U NIVERSIT Y OF TOMORROW

Business Policy
and Strategies
Contents

Unit 1 Business Policy - An Overview......................... ............................................................1

Unit 2 Strategy and Strategic Management..............................................................................9
Unit 3 Basic Models of Strategic Management.......................................................................28
Unit 4 Strategic Intent – Vision, Mission and Objectives......................................................39
Unit 5 Formulating Business Strategy and Corporate Strategy...........................................54

Unit 6 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance.................74
Unit 7 Strategic Planning and Strategic Management Process...........................................104
Unit 8 Strategies for Retrenchment.......................................................................................124
Unit 9 Strategic Organizational Design and Modern Organizational Structure.................139
Unit 10 Behavioural Strategic Implementation.......................................................................160

Unit 11 Strategies at Functional and Operational Level.......................................................172

Unit 12 Strategic Control and Evaluation...............................................................................184

Business Policy and Overview
Learning Objectives
By the end of this unit, you will be
able to understand:
● Concept of policy
● Concept of strategy
● Policy vs strategy
● Business policy
● Scope of business policy
1 Business Policy – An Overview
Unit 1
Introduction
The world economy has witnessed an amazing
succession of major developments during the last
few decades, particularly after the Second World War.
The profile of business enterprises has undergone
phenomenal changes. These changes are reflected in
terms of developments in technology, such as electric
lights, power distribution, telephone, refrigeration, radio,
television, video, and computers, expanding scale of
business operations, ever-increasing competition,
mounting internationalization of business, growing state
interference, changing socio-economic and political
environments, and the emergence of new human values.
These developments served to complicate business
problems and even posed a threat to the survival of
existing enterprises. To cope with these remarkable
developments in the business environment and to
surmount the grave problems encountered by the chief
executives for the survival and growth of their enterprises,
new techniques and principles of management have been
evolved from time to time.
Concept of Policy
Policies have been defined as statements, either expressed
or implied, of those principles and rules that are set up
by executive leadership as guides and constraints for the
organization’s thought and action. They are a kind impacted by the policy. The applicability and
of standing answers to recurring questions. Thus, scope may expressly exclude certain people,
it may be the policy of the enterprise to employ organizations, or actions from the policy
local people, to charge fixed prices for its products, requirements. Applicability and scope are used to
and to sell only against cash. Policies may relate focus the policy on only the desired targets and
to production, sales, personnel, finance, and so on. avoid unintended consequences where possible.
Policies are general in nature, emphasizing a fairly
● An effective date that indicates when the policy
definite course of action and change infrequently.
comes into force. Retroactive policies are rare
but can be found.
“Policies are general statements or undertakings
● A responsibilities section, indicating which
(members of the group), which make the action
parties and organizations are responsible for
of each member of the group in the given set of
carrying out individual policy statements. Many
circumstances more predictable to other members.”
policies may require the establishment of
—J.L. Massie
some ongoing function or action. For example,

“Policies are general statements or a purchasing policy might specify that

undertakings, which guide or a purchasing office be created to

channel thinking in decision process purchase requests,

making of subordinates.” and that this office would

be responsible for ongoing
Policies are typically actions. Responsibilities often
promulgated through official include the identification of
written documents. Policy any relevant oversight and/or
documents often come with governance structures.
the endorsement or signature ● Policy statements
of the executive powers within an indicating the specific regulations,
organization to legitimize the policy and requirements, or modifications to
demonstrate that it is considered in force. Such organizational behavior that the policy is
documents often have standard formats that are creating. Policy statements are extremely diverse
particular to the organization issuing the policy. depending on the organization and intent, and
While such formats differ in form, policy documents may take almost any form.
usually contain certain standard components,
including: Some policies may contain additional sections,
including:
● A purpose statement, outlining why the
organization is issuing the policy and what its ● Background, indicating any reasons, history,
desired effect or outcome of the policy should and intent that led to the creation of the policy,
be. which may be listed as motivating factors.

● An applicability and scope statement, describing This information is often quite valuable when

who the policy affects and which actions are policies must be evaluated or used in ambiguous
situations, just as the intent of a law can be useful
2 Business Policy – An Overview
 to a court when deciding a case that involves
that law.
● Definitions, providing clear and unambiguous
definitions for terms and concepts found in the
policy document.
Concept of Strategy
same due to changes in situations.
● Strategy is forward-looking.
● It is a means to an end and not an end in itself.
● It is a means of coping with or managing the
events and changes in the external environment.
● It is formulated at the top management level.

A strategy is gamesmanship or an administrative ● It is generally long-range in nature, but short-

course of action designed to achieve success in range moves are also specified in it.
the face of difficulties. It is the design or the overall
● It is flexible and dynamic.
plan, which a company chooses in order to move or
● It involves the assumption of certain calculated
reach the objectives it seeks to provide the optimum
risks.
match between the firm and its environment.
● It is action-oriented and more specific than
“Strategy is the complex plan for bringing objective.
the organization from a given posture
● It is generally meant to cope with
to a desired position in a future
a competitive setting in which the
period of time.”
behavior of competitors and other
adversaries of the enterprise
“Strategy refers to the
affects its own functioning
determination of purpose and
and performance.
the long-term objectives of the
enterprise and the adoption of
A policy is a guide to thinking
the course of action and allocation
and action for those responsible
of resources necessary to achieve
for making decisions. On the
these aims.” —Harold Koontz
other hand, a strategy deals with the
allocation and development of physical and human
Nature and Characteristics of Strategy
resources to achieve the desired goals in the face
of environmental pressures. A strategy may exist
The nature and characteristics of strategy are:
without a policy; strategy and policy may, in some
cases, be co-extensive. A strategy deals primarily
● It is the right combination of different factors.
with environmental constraints and opportunities,
● It relates the business organization to its whereas a policy is concerned mainly with internal
environment. management.
● It is an action to meet a particular challenge to
solve particular problems or attain objectives. A policy is a contingent decision and lays down
the response to be made whenever the specified
● Strategy may need contradictory actions. For
contingency arises. But a strategy is designed
example, today a manager may adopt a particular
to deal with situations about which all facts are
course of action, but tomorrow he may end the
not known and, therefore, alternatives cannot be

3 Business Policy – An Overview

evaluated in advance. The implementation of policy decision. The term “policy” should not be
can be delegated, but the execution of strategy considered synonymous with the term “strategy.”
cannot be delegated because it requires last- The differences between policy and strategy can
minute executive decisions. However, both policy be summarized as follows:
and strategy are designed to achieve organizational
objectives. ● Policy is a blueprint of the organizational
activities, which are repetitive/routine in nature.
The process of their formulation is similar. In Strategy is concerned with those organizational
strategic decisions, the identification and analysis decisions that have not been dealt/faced before
of the factors bearing on the problem are more in the same form.
difficult than in the case of policy decisions.
● Policy formulation is the responsibility of top-
level management. Strategy formulation is done
Thus it can be said that a major distinction between
by middle-level management.
policy and strategy is that the former is a guide to the
● Policy deals with routine/daily activities
thinking and action of those who make decisions,
essential for effective and efficient running of
while the strategy concerns the direction in which
an organization. Strategy deals with strategic
human and physical resources will be deployed
decisions.
and applied to maximize the chance of achieving a
selected objective in the face of difficulties. ● Policy is concerned with both thought and
actions. Strategy is concerned mostly with
Policy is a contingent decision, whereas strategy is action.
a rule for making a decision. A contingent event is
● Policy is - what is done, or what is not done.
recognized because it is repetitive, but the time of
Strategy is the methodology used to achieve a
its specific occurrence cannot be specified. It is not
target as prescribed by a policy.
worthwhile to require a new decision on what should
be done each time when a contingency arises. It is
better to prescribe, in advance, the response to be
made whenever a specified contingency occurs.
This is done through policy formulations. The
specification of strategy is forced under conditions
of partial ignorance when alternatives cannot be
arranged and analyzed in advance. The strategy
decision is taken under conditions where all the
facts are not known, which may not be lasting
because of the further knowledge of the facts.

The distinction between policy and strategy is made

in the context of delegation or implementation.
The implementation of policy can be delegated
downward in the organization, while the strategy
cannot, since it requires a last-minute executive
4 Business Policy – An Overview
Business Policy
Business policy refers to decisions about the future
of an ongoing enterprise. These are the decisions
that only the top management of an organization
can take. Top management takes these decisions
after thoroughly investigating market opportunities,
taking into consideration resources available in the
internal and external environment, and by appraising
the destructive competence. These are vital and
strategic decisions in as much as they determine
the relationship between the enterprise and its
environment, what it is supposed to be doing in the
coming years, and how it should position itself to
take advantage of future market opportunities.
“A management policy is a and are subject to alteration or
predetermined selected course
established as a guide
towards accepted goals and
objectives. Policies establish
the framework of guiding
principles that facilitate
delegation to lower levels and
permit individual managers
to select appropriate tactics or
programs.” —Yoder and Dale
“A business policy is nothing more than a well-
developed statement of directions and goals. Goals
involve definitions of precisely what the business is
or should be and the particular kind of company it
should be. Direction guides the action of the firm to
accomplish these goals.” —Edmond and Gray
“A policy is a statement or a commonly accepted
understanding of decision-making criteria or
formulate prepared or evolved to achieve economy
in operations by making decisions, relatively routine
or frequently occurring problems and consequently
facilitating the delegation of such decisions to
5 Business Policy – An Overview
lower managerial levels.” —Miller and Earnest
Characteristics of Business Policy
The characteristics of business policy are:
● When policies are clearly framed and explained,
they help the executive to know how others
will act, and this will help them to have better
coordination in achieving the well-planned
objectives.
● Policies will be effective and fruitful only when
they are properly implemented by properly trained
personnel, as per the time schedule.
● Business policies are never static
modification depending upon the
business environment.
● Policies act as guidelines
to business executives to
resolve recurring problems
so as to attain predetermined
objectives.
● Policies cover the wide
field of product mix and market mix,
guiding the enterprise as to how much and
what type of product to be manufactured and its
channels of distribution.
● Policies are not a set of rigid rules and regulations;
instead, they are living precepts guiding an
enterprise to continue within the set pattern of
behavior.
● They are overall guides determining the direction
of managerial action subject to policy restrictions.
● Consistency in the work performance by different
members of the firm is maintained because of
clear-cut policies chalked out at the executive
level.
● Policies cover the study of the nature and
process of choice about the future of a business
enterprise and are to be handled by responsible
executives.
● Policies are general statements of principles for
achieving predetermined goals by guiding action
by executives at different levels.
● They are meant for subordinates and are framed
to suit a specific situation.
● They are of a multipurpose nature embracing:
» Avoiding confusion.
» Providing guidelines at all levels.
» Enabling the enterprise to run smoothly without
any hindrance.
» Helping management to achieve the
maximum utilization of human and
material resources.
● Decision making, planning, and
coordination of any business
organization are exclusively
governed and controlled by
business policies.
● Policies dominate over all other factors
of management since they act in the form of
a formal agreement to be strictly followed at
all levels in the organization before taking any
decision.
● Policies help the management to delegate
duties to subordinates with full confidence that
these duties will be carried out strictly as per the
policy decisions.
Objectives of Business Policy
The objectives of business policy are as follows:
● Development of Skills: The attainment of
knowledge should lead to the development
6 Business Policy – An Overview
of skills so as to apply what is learned. Such
application takes place by an analysis of case
studies and their interpretation and by an analysis
of the business events taking place around us.
● Determination of Objectives, Mission, Etc.:
Information about the environment helps in the
determination of the mission, objectives, and
strategies of a firm. The learner appreciates the
manner in which strategy is formulated.
● Developing a Creative Attitude: An important
attitude is to go beyond and think when faced
with a problematic situation. Developing a
creative and innovative attitude is the hallmark
of a general manager who refuses to be bound
by precedents & stereotyped decisions.
● Environmental Analysis and
Knowledge: Knowledge about the
environment—external and internal—
and how it affects the functioning
of an organization is vital in
understanding business policy.
Through the tools of analysis and
diagnosis, a learner can understand
the environment in which a firm operates.
● Generalization Approach: The
problems in real-life business are unique, and so
far, their solutions are an enlightening experience
for the managers at all levels. The knowledge
component of such experience stresses the
generalization of the approach to be adopted
in problem-solving and decision making. With a
generalized approach, it is possible to deal with
a wide variety of situations. • Implementation
of strategy: The implementation of strategy is a
complex issue and is invariably the most difficult
part of strategic management. Through the
knowledge gained in business policy, the learner
is able to visualize how the implementation of
strategies can take place.
Advantages of Business Policy
The advantages of business policy are:
● An understanding of business policy enables
the executives to avail of opportunities and
the other way round to equip the executive for
avoiding a risk with regard to career planning and
development. • Setting up policies can speed up
decision making since they provide a framework
within which the decisions can be made.
Policies give a practical shape to the objectives
by elaborating and directing the way in which
predetermined goals are to be achieved.
● Policies help in securing coordination of efforts
and activities in the organizations. Though
managers try to coordinate the efforts of their
subordinates, by prescribing how a subordinate
is expected to behave in a particular context, they
secure better coordination in a subordinate’s
efforts and actions.
● A clearly defined business policy may lead to an
improvement in job performance. As a middle-
level manager, a person is helped to understand
the linkages between different subunits of an
organization and how a particular subunit fits
into the overall picture.
● Policies help both superior and subordinates to
work for better performance. When the policies
are formulated carefully, the managers are not
required to devote time to the same or similar
assignments. The subordinates have not to
consult their superiors frequently. So, by this
way, everybody can stick to one’s task instead of
wasting time here & there.
● Business policy diverts the management
towards a more meaningful position, as one
can look at business decision making in its
proper perspective. For example, in the context
7 Business Policy – An Overview
of business policy, a short-term gain for a
department is knowingly sacrificed in the interest
of the long-term benefit that may accrue to the
organization as a whole.
Disadvantages of Business Policy
The disadvantages of business policy are:
● No problem can be solved very quickly on the
basis of policies because policies don’t give
enough room to managers to decide. Policies
force managers to remain in boundary.
● Policies are not very fruitful in these days of
rapidly changing the business environment. Even
this is possible that the time at which policies
were set up was quite different as compared
to the present scenario because of changes in
political, social, economic, and technological
aspects. So, in these types of situations, policies
don’t provide much help.
● Policies do not cover each and every sort of
problem. At times, such type of situation arises
which never predicted earlier. So, in these sorts
of circumstances, policies are meaningless.
● In these days of dynamism, there is no space for
anything static. Policies once set up, they will go
for a longer period. Managers have to take their
decisions by taking into consideration policies.
Scope of Business Policy

No business organization can either survive or grow without definite objectives, which can only be
accomplished by applying different policies from time to time, depending on the working organizational
thinking, behavior, and action. Policies as such are formulated pertaining to different aspects of business
organizations, and therefore, they enjoy a very wide scope in the day-to-day life of any business unit. Persons
concerned with any type of activity, either commercial or otherwise, will have to think of clear-cut policies
right from the formation stage to the winding up of the proposed business project. It should, however, be
noticed that though the scope of business policy is wide in general, it varies in degree depending upon the
size and nature of the business undertaking.

Classification of Business Policy

Policies are of several types according to the nature. These are:

● Organizational And Functional Policies: Policies for the enterprise as a whole are known as organizational
policies, e.g., promotion policy. Such policies are formulated by top management. On the other hand,
policies relating to a particular function or department of the business are called functional or operating
policies, e.g., production policy, price policy, personnel policy, etc. Functional or departmental policies are
formulated by departmental managers.

● Written and Implied Policies: Policies explicitly stated in writing are written policies. They form a part of the
organization manual or records. Implied policies are not in print but are understood from the functioning
of the management.

● Originated, Appealed, and Imposed Policies: Originated policies are those laid down by top management
to guide lower-level executives. They originate at the higher echelons of management. Policies that are
formulated on the appeal or request of subordinate managers are called appealed policies. Subordinates
request the formulation of policies to meet exceptional problems not covered by prevailing policies.
Originated and appealed policies are two types of internal policies. Imposed policies or external policies
are those thrust upon the enterprise by outside forces, such as government, trade unions, competitors,
trade associations, etc. Such policies tend to restrict the freedom of management.

Summary

Policy and strategy represent two significant subsets of the total field of management, about which there
is less than common agreement regarding definition or relationship. In some instances, policy is viewed as
a static framework within which the more dynamic construct of strategy is shaped and tempered. In other
instances, strategy is said to give rise to policy in a logical form from the mission to the mainstream of the
organization. In still other instances, policy and strategy are conceived in a kind of transitory juxtaposition in
which one may affect the other directly, indirectly, or not at all.

8 Business Policy – An Overview


Strategy and Strategic
Learning Objectives
By the end of this unit, you will be
able to understand:
● Strategy and strategic
management
● Need for strategies and strategic
management
● Strategies and the role in
strategic management
● Dimensions of strategic
management
● Strategic decision making
9 Strategy and Strategic Management
Unit 2
Management
Introduction
Strategic Management is the process by which
organizations translate their vision into programs and
actions to deliver ‘outcomes’. It is recognized today that
changing the ‘outcomes’ in the real world is a necessary
requirement for the survival of the business organization,
and it is essential that the ‘outcomes’ result in the desired
changes. Controlling market forces and shaping the
competitive environment was, at one time, considered to
be outside the capability of business organizations.
Economic thought until the beginning of the twentieth
century was dominated by the concept of the ‘invisible
hand’. This concept meant that firms do not have the ability
to impact the external environment. The development
of strategic management as an area of study began
when there was a realization that it was possible for the
organization to impact changes in the macro-economic
environment. It is, therefore, not surprising that the
study of strategic management is a relatively recent
phenomenon.
Before understanding the definition of strategy, it is
important to understand the difference between two
terms that are often used interchangeably – ‘strategy’
and ‘tactics’. Strategy and tactics are both concerned with
formulating and then carrying out courses of action intended to attain particular objectives. The language
of strategic maneuver is also largely the language of tactics. ‘Tactics’ follow and facilitate strategy and are
defined as techniques or a science of dispensing and maneuvering forces to accomplish a limited objective
or an immediate end.

Strategy and tactics are distinct in terms of their dimensions. Strategy, for the most part, is concerned with
deploying resources, and tactics are concerned with employing them. Strategy deals with wide spaces, long
periods of time, and large movements of forces, while tactics deal with the opposite. Strategy is the prelude
to action, and tactics are the action itself. Table 2.1 summarizes the differences between the two, as there is
often confusion about the distinction between strategy and tactics.

Despite distinctions in theory, strategy and tactics cannot always be separated in practice. Strategy gives
tactics its mission and resources and seeks to reap the results. Tactics then become important conditioning
factors of strategy, and as the tactics change, so does strategy. Strategy triggers a movement; a movement
begets an action, and the action results in new movement. This interconnectedness between the movement
and the action often merges one into the other.

Aspects Strategy Tactics

Scale of the Objective Grand Limited

Scope of the Action Broad and General Narrowly Focused

Guidance Provided General and Ongoing Specific and Situational

Adaptable, but not hastily Fluid, quick to adjust and adapt in

Degree of Flexibility
changed minor or major ways

Timing in Relation to Action Before Action During Action

Focus of Resource Utilization Deployment Employment

Figure No. 2.1: Strategic Management

Strategic Management is the process by which organizations translate their vision into programs and actions
to deliver ‘outcomes’. It is recognized today that changing the ‘outcomes’ in the real world is a necessary
requirement for the survival of the business organization, and it is essential that the ‘outcomes’ result in
the desired changes. Controlling market forces and shaping the competitive environment was, at one time,
considered to be outside the capability of business organizations.

Economic thought until the beginning of the twentieth century was dominated by the concept of the
‘invisible hand’. This concept meant that firms do not have the ability to impact the external environment.

10 Strategy and Strategic Management

The development of strategic management as an
area of study began when there was a realization
that it was possible for the organization to impact
changes in the macro-economic environment. It is,
therefore, not surprising that the study of strategic
management is a relatively recent phenomenon.
Before understanding the definition of strategy, it
is important to understand the difference between
two terms that are often used interchangeably
– ‘strategy’ and ‘tactics’. Strategy and tactics are
both concerned with formulating and then carrying
out courses of action intended to attain particular
objectives. The language of strategic maneuver is
also largely the language of tactics. ‘Tactics’
follow and facilitate strategy and are
defined as techniques or a science
of dispensing and maneuvering
forces to accomplish a limited
objective or an immediate end.
Strategy and tactics are
distinct in terms of their
dimensions. Strategy, for the
most part, is concerned with
deploying resources, and tactics are
concerned with employing them. Strategy
deals with wide spaces, long periods of time, and
large movements of forces, while tactics deal with
the opposite. Strategy is the prelude to action, and
tactics are the action itself. Table 2.1 summarizes
the differences between the two, as there is often
confusion about the distinction between strategy
and tactics.
Despite distinctions in theory, strategy and tactics
cannot always be separated in practice. Strategy
gives tactics its mission and resources and
seeks to reap the results. Tactics then become
important conditioning factors of strategy, and
as the tactics change, so does strategy. Strategy
11
triggers a movement; a movement begets an
action, and the action results in new movement.
This interconnectedness between the movement
and the action often merges one into the other.
Definition of Strategic Management
To get an understanding of what goes on in strategic
management, it is useful to begin with definitions
of strategic management.
The concepts in strategic management have been
developed by a number of authors like Alfred
Chandler, Kenneth Andrews, Igor Ansoff, William
Glueck, Henry Mintzberg, Michael E. Porter, Peter
Drucker and a host of others. There are,
therefore, several definitions of
strategic management. Some of
the important definitions are:
“Strategic management
is concerned with the
determination of the basic
long-term goals and the
objectives of an enterprise and
the adoption of courses of action
and allocation of resources necessary
for carrying out these goals.” — Alfred
Chandler, 1962
“Strategic management is a stream of decisions
and actions which lead to the development of an
effective strategy or strategies to help achieve
corporate objectives.” — Glueck and Jauch, 1984
“Strategic management is a process of formulating,
implementing and evaluating cross-functional
decisions that enable an organization to achieve its
objective.” — Fred R David, 1997
“Strategic management is the set of decisions
and actions resulting in the formulation and
Strategy and Strategic Management
implementation of plans designed to achieve a
company’s objectives.” — Pearce and Robinson,
1988
“Strategic management includes understanding
the strategic position of an organization, making
strategic choices for the future and turning strategy
into action.” — Johnson and Scholes, 2002
“Strategic management consists of the analysis,
decisions, and actions organization undertakes
in order to create and sustain competitive
advantages.” — Dess, Lumpkin & Taylor, 2005
We observe from the above definitions that
different authors have defined strategic
management in different ways. Note
that the definition of Chandler that
has been quoted above is from
the early 1960s, the period
when strategic management
was being recognized as
a separate discipline. This
definition consists of three basic
elements:
● Determination of long-term goals.
● Adoption of courses of action.
● Allocation of resources to achieve those goals.
Though this definition is simple, it does not consist
of all the elements and does not capture the
essence of strategic management.
The definitions of Fred R. David, Pearce and
Robinson, Johnson and Scholes, and Dell, Lumpkin
and Taylor are some of the definitions of recent
origin. Taken together, these definitions capture
three main elements that go to the heart of strategic
management. The three ongoing processes are
12
strategic analysis, strategic formulation, and
strategic implementation. These three components
parallel the processes of analysis, decisions, and
actions. That is, strategic management is basically
concerned with:
● Analysis of strategic goals (vision, mission, and
objectives) along with the analysis of the external
and internal environment of the organization.
● Decisions about two basic questions:
● What businesses should we compete in?
● How should we compete in those businesses to
implement strategies? • Actions to implement
strategies. This requires leaders to allocate the
necessary resources and to design the
organization to bring the intended
strategies to reality. This also
involves evaluation and control
to ensure that the strategies
are effectively implemented.
The real strategic challenge
to managers is to decide on
strategies that provide a competitive
advantage that can be sustained over
time. This is the essence of strategic
management, and Dess, Lumpkin, and Taylor have
rightly captured this element in their definition.
Nature of Strategic Management
Strategic management can be defined as the art
and science of formulating, implementing, and
evaluating cross-functional decisions that enable
an organization to achieve its objectives. Strategic
management is different in nature from other
aspects of management. An individual manager
is most often required to deal with problems of
operational nature. He generally focuses on day-
to-day problems such as the efficient production of
Strategy and Strategic Management
goods, the management of a sales force, the monitoring of financial performance, or the design of some new
system that will improve the level of customer service.

These are all very important tasks. But they are essentially concerned with effectively managing resources
already deployed, within the context of an existing strategy. In other words, operational control is what
managers are involved in most of their time. It is vital to the effective implementation of strategy, but it is not
the same as strategic management.

Strategic management involves elements geared toward a firm’s long-term survival and achievement
of management goals. The components of the content of a strategy-making process include a desirable
future, resource allocation, management of the firm-environment, and competitive business ethics. However,
some conflicts may result in defining the content of strategy such as differences in interaction patterns
among associates, inadequacy of available resources, and conflicts between the firm’s objectives and its
environment.

Levels at Which Strategy Operates

Strategies surface at different tiers in the organization hierarchy depending on the architecture of the
organization. Business strategy can be formulated and implemented at three different levels:

● Corporate level

● Business unit level

● Functional or departmental level

Figure No. 2.2: Strategy Operates

13 Strategy and Strategic Management

Corporate Level or Grand Strategy
Corporate strategy is the highest, in the sense
that it is the broadest, applying to all parts of the
organization. The corporate-level strategies or
grand strategies are the general plan by which the
organization intends to achieve its purpose and long-
term objectives. Grand strategies are concerned
with the type of business the organization is in, its
overall competitive position, and how the resources
of the organization have to be deployed. They set
the overall direction the organization will follow.
At the corporate level, the firm faces several strategic
questions: What businesses should we compete in,
given our strengths and weaknesses? Which new
product markets should we enter? Which should
we exit? This is the “domain choice” question. It
delineates the product-market domain of the firm
and describes the firm’s scope of operations.
Business Unit Level or Competitive Strategy
Many companies are composed of a number of
Strategic Business Units (SBUs). An SBU is an
operating unit that groups a distinct set of products
or services. These products or services are sold to
a uniform set of customers, facing a well-defined
set of competitors.
14
It is this external (market) dimension of a business
that identifies an SBU. At the business unit level,
the SBU should have a set of strategies that allow
it to align and coordinate its activities with other
operating units on strategic issues.
In addition, business unit level or competitive
strategy is also about developing and sustaining a
competitive advantage for the products and services
that are produced. Developing a competitive
strategy is developing a broad framework for the
business:
● How are we going to compete?
● What are our objectives?
● What policies will be needed to carry out our
objectives?
The competitive strategy is a combination of ‘ends’
for which an organization is striving and means
by which it is seeking to get there. Competitive
advantage is created when resources and
capabilities owned exclusively by the organization
can generate unique abilities or core competencies
in the business. Therefore, in determining
functional strategy, the management has to identify
business unit’s core competencies and ensure that
competencies are continually strengthened. It
must manage competencies so that competitive
advantage is preserved. It must meet three tests:
● Customer value
● Competitor unique
● Extendibility
The advantage that results from identifying and
using core competencies can be sustained due to
the lack of substitution and imitation capacities
by the organization’s competitors. As the core
competencies are unique, the benefits derived
Strategy and Strategic Management
from these advantages are retained inside the level. Functional units are involved in translating the
organization: they are not appropriated by others. higher-level strategies into discrete action plans
that each department or division must accomplish
Functional-level Strategy for the strategies to succeed. At each stage, there
is a reverse flow of information on customer
The approach a functional area takes to achieve feedback, market, resources, and capabilities, etc.,
corporate and business unit objectives by on which the higher-level strategies can be based
maximizing resource productivity in its different in the future.
operating divisions and departments is the
functional level strategy. The strategic issues at the Need for Strategies and Strategic
functional level are related to functional business Management
processes and the value chain. Functional-level
Need for Strategy
strategies in R&D, operations, manufacturing,
marketing, finance, and human resources
Those in favor of setting strategies argue that
involve the development and coordination of
strategies are needed to give companies
resources through which business unit
direction. Without strategies,
level strategies can be executed
incorporating objectives,
effectively and efficiently.
companies would be adrift.
If companies do not decide
The functional strategy is
where they want to go, any
dictated by the business
direction and any activity are
unit’s strategy. For example,
fine. People in companies
a business unit that tries to
would not know what they were
differentiate its products to
working towards and, therefore,
gain a competitive advantage
would not be able to judge what
will require functional strategies in
constitutes effective managerial
manufacturing that emphasize quality,
behavior. However, those not in favor argue
quality assurance processes; a human resource
that direction-setting strategies can also block out
functional strategy that emphasizes the hiring
peripheral vision, keeping companies sharply, yet
and training of a highly skilled workforce; and a
myopically, focused on one course of action. Thus,
marketing functional strategy that emphasizes
strategies may limit the company’s ability to open
distribution channel “pull” using advertising to
to new opportunities and threats as these unfold
increase consumer demand over “push” using
and to deviate from a set course as the company
promotional allowances to retailers. If a business
interacts with its environment and learns.
unit were to follow a strategy of competing on cost,
a different set of functional strategies would be
Strategists hit back arguing that early commitment
needed to support the business strategy.
to a course of action is highly beneficial. By setting
objectives and drawing up a strategy to accomplish
Therefore, at the highest level, strategic intent and
these, companies can invest resources, train
corporate goals are developed. These strategies
people, build up production capacity and take a
form the basis of the strategies at the business unit
15 Strategy and Strategic Management
dear position within their environment. Strategies
allow companies to mobilize themselves and to
dare to take actions that are difficult to reverse and
have a long payback period. Commitment has a flip
side, inflexibility, especially when mechanisms to
change course midway are not in place.
The absence of strategies does give the company
flexibility to easily change course. Strategic plan
also has the benefit of coordinating all strategic
initiatives within a company into a single cohesive
pattern. A company-wide master strategy can ensure
that differences of opinion are ironed out and one
consistent course of action is followed throughout
the entire company, avoiding overlapping,
conflicting, and contradictory behavior.
But the flip side is that developing a
master strategy may lead to the
squashing of initiative, either
purposely or inadvertently.
Strategists also point out
that strategies also facilitate
optimal resource allocation.
Drawing up a strategy disciplines
strategists to explicitly consider all
available information and consciously
evaluate all available options before committing
to a course of action. Documented strategies
also permit corporate-level strategists to compare
the courses of action proposed by their various
business units and to allocate scarce resources to
the most promising initiatives. However, strategies
sometimes place a disproportionate emphasis
on thinking over action. An enormous amount of
time and effort is put into analyses, paperwork,
meetings, and presentations, trying to arrive at the
optimal strategy. Often the result is that producing
a strategy becomes an end in itself. Action is seen
merely as operationalizing the strategy, instead of
as the primary input into further strategy formation.
16
The absence of explicit strategies, therefore, gives
strategists the opportunity to merge thinking and
acting and to form strategies through learning.
Last, but not least, strategies are a means for
programming all organizational activities in
advance.
Having detailed strategies allows companies to
be run with the clockwork precision, reliability,
and efficiency of a machine. Activities that
might otherwise be plagued by poor company,
inconsistencies, redundant routines, random
behavior, helter-skelter firefighting, and chaos can
be programmed and controlled if strategies are
drawn up. However, using strategies to pre-program
all activities within a company grossly
overestimates the extent to which a
company can be run like a machine.
For adaptation, experimentation,
and learning to take place and
for new ideas to emerge
from within the company,
a certain measure of chaos
might actually be beneficial.
The absence of detailed top-down
strategies encourages employees
to be responsible, entrepreneurial
and combine thinking and action. In this way,
new strategic initiatives are not organized and
controlled top-down but emerge spontaneously
through bottom-up processes of self-company.
What clearly comes out of these conflicting views
is that strategies are required but should not be
walled ironclad into the one fixed seat and not be
changed, for that is the major objection against
the requirement of strategies. They should be
adaptable as the circumstances warrant and under
the light of new developments as they keep on
happening in the dynamic and hypercompetitive
world of business today.
Strategy and Strategic Management
Strategies and their Role in Strategic Management

The nature of Strategic Management is different from other aspects of management as it demands attention
to the “big picture” and a rational assessment of the future options. Strategic Management demands a clear
analysis of the situation facing the organization, which has to have:

● A strategic direction endorsed by the team and stakeholders.

● A clear business strategy and vision for the future.

● A mechanism for accountability.

● A framework for governance at the various levels that provide the course of action even when there are
competing priorities and different goals.

● The ability to exploit opportunities and respond to external change by taking ongoing strategic decisions.

● A coherent framework for managing risk – whether it is balancing the risks and rewards of a business
direction, coping with the uncertainties of project risk or ensuring business continuity.

The complexity and iterative nature of the process have been shown in the Strategic Management model
in Figure 2.2. The decisions taken have serious impacts on all or some of the areas of the working of
the organization. The firm has to continuously interact with the market, the business, and technological
environments and keep re-evaluating its options in terms of the prevalent or changing conditions.

Figure No. 2.3: Strategy Management

17 Strategy and Strategic Management

Environmental Scan at the Corporate Level
This refers to assessing the external forces
impacting the firm. The environmental scan
formalizes the process of understanding the
external forces that are impacting the firm. There
are three different types of analyses to support this
process—economic overview, primary industrial
sectors, and basic external factors.
The Mission of the Firm
Choosing competitive domains and the way to
compete. The mission of a firm is a statement of the
current and future expected product scope, market
scope, and geographic scope. It also identifies the
unique competencies the firm has developed to
achieve a long-term sustainable advantage.
Business Segmentation
Selecting planning and organizational focuses. A
business unit can be defined as an operating unit or
a planning focus that sells a distinct set of products
or services to an identified group of customers with
a well-defined set of competitors. The business unit
is the level of analysis where most of the strategic
planning effort is centered.
18
Horizontal Strategy
Pursuing synergistic linkages across business units.
Horizontal strategy is coordinated goals and policies
across distinct but interrelated business units.
Defining horizontal strategy requires searching for
and exploiting potential interrelationships among
the various business units of the firm.
Horizontal strategy is required at the group, sector,
or corporate levels of a diversified firm. Through
horizontal strategy, a diversified firm enhances the
competitive advantage of its business units.
Vertical Integration
Vertical integration involves the following set of
decisions:
● Defining the boundaries, a firm should establish
the firm’s generic activities on the value chain
(the question of make versus buy or integrate
versus contract).
● Establishing the relationship of the firm with its
constituencies outside its boundaries, primarily
its suppliers, distributors, and customers.
● Identifying the circumstances under which these
boundaries and relationships should be changed
to enhance and protect the firm’s competitive
advantage.
Corporate Philosophy
Defining the relationship between the firm and its
stakeholders. Corporate philosophy is a rather
permanent statement articulated by the Chief
Executive of the firm, addressing the following
issues:
Strategy and Strategic Management
● The relationship between the firm and its
primary stakeholders – employees, customers,
shareholders, suppliers, and the communities in
which the firm operates.
● A broad statement of objectives of the firm’s
expected performance primarily expressed in
terms of growth and profitability.
Strategic Posture of the Firm
Identifying strategic thrusts and planning challenges
and establishing corporate performance objectives
in corporate, business, and functional key result
areas.
Strategic posture is a pragmatic and
concrete set of guidelines that
serve as immediate challenges
for the development of strategic
proposals at the business and
major functional levels of the
firm.
It is primarily expressed by:
● Corporate Strategic thrusts,
● Corporate, business, and functional
planning challenges, and
● Corporate performance objectives.
Portfolio Management
Assigning priorities for resource allocation and
identifying opportunities for diversification and
divestment.
Organizational and Managerial Infrastructure
Adjusting the organizational structures, managerial
processes, and systems, in consonance with the
19
culture of the firm, to facilitate the implementation
of strategy.
Human Resource Management of Key Personnel
Selection, development, appraisal, reward, and
promotion.
Dimensions of Strategic Management
The characteristics of strategic management are
as follows:
● Top Management Involvement: Strategic
management relates to several areas of a firm’s
operations. So, it requires top management’s
involvement. Generally, only the top
management has the perspective
needed to understand the broad
implications of its decisions
and the power to authorize
the necessary resource
allocations.
● Requirement Of Large
Amounts Of Resources: Strategic
management requires commitment
of the firm to actions over an extended
period. So, they require substantial resources,
such as physical assets, money, manpower, etc.
Example: Decisions to expand geographically
would have significant financial implications in
terms of the need to build and support a new
customer base.
● Affect The Firm’s Long-Term Prosperity: Once a
firm has committed itself to a particular strategy,
its image and competitive advantage are tied to
that strategy; its prosperity is dependent upon
such a strategy for a long time.
● Future-Oriented: Strategic management
encompasses forecasts, what is anticipated by
Strategy and Strategic Management
 the managers. In such decisions, emphasis is that are sustainable and at the same time:
placed on the development of projections that
will enable the firm to select the most promising ● Permit it to deliver greater value, or
strategic options. In the turbulent environment, ● Create a similar value at a lower cost, or
a firm will succeed only if it takes a proactive
● Deliver greater value at a lower cost, for the
stance towards change.
customer.
● Multi-Functional Or Multi-Business
Consequences: Strategic management has Strategic Decision-Making Process
complex implications for most areas of the firm.
For the past few decades, researchers have
They impact various strategic business units,
attempted to model the strategic decision process.
especially in areas relating to customer-mix,
There is a large amount of consensus on the major
competitive focus, organizational structure, etc.
elements of the decision-making process. There
All these areas will be affected by allocations or
are three major phases with subphases within each
reallocations of responsibilities and resources
as described below:
that result from these decisions.

● Non-Self-Generative Decisions: ● The Identification Phase

While strategic management
» Decision Recognition:
may involve making decisions
Opportunities, problems, and
relatively infrequently, the
crises are recognized and
organization must have
evoke decisional activity.
the preparedness to make
strategic decisions at any » Diagnosis: Information
point in time. That is why relevant to opportunities,
Ansoff calls them “non-self- problems, and crises is collected,
generative decisions.” and problems are more clearly
identified.
Strategic Decision-making ● The Development Phase

» Search: Organizational decision-makers go

In the present business environment of rapid
changes, heightened risk and
developing effective strategies is crucial for
achieving the organization’s objectives. This is
not an easy task as it requires good decision-
making skills. Good decision-making is crucial
to good management and successful strategic
management.
The excellence of an organization can be judged by
its success in putting diverse components together.
Excellent organizations develop effective strategies
through a number of activities to generate
uncertainty,
alternative solutions to problems.
» Design: Readymade solutions that have been
identified are modified to fit the particular
problem or new solutions are designed.
● The Selection Phase
» Screen: When the search identifies more
alternatives than can evaluate in detail,
alternatives are scanned, and the most
obviously infeasible are eliminated.

20 Strategy and Strategic Management

 » Evaluation-Choice: An alternative is chosen
either through a process of analysis and
judgment or a process of bargaining among
decision-makers.
» Authorization: When the individual making
the decision does not have the authority to
commit the organization to a course of action,
the decision must move up the organizational
hierarchy until it reaches a level at which the
necessary authority resides.
● At any of the stages of decision-making, if new
information is available, decision-makers may
return to earlier phases as necessary.
There are five basic types of processes of decision
making:
● Command Mode: In this mode, strategy is driven
by the organization’s leader or by a small top
management team,
● Symbolic Mode: In this mode, strategy is driven
by the organization’s mission and vision of the
future,
21
● Rational Mode: Strategy is driven by formal
structure and planning systems,
● Transactive Mode: Strategy formulation is driven
by internal processes and mutual adjustment,
and
● Generative Mode: Strategy is most strongly
influenced by the initiative of organizational
actors.
The process of decision-making starts at the vision
for the organization and then works backwards by
focusing on how the business will be able to reach
this vision. In doing so, it improves the ability of the
organization to make its business vision a reality.
‘Vision’ is a long-term perspective of what is the
destination of the organization. Vision is what
keeps the organization moving forward. Vision
is the motivator in an organization. It needs to be
meaningful with a long-term perspective so that it
can motivate people even when the organization is
facing discouraging odds.
Strategy and Strategic Management
These are times of change and paradigm shift, where management no longer has the luxury of resting upon
past successes or ways of doing business. The future is unknown, and the world is continually changing,
all business plans and strategies eventually become obsolete, and the assumptions on which they are
based must be re-examined and updated. Therefore, it is not surprising that a focused approach to strategic
decision-making has become a critical requirement of the business process and is a necessary requirement
for the modern organization.

Figure No. 2.4: Strategic Decision-Making Process

In strategic decision-making, we first seek a clear understanding of the particular character of each element
of a situation. Then we make the fullest possible use of the basic types of processes used by the organization
for decision making to restructure the elements in the most advantageous way. For example, if the processes
are based on a command mode, the organization’s leader or the small top management team will sit together
to restructure the elements.

Phenomena and events in the real world do not always fit a linear model. Hence the most reliable means
to analyze a situation is to break it up into its constituent parts and reassemble the constituent parts in
the desired pattern. Though the decision-making process has been shown as a step-by-step methodology,
very often the decision is based on the ultimate nonlinear thinking tool, the human brain. Strategic decision-
making, therefore, often contrasts sharply with the conventional mechanical systems approach based on
linear thinking. However, it should reach its conclusions with a real breakdown or analysis. The strategic
decision-making process is shown schematically in Figure 2.3.

Strategic decisions demand an integrated approach to the management of the organization. Unlike functional
problems, there is no one area of expertise or one perspective that can define or resolve the decision-making.
The management has to cut across functional and operational boundaries to make strategic decisions. Very

22 Strategy and Strategic Management

often, there is a conflict of interest and perhaps
priorities between management involved in
different functional or operational areas.
Strategic decisions may also involve major changes
in the organization as well as in relation to the task
environment. These are difficult decisions, both in
terms of planning as well as in implementation.
Especially so, as most ‘going businesses’ develop
their own style of operating, which is not necessarily
in line with future strategy. Therefore, strategic
decisions may require major changes, including a
change in the operational style of the organization.
Industry Analysis
Each business operates among a group of firms
that produce competing products or services
known as an “industry.” An industry is thus a group
of firms producing similar products or services. By
similar products, we mean products that customers
perceive to be substitutes for one another.
Example: Firms that produce and sell textiles such
as Reliance Textiles, Raymond, S. Kumars, etc.
belong to the textile industry. Similarly, firms that
produce PCs, such as Apple, Compaq, AT&T, IBM,
etc. belong to the microcomputer industry.
23
Although there are usually some differences among
competitors, each industry has its own set of “rules
of combat” governing such issues as product
quality, pricing, and distribution. This is especially
true in industries that contain a large number of
firms offering standardized products and services.
As such, it is important for strategic managers to
understand the structure of the industry in which
their firms operate before deciding how to compete
successfully. Industry analysis is, therefore, a
critical step in the strategic analysis of a firm.
In a perfect world, each firm would operate in one
clearly defined industry. However, many firms
compete in multiple industries, and strategic
managers in similar firms often differ in their
conceptualization of the industry environment. In
addition, the advent of the Internet has completely
changed the way business is done. As a result, the
process of industry definition and analysis can be
especially challenging when internet competition is
considered.
The basic purpose of industry analysis is to assess
the strengths and weaknesses of a firm relative to
its competitors in the industry. It tries to highlight
the structural realities of a particular industry and
the extent of competition within that industry.
Through industry analysis, an organization can find
whether the chosen field is attractive or not and
assess its position within the industry.
Framework for Industry Analysis
Industry analysis covers two important components:
● Industry environment
● Competitive environment
The following are the aspects to be covered in the
above analysis:
Strategy and Strategic Management
● Industry Analysis
● Industry features
● Industry boundaries
● Industry environment
● Industry structure • Industry performance
● Industry practices • Industry attractiveness
● Industry prospects for the future
Competitive Analysis
Competitive analysis basically addresses two
questions:
● Which firms are our competitors?
● What factors shape competition
in the industry?
Industry Analysis
Industry Features: Industries
differ significantly. So, analyzing
a company’s industry begins with
identifying the industry’s dominant
economic features and forming a
picture of the industry landscape. An
industry’s dominant economic features include
such factors as:
● Overall size
● Market growth rate
● Geographic boundaries of the market
● Number and sizes of competitors
● Pace of technological change
● Product innovations, etc.
Getting a hand on industry features promotes
understanding of the kinds of strategic moves
24
that managers should employ. For example, in
industries characterized by one product advance
after another, a strategy of continuous product
innovation becomes a condition for survival.
Example: Video games, computers, and
pharmaceuticals.
Industry Boundaries: All the firms in the industry are
not similar to one another. Firms within the same
industry could differ across various parameters
such as:
● Breadth of market
● Product/service quality
● Geographic distribution
● Level of vertical integration
● Profit motives
Industry Environment: Based
on their environment, industries
are basically of two types:
● Fragmented Industries: A
fragmented industry consists of a
large number of small- or medium-sized
companies, none of which is in a position to
determine industry price. Many fragmented
industries are characterized by low entry barriers
and commodity-type products that are hard to
differentiate.
● Consolidated Industries: A consolidated
industry is dominated by a small number of
large companies (an oligopoly) or in extreme
cases, by just one company (a monopoly).
These companies are in a position to determine
industry prices. In consolidated industries, one
company’s competitive actions or moves directly
affect the market share of its rivals, and thus their
Strategy and Strategic Management
 profitability. When one company cuts prices, the
competitors also cut prices. Rivalry increases
as companies attempt to undercut each other’s
prices or offer customers more value in their
products, pushing industry profits down in the
process. The consequence is a dangerous
competitive spiral.
According to Michael Porter, industries can be
categorized into:
● Emerging Industries: Are those in the introductory
and growth phases of their life cycle.
● Mature Industries: Are those who reached the
maturity stage of their life cycle.
● Declining Industries: Are those
in the transition stage from
maturity to decline.
● Global Industries:
Are those with
manufacturing bases
and marketing operations
in several countries.
Industry Structure: Defining an
industry’s boundaries is incomplete
without an understanding of its
structural attributes. Structural attributes are the
enduring characteristics that give an industry its
distinctive character. Industry structure consists of
four elements:
● Concentration: It means the extent to which
industry sales are dominated by only a few firms.
In a highly concentrated industry (i.e., an industry
whose sales are dominated by a handful of firms),
the intensity of competition declines over time.
High concentration serves as a barrier to entry
into an industry, because it enables the firms to
hold large market shares to achieve significant
25
economies of scale.
● Economies Of Scale: This is an important
determinant of competition in an industry. Firms
that enjoy economies of scale can charge lower
prices than their competitors because of their
savings in per-unit cost of production. They also
can create barriers to entry by reducing their
prices temporarily or permanently to deter new
firms from entering the industry.
● Product Differentiation: Real perceived
differentiation often intensifies competition
among existing firms.
● Barriers To Entry: Barriers to entry are the
obstacles that a firm must overcome to
enter an industry, and the competition
from new entrants depends mostly
on entry barriers.
Industry attractiveness:
Industry attractiveness is
dependent on the following
factors:
● Profit potential
● Growth prospects
● Competition
● Industry barriers, etc.
As a general proposition, if an industry’s profit
prospects are above average, the industry can be
considered attractive; if its profit prospects are
below average, it is considered unattractive. If the
industry and competitive situation are assessed
as attractive, firms employ strategies to expand
sales and invest in additional facilities as needed to
strengthen their long-term competitive position in
business. If the industry is judged as unattractive,
firms may choose to invest cautiously, look for ways
to protect their profitability. Strong companies may
Strategy and Strategic Management
consider diversification into more attractive businesses. Weak companies may consider merging with a rival
to bolster market share and profitability.

Industry performance: This requires an examination of data relating to:

● Production

● Sales

● Profitability

● Technological advancements, etc.

Industry Practices: Industry practices refer to what a majority of players in the industry do with respect to
products, pricing, promotion, distribution, etc. This aspect involves issues relating to:

● Product policy

● Pricing policy

● Promotion policy

● Distribution policy

● R&D policy

● Competitive tactics.

Industry’s Future Prospects: The future outlook of an industry can be anticipated based on such factors as:

● Innovation in products and services

● Trends in consumer preferences

● Emerging changes in regulatory mechanisms

● Product life cycle of the industry

● Rate of growth, etc.

Summary

Strategic or institutional management is the conduct of drafting, implementing, and evaluating cross-
functional decisions that will enable an organization to achieve its long-term objectives.

It is a level of managerial activity under setting goals and over tactics.

It is the process of specifying the organization’s mission, vision, and objectives, developing policies and
plans, often in terms of projects and programs, which are designed to achieve these objectives, and then
allocating resources to implement the policies, and plans, projects, and programs.

26 Strategy and Strategic Management

Strategic management provides overall direction to the enterprise and is closely related to the field of
Organization Studies.

Although a sense of direction is important, it can also stifle creativity, especially if it is rigidly enforced. In an
uncertain and ambiguous world, fluidity can be more important than a finely tuned strategic compass.

27 Strategy and Strategic Management

 Unit 3

Basic Models of Strategic

Management
Learning Objectives Introduction

By the end of this unit, you will be The term ‘strategy’ is widely used in discussions of
able to understand: business. Scholars and consultants have provided
● Henry mintz berg model of numerous models and frameworks for analyzing strategic
strategic management choices. Today, various firms and organizations operate

● Ansoff model of strategic in different natures and work environments, but they all

management share the same objective, which is to increase the firm’s

sales. To achieve this objective, a firm needs to tailor its
● Michael porter model of
working strategy in such a way that it can reach its target
strategic management
or objective within the specified time with the minimum
possible wastage of resources. This unit discusses
a few strategic models designed by various eminent
management professionals based on their extensive
experience and expertise.

Henry Mintzberg Model of Strategic Management The

word “strategy” has been used implicitly in different ways,
even though it has traditionally been defined in only one.
Mintzberg provides five definitions of strategy:

● Plan: Strategy is a plan, a consciously intended course

of action, a guideline (or set of guidelines) to deal with a
situation. Strategies are made in advance of the actions
to which they apply and are developed consciously and
purposefully.

● Ploy: Strategy can also be a ploy, a specific maneuver

intended to outwit an opponent or competitor.
28 Basic Models of Strategic Management
● Pattern: If strategies can be intended (as plans
or ploys), they can also be realized. Strategy is
a pattern, a consistency in behavior, whether or
not intended. This encompasses both deliberate
strategies (intentions realized) and emergent
strategies (patterns developed despite or in the
absence of intentions).
● Position: Strategy is a position, a means of
locating an organization in its environment,
mediating between the internal and external
context.
● Perspective: Strategy is a perspective, an
ingrained way of perceiving the world shared
by members of an organization through their
intentions and/or actions. Strategy, in this sense,
is like personality to an individual.
Mintzberg’s Views on Strategic Planning Mintzberg
emphasizes that strategic planning is not the
same as strategic thinking. Strategic planning can
sometimes hinder strategic thinking by focusing
too much on manipulating numbers rather than real
vision. The most successful strategies are visions,
not just plans. Strategic thinking involves synthesis
and intuition, resulting in an integrated perspective
of the enterprise.
Ansoff Model of Strategic Management Igor
Ansoff developed a systematic approach to
29
strategy formulation and decision-making through
a framework of theories, techniques, and models.
He identified four standard types of organizational
decisions related to strategy, policy, programs, and
standard operating procedures. Strategy decisions
apply to new situations and need to be made anew
every time.
Ansoff identified four key components of strategy
within a company’s activities:
● Product-Market Scope: A clear idea of what
business or products a company is responsible
for.
● Growth Vector: Exploring how growth may be
attempted.
● Competitive Advantage: Advantages that enable
the organization to compete effectively.
● Synergy: Examining how opportunities fit the
core capabilities of the organization.
Ansoff Matrix The Ansoff Matrix, also known as the
“product-mission matrix” or the “2 × 2 growth vector
component matrix,” helps organizations understand
the risk component of various growth strategies,
including product versus market development and
diversification.
Basic Models of Strategic Management
In conclusion, strategic management involves various models and frameworks to analyze strategic choices
and make decisions that align with the organization’s objectives and resources. Effective strategic thinking
and planning are essential to guide an organization’s growth and success.

Figure No. 3.1: Development and Diversification

The Ansoff Growth Matrix is a tool that helps businesses decide their product and market growth strategy.
Ansoff’s product/market growth matrix suggests that a business’s attempts to grow depend on whether it
markets new or existing products in new or existing markets.

The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the
direction for the business strategy. These are described below:

Market Penetration Market penetration is the name given to a growth strategy where the business focuses
on selling existing products into existing markets. Market penetration seeks to achieve four main objectives:
• Maintain or increase the market share of current products – this can be achieved by a combination of
competitive pricing strategies, advertising, sales promotion, and perhaps more resources dedicated to
personal selling. • Secure dominance of growth markets. • Restructure a mature market by driving out
competitors; this would require a much more aggressive promotional campaign, supported by a pricing
strategy designed to make the market unattractive for competitors. • Increase usage by existing customers
– for example, by introducing loyalty schemes.

A market penetration marketing strategy is very much about “business as usual”. The business is focusing on
markets and products it knows well. It is likely to have good information on competitors and customer needs.
It is unlikely, therefore, that this strategy will require much investment in new market research.

30 Basic Models of Strategic Management

Market Development Market development is the name given to a growth strategy where the business seeks
to sell its existing products into new markets. There are many possible ways of approaching this strategy,
including: • New geographical markets, for example, exporting the product to a new country. • New product
dimensions or packaging, for example, new distribution channels. • Different pricing policies to attract
different customers or create new market segments.

Product Development Product development is the name given to a growth strategy where a business
aims to introduce new products into existing markets. This strategy may require the development of new
competencies and requires the business to develop modified products that can appeal to existing markets.

Diversification Diversification is the name given to the growth strategy where a business markets new
products in new markets. This is an inherently more risky strategy because the business is moving into
markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it
must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.

Of the four strategies given in the matrix, market penetration requires increasing existing product market
share in existing markets; market expansion requires identifying new customers for existing products; product
expansion requires developing new products for existing customers; and diversification requires producing
new products for new markets.

Michael Porter Model of Strategic Management If the primary determinant of a firm’s profitability is the
attractiveness of the industry in which it operates, an important secondary determinant is its position within
that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned
can generate superior returns.

A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm’s strengths ultimately
fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a
broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These
strategies are applied at the business unit level. They are called generic strategies because they are not firm
or industry dependent. The Table 3.1 illustrates Porter’s generic strategies.

Advantage

TargetScope
LowCost ProductUniqueness

Broad(Industry Wide) Cost Leadership strategy Differentiation Strategy

Narrow
(MarketSegment) Focus Strategy (lowcost) Focus Strategy (differentiation)

31 Basic Models of Strategic Management

Cost Leadership Strategy This generic strategy
calls for being the low-cost producer in an
industry for a given level of quality. The firm sells
its products either at average industry prices to
earn a profit higher than that of rivals or below the
average industry prices to gain market share. In the
event of a price war, the firm can maintain some
profitability while the competition suffers losses.
Even without a price war, as the industry matures
and prices decline, the firms that can produce more
cheaply will remain profitable for a longer period of
time. The cost leadership strategy usually targets a
broad market.
Some of the ways that firms acquire cost advantages
are by improving process efficiencies,
gaining unique access to a large
source of lower-cost materials,
making optimal outsourcing and
vertical integration decisions, or
avoiding some costs altogether.
If competing firms are unable
to lower their costs by a similar
amount, the firm may be able to
sustain a competitive advantage
based on cost leadership.
Firms that succeed in cost leadership often have
the following internal strengths: • Access to the
capital required to make a significant investment
in production assets; this investment represents
a barrier to entry that many firms may not
overcome. • Skill in designing products for efficient
manufacturing, for example, having a small
component count to shorten the assembly process.
• High level of expertise in manufacturing process
engineering. • Efficient distribution channels.
Each generic strategy has its risks, including the
low-cost strategy. For example, other firms may
be able to lower their costs as well. As technology
32
improves, the competition may be able to leapfrog
the production capabilities, thus eliminating the
competitive advantage. Additionally, several firms
following a focus strategy and targeting various
narrow markets may be able to achieve an even
lower cost within their segments and as a group
gain significant market share.
Differentiation Strategy A differentiation strategy
calls for the development of a product or service
that offers unique attributes that are valued by
customers and that customers perceive to be
better than or different from the products of the
competition. The value added by the uniqueness of
the product may allow the firm to charge a premium
price for it. The firm hopes that the higher
price will more than cover the extra
costs incurred in offering the
unique product. Because of the
product’s unique attributes, if
suppliers increase their prices,
the firm may be able to pass
along the costs to its customers
who cannot find substitute
products easily.
Firms that succeed in a differentiation
strategy often have the following internal strengths:
• Access to leading scientific research. • Highly
skilled and creative product development team. •
Strong sales team with the ability to successfully
communicate the perceived strengths of the
product. • Corporate reputation for quality and
innovation.
The risks associated with a differentiation
strategy include imitation by competitors and
changes in customer tastes. Additionally, various
firms pursuing focus strategies may be able to
achieve even greater differentiation in their market
segments.
Basic Models of Strategic Management
Focus Strategy The focus strategy concentrates
on a narrow segment and within that segment
attempts to achieve either a cost advantage or
differentiation. The premise is that the needs of the
group can be better serviced by focusing entirely on
it. A firm using a focus strategy often enjoys a high
degree of customer loyalty, and this entrenched
loyalty discourages other firms from competing
directly.
Because of their narrow market focus, firms
pursuing a focus strategy have lower volumes
and therefore less bargaining power with their
suppliers. However, firms pursuing a differentiation-
focused strategy may be able to pass higher costs
on to customers since close substitute
products do not exist.
Firms that succeed in a focus
strategy are able to tailor
a broad range of product
development strengths to
a relatively narrow market
segment that they know very
well. Some risks of focus strategies
include imitation and changes in the
target segments. Furthermore, it may
be easy for a broad-market cost leader to adapt its
product in order to compete directly. Finally, other
focusers may be able to carve out sub-segments
that they can serve even better.
A Combination of Generic Strategies - Stuck in the
Middle These generic strategies are not necessarily
compatible with one another. If a firm attempts to
achieve an advantage on all fronts, in this attempt
it may achieve no advantage at all. For example, if
a firm differentiates itself by supplying very high-
33
quality products, it risks undermining that quality
if it seeks to become a cost leader. Even if the
quality did not suffer, the firm would risk projecting
a confusing image. For this reason, Michael Porter
argued that to be successful over the long-term, a
firm must select only one of these three generic
strategies. Otherwise, with more than one single
generic strategy, the firm will be “stuck in the middle”
and will not achieve a competitive advantage.
Porter argued that firms that are able to succeed at
multiple strategies often do so by creating separate
business units for each strategy. By separating
the strategies into different units having different
policies and even different cultures, a corporation
is less likely to become “stuck in the
middle.”
However, there exists a viewpoint
that a single generic strategy
is not always best because
within the same product,
customers often seek multi-
dimensional satisfactions such
as a combination of quality, style,
convenience, and price. There have
been cases in which high-quality
producers faithfully followed a single strategy and
then suffered greatly when another firm entered the
market with a lower-quality product that better met
the overall needs of the customers.
Generic Strategies and Industry Forces These
generic strategies each have attributes that can
serve to defend against competitive forces. The
Table 3.2 compares some characteristics of the
generic strategies in the context of the Porter’s five
forces.
Basic Models of Strategic Management

Industry Force
Cost Leadership
Ability to cut
Entry Barriers
price in retaliation
deterspotential entrants.
Buyer Power
Ability to offer lowerprice
to powerful buyers.
Supplier Power Better insulated
frompowerful suppliers.
Can use low price
Threat of Substitutes
to defend against
substitutes.
Better able to compete
Rivalry
on price.
34
Generic Strategies
Differentiation Focus
Focusing develops
Customer loyalty can
corecompetencies
discourage potential
that canactas an entry
entrants.
barrier.
Large buyer shaveless Large buyers haveless
power tonegotiate power to negotiate
because offew close because offe
alternatives. walternatives.
Suppliers have power
because of low volumes,
Better able to pass on
but a differentiation
supplier price increases
focused firm is better
to customers.
able to pass on supplier
price increases.
Customer’s become
attached to Specialized products &
differentiating attributes, core competency protect
reducing threat of against substitutes
substitutes.
Rivals cannot meet
Brand loyalty to keep
differentiation- focused
customers from rivals.
customer needs.
Basic Models of Strategic Management
BCG Matrix The Boston Consulting Group (BCG) Matrix is a four-celled matrix (a 2 * 2 matrix) developed by
BCG, USA. It is the most renowned corporate portfolio analysis tool, providing a graphic representation for an
organization to examine different businesses in its portfolio based on their related market share and industry
growth rates. It is a two-dimensional analysis of Strategic Business Units (SBUs) management. In other
words, it is a comparative analysis of business potential and environmental evaluation.

According to this matrix, businesses could be classified as high or low based on their industry growth rate
and relative market share.

Relative Market Share = SBU sales this year / leading competitors’ sales this year

Market Growth Rate = Industry sales this year - Industry sales last year

The analysis requires calculating both measures for each SBU. The dimension of business strength, relative
market share, will measure the comparative advantage indicated by market dominance. The key theory
underlying this is the existence of an experience curve, and that market share is achieved due to overall cost
leadership.

The BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis
denoting the market growth rate. The midpoint of relative market share is set at 1.0. If all the SBUs are in the
same industry, the average growth rate of the industry is used. While, if all the SBUs are located in different
industries, then the midpoint is set at the growth rate for the economy.

Resources are allocated to the business units according to their situation on the grid. The four cells of
this matrix have been called stars, cash cows, question marks, and dogs. Each of these cells represents a
particular type of business.

35 Basic Models of Strategic Management

Stars: Stars represent business units that have a
large market share in a fast-growing industry. They
may generate cash, but because of the fast-growing
market, stars require huge investments to maintain
their lead. Net cash flow is usually modest. SBUs
located in this cell are attractive as they are located
in a robust industry, and these business units are
highly competitive in the industry. If successful,
a star will become a cash cow when the industry
matures.
Cash Cows: Cash cows represent business
units that have a large market share in a mature,
slow-growing industry. Cash cows require little
investment and generate cash that can be utilized
for investment in other business units. These SBUs
are the corporation’s key source of cash and are
specifically the core business. They are the base of
an organization. These businesses usually follow
stability strategies. When cash cows lose their
appeal and move towards deterioration, then a
retrenchment policy may be pursued.
Question Marks: Question marks represent
business units having a low relative market share
and located in a high-growth industry. They require
a huge amount of cash to maintain or gain market
share. They require attention to determine if the
venture can be viable. Question marks are generally
new goods and services that have good commercial
potential. There is no specific strategy that can be
adopted. If the firm thinks it has a dominant market
share, then it can adopt an expansion strategy;
otherwise, a retrenchment strategy can be adopted.
Most businesses start as question marks as the
company tries to enter a high-growth market in
which there is already a market share. If ignored,
then question marks may become dogs, while
if a huge investment is made, then they have the
potential of becoming stars.
36
Dogs: Dogs represent businesses having weak
market shares in low-growth markets. They neither
generate cash nor require a huge amount of cash.
Due to low market share, these business units
face cost disadvantages. Generally, retrenchment
strategies are adopted because these firms can gain
market share only at the expense of competitors/
rival firms. These business firms have weak
market share because of high costs, poor quality,
ineffective marketing, etc. Unless a dog has some
other strategic aim, it should be liquidated if there
are fewer prospects for it to gain market share. A
number of dogs should be avoided and minimized
in an organization.
Limitations of BCG Matrix: The BCG Matrix produces
a framework for allocating resources among
different business units and makes it possible to
compare many business units at a glance. But the
BCG Matrix is not free from limitations, such as:
● The BCG matrix classifies businesses as low and
high, but generally businesses can be medium
also. Thus, the true nature of business may not
be reflected.
● The market is not clearly defined in this model.
● High market share does not always lead to high
profits. There are high costs also involved with
high market share.
● Growth rate and relative market share are not the
only indicators of profitability. This model ignores
and overlooks other indicators of profitability.
● At times, dogs may help other businesses in
gaining a competitive advantage. They can earn
even more than cash cows sometimes.
● This four-celled approach is considered to be too
simplistic.
Basic Models of Strategic Management
Porter’s Five Forces Model: The Porter’s Five Forces tool is a simple but powerful tool for understanding
where power lies in a business situation. This is useful because it helps you understand both the strength of
your current competitive position and the strength of a position you’re considering moving into.

With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve
a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning
toolkit.

Conventionally, the tool is used to identify whether new products, services, or businesses have the potential
to be profitable. However, it can be very illuminating when used to understand the balance of power in other
situations.

Five Forces Analysis assumes that there are five important forces that determine competitive power in a
business situation. These are:

● Supplier Power: Here, you assess how easy it is for suppliers to drive up prices. This is driven by the
number of suppliers of each key input, the uniqueness of their product or service, their strength and control
over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have,
and the more you need suppliers’ help, the more powerful your suppliers are.

● Buyer Power: Here, you ask yourself how easy it is for buyers to drive prices down. Again, this is driven
by the number of buyers, the importance of each individual buyer to your business, the cost to them of
switching from your products and services to those of someone else, and so on. If you deal with few,
powerful buyers, then they are often able to dictate terms to you.

37 Basic Models of Strategic Management

● Competitive Rivalry: What is important here is the number and capability of your competitors. If you have
many competitors, and they offer equally attractive products and services, then you’ll most likely have little
power in the situation, because suppliers and buyers will go elsewhere if they don’t get a good deal from
you. On the other hand, if no one else can do what you do, then you can often have tremendous strength.

● Threat of Substitution: This is affected by the ability of your customers to find a different way of doing
what you do – for example, if you supply a unique software product that automates an important process,
people may substitute by doing the process manually or by outsourcing it. If substitution is easy and
substitution is viable, then this weakens your power.

● Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in
time or money to enter your market and compete effectively, if there are few economies of scale in place,
or if you have little protection for your key technologies, then new competitors can quickly enter your
market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a
favorable position and take fair advantage of it.

Summary

There is no one perfect strategic management model for each organization. Each organization ends up
developing its own nature and model of strategic planning, often by selecting a model and modifying it as
they go along in developing their own planning process. The models discussed in this unit provide a range
of alternatives from which organizations might select an approach and begin to develop their own strategic
planning process. It should be noted that an organization might choose to integrate the models, e.g., using a
scenario model to creatively identify strategic issues and goals, and then an issues-based model to carefully
strategize to address the issues and reach the goals.

38 Basic Models of Strategic Management

 Unit 4

Strategic Intent – Vision, Mission

and Objectives
Learning Objectives Introduction

By the end of this unit, you will be When you begin the process of strategic planning,
able to understand: visioning comes first. A vision statement answers the
● Vision statement question, “Who are we? Where are we headed? How do

● Mission statement we want to go about it? What is our preferred future?

What will success look like?” The process is developed
● Value statement
through visioning. The outcome of visioning is to develop
● Business and the nature of its an effective basis for business strategy. The organization
objectives tries to fit its strengths with market demand, to make the
organization highly competitive, with growth and profits
as the rewards.

Successful organizations have an executable vision. Their

vision statement identifies activities the organization
intends to pursue, sets forth long-term direction, and
provides a big perspective. The vision statement becomes
a basis for performance, reflects the core values of the
organization, and is the way to communicate to bring the
workforce together and galvanize people to act. It is this
quality of vision that makes organizations excel.

Vision is the critical focal point and beginning of high

performance. Even the most exciting vision will remain
only a dream unless it is followed up with striving,
building, and improving; it requires a statement of purpose
and function. The mission statement is a statement of

39 Strategic Intent – Vision, Mission and Objectives

purpose and function. • Vision is what keeps the organization moving
forward. Vision provides the long-term perspective
Hierarchy of Strategic Intent of the organization so that it can motivate people
even when the organization is facing discouraging
Strategic Intent is the basis on which organizations odds.
provide products and services for consumers,
profits for investors, jobs for employees, taxes ● Mission is the founders’ intentions at the outset
for governments, and economic stability for of the organization – what they wanted to
communities. Strategic intent also identifies the achieve.
commitment of the organization to contribute
● Values manifest in what the organization does
to the welfare of society by setting standards
as a group and how it operates.
on being economically productive and socially
responsible. The goals identified through the
The vision of an organization consists of two major
strategic intent of the organization represent a
components, the ideology and the envisioned
synthesis of goals and demands placed on the
future of the organization. The core ideology
organization by its stakeholders. These
characterizes the enduring nature
choices, collectively, set apart one
of an organization and remains
organization from another.
unchangeable over a long period
of time. The envisaged future
Formulating the strategic
provides a description of
intent, the organization’s
goals.
vision, mission, and value
statements is one of the first
The idea that an organization
tasks of Strategic Management.
might be guided by its vision,
The strategic intent should be
mission, and values is a key part of
articulated at the outset of an
strategic thinking. Peter Drucker has,
organization’s life if possible, and at
time and again, emphasized that a failure
the first opportunity if the organization is already
to give adequate thought to business purpose and
underway.
mission was perhaps the most important factor in
both managerial frustration and business failure.
The vision, mission, and value statements have the
greatest impact on the identity and the future of the
A vision and sense of mission can be a powerful
organization as they reflect what the organization
force in shaping and guiding an organization. It is
intends to be in the long run. They offer unique
the entrepreneur’s vision that gives the organization
insights into the way in which organizations work
a real strategic direction and focus. However, the
and think, and the aspirations of the organization.
most important function of building a vision is to
provide a dream for the organization to live for – a
Vision, mission, and values have their distinct
basic motivation.
characteristics and play distinct roles in the
development of the organization. Short definitions
The vision statement should be such that each
given below explain these distinct characteristics:
40 Strategic Intent – Vision, Mission and Objectives
person in the organization should see his or her
job as part of building a cathedral. It is this type
of vision that provides a sense of purpose and
common cause to people in the organization.
Articulated as a formal mission statement, it can be
used to bring together different stakeholder groups
within the organization. It also communicates what
the venture has to offer customers, suppliers, and
potential employees. A clear mission can also help
in attracting investment. It catches the attention of
potential investors and suggests professionalism
in the management approach.
behaviors and actions required for the organization
to be what it wants to be. To quote Azim Premji,
“Beliefs and values give a common cause and a
sense of purpose across the businesses making
Wipro in essence one company. They define the
spirit of Wipro…”
Vision, values, and mission are the three components
of focus and context of the organization. They form
a hierarchy.

The mission statement has a different perspective

from the vision statement. The mission statement
lists out a set of tasks that the organization has
to carry out to fulfill the vision of the organization.
It sets out priorities of how the purpose of the
organization can be fulfilled and identifies the Figure 4.1: Hierarchy of Vision, Mission and Objectives

needs of society the organization will satisfy.

The vision of the organization leads to its Mission
and its values. The Mission in turn leads to the
This need of society, for example, could be the need
Objectives of the firm, which is shown in Figure 4.1.
for personal transportation. This need could be
satisfied equally by a manufacturer of motorcycles
Vision Statement
and scooters, as it would by a bicycle manufacturer,
or a manufacturer of automobiles. Though they all
The first task in the process of strategic
meet the same need of society, they will necessarily
management is to formulate the organization’s
have different objectives.
vision and mission statements. These statements
define the organizational purpose of a firm.
However, if it is to be effective, the mission must be
Together with objectives, they form a “hierarchy of
right for the venture, developed with sympathy to
goals.”
the organization, and be communicated effectively.
A clear mission can aid the performance of an
When you begin the process of strategic planning,
entrepreneurial venture – if it is developed in an
visioning comes first. Martin Luther King, Jr. said,
appropriate way.
“I have a dream,” and what followed was a vision
that changed a nation. That famous speech is
Just the vision and the mission are not sufficient to
a dramatic example of the power that can be
create a sense of purpose in the organization. To
generated by a compelling vision of the future. A
create purpose, it is equally important to embed the
vision is a guide to implementing strategy. Visions
vision and mission of the organization with a set of
are about feelings, beliefs, emotions, and pictures.
shared values and beliefs – a description of types of
41 Strategic Intent – Vision, Mission and Objectives
A vision statement answers the question, “What
will success look like?” The pursuit of this image of
success is what motivates people to work together.
It is an important requirement for building a strong
foundation. When all the employees are committed
to the firm’s visions and goals, optimum choices on
business decisions are more likely.
A clear vision helps in developing a mission
statement, which, in turn, facilitates the setting of
objectives for the firm after analyzing external and
internal environments. Though vision, mission, and
objectives together reflect the “strategic intent” of
the firm, they have their distinctive characteristics
and play important roles in strategic management.
Vision can be defined as “a mental
image of a possible and desirable
future state of the organization.”
It is “a vividly descriptive image
of what a company wants to
become in the future.” Vision
represents top management’s
aspirations about the company’s
direction and focus. Every
organization needs to develop a vision
of the future. A clearly-articulated vision
molds organizational identity, stimulates managers
in a positive way, and prepares the company for the
future.
“The critical point is that a vision articulates a
view of a realistic, credible, attractive future for
the organization, a condition that is better in some
important ways than what now exists.”
Vision, therefore, not only serves as a backdrop for
the development of the purpose and strategy of
a firm but also motivates the firm’s employees to
achieve it.
42
According to Collins and Porras, a well-conceived
vision consists of two major components:
● Core ideology
● Envisioned future
Core ideology is based on the enduring values of
the organization (“what we stand for and why we
exist”), which remain unaffected by environmental
changes. Envisioned future consists of a long-term
goal (“what we aspire to become, to achieve, to
create”) which demands significant change and
progress.
When visioning the change, ask yourself,
“what is our preferred future?” Your
vision must be encompassed by
your beliefs:
● Your beliefs must meet your
organizational goals as well
as community goals.
● Your beliefs are a statement
of your values. • Your beliefs are
a public/visible declaration of your
expected outcomes.
● Your beliefs must be precise and practical.
● Your beliefs will guide the actions of all involved.
● Your beliefs reflect the knowledge, philosophy,
and actions of all.
● Your beliefs are a key component of strategic
planning.
The process and outcomes of visioning are to
develop an effective basis for business strategy. The
foresight of the organization is to fit the strengths of
the organization with the market demands, to make
the organization highly competitive with growth
and profits as the rewards. The long-term benefits
Strategic Intent – Vision, Mission and Objectives
are substantial because visioning facilitates the
following:
● Breaks you out of boundary thinking.
● Provides continuity and avoids the stutter effect
of planning fits and starts.
● Identifies direction and purpose.
● Alerts stakeholders to needed change.
● Promotes interest and commitment.
● Promotes laser-like focus.
● Encourages openness to unique and creative
solutions.
● Encourages and builds confidence.
● Builds loyalty through involvement (ownership).
● Results in efficiency and productivity.
Whatever the eventual architecture of
organization, the vision statement encompasses
the organization in all its forms. The vision
statement identifies activities the organization
intends to pursue, sets forth long-term direction,
and provides a big perspective of:
● Who are we?
● What we’re trying to do?
● How we want to go about it?
● Where we’re headed?
43
Nature of Vision
Successful organizations have a vision that is
executable – not a pie-in-the-sky blanket statement
but a realistic goal, according to Sunil Alagh, former
Managing Director and CEO of Britannia Industries.
“It’s all about how you define the market or how
you redefine it for yourself? We can always raise
the bar, but the vision stays with the company.”
A vision represents an animating dream about
the future of the firm. By its nature, it is hazy and
vague. That is why Collins describes it as a “Big
Hairy Audacious Goal” (BHAG). Yet it is a powerful
motivator to action. It captures both the minds and
hearts of people. It articulates a view of a realistic,
credible, attractive future for the organization,
which is better than what now exists. Developing
and implementing a vision are one of the leader’s
central roles. He should not only have a “strong
the sense of vision” but also a “plan” to implement it.
Example:
● Henry Ford’s vision of a “car in every garage” had
power. It captured the imagination of others and
aided internal efforts to mobilize resources and
make it a reality. A good vision always needs to
be a bit beyond a company’s reach, but progress
towards the vision is what unifies the efforts of
company personnel.
● One of the most famous examples of a vision is
that of Disneyland “To be the happiest place on
earth.”
Characteristics of Vision Statements
As may be seen from the above definitions, many
of the characteristics of vision given by these
authors are common, such as being clear, desirable,
challenging, feasible, and easy to communicate.
Strategic Intent – Vision, Mission and Objectives
Nutt and Backoff have identified four generic
features of visions that are likely to enhance
organizational performance:
● Possibility means the vision should entail
innovative possibilities for
organizational improvements.
● Desirability means the extent to which it draws
upon shared organizational norms and values
about the way things should be done.
● Actionability means the ability of people to see
in the vision, actions that they can take that are
relevant to them.
● Articulation means that the vision has
imagery that is powerful enough to
communicate clearly a picture
of where the organization is
headed.
Importance of Vision
Having a strategic vision is
linked to competitive advantage,
enhancing organizational
performance, and achieving
sustained organizational growth. A ● Way to communicate: A vision
clear vision enables firms to determine how well
organizational leaders are performing and to identify
gaps between the vision and current practices.
Organizations preparing for transformational
change regularly undertake “envisioning” exercises
to help guide them into the future. The visioning
process itself can enhance the self-esteem of the
people who participate in it because they can see
the potential fruits of their labors.
Conversely, a “lack of vision” is associated with
organizational decline and failure. As Beaver
argues, “Unless companies have a clear vision of
how they are going to be distinctly different and
44
unique in adding and satisfying their customers,
they are likely to be the corporate failure statistics
of tomorrow.” Lacking vision is used to explain why
companies fail to build their core competencies
despite having access to adequate resources to do
dramatic so. Business strategies that lack visionary content
may fail to identify when change is needed. The
lack of an adequate process for translating shared
vision into collective action is associated with the
failure to produce transformational organizational
change.
Thus, vision statements serve as:
● A basis for performance: A vision creates a
mental picture of an organization’s path
and direction in the minds of people
in the organization and motivates
them for high performance.
● Reflects core values: A vision
is generally built around core
values of an organization and
channels the group’s energies
towards such values and serves
as a guide to action.
statement is an exercise in communication.
A well-communicated vision statement will bring
the employees together and galvanize them into
action.
● A desirable challenge: A vision provides a
desirable challenge for both senior and junior
managers.
Mission Statement
Vision is the critical focal point and beginning to
high performance. But obviously, a vision alone
won’t make it happen. Even the most exciting
vision will remain only a dream unless it is followed
Strategic Intent – Vision, Mission and Objectives
up with striving, building, and improving. common purpose.

● Your mission statement must be specific to the

Why does the organization exist? What is its value
organization, not generic.
addition? What’s its function? How does it want to be
positioned in the market and minds of customers?
The mission statements set the organization apart
What business is it in? These are all questions of
from others. They give meaning to the reason for
purpose. They deal with the deeper motivations and
being, value-add, and define the business of the
assumptions underlying the values and purpose
organization. As with vision and values, the mission
that form the context and focus of the organization.
should have clear answers to questions about the
Your mission statement is a statement of purpose
future of the organization.
and function.

A mission statement can be defined as follows:

● Your mission statement draws on your belief
statements.
● Your mission statement must be future-oriented
and portray your organization as it will be, as if it
already exists.
● Your mission statement must focus on one
A statement of the current and future expected
product scope, market scope, and geographical
scope, as well as the unique competencies of
the business must develop to achieve its desired
competitive positioning.

Now Future

Product Scope

Market Scope

Geographical Scope

Unique Competencies

Table 4.1

The worksheet shown in Table 4.1 looks at these issues and analyzes the direction that the organization
should move towards. It is a statement of the current and future expected product scope, market scope, and
geographic scope.

Mission Statement

The mission statement should, in addition, identify the unique competencies the firm has developed to
achieve a long-term sustainable advantage. It should also reflect some of the major characteristics which
are given in the paragraphs that follow.

45 Strategic Intent – Vision, Mission and Objectives

Aspirations
The mission statement should arouse a strong
sense of organizational identity and business
purpose. It should clearly state what the firm aims
to achieve with this strategy: its aspirations.
Aspirations can be defined in many ways. However,
in the mission statement, it must be defined in a
way that relates the firm to the competitive situation
in its market. Some typical aspirations can include
being the “leader” in a market or the “leading” firm.
However, care is required with such definitions.
Though these questions may seem deceptively
simple, they are not so simple. We need to answer
them to prepare a mission statement.
For example, this is ambiguous,
‘leading’ can be understood to
mean being the largest firm in the
market (volume sales, market
share?) Or, could it refer to
some other criteria, such
as being the technical leader,
or the firm offering the highest
quality? Be specific.
It is best to be definite, but you must
remember aspirations of a firm cannot be absolute.
They must be defined relative to competitors.
Though an aspiration is not like an objective, it
should be capable of being used to guide the
objective setting, performance evaluation, and
benchmarking systems of the company. It must
preferably identify why the firm finds the niche it is
aspiring to fill profitable and how it can defend it.
Business Horizon
Many industries have faded away because of the
lack of vision in identifying their business horizon in
the mission statement. A railway company can be in
46
the ‘business of running railways’ or ‘it can be in the
business of moving people and goods.’ Similarly,
a cosmetics company can be in the business of
‘making cosmetics’ or in the business of ‘enhancing
beauty.’ An oil company can ‘supply oil products’
or it can be in the ‘energy business.’ For example,
Helen Curtis says that it is in the ‘enriching beauty
business.’ Oil & Natural Gas Commission (ONGC)
presents its mission statement as, “To stimulate,
continue, and accelerate efforts to develop and
maximize the contribution of the energy sector to
the economy of the country.”
Many companies define their business too
narrowly. That means they often miss new market
opportunities. Or they don’t provide a
broader level of service support to
their basic products or services.
So, customers start looking
elsewhere. At the other
extreme, some companies
define their business too
broadly. That often takes them
beyond their core competencies
into businesses they don’t
understand. The results are often very
expensive and sometimes fatal learning
experiences.
The perception of what business you are in will, to
a large extent, determine strategy. It will determine
who you consider your competition is, and this
focus can very often be the basis for the survival of
the firm. Management philosophers believe that if
the carriage makers of yesterday had realized that
they were in the business of ‘providing personal
transportation to people’ and not in the ‘carriage-
making business,’ many of them would have
survived the introduction of the motorcar. Similarly,
gas light manufacturers would have survived the
electric bulb. An inadequate vision of the business
Strategic Intent – Vision, Mission and Objectives
horizon is often called ‘organizational myopia.’ Signal to Management’s Intents

Range of Offerings Specifically speaking of Mission statements, a well-

A Mission statement identifies the range of
products and services that the firm will offer the
market. The target market needs to be defined very
carefully. To do this successfully, both products
and the market have to be analyzed so that the
supply structure and the dimensions along which
segmentation occurs are fully understood. There
are established techniques to carry out this type of
market analysis exercise.
The product/service scope must be specified in
terms of the features that characterize it. If the
target market is composed of consumer groups,
then it may be specified in geographic, sociographic,
or psychographic terms. In a business sector, it can
be identified in geographic, industry sector, product
use, or buying decision process terms. The range
should lie between two extremes; it must be greater
than the current scope of the firm but be smaller
than the “total” market in which the firm competes.
crafted mission statement must be narrow enough
to specify the real area of interest, and it should serve
as a signal of where the top management intends
to take the firm. Overly broad mission statements
provide no guidance in strategy-making. However,
diversified companies will have a broader mission
definition than single business enterprises. In either
case, the statement should lead to the direction the
organization plans to take.
Ranbaxy Laboratories Ltd. – Mission Statement
Our mission is to become a research-based
international pharmaceutical company.
McDonald’s – Mission Statement
To offer the fast food customer food prepared in the
same high quality worldwide, tasty and reasonably
priced, delivered in a consistent low-key décor and
a friendly manner.

The range of offerings also has direct implications

on the diversification strategy of the organization.
It provides directions on the strategic choice in
diversification strategies. The implications of
making a definitive identification mean that the
organization has put boundaries around to give
guidance to the strategic direction in which it will
move. For example, if the areas are to be related, it
puts limits on the options.

The diversification options may be related in a

number of different ways; the new products and
services may have similar technologies or may
be serving similar markets or may have similar
competencies.

47 Strategic Intent – Vision, Mission and Objectives

In the examples given above, the mission
statement of Ranbaxy gives a clear signal of the
management’s intent. As a matter of fact, Ranbaxy
rejected a lucrative offer to expand by setting up
business in the USSR. It was the management’s
view that this would deter it from its mission to
become an international pharmaceutical company.
Similarly, McDonald’s mission statement,
which is given above, gives a clear signal of its
management’s intent. It indicates that it will look at
domestic and international markets, and it intends
to remain in the reasonably priced, high-quality fast
food industry.
Some examples of mission statements are
given below. These are the mission
statements of Ford Foundation and
Otis Elevators:
Ford Foundation - Mission
Statement
Our dream is a world free of
poverty. To fight poverty with
passion and professionalism for
lasting results. To help people help
themselves and their environment by
providing resources, sharing knowledge, building
capacity, and forging partnerships in the public
and private sectors. To be an excellent institution
able to attract, excite, and nurture diverse and
committed staff with exceptional skills who know
how to listen and learn.
Our Principles:
Client-centered, working in partnership, accountable
for quality results, dedicated to financial integrity
and cost-effectiveness, inspired, and innovative.
48
Value Statement
The potential of a mission statement does not end
with strategy. It can also include the values that the
organization aspires to hold. Corporate values can
be defined, in a classical sense, as beliefs that help
companies make choices among available means
and ends and the behaviors they inculcate.
Technically values reflect the weight which corporate
decision-makers attach to alternative goals when
making their decisions. Alternative goals could be
accounting profitability, stock returns, customer
value, market share, company growth, employee
satisfaction, supplier surplus, or measures
of corporate social performance (like
image or environmental impact).
They could be present or future
values of these variables to
capture a trade-off between
the short and the long run.
At the end of it all, value
statements give a common
cause and a common sense of
purpose across the organization.
Just like the mission statement, it provides
direction to the strategy of the organization. It
provides an explicit depiction of values to guide
the organization in choosing among competing
priorities, thereby setting the organization apart
from others.
Organizational Values can set the direction of
the business organization by identifying the
contribution the organization plans to make to
the key market and the ‘distinctive competencies’
or ‘value’ the organization will provide in its focus
on serving the key market. The statements should
speak loudly and clearly for themselves, elicit
personal effort and dedication, and generate
Strategic Intent – Vision, Mission and Objectives
enthusiasm for the firm’s future – the strategy of
the organization.
All organizations have some values. There are three
broad reasons why the organization might wish to
codify those values in the mission statement:
behaviors. This means that a firm should maximize
the expected value of a corporate value function,
which can be defined on the range of potential
goal variables. In a practical sense, what matters
is whether and how much potential goal variables
influence the behavior of the company.

1. To impress values on internal stakeholders. The value statement, therefore, basically translates

2. To express values to external stakeholders. the vision and mission of the organization into
the manner or behavior of the officers of the firm.
3. A testament to managerial values.
Some of the attributes that the firm can identify are
shown in Figure 4.2. This diagram is based on a field
Values are already part of the attitudes and culture
interview with employees of a telecom company.
of the organization. But the value statement may
incorporate some principle or ethical standard
The value statement of the Ford Foundation
on which the organization holds to be important.
provides guidelines for the moral conduct of the
Sometimes, the company may use a particular
organization in achieving its mission and objectives.
stance on some ethically or politically contentious
The statements reflect that the Ford Foundation
issue to achieve differentiation from competitors
does not believe in a ‘no holds barred’ strategy.
and give itself a unique positioning in the minds
The strategies that it will adopt will be limited by
of external stakeholders. However, both the
the ethical values of the organization. The value
impression of values on internal stakeholders and
statements are given below, as an example:
the expression of values to external stakeholders
are, in the final instance, directed towards enhancing
Ford Foundation – Our Values
the performance of the firm.

Personal honesty, integrity, commitment; working

Corporate values should aim to predict what goal
together in teams with openness and trust;
variables will be influential in a given company and
empowering others and respecting differences;
what emphasis the decision-makers will place on
encouraging risk-taking and responsibility; enjoying
each goal. Company behavior can be modeled
our work and our families. Behaviors that form part
as a balance struck between these alternative
of the firm’s values are shown in Figure 4.2.

49 Strategic Intent – Vision, Mission and Objectives

 Figure 4.2: Behaviours that Form Part of the Firm’s Values
As with vision and its mission, the organizational
values provided should be clear to provide
answers to what strategic options are acceptable
to the organization. It should add to the sense
of organizational identity and business purpose
and identify the areas of value-addition of the
organization in its business. The Values of an
organization are often built with associations. You
create a simple and consistent message of who you
are, what you’re looking for, and your uniqueness as
differentiated from others.
For example, what does Pillsbury mean? Pillsbury
perhaps means a lot because it is identified with
high-quality dough products. The two of the biggest
names that have emerged in the past decade are
Amazon and Starbucks. Does Starbucks mean
coffee? Absolutely not. But we get to know a
company, and that starts to create an image. It
is linked in customers’ minds with attributes or
benefits.
50
Identity is the answer to the question, “Who are
we?” The Tatas have been advertising, “Tata, a
century of trust”. This corporate identity reflects
the personalities and values of the founders and
its management. It envelops the whole group of
industries operating in different areas of business
and the economy.
Business and the Nature of its Objectives
A business (also called firm or an enterprise) is
a legally recognized organizational entity. The
classical economic theory of profit maximization
implies that a business has a single objective, that
is, to make a profit. In other words, the owners and
operators of a business have as one of their main
objectives the receipt or generation of financial
returns in exchange for work and acceptance of
risk. But organizations that exist only to produce
profit don’t last long. And organizations that don’t
pay attention to profits cannot exist to fulfill their
Strategic Intent – Vision, Mission and Objectives
long-term purpose.
While pursuing the objective of earning profit,
business units cannot ignore the interests of its
employees, customers, the community, as well as
the interests of society as a whole. Many values
studies have shown that profits follow from fulfilling
the purpose or strategic intent of the organization.
Profits are a reward depending on the value of the
service the firm gives to others.
Based on the argument above, the nature of
business objectives can vary significantly. The
nature depends on the perspective the firm takes,
from an economic to a global perspective.
Based on their nature and content,
objectives may be described to be
any of the following:
● Economic objectives
● Social objectives
● Human objectives
● Global objectives
● Economic objectives
Economic objectives refer to earning a profit and
other objectives necessary to achieve the profit
objective. Profits must be earned to ensure the
survival of the business, its growth, and expansion
over time. In order to achieve this primary objective,
the firm also has to include the following:
● Customers: A business unit cannot survive unless
there are customers to buy the products and
services. Profits are earned when a firm provides
quality goods and services at a reasonable price.
Survival depends on maintaining a satisfied
customer base.
51
● Innovations: Innovation means improvement
in products, the process of production, and
distribution of goods. Business units, through
innovation, are able to reduce costs by adopting
better methods of production and also increase
their sales by attracting more customers because
of improved products.
● Resources: Business activities require various
resources like men, materials, money, and
machines. For example, capital is required to
buy machinery, raw materials, employ men, and
have cash to meet day-to-day expenses. The
availability of these resources is usually limited,
and companies have to make the best possible
use of these resources.
Economic objectives, therefore, need
to include all these aspects which
ensure the well-being of the firm
in the long run.
Social Objectives
Social objectives are those
objectives that benefit society. Since
business operates in a society by
utilizing its scarce resources, the society
expects something in return for its welfare. These
expectations are reflected in the social objectives
of the business, which may include:
● Production and supply of quality goods and
services
● Adoption of fair-trade practices
● Ensuring a minimal ecological footprint
● Contribution to the general welfare of society
Human Objectives
Human objectives refer to the objectives aimed at
Strategic Intent – Vision, Mission and Objectives
the economic well-being as well as the fulfillment
of expectations of employees and the community.
Employees must be provided with fair remuneration
and incentives for performance. Their social and
psychological satisfaction must be ensured.
Employees as human beings want to grow.
Their growth requires proper training as well as
development. Business can prosper if the people
employed can improve their skills and develop
their abilities and competencies in the course of
time. Thus, it is important that business should
arrange training and development programs for its
employees.
Global Objectives
Today, the entire world has become one big market.
Goods produced in one country are readily available
in other countries. Global objectives are those
objectives that make it possible for a business
to survive in the globalized marketplace. To face
global players, businesses have to reflect this
phenomenon in their objectives. These may range
from making available globally competitive goods
and services to competing in global markets with
their competitors. Very often, these objectives may
reflect important national objectives, e.g., creating
opportunities for gainful employment of people;
investment in national priority areas, raising the
general standard of living, export substitution, etc.
Most businesses must accomplish similar
functions regardless of size, legal structure, or
industry. These functions are often organized into
departments. The role of business objectives is
to ensure the viability of the organization moving
right through the organization up to the level of the
individual and department.
52
Organization’s Objectives
The strategic intent provides insight into the way
in which the organization is supposed to work. The
role that objectives play in realizing this is important.
The mission statement lists out a particular set of
tasks that the organization has to carry out in order
to fulfill the vision of the organization. It sets out
priorities of how the purpose of the organization
can be fulfilled and identifies the particular need of
society the organization will satisfy.
Objectives define the organization’s relationship
with the environment and help the organization to
pursue its mission. They also provide the standards
by which the performance of the organization can be
judged. But most importantly, as strategies consist
of a set of objectives, the objectives determine the
strategies of the organization.
Firms choose their objectives to reflect the
demands of their many stakeholders.
Figure 4.2: Objectives at Different Levels
Objectives of an organization form a hierarchy
on a similar basis as that for strategic choice,
discussed earlier. This is shown in Figure 4.3. The
hierarchy ranges from the broad aim to specific
individual objectives. The long-term intentions of
the organization provide a focus for setting the
objectives. They are expressed qualitatively in the
Strategic Intent – Vision, Mission and Objectives
form of a mission statement. The zenith of the hierarchy is the mission of the organization. This produces
the strategic objectives or corporate goals.

At the second level are the operations of the Strategic Business Units (SBUs) in a diversified organization,
or critical processes in a single unit organization. For example, in a single unit organization manufacturing
commercial vehicles, these could be marketing, manufacturing, or quality control. In a diversified organization,
this would imply each major commercially oriented activity of the firm, or each of its units. These are the
business process objectives.

At a lower level that reflects the operations of a department, the objectives are more specific. These are
generally the Key Result Areas (KRAs). The objectives are translated further down the line to the individual
managers and down to the lowest level of the organization. It may be necessary to sub-divide objectives into
functional work-tasks so accountability can be assigned to a single individual.

Much of the management literature talks about long-run and short-run objectives. Long-run objectives focus
on long-term performance, and short-run objectives focus on short-term performance. Generally, the span
of a short-run objective is 1-2 years, while the span of a long-run objective is 3-5 years. Some planners try to
emphasize that a difference exists between goals and objectives – in that case, you should clearly define the
difference. But for the majority of the managers, there is very little difference between the terms.

Corporate goals or strategic objectives are normally long-term objectives but often incorporate short-run
objectives. Short-run objectives play a significant part in assessing and determining whether the speed
and level of performance being aimed for are being achieved. They also provide a steppingstone towards
attaining the long-term performance.

Summary

Strategies surface at different tiers in the organization hierarchy depending on the architecture of the
organization. The first task of Strategic Management is formulating the organization’s vision, mission, and
value statements. Strategic intent is the choices the firm makes and is reflected in the vision, mission, and value
statements. These statements define the choices - what to do and what not to do. They establish the basis
for identifying acceptable strategic alternatives. The idea that an organization might be guided by its vision,
mission, and values is a key part of strategic thinking. Whatever the eventual architecture of the organization,
the vision statement encompasses the organization in all its forms. The vision of the organization leads to its
Mission and its values. The vision of an organization consists of two major components, the ideology and the
envisioned future of the organization. Corporate values can be defined, in a classical sense, as beliefs that
help companies make choices among available means and ends and the behaviors they inculcate. Technically,
values reflect the weight which corporate decision-makers attach to alternative goals when making their
decisions. It provides an explicit depiction of values to guide the organization in choosing among competing
priorities, thereby setting the organization apart from others. Objectives should be balanced. They should
incorporate requirements that will involve all members of the organization. The SMART Formula is a useful
method
53
of examining objectives.
Strategic Intent – Vision, Mission and Objectives

Formulating Business Strategy
and Corporate Strategy
Learning Objectives
By the end of this unit, you will be
able to understand:
● Business level strategy
● Concept of competitive
advantage
● Corporate strategy
● Single business units (SBUs)
54
Unit 5
Introduction
In an illogical world, any process of choice could be
rational. Identifying and choosing options would be done
purely analytically. However, this is not necessarily true.
Identifying, evaluating options, and then exercising them
for strategy formation is a complex process. In reality, it
may be difficult to identify all possible options with equal
clarity at the same time. The future may evolve differently
from any of the options. Unexpected events can create
new opportunities, destroy foreseen opportunities, or
alter the balance of advantage between opportunities.
The results may eventually depend as much on chance
and opportunity as on deliberate choice. Good fortune
and inspiration also play a large role in organizational
success and failure. No one yet knows enough about
effective strategic management to model it fully, making
it more art than science.
In this unit, we delve into corporate strategy. Corporate-
level strategies or grand strategies can be defined as the
general plan by which the organization intends to achieve
its purpose and long-term objectives. Growth is the
primary objective of most organizations. If the firm stops
growing, it will ultimately be replaced by others in the
marketplace. Growth is often a requirement for survival.
Management also opts for growth strategies in the belief
Formulating Business Strategy and Corporate Strategy
that ‘bigger is better’. Profitable growth generates
cash, allowing an organization to fund further
growth without taking on excessive debt or diluting
equity too much. This provides the organization with
the advantages of retaining its strategic freedom
as well as enhancing its investment potential.
Business Level Strategy
Business strategies are basically competitive
strategies. The objectives of these strategies are
about how to compete successfully in particular
markets and how business units can acquire a
competitive advantage. This is an area of principal
concern to managers. It provides the framework
that guides competitive positioning decisions. It
examines the way in which an organization can
compete more effectively to strengthen its market
position. The purpose of the competitive strategy
of a business is to build a sustainable competitive
advantage over the organization’s rivals. This
means the ability to anticipate correctly how
businesses respond strategically to competitive
threats and opportunities. Michael Porter, in his
book “Competitive Strategy,” has provided the
framework for business strategies. This is the
framework of ‘Generic Strategies’.
Generic Strategies
Business Policy and Strategy:
There are two basic types of competitive advantage
a firm can possess – low cost or differentiation.
The two basic types of competitive advantage,
combined with the scope of activities for which a
firm seeks to achieve them, lead to three internally
consistent generic competitive strategies. These
strategies are:
● Cost Leadership,
● Differentiation, and
● Focus Strategies.
These strategies can be used by the organization
to outperform competition and defend its position
in the industry. The Generic Competitive Strategies
are shown in Figure 6.1. These strategies need to
be examined in conjunction with the ‘competitive
capabilities’ of the organization and the external
environment. Effectively implementing any of
the generic competitive strategies requires total
commitment and determined organizational
support. There needs to be compatibility between
corporate-level strategy and the strategy at the
operational level.

Competitive Advantage

Lower Cost Differentiation

Broad
Target 1. Cost Leadership 2. Differentiation

Narrow
Target 3 a. Cost Focus 3 b. Differentiation on Focus

Figure No. 5.1: Generic Competitive Strategies

55 Formulating Business Strategy and Corporate Strategy

Cost Leadership Strategy:
A firm pursuing a cost leadership strategy attempts
to gain a competitive advantage primarily by
reducing its economic costs below its competitors.
This policy, once achieved, provides high margins
and a superior return on investments. The skills and
resources required to be successful in this strategy
are sustained capital investment and access to
capital; superior process engineering skills; good
supervision and motivation of its labor force;
products designed for ease in manufacturing; and
a low-cost distribution system. The organization
attempts to exploit economies of scale by
aggressive construction of efficient economies of
scale through:
● Volume of production and
specialized machines.
● Volume of production and
cost of plant and equipment.
● Volume of production and
employees’ specialization.
● Volume of production and
overhead costs.
This strategy requires tight cost control. This is
often done by using a full costing method or activity-
based costing with frequent and detailed control
reports. The structure of the organization should be
clear-cut, and responsibilities should be clearly laid
out. Organizations often provide incentives based
on meeting strict quantitative targets, etc.
In order to remain a cost leader, the firm attempts to
avoid those factors that can cause the economies
of scale to be affected. It has to work within the
physical limits to efficient size, worker motivation,
and focus on markets and suppliers, sometimes in
restricted geographical areas. Firms that are known
56
to have successfully used this strategy in a number
of their businesses include Black and Decker, Texas
Instruments, and DuPont.
The low-cost producer strategy works best when
buyers are large and have significant bargaining
power, price competition among rival sellers is a
dominant competitive force, the industry’s product
is a standard item readily available from a variety of
sellers, there are not many ways to achieve product
differentiation that have value to the buyer, buyers
incur low switching costs in changing from one
seller to another, and are prone to shop for the best
price.
A low-cost leader is in the strongest
position to set the floor on market
price, and this strategy provides
attractive defenses against
competitive forces. Its cost
position gives it a defense from
competitors because its lower
costs mean that it can still earn
returns after its competitors
have competed away their profits
through rivalry. It is protected from
powerful buyers because buyers can exert
power only to lower prices, and this will be possible
only with the next most efficient competitor. Lower
cost provides protection against suppliers because
there is more flexibility in the organization to cope
with input cost increases. Any new entrant will
find it difficult to overcome entry barriers because
of economies of scale, and as the activities taken
to achieve low costs are both rare and costly to
imitate.
Finally, it places the organization in a favorable
position when pitted against substitutes compared
to competitors in the industry. Cost leadership is
valuable if:
Formulating Business Strategy and Corporate Strategy
● Buyers do not value differentiation very much.
● Buyers are price-sensitive.
● Competitors will not immediately match lower
prices.
● There are no changes in:
The challenge is finding ways to differentiate that
create value for buyers and that are not easily copied
or matched by rivals. Anything a company can do to
create value for buyers represents a potential basis
for differentiation. Ways to differentiate products/
services include:

» Consumer tastes
● Product features
» Technology
● Linkage between functions
» Exogenous prices/costs
● Timing

There are a number of risks in using this strategy. ● Location/convenience

These risks relate to the fast-changing business
● Product mix
environment. The most important risk to cost
● Links with other firms
leadership is technological change that nullifies
past investment or learning of the ● Customization
organization. Sometimes the
● Product complexity/
inability of the management to
sophistication
see or anticipate the changes
● Marketing (image, etc.)
required in the product or
market change is a risk. The ● Service and support
organization’s advantage
can also be neutralized if there Successful differentiation
is low-cost learning by industry creates lines of defense against
newcomers or inflation in costs of the five competitive forces.
supplies or processes that provide the It provides insulation against
organization a competitive advantage. competitive rivalry because of brand
loyalty of customers and hence lower sensitivity to
Differentiation Strategy: price. Customer loyalty also provides a disincentive
for new entrants who will have to overcome the
In a differentiation strategy, a firm seeks to be uniqueness of the product or service. Competitors
unique in its industry along some dimensions that are not likely to follow a similar approach if buyers
are widely valued by buyers. It selects one or more value the differentiated products and services. If
attributes that many buyers in an industry perceive they do, this will lead to a lose-lose situation for
as important and uniquely positions itself to meet them.
those needs. Differentiation will cause buyers to
prefer the company’s product/service over brands The higher returns of the strategy provide a higher
of rivals. An organization pursuing such a strategy margin to deal with supplier power. Buyer power is
can expect higher revenues/margins and enhanced mitigated as there are no comparable alternatives.
economic performance. Finally, a company that has differentiated itself to
achieve customer loyalty should be better placed

57 Formulating Business Strategy and Corporate Strategy

to compete with substitutes than its competitors.
Some successful examples of this strategy are
Mercedes in Automobiles, Bose in Audio Systems,
and Caterpillar in construction equipment.
Competitive advantage through differentiation
is sustainable if the activities taken to achieve
differentiation are rare and costly to imitate. The
most appealing types of differentiation strategies
are those least subject to quick or inexpensive
imitation. Differentiation is most likely to produce
an attractive, long-lasting competitive edge when
it is based on technical superiority, quality, giving
customers more support services, and on the core
competencies of the organization.
Differentiation requires the organization to have
some of these skills and resources:
● Strong marketing abilities
● Good product engineering
● Creative flair
● Corporate reputation for quality or technological
leadership
● Strong cooperation from channels
● Strong coordination among functions
● Amenities to attract highly skilled labor, scientists,
or creative people.
58
The differentiation strategy works best when there
are many ways to differentiate the product/service
and these differences are perceived by buyers to
have value, or when buyer needs and uses of the
item are diverse. The strategy is more effective
when not many rivals are following a similar
type of differentiation approach. There are risks
in this strategy when the cost of differentiation
becomes too great or when buyers become more
sophisticated and the need for differentiation falls.
Focus and Niche Strategies:
The generic strategy of focus rests on the choice of
a narrow competitive scope within an industry. The
focuser selects a segment or group of segments
in the industry, or buyer groups, or a geographical
market and tailors its strategy to serving them
to the exclusion of others. The attention of the
organization is concentrated on a narrow section
of the total market with an objective to do service
buyers in the target niche market. The idea is that
they will do a better job than the rivals who service
the entire market. Each functional policy of the
organization is built with this in mind.
There are two aspects to this strategy, the cost
focus, and the differentiation focus. In cost
focus, a firm seeks a cost advantage in its target
market. The objective is to achieve lower costs
than competitors in serving the market – this is a
low-cost producer strategy focused on the target
market only. This requires the organization to
identify buyer segments with needs/preferences
that are less costly to satisfy as compared to the
rest of the market.
Differentiation focus offers niche buyers something
different from other competitors. The firm seeks
product differentiation in its target market. Both
variants of the focus strategy rest on differences
Formulating Business Strategy and Corporate Strategy
between a focuser’s target market and other
markets in the industry. The target markets must
either have buyers with unusual needs or else the
production and delivery system that best serves
the target market must differ from that of other
industry segments.
Cost focus exploits differences in cost behavior in
some markets, while differentiation focus exploits
the special needs of buyers in certain markets.
A focuser may do both to earn a sustainable
competitive advantage, though this is difficult.
Examples of focus strategies are Rolls Royce in
luxury automobiles; Apple Computer in Desktop
Publishing.
Focus strategy is successful if
the organization can choose a
market niche where buyers have
distinctive preferences, special
requirements, or unique needs,
and then developing a unique
ability to serve the needs of
the target buyer segment. Even
though the focus strategy does
not achieve low cost or differentiation
from the perspective of the market as
a whole, it does achieve this in its narrow target.
However, the market segment has to be big enough
to be profitable and it has growth potential. The
organization has to identify a buyer group or
segment of a product line that demands unique
product attributes. Alternatively, it has to identify
a geographical region where it can make such
offerings.
Focusing organizations develop the skills and
resources to serve the market effectively. They
defend themselves against challengers via the
customer goodwill they have built up and their
superior ability to serve buyers in the market. The
59
competitive power of a focus strategy is greatest
when the industry has fast-growing segments that
are big enough to be profitable but small enough to
be of secondary interest to large competitors, and
no other rivals are concentrating on the segment.
Their position is strengthened as the buyers in
the segment require specialized expertise or
customized product attributes.
A focuser’s specialized ability to serve the target
market niche builds a defense against competitive
forces. Its focus means that either the organization
has a low-cost position with its strategic target, high
differentiation or both. The logic that has been laid
out earlier for cost leadership and differentiation
also is applicable here.
Some of the situations and
conditions where a focus
strategy works best are:
● When it is costly or difficult
for multi-segment rivals to serve
the specialized needs of the
target market niche.
● When no other rivals are
concentrating on the same target segment.
● When a firm’s resources do not permit it to go
after a wider portion of the market.
● When the industry has many different segments,
creating more focusing opportunities and
allowing a focuser to pick out an attractive
segment suited to its strengths and capabilities.
A focus strategist must beware of events that
could impact the target market. This can happen
when broad-line, multi-segment competitors may
find effective ways to match the focused firm in
serving the narrow target market or the segment
may become so appealing that it is soon crowded
Formulating Business Strategy and Corporate Strategy
with eager, aggressive rivals, causing segment profits to be split. Often the niche buyer’s preferences and
needs drift more and more towards the product attributes desired by the market as a whole, this could be
threatening. The focus strategy always implies some limitation on the overall market share achievable. The
strategy involves a trade-off between profitability and sales volume.

Concept of Competitive Advantage

Every business has a competitive strategy. However, many strategies are implicit, having evolved over time,
rather than explicitly formulated from thinking and planning processes. Implicit strategies lack focus, produce
inconsistent decisions, and unknowingly become obsolete. Without a well-defined strategy, organizations
will be driven by current operational issues rather than by a planned future vision. Porter’s model provides
a process to make your competitive strategy explicit so it can be examined for focus, consistency, and
comprehensiveness.

Developing a competitive strategy means creating a broad framework for the business – how it is going
to compete; what its objectives are; and what policies will be needed to carry out those objectives. The
competitive strategy is a combination of ‘ends’ that the organization is striving for and ‘means’ by which it is
seeking to get there. It gives the firm a competitive advantage.

Competitive advantage is a position a firm occupies against its competitors, allowing it to earn revenues
higher than costs, including the cost of capital. A firm possesses a sustainable competitive advantage when
its value-creating processes and position cannot be duplicated or imitated by other firms. As mentioned
earlier in the last section, competitive advantages are cost advantage and differentiation advantage. They are
collectively known as positional advantages because they denote the firm’s position in its industry as a leader
in either superior services or cost.

Figure No. 5.2

60 Formulating Business Strategy and Corporate Strategy

Creating competitive advantage involves the
consideration of four key factors. These are
shown in figure 6.2. These factors determine what
a company can successfully accomplish. The
factors that are internal to the organization are its
strengths and weaknesses and the values of its
key personnel; the factors that are external to the
organization are the industry opportunities and
threats and societal expectations. These factors
combine to provide the basis and limits to the
competitive strategy a company can successfully
adopt. The appropriateness of the competitive
strategy can be determined by testing the proposed
objectives and policies for consistency.
A business must adopt a strategy that
enables it to secure the resources
needed to effectively remain at
the cutting edge of operational
and technological advances
in the pursuit of creating
and retaining the customers
the firm wants. This is the
first requirement. History is rife
with firms that failed to see new
technologies coming. Christensen
uses the example of the diesel
locomotive to illustrate how disruptive technologies
“sneak up” until it is too late for the previously
dominant firms to respond. When the diesel
locomotive was introduced, it did not match the
performance of the steam locomotive. Baldwin, the
leading locomotive manufacturer, scoffed at this
upstart and proclaimed, “They will never replace
the steam locomotive!” This was true for some
time, but little by little, diesel locomotives improved
and before Baldwin knew it, by 1950, diesels had
the lion’s share of the market. By then, it was too
late for Baldwin to respond.
61
Second, ‘competitive advantage’ is also created
when resources and capabilities owned exclusively
by the organization can generate unique core
competencies. This advantage is sustainable due
to the lack of substitution and imitation capacities
by the organization’s competitors. As the core
competencies are unique, the benefits derived
from these advantages are retained inside the
organization; they are not appropriated by others.
Finally, competitive advantage can come from a
strong and supportive value chain. The members
of the chain look at the benefits that accrue to the
entire value chain. Such cooperation is possible
and often seen in such value chains, e.g., increasing
productivity, reducing stocks at different
levels, or process improvements, etc.,
are undertaken by members of the
value chain and the advantages
that accrue benefit all members
of the value chain. In addition,
it is able to provide greater
value to the customer.
These broad considerations in an
effective competitive strategy, to gain
sustainable competitive advantage,
can be extended into a generalized approach to
the formulation of strategy. In order to do this, the
organization must be in a position to answer the
following questions:
● What is the current strategy, implicit or explicit?
● What assumptions have to hold for the current
strategy to be viable?
● What is happening in the industry, with our
competitors, and in general?
● What are our growth, size, and profitability goals?
● What products and services will we offer?
Formulating Business Strategy and Corporate Strategy
● To what customers or users?
● How will the selling/buying decisions be made?
● How will we distribute our products and services?
● What technologies will we employ?
Focus has to be on a few activities – on those
most important activities – on those two or three
(no more) key success factors. For example, in
the computer software market, the key success
factors are establishing efficient channels of

● What capabilities and capacities will we require? distribution and providing after-sales support.
Too much concern about writing “efficient code”
● Which ones are core?
may be a technical nicety, but from a competitive
● What will we make, what will we buy, and what point of view, it’s a waste of resources. Similarly, in
will we acquire through alliances? the strategy consulting business, the key success
● What are our options? factors are communicating with executive decision-
makers and helping managers think more deeply
● On what basis will we compete?
about their enterprise than they ever have before.
Time spent on controlling expenses is not critical.
Although the process may seem intuitively clear,
answering these questions involves a great
Key Success Factors are defined by the market and
deal of penetrating analysis. It is in answering
by the customer, not by the company. They revolve
these questions that the organization finds the
around skills, processes, and systems. There are
competitive strategy most suited to it.
many ways to identify the company’s KSFs. One
of the methods is through brainstorming. Ask your
Sustainable competitive advantage is built upon
planning team to provide two or three answers (but
corporate capabilities and must constantly be
no more) to the question, “For our organization to
reinvented. Distinctive capabilities are the basis
be successful, we must be especially good at the
of competitive advantage. Organizations have
following activities...”
found many offensive and defensive actions to
defend their position in the industry and cope with
Ask everyone in the room to first spend a few
competitive forces.
moments thinking about the question and writing
their individual answers. Then have each person
Key Success Factors
read their own answers aloud. Next, discuss
any differences of opinion, and finally, arrive at
A Key Success Factor (KSF) is a performance area
a consensus. Record your team’s final answers.
of critical importance in achieving consistently high
You’ve developed a shortlist of “activities at which
productivity. There are at least two broad categories
we’ve got to be especially good.”
of key success factors that are common to virtually
all organizations: business processes and human
processes. Both are crucial to building great
companies. If your company is especially good in
those processes and just mediocre at everything
else, your company will be successful.

62 Formulating Business Strategy and Corporate Strategy

And when itemizing your internal strengths and internal weaknesses, you’ll want to keep your lists short and
well-focused. You’ll want to include only those strengths and weaknesses which relate to your key success
factors. Thus, your key success factors will serve as a guide in determining which potential strengths and
which potential weaknesses you actually include in your lists.

These are normally two or three activities that are the primary determinants of success.

You can transfer your results to the matrix shown in Figure 6.3. Sorting these results based on the probability
of occurrence and the probable impact on the company, you can prune the list to 3 or 4 KSFs. Items that fall
in the first column of the chart are most probably Key Success Factors (KSFs). The items that fall in the first
two rows are factors on which the company needs to focus on. Identifying KSFs is a good cornerstone of a
firm’s strategy. Winning competitive advantage often hinges on being distinctively better than rivals at one or
more of the KSFs.

Figure No. 5.3

To generate an industry matrix, identify 4 to 5 factors that appear to determine current and expected success
in the industry. Once the KSFs have been identified, these can be used to analyze the position of the firm
within the industry.

● Give yourself a score on each KSF and also give a score to competition on a scale of ten (ten is outstanding).
Each rating is a judgment regarding how well that company is currently dealing with each key success
factor.

● Assign a weight to each factor from 1 to 0. The higher the value, the more important is the factor. The total
of the weights for all the factors must add up to 1.

● In the table shown below, multiply the weight in Column 2 for each factor times its rating in Column 3 to
obtain that factor’s weighted score for our company. Similarly, Company A and Company B can be rated.

● Finally, add the weighted scores for all the factors determine the total weighted scores. This score indicates
how well each company is responding to current and expected key success factors in the industry’s

63 Formulating Business Strategy and Corporate Strategy

 environment. Compare your score against competitors (highest score is probably doing the right things
better)

An industry matrix, shown as in Table 6.1, summarizes the key success factors within a particular industry.

Company Company Weighted Score

Key Our
B B
Success Weight Company
Rating Rating
Factors Rating Us A B

Total 1.00

The matrix is used to specify the position of the primary competitors in the industry on each of the factors.
The industry matrix can be expanded to include all the major competitors within an industry simply by adding
two additional columns for each additional competitor. Use the score as a benchmark in the future to improve
your performance and success over time. What are our differentiators, and what sustainable competitive
advantage can we develop? What are our areas of weakness, and potential quick wins to improve our success?

Key success factors are indicators or milestones that measure your business achievements and help
determine how well you are progressing towards your goals and objectives. The challenge is to improve in
these areas. The success of the initiatives, in both areas of business processes and human processes, and
their incorporation within the line organization, ultimately determines the success of the firm. Key success
factors are different from strategic factors. Key success factors deal with an entire industry, whereas strategic
factors deal with a particular company.

Corporate Strategy

Corporate strategy is dominated by the “domain choice” question. It defines the product-market domain of
the firm and describes the firm’s scope of operations. At the corporate level, the firm faces several strategic
questions:

● What businesses should we compete in, given our strengths and weaknesses?

● Which new product markets should we enter?

● Which should we exit?

64 Formulating Business Strategy and Corporate Strategy

All these activities are related to the grand strategy
of the organization. The specific tasks from that
list that fall under the domain of corporate strategy
include:
● The mission of the firm;
options are defined by three major approaches.
The appropriate approach depends upon the state
of the organization and the internal and external
environment of the firm. The organization can
adopt any of the approaches described below or
it can combine the approaches in the options it

● Business segmentation, i.e., selecting planning exercises:

and organizational focuses;

Growth Strategies: Long-Term Strategies
● Horizontal strategy, i.e., pursuing synergistic
linkages across business units and searching for
Stabilization or Restructuring Strategies: Medium-
and exploiting potential interrelationships among
Term Strategies
the various business units of the firm;

● Vertical integration, i.e., defining the boundaries Corporate Revival or Turnaround: Short-Term
of the firm; and Strategies

● The strategic posture of the firm,

We will start by looking at growth
i.e., identifying strategic thrusts
strategies. Growth is the primary
and planning challenges
objective of most organizations.
and establishing corporate
If the firm stops growing, it will
performance objectives in
ultimately be replaced by others
corporate, business, and
in the marketplace. Growth is
functional key result areas.
often a requirement for survival.

Corporate Strategy binds the

Management also opts for growth
organization together. It sets the
strategies in the belief that ‘bigger is
guides and principles for the rest of the
better’. They keep attempting to increase
functions to follow. It is concerned with the
the level of the organization’s operations. In the
type of business the organization is in, its overall
bargain, these strategies provide career growth
competitive position, and how the resources of
for them and employees of the organization. In a
the organization have to be deployed. They set
nutshell, there is a perception in many managements
the overall direction the organization will follow.
wherein they:
Figure 7.1 graphically represents the structure of
strategies in a firm.
● Equate growth with success,

The strategic intent, or the mission of the firm, gives
a broad direction to strategic choice. Depending on
the nature and purpose of the organization, within
this broad direction, there are a number of specific
options concerning the direction of developing
the organization’s strategies. However, these
● See the potential for greater rewards, and
● View a strategy of stability as long-run failure.
Profitable growth generates cash, allowing an
organization to fund further growth without taking
on excessive debt or diluting equity too much. This

65 Formulating Business Strategy and Corporate Strategy

provides the organization with the advantages of
retaining its strategic freedom as well as enhancing
its investment potential. Reliance Industries and
Bajaj Auto are examples of this type of growth.
The growth strategy can be based on external
options, as in the case of acquisitions and
divestitures. Growth can also be through direct
expansion that is internally focused and does not
involve other firms: new product development;
quality improvement; increasing company size,
revenues, operations, or workforce; and creating
businesses within the organization.
Growth strategies are usually healthy, but can be a
misleading indicator of the organization’s
general health and cash flow.
Unprofitable growth is not desirable.
There are numerous examples
of this type of growth among
Indian companies. Some
examples are Kulwant Rai
Group of Companies, Southern
Petrochemical Industries Ltd.,
Nagarjuna Fertilizers. All these
companies have been traded at very
high stock prices and today are not
traded, or the stock prices have fallen below the
face value.
Very often, the organization has to pause before
it goes ahead if it has issues exemplified in the
Essar case above. This is when stabilization
strategies become necessary. In the case of
Essar, the company needed to stabilize to focus
on factors such as organizational weaknesses or
lack of competitiveness. An organization will opt
for stabilization strategies when it needs to have
breathing space to reorganize its activities so that
it can grow more vigorously in the long term. These
strategies are also called ‘restructuring’ strategies.
66
Some of the factors that may lead an organization
to decide to restructure are changing technologies,
the rise of competition, management adjustments,
deregulation, fluctuating exchange rates, and
changes in tax policy, etc.
If any of these factors become critical, it results
in unprofitable growth. Unprofitable growth allows
debts to grow, increases interest costs, and the
overall cost of capital. Gradually, the company
loses its ability to pursue growth opportunities
because of depressed stock prices and dwindling
cash flows.
Hindustan Lever devised Project Millennium, a
comprehensive transformation strategy,
to restructure itself and also to
manage the resultant changes.
This envisaged a transition
from being a large, diversified
conglomerate company to
becoming a configuration
of empowered businesses,
each business acting like a
virtual company built around a
single category of products. These
strategies were medium-term and were
meant to ensure long-term growth.
Corporate sickness is widespread in India and
in many other market economies and is on the
increase because of “hypercompetition” as a
result of globalization. Sometimes, the firm has
reached a stage when sales and profits are down
and market share is slipping. A strategy must be
found in time to stop the decline if the organization
is to continue to succeed. Strategies of renewal will
stop the organization’s decline and put it back on a
successful path.
Formulating Business Strategy and Corporate Strategy
Such strategies are called Corporate Revival
or Turnaround strategies. Renewal strategies
are a similar to restructuring strategies. While
restructuring can be applied to healthy organizations,
with a view to make the business more efficient and
therefore more profitable, renewal or turnaround
strategies address great weaknesses or flaws in
the business.
For example, with the removal of controls and
restrictions in 1991, individual entrepreneurs had
the freedom to explore their opportunities in a more
meaningful way than was possible before. While
some groups like the Tata Group and Hindustan
Lever etc. gained from these changes, some who
had become complacent in their monopolistic
positions did not.
Some of these companies, in the later group, had
centralized their operations so much that they
became unmanageable within the new environment.
The situation was further complicated by poor
financial management and interfamily and intra-
family disputes. Instead of taking up the opportunity
to restructure, they continued in their old ways.
The result was that many of them started losing
their pre-eminence and some started cracking up.
Those who lost their positions in top business
groups included the Scindias, the Sarabhais, and
the Bhiwandiwalas. Some declined like Bangurs
and the Walchand Hirachands.
67
The three strategy configurations show three
different ways to create value for the customer
and for the company. One of the configurations will
probably explain the logic better than the two others
for the company in mind. Competitive advantage
can be created through unique resources and/
or combining the activities in a unique way. The
three configurations show three different ways
to establish competitive advantage, focusing on
the activities and the unique drivers behind the
activities.
These configurations are also tools to establish a
common communication platform. If management
is the only one that understands how value is
created in the company, they will have problems
in implementing their strategies. The middle
management and employees will simply not
understand the logic behind decisions. This
reduces the probability of the success of the
strategy employed.
Starting with a single business firm, we will discuss
diversification strategies. Then we will discuss the
portfolio method of analysis. We will also look at
mergers and acquisitions that have made waves
in the recent past. Another topic that has been in
the forefront of discussions on strategy is strategic
alliances. We will discuss this. Finally, we will look
at the concept of value creation through corporate
strategy.
Single Business Units (SBUs) The primary goal
of any firm or organization is to achieve higher
levels of performance, where performance is a
comprehensive term that includes profitability,
efficiency, and effectiveness. The core of strategy
is to set the direction. Corporate strategy sets
the overall strategic direction. Strategy creates
opportunities. As opportunities increase, the
organization is driven into more and more
Formulating Business Strategy and Corporate Strategy
neighboring areas of opportunity and is further propelled in this direction by greater and greater success.
Strategies become a means towards more sales revenues, more employees, or more market share and an
important option to help improve odds against greater uncertainty.

How that strategy is implemented and managed depends to a large degree on whether an organization is
engaged in one or several businesses. A single-business firm is technically not diversified because it gets 95
percent or more of its total revenues from one business. A dominant-business firm is different in that it has
moved beyond a complete focus on one business by obtaining revenues from other businesses. However,
as the definition indicates, it is still largely dependent upon one industry. The simplest corporate strategic
model of a firm that has a single business or a dominant business can be represented by a 2×2 matrix
shown in Figure 7.2. The Product-Market matrix (sometimes called the Corporate Strategy matrix) defines
the options that are open to the firm. The Product-Market matrix, also known as Ansoff’s matrix, explores two
key dimensions.

The first is ‘product’ around which the business is built. Most offerings are limited in at least two ways: time,
in that their relevance diminishes and redesign or renewal is usually required, and transferability, in that they
tend to work best under certain market conditions. Modifying the core offering to improve the value offering
is a key strategic choice.

The second is the market, generally applied as market options. This dimension distinguishes between
customer markets that are well established and known to the firm versus all the rest that are not.

Figure No. 5.4

68 Formulating Business Strategy and Corporate Strategy

According to Ansoff, each of the four quadrants
defines the core strategic options to different
sets of internal and external conditions. Careful
assessment leads to a better understanding and
decision-making:
● Upper left – Product Development: Positive
customer relationships and goodwill allow a
company to make new product offers more
effectively and inexpensively to existing
customers than to new ones. The advantages
of this have to be weighed against the possible
damage resulting from negative spill-over from
the new to the existing product experience.
Any new offering needs to enhance customer
relationship and goodwill.
● Lower left – Market Penetration:
This strategy says, change
nothing and sell more of the
same to existing customers.
When a business does not
consciously select a growth
or diversification strategy,
it is doing this, capacity
expansion. This is the preferred
strategy when a company’s product
is performing well and there is room to
increase market share. However, the risk involved
is in overcapacity in the industry.
● Lower right – Market Development: A well-
developed product can be introduced into new
markets to extend its value. This is ideal when
little modification is required and room for
growth in the original market is restricted. Many
products offered by multinationals, as diverse
as food, pharmaceuticals, and automobiles, etc.,
fall in this category.
● Upper right – Diversification: Diversification
represents a near total strategic overhaul,
simultaneously trading in both Product and
69
Market. It is the most challenging, costly, and
risky of the options. New skills and relationships
need to be developed. Companies need to chart
a gradual migratory path leading from the known
to the unknown.
In a multi-business firm, corporate strategy takes
a broad overview role that is more encompassing
than crafting strategy for a single business. Major
tasks include devising actions to improve the long-
term performance of a corporation’s portfolio
of businesses; capturing strategic fit benefits
existing within and between business units; and
evaluating the profit prospects of each business
unit and steering corporate resources into the most
attractive strategic opportunities.
Diversification
Diversification entails entry
into new markets with new
products. There is an underlying
struggle for supremacy between
the management capabilities of
the organization and the discipline
of market forces. Market forces try to
divide organizations into smaller entities
so as to achieve the economist’s ideal of a perfect
market with a large number of small operators
defenseless against the forces of competition. In
contrast, corporate managements try to grow and
diversify, fighting market forces so as to achieve
high profits and be able to control their own
destinies. This conflict is the basis for the theory of
diversification.
Diversification, as a strategy, has had a roller
coaster relationship with business. In the 1970s,
diversification was the essence of strategy.
Organizations tried to diversify to minimize risks
in their product portfolios and enhance their
Formulating Business Strategy and Corporate Strategy
capability for unlimited growth. Problems in many
organizations that followed this dogma created
a new concept of strategy – core competence.
Organizations that adhered to this dogma missed
the opportunities that were opening up around
the globe as markets and technologies converged
to create huge new businesses. Since the late
nineties, this has brought in a renewed interest in
diversification.
When does one diversify and to what extent?
Perhaps the answers lie both in the market and
the organization. When the organization has a
high level of organizational capability, it can bring
the market into submission and thereby diversify
and earn sustained high profits. As the
markets become stronger and more
efficient, when competition is high,
capital markets are efficient,
and labor markets are more
flexible, organizations require
higher levels of management
capability to protect their
diversity. Diversification is an
exciting option for those who have
the management capability.
Diversification may be related or unrelated to the
existing operations of the organization. Related
diversification is called concentric diversification,
and unrelated diversification is called conglomerate
diversification.
Concentric Diversification
The acquisition or internal development of a
business outside of but in some way related to a
company’s existing scope of operations. Related
diversification again divides into backward, forward,
and horizontal integration:
70
● Backward integration is a move towards suppliers
and raw materials in the same overall business.
An example of this would be a brewer acquiring
malting facilities or growing hops.
● Forward integration is a move towards the
marketplace or customers in the same overall
business. An example of this would be a
manufacturer acquiring retail outlets or a hop
grower beginning to brew his own beer.
● Horizontal integration is a lateral move into a
closely related business such as selling by-
products.
Related diversification can happen in two ways:
● Related-constrained – when all the
businesses in which a firm operates
share a significant number of
inputs, production technologies,
distribution channels, similar
customers, etc., and
● Related-linked – when the
different businesses that a single
firm pursues are linked on only a
couple of dimensions, or if different
sets of businesses are linked along very
different dimensions.
For example, BIC produces products such as
disposable razors, cigarette lighters, and pens.
This is a related-constrained diversification
strategy because all the products share significant
commonalities in the areas of plastic injection
molding, retail distribution, and brand name.
Larsen & Toubro Limited (L&T) is a good example
of a related-linked firm. L&T is India’s largest
engineering and construction conglomerate.
The company sells its strengths in basic and
detailed engineering, process technology, project
Formulating Business Strategy and Corporate Strategy
management, procurement, fabrication and
erection, construction and commissioning, to offer
single-point responsibility in project execution and
management.
The rationale behind the conglomerate
diversification decision is that there is a minimum
common denominator and some degree of synergy
with the original business, even if the diversification
is unrelated. Examples of synergy are the ability
to share facilities – a salesforce, for instance –
or reducing the risk profile of the organization by
creating a balance in the timing of cash flow, etc.
More generally, diversified businesses grow faster,
and growth tends to be greatest if the diversification
is unrelated. However, related diversifications tend
to be more profitable.
Conglomerate Diversification
Conglomerate diversification is where a firm
diversifies into unrelated areas. It is the acquisition
or internal development of a business outside
of and in no way related to a company’s existing
scope of operations. Conglomerate diversification
requires strong analysis of fit between the
unrelated industries. It is often an excellent option
for organizations whose assets are undervalued;
who are financially distressed; or organizations
with bright growth prospects but which are
short on investment capital. Another reason for
conglomerate diversification is when there is some
sort of barrier to expansion in or related areas of
the existing business.
71
For example: Gujarat Flourocarbons Ltd, a
manufacturer of refrigerant gases, has gone into
building and operating multiplexes. This was an
enforced choice due to the Montreal Protocol,
of which India is a signatory, which restricted its
growth in its traditional businesses.
Many organizations either have no option but to
diversify into unrelated areas or find it prudent to
do so, anticipating unfavorable regulatory changes
in the near future. For example, many tobacco
companies, due to stringent laws being enacted
against their products, have diversified into
unrelated products. ITC Ltd. has entered the food
industry and hotel industry, etc.
Conglomerate diversification has a number of
advantages. Business risk is scattered over many
industries, and capital can be invested in whatever
seems to offer the best profit prospects. Profitability
is more stable because hard times in one industry
may be partially offset by good times in another. If
corporate managers are good at spotting bargain-
priced firms with big upside profit potential,
shareholder wealth can be enhanced.
On the negative side, diversification does nothing
to enhance the competitive strength of individual
business units; each business remains on its own;
and corporate synergy can be achieved only if the
organization has the ability to build and manage the
units through an integrated network that exhibits
three key features:
● Strong entrepreneurial units;
● Rich, horizontal flow of knowledge, best practices
across units; and
● A corporate ambition, set of values, and identity.
Formulating Business Strategy and Corporate Strategy
This approach to creating strong, diversified organizations within integrated networks raises questions about
the quality of management. Some of the issues raised are given below:

● Top management competence

● Can top management tell a good acquisition from a bad one?

● Can they select good managers to run each business?

● Do they know what to do if a business unit stumbles?

● Are the firm’s profits more stable?

● How much diversity can the firm manage successfully?

● How broad should the organization’s portfolio be?

● Do the “up & down” cycles cancel out?

There are questions about the ability of organizations with conglomerate diversification to mask poor
performance of some units with the good performance of other units. This has raised a number of questions
on the desirability of extensive conglomerate diversification. Financial analysts and institutional investors
have been found to prefer investing in narrow product category companies rather than in organizations that
are highly diversified. The result is that the attractiveness of conglomerate diversification is on the wane.

Summary

Successful organizations create value in many different ways. Competitive advantage stems from the
provider’s ability to create experiences that are regarded as valuable by the consumer. Management has
to increasingly look at its job as providing meaningful experiences, as value creation progressively bases
itself on intangibles, so that ‘value creation logic’ can be translated into a coherent growth path. There are
two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic
types of competitive advantage, combined with the scope of activities for which a firm seeks to achieve
them, lead to three internally consistent generic competitive strategies. In a differentiation strategy, a firm
seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one
or more attributes that many buyers in an industry perceive as important and uniquely positions itself to
meet those needs. Differentiation will cause buyers to prefer the company’s product/service over brands of
rivals. Differentiation is most likely to produce an attractive, long-lasting competitive edge when it is based
on technical superiority, quality, giving customers more support services, and on the core competencies of
the organization. Strategy of focus rests on the choice of a narrow competitive scope within an industry. The
focuser selects a segment or group of segments in the industry, or buyer groups, or a geographical market
and tailors its strategy to serving them to the exclusion of others. There are two aspects to this strategy, the
cost focus and the differentiation focus. In cost focus, a firm seeks a cost advantage in its target market.

Creating competitive advantage involves the consideration of four key factors. The factors that are internal
to the organization are its strengths and weaknesses and the values of its key personnel; the factors that
72 Formulating Business Strategy and Corporate Strategy
are external to the organization are the industry opportunities and threats and societal expectations. These
factors combine to provide the basis and limits to the competitive strategy a company can successfully
adopt. A business must adopt a strategy that enables it to secure the resources needed to effectively remain
at the cutting edge of technological advances in the pursuit of creating and retaining the customers the firm
wants. The three generic strategies are based on competing differently in the marketplace. They construct
different types of defenses against competitive forces to provide the firm a competitive advantage.

Cost leadership imposes a severe burden on the organization to keep up its position. It means the organization
has to reinvest in modern equipment to keep reaping all economies of scale. In addition, it must keep honing
its process engineering core capability. Similarly, differentiation requires investments in a strong R&D on a
continuous basis and the ability to attract the right type of people into the company. A Key Success Factor
(KSF) is a performance area of critical importance in achieving consistently high productivity.

The specific tasks falling under the domain of corporate strategy include: the mission of the firm; business
segmentation; horizontal strategy; vertical integration; and the strategic posture of the firm. Within this broad
direction, there are numerous specific options regarding the development of the organization’s strategies.
However, these options are defined by three major approaches: Growth Strategies (Long-Term Strategies);
Stabilization or Restructuring Strategies (Medium-Term Strategies); and Corporate Revival or Turnaround
Strategies (Short-Term Strategies). Diversification, as a strategy, depends on both the market and the
organization. Organizations require higher levels of management capability to safeguard their diversity.
Diversification may be related or unrelated to the organization’s existing operations. Related diversification
is known as concentric diversification, while unrelated diversification is referred to as conglomerate
diversification.

73 Formulating Business Strategy and Corporate Strategy


SWOT, Value Chain Analysis,
Portfolio Analysis and Strategic
Alliance
Learning Objectives
By the end of this unit, you will be
able to understand:
● SWOT analysis: an introduction
● The SWOT matrix
● Value chain: an introduction
● Portfolio analysis
● Strategic alliances
74
Unit 6
Introduction
The SWOT analysis provides information that is helpful
in matching the firm’s resources and capabilities to the
competitive environment in which it operates. Successful
businesses build on their strengths, correct their
weaknesses, and protect against internal vulnerabilities
and external threats. Value chain analysis describes the
activities the organization performs and links them to the
organization’s competitive position. When looking at the
strategic capability of an organization, it is not sufficient
to look only inside the organization. Much of the value
creation occurs in the supply and distribution chain.
Therefore, it evaluates the value that each particular
activity adds to the organization’s products or services.
A number of techniques have been developed for
displaying a diversified organization’s operations as a
portfolio of businesses. The techniques provide simple
frameworks for reviewing the performance of multiple
Strategic Business Units (SBUs) collectively. An SBU is
a business that can be planned separately from others,
has its own set of competitors, and is managed as a
profit center. Techniques of portfolio analysis have
their greatest applicability in developing strategy at the
corporate level. It charts and characterizes the different
businesses in the organization’s portfolio and helps in
determining the implications for resource allocation.
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
SWOT Analysis: An Introduction

In the early 1950s, two professors of business policy at Harvard, George Albert Smith Jr. and C. Roland
Christensen, taught students to question whether a firm’s strategy matched its competitive environment.
When reading stories of companies, students were instructed to ask: Do the company’s policies “fit together
into a program that effectively meets the requirements of the competitive situation?” Students were told to
address this problem by asking: “How is the whole industry doing? Is it growing and expanding? Or is it static
or declining?” Then, having “sized up” the competitive environment, the student was to ask: “On what basis
must any one company compete with the others in this particular industry? At what kinds of things does it
have to be especially competent in order to compete?”

By the 1960s, classroom discussions in the business policy course focused on matching a company’s
“strengths” and “weaknesses” – its distinctive competence – with the “opportunities” and “threats” (or risks)
it faced in the marketplace. This framework, which came to be referred to by the acronym SWOT, was a major
step forward in bringing explicitly competitive thinking to bear on questions of business policy. Kenneth
Andrews put these elements together in a way that became particularly well known. In 1963, a business policy
conference was held at Harvard that helped diffuse the SWOT concept in academia and in management
practice.

The acronym “SWOT” represents “Strengths,” “Weaknesses,” “Opportunities,” and “Threats.” The environmental
factors

internal to the firm can usually be classified as strengths (S) or weaknesses (W), and those external to the
firm can be classified as opportunities (O) or threats (T). The process diagram for a SWOT analysis is shown
in Figure 6.1.

Figure 6.1

75 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

The SWOT analysis provides information that
is helpful in matching the firm’s resources and
capabilities to the competitive environment in which
it operates. As such, it is instrumental in strategy
formulation and selection. Successful businesses
build on their strengths, correct their weaknesses,
and protect against internal vulnerabilities and
external threats. They also keep an eye on their
overall business environment, spot and exploit
new opportunities faster than competitors. The
technique is simple and effective. It requires an
analytical frame of mind. Due to its simplicity, all
firms have the capacity to use this tool to their
advantage.
Analysis of the Firm Against Competition:
The first step is to identify
competition. Every business
has competitors. Competitors
are those who could provide
our customers with a product
or service that fulfills the same
need as the business does. Even
if the product or service is truly
innovative, we need to look at what else
customers would purchase to accomplish
this task. Begin by looking at primary competitors.
These are the market leaders, the companies
that currently dominate the market. Next, look for
secondary competitors. These are the businesses
that may not go head-to-head with the firm but are
targeting the same general market. Finally, look at
potential competitors. These are companies that
might be moving into the market and against whom
the firm needs to prepare to compete.
The second step is to analyze strengths and
weaknesses of competitors. Determine their
strengths and find out what their vulnerabilities
are. Why do customers buy from them? Is it price?
76
Value? Service? Convenience? Reputation? Focus
as much on “perceived” strengths and weaknesses
as on actual ones. This is because customer
perception may actually be more important than
reality. The strengths/weaknesses analysis is more
easily done in table form. Write down the names of
each of the competitors. Then set up columns listing
every important category for the line of business.
It may be price, value, service, location, reputation,
expertise, convenience, personnel, or advertising/
marketing. Rate the competitors on each of the
identified parameters and put in comments as to
why you have given them that rating.
The third step is to look at opportunities and threats.
While strengths and weaknesses are often
factors that are under a company’s
control, when we’re looking at our
competition, we also need to
examine how well prepared we
are to deal with factors outside
our control. Opportunities
and threats fall into a wider
range of categories. It might
be technological developments,
regulatory or legal action, economic
factors, or even a possible new competitor.
An effective way to do this is to create a table listing
competitors and the outside factors that will impact
the industry. We will then be able to determine how
we can deal with opportunities and threats.
The fourth step is to determine the position of the
firm. Once we figure out what the competitors’
strengths and weaknesses are, we need to
determine where to position the company with
respect to the competition. Rank the company in
the same categories that you ranked competitors.
This will give a clear picture of where the business
fits in the competitive environment. It will also help
determine what areas the firm needs to improve
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
and what characteristics of business the firm should take advantage of to gain more customers.

The SWOT Matrix

The relationships in a SWOT analysis are generally represented by a 2 × 2 matrix. The “Strengths”
and “Opportunities” are both positive considerations. “Weaknesses” and “Threats” are both negative
considerations. The final results of an analysis could be listed in the matrix given in Table 8.1. The matrix
identifies the Strengths, Weaknesses, Opportunities, and Threats of a firm.

This information can be used by the company in many ways involving its options for the future. In general,
the company should attempt:

● To build its strengths;

● To reverse its weaknesses;

● To maximize its response to opportunities; and

● To overcome its threats.

Strengths (Internal) Weaknesses (Internal)

Many product lines?
Broad market coverage?
Manufacturing competence?
Good marketing skills?
Good materials management systems?
R&D skills and leadership?
Information system competencies?
Human resource competencies?
Brand name reputation?
Portfolio management skills?
Cost of differentiation advantage?
Appropriate management style?
Appropriate organizational structure?
Inappropriate organizational structure and
Appropriate control systems?
Ability to manage strategic change?
Well-developed corporate strategy?
Obsolete, narrow product lines?
Rising manufacturing costs?
Decline in R&D innovations?
Poor marketing plan?
Poor material management systems?
Loss of customer goodwill?
Inadequate human resources?
Inadequate information systems?
Loss of brand name capital?
Growth without direction?
Bad portfolio management?
In fighting among divisions?
Loss of corporate control?
control systems?
High conflict and politics?
Poor financial management?

77 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

 Good financial management?
Opportunities (External)
Expand core business(es)?
Exploit new market segments?
Widen product range?
Extend cost or differentiation advantage?
Diversify into new growth businesses?
Expand into foreign markets?
Apply R&D skills in new areas?
Enter new related businesses?
Vertically integrate forward?
Vertically integrate backward?
Enlarge corporate portfolio?
Overcome barriers to entry?
Reduce rivalry among competitors?
Make profitable new acquisitions?
Apply brand name capital in new areas?
Seek fast market growth?
Others?
Others?
Threats(External)
Attacks on core business(es)?
Increases in domestic competition?
Increase in foreign competition?
Change in consumer tastes?
Fall in barriers to entry?
Rise in new or substitute products?
Increase in industry rivalry?
New forms of industry competition?
Potential for takeover?
Existence of corporate raiders?
Increase in regional competition?
Changes in demo graphic factors?
Changes in economic factors?
Downturn in economy?
Rising labour costs?
Slower market growth?
Others?

Table 6.1: The SWOT Matrix

A firm should develop a competitive advantage by identifying a fit between the firm’s strengths and upcoming
opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a
compelling opportunity. SWOT analysis is often used to develop strategies. The strategy matrix is known as
the TOWS matrix.

78 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

 Figure 6.2

The TOWS matrix, as shown in Figure 8.2, depicts the approach to developing a competitive advantage in the
existing circumstances. The different quadrants can be interpreted as follows:

● S-O strategies pursue opportunities that are a good fit with the company’s strengths.

● S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.

● W-T strategies establish a defensive plan to prevent the firm’s weaknesses from making it highly susceptible
to external threats.

The SWOT analysis is a powerful tool, but it involves a large subjective component. Therefore, it is best when
used as a guide and not a prescription. Used in conjunction with other established strategic management
tools, for example, the PEST or PESTLE analysis, the SWOT Analysis can provide information that is helpful
to the firm in strategy formulation and selection.

Value Chain: An Introduction

In his book “Competitive Advantage: Creating and Sustaining Superior Performance,” Porter used the
concepts of separate activities and value-added and linked them for analyzing the organization’s competitive
advantage. In Porter’s analysis, he considered ‘strategic fit’ as the way various components of a strategy
interlink, and this could be facilitated by “creating a value chain that is as strong as its strongest link, and is a
more potent and central strategic concept.”

79 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

According to Porter, the processes and linkages
between activities can be better examined and
understood through a Value Chain Analysis. The
value chain analysis describes the activities the
organization performs and links them to the
organization’s competitive position. Therefore, it
evaluates which value each particular activity adds
to the organization’s products or services.
This idea of the value chain recognizes that
organizations are much more than a random
compilation of machinery, equipment, people,
and money. If these assets are deployed into
activities or are arranged into systems effectively
to maximize the benefits to the organization, it will
become possible to produce something
of value for which customers are
willing to pay a price. In other
words, it is the ability to perform
particular activities efficiently
and the ability to manage
the linkages between these
activities which are the source
of competitive advantage.
Primary Activities
Porter distinguishes between primary activities and
support activities. Primary activities are directly
concerned with the creation or delivery of a product
or service. They can be grouped into five main
areas:
● Inbound logistics: These are inputs required
and disseminated by the organization in order
to produce the goods and services that it
offers. These could be activities concerned with
receiving goods, stores functions, inventory
control, etc.
● Operations: These are the primary activities
80
involved in converting the inputs into outputs.
For example, in an automotive company, these
could be foundry operations, forging operations,
machining, assembly, painting, etc.
● Outbound logistics: Once the output reaches
its final form, the activities that are involved in
taking the service or product to the end user or
bringing the end user to the product or service.
For example, in the case of tangible products,
it could mean warehousing, transportation,
material handling, etc.
● Marketing and Sales: These are activities linked
to bringing the product to the attention of the
consumer and inducing them to consume the
product or service. It also includes
those activities that would enable and
facilitate the purchase of the product
or service. This would include
sales administration, marketing
services, advertising, and
promotion, etc.
● Service: These are activities
designed to enhance or maintain a
product or service’s value. Examples
are installation of the product, spare
parts support, warranty administration,
maintenance, etc.
Each of these primary activities is linked to support
activities which help to improve their effectiveness
or efficiency. There are four main areas of support
activities:
● Procurement: This refers to the activities
involved in acquiring the various resource inputs
needed to produce the product or the service.
This could be procurement of capital goods,
consumables, production parts, raw materials,
etc. Procurement occurs in many parts of the
organization.
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
● Technology Development: All ‘value’ activities have a technology, even if it is certain rules and procedures.
The key technology may be directly concerned with the product or service (e.g., Research & Development,
Design, etc.) or with the process (e.g., design of dies and fixtures, or methods to improve productivity, etc.)
or with a particular resource (e.g., raw material improvements, etc.).

● Human Resource Management: This is concerned with all activities involved in recruiting, training,
developing, and rewarding people in the organization. This is a particularly important function as it is the
basis for creating, rewarding, and enhancing those competencies that are related to the people in the
organization.

● Infrastructure: The systems for planning, finance, legal, quality, information management, etc. are
included under this head. These activities are crucially important in the organization’s performance of its
primary activities. Through its infrastructure, the organization tries to effectively and consistently identify
external opportunities and threats, identify resources and capabilities, and support core competencies.
Infrastructure also includes the structures and routines of the organization that sustain its culture.

In Figure 6.3, the primary activities as well as the support activities are bordered with a ‘margin’. The term
‘margin’ implies that organizations realize a profit margin that depends on their ability to manage the linkages
between all activities in the value chain. In other words, the objective of the organization is to deliver a
product/service for which the customer is willing to pay more than the sum of the costs of all activities in the
value chain.

Figure 6.3

81 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

The linkages shown in the model are crucial for corporate success. These linkages involve flows of information,
goods, services, as well as systems and processes for regulating activities. As a result, the linkages are about
seamless cooperation and information flow between the value chain activities. Their importance is illustrated
with a simple example:

In an organization producing a tangible product, the Marketing & Sales function is supposed to deliver the
sales forecasts for the next period to all other departments in time and with reliable accuracy. Based on this
forecast, procurement will be able to order the necessary material for the correct date. And if the materials
and inputs are properly provided by procurement and it forwards order information to inbound logistics, only
then operations will be able to schedule production in a way that guarantees the delivery of products in a
timely and effective manner – as predetermined by marketing.

One of the key features of a modern industrial system is that organizations use specialist services, incorporate
proprietary items into products, and develop ancillaries to support their products and services. Very rarely
does a single company perform all activities from product design, production of components, and final
assembly to delivery to the final user by itself. Therefore, all the organizations connected with delivering the
product or services to the final consumer are elements of a value system or supply chain. There is usually
specialization of roles, and a number of organizations are involved in the creation of the final product.

In looking at the strategic capability of an organization, it is not sufficient to look inside the organization. We
must look into the interconnections. Much of the value creation will occur in the supply and distribution chain.
Any analysis of the strategic capability has to be viewed from a holistic perspective that includes the entire
value chain. For example, an analysis into the value chain may show that some of these interconnections will
be critical to the competitive advantage of the organization; some can perhaps have substitutes; others can
be eliminated. Hence, value chain analysis should cover the whole value system in which the organization
operates. This concept is illustrated in Figure 6.4.

Figure 6.4

82 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

Within the whole value system, there is only a
certain value of profit margin available. This is the
difference between the final price the customer
pays and the sum of all costs incurred with the
production and delivery of the product/service
(e.g., raw material, energy, etc.). The structure of
the value system will determine, to a large extent,
how this margin is distributed between the various
elements of the value system, e.g., suppliers,
producers, distributors, customers, and others.
Each member of the value chain will use its
standing in the value chain, market position, and
negotiating power to get a higher proportion of
this margin. A successful value chain is developed
when each member of the value chain believes that
it obtains value from the relationship. The ability
of an organization to influence the performance of
other organizations in the value chain is often a core
capability and a source of competitive advantage.
Many organizations have special functions that
are involved in ancillary development, dealer and
distributor training, etc.
A value chain is one of the most common sources
of increasing the technological competence of
organizations. Knowledge is spread between
members in the value chain through the process
of diffusion. This results in adding competencies
both to the provider and receiver of the knowledge.
The traditional structure of the Japanese industry
is illustrative of this. Units attached to the mother
unit cooperated with each other to improve their
efficiency, teach each other, and learn from each
other new and better ways of accomplishing their
tasks, and help each other to reduce their costs.
In doing so, they are able to achieve a higher total
margin to the benefit of all of the members in the
system.
83
A strong and supportive value chain works like the
traditional Japanese system, where members of the
chain look at the benefits that accrue to the entire
value chain. Such cooperation is possible and often
seen in such value chains. For example, increasing
productivity, reducing stocks at different levels,
or process improvements, etc., are undertaken by
members of the value chain, and the advantages
that accrue benefit all members of the value chain.
Value chain analysis is not a very difficult exercise
conceptually. However, depending on the nature of
the product, the linkages, the primary processes
involved, etc., it is often an exercise that can be
quite complex and requires a large amount of
information and data processing capacity for
the analysis. However, many of the concepts of
breaking up functions into activities and attributing
costs to them are now standard cost accounting
practices, which makes the process easier. Once
the basic information has been collected and the
linkages established, it becomes a routine exercise.
A typical value chain analysis can be performed in
the following steps:
● Analysis of own value chain – identify the primary
and support activities. Each of these activity
categories needs to be broken up into its basic
components, and costs are allocated to every
single activity component.
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
● Analysis of customers’ value chains – examine
how does our product fit into the value chain of
the customer.
● Identify activities that differentiate the firm and
the potential cost advantages in comparison
with competitors.
● Identify potential value added for the customer –
how can our product add value to the customer’s
value chain (e.g., lower costs or higher
performance) – where does the customer see
such potential?
● The final step is to identify those activities that
provide a differential advantage compared to
competitors. These are the competencies or the
core competencies of the organization.
Value Chain Analysis
The value chain is useful in
defining the areas where it can
benefit from:
● Cost reduction, and/or
● Product differentiation.
Cost Reduction
Rahul Bajaj, in the face of competition and limited
by the capacity to grow due to Government
restrictions, focused on standardizing and refining
the operational processes of Bajaj Auto. He was
able to bring Bajaj Auto to the position where it
became the lowest cost two-wheeler producer
in the world. The idea was to give customers ‘the
best value for money.’ Historically, about 60 percent
of the value of the Bajaj vehicle was outsourced.
Outsourcing was increased, and the value chain
was rationalized. Costs were tightly controlled on
costs and developing a highly efficient value chain
84
for supply, production, and distribution systems. As
a result, the labor time to manufacture a scooter
came down from 1.9 man days to 1.3 man days.
Bajaj Auto successfully regained its position as the
market leader in the two-wheeler industry based on
cost leadership.
A strategy based on seeking cost leadership
requires a reduction in the costs associated with
the value chain activities or a reduction in the total
amount of resources used. The basic approach
of value chain analysis is to look at the value and
cost of each activity and determine whether it is
delivering value for money. The priority between
various activities is determined by a Value Index:
Value Index (VI) = Value/Cost = Utility/
Cost = Function/Cost
If the Value index is less than 1,
it is not worth the cost incurred;
if the Value index is greater
than 1, it provides value to the
organization. The organization
has to identify those activities that
add value and those where the value
added does not justify their cost. The value
is generally based upon a comparison with a similar
activity within the organization or on the basis of
benchmarking the activity with the best practices
in the industry.
Cost reduction can be either by reducing individual
value chain activities or by reconfiguring the value
chain. Reconfiguring the value chain involves
structural changes such as new production
processes, new distribution channels, new sources
of supply, etc. In general, Porter has identified 10
drivers for cost reduction:
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
● Economies of Scale, quality of catering, in-flight service, and the attention
paid to security. Today, Jet Airways accounts for a
● Learning,
domestic market share of around 45 percent.
● Capacity utilization,

● Linkages between activities, Differentiation stems from uniqueness. This

● Interrelationships with suppliers and buyers,
● Degree of Vertical Integration,
● Timing of market entry,
uniqueness can be achieved either by changing the
value chain activities to provide uniqueness to the
product or by reconfiguring the value chain. Porter
has identified several drivers for uniqueness:

● Generic Strategy,
● Policies and decisions,
● Geographical location, and
● Linkages between activities,
● Institutional factors.
● Timing,

Value chain activities are often linked. For example, ● Location,

if a product is redesigned to reduce cost,
● Interrelationships,
it is possible that the cost of servicing
● Learning,
the product may go up. Conversely,
it may result in a concomitant ● Integration,
reduction in service costs
● Scale, and
due to an improvement in
● Institutional factors.
reliability. In the first case, the
value benefit would be less than
Once identified, we have to
anticipated. On the other hand, in
decide how we can enhance these
the second case, the value benefit
competencies that have a Value
would be greater and has the potential
index greater than 1, to provide us with
to become a source of competitive
greater differentiation and competitive
advantage.
advantage. For example, a business which wishes to
outperform its competitors through differentiating
Product Differentiation
itself, through higher quality, will have to perform its
value chain activities related to quality better than
Jet Airways started with 4 aircraft in 1993. Since
the opposition. Changes in technology can also be
May 1993, the airline has flown close to 33 million
a factor in reconfiguring the value chain or changing
passengers. Its fleet of 31 Boeing B737s and 8
the activities, to provide a competitive advantage.
ATR aircraft operates daily over 245 flights to 41
destinations in India. Jet Airways differentiated
However, there will be activities that add value to
itself from its main rival, Indian Airlines, by its
the business though they may not directly justify
focus from the very beginning to emerge as the
their costs. These are activities that have to be
“Businessman’s Preferred Airline.” It did this by
accepted as a part of doing business and cannot be
providing high standards of service and reliability
eliminated. It should be recognized that Value Chain
of operations. It earned a reputation for punctuality,

85 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

Analysis has its origins in accounting practices. Its effectiveness is based on the ability of the organization to
identify costs and associate them with each activity and attributing a value to each activity.

Since the value chain is composed of the set of activities performed by the business unit, it provides a very
effective way to analyze the position of the business against its major competitors. The way in which the
value system of the organization is configured, the linkages between value activities, and the competence
in separate activities provide the key to sustainable success. This type of analysis has already been shown
in the last section. The manner in which the value chain will improve the competitive position has also been
shown in the use of the Life Cycle–Portfolio matrix.

Another way to use the value chain is to determine the degree to which the strategy provides synergy. This
will show how much extra benefit can be created by reconfiguring the value chain.

Degree of Synergy
with present Weight age Strategy1 Strategy2 Strategy3
Activities

Table 6.2 is an analytical tool designed to show the relationship between synergy and the value chain. The
first column should identify all the activities in the organization that are impacted by the strategic options.
The second column represents the importance of the activity in the scheme of the organization. The total of
the weightage in the second column should add up to 100. The third column onwards represents the different
strategies.

The objective is to identify the impact of each strategy on the identified activity. The degree of synergy can be
scored on a scale of 1 to 5. The degree of synergy should be multiplied by the weightage factor of the activity,
and the total put in the column for the particular strategy. Then each column is added. The total of the column
represents the level of synergy of the strategy.

Synergy can arise through many different types of links or interrelationships. For example, in marketing, it
could arise from exploiting the brand name, sharing distribution channels, advertising and promotion, etc.
Synergy is often used as a justification in many areas of the company’s strategy that includes new products,
new markets, and diversification. Many decisions on mergers and acquisitions are based on the synergy the
organization derives from such a strategy.
86 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
Portfolio Analysis
Besides other portfolio methods, some of the
important instruments of strategic planning. By
using these methods, strategic business units of an
enterprise can be analyzed, and strategies can be
built to strengthen the strategic business units. It is
pointless to focus on only one single business unit;
rather, it is important to have several business units
and build up a combination out of them to achieve
objectives and adequate results in different future
environments. Portfolio models are instruments to
coordinate the several strategic business units of an
enterprise. Enterprises use them to analyze whether
there is an opportune or optimal combination of
several business units in their own enterprise. If
not, the enterprise has to adjust its strategy, create
new business units, or enlarge existing ones to
get an optimal combination. Another coordinating
task of the strategic planning is to get and to
coordinate substitutes to reach the target portfolio.
This instrument exists to look up the substitutes
and basic conditions in a global way. The planning
period has a look at the future, but the models
are not quantitative models. They are for the use
of qualitative analyzes of the combinations of the
business units and to have an effect on them.
87
A business portfolio is the collection of Strategic
Business Units (SBUs) that make up a corporation.
The optimal business portfolio is one that fits
perfectly with the company’s strengths and helps
to exploit the most attractive industries or markets.
An SBU can either be an entire mid-size company
or a division of a large corporation. It normally
formulates its own business-level strategy and
often has separate objectives from the parent
company.
The aim of a portfolio analysis is:
● Analyze its current business portfolio and
decide which SBUs should receive more or less
investment.
● Develop growth strategies for adding new
products and businesses to the portfolio, and
● Decide which businesses or products should no
longer be retained.
The basis for many of these matrix analyses grew
out of work carried out in the 1960s by the Boston
Consulting Group (BCG). BCG observed in many
of their studies that producers tend to become
increasingly efficient as they gain experience in
making their product, and costs usually declined
with cumulative production. They came up with
a hypothesis to explain how an organization with
the highest market share in the industry generally
will have the greatest accumulated volume of
production and therefore the lowest cost relative to
other producers in the market.
The breakthrough came while working for a major
manufacturer of semiconductors. They were
able to collect the evidence on which to build
the experience curve concept. The wide variety
of semiconductors that were a part of the study
offered them the chance to compare differing
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
growth rates and price decline rates in a similar environment. Price data supplied by the Electronic Industries
Association was compared with accumulated industry volume.

Two distinct patterns emerged:

● In one pattern, prices, in current dollars, remained constant for long periods and then began a relatively
steep and long continued decline in constant dollars.

● In the other pattern, prices, in constant dollars, declined steadily at a constant rate of about 25 percent
each time accumulated experience doubled.

This pattern seemed to have applicability across the board. In a study on the cost of television components,
BCG found striking differences in the rate of cost improvement between monochrome parts and color parts.
This was difficult to explain since the same factory, the same labor, the same processes were involved at
the same time. This was explained by the experience curve; monochrome parts had progressed down a cost
curve to a larger degree than the color parts, as the accumulated experience in monochrome parts was much
greater than in color parts.

Systematic cost differences arise between competitors because some develop more knowledge about
production than others. This concept has important implications: if a company can accelerate its production
experience by increasing its market share, it could gain a cost advantage in its industry that would be difficult
to match. Substantial investment in pursuing market share today could pay off even more substantially
tomorrow.

Figure 6.5

88 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

This linear relationship between costs and experience effects?
cumulative production became known as the
● What effect does capital investment intensity
Experience Curve. The Experience Curve, which is
have?
shown in Figure 9.1, has had profound implications
● Does the same effect appear in overhead and
for business thinking and practice. As a strategic
marketing functions?
concept, it is based on strong relationships between
market share and accumulated production. It
The cost declines identified by the experience
shows that it is possible to deliberately acquire and
curve do not occur automatically. It is assumed
manage competitive advantage.
that there is added investment in an amount
commensurate with the marginal cost of capital.
According to the experience curve concept, costs of
Study of the experience curve shows, if high return
value added decline approximately 20 to 30 percent
on investment thresholds is used to limit capital
in real terms each time accumulated experience is
investment, then costs do not decline as expected.
doubled. If the growth rate is constant, the cost
decline continues indefinitely as long as the growth
The experience curve and the learning curve
rate continues. If the growth stops, costs
are related. The learning curve is a
continue to decline, but the rate of
somewhat limited application of
decline is cut in half each time
the experience curve. It is only
the accumulated experience
applied to direct labor. The
doubles. Extensive substitution
experience curve deals with the
of cost elements and
entire realm of possibilities of
exchange of labor for capital is
job element management with
characteristic of progress down
volume changes. Its business
a cost experience curve.
effects are summarized below:

Application of the experience curve to

problem-solving and policy determination
requires managerial inputs. There are many
technical questions that need to be addressed.
Some of these have been identified below:
● How do you define cost elements?
● How do you define the measuring unit of
experience?
● Market Share: Costs are inversely
proportional to market share. A high market
share will produce low cost.
● Growth: Relative costs should improve if the
growth rate is faster than that of competitors.
● Debt Capacity: Relative debt capacity will
increase with no loss of safety if market share
increases.

● What is an appropriate unit of experience where ● Shared Experience: Cost should decline
the product itself changes too? proportionately faster or slower when cost
elements are shared between more than one
● What is the relationship between experience
product.
effects on similar but different products?
● Cost Control: As cost declines are predictable,
● How are technological changes integrated into
it should therefore be the basis for cost control
89 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
 and management evaluation. The average cost is by definition the total
expenditure divided by the total output. The unit
● Product Design: Choice of design element
cost is the rate of change in that ratio. Projection
alternatives can be determined by whether initial
of this relationship is frequently both simpler and
experience is high or low compared to future
more accurate for cost forecasting.
volume expected.

● Make or Buy: The relative experience between

The use of cash is proportional to the rate of growth
your experience and supplier experienced
of any product. The generation of cash is a function
differential if you make the part should determine
of market share because of the experience curve
the choice of make or buy.
effect. A difference in market share of 2 to 1 should
● Procurement Negotiation: The value to the produce about 20 percent or more differential in
supplier of large-scale procurement can be cost on value added. The growth share matrix is a
calculated. Also, the rate of normal cost change diagram of the normal relationship of cash use and
for the supplier can be calculated. cash generation.

● Market Potential: By comparing market elasticity

All of the products of a company can be shown on
with cost decline, the market potential can be
a single growth share matrix as a product portfolio.
approximated.
Each product can be plotted on its own growth and
● Product Line Breadth: The total economic effect
share coordinates. The size of the product can be
of product line extension can be evaluated by
indicated by a circle in proportional scale. Great
the interaction of the experience and volume of
care must be taken in product-market segmentation
combined cost elements.
before drawing such charts. It is quite possible for
a company to be the largest in the industry and be a
As can be seen, the experience curve has significant
leader in no single segment.
effects on business decisions. However, the basic
mechanism that produces the experience curve
effect is still to be adequately explained. The effect
itself is beyond question and is so universal that its
absence is almost a warning of mismanagement or
misunderstanding.

BCG Matrix

The Boston Consulting Group Matrix (BCG Matrix)

is the best-known portfolio planning framework.
The BCG growth-share matrix is directly derived
from the experience curve. The experience curve
Figure 6.6
essentially provides a pattern of cash flow.

The experience curve is used as the means of

measuring probable competitive cost differentials.

90 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

The Matrix: The matrix reflects the contribution of
the products offered by the firm to its cash flow.
Based on this analysis, products are classified as
‘stars’, ‘cash cows’, ‘question marks’, and ‘dogs’ as
shown in Figure 6.6.
● Stars (high growth, high market share): Stars are
in the upper-left quadrant of the matrix.
● They grow rapidly.
● They use large amounts of cash.
● They are leaders in the business, so they should
also generate large amounts of cash.
● There is generally a balance on net cash flow.
● Overtime, all growth slows. Therefore,
stars eventually become cash cows
if they hold their market share. If
they fail to hold market share,
they become dogs.
● Cash Cows (low growth,
high market share): Cash
cows are in the lower-left
quadrant of the matrix.
● Such products are profitable and
cash generation is high.
● Because of the low growth, investments
needed should be low.
● Keep profits high.
● They form the foundation of an organization.
Cash cows pay the dividends, pay the interest on
debt, and cover corporate overhead.
● Dogs (low growth, low market share): Dogs are in
the lower-right quadrant.
● These products need to be avoided. You should
try to minimize the number of dogs in a company.
● Beware of expensive ‘turn around plans’.
● As soon as they stop delivering cash, they should
91
be phased out or otherwise liquidated. They are
essentially worthless and are generally cash
traps.
● Question Marks (high growth, low market share):
They are in the upper-right quadrant.
● These products have the worst cash
characteristics of all because of high demands
and low returns due to low market share.
● If nothing is done to change the market share,
question marks will simply absorb great amounts
of cash and later, as the growth stops, turn into
dogs.
● Either invest heavily or sell off; or invest nothing
and generate whatever cash it can. Either
you should increase market share or
deliver cash.
● Question marks are the real
gambles. Their cash needs are
great because of their growth.
Yet, their cash generation is
very low because their market
share is low.
Strategic Implications: The strategic
implications of this categorization
appear obvious. The cash cows become the
financiers of the other developing businesses of the
organization. One funds the ‘stars’, decides what
to do with the ‘question marks’, and gets rid of the
dogs. However, the importance of this analysis is
that it highlights the need for management to look
into the products and analyze their performance
based on the fact that the life of products is finite.
As put by a leading management thinker, “Perhaps
the most important task of management is to
balance the needs of existing lines against the
needs of potential lines.”
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
Applicability of the Portfolio Model: The degree of applicability of the portfolio model depends on a number
of conditions. Some of them are given below:

● It is essential that the market is defined properly to account for the important interdependencies with other
markets.

● In many industries, the relative market share is not a good proxy for competitive position and relative costs.

● Market growth is a good proxy for required cash investments. Yet, profits and cash flow depend on a
number of other factors.

The growth-share matrix is not very useful by itself in determining strategy for a particular business. However,
it provides analysis in determining the competitive position and this can then be translated into strategy. For
example, a business being harvested could be vulnerable to attacks on its market share. The comparison of
a competitor’s portfolio over time could provide information on shifts in competitor’s unit relative to others
and provide insight into the strategic mandate of the competitor.

GE/McKinsey Matrix: GE’s Business screen is a more complex version of the BCG matrix. However, it is
derived from the same principles as the BCG Matrix. This matrix is a model to perform a business portfolio
analysis on the Strategic Business Units of a corporation. Strategic Business Units (SBUs) are portrayed as
circles plotted in the Matrix. The sizes of the circles represent the Market Size; the size of the pies represents
the Market Share of the SBUs, and arrows represent the direction and the movement of the SBUs in the future.
This is shown in Figure 6.7

Figure 6.7

92 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

The GE/McKinsey Matrix is a later and more
advanced form of the BCG Matrix in three aspects,
which are discussed below: In this model,
market growth is replaced by market (Industry)
attractiveness as the dimension of industry
attractiveness. Porter identified market growth as
just one of the parameters of market attractiveness.
Market Attractiveness includes a broader range of
factors other than just the market growth rate that
can determine the attractiveness of an industry/
market. Depending on the product characteristics,
different parameters can be selected to measure
‘market attractiveness’.
Typical factors that affect ‘Market Attractiveness’
are called ‘drivers’ and can be:
● Market size
● Market growth rate
● Market profitability
● Pricing trends
● Competitive intensity/rivalry
● Overall risk of returns in the industry
● Opportunity to differentiate products and
services
● Demand variability
● Segmentation
● Distribution structure
93
Market share in the BCG Matrix is replaced by
competitive strength. This is the dimension by
which the competitive position of each SBU is
assessed. Competitive strength likewise includes a
broader range of factors other than just the market
share that can determine the competitive strength
of a Strategic Business Unit. Typical drivers of
Competitive Strength of a Strategic Business Unit:
● Strength of assets and competencies
● Relative brand strength
● Market share
● Market share growth
● Customer loyalty
● Relative cost position (cost structure compared
with competitors)
● Relative profit margins (compared to competitors)
● Distribution strength and production capacity
● Record of technological or other innovation
● Access to financial and other investment
resources
Finally, it works with a 3x3 grid, while the BCG
Matrix has only a 2x2. This also allows for more
sophistication.
Using the GE/McKinsey Matrix involves a six-step
approach. The different stages to implement the
portfolio analysis include the following:
● The drivers for each dimension are to be specified.
The organization must carefully determine those
factors that are important to its overall strategy.
● You must assign relative importance by giving
weights to the drivers.
● Score the SBUs on each driver and multiply
weights times scores for each SBU to determine
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
 the value of each dimension.
● Repeat the exercise for each dimension.
● View the resulting graph and interpret it.
● Perform a review/sensitivity analysis using
adjusted weights and scores.
Though this matrix analysis is more sophisticated
than many other similar tools, there are some
important limitations. It has most of the advantages
and limitations of the BCG matrix analysis. However,
it has some specific characteristics that need to be
understood:
● The company position/industry attractiveness
screen is less precisely quantifiable
than the growth/share matrix.
● This technique requires
subjective criteria about where
a particular business unit
should be plotted.
● The screening technique
reflects the assumption that
each business unit is different
and requires its own analysis of
competitive position and industry
attractiveness. Therefore, it is more vulnerable
to manipulation.
Strategic Alliances
Lando Zeppei, managing partner of Booz, Allen
and Hamilton, defines a strategic alliance as a
cooperative arrangement between two or more
companies where:
● A common strategy is developed in unison and a
win-win attitude is adopted by all parties.
● The relationship is reciprocal, with each partner
prepared to share specific strengths with each
94
other, thus lending power to the enterprise.
● A pooling of resources, investments, and risks
occurs for mutual (rather than individual) gain.
Strategic alliances and partnerships have
become popular recently. A strategic alliance is
an intention to cooperate at a strategic level, to
share information, and to work together in a way
that goes beyond a clear contractual arrangement.
In a rapidly changing world, strategic alliances are
an effective way in which the necessary speed of
response and global spread can be achieved. In a
strategic alliance, two or more organizations share
resources, capabilities, or distinctive competencies
to pursue some business purpose.
Strategic alliances often transcend
the narrower focus and shorter
duration of joint ventures.
These alliances may be aimed
at world market dominance
within a product category.
However, it must be kept in
mind that the companies in
strategic partnerships are normal
competitors. Therefore, the types of
projects that are conducive to this instrument
are normally limited. Strategic partnerships are
becoming relatively common with large companies
in electronics/computers, automobiles, oil, and
mining, while they are still rare in small and medium
companies.
The incentive for such relationships is to gain
competitive or strategic advantage. This would
include gaining access to new markets and new
supply sources, access to the latest technology,
or improving the utilization of resources. In
the developing and underdeveloped countries,
organizations rely on strategic alliances for
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
technology and know-how acquisition, on a large scale. Apart from these reasons, strategic alliances are
also used to accelerate product introduction and overcome legal and trade barriers. Sometimes, speed and
timing are of essence in implementing strategies; alliances may help the organization attain these.

There are many examples of strategic alliances in India as well. Some of the alliances that have been
successful are alliances such as TVS-Suzuki and Mahindra-Ford, BPL-Sanyo, and Videocon-Sansui. To realize
its mission of becoming a research-based international pharmaceutical company, Ranbaxy entered into a
strategic alliance with Eli Lilly of the US. Taj Hotels and British Airways are a good example of synergistic
benefits arising out of a strategic alliance; both have gained through complementarities of airline and hotel
services.

Several typologies of strategic alliances are available in business literature. One such classification is
by Yoshino and Rangan. This is a two-dimensional model with the two dimensions being the extent of
organizational interaction and conflict potential between alliance partners. The classification is shown in
Figure 6.8.

Figure 6.8

● Pro-competitive Alliances: These are generally alliances within the industry, exemplified by vertical value-
chain relationships between manufacturers and their suppliers and distributors. Such relationships are
advantageous to both parties as they do not invest resources for the activities carried out by the other.
Supplier and buyer organizations entering upon long-term contracts constitute pro-competitive alliances.

● Non-competitive Alliances: These are partnerships within the industry. Such alliances are entered into by
organizations that operate in the same industry yet do not perceive each other as rivals. This can be because
their areas of activity do not coincide and/or their products and services are sufficiently dissimilar to prevent

95 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

 competition. Organizations that have carved out and other manufacturers.
distinct areas in the industry, geographically or
otherwise, adopt the non-competitive alliances. Contractual Arrangements
There has been a growing trend in this direction
in R&D Research. Contractual arrangements come in many different
forms. Long-term contracts are agreements
● A number of strategic alliances have been formed
between two firms without actual exchange of
where a group of companies with a common
ownership. One form is Consortia. These are
need collectively contract research development
groups of companies that form a joint entity for
through an established institution or through an
a specific purpose—such as building the channel
independent facility. This allows the companies
tunnel. When the project is finished, the consortium
to share the risk and cost. It also creates a
breaks up.
situation where they can learn from each other
as well as from the experts conducting the
Franchising is another form of contractual
research. For example, a number of automotive
arrangement and is commonest in retailing. Some
manufacturers in Europe have entered
of the well-known franchises in India are
into a strategic alliance for engine
McDonald’s, Pizza Hut, DPS Schools,
development.
and NIIT etc. The franchisee pays
● Competitive Alliances: These the franchiser a fee for services
are relationships that bring and royalties, typically for use of
rival organizations in a the company name, business
cooperative arrangement. approaches, and advertising.
These alliances may be The franchisee’s risk is
intra- or inter-industry. Many determined by the success of the
foreign companies, operating brand name and by the support and
independently in India, have sought advice provided by the franchiser.
this route to enter into a cooperative
arrangement with local rival companies for There are other types of contractual arrangements
specific purposes. For example, Coca-Cola used for technology acquisition. It is also possible
entered into an agreement with Parle Products, to develop combinations of these sources of
the manufacturers of ThumsUp, their main technology for the best results. Many companies
competitors in western India. purchase technology by the route of purchasing
● Pre-competitive Alliances: These partnerships only the drawing and technical specifications of
bring two organizations from different, often the process or product or both. In such cases, it is
unrelated industries to work on well-defined quite common to hire the services of experts from
activities. This is often seen in activities such as the seller to operate the system till such time that
mass awareness campaigns or environmental the buyer is able to absorb the technology. Recent
and social issues. Sometimes interindustry developments include strategic partnerships
and interdisciplinary cooperation is necessary in Research & Development and personnel
for development. For example, Intel has pre- secondment.
competitive alliances with software, hardware,
96 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
Collaborative Development
The internal R&D work with an external agency to
jointly develop a technology. This enhances the
ability of the firm to enter into technology areas where
it might not be able to do so singly. Collaborative
development has the same advantages and
disadvantages as internal R&D. The basic difference
is that the results are jointly owned, and an effective
mechanism to co-ordinate the efforts of the teams
is necessary. This approach actually improves the
company’s external acquisition capabilities. This
often uncovers technology options that might not
be considered by the firm from its internal R&D.
Joint Ventures
In a joint venture, two or more organizations
form a separate legal undertaking, which is an
independent organization for strategic purposes.
The partnership is usually focused on a specific
market objective. They may last from a few months
to a few years, and often involve a cross-border
relationship. One organization may purchase a
percentage of the stock in the other partner, but
not a controlling share. Entering into a joint venture
agreement with a technology provider is another
form of external acquisition that can be very
effective. This form is extremely advantageous
when it is contracted between a company with
technology and a company with market access.
It normally takes the form of a new company with
each of the partners owning shares in the company.
For example, General Motors came into India in a
joint venture with Hindustan Motors and set up its
manufacturing facilities at Halol, in Gujarat.
Licensing
Licensing is a third form of contractual arrangement.
Licensing existing technology is a popular and
97
effective form of technology acquisition. It enables
the firm to move directly into the implementation
of the project. Its major advantage is the reduction
in time to market the product, relative to forms of
technology acquisition that require development. If
the payment is in the form of a royalty, the provider
of the technology shares the risks of financial
performance. It has the appearance of being low
risk or almost risk-free. This is true if the company’s
application is identical to the one for which the
technology was developed. However, there are
implementation risks involved in such cases.
When the application is not similar or the variables
change significantly, the risks can be serious. Some
of the variables that one should consider include
scale of operations, climate, and legal requirements
to reduce import content, quality of local inputs,
skill level of acquiring organization, and level of
codification of the technology.
Though this is often the lowest cost option for
the firm, the major risk in the technology transfer
mechanism is the inability of the firm to develop the
internal technical strength to absorb the technology.
Alternatively, the reluctance of the technology
supplier to create this competence in the firm can
result in higher risks and often failure of the project.
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
The major limitation of licensing is that the licensee
will seldom be able to compete with the licensor.
This is because of the inherent impact on the price
of the product or service. The price is constituted
of a number of components: manpower, materials,
money, capital investments, and taxes. It will be
an unusual circumstance if the sum total of these
factors comes out to be the same in different
economies and under different business conditions.
This means that imported technology generally
has limitations in that it is sub-optimal when
implanted across international borders where
costs of resources and taxes, scales of operation,
and productivity parameters undergo change.
The greater the change, the less suitable is the
technology. This is a very important
consideration when considering
how technology is to be managed.
How do we minimize the impact
of these factors when selecting
technological options? What do
we need to do within the firm to
improve the competitiveness of such
technologies?
This route has been used by a number of
corporations to establish their products or brands
in India. Daimler Benz had a licensing agreement
with Telco, GE and Siemens had a number of
licensing agreements with BHEL. There are many
such examples. This can allow quick growth
by avoiding the need to build manufacturing or
distribution capability. At the same time, the
intellectual property rights for the invention are
retained. Licensing is probably most frequent in
high-technology businesses, particularly in foreign
countries or specialized markets where volumes
of business may be too low to justify a permanent
presence. Such contracts normally have a defined
duration. Difficulties with this mode include
98
conflicts of interest when the same agent acts
for competing principals, develops competitive
products, or is simply inert.
Contracted Out R&D
Companies choose to contract out R&D for a variety
of reasons. It is an ideal option for those who do not
have the necessary facilities and expertise to carry
out the work and yet would like to maintain control
and own the results exclusively. It allows short-term
access to world-class personnel and facilities that
would normally be beyond the company’s means.
With the selection of the right team for the work
required, it should be able to assemble a more
capable team than it could assemble internally.
Contracting R&D reduces the
company’s hands-on experience
with the technology. This can be
quite risky if the application of the
technology is in areas with no in-
house expertise. The risk of breach
of confidentiality may be high in some
cases. The ownership of the technology
and what constitutes the technology needs
to be carefully defined in the documentation.
Consulting Engineering Firms are often a source of
technology. Obtaining technology from consulting
engineering firms is another form of contracted out
R&D. This is generally used in the case of process
design and seldom for product design. It has the
problems associated with contracted out R&D as
well as its advantages.
Personnel Secondment
Firms fill gaps in their perceived technological
requirements are increasingly using Personnel
secondment. A number of firms offer Operation
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
and Maintenance contracts for running complex
industrial plants. This method is increasingly being
used where the promoters have a high level of
financial and organizational skills but lack technical
skills.
Another form of personnel secondment is called
“body shopping.” This is quite common in the
software industry. The firm buys the services of
trained personnel for a limited period of time,
based either on specific project requirements or on
a ‘time’ basis. In this case, the seconded personnel
are generally specialists who the firm may find
uneconomical to recruit on a long-term basis.
An example is the early business model
of Infosys Technologies. It was set
up in 1981 as a body shopping
operation. The customers were
mostly located in the United
States. Infosys would send
its officers to the customer
site and plan, prepare, develop,
implement the software system,
and train organization members
on-site. On project completion, the
manpower resources were relocated to
the next project. The client was able to leverage
low-cost manpower to create a quality product
with extremely low risks, as the functions of
the ‘seconded personnel’ were defined and the
credentials tailored to the requirements.
The costs are low because, in all these cases, the
transfer of technology is facilitated either through
an individual or group of individuals or through an
offshore entity with the core competency to create
value through price differentials. The contracting
organization is able to develop its technological
objectives during the period of secondment.
99
Managing Strategic Alliances
Managing strategic alliances is difficult. Yet, like
most things difficult to manage, the ultimate
rewards are well worth the effort. A good strategic
alliance should be consistent with the corporate
strategies of the partners; the operational
responsibility of each partner has clarity; there is
trust and commitment on both sides; and there is
a continuing and consistent commitment to shared
goals. Walters, Peters & Dess suggested four basic
principles to manage alliances successfully.
● Clearly define the strategy and assign
responsibilities.
● Phase in the relationship between
the partners.
● Blend the cultures of the
partners.
● Provide for an exit
strategy.
Phasing in the relationship
means giving adequate time and
opportunity to the partners to know
each other well. Once two firms have
worked in a partnership successfully, it is easier
for them to work in subsequent projects. It is also
important to blend cultures. There must be an
understanding and appreciation of the differences.
It is the understanding between people that makes
any alliance work. In addition, an exit clause is
essential to cover the eventuality that the alliance
does not work or the objectives are not being
achieved. Contracting and communication issues
need to be clearly understood for successful
partnerships.
There are dangers in strategic alliances in that the
objectives of the two parties may drift apart over
SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
time and the arrangement is hard to terminate neatly ● Society, and
because of the lack of organizational contracts.
● The environment.
The Rover–Honda alliance is an example of an
arrangement that seemed to work well for a time Successful corporations must evolve new ways of
but ended messily when Rover was acquired by monitoring, measuring, and managing their impacts
BMW. A strategic alliance is a demanding strategy (both positive and negative) in these three areas.
in terms of the leadership and human relations Acceptance of this concept has resulted in firms
skills of the managers involved. adding to their agenda improvements in areas such
as public relations or stakeholder engagement,
Value Through Corporate Strategy
rather than just the company’s business model.
The TBL concept has been built into the strategies
The key strategic issue for stakeholders is how best
of many companies. While some believe this to
to seek out the most effective ways to maximize
be a trade-off across the various dimensions, the
the different forms of value created through the
general perception is that TBL is a positive sum
utilization of capital. Recent years have brought new
game.
ways of looking at the spectrum of value creation,
expanding business perception to effective action
Many companies are using a model that combines
on a broad civil society agenda.
the multiple dimensions of value creation and
tailors them to the specific needs and tastes of its
The issue is: what is the value created by an
stakeholders. An example is Toyota Motors. Toyota,
organization through corporate strategy? Is it
in its new offering of Prius hybrid cars, spotlights
limited to the business model of the firm, or does
the environmental credentials in Europe (presenting
it have to be measured on dimensions over and
them as “green” cars), but emphasizes technology,
above the simple concept of profit and growth?
fuel efficiency, and torque (i.e., they are positioned
Value is what gets created when investors invest
as “muscle” cars) in the United States. The growing
and organizations act to pursue their mission.
complexity of the parameters of judging business
Traditionally, we have thought of value as being
success means that successful enterprises need to
either economic (created by for-profit companies)
know how to operate across the full spectrum of
or social (created by non-profit or nongovernmental
value—and value perception.
organizations). All organizations, whether for-profit
or not, create value that consists of economic,
social, and environmental value components.

This measure of value, which is being increasingly

used, has helped drive and shape the fields of
corporate strategy and is called the triple bottom
line (TBL) concept. The TBL concept focuses on
value created – or destroyed – in relation to

● The economy,

100 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
Efforts are on to develop standard methodologies for assessing progress against the triple bottom line and
the social return on investment model or other concepts linked to multi-dimensional value creation. Among
recent experiments, one of the most interesting is ITC Ltd., which has prepared and circulated a full-fledged
set of TBL accounts for the company. This is also being practiced by Tata Steel Ltd.

Triple Bottom Line (TBL) is assessed using Input-Output Analysis (IOA). Input-output analysis is a top-
down economic technique that uses sectoral monetary transaction data to account for the complex
interdependencies of industries in modern economies.

Macro Indicator (and unit) Brief description

Primary energy(MJ) Combustion of all non-renewable fossil fuels

Green house gas emissions (kg CO2–e) Carbon dioxide equivalent impact of all gases affect-
ed climate

Water use (L) Consumption of all mains and self-extracted surface

water

Land disturbance (hectares–ha) Land use, weighted by intensity of impact

Imports(m$) Value of all goods and services purchased from for-

eign residents

Exports(m$) Australian production destined for consumption

outside Australia

Surplus(m$) Operating profits and expenditure on fixed capital

Government revenue (m$) All taxes less subsidies

Employment(hours) Full time equivalent employment

Income(m$) Total compensation for employees

101 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance
Some macro TBL indicators have been shown in Table. Thus, economic indicators of surplus, exports,
and imports can be reported as “dollars of surplus per dollar of final demand.” Social indicators such as
employment, wages, and government revenue can be described as “the minutes of employment generated
per dollar of final demand.” Environmental indicators such as greenhouse gas emissions, water requirement,
and land disturbance can be described as “kilograms of carbon dioxide equivalent emissions per dollar of
final demand” or the like.

It is important to note that understanding value as a composite of three components does not mean value
is in any way “blurred” or that each component loses its definition. Rather, firms and capital should seek to
maximize the contribution of each component to ensure that both performance and returns are greater than
the sum of their parts. That understanding is what is now driving companies such as ITC Ltd. or Tata Steel.

Summary

The SWOT strategy matrix, better known as the TOWS matrix, enables a different strategic perspective
from which to examine problems or situations based on corresponding identified opportunities/threats,
opportunities/weaknesses, etc. The basic approach of value chain analysis is to look at the value and cost of
each activity and determine whether it is delivering value for money. The priority between various activities
is determined by a Value Index. If the Value index is less than 1, it is not worth the cost incurred; if the Value
index is greater than 1, it provides value to the organization.

Portfolio analysis is an analytical tool that views a corporation as a basket or portfolio of products or business
units to be managed for the best possible returns and helps a corporation build a multi-business strategy.
Although portfolio approaches have limitations, all these limitations can be overcome through effective
strategy development and meticulous planning. An SBU can either be an entire mid-size company or a division
of a large corporation. The basis for many of these matrix analyses grew out of work carried out in the 1960s
by the Boston Consulting Group (BCG). The matrix reflects the contribution of the products offered by the firm
to its cash flow. Based on this analysis, products are classified as ‘stars’, ‘cash cows’, ‘question marks’, and
‘dogs’. The key strategic issue for stakeholders is how best to seek out the most effective ways to maximize
the different forms of value created through the utilization of capital.

102 SWOT, Value Chain Analysis, Portfolio Analysis and Strategic Alliance

Strategic Planning and Strategic
Management Process
Learning Objectives
By the end of this unit, you will be
able to understand:
● Life cycle approach to strategic
planning
● Ia - bs matrix
● Arthur. D. Little’s life cycle
approach to strategic planning
● Business portfolio balancing
● Strategic funds programming
● Purposes of strategic
management process
● Strategic management process
● Strategy implementation
● Strategic control and
assessment
● Performance management
● Individual motivators
● Strategies in geographic
expansion
● International strategies
104
Unit 7
Introduction
A strategy is developed within a firm. The final product
will necessarily be shaped by the background of that
firm, the processes it has in place for arriving at basic
business decisions, and the interests and perspectives
of its senior managers. Typically, these factors come
together in a formal strategy process through which the
strategy is defined and evaluated by the firm’s managers.
The strategic management process is continuous. “As
performance results or outcomes are realized – at any
level of the organization – organizational members
assess the implications and adjust the strategies as
needed.” Additionally, as the company grows and changes,
so will the various strategies. Existing strategies will
change, and new strategies will be developed. This is all
part of the continuous process of improving the business
in an effort to succeed and reach company goals.
In general management, strategic choice refers to
the view that, because of the power relationships in
various organizational contexts, people in roles with
managerial accountability are not simply restricted by
obvious contextual factors such as available technology
or environmental factors such as market demand,
but they exercise sometimes considerable discretion.
Strategic choice is a systemic theory of strategy. This
Strategic Planning and Strategic Management Process
theory is built on a notion of interaction in which
organizations adapt to their environment in a self-
regulating, negative-feedback manner to achieve
their goals. The dynamics, or pattern of movement
over time, are those of movement to states of
stable equilibrium. Prediction is not seen as
problematic. The analysis is primarily at the macro
level of the organization in which cause and effect
are related to each other in a linear manner. Micro-
diversity receives little attention, and interaction
is assumed to be uniform and harmonious.
Strategic implementation, put simply, is the process
that puts plans and strategies into action to reach
goals. A strategic plan is a written document
that lays out the business’s plans to
reach goals, but it will sit forgotten
without strategic implementation.
The implementation makes
the company’s plans happen.
The spread and power of
globalization, or the shrinking of
the planet as it is today, has its
foundations in four major drivers.
These drivers provide insight into the
opportunities and challenges that nations
and corporations face in the future. The spread
and power of globalization, or the shrinking of the
planet as it is today, has its foundations in four
major drivers:
● Technology,
● Finance,
● Information, and
● Decision-making and information flows.
Globalization thrives in a world where the cost and
ease of global transport and communications are
ever-improving, the cost and ease of moving money
105
are negligible, and where companies around the
world use common operating standards. These
are the right conditions for businesses to replicate
what they do at home in countries.
Life Cycle Approach to Strategic
Planning
Strategic planning is the compass that guides
organizations through the complex and ever-
changing landscape of the business world.
However, adopting a one-size-fits-all strategy may
not be the most effective way to navigate the diverse
challenges and opportunities that organizations
encounter throughout their existence. Instead, a
life cycle approach to strategic planning
recognizes that the strategies an
organization needs evolve as it
matures.
Understanding the Life Cycle
Approach
The life cycle approach to
strategic planning acknowledges
that businesses go through distinct
stages of development, each with its unique
characteristics, challenges, and opportunities.
These stages can be broadly categorized as
follows:
Startup Phase: In the infancy stage, businesses are
focused on survival. The primary goal is to establish
a foothold in the market, gain initial customers, and
secure funding. Strategies during this phase revolve
around product development, market research, and
building a viable business model.
Growth Phase: As a company gains momentum,
it enters the growth phase. During this period, the
Strategic Planning and Strategic Management Process
emphasis shifts to expanding market share, scaling
operations, and maximizing revenue. Strategic
planning here involves marketing and sales
strategies, expanding product lines, and optimizing
processes for efficiency.
Maturity Phase: In the maturity phase, businesses
face increased competition and market saturation.
The strategic focus centers on maintaining market
share, optimizing profitability, and exploring
diversification. Businesses may also look for
international expansion opportunities.
Decline or Renewal Phase: Over time, markets
change, and products or services may become
obsolete. Organizations must decide whether to
revitalize their offerings or gracefully
exit the market. Strategic planning
in this phase involves rebranding,
cost reduction, innovation, and
restructuring.
Benefits of a Life Cycle Approach
Tailored Strategies: By aligning
strategies with the specific stage of the
business life cycle, organizations can address
their unique challenges and opportunities more
effectively. This results in a better allocation of
resources and a higher likelihood of success.
Adaptability: Markets and industries are dynamic,
and what works in one phase may not work in
another. A life cycle approach enables organizations
to adapt their strategies as they progress, helping
them stay relevant and competitive.
Risk Mitigation: Recognizing the signs of a declining
phase early allows organizations to proactively
adjust their strategies, reducing the risk of financial
distress or market irrelevance.
106
Resource Efficiency: Rather than pursuing generic
strategies, organizations can allocate resources
more efficiently by focusing on initiatives that align
with their current life cycle phase. This prevents
wasted efforts and resources on inappropriate
strategies.
Long-Term Sustainability: Businesses that adopt a
life cycle approach are better positioned for long-
term sustainability. By planning for the future while
addressing immediate needs, they can navigate
challenges and continue to thrive.
Implementing the Life Cycle Approach
To implement the life cycle approach to strategic
planning effectively, organizations should
consider the following steps:
Assessment: Begin by evaluating
where your organization currently
stands in its life cycle. Analyze
financial data, market trends, and
industry developments to gain a clear
understanding of your position.
Define Objectives: Based on your assessment, set
clear objectives that are appropriate for your life
cycle phase. These objectives should guide your
strategic planning efforts.
Strategy Development: Develop strategies that
align with your objectives and life cycle phase.
Consider factors like product development, market
expansion, cost reduction, and innovation.
Execution and Monitoring: Implement your
strategies and continuously monitor their
progress. Be prepared to make adjustments as
needed, especially if you notice changes in market
conditions or customer preferences.
Strategic Planning and Strategic Management Process
Long-Term Vision: While focusing on your current
life cycle phase, also maintain a long-term vision.
Think about how your strategies today will impact
your organization’s future.
In a rapidly changing business landscape, the
life cycle approach to strategic planning offers a
dynamic and adaptable framework for organizations
to thrive. By recognizing that strategies must evolve
as an organization matures, businesses can make
better-informed decisions, allocate resources more
efficiently, and secure their long-term sustainability.
Embrace the life cycle approach, and you’ll find that
your strategic planning becomes a powerful tool for
navigating the complex journey of business growth
and development.
The IA-BS Matrix | A Tool for Strategic
Decision-Making
In today’s dynamic business environment,
organizations must continuously assess their
internal capabilities and external market conditions
to make informed strategic decisions. The
Information-Asymmetry Business Strategy (IA-
BS) Matrix is a valuable framework that aids in
this process. It helps organizations evaluate their
information resources and decide on the most
suitable business strategies.
107
Understanding the IA-BS Matrix
The IA-BS Matrix is a strategic planning tool that
connects a company’s information asymmetry,
which refers to the gap between the information
a company possesses and what is available in the
external environment, with its business strategy.
This matrix comprises four quadrants, each
representing a distinct combination of information
asymmetry and business strategy.
Quadrant I: High Information Asymmetry, Low
Business Strategy (HI-LO)
In this quadrant, organizations possess extensive
information about the market, competitors, and
industry trends, yet their business strategy is
minimal. These companies often adopt a cautious
approach, characterized by slow decision-making
and a reluctance to take risks. They tend to analyze
market data meticulously but struggle to translate
it into effective strategies.
Quadrant II: High Information Asymmetry, High
Business Strategy (HI-HI)
Companies in this quadrant recognize the
importance of both information and strategy.
They actively gather market intelligence, assess
competitive landscapes, and swiftly implement
strategies to gain a competitive edge. These
organizations are agile and responsive, leveraging
their information resources to drive innovation and
growth.
Quadrant III: Low Information Asymmetry, Low
Business Strategy (LI-LO)
Quadrant III represents organizations with limited
access to market information and a low strategic
Strategic Planning and Strategic Management Process
orientation. These companies often operate in
stable industries with little need for rapid decision-
making. Their focus is primarily on maintaining
existing operations rather than pursuing ambitious
growth strategies.
Quadrant IV: Low Information Asymmetry, High
Business Strategy (LI-HI)
In this quadrant, organizations have a strong
strategic focus, even though they lack extensive
market information. These companies rely on their
internal capabilities, such as product innovation,
cost leadership, or niche markets, to drive their
business strategies. They are proactive in seizing
opportunities and shaping market dynamics.
Application of the IA-BS Matrix
The IA-BS Matrix offers several
advantages for organizations
seeking to enhance their strategic
decision-making:
Self-Assessment: Companies
can use the matrix to conduct a self-
assessment and determine their current
position. Identifying their quadrant helps them
understand their strengths and weaknesses in
terms of information resources and strategic
orientation.
Alignment: The IA-BS Matrix assists in aligning
information-gathering efforts with strategic goals.
Organizations can focus on improving information
resources where necessary and fine-tuning their
strategies accordingly.
Competitor Analysis: By assessing competitors’
positions on the matrix, organizations gain insights
into the competitive landscape. They can identify
108
vulnerabilities and opportunities in the market and
adjust their strategies accordingly.
Scenario Planning: The matrix is a valuable tool
for scenario planning. It allows organizations to
explore how changes in information asymmetry
or business strategy may impact their competitive
position.
Resource Allocation: Understanding their quadrant
helps organizations allocate resources more
effectively. Companies in HI-HI may invest in
market research, while those in LI-HI may prioritize
internal capabilities and innovation.
The IA-BS Matrix is a powerful framework for
organizations to align their information
resources with their business
strategies. It offers a structured
approach to evaluating current
positions, enhancing decision-
making processes, and gaining
a competitive edge in today’s
information-intensive business
landscape. By leveraging the
insights provided by this matrix,
organizations can chart a course toward
sustainable growth and success.
Arthur D. Little’s Life Cycle Approach to
Strategic Planning
Strategic planning is paramount for an organization’s
long-term success. Arthur D. Little, a renowned
management consulting firm, has developed a
distinctive approach to strategic planning known
as the Life Cycle Approach. This framework
integrates the concepts of industry life cycles and
competitive positioning, offering a comprehensive
and adaptable method for organizations to navigate
the complexities of strategic decision-making.
Strategic Planning and Strategic Management Process
Understanding the Life Cycle Approach
The Life Cycle Approach is rooted in two
fundamental concepts: the industry life cycle and
competitive positioning.
Industry Life Cycle: The first pillar of this approach
revolves around the idea that industries go through
positioning within its industry. Arthur D. Little
identifies four primary positions:
» Leadership: Firms in this position are market
leaders and often set industry standards.
They have substantial resources, strong brand
recognition, and high profitability.
» Challenger: Challengers are ambitious

distinct life stages, akin to a biological life cycle.
These stages include Introduction, Growth, Maturity,
and Decline. Each phase is characterized by unique
challenges and opportunities, requiring different
strategic responses.
● Introduction: In this stage, a new
product or service is introduced
to the market. Companies often
focus on product development
and building a customer
base.
organizations that actively challenge industry
leaders. They invest in innovation, marketing,
and growth to increase their market share.
» Niche Player: Niche players concentrate on
specific market segments or niches. They excel
in serving specialized customer needs and
often enjoy high margins.
» Follower: Followers tend to mimic
the strategies of industry leaders
without taking significant risks.
They prioritize operational
efficiency and cost control.

● Growth: The growth Application of the Life Cycle

stage witnesses rapid Approach
market expansion, increased
competition, and the emergence The Life Cycle Approach provides
of dominant players. Strategic organizations with a structured method
priorities shift towards market share for strategic planning and execution:
capture and differentiation.
● Situation Analysis: Organizations assess their
● Maturity: As the market matures, growth rates
industry’s life cycle stage and competitive
slow, and competition intensifies. Companies
position. This analysis informs strategic priorities
must emphasize cost efficiency, customer
and resource allocation.
retention, and market consolidation.
● Strategy Formulation: Armed with a clear
● Decline: In the decline phase, market saturation
understanding of their situation, companies
and technological advancements lead to a
develop tailored strategies. Leaders may focus
shrinking market. Organizations need to decide
on innovation, challengers on market share
whether to divest, maintain, or innovate to revive
growth, niche players on specialization, and
the industry.
followers on cost efficiency.
● Competitive Positioning: The second pillar
● Implementation: Executing the chosen strategies
focuses on an organization’s competitive
involves aligning internal processes, resources,
109 Strategic Planning and Strategic Management Process
 and culture with the strategic objectives. strategic objectives.

● Monitoring and Adaptation: Regularly reviewing

the industry’s life cycle stage and competitive
dynamics helps organizations adapt
strategies as needed. This ensures agility in a
dynamic business environment.
● Scenario Planning: The framework allows
organizations to anticipate potential shifts in their
industry’s life cycle and adjust their strategies
accordingly.
Arthur D. Little’s Life Cycle Approach to strategic
planning offers a robust framework for organizations
to thrive in an ever-changing business landscape. By
aligning their strategies with the industry’s life cycle
stage and competitive positioning, companies can
make informed decisions, seize opportunities, and
remain resilient in the face of challenges. In today’s
competitive environment, adopting a holistic and
adaptable approach to strategic planning is crucial
for long-term success.
Business Portfolio Balancing
Optimizing Success
Business Portfolio Balancing, often referred to as
Portfolio Management, is a strategic approach that
involves optimizing a company’s mix of offerings
to maximize value, mitigate risks, and adapt to
changing market conditions. This article delves into
the concept of Business Portfolio Balancing and
explores its significance in contemporary business
strategy.
It encompasses several key elements:
their
● Diverse Offerings: Companies often have a
range of products, services, or business units
in their portfolio. These offerings may cater
to different markets, customer segments, or
industry sectors.
● Strategic Objectives: The primary goal of
Business Portfolio Balancing is to align the
portfolio with the company’s strategic objectives.
These objectives may include revenue growth,
market share expansion, risk mitigation, or
diversification.
● Resource Allocation: Effective portfolio
management involves allocating resources
such as capital, talent, and time to the various
components of the portfolio based on their
strategic importance and potential for growth.
● Risk Mitigation: Balancing a portfolio can help
reduce risks associated with market fluctuations,
| economic downturns, or industry-specific
challenges. A diversified portfolio can act as a
buffer against adverse events.
● Adaptation: In a constantly evolving business
environment, companies must be agile. Business
Portfolio Balancing allows organizations to adapt
to changes in consumer preferences, technology
advancements, and competitive landscapes.

Understanding Business Portfolio Balancing

Business Portfolio Balancing is the process

of assessing, adjusting, and optimizing an
organization’s portfolio of products, services,
business units, or investments to achieve specific

110 Strategic Planning and Strategic Management Process

The Process of Business Portfolio Balancing their overall performance and profitability.

● Risk Mitigation: Diversification and careful

Achieving an optimally balanced portfolio involves
risk assessment reduce the impact of market
a structured process:
uncertainties and economic downturns.

Evaluation: Begin by assessing each component of ● Competitive Advantage: A balanced portfolio

the portfolio. This includes analyzing their financial allows organizations to stay competitive by

performance, growth potential, market share, and adapting to changing customer needs and

competitive positioning. technological advancements.

● Efficient Resource Allocation: Resources are

Prioritization: Based on the evaluation, prioritize allocated more efficiently to initiatives that align
portfolio components according to their strategic with strategic goals, avoiding wasteful spending.
significance. Identify high-growth opportunities,
● Long-Term Sustainability: Business Portfolio
cash cows, and underperforming assets.
Balancing promotes long-term sustainability by
preventing overreliance on a single product or
Resource Allocation: Allocate resources
market.
based on the priorities. Invest in
high-growth areas, divest from
Business Portfolio Balancing
underperforming assets, and
is a strategic approach that
maintain a balance between
empowers organizations to
short-term and long-term
align their offerings with their
initiatives.
strategic goals, maximize value,
and minimize risks. By evaluating,
Risk Analysis: Evaluate the risks
prioritizing, and managing their
associated with each portfolio
portfolio components effectively,
component. Diversify to spread risk,
companies can achieve sustained
invest in hedging strategies, or develop
growth, competitiveness, and resilience in
contingency plans.
the face of uncertainty.

Monitoring and Adjustment: Continuously monitor

Strategic Funds Programming
the performance of portfolio components. Be
prepared to adjust strategies as market conditions
Strategic Funds Programming is a vital aspect
change or new opportunities emerge.
of modern business management, essential for
achieving long-term success, profitability, and
The Benefits of Business Portfolio Balancing
sustainability. This strategic approach involves the
allocation and utilization of financial resources in
Implementing Business Portfolio Balancing offers
ways that align with a company’s overarching goals
several strategic advantages:
and objectives.

● Enhanced Performance: By focusing resources

on high-potential areas, companies can boost

111 Strategic Planning and Strategic Management Process

Understanding Strategic Funds Programming that require adjustments.

● Flexibility: While Strategic Funds Programming

Strategic Funds Programming is the process of
follows a structured approach, it should also
systematically allocating financial resources within
allow for flexibility. This flexibility enables
an organization to support its strategic objectives.
organizations to adapt to changing market
These objectives may include market expansion,
conditions and seize new opportunities.
product development, research and innovation,
cost reduction, or risk mitigation. The primary aim
Steps in Implementing Strategic Funds
is to ensure that funds are deployed in a manner
Programming
that optimally advances the company’s mission
and vision. Implementing strategic funds programming
involves a series of systematic steps:
Key Elements of Strategic Funds Programming

● Define Strategic Objectives: Clearly articulate the

● Strategic Alignment: The core principle of
company’s strategic objectives, including
Strategic Funds Programming is the
long-term goals, short-term targets, and
alignment of financial resources
key performance indicators.
with the company’s strategic
● Resource Identification:
priorities. This involves
Identify the financial resources
identifying the key initiatives
available for allocation. This
and projects that will drive
includes evaluating existing
the organization toward its
capital, assessing borrowing
long-term goals.
capacity, and considering
● Resource Allocation: It entails
potential sources of funding.
the allocation of funds, budgeting,
● Prioritization: Prioritize strategic
and financial planning. Resources
initiatives based on their alignment with
are allocated to specific projects,
the defined objectives and potential return on
departments, or investments based on their
investment (ROI).
strategic importance and potential for value
creation. ● Budget Allocation: Allocate the budget to
specific initiatives and projects. Ensure that each
● Risk Management: An essential aspect of this
allocation is directly linked to achieving strategic
process is the assessment and management
goals.
of financial risks associated with strategic
initiatives. This involves considering factors ● Risk Assessment: Conduct a thorough risk
such as market volatility, economic fluctuations, assessment for each initiative. Identify potential
and regulatory changes. financial risks and develop risk mitigation
strategies.
● Performance Monitoring: Continuous monitoring
of financial performance is crucial to ensure that ● Implementation: Put the budget allocation into
allocated funds are being used effectively and action by funding and initiating the identified
efficiently. Regular reviews help identify areas projects, ensuring they remain on track.
112 Strategic Planning and Strategic Management Process
● Monitoring and Evaluation: Continuously monitor
the financial performance of each initiative.
Regularly assess whether funds are being used
efficiently and effectively.
● Adjustment: Be prepared to adjust resource
allocation based on real-time feedback and
changing circumstances. Flexibility is key to
responding to evolving business dynamics.
success, resilience, and long-term profitability. In
an ever-evolving business environment, the ability
to strategically allocate funds can be a crucial
determinant of an organization’s ability to thrive
and prosper.
Purposes of Strategic Management
Process

Strategic management is a fundamental process

Benefits of Strategic Funds Programming
that drives an organization toward its desired goals
and objectives. It involves planning, executing, and
Implementing Strategic Funds Programming offers
monitoring strategies to ensure a company remains
several key benefits to organizations:
competitive and responsive in a dynamic business

● Enhanced Resource Efficiency: Funds are environment.

directed toward initiatives most likely to yield

Setting Direction and Vision
favorable results, minimizing wastage.

● Risk Mitigation: By assessing and managing

One of the primary purposes of strategic
financial risks, organizations can safeguard
management is to establish a clear direction for the
investments and protect against unforeseen
organization. It helps define the company’s mission
challenges.
and vision, answering fundamental questions
● Strategic Alignment: Funds are channeled into like “What do we want to achieve?” and “Where
areas directly supporting the organization’s do we see ourselves in the future?” By outlining a
strategic objectives, ensuring every investment compelling vision, strategic management inspires
contributes to long-term success. and aligns employees, fostering a shared sense of
purpose.
● Improved Decision-Making: Data-driven decision-
making becomes easier with a structured
approach to financial resource allocation.

● Competitive Advantage: Organizations that

strategically allocate funds are better equipped
to respond to market changes, making them
more competitive.

Strategic Funds Programming is an indispensable

tool for modern businesses seeking to navigate
the complexities of the marketplace. By aligning
financial resources with strategic goals, assessing
risks, and continuously monitoring performance,
organizations can maximize chances of achieving

113 Strategic Planning and Strategic Management Process

Defining Goals and Objectives scan the external environment for emerging
trends, technologies, and competitive pressures.
Strategic management facilitates the formulation By staying informed and proactive, companies can
of specific, measurable, achievable, relevant, adjust their strategies to seize opportunities and
and time-bound (SMART) goals and objectives. navigate challenges effectively.
These objectives serve as tangible targets that
guide decision-making and resource allocation. Risk Management
Setting clear goals ensures that everyone within
the organization understands what needs to be Risk is inherent in business, and strategic
accomplished. management addresses this by identifying,
assessing, and managing risks. This includes
Resource Allocation financial risks, market risks, operational risks,
and more. By understanding potential threats,
Efficient allocation of resources is a core purpose organizations can implement risk mitigation
of strategic management. It involves allocating strategies and contingency plans.
capital, human resources, and other
assets to projects, initiatives, or Performance Measurement and
departments that align with Accountability
the strategic direction. This
process optimizes resource Strategic management
utilization, preventing waste establishes key performance
and inefficiency. indicators (KPIs) and metrics to
gauge progress toward strategic
Competitive Advantage goals. Regular performance
evaluations hold teams and
Strategic management enables individuals accountable for their
organizations to identify and leverage contributions to the strategic objectives.
their competitive advantages. Through a SWOT Data-driven insights enable organizations to make
(Strengths, Weaknesses, Opportunities, Threats) informed adjustments as needed.
analysis, companies can assess their internal
strengths and weaknesses while identifying external Continuous Improvement
opportunities and threats. This information guides
strategy development and helps organizations Strategic management fosters a culture of
exploit their strengths and mitigate weaknesses. continuous improvement. By evaluating the
effectiveness of strategies and learning from both
Adaptation to Change successes and failures, organizations can refine
their approaches and enhance their competitive
In today’s fast-paced business landscape, edge over time.
adaptability is crucial. The strategic management
process equips organizations with the tools to

114 Strategic Planning and Strategic Management Process

Stakeholder Engagement necessary to create a company mission statement.
Situation analysis involves “scanning and
Engaging with stakeholders, including customers, evaluating the organizational context, the external
employees, investors, and the community, is integral environment, and the organizational environment.”
to strategic management. Organizations that Several techniques can be used for this analysis,
consider the interests and expectations of these and observation and communication are two highly
groups are more likely to build lasting relationships effective methods.
and maintain a positive reputation.
To commence this process, organizations should
The strategic management process serves as observe the internal company environment.
the compass that guides organizations through This encompasses employee interactions with
the turbulent waters of the business world. By colleagues, interactions between employees and
setting direction, defining objectives, allocating management, interactions among managers,
resources, and adapting to change, it empowers and interactions between management and
companies to pursue competitive advantage, shareholders. Additionally, discussions, interviews,
manage risks, and drive continuous and surveys can be employed to analyze
improvement. Strategic management the internal environment.
is not a one-time endeavor; it is an
ongoing process that ensures Organizations must also analyze
organizations remain agile, the external environment,
resilient, and well-prepared which includes customers,
for whatever the future may suppliers, creditors, and
hold. competitors. Several questions
can aid in analyzing the
Strategic Management external environment. What is the
Process relationship between the company and
its customers? How does the company
The strategic management process comprises four interact with its suppliers? Does the company
elements: situation analysis, strategy formulation, maintain a positive rapport with its creditors? Is the
strategy implementation, and strategy evaluation. company actively striving to enhance shareholder
These elements are steps performed sequentially value? Who are the competitors? What advantages
when developing a new strategic management do competitors possess over the company?
plan. Existing businesses that have already
developed a strategic management plan will revisit Strategy Formulation
these steps as needed to make necessary changes
and improvements. Strategy formulation involves designing and
developing company strategies. Determining
Situation Analysis company strengths assists in formulating
strategies. Strategy formulation is generally
Situation analysis is the initial step in the strategic categorized into three organizational levels:
management process. It provides the information operational, competitive, and corporate.
115 Strategic Planning and Strategic Management Process
● Operational strategies are short-term
pertain to various operational departments of
the company, such as human resources, finance,
marketing, and production. These strategies are
specific to departments. For instance, human
resource strategies concern hiring and training
employees with the goal of enhancing human
capital.
● Competitive strategies relate to methods of
competing in a particular business or industry.
Knowledge of competitors is essential for
formulating competitive strategies. The company
must identify its competitors, understand their
operations, and pinpoint their strengths and
weaknesses. With this information, the company
can devise a strategy to gain a competitive edge
over these rivals.
● Corporate strategies are long-term and involve
“determining the optimal mix of businesses
and the overall direction of the organization.”
Operating as a sole business or as a business
with multiple divisions falls within the scope of
corporate strategy.
Strategy Implementation
and creating the human resources strategy involving
employee training, factors such as delivery method,
timing, and cost coverage should be taken into
account.
Strategic Control and Assessment
Strategic control, the final step of the strategic
management process, involves monitoring and
evaluating the strategy management process as
a whole to ensure its proper operation. The focus
is clearly on activities related to environmental
analysis, organizational direction, strategy
formulation, and strategy implementation, ensuring
that all stages of the strategy management process
are appropriate, compatible, and functioning
effectively. The strategic control process consists
of three fundamental steps.
Measure Performance
Strategic audits are employed to ascertain the
actual happenings within the organization. Both
qualitative and quantitative tools serve this purpose.
According to S. Tilles, qualitative measurement
addresses five questions:

Strategy implementation involves translating the ● Is the strategy internally consistent?

strategy into action. This encompasses developing
● Is it congruent with its environment?
steps, methods, and procedures to execute the
strategy, as well as determining the priority order ● Does it align with organizational resources?
for implementing strategies. Strategies should ● Is it excessively risky?
be prioritized based on the severity of underlying
● Is the strategy’s time horizon appropriate?
issues. The company should address the most
critical problems first before tackling other issues.

“The approaches to implementing the various

strategies should be considered during the
formulation process.” The company should
contemplate how the strategies will be executed
while they are being developed. For instance, when

116 Strategic Planning and Strategic Management Process

Quantitative tools such as return on investment to what is known as an integrated performance
(the relationship between generated income and management process. To achieve this, detailed
assets required for operation), z-score (an analysis budgets and programs should be developed.
that assigns numerical weight to and sums five Individuals should also have a clear understanding
measures: working capital/total assets, retained of their accountability within the organizational
earnings/total assets, earnings before interest and structure and the specific goals and objectives they
taxes/total assets, market value of equity/book need to achieve in the current year to remain on track.
value of total liabilities, and sales/total assets) Performance management ensures that rewards
and shareholders’ audit are employed to gauge and consequences stem from assessments
organizational performance. of good or poor performance. It establishes a
connection between human resources planning,
Compare Performance to Goals and Standards the firm’s strategy formulation, and performance
appraisal processes, guiding the company’s future
Here, management constructs a case to determine endeavors.
whether performance aligns with predetermined
standards concerning specific key areas. Individual Motivators
At General Electric, the following
eight types of standards are In addition to traditional
established for later-stage motivational techniques,
performance comparison: the organization should
profitability, market position, also incorporate individual
productivity, product leadership, motivators to encourage
personnel growth, employee proficient results. Relying solely
attitude, social responsibility, on bonuses and incentives
and standards reflecting a balance might not fully motivate individual
between short-range and long-range managers in today’s environment.
goals. Hence, top management should
thoroughly comprehend individual differences
Corrective Action and develop an appropriate motivational strategy.
While categorizing individual motivators can be
When actual performance deviates from the challenging, some significant ones can be outlined
predetermined standards, corrective action as follows:
becomes necessary. In such cases, every effort
is made to adjust the enterprise’s strategies and ● Mastery: The process of mastering a new skill
their implementation, thereby enhancing the or gaining control over a challenging problem is
organization’s ability to achieve its goals. highly motivating for many individuals.

● Approval: The absence of approval can hinder

Performance Management
Traditional motivators (such as MBO, performance
appraisal, etc.) should be logically and firmly linked
and limit the performance of talented and
capable managers.
● Risk and Adventure: Managerial roles that offer

117 Strategic Planning and Strategic Management Process

 high visibility, coupled with risk and adventure, between risk level and the extent of foreign control
are particularly favored by managers with that an organization’s managers are willing to
entrepreneurial talents. permit. Figure 13.2 illustrates the most common
paths for international expansion. Organizations
● Security: For managers to perform effectively
often initiate their exposure to a new market
and efficiently, they need to feel that their careers
through exporting to minimize their exposure to
are relatively secure.
market risks. As the market expands and product
● Power and Influence: Organizational positions
servicing becomes necessary, they progress from
that empower managers to wield power and
licensing to franchising. The final stage entails
control over both human and non-human
direct investment.
resources are extremely motivating.

As an organization achieves success at each level,

Strategies in Geographic Expansion
it advances to the next. If problems arise at any
of these stages, progress may halt. In the case of
The rise of trade liberalization and the growth
severe issues or inadequate profitability within a
of transnational and multinational
reasonable timeframe, the organization
companies have significantly propelled
may choose to withdraw from the
the internationalization of businesses.
foreign market.
Traditionally, multinational firms
hailed from economically
Export Entry Modes:
developed countries, but now
many developing nations
Firms produce in their home
boast their own multinational
country and market products in
corporations. Global markets
overseas markets. Direct exports
offer opportunities for increased
involve no intermediaries in the home
profits through higher sales volumes.
country, and marketing is done either
Furthermore, catering to global markets
directly through agents/distributors or
with larger production runs holds the promise of
through a direct branch/subsidiary in overseas
heightened profits due to economies of scale.
markets. Indirect exports involve home country
intermediaries responsible for exporting the firm’s
An organization may need to explore opportunities
products.
beyond its borders for expansion. However,
expansion through internationalization is far from
Contractual Entry Modes:
an easy path. It demands the achievement of
exacting benchmarks in terms of price, quality, and These entail non-equity partnerships between an
timely delivery. international company and a company in foreign
markets. Licensing involves the international
Ways to Pursue Internationalization
company transferring knowledge, know-how,
technology, patent rights, etc., to a foreign entity for
Several methods exist for pursuing
a fixed period in exchange for payment, often in the
internationalization, each involving a trade-off
form of royalties. Other contractual arrangements
118 Strategic Planning and Strategic Management Process
encompass technical agreements, service
contracts, contract manufacturing, production
sharing, turnkey operations, and Build-Operate-
Transfer (BOT) agreements.
Franchising:
Franchising involves granting the right to use a
business format, typically a brand name, in a foreign
market in return for payment to the franchiser.
Investment Entry Modes:
This approach involves ownership of production
units in foreign markets through some form of
equity investment or direct foreign investment. Joint
ventures and strategic alliances entail cooperative
partnerships between two or more firms based on
financial interests.
“Worldwide sourcing” represents a fundamental
principle of the new world economy. Rather than
merely operating foreign plants, multinational
corporations integrate these plants that
manufacture components as divisions of a globally
organized production process. This paradigm shift
is evident.
Independent ventures or wholly-owned subsidiaries
involve the parent international company holding
100% equity and full control. These facilities
can be established via a new venture, known as
a Greenfield venture, or through acquisition via
takeover strategies.
119
International Strategies
International trade heavily revolves around the
activities of Multinational Corporations (MNCs).
Dun and Stopford revealed that 500 MNCs account
for 80% of global foreign direct investment and 25%
of global capital. Among these, 414 are from the
European Commission, United States, and Japan—
referred to as the triad.
China, India, Brazil, and gradually South Africa
are emerging as new engines of global economic
growth. They present opportunities for new
entrants in international business. For example,
Indian Oil, Bharat Petroleum, Hindustan Petroleum,
and Reliance Industries from India have made it to
the list of the world’s top 500 companies compiled
by “Fortune” magazine.
In the previous realm of national economies,
companies had limited flexibility in where and
how to compete. Size was achieved through
diversification or integrated business systems. In
each national market, the rules remained relatively
stable, favoring established businesses over new
entrants. However, changes in transaction costs,
communication capabilities, and lowered barriers
have significantly altered this landscape.
International business is no longer exclusive to
giant multinational enterprises. Numerous small
and medium-sized businesses also venture into the
international arena, with many hailing from outside
the triad. While inherent risks exist in the global
market, smaller and less-experienced organizations
from outside the triad can succeed, albeit facing
competitive disadvantages. Companies like
Ranbaxy, Tata Tea, Tata Steel, Sundram Fastners,
Infosys, Wipro, and Tata Consultancy Services have
demonstrated their ability to thrive in these markets.
Acer, originating as a small electronics consulting
Strategic Planning and Strategic Management Process
firm in Taiwan, has ascended to become the world’s
second-largest personal computer manufacturer.
Business organizations pursue internationalization
for two types of opportunities:
● Specialization and Scale Effects: Organizations
can exploit these effects by specializing in areas
such as software development, package delivery,
personal computers, or jet engines.
● Variations in Factor Cost Productivity and
Demand Patterns: Cross-border participants
capitalize on these differences in skill sets,
productivity, labor price differentials, taxes, and
demand patterns.
Strategically, this translates into
various initiatives:
● Safeguarding against the risk
and uncertainty of domestic
business cycles.
● Tapping into the growing
market for goods and services.
● Protecting global market shares
against heightened foreign competition.
● Cost reduction.
● Overcoming tariff barriers by servicing foreign
markets from within.
● Leveraging technological expertise by direct
manufacturing.
While organizations can “go international” by
crossing domestic borders, changes in the
world economy and enabled strategic initiatives
are encouraging more businesses to choose
international expansion as a preferred avenue for
growth.
While going international, there are four major
120
strategic choices the company has to make. The
company can go Global; Transnational; Multi-
domestic; or International. These choices depend
mainly on two factors:
● Cost pressure, and
● Local responsiveness.
These factors can be either low or high. Based
on this, we can create a decision matrix that will
provide guidance for the appropriate strategic
choice. This matrix is shown in Figure 13.3.
Global: The organization offers standardized
products and uses integrated operations.
Example: Coca Cola and Pepsi are
marketing Coke and Pepsi for all
world markets. These drinks can
be produced and sold in any
nation. The basic formula is
either manufactured by them
locally or imported and sold to
a bottler who has to maintain
the standards laid out internally
for their products. The white goods
industry, FMCG industry, and Fast-food
and Beverage industries have established
global brands in a large number of countries, and
this seems to be a new global trend.
McDonald’s in India has used this strategy with a
twist. It recognized the cultural bias in the taste
of its consumers and has special offerings in
India suiting the palate of its audience, though it
maintains and offers its standardized products
and processes to its customers and franchisees.
Its business, which was once in the doldrums, is
picking up again.
Transnational: The organization seeks the best
Strategic Planning and Strategic Management Process
of both the multi-domestic and global strategies
by globally integrating operations while tailoring
products and services to the local market. Flexible
manufacturing enables organizations to produce
multiple versions of products from the same
assembly line, tailoring them to different markets.
This gives more choice in locating facilities to take
advantage of cheaper labor or to get the best of
other factors of production.
Multi-domestic: A multi-domestic strategy is
adopted when an organization can achieve a high
level of local responsiveness by matching products
and services to the national conditions prevalent
in the countries they operate in. The organization
attempts to extensively customize its
products and services according to the
local conditions. This may lead to
a high-cost structure as research
and development, production,
and marketing have to
be duplicated. However,
the advantages that accrue,
especially when cultural, social,
climatic, and economic differences
exist, can be substantial. For years,
U.S. auto manufacturers maintained
decentralized overseas units that produced cars
tailored to different countries and regions. General
Motors produced the Opel in Germany and Opel in
India. Though the two cars are branded similarly, the
Indian Opel has been tailored to Indian conditions.
Ford Motors offers a range of products in India that
it does not produce elsewhere in the world.
The problem with this strategy often is that the local
products may not be regularly upgraded to match
technological changes taking place. If that happens,
the organization could be at a disadvantage. Phillips
used this strategy in India to its disadvantage. It
provided top-of-the-line technology to customers
121
in developed nations. In India, its manufacturing
base was for low-technology components, and the
offerings were based on these components. As the
Indian economy opened up and was liberalized,
Sony, Akai, along with a number of Korean
companies like Samsung, LG, etc., came into the
country offering products that were concurrent
with world standards. Phillips India lost a large part
of its market share and had to completely revamp
its strategy to rebuild the company.
International: Firms that have products or
technologies that are proprietary or protected
against replication can create value by transferring
products and services to foreign markets where
these products and services are not
available. This is called an international
strategy.
The international organization
maintains tight control over
its overseas operations,
offers standardized products
and services in different countries
with little or no differentiation. Most
international companies, such as Coca
Cola, IBM, Kellogg, Proctor and Gamble,
Microsoft, and several others, adopt this strategy
for the different countries they operate in. Indian
organizations in software development have also
adopted this strategy. They combine this strategy
with a cost leadership strategy, taking advantage
of the large base of low-cost scientific and
technological manpower. Other industries where
India could find a niche are the service industry,
knowledge-based industries, pharmaceuticals, and
entertainment.
Some Indian companies have either adopted
international strategies or become beneficiaries
of the expansion strategies of international
Strategic Planning and Strategic Management Process
companies. For example, the AV Birla group took the route of international strategies quite early. They have
set up manufacturing facilities in many countries, including Egypt, Thailand, Indonesia, Malaysia, and the
Philippines. They also supply to a wide spread of export markets, both from India and their subsidiaries
overseas.

Another example is Sun Pharmaceuticals, one of India’s top pharmaceutical companies. The company has
adopted the acquisition route for its expansion strategies. It has acquired six companies, one of which is in
the US.

The disadvantages of international strategies lie in factors such as the risks related to uncertainty in economic
and political environments in host countries, difficulty managing cultural diversity, cost of coordination,
communication, and distribution, and barriers to expansion and growth.

International strategies provide opportunities for economies of scale and learning. It offers a promise of
above-average returns. Globalization, trade liberalization, the regulatory framework, emergence of regional
trade blocs, emergence of the internet as a communication platform, higher levels of cultural diffusion,
and the establishment of bilateral and multilateral institutions such as the WTO to regulate and manage
trade relations are some of the significant factors that indicate the likelihood of the growth of international
business at an accelerated pace.

This is demonstrated by Indian companies like Infosys, Tata Consulting Services, Wipro, Tata Tea, Tata
Steel, Ranbaxy, Dr. Reddy’s Labs, Sundram Fasteners, Reliance, Larson & Toubro, and many other business
organizations that have gained a foothold in the international market. The Indian industry already has the
essential competencies and competitiveness to compete internationally in pharmaceuticals, textiles,
software services, biotechnology, steel, and engineering. It is developing competencies and competitiveness
in other areas as well.

Summary

The term ‘Strategic Management Process’ refers to the steps by which management converts a firm’s mission,
objectives, and goals into a workable strategy. In a dynamic environment, each firm needs to tailor its strategic
management process in ways that best suit its capabilities and situational requirements. Viewed broadly, the
strategic management process has two parts: an information process and a decision process. The information
process involves collecting and analyzing information about the external and internal environments. External
factors are taken into account to find major opportunities and threats that either currently confront the
organization or will do so in the future. To survive and grow, every organization must inevitably determine how
situational factors have affected its past and current performance. This must be followed by an internal analysis to
determine the organization’s strategic direction. Strategists carry out internal analysis to understand where their
organization has been and where it currently stands, particularly in terms of internal strengths and weaknesses.
Combining information about the organization’s strengths and weaknesses with information about external
opportunities and threats provides a stronger foundation for informed decisions about strategic direction.

122 Strategic Planning and Strategic Management Process

The decision process encompasses four important steps: the development of alternatives, choice,
implementation, and assessment. Based on the external and internal analysis, strategists first identify
possible strategic alternatives and select those that align with the organization’s mission and objectives.
In the next step, planners decide how and when to translate strategic choices into action, followed by
an evaluation of the effectiveness and efficiency of the strategic direction the organization has pursued.

There are strategic choices concerning how the organization aims to compete at the individual business
level. Strategy implementation is the process of translating strategies and policies into action through the
development of programs, budgets, and procedures. Effective strategy implementation calls for the full
utilization of human resources. People should be motivated to implement a new strategy in desired ways.
Traditional motivational techniques are often based on a reward-punishment psychology and involve the use
of performance appraisals and performance-based incentive programs. The successful implementation of
strategy must take into account the organization’s history and the dominant values or culture that exist. While a
company’s culture affects strategy implementation over the long term, the short-term motivational environment
impacts strategy implementation today. Strategic control, the final step of the strategic management process,
involves monitoring and evaluating the strategy management process as a whole to ensure its proper operation.

In a globalized era, a level playing field for international trade serves as the principal engine of change. To join
the league of globalized nations, countries must either adopt or be seen as moving towards the rules of the
free market economy. To survive in this new world and attract investments from the international community,
countries have to abide by the neo-liberal economic model. Some of the rules of the neo-liberal economic
model are:

● Make the private sector the primary engine of economic growth;

● Maintain a low rate of inflation and price stability;

● Reduce the size of state bureaucracies and minimize government corruption, subsidies, and kickbacks;

● Aim for a balanced budget to the extent possible; and

● Eliminate or lower tariffs on imported goods, remove restrictions on foreign investment, and eliminate
quotas and domestic monopolies.

However, globalization must work within the framework of the nation-state, and each state makes decisions
based on its national economics. National governments must still endorse international agreements. The
power of national governments may become more limited in the future, but the nation-state is far from dead,
and sovereignty is still cherished. It remains the sole arbiter in determining the nature, scope, pace, and
sequencing of economic policy reform.

123 Strategic Planning and Strategic Management Process

 Unit 8

Strategies for Retrenchment

Learning Objectives Introduction

By the end of this unit, you will be Retrenchment calls for a radical surgery to trim the ‘extra
able to understand: fat’ – for example, laying off employees, dropping items
● What is retrenchment strategy? from a production line, eliminating low-margin customer

● Corporate restructuring strategy groups, and avoiding elaborate promotional efforts. In

addition to the above cost reductions, retrenchment calls
● Category of corporate
for drastic steps to improve cash flow through the sale of
restructuring
assets.
● Methods of corporate
restructuring What is Retrenchment Strategy?

Retrenchment strategy is a corporate-level defensive

strategy followed by a firm when its performance is
disappointing or when its survival is at stake for a variety of
reasons. Economic recessions, production inefficiencies,
and innovative breakthroughs by competitors are just
three causes. Managers choose retrenchment when
they think that the firm is neither competitive enough to
succeed through a counterattack (against market forces
negatively affecting its sales) nor agile enough to be a
fast follower. However, retrenchment does not mean
a death knell for every business under attack. Many
healthy companies have successfully addressed life-
threatening competitive situations in the past, rectified
their weaknesses, and restored themselves.

124 Strategies for Retrenchment

Retrenchment strategy, as such, is adopted out
of necessity, not by deliberate choice. In actual
practice, retrenchment may take one of the
following forms:
● Outright sale to another company
● Leveraged Buyout (LBO)
● Spin-off
A leveraged buyout occurs when a company’s
shareholders are bought out (hence the term
buyout) by the company’s management and other
private investors using borrowed funds (hence
leveraged). In the last case, the parent company
creates a new company, then distributes its
shares to shareholders of the parent.
Reasons for Divestment
The following are the reasons
for disinvestment:
● Strong Focus: Spinning off
unviable units may help a firm
focus on its core business more
closely and quickly regain lost ground.
● Unlock Critical Funds: The firm can sell those
assets whose values have plateaued or declined
due to ignorance or neglect.
● Invest in Emerging Technologies: Firms can use
the cash generated through spin-offs in emerging
or future technologies that better leverage or
revitalize their core competencies.
● A Maker of Policy: Sometimes the firm may spin
off units in fields where it has no dominance. If
the firm aims to be at the top, it must naturally
exit ventures where it is only a marginal player
(similar to what K. M. Birla did in paper, sugar,
and steel – all peripheral businesses in Birla’s
125
portfolio).
● From Red to Black: Assets purchased at inflated
prices might drain cash flows, especially if
funded through debt capital. Spinning off such
assets would help a firm liquidate debts, improve
cash flow, and reenergize operations in areas of
strength.
● Unviable Projects: If the business becomes
unviable due to stiff competition or changing
government policy, it is better to exit quickly.
Corporate Restructuring Strategy
Corporate restructuring is one of the most
complex and fundamental phenomena that
management confronts. Each company
has two opposite strategies to
choose from: to diversify or to
refocus on its core business.
Diversifying represents the
expansion of corporate
activities, while refocusing
characterizes a concentration
on the core business. From this
perspective, corporate restructuring
is a reduction in diversification.
Corporate restructuring is an episodic exercise, not
related to investments in new plant and machinery,
which involve a significant change in one or more
of the following:
● Pattern of ownership and control
● Composition of liability
● Asset mix of the firm
It is a comprehensive process by which a company
can consolidate its business operations and
strengthen its position to achieve the desired
objectives:
Strategies for Retrenchment
● Synergetic market share.

● Competitive
Corporate restructuring may also take place as a
● Successful
result of the acquisition of the company by new
owners. The acquisition may take the form of a
It involves a significant reorientation, reorganization,
leveraged buyout, a hostile takeover, or a merger
or realignment of assets and liabilities of the
of some type that keeps the company intact as a
organization through conscious management
subsidiary of the controlling corporation. When the
action to improve the future cash flow stream and
restructuring is due to a hostile takeover, corporate
make it more profitable and efficient.
raiders often implement a dismantling of the
company, selling off properties and other assets to
Meaning and Need for Corporate Restructuring
make a profit from the buyout. What remains after
this restructuring may be a smaller entity that can
Corporate restructuring is the process of
continue to function, albeit not at the level possible
redesigning one or more aspects of a company.
before the takeover occurred.
The process of reorganizing a
company may be implemented due
In general, the idea of corporate
to a number of factors, such as
restructuring is to allow the company
positioning the company to be
to continue functioning in some
more competitive, surviving a
manner. Even when corporate
currently adverse economic
raiders break up the company
climate, or positioning the
and leave behind a shell of the
corporation to move in an
original structure, there is still
entirely new direction. Here are
usually hope that what remains
some examples of why corporate
can function well enough for a new
restructuring may take place and
buyer to purchase the diminished
what it can mean for the company.
corporation and return it to profitability.

Restructuring a corporate entity is often a necessity

Purpose of Corporate Restructuring
when the company has grown to the point that the
original structure can no longer efficiently manage
To enhance shareholder value, the company should
the output and general interests of the company.
continuously evaluate its:
For example, corporate restructuring may call for
spinning off some departments into subsidiaries as
● Portfolio of businesses.
a means of creating a more effective management
● Capital mix, Ownership & Asset arrangements to
model, as well as taking advantage of tax breaks
find opportunities to increase shareholder value.
that would allow the corporation to redirect more
revenue to the production process. In this scenario, ● Focus on asset utilization and profitable
restructuring is seen as a positive sign of the investment opportunities.
company’s growth and is often welcomed by those ● Reorganize or divest less profitable or loss-
who wish to see the corporation gain a larger making businesses/products.

126 Strategies for Retrenchment

● The company can also enhance value through
capital restructuring; it can innovate securities
that help reduce the cost of capital.
Characteristics of Corporate Restructuring
The basic characteristics of corporate restructuring
include:
● Improving the company’s balance sheet (by
selling unprofitable divisions from its core
business).
● Accomplishing staff reduction (by selling/closing
unprofitable portions).
● Changes in corporate management.
● Sale of underutilized assets, such as patents/
brands.
● Outsourcing of operations, such as payroll and
technical support, to a more efficient third party.
● Moving operations, such as manufacturing, to
lower-cost locations.
● Reorganization of functions, such as sales,
marketing, & distribution.
● Renegotiation of labor contracts to reduce
overhead.
● Refinancing of corporate debt to reduce interest
payments.
● A major public relations campaign to reposition
the company with consumers.
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Categories of Corporate Restructuring
Corporate restructuring entails a range of activities,
including financial restructuring and organization
restructuring.
Financial Restructuring
Financial restructuring is the reorganization of the
financial assets and liabilities of a corporation to
create the most beneficial financial environment for
the company. The process of financial restructuring
is often associated with corporate restructuring, as
the reordering of the company’s general function and
composition is likely to impact its financial health.
When completed, this reordering of corporate
assets and liabilities can help the company remain
competitive, even in a depressed economy.
Almost every business goes through a phase of
financial restructuring at one time or another. In
some cases, the process of restructuring takes
place as a means of allocating resources for a new
marketing campaign or the launch of a new product
line. When this happens, the restructure is often
viewed as a sign that the company is financially
stable and has set goals for future growth and
expansion.
The need for financial restructuring may arise as
a means of eliminating waste from the company’s
operations. For example, the restructuring effort
may find that two divisions or departments of the
company perform related functions and, in some
cases, duplicate efforts. Rather than continuing
to use financial resources to fund the operation of
both departments, their efforts are combined. This
helps reduce costs without impairing the company’s
ability to achieve the same ends in a timely manner.
Strategies for Retrenchment
In some cases, financial restructuring is a strategy
that must take place to allow the company to
continue operations. This is especially true when
sales decline and the corporation no longer
generates a consistent net profit. Financial
restructuring may include a review of the costs
associated with each sector of the business and
the identification of ways to cut costs and increase
net profit. The restructuring may also involve
reducing or suspending production facilities that
are obsolete or currently produce goods that are
not selling well and are scheduled to be phased out.
Organizational Restructuring
In organizational restructuring, the focus is on
management and internal corporate governance
structures. Organizational restructuring has
become a very common practice among firms
in order to match the growing competition of
the market. This makes the firms change the
organizational structure of the company for the
betterment of the business.
Need for Organizational Restructuring

Financial restructuring may also take place in ● New skills and capabilities are needed to meet
response to a drop in sales due to a sluggish current or expected operational requirements.
economy or temporary concerns about ● Accountability for results is not
the economy in general. When this clearly communicated, leading to
happens, the corporation may need measurable results and resulting
to reorder its finances to keep the in subjective and biased
company operational through performance appraisals.
the tough times. Costs may
● Parts of the organization
be cut by combining divisions
are significantly over or
or departments, reassigning
understaffed.
responsibilities, and eliminating
personnel, or by scaling back ● O r g a n i z a t i o n a l
production at various facilities owned communications are inconsistent,
by the company. With this type of corporate fragmented, and inefficient.
restructuring, the focus is on survival in a difficult ● Technology and/or innovation are creating
market rather than on expanding the company to changes in workflow and production processes.
meet growing consumer demand.
● Significant staffing increases or decreases are
contemplated.
All businesses must pay attention to financial
matters to remain operational and to hopefully ● Personnel retention and turnover is a significant
grow over time. From this perspective, financial problem.
restructuring can be seen as a tool that ensures ● Workforce productivity is stagnant or
the corporation is making the most efficient use deteriorating.
of available resources and generating the highest
● Morale is deteriorating.
amount of net profit possible within the current
economic environment.
The perspective of organizational restructuring
may be different for the employees. When a

128 Strategies for Retrenchment

company goes for organizational restructuring, it
often leads to reducing the manpower and hence
means that people are losing their jobs. This
may decrease the morale of employees in a large
manner. Hence, many firms provide strategies on
career transitioning and outplacement support to
their existing employees for an easy transition to
their next job.
Leveraged Buyout, Hostile Takeover & Merger
Corporate restructuring may take place as a result
of the acquisition of the company by new owners.
The acquisition may be in the form of a leveraged
buyout, a hostile takeover, or a merger of some
type that keeps the company intact
as a subsidiary of the controlling
corporation.
Hostile Takeover
A hostile takeover is a type
of corporate takeover which is
carried out against the wishes of
the board of the target company.
This unique type of acquisition
does not occur nearly as frequently as
friendly takeovers, in which the two companies
work together because the takeover is perceived as
beneficial. Hostile takeovers can be traumatic for
the target company, and they can also be risky for
the other side, as the acquiring company may not
be able to obtain certain relevant information about
the target company.
Companies are bought and sold on a daily basis.
There are two types of sale agreements. In the first,
a merger, two companies come together, blending
their assets, staff, facilities, and so forth. After
a merger, the original companies cease to exist,
and a new company arises instead. In a takeover,
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a company is purchased by another company.
The purchasing company owns all of the target
company’s assets, including company patents,
trademarks, and so forth. The original company
may be entirely swallowed up, or may operate semi-
independently under the umbrella of the acquiring
company.
Typically, a company which wishes to acquire
another company approaches the target company’s
board with an offer. The board members consider
the offer and then choose to accept or reject it.
The offer will be accepted if the board believes
that it will promote the long-term welfare of the
company, and it will be rejected if the board dislikes
the terms or feels that a takeover would
not be beneficial. When a company
pursues takeover after rejection by
a board, it is a hostile takeover. If
a company bypasses the board
entirely, it is also termed a
hostile takeover.
Publicly traded companies are at
risk of hostile takeovers because
opposing companies can purchase
large amounts of their stock to gain a
controlling share. In this instance, the company
does not have to respect the feelings of the board
because it already essentially owns and controls
the firm. A hostile takeover may also involve tactics
like trying to sweeten the deal for individual board
members to get them to agree.
An acquiring firm takes a risk by attempting a
hostile takeover. Because the target firm is not
cooperating, the acquiring firm may unwittingly
take on debts or serious problems, since it does
not have access to all of the information about
the company. Many firms also have trouble getting
financing for hostile takeovers, since some banks
Strategies for Retrenchment
are reluctant to lend in these situations.
Merger
A merger occurs when two companies combine
to form a single company. A merger is very similar
to an acquisition or takeover, except that in the
case of a merger, existing stockholders of both
companies involved retain a shared interest in the
new corporation. By contrast, in an acquisition, one
company purchases a bulk of a second company’s
stock, creating an uneven balance of ownership in
the new combined company.
The entire merger process is usually kept secret
from the general public, and often from the majority
of the employees at the involved companies. Since
the majority of merger attempts do not succeed,
and most are kept secret, it is difficult to estimate
how many potential mergers occur in a given year.
It is likely that the number is very high, however,
given the amount of successful mergers and the
desirability of mergers for many companies.
A merger may be sought for a number of reasons,
some of which are beneficial to the shareholders,
some of which are not. One use of the merger, for
example, is to combine a very profitable company
with a losing company in order to use the losses as
a tax write-off to offset the profits, while expanding
the corporation as a whole.
130
Increasing one’s market share is another major
use of the merger, particularly amongst large
corporations. By merging with major competitors,
a company can come to dominate the market they
compete in, giving them a freer hand with regard
to pricing and buyer incentives. This form of
merger may cause problems when two dominating
companies merge, as it may trigger litigation
regarding monopoly laws.
Another type of popular merger brings together two
companies that make different, but complementary,
products. This may also involve purchasing a
company which controls an asset your company
utilizes somewhere in its supply chain. Major
manufacturers buying out a warehousing chain
in order to save on warehousing costs, as well
as making a profit directly from the purchased
business, is a good example of this. PayPal’s
merger with eBay is another good example, as it
allowed eBay to avoid fees they had been paying,
while tying two complementary products together.
A merger is usually handled by an investment
banker, who aids in transferring ownership of the
company through the strategic issuance and sale
of stock. Some have alleged that this relationship
causes some problems, as it provides an incentive
for investment banks to push existing clients
towards a merger even in cases where it may not
be beneficial for the stockholders. Mergers and
acquisitions are means by which corporations
combine with each other. Mergers occur when
two or more corporations become one. To protect
shareholders, state law provides procedures for the
merger. A vote of the board of directors and then
a vote of the shareholders of both corporations
is usually required. Following a merger, the two
corporations cease to exist as separate entities. In
the classic merger, the assets and liabilities of one
corporation are automatically transferred to the
Strategies for Retrenchment
other. Shareholders of the disappearing company
become shareholders in the surviving company or
receive compensation for their shares.
Benefits of Mergers and Acquisitions
Merger refers to the process of the combination of
two companies, whereby a new company is formed.
An acquisition refers to the process whereby a
company simply purchases another company. In
this case, there is no new company being formed.
Benefits of mergers and acquisitions are quite a
handful.
Mergers and acquisitions generally succeed in
generating cost efficiency through the
implementation of economies of
scale. It may also lead to tax gains
and can even lead to a revenue
enhancement through market
share gain. The principal
benefits from mergers and
acquisitions can be listed as
increased value generation, an
increase in cost efficiency, and an
increase in market share.
Mergers and acquisitions often lead to an increased
value generation for the company. It is expected
that the shareholder value of a firm after mergers
or acquisitions would be greater than the sum of
the shareholder values of the parent companies.
An increase in cost efficiency is affected through
the procedure of mergers and acquisitions. This
is because mergers and acquisitions lead to
economies of scale. This, in turn, promotes cost
efficiency. As the parent firms amalgamate to form
a bigger new firm, the scale of operations of the new
firm increases. As output production rises, there
are chances that the cost per unit of production will
come down.
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Demerger
Demergers are situations in which divisions or
subsidiaries of parent companies are split off into
their own independent corporations. The process
for a demerger can vary slightly, depending on the
reasons behind the implementation of the split.
Generally, the parent company maintains some
degree of financial interest in the newly formed
corporation, although that interest may not be
enough to maintain control of the functionality of
the new corporate entity.
A demerger results in the transfer by a company of
one or more of its undertakings to another company.
The company whose undertaking is
transferred is called the demerged
company, and the company (or
the companies) to which the
undertaking is transferred is
referred to as the resulting
company.
Methods of Corporate
Restructuring
Following are the methods of Corporate
Restructuring:
Joint Venture
Joint ventures are new enterprises owned by two
or more participants. They are typically formed
for special purposes for a limited duration. It is
a combination of subsets of assets contributed
by two (or more) business entities for a specific
business purpose and a limited duration. Each
of the venture partners continues to exist as a
separate firm, and the joint venture represents a
new business enterprise. It is a contract to work
together for a period of time; each participant
Strategies for Retrenchment
expects to gain from the activity but also must ● To extend activities with smaller investment than
make a contribution. if done independently.

● To take advantage of favorable tax treatment

For example, GM-Toyota JV: GM hoped to gain new
or political incentives (particularly in foreign
experience in the management techniques of the
ventures).
Japanese in building high-quality, low-cost compact
& subcompact cars. Whereas, Toyota was seeking
Spin-off
to learn from the management traditions that had
made GE the no. 1 auto producer in the world and to Spin-offs are a way to get rid of underperforming
operate an auto company in the environment under or non-core business divisions that can drag down
the conditions in the US, dealing with contractors, profits.
suppliers, and workers. DCM group and Daewoo
motors entered into JV to form DCM DAEWOO Ltd. Process of Spin-off
to manufacture automobiles in India.
● The company decides to spin off a business
Reasons for Forming a Joint Venture division.

● The parent company files

● Build on the company’s strengths.
the necessary paperwork with the
● Spreading costs and risks. Securities and Exchange Board
● Improving access to of India (SEBI).
financial resources. ● The spin-off
● Economies of scale and becomes a company of its own
advantages of size. and must also file paperwork
with the SEBI.
● Access to new technologies and
customers. ● Shares in the new company
are distributed to parent company
● Access to innovative managerial
shareholders.
practices.
● The spin-off company goes public.
Rationale for Joint Ventures
Notice that the spin-off shares are distributed to
● To augment insufficient financial or technical the parent company shareholders. There are two
ability to enter a particular line of business. reasons why this creates value:

● To share technology and generic management

● Parent company shareholders rarely want
skills in organization, planning, and control.
anything to do with the new spin-off. After all, it’s
● To diversify risk.
an underperforming division that was cut off to
● To obtain distribution channels or raw materials improve the bottom line. As a result, many new
supply. shareholders sell immediately after the new
company goes public.
● To achieve economies of scale.

132 Strategies for Retrenchment

● Large institutions are often forbidden to hold independent companies. As a sequel, the parent
shares in spin-offs due to the smaller market company disappears as a corporate entity, and in
capitalization, increased risk, or poor financials its place, two or more separate companies emerge.
of the new company. Therefore, many large
institutions automatically sell their shares Squeeze-out: The elimination of minority
immediately after the new company goes public. shareholders by controlling shareholders.

Simple supply and demand logic tells us that such a Sell-off

large number of shares on the market will naturally
decrease the price, even if it is not fundamentally
justified. It is this temporary mispricing that gives
the enterprising investor an opportunity for profit.
There is no money transaction in a spin-off. The
transaction is treated as a stock dividend and tax-
free exchange.
Split-off & Split-up
Split-off: It is a transaction in which some but not
all parent company shareholders receive shares in
a subsidiary, in return for relinquishing their parent
company’s share. In other words, some parent
company shareholders receive the subsidiary’s
shares in return for which they must give up their
parent company shares.
Selling a part or all of the firm by any one of means:
sale, liquidation, spin-off, etc., or a general term for
the divestiture of part/all of a firm by any one of a
number of means: sale, liquidation, spin-off, and so
on.
Partial Sell-off
● A partial sell-off/slump sale involves the sale of a
business unit or plant of one firm to another.
● It is the mirror image of a purchase of a business
unit or plant.
● From the seller’s perspective, it is a form of
contraction; from the buyer’s point of view, it is a
form of expansion.

For example, when Coromandel Fertilizers Limited

Features: A portion of existing shareholders
sold its cement division to India Cement Limited, the
receive stock in a subsidiary in exchange for parent
size of Coromandel Fertilizers contracted whereas
company stock.
the size of India Cements Limited expanded.

Split-up: It is a transaction in which a company

spins off all of its subsidiaries to its shareholders
and ceases to exist.

● The entire firm is broken up in a series of spin-

offs.

● The parent no longer exists, and

● Only the new offspring survive.

In a split-up, a company is split up into two or more

133 Strategies for Retrenchment

Divestitures
Divestiture is a transaction through which a firm
sells a portion of its assets or a division to another
company. It involves selling some of the assets or
division for cash or securities to a third party, which
is an outsider.
Divestiture is a form of contraction for the selling
company, a means of expansion for the purchasing
company. It represents the sale of a segment of a
company (assets, a product line, a subsidiary) to a
third party for cash and/or securities.
Mergers, asset purchases, and takeovers lead to
expansion in some way or the other. They
are based on the principle of synergy,
which says 2 + 2 = 5; divestiture, on
the other hand, is based on the
principle of “anergy,” which says
5 – 3 = 3.
Among the various methods of
divestiture, the most important
ones are partial sell-off, demerger
(spin-off & split-off), and equity carve-
out. Some scholars define divestiture
rather narrowly as a partial sell-off, and some
scholars define divestiture more broadly to include
partial sell-offs, demergers, and so on.
Motives for Divestitures
● Change of focus or corporate strategy
● Unprofitable unit or mistake
● Sale to pay off leveraged finance
● Antitrust
● Need cash
● Defend against takeover
134
● Good price.
Equity Carve-out
A transaction in which a parent firm offers some of
a subsidiary’s common stock to the general public
to bring in a cash infusion to the parent without
loss of control. In other words, equity carve-outs
are those in which some of a subsidiary’s shares
are offered for sale to the general public, bringing
an infusion of cash to the parent firm without a
loss of control. Equity carve-out is also a means of
reducing their exposure to a riskier line of business
and to boost shareholders’ value.
Features of Equity Carve-Out
● It is the sale of a minority
or majority voting control in a
subsidiary by its parents to
outsider investors. These are
also referred to as “split-off
IPOs.”
● A new legal entity is created.
● The equity holders in the
new entity need not be the same as the
equity holders in the original seller.
● A new control group is immediately created.
Difference between Spin-off and Equity Carve-
outs:
● In a spin-off, distribution is made pro-rata to
shareholders of the parent company as a dividend,
a form of non-cash payment to shareholders. In
equity carve-out, stock of the subsidiary is sold
to the public for cash, which is received by the
parent company.
● In a spin-off, the parent company no longer has
control over subsidiary assets. In equity carve-
Strategies for Retrenchment
 out, the parent sells only a minority interest in the
subsidiary and retains control.
Leveraged Buyout
A buyout is a transaction in which a person,
group of people, or organization buys a company
or a controlling share in the stock of a company.
Buyouts, both large and small, occur all over
the world on a daily basis. Buyouts can also be
negotiated with external parties. For instance, a
large candy company might acquire smaller candy
companies to more effectively corner the market
and expand its customer base by adding new
brands. Similarly, a company that manufactures
widgets might decide to acquire a
company producing thingamabobs
to enhance its operations, using
an established company as a
foundation rather than starting
from scratch.
In a leveraged buyout, the
company is primarily purchased
using borrowed funds. In fact, up
to 90% of the purchase price can be
borrowed. This decision can be risky,
as the company’s assets are usually used as
collateral. If the company fails to perform, it could
go bankrupt because the individuals involved in
the buyout may not be able to service their debt.
Leveraged buyouts’ popularity waxes and wanes
depending on economic trends.
Buyers in a buyout gain control over the company’s
assets and also gain the right to use trademarks,
service marks, and other registered copyrights.
They can utilize the company’s name and reputation
and may choose to retain key employees who can
facilitate a smooth transition. However, senior
management individuals may find that they cannot
135
retain their positions because the purchasing
company does not want redundant personnel and
seeks to place its own personnel in key roles to
manage the company according to its practices.
In a leveraged buyout, ownership transfer is mainly
accomplished with debt. While some leveraged
buyouts involve entire companies, most focus on
a business unit within a company. In many cases, a
business unit is bought out by its management, and
this type of transaction is known as a management
buyout (MBO). Following the buyout, the company
(or business unit) often becomes a private entity.
Management Buyout
In this scenario, the company’s
management purchases the
company, and they might be joined
by employees in this venture.
However, this practice is
sometimes questioned due
to potential unfair advantages
in negotiations for management
and concerns that they could
manipulate the company’s value to
lower the purchase price for themselves.
On the flip side, the possibility of being able to buy
out their employers in the future could incentivize
employees and management to strengthen the
company. Management buyouts occur when a
company’s managers acquire a significant portion
of the company. The objective of an MBO may be
to enhance the managers’ interest in the company’s
success.
Purpose of MBO
From a management perspective, the purpose of
MBO can be:
Strategies for Retrenchment
● To retain their jobs, either in cases where the
business is scheduled for closure or when
an outside purchaser might bring in its own
management team.
● To maximize the financial benefits from their
contributions to the company’s success by
enjoying the profits themselves.
● To deter aggressive buyers.
A significant advantage of a Master Limited
Partnership is that it combines the tax benefits of
a limited partnership (the partnership itself does
not pay taxes on profits; taxes are levied only when
unit holders receive distributions) with the liquidity
associated with a publicly traded company.
There are two types of partners in this type of
partnership:

The aim of an MBO may be to reinforce the

● The limited partner is the individual or group
manager’s commitment to the company’s success.
providing capital to the MLP and receives
Key considerations in MBO include fairness to
periodic income distributions from the Master
shareholders’ price, the future business plan, and
Limited Partnership’s cash flow.
legal and tax matters.
● The general partner is responsible for managing
the Master Limited Partnership’s affairs and
Benefits of MBO
receives compensation linked to the venture’s

● It provides an excellent opportunity for performance.

management of undervalued companies to

Employee Stock Option Plan (ESOP)
realize the company’s inherent value.

● Lower agency costs: This pertains to costs

An Employee Stock Option is a type of defined
associated with conflicts of interest between
contribution benefit plan that purchases and holds
owners and managers.
stock. ESOP is a qualified, defined contribution
● Source of tax savings: Since interest payments employee benefit plan designed to primarily invest
are tax-deductible, increasing gearing ratios in the stock of the sponsoring employer. Employee
to fund a management buyout can result in Stock Options are “qualified” in the sense that
significant tax benefits. the ESOP’s sponsoring company, the selling
shareholder, and participants receive various tax
Master Limited Partnership benefits.With an ESOP, employees never directly
buy or hold the stock themselves.
Master Limited Partnerships (MLPs) are a type of
limited partnership in which shares are publicly
traded. The ownership interests in the limited
partnership are divided into units, which are traded
like shares of common stock. These ownership
shares are referred to as units. MLPs primarily
operate in industries such as natural resources
(petroleum and natural gas extraction and
transportation), financial services, and real estate.

136 Strategies for Retrenchment

Features warning signs early and take corrective actions
promptly. These negative trends are not difficult to
● Employee Stock Ownership Plan (ESOP) is an detect and may include:
employee benefit plan.
● Continuous cash flow problems
● The scheme provides employees with ownership
of stocks in the company. ● Declining profits and lower profit margins

● It is a form of profit-sharing plan. ● Shrinking market share

● Employers can use ESOPs as a tool to secure ● High employee turnover

loans from financial institutions.
● Low employee morale
● It also offers tax benefits to employers.
● Underutilized capacity

● Raw material supply issues

Benefits for the Company
● Rising input prices
Increased cash flow, tax savings, and enhanced
●Strikes and lockouts
productivity from highly motivated
● Increased competition,
workers. For employees, the benefit
uncompetitive products, or services
is the opportunity to share in the
company’s success. ● Economic recession

● Mismanagement, etc.
Turnaround Strategies

Action Plans for Turnaround

A turnaround strategy is
designed to reverse a negative
Action plans for achieving a
trend and restore the organization
turnaround focus on yielding
to normal health and profitability.
immediate results by addressing key
The primary goal of a turnaround is to
areas such as quality improvement, cost
transform the corporation into a leaner and more
reduction, new product development, and revitalized
efficient entity. This typically involves eliminating
marketing efforts. These short-term action plans
unprofitable products, reducing the workforce,
usually address the following issues:
optimizing distribution outlets, and finding other
effective methods to enhance organizational ● Change in leadership.
efficiency. If successful, a turnaround enables
● Adjustment of prices based on demand elasticity.
the organization to shift its focus towards growth
strategies. ● Concentration on specific customers and
products.
Conditions for Turnaround Strategies ● Enhancements to existing products to extend
their life.
Firms often lose their market share due to various
● Replacement of current products with new ones.
internal and external factors. To survive and thrive
in a competitive environment, they must identify ● Focus on ‘power brands’ that contribute most of
137 Strategies for Retrenchment
 the firm’s revenue; in other words, streamlining the product line.

● Liquidation of assets to generate cash.

● Improved internal coordination.

● Emphasis on selling, advertising, etc.

Summary

Retrenchment strategy is a corporate-level, defensive strategy followed by a firm when its performance
is disappointing or when its survival is at stake for a variety of reasons. Corporate restructuring is one of
the most complex and fundamental phenomena that management confronts. Corporate restructuring is
the process of redesigning one or more aspects of a company. Restructuring a corporate entity is often
a necessity when the company has grown to the point that the original structure can no longer efficiently
manage the output and general interests of the company. Financial restructuring is the reorganization of the
financial assets and liabilities of a corporation in order to create the most beneficial financial environment for
the company. In organizational restructuring, the focus is on management and internal corporate governance
structures. Joint ventures are new enterprises owned by two or more participants. Spin-offs are a way to get
rid of underperforming or non-core business divisions that can drag down profits.

138 Strategies for Retrenchment


Strategic Organizational Design
and Modern Organizational
Structure
Learning Objectives
By the end of this unit, you will be
able to understand:
● Organizational structure: an
introduction
● Organizational design
● Matrix structure
● Strategy and structure
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Unit 9
Introduction
Organizations are social entities that are goal-directed,
with deliberately structured activity systems, and a link to
the external environment. They create value for owners,
customers, and employees through their activities. They
bring together resources to accomplish specific goals,
whether those goals are putting a man on the moon,
selling lottery tickets, producing goods and services, or
providing value to customers. They organize people’s
activities to meet organizational objectives. The term
“organization” has been defined in several ways. Katz and
Kahn define the organization as a system incorporating
a set of sub-systems. These sub-systems are related
groups of activities performed to meet the organization’s
objectives.
Modern organizational structures are built on the
foundation of granting a high level of autonomy to
operational units. This approach entails a hands-off
organizational strategy, supported by control systems for
monitoring and evaluating business unit performance.
Such an architecture is observed in the matrix structure,
the horizontal structure, and virtual structures.
Modern organizational structures have emerged from
various organizational theories, which have identified
certain principles as fundamental to any organization.
Strategic Organizational Design and Modern Organizational Structure
Examples of the architecture employed in modern
organizational design include matrix structures,
horizontal structures, and virtual structures.
Organizational Structure: An Overview
Organizational structure refers to the institutional
arrangements and mechanisms for mobilizing
human, physical, financial, and information
resources at all levels of the system. Organizational
structure and design are important factors in an
organization’s performance. It not only affects
strategy but also other factors such as environmental
stability, workflow, technology, size and lifecycle,
and corporate culture. Therefore, there is overriding
importance given to “structure” in the
implementation of strategy. With
a structural framework in place,
people within a firm know how
to interrelate their actions with
others to support and execute
the organization’s strategy.
Organizational structure
provides guidelines on:
● Division of work into activities;
● Linkage between different functions;
● Hierarchy;
● Authority structure;
● Authority relationships; and
● Coordination with the environment.
In other words, the structure of an organization is the
manner in which various sub-units are arranged and
interrelated. The structure provides guidelines on
hierarchy, authority structure, relationships, linkage
between different functions, and coordination with
the environment. However, it is not necessary for
the organizational structure to remain the same
140
throughout the entire organization; it may differ
within the same organization according to its
particular requirements.
Organizational Chart
The organizational chart is the visual representation
of the underlying activities and processes being
undertaken by the organization. They have their
origin in medieval times, with diagrams outlining
church hierarchy found as far back as medieval
churches in Spain. The key components pertaining
to organizing the activities of the people in the
organization and their relationships with each other
are reflected in the organizational chart:
● Designation of formal reporting
relationships, including the number
of levels in the hierarchy and the
span of control of managers
and supervisors; and
● Grouping of individuals into
departments and departments
into the total organization.
The organization is represented by both
the vertical and horizontal aspects of the
organization chart. Complexity is reflected in the
degree to which activities within the organization
are differentiated. Such differentiations may
be horizontal, vertical, or spatial. The chain
of command, an unbroken line of authority, is
represented by vertical lines on an organization
flowchart. A simple organizational or company
chart is shown as Figure 16.1.
The principle underlying the organization chart is
that vertical linkages primarily show control, while
horizontal linkages indicate coordination and
collaboration. Vertical control is best associated
Strategic Organizational Design and Modern Organizational Structure
with goals of efficiency and stability, while horizontal coordination is associated with learning, innovation,
and flexibility.

Figure 9.1

Organizational Design

In designing an organization, due consideration has to be given to ensure clarity, understanding,

decentralization, stability, and adaptability. The basic principles are:

● Specialization,

● Coordination,

● Centralization, and

● Formalization.

Specialization: Specialization is the division of work into components or units in which people specialize.
It can be vertical (different kinds of work at different levels in the organization) or horizontal (division into
departments).
141 Strategic Organizational Design and Modern Organizational Structure
Coordination: Coordination is the integration of
activities of specialized units toward the common
objective. This involves the placement of different
units in the organization together or separately
and deciding on patterns of relationship and
communication. Coordination is achieved through
the hierarchy of authority. This involves important
principles of organization. Unity of command is
being responsible to and receiving orders from only
one superior. The scalar principle ensures a chain
of command in a straight line from top to bottom.
Since this is not always desirable or possible, in
modern organizational structures, employees may
relate with each other on both the vertical and
horizontal levels.
The responsibility and authority
principle establishes the need for
authority along with responsibility
for accomplishing tasks.
Span of control refers to
the number of specialized
units of persons under one
manager. Departmentalization is
the process of grouping different
types of functions and activities of
the organization. Departmentalization
may be functional, by product, or by users, territory,
process, equipment, etc.
Centralization: Another important principle of
organizational structuring is whether decision
making is delegated to lower levels (decentralized)
or concentrated at the top (centralized). The
design of systems is required to ensure effective
communication, coordination, and integration
across departments depending on decision-
making criteria. Organizations have different
blends of centralization and decentralization as
will be apparent as we study the different types of
organizational structures.
142
Formalization: Formalization refers to the extent
to which rules and regulations permeate the
organization. It defines the formal relations in the
organization. Line authority is used to classify
the superior-subordinate relationship through a
hierarchy of policies, rules, and regulations. Line
employees are directly responsible for achieving
organizational goals. Departments are created
to perform strategically important tasks. Finding
the right balance between vertical control and
horizontal coordination is an important design
decision. Departmental grouping can be a
functional, divisional, multi-focused, or horizontal
grouping. Each type of structure is used in different
situations to meet different needs.
Organizational structure has become
important because of the size,
global spread, and complexity
of modern business firms.
Expanding markets, new
competitors, a proliferation
of products, instant
communications, and a fierce
focus on asset values have made
the old industrial corporation obsolete
in many instances. Even in the case of
a midsize company, management can’t oversee
every employee. Authority and accountability must
be distributed, systems of control and inspection
implemented, with incentives to encourage desired
behavior.
There is no particular type of organizational
structure that is best suited for all enterprises. The
main issues in designing organization structure
are how to group tasks, functions, and divisions;
how to allocate authority and responsibility; and
how to use integrating mechanisms to improve
coordination between functions.
Strategic Organizational Design and Modern Organizational Structure
Goold and Campbell in their study, “Strategies
and Styles,” came to the conclusion that the
organizational architecture and organizational
structure determine the role of the corporate center
and the various parts of the organization. Therefore,
the structure and the model of strategic planning
used by the organization form the basis on which
the organization exercises strategic control.
Above all, the design of the organization’s structure
must infuse meaning into the corporation’s work for
thousands of its employees. The most important
resource of an organization is its people. It is
people who implement strategy. The relationship
between people who work with the organization,
either internally or externally, is determined by the
design of the organizational structure.
Classical Structure Configurations
There are a number of classical (traditional)
organizational structures that are generally seen in
many business organizations. Classical structures
are the most common organizational designs used
by business and include:
● Simple Structures,
● Functional Structures,
● Divisional Structures, and
● Geographic Structures.
A brief description of these classical organizational
structures is given in this section.
Simple Structure
This type of structure is generally seen in small
businesses. A single product or owner-driven
organization generally starts with a simple structure
or with no structure at all. There is little separation of
143
management responsibility, and generally no clear
definition of functional divisions of labor. The owner
or a representative of the owner undertakes most of
the responsibilities of management. The emphasis
here is on direct control and communication to
increase volumes.
It can operate effectively up to a certain size, beyond
which it becomes too cumbersome for an individual
to control the organization. The threshold size will
depend on several factors, including the nature
of the business, type of competencies required
to run the business, etc. For example, a lawyer in
our apex courts may handle a very large turnover
efficiently, whereas a manufacturing organization
with a similar turnover may require a clear division
of functional responsibilities.
Functional Designs
The functional design is a natural evolution of
the simple structure as the organization grows,
and direct control becomes difficult or inefficient.
Functional designs are structured around a chief
executive officer and limited corporate staff.
Activities are grouped together by common
functions with functional line managers in
important organizational areas such as production,
accounting, marketing, R&D, engineering, and
human resources, etc. Each functional unit has a
different set of duties and responsibilities. Jobs
become differentiated around areas of specialty, as
shown in Figure 9.2 below.
Strategic Organizational Design and Modern Organizational Structure
The functional structure consolidates human knowledge and skills with respect to specific activities to
provide depth of expertise. This structure can be effective if there is a low need for horizontal coordination
between functional departments. Functional design provides functional clarity. Everybody understands their
own task. As each departmental manager is concerned with only one kind of work, specialization is built into
the organizational structure. This can be a competitive advantage for the organization.

Figure 9.2

Functional organization is a useful approach, and one in which corporate managers add value if they have an in-
depth, detailed working knowledge of each ‘core business’. This type of structure promotes skill development
among employees. They are exposed to a limited range of activities within their departments, allowing them
to build on their skills. This promotes economies of scale in functional departments and makes it best suited
for a cost leadership strategy. It also suits small to medium-sized organizations producing a limited line of
products, where the dominant competitive issues are cost, efficiency, and quality.

The disadvantage is that functional-area managers tend to develop a narrow dimension of the organization.
The focus is on local issues instead of the overall company’s strategic issues. Vertical communication may
be difficult, thereby causing duplication or rivalry between departments. As functional organizations grow,
boundaries are erected between departments. Coordination and delegating responsibility among departments
become increasingly difficult, at the expense of performance. Additionally, functional specialization may lead
to routine, narrow, and repetitive jobs, resulting in poor productivity. This disadvantage can be overcome by
focusing on job enrichment in the work environment.

The traditional form of this organizational structure has a weakness: it is slow to respond to environmental
changes. To overcome this limitation, a method used by management is to design functional organizational
structures with horizontal linkages. This trend of redesigning the functional organization is partly due to
an increasingly uncertain environment and partly to improve response time. The functional organizational
structure with horizontal linkages reflects a shift towards flatter and more horizontal structures. Horizontal

144 Strategic Organizational Design and Modern Organizational Structure

coordination can be improved with information
systems, direct contact between departments,
full-time integrators or project management task
forces, or teams.
The major limitation of this type of organizational
structure is the emphasis on functional skills.
This focus often limits the perspective on the
organization’s activities and attention to strategic
issues. When it does so, it does not prepare people
in the organization for the future.
Divisional Structure
As the organization grows laterally and the
product offerings increase, the functional
organization becomes unwieldy as
functional units have to be assigned
to different products and product
groups, reporting to the function
heads. Coordination becomes
difficult, and decisions are often
delayed. The divisional structure
was considered a solution. As a
company grows and diversifies,
it adopts a multidivisional structure.
Although this structure costs more to
operate than a functional or product structure, it
economizes on the bureaucratic costs associated
with operating through a functional structure and
gives a company the capability to handle its value
creation activities more effectively. In this type of
structure, departments are grouped together based
on organizational outputs, and each such structure
is called a ‘division’.
The innovation of the divisional organizational
structure is attributed to Alfred Sloan, Jr. He was
responsible for reorganizing General Motors into
separate divisions. Each division was a distinct
self-contained business with its own functional
145
hierarchy. The functional hierarchy, instead of
reporting to the functional head, reported to the
divisional head, making operations more efficient.
Sloan’s new structure delegated day-to-day
operating responsibilities to division managers.
A small corporate office was responsible for
determining the organization’s long-term strategic
direction and for exercising overall financial control.
Each division made its own business-level strategic
decisions within the overall corporate strategy.
Sloan’s structural innovation had three important
aspects:
● It enabled more accurate monitoring of the
performance of each business.
● It facilitated comparisons between
divisions and improved resource
allocation process.
● It motivated managers of
poorly performing divisions
to look for ways to improve
performance.
The divisional structure centers on
the use of separate businesses, cost
or profit centers. It is particularly adaptable
to the large and complex modern organization.
This structure is used by many organizations
competing at the global level. Composed of
operating divisions where each division represents
a separate business or profit center, and the top
corporate officer assigns responsibility for day-
to-day operations and business-unit strategy to
division managers. The organizational structure is
shown in Figure 16.3.
The resources of a division are deployed on the
product, and all activities for a single project or
purpose are brought under one manager. This
makes it easy to fix accountability, procedures,
Strategic Organizational Design and Modern Organizational Structure
and systems can be standardized, leading to better
integration across different specialties. The different
units like marketing, sales, engineering, finance,
and personnel are dedicated to the interests of one
or a few related products, increasing emphasis on
product and market development and growth.
The divisional structure’s strengths are that the
design is suited to fast change in an unstable
environment, enhanced corporate financial control,
enhanced strategic control, growth, and a stronger
pursuit of internal efficiency. It prepares managers
for the future, creating high-quality managers
possessing specialized skills. However, it makes
high human demands of self-discipline, mutual
toleration, and subordinating one’s self-
interest to that of the organization.
However, the divisional
structure has some
disadvantages as well.
Problems in implementing a
multidivisional structure include
establishing the divisional-
corporate authority relationship,
distortion of information, and short-
term R&D focus. This structure tends
to create functional departments in each division,
leading to duplication of effort. The economies of
scale in functional departments are reduced. There
is little incentive to promote cooperation among
divisions. The rivalry and territorial protectionism
by the individual divisions can make coordination
by headquarters extremely difficult. Interdivisional
trading becomes complex and often misleading,
especially where there is extensive transfers
between the divisions. It can lead to reduced
transparency in the operations of the organization.
Conflicts are created as divisions and headquarters
argue about the allocation of resources and support
146
services. Managerial energy is often wasted on
adjudicating disputes between divisions with
reference to scarce inputs, etc. The focus often
turns to the division even in matters where the
organization should have primacy.
Geographical Structure
In a world where organizations are working towards
becoming transnational entities, the relevance of
the organization with a geographical structure is
becoming increasingly important. This is especially
true because the markets, legal framework, culture,
and state of the economy often determine the
strategy required in the particular geographical
region.
The geographical structure
is based on the concept of
market segmentation. The
organization’s users or
customers are grouped
together by a geographical area.
As the operations in a particular
area grow, the geographical areas
are often redefined. The geographical
structure is a form of the multi-divisional
organizational structure. It has strengths and
weaknesses that are similar to the divisional
structure.
The geographical structure provides the option of
flexibility in strategic direction without compromising
its strategy in dissimilar geographical areas. This
is an additional advantage of this organizational
structure. Figure 16.4 illustrates the geographical
structure.
For example, Hanover Insurance, which is one of
the world’s leaders in their field, has become a
trendsetter. It has localized regionally, with each
Strategic Organizational Design and Modern Organizational Structure
region operating as a free-standing unit with its own internal board of directors. The people on the boards
overlap, and this creates shared knowledge.

However, to make such a system work, the skills and capabilities of board members with respect to dealing
with complex, highly conflictual issues are important. These include both conceptual and analytical skills and
interpersonal skills, all of which are needed to confront difficult problems where important decisions need to
be made, and yet those decisions need to be understood and arrived at by groups of people who may have
conflicting interests.

Matrix Structure

A matrix, as defined by Webster’s Dictionary, is “something within which something else originates or
develops.” In the context of an organization, a matrix is a framework designed to accommodate multifocused
operations. It often comes into play when there is a need for simultaneous emphasis on both product and
function, or product and geography, and so on.

Various designs of the matrix exist. The balanced matrix bestows dual lines of authority to both functional
and product chains concurrently. This approach introduces lateral chains of influence, allowing managers to
report both laterally and vertically. The traditional vertical hierarchy is complemented by this form of lateral
influence.

Figure 9.3 illustrates the matrix structure, where horizontal and vertical lines intersect to form a grid. This grid
represents a network of interfaces, or “who works with whom.” These interfaces can exist between project
teams and functional elements within an organization. Horizontally, it could represent a process flow, product
line, or activity set that requires multidisciplinary cooperation for timely success. Project managers oversee
project activities, while functional heads allocate resources to meet project requirements.

Figure 9.3

147 Strategic Organizational Design and Modern Organizational Structure

Two variations have evolved: the functional matrix myopic.
and the product matrix. The former grants primary
authority to functional bosses, with project or The matrix structure is most effective in
product managers coordinating product activities. environments characterized by high environmental
The latter assigns primary authority to project or change and where dual emphasis on product and
product managers, while functional managers functional goals is required. It provides employees
provide advisory expertise as needed. opportunities to develop and grow, exposing them
to a wide range of challenges. This participation
The success of the matrix organization hinges in decision-making fosters higher motivation and
on participants having a clear understanding of commitment.
goals, objectives, and accountability performance
metrics. Vertical and horizontal alignment of these However, weaknesses of the matrix structure
elements is crucial for the proper functioning of include potential frustration and confusion due to
the matrix. Additional conditions necessary for the dual authority, particularly in the balanced matrix.
matrix organization’s success include: It deliberately violates the principle of “unity of
command,” where individuals should receive orders
● Economies of scale in internal resource utilization from a single superior in the chain of command.
Striking a balance between project and functional
● Environmental pressures for two or more critical
authority is essential, as these two influences
factors
are negatively correlated. Successful lateral
● Complexity and uncertainty in the environment
collaboration can lead to decreased influence of
the vertical hierarchy.
In this organizational structure, top leadership holds
the balance of power. Effective communication
Power struggles between product and functional
throughout the organization is essential, and the
managers can emerge, as they share the same set
equilibrium of power must be maintained. The
of resources. Role conflict, ambiguity, and overload
project manager acts as an integrator to achieve
must be controlled. Misalignment, competition, or
specific project objectives.
conflict among managers’ goals, objectives, and
metrics can lead to gridlock in the matrix structure.
A matrix structure allows efficient resource
utilization, enabling the free allocation of resources
across different projects. Specialists are available
to all projects on an equal basis, facilitating
knowledge and experience transfer. This structure
fosters learning among project units and
functional department members, promoting better
communication and flexibility. Quick decisions can
be made, and interaction among project units and
functional departments encourages the exchange
of ideas. The dual lines of authority mitigate the
tendency of departmental managers to become

148 Strategic Organizational Design and Modern Organizational Structure

Despite these limitations, the advantages of the matrix organization often outweigh the disadvantages. As
organizations adopt more multidisciplinary approaches and take on multiple assignments concurrently, the
importance of the matrix organization and its management style will continue to grow.

Horizontal Structure

The horizontal structure organizes employees around core processes, facilitating communication and
coordination among individuals working on a common process. This structure aims to replicate the benefits
of the simple structure commonly found in small organizations, where the owner-manager makes most
decisions and supervises all activities.

Contrary to the traditional vertical hierarchy with departmental boundaries, the horizontal structure eliminates
these boundaries. Divisions within the organization are organized around products, and large functional units
are subdivided into smaller units grouped by product.

Figure 9.4 depicts the predominant characteristics of the horizontal structure. This structure is often favored
by multi-product enterprises seeking to expand and diversify products using a differentiation strategy.
Particularly suitable for large, complex, and multi-product organizations, the horizontal structure aligns well
with the emphasis on products.

Figure 9.4

149 Strategic Organizational Design and Modern Organizational Structure

In a horizontal structure, the focus is on results and performance rather than means. The organization is
organized around outputs, with divisional heads responsible for performance and holding complete strategic
and operational decision-making authority. Core processes, rather than tasks, functions, or geography, serve
as the foundation of this structure. Self-directed teams form the basis of the design, and process owners are
accountable for each core process in its entirety. Team members possess the skills and authority to make
decisions critical to the team’s performance.

The horizontal structure is effective in fostering product emphasis and orderly development, allowing for
careful nurturing and skillful development of products. It supports continuous improvement and is open,
trustful, and collaborative in culture, with a focus on flexibility and responsiveness to changing customer
needs.

While the horizontal structure offers advantages, it also has weaknesses. Its success hinges on managers’
ability to determine which core processes are critical for delivering customer value.

Virtual Organization Structure

A virtual organization is characterized by its almost seamless appearance, featuring permeable and continually
changing interfaces between the company, suppliers, and customers. Operating divisions constantly reform
based on need, and job responsibilities shift regularly, along with lines of authority. The very definition of
“employee” may change, as some customers and suppliers spend more time within the company than some
of its own workers. A leading Canadian natural resources company established a unique organizational
structure that blends the benefits of small business units with Virtual Structures – groupings of these units
– to address diverse strategic issues and competitive environments. Over 100 business units were created,
subdivided based on criteria such as serving a common customer group, geographic location, supplier group,
or phase of development.

Each business unit, numbering over 100, functions as a small team with accountability for strategy, resources,
and performance. This structure allows the CEO and their team to closely monitor value creation and
destruction at the “coal face,” where value is generated or lost.

Virtual structures are dynamic groupings of business units that tackle various strategic issues and competitive
environments. They possess the capacity to be organized in multiple ways to meet evolving priorities and
competitive landscapes. This adaptability provides companies with the ability to reorganize in response
to changing agendas and environments. The Virtual Structure, as illustrated in Figure 17.3, shares some
resemblance to the previously discussed horizontal structure.

150 Strategic Organizational Design and Modern Organizational Structure

 Figure 9.5

In a conventional business organization, mission statements and competitive strategy naturally flow from
the vision statement. However, this is not the case in the new organizational architecture. The focus on unit-
level determination of corporate culture, missions, and objectives necessitates a hands-off policy from the
corporate center.

Modern organization Virtual organization

1.De-functionalized project-based design held together

1. Function in design structure.
by network capabilities

2. Instantaneous, remote computer communication for

2. Hierarchy governing formal communication flows primary interaction; increase inface-to-face informal
and managerial imperative–the major form and basis of interaction; decrease in imperative actions and
formal communication. increase governance through accountability in terms of
parameters rather than instruction or rules.

3. The files. 3. Flexible electronic immediacy through IT.

4. Networking of people from different organizations

4. Impersonal roles.
such that their sense of formal organizational roles blurs.

5. Global, cross-organizational computer-mediated

5. Specialized technical training for specific careers.
projects.

151 Strategic Organizational Design and Modern Organizational Structure

The organization design is based on the
technological capacities of digitalization amongst
other things. Digitalization is just one part of
the tendencies towards ‘virtuality’. The enabling
mechanism of the ‘virtual organization’ allows time
and space to be collapsed, and the informational
controls of conventional bureaucracies superseded.
This is reflected in Table 9.1
These new organizational structures are based
on being able to pick points of leverage carefully.
The relationship among the business units is
inconsistent and asymmetric. The asymmetrical
structure of these organizations runs counter to
traditional notions of balance, equity, and fairness.
There are flexible relationships
among its business units. R&D,
for example, could be managed
centrally for two businesses,
but not a third. Or the corporate
center might play a role in
managing certain processes in
one business unit but may not
do so in another. The logic is that
just like there the differences between
a mature business and a start-up, there
are differences between units and these need
to be recognized. The organization has to avoid
imposing standardized rules and procedures that
ignore the unique requirements of each business
unit. Therefore, it has many of the advantages of
small business units.
Though the advantages of this structure outweigh its
disadvantages, managing this type of organization
is challenging. The organizational architecture
of this type of organization is based on conflict.
Conflict is encouraged to help incubate new ideas
and foster innovation. Very often, conflict within
the organization is essential – and inevitable. The
152
conflict has to be managed so that it does not
become self-destructive. Management also has
to create a relationship between the corporate
center and the unit in a manner that the strategic
choices are integrated into the vision of the larger
organization.
Strategy and Structure
Today’s modern business practices demand
leveraged operations, technology, and knowledge
throughout the enterprise, using a multiplicity of
corporate structures for competitive advantage.
The task of organization is particularly challenging
because most large companies are active not in
one line of business but in several, and
even a company that makes a single
product will probably wish to excel
in a number of dimensions.
An organization with a focused
approach normally employs a
multi-divisional structure. Many
companies in India use this
model. For example, Tata Motors
was organized into three major
manufacturing divisions at Jamshedpur:
the Automotive Division, the Excavator Division, and
the General Engineering Division. Escorts Ltd. was
organized into the Tractor Division, the Motorcycle
Division, the Agency Sales Division, the Automotive
Division, and the Farm Equipment Division, etc.
When operations are related to a limited set of
businesses, corporate management is likely to
perform better in forming the strategic direction of
the different units. Highly diversified organizations
do well when the corporate management follows
a ‘hands-off’ relationship with the different units.
The greater the diversity among the businesses in
multi-business firms, the greater is the necessary
Strategic Organizational Design and Modern Organizational Structure
degree of decentralization and self-containment.
The complex challenges have pioneered a range of
novel hybrid organizational designs. An industrial
company might, for example, have manufacturing
units that are organized geographically by product,
as well as customer-oriented business units
dealing with sales and services that are organized
by the industries they serve. These hybrids require
complex coordination, promoted by advanced
information technology and by corporate cultures
that foster cooperation.
Different strategies require different types of
organizational structures to deliver
The structure of the organization
must support the organization’s
competitive approach. For
example, if the organization
uses a low-cost leadership
strategy, the organization has
to be designed for efficiency,
whereas if the organization uses
the differentiation strategy, the
design calls for a learning structure
with strong horizontal coordination.
Therefore, organizational structure
and design are vital in the context of the strategic
management of organizations.
Even two organizations competing in the same
industry with a similar set of products, technologies,
and markets may find that a structure that works
for one organization may need some modification
in another; the issue depends on several factors,
such as environment, strategy and goals, culture,
technology, and size.
The schematic relationship between structure
and how the organization benefits from good
organizational design is shown in Figure 9.6. The
153
structural components of an organization facilitate
the smooth translation of organizational strategy
and policies into action. They distribute authority
and accountability; establish systems of control and
inspection. Properly designed, the organizational
structure encourages desired behavior. Above all, it
infuses the corporation’s work with meaning for the
people working in the organization. It also supports
the organization’s competitive approach. Therefore,
a strategy–structure fit is one of the necessary
requirements for competitive advantage.
Good organizational design can lead to
optimizing bureaucratic costs, resulting in a low-
results. cost advantage, providing increased profits. In
addition, enhancing the value creation
skills of the organization leads to
differentiation advantages and the
ability to charge a premium price,
thereby impacting the bottom
line. In order to maximize the
benefits to the organization, it
is necessary and important that
the structure of the organization
should align itself and focus on
furthering organizational objectives.
There should be benchmarks by which
an organization can determine whether or not it is
benefiting from the way the organizational structure
is designed.
The main factors that need to be considered in
deciding on the design of the organization are how
to group tasks, functions, and divisions; how to
allocate authority and responsibility; should it be
tall or flat organization; how to ensure a minimum
chain of command; should there be centralization
or decentralization? In addition, the important
requirements for organizational alignment are
that the design should incorporate integration and
integrating mechanisms; it should define degrees
Strategic Organizational Design and Modern Organizational Structure
of direct contact, liaison roles, and the function and
structure of specialized teams.
One or more of the following symptoms of
structural deficiency may appear as an indication
of the structure being out of alignment:
● Decision-making is delayed or lacking in quality.
● The organization does not respond innovatively
to a changing environment.
the environment is both complex and dynamic –
for example, among organizations operating at
the frontiers of scientific development, there is a
need for speed and flexibility. Often, the level of
complexity is such that responsibility and authority
must be devolved to specialists. Therefore, self-
control and personal motivation have to be the
dominant control processes in the organization.
External Environment on Structure

● Too much conflict from departments being at

The external environment influences the
cross purposes is evident.
effectiveness of the firm’s day-to-day operations
and its long-term growth. Factors such as economic
In case it becomes apparent from its symptoms
conditions, changes in market conditions, advances
that there is a lack of alignment or such a danger is
in technology, legal and political conditions, all
imminent, an analysis of the structure is necessary.
come within the purview of the environment. If the
Analysis involves the examination of the various
structure fits the type of environment that it faces,
factors that may influence the structure of the
the organization will be more successful.
organization. Some factors that have an influence
on structure are discussed below.
Often, different departments and divisions of the
organization may have to respond to different
Nature of Environment
environments. The structure of these sub-units
should be designed taking this into consideration.
The environment can be simple, complex, or
For example, many medium-sized organizations
dynamic. In a simple and static environment,
in India prefer to set up small legally independent
organizations can gear themselves for operational
units rather than consolidate their operations due
efficiency. They standardize operations and
to the legal protection provided to workers and to
processes of control. Examples are mining
avoid union formation.
companies or some mass-production companies.
With increasing complexity, there is a need to
devolve decision-making responsibilities to lower
levels or specialists. This means that organizations
in complex environments tend to be more devolved
for operational purposes.

In dynamic conditions, it is necessary for the

organization to increase its ability of sensing
change and responding to it. Adhocracy/Missionary
or divisional styles, with more emphasis on
cultural and self-controls, will be required. Where

154 Strategic Organizational Design and Modern Organizational Structure

Type of Strategy
Matching organizational design to the types of
strategy that the organization is pursuing is a
two-way process. Organizational configuration
influences preferences for particular types of
strategy. Different product/market strategies may
require different forms of organizational design. For
example, a low-price strategy will need to find an
organizational design that ensures a cost-efficient
operation with an emphasis on cost control. On the
other hand, a differentiation strategy may need the
organization to possess a high degree of creativity
to develop and sustain the product or service
qualities which provide competitive advantage.
Based on this view, the low-price
strategy will require a mechanistic
system of control, with clear
job responsibilities, frequent
and detailed reports on
organizational efficiency and
cost, and a clear delineation
of responsibility for budgets
and expenditure. There will be a
strong emphasis on administrative
controls. The organization following a
differentiation strategy, on the other hand, will need
a great encouragement of informality and creativity
within a more devolved structure, but a good deal
of coordination between its various activities. The
emphasis will be more on groups working together
on problems and opportunities rather than on
individual departments and specific job functions.
Cultural and self-control processes are of great
importance with this type of strategy.
Strategic focus in diversified firms concerns
the degree to which the various businesses and
products are structured around a reasonably well-
defined commonality. An organization that has
155
different units seeking different strategies may
experience conflicts in terms of organizational
design and the need to have different types of
control systems. However, such conflicts are now
a common part of organizational life, and a number
of solutions to this type of problem are available.
The important requirement is that management is
aware of the need to balance the organization in
terms of its commonalities. This commonality may
not be advantageous in itself. However, a strategic
focus helps management in deciding where to
concentrate its attention and resources. In addition,
it influences the manner in which the organization
defines itself.
Technology
The nature of the tasks undertaken
by the organization has an
important influence on various
aspects of organizational
design and control. For example,
mass production systems require
the standardization of processes,
centralization with greater direction
and control by senior managers. This can
be implemented through formal planning systems
or direct supervision. Organizations with less
standardized operational processes are likely to
have more devolved and informal decision-making
processes.
The more sophisticated and complex the
technology of an organization, the more elaborate
the structure becomes. When the work requires
innovativeness and creativity, a significant amount
of responsibility and power is likely to devolve to
specialists concerned with the technology itself.
Such an organization may tend to operate as
an adhocracy. This, in turn, creates the need for
Strategic Organizational Design and Modern Organizational Structure
effective exchange of information between specialists and the operating core of the business. This is often
accomplished by integrating and coordinating mechanisms such as committees, joint working groups, and
project teams. Alternatively, there may be an emphasis on social control through professional networks or a
combination.

Size on Structure

Considerable evidence suggests that an organization’s size significantly influences its structure. As the size
of the organization increases, the number of hierarchical levels also increases. This relationship is depicted
in Figure 9.6.

Figure 9.6

Larger organizations have greater specialization and horizontal differentiation. To facilitate coordination, there
is a corresponding increase in vertical differentiation. The resulting complexity makes it more challenging for
top management to directly oversee activities throughout the organization. Direct control and communication
are replaced by formalized rules and regulations. This increases the distance between top management and
the operating level and often leads to delayed and less informed decision-making.

This issue necessitates a redesign of the organization to decentralize decision-making. The result is a new
organizational framework.

Information-processing Perspective on Structure

Throughout most of the 20th century, the hierarchical functional structure predominated. However, in recent
156 Strategic Organizational Design and Modern Organizational Structure
years, organizations have developed other structural designs aimed at increasing horizontal communication.
Vertical linkages are primarily designed for control, in contrast to horizontal linkages that are designed for
coordination and collaboration. All organizations require a mix of both. Figure 9.7 illustrates the relationship
between organizational structure and the capability of information processing.

Figure 9.7

Vertical Information Linkages: The lines of the organization chart act both up and down the chain as the
communication channel. Vertical linkages emphasize efficiency and control. For repetitive problems and
decisions, rules or procedures are established so employees know how to respond without communicating
on each separate issue. For example, budgetary control strategy is executed through an increase in vertical
information capacity in the form of periodic reports, written information, and computer-based communications
distributed to managers.

Horizontal Information Linkages: Horizontal linkages emphasize learning. Many organizations require
a significant amount of information flow. A flat structure is more responsive to the flow of information.
Organizations requiring large amounts of information flow are normally designed with flatter organizational
structures.

A classic structure will have the maximum number of vertical linkages and the minimum amount of
information processing capability. Such organizations are characterized by values that promote control,
efficiency, stability, and reliability. Horizontal structures have the least number of vertical linkages but the
maximum information processing capability. These organizations value coordination, change, learning,
innovation, and flexibility. Other organizational structures fall between these two extremes. The structure
must fit the information requirements of the organization, providing an appropriate balance of information.

157 Strategic Organizational Design and Modern Organizational Structure

In cases where flatter organizational structures are not feasible, cross-functional information systems can be
used. These systems enable employees to routinely exchange information. Alternatively, a liaison role can be
utilized. This involves designating an individual in one department with the responsibility of communicating
and coordinating with another department.

For more acute problems, task forces or temporary committees composed of representatives from different
departments can be used. These task forces link several departments to solve common problems and are
disbanded after tasks are accomplished.

Specialized tasks, hierarchy of authority, rules

Vertical linkages–emphasis on efficiency and
control.
Horizontal linkages–emphasis on learning.
and regulations, formal reporting systems, few
teams or task forces, centralized decision-
making.
Shared tasks, relaxed hierarchy and few rules,
face-to-face communication, many teams and
task forces, informal/ decentralized decision-
making.

Box 9.8 summarizes the emphasis provided by different types of linkage mechanisms. The selection of
linkages depends on the nature of the business and the core capabilities required for the functions of the
organization.

People on Structure

To be effective, the basic structure is governed by a set of rules and regulations, reward-punishment systems,
information networks, control procedures, etc. These apply to the people who are part of the organization. As
a result, the organization attracts and retains individuals whose attitudes, aspirations, experiences, and roles
as organization members are related to and reflected in the structure of the organization.

Depending on the nature of the work, it is necessary to design the organization for excellence in performance.
Organizations should adequately accommodate the psychological needs of employees. Therefore, choosing
the right structure for the type of people the organization requires assumes importance. For example, an
organization in the knowledge industry will require a structure that differs from that of a manufacturing
organization. The requirements of people and organizational structure in an international organization may
significantly differ from those of a local organization.

158 Strategic Organizational Design and Modern Organizational Structure

Summary

The strategy implementation process is a bridge between the classic economist’s view and the view of the
resource school. Critical areas related to the implementation of strategy are organizational structure, the culture
of the organization, and the strategic change process. The structure of the organization determines three key
components pertaining to organizing the activities of the people in the organization. The organization chart
is the visual representation of underlying activities and processes being undertaken by the organization. The
principle underlying the organization chart is that vertical linkages primarily show control, while horizontal
linkages indicate coordination and collaboration. Business Organizations can have a classical or a modern
structure. Classical organizational structures include the Simple Structure, the Functional Structure, the
Divisional Structure, and the Geographical Structure.

The structural components of an organization facilitate the smooth translation of organizational strategy
and policies into action. Properly designed, the organizational structure encourages desired behavior. It also
supports the organization’s competitive approach. In addition to organization design affecting strategy, other
factors – environmental stability, workflow technology, size and life cycle, and corporate culture – must “fit”
into the design of the organization. There is considerable evidence that an organization’s size significantly
influences its structure. Structural designs of organizations are often aimed at optimizing the information
processing capability. The structure must fit the information requirements of the organization so that people
have neither too little information nor too much irrelevant information.

159 Strategic Organizational Design and Modern Organizational Structure


Behavioural Strategic
Learning Objectives
By the end of this unit, you will be
able to understand:
● Stakeholders and strategy
● Strategic leadership
● Leadership approaches
● Corporate culture and strategic
management
● Social responsibility and
strategic management
160
Unit 10
Implementation
Introduction
Successful strategy formulation does not at all guarantee
successful strategy implementation. It is always more
difficult to actually carry out something than to say you
are going to do it. Strategy implementation requires
support, discipline, motivation, and hard work from all
managers and employees. Managers should pay careful
attention to a number of key issues while executing the
strategies. Chief among them are how the organization
should be structured to put its strategy into effect and how
variables such as leadership, power, and organizational
culture should be managed to enable employees to work
together while implementing the firm’s strategic plans.
Organizations in stable, predictable environments often
become relatively tall, with many hierarchical levels and
narrow spans of control. On the other hand, companies
in dynamic, rapidly-changing environments usually adopt
flat structures with few hierarchical levels and wide spans
of control.
Stakeholders and Strategy
A firm’s stakeholders are the individuals, groups, or other
organizations that are affected by and also affect the
firm’s decisions and actions. Depending on the specific
firm, stakeholders may include government, employees,
shareholders, suppliers, distributors, the media, and even
Behavioural Strategic Implementation
the community in which the firm is located, among are affected by the business. For this purpose, a
many others. stakeholder map can be used.

● Stakeholder Analysis: Identify and acknowledge

● When it comes to corporate mission values,
stakeholder’s needs, concerns, wants, authority,
stakeholders will maximize the value for all
common relationships, interfaces, and put this
stakeholders, as opposed to shareholders who
information in line within the Stakeholder Matrix.
only maximize the value for themselves.
● Stakeholder Matrix: Position the stakeholders
● Stakeholders also play a role in the decision-
on a matrix based on their level of influence,
making process in a business. Although
impact, or enhancement they may provide to the
employees and customers are included as
business or its projects.
stakeholders, they too are considered when it
● Stakeholder engagement: Engaging
comes to decision-making.
stakeholders does not seek to develop the
● When it comes to accountability, it does not just
project/business requirements, solution, or
come down to being accountable to themselves.
problem creation or establishing roles and
Accountability lies with customer,
responsibilities. The process focuses on
suppliers, government, community,
knowing and understanding each
and employee stakeholders.
other at the Executive level. It

S t a k e h o l d e r gives an opportunity to discuss

Management and agree on expectations of

An organization needs to
have an effective stakeholder
management system in place,
which provides great support in
achieving its strategic objectives. It
interprets and influences both the external
and internal environments and creates positive
relationships with stakeholders through
appropriate management of their expectations
and agreed objectives. Stakeholder Management
is a process and control that must be planned and
guided by underlying principles.
communication and, primarily,
agree a set of Values and
Principles that all stakeholders
will abide by.
● C o m m u n i c a t i n g
Information: Expectations are
established and agreed for the manner in
which communications are managed between
the
stakeholders - who receives communications,
when, how, and to what level of detail. Protocols
may be established, including security and
confidentiality classifications.

An organization can follow these basic tips to

Stakeholder Management, within business
manage their stakeholders effectively:
or projects, prepares a strategy that utilizes
information or intelligence collected during the
● The organization must prioritize business and
following common processes:
stakeholders’ needs. In order to feel like the
organization is still yours without offending or
● Stakeholder Identification: Identify the parties,
losing big stakeholders that contribute money to
either internal or external to the organization, that

161 Behavioural Strategic Implementation

 keep your company in business, the organization
needs to think strategically and balance out
business needs and stakeholders’ needs. This
means that they have to capture business
processes and link them to projects, software,
and capabilities. They will also need to modify
their prioritization as their understanding of the
application and stakeholder needs change. They
also need to take into consideration the customer
needs as well by involving them in the project.
● The organization should develop the growth
activities around stakeholder needs.
leveraging certain developments or user-
centered designs, an organization can accept
the fact that stakeholder needs will
change over time. As your business
changes, so will the needs of the
stakeholders, and they will need
to also meet their changing
needs.
● The organization should
understand the available
assets. By understanding
what assets are available to the
business, they can also balance
asset reuse with stakeholders’ needs.
Some examples of business assets would be
legacy applications, reusable components, etc.
Strategic Leadership
Leadership is the art and process of influencing
people so that they will strive willingly and
enthusiastically towards the achievement of the
organization’s purpose. Specific styles of leadership
are often associated with specific approaches
to the crafting and execution of strategies. The
organization’s purpose and strategy do not just
drop out of a process of discussion but are actively
directed by an individual with a strategic vision,
162
whom we call a “strategic leader”.
Strategic leadership establishes the firm’s direction
by developing and communicating a vision of the
future and inspiring organization members to move
in that direction. Unlike managerial leadership,
which is generally concerned with the short-
term day-to-day activities, strategic leadership is
concerned with determining the firm’s strategy,
direction, aligning the firm’s strategy with its
culture, modeling and communicating high ethical
standards, and initiating changes in the firm’s
By
strategy when necessary. The most successful
leadership is not just to define the vision and mission
of an organization in a cold, abstract manner but
to communicate trust, enthusiasm, and
commitment to strategy.
Example: Bill Gates of Microsoft,
Akio Morita of Sony, Jack
Welch of General Electric,
Gianni Agnelli of Fiat,
Narayana Murthy of Infosys, are
all examples of strategic leaders
who have guided and shaped the
direction of their companies.
It is rightly said: “Visionary leadership inspires the
impossible: fiction becomes truth”.
Strategic leadership thus enhances prospects for
the organization’s long-term success while at the
same time maintaining its short-term financial
stability.
Role of a Strategic Leadership
Leaders play a central role in performing six critical
and interdependent activities in the implementation
of strategies:
Behavioural Strategic Implementation
● Clarifying Strategic Intent: Leaders motivate
employees to embrace change by setting forth
a clear vision of where the business’s strategy
needs to take the organization.
● Setting the Direction: Leaders set the direction
and scope of the organization through formulating
appropriate corporate and business strategies.
● Creating a Learning Organization: Leaders must
also play a central role in creating a learning
organization. A learning organization is one that
quickly adapts to change. The five elements
central to a learning organization are:
» Inspiring and motivating people with a mission
or purpose.

● Building the organization: Since leaders are
attempting to embrace change, they are often
required to rebuild their organization to align it
with the ever-changing environment and needs
of the strategy. And such an effort often involves
overcoming resistance to change and addressing
problems like the following:
» Empowering people at all levels throughout
the organization.
» Accumulating and sharing internal knowledge.
» Gathering external information.
» Challenging the status quo to stimulate
creativity.

» Ensuring a common understanding about
organizational priorities.
» Clarifying responsibilities among managers
and organizational units.
» Empowering managers and pushing authority
lower in the organization.
» Uncovering and remedying problems
coordination and communication across the
organization.
» Gaining personal commitment from managers
to a shared vision.
» Keeping closely connected with “what’s going
on in the organization”.
● Instilling Ethical Behavior: Ethics may be defined
as a system of right and wrong. Business ethics
is the application of general ethical standards
to commercial enterprises. A leader plays a
central role in instilling ethical behavior in the
organization. The ethical orientation of a leader
is generally considered a key factor in promoting
in ethical behavior among employees. Leaders
who exhibit high ethical standards become role
models for others in the organization and raise
its overall level of ethical behavior. In essence,
ethical behavior must start with the leader before
the employees can be expected to perform
accordingly.

● Shaping Organizational Culture: Leaders play a

key role in developing and sustaining a strategy
supportive culture. Leaders know well that
the values and beliefs shared throughout their
organization will shape how the work of the
organization is done. And when attempting to
embrace accelerated change, reshaping their
organization’s culture is an activity that occupies
considerable time for most leaders.

163 Behavioural Strategic Implementation

Leadership Approaches Transformational Leadership

Research has found that some leadership Transformational leaders have a special ability
approaches are more effective than others for to bring about innovation and change. They
bringing about change in the organization. Three encourage the followers to question the status
types of leadership that can have a substantial quo. They have the ability to lead change in the
impact are transactional, transformational, and organization’s mission, strategy, structure, and
charismatic leadership. These types of leadership culture, as well as promote innovation in products
are briefly explained below: and technologies. Transformational leaders do
not rely solely on tangible rules and incentives to
Transactional Leadership control specific transactions with followers. They
focus on intangible qualities such as vision, shared
Transactional leaders clarify the role and task values, and ideas to build relationships and find
requirements of subordinates, initiate structure, common ground to enlist in the change process.
provide appropriate rewards, and try to be
considerate to and meet the social Charismatic and Visionary Leadership
needs of subordinates. The
transactional leader’s ability Charismatic leadership goes
to satisfy subordinates beyond transactional and
may improve productivity. transformational leadership.
Transactional leaders excel Charisma is a “fire that
at management functions. ignites followers’ energy
They are hardworking, and commitment, producing
tolerant, and fair-minded. They results above and beyond the
take pride in keeping things call of duty”. The charismatic
running smoothly and efficiently. leader has the ability to inspire and
Transactional leaders often stress motivate people to do more than what
the impersonal aspects of performance, they would normally do, despite obstacles and
such as plans, schedules, and budgets. They personal sacrifice. Followers transcend their own
have a sense of commitment to the organization self-interests for the sake of the leader.
and conform to organizational norms and values.
In short, transactional leaders use the authority Charismatic leaders are often skilled in the art of
of their office to exchange rewards such as pay visionary leadership. A vision is an attractive, ideal
and status for employees and generally seek to future that is credible yet not readily attainable.
enhance an organization’s performance steadily, Visionary leaders see beyond current realities and
but not dramatically. In other words, transactional help followers believe in a brighter future. They
leadership is important to all organizations, but speak to the hearts of their followers, letting them
leading change requires a different approach, viz. be part of something bigger than themselves. Thus,
transformational leadership. visionary leaders have a strong vision for the future

164 Behavioural Strategic Implementation

and can motivate others to help realize it. They have
an emotional impact on subordinates because they
strongly believe in the vision and can communicate
it to others in a way that makes the vision real,
personal, and meaningful to others.
When charismatic and visionary leaders respond to
organizational problems, they can have a powerful,
positive influence on organizational performance.
Personal Values and Ethics
Values, personal values, and core values all refer
to the same thing. They are desirable qualities,
standards, or principles. Values are a person’s
driving force and influence their actions
and reactions.
Ethics is defined as “the discipline
dealing with what is good and
bad, and right and wrong,
or with moral duty and
obligation.” Ethics refers to
the moral principles and values
that govern the behavior of a
person or group. Ethics helps us in
deciding what is good or bad, moral
or immoral, fair or unfair in conduct and
decision-making. In other words, ethics serve as a
“moral compass” to guide our actions.
There are many sources for an individual’s ethics.
These include family background, religious beliefs,
community standards, and expectations, etc.
Importance of Ethics
There has been growing interest in corpora te
ethics over the past several years. This is perhaps
because of a spate of recent corporate scandals at
such firms as Enron, Tyco, Texaco, etc. Without a
strong ethical culture, the chances of ethical crises
165
occurring in companies cannot be ruled out. Due to
this, companies face enormous costs in terms of
financial and reputational loss as well as erosion
of human capital and relationships with suppliers,
customers, society at large, and governmental
agencies.
An ethical organization is driven by ethical values
and integrity. Such values shape the search for
opportunities, the design of systems, and the
decision-making processes of the organization.
They provide a common frame of reference that
serves as a unifying force across different functions
and employee groups. Organizational ethics define
what a company is and what it stands for.
The potential benefits of an ethical
organization are many. A strong
ethical orientation can have a
positive effect on employee
commitment and motivation
to excel. This is particularly
important in today’s knowledge-
intensive organizations, where
human capital is critical in creating
value and competitive advantage.
An ethically sound organization can
also strengthen its bonds among its suppliers,
customers, and governmental agencies.
The ethical orientation of a leader is generally
considered to be a key factor in promoting ethical
behavior among employees. Leaders who exhibit
high ethical standards become role models for
others in the organization and raise its overall
ethical behavior. In essence, ethical behavior must
start with the leader, who plays a central role in
instilling ethical behavior in the organization.
Some may think that ethics is a question of personal
scruples. But ethics is as much an organizational
Behavioural Strategic Implementation
issue as a personal issue. Leaders who fail to
provide leadership in establishing proper systems
and controls cannot create an ethical organization.
Unethical business practices reflect the values,
attitudes, and behavioral patterns that define an
organization’s operating culture. Thus, ethics play a
critical role in organizations.
Approaches to Ethics
When an ethical dilemma arises, there are four
approaches to guide our action. These four
approaches are:
● Utilitarian approach
● Individualism approach
● Moral–rights approach
● Justice approach
Utilitarian Approach
According to this approach, moral behavior is one
that produces the greatest good for the greatest
number.
Individualism Approach
According to this approach, acts are moral when
they promote the individual’s best long-term
interests, which ultimately lead to the greater good.
166
Moral–Rights Approach
According to this approach, the fundamental rights
and liberties should be respected in all decisions.
Thus, an ethically correct decision is one that best
maintains the rights of those people affected by
it. Six moral rights should be considered during
decision-making:
● Right of free consent
● Right of privacy
● Right of freedom of conscience
● Right of free speech
● Right to due process
● Right to life and safety
To make ethical decisions, managers need to avoid
interfering with the rights of others.
Justice Approach
According to this approach, moral decisions must
be based on equity, fairness, and impartiality. Four
types of justices are of concern to managers:
● Distributive justice requires that individuals
should not be treated differently on the basis of
race, sex, religion, or national origin. Individuals
who are similar should be treated similarly. Thus,
men and women should not receive different
salaries if they are performing the same job.
● Procedural justice requires that rules be
administered fairly. Rules should be clearly stated
and be consistently and impartially administered.
● Compensatory justice requires that individuals
should be compensated for the cost of their
injuries by the party responsible. Moreover,
individuals should not be held responsible for
matters over which they have no control.
Behavioural Strategic Implementation
● Natural duty principle: This principle reflects a
duty to help others who are in need or danger; a
duty not to cause unnecessary suffering; and the
duty to comply with the just rules of an institution.
Building an Ethical Organization
A firm must have several key elements before it
can become a highly ethical organization. These
elements must be constantly reinforced in order for
the firm to be successful:
Role Models
adopted to achieve the organizational goals and
objectives. Inappropriate reward systems may
cause individuals to commit unethical acts.
Policies and Procedures
Most of the unethical behaviors in organizations
could be traced to the absence of policies and
procedures to guide behavior. It is important to
carefully develop policies and procedures to guide
behaviors so that all employees are encouraged
to behave in an ethical manner. However, it is not
enough merely to have policies “on the books.”

For good or bad, leaders are role models in their Rather, they must be effectively communicated,

organization. The values as well as enforced, and monitored. The company

the character of leaders become should also follow sound corporate

transparent to an organization’s governance practices.

employees through their

Ethics Training
behavior. Leaders must
take responsibility for
The purpose of ethics training
ethical lapses within the
is to encourage ethical
organization, which enhances
behavior. Companies should
the loyalty and commitment
provide appropriate training
of employees through the
in ethical standards. It enables
organization.
managers to align ethical behavior
with organizational goals.
Code of Ethics

Ethics Audit
They are another important element of an ethical
organization. Such mechanisms provide a
Companies should undertake periodic audits to
statement and guidelines for norms and beliefs as
ensure that proper ethical standards are being
well as decision–making. They provide employees
followed by all departments of the organization.
with a clear understanding of the ethical standards
of the organization. Many large companies have
Chief Ethics Officer
developed such codes of conduct.

Some large corporations appoint a senior officer

Reward and Evaluation Systems
with the exclusive responsibility of overseeing the
ethical conduct of employees. He functions like a
An appropriate reward and evaluation system
watchdog on ethics.
should consider both the outcomes and the means

167 Behavioural Strategic Implementation

Ethics Committee
An ethics committee establishes policies regarding
ethical conduct and resolves major ethical dilemmas
faced by the employees of an organization. An
ethics committee performs such functions as
organization of regular meetings to discuss ethical
issues, identifying possible violations of the code,
enforcing the code, rewarding ethical behavior, etc.
Ethics Hotline
This is a special telephone line that enables
employees to bypass the proper channel for
reporting their ethical dilemmas and problems. The
line is usually handled by an executive
who also investigates the matter and
helps resolve the problems of the
concerned employees.
Social Responsibility
and Strategic
Management
Corporate social responsibility
(CSR) consists of “actions that
appear to further some social good,
beyond the interests of the firm.” It
includes such topics as environmental ‘green’
issues, treatment of employees and suppliers,
charitable work, and other matters related to the
community. A brief idea of the areas included in
CSR is given in the figure.
It is important to note that CSR requires firms to
go beyond what the law requires – just doing the
minimum required by the law is not sufficient.
“Corporate social responsibility is concerned with
the ways in which an organization exceeds the
minimum obligations to the stakeholders.”
168
Corporate Social Responsibility is therefore a
company’s duty to operate its business by means
that avoid harm to other stakeholders and the
environment and also to consider the overall
betterment of society in its decisions and actions.
The essence of socially responsible behavior is
that a company should strive to balance its actions
to benefit its shareholders without any adverse
impact on other stakeholders like employees,
suppliers, customers, local communities, and
society at large, and further, to proactively mitigate
any harmful effects on the environment its actions
and business may have.
Responsibilities of Business
A business organization has four
responsibilities:
● Economic Responsibilities:
are the most basic
responsibilities of a
business firm. This involves
the essential responsibility of
the business to provide goods and
services to society at a reasonable
cost. In discharging that economic
responsibility, the company provides productive
jobs to its workforce, pays taxes to central, state,
and local governments.
● Legal responsibilities: reflect the firm’s obligation
to comply with the laws that regulate business
activities, especially in the areas of consumer
safety and pollution control.
● Ethical Responsibilities: reflect the company’s
notion of right or proper business behavior. Ethical
responsibilities go beyond legal requirements.
Firms are expected, though not legally bound, to
behave ethically.
Behavioural Strategic Implementation
● Discretionary Responsibilities: are those that are
voluntarily assumed by business organizations
that adopt the citizenship approach. They support
ongoing charities, public-service advertisement
campaigns, donations, medical camps, public
welfare activities, etc. A commitment to full
corporate responsibility requires strategic
managers to attack social problems with
the same zeal in which they tackle business
problems.
Business managers should keep in mind that
economic and legal responsibilities are mandatory,
ethical responsibilities are expected, and
discretionary responsibilities are desirable.
The above four responsibilities are listed in order
of priority. A business firm must first make a profit
to satisfy its economic responsibilities. A firm
must also follow the laws as a good corporate
citizen. Carroll, however, argues that business firms
have obligations beyond the economic and legal
responsibilities; that firms must also fulfill their
social responsibilities. Social responsibility includes
both ethical and discretionary responsibilities, but
not economic and legal responsibilities.
169
Need for CSR: The Strategy
After considering the arguments for and against
CSR, it becomes evident that it is in the enlightened
self-interest of companies to be good corporate
citizens and devote some of their resources and
energies to employees, the communities in which
they operate, and society in general. There are
five important reasons why companies should
undertake social responsibilities.
Self-interest of the Organization
Every organization obtains critical inputs from
the environment and converts them into goods
and services to be used by society at large. In this
process, they help shareholders to get appropriate
returns on their investment. It is expected that
organizations acknowledge and act upon the
interests and demands of other stakeholders such
as citizens and society in general that are beyond
its immediate constituencies – owners, customers,
suppliers, and employees. That is, they must
consider the needs of the broader community at
large and act in a socially responsible way.
It Generates Internal Benefits
CSR generates internal benefits like employee
recruitment, workforce retention, and training.
Companies with a good CSR reputation are better
able to attract and retain employees compared
to companies with tarnished reputations. Some
employees just feel better about working for a
company committed to improving society. This
can contribute to lower turnover and better worker
productivity. This also benefits the firm by way of
lower costs for staff recruitment and training. The
provision of good working conditions results in
greater employee commitment.
Behavioural Strategic Implementation
It Reduces Risks

CSR reduces the risk of damage to reputation and increases buyer patronage. Consumer, environmental,
and human rights activist groups are quick to criticize businesses that are not socially responsive. Pressure
groups can generate adverse publicity, organize boycotts, and influence buyers to avoid an offender’s
products. Research has shown that adverse publicity is likely to cause a decline in a company’s stock price.

In the Best Interest of Shareholders

CSR is in the best interest of shareholders. Well-conceived social responsibility strategies work to the
advantage of shareholders in several ways. Socially responsible behavior can help avoid or prevent legal
and regulatory actions that could prove costly or burdensome. A study of leading companies found that
environmental compliance and developing eco-friendly products can enhance earnings per share, profitability,
and the likelihood of winning contracts.

It Gives Competitive Advantage

Being known as a socially responsible firm may provide a firm a competitive advantage. For example, firms
that are eco-friendly enhance their corporate image. In western countries, many consumers boycott products
that are not “green”. Companies that take the lead in being environmentally friendly, such as by using recycled
materials, producing ‘green’ products, and helping social welfare programs, enhance their corporate image.

In sum, companies that take social responsibility seriously can improve their business reputation and
operational efficiency while reducing their risk of exposure and encouraging loyalty and innovation. Overall,
companies that take special pains to protect the environment (beyond what is required by law), are active
in community affairs, and are generous supporters of charitable causes are more likely to be seen as good
companies to work for or do business with. It will also benefit the shareholders.

Summary

A firm’s stakeholders are the individuals, groups, or other organizations that are affected by and also affect
the firm’s decisions and actions. An organization needs to have an effective stakeholder management system
in place, which provides great support in achieving its strategic objectives. Strategic leadership establishes
the firm’s direction by developing and communicating a vision of the future and inspiring organization
members to move in that direction. A company’s culture is manifested in the values and business principles
that management preaches and practices. An organization’s culture can exert a powerful influence on the
behavior of all employees.

Ethics refers to the moral principles and values that govern the behavior of a person or group. Ethics help us
in deciding what is good or bad, moral or immoral, fair or unfair in conduct and decision-making. Corporate
social responsibility (CSR) consists of “actions that appear to further some social good, beyond the interests
of the firm.” It includes topics such as environmental ‘green’ issues, treatment of employees and suppliers,
170 Behavioural Strategic Implementation
charitable work, and other matters related to the community. Corporate Social Responsibility is a company’s
duty to operate its business by means that avoid harm to other stakeholders and the environment, and also
to consider the overall betterment of society in its decisions and actions.

171 Behavioural Strategic Implementation

 Unit 11

Strategies at Functional
and Operational Level
Learning Objectives Introduction

By the end of this unit, you will be Once corporate and business-level strategies are
able to understand: developed, management must turn its attention to
● Functional strategies formulating strategies for each functional area of the

● Operational plans and policies business unit. For effective implementation of strategies,
functional strategies provide direction to functional
managers regarding the plans and policies to be adopted
in each functional area.

Functional Strategies

A functional strategy is the approach taken by a functional

area to achieve corporate and business unit objectives
and strategies by maximizing resource productivity. It is
concerned with developing and nurturing a distinctive
competence to provide a company or business unit
with a competitive advantage. Just as a multi-divisional
corporation has several business units, each with its own
business strategy, each business unit has its own set of
departments with its own functional strategy.

Nature of Functional Strategies

Functional strategies are essential to implement business

strategy. In fact, the effectiveness of a corporate or
business strategy execution depends critically on the
manner in which the strategies are implemented at the

172 Strategies at Functional and Operational Level

functional level. The corporate strategy provides
the long-term direction and scope of a firm. The
business strategy outlines the competitive posture
of its operations in an industry. The functional
strategy clarifies the business strategy, giving
specific short-term guidance to operating managers
in the areas of operations like marketing, finance,
HR, R&D, etc., and increases the likelihood of their
success.
Orientation of the functional strategy, therefore,
depends on the business strategy.
Example: If a business unit follows a differentiation
strategy through high-quality products, its
production strategy emphasizes expensive quality
assurance processes over cheaper, high-volume
production; a human resource functional strategy
that emphasizes hiring and training of a highly skilled
but costly workforce; and a marketing functional
strategy that emphasizes extensive advertising
to increase demand rather than using marketing
incentives to retailers. Similarly, if the business unit
follows a low-cost competitive strategy, a different
set of functional strategies emphasizing cost-
cutting measures would be needed to support the
business strategy.
173
Need for Functional Strategies
Functional managers need guidance from the
corporate and business strategies in order to make
decisions. In simple terms, functional strategies tell
the functional manager what to do in his area to
achieve business objectives.
Glueck and Jauch have suggested five reasons
to show why functional strategies are needed.
Functional strategies are developed to ensure that:
● The strategic decisions are implemented by all
the parts of an organization.
● There is a basis available for controlling activities
in different functional areas of a business.
● The time spent by functional managers on
decision-making can be reduced.
● Similar situations occurring in different functional
areas are handled by the functional managers in
a consistent manner.
● Coordination across different functions takes
place where necessary.
Functional Plans and Policies
The process of developing functional plans
and policies is quite similar to that of strategy
formulation, with the difference that functional
heads are responsible for its formulation and
implementation. Environmental factors relevant
to each functional area will have an impact on the
choice of strategies. Finally, the actual process of
choice involves a negotiation between functional
managers and business unit managers. Thus,
functional strategies are generally formulated in all
the key functional areas.
For each of the functional strategies, a set of
policies will have to be established for appropriate
Strategies at Functional and Operational Level
areas of the business. The policies will ensure that
the strategies are carried out as intended and that
the different functional areas are working towards
the same ends. Companies have plans and policies
that cover nearly every major aspect of the firm. The
firm should have strategies in every major aspect of
business, at least in the key functional areas. We
will highlight some of the most important issues
for each functional area that need to be addressed
through their respective functional strategies.
The functional strategies should be comprehensive,
but at the same time, they should not leave so
much choice to operating managers that they work
sub-optimally or at cross purposes. At the same
time, the functional strategies should
be flexible enough to leave room for
managers to respond quickly to
situations and make exceptions
for good reasons. The
functional strategies required
in the key functional areas are
outlined below:
Financial Strategy
In the financial management area, the
major concern of the strategy relates to
the acquisition and utilization of funds. The major
issues involved are the sources from where the
funds would come, from equity or by borrowing.
How much of the borrowing would be short-term
and long-term. In terms of the usage of funds,
the policy decisions would relate to whether and
to what extent funds have to be deployed in fixed
assets and current assets. The long-term or capital
investment decisions relate to buying or leasing the
fixed assets. A retrenchment strategy or paucity of
funds may compel the organization to lease rather
than buy. In the case of an organization where
capital investment decisions are decentralized, a
174
“hurdle rate” may be fixed so as to avoid investment
in weaker projects by one division and non-
investment by another division.
Cash Flow
Apart from capital budgeting, another consideration
in financial strategy, which influences other
functional areas, is the cash flow. A company may
frame bonus and dividend policies based on the
availability of cash. In case a company proposes
expansion through internally generated funds,
it may reduce bonuses and dividends. This is
particularly so when it has formulated ambitious
growth strategies that require large cash. Similarly,
if the firm has a high-risk business, it
should have a conservative debt/
equity ratio to guard against a heavy
interest burden.
The funds position and
optimization orientation
of the top management
also determine the accounts
receivable and payable policies.
Financial strategies and policies may
even determine the accounting policies
as these affect the profitability, the balance-sheet,
and hence, the cash flow through taxes, dividends,
bonuses, etc.
Marketing Strategy
Functional strategies in the marketing area are
required for marketing-mix decisions, i.e. the four
Ps of Marketing, viz. Product Design, Product
Distribution, Pricing, and Promotion aspects of
marketing. In terms of specifics, the product
decisions relate to such issues as the variety
of the product (shape, size, model, etc.), quality
requirements, introduction/withdrawal of products,
Strategies at Functional and Operational Level
nature of customers, etc. Specific policies are
also required regarding distribution channels, i.e.
through retailers or direct selling. What would be
the spread of the distribution network? Whether
new dealers will be established or old ones
developed? The promotion strategies will relate
to the mode of promotion, coverage, and nature
(corporate, product, or brand promotion). Again,
clear and specific strategies will have to be made
about pricing, etc., full cost or standard cost-based
pricing. Offensive vs. defensive postures also
influence the pricing policies.
HR Strategy
HR strategy deals with matters like HR
planning, recruitment and selection,
training and development,
compensation management,
performance management,
rewards and incentives, etc.
Which compensation/reward
system will be able to attract
people of the desired type to join
the organization so as to meet
the task requirements demanded
by the strategy? Which strategies are
necessary to groom the internal people for
new positions? The problem becomes acute in the
context of turnaround strategies. On one hand, the
most competent people leave, and the firm finds
it difficult to attract suitable replacements. On the
other hand, it faces the problem of surplus staff.
HR strategies for retrenchment, though painful, are
quite necessary but difficult to develop.
Production Strategy
The functions relating to production need strategies
relating to quality assurance, machine utilization,
location of facilities, balancing the line, scheduling
of production, and material management. The
175
strategy for entering into the export market will
dictate a different policy regarding the quality
of products and maintenance. The location of
facilities may be determined by closeness to
market or input supply points. Decisions must be
made to determine whether and how much to make
or buy, on the basis of cost differential, availability,
criticality of the item, capacity if expansion becomes
necessary. In the case of bought-out items, policies
regarding the number of suppliers and the criteria
for selecting them are necessary.
R&D Strategy
In the area of research and development, functional
strategies regarding the nature of research are
necessary. In case of expansion through
new product development, heavy
emphasis has to be laid on the
basic and the applied research.
On the contrary, for expansion
in the same line, research
emphasis has to be on product/
process improvement to cut the
cost and to add value. It may be
noted that in the case of basic research,
the firm should be prepared to commit
resources and wait for outcomes for several years.
It cannot have basic research unless it is prepared
to commit resources on a long-term basis.
Importance of Operational Strategy
The key to the successful survival of an enterprise
is how efficiently the production activity is
managed. The two major factors that contribute to
business failures are obsolescence of the product
line and excessive production costs. These factors
themselves have been the outcome of ineffective
production planning.
Strategies at Functional and Operational Level
Operations strategy plays a crucial role in shaping
the ultimate success of a firm. It enables an
organization to make optimal decisions regarding
product, production capacity, plant location, choice
of machinery and equipment, maintenance of
existing facilities, and a host of other aspects of
production. Constant review of the production plan
aids in maintaining a proper balance of capital
investment in plant, equipment, and inventory,
efficient operation of the production system,
product mix, quality control, and ensures effective
material handling and planning of facilities.
Within the broad framework of corporate and
business strategies, production strategy helps in
maintaining full coordination with marketing and
engineering functions to formulate plans to improve
products and services. It calls upon management to
keep in constant touch with finance and personnel
to achieve the optimal use of assets, cost control,
recruitment of suitable personnel, and management
of labor disputes and negotiations.
Components of Operational Plan and Policies
The different components of a production strategy
should ideally consist of the following:
176
Product Mix
A firm should decide about the product mix (how
many and what kind of products to be produced)
keeping in view the objectives such as productivity,
cost efficiency, quality, reliability, flexibility, etc.
Capacity Planning
Capacity Planning is the process of forecasting
demand and deciding what resources will be
required to meet that demand. Meclain and
Thomas suggested that capacity planning involves
the following five sequential steps:
● Predict Future Demand and Competitive
Reactions: The firm should forecast the demand
for various products/services and also estimate
customer reaction to the products offered by it. It
should also take care of potential counter moves
by competitors.
● Translate Above Estimates into Capacity Needs:
Based on forecasts, the firm must decide the
quantity that can be manufactured, keeping input
limitations, such as plant equipment, manpower,
etc., in mind.
● Create Alternative Capacity Plans: Depending
on what the market might absorb and what the
organization can produce, management should
create alternative capacity plans for various
products/services that are offered to customers.
● Evaluate each Alternative: The firm should
identify the opportunities and threats associated
with each alternative and carefully evaluate them
in terms of additional costs involved, payoffs,
etc.
● Select and Implement a Particular Capacity Plan:
The capacity plan that best serves organizational
objectives should be selected and implemented.
Strategies at Functional and Operational Level
One of the most vital decisions which have to be
made regarding production capacity is whether the
company should build so much capacity to satisfy
the entire demand during peak periods and keep
the production facilities idled during lean periods.
There are some organizations that prefer to build
small capacity to take care of normal requirements
and meet peak demand by way of imports or
subcontracting. Some organizations employ
measures such as off-peak discounts, mail early
campaigns, etc., to induce customers to avoid peak
periods.
Technology and Facilities Planning
Choosing Machines and Equipment
A strategic decision to be made
by a production manager is
what type of equipment the
organization will require for
production purposes, how
much it will cost, what will be its
operating cost, and what services
it will render to the organization and
for how long.
The choice of equipment for making a particular
product essentially depends on the basic
manufacturing process. The decision-maker must,
therefore, familiarize himself with the production
process to be adopted.
Another consideration in the choice of new
equipment for a plant is the type and degree of
operating skill required and presently available
skills within the organization. Other factors worth
considering are the ease with which the equipment
can be operated and the safety features of the
equipment.
177
Equipment Investment
The acquisition of equipment involves capital
expenditure which will have long-term effects
on the financial position of the company. Hence,
before taking a final decision regarding investment
in a machine, a detailed analysis of such investment
in terms of cost-benefits must be made, and
its desirability and worthwhileness should be
evaluated with the help of internal rate of return or
net present value method.
The decision to replace the existing machine
is equally important to the enterprise. In this
regard, the management has to decide when
the replacement should be made and
the best replacement policy that
must be considered while making
comparisons between an
existing unit of equipment and
its possible replacement.
In order to make a sound
economic comparison, all the
factors must be converted into
cost considerations. The rate of
return so obtained is compared with
the cut-off rate to ascertain whether the
replacement is economically viable.
Thus, clear-cut policy guidelines regarding the
methodology or computation of net investment
outlay, incremental operating expenditure and
income, depreciation, obsolescence, salvage value,
etc., will help management in taking decisions
regarding the acquisition and/or replacement of
machines.
Physical Facilities Decisions
Facilities strategy covers plans for location analysis
and selection, design and specifications including
Strategies at Functional and Operational Level
the layout of equipment, plant, warehouses, and process, plant layout and space requirements,
related services. Facilities Planning deals with the lighting, ventilating, air-conditioning, service
separate but interrelated costs of material, supplies, facilities, and future expansion.
manpower, services, and facilities. Its mission is to
find ways to minimize the aggregate of such costs Plant Layout
in making and distributing the products at the
proper time. Plant layout involves the arrangement and location
of production machinery, work centers, and auxiliary
Plant Location facilities and activities (inspection, handling of
material storage and shipping) for the purpose of
Plant location is essentially an investment decision achieving efficiency in manufacturing products or
having long-term significance. Once a plant is supplying consumer services. Plant layout should
acquired, it is a permanent asset that cannot readily coordinate material, men, and machines and
be sold. The management may also contemplate achieve the following objectives:
the relocation of the plant when business
expansion and advanced technology ● Facilitate the manufacturing
require additional facilities to process.
serve new market areas, to ● Minimize material handling.
produce new products, or
●Maintain flexibility of
simply to replace the old,
arrangement and operation.
obsolete plants to increase
the company’s production ● Maintain a high
capacity. turnover of work-in-process.

● Hold down investment in

The selection of an appropriate
plant site calls for a location study
of the region in which the factory is to
be situated, the community in which it should
be placed, and finally, the exact site in the city or
countryside.
Plant Building
Once the company has chosen the plant site, due
consideration must be given to providing physical
facilities. A company requiring extensive space will
always construct new buildings.
equipment.
● Make economical use of
building space.
● Promote effective utilization of manpower.
● Promote employee convenience, safety, and
comfort in doing the work.
In designing plant layout, a number of factors such
as the nature of the product, volume of production,
quality, equipment, type of manufacture, building
plant site, personnel, and material handling plan
should be kept in view.

On planning a building for the manufacturing Maintenance of Equipment

facilities, a number of factors will have to be kept
in mind, such as the nature of the manufacturing Maintenance of equipment is an important
178 Strategies at Functional and Operational Level
component of planning consideration. It is Preventive Maintenance
intimately linked with replacement policies.
Every manufacturing enterprise follows some Preventive maintenance is based on the premise
maintenance routine to avoid unexpected that good maintenance prevents breakdowns.
breakdown and thus minimize costs associated Preventive maintenance means preventing
with machine downtime, possible loss of potential breakdowns by replacing worn-out machines or
sales, idle direct and indirect labor delays, customer their parts before their breakdown. It anticipates
dissatisfaction from possible delays in deliveries, likely difficulties and does the expected needed
and the actual cost of repairing the machine. repairs at a convenient time before the repairs are
actually needed. Preventive maintenance depends
A number of strategies can be adopted for upon the past knowledge that certain wearing parts
maintenance of machines and equipment. Two will need replacement after a normal interval of use.
most important ones are carrying excess capacity
and preventive maintenance. Inventory Management

Excess Capacity This is concerned with the management of inventory

In carrying excess capacity method, an organization
carries standby capacity, which is used if trouble
occurs. This excess capacity can be a whole
machine or it can be major parts or components
that ordinarily take time to obtain. Carrying excess
capacity involves cost which must be compared
with costs arising out of a slow-down or a shut-
down of a whole series of dependent operations.
Therefore, the decision in this regard is cost trade-
offs.
consisting of raw material, work-in-process, goods in
transit, finished goods, etc. Inventory management
is a critical function because substantial money
can be locked up in inventory, which can be put to
productive use. There are various techniques that
can be used for effective inventory management.
● Economic Order Quantity
● ABC Analysis
● Just-in-Time (JIT) Inventory systems, etc.

Quality Management

Quality is a major consideration in Production/

Operations strategy. By using techniques like
Total Quality Management (TQM), Six Sigma,
etc., organizations strive to produce ‘Zero-defect
products’. Operations strategy should consist of
appropriate Quality improvement programs to
achieve total Quality in products and services of the
organization.

179 Strategies at Functional and Operational Level

Personnel (HR) Plans and Strategies determine the manpower needs of firms and
develop strategies for meeting those needs.
Personnel policies are guidelines to action.
Brewster and Ricbell defined HR policies as “a set of According to Jeffrey Mello, the key objectives of HR
proposals and actions that act as a reference point planning are:
for managers in their dealings with employees”.
Management should pay attention to the following ● Prevent overstaffing and understaffing.
aspects of HR policies:
● Ensure the organization has the right number of
employees with the right skills in the right places
● HR policies must be related to the strategic
and at the right time.
objectives of the firm.
● Ensure the organization is responsive to changes
● They should be stated in definite, clear, and
in its environment.
understandable language.
● Provides direction and coherence to all HR
● They should be sufficiently comprehensive and
activities and systems.
provide yardsticks for future action.
● Unites the perspectives of line and
● They should be stable enough to
staff managers.
assure people that there will not
be drastic overnight changes. ● Facilitates leadership
continuity through succession
● They should be built on the
planning.
basis of facts and sound
judgment.
Although HR planning follows
● They should be just, fair, and from the strategic plan, the
equitable. information collected in the
● They must be reasonable and HR planning process contributes
capable of being accomplished. to the assessment of the internal
organization’s environment done in
● Periodic review of HR policies is essential to
strategic planning.
keep in tune with changing circumstances.

Staffing
HR Planning

Staffing, the process of recruiting applicants and

HR planning is the first key component for
selecting prospective employees, remains a key
developing a human resource strategy. It involves
strategic area for human resource strategy. Given
translating corporate-wide strategic objectives
that an organization’s performance is a direct result
into a workable plan and serves as a blueprint
of the individuals it employs, the specific strategies
for all specific HR programs and policies. It is
used and decisions made in the staffing process
the process of analyzing and identifying the need
will directly impact the success of the strategic
for and availability of human resources so that
plan.
the organization can meet its objectives. It helps

180 Strategies at Functional and Operational Level

Recruitment There are two key factors to develop successful
training programs in organizations. The first is
Recruitment means attracting people to apply for planning and strategizing the training. This involves
jobs in the organization. The strategic issues in four distinct steps:
recruitment are:
● Needs assessment
● Temporary versus permanent employees
● The establishment of objectives and measures
● Internal versus external recruiting
● Delivery of the training
● When and how extensively to recruit
● Evaluation
● Methods of recruiting
The second key factor is to ensure that desired
Selection results are achieved or accomplished. Training
needs are to be integrated with performance
Once a sufficient pool of applicants has management systems and compensation.
been received, critical decisions need
to be made regarding applicant Performance Management
screening, methods of selection,
and placement. The selection An organization’s long-term
methods should be reliable success in meeting its
and valid. strategic objectives rests
on managing employee
Placement performance and ensuring
that performance measures
After selecting a candidate, he are consistent with the strategic
should be placed on a suitable job. needs. One purpose of the
Placement is an important human performance management system
resource activity. If neglected, it may create is to facilitate employee development.
employee adjustment problems. An employee The second purpose is to determine appropriate
placed in a wrong job may quit the organization in rewards and compensation, which must be clearly
frustration. linked to the achievement of strategic goals.

Training and Development Compensation and Rewards

Training and development of employees is a key Organizations face several key strategic issues in
strategic issue for organizations. It is the means by setting their compensation and reward policies and
which organizations determine the extent to which programs. These include:
their human assets are viable investments. Training
involves employees acquiring knowledge and skills ● Compensation relative to the market.
that they will be able to use on the job.
● Balance between fixed and variable
compensation.
181 Strategies at Functional and Operational Level
● Appropriate mix of financial and non-financial compensation.

● Developing a cost-effective compensation program that results in high performance.

In addition to these strategic issues, the fast pace of change and the need for organizations to respond
in order to remain competitive create challenges for all HR programs, but particularly for compensation.
Organizations should reevaluate their compensation programs within the context of their corporate strategy
and specific HR strategy to ensure consistency with the necessary performance measures required by the
organization. Overly rigid compensation systems inhibit the flexibility needed by the company’s competitive
strategies. HR strategy must encourage creativity to meet strategic objectives. Therefore, compensation
systems must ensure that behaviors that help achieve strategic objectives are appropriately rewarded.

Industrial Relations

Industrial relations are a key strategic issue for organizations because the nature of the relationship between
employees can have a significant impact on morale, motivation, and productivity. Consequently, how
organizations manage the day-to-day aspects of the employment relationship can be a key variable affecting
their ability to achieve strategic objectives.

Unionized employees present several key strategic challenges for management:

● The power base within the organization is redistributed.

● Management’s ability to manage workers at their discretion to achieve the organization’s strategic
objectives gets severely curtailed.

● Outside leadership may pose additional challenges to the management.

● A unionized work setting can greatly impact the organization’s cost structure. Since the liberalization of the
Indian economy in the 1990s, there has been a perceptible change in the industrial relations scenario of our
country. Labor militancy, strikes, and lockouts have reduced drastically. However, in certain sectors of the
economy, especially the government and public sector, there is not much change in the clout of the unions.

Through appropriate collective bargaining and participative management practices, industrial relations can
be managed effectively. HR strategy must incorporate long-term plans and programs to maintain industrial
peace for effective implementation of the business strategy.

Summary

Functional Strategy is concerned with developing and nurturing a distinctive competence to provide a
company or business unit with a competitive advantage. Functional strategies are essential to implementing
business strategy. Functional policies will ensure that the strategies are carried out as intended and that the
different functional areas are working toward the same ends. Companies have plans and policies that cover
nearly every major aspect of the firm. Operations strategy plays a crucial role in shaping the ultimate success

182 Strategies at Functional and Operational Level

of a firm. It enables an organization to make optimal decisions regarding product, production capacity, plant
location, choice of machinery and equipment, maintenance of existing facilities, and a host of other aspects
of production. Personnel policies are a guide to action. Brewster and Ricbell defined HR policies as “a set of
proposals and actions that act as a reference point for managers in their dealings with employees.”

183 Strategies at Functional and Operational Level

 Unit 12

Strategic Control
and Evaluation
Learning Objectives Introduction

By the end of this unit, you will be Strategic evaluation and control represent the final phase
able to understand: in the process of strategic management. Its basic purpose
● Nature of strategic evaluation is to ensure that the strategy is achieving the goals and
and control objectives set forth. It involves comparing performance

● Strategic control with the desired results and providing the necessary
feedback for management to take corrective action.
● Operational control

● Techniques of strategic control According to Fred R. David, strategy evaluation includes

three basic activities: (1) examining the underlying
bases of a firm’s strategy, (2) comparing expected
results with actual results, and (3) taking corrective
action to ensure that performance conforms to plans.
Sometimes, even the best formulated strategies become
obsolete as a firm’s external and internal environments
change. Managers should, therefore, identify important
milestones and set strategic thresholds to assist them
in understanding changes in the underlying assumptions
of a strategy and, if necessary, alter the basic strategic
direction. The evaluation process thus serves as an early
warning system for the organization.

Strategic evaluation generally operates at two levels:

strategic and operational. At the strategic level, managers
try to examine the consistency of strategy with the
environment. At the operational level, the focus is on

184 Strategic Control and Evaluation

determining how a given strategy is effectively
pursued by the organization. Different control
systems are used for both strategic and operational
levels.
Nature of Strategic Evaluation and
Control
Strategic evaluation and control are defined as the
process of determining the effectiveness of a given
strategy in achieving organizational objectives
and taking corrective actions wherever required.
According to Pearce and Robinson, strategic
control is concerned with tracking a strategy as it is
being implemented, detecting problems or changes
in its underlying premises, and making
necessary adjustments. In contrast to
post-action control, strategic control
seeks to guide action on behalf of
the strategies as they are taking
place and when the end result
is still several years off.
Strategic control in an
organization is similar to the
“steering control” in a ship. Steering
keeps a ship stable on its course.
Similarly, strategic control systems sense
to what extent the strategies are successful in
attaining goals and objectives, and this information
is fed to the decision-makers for taking corrective
action in time. Strategic managers can steer the
organization by instituting minor modifications or
resort to more drastic changes, such as altering
the strategic direction altogether. Strategic control
systems thus offer a framework for tracking,
evaluating, or reorienting the functioning of the
firm’s strategy.
Types of General Control Systems: Basically, there
are three types of general control systems:
185
● Output control (i.e. control on actual performance
results).
● Behavior control (i.e. control on activities that
generate the performance).
● Input control (i.e. control on resources that are
used in performance).
Output Control
Output controls specify what is to be accomplished
by focusing on the end result. This control is done
through setting objectives, targets, or milestones for
each division, department, section, and executives,
and measuring actual performance. These controls
are appropriate when specific output
measures haven’t been agreed upon.
Often, rewards and incentives are
linked to performance goals.
Example: Sales quotas,
specific cost reduction or
profit targets, milestones, or
deadlines for completion of
projects are examples of output
controls.
Behavior Control
Behavior controls specify how something is to be
done. This control is done through policies, rules,
standard operating practices, and orders from
superiors. These controls are the most appropriate
when performance results are hard to measure.
Rules standardize behavior and make outcomes
predictable. If employees follow rules, then actions
are performed and decisions handled the same
way time and again. The result is predictability and
accuracy, which is the aim of all control systems.
The main mechanisms of behavior control are:
Strategic Control and Evaluation
● Operating budgets
● Standard operating practices
● Rules and procedures
Example: An increasingly popular behavior control
is the ISO 9000 Standards Series on quality
management and assurance developed by the
International Standards Association of Geneva,
Switzerland. The ISO 9000 series is a way of
documenting a company’s quality operations
and strictly complying with it. Many corporations
worldwide view ISO 9000 certification as assurance
that the firm sells quality products.
Input Control
Input controls specify the amount
of resources, such as knowledge,
skills, abilities, of employees to
be used in performance. These
controls are most appropriate
when output is difficult to
measure.
Basic Characteristics of Effective
Evaluation and Control System:
Effective strategy evaluation systems must
meet several basic requirements. They must be:
● Simple: Strategy evaluation must be simple,
not too comprehensive, and not too restrictive.
Complex systems often confuse people and
accomplish little. The test of an effective
evaluation system is its simplicity, not its
complexity.
● Economical: Strategy evaluation activities must
be economical. Too many controls can do more
harm than good.
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● Meaningful: Strategy evaluation activities should
be meaningful. They should specifically relate to a
firm’s objectives. They should provide managers
with useful information about tasks over which
they have control and influence.
● Timely: Strategy evaluation activities should
provide timely information. For example, when
a firm has diversified into a new business by
acquiring another firm, evaluative information
may be needed at frequent intervals. The time
dimension of control must coincide with the time
span of the event being measured.
● Truthful: Strategy evaluation should be designed
to provide a true picture of what is happening.
Information should facilitate action and
should be directed to those individuals
who need to take action based on it.
● Selective: The control
systems should focus on
selective criteria like key
important factors which
are critical to performance.
Insignificant deviations need not
be focused.
● Flexible: They must be flexible to
take care of changing circumstances.
● Suitable: Control systems should be suitable
to the needs of the organization. They must
conform to the nature and needs of the job and
area to be controlled.
● Reasonable: Control standards must be
reasonable. Frequent measurement and rapid
reporting may frustrate control.
● Objective: A control system would be effective
only if it is unbiased and impersonal. It should
not be subjective and arbitrary. Otherwise, people
may resent them.
Strategic Control and Evaluation
● Acceptable: Controls will not work unless they
are acceptable to those who apply them.
● Foster Understanding and Trust: Control
systems should not dominate decisions. Rather,
they should foster mutual understanding, trust,
and common sense. No department should
fail to cooperate with another in evaluating and
controlling strategies.
● Fix Responsibility for Failure: An effective
control system must fix responsibility for failure.
Detecting deviations would be meaningless
unless one knows where they are occurring and
who is responsible for them. Control system
should also pinpoint what corrective actions are
needed.
There is no ideal strategy evaluation and
control system. The final design depends on
the unique characteristics of an organization’s
size, management style, purpose, problems, and
strengths.
Strategic Control
Strategic control is a type of “steering control”. We
have to track the strategy as it is being implemented,
detect any problems or changes in the predictions
made, and make necessary adjustments. This is
especially important because the implementation
process itself takes a long time before we can
achieve the results. Strategic controls are, therefore,
necessary to steer the firm through these events.
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Types of Strategic Control: There are four types of
strategic controls:
● Premise Control
● Strategic Surveillance
● Special Alert Control
● Implementation Control
Premise Control
Strategy is built around several assumptions or
predictions, which are called planning premises.
Premise control checks systematically and
continuously whether the assumptions on which
the strategy is based are still valid. If a vital premise
is no longer valid, the strategy may have to be
changed. The sooner these invalid assumptions are
detected and rejected, the better are the chances
of changing the strategy. The premise control is
concerned with two types of factors:
● Environmental Factors: The performance of a firm
is affected by changes in environmental factors
like the rate of inflation, change in technology,
government regulations, demographic and
social changes, etc. Although the firm has little
or no control over environmental factors, these
factors have a considerable influence over the
success of the strategy because strategies are
generally based on key assumptions about them.
Example: A firm may assume a massive increase
in demand and embark on an expansion plan. If
suddenly there is a recession and demand for the
products of the firm falls down, it may have to
change its strategic direction.
● Industry Factors: Industry factors also affect
the performance of a company. Competitors,
suppliers, buyers, substitutes, new entrants,
etc. are some of the industry factors about
which assumptions are made. If any of these
Strategic Control and Evaluation
 assumptions go wrong, the strategy may have to
be changed.
Strategic Surveillance
Strategic surveillance is a broad-based vigilance
activity in all the daily operations both inside and
outside the organization. With such vigilance, the
events that are likely to threaten the course of a
firm’s strategy can be tracked. Business journals,
trade conferences, conversations, observations,
etc. are some of the information sources for
strategic surveillance.
Special Alert Control
Sudden, unexpected events can
drastically alter the course of the
firm’s strategy. Such events
trigger an immediate and
intense reconsideration of
the firm’s strategy.
Implementation Control
Strategy implementation takes
place as a series of steps, programs,
investments, and moves that occur over an
extended period of time. Resources are allocated,
essential people are put in place, special programs
are undertaken, and functional areas initiate
strategy-related activities. Implementation control
is aimed at assessing whether the plans, programs,
and policies are actually guiding the organization
towards the predetermined objectives or not.
Implementation control assesses whether the
overall strategy should be changed in the light of the
results of specific units and individuals involved in
the implementation of the strategy. Two important
methods to achieve implementation control are:
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● Monitoring Strategic Thrusts: Strategic thrusts
are small critical projects that need to be done
if the overall strategy is to be accomplished.
They are critical factors in the success of the
strategy. One approach is to agree early in the
planning process on which thrusts are critical
factors in the success of the strategy. Managers
responsible for these implementation controls
will single them out from other activities and
observe them frequently. Another approach is
to use stop/go assessments that are linked to a
series of these thresholds (time, costs, success,
etc.) associated with a particular thrust.
● Milestone Reviews: Milestones are critical events
that should be reached during strategy
implementation. These milestones
may be fixed on the basis of critical
events, major resource allocation,
timeframes, etc.
Techniques of
Strategic Control
Organizations use many techniques
or mechanisms for strategic control.
Some of the important mechanisms
are:
● Management Information Systems: Appropriate
information systems act as an effective control
system. Management will come to know the
latest performance in key areas and take
appropriate corrective measures.
● Benchmarking: It is a comparative method where
a firm finds the best practices in an area and then
attempts to bring its own performance in that
area in line with the best practice. Best practices
are the benchmarks that should be adopted by
a firm as the standards to exercise operational
control. Through this method, performance can
Strategic Control and Evaluation
 be evaluated continually till it reaches the best Appraisal System
practice level. In order to excel, a firm shall
have to exceed the benchmarks. In this manner, This is the system that actually evaluates
benchmarking offers firms a tangible method to performance. When measuring the performance
evaluate performance. of managers, the contribution to organizational
objectives is sought to be measured. The evaluation
● Balanced Scorecard: It is a method based
process through the appraisal system measures
on the identification of four key performance
the actual performance and provides for the control
measures, i.e., customer perspective, internal
system to work.
business perspective, innovation and learning
perspective, and the financial perspective. This
Motivation System
method is a balanced approach to performance
measurement as a range of financial and non-
The primary role of the motivation system is
financial parameters are taken into account for
to induce strategically desirable behaviors
evaluation.
so that managers are encouraged to
work towards the achievement of
Role of Organizational
organizational objectives. This
Systems in Evaluation
system plays an important
role in ensuring deviations
There are six types of
of actual performance with
organizational systems
standards. Performance
involved in evaluation.
checks, which are a feedback
in the evaluation process, are
Information System
done through the motivation

Organizations evaluate by process.

comparing actual performance

Development System
with standards. The purpose of the
information management system is to enable
The development system prepares the managers
managers to keep track of performance through
for performing strategic and operational tasks.
control reports. Whether strategic surveillance or
Among the several aims of development, the most
financial analysis, both are based on the information
important is to match a person with the job to be
system to provide relevant and timely data to
performed. This, in other words, is matching actual
managers to allow them to evaluate performance
performance with standards. This matching can
and strategy and initiate corrective action.
be done, provided it is known what a manager is
required to do and what is deficient in terms of
Control System
knowledge, skills, and attitude. Such a deficiency

The control system is the core of any evaluation is located through the appraisal system. The role

process and is used for setting standards, of the development system in evaluation is to help

measuring performance, analyzing variances, and the strategists initiate and implement corrective

taking corrective action. action.

189 Strategic Control and Evaluation

Planning System

The evaluation process also provides feedback to the planning system for the reformulation of strategies,
plans, and objectives. Thus, the planning system closely interacts with the evaluation process on a continuous
basis.

Summary

Strategic evaluation generally operates at two levels – strategic and operational levels. At the strategic level,
managers try to examine the consistency of strategy with the environment. At the operational level, the focus
is on finding how a given strategy is effectively pursued by the organization. Strategic control is a type of
“steering control.” We have to track the strategy as it is being implemented, detect any problems or changes in
the predictions made, and make necessary adjustments. Operational control provides post-action evaluation
and control over short periods. They involve systematic evaluation of performance against predetermined
objectives. Organizations use many techniques or mechanisms for strategic control. Some of the important
mechanisms are Management Information Systems, benchmarking, balanced scorecard, key factor rating,
responsibility centers, network technique, Management by Objectives (MBO), Memorandum of Understanding,
etc. If the need for evaluation is recognized from the outset, then a strategic evaluation will ideally take
place before the project begins delivering activities. The purpose of evaluating causal connections between
activities, outputs, and outcomes is to explore whether or not the project’s assumptions about the likely
outcomes and effects of its activities and outputs are well-founded. There are three fundamental strategy
evaluation activities, viz. reviewing external and internal factors that are the bases for current strategies;
measuring performance and taking corrective actions.

190 Strategic Control and Evaluation