STRATEGIC MANAGEMENT

Unit 1

Introduction- Concepts in Strategic

Management
STRATEGIC MANAGEMENT

Strategic management is the process by which an organisation formulates its objectives and
manages to achieve them. Strategy is the means to achieve the organisational ends.
Strategic management can be defined as the art and science of formulating, implementing,
and evaluating cross-functional decisions that enable an organisation to achieve its objectives.
As this definition implies, strategic management focuses on integrating management,
marketing, finance/accounting, production/operations, research and development, and
information systems aspects of a business to achieve organisational success. The term .
strategic management. is used at many colleges and universities as the title to the capstone
course in business administration. business policy which integrates material from all
business courses. The strategic-management process consists of three stages: strategy
formulation, strategy
evaluation. Strategy formulation includes developing a business mission, identifying an
organisations external opportunities and threats, determining internal strengths and
weaknesses, establishing long-term objectives, generating alternative strategies, and choosing
particular strategies to pursue. Strategy-formulation issues include deciding what new
businesses to enter, what businesses to abandon, how to allocate resources whether to expand
operations or diversify, whether to enter international markets, whether to merge or form a
joint venture, and how to avoid a hostile takeover.
 vision,
 Mission,
 Objectives
 Policies

VISION (THE DREAM)

Your vision communicates what your organization believes are the ideal conditions for your
community – how things would look if the issue important to you were perfectly addressed.
This utopian dream is generally described by one or more phrases or vision statements, which
are brief proclamations that convey the community's dreams for the future. By developing a
vision statement, your organization makes the beliefs and governing principles of your
organization clear to the greater community (as well as to your own staff, participants, and
volunteers).
There are certain characteristics that most vision statements have in common. In general,
vision statements should be:
 Understood and shared by members of the community
 Broad enough to encompass a variety of local perspectives
 Inspiring and uplifting to everyone involved in your effort
 Easy to communicate - for example, they should be short enough to fit on a T-shirt

MISSION (THE WHAT AND WHY)

Developing mission statements are the next step in the action planning process. An
organization's mission statement describes what the group is going to do, and why it's going
to do that. Mission statements are similar to vision statements, but they're more concrete, and
they are definitely more "action-oriented" than vision statements. The mission might refer to
a problem, such as an inadequate housing, or a goal, such as providing access to health care
for everyone. And, while they don't go into a lot of detail, they start to hint - very broadly -
at how your organization might go about fixing the problems it has noted
 OBJECTIVES (HOW MUCH OF WHAT WILL BE ACCOMPLISHED BY WHEN)
Once an organization has developed its mission statement, its next step is to develop the
specific objectives that are focused on achieving that mission. Objectives refer to specific
measurable results for the initiative's broad goals. An organization's objectives generally lay
out how much of what will be accomplished by when. For example, one of several objectives
for a community initiative to promote care and caring for older adults might be: "By 2015 (by
when), to increase by 20% (how much) those elders reporting that they are in daily contact
with someone who cares about them (of what)."

There are three basic types of objectives. They are:

Behavioral objectives. These objectives look at changing the behaviors of people (what they
are doing and saying) and the products (or results) of their behaviors. For example, a
neighborhood improvement group might develop an objective around having an increased
amount of home repair taking place (the behavior) or of improved housing (the result).

Community-level outcome objectives. These are related to behavioral outcome objectives,

but are more focused more on a community level instead of an individual level. For example,
the same group might suggest increasing the percentage of decent affordable housing in the
community as a community-level outcome objective.

Process objectives. These are the objectives that refer to the implementation of activities
necessary to achieve other objectives. For example, the group might adopt a comprehensive
plan for improving neighborhood housing.
Polices
An organization's polices describes in great detail exactly how strategies will be implemented
to accomplish the objectives developed earlier in this process. The plan refers to: a) specific
(community and systems) changes to be sought, and b) the specific action steps necessary to
bring about changes in all of the relevant sectors, or parts, of the community.

The Factors That Shape Company Strategy

Organizations do not exist in a vacuum. Many factors enter into the forming of a company's
strategy. Each exists within a complex network of environmental forces.
These forces, conditions, situations, events, and relationships over which the organization has
little control are referred to collectively as the organization's environment.
In general terms, environment can be broken down into three areas:
1. the macroenvironment, or general environment (remote environment) - that is,
economic, social, political and legal systems in the country;
2. operating environment - that is, competitors, markets, customers, regulatory
agencies, and stakeholders; and
3. the internal environment - that is, employees, managers, union, and board directors.

Environmental scanning
 Environmental scanning refers to possession and utilization of information about occasions,
patterns, trends, and relationships within an organization’s internal and external environment.
It helps the managers to decide the future path of the organization. Scanning must identify the
threats and opportunities existing in the environment. While strategy formulation, an
organization must take advantage of the opportunities and minimize the threats. A threat for
one organization may be an opportunity for another.

Internal analysis of the environment 

External analysis of the environment 

Internal analysis of the environment is the first step of environment scanning.

Organizations should observe the internal organizational environment. This includes
employee interaction with other employees, employee interaction with management, manager
interaction with other managers, and management interaction with shareholders, access to
natural resources, brand awareness, organizational structure, main staff, operational potential,
etc. Also, discussions, interviews, and surveys can be used to assess the internal environment.
Analysis of internal environment helps in identifying strengths and weaknesses of an
organization.

 External analysis

 External analysis three correlated environment should be studied and analysed —

 immediate / industry environment

 national environment
 broader socio-economic environment / macro-environment

Industry environment needs an appraisal of the competitive structure of the organization’s

industry, including the competitive position of a particular organization and it’s main rivals.
Also, an assessment of the nature, stage, dynamics and history of the industry is essential. It
also implies evaluating the effect of globalization on competition within the industry.
Analysing

 National environment needs an appraisal of whether the national framework helps in

achieving competitive advantage in the globalized environment.

Macro-Environment includes exploring macro-economic, social, government, legal,

technological and international factors that may influence the environment. The analysis of
organization’s external environment reveals opportunities and threats for an organization.

Concept of Core Competence :

Core competency is explained by academicians as an ability at which an individual is

particularly proficient, or a set of actions that firms perform better than other functions
whether more efficiently, at lower cost or at higher quality. The main attribute of core
competencies is that it can transform into competitive advantages for small businesses and
small business possessor. Knowledgeable entrepreneurs learn to recognize and control their
core competencies to generate lean, high-performance organizations. Core Competence is
array of skills integrated to make a company distinctive, the mechanism for new business
development, and underlying component of a company's competitive advantage. It is shaped
from the harmonization, integration of dissimilar skills and numerous technologies.
Core competence is associated with resource allocation, capabilities, knowledge, skills, and
expertise along with value chain. It needs three elements: skills, resources and processes , and
it is communication, involvement, and a deep commitment to working organizational
boundaries . Knowledge resources, innovative creativity and expertise are success factors
that create the critical potential of an organization which is termed core competencies .
Therefore, a firm's core competence is described as a set of problem-defining and problem-
solving insights that fosters the development of strategic growth alternatives.
The development of core competence is vital to organizational learning and organizational
culture. Instead of a static stock of knowledge, core competence develops from "collective
learning in the organization"generating a set of problem-defining and problem-solving
insights to create competitive advantage and acting as a vehicle for SBUs to find common
interests, problems, capabilities or opportunities.
A practical way to consider core competencies is to view these as aggregate of capabilities
where synergy is created to deliver value. Within core competency aggregates, there are
always at least two complementary critical capabilities. These critical capabilities are source
of the power of competency and are where a company's strength can really distinguish it from
other firms . The major objective of core competencies is to gain sustainable competitive
advantage. Studies have found that core competencies generate competitive advantage and
affect organizational performa. A competitive advantage is significant if it is related to an
attribute valued by the market. Customers need to perceive a consistent difference in
important attributes between the producer's products or services and those of its competitors.
These differences must relate to some product/delivery attributes which are among the key
buying criteria for the market. Product/delivery attributes are those variables that impact the
customers' perceptions of the product or service, its usefulness and its availability.
Chart: Process of core competency from initial assessment to new job description
Managing Core Competencies:
Main basis of core competencies are activities, skills and disciplines, which are termed
primary capabilities . The aptitudes, the skills and motivation of the employees are essential
conditions for develop a core competence because knowledge is carried through human
resources to achieve the company's objectives. In a sense, those core competencies must be a
capability which the organization can sustain over time. The management of technological
competences is important because it produces increasing economic revenues as they focus
more narrowly on knowledge assets and processes that are non-substitutable, rare, and. It is
established that Core competence development efforts are based on capabilities, resources,
organizational learning, R&D works, technology, and work teams. Additionally, the content
and form of the core competencies are shaped through the linkages between the
organization's goals, structure and culture . Building competence needs huge amount and
variety of employee participation, and demands demanding analytical activity, and
organizational learning). Furthermore, core competencies should be developed around
strategic business factors because this approach leads to a common understanding of where
the key performance gaps were in the business .
Critical competence recognizes the unique competencies of a firm through generic
techniques. In this sense, though the core competencies of firms are dissimilar, their critical
competence is universal. Hamel (1994) has labelled the hierarchy and differences between
meta-competencies, core competencies, and constituent skills.
Managing core competency of organization

Importance of core competences: Core competencies are significant for firms in

competitive business climate. These are the combined learning of the organization,
particularly how to co-ordinate the diverse production skill and amalgamate numerous
technologies. Organizations which recognizes its core competencies can create more value
and enhance output. Core competences must join together around individuals working in the
organization. These people should identify their effort in building and underpinning these
core competencies. Contrasting physical assets, which can depreciate with time, competences
are enhanced as applied and share across the organization. The competences bind businesses
simultaneously as well as cover the way for new business development. It is established that
core competences of a business are also guiding principles for new markets and
diversification.
Organizational Core Competencies: In small scale companies, core competencies are
related to a particular business function, such as marketing or manufacturing. Companies'
core competencies can develop through the business owner's personal experience, the specific
team the owner puts together or the company's responses to changing market conditions. It
has been affirmed by scholars that one business can successfully manufacture products at
high-quality standards, but the same organization may not be experienced in tax accounting.
A different company may be run by a highly experienced tax accountant who knows nothing
about manufacturing . Core competencies must offer access to wide array of market,
contribute significantly to the end product benefits and be difficult for competitors to imitate.
Competencies

Identification of core competencies: Core competencies has vital role in the process of
leverage. It can be recognized through using three simple tests such as, Does the trait provide
a major competitive differentiation? Does it provide a unique value proposition to the
organization? Does the trait covers a lot of business or is useful only for a single business
unit? Is it useful only for current business or for new ones too? Is it hard for competitors to
imitate? Core competencies expand to the whole organization, and are part of strategic
learning at the same time. A core competence is not a synonym of a core technology. A
technology / technical capabilities is complete in itself while a core competence is entrenched
inside the organization. Core capabilities are critical for continued existence but, dissimilar a
core competency does not confer any specific differential advantage over other competitors in
the business.
Company Core competencies Strategy
Manufacturing sector:    
Toyota Efficient manufacturing Continuous improvement
 
Bhart Forge Manufacturing excellence Kanban, integrated operations
 
Service Sector:    
Infosys Network equipment Integration of global facilities
 
Google Harvesting the value from  
massively scaled, complex
human activity
FMCG Sector:    
P&G Product marketing Asking customer, R&D
 
HLL Distribution channel Integrated marketing channel
 
Electronic goods:    
Sony Miniaturization R&D, Continuous
improvement
 
Dell Cost leadership Perusing multistage channel
opportunities
 
Building core competencies: The process of developing new core competencies involves an
interchange between knowledge, practice, coordination, and refinement. Knowledge assets
must be built, improved, combined, and synchronized in an environment that supports
experimentation and development. Building core competencies can be a complicated
endeavour since sustained competitive advantage is derived from assets that are hard to
imitate (Dierickx and Cool 1989). From the viewpoint of knowledge management, this
implies the build-up of specific tacit knowledge and expertise often across multiple
departments or functions.
Benefit of core competencies: There are several benefits of creating core competencies.
The main advantage of having core competencies is having a long term competitive
advantage. These competencies assist in bridging the gap between performance and
opportunity and in turn, helping a company in being a potential leader in the industry. By
linking conventional business to products and service of the future, the company obtains
greater opportunity for success. This also helps in establishment of the company by acting as
a directive for diversification.
Another advantage of Core competencies is that these competencies are an indicator of
proper utilization of resources in the right places in the right amount. An organization should
focus on outsourcing all non-core activities which will streamline the operations to encourage
learning environment congruent to their competencies. Core competencies also facilitate in
the development of core merchandise. They should have access to all the primary component
of a complex product which can help in long term foothold in that particular industry. This
intricate product can then be used to create a pipeline of products.
Core competencies are significant if they are associated with an attribute valued by the
market. Customers need to perceive a consistent difference in important attributes between
the producer's products or services and those of its competitors. Core competencies make a
company focus on wide-ranging R&D.

Crafting a strategy for competitive advantage

Imagine someone planning strategy. What likely springs to mind is an image of orderly
thinking: a senior manager, or a group of them, sitting in an office formulating courses of
action that everyone else will implement on schedule. The keynote is reason—rational
control, the systematic analysis of competitors and markets, of company strengths and
weaknesses, the combination of these analyses producing clear, explicit, full-blown
strategies.

Now imagine someone crafting strategy. A wholly different image likely results, as different

from planning as craft is from mechanization. Craft evokes traditional skill, dedication,
perfection through the mastery of detail. What springs to mind is not so much thinking and
reason as involvement, a feeling of intimacy and harmony with the materials at hand,
developed through long experience and commitment. Formulation and implementation merge
into a fluid process of learning through which creative strategies evolve.

Competitive advantage

Definition
competitive advantage means superior performance relative to other competitors in the same
industry or superior performance relative to the industry average.
[1
What is competitive advantage?
There is no one answer about what is competitive advantage or one way to measure it, and for
the right reason. Nearly everything can be considered as competitive edge, e.g. higher profit
margin, greater return on assets, valuable resource such as brand reputation or unique
competence in producing jet engines. Every company must have at least one advantage to
successfully compete in the market. If a company can’t identify one or just doesn’t possess it,
competitors soon outperform it and force the business to leave the market.There are many
ways to achieve the advantage but only two basic types of it: cost or differentiation
advantage. A company that is able to achieve superiority in cost or differentiation is able to
offer consumers the products at lower costs or with higher degree of differentiation and most
importantly, is able to compete with its rivals.
An organization that is capable of outperforming its competitors over a long period of time
has sustainable competitive advantage.

The following diagram illustrates the basic competitive advantage model, which is explained
below in the article:
How a company can achieve it?

An organization can achieve an edge over its competitors in the following two ways:

 Through external changes. When PEST factors change, many opportunities can
appear that, if seized upon, could provide many benefits for an organization. A
company can also gain an upper hand over its competitors when its capable to respond
to external changes faster than other organizations.
 By developing them inside the company. A firm can achieve cost or differentiation
advantage when it develops VRIO resources, unique competences or through
innovative processes and products.

Changes in PEST factors. PEST stands for political, economic, socio-cultural and

technological factors that affect firm’s external environment. When these factors change
many opportunities arise that can be exploited by an organization to achieve superiority over
its rivals. For example, new superior machinery, which is manufactured and sold only in
South Korea, would result in lower production costs for Korean companies and they would
gain cost advantage against competitors in a global environment. Changes in consumer
demand, such as trend for eating more healthy food, can be used to gain at least temporary
differentiation advantage if a company would opt to sell mainly healthy food products while
competitors wouldn’t. For example, Subway and KFC.

If opportunities appear due to changes in external environment why not all companies are
able to profit from that? It’s simple, companies have different resources, competences and
capabilities and are differently affected by industry or macro environment changes.

Company’s ability to respond fast to changes. The advantage can also be gained when a
company is the first one to exploit the external change. Otherwise, if a company is slow to
respond to changes it may never benefit from the arising opportunities.

Internal Environment

VRIO resources. A company that possesses VRIO (valuable, rare, hard to imitate and
organized) resources has an edge over its competitors due to superiority of such resources. If
one company has gained VRIO resource, no other company can acquire it (at least
temporarily). The following resources have VRIO attributes:

 Intellectual property (patents, copyrights, trademarks)

 Brand equity
 Culture
 Know-how
 Reputation

Unique competences. Competence is an ability to perform tasks successfully and is a cluster

of related skills, knowledge, capabilities and processes. A company that has developed a
competence in producing miniaturized electronics would get at least temporary advantage as
other companies would find it very hard to replicate the processes, skills, knowledge and
capabilities needed for that competence.

Innovative capabilities. Most often, a company gains superiority through innovation.

Innovative products, processes or new business models provide strong competitive edge due
to the first mover advantage. For example, Apple’s introduction of tablets or its business
model combining mp3 device and iTunes online music store.

Two basic types

M. Porter has identified 2 basic types of competitive advantage: cost and differentiation
advantage.
Cost advantage.

Porter argued that a company could achieve superior performance by producing similar
quality products or services but at lower costs. In this case, company sells products at the
same price as competitors but reaps higher profit margins because of lower production costs.
The company that tries to achieve cost advantage (like Amazon.com) is pursuing cost
leadership strategy. Higher profit margins lead to further price reductions, more investments
in process innovation and ultimately greater value for customers.

Differentiation advantage.

Differentiation advantage is achieved by offering unique products and services and charging
premium price for that. Differentiation strategy is used in this situation and company
positions itself more on branding, advertising, design, quality and new product development
(like Apple Inc. or even Starbucks) rather than efficiency, outsourcing or process innovation.
Customers are willing to pay higher price only for unique features and the best quality.

The cost leadership and differentiation strategies are not the only strategies used to gain
competitive advantage. Innovation strategy is used to develop new or better products,
processes or business models that grant competitive edge over competitors.
 Unit 2

Strategic Analysis and Choice

Strategic Analysis and Choice

Porter's Five Force Model

Porter’s five forces model

 It is an analysis tool that uses five industry forces to determine the intensity of competition in
an industry and its profitability level.

Understanding the tool

Five forces model was created by M. Porter in 1979 to understand how five key competitive
forces are affecting an industry. The five forces identified are

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 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 another supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

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.
 Using the tool

We now understand that Porter’s five forces framework is used to analyze industry’s
competitive forces and to shape organization’s strategy according to the results of the
analysis. But how to use this tool? We have identified the following steps:

 Step 1. Gather the information on each of the five forces

 Step 2. Analyze the results and display them on a diagram
 Step 3. Formulate strategies based on the conclusions

Step 1. Gather the information on each of the five forces.

 What managers should do during this step is to gather information about their industry and to
check it against each of the factors (such as “number of competitors in the industry”)
influencing the force. We have already identified the most important factors in the table
below.

Porter's Five Forces Factors

Threat of new entry

 Amount of capital required

 Retaliation by existing companies
 Legal barriers (patents, copyrights, etc.)
 Brand reputation
 Product differentiation
 Access to suppliers and distributors
 Economies of scale
 Sunk costs
 Government regulation

Supplier power
  Number of suppliers
 Suppliers’ size
 Ability to find substitute materials
 Materials scarcity
 Cost of switching to alternative materials
 Threat of integrating forward

Buyer power

 Number of buyers
 Size of buyers
 Size of each order
 Buyers’ cost of switching suppliers
 There are many substitutes
 Price sensitivity
 Threat of integrating backward

Threat of substitutes

 Number of substitutes
 Performance of substitutes
 Cost of changing

Rivalry among existing competitors

 Number of competitors
 Cost of leaving an industry
 Industry growth rate and size
 Product differentiation
 Competitors’ size
 Customer loyalty
 Threat of horizontal integration
 Level of advertising expense

Step 2. Analyze the results and display them on a diagram. After gathering all the
information, you should analyze it and determine how each force is affecting an industry. For
example, if there are many companies of equal size operating in the slow growth industry, it
means that rivalry between existing companies is strong. Remember that five forces affect
different industries differently so don’t use the same results of analysis for even similar
industries!
Step 3. Formulate strategies based on the conclusions. At this stage, managers should
formulate firm’s strategies using the results of the analysis For example, if it is hard to
achieve economies of scale in the market, the company should pursue cost leadership
strategy. Product development strategy should be used if the current market growth is slow
and the market is saturated.

Although, Porter’s five forces is a great tool to analyze industry’s structure and use the results
to formulate firm’s strategy, it has its limitations and requires further analysis to be done,
such as SWOT, PEST or Value Chain analysis.

Example

This is Porter’s five forces analysis example for an automotive industry.

Porter's Five Forces Evaluation

Threat of new entry (very weak)

 Large amount of capital required

 High retaliation possible from existing companies, if new entrants would bring innovative
products and ideas to the industry
 Few legal barriers protect existing companies from new entrants
 All automotive companies have established brand image and reputation
 Products are mainly differentiated by design and engineering quality
 New entrant could easily access suppliers and distributors
 A firm has to produce at least 5 million (by some estimations) vehicles to be cost
competitive, therefore it is very hard to achieve economies of scale
 Governments often protect their home markets by introducing high import taxes

Supplier power (weak)

 Large number of suppliers

 Some suppliers are large but the most of them are pretty small
 Companies use another type of material (use one metal instead of another) but only to
some extent (plastic instead of metal)
 Materials widely accessible
 Suppliers do not pose any threat of forward integration

Buyer power (strong)

 There are many buyers

 Most of the buyers are individuals that buy one car, but corporates or governments usually
buy large fleets and can bargain for lower prices
 It doesn’t cost much for buyers to switch to another brand of vehicle or to start using other
 type of transportation
 Buyers can easily choose alternative car brand
 Buyers are price sensitive and their decision is often based on how much does a vehicle
cost
 Buyers do not threaten backward integration

Threat of substitutes (weak)

 There are many alternative types of transportation, such as bicycles, motorcycles, trains,
buses or planes
 Substitutes can rarely offer the same convenience
 Alternative types of transportation almost always cost less and sometimes are more
environment friendly

Competitive rivalry (very strong)

 Moderate number of competitors

 If a firm would decide to leave an industry it would incur huge losses, so most of the time
it either bankrupts or stays in automotive industry for the lifetime
 Industry is very large but matured
 Size of competing firm’s vary but they usually compete for different consumer segments
 Customers are loyal to their brands
 There is moderate threat of being acquired by a competitor

 
BCG Matrix

DEFINATION
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.

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

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:

 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 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, 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.
Examples

Corporate ‘A’ BCG matrix

Brand Revenues % of Largest Your Relative Market

corporate rival’s brand’s market growth
revenues market share market share share rate

Brand $500,000 54% 25% 25% 1 3%

1

Brand $350,000 38% 30% 5% 0.17 12%

2

Brand $50,000 6% 45% 30% 0.67 13%

3

Brand $20,000 2% 10% 1% 0.1 15%

4
This example was created to show how to deal with a relative market share higher than 100%
and with negative market growth.

Corporate ‘B’ BCG matrix

Brand Revenues % of Largest Your Relative Market

corporate rival’s brand’s market growth
revenues market share market share share rate

Brand $500,000 55% 15% 60% 1 3%

1

Brand $350,000 31% 30% 5% 0.17 -15%

2

Brand $50,000 10% 45% 30% 0.67 -4%

3

Brand $20,000 4% 10% 1% 0.1 8%

4
 GE Model

Definition 

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.

GE-McKinsey is a framework that evaluates business portfolio, provides further strategic

implications and helps to prioritize the investment needed for each business unit

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.

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 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.

Swot analysis
Definition
 
Swot analysis involves the collection and portrayal of information about internal and external
factors which have, or may have, an impact on business.

SWOT is a framework that allows managers to synthesize insights obtained from an internal
analysis of the company’s strengths and weaknesses with those from an analysis of external
opportunities and threats.

Understanding the tool

What is SWOT analysis? The answer to the question is simple: it’s a tool used for situation
(business or personal) analysis! SWOT is an acronym which stands for:

Strengths: factors that give an edge for the company over its competitors.
Weaknesses: factors that can be harmful if used against the firm by its competitors.
Opportunities: favorable situations which can bring a competitive advantage.
Threats: unfavorable situations which can negatively affect the business.

Strengths and weaknesses are internal to the company and can be directly managed by it,
while the opportunities and threats are external and the company can only anticipate and react
to them. Often, swot is presented in a form of a matrix as in the illustration below:
Swot is widely accepted tool due to its simplicity and value of focusing on the key issues
which affect the firm. The aim of swot is to identify the strengths and weaknesses that are
relevant in meeting opportunities and threats in particular situation. [4]

Benefits

Swot tool has 5 key benefits:

 Simple to do and practical to use;

 Clear to understand;
 Focuses on the key internal and external factors affecting the company;
 Helps to identify future goals;
 Initiates further analysis.

Limitations

Although there are clear benefits of doing the analysis, many managers and academics
heavily criticize or don’t even recognize it as a serious tool. [2] According to many, it is a ‘low-
grade’ analysis. Here are the main flaws identified by a research:[2][5]

 Excessive lists of strengths, weaknesses, opportunities and threats;

 No prioritization of factors;
 Factors are described too broadly;
 Factors are often opinions not facts;
 No recognized method to distinguish between strengths and weaknesses, opportunities
and threats.
How to perform the analysis?

Swot can be done by one person or a group of members that are directly responsible for the
situation assessment in the company. Basic swot analysis is done fairly easily and comprises
of only few steps:

Step 1. Listing the firm’s key strengths and weaknesses

Step 2. Identifying opportunities and threats

Strengths and Weaknesses

Strengths and weaknesses are the factors of the firm’s internal environment. When looking
for strengths, ask what do you do better or have more valuable than your competitors have?
In case of the weaknesses, ask what could you improve and at least catch up with your
competitors?

Where to look for them?

Some strengths or weaknesses can be recognized instantly without deeper studying of the
organization. But usually the process is harder and managers have to look into the firm’s:

 Resources: land, equipment, knowledge, brand equity, intellectual property, etc.

 Core competencies
 Capabilities
 Functional areas: management, operations, marketing, finances, human resources and
R&D
 Organizational culture
 Value chain activities

Strength or a weakness?

Often, company’s internal factors are seen as both, strengths and weaknesses, at the same
time. It is also hard to tell if a characteristic is a strength (weakness) or not. For example,
firm’s organizational structure can be a strength, a weakness or neither! In such cases, you
should rely on:

Clear definition. Very often factors which are described too broadly may fit both strengths
and weaknesses. For example, “brand image” might be a weakness if the company has poor
brand image. However, it can also be a strength if the company has the most valuable brand
in the market, valued at $100 billion. Therefore, it is easier to identify if a factor is a strength
or a weakness when it’s defined precisely.

Benchmarking. The key emphasize in doing swot is to identify the factors that are the
strengths or weaknesses in comparison to the competitors. For example, 17% profit margin
would be an excellent margin for many firms in most industries and it would be considered as
a strength. But what if the average profit margin of your competitors is 20%? Then
company’s 17% profit margin would be considered as a weakness.
VRIO framework. A resource can be seen as a strength if it exhibits VRIO (valuable, rare
and cannot be imitated) framework characteristics. Otherwise, it doesn’t provide any strategic
advantage for the company.

Opportunities and threats

Opportunities and threats are the external uncontrollable factors that usually appear or arise
due to the changes in the macro environment, industry or competitors’ actions. Opportunities
represent the external situations that bring a competitive advantage if seized upon. Threats
may damage your company so you would better avoid or defend against them.

Where to look for them?

PESTEL. PEST or PESTEL analysis represents all the major external forces (political,

economic, social, technological, environmental and legal) affecting the company so it’s the
best place to look for the existing or new opportunities and threats.

Competition. Competitor’s react to your moves and external changes. They also change their
existing strategies or introduce new ones. Therefore, the company must always follow the
actions of its competitors as new opportunities and threats may open at any time.

Market changes. The most visible opportunities and threats appear during the market
changes. Markets converge, starting to satisfy other market segment needs with the same
product. New geographical markets open up allowing the firm to increase its export volumes
or start operations in a new country. Often niche markets become profitable due to
technological changes. As a result, changes in the market create new opportunities and threats
that must be seized upon or dealt with if the company wants to gain and sustain competitive
advantage.

Opportunity or threat?

Most external changes can represent both opportunities and threats. For example, exchange
rates may increase or reduce the profits gained from exports. This depends on the exchange
rate, which may rise (opportunity) or fall (threat) against the home country currency. The
organization can only guess the outcome of the change and count on analysts’ forecasts. In
such cases, when organization cannot identify if the external factor will affect it positively or
negatively, it should gather unbiased and reliable information from the external sources and
make the best possible judgement.

Guidelines for successful SWOT

The following guidelines are very important in writing a successful swot analysis. They
eliminate most of swot limitations and improve it's results significantly:

 Factors have to be identified relative to the competitors. It allows specifying whether

the factor is a strength or a weakness.
 List between 3 – 5 items for each category. Prevents creating too short or endless lists.
  Items must be clearly defined and as specific as possible. For example, firm’s strength
is: brand image (vague); strong brand image (more precise); brand image valued at
$10 billion, which is the most valued brand in the market (very good).
 Rely on facts not opinions. Find some external information or involve someone who
could provide an unbiased opinion.
 Factors should be action orientated. For example, “slow introduction of new
products” is action orientated weakness.

SWOT analysis example

This is a basic example of the analysis:

SWOT analysis of Company "A"

Strengths Weaknesses

1. Second most valuable brand in the world 1. Investments in R&D are below the
valued at $76 billion industry average
2. Diversified income (5 different brands 2. Very low or zero profit margins
earning more than $4 billion each) 3. Poor customer services
3. Strong patents portfolio (15,000 patents)4. High employee turnover
4. Investments in R&D reaching 4 billion5.a High cost structure
year.
6. Weak brand portfolio
5. Competent in mergers & acquisitions
7. Rigid (bureaucratic) organizational
6. Have an access to cheap cash reserves culture impeding fast introduction of new
7. Effective corporate social responsibility products
(CSR) projects 8. High debt level ($3 billion)
8. Localized products 9. Brand dilution (the firm has too many
9. Highly skilled workforce brands)
10. Economies of scale or economies 10. of Poor presence in the world's largest
scope markets

Opportunities Threats

1. Market growth for the main firm's 1. Corporate tax may increase from 20% to
product 22% in 2013
2. Growing demand for renewable energy 2. Rising pay levels
3. New technology, that would drive 3. Rising raw material prices
production costs by 20% is in development 4. Intense competition
4. Our country accession to EU 5. Market is expected to grow by only 1%
5. Changing customer habits next year indicating market saturation
6. Disposable income level will increase 6. Increasing fuel prices
7. Government's incentives for 'specific'7. Aging population
industry 8. Stricter laws regulating environment
8. Economy is expected to grow by 4% next pollution
year 9. Lawsuits against the company
9. Growing number of people buying online10. Currency fluctuations
10. Interest rates falling to 1%

TOWS Analysis

What is TOWS Analysis?

TOWS analysis is a tool which is used to generate, compare and select strategies. Strictly
speaking it is not the same as SWOT analysis, and it is certainly not a SWOT analysis which
focuses on threats and opportunities. This is a popular misconception. TOWS may have
similar roots. TOWS is a tool for strategy generation and selection; SWOT analysis is a tool
for audit and analysis. One would use a SWOT at the beginning of the planning process, and
a TOWS later as you decide upon ways forward.

There is a trade-off between internal and external factors. Strengths and weaknesses are
internal factors and opportunities and threats are external factors. This is where our four
potential strategies derive their importance. The four TOWS strategies are
Strength/Opportunity (SO), Weakness/Opportunity (WO), Strength/Threat (ST) and
Weakness/Threat (WT).
 TOWS Analysis

Four TOWS strategies

Strength/Opportunity (SO). Here you would use your strengths to exploit opportunities.
Weakness/Opportunity (WO). Indicates that you would find options that overcome
weaknesses, and then take advantage of opportunities. So, you mitigate weaknesses, to
exploit opportunities.
Strength/Threat (ST). One would exploit strengths to overcome any potential threats.
Weakness/Threat (WT). The final option looks least appealing; after all, would relish using
a weakness to overcome a threat? With Weakness/Threat (WT) strategies one is attempting to
minimise any weaknesses to avoid possible threat.

TOWS Analysis – Simple Rules.

1. Like many tools, models, concepts and frameworks, TOWS is subjective. It is only as
robust as the data which you include within the model.
2. Use other models and frameworks to support your strategic choices, such as Ansoff’s
Matrix Porters’ Generic Strategies and others.
3. Strategy will include internal development for growth, merger, acquisitions and joint-
ventures.
4. Be as specific as possible and avoid grey areas.
5. Always rely on your gut feeling. If it doesn’t feel right, then maybe it isn’t right. Take
another look at simple rule 1 above.

Market Life Cycle Model - and Organisational Learning

What is Organizational Lifecycle

Organization lifecycle is the way of describing the organizational development over the time.
The model describes the mutual development of revenue and expenses during the cycle. The
cycle consists of five phases

Organizational lifecycle is the way of describing the organizational development over time.

Like other biological and social organisms, the organization creates, develops and changes. It
goes through the growth, crises and eventually dies. There are many ways to describe the
organizational development.
One of the most frequent models is the model of the enterprise lifecycle, which was
published by Danny Miller and Peter Friesen. The model describes the mutual development
of revenue and expenses during the cycle. The cycle consists of five phases (see figure):

 Establishment - There are only expenses, the company consumes the investment
 Growth - expenses exceed revenues, the company is in loss
 Stabilization - revenues exceed expenses, the company is profitable
 Crisis - incomes fall below the level of expenses, the company gets into loss
  Termination - the company cannot handle the crisis, the loss is unbearable, business
ends

The model is the result of long study of many businesses, but it is not applied generally. In
the life of long-lived enterprises (organizations) different phases take their turn . Many
companies have several repeat cycles and even after a long time may not get to the stage of
termination, while many companies undergo only one cycle and then it terminates. Long-term
maintenance of the organization in a stable phase is the main task of managers at all levels.

Experience curve Analysis in Strategic Management

The experience curve effect are relatively easy to understand, and are encapsulated in the
name of the phenomenon itself. Put simply, experience curve effects are derived from the fact
that the more times we repeat an activity, the more proficient we become: in other words
‘practice makes perfect’. In the case of the Wright Patterson Air Force Base, the commander
noticed that this led to a reduction in the time it took to assemble an aircraft as cumulative
production increased. The assembly workers simply became more adept at assembling an
aircraft because over time they had assembled increasing numbers.
In the 1960s, the Boston Consulting Group,3 whose work we look at in more detail later in
this chapter, observed that the experience curve effect was not confined to assembly
operations, or even simply to direct labour costs, but encompassed almost all cost areas of a
business.
The experience curve effect is observed to encompass all costs – capital, administrative,
research and marketing – and to have transferred impact from technological displacements
and product evolution. (Boston Consulting Group: 1970)
 Furthermore, not only was the experience curve effect found to encompass more than just
production, even more importantly, the effect was found to be predictable (Abell and
Hammond).
Personnel from the Boston Consulting Group and others showed that each time cumulative
volume of a product doubled, total value-added costs . . . fell by a constant and predictable
percentage.(Abell and Hammond: 1986)
It is this predictable relationship between costs and experience that constitutes the experience
curve effect.
Specific sources of experience curve effects
We have observed that experience curve effects are based on the old adage ‘practice makes
perfect’.
We can now isolate five specific major sources:
1. increased labour efficiency, e.g. learning short cuts, improved dexterity and greater
familiarity with systems/procedures;
2. greater specialization/redesign of working methods;
3. process and production improvements, e.g. design of more effective plant and
increased automation;
4. changes in the resources mix, e.g. substitution of initially highly qualified labour by
less qualified personnel;
5. product standardization and product redesign.
The important point to note about these sources of experience curve effects is that many of
them are not ‘automatic’, i.e. in order to achieve experience curve effects management must
undertake the necessary steps and exercise initiative.
Experience effects provide the opportunities to lower costs, but appropriate strategies are
required to grasp them.
Calculating experience curve effects
Understandably experience curve effects differ between industries and between companies.
The basic formula for the experience curve is:
Cq=Cn_qn_–b
Where:
q =the experience (cumulative production) to date
n = the experience (cumulative production) at an earlier date
Cq = the cost of a unit q (adjusted for inflation)
Cn = the cost of a unit n (adjusted for inflation)
b = a constant depending on the learning rate.
Experience curves are normally expressed in percentage terms, e.g. an ‘85 per cent’
experience curve or a ‘70 per cent’ experience curve. Expressing the experience curve in this
way tells us the expected reduction in costs for each doubling of cumulative production. An
‘85 per cent’ curve means that the unit cost of producing (say) 2,000 cumulative units of
production will be only 85 per cent of the unit cost when cumulative production had reached
 only 1,000 units. It is important to note that evidence shows that this percentage impact in
costs is the same across the whole range of cumulative experience i.e. doubling experience
from four million to eight million units results in exactly the same percentage cost reduction
as doubling experience from 100 to 200 units in the company. This too, has important
strategic implications.
A typical experience curve. Note how the curve shows that the higher the level of cumulative
production the lower the cost per unit will be.
Strategic implications of the experience curve effect
In industries where curve effects are present (and this is in most industries) and particularly
where these are substantial, a significant competitive edge can be gained by adopting a
strategy aimed at moving down the experience curve more rapidly than competitors.
In effect, this means being the dominant firm in an industry, with strategies aimed at being
the early leader and capturing market share.
Remember that the experience curve effect is based on cumulative production and not scale
of production. This means that in the early stages it is simple to, for example, double market
share at relatively low volumes. Early leadership can thus ensure that the leaders’ costs can
be reduced relatively quickly and often before competitors have time to enter the market. By
the time these competitors are able to do this the early market leader has established an
unassailable cost advantage and competes on price leadership. Owing to the experience curve
effect, high market share undoubtedly becomes a prime objective in marketing strategies.
When considering this strategy the following points need to be borne in mind:

 Achieving high market shares can be expensive. In the short term we need to
consider if we can finance the capture of market share.
A typical experience curve

 Market share – and hence cumulative volume – is easier to achieve in high growth
markets where experience can be gained by taking a disproportionate share of new sales.
 The pursuit of market share in order to lower costs – and hence competing through
price leadership – assumes that the market is price sensitive. Not all markets are; it often
makes more sense to compete on superior products or service rather than price.
Experience curve effects are much greater and therefore more relevant in industries such as
Aerospace than they are in many service product industries. This explains why the European
Consortium which has produced the ‘Eurofighter’ aeroplane was reliant on securing market
share. Only major orders from the defence departments of different governments enabled the
venture to succeed.
In short, the pursuit of competitive advantage based on experience curves is not a certain
solution for success in an industry. The experience curve concept is a useful adjunct to the
strategic market planner’s portfolio of ideas and is particularly useful for market share and
pricing decisions. Like the product life cycle concept, it has in part provided the impetus to
the development of more comprehensive planning tools. The first of these is the Boston
Consulting Group’s growth/share matrix, but before this we need to consider the nature of
these modern tools of strategic marketing planning.
 Unit 3

Strategy Formulation
 Strategy Formulation at corporate
Definition: Strategy Formulation is an analytical process of selection of the best suitable
course of action to meet the organizational objectives and vision. It is one of the steps of
the strategic management process. The strategic plan allows an organization to examine its
resources, provides a financial plan and establishes the most appropriate action plan for
increasing profits.

It is examined through SWOT analysis. SWOT is an acronym for strength, weakness,

opportunity and threat. The strategic plan should be informed to all the employees so that
they know the company’s objectives, mission and vision. It provides direction and focus to
the employees.

 Steps of Strategy Formulation

The steps of strategy formulation include the following:

1. Establishing Organizational Objectives: This involves establishing long-term goals

of an organization. Strategic decisions can be taken once the organizational objectives are
determined.
2. Analysis of Organizational Environment: This involves SWOT analysis, meaning
identifying the company’s strengths and weaknesses and keeping vigilance over competitors’
actions to understand opportunities and threats.

Strengths and weaknesses are internal factors which the company has control over.
Opportunities and threats, on the other hand, are external factors over which the company has
 no control. A successful organization builds on its strengths, overcomes its weakness,
identifies new opportunities and protects against external threats.

3. Forming quantitative goals: Defining targets so as to meet the company’s short-term

and long-term objectives. Example, 30% increase in revenue this year of a company.
4. Objectives in context with divisional plans: This involves setting up targets for
every department so that they work in coherence with the organization as a whole.
5. Performance Analysis: This is done to estimate the degree of variation between the
actual and the standard performance of an organization.
6. Selection of Strategy: This is the final step of strategy formulation. It involves
evaluation of the alternatives and selection of the best strategy amongst them to be the
strategy of the organization.

Strategy formulation process is an integral part of strategic management, as it helps in

framing effective strategies for the organization, to survive and grow in the dynamic business
environment.

Levels of strategy formulation

There are three levels of strategy formulation used in an organization:

 Corporate level strategy: This level outlines what you want to achieve: growth,
stability, acquisition or retrenchment. It focuses on what business you are going to enter
the market.

Business level strategy:

Business level strategies are formulated for specific strategic business units and relate to a
distinct product-market area. It involves defining the competitive position of a strategic
business unit. The business level strategy formulation is based upon the generic strategies of
overall cost leadership, differentiation, and focus. For example, your firm may choose overall
cost leadership as a strategy to be pursued in its steel business, differentiation in its tea
business, and focus in its automobile business. The business level strategies are decided upon
by the heads of strategic business units and their teams in light of the specific nature of the
industry in which they operate.

Functional level strategy:

Functional level strategies relate to the different functional areas which a strategic business
unit has, such as marketing, production and operations, finance, and human resources. These
strategies are formulated by the functional heads along with their teams and are aligned with
the business level strategies. The strategies at the functional level involve setting up short-
term functional objectives, the attainment of which will lead to the realization of the business
level strategy.
For example, the marketing strategy for a tea business which is following the differentiation
strategy may translate into launching and selling a wide variety of tea variants through
company-owned retail outlets. This may result in the distribution objective of opening 25
retail outlets in a city; and producing 15 varieties of tea may be the objective for the
production department. The realization of the functional strategies in the form of quantifiable
and measurable objectives will result in the achievement of business level strategies as well.

Strategy Alternatives:- Stability Strategy

Stability Strategy

Definition: The Stability Strategy is adopted when the organization attempts to maintain its

current position and focuses only on the incremental improvement by merely changing one or
more of its business operations in the perspective of customer groups, customer functions and
technology alternatives, either individually or collectively.

Generally, the stability strategy is adopted by the firms that are risk averse, usually the small
scale businesses or if the market conditions are not favorable, and the firm is satisfied with its
performance, then it will not make any significant changes in its business operations. Also,
the firms, which are slow and reluctant to change finds the stability strategy safe and do not
look for any other options.

Stability Strategies could be of three types:

1. No-Change Strategy
2. Profit Strategy
3. Pause/Proceed with Caution Strategy

To have a better understanding of Stability Strategy go through the following examples in the
context of customer groups, customer functions and technology alternatives.

1. The publication house offers special services to the educational institutions apart from
its consumer sale through the market intermediaries, with the intention to facilitate a bulk
buying.
2. The electronics company provides better after-sales services to its customers to make
the customer happy and improve its product image.
3. The biscuit manufacturing company improves its existing technology to have the
efficient productivity.

GROWTH (or) Expansion Strategy

Definition: The Expansion Strategy is adopted by an organization when it attempts to

achieve a high growth as compared to its past achievements. In other words, when a firm
aims to grow considerably by broadening the scope of one of its business operations in the
perspective of customer groups, customer functions and technology alternatives, either
individually or jointly, then it follows the Expansion Strategy.

The reasons for the expansion could be survival, higher profits, increased prestige, economies
of scale, larger market share, social benefits, etc. The expansion strategy is adopted by those
firms who have managers with a high degree of achievement and recognition. Their aim is to
grow, irrespective of the risk and the hurdles coming in the way.

The firm can follow either of the five expansion strategies to accomplish its objectives:
1. Expansion through Concentration
2. Expansion through Diversification
3. Expansion through Integration
4. Expansion through Cooperation
5. Expansion through Internationalization

Go through the examples below to further comprehend the understanding of the expansion
strategy. These are in the context of customer groups, customer functions and technology
alternatives.

1. The baby diaper company expands its customer groups by offering the diaper to old
aged persons along with the babies.
2. The stockbroking company offers the personalized services to the small investors
apart from its normal dealings in shares and debentures with a view to having more business
and a diversified risk.
3. The banks upgraded their data management system by recording the information on
computers and reduced huge paperwork. This was done to improve the efficiency of the
banks.

Retrenchment Strategy
Definition: The Retrenchment Strategy is adopted when an organization aims at reducing
its one or more business operations with the view to cut expenses and reach to a more stable
financial position.

In other words, the strategy followed, when a firm decides to eliminate its activities through a
considerable reduction in its business operations, in the perspective of customer groups,
customer functions and technology alternatives, either individually or collectively is called as
Retrenchment Strategy.

The firm can either restructure its business operations or discontinue it, so as to revitalize its
financial position. There are three types of Retrenchment Strategies:
1. Turnaround
2. Divestment
3. Liquidation

To further comprehend the meaning of Retrenchment Strategy, go through the following

examples in terms of customer groups, customer functions and technology alternatives.

1. The book publication house may pull out of the customer sales through market
intermediaries and may focus on the direct institutional sales. This may be done to slash the
sales force and increase the marketing efficiency.
2. The hotel may focus on the room facilities which is more profitable and may shut
down the less profitable services given in the banquet halls during occasions.
3. The institute may offer a distance learning programme for a particular subject, despite
teaching the students in the classrooms. This may be done to cut the expenses or to use the
facility more efficiently, for some other purpose.

Combination Strategy
Definition: The Combination Strategy means making the use of other grand strategies
(stability, expansion or retrenchment) simultaneously. Simply, the combination of any grand
strategy used by an organization in different businesses at the same time or in the same
business at different times with an aim to improve its efficiency is called as a combination
strategy.
Such strategy is followed when an organization is large and complex and consists of several
businesses that lie in different industries, serving different purposes. Go through the
following example to have a better understanding of the combination strategy:

A baby diaper manufacturing company augments its offering of diapers for the babies to
have a wide range of its products (Stability)and at the same time, it also manufactures the
diapers for old age people, thereby covering the other market segment (Expansion). In order
to focus more on the diapers division, the company plans to shut down its baby wipes
division and allocate its resources to the most profitable division (Retrenchment).
 Unit 4

Strategy Implementation
Strategic Implementation

Strategy implementation is the translation of chosen strategy into organizational action so as

to achieve strategic goals and objectives. Strategy implementation is also defined as the
manner in which an organization should develop, utilize, and amalgamate organizational
structure, control systems, and culture to follow strategies that lead to competitive advantage
and a better performance. Organizational structure allocates special value developing tasks
and roles to the employees and states how these tasks and roles can be correlated so as
maximize efficiency, quality, and customer satisfaction-the pillars of competitive advantage.
But, organizational structure is not sufficient in itself to motivate the employees.
An organizational control system is also required. This control system equips managers with
motivational incentives for employees as well as feedback on employees and organizational
performance. Organizational culture refers to the specialized collection of values, attitudes,
norms and beliefs shared by organizational members and groups.
Following are the main steps in implementing a strategy:
Developing an organization having potential of carrying out strategy successfully.
Disbursement of abundant resources to strategy-essential activities.
Creating strategy-encouraging policies.
Employing best policies and programs for constant improvement.
Linking reward structure to accomplishment of results.
Making use of strategic leadership.
Excellently formulated strategies will fail if they are not properly implemented. Also, it is
essential to note that strategy implementation is not possible unless there is stability between
strategy and each organizational dimension such as organizational structure, reward structure,
resource-allocation process, etc.
Strategy implementation poses a threat to many managers and employees in an organization.
New power relationships are predicted and achieved. New groups (formal as well as
informal) are formed whose values, attitudes, beliefs and concerns may not be known. With
the change in power and status roles, the managers and employees may employ confrontation
behaviour
Types of strategies
Offensive strategy:
It involves direct and indirect attacks by improving own position by taking away the market
share of the competitors. The primary focus of this strategy is to be a first mover and a
proactive market leader and to protect itself by standing one step ahead of the competitors
and allowing them to follow.
If the leader’s growth is not equal or higher than the average growth rate of the industry then
the market shares and position can be easily taken over by its competitors. A firm who wants
to lead the markets need to improve the speed of cost reduction, improved customer relations,
value added performance characteristics and quality.

Objectives of offensive strategies:

To maximize the sales
To destabilize the current market leader
To acquire market share
Various offensive strategies:

offensive strategies

Frontal attack:
A frontal attack is attacking a competitor ahead on by producing similar products with similar
quality and price; it is highly risky unless the attacker has a clear advantage. In the frontal
attack, firms concentrate on competitor’s strengths rather than weaknesses.
Flank attack:
Flank attack is less risky when compared to that of frontal attack in which firms attacking at
the competitor’s weak point or blind spot. In this strategy firms follow the path of least
resistance where the competitor is incapable of defending.
Encirclement attack:
It is the combination of both frontal and flank attacks. Here the challenging firm attacks the
competitor firm on its entire major fronts i.e. strengths and weaknesses. There are two
strategies that can be used under the encirclement attack.
1.Product encirclement:
In this strategy, the challenger firm introduces different types of products with varied
features, quality and price.
2.Market encirclement:
In market encirclement strategy the challenger firm introduces the products into the new
market segments which are left untapped by the competitor’s firms.
Bypass attack:
Bypass attack is the most indirect form of marketing strategy in which challenging firms
produce next generation products to occupy the competitor’s market share. Challengers may
diversify into unrelated products with new technology or may enter into new geographical
markets.
The challenger firm performs a thorough research and produces next generation products in
order to attract the more customers this strategy is also called as leapfrogging strategy
Guerrilla attack:
The guerrilla attack is expensive, but it is less than the frontal, flank and encirclement attacks.
In guerrilla warfare, the challenger firm applies strategies with an intention to demoralize and
harass the competitor by the following strategies.
Giving free samples to the customers
Allowing the customers to pay in any form i.e. cash, credit or debit cards
Attracting new customers by giving advertisements in social networks
By using powerful advertisement strategies

Defensive Strategies

Defensive strategies are only used by market leaders in strategic management. If your small-
business has reached a market-leading position, you may need to use such strategies. The
goal of these strategies is to hold onto your position as the market leader, fighting off
competitors who try to take away your market share. Because firms tend to target market
leaders, this will not be an easy task, but fortunately you have multiple strategies to choose
from.

Position Defense
The position defense is the simplest defensive strategy. It simply involves trying to hold your
current position in the market. To do this, you simply continue to invest in your current
markets and attempt to build your brand name and customer loyalty. The problem with this
strategy is that it can make you a target for new entrants to the market.

Mobile Defense
The mobile defense involves making constant changes to your business so that it is difficult
for competitors to compete with you. This can involve introducing new products, entering
new markets or simply making changes to existing products. This constant moving between
strategies requires a flexible business that can adjust to change.

Flanking Defense
When a firm uses the flanking defense, it defends its market share by diversifying into new
markets and niche segments. The idea behind the strategy is that if you lose your market
share in the existing market you can make up for it in these new markets. The danger of the
flanking defense is that it can stretch your resources thin and pull attention away from your
main focus.

Counter-Offensive Defense
The counter-offensive defense is a retaliatory strategy. When a competitor attacks your
business, you strike back with your own attack. For instance, if you operate a bakery that
only produces gluten-free products and a competitor who produces regular bread also begins
producing gluten-free products, you could hit back at it by introducing regular bread
products.

Contraction Defense
The contraction defense is the least desirable defense because it involves retreating from
markets. If you don't believe you can successfully defend those markets,however, then it can
be the best option. This allows you to redeploy your resources into other areas. For example,
imagine that you manufacture two products: liquid soap and bar soap. If you find that you can
no longer compete in the bar soap market, then it makes sense to retreat from that market and
focus on liquid soaps.

Vertical Integration

Vertical integration is a competitive strategy by which a company takes complete control

over one or more stages in the production or distribution of a product.
A company opts for vertical integration to ensure full control over the supply of the raw
materials to manufacture its products. It may also employ vertical integration to take over the
reins of distribution of its products.

A classic example is that of the Carnegie Steel Company, which not only bought iron mines
to ensure the supply of the raw material but also took over railroads to strengthen the
distribution of the final product. The strategy helped Carnegie produce cheaper steel, and
empowered it in the marketplace.
 

What is horizontal integration?

Horizontal integration is another competitive strategy that companies use. An academic

definition is that horizontal integration is the acquisition of business activities that are at the
same level of the value chain in similar or different industries.

In simpler terms, horizontal integration is the acquisition of a related business: a fast-food

restaurant chain merging with a similar business in another country to gain a foothold in
foreign markets.
 

Vertical Integration in Strategic Management

 Types of vertical integration strategies

As we have seen, vertical integration integrates a company with the units supplying raw
materials to it (backward integration), or with the distribution channels that carry its products
to the end-consumers (forward integration).

For example, a supermarket may acquire control of farms to ensure supply of fresh
vegetables (backward integration) or may buy vehicles to smoothen the distribution of its
products (forward integration).
A car manufacturer may acquire tyre and electrical-component factories (backward
integration) or open its own showrooms to sell its vehicle models or provide after-sales
service (forward integration).

There is a third type of vertical integration, called balanced integration, which is a judicious
mix of backward and forward integration strategies.

When is vertical integration attractive for a business?

Several factors affect the decision-making that goes into backward and forward integration. A
company may go in for these strategies in the following scenarios:

 The current suppliers of the company’s raw materials or components, or the

distributors of its end products, are unreliable
 The prices of raw materials are unstable or the distributors charge high fees
 The suppliers or distributors earn big margins
 The company has the resources to manage the new business that is currently being
taken care of by the suppliers or distributors
 The industry is expected to grow significantly
 

Advantages of vertical integration

What are the benefits of vertical integration? Let us take the example of a car manufacturer
implementing this strategy. This company can
  smoothen its supply chain (by ensuring ready supply of tyres and electrical
components in the exact specifications that it requires)
 make its distribution and after-sales service more efficient (by opening its own
showrooms)
 absorb for itself upstream and downstream profits (profits that would have gone to the
tyre and electrical companies and showrooms owned by others)
 increase entry barriers for new entrants (by being able to reduce costs through its own
suppliers and distributors)
 invest in specific functions such as tyre-making and develop its core competencies
 

Disadvantages of vertical integration

But what is the downside? What are the drawbacks of vertical integration? Let us see the
main disadvantages.

 The quality of goods supplied earlier by external sources may fall because of a lack of
competition.
 Flexibility to increase or decrease production of raw materials or components may be
lost as the company may need to sustain a level of production in pursuit of economies of
scale.
 It may be difficult for the company to sustain core competencies as it focuses on the
integration of the new units.
However, there are alternatives to vertical integration, such as purchases from the market (of
tyres, for example) and short- and long-term contracts (for showrooms and with service
stations, for example).
 

Horizontal Integration

Horizontal integration, as we have seen, is a company’s acquisition of a similar or a

competitive business—it may acquire, but it may also merge with or takeover, another
company to strengthen itself—to grow in size or capacity, to achieve economies of scale or
product uniqueness, to reduce competition and risks, to increase markets, or to enter new
markets.

Quick examples of horizontal expansion are Standard Oil’s acquisition of about 40 other
refineries and the acquisition of Arcelor by Mittal Steel and that of Compaq by HP.
 
When is horizontal integration attractive for a business?

A company can think of acquisitions and mergers for horizontal integration in the following
situations:

 When the industry is growing

 When rivals lack the expertise that the company has already achieved
 When economies of scale can be achieved
 When the company can manage the operations of the bigger organisation efficiently,
after the integration
 

Advantages of horizontal integration

The advantages of horizontal integration are economies of scale, increased differentiation

(more features that distinguish it from its competitors), increased market power, and the
ability to capture new markets.

 Economies of scale: The bigger, horizontally integrated company can achieve a higher
production than the companies merged, at a lower cost.
 Increased differentiation: The company will be able to offer more product features to
customers.
  Increased market power: The new company, because of the merger of companies, will
become a bigger customer for its old suppliers. It will command a bigger end-product
market and will have greater power over distributors.
 Ability to enter new markets: If the merger is with an organisation abroad, the new
company will have an additional foreign market.
 

Disadvantages of horizontal integration strategy

As touched upon earlier, the management of a company should be able to handle the bigger
organisation efficiently if the advantages of horizontal integration are to be realised.

The legal ramifications will have to be studied as there are strict anti-monopoly laws in many
countries: if the merged entity threatens to oust competitors from the market, these laws will
be used against it.

Standard Oil, which was seen as a powerful conglomerate brooking no competition, was split
up into over 30 competing companies in an anti-trust case.

As a company grows bigger with horizontal integration, it might become too rigid, and its
procedures and practices may become unfriendly to change. This could prove dangerous to it.

Moreover, synergies between companies that may have been predicted may prove elusive or
non-existent (for example, the failed horizontal integration of hardware and software
companies merged in the expectation of “synergies” between their products).

The decision whether to employ vertical or horizontal integration has a long-term influence
on the business strategy of a company.

Tailoring Strategy to Fit Specific Company - Industry Situation -

Strategies to Fit Industry Situation

Strategic Avenues for Competing in an Emerging Industry

1. Try to win the early race employing broad or focused differentiation strategy.
2. Push to perfect the technology, improve the product and quality.
3. Adopt dominant technology quickly.
4. Form strategic alliances with suppliers
5. Acquire or form alliances with companies that have related or complementary
technological expertise.
6. Try to capture first mover advantages
7. Pursue new customer groups, new user applications and entry into new geographical areas.
8. Begin to shift advertising to increase the frequency of use and building brand loyalty.
9. Use price reductions to attract the next layer of price-sensitive buyers into the market.

Strategies for Competing in Turbulent, High-Velocity Markets

1. Invest aggressively in R&D

2. Develop quick response capability.
3. Develop tie-in.
4. Initiate fresh actions every few months - Create change proactively
5. Keep the company's products and services fresh.
Strategic Moves in Mature Industries

1. Pruning marginal products and models.

2. More emphasis on value chain innovation
3. Trimming costs
4. Increasing sales to present customers
5. Acquiring rival firms at bargain prices
6. Expanding internationally
7. Building new or more flexible capabilities
Strategies for Firms in Stagnant or Declining Industries

1. Pursue fastest growing market segments in the industry.

2. Stress differentiation based on quality improvement and product innovation
3. Strive to drive cost down.

Strategies for Competing in Fragmented Industries

1. Constructing and operating formula facilities

2. Becoming a low cost operator
3. Specializing by product type
4. Specializing by customer type
5. Focusing on limited geographical area

Strategies to Fit Company Situation

Rapid Growth Company

These companies have to craft a portfolio of strategic initiatives covering three horizons.

Short-term horizon: Strategies typically include adding new items to the company's present
product line, expanding into new geographic areas, and launching offensives to take market
share away from competitors.

Medium-term horizon:  Entering new businesses

Long-term horizon: Pumping funds into R&D to create new businesses

Strategies for Industry Leaders

1. Stay-on-the-offensive strategy
2. Fortify and defend strategy
3. Muscle flexing strategy

Strategies for Runner-up Firms

Strategies to build market share

Acquisition opportunities
Vacant niches
Specialist firm strategy
Superior product strategy
Distinctive image strategy
Content follower strategy
Strategies for Weak and Crisis-Ridden Businesses

Selling off assets

Cutting costs
Liquidation

Strategy and 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 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.

Resource Allocation as a vital part of strategy

Resource Allocation

Resource allocation is a central management activity that allows for strategy execution.
The real value of any resource-allocation program lies in the resulting accomplishment of
an organization's objectives.

A number of factors prohibit effective resource allocation, including an over-protection of

resources, too great an emphasis on short-run financial criteria, organizational politics,
vague strategy targets, a reluctance to take risks, and a lack of sufficient knowledge.

Yavitz and Newman explain why below the corporate level, there often exists an absence
of systematic thinking about resources allocated and strategies of the firm:

Managers normally have many more tasks than they can do. Managers must allocate time
and resources among these tasks. Pressure builds up. Expenses at too high. The CEO wants
a good financial report for the third quarter.

Strategy formulation and implementation activities often get deferred. Today's problems
soak up available energies and resources. Scrambled accounts and budgets fail to reveal
the shift in allocation way from strategic needs to currently squeaking wheels.

The relationship between resources and strategy is two-way. Strategy affects resources and
resources affect strategy.

Resources can be evaluated from several different perspectives: The most prevalent way of
evaluating them is by functional areas: finance, research and development, human
resources, operations, marketing. A second way of evaluating resources is by type:
financial, physical, human, and organizational. A third way of evaluating resources is in
terms of their tangibility.

Tangible resources (e.g., a plant or the number of employees) can be observed and
measured. Less tangible resources (e.g., corporate name) are also important though their
characteristics and importance are harder to evaluate.

Strategic Planning and Implementation

Strategic Planning is systematic procedure to establish the long term objectives of an

organization and the policies and strategies that oversee the achievement, use and
disposition of resources to accomplish the vision and mission of firms. It is basically the
responsibility of senior management. Strategic planning is the problem-solving process of
establishing strategic objectives and devising strategic plans to realize those objectives.
The goals of strategic planning including understanding the benefits of strategic planning;
understanding the products of strategic planning; and learning the keys to successful
planning and implementation.

Many theorists explained that Strategic planning is a well-organized process to make

major decisions and agreeing on actions that shapes and guide what an organisation is,
what it does, and why it does it.

The Strategic planning mainly assists to organization for:

1. Setting up of goals or objectives;

2. The analysis of the environment and the resources of the organization;

3. The generation of strategic options and their evaluation; and

4. The planning of implementation of the design of control systems or monitoring

mechanisms.

different components relate to each other with the strategic plan.

The particular steps for Strategic Planning

This planning comprises of six identifiable stages that fulfil the requirements of the
 management thinkers:

1. Environmental scanning.

2. Evaluation of issues.

3. Forecasting.

4. Goal setting.

5. Implementation, and

6. Monitoring.

A written strategic plan might include the following headings:

I. Executive summary

II. Vision statement

III. Mandate and scope of work

IV. Summary analysis of external and internal environment

V. Main strategic issues

VI. Four or five aims that accompany strategies

VII. Assessment of human resource needs

VIII. Budget protection

Importance of Strategic Planning

The significance of strategic planning in any business organization cannot be exaggerated.

Majority of top performing companies have identified the role of strategic planning for
long term growth and continued existence of their business organization. Most of the
managers have observed that through defining the mission of their organization, they are
better able to give it direction and focus its activities. Planning is major process for
organization's success because without proper planning, there may be confusion and
unethical practices can occur. Currently, researchers are more interested to study strategic
management. Adeyemi (1992) stated that there is a positive correlation between strategic
management and organizational performance in some Nigeria banks in his study.

It is well established in management studies that the success or failure of strategic planning
is determined by a number of components which include the environment, organization
structure and strategic decision making. Ansoff (1979) said that when these three
components are appropriately matched, the performance of any organization is optimised.
Lorange (1979) hypothesized that the significance of strategic planning is to achieve a
sufficient process of modernism to support and augment the planning process. He further
argues that effective strategic planning does not have to be detailed or complicated but
must be rational and focused on strategic decisions to be carry out.

The advantages of Strategic planning

Strategic planning is methodological form of planning and therefore it is simple to grasp

the methods, procedures and rituals programmed to implement the strategies.

Strategic planning provides a structured way to analyse and think about complex strategic
problems, requiring management to question and challenge what they take for granted.

Strategic planning can be used to involve people in strategy development.

Strategic planning is an effective way to communicate the aim of management to members

of the organization.

Strategic planning can be used as a means of control by regularly reviewing performance

and progress against agreed objectives.

Drawbacks of Strategic Planning: Besides several advantages, strategic planning has

following pitfalls:

Strategic Planning is difficult and time consuming.

In Strategic planning, immediate results are rarely obtained.

Strategic Planning quite often, limits the organization and executives to the more rational
and risk free options.

It can be established that Strategic planning is a process that brings life to the mission and
vision of the enterprise. A strategic plan, well-crafted of value, is determined from the top
down; considers the internal and external environment around the business; is the work of
the managers of the business; and is communicated to all the business stakeholders, both
inside and outside of the company.

Implementation

Implementation is the process of turning strategies and plans into actions to achieve
strategic objectives and goals. Implementation is important part of the strategic planning
process, and organizations that develop strategic plans must incorporate a process for
applying the plan. The particular implementation process can differ from organization to
organization. Strategy will tend to be formulated at high level, mainly if it follows a
common strategy of value discipline and it can only be successfully implemented if it can
be expressed in more detailed policies and communications that are directed at workforce
throughout the organisation. Strategic alteration can only be successful if it has the support
of the employees who have to deal with the customers, suppliers and organisational
resources that of the strategy is targeted at. Consequently, when representing the strategy
at a lower organisational level, it also helps to ensure that the strategy is practicable and
addresses any realistic issues which may arise. Particularly, a strategy needs to be
implemented in the marketing, research and development, procurement, HR, production
and IT departments in order to be triumphant. Implementation must also recognize any
resources and capabilities required to support the new strategy, and any organisational
change which will have to take place. In implementation process, the strategy also needs to
be controlled and revised to make certain that it is being implemented accurately and
fruitfully. This needs appraisal and feedback procedures as well as control systems to
observe the important characteristics of the strategy.

Senior management commitment is significant factor for the implementation of a strategy.

Research has revealed that senior management's commitment is certainly a requirement for
strategy implementation. Therefore, they must show their keenness to give energy and
faithfulness to the implementation process. Senior executives must discard the notion that
lower level managers have the same perceptions of the strategy and its implementation, of
its underlying rationale, and its urgency (Dahlgaard, and Martensen, 1998). Another aspect
of implementation of strategic plan is involvement of middle manager's valuable
knowledge. The success of any implementation attempt depends on the level of
involvement of middle managers. To generate the required acceptance for the
implementation as a whole, the affected middle managers' knowledge, which is often
underestimated, must already be accounted for in the formulation of the strategy. After
that, it is to make sure that these managers are a part of the strategy process, their
motivation towards the project will increase and they will see themselves as an important
part in the process (Rps, 2005).

Effective communication should be emphasized in the implementation process. Many

theorists have designated that communication is a major success factor within strategy
implementation (Prahalad, and Hamel, 1990). Research has shown that an organization
introduce a two-way communication program that allows and solicits questions from
employees about issues regarding the formulated strategy. Additionally, the
communications should inform employees about their new requirements, tasks and
activities to be performed by the affected employees, and furthermore, cover the reason
behind changed circumstances ( Alexander, 1995).

There are few basic steps that can assist in the process and guarantee success of
implementation:

1. Evaluate the strategic plan: This is the first step in the implementation process. It
states that managers must know what the strategic plan is. They must review it
carefully, and highlight any elements of the plan that might be especially
challenging. It is necessary to identify any part of the plan that might be unrealistic
or excessive in cost, either of time or money and emphasize these, and be sure to
keep them in mind to begin implementing the strategic plan.

2. Create a vision for implementing the strategic plan: This vision might be a series of
goals to be reached, step by step, or an outline of items that need to be completed.
It is imperative that everybody must know what the end result should be and why it
is important and establish a clear image of what the strategic plan is intended to
 accomplish.

3. Select team members to help to implement the strategic plan: Management must
develop competent team that support management to implement strategies. They
must establish a team leader who can encourage the team and field questions or
address problems as they arise.

4. Schedule meetings to talk about progress reports: Organize meetings and present
the list of goals or objectives, and let the strategic planning team know what has
been accomplished. Whether the implementation is on schedule, ahead of schedule,
or behind schedule, evaluate the current schedule regularly to discuss any changes
that need to be made. Management must establish a rewards system that recognizes
success throughout the process of implementation.

5. Involve the upper management where appropriate: It is good to inform all activities
to the organization's executives and provide progress reports on the implementation
of the plan. Letting an organization's management know about the progress of
implementation makes them a part of the process, and, should problems arise, the
management will be better able to address concerns or probable changes.

Unit 5

Strategy Evaluation and control

Strategic evaluation and control is the process of determining the effectiveness of a given
strategy in achieving the organizational objectives and taking corrective actions whenever
required.

Control can be exercised through formulation of contingency strategies and a crisis

management team. There can be the following types of control –

(i) Operational control- It is aimed at allocation and use of organizational resources through

evaluation of performance of organizational units, divisions, SBU`s to assess their
contribution in achieving organizational objectives.

(ii) Strategic control- It takes into account the changing assumptions that determine a
strategy, continually evaluate the strategy as it is being implemented and take the necessary
steps to adjust the strategy to the new requirements.

The four basic type of strategic control are-

1. Premise control- It identifies the key assumptions and keeps track of any change in them
to assess its impact on strategy and implementation. The goal is to find if the assumptions are
still valid or not .It is generally handled by the corporate planning staff considering the
environmental and organizational factors.

2. Implementation control- It includes evaluating plans, programs, projects, to see if they

guide the organization to achieve predetermined organizational objectives or not. It leads to
strategic rethinking .It consists of identification and monitoring of strategic thrusts.

3. Strategic surveillance- It aims at generalized control. It is designed to monitor a broad

range of events inside and outside the organization that are likely to threaten the course of the
firm. Organizational learning and knowledge management systems capture the information
for strategic surveillance.

4. Special Alert control- It is a rapid response or immediate reassessment of strategy in the

light of sudden and unexpected events. It can be exercised through formulation of
contingency strategies and a crisis management team. 

Strategic Evaluation Process-

(A) Setting standards of performance – It must focus on questions like:

 What standards should be set?

 How should the standards be set?
 In what terms should these standards be expressed?

The firm must identify the areas of operational efficiency in terms of people, processes,
productivity and pace. Standards set must be related to key management tasks. The special
requirement for performance of these task must be studied. It can be expresses in terms of
performance indicators.
The criteria for setting standards may be qualitative or quantitative. Therefore standards can
be set keeping in mind past achievements, compare performance with industry average or
major competitors. Factors such as capabilities of a firm, core competencies, risk bearing
ability, strategic clarity and flexibility and workability must also be considered.

(B) Measurement of performance – Standards of performance act as a benchmark in

evaluating the actual performance. Operationally it is done through accounting, reporting and
communication system. The key areas which must be kept in mind are – difficulty in
measurement, timing of measurement (critical points) and periodicity in measurement (task
schedule).

(C) Analyzing variances – The two main tasks are noting deviations and finding the cause of
deviations. 
♦  When actual performance is equal to budgeted performance tolerance limits must be set.

♦ When actual performance is greater than budgeted performance one must check the validity
of standards and efficiency of management.

♦ When actual performance is less than budgeted performance we must pinpoint the areas
where performance is low and take corrective action,

The cause of deviations may be – External or internal, Random or expected, Temporary or

permanent. The two main questions to focus upon are : 

Are the strategies still valid?

Does the organization have the capacity to respond to the changes needed?

(D) Taking corrective actions – It consists of the following-

♦ Checking of performance – It includes in-depth analysis and diagnosis of the factors that
might be responsible for bad performance.

♦ Checking of standards – It results in lowering or elevation of standards according to the

conditions.

♦ Reformulate strategies,plans,objectives – Giving a fresh start to the strategic

management process

Importance of Strategic evaluation and control

 There is a need for feedback ,appraisal and reward

 to check on the validity of strategic choice
 Congruence between decisions and intended strategy

 Creating inputs for new strategic planning

The Role of Strategist in a Business Organization

Strategists are individuals or groups who are primarily involved in the formulation,
implementation and evaluation of strategy.  A strategist is like a root of an organization. In
order to overcome the deadly traps in any organization a strategist must first think outside of
the “box” and they must focus on both “forest and the trees.” They must need to concentrate
on three aspects of human intelligence like Intellectual Intelligence (IQ), Emotional
Intelligence (EQ), and Spiritual Intelligence (SQ).

The mind of strategist must try to decide when to do strategy and when not to do strategy,
clear target markets, competitive advantage, 80/20 focus and alignment. They need to do
research, analyse the given situation with the available information’s and comes out with the
best solutions. The heart of strategist must have the concepts, rules, power and politics play
an important role in the development of any strategy. The end result of a strategy
(the strategic plan) determines what is, and what is not important to the company’s future,
who will get scarce resources such as budgets, and skills, who will be gain and who will lose
power. The soul of strategist must have ingredients to inspiration include energy, creativity,
action or doing, wisdom, purpose, fun, awareness of the mystery, caring, motivating the
people, stimulating the new innovative ideas.

There are various kinds of strategists like managers, board of directors, chief executive
officers, entrepreneurs, senior management, SBU-level executives, corporate planning staff,
consultants, middle level managers, executive assistants.

 Board of directors are the owners of an organization such as shareholders,

controlling agencies, government, financial institutions, etc. They are responsible
for governance of an organization, technology collaboration, new product
development and senior management appointments. They guide the senior
management in setting and accomplishing objectives, review and
evaluate organization performance.
 The chief executive officer is answerable for all aspects of strategic
management from the formulation to the evaluation of strategy. They play a major
role in strategic decision making and provide the direction for the organization so that
it can achieve its purpose. They assist in setting the mission of the organization. They
are responsible for deciding the objectives, formulating and implementing the
strategy.
 Entrepreneurs are strategist who starts a new business, initiator, searches for change,
respond to it and exploits its as an opportunity. By their nature, entrepreneurs play a
proactive role. They are implementers and evaluators of strategies.
 Senior management or top management consists of managers at highest level
managerial hierarchy. They look after renovation, technology up
progression, diversification and expansion and also focus on new product
development. They assist the board and chief executives in formulating, implementing
and evaluating the strategy.
 SBU level executives are profit center heads or divisional heads. They manage
a diversified company as a portfolio of businesses, each business having a clearly
 defined product-market segment and an unique strategy. SBU executives maintain
harmonization with other SBUs in the organizing, formulating and implementing the
SBU level strategy.
 Corporate planning staff plays a supporting role. They put in order and
communicate the strategic plans. They make available administrative support and
fulfill the function of assisting the introduction, working and maintenance of strategic
management system.
 Consultants may be individuals, academicians or consultancy companies who are
specialized in strategic management activities. They will advise and assist managers
to improve the performance and effectiveness of an organization. They provide
services of corporate strategy and planning.
 Middle level managers look after operational matters, so they rarely play an active
role in strategic management. They are the implementers of decision taken by top
level and followers of policy guidelines. They contribute to generation of ideas and in
development of strategic alternative. They also help in setting objectives at
departmental level.
 An executive assistant will assist the chief executive in the performance of his duties
in various ways. They assist the chief executive in data collection, analysis and in
suggesting alternatives. Coordinating activities with internal staff and outsiders and
acting as a filter for information are also performed by the executive assistant.

The Role of Strategist in Organizations

A powerful strategist plays the major important roles like sooth sayer, sculptor, politician,
guru and jail buster.

 A strategist must be a soothsayer or seer who helps his team to imagine the future
world within which they will be competing. They begin by reading the palm of the
organisation and also identify its competencies and unique strengths. They then use
the crystal ball of scenarios, and imaginative thinking to help the team to visualize the
future within which the business will operate.
 A strategist should also be a sculptor like an artist ‘who carves a form’ out of raw
materials. The sculptor strategist creates a unique role or purpose for the organisation.
They predict the reason why the organisation will be successful within the
soothsayer’s imagined future. The sculptor begins by defining the organisation’s
future target markets. They then provide the future shape of the organisation by
defining why its future customers will choose to support it, rather than any future
imagined competitor. So the strategist changes systems, structures, rewards, alliances,
products and services to ensure that everything supports the organisational purpose.
 A politician is someone who is ‘skilled in the art of maneuvering and manipulation.’
The politician strategist knows the power players in the organisation. They know what
drives each leader and they also know who is motivated by what external and internal
factors.
 A guru is ‘a person who gives personal spiritual guidance to his disciples.’ The
strategist guru, shows how each individual employee in the company, can contribute
to the greater, noble goal. They help individual employees to discover their inimitable
personal purpose. Then they show them how to channel their energy and talent
towards living their purpose, whilst acting in ways that support the company’s goal.
  A strategist must also plays a role of jail buster, while at work, many employees find
that their talents, passions, creativity, imagination, and energy are locked behind bars
of the company culture. Timid managers who want to ‘be in control’, and ‘avoid
making mistakes’, often hide the keys to creativity, energy, passion, self-assurance,
and innovation. The jail buster strategist shows employees how to break out from
their prison of tediousness and fear without alerting their fearful managers. They
provide the key to unlocking their talents, creativity, and energy.

Benchmarking To Evaluate Performance

Benchmarking  is a strategy tool used to compare the performance of the business processes
and products with the best performances of other companies inside and outside the industry.

Benchmarking is the search for industry best practices that lead to superior performance.

Understanding the tool

Comparing your own business to a rival is essential when competing. Without it, you would
never know how successful your performance is in a market or whether you perform one or
another task better than your competitor does. For example, 85% customer satisfaction might
look great for you or even compared to your industry’s average, but what if some other
companies (not necessarily rivals) easily achieve 97% rate? In this situation, your 85%
satisfaction rate doesn’t look that brilliant. To better understand your situation and improve
company’s performance, the managers use benchmarking.

Some form of comparison in the companies was used, since 1800s, and mainly included
product’s quality and feature comparison. This type of comparison was scarcely used and
didn’t become a valuable management tool until late 1980s and 1990s, when Xerox
introduced the process benchmarking technique. This type of comparison proved very
beneficial and Xerox, AT&T and other companies began comparing the performance of their
processes to the best standards in the industry. The following table shows how benchmarking
evolved into a modern strategy tool:

Benchmarking history

1950-1975 Reverse engineering

1976-1986 Competitive benchmarking

1982-1986 Process benchmarking

1988+ Strategic benchmarking

1993+ Global benchmarking

Source: J. Blakeman, University of Wisconsin-Milwaukee[3]

According to Camp, benchmarking is simply “Finding and implementing the best business

practices”. Managers use the tool to identify the best practices in other companies and apply
those practices to their own processes in order to improve the company’s performance.
Improving company’s performance is, without a doubt, the most important goal of
benchmarking.

It’s a very important tool in strategic management, because it often reveals how well your
organization performs compared to rivals.

Other uses of the tool:

 To reveal successful business processes. It is often unclear how successful

companies achieve superior performance. By observing and scrutinizing such
companies you can identify the processes, skills or competences that contribute to
organization’s success and then apply the same practices to your own company.
 To facilitate knowledge sharing. The knowledge acquired about other businesses
can be easily transferred to your own organization.
 To gain competitive advantage. The company can gain a competitive advantage if it
applies the best practices from other industries to its own industry. For example, a
small family owned farm selling its own agricultural products online could apply the
same social media strategies as internet blogs to attract attention and gain new
customers. This would be a new way to gain customers and may result in at least
temporary competitive advantage.

Popularity

The tool is one of the most recognized and widely used tools of all the business strategy tools.
The survey done by The Global Benchmarking Network reveals that adaptation of the tool in
organizations vary from 68% for informal benchmarking to 49% and 39% for performance
and best practice benchmarking, respectively. In addition, annual surveys from Bain &
Company’s indicate similar results.

Source: Bain
& Company
The graph shows that, although, the satisfaction of the tool is high, the usage of it has
declined since the heights in 1999. Still, benchmarking remained the 4th top used tool by
businesses in the world in 2013.

Types

There are different types of benchmarking the managers can use. Tuominen [ and Bogan &
English[8] identified these 3 major types:

 Strategic benchmarking. Managers use this type of benchmarking to identify the

best way to compete in the market. During the process, the companies identify the
winning strategies (usually outside their own industry) that successful companies use
and apply them to their own strategic process. It is also common to compare the
strategic goals in order to spot new strategic choices.
 Performance benchmarking. It is concerned with comparing your company’s
products and services. According to Bogan & English [8] the tool mainly focuses on
product and service quality, features, price, speed, reliability, design and customer
satisfaction, but it can measure anything that has the measurable metrics, including
processes. Performance benchmarking determines how strong our products and
services are compared to our competition.
 Process benchmarking. It requires to look at other companies that engage in similar
activities and to identify the best practices that can be applied to your own processes
in order to improve them. Process benchmarking is a separate type of benchmarking,
but it usually derives from performance benchmarking. This is because companies
first identify the weak competing points of their products or services and then focus
on the key processes to eliminate those weaknesses. For example, an organization
using performance comparison identifies that their product ‘X’ is superior in features,
manufacturing quality and design, but pricier than competitor’s product ‘Y’. Then the
company determines, which processes add the most to the cost of the product and
seek how to improve them by looking at similar, but less cost heavy processes in other
companies.

Approaches

In addition to the types, there are four ways you can do benchmarking. It is important to
choose the optimal way because it reduces the costs of the activity and improves the chances
to find the ‘best standards’ you can rely on.

 Internal benchmarking. In large organizations, which operate in different

geographic locations or manage many products and services, same functions and
processes are usually performed by different teams, business units or divisions. This
often results in processes performed very well in one division but poorly in another.
Internal benchmarking is used to compare the work of separate teams, units or
divisions to identify the ones that are working better and share the knowledge
throughout the company to other teams to achieve higher performance. It is usually
employed by the companies that have recently expanded geographically, but haven’t
yet created proper knowledge sharing systems between divisions. If such systems are
in place, there’s no need to use internal benchmarking to look for best practices.
 External or competitive benchmarking. Some authors use these terms
interchangeably but there are a few differences between them. First, competitive
 benchmarking refers to a process when a company compares itself with the
competitors inside its industry. Whereas external benchmarking looks both inside and
outside the industry to find the best practices, thus, including competitive
benchmarking.[9] Second, competitive benchmarking, in my opinion, will only be used
with performance benchmarking to compare your products and services. Strategic or
process benchmarking won’t be viable options, because it’ll be very hard to find a
competitor, who wants to share sensitive information with you and you’ll never
outcompete your rival if you’ll be using his strategy or processes. Besides, external
benchmarking is a more beneficial approach to use due to higher possibilities of
finding the best practices.
 Functional benchmarking. Managers of functional departments find it useful to
analyze how well their functional area performs compared to functional areas of other
companies. It is quite easy to identify the best marketing, finance, human resource or
operations departments, in other companies, that excel in what they do and to apply
their practices to your own functional area. This way the companies can look at a
wide range of organizations, even unrelated ones, and instead of improving separate
processes, they can improve the whole functional areas.
 Generic benchmarking. According to Kulmala,[9] it refers to comparisons, which
“focus on excellent work processes rather than on the business practices of a
particular organization”. For example, your company tries to improve its marketing
capabilities and benchmarks itself against company ‘A’. While observing company’s
‘A’ marketing processes you also notice how well their human resources are managed
using ‘big data’ analytics. This gives you an idea to implement the data collecting and
analysis team in your own company to significantly improve its overall performance. 
The other example of generic benchmarking would be to compare your processes
against generally accepted best standards. For example, every organization strives to
become a learning organization, because such an organization is better equipped to
overcome challenges and adapt to the market changes. By comparing your company
to some general standards, which would indicate that your company is a learning
organization, you would be using generic benchmarking.

The following diagram summarizes the types and approaches to benchmarking:

Advantages

 Easy to understand and use.

 If done properly, it’s a low cost activity that offers huge gains.
 Brings innovative ideas to the company.
 Provides you with insight of how other companies organize their operations and
processes.
 Increases the awareness of your costs and level of performance compared to your
rivals.
 Facilitates cooperation between teams, units and divisions.

Disadvantages

 You need to find a benchmarking partner.

 It is sometimes impossible to assign a metric to measure a process.
 You might need to hire a consultant.
 If your organization is not experienced at it, the initial costs could be huge.
 Managers often resist the changes that are required to improve the performance.
 Some of best practices won’t be applicable to your whole organization.

Using the tool

Benchmarking is used extensively by organizations, but no universal process of how to

conduct it is established. Each organization designs its own way of using the tool. Before
revealing some of the examples, we provide you with the guidelines [3] to make the process
easier.
Guidelines:

1. Only choose the products, services or processes, which perform poorly. Comparing
the processes you are good at will be a waste of time and money, and won’t bring the
desired results.
2. Define the specific metrics or processes to measure. Be careful not to choose too
broad processes that can’t be measured as you won’t be able to compare it properly.
3. Prepare your company for change. Your organization must overcome the resistance to
change to implement new best practices.
4. Choose the team that is qualified. Although benchmarking is easy to use, you
shouldn’t pick up just anybody to do it. Include the people that will be responsible for
implementing the changes and the people that are skilled at it.
5. Participate in benchmarking networks and use the appropriate software to facilitate
the process. There are various benchmarking networks, where participating
companies can find benchmarking partners or gather the data for the metrics they
need. Such participation facilitates the process significantly by reducing the costs and
time spent looking for the right data.
6. Look for the best standards and ideas even in unrelated areas. Many significant
discoveries will be made by observing the companies that are completely unrelated to
your organization.

Benchmarking Wheel

The benchmarking wheel model introduced in article “Benchmarking for Quality”[10] is a 5

stage process that was created by observing more than 20 other models.

It’s fairly simple and comprises of following stages:

1. Plan. Assemble a team. Clearly define what you want to compare and assign metrics
to it.
 2. Find. Identify benchmarking partners or sources of information, where you’ll be able
to collect the information from.
3. Collect. Choose the methods to collect the information and gather the data for the
metrics you defined.
4. Analyze. Compare the metrics and identify the gap in performance between your
company and the organization observed. Provide the results and recommendations on
how to improve the performance.
5. Improve. Implement the changes to your products, services, processes or strategy.

Xerox Process

Xerox has popularized benchmarking and was one of the first companies to introduce the
process of doing it. This 5-phase and 12-step process was created by Camp, R. the manager
of Xerox responsible for benchmarking.[3]
Most of the processes are similar to the examples above and can be applied to any company
or non-profit organization that strives to achieve superior performance using benchmarking.

Example

Company ‘A’ has used performance benchmarking to compare its product ‘X’ with the
competitor’s product ‘Y’ and found out that the product ‘X’ is priced slightly lower, but it
also has fewer features than product ‘Y’. The company recognized that in order to win a
larger market share and establish itself in the market, it has to increase the number of features
in its product while keeping the price at the same level or even decreasing it.

To achieve this, the company ’A’ has set up a team that investigated product ‘X’ value chain
analysis. The team identified that the activities adding the most to the cost are marketing and
purchasing parts in an open market. The team also identified that by buying standards parts in
the market, the company has little room to introduce new features as this would require
customized parts for its product ‘X’. The next step was to assign the proper metrics to
marketing and purchasing activities and gather the required data. The company joined the
benchmarking network and in a few weeks gathered enough data to compare the performance
of its processes.

The results indicated that the marketing activities could be improved significantly. The team
recognized that many businesses in the industry were able to attract new customers profitably
through heavy advertising online. Yet, further observations of the companies outside the
industry showed that the average returns on advertising weren’t so huge compared to the
returns when attracting customers through social media. Therefore, the team decided to rely
on social media rather than advertising to attract more customers, while reducing its costs by
20%.

The next activity analyzed was the purchase of parts in the open market. While this was a
convenient way to conduct the business it was costing more and didn’t allow customizing the
product. The team identified that this activity could be improved by manufacturing the parts
inside the company or by establishing long term relationships with suppliers. The collected
data and the experience of other similar businesses showed that the best option would be to
establish long term relationships with suppliers. It would cost less than manufacturing the
parts inside the company or buying them in an open market. It would also allow ordering
customized parts that were needed for the new features.

By engaging in benchmarking activities, the team has identified the gaps in company’s
performance and introduced new ways to improve the current processes to achieve the higher
performance.

Strategic Information System

A strategic information system is mainly developed to respond to the corporate world and
many business initiatives. They are used for giving the higher advantage of competition to the
organization. It may deliver a service or product that is at a lower price, differentiated and
mainly concentrates on a demanding market section, or which is innovative.

Information system strategy is an essential feature in corporate and information technology

(IT) world. In a nutshell, it helps firms and companies to allocate, store, process data and
move the data and information they develop and receive. It also enables and provides various
tools and services for aiding the firms to apply metrics and analytical tools in their
information repositories function and allowing them to recognize the resourceful
opportunities for expansion and simple ways enhance operations and supply efficiency. Thus
a better data management along with more effective data presentation and analysis.

Importance of Strategic information system

Strategic information system provides a connection between demands of organization and

latest information technology. This tactic helps an organization to get hold of the market by
utilizing Information tech to meet its challenging requirements to the continuous variation in
the corporate environment.

Information system strategy in a critical aspect of an organization for its growth and
expansion. Within it, the integration of the data system and its function within the
organization can be handled easily. Besides that, it also enables the classification of different
opportunities for the use of information systems for different strategies. It gives the surety
that only useful resources or the use of resources which are less are allocated to the
applications and the use of scarce resources in a sustainable way. With the system
information strategy, it ensures that the Information system functions accordingly and
supports the business goals and objectives of the organization at the different levels.

There are several instances of strategically information systems which have helped the
organizations to help create and sustain the resources in this competitive market over the past
years and has allocated several effective benefits and simply continued to provide survival of
the organizations which have used these systems. These systems are often termed as
‘strategic concepts of the organization.’ To give the maximum performance of the firms
financially in a fluctuating market, the correlation between strategic management and
information system is significant fundamentally.

Types of Information System strategies

1. Operations support system: In a firm, data execution is performed by the user end, which
is later processed to generate useful data products and services like reports, which are utilized
by different users. Such a strategy is called operation support. The primary purpose of this
system is to keep a check on transactions, operations, control, chain supply, and management.
It also helps to facilitate internal and external talks, and it updates the central main database
of the organization. The operation support system is further divided into three systems which
are-

1. Transaction Processing System (TPS)

2. Process Control System
3. Enterprise Collaboration System

2. Management Support System

Firms require accurate data in a specific format to understand the decisions of the
organizations. Management support system strategy enables the effective decision and task
operation process more manageable for the managers. They are essentially divided into a
different strategy like management, decision, accounting and expert information system.
These systems facilitate and provide precise information and data to the manager for easy
routines, decision-making processes. Decision support system which helps to solve particular
issues related problems.

Uses of Strategic information system

 Creating hurdles for the entry of a competitor: In this, a firm uses information
systems to supply products and services that are hard to duplicate or that are used
primarily to aid highly specialized networks of business. This strategy stops the entry
of competitors in the market as they find the cost of giving such services at a very
high price.
 Improving marketing by generating database: Information system also gives the
firms and organization an edge over their competition by generating stronger
databases to enhance their sales and marketing tactics. It treats existing information as
a useful resource. For instance, a business firm may use its updated databases to
monitor the purchase of the customers and to locate many segments of the market.
 Locking customers and suppliers.: It is an essential way of getting the advantage of
competition by making the customers and suppliers permanent. In this information
systems strategy are implemented to provide benefits to the customer and the
suppliers so that it may change their mind and it becomes hard for them to switch over
to the other competitor so that they continue to provide the services.

Lowering the costs of the products: It may help the firms lower their costs and
allowing them to give products and services at a much smaller cost than their
competitors. Thus such a strategy can provide the expansion and growth of the firm.
 Leveraging technology in the value chain: In this way, the organizations pinpoint
the particular activities in the business, where competitive market strategies can be
applied and where the strategical information systems can be more effective.

Conclusion

Before making a new system, the strategy is very essential for smooth business operations
and services. First of all, the firm should identify their requirements. Development of new
information system should be in response to the needs and requirements whether at the level
of executing transactions or at some complex data and support information system levels. The
normalization of requirements, goals, and authorization of the information system should be
done first. These systems include financial measures that focus mainly on the short period
consequences of manager’s decisions regarding queries such as revenue expansion, market
inflation, asset utilization, resource management and cash flow in the fluctuating market.
They boost up the objectives of the firm with nonfinancial measures that helps with
operational achievements to raise the future financial growth of the organization. The system
strategy development should mainly identify the project resources and constraints for every
area of application. Necessary planning should be flexible to adjust the priorities of the
organization.
Guidelines for Proper Control

1. Control should involve only the minimum amount of information

2. Controls should monitor only meaningful activities and results
3. Controls should be timely
4. Long-term and short-term controls should be used
5. Controls should aim at pinpoint exceptions
6. Emphasize the reward of meeting or exceeding standards

Strategic Surveillance

Compared to premise control and implementation control, strategic surveillance is designed

to be a relatively unfocused, open, and broad search activity.

"... strategic surveillance is designed to monitor a broad range of events inside and

outside the company that are likely to threaten the course of the firm's strategy."

The basic idea behind strategic surveillance is that some form of general monitoring of
multiple information sources should be encouraged, with the specific intent being the
opportunity to uncover important yet unanticipated information.

Strategic surveillance appears to be similar in some way to "environmental scanning." The

rationale, however, is different. Environmental, scanning usually is seen as part of the
chronological planning cycle devoted to generating information for the new plan.

By way of contrast, strategic surveillance is designed to safeguard the established strategy on

a continuous basis.

Strategic Audit

An important part of business strategy is concerned with ensuring that these resources and
competencies are understood and evaluated - a process that is often known as a "Strategic
Audit".

In our introduction to business strategy we emphasised the role of the business environment

in shaping strategic thinking and decision-making.

The external environment in which a business operates can create opportunities which a

business can exploit, as well as threats which could damage a business. However, to be in a
position to exploit opportunities or respond to threats, a business needs to have the right
resources and capabilities in place.

The process of conducting a strategic audit can be summarised into the following stages:

(1) Resource Audit:

The resource audit identifies the resources available to a business. Some of these can be
owned (e.g. plant and machinery, trademarks, retail outlets) whereas other resources can be
obtained through partnerships, joint ventures or simply supplier arrangements with other
businesses.

(2) Value Chain Analysis:

Value Chain Analysis describes the activities that take place in a business and relates them to
an analysis of the competitive strength of the business. Influential work by Michael Porter
suggested that the activities of a business could be grouped under two headings:

1. Primary Activities - those that are directly concerned with creating and delivering a
product (e.g. component assembly)
2. Support Activities, which whilst they are not directly involved in production, may
increase effectiveness or efficiency (e.g. human resource management). It is rare for a
business to undertake all primary and support activities

Value Chain Analysis is one way of identifying which activities are best undertaken by a
business and which are best provided by others ("outsourced"). 

(3) Core Competence Analysis:

Core competencies are those capabilities that are critical to a business achieving competitive
advantage. The starting point for analysing core competencies is recognising that competition
between businesses is as much a race for competence mastery as it is for market position and
market power.

Senior management cannot focus on all activities of a business and the competencies required
to undertake them. So the goal is for management to focus attention on competencies that
really affect competitive advantage.

(4) Performance Analysis

The resource audit, value chain analysis and core competence analysis help to define the
strategic capabilities of a business. After completing such analysis, questions that can be
asked that evaluate the overall performance of the business. These questions include:

How have the resources deployed in the business changed over time? This is historical
analysis

How do the resources and capabilities of the business compare with others in the industry?
This is industry norm analysis

How do the resources and capabilities of the business compare with "best-in-class" -
wherever that is to be found? This is benchmarking
How has the financial performance of the business changed over time, and how does it
compare with key competitors and the industry as a whole? This is ratio analysis

(5) Portfolio Analysis:

Portfolio Analysis analyses the overall balance of the strategic business units of a business.
Most large businesses have operations in more than one market segment, and often in
different geographical markets. Larger, diversified groups often have several divisions (each
containing many business units) operating in quite distinct industries.

An important objective of a strategic audit is to ensure that the business portfolio is strong
and that business units requiring investment and management attention are highlighted. This
is important - a business should always consider which markets are most attractive and which
business units have the potential to achieve advantage in the most attractive markets.

Traditionally, two analytical models have been widely used to undertake portfolio analysis:

1. The Boston Consulting Group Portfolio Matrix (the "Boston Box")

2. The McKinsey/General Electric Growth Share Matrix

(6) SWOT Analysis:

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats.

SWOT analysis is an important tool for auditing the overall strategic position of a business
and its environment.

Strategy and Corporate Evaluation and feedback in the Indian and international
context.

The Evaluation Of Corporate Strategy

Each organization has its own approach to evaluation. There are not absolute answers as to
the proper evaluation standards. However, there are three basic questions to ask in strategy
evaluation:

1. Is the existing strategy any good?

2. Will the existing strategy be good in the future?
3. Is there a need to change a strategy?

The first question may need additional detailing to indicate whether the current strategy is
useful and beneficial to the organization.
Seymour Tilles has written a classic article on the qualitative assessment of organizational
performance. This article serves several particular questions to be asked for evaluation. These
questions are:

1. Is the strategy internally consistent? Internal consistency refers to the cumulative

impact of various strategies on the organizations. According to Tilles, a strategy must
be judged not only in relationships to other strategies.
2. Is organizations strategy consistent with its environment? An important test of
strategy is whether the chosen strategy in consistent with environment (constituent
demands, competition, economy, product / industry life cycle, suppliers, customers) -
whether the really make sense with respect to what is going on outside.
3. Is the strategy appropriate in view of available resources? Resources are those things
that company is or has and that help it to achieve its corporate objectives. Included are
money, competence, facilities and other. Without appropriate resources, organization
simply cannot make strategic work.
4. Does the strategy involve an acceptable degree of risk? Strategy and resources, taken
together, determine the degree of risk which the company is undertaken. Each
company must determine the amount of risk it wishes to incur. This is a critical
managerial choice. In attempting to assess the degree of risk associated with a
particular strategy, management must assess such issues as the total amount of
resources a strategy requires, the proportion of the organization's resources that a
strategy will consume, and the amount of time that must be committed.
5. Does the strategy have an appropriate time horizon? A significant part of every
strategy is the time horizon on which it is based. For example, a new product
developed, a plant put on stream, a degree of market penetration, become significant
strategic objectives only if accomplished by a certain time. Management must ensure
that the time necessary to implement the strategy is consistent. Inconsistency between
these two variables can make it impossible to reach goals in a satisfactory way.
6. Is the strategy workable?

E. P. Learned and others, building on the Tilles model, suggest that the following are also
proper evaluative questions:

7. Is the strategy identifiable? Has it been clearly and consistently identified and are
people aware of it?
8. Is the strategy appropriate to the personal values and aspirations of key managers?
9. Does strategy constitute a clear stimulus to organizational effort and commitment?
10. Is the strategy socially responsible?
11. Are there early indications of the responsiveness of markets and market segments to
the strategy?

J. Argenti adds:

12. Does the strategy rely on weakness or do anything to reduce them?

13. Does the strategy exploit major opportunities?
14. Does it avoid, reduce, or mitigate the major threats? If not, are there adequate
contingency plans?
All these questions can by applied as the strategy progresses through its various stages,
including implementation. The answers can provide guidelines as to how the strategy should
be altered or changed.

The second basic question "Will the existing strategy be good in the future?" seeks to
ascertain if the strategy would continue to satisfy the firm's objective in the future. The
answer to this is based upon unforeseeable changes in the organization's environment or
resources, or changes in its mission, goals, or objectives.

The answer to the third question "Is there a need to change the strategy?" will provide
direction toward a strategy formation task.

Qualitative measurements methods can be very useful, but their application involves
significant amounts of human judgment. Thus, conclusions based on such methods must be
drawn carefully.