STRATEGIC MANAGEMENT

MODULE - 2 Joshi

MBA III SEMESTER

Faculty: Krupa

Strategy formulation – Developing Strategic vision and Mission for a company – Setting Objectives – Strategic Objectives and Financial Objectives – Balanced score card, Company Goals and Company Philosophy. The hierarchy of Strategic Intent – Merging the Strategic Vision Objectives and Strategy into a Strategic Plan. INTRODUCTION: Strategic management is a combination of three main processes: (1) Strategy Formulation (2) Strategy Implementation (3) Strategy Evaluation (1) STRATEGY FORMULATION: • Performing a situation analysis, self-evaluation and competitor analysis: both internal and external; both micro-environmental and macro-environmental. • Concurrent with this assessment, objectives are set. These objectives should be parallel to a timeline; some are in the short-term and others on the long-term. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.

These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives. This three-step strategy formulation process is sometimes referred to as determining where you are now, determining where you want to go, and then determining how to get there. Some fundamental questions are… • Is management aware of the threats posed by new rivals? • Do senior executives have a sense of urgency about the need to reinvent the current business model? • Is my company pursuing growth and new business development? • Does the senior management have a clear understanding of how the industry may be different in the next 10 years? • Is it regularly defining new ways of doing business, building new capabilities and setting new standards of customer satisfaction? It is useful to consider strategy formulation as part of a strategic management process that comprises three phases: diagnosis, formulation, and implementation. Strategic management is an ongoing process to develop and revise future-oriented strategies that allow an organization to achieve its objectives, considering its capabilities, constraints, and the environment in which it operates. Diagnosis includes: (a) performing a
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situation analysis (analysis of the internal environment of the organization), including identification and evaluation of current mission, strategic objectives, strategies, and results, plus major strengths and weaknesses; (b) analyzing the organization's external environment, including major opportunities and threats; and (c) identifying the major critical issues, which are a small set, typically two to five, of major problems, threats, weaknesses, and/or opportunities that require particularly high priority attention by management.

MBA III SEMESTER

Formulation produces a clear set of recommendations, with supporting justification, that revise as necessary the mission and objectives of the organization, and supply the strategies for accomplishing them. In formulation, we are trying to modify the current objectives and strategies in ways to make the organization more successful. This includes trying to create "sustainable" competitive advantages -- although most competitive advantages are eroded steadily by the efforts of competitors. A good recommendation should be: effective in solving the stated problem(s), practical (can be implemented in this situation, with the resources available), feasible within a reasonable time frame, cost-effective, not overly disruptive, and acceptable to key "stakeholders" in the organization. It is important to consider "fits" between resources plus competencies with opportunities, and also fits between risks and expectations. There are four primary steps in this phase: * Reviewing the current key objectives and strategies of the organization, which usually would have been identified and evaluated as part of the diagnosis * Identifying a rich range of strategic alternatives to address the three levels of strategy formulation outlined below, including but not limited to dealing with the critical issues * Doing a balanced evaluation of advantages and disadvantages of the alternatives relative to their feasibility plus expected effects on the issues and contributions to the success of the organization * Deciding on the alternatives that should be implemented or recommended. In organizations, and in the practice of strategic management, strategies must be implemented to achieve the intended results. The most wonderful strategy in the history of the world is useless if not implemented successfully. This third and final stage in the strategic management process involves developing an implementation plan and then doing whatever it takes to make the new strategy operational and effective in achieving the organization's objectives. The remainder of this chapter focuses on strategy formulation, and is organized into six sections: Aspects of Strategy Formulation, • Corporate-Level Strategy, • Competitive Strategy, • Functional Strategy,
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Choosing Strategies, Troublesome Strategies.

MBA III SEMESTER

ASPECTS OF STRATEGY FORMULATION: The following aspects or levels of strategy formulation, each with a different focus, need to be dealt with in the formulation phase of strategic management. The three sets of recommendations must be internally consistent and fit together in a mutually supportive manner that forms an integrated hierarchy of strategy, in the order given.

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Corporate Level Strategy: In this aspect of strategy, we are concerned with broad decisions about the total organization's scope and direction. Basically, we consider what changes should be made in our growth objective and strategy for achieving it, the lines of business we are in, and how these lines of business fit together. It is useful to think of three components of corporate level strategy: (a) growth or directional strategy (what should be our growth objective, ranging from retrenchment through stability to varying degrees of growth - and how do we accomplish this), (b) portfolio strategy (what should be our portfolio of lines of business, which implicitly requires reconsidering how much concentration or diversification we should have), and (c) parenting strategy (how we allocate resources and manage capabilities and activities across the portfolio -- where do we put special emphasis, and how much do we integrate our various lines of business). Competitive Strategy (often called Business Level Strategy): This involves deciding how the company will compete within each line of business (LOB) or strategic business unit (SBU). Functional Strategy: These more localized and shorter-horizon strategies deal with how each functional area and unit will carry out its functional activities to be effective and maximize resource productivity.

CORPORATE LEVEL STRATEGY: This comprises the overall strategy elements for the corporation as a whole, the grand strategy, if you please. Corporate strategy involves four kinds of initiatives: * Making the necessary moves to establish positions in different businesses and achieve an appropriate amount and kind of diversification. A key part of corporate strategy is making decisions on how many, what types, and which specific lines of business the company should be in. This may involve deciding to increase or decrease the amount and breadth of diversification. It may involve closing out some LOB's (lines of business), adding others, and/or changing emphasis among LOB's. * Initiating actions to boost the combined performance of the businesses the company has diversified into: This may involve vigorously pursuing rapid-growth strategies in the most promising LOB's, keeping the other core businesses healthy, initiating turnaround efforts in weak-performing LOB's
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with promise, and dropping LOB's that are no longer attractive or don't fit into the corporation's overall plans. It also may involve supplying financial, managerial, and other resources, or acquiring and/or merging other companies with an existing LOB. * Pursuing ways to capture valuable cross-business strategic fits and turn them into competitive advantages -- especially transferring and sharing related technology, procurement leverage, operating facilities, distribution channels, and/or customers. * Establishing investment priorities and moving more corporate resources into the most attractive LOB's. It is useful to organize the corporate level strategy considerations and initiatives into a framework with the following three main strategy components: growth, portfolio, and parenting. These are discussed in the next three sections. What should be Our Growth Objective and Strategies? Growth objectives can range from drastic retrenchment through aggressive growth. Organizational leaders need to revisit and make decisions about the growth objectives and the fundamental strategies the organization will use to achieve them. There are forces that tend to push top decision-makers toward a growth stance even when a company is in trouble and should not be trying to grow, for example bonuses, stock options, fame, ego. Leaders need to resist such temptations and select a growth strategy stance that is appropriate for the organization and its situation. Stability and retrenchment strategies are underutilized. Some of the major strategic alternatives for each of the primary growth stances (retrenchment, stability, and growth) are summarized in the following three sub-sections. Growth Strategies: All growth strategies can be classified into one of two fundamental categories: concentration within existing industries or diversification into other lines of business or industries. When a company's current industries are attractive, have good growth potential, and do not face serious threats, concentrating resources in the existing industries makes good sense. Diversification tends to have greater risks, but is an appropriate option when a company's current industries have little growth potential or are unattractive in other ways. When an industry consolidates and becomes mature, unless there are other markets to seek (for example other international markets), a company may have no choice for growth but diversification. There are two basic concentration strategies, vertical integration and horizontal growth. Diversification strategies can be divided into related (or concentric) and unrelated (conglomerate) diversification. Each of the resulting four core categories of strategy alternatives can be achieved internally through investment and development, or externally through mergers, acquisitions, and/or strategic alliances -- thus producing eight major growth strategy categories. Comments about each of the four core categories are outlined below, followed by some key points about mergers, acquisitions, and strategic alliances.
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MBA III SEMESTER

location. creating a situation in which the existing and new lines of business share and gain special advantages from commonalities such as technology. Related Diversification (Concentric Diversification): In this alternative.. one having synergy with the company's existing lines of business. from modest extensions of present products/markets to major expansions -. and making operations more difficult for competitors. 2. This strategy provides more control over such things as final products/services and distribution. However. one in the decline stage of the product life cycle). attractive industry. but its existing industry is not very attractive. a company expands into a related industry. it also reduces flexibility. many companies have moved toward less vertical integration (especially backward. this may be an appropriate strategy when. Vertical Integration: This type of strategy can be a good one if the company has a strong competitive position in a growing. Horizontal Growth: This strategy alternative category involves expanding the company's existing products into other locations and/or market segments. Further. and prevents the company from seeking the best and latest components from suppliers competing for their business. but may involve new critical success factors that the parent company may not be able to master and deliver. e. or retailers ("forward integration"). distribution. Unrelated Diversification (Conglomerate Diversification): This fourth major category of corporate strategy alternatives for growth involves diversifying into a line of business unrelated to the current ones. In any case. or increasing the range of products/services offered to current markets. although this does not have general support. It amounts to expanding sideways at the point(s) in the value chain that the company is currently engaged in. A company can grow by taking over functions earlier in the value chain that were previously provided by suppliers or other organizations ("backward integration"). The reasons to consider this alternative are primarily seeking more attractive opportunities for growth in which to invest available funds (in contrast to rather unattractive opportunities in existing industries). in cost. and government access. Some writers claim that backward integration is usually more profitable than forward integration.g. 3. raises exit barriers for the company to leave that industry. being a world-class manufacturer does not make a company an effective retailer. or a combination of both. replacing significant amounts of previous vertical integration with outsourcing and various forms of strategic alliances. but also forward) during the last decade or so. product or manufacturing similarities. One of the primary advantages of this alternative is being able to choose from a fairly continuous range of choices. For example. and/or preparing to exit an existing line of business (for example.each with corresponding amounts of cost and risk. customers. distributors. This strategy can have advantages. not only the present industry is 5 MBA III SEMESTER .1. risk reduction. 4. This is often an appropriate corporate strategy when a company has a strong competitive position and distinctive competencies. A company also can grow by taking over functions forward in the value chain previously provided by final manufacturers. stability and quality of components.

but the company lacks outstanding competencies that it could transfer to related products or industries. one study published in Business Week in 1999 found that 61 percent of alliances were either outright failures or "limping along. mergers. however. rather than growth. in which the actual strategy actions are similar. new markets. global mergers between 1993 and 1996 where 58 percent failed to create "substantial returns for shareholders" in the form of dividends and stock price appreciation. it can be difficult to realize the hoped-for value added. and conflicting corporate cultures. Various forms of strategic alliances. Of course. a large share of alliances. However. there also can be a mixture of internal and external actions. combined with circumstances that either permit a period of comfortable coasting or suggest a pause or caution. and acquisitions fall far short of expected benefits or are outright failures. through mergers. They are used particularly to bridge resource and technology gaps. including paying too much.unattractive. but differing primarily in the circumstances motivating the choice of a stability strategy and in the intentions for future strategic actions. unrealistic expectations." Research on mergers and acquisitions includes a Mercer Management Consulting study of all mergers from 1990 to 1996 which found that nearly half "destroyed" shareholder value. Mergers. and Strategic Alliances: Each of the four growth strategy categories just discussed can be carried out internally or externally. Although the lawyers and investment bankers may consider a deal done when the papers are signed and they receive their fees. after which further growth is planned. inadequate due diligence. Kearney study of 115 multibillion-dollar. They are particularly necessary and potentially useful when a company wishes to enter a new industry. and to obtain expertise and market positions more quickly than could be done through internal development. mergers. Acquisitions. and a Price-WaterhouseCoopers study of 97 acquisitions over $500 million from 1994 to 1997 in which two-thirds of the buyer's stocks dropped on announcement of the transaction and a third of these were still lagging a year later. STABILITY STRATEGIES: There are a number of circumstances in which the most appropriate growth stance for a company is stability. Three alternatives are outlined below. Despite their extensive use. an A. and/or strategic alliances. T. Such circumstances usually involve a reasonable successful company. Often. acquisitions. 6 . and acquisitions have emerged and are used extensively in many industries today. this may be used for a relatively short period. MBA III SEMESTER Many reasons for the problematic record have been cited. this should be merely an incident in a multi-year process of integration that began before the signing and continues far beyond. the most powerful contributor to success or failure is inadequate attention to the merger integration process. For example. and/or new parts of the world. because it is difficult to manage and excel in unrelated business units.

Pause and Then Proceed: This stability strategy alternative (essentially a timeout) may be appropriate in either of two situations: (a) the need for an opportunity to rest. not the company's portfolio of individual products. or a dependent subsidiary. Grab Profits While You Can: This is a non-recommended strategy to try to mask a deteriorating situation by artificially supporting profits or their appearance. RETRENCHMENT STRATEGIES: 1. Liquidation: When a company has been unsuccessful in or has none of the previous three strategic alternatives available. attempts to resuscitate or MBA III SEMESTER revive the company through a combination of contraction (general. digest. or (b) an uncertain or hostile environment in which it is prudent to stay in a "holding pattern" until there is change in or more clarity about the future in the environment. Recent terrible examples in the USA are Enron and WorldCom. Turnaround: This strategy. even long-term strategy in a mature. No Change: This alternative could be a cop-out.1. major cutbacks in size and costs) and consolidation (creating and stabilizing a smaller. 2. 3. if part of a diversified corporation). the only remaining alternative is liquidation. temporary strategy in a worsening situation. leaner company).g. often involving a bankruptcy. 2. dealing with a company in serious trouble. and consolidate after growth or some turbulent events . usually chosen either to try to delay letting stakeholders know how bad things are or to extract personal gain before things collapse. when done very effectively it can succeed in both retaining enough key employees and revitalizing the company. rather stable environment. It is an unstable. There is a modest advantage of a voluntary liquidation over bankruptcy in that the board and top management make the decisions rather than turning them over to a court.. Captive Company Strategy: This strategy involves giving up independence in exchange for some security by becoming another company's sole supplier. What Should Be Our Portfolio Strategy? This second component of corporate level strategy is concerned with making decisions about the portfolio of lines of business (LOB's) or strategic business units (SBU's). e. or otherwise trying to act as though the problems will go away. it may be a comfortable. The purpose 7 . Alternatively. 3. 4. a small business in a small town with few competitors.before continuing a growth strategy. Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or captive company strategy. Although difficult. representing indecision or timidity in making a choice for change. distributor. Portfolio matrix models can be useful in reexamining a company's present portfolio. which often ignores stockholders' interests. it has few choices other than to try to find a buyer and sell itself (or divest.

i.e. profitability. 1980. It is not always desirable to have a broad scope. early strategies of McDonald's. These models consider and display on a two-dimensional graph each major SBU in terms of some measure of its industry attractiveness and its relative competitive strength. etc. technological position. which can be customized by the user. size. how broad or narrow should be the scope of the company. pricing practices. and relative market share as an indication of its relative competitive strength.of all portfolio matrix models is to help a company understand and consider changes in its portfolio of businesses. Related to this overall criterion are such questions as: * Does the portfolio contain enough businesses in attractive industries? * Does it contain too many marginal businesses or question marks? * Is the proportion of mature/declining businesses so great that growth will be sluggish? * Are there some businesses that are not really needed or should be divested? * Does the company have its share of industry leaders.g.. Single-business strategies can be very successful (e. for (a) industry attractiveness (e. has a good summary of these). The two primary models are the BCG Growth-Share Matrix and the GE Business Screen (Porter. The GE Business Screen. considers two composite variables. profitability. and also to think about allocation of resources among the different business elements. etc. or is it burdened with too many businesses in modest competitive positions? * Is the portfolio of SBU's and its relative risk/growth potential consistent with the strategic goals? * Do the core businesses generate dependable profits and/or cash flow? * Are there enough cash-producing businesses to finance those needing cash * Is the portfolio overly vulnerable to seasonal or recessionary influences? * Does the portfolio put the corporation in good position for the future? It is important to consider diversification vs..g.) The best test of the business portfolio's overall attractiveness is whether the combined growth and profitability of the businesses in the portfolio will allow the company to attain its performance objectives. also associated with McKinsey. one could include industry size and growth rate. Coca-Cola. The BCG Growth-Share Matrix model considers two relatively simple variables: growth rate of the industry as an indication of industry attractiveness. concentration while working on portfolio strategy.g. market share. and BIC 8 MBA III SEMESTER .) and (b) competitive strength (e. favored treatment in government dealings..

It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.g. Some of the advantages of a narrow scope of business are: (a) less ambiguity about who we are and what we do.or any strategy." which is dangerous when the industry and/or technology may change. relevant for a multi-business company (it is moot for a single-business company). However. and better customer service and convenience. Competitive strategy is about being different. better manufacturing technology and skills.Pen). Diversification becomes more important when market growth rate slows. Some examples of distinctive competencies are superior technology and/or product features. Building stable shareholder value is the ultimate justification for diversifying -. Companies want to develop competitive advantages that have some sustainability (although the typical term "sustainable competitive advantage" is usually only true dynamically. superior sales and distribution capabilities. (Gary Hamel & C.. rather than stretching them across many lines of business. K. The central thrust is how to build and improve the company's competitive position for each of its lines of business. and how can the company do well on them * Coordination of activities (e. Prahalad) MBA III SEMESTER 9 . It includes evaluating and making decisions on the following: * Priorities in allocating resources (which business units will be stressed) * What are critical success factors in each business unit. the focus is on how to compete successfully in each of the lines of business the company has chosen to engage in. as a firm works to continue it). (Michael E. A company has competitive advantage whenever it can attract customers and defend against competitive forces better than its rivals. the company is more likely to develop distinctive competence. having a single business puts "all the eggs in one basket. (c) through extensive hands-on experience. is concerned with how to allocate resources and manage capabilities and activities across the portfolio of businesses. (b) concentrates the efforts of the total organization. What Should Be Our Parenting Strategy? This third component of corporate level strategy. Porter) The essence of strategy lies in creating tomorrow's competitive advantages faster than competitors mimic the ones you possess today. and (d) focuses on long-term profits. Successful competitive strategies usually involve building uniquely strong or distinctive competencies in one or several areas crucial to success and using them to maintain a competitive edge over rivals. horizontal strategies) and transfer of capabilities among business units * How much integration of business units is desirable? COMPETITIVE (BUSINESS LEVEL) STRATEGY: In this second aspect of a company's strategy.

and is included below: 1. Overall Price (Cost) Leadership: appealing to a broad cross-section of the market by providing products or services at the lowest price.g.. Differentiation: appealing to a broad cross-section of the market through offering differentiating features that make customers willing to pay premium prices.We will consider competitive strategy by using Porter's four generic strategies (Porter 1980. and then adding various competitive tactics. among retail stores.common user requirements * Switching costs for buyers are low * Buyers are large and have significant bargaining power 2. although not by Porter. prestige. quality. Some conditions that tend to favor differentiation strategies are: 10 MBA III SEMESTER . Costco. Success with this type of strategy requires differentiation features that are hard or expensive for competitors to duplicate. but price is what the customer responds to) or to compete through providing some distinctive points of differentiation that justify higher prices. Sustainable differentiation usually comes from advantages in core competencies. service.without excluding product features and services that buyers consider essential. Implementing this strategy successfully requires continual.. These two choices define the following four generic competitive strategies. e. and (b) how broad a market target it will aim at (its competitive scope)." which is necessary to sustain competitive prices. 1985) as the fundamental choices. convenience (examples are Nordstrom and Lexus). This requires being the overall low-cost provider of the products or services (e. exceptional efforts to reduce costs -. unique company resources or capabilities. among automobile manufacturers). Some conditions that tend to make this strategy an attractive choice are: * The industry's product is much the same from seller to seller * The marketplace is dominated by price competition. special features. and Hyundai. It also requires achieving cost advantages in ways that are hard for competitors to copy or match. PORTER'S FOUR GENERIC COMPETITIVE STRATEGIES: He argues that a business needs to make two fundamental decisions in establishing its competitive advantage: (a) whether to compete primarily on price (he says "cost. A fifth strategy alternative (best-cost provider) is added by some sources. and superior management of value chain activities.g. superior technology. with highly price-sensitive buyers * There are few ways to achieve product differentiation that have much value to buyers * Most buyers use product in some ways -.

Differentiation Focus: a second market niche strategy. and targets a segment of value-conscious buyers that is usually larger than a market niche.. concentrating on a narrow customer segment and competing with lowest prices. there are many different niches and segments in the industry * Buyer segments differ widely in size. again. Some conditions that tend to favor focus (either price or differentiation focus) are: * The business is new and/or has modest resources * The company lacks the capability to go after a wider part of the total market * Buyers' needs or uses of the item are diverse. a high-fashion women's clothing boutique in Paris. the business is stuck in the middle of the competitive marketplace and will be out-performed by competitors who choose and excel 11 MBA III SEMESTER . or the cheapest automobile made in the former Bulgaria). This strategy could be attractive in markets that have both variety in buyer needs that make differentiation common and where large numbers of buyers are sensitive to both price and value. by incorporating key good-or-better product characteristics at a lower cost than competitors.) This is a strategy of trying to give customers the best cost/value combination. but smaller than a broad market. or Ferrari). and that a business should choose and achieve one of the four generic competitive strategies above. this strategy is mentioned by a number of other writers. Price (Cost) Focus: a market niche strategy.g. profitability.* There are multiple ways to differentiate the product/service that buyers think have substantial value * Buyers have different needs or uses of the product/service * Product innovations and technological change are rapid and competition emphasizes the latest product features * Not many rivals are following a similar differentiation strategy 3.g. making some segments more attractive than others * Industry leaders don't see the niche as crucial to their own success * Few or no other rivals are attempting to specialize in the same target segment 4. concentrating on a narrow customer segment and competing through differentiating features (e. Successful implementation of this strategy requires the company to have the resources.. growth rate. in which they will order electronic equipment at low prices. Porter might argue that this strategy is often temporary. Otherwise. capabilities (and possibly luck) to incorporate upscale features at lower cost than competitors. This strategy is a mixture or hybrid of low-price and differentiation. a single. requires having lower cost structure than competitors (e. small shop on a side-street in a town. which. Best-Cost Provider Strategy: (although not one of Porter's basic four strategies. and intensity in the five competitive forces. skills.

(b) the products of an innovator are somewhat primitive and do not live up to buyer expectations. (c) first-time customers remain strongly loyal in making repeat purchases. there are many variations and elaborations.g. when: (a) being a first-mover is more costly than imitating and only modest experience curve benefits accrue to the leader (followers can end up with lower costs than the first-mover under some conditions).g. thus allowing a clever follower to win buyers away from the leader with better performing products. while the following section discusses cooperative tactics. while having the advantage of minimizing risks by waiting until a new market is established. COMPETITIVE TACTICS: Although a choice of one of the generic competitive strategies discussed in the previous section provides the foundation for a business strategy.e. others present examples of companies (e. (c) technology is advancing rapidly. the first to provide a product or service).. giving fast followers the opening to leapfrog a first-mover's products with more attractive and full-featured second. tactics are shorter in time horizon and narrower in scope than strategies). His argument is analogous to the threats to a tennis player who is standing at the service line. exclusive distribution channels. can produce cost and/or other advantages over rivals. Each tactic can have advantages and disadvantages. Among these are various tactics that may be useful (in general. different components. Sometimes. However. there are advantages to being a skillful follower rather than a first-mover. This section deals with competitive tactics. while defensive tactics attempt to keep a competitor 12 MBA III SEMESTER . e. (b) early adoption of new technologies. etc.. We often speak of first-movers (i. and (d) moving first makes entry and imitation by competitors hard or unlikely. technology. Honda and Toyota) who seem to be able to pursue successfully a best-cost provider strategy. Market Location Tactics: These fall conveniently into offensive and defensive tactics. There are cases in which the first-mover's skills. Timing Tactics: When to make a strategic move is often as important as what move to make. allowing them to catch or pass the first-mover in a relatively short period. and late movers (wait-and-see).. Offensive tactics are designed to take market share from a competitor. Being a first-mover can have major strategic advantages when: (a) doing so builds an important image and reputation with buyers. and (d) the first-mover ignores market segments that can be picked up easily. However.and third-generation products. Two categories of competitive tactics are those dealing with timing (when to enter a market) and market location (where and how to enter and/or defend). and strategies are easily copied or even surpassed by later-movers.in one of the fundamental strategies. with stability. being a second. second-movers or rapid followers. rather than near the baseline or getting to the net.or late-mover isn't necessarily a disadvantage.

To be successful. Some Defensive Tactics are: * Raise Structural Barriers: block avenues challengers can take in mounting an offensive * Increase Expected Retaliation: signal challengers that there is threat of strong retaliation if they attack * Reduce Inducement for Attacks: e. To be successful. These involve an agreement or alliance between two or more businesses formed to achieve strategically significant objectives that are mutually beneficial. * Guerrilla Warfare: using a "hit and run" attack on a competitor.g. This offers the possibility for even a small firm to make some gains without seriously threatening a large. which have been discussed to some extent under Corporate Level growth strategies. Some of the reasons for strategic alliances are to: obtain/share technology. Keeping prices very low gives a new entrant little profit incentive to enter. encirclement involves encircling and pushing over the competitor's position in terms of greater product variety and/or serving more markets.. Some are very short-term. COOPERATIVE STRATEGIES: Another group of "competitive" tactics involve cooperation among companies. share manufacturing capabilities and facilities. * Flanking Maneuver: attacking a part of the market where the competitor is weak. others are longer-term and may be the first stage of an eventual merger between the companies. resourceful competitors. superior type of produce that makes the competitor's product unnecessary or undesirable. This requires a wide variety of abilities and resources necessary to attack multiple market segments. These could be grouped under the heading of various types of strategic alliances. 13 MBA III SEMESTER .from taking away some of our present market share. under the onslaught of offensive tactics by the competitor. to sustain its initial advantage. intermittent assaults on different market segments. the attacker must be patient and willing to carefully expand out of the relatively undefended market niche or else face retaliation by an established competitor. Some offensive tactics are: * Frontal Assault: going head-to-head with the competitor. * Encirclement: usually evolving from the previous two. * Bypass Attack: attempting to cut the market out from under the established defender by offering a new. matching each other in every way. established competitor and evoking some form of retaliation. a firm must use both defensive and offensive strategies. The general experience is that any competitive advantage currently held will eventually be eroded by the actions of competent. Therefore. in elaborating on its basic competitive strategy. the attacker must have superior resources and be willing to continue longer than the company attacked. with small. lower profits to make things less attractive (including use of accounting techniques to obscure true profitability).

Examples are job categories and descriptions. and primary involvement of operating managers. alliances. ranging from: (a) mutual service consortiums (e. The production or operations functional strategies address choices about how and where the products or services will be manufactured or delivered. management of resources. and out-sourcing of major value-chain functions). operational responsibilities. However. and degree of centralization for R&D activities. what should be done in-house and what should be outsourced? Marketing strategy deals with product/service choices and features. similar companies in similar industries pool their resources to develop something that is too expensive alone). Three basic characteristics distinguish functional strategies from corporate level and business level strategies: shorter time horizon. For firms in high-tech industries. distribution. MBA III SEMESTER FUNCTIONAL STRATEGIES: Functional strategies are relatively short-term activities that each functional area within a company will carry out to implement the broader. and achieve other competitive advantages not otherwise available. and financial risks and rewards). evaluation and incentive systems. and management/executive selection processes. finance. typically recommended by the human resources department. and orientation. including choices between being a technology leader or follower. career development and training.share access to specific markets. there will remain more specific decisions that are part of R&D functional strategy. but many requiring top management approval. (c) joint ventures (an independent business entity formed by two or more companies to accomplish certain things. selection. Each area needs to deal with sourcing strategy. technology to be used. just-in-time supplier relationships. policies and discipline. dividend policy. research and development. licensing.g. CHOOSING THE BEST STRATEGY ALTERNATIVES: 14 . such as the relative emphasis between product and process R&D.. markets to be targeted.. Financial strategies include decisions about capital acquisition. for example the role of technology in the company's competitive strategy.g.). pricing strategy. etc. external through purchasing. recruiting. (d) value-chain partnerships (e..e. R&D strategy may be so central that many of the decisions will be made at the business or even corporate level. Human resources functional strategy includes many topics. reduce financial/political/market risks. greater specificity. plus purchasing and relationships with suppliers. A few examples follow of functional strategy topics for the major functional areas of marketing. There could be considered a continuum of types of strategic alliances. production/operations. and human resources management. how new technology will be obtained (internal development vs. and investment and working capital management. with allocated ownership. longer-term corporate level and business level strategies. and promotion considerations. Each functional area has a number of strategy choices that interact with and must be consistent with the overall company strategies. acquisition. i. capital allocation. (b) licensing arrangements. pay and benefits.

g. Unfortunately. Polaroid tried to follow its early success with instant photography by developing "Polavision" during the mid-1970s. but not without careful consideration of the company's particular strengths and weaknesses. is that the chosen strategies must be effective in addressing the "critical issues" the company faces at this time * They must be consistent with the mission and other strategies of the organization * They need to be consistent with external environment factors. including realistic assessments of the competitive environment and trends * They fit the company's product life cycle position and market attractiveness/competitive strength situation * They must be capable of being implemented effectively and efficiently. and (c) company position (dominant leader. Here are some factors to consider when choosing among alternative strategies: * It is important to get as clear as possible about objectives and decision criteria (what makes a decision a "good" one?) * The primary answer to the previous question. and growth rate of industry. including fragmentation. and pessimistic assumptions. and Williams (2002). leader. black and white.g. internal and external pressures. risk propensity. silent motion picture camera and film was displayed at a stockholders' MBA III SEMESTER 15 . (e. most likely.. including being realistic with respect to the company's resources * The risks must be acceptable and in line with the potential rewards * It is important to match strategy to the other aspects of the situation. importance of technology. e. was driven since the 1960s to catch up to IBM in mainframes and continued this quest even into the 1990s after mainframes were in steep decline. instant developing. weak. 8mm. stage.. including: (a) size. SOME TROUBLESOME STRATEGIES TO AVOID OR USE WITH CAUTION: Follow the Leader: when the market has no more room for copycat products and look-alike competitors. worthy of a chapter or book of its own. I recommend Harrison (1999). aggressive challenger.Decision making is a complex subject. and needs and desires of important decision-makers) * Sometimes it is helpful to do scenario construction. (b) industry characteristics. follower. "stuck in the middle") * Consider stakeholder analysis and other people-related factors (e.. Fujitsu Ltd. or the decision by Standard Oil of Ohio to follow Exxon and Mobil Oil into conglomerate diversification) Count on Hitting another Home Run: e. Sometimes such a strategy can work fine. McCall & Kaplan (1990).g. international features. this very expensive.. Among the many sources for additional information. cases with optimistic. commodity product orientation.g. and therefore a vital criterion. This section can only offer a few suggestions.

and cash flows are tight Unrealistic Status-Climbing: Going after the high end of the market without having the reputation to attract buyers looking for name-brand. Strategic intent is said to exist when all employees and levels of a firm are committed to the pursuit of a specific but significant performance target (Hammel and Prahalad. Pan Am's attempt to continue global routes in 1987) Over-optimistic Expansion: Using high debt to finance investments in new facilities and equipment. In complex science terms. a strategic intent can cause people to turn out excellent performance (Hammel and Prahalad. a strategic intent is your company's vision of what it wants to achieve in the long term. Sears' attempts to introduce designer women's clothing) Selling the Sizzle Without the Steak: Spending more money on marketing and sales promotions to try to get around problems with product quality and performance. The intent can take the form of a broad vision or mission statement or a more focused route covering specific objectives and goals (Richards). Polaroid reportedly wrote off at least $500 million on this venture without selling a single camera. capabilities and core competencies to accomplish the firm’s vision. motives and actions of people throughout their organization (R Howard). prestige goods (e. excess capacity appears. Try to do everything: establishing many weak market positions instead of a few strong ones Arms Race: Attacking the market leaders head-on without having either a good competitive advantage or adequate financial strength. It is a statement of design for creating a desirable future (stated in present terms). Polavision again. 1989). thus." Such battles seldom produce a substantial change in market shares. strategic intent is decomposition of exploration rules into the next level of detail.g. Strategic intent is a high-level statement of the means by which your organization will achieve its vision.. Putting it simple.g. usual outcome is higher costs and profitless sales growth Put More Money on a Losing Hand: one version of this is allocating R&D efforts to weak products instead of strong products (e. (1) STRATEGY IMPLEMENTATION: (Module:7) (2) STRATEGY EVALUATION: (Module:8) THE HIERARCHY OF STRATEGIC INTENT: ‘Strategic Intent’ is the leveraging of a firm’s internal resources. In a way.. then getting trapped with high fixed costs when demand turns down. strategic intent tries to establish the parameters that shape the values. 1994). making such aggressive attempts to take market share that rivals are provoked into strong retaliation and a costly "arms race. Depending on cosmetic product improvements to serve as a substitute for real innovation and extra customer value. It is all about winning competitive battles and gaining leadership position by putting organizational resources to best use. the linkages to the exploration rules and the transition rules that define how it 16 MBA III SEMESTER . mission and objectives in a competitive environment. When established effectively.meeting about the time that the first beta-format video recorder was released by Sony.

not a fit exercise. Strategy should be a stretch exercise. uniqueness and discovery that make your strategic intent come to life are vitally important for employees. MBA III SEMESTER Decision Criteria INFLUENCES ON STRATEGIC INTENT: Strategic Intent in Practice:      Acceptable to stakeholders Consistent with the history and culture of the enterprise Must stretch beyond its present aspirations and practices Will tend to be based on inspired guess of the future Includes both vision and goals VISION AND MISSION: 17 . adopt a predetermined direction and attempt to achieve their goal is provided by a strategic intent. The hierarchy of strategic intent covers the vision. believe and live according to it. Expression of strategic intent is to help individuals and organizations share the common intention to survive and continue or extend themselves through time and space.will migrate from its current design and ecosystem to a future business design and ecosystem. THE HIERARCHY OF STRATEGIC INTENT: Strategic intent refers to the purposes the organization strives for. business model and the goals and objectives. they have to understand. business definition. The framework within which firms operate. These may be expressed in terms of a hierarchy of strategic intent. mission. The logic. Purpose of Strategic Intent.

• A Vision statement outlines what the organization wants to be. • Vision therefore is future aspirations that lead to an inspiration to be the best in one’s field of activity. even if they are stretch objectives. It can confuse people. It is a source of inspiration. The Mission describes why it is important to achieve the Vision. then many times. These statements have a direct bearing on the bottom line and success of the organization. If you have an established business where the mission is established. Achievable. It concentrates on the future. A mission statement can resemble a vision statement in a few companies.5 questions that the firm must ask itself before creating vision and mission statement  What is our business?  Who is our customer?  What does our customer need?  What will our business be?  What should our business be? Organizations sometimes summarize goals and objectives into a MISSION STATEMENT and/or a vision statement: While the existence of a shared mission is extremely useful. Features of an effective vision statement include: • Clarity and lack of ambiguity • Vivid and clear picture • Description of a bright future • Memorable and engaging wording 18 MBA III SEMESTER . Which comes first? The mission statement or the vision statement? That depends. It's important that you keep the end or desired result in sight from the start. If you have a new start up business. provided the vision is SMART (Specific. then the vision will guide the mission statement and the rest of the strategic plan. It provides clear decision-making criteria. so it is useful to examine them here. new program or plan to reengineer your current services. Measurable. VISION: • A vision articulates the position that an organization would like to attain in the distant future. Many people mistake vision statement for mission statement. many strategy specialists question the requirement for a written mission statement. Relevant and Time bound). • A Mission statement tells you the fundamental purpose of the organization. but that can be a grave mistake. Either way. the mission guides the vision statement and the rest of the strategic plan. your current situation in terms of internal resources and capabilities (strengths and/or weaknesses) and external conditions (opportunities and/or threats).the vision for the future. Vision describes what will be achieved if the organization is successful. The vision statement can galvanize the people to achieve defined objectives. and where you want to go . However. It defines the customer and the critical processes. A mission statement provides a path to realize the vision in line with its values. A Mission statement defines the purpose or broader goal for being in existence or in the business and can remain the same for decades if crafted well. A Vision statement is more specific in terms of both the future state and the time frame. The Vision describes a future identity while the Mission serves as an ongoing and time-independent guide. there are many models of strategic planning that start with mission statements. It concentrates on the present.the mission. It informs you of the desired level of performance. you need to know your fundamental purpose .

• It creates a common identity and a shared sense of purpose. These discrepancies between these two assessments can give insight on the organization's mission statement effectiveness. Vision is the motivator in an organization. • Good visions foster risk-taking and experimentation. competition. creating short-term objectives compatible with the vision.which includes all of the businesses stakeholders -. said. • High and audacious but achievable aspirations for its future.• Realistic aspirations • Alignment with organizational values and culture To become really effective. Sony’s vision rests on the values of encouraging individual creativity and its determination to be a pioneer. ‘I have a dream’. and encouraging others to craft their own personal vision compatible with the organization's overall vision. Martin Luther Kind Jr. Vision is simply a combination of 3 basic elements: • An organization’s fundamental reason for existence beyond just making money. Leaders have the responsibility of communicating the vision regularly. The external assessment -. and acting as role-models by embodying the vision.is valuable since it offers a different perspective. unchanging core values. creating narratives that illustrate the vision. mission statements need to conduct an internal assessment and an external assessment. The statement should be designed to orient the group’s energies towards the core values and serve as a guide to action. and what followed was a vision that changed a nation. an organizational vision statement must (the theory states) become assimilated into the organization's culture. Values. Building vision: The vision statement should be built around the core values of the organization and the people within it. Vision provides a big perspective of: • Who are we? • What are we trying to do? • How do we want to go about it? • Where are we headed? In strategic management process. thus. Why should organizations have a “Vision”: • Good visions are inspiring and exhilarating. unique and simple. • Its timeless. It needs to be meaningful with a long term perspective so that it can motivate people even when the organization is facing discouraging odds. In addition. Creating a Shared Vision: 19 MBA III SEMESTER . are the essential glue of vision. The internal assessment should focus on how members inside the organization interpret their mission statement. Such core values reflect how you want your future to look. visioning comes first. • They are competitive. The core values define the enduring character of an organization that remains unchanged as it experiences changes in technology. Vision is what keeps the organization moving forward. management styles etc.

must be injected into the veins of the organization. The vision once finalized. now-a-days. People at all levels must share a common inspirational image that compels them to give their best and realize their own dreams. Mintzberg defines a mission as follows: “A mission describes the organization’s basic function in society. Example of corporate vision statements: i) BHEL: A world class innovative. understood and preferably memorized quickly.Strengthen democratic values . who is our customers it looks to satisfy”. Mission is a statement which defines the role that an organization plays in a society. achievable: There is a certain amount of controversy on this issue. ii) Colgate-Palmolive: To be company of first choice in oral and personal hygiene by continuously caring for consumers and partners. It should be short enough to be written on the back of even a business card. (II) Reachable. feel that brevity should not be at the cost of clarity.Most managers. Others. inspirational and should not be reachable. v) Ford Motors: The Ford Foundation is a resource for innovative people and institutions worldwide. talk about a shared vision. meaning that individuals from across the organization have a common mental image and a mutually supported set of aspirations that serve to unite their efforts. (III) Brevity: Some CEOs feel that the vision statement should be pithy enough to be read. being shared. Characteristics of Vision: (I) Clarity: Vision is a vividly descriptive image of what a company wants to be or wants to be known for in future.Reduce poverty and injustice . competitive and profitable engineering enterprise providing total business solution. • • • 20 MBA III SEMESTER Mission is what an organization is and why it exists. iii) NTPC: To make available. in terms of the products and services it produces for its customers”. owned and lived by every single person in the company. Vision must be clear and within a reasonable distance so that people do not get frustrated after repeated attempts result in failures. reliable and quality power in increasingly large quantities.Advance human achievement MISSION: A strategic plan starts with a clearly defined business mission. however. Of course the projected future is not something that can be reached in normal course. Our goals are to . Some CEOs feel that vision should be abstract. concerning philosophical question s like what is our business. Others feel that there is no use chasing a pie in the sky. the nature of business it is in. A difficult target will stretch people to the extreme and compel them to scale new heights every year. iv) HUL: Our vision is to meet the everyday needs of people everywhere. it requires a quantum leap. . Mission is defined as “Essential purpose of the organization.Promote international cooperation and .

It should be unique and distinctive: A unique because an organization should be seen by market and customers as “different”. direction and opportunity MBA III SEMESTER Organizations are founded for a purpose. It should have clarity: It should be clear enough to lead to action. a kind of self image the firm intends to project for years to come. It should the major strategy components: It should indicate the strategy direction for the organization. However. Mission statement answers the questions: • Why it is in existence? • What it wants to be? • Where exactly wants to go? • Whom it wants to serve? Good mission statements have three characteristics:  They focus on a limited number of goals  It stresses the major values and policies the firm desires  It defines the major competitive scope of operation Features of a Mission statement: • • • • • • They should be feasible: Though mission should aim high. SBI – With you. it is essential that stakeholders understand the reason for the organization’s existence. For example. the organization’s mission. (ii) Broad and enduring: the mission is a grand design of the firm’s future. The corporate dream must be presented in crystal-clear manner preferably in a positive tone. Characteristics of Mission: • (i) Clarity: The mission should be clear enough to lead to action. Although the purpose may change over time. It is a general statement of the firm’s intent. To make things clear. It should be precise: It should not be very narrow nor should it be too broad. mission statements come in two forms: primary mission (a general category of business to be engaged in ) and secondary mission ( defining everything more • 21 . aspirations and reason for being. The mission describes the organization’s values. that is. all the way. it should not be so narrow as to restrict the firm’s operations nor should it be too general to make itself meaningless.• • • Mission is the “ purpose or the reason for the organization’s existence” This seeks to embody the entire goals of the organization and the objective of its existence. it should be realistic and achievable. It seeks to provide a sense of purpose. It should be motivating: It should motivate employees to achieve its mission.

• • • • • specifically). is in the transportation business (primary business). Objectives and strategies are generally designed. services). between the present requirements and future expectation. Mission helps people understand organizational priorities and commit resources accordingly. for example. (iv) Realistic: Missions should be realistic and achievable. It is worth remembering that the future of a business is usually determined by the way it defines its business today. and the range of regions. consumer goods. Air India would be deluding itself if it adopted the mission to become “the world’s favourite airline”. the type of customers a company will serve. (iii) Motivating Force: The mission offers a broad roadmap to all people. Components of a Mission Statement: 22 . countries in which a company will operate (kotler). (vi) Values and Beliefs and Philosophy: The mission lays emphasis on the values the firm stands for – what it intends to do. but that would not take advantage of its core competence – providing low cost food and fast service to large group of customers. When everyone is able to understand the corporate mission properly. work is assigned. the range of products and applications the company will supply. MTNL present itself as the ‘Lifeline of Delhi and Mumbai’. (v) Specific: Missions should be specific. Asian Paints stresses. people in the film industry thought that they were in the movie business and not in the entertainment business MBA III SEMESTER How does mission help the firm? (i) Reference Point: The mission guides the operations of a firm by providing proper directions and a sense of purpose. For a painfully long time. They draw meaning and direction from it. (iv) Productive use of Resources: The mission helps ensure that the organization will not pursue conflicting purposes. (iii) Identity and Image: The mission sets a firm apart from other firms of its style. It provides passenger car and truck products to a wide variety of customers and markets (secondary mission). employees. the range of core competencies that a company will master and leverage. (ii) Educative Value: The mission educates people about corporate vision and purpose why the company is there. of course. resources are committed to best use and people can now compare themselves against the benchmarks set by the along right paths. suppliers and dealers. It does not allow the constituent elements of an organization to move in different directions. latest technology and unique product offerings etc. McDonald’s could probably enter the solar energy business. They must define the competitive scopes within which the company will operate. where it wants to go in future etc. that is the range of industries in which a company will operate (industrial goods. It must strike a happy balance between the narrow and broad ways of doing things in the years ahead. TELCO. by running that extra mile. what is unique about its offerings. what existence it seeks. how it strives to meet the needs of its customers. a kind of unity of purpose is achieved. so that it stands out in a crowd. keeping the broad picture offered by mission in the background. Through this statement the firm wants to maintain its distinct image and character in terms of excellent quality and service. For example. The targets are set. ‘Leadership through excellence’. (vii) Dynamic: The concept of mission is dynamic and not a static one.

MBA III SEMESTER 23 .

system and service to serve the national and international market in the field of energy.” A clear business mission should have each of the following elements: Taking each element of the above diagram in turn. utilization and conservation of energy for applications in the power. The areas of interest would be the conversion. continue and accelerate efforts to develop and maximize the contribution of the energy sector to the economy of the country.” Ranbaxy Laboratories: “To become a research-based international pharmaceutical company. transmission.MBA III SEMESTER Examples of Mission Statements: BHEL: “To achieve and maintain a leading position as suppliers of quality equipment.” ONGC: “To stimulate. industrial and transportation fields. what should a good mission contain? (1) A Purpose: Why does the business exist? Is it to create wealth for shareholders? Does it exist to satisfy the needs of all stakeholders (including employees. to strive for technological excellence and market leadership in these areas. and society at large?) (2) A Strategy and Strategic Scope: A mission statement provides the commercial logic for the business and so defines two things: .The products or services it offers (and therefore its competitive position) 24 .” Cadbury India: “To attain leadership position in the confectionery market and achieve a strong national presence in the food drinks sector.

For example. The decisions management make about strategic scope define the nature of the business. Objectives can be set at two levels: (1) Corporate level: These are objectives that concern the business or organization as a whole Examples of “corporate objectives might include: • We aim for a return on investment of at least 15% • We aim to achieve an operating profit of over £10 million on sales of at least £100 million • We aim to increase earnings per share by at least 10% every year for the foreseeable future (2) Functional level: e.The competences through which it tries to succeed and its method of competing A business’ strategic scope defines the boundaries of its operations.g.g. (3)Policies and Standards of Behaviors: A mission needs to be translated into everyday actions. product etc. commitments to customers) • Loyalty and commitment (e. (1) Values and Culture: The values of a business are the basic. These might include monitoring the speed with which telephone calls are answered in the sales call centre. social policy. are employees inspired to sacrifice their personal goals for the good of the business as a whole? And does the business demonstrate a high level of commitment and loyalty to its staff?) • Guidance on expected behaviour – a strong sense of mission helps create a work environment where there is a common purpose What role does the mission statement play in marketing planning? In practice. For example. These would include: • Business principles (e. are marketing decisions consistent with the mission? • It provides an incentive to implement the marketing plan OBJECTIVES: Objectives set out what the business is trying to achieve.. these boundaries may be set in terms of geography. if the business mission includes delivering “outstanding customer service”. the number of complaints received from customers. or the extent of positive customer feedback via questionnaires. These are set by management. beliefs of the people who work in the business. market. then policies and standards should be created and monitored that test delivery. often un-stated.000 households within the next 12 months • We aim to achieve a market share of 10% • We aim to achieve 75% customer awareness of our brand in our target markets MBA III SEMESTER 25 . a strong mission statement can help in three main ways: •It provides an outline of how the marketing plan should seek to fulfill the mission •It provides a means of evaluating and screening the marketing plan.g. business method. specific objectives for marketing activities Examples of functional marketing objectives” might include: • We aim to build customer database of at least 250.

Any objective that can be derived from financial statements is financial objective. For a new business the first financial objective will be to survive because most new businesses do not develop beyond their initial ideas enough or they can't and the investor does not believe that there is a future for the product as there isn't much to work on. to see if the organization is on the right track or not.objectives should be set with a time-frame in mind. Objectives become the basis for strategic decisionmaking. The SMART criteria (an important concept which you should try to remember and apply in exams) are summarized below: • Specific .Both corporate and functional objectives need to confirm to the commonly used SMART criteria. They provide clear measures and standards for performance. Objectives are framed in line with the vision/mission of the organization.the objective should state exactly what is to be achieved. Roles of objectives: Objectives are set and in a way they define what the organization has to achieve for its employees. To set these goals the business will need to do corporate financial planning. They can set at two levels: Corporate level: These objectives are ones that include the business as a whole. This consistency helps the organization to pursue its vision and mission. For example. The main financial objective of any company will be to make an income.the objective should be realistic given the circumstances in which it is set and the resources available to the business. customers etc. STRATEGIC OBJECTIVES: Any objective that is market based is strategic objective. Objectives are invariably quantitative. as the right strategies need to be formulated and implemented for achieving the objectives. So they help in appraisal.objectives should be relevant to the people responsible for achieving them • Time Bound . 26 MBA III SEMESTER . • Relevant . so this will cause the collapse of the business. Strategic objectives are objectives that set out what the business are trying to achieve. These deadlines also need to be realistic. ‘Our Company’s top line goal is to increase our annual income by 15% for every year. Financial objectives are the business' financial future plans and needs.an objective should be capable of measurement – so that it is possible to determine whether (or how far) it has been achieved • Achievable . since objectives are set with the environment in mind they define its relationship with its environment.' Functional level: These objectives are set out to improve on an area of assigned responsibilities of the chosen division of the business. share holders. Additionally the objectives are usually set after the corporate objectives have been set. but apart from this the objectives will set out how much the company will need to earn and how much to spend. as there will be no money being made and then the business will run out of money. • Measurable . This is when the business decides what the company needs to do with their finance under economic circumstances.

ongoing. profit will be the next financial objective. and ongoing. the most straightforward short reference guide was this piece from Purdue University. Once survival has been accomplished. This is probably more applicable to someone in the commercial sector (as suggested by the title). such as raw materials. What made it useful as a future reference guide was a simple definition of long-term and short-term planning. They are non-measurable. Objectives are the general areas in which your effort is directed to drive your mission statement. continuous.For a business to survive it will need to be able to pay off the debts that has required them to buy the building blocks for their business. non-dated. and ultimate survival. rent and wages. the business will need to add value to its company and it will need to be able go into other areas of the market. long-term health. One unusual aspect of the checklist was the suggestion that the planner consider long-term goals in relation to family values. creditworthiness. but the author submits that such comparisons are probably valid in most business situations. To write an objective asks the questions: 27 MBA III SEMESTER . FINANCIAL OBJECTIVES: Financial objectives focus on achieving acceptable profitability in a company’s pursuit of its mission/vision. So a new business will need a adequate amount of money and a reasonable business model. With objectives the company moves from motive to action. Financial objectives signal commitment to such outcomes as good cash flow. and stock price appreciation. and non-dated? • Does my objective convert my mission/vision into action? • Does my objective help to sustain my competitive advantage? There were numerous articles on both short and long term objectives and planning. dividend growth. For a new business to make an acceptable amount of profit. It is little more than a checklist for long-term and short-term goal setting. • In what areas will we continue being actively involved in the future? In this step the firm’s mission and vision is converted into tangible actions (objectives) and later into results (goals) to be achieved. However. an acceptable return on investment. and a brief statement connecting the two. The following are examples of financial objectives: • Growth in revenues • Growth in earnings • Wider profit margins • Bigger cash flows • Higher returns on invested capital • Attractive economic value added (EVA) performance • Attractive and sustainable increases in market value added (MVA) • A more diversified revenue base Questions to Ask: • Is my objective broad? • Is my objective non-measurable? • Is my objective continuous. Objectives are broad categories. earnings growth.

winning a stronger foothold in international markets. gaining a sustainable competitive advantage. Strategic objectives need to be competitor-focused and strengthen the company’s long-term competitive position. exercising technological leadership. From a company perspective. to be responsible for everything going on in their area. to be responsible for everything going on in their area. A company exhibits strategic intent when it pursues ambitious strategic objectives and concentrates its competitive actions and energies on achieving that objective. achieving lower overall costs than rivals. Strategic objectives focuses on winning additional market share. and non-dated? • Does my objective help to sustain my competitive advantage? • Does my objective convert my mission/vision into action? • Could I assign a person to be responsible for this area of activity? If you can assign a person. on a continuing basis. and capturing attractive growth opportunities. boosting the company’s reputation with customers. overtaking key competitors on product quality or customer service or product innovation. there are distinct types of objectives: Strategic Market Objectives: Strategic market objectives focus on the company’s intent to sustain and improve the organization’s competitive strength and long-term market position through creating customer value.• In what 3-7 areas will our company continue being actively involved in the future? • What areas do we need to be involved in to accomplish our mission statement? • What is our company going to do about our competitive advantage categorically? One of the best ways to tell whether or not an area is a clearly defined objective area is to ask the question: • Could I assign a person to be responsible for this area of activity? If you can assign a person. Small companies determined to achieve ambitious strategic objectives exceeding their present reach and resources. on a continuing basis. The strategic intent of a technologically innovative company may be to create a new product. Use the following criteria in evaluating your objective: • Is my objective broad? • Is my objective non-measurable? • Is my objective continuous. The following are examples of strategic market objectives: • A bigger market share 28 MBA III SEMESTER . often prove to be more formidable competitor than larger. A few examples of objectives are: • Expand sales to existing customers (build on a strength) • Introduce existing products into a new market (build on a strength) • Develop an incentive plan for research and development staff who are slow to innovate (correct a weakness) Objectives are needed for each key area the company deems important to success. The strategic intent of a small company may be to dominate a market niche. it is probably a clear objective area. it is probably a clear objective area. cash-rich companies with modest strategic intents. The strategic intent of an up-and-coming company may be to overtake the market leaders. ongoing.

helps produce cohesion among objectives and strategies of different parts of the organization 2. they: i) Are derived from objectives ii) Offer a standard for measuring performance iii) Are expressed in concrete terms iv) Are time-bound and work-oriented Any company needs solid goals in order to grow the business and reach full potential. production. distribution. They are stated in precise terms as quantatively as possible. shipping. 29 . Objective setting needs to be top-down in order to guide lower-level managers and organizational units toward outcomes that support the achievement of overall business and company objectives. customer service. Internal objectives focus on maintaining the firm’s core competencies. such as. marketing. COMPANY GOALS: Goals and targets are more precise and expressed in specific terms.• • • • • • • • • Quicker design-to-market times than rivals Higher product quality than rivals Lower costs relative to key competitors Broader or more attractive product line than rivals A stronger reputation with customers than rivals Superior customer service Recognition as a leader in technology and/or product innovation Wider geographic coverage than rivals Higher levels of customer satisfaction than rivals MBA III SEMESTER Internal Operational Objectives: Internal operational objectives focus on business processes that have an impact on creating customer value and satisfaction. Goals have the following features. Innovative and Learning Objectives: Innovative and learning objectives focus on activities that assist to improve and build the company’s value creating activities. finance. then you are going to need the full cooperation of all the employees involved. inventory control. research and development. Management objectives focus on running a major functional activity or process within a business. A top-down process 1. The emphasis in goals is on measurement of progress toward the attainment of objectives. If you are looking to set a few company goals to inspire your employees and make your business more successful. distribution centers) and how to perform strategically significant operating tasks (materials purchasing. With the help of everyone at your company. human resources. sales districts. maintenance. Each manager should have objectives and be responsible for reaching them. and other strategy critical activities. Helps unify internal efforts to move the company along the chosen strategic plan. Operational objectives focus on how a company manages frontline organizational units with a business (plants. advertising campaigns) Small Business Unit (SBU) Objectives – The Company’s mission and vision needs to be turned into detailed supporting objectives for each level of management. It involves increases the firm’s knowledge base and learning best practices so the company is continually on the cutting edge.

The measures or indicators should be selected to best represent the factors that lead to improved customer. Begin the meeting by explaining why you believe your company should be setting goals. so they are constantly fresh in all of the employees' minds. Here's how. including: customer. and what those goals should ultimately achieve." 30 MBA III SEMESTER . Data and information needed for performance measurement and improvement are of many types. services. operations. projections. employee-related. Ask for ideas for goals that the company could try to meet. operational. 2. what you expect to get out of setting that goal. and comparing company performance with competitors' or with 'best practices' benchmarks. and financial performance. A comprehensive set of measures or indicators tied to customer and/or company performance requirements represents a clear basis for aligning all activities with the company's goals. Write about the goals in a memo to send out to everyone in the company. Write all the ideas on a large piece of poster board or white board. 5. Choose three goals from the brainstorming session that you are going to commit to keeping as a company. Discuss how each goal could potentially be met. and operations the company uses to track and improve performance. improving operations. such as planning. Through the analysis of data from the tracking processes. 3. so everyone knows what was discussed in the meeting. Performance measures or indicators are measurable characteristics of products. Measurements must derive from the company's strategy and provide critical data and information about key processes. Call a meeting together with some of your top employees. outputs and results. better customer satisfaction or better inter-office relationships. Management by Fact: The goal of measuring is to permit managers to see their company more clearly . Post the goals in prominent places around the office. the measures or indicators themselves may be evaluated and changed to better support such goals. and a timeline for those changes to take place. sales associates and anyone else who should be a part of your company goal-setting. Strategize on how the goals will be met. product and service performance. and cause and effect . processes. such as better productivity. competitive comparisons." "A major consideration in performance improvement involves the creation and use of performance measures or indicators. Send out a memo detailing the time and place of a goal setting meeting. Be specific and write down all the ways you can achieve the goals you've chosen. reviewing company performance.you can set and subsequently reach goals that are made to make your business more successful and your employees more satisfied and productive.from many perspectives and hence to make wiser long-term decisions. supplier. market. Instructions: 1.that might not be evident without analysis. A 1997 booklet on the Baldrige Criteria summarizes this concept of fact-based management: "Modern businesses depend upon measurement and analysis of performance. and cost and financial. Analysis entails using data to determine trends. Data and analysis support a variety of company purposes. 4.

I’m not saying companies don’t try to contribute to their communities or try to make jobs rewarding. professionalism and accountability." or "Provide a meaningful. But one dictionary definition of philosophy does apply: "general laws that furnish the rational explanation of anything. Then. some business gurus recommend against them altogether. they would rigorously research every credit application with a fine-toothed comb. But either way. there is a real desire to do right by their employees and the community." They may speak of something that "our philosophy calls for" or of some action taken in the business that is "not in accordance with our philosophy.Having some clearly stated goals is really helpful in making decisions. as expected patterns of behavior. they would deny credit to any potential customer who was ever late with a payment or who didn’t have a five-star credit rating.) You need to be careful about setting departmental goals. If your company’s primary goal is truly "Make the world a better place. fostering a healthy growth and development of human resources. Once such a philosophy crystallizes. First. What are your organization’s goals? Odds are. When one person tells another "That's not the way we do things around here. (Yeah. At the highest level. through trial and error or through leadership.often refer to "our philosophy. you’ll need to evaluate them in terms of their intended use." they assume that everyone knows what "our philosophy" is." the advice had better be heeded. Imagine the havoc that could be wrought by a credit and collections department whose goal was to drastically reduce bad debt write-offs. I know." you don’t work at a typical company. the Company continuously endeavours to improve upon these aspects and adopts innovative approaches for leveraging resources. Then they would watch sales plummet. As the term is most commonly used. Some typical examples of 31 MBA III SEMESTER . the goal is pretty simple: make money. You’ve been asked to do both and to reduce your computer repair expenses. But that could still leave you with half dozen or more options. Some executives -. making money is what it’s about. unwritten guidelines on how people should perform and conduct themselves. The literature on company philosophy is neither very extensive nor very satisfactory." In this sense. whether your company has written goals or not. a company philosophy evolves as a set of laws or guidelines that gradually become established.particularly top-management executives in the most successful companies -. you’ll make a different choice than if the pressure has been to give speedier customer service. In fact.informal. The company’s goal is to sell its product at a profit. Do you buy the fastest? The most reliable? The cheapest? What are your goals? If you’ve been told you need to curb the growth of capital expenses. In order to decide which workstations to buy for the department. the better. these things are just designed to project an image or to retain valued employees. Then they’d sit back and watch those write-offs drop. it becomes a powerful force indeed. In some cases. integrity." In mentioning "our philosophy. rewarding livelihood for our employees. it seems to stand for the basic beliefs that people in the business are expected to hold and be guided by -. In most businesses. COMPANY PHILOSOPHY: The Company's essential character revolves round values based on transparency. The more. Make sure your goals are contributing to the company’s goal. converting opportunities into achievements through proper empowerment and motivation. if push comes to shove.

4. but the leaders of a company can profitably articulate.what I call the fact-founded. here are five that recurring frequently in the most successful corporations: 1. For this reason. Maintenance of high ethical standards in external and internal relationships is essential to maximum success. • A business of high principle develops better and more profitable relations with customers. 5. it builds a favorable image. 3. 2. In choosing among suppliers. When there is any doubt about what action to take.basic beliefs that serve as guidelines to action will clarify the concept. these values tend to be taken for granted. People should be judged on the basis of their performance. Inner administrative drive emanates largely from the fact that everyone feels confident that he can safely do the right thing immediately. competitors. That is the best foundation for a profit-making company philosophy and a profitable system of management. not on personality. within the organization. MERGING THE STRATEGIC VISION OBJECTIVES AND STRATEGY INTO A STRATEGIC PLAN: MBA III SEMESTER 32 . Competitors are less likely to comment unfavorably on it. No one likes to declaim about his honesty and trustworthiness. By the consistently ethical character of its actions. High ethical standards: The business with high ethical standards has three primary advantages over competitors whose standards are lower: • A business of high principle generates greater drive and effectiveness because people know that they can do the right thing decisively and with confidence. they can rely on the guidance of ethical principles. objectively considered -. Although such basic beliefs inevitably vary from company to company. My point in mentioning them is to urge executives to actively seek ways of making high principle a more explicit element in their company philosophy. And they also know that any action that is even slightly unprincipled will be generally condemned. A high-caliber person favors the business of principle and avoids the employer whose practices are questionable. The business should be administered with a sense of competitive urgency. customers resolve their doubts in favor of such a company. thereby gaining a basic competitive and profit edge. thoughtthrough approach to decision making. Too often. The business should be kept in adjustment with the forces at work in its environment. • A business of high principle attracts high-caliber people more easily. And the general public is more likely to be open-minded toward its actions. companies that do not adhere to high ethical standards must actually maintain a higher level of compensation to attract and hold people of ability. and the general public because it can be counted on to do the right thing at all times. education. Decisions should be based on facts. their determination that everyone shall adhere to high standards of ethics. or personal traits and skills.

Developing a strategic vision. Thus the performance as assessed in one perspective supports performance in other areas as shown below: 33 MBA III SEMESTER . The arguments run this (i) A firm can offer superior returns to stakeholders if it has a competitive advantage in its product or service offerings when compared to its rivals. In small privately owned companies. a firm must offer superior value to customers (iii) this. and strategy. and the competitive moves and internal action approaches to be used in achieving the targeted business results. yet inter-related • Clarifying vision / mission • Defining the business • Surveying the environment • Internal appraisal of the firm • Setting the corporate objectives • Formulating the corporate / business strategy • Monitoring the strategy BALANCE SCORE CARD RS Kaplan and DP Norton came out with a popular. The score card allows managers to evaluate a firm from different complementary perspectives. its short range and long range performance targets. Other companies. strategic plan exist mostly in the form of oral understandings and commitments among managers and key employees about where to head. (ii) In order to sustain a competitive advantage. departmental and individual level. the expected action of the industry’s key players. in turn. Strategic planning is however not a single task. operational decisions are routine ones pertaining to day to day activities and administrative decisions are by and large patterned after existing practices in the corporation.A company’s strategic plan lays out its future direction. diversity and motivations. in press releases. and the challenges and issues that stand as obstacles to the company’s success. Together. In companies committed to regular strategy reviews and the development of explicit strategic plans. Strategic decisions differ from other functions of management as strategic decisions deal with growth of an organization (long range focus). The strategic plan may take the form of a written document that is circulated to managers (and perhaps to select employees). what to accomplish and how to proceed. they constitute a strategic plan for coping with industry and competitive conditions. a firm requires the service of employees having requisite skills. clear cut. performance targets. make only vague. creativity. it is an integrated package of several tasks that are distinct. perhaps for reasons of competitive sensitivity. requires development of operations with necessary capabilities. balanced score card approach in early 90s linking corporate goals with strategic actions undertaken at the business unit. (iv) In order to develop the needed operational capabilities. Short-term performance targets are the part of the strategic plan most often spelled out explicitly and communicated to managers and employees. or in statements provide to the business media. objective-strategy design which in turn takes the company in the required direction. general statements about their strategic plans that could apply to most any company. Whereas. They map out the company’s direction. in postings on their websites. setting objectives and crafting a strategy are basic-direction setting tasks. A number of companies summarize key elements of their strategic plans in the company’s annual report to shareholders. strategic planning provides the company with an easily discernible. In short.

The operation perspective: How effectively and efficiently do the core processes that produce customer value perform? Which are the most important sources of customer value. specialized. financial and non-financial measures.The Financial Perspective: Does the firm offer returns in excess of the total cost of capital. The excess value is resulting from intangible assets. a pure financial approach for managing organizations suffers from two drawbacks: • • MBA III SEMESTER It is historical. ultimately. how should we appear to our shareholders? Is the question to be answered here? Four perspectives of the Balanced Scorecard: The Customer’s perspective: Does the firm provide the customer with superior value in terms of product differentiation. multiplied by the amount of capital invested. As mentioned previously. Nor it is a good indicator of future performance. A firm’s long-term strategy should take all the above perspectives into account while trying to match a firm’s internal resources and capabilities with external opportunities. and led to their business bestseller. published in 1996. Tobin's-q measures the ratio of the value of a company's assets to its market value. low cost and quick response.Measures that Drive Performance" in the Harvard Business Review caused a lot of attention for their method. interest. durable. competitive advantage comes from a firm’s ability to perform activities (using its unique. does it go to work on root causes or does it only scratch the surface! A properly constructed scorecard helps a firm strike a find balance between short and long term financial measures. “To succeed financially. taxes. as suggested by the economic value added (EVA) model? EVA is the spread between a firm’s return on invested capital minus its weighted average cost of capital. The financial performance of an organization is essential for its success. It is common for the current market value of an organization to exceed the market value of its assets. depends on how well a firm is able to extend its competitive advantage to new areas over a long period of time. overheads. while serving the needs of customers) more effectively than rivals. Even non-profit organizations must deal in a sensible way with funds they receive. This kind of value is not measured by normal financial reporting. EVA is what is left over after a firm has covered all its factors of production (operating expenses. History of the Balanced Scorecard: In 1992. It is too low. plus fair return to shareholders). Whilst it tells us what has happened to the organization. it may not tell us what is currently happening. hard-to-imitate resources and skills etc. 34 . Corporate success. internal and external performance perspectives. an article by Robert Kaplan and David Norton entitled "The Balanced Scorecard . In other words. However. "The Balanced Scorecard: Translating Strategy into Action". which need improving to offer greater customer value? The Organizational perspective: Can this firm adapt to changes in its environment? Is its workforce committed to shared goals? Does the organization learn from past mistakes? When confronted with a problem.

The customer perspective: Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any company. such as risk assessment and cost-benefit data. Timely and accurate funding data will always be a priority. Learning and growth perspective. it is hoped that more of the processing can be centralized and automated. 4. and of the kinds of processes for which we are providing a product or service to those customer groups. they will eventually find other suppliers that will meet their needs. Even though the current financial picture may seem (still) good. working from 4 perspectives: 1. 35 . In fact. These are called leading indicators: if customers are not satisfied. re-engineering. Such as: quality. 3. Benefits of the Balanced Scorecard: Kaplan and Norton cite the following benefits of the usage of the Balanced Scorecard: • Focusing the whole organization on the few key things needed to create breakthrough performance. operators. In terms of kinds of customers. • Breaking down strategic measures towards lower levels. and employees can see what's required at their level to achieve excellent overall performance. there is often more than sufficient handling and processing of financial data. Business process perspective. But the point is that the current emphasis on financial issues leads to an unbalanced situation with regard to other perspectives. In developing metrics for satisfaction. in this category. and managers will make sure to provide it. but the method also tries to capture information about how well the organization is positioned to perform in the future. 2. • Helps to integrate various corporate programs. so that unit managers. The Financial Perspective: Kaplan and Norton do not disregard the traditional need for financial data. 1. With the implementation of a corporate database. Poor performance from this perspective is thus a leading indicator of future decline. Financial perspective. 2. This allows the monitoring of present performance. and customer service initiatives. There is perhaps a need to include additional financial related data. customers should be analyzed. Customer perspective. and performance management system.MBA III SEMESTER The 4 perspectives of the Balanced Scorecard: The Balanced Scorecard method of Kaplan and Norton is a strategic approach. that enables organizations to translate a company's vision and strategy into implementation.

Generic measurement methods can be used. two kinds of business processes may be identified: • Mission-oriented processes. In addition to the strategic management processes. The support processes are more repetitive in nature. 4. These metrics have to be carefully designed by those that know these processes most intimately. • Support processes. and hence easier to measure and to benchmark. Many unique problems are encountered in these processes.MBA III SEMESTER 3. Measurements based on this perspective will show the managers how well their business is running. The Business Process perspective: This perspective refers to internal business processes. and whether its products and services conform to customer requirements. Learning and Growth perspective 36 .

People will work to achieve the explicit targets which are set. It also includes technological tools such as an Intranet. Objectives. • Initiatives: projects or programs to be initiated in order to meet the objective. Cobbold and Lawrie developed a classification of Balanced Scorecard designs based upon the intended method of use within an organization. • Targets: the specific target values for the measures. and urge for a more balanced set of measurements. MBA III SEMESTER Evolution of the Balanced Scorecard: In 2002. and Initiatives: For each perspective of the Balanced Scorecard four things are monitored (scored): • Objectives: major objectives to be achieved. The Core Group Theory by Kleiner provides further clues on the mechanisms behind this. • Measures: the observable parameters that will be used to measure progress toward reaching the objective. planned use should influence the type of BSC design adopted. In a knowledge worker organization. Later that year the same authors reviewed the evolution of 37 . people are the main resource. for example. it also includes things like mentors and tutors within the organization. Targets. For example. But still. profitable growth. it is becoming necessary for knowledge workers to learn continuously. as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. and may ignore important things which have no place on their scorecard. Government agencies often find themselves unable to hire new technical workers and at the same time is showing a decline in training of existing employees. Measures. They describe how the Balanced Scorecard can be used to support three distinct management activities.This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. The integration of these four perspectives into a one graphical appealing picture has made the Balanced Scorecard method very successful as a management methodology. Kaplan and Norton emphasize that 'learning' is something more than 'training'. the objective of profitable growth might be measured by growth in net margin. They assert that due to differences in the performance data requirements of these applications. emphasizing traditional financial measures may encourage short-term thinking. the first two being management control and strategic control. people will work to achieve their scorecard goals. Kaplan and Norton recognize this. for example. In the current climate of rapid technological change. Cautionary note on using the Balanced Scorecard: You tend to get what you measure. For example. 7% annual decline in manufacturing disruptions.

process performance. internal processes. Balanced Scorecards have become a fertile field of theory. An approach to performance measurement that also focuses on what managers are doing today to create future shareholder value. Kaplan and David P. and so on. The customer. research and consulting practice. marketing and developmental inputs to these. and grow. and that the use of financial measures alone to inform the strategic control of the firm is unwise. By focusing not only on financial outcomes but also on the operational. which in turn helps organizations act in their best long-term interests." MBA III SEMESTER History of balance Scorecards: In 1992. and innovation).g. A balanced scorecard is a set of performance measures constructed for four dimensions of performance. the early versions of the Balanced Scorecard helped organizations achieve a degree of "balance" in selection of performance measures. Organizations should instead also measure those areas where direct management intervention is possible. long term learning and skills development. innovate. they have a great effect on the evaluation of the company by shareholders and creditors. The Balanced Scorecard (BSC) is a performance management tool which began as a concept for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy. For example.. (2) quantitative measures (e. customer. customer.g.g.. and learning and growth. After all. And learning and growth measures examine the company's success in improving its ability to adapt. The underlying rationale is that organizations cannot directly influence financial outcomes. note how "balance" is achieved: (1) performance is assessed across a balanced set of dimensions (financial. and learning and growth measures are generally thought to be predictive of future success (i. Norton began publicizing the Balanced Scorecard through a series of journal articles. In so doing. Organizations were encouraged to measure—in addition to financial outputs—what influenced such financial outputs. The dimensions are financial. In practice. internal processes. In 1996." "Internal Business Processes" and "Learning and Growth. number of defects) are balanced with qualitative measures (e. as these are "lag" measures. Robert S. The 38 .g. After reviewing these measures. Having financial measures is critical even if they are backward looking.. Since the original concept was introduced. internal processes. they published the book The Balanced Scorecard. early Scorecards achieved this balance by encouraging managers to select measures from three additional categories or perspectives: "Customer. the Balanced Scorecard helps provide a more comprehensive view of a business.the Balanced Scorecard as shown through the use of Strategy Maps as a strategic management tool. market share / penetration. ratings of customer satisfaction). financial measures like growth in sales) and forward-looking measures (e. they are not backward looking). and (3) there is a balance of backward-looking measures (e. Internal process measures examine the company's success in improving critical business processes. recognizing three distinct generations of Balanced Scorecard design. Customer measures examine the company's success in meeting customer expectations. number of new patents as an innovation measure).e...

In short. they will have less confidence in the information it provides. many aspects of Kaplan & Norton's original approach were unworkable in practice. Translating the vision into operational goals.typically these "perspectives" were labeled "Financial". and "Learning & Growth". it is important to remember that the Balanced Scorecard itself has no role in the formation of strategy. Both in firms associated with Kaplan & Norton (Renaissance Solutions Inc. Original methodology: The earliest Balanced Scorecards comprised simple tables broken into four sections . Feedback and learning. 3. Business planning. “The Balanced Scorecard provides managers with the instrumentation they need to navigate to future competitive success”. These suggestions were notably triggered by recognition that different but equivalent headings would yield alternative sets of measures. these early-style Balanced Scorecards are still designed and used today. "Customer". "Internal Business Processes".Balanced Scorecard has evolved considerably from its roots as a measure selection framework. with similar principles as Management by Objectives. 39 MBA III SEMESTER . and also suggested using either additional or fewer perspectives. and BSCOL). which was publicized by Robert S. The major design challenge faced with this type of Balanced Scorecard is justifying the choice of measures made. Although less common. Because of this. There has also been a rapid growth in consulting offerings linked to Balanced Scorecards at the level of branding only. the Balanced Scorecard has changed so that there is now much greater emphasis on the design process than previously. The Balanced Scorecard is a framework. and elsewhere (Cepro in Sweden. In particular. While the underlying principles were sound. or what can be best characterized as a “strategic management system” that claims to incorporate all quantitative and abstract measures of true importance to the enterprise. Kaplan and David P. and adjusting the strategy accordingly. Many authors have since suggested alternative headings for these perspectives. many are abandoned soon after completion. In fact. According to Kaplan and Norton. 2. Use: Implementing Balanced Scorecards typically includes four processes: 1. Balanced Scorecards can comfortably co-exist with strategic planning systems and other tools. why did you choose these?" This common question is hard to ask using this type of design process. The Balanced Scorecard is a performance planning and measurement framework. If users are not confident that the measures within the Balanced Scorecard are well chosen. Communicating the vision and link it to individual performance. it is common for people to refer to a “strategic linkage model” or “strategy map” as being a Balanced Scorecard. Although it helps focus managers' attention on strategic issues and the management of the implementation of strategy. Norton in the early 1990s. 4. "Of all the measures you could have chosen. Kaplan & Norton themselves revisited Balanced Scorecards with the benefit of a decade's experience since the original article. Many books and articles referring to Balanced Scorecards confuse the design process elements and the Balanced Scorecard itself. and 2GC Active Management in the UK). early-style Balanced Scorecards are hard to design in a way that builds confidence that they are well designed. Designing the Balanced Scorecard required selecting five or six good measures for each perspective.

the need to "roll forward" and test the impact of these goals necessitated the creation of an additional design instrument. • Conduct periodic strategic performance reviews to learn about and improve strategy. the Balanced Scorecard is devised by choosing suitable measures for each objective. Kurtzman found that 64 percent of the companies questioned were measuring performance from a number of perspectives in a similar way to the Balanced Scorecard. and need to be anchored in the "now. Many examples of Balanced Scorecards can be found via Web searches." or the "strategic end-state" looked like. business units and corporations as a whole. • Link budget with strategy. Indeed. One problem with the "2nd generation" design approach described above was that the plotting of causal links amongst twenty or so medium-term strategic goals was still a relatively abstract activity. It was quickly realized. Secondly. Balanced Scorecards have been implemented by government agencies. With this modified approach. but it has been much more successful than the design approach it superseded. • Clarify strategy and make strategy operational. Managers have to identify five or six goals within each of the perspectives. in that early Balanced Scorecards were often designed remotely by consultants. Several design issues still remain with this enhanced approach to Balanced Scorecard design. In the new method. Managers did 40 MBA III SEMESTER . the strategic objectives are typically distributed across a similar set of "perspectives". adapting one organization's Balanced Scorecard to another is generally not advised by theorists. In 1997. and is generally easier for managers to work through. • Identify and align strategic initiatives. Having reached some consensus about the objectives and how they inter-relate. and schools. military units. Popularity: Kaplan and Norton found that companies are using Balanced Scorecards to: • Drive strategy execution. In practice it ignored the fact that opportunities to intervene. In the late 1990s. to influence strategic goals are. but the design question becomes slightly less abstract. an improved design method emerged. • Align the organization with strategy." in current and real management activity. as is found in the earlier designs. However. This style of Balanced Scorecard has been commonly used since 1996 or so. and then demonstrate some inter-linking between these goals by plotting causal links on the diagram. it could be argued that many failures in the early days of Balanced Scorecard could be attributed to this problem. the Vision or Destination Statement. who believe that much of the benefit of the Balanced Scorecard comes from the implementation method. non-profit organizations. Destination Statement driven or 3rd Generation Balanced Scorecards represent the current state of the art in Scorecard design. This type of approach provides greater contextual justification for the measures chosen. Measures and targets could then be selected to track the achievement of these objectives. measures are selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or "strategy map".Improved methodology: In the mid 1990s. the design approach had evolved yet again. that if a Destination Statement was created at the beginning of the design process then it was much easier to select strategic Activity and Outcome objectives to respond to it. This device was a statement of what "strategic success.

The Four Perspectives: The grouping of performance measures in general categories (perspectives) is seen to aid in the gathering and selection of the appropriate performance measures for the enterprise.g. These tools seek to solve some of the remaining design issues. Balanced Scorecards are still much more widely used than AIE. The three possible stages as described by Kaplan and Norton (1996) are rapid growth. Another criticism is that the Balanced Scorecard does not provide a bottom line score or a unified view with clear recommendations: it is simply a list of metrics. The resulting report found that while AIE was much more sophisticated. and issues in setting targets for the measures selected. • Customer Perspective. as there are no empirical studies linking the use of Balanced Scorecards to better decision making or improved financial performance of companies.. It represents the long-term strategic objectives of the organization and thus it incorporates the tangible outcomes of the strategy in traditional financial terms. Financial objectives and measures for the growth stage will stem from the 41 . risk and economic value) in a way that is actuarially or economically well-founded. A criticism of Balanced Scorecards is that the scores are not based on any proven economic or financial theory. • Innovation & Learning Perspective. the Federal CIO Council commissioned a study to compare the two methods by funding studies in side-by-side projects in two different agencies. (1) The financial perspective examines if the company’s implementation and execution of its strategy are MBA III SEMESTER contributing to the bottom-line improvement of the company. AIE actually took slightly less time to utilize. and so failed to engage with and use these measure suites created by people lacking knowledge of the organization and management responsibility. and harvest. Some people also claim that positive feedback from users of Balanced Scorecards may be due to a placebo effect. various alternatives to the Balanced Scorecard have emerged. Variants. and therefore have no basis in the decision sciences. In 2000. However. while the users of Balanced Scorecards felt it simply documented their inputs and offered no other particular insight. • Internal process Perspective. AIE was also more likely to generate findings that were newsworthy to the organization. The process is entirely subjective and makes no provision to assess quantities (e. Applied Information Economics (AIE) has been researched as an alternative to Balanced Scorecards. Alternatives and Criticisms: Since the late 1990s.not trust. The Dept. such as The Performance Prism. Results Based Management and Third Generation Balanced Scorecard. Four general perspectives have been proposed by the Balanced Scorecard: • Financial Perspective. of Agriculture applied Balanced Scorecards. sustain. of Veterans Affairs used AIE and the US Dept. in particular issues relating to the design of sets of Balanced Scorecards to use across an organization.

while maintaining threshold levels at the other two.development and growth of the organization which will lead to increased sales volumes. etc. (4) The Innovation & Learning Perspective is the foundation of any strategy and focuses on the intangible assets of an organization. since an improvement in the learning and growth perspective will require certain expenditures that may decrease short-term financial results. acquisition of new customers.. customer management (by expanding and deepening relations).e. (2) The customer perspective defines the value proposition that the organization will apply to satisfy MBA III SEMESTER customers and thus generate more sales to the most desired (i. costs. Kaplan and Norton propose using certain clusters that group similar value creating processes in an organization. etc). profit margins. the most profitable) customer groups. innovation (by new products and services) and regulatory & social (by establishing good relations with the external stakeholders). Some of the most common financial measures that are incorporated in the financial perspective are EVA. The value proposition can be centered on one of the three: operational excellence. performance and service and cost and the outcomes that come as a result of this value proposition (e. revenue growth. by calculating the return on investment. BEST OF LUCK FOR YOUR EXAMS 42 . the harvest stage will be based on cash flow analysis with measures such as payback periods and revenue volume. The Innovation & Learning Perspective is concerned with the jobs (human capital). In order to identify the measures that correspond to the internal process perspective.g. These can include both short-term and long-term objectives as well as incorporating innovative process development in order to stimulate improvement. The measures that are selected for the customer perspective should measure both the value that is delivered to the customer (value proposition) which may involve time. It focuses on all the activities and key processes required in order for the company to excel at providing the value expected by the customers both productively and efficiently. quality. Finally. whilst contributing to long-term success. The sustain stage on the other hand will be characterized by measures that evaluate the effectiveness of the organization to manage its operations and costs. customer satisfaction. The clusters for the internal process perspective are operations management (by improving asset utilization. customer intimacy or product leadership. growth in revenues etc. (3) The internal process perspective is concerned with the processes that create and deliver the customer value proposition. the systems (information capital). cash flow. and the climate (organization capital) of the enterprise. net operating income etc. This of course will be in the long term. the return on capital employed. market share). mainly on the internal skills and capabilities that are required to support the value-creating internal processes. These three factors relate to what Kaplan and Norton claim is the infrastructure that is needed in order to enable ambitious objectives in the other three perspectives to be achieved. supply chain management.

MBA III SEMESTER 43 .

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