
When network techniques are modified for use as a cost accounting system, they become highly
effective operational controls for project costs and performance.
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3. Management by Objectives (MBO) is a system, proposed by Drucker, which is based on a
regular evaluation of performance against objectives which are decided upon mutually by the
superior and the subordinate. By the process of consultation, objective-setting leads to the
establishment of a control system that operates on the basis of commitment and self-control.
Thus, the scope of MBO to be used as an operational control is quite extensive.
4. Memorandum of understanding Just like MBO is a commitment to objectives between
individuals, a memorandum of understanding (MoU) is "an agreement between a public
enterprise and the Government, represented by the administrative ministry in which both parties
clearly specify their commitments and responsibilities". Having done that, the enterprises are
evaluated on the basis of the MoU. Though is usually thought of as a technique used solely in the
context of public enterprises, its use can be extended to any situation where an external agency is
required to evaluate a firm's performance. Thus, a multinational company can set a MoU with its
subsidiary and a family business group council can use a MoU to evaluate its constituent
companies.

References: Educational websites & prescribed reference books

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