Download MBA (Master of Business Administration) IB and Marketing 1st and 2nd Semester Strategic Management
Unit I
ON
S
1 Concept of Corporate Strategy
S
E
L
LESSON OUTLINE
Introduction
What is strategy?
Why corporate strategy?
Levels of strategy
Crafting a strategy
An ongoing process
Summary
Self assessment questions
Activities
References
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Define and understand the concept of
corporate strategy
Identify the different levels
of corporate strategy
Examine the reasons for developing
strategies
See corporate strategy as an on going
process
Organizations are facing exciting and dynamic challenges in the 21st century. In the
gloabalized business, companies require strategic thinking and only by evolving good corporate
strategies can they become strategically competitive. A sustained or sustainable competitive
advantage occurs when firm implements a value ? creating strategy of which other companies
are unable to duplicate the benefits or find it too costly to initiate. Corporate strategy includes
the commitments, decisions and actions required for a firm to achieve strategic competitiveness
and earn above average returns. The goals of corporate strategy are challenging not only for
large firms like Microsoft but also for small local computer retail outlets or even dry cleaners.
Table 1.1 lists the top ten strategists in India in 2005..
TABLE 1.1 - INDIA'S TOP TEN STRATEGISTS
Position in the
Name of the company
industry
Infosys Technologies
1
Reliance Industries
2
Wipro
3
Hindustan Lever
4
Maruti Udyog
5
Dr. Reddy's Laboratories
6
HDFC Bank
7
Jet Airways
8
ICICI Bank
9
Ranbaxy Laboratories
10
* Source - Internet
What is strategy?
Strategy", narrowly defined, means "the art of the general" (the Greek stratos, meaning
`field, spread out as in `structure'; and agos, meaning `leader'). The term first gained currency
at the end of the 18th century, and had to do with stratagems by which a general sought to
deceive an enemy, with plans the general made for a campaign, and with the way the general
moved and disposed his forces in war. Also was the first to focus on the fact that strategy of war
was a means to enforce policy and not an end in itself. Strategy is a set of key decisions made
to meet objectives. A strategy of a business organization is a comprehensive master plan stating
how the organization will achieve its mission and objectives.
I keep six honest serving men.
They taught me all I know. Their names
are What, Why, When, How, Where and
Who.
- Rudyard Kipling
Here are some definitions of strategy.
Chandler(1962)Strategy is the determinator of the basic long-term goals of
an enterprise, and the adoption of courses of action and the allocation of
resources necessary for carrying out these goals;
Mintzberg (1979) Strategy is a mediating force between the organization
and its environment: consistent patterns in streams of organizational
decisions to deal with the environment.
Prahlad (1993) Strategy is more then just fit and allocation of resources. It
is stretch and leveraging of resources
Porter (1996) Strategy is about being different. It means deliberately
choosing a different set of activities to deliver a unique mix of value
Mintzberg has identified the 5 P's of strategy. Strategy could be a plan, a pattern, a position, a
ploy, or a perspective.
1. A plan, a "how do I get there"
2. A pattern, in consistent actions over time
3. A position that is, it reflects the decision of the firm to offer particular products or
services in particular markets.
4. A ploy, a maneuver intended to outwit a competitor
5. A perspective that is, a vision and direction, a view of what the company or organization
is to become.
Why Corporate Strategy?
Strategic management is basically needed for every organization and it offers several benefits.
1.Universal
Strategy refers to a complex web of thoughts, ideas, insights, experiences, goals, expertise,
memories, perceptions, and expectations that provides general guidance for specific actions in
pursuit of particular ends. Nations have, in the management of their national policies, found it
necessary to evolve strategies that adjust and correlate political, economic, technological, and
psychological factors, along with military elements. Be it management of national polices,
international relations, or even of a game on the playfield, it provides us with the preferred path
that we should take for the journey that we actually make.
2. Keeping pace with changing environment
The present day environment is so dynamic and fast changing thus making it very difficult for
any modern business enterprise to operate. Because of uncertainties, threats and constraints, the
business corporation are under great pressure and are trying to find out the ways and means for
their healthy survival. Under such circumstances, the only last resort is to make the best use of
strategic management which can help the corporate management to explore the possible
opportunities and at the same time to achieve an optimum level of efficiency by minimizing the
expected threats.
3. Minimizes competitive disadvantage
It minimizes competitive disadvantage and adds up to competitive advantage. For
example, a company like Hindustan Lever Ltd., realized that merely by merging with companies
like Lakme, Milk food, Ponds, Brooke bond, Lipton etc which make fast moving consumer
goods alone will not make it market leader but venturing into retailing will help it reap heavy
profits. Then emerged its retail giant "Margin Free' which is the market leader in states like
Kerala. Similarly, the R.P. Goenka Group and the Muruguppa group realized that mere
takeovers do not help and there is a need to reposition their products and reengineer their brands.
The strategy worked.
4. Clear sense of strategic vision and sharper focus on goals and objectives
Every firm competing in an industry has a strategy, because strategy refers to how a
given objective will be achieved. `Strategy' defines what it is we want to achieve and charts our
course in the market place; it is the basis for the establishment of a business firm; and it is a basic
requirement for a firm to survive and to sustain itself in today's changing environment by
providing vision and encouraging to define mission.
5.Motivating employees
One should note that the labor efficiency and loyalty towards management can be
expected only in an organization that operates under strategic management. Every guidance as to
what to do, when and how to do and by whom etc, is given to every employee. This makes them
more confident and free to perform their tasks without any hesitation. Labor efficiency and their
loyalty which results into industrial peace and good returns are the results of broad-based
policies adopted by the strategic management
6. Strengthening Decision-Making
Under strategic management, the first step to be taken is to identify the objectives of the
business concern. Hence a corporation organized under the basic principles of strategic
management will find a smooth sailing due to effective decision-making. This points out the
need for strategic management.
7. Efficient and effective way of implementing actions for results
Strategy provides a clear understanding of purpose, objectives and standards of
performance to employees at all levels and in all functional areas. Thereby it makes
implementation very smooth allowing for maximum harmony and synchrony. As a result, the
expected results are obtained more efficiently and economically.
8. Improved understanding of internal and external environments of
business
Strategy formulation requires continuous observation and understanding of environmental
variables and classifying them as opportunities and threats. It also involves knowing whether the
threats are serious or casual and opportunities are worthy or marginal. As such strategy provides
for a better understanding of environment.
Levels of strategy
A typical business firm should consider three types of strategies, which form a hierarchy
as shown in Figure 1.1
Corporate strategy ? Which describes a company's overall direction towards growth by
managing business and product lines? These include stability, growth and retrenchment.
For example, Coco cola, Inc., has followed the growth strategy by acquisition. It has
acquired local bottling units to emerge as the market leader.
Business strategy - Usually occurs at business unit or product level emphasizing the
improvement of competitive position of a firm's products or services in an industry or market
segment served by that business unit. Business strategy falls in the in the realm of corporate
strategy.
For example, Apple Computers uses a differentiation competitive strategy that
emphasizes innovative product with creative design. In contrast, ANZ Grindlays merged with
Standard Chartered Bank to emerge competitively.
Functional strategy ? It is the approach taken by a functional area to achieve corporate
and business unit objectives and strategies by maximizing resource productivity. It is concerned
with developing and nurturing a distinctive competence to provide the firm with a competitive
advantage.
For example, Procter and Gamble spends huge amounts on advertising to create customer
demand.
Operating strategy - These are concerned with how the component parts of an organization
deliver effectively the corporate, business and functional -level strategies in terms of resources,
processes and people. They are at departmental level and set periodic short-term targets for
accomplishment.
Figure 1.1 Hierarchy of strategy
Responsibility of
corporate-level managers
Responsibility of
business ?level general
managers
Res ponsibili ty of hea
ds of
maj or functi onal acti
vities
wit hin a busi ness unit or
division
Res
ponsibility of plant
ma
nagers,
geographic
unitCr
m a
a f
natin
ger g
s, a
an sdt rategy
low er-level supervisors
Companies and strategists craft strategies in different ways. In extreme cases it is only
the Chairman cum Managing Director who crafts the strategy. But in firms, which have
participative management style of functioning, it is a group or team exercise involving key
personnel and all functional executives in the organization.
There are basically four approaches to crafting a strategy
1. The Chief Architect approach A single person ? the owner or CEO ?assumes the role of
chief strategist and chief entrepreneur, single handedly shaping most or all of the major
pieces of strategy. This does not mean that one person is the originator of all the ideas
underlying the resulting strategy or does all the background data gathering and analysis:
there may be much brainstorming with subordinates and considerable analysis by specific
departments.
The chief architect approach to strategy formation is characteristic of companies that
have been founded by the company's present CEO. Michael Dell at Dell Computer, Steve
Case at America Online, Bill Gates at Microsoft, and Howard Schultz at Starbucks are
prominent examples of corporate CEOs who exert a heavy hand in shaping their
company's strategy.
2. The Delegation Approach: Here the manager in charge delegates big chunks of the
strategy-making task to trusted subordinates, down-the-line managers in charge of key
business units and departments, a high-level task force of knowledgeable and talented
people from many parts of the company, self-directed work teams with authority over a
particular process or function, or, more rarely, a team of consultants brought in
specifically to help develop new strategic initiatives.
3. The Collaborative or Team Approach: This is a middle approach when by a manager with
strategy-making responsibility enlists the assistance and advice of key peers and
subordinates in hammering out a consensus strategy. Strategy teams often include line
and staff managers from different disciplines and departmental units, a few handpicked
junior staffers known for their ability to think creatively, and near-retirement veterans
noted for being keen observers, telling it like it is, and giving sage advice.
Electronic Data Systems conducted a year-long strategy review involving 2,500
of its 55,000 employees and coordinated by a core of 150 managers and staffers from all
over the world.
Nokia Group, a Finland-based global leader in wireless telecommunications, involved
250 employees in a strategy review of how different communications technologies were
converging, how this would affect the company's business, and what strategic responses
were needed.
4. The Corporate Intrapreneur Approach: In the corporate intrapreneur approach, top
management encourages individuals and teams to develop and champion proposals for
new product lines and new business ventures. The idea is to unleash the talents and
energies of promising corporate intrapreneurs, letting them try out business ideas and
pursue new strategic initiatives. Executives serve as judges of which proposals merit
support, give company intrapreneurs the needed organizational and budgetary support,
and let them run with the ball.
W.L. Gore & Associates, a privately owned company famous for its Gore-Tex
waterproofing film, is an avid and highly successful practitioner of the corporate
intrapreneur approach to strategy making. Gore expects all employees to initiate
improvements and to display innovativeness.
As on going process
Corporate strategy is a continuous on going process and extends company wide over a
diversified company's business. It is a boundary spanning planning activity considering all the
elements of the micro and macro environments of a firm. The following are the key tasks of the
process of developing and implementing a corporate strategy.
Exploring and determining the vision of the company in the form of a vision statement.
Developing a mission statement of the company that should include statement of
methodology for achieving the objectives, purposes, and the philosophy of the
organization adequately reflected in the vision statement.
Defining the company profile that includes the internal analysis of culture, strengths and
capabilities of an organization.
Making external environmental analysis to identify factors as threats, opportunities
etc.
Finding out ways by which a company profile can be matched with its environment to
be able to accomplish mission statement
Deciding on the most desirable courses of actions for accomplishing the mission of an
organization
Selecting a set of long-term objectives and also the corresponding strategies to be
adopted in line with vision statement.
Evolving short-term and annual objectives and defining the corresponding strategies that
would be compatible with the mission and vision statement.
Implementing the chosen strategies in a planned way based on budgets and allocation of
resource, outlining the action programs and tasks.
Installation of a continuous comparable review system to create a controlling mechanism
and also generate data for selecting future course of action
The over all corporate strategy of a diversified company is depicted in Figure 1.2
Figure 1.2 Strategy of a diversified company.
Whether diversificat ion
is based narrowly in a
few industries or broadly
in many industries
Whether the businesses
Approach to allocating
the company has
investment capital and
diversified into are
resources across
related, unrelated, or a
business units
mixture of both
Whether the
scope of
company
Efforts to capture
Corporate strategy
operations is
cross-business
(The action plan
mostly
for managing a
strat egic fits
domestic,
diversified
increasingly
multinational,
company)
or global
Moves to divest
Moves to
weak or
strengthen
unattractive
positions in
Source : Thompson & Strickland (2003), Strategic Management, Tata McGraw Hill, New Delhi.
The process of developing corporate strategy or the overall managerial plan for involves the
following processes.
a. Making the moves to establish in different businesses and achieve diversification.
b. Initiating actions to boost the combined performance of the businesses the firm has
diversified into.
c. Pursuing ways to capture valuable cross-business strategic fits and turn them into
competitive advantage.
d. Establishing investment priorities and steering corporate resources into the most attractive
business units
Summary
In the globalized business, companies require strategic thinking and only by evolving
good corporate strategies can they become strategically competitive. A strategy of a business
organization is a comprehensive master plan stating how the organization will achieve its
mission and objectives. Strategy is significant because it is universal. It helps corporate to keep
pace with changing environs, provides better understanding of external environment, minimizes
competitive disadvantage by forcing to think clearly about mission, vision and objectives of
enterprise. It improves motivation of employees and strengthens decision-making. It forms the
basis for implementing actions. Strategy can be classified based on hierarchy into four levels:
corporate level, strategic business level, functional level and operating level. The approaches to
strategy making are: the Chief Architect approach, the delegation approach, the collaborator or
team approach and the corporate intrapereneur approach. Strategy making is an ongoing process
involving activities like defining vision, mission and goals, analyzing organization and
environment and matching them to decide suitable actions and objectives, and implementing
with a review system.
Self -assessment questions
1. Define the concept of strategy
2. Write two definitions of strategy and identify the key elements in them.
3. Distinguish strategy and plan. Which one is more suitable in a competitive environment?
4. What are the 5 Ps of a strategy?
5. Explain the significance of a strategy.
6. What are the different levels of strategy making?
7. Identify the people responsible for strategy making at different levels in an organization
8. Explain the different approaches to strategy making.
9. "Corporate strategy making is an on going process " ?Discuss
10. Explain the strategy of a diversified company.
Activities
1. Visit a local business organization, a hospital and educational institution and interview
the director or owner of these organizations to identify the mission, vision, goals of the
organizations. Also identify the achievements and future plans of these organizations.
2. Refer management journals like Vikalpa of IIM-A or IIMB Management Review or
Global CEO or visit websites like India infoline.com and identify articles on strategy and
prepare a write up on " Strategy for modern organizations".
References
1. Lomash Sukul & Mishra P.K.(2003) Business policy and Strategic Management, Vikas
Publishing House, New Delhi
2. Thomas L. Wheelen and Hunger J. David (2002) Concepts in Strategic Management and
Business Policy, Pearson Education Asia, New Delhi.
3. Thompson & Strickland (2003), Strategic Management: Concepts and Cases, Tata
McGraw Hill: New Delhi
4. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books, New
Delhi.
Unit I
ON
2
Strategic Management Process
S
S
E
L
LESSON OUTLINE
Introduction
Process of Strategic
Management ? Basic model
Role of strategists
Mintzberg's modes of
strategic decision making
Strategic Management in India
Summary
Self assessment questions
LEARNING
Activities
OBJECTIVES
References
After reading this lesson
you should be able to
Describe the strategic
LEARNING
management process
OBJECTIVE
Once there were two company
Know the role of
presidents
different persons in
who competed in the same industry. These
two presidents
an organization in
decided to go on a camping trip to discuss a
strategy making
possible
merger. They hiked deep into the woods.
Suddenly,
Explain Mintzberg's
they came upon a grizzly bear that rose up on
modes of executive
its hind legs
decision making
and snarled. Instantly, the first president took
off
his
knapsack and got out a pair of jogging shoes.
Appreciate
the
The
second
initiatives taken by
president said, "Hey, you can't outrun that
bear. The first
corporate in India for
president responded, " May be I can't outrun
effective
strategy
that bear but I
management
surely can outrun you!" (Fred R. David,
2003,p.5)
This story captures the notion of strategic management, which is to achieve and maintain
competitive advantage. How do business organizations operate successfully in the changing
business environment? Strategic management has evolved as a primary value in helping
organization operate successfully in a dynamic, complex environment. Even the most successful
Fortune 500 companies would accept that it is definitely not by following traditional ways of
doing business.
Most successful companies like General Electric have found internet mentors to tutor
their managers to world wide web. The company has launched its financial network
www.gefn.com in the year 2000 for its consumers. Also the company advertises heavily in
Olympics.
Launch of Apna PC is a strategic decision. The leader in PC business HCL Info systems
has launched one PC below Rs.10, 000 (its sticker price is Rs.9, 990). It has committed to
manufacture one million of them every year and expand its dealer network from 800 to 3,000.
This strategy is to tap the small businesses and lower income classes in urban and rural India.
Even the software probably will not be from Microsoft but from smaller companies. But the
company has to take of piracy and copyright the software also.
BHEL for example uses strategic management to create or modify its long-range plans,
which range from 5 to 20 years.
Process of Strategic Management
Strategic management consists of four basic elements.
Environmental scanning
Strategy formulation
Strategy implementation
Evaluation and control
Figure 2. 1 shows simply how these elements interact. Figure 2 .2 expands each of these
elements and serves as the model for discussion.
Environment
Strategy
Strategy
Evaluation
al Scanning
formulatio
imple-
and
n
mentation
control
Figure 2.1 Basic model
External
Perfor-
Mission
___________
Program
mance
_
s
Objectives
Societal
Reason for
Programs
E nvironment
Existence What results Activities
General
To be
Ne
e ds
F orces
Task
Budget
Strategies
E nvironment
s
Achieved
Budgets
I ndustry
Analysis
Procedures
Figure 2.2 Expanded model for strategic Management.
Environmental scanning is the monitoring, evaluating, and disseminating of information from
the external and internal environments to key people within the corporation. Its purpose is to
identity strategic factors ? those external and internal elements that will determine the future of
the corporation.
The external environment consists of variables (Opportunities and Threats) that are
outside the organization and not typically within the short-run control of top management. These
variables form the context within which the corporation exists.
The internal environment of a corporation consist of variables (Strengths and Weakness)
that are within the organization itself and are not usually within the short run control of top
management. These variables form the context in which work is done. They include the
corporation's structure, culture, and resources.
The simplest way to conduct environmental scanning is through SWOT analysis . SWOT
is an acronym used to describe those particular Strengths, Weakness, Opportunities, and Threats
that are strategic factors for a specific company
Strategy formulation is the development of long-range plans for the effective management of
environmental opportunities and threats, in light of corporate strengths and weaknesses. It
includes defining the corporate mission, specifying achievable objectives, developing strategies
and setting policy guidelines.
LIC of India is going global by entering into alliances with local
Strategy
counterparts in South east Asian Countries like Malaysia, China,
implementation is
Bangladesh and Singapore. This was never thought of by this public
sector Insurance giant earlier.
the
process
by
which
strategies
UCO bank has announced an innovative strategy of keeping a
minimum balance of Rs.5/- for a savings bank account and issuing a
and polices are put
cheque book for maintaining a minimum balance of Rs.250/- to attract
into action through
more customers from December 2005.
the development of programs, budgets and procedures. This process might involve changes
within the overall culture, structure, and/or management system of the entire organization. Most
of the times strategy implementation is carried out by middle and lower level managers with top
management's review. Some times refereed to as operational planning, strategy implementation
often involves day-to-day decisions in resource allocation. It includes programs, budgets and
procedures.
Evaluation and control is the process in which corporate activities and performance results are
monitored so that actual performance can be compared with desired performance. Managers at
all levels use the resulting information to take corrective action and resolve problems. Although
evaluation and control is the final major element of strategic management, it also can pinpoint
weaknesses in previously implemented strategic plans and thus stimulate the entire process to
begin again.
Role of strategists
Strategists are individuals or groups who are primarily involved in the formulation,
implementation, and evaluation of strategy. In a limited sense, all managers are strategists.
There are persons outside the organization who are also involved in various aspects of strategic
management. They too are referred to as strategists. We can identify nine strategists who, as
individuals or in groups, are concerned with and play a role in strategic management.
1.
Consultants
2.
Entrepreneurs
3.
Board of Directors
4.
Chief Executive Officer
5.
Senior management
6.
Corporate planning staff
7.
Strategic business unit (SBU) level executives
8.
Middle level managers
9.
Executive Assistant
A brief description of how the different strategists approach the process is outlined here.
1) Consultants: Many organizations which do not have a corporate planning department
owing to reasons like small size, infrequent requirements, financial constraints, and so on,
take the help of external consultants in strategic management. Besides the Indian
consultancy firms, such as, A.F.Ferguson, S.B. Billimoria and several others, now there
are many foreign consultancy firms. They offer a variety of services.
McKinsey and Company, specializes in offering consultancy in the areas of fundamental
change management and strategic visioning; Andreson Consulting, is in business
restructuring, and info tech and systems; Boston Consulting helps in building
competitive advantage; and KPMG Peat Marwick is in strategic financial management
and feasibility studies for strategy implementation.
2) Entrepreneurs are promoters who conceive the idea of starting a business enterprise for
getting maximum returns on their investment. They are awaiting for an environment
change and thereby for an opportunity to exploit the situation in their best interest. Thus
they start playing their role right from the promotion of the proposed venture. So, their
strategic role to make the venture a success is very conspicuous in a new business
enterprise. Therefore, it is expected of an entrepreneur that he should posses foresight,
sense of responsibility, desire to work hard and dashing spirit to bear any future
contingencies. According to Drucker, "the entrepreneur always searches for change,
responds to it and exploits it as an opportunity". Here is an example of a successful
women entrepreneur.
Kiran Mazumdar Shaw, a young entrepreneur, set up an export-oriented unit
manufacturing a range of enzymes. As an expert in brewing technology, Mazumdur
entered the field of biotechnology after experiencing problems in getting a job. Later she
set up another plant for manufacturing two new enzymes created by her own research and
development (R&D) department. As managing director, Mazumdar was actively
involved in all aspects of policy formulation and implementation for her companies.
3) Board of Directors are professionals elected on the Board of Directors (BOD) by the
shareholders of the company as per rules and regulations of the Companies Act, 1956.
They are responsible for the general administration of the organization. They are
supposed to guide the top management in framing business strategies for accomplishing
predetermined objectives. It is also the responsibility of the Board to review and evaluate
organizational performance whether it is as per the strategy laid down or not. The Board
is also empowered to make appointments of senior executives. In this connection, it
should be noted that the success of strategies much depends on the relative strength in
terms of power held by the Board and the Chief Executive (CE).
In April 1997, the CII, under the chairmanship of Rahul Bajaj, devised a code of
desirable corporate governance which, besides other recommendations, suggested
that "the key to good corporate governance is a well-functioning board of
directors which should have a core group of excellent, professionally-acclaimed,
non-executive directors who understand their dual role of appreciating the issues
put forward by the management and honesty discharging their fiduciary
responsibilities towards the company's shareholders as well as creditors.
4) Chief Executive Officer : In the management circle, the chief executive is the top man,
next to the directors of the Board. He occupies the most sensitive post, being held
responsible for all aspects of strategic management right from formulation to evaluation
of strategy. He is designated in some companies as the managing director, executive
director or as a general manager. Whatever the designation be, he is considered the most
important strategist being responsible to play major role in strategic decision-making.
.
5) Senior Management Starting from the chief executive to the level of functional or profit-
centre heads, these managers are involved in various aspects of strategic management.
Some of the members of the senior management act as directors on the board usually on a
rotational basis. All of them serve on different top-level committees set up by the board
to look after matters of strategic importance and other policy issues. Executive
committees, consisting of senior managers, are responsible for implementing strategies
and plans, and for a periodic evaluation of performance.
Strategic planning at MRF Ltd. used senior management expertise by dividing them into
five groups dealing with products and markets, environment, technology, resources, and
manpower. Each group had a leader who helped to prepare position papers for
presentation to the board. The executive directors in the company were actively involved
in SWOT analysis through the help of managers and assistant managers.
6) SBU level executives "SBU" stands for strategic business unit. Under this approach, the
main business unit is divided into different independent units and is allowed to form their
own respective strategies. In fact, the business is diversified and thus the departmental
heads are supposed to act as the main strategist, keeping an eye on optimum benefit for
their departments. Hence strategists i.e., the departmental heads enjoy the maximum
amount of authority and responsibility within their strategic business units.
At Shriram Fibres, the strategic planning system covered the different businesses ranging
from nylon yarn manufacture to the provision of financial services. Strategic plans were
formulated at the level of each SBU as well as at the corporate level. The corporate
planning department at the head office coordinated the strategic planning exercise at the
SBU-level. Each SBU had its own strategic planning cell.
7) Corporate-planning staff plays a supporting role in strategic management. It assists the
management in all aspects of strategy formulation, implementation and evaluation.
Besides this, they are responsible for the preparation and communication of strategic
plans, and for conducting special studies and research pertaining to strategic
management. It is important to note that the corporate planning department is not
responsible for strategic management and usually does not initiate the process on its own.
By providing administrative support, it fulfills its functions of assisting the introduction,
working, and maintenance of the strategic management system.
8) Middle level managers: They are basically operational planners they may, at best, be
involved as `sounding boards' for departmental plans, as implementers of the decisions
taken above, followers of policy guidelines, and passive receivers of communication
about functional strategic plans. As they are basically involved in the implementation of
functional strategies, the middle-level mangers are rarely employed for any other purpose
in strategic management.
9) Executive Assistant: An executive assistant is a person who assists the chief executive in
the performance of his duties in various ways. These could be : to assist the chief
executive in data collection and analysis, suggesting alternatives where decisions are
required, preparing briefs of various proposals, projects and reports, helping in public
relations and liaison functions, coordinating activities with the internal staff and
outsiders, and acting as a filter for the information coming from different sources.
Among these "the most important and what one manager labels the "bread and butter
role" of EA (executive assistant) could be that of corporate planner".
Mintzberg's modes of strategic decision-making
Henry Mintzberg has given three most typical approaches of strategic decision making
which include:
Entrepreneurial mode
Adaptive mode
Planning mode
We will now examine the three modes of strategic decision making
Entrepreneurial Mode: Strategy is made by one powerful individual who has
entrepreneurial competencies like innovation and risk taking. The focus is on opportunities.
Problems are secondary. Generally the founder is the entrepreneur and the strategy is guided
by his or her own vision of direction and is exemplified by bold decisions.
The success of Biocon India founded by Kiran Mazumdur shaw is an example of this
mode of strategic decision making.
Adaptive mode : Sometimes referred to as "muddling through," this decision-making mode
is characterized by reactive solutions to existing problems, rather than a proactive search for
new opportunities. Much bargaining goes on concerning priorities of objectives. Strategy is
fragmented and is developed to move the corporation forward incrementally. This mode is
typical of most universities, many large hospitals and a large number of governmental
agencies.
Planning mode : This decision making mode involves the systematic gathering of
appropriate information for situation analysis, the generation of feasible alternative strategies,
and the rational selection of the most appropriate strategy. It includes both the proactive
search for new opportunities and the reactive solution of existing problems.
Hewlett-Packard (HP) is an example of the planning mode. After a careful study of
trends in the computer and communications industries, management noted that the company
needed to stop thinking of itself as a collection of stand-alone products with a primary focus
on instrumentation and computer hardware. Led by its new CEO, Carly Florina, top
management felt that the company needed to become a customer-focused and integrated
provider of information appliances, highly reliable information technology infrastructure and
electronic commerce service.
A fourth mode of `logical incrementalism' was later added by Quinn.
Logical Incrementalism : In this mode, top management first develops reasonably clear idea
of the corportion's mission and objectives. Then in its development of strategies, it chooses
to use "an interactive process in which the organization probes the future, experiments and
learns from a series of partial (incremental) commitments rather than through global
formulations of total strategies". Thus the strategy is allowed to emerge out of debate,
discussion, and experimentation. This approach appears to be useful when
the environment is changing rapidly,
it is important to build consensus, and
needed resources are to be developed before committing the
entire corporation to a specific strategy.
Dr. Reddy's Laboratories follows this mode
Strategic management in India
After the economic liberalization announced in India in 1991, strategic management has gained
greater relevance. In fact it is a major thrust area after the WTO meet of December 2005 held in
Hong Kong. Figure 2.3 lists the environmental changes that have increased the relevance of
strategic management. In view of this to make strategic management effective organizations are
showing some new initiatives described here.
1. The abolition of public sector monopoly or dominance in a number of
industries has enormously increased business opportunities. Many of
them are high-tech and heavy investment sectors which make
strategic management all the more relevant.
2. The delicensing has removed not only an important entry and growth
barrier but also a consumption (and, therefore, demand) barrier. In
the past, because of non-production/limited production and import
restrictions, many goods were non-available or had limited
availability (in quantity and /or variety).
3. The scrapping of most of the MRTP Act restrictions on entry, growth
and Mergers &Acquisitions (M&As) , along with the dereservation
and delicensing of industries referred to above, have opened up flood-
gates of business opportunities for large enterprises.
4. The liberalization in policy towards foreign capital and technology,
imports and accessing foreign capital markets provides companies
opportunities for enhancing their strengths to exploit the
Figure 2.3 Trend setters in Indian economy
Source: Cherunilam, Francis( 2002) Strategic Management,
Himalaya Publishing Company, New Delhi
(i)
Developing learning organization
Strategic flexibility demands a long-term commitment to the development and nurturing of
critical resources. It also demands that the company become a learning organization ? an
organization skilled at creating, acquiring, and transferring knowledge, and at modifying its
behavior to reflect new knowledge and insights. Organizational learning is a critical component
of competitiveness in a dynamic environment. It is particularly important to innovation and new
product development.
For example, Hewlett-Packard uses an extensive network of informal committees to transfer
knowledge among its cross-functional teams and to help spread new sources of knowledge
quickly.
(ii) TQM implementation
The very purpose of strategic management is to win over its competitors. Total quality
Management (TQM) is an organizational philosophy that aims at maximizing customer
satisfaction by constantly striving to enhance operational efficiency through out the organization.
It is a start to finish process that systematically integrates the strategy and all the function
activities of the organization. Most of the Japanese companies adopted TQM practices in 1970
itself.
TQM method measures customers' needs, measures and evaluate customer
satisfaction delivered by the product or service ,and engages the organization in continuous
improvement to stay tuned-in to changes in customers' needs". The essential characteristics
of TQM are:
o
A customer-driven definition of quality
o
Strong quality leadership
o
Emphasis on continuous improvement
o
Reliance on facts, data, and analysis
o
Encouragement of employee participation
ISO 9000 certification and ISP 9002 etc., encourage organizations to embody these
characteristics. According to Certo & Peter, the TQM philosophy demands total dedication to
the customer and when an organization successfully implements TQM, it develops the following
four characteristics.
Customers are intensely loyal. They are more than satisfied because the
organization meets their needs and exceeds their expectations.
The organization can respond to problems, needs and opportunities with minimal
delays. It also minimizes costs by eliminating or minimizing tasks that do not add
value.
The organization's climate supports and encourages teamwork and makes work
more satisfying, motivating and meaningful for employees.
The organization develops and nurtures a general ethic of continuous
improvement. In addition, a method that employees understand leads them
toward a state of continuous improvement.
It is imperative for a company, which has adopted the TQM to integrate it with every phase of
the strategic management.
Environmental Analysis and TQM : The environmental analysis of a company with TQM
connects the needs of the external customer (the entirety that buys the good or service of
the company) with the various activities of the company.
Organizational Decision and TQM : TQM influences the organizational direction by
embodying the quality philosophy in the organizational mission. Indeed, the missions of
a number of organizations emphasize that quality and continuous improvement must
drive every action of the organization.
Strategy Formulation and TQM : TQM helps make strategy implementation very
efficient because of the clarity of organizational goals and direction, and the work and
relationships culture fostered by TQM.
Strategic control and TQM : Systems established under TQM and the favorable change in
the organizational culture make strategic control more effective. Benchmarking also
helps efficient control.
Information technology adaptation
Until the mid 1989 business firms were successfully making profits without using
Internet or launching their websites. Today virtual shopping and online retailing supplement
brick and mortar sales. A great success is that of amazon.com, which do not involve in brick and
mortar retailing at all. All their sales come from online business only today.
Space providers like e-bay.com are becoming increasingly popular in India after taking over
bazee.com. Executives today are electronic executives who cannot operate without World Wide
Web.
Globalizing operations
Nike and Reebok, for example, manufacture their athletic shoes in various countries
thorough out Asia for sale on every continent. Instead of using one international division to
manage everything outside the home country, large corporations are now using matrix structures
in which product units are interowen with country or regional units. International assignments
are now considered key for anyone interested in reaching top management.
As more industries become global, strategic management is becoming an increasingly
important way to keep track of international developments and position the company for long-
term competitive advantage.
Summary
Strategic management has evolved as a primary value in helping organization operate
successfully in a dynamic, complex environment BHEL for example uses strategic management
to create or modify its long-range plans, which range from 5 to 20 years. Strategic management
consists of four basic elements: Environmental scanning, Strategy formulation, Strategy
implementation and Evaluation and control. Nine persons or groups are identified to have
interest in strategic management. They are-Consultants, Entrepreneurs, Board of Directors, Chief
Executive Officer, Senior management, Corporate planning staff, Strategic business unit (SBU)
level executives, Middle level managers and Executive Assistant. Henry Mintzberg has given
three most typical approaches of strategic decision making which include: Entrepreneurial mode,
Adaptive mode and Planning mode. In India, abolition of public sector monopoly, the
delicensing, scrapping of MRTP Act, liberalization policy towards technology and capital,
expanding foreign markets and competition and grant of autonomy to navarathnas etc., created
the need for strategic management. The key elements in strategic management are: developing
learning organization, TQM implementation, and information technology adaptation and
globalsing operations.
Self -assessment questions
1. Describe the strategic management process with examples.
2. Explain environment canning and analysis.
3. What do you understand by strategy implementation and control?
4. Explain the role of different persons in an organization in strategy making.
5. What is the role of entrepreneur and entrepreneur in strategy making?
6. Examine the Mintzberg's modes of executive decision-making and identify the
companies adapting such modes.
7. What factors in India are responsible for growing importance of strategy?
8. Describe with examples the initiatives taken by corporate in India for effective strategy
management.
9. What is TQM and how it is made an element in strategy?
10. What is the impact of IT on corporate strategy?
Activities
1. Read the Chairman's speech of two different companies in the Annual General Meetings
and prepare a note on their strategies.
2. Refer the websites of three organizations ?one from service sector, one from
manufacturing sector and one from IT sector- and compare their strategic approaches.
References
3. Acharya B.K.and GovekarP.B. (1999), Business policy and Strategic Management,
Himalaya Publishing House, New Delhi.
4. Wheelen L Thomas and Hunger J. David( 2002), Concepts in
Strategic Management and Business Policy, Pearson Education Asia, New Delhi.
5. Kachru Upendra(2005), Strategic Management Concepts and cases, Excel Books, New
Delhi
6. Kazmi Azhar(2002) , Business policy and Strategic Management, Tata Mc Graw Hill,
New Delhi.
5. Fred R. David (2003), Strategic Management : Concepts and Cases, Pearson Education,
New Delhi.
Unit I
ON
S 3
Mission and Objectives
S
E
L
LESSON OUTLINE
Introduction
Process of establishing
Organizational direction
Strategic intent
Mission or purpose
Objectives
Synergy
Summary
Self assessment questions
Activities
References
LEARNING OBJECTIVES
After reading this lesson you
should be able to
Understand and need
for strategic direction
and strategic intent
Define
mission
statements for different
organizations
Appreciate the types of
organization objectives
Know how to set
objectives in of Key
Result Areas (KRAs)
Introduction
Planning is way of organization life but it differs from individuals to organizations. It is
futuristic, decision oriented and goal driven. Planning bridges the gap from where we are to
where we want to go. It involves the process of establishing direction, identifying a strategic
intent, selecting missions and objectives and ways of achieving them.
Process of establishing organizational direction
The process of establishing direction consists of three major step as shown in Figure 3.1
(1)
Reflecting on the results of an environmental analysis,
(2)
Establishing an appropriate organizational mission, and
(3)
Establishing appropriate organizational objectives.
Figure 3.1 Strategic Management ?Process focus
MISSION
LONG-RUN OBJECTIVES
SHORT-RUN OBJECTIVES
Gre
at
Scot
Ma
ke
Achi eve
S
upermarkets is
Serves as
Great
Serves as
major
a
progressive
foundation
Scot
foundation
reductions in
gro
wth
? for..
above the
for..
wage
orie nted
grocery
expenses
com pany
store
Reduce
reco gnized as a
industry
warehouse
regi onal leader
average
expenses
in r etails foods.
profitabili
Buy quality
We
will
ty
products at
cont inue
to
lower costs
striv e
to
Review and
im
prove
our
Improve
evaluate sales
res
ponsiveness
competiti
run by
to t he needs
ve
competition.
and concerns of
position
Match prices
When
When
our custo
mers,
within
offered by
a ccompli s-
accomplis-
emp loyees, an hed result in
market
hed result in
competition
emp hasis on t he
areas.
the
on high-
volu me,
a n d a c complish
accomplish
volume items
profitability.
ment of....
ment of....
Encourage
We intend to
store tours by
expand within
community
our
existing
groups.
Source: Samuel C. Certo & J Paul Peter, Strategic Management ? A Focus on Process,
Mc Graw Hill International, New York. p
Developing mission and objectives helps a manager
contribute primarily to manager's purpose
identify primarily among manager's tasks
examine the pervasiveness of planning and
outline the efficiency of resulting plans.
The terms mission, objectives, goals and targets are used many a time interchangeable.
However, in corporate literature they are often used distinctively. Mission leads to objectives
(which are designed to achieve the mission), objectives lead to goals (which are designed to
achieve the objectives) and goals lead to targets (which are set to achieve the goals) as shown in
Figure3.2.
Figure 3.2 Elements in Strategy Formulation
F
Mission
A
O
C
R
H
M
Objectives
I
U
E
L
V
A
E
Goals
T
M
I
E
O
N
N
Targets
T
S
Strategic Intent
CK Prahald and Hamel coined the term `strategic intent' to indicate an obsession of an
organization, some times having ambitions that may even be out of proportion to their resources
and capabilities. They explain the term `strategic intent' like this.
"On the one hand, strategic intent envisions a desired leadership position and establishes the
criterion the organization will use to chart its progress.... At the same time, strategic intent is
more than simply unfettered ambition. The concept also encompasses an active management
process that includes:
o focusing the organization's attention on the essence of winning,
o motivating people by communicating the value of the target,
o leaving room for individual and team contributions,
o sustaining enthusiasm by providing new operational definitions as circumstances change
and
o using intent consistently to guide resource allocations".
Hamel and Prahlad quote several examples of global firms, almost all of American and
Japanese origin, to support their view. In fact, the concept of strategic intent ?as evident from
their pathbreaking article, published in 1989 in the Harvard Business Review- seems to have
been proposed by them to explain the lead taken by Japanese firms over their American and
European counterparts.
Indian examples of companies with strategic internet are late Dhirubai Ambani's
Reliance group with the strategic intent of being a global leader of being the lowest cost producer
of polyster products a status achieved with vertical integration and operational effectiveness.
The Indian hardware grint, HCL's aspiration to become global software and service company is
working with the strategic intent of putting hardware, software and networking together and
making it work At Procter & Gamble (P&G) employees participate in a program the CEO calls
"combat training, "The program's intent is to focus on ways P&G can beat the competition.
Mission or Purpose
Its name, or articles of incorporation do not define a business. The business mission
defines it. Only a clear definition of mission and purpose of the organization makes possible
clear and realistic business objectives.
Mission statements can vary in length, content, format, and specificity. Most
practitioners and academicians of strategic management feel that an effective statement exhibits
nine characteristics or components. Because a mission statement is often the most visible and
public part of the strategic-management process, it is important that it includes all of these
essential components:
1. Customers: Who are the firm's customers?
2. Product or services: What are the firm's major products or services?
3. Markets: Geographically, where does the firm compete?
4. Technology: Is the firm technologically current?
5. Concern for survival, growth and profitability: Is the firm committed to growth
and financial soundness?
6. Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities
of the firm?
7. Self-concept: What is the firm's distinctive competence or major competitive
advantage?
8. Concern for public: Is the firm responsive to social, community, and
environmental concerns?
9. Concern for employees: Are employees a valuable asset of the firm?
Pepsi Co's mission is to increase the value of our shareholders'
investment. We do this through sales growth, cost controls, and wise
investment resource. We believe our commercial success depends
upon offering quality and value to our consumers and customers;
providing products that are safe, wholesome, economically efficient,
and environmentally sound; and providing a fair return to our inventors
while adhering to the highest standards of integrity.
Dell Computer's mission is to be the most successful computer
company in the world at delivering the best customer experience in
markets we serve. In doing so, Dell will meet customer expectations of
highest quality; leading technology; competitive pricing; individual
and company accountability; best-in-class service and support; flexible
customization capability; superior corporate citizenship; financial
stability.
Establishing an organizational mission is an important part of management's job, because
the existence of a formally expressed organizational mission generally makes it more likely that
the organizational will succeed. Having an established and documented organizational mission
accomplishes several important things. A mission statement once established serves an
organization for many years. But a mission may become unclear as the organization grows and
adds new product, markets and technologies to its activities. So a mission statement should be
broad enough to accommodate any new changes to avoid reformulation.
Objectives
An organization's mission gives a framework or direction to a firm. The next step in
planning is focusing on establishing progressively more specific organizational direction by
setting objectives. An organizational objective is a target toward which the organization directs
its efforts. Objectives in organizations, as shown in Figure 3.3 exhibit a hierarchy.
Figure 3.3 Hierarchy of objectives
B
1.
o
Socio
Top Down
Board of Directors
t
econom
Approach
(BOD)
t
2. ic
Mission
3. Overall
o
Top Management
objectives of the
m
organization
4. KRAs
Middle
u
5. Division objectives
Management
p
6. Department & unit
a
7. Individual objectives
Lower
p
* Performance
Management p
* Personal development
The BOD are more concerned with mission, purpose and overall objectives. Middle
managers are involved in key result areas(KRAs), division and department objectives. At the
lower level, group personal objectives are set. The objectives can be top down or bottom up
taking the initiative from lower management.
Managers should develop organizational objectives that are
o specific
o require a desirable level of effort
o flexible
o measurable and operational
o consistent in the long and short run
Peter Drucker, perhaps the most influential business writer of modern times, has pointed
out that it is a mistake to manage organizations by focusing primarily on one and only one
objective. According to Drucker, organizations should aim at achieving several objectives
instead of just one. Enough objectives should be set so that all areas important to the operation
of the firm are covered. Eight key areas in which organizational objectives should normally be
set are:
1. Market standing: the position of an organization ? where it stands ? relative to its
competitors
2. Innovation: any change made to improve methods of conducting organizational business.
3. Productivity: the level of goods or services produced by an organization relative to the
resources used in the production process. Organizations that use fewer resources to
produce a specified level of products are said to be more `productive than organizations
that require more resources to produce at the same level.
4. Resource levels: the relative amounts of various resources held by an organization, such
as inventory, equipment, and cash. Most organizations should set objectives indicating
the relative amount of each of these assets that should be held.
5. Profitability: the ability of an organization to earn revenue dollars beyond the expenses
necessary to generate the revenue. Organizations commonly have objectives indicating
the level of profitability they seek.
6. Manager performance and development: the quality of managerial performance and the
rate at which managers are developing personally. Because both of these areas are
critical to the long-term success of an organization, emphasizing them by establishing
and striving to reach related organizational objectives is very important.
7. Worker performance and attitude: the quality of non-management performance and such
employee's feelings about their work. These areas are also crucial to long-term
organizational success. The importance of these considerations should be stressed
through the establishment of organizational objectives.
8. Social responsibility: the obligation of business to help improve the welfare of society
while it strives to reach organizational objectives.
Table 3.1 shows the usage of the different objectives by various companies.
Table 3-1
Types and Usage Levels of Organizational Objectives
Type of objective
Number of companies
Percent of
studied having objective
companies studied
type
having objective
type
Profitability
73
89
Growth
67
82
Market share
54
66
Social responsibility
53
65
Employee welfare
51
62
Product quality and
49
60
service
Research and
44
54
Development
Diversification
42
31
Efficiency
41
50
Financial stability
40
49
Resource conservation
32
39
Management
29
35
development
Multinational
24
29
enterprise
Consolidation
14
17
Miscellaneous other
15
18
goals
*Adds to more than 100 percent because most companies have more than one goal
Source : Y.K. Shetty, New Look at Corporate Goals," California Management Review, 22 ,
No.2 (Winter 1979).
Synergy
Derived form the Greek word "synergos," which means "working together" exceeds the value
those units could create working independently. Another way of saying this is that synergy
exists when assets" are worth more when used in conjunction with each other than separately.
Synergies can involve physical and non-physical assets" such as human capital. For
shareholders, synergy generates gains in their wealth that they could not duplicate or exceed
through their own portfolio diversification decisions.
Synergy exists when the value created by business units, working together exceeds the value
those same units create working independently. But, as a firm increases its relatedness between
business units, it also increases its risk of corporate failure, because synergy produces joint
interdependence between business units and the firm's flexibility to respond is constrained. This
threat may force two basic decisions. First, the firm may reduce its level of technological change
by operating in more certain environments. Alternatively, the firm may constrain its level of
activity sharing and forego the benefits of synergy. Either or both decisions may lead to further
diversification. The latter may produce additional, but unrelated, diversification. Synergetic
effects occur across functional areas and core competencies emerge as a result of the
concentration of resources to the areas where an organization wishes to build up strategic
advantages. This can be observed in the case of a company, which is, or intends to be, a market
leader, a low-cost producer, a technologically superior competitor, or an ideal employer. For
achieving each of these objectives, an integrated approach to functional plans and policies would
be necessary. For instance, a company, which intends to be a market leader, would have to offer
products of the best quality at a competitive price through an efficient distribution network
supported by an aggressive promotion policy. The other functional area plans and policies
would have to supplement these marketing policies.
Summary
Two main organizational ingredients are commonly used to establish organizational direction:
Organizational mission and organizational objectives. Organizational mission is the purpose for
which, or reason why, the organization exists. An organizational mission should help focus
human effort, ensure compatibility of organizational purposes, provide a rationale for resource
allocation, indicate broad areas of job responsibility, and provide the foundations for
organizational objectives. Objectives are the end points of an activity. They help define the
direction of an organization in concrete form for accomplishment. Objectives of an organization
form a hierarchy and are multiple. Objectives are needed in key result areas. They include
market-standing, innovation, productivity, profitability, public responsibility, physical and
financial resources, employee performance and attitude and manager performance and
development. Synergy is necessary for competitive advantage. For instance, a company, which
intends to be a market leader, would have to offer products of the best quality at a competitive
price through an efficient distribution network supported by an aggressive promotion policy.
The other functional area plans and policies would have to supplement these marketing policies.
Self-assessment questions
1. Define mission and objectives and give examples.
2. Examine the significance of mission statement and goals and objectives in giving
strategic direction to a firm
3. What do you understand by strategic intent? Explain the concept with corporate
examples
4. Explain why a mission statement should accommodate the future growth of a company
5. Outline the typical characteristics of a mission statement and list its components
6. Illustrate the hierarchy of objectives as it cascades down the hierarchy
7. Identify and briefly explain the Key Result Areas of Peter F. Drucker
8. What are the characteristics of goals?
9. Describe the concept of `synergy' and discuss its significance to strategic planning.
10. Identify companies having clear strategic direction, mission and objectives.
Activities
1. Find the mission statements of the following organizations:
(a) Procter & Gamble India Ltd (a) Glaxo Laboratories (c) Appolo Hospitals
2. Study the objectives of Bharat Heavy Electrical Limited. Figure out the strategic intent
of the company.
References
1. Ansoff, H.I (1965), Corporate strategy, McGraw Hill, New York
2. Gulati M.L.(2000) , Strategic Planning and Management, Excel publishers, Mumbai
3. Azar Kazmi (2003), Business Policy and strategic management, Tata Mc Graw Hill,
New Delhi
Unit I
ON
4 Strategic Business Unit and
S
S
Functional Level Strategies
E
L
LESSON OUTLINE
Introduction
Strategy management outcomes
Evolution of structures
Types of structures
Decision-making hierarchy of
Business firms
Strategy - Structure combinations
LEARNING OBJECTIVES
Role of SBU level executives and
Strategies
After reading this lesson you
Functional level strategies
should be able to
Summary
Self assessment questions
Understand
Activities
significance of strategy
References
implementation
Know
different
structures
of
organizations.
Explain
strategy
structure relationships
Outline the role of SBU
level executive
Know what functional
strategies are
Introduction
The true success of an organization depends upon effective formulation and implementation of
strategies. According to Thomas Peters and Robert Waterman innovative companies are good at
strategy implementation. Effective managers often work back and forth between strategy
formulation and strategy implementation. In this process, there is a need to understand the
concept of Strategic Business Units (SBUs) and functional level strategies. There is a need to
understand the hen and egg dilemma-strategy follows structure or structure follows strategy.
Strategy Management outcomes
Strategy formulation and strategy implementation when depicted on a matrix form suggests four
probable outcomes of the four combinations of variables: Success, roulette, trouble and failure.
STRATEGY FORMULATION
Good
Poor
STRATEGY
Success
Roulette
Good
Trouble
Failure
IMP
LEMENTATION
Poor
Success is the most likely outcome when an organization has a good strategy and
implements it well. In this case, all that can be done to ensure success has been done.
Environmental factors outside the company's control such as competitive reactions or customer
changes may still make a strategy unsuccessful. However, organizational objectives have the
best chance of being achieved in this cell.
Roulette involves situations wherein a poorly formulated strategy is implemented well.
Two basic outcomes may ensue. The good execution may overcome the poor strategy or at least
give management an early warning of impending failure. Perhaps the field sales force
recognizes a problem in the strategy and changes its selling approach to a more successful one.
Alternatively, the same good execution can hasten the failure of the poor strategy. Thus, it is
impossible to predict exactly what will happen to strategies in the roulette cell, and that's where
it gets its name.
The trouble cell is characterized by situations wherein a well-formulated strategy is
poorly implemented. Because managers are more accustomed to focusing on strategy
formulation, the real problem with the strategy ? faulty implementation-is often not diagnosed.
When things go wrong, managers are likely to reformulate the strategy rather than question
whether the implementation was effective. The new (and often less appropriate) strategy is then
reimplemented and continues to fail.
Failure is the most likely to occur when a poorly formulated strategy is poorly
implemented. In these situations, management has great difficulty getting back on the right
track. If the same strategy is retained and implemented in a different way, it is still likely to fail.
If the strategy is reformulated and implemented the same way, failure remains the probable
result. Strategic problems in this cell of the matrix are very difficult to diagnose and remedy.
The analysis of the matrix makes two things clear.
First, strategy implementation is atleast as important as strategy formulation
Second, the quality of a formulated strategy is difficult to assess in the absence of
effective implementation.
Evolution of structures
A firm's organizational structure is a formal configuration that largely determines what
the firm will do and how it will complete its work. Different structures are required to
implement different strategies. A firm's performance increases when strategy and structure are
properly matched. Business-level strategies are usually implemented through the functional
structure. The cost leadership strategy requires a centralized functional structure-one in which
manufacturing efficiency and process engineering are emphasized. The evolution from the
functional structure to the three types of multidivisional structure (M-form) occurred from the
1920s to the early 1970s. The cooperative M-form, used to implant the related-constrained
corporate-level strategy, has a centralized corporate office and extensive integrating mechanisms.
Divisional incentives are linked to overall corporate performance. The related-linked SBU M-
form structure establishes separate profit centers within the diversified firm.
Types of organization structures
Two basic kinds of organizational structures exist-Formal and informal. There is the
formal organizational structure which represents the relationships between resources as designed
by management. The formal organizational structure is conveyed in the organization chart.
Then there is the informal organizational structure, which represents the social relationships
based on friendships or interests shared among various members of an organization. The
informal organizational structure is evidenced in the patterns of communication commonly
called the "grapevine." The informal network can be used to encourage rapid execution of
strategies.
In formal organization structure there is the question of what management levels and
personnel with the organization will be responsible for various implementation tasks. The five
types of organizational structures that are commonly seen are the simple, functional, divisional,
strategic business unit (SBU), and matrix structures. A schematic diagram of each of these
structures is shown in Figure 4-1
Simple
Functional
Owner-Manager
CEO
Employees
Operations
Marketing
Finance
Divi
s
ional
SBU
CEO
CEO
Divi
sion 1
Division 2
VP
VP
Ma
nager
Manager
SBU 1
SBU 2
Division
Division
Managers
Managers
1
2
3
2
3
1
Matrix type
CEO
VP
VP
VP
VP
Production
Marketing
R & D
Finance
Pro ject
Man
ager 1
Proj
e
c t S
Mana
ger 2
Figure 4-1 Different organization structures
Simple Organizational Structure
A simple organizational structure has only two levels, the owner-manager and the employees.
Small firms with one product or only a few related ones usually exhibit this structure.
Functional Organizational Structure
As organizations grow and develop a number of related products and markets, their structures
frequently change to reflect greater specialization in functional business areas. Such line
functions as production and operations, marketing and research and development (R&D) may be
organized in departments.
Divisional Organizational Structure
As firms acquire or develop new products in different industries and markets, they may evolve a
divisional organizational structure. Each division may operate autonomously under the direction
of a division manager, who reports directly to the CEO. Divisions may be formed on the basis of
product lines (automotive, aircraft), markets (customer, industrial buyers), geographic areas
(north, south, international), or channels of distribution (retail store, catalog sales). Each division
not only has its own line and staff functions to mange but also formulates and implements
strategies on its own with the approval of the CEO.
Strategic Business Unit Structure
When a divisional structure becomes unwieldy because a CEO has too many divisions to manage
effectively, organizations may reorganize in the form of strategic business units (SBUs) or
strategic groups. This structure groups a number of divisions together on the basis of such things
as the similarity of product lines or markets. Vice presidents are appointed to oversee the
operations of the newly formed strategic business units, and these executives report directly to
the CEO.
Matrix Organizational Structure
A matrix organizational structure is used to facilitate the development and execution of various
programs or projects. Each of the department vice presidents listed at the top has functional
responsibility for all the projects, whereas each of the project managers listed down the side has
project responsibility for completing and implementing the strategy. This approach allows
project mangers to cut across departmental lines and can promote efficient implementation of
strategies.
The advantages and disadvantages of the different structures are presented below.
Simple
Advantages
Disadvantages
1. Facilitates control of all the business 1. Relies totally on the owner-
activities.
manger
2. Makes possible rapid decision- 2. Grows increasingly inadequate as
making and ability to change with
volume expands.
market signals.
3. Does not facilitate development
3. Offers
simple
and
informal
of future managers
motivation/reward/control systems.
4. Owner-manager is forced to
focus on day-to-day matters and
not on future strategy.
Functional
Advantages
Disadvantages
Divisional
1. Boo
Ad
st
vanst ages efficiency
through 1. P
Di r
s om
ad ote
van st nar
age r
s ow specialization and
specialization
potential functional rivalry or
2. F
1. oFst
o errcse s i mprocve
o d
or de
din v
ateilo
o p
n ment a o
n f
d 1. c
F oonf
st leircst potentiality dysfunctional
fu
n n
e c
c t
e isosn
a a
r l
y ex
a p
uter
h toirsiet y down to the 2. F
c o
o st
m er
poss iti di
o f
n ficfuoltr y c ion
rpo fru
atnec-tlieovneal l
3. D
a iffe
ppr roepnrtiiaattee s aln
e d
vel de
lefga
or t es r da
ap y
i -
d
c
r oo
esordi
ur n
c a
e tsi.o
n and inter functional
Sto
re
tr-da
s
atey
po nos
gicpe
e.
Bra
u t
s ing
esde
s cis
Un io
t ns
s
2. de
Cr ceis
at io
esn am
a
prkoing
ble m with the extent
4. S
2. h
Ad a
Pl rapc
vanlty
es fsot
age c
rs us
ate
es
gy on
de vaeclc
o o
p un
m t
e a
n bi
t lait
n y
d 3. C
of
Dis a
n
ad o
a c
ut ch
van a
o
t sriio
t n
y
ages sta
giff-
ve linne
tc
o o nfl
di ic
vit.s ion
Decision-
f
ior
m pe
ple rfo
merm
nt a
atnic
o e
n
in
closer 4. L
mim
an its
ge rs. i nternal development of making
5.
1. R
Te
pri togai
h ns
xim
te it
ns f
y u
t noc ttio
hetn ad
h li
e vi s
s p
i e
o ci
n' a
s
stli
u
r z
a a
ni
t t
e io
qu
gi n
e
c
3.
1. ge
Fo ns
M e
ta r
e
y a
r ls mtia
h n
e
nc a
r ge
ea r
pot
s s
e .
e ntial for policy
dysfunctional
hierarchy of
w
e i
m t
ahi
nvir
n n
a
o e
ge ac
nm
m h
ee nndt t ivi
ansio
d n
c
o
inconsistencies between divisions.
ntrol of large,
competition
for
corporate
business firms
6. S
3.
d
M e
i r
Fv
at v
rere
eri s
esx s e a s
cb go
hief
usi o
d
ex
nes t
s r
e a
c
e i
nni
uti
te ng
ve
rpr gr
of
iseo
fi
s un
ce
. d
r ffo
o rr 4. Raises the problem of arriving at a
resources
2. s
t
b
F r
ra
Ad a
octie
al gi
de
it
van c
r
at m
str
es
age a
a
s n
td ge
egi
istris
c .
n
c
decision making.
method to distribute corporate
t and in-depth 2. May
Di s ma
ad ke
van de
t fi
agen
s i
ng the role of
The decision-
4. Sharply focuses accountability
overhead costs that is acceptable
business planning at the corporate
the group vice president difficult
making
for performance.
to different division managers with
1. a
nd
Acb
c us
o ine
mm s
os l
dae
t v
e e
s ls.a wide variety 3.
of M
a
1. y
Ca inc
n re
c a
r s
e e
a te dif
c f
o ic
nfult
us y
i
on in
and
5. Retains functional specialization
profit responsibility.
3. Cha
pr nn
ojee
clts a
orc
i c
e o
n un
te t
d abi
b l
us ity
ne t
s o
s di
ac s
t t
i in
vitct
y
.
defini
cng
ont trh
a e
di de
ct gr
or e
y e of a
po ut
lico
i n
e o
s my by
hierarchy
of
within each division.
2. b
us
S i
e ne
rv s
e s
s
uani
s ts.
good training ground forf or the
al l gr
o o
wiup
ng vice
dual pr
ac e
c s
oide
un n
tats
bila
i n
t d
y.
6. Serves as good training ground
business firms
strategic managers.
divi
2. sion
Ne cm
e a
ssn
i ge
tat r
es
tremendous
for strategic mangers.
3. Maximizes efficient use of functional
horizontal
and
vertical
typically
managers.
coordination.
contains three
4. Fosters
creativity
and
multiple
sources of diversity.
levels as
5. Provides broader middle management
shown
in
exposure to strategic issues for the
business.
Figure 4.2 At
the top is the corporate level, composed principally of members of the board of directors and the
chief executive and administrative officers. They are responsible for the financial performance
of the corporation as a whole and for achieving the non-financial goals of the firm, for example,
corporate image and social responsibility.
The second rung of the decision-making hierarchy is the business level composed
principally of business and corporate mangers. These managers
must translate the general statements of directions and intent generated at the corporate level into
concrete, functional objectives and strategies for individual business divisions or SBUs. In
essence, business-level strategic mangers must determine the basis on which a company can
compete in the selected product-market arena.
The third rung is the functional level, composed principally of managers of product,
geographic, and functional areas . It is their responsibility to develop annual objectives and
short-term strategies in such areas as production, operations, and research and development;
finance and accounting, marketing: and human relations. However, their greatest responsibilities
are in the implementation or execution of a company's strategic plans. While corporate and
business-level managers centre their planning concerns on "doing the right things," managers at
the functional level must stress "doing things right." Thus, they directly address such issues as
the efficiency and effectiveness of production and marketing systems, the quality and extent of
customer service, and the success of particular products and services in increasing their market
shares.
Figure 4.2 Decision Making hierarchy
Corporate
Corporate Level
strategy
B
usiness 1
Business 2
Business 3
Business Level
Corp
orate
Corporate
Corporate
Corporate
Functional
strate gy
strategy
strategy
strategy
Level
Table 4-1 depicts the characteristics of strategic management decisions at different
levels. Examples of corporate-level decisions include the choice of business, dividend policies,
sources of long-term financing, and properties for growth. Functional-level decisions usually
determine actions requiring minimal company wide cooperation. These activities supplement the
functional area's present activities and a re adaptable to ongoing activities so that minimal
cooperation is needed for successful implementation. Business ?level descriptions of strategic
decisions fall between those for the other two levels. For example, business-level decisions are
less costly, risky, and potentially profitable than corporate level decisions, but they are more
costly, risky, and potentially profitable than functional-level decisions. Some common business-
level decisions involve plant location marketing segmentation and geographic coverage, and
distribution channels.
Table 4-1 Characteristics of strategic management decisions at different levels
Level of strategy
Characteristic Corporate
Business
Functional
Type
Conceptual
Mixed
Operational
Measurability
Value
judgments Semi quantifiable
Usually
dominant
quantifiable
Frequency
Periodic
or Periodic
or Periodic
sporadic
sporadic
Adaptability
Low
Medium
High
Relation
to Innovative
Mixed
Supplementary
present
activities
Risk
Wide range
Moderate
Low
Profit potential Large
Medium
Small
Cost
Major
Medium
Modest
Time horizon
Long range
Medium range
Short range
Flexibility
High
Medium
Low
Cooperation
Considerable
Moderate
Little
required
Corporate level Strategy and structure combinations
The need for having the right structure for implementation of strategy need not be over
emphasized. Cost leadership strategy prefers functional structure (Figure 4.3). The structural
characteristics of specialization, centralization, and formalization play important roles in the
successful implementation of the cost leadership strategy. Specialization refers to the type and
number of job specialties that are required to perform the firm's work. For the cost leadership
strategy, mangers divide the firm's work into homogeneous subgroups. The basis for these
subgroups is usually functional areas, products being produced, or clients served. By dividing and
grouping work tasks into specialties, firms reduce their costs through the efficiencies achieved by
employees specializing in a particular and often narrow set of activities. Additional characteristics
of the form of the functional structure used to implement the differentiation strategy are shown in
Figure 4-4
r
e
Office of the President
t
u
c
l
l
s
t
r
u
t
a
r
t
o
f
l
a
Cost leadership strategy
Centralized Staff
e
l
y
t
i
v
e
r
e
l
a
b
y
a
Engineering
Marketing
Operations
Personnel
Accounting
M
Figure 4-3 Functional organization for cost leadership strategy
Figure ? 4-4 Differentiation through functional structure
President and Limited staff
R & D
Marketing
New Product Operations Marketing Human Finance
R & D
Resources
Notes:
Marketing is the main function for keeping track of new product ideas
New product R & D is emphasized
Most functions are decentralized, but R & D and marketing may have centralized staffs
that work closely with each other.
Formalisation is limited so that new product ideas can emerge easily and change is more
readily accomplished.
Overall structure is organic. Job roles are less structured.
Role of SBU level executives
The role of SBU level executive is very important to strategic management since each product-
market segment has a unique strategy. These executives are profit centre heads or divisional
heads and are considered the chief executives of a defined business unit for the purpose of
strategic management. An SBU level executive wields a lot of authority within the SBU and
also works in coordination with other SBUs.
Functional
Many public and private sector companies have adopted the SBU concept
strategies
in some form or the other "There are several family-managed groups today
who boast of their professionally-managed organizations structure. Each of
Functional
their companies has a chief executive who has total responsibility and
authority over the profit center.
strategies which
are
short-term
Strategic planning at MRF Ltd used senior management expertise by
dividing them into five groups
dealing with products and markets,
game plans for
environment, technology, resources, and manpower. Each group had a
the key functional
leader who helped to prepare position papers for presentation to the board.
The executive directors in the company were actively involved in SWOT
areas
are
the
analysis through the help of managers and assistant managers.
means
to
At Shriram Fibers, the strategic planning system covered the
different businesses ranging from nylon yarn manufacture to the provision
accomplish
the
of financial services. Strategic plans were formulated at the level of each
annual
plans.
SBU as well as at the corporate level. The corporate planning department at
the head office coordinated the strategic planning exercise at the SBU-level.
Functional
Each SBU had its own strategic planning cell
strategies
by
clearly specifying
the various measures to be taken in different functional areas in different time horizons help
operationalize the grand strategy. In other words, functional strategies provide the short-term
operational details for accomplishing the long term objectives systematically. Pearce II and
Robinson Jr. (1988) maintained :
"Functional strategies help in implementation of grand strategy by organizing and
activating specific subunits of the company (marketing, finance, production, etc) to pursue the
business strategy in daily activities. In a sense, functional strategies translate thought (grand
strategy in to action designed to accomplish specific annual objectives. for every major subunit
of a company, functional strategies identify and coordinate actions that support the grand
strategy and improve the likelihood of accomplishing annual objectives."
Operationalizing the corporate strategy requires the development of functional strategies
in key areas like marketing, production, R &D, finance and human resources. Figure.4.5
Illustrates annual objectives and functional strategies
Long-term obj ective
Figure.4.5
Double Sales
within
Annual
3 years
objectives and
functional
strategies
Annual objective
Increase sales by
Rs. 86 crores
Division A
Division C
Annual
Division B
Annual objective
objec
tive
Annual objective
Increase sales
Increase sales
by Rs.18 crores
Increase sales
by Rs.30 crores
R & D Annual
Production Annual
Marketing Annual
Personnel
Objectives
Objectives
Objectives
Annual
Develop one
Increase
Increase no.
Objective
new product
productivity by
Increase no. of
Reduce no. of
Improve
15 %. Increase
dealers by 50
employees by
features of
production by 25%
Increase field sales
500 Organize
product Y
force by 10
two Epps
The annual objective is to increase sales by Rs. 86 crores. Strategies for this include, for
example, increasing the sale of division A by Rs.38 crores, division B by Rs. 30 croes, division C
by Rs.18 crores, developing a new product, intensifying promotion by increasing the size of the
filed sales force, increasing the number of dealers etc.
The functional strategy for marketing must cover all the factors of the marketing mix.
Mutually consistent strategies for each of the factors must be developed to help achieve the
annual marketing objective.
R & D strategy may involve improving product or packing, developing new product
etc.
Similarly every key functional area must develop strategies to achieve the annual
objectives. The functional strategies are discussed in detail in unit III of this study material for
all the functional areas viz., R & D operations, finance, human resources, logistics, information
systems and marketing
Summary
The true success of an organization depends upon effective formulation and implementation of
strategies. There is a need to understand the hen and egg dilemma-strategy follows structure or
structure follows strategy. Strategy formulation and strategy implementation when depicted on a
matrix form suggests four probable outcomes of the four combinations of variables: Success,
roulette, trouble and failure. Designing sound organization structures would enable strategists to
accomplish the implementation of strategies in a proper way. There are four types of
organization structures. The five types of organizational structures that are commonly seen are
the simple, functional, divisional, strategic business unit (SBU), and matrix structures. Decision
making in the hierarchy is found at three levels ? corporate, business and functional. Functional
strategies enable the implementation of corporate level strategies.
Self Assessment questions
1. Why is it important that strategy implementation and strategy formulation be integrated
carefully?
2. What is the meaning of the following statement? "In organizations, there is a consistent
path of structure following strategy and then strategy following structure."
3. Explain the different types of organizational structures and state their merits and demerits.
4. Why do you think divisional organization is necessary for strategic management ?
5. Explain the relevance of matrix structures for corporate strategies
6. What type of organizational structure is used to implement the cost leadership, and
differentiation ?
7. What organizational structures should be used to implement the multi domestic, global,
and transnational international strategies?
8. Explain the decision making hierarchy in an organization.
9. What is Strategic business unit and what type of leadership is required?
10. Explain the significance of functional strategies.
Activities
1. From the management journals collect two articles on corporate strategy and structure
and draw conclusions on the question whether strategy follows structure.
2. From the internet identify the structure and strategy elements of two organizations and
prepare a paper on strategy decision making in modern enterprises
References
1. Azhar Kazmi (2003), Business policy and Strategic Management 2nd edition , Tata
McGraw Hill,New Delhi.
2. Francis Cherunilam(2000),Strategic Management, Himalaya Publishing House, Mumbai.
3. John A. Pearce II and Richard B. Robinson Jr.,(1988) Strategic Management , All India
Traveller Bookseller, New Delhi
4. Hitt , M.A, R.D Ireland and R E Hoskission, (1996) Strategic Management :
Competitiveness and globalization, West publishing New York
Unit II
ON
5 Environmental Analysis
S
S
EL
LESSON OUTLINE
Introduction
Concept of environment
Taxonomy of a firm's environment
Macro environment analyzed
Impact of macro environment on
business
Environment and strategic analysis
Environmental changes in India
Summary
Self assessment questions
Activities
References
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Understand the concept and different
types of environment
Examine the elements of external
environment and their influences on
business
Know how strategic analysis and
response
takes
place
relating
to
environment
Introduction
Business organizations operate in a turbulent environment and the changes in the environment
impacts business. The changes that take place in the internal and external environments impinge
on the policy decisions of business enterprises and cast profound influence in their working and
efficiency. The external environmental factors are in a continual flux creating new opportunities
and new threats to the company. They are always capable of producing major shocks, which
Peter Drucker has called as, "an Age of Discontinuity." In order to survive and succeed a
company must consider and understand the environment and make policies to adopt to or alter
the environment.
Concept of environment
Prof. Keith Davis defines business environment as, "the aggregate of all conditions events and
influences that surround and affect it." These surroundings are constantly changing and
uncertain.
Unilever recently sued Proctor & Gamble (P&G) over that company's
corporate espionage activities to obtain the secrets of its Unilever hair-care
business. After spending $3 million to establish a team to find out about
competitors in the domestic hair care industry, P&G allegedly took roughly
eighty documents from garbage bins outside Unilever' s hair-care brands such
as ThermaSilk, Suave, Salon Selective, and Finesse.
Similarly, Oracle Corp. recently admitted that detectives it hired paid janitors
to go through Microsoft Corp.'s garbage, looking for evidence to sue in court.
Taxonomy of a firm's environment
The total environment can be classified into two broad categories
Internal environment
External environment
The internal environment includes the goals and value system, the hierarchical authority
structure, the technological equipment and processes, the social groups and teams, the
management groups, organizational climate and culture,etc.
The external environment can be classified into two segments.
Macro environment or Mega environment, or
Micro environment or task environment.
Figure 4-1 Environment types
Socio Cultural environment Economic environment
Internal
Environment
Customers
Suppliers
Competitors
Firm
Special Shareholders
Interest
Groups
Employees
Creditors
Pol?tico-legal environment Technological environemnt
Macro Environment
Also referred to as general or remote environment, Mega' environment, skirts the `micro', or
the relevant environments.
The major constituents of mega environment are PEST or STEP (P
refers to Politico-legal environment, E-Economic environment, S-Socio-cultural environment
and T-Technological environment) or PESTEL (Political, environmental, socio-cultural,
technological, economic and legal). These environments can further be classified into
international, regional, national etc. Thus, depending upon the situation, an analyst may refer to
the global economic environment, the regional political environment or the national social
environment.
Micro Environment
Microenvironment includes employees, shareholders, creditors, suppliers, customers and
financial institutions, regulatory organizations, channels of distribution, and special interest
groups like consumer associations, and community organizations. This environment has a
substantial impact on an organization's current business. Consequently, developments in
microenvironment become the dominant preoccupation of the management for strategic
decisions. To avoid obsolescence and promote innovation, a firm must be aware of
technological changes that might influence its industry. Creative technological adoptions can
improve manufacturing and marketing techniques.
Macro environment Analyzed
Now, we will examine the various factors in the macro environment and identify the type of
impact they make on business organizations.
Socio -cultural
environment
A company like L& T which has diversified product mix like machinery for
cement, switchgear, material handling equipment, machinery for dairy plants,
computer peripherals etc., may have many `micro' environments. Only
necessary information should be gathered by L & T from the relevant
environment.
The socio cultural environment is one of the key elements of macro environment. Figure 4-3
lists the key variables in this environment. Demographics like literacy rates, sex ratios, child
birth rates, age distribution, educational levels life style, geographic distribution, mobility of the
pollution cultural variables like beliefs, values, faiths, religion, customs and traditions,
environment folkways, etc., are part of the social changes in society may be slow or fast but
change is inevitable in any business environment. Examples in the Indian business environment
include ?
Growing fast food culture
Women moving from kitchens to corporate
Burgeoning middle class
Increasing literacy levels
Declining birth rates and increasing senior citizens
Increasing health consciousness
Socio-cultural factors affect buying preferences, usage patterns and life style adaptations. Firms,
which ignore the socio cultural environments, tend to loose.
McDonalds, the world's fastest growing fast food chains extended Indian
Figure 4-3 Key
market with beef and pork as ingredients in its pizzas and burgers. Since
Social, Cultural
Hindus are religiously against cow slaughter and do not consume beef
and
and Muslims hate pork these was great opposition in Bombay and the
Demographic
local shiv sena activities broke down McDonald's fast food center at
Variables
Mumbai. Today the company relaunched its products with `no beef and
no pork' sign boards and even gave wide publicity that animal fat is not
1.
C
used in its restaurants. Further to Indianise its products new versions for
hi
Indians like Mc. Imli (with tamarind), Mc spic (with Indian spices) etc
ld
are introduced exclusively for Indian market.
b
e
Peculiar usage forms include:
ar
Vicks Vaporub is used as a mosquito repellent in some tropical countries.
in
Hair dyes are used for marking animals and washing machines for
g
making Lassi in some rural areas of Punjab.
ra
te
s
2.
Number of specific interest groups
3.
Birth and death rates
4.
Life expectancy rates
5.
Attitude towards work and organization
6.
Attitude towards government
7.
Attitude towards authority
8.
Ethical norms
9.
Value system
10. Composition of work force
11. Attitude towards income, savings and capital formation
12. Social ethos towards work and organization
Technological environment
Technology is knowledge to create new things. Mangers need technology to design, produce,
distribute and sell goods and services. Impact of technology is mixed. Positive benefits are seen
in new products, new machines, new tools, new materials and services. Benefits include greater
productivity, higher living standards, more leisure time and greater variety of products. Ex:
Range of cars ? subcompacts, compacts, intermediates, sports, specialty, variations in engine
power, steering A/c, speed control, roof etc. Negative effects include pollution, energy shortage,
loss of privacy, traffic jam etc. A balanced approach is therefore needed.
In
1975,
Xerox dominated the world photocopier market with 93 percent of the
revolutionary
market share. It guarded its technology with over 500 patents. Cannon
was a camera company from Japan that entered into this business around
technological
1970. It did not have the process technology to by-pass Xerox's patents. changes
and
Yet over the next three decades, Canon rewrote the rule book of how
copiers were to be produced and sold. Canon's copiers are a business of
discoveries
have
around Rs.300,000 crore in annual revenues and it sells more copiers than
brought
about
Xerox does. Canon succeeded, not by coping Xerox, but Canon believed
that individuals and small businesses would find the product useful if only
dramatic impact of
they could afford it. The technology appropriate for this product would
organizations.
therefore be different from Xerox's patent protected technologies.
Among
such
discoveries mention may be made of super conductivity, computer engineering, "thinking"
computers, robotics, unmanned factories, miracle drugs, fiber optics biometrics and electronic
funds transfer. Superconductivity is expected to revolutionize business operations especially in
such areas as transport, utility, health care, electrical and computers.
Technological change is of two types
Convergent change - where incremental innovation and improvement optimizes the ability of the
organization to succeed in the existing environment. In India this change occurs in 10-12 years,
in western firms five to six years and in Japan it is four years. Presently some Japanese firms
like Nissan make changes from 14 months to 2 years time.
Divergent change ? Involves changes where the framework of the organization undergoes
discontinuities. Whether it is in response to events over which the corporation has no control,
like deregulation, major shift in economic policies, nationalization or events related to radical
changes in technology like product life cycle shifts, new process technologies, radical
innovations, etc., these changes involve organizational re-formation or transformation. Example
includes replacement of Swiss mechanical watches with high innovation by simple battery
operated electronic watches. Some of the winners and losers of technological changes are given
in the following Table 4-1.
Table 4-1: Disruptive Technologies : Winners and Losers
Dominant Firm
Product
Disruptive
Winning
Technology
Challengers
GM and Ford
Small cars
Japanese quality
Totyoto and
& manufacturing
Honda
expertise
Gillette
Razor blades
Stainless steel
Wilkensen
technology
Gillette
Cheap razors Plastic
Bic
technology
Parker
Fountain
Ball point pen
Timex
pens
technology
Swiss
Time pieces
Lever-action
Timex
watchmakers
watch technology
Timex
Watches
Electronic
Casio. Etc.
technology
Economic environment
The various forces of economic environment can be explained as follows.
Capital ?machinery, buildings, investments office equipment, tools and cash.
Business organizations issue shares and debentures and borrow from commercial
banks.
Labour ?availability of skilled labor at affordable wage rates.
US companies are outsourcing from India because labor is very cheap here.
Prices ? The price changes caused by business cycles are a major concern. The
price raise in one industry affects the other ones. It is like a chain reaction. It
reduces the buying power of consumers and reduces demand.
Government Fiscal and tax policies ? Government's control on availability of
credit through fiscal policy has considerable impact on business. If business
profit taxes are high, the interest to go into business gets marginalized. If sale, tax
is high people don't buy.
Customers- Customers are the foundation of business. Business must serve the
public. People want value for the money they pay and service that satisfy their
needs. Companies are customizing products to specific groups or individuals.
Refrigerator companies are introducing bare bone models for the low income
groups. Auto companies are opening up service centers. Also thee are CRM
(customer relationship management) programs in many organizations today.
General Economic Conditions - The general economic conditions like national
income, per capita income, economic resources, distribution of income and assets,
economic development, etc. are important determinants of the business strategies.
In countries and regions where income of people is low, the demand for the
product will be low. It discourages the companies to enter the market. However
in economies where the income of people is rising and hence business prospects
will be brighter; investment will get automatic attraction. Recently growing
income of middle class in India, encouraged foreign investors to operate in India.
Economic Systems. All business organizations operate in at least one type of
economic system-socialist, communist and capitalistic. In capitalistic type of
economic system, free play of market mechanism takes place, whereas in state-
controlled economies, there are restrictions, on the private sector's role. It has
been noticed that with the collapse of communist Soviet Union multinational
corporations are searching their market in East European Countries.
Economic Policies. The economic policies of the government have tremendous
impact on the business. For example, in India, before July 1991 public sectors
were encouraged to play dominant role to achieve commanding heights of the
economy; as a result competition was not there. With the new economic policies
of liberalization and globalization, the era of protectionism and preferential
treatment is giving way to competition and cost-consciousness.
Economic Growth The general economic growth in the economy has direct
impact on the business strategies. Increased economic growth rate, leading to
increase in consumptions, expenditure, lowers the general pressure within an
industry and offers more opportunities than threats. On the other hand, decline in
economic growth reduces consumer expenditure , that leads to competitive
pressures and threatens the profitability.
Interest rates. The rate of interest affects the demand for the products in the
economy, particularly when general goods are to be purchased through borrowed
finance. If the interest rate is low, the demand for certain products like autos,
appliances, capital equipments, housing materials, etc. will rise. This provides
good opportunity for these industries to expand whereas rising interest rates pose
a threat to these industries. Interest rates also determine the cost of capital of the
company. When rates of interests are lower, companies can adopt ambitious
strategy with borrowed funds.
Currency exchange rates. Currency exchange rates have direct impact on the
business environment. When the rupee was devalued in 1991, it was to make
Indian products cheaper in the world market and consequently boost India's
exports. That was a great opportunity for Indian exporters.
Taxes- the imposition of taxes like income tax, sales tax and excise duties have
impact on business. The chocolate manufactures in India suffered a set back in the
new millennium when the excise duty on confectionery items increased from 8 to
16 percent. Nutrine Confectionery company which sells a popular brand of
chocolate called `Aasey' with a price of 0.25 paise to had to increase its price
from 0.25 paise had 0.50 paise since the price cannot be increased by 0.04 paise
due to coinage problem. A child who goes to nearly kiosk with 0.25 paise used to
return home to his mother without a chocolate. It took three months for the
customers (children) to adjust to the new price and the company lost crores of
rupees it gets from Children's pocket money.
Politico- legal environment
The various forces in political and legal environment direct and restrict business decision-
making.
Political environment ? Attitudes of Government and legislators change with social
demands and beliefs. Government affects every aspect of life. For instance, strong
pollution norms many result in closure of a company. Government not only promotes but
also constrains business. Promotion is possible by stimulating economic extension and
development, by providing subsidies to SSIs, tax advantages, support to R&D and
protecting business in priority sector. Also, government can be the biggest customer.
The public announcements of government, the observations in plan documents indicate
government policies. E.g.: Industrial policy resolution, 1948 and the economic policy,
1991.
Several European Countries restrain the use of children in commercial
advertisements. In India advertisement of cigarettes must carry the statutory warning that
"Cigarette smoking is injurious to health."
The prevalence of political uncertainty has effect on the business strategies. In the
presence of political uncertainty, no business likes to commit itself for long term
strategies or investments while the uncertainty countries. Therefore the companies focus
more on preparing alternative plans for different emerging situations.
Legal environment ? It consists of judiciary and legislation. It constrains and
regulates business. There are several legislation like the Company act 1956, the Payment
of wages Act, 1936 and Factories Act 1948. There are judiciary arrangements like courts
and tribunals.
Indian business environment is undergoing a sea change since 1991 after economic reforms were
introduced. Fredrick Gluck, Director of Mckinsey & Company concludes his observations in the
following words:
"It is no exaggeration that in an industry that is, or is rapidly becoming global,
the riskiest possible posture is to watch as more aggressive companies use this growth
to capture economies of scale and learning. The domestic competitor will then be
faced with an attack on domestic markets using different (and possibly superior)
technology, product design, manufacturing, marketing approaches, and economies of
scale. A few examples suggest how extensive the phenomenon of world markets has
already become. Hewlett Packard's manufacturing chain reaches half-way around
the globe, from well paid, skilled engineers in California to low range assembly in
Malaysia. General Electric has survived as a manufacturer of inexpensive audio
products by centralizing its world production in Singapore.
A number of measures have been announced to facilitate private entry into areas of infrastructure
which were formerly the prerogative of the public sector with a view to freeing scarce public
resources for social sector. These include natural resource sectors, and non-tradable
infrastructure services such as electricity, internal transport telecommunications.
1. The National Mineral Policy was revised and the Mines and Mineral Development Act
amended to open up this sector to private and foreign investment. Thirteen minerals were
dereserved for exploitation by the private sector.
2. The R.B.I passed automatic approval policy for foreign investment was made applicable
to mining (except for atomic minerals and mineral fuels) subject to a limit of 50% on
foreign equity.
3. The power sector policy framework attracted 138 private proposals for creating 58,745
mega watts of capacity with an investment of Rs.2,19,927 crores. Of these, 41 proposals
are from foreign investors or are joint ventures with foreign partners, of which thirteen
have already been cleared by the government.
4. The National Tele-communcition Policy, 1994 allows private provision of basic telecom
services. Implementation has begun after announcement of rules and procedures.
5. The New Air Corporation Act, 1994 enables private Air Taxi Companies to operate as
regular domestic airlines. Nine Air Taxi operators, complying with Aircraft Rules have
been granted "scheduled airlines" status.
6. The National Highway Act, has been amended to enable levy of tolls on national
highway users. Government intends further amendment of the Act of allow private
participation in construction, maintenance and operation of roads on Build-operate-
Transfer (BOT) basis.
Natural Environment: Geographical and ecological factors, such as natural resources
endowments, weather and climatic conditions, topographical factors, location aspects in the
global context, port facilities etc., are all relevant to business. Differences in geographical
conditions between markets may sometimes call for changes in the marketing mix. Geographical
and ecological factors also influence the location of certain industries.
Natural Resource availability
For example, industries with high material index tend to be located near the raw material
sources. Climate and weather conditions affect the location certain industries like the cotton
textile industry in Mumbai, Ahmedabad and Coimbatore. Topographical factors They may
affect the demand pattern.
For example, in hilly areas with a difficult terrain, jeeps may be in greater demand than cars.
Ports - Air ports and seaports offer an advantage in transport. Many commercial cities are those,
which have this port advantage.
In India business has flourished near ports. For example, Visakhapatnam in Andhra Pradesh,
which has a natural harbour, has many major industries like BHPV, steel plant, Hindustan
Shipyard, Coromandel Fertilizers etc., located there due to the advantage of port.
Green concerns Government is becoming increasingly concerned about protecting the
environment. Use of plastic bags is banned in several states and Union Territories like Andhra
Pradesh and Sikkim. Government is investing on water harvesting schemes to conserve ground
and natural water resources
Cliamtic conditions Variations in climatic conditions cause differences in demand for goods.
More number of air conditioners and refrigerators are sold in the South India during summer due
to warm weather.
Impact of macro environment on business
The trends in mega environment, from the viewpoint of a company, have long-term implications.
Figure 4-2 shows some of the trends that impacted business.
The following
.have potentially
.....Probably won't
...have potentially
Environmental trends.....
positive effects on
affect these much negative effects on
DEMOGRAPHIC
Aging population
Medical services Steel
Colleges and
Universities
Increased purchasing
Luxury automobiles
power of baby boomers
SOCIOCULTURAL
More women in the force Convenience foods Farm Home baking
Equipment
Supplies
Greater health and fitness
Exercise equipment
Mest products
awareness
POLITICAL/LEGAL
Trucking
Banking
Deregulation
Book
Increased environmental
Waste management publishing Automobiles
legislation
TECHNOLOGICAL
Advances in laser compact discs
Long playing technology
records
Progress in Ethical drugs Building
Bio-technology materials
MACROECONOMIC Housing construction Prescription
Declining interest rates drugs
GLOBAL Global Domestic stores
Growing competitive telecommunications manufacturing
strength of newly industrialized
Countries (NICs)
Opening of eastern bloc Fast foods Defense
countries
,
,
,
Figure 4-2: Trends in environment and their impact
Source: Alex Miller and Geogory G. Dess( 1996), Strategic Management McGraw -Hill, New York, p. 61.
Environment and strategic analysis
By the very principle of its operation, industry never reaches a point of equilibrium. Strategic
analysis provides the framework on study, forecast, anticipates and prepares the organization to
tackle the challenges posed by the changes, head on.
Organizations have to recognize the dynamic nature of the environment in which they operate.
The environment is affected by a number of factors that include events and influences from a
number of sources, resulting in a complex play of forces that are not easy to analyze in their
totality
Internal factors are those over which the business enterprise can exercise its control and are
regarded as controllable variables. External environmental factors are regarded as uncontrollable
factors. As the external factors of environment are beyond the control of a business enterprise,
its progress, success and survival largely depends upon its capacity and ability to adapt
successfully to environmental changes. In order to do this, it will have to reorganize, readjust its
controllable internal factors to suit the external business environment.
Effective strategic management begins with assessment of business risk. Business risk arises as
much from the likelihood that something good will not happen as it does from the threat that
something bad will happen. Each organization has its own unique set of business risks and these
risks keep changing constantly. Some risks are external, e.g. competitors, economic conditions,
and capital availability etc. Others are internal, resulting from the company's own organization,
processes, products, and relationship with customers, shareholders, suppliers and employees;
information; and contractual commitments.
There are two mainstreams of thought on strategy. These are represented by the `fit'
concept of the `positioning school' and the `stretch' concept of the resource based' school. Each
of these schools views strategy differently, as a result of which strategic capability is also viewed
differently.
The `Fit' Concept
The traditional concept of organizational strategy is based on the `fit' concept. This
concept is propagated by the `positioning' school and more particularly by Michael Porter in his
development of the theory of competitive strategy. According to this, strategies should aim at
achieving fit between environment and organizations.
The `Stretch' Concept
Gary Hamel and C.K. Prahlad opined that the conventional framework of strategy using the `fit'
concept is incomplete as a strategy for the organization. Though the long-term strategy should
have a consistency and purpose and supplement the idea of `fit', the importance of competitive
strategy is not about how the organization fits its strategy to match its resources, but about how
the organization marshals its resources. They said, "competitiveness is born in the gap between
a company's resources and its managers goals. "The long term competitive success depends on
managers' willingness to continually challenge their existing frames of reference. Leveraging
resources can do this. Leveraging resources is as important as allocating them. This concept of
leveraging resources so as to extend the capabilities of the organization and its competitiveness is
called `stretch'.
Summary
Business organizations are subject to its internal and external environmental factors. The
internal factors are its personnel, physical facilities, organization structure, production system,
marketing mix, technical facilities etc. These internal factors are those over which the business
enterprise can exercise its control and are regarded as controllable variables.
The external factors are those over which the business organization has no control such as
social and political atmosphere, economic environment etc. These environmental factors are
regarded as uncontrollable factors. As the external factors of environment are beyond the control
of a business enterprise, its progress, success and survival largely depends upon its capacity and
ability to adapt successfully to environmental changes. In order to do this, it will have to
reorganize, readjust its controllable internal factors to suit the external business environment.
There are two mainstreams of thought on strategy. These are represented by the `fit' concept of
the `positioning school' and the `stretch' concept of the resource based' school
Self assessment Questions
1. What do you understand by environment? How do you classify it?
2. What is internal environment? Is it controllable?
3. What PESTEL means to you? Which of the external factors are controllable ?
4. What factors in social environment affect business and how?
5. Discuss the implications of political environmental forces in India?
6. Examine the impact of changing technology on business.
7. What are the major economic environmental factors?
8. Identify the major changes in Indian environment impacting domestic and foreign
business.
9. How do strategists look at environment and take decisions?
10. Write a note on the long tem impact of microenvironment on business as given by Miller
and Dess in the lesson.
Activities
1. Visit websites of any two companies and from the annual reports or publicity material
and figure out the environment in which they are operating.
2. What steps are taken now a days by companies in response to green issues? Collect
material from Vikalpa and other journals and make a 3 page report..
References
1. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books, New
Delhi.
2. John Pearce II and Richard B. Robinson Jr(1996), Strategic Management, A.I.T.B.S, New
Delhi
3. N.S. Gupta, Business Policy and Strategic Management, Himalaya Publishing House,
Mumbai
4. Fred R. David (2003), Strategic Management : Concepts and Cases, Pearson Education,
New Delhi.
5. Francis Cherunilam(2000),Strategic Management, Himalaya Publishing House, Mumbai
Unit II
ON
S 6
Environmental Scanning Techniques
S
E
L
LESSON OUTLINE
Introduction
Why scanning?
Techniques of scanning
Issues Priority matrix
Environmental Threats and
opportunities Profile (ETOP)
Strategic advantage profile (SAP)
Functional ? area profile and resource
deployment matrix
SWOT Analysis
The opportunity and Threat matrices
The Impact Matrix
The Impact scale
Gap Analysis
Balanced Score card
Summary
Self Assessment questions
Activities
References
LEARNING OBJECTIVES
After reading this lesson you
should be able to
Understand the importance of scanning
techniques.
Describe the different scanning techniques
Since the Strategic Advantage Profile is a summary statement of corporate capabilities, in
summarizing the functional competencies a comparative view needs to be taken in the light of
external conditions and the time horizon of projections. For example, while comparing the level
of inventory holding, one may find it to be relatively higher than that of competing firms; as such
it should be regarded as a weakness. But if the market demand shows an increasing trend,
apparent weakness should be considered strength.
III. Functional ? area profile and resource deployment matrix.
Developed by Hofer and Schendel, this method requires the preparation of a matrix of functional
areas with characteristics common to each, e.g., focus of financial outlay, physical resource
position, organizational system, and technological capability. The functional area profile of a
manufacturing company is given by way of illustration. Following this exercise, it is required
that the resource outlay and focus of efforts over time in the respective functional areas be
presented also in the form of a matrix. Figure 8-4 Functional ? Area Resource ? Deployment
Matrix
Techniques of Scanning
There are various scanning techniques used by organizations
ii)
Issues Priority matrix
iii)
Environmental Threats and opportunities Profile (ETOP)
iv)
Strategic advantage profile (SAP)
v)
Functional ? area profile and resource deployment matrix
vi)
SWOT Analysis
vii)
The opportunity and Threat matrices
viii)
The Impact Matrix
ix)
The Impact scale
x)
Gap Analysis
xi)
Balanced Score card
I)
Issues Priority Matrix (IPM)
One way to identify and analyze developments in the external environment is to use the issues
priority matrix (Figure 8-1) as follows:
1. Identify a number of likely trends emerging in the societal and task environments.
These are strategic environmental issues ? those important trends that, if they
occur, determine what the industry or the world will look like in the near future.
2. Assess the probability of these trends actually occurring from low to high.
3. Attempt to ascertain the likely impact (from low to high) of each of these trends
on the corporation being examined.
Figure 8-1
Issues Priority Matrix
Probable Impact on Corporation
High
Medium
Low
gh
High
High
Medium
e
Priority
Priority
Priority
r
e
nc
Hi
c
ur
um
e
di
Oc
High
Medium
Low
Priority
Priority
Priority
l
i
t
y
bi
r
oba
M
Medium
Low
Low
ow
P
Priority
Priority
Priority
L
Source: L. L. Lederman, "Foresight Activities in the U.S.A: Time for a Re-Assessment?" Long ? Range Planning (June
1984), p-46.
A corporation's external strategic factors are those key environmental trends that are judged to
have both a medium to high probability of occurrence and a medium to high probability of
impact on the corporation. The issues priority matrix can then be used to help managers decide
which environmental trends should be merely scanned (low priority) and which should be
monitored as strategic factors (high priority). Those environmental trends judged to be a
corporation's strategic factors are then categorized as opportunities and threats and are included
in strategy formulation.
II)
Environmental threats and opportunities Profile (ETOP )
Assessment of the environmental information and determining the relative significance of
threats and opportunities require a systematic evaluation of the information developed in
the course of environmental analysis. For this purpose, preparation of a profile of
environmental threat and opportunity (ETOP) is considered to be a useful device.
An illustrative profile is given in Figure 8-2 on the basic of environmental analysis
carried out by Bharat Heavy Electricals Ltd.
BHEL: ENVIRONMENTAL THREAT AND OPPORTUNITY PROFILE (ETOP)
Environmental Sector
Impact
( +) Opportunity (-) Threat
Socio ? economic
(+_) continued emphasis on infrastructural
development which includes power supply for
industry, transport, and domestic consumption.
(-) Severe resource constraints.
Technological
(+) High growth envisaged in industrial
production and technology upgradation.
Supplier
(-) Sources of technology will become scarce due
to formation of technology cartels.
Government
(+) Liberalization of technology import policy
Competition
(-) Customers will become more discerning in
their requirements due to an increasing role of
power plant consultants.
(-) Public sector will find it increasingly difficult
to retain specialists and highly qualified
personnel.
Figure 8-2 Environmental analysis at BHEL
III.
Strategic advantage profile
A Profile of strategic advantages (SAP) is a summary statement, which provides an overview of
the advantages and disadvantages in key areas likely to affect future operations of the firm. It is
a tool for making a systematic evaluation of the strategic advantage factors, which are significant
for the company in its environment. The preparation of such a profile presupposes detailed
analysis and diagnosis of the factors in each of the functional areas (Marketing, Production,
Finance and Accounting, Personnel and Human Resources, R& D). The relevant data for the
critical areas may go as a supplement to the profile. The following Strategic Advantage Profile
relates to a food processing company in India.
Figure 8-3 Strategic Advantage Profile (SAP) of ABC India Ltd.
Internal Area
(+) Strength (-) Weakness
Marketing
(+) Capable sales force; sales agents
dispensed with.
(-) Shrinking market for most
products.
Operations
(-) Stagnating sales performance.
(+) Profits after tax picking up after
1982.
(-) Plant facilities are old.
R&D
(-) No R&D effort so far.
(+) Backing in R &D expected from
parent US company.
Finance
(-) No additional investment since
1980.
(-) Heavy reliance on fixed deposits
and bank loans.
(+) Parent US company now
interested in expansion.
Corporate Resources
(+) Management team comprises
young, ambitious executives.
Since the Strategic Advantage Profile is a summary statement of corporate capabilities, in
summarizing the functional competencies a comparative view needs to be taken in the light of
external conditions and the time horizon of projections. For example, while comparing the level
of inventory holding, one may find it to be relatively higher than that of competing firms; as such
it should be regarded as a weakness. But if the market demand shows an increasing trend,
apparent weakness should be considered strength.
IV. Functional ? area profile and resource deployment matrix.
Developed by Hofer and Schendel, this method requires the preparation of a matrix of functional
areas with characteristics common to each, e.g., focus of financial outlay, physical resource
position, organizational system, and technological capability. The functional area profile of a
manufacturing company is given by way of illustration. Following this exercise, it is required
that the resource outlay and focus of efforts over time in the respective functional areas be
presented also in the form of a matrix. Figure 8-4 Functional ? Area Resource ? Deployment
Matrix
Figure 8-4 Functional ? Area Resource ? Deployment Matrix
Functional
Resource
a
r
Area
Deployment
-
82
-
83
-
84
-
85
-
86
-
86
-
88
and Focus of
s
ye
xt
hi
a
r
Efforts
1981
1982
1983
1984
1985
1986
T
1987
Ne
ye
Development
Marketing
Focus of
Effort
Development
outlay (%)
Amount Rs.)
Production
Focus of
Effort
Development
outlay (%)
Amount Rs).
Finance
Focus of
Effort
Development
outlay (%)
R&D
Amount Rs.)
Focus of
Effort
Development
Management outlay (%)
Amount (rs.)
Focus Effort
V.
SWOT Analysis
SWOT is an acronym for the internal Strengths and Weaknesses of a business and environmental
Opportunities and Threats facing that business. SWOT analysis is a systematic identification of
these factors and the strategy that reflects the best match between them. It is based on the logic
that an effective strategy maximizes a business's strengths and opportunities but at the same time
minimizes its weaknesses and threats. This simple assumption, if accurately applied, has
powerful implications for successfully choosing and designing an effective strategy.
Opportunities
An opportunity is a major favorable situation in the firm's environment. Key trends represent
one source of opportunity. Identification of a previously overlooked market segment, changes in
competitive or regulatory circumstances, technological changes, and improved buyer or supplier
relationships could represent opportunities for the firm.
Threats
A threat is a major unfavorable situation in the firm's environment. It is a key impediment to
the firm's current and / or desired future position. The entrance of a new competitor, slow
market growth, increased bargaining power of key buyers or supplier, major technologies
change, and changing regulations could represent major threats to a firm's future success.
Consumer acceptance of home computers was a major opportunity for IBM. The second
fundamental focus in SWOT analysis is identifying key strengths and weakness based on
examination of the company profile. Strengths and weaknesses can be defined as follows:
Strengths
A strength is a resource, skill, or other advantage relative to competitors and the needs of
markets a firm serves or anticipates serving. a strength is a distinctive competence that gives the
firm a comparative advantage in the marketplace. Financial resources, image, market leadership,
and buyer / supplier relations are examples.
Weaknesses
A weakness is a limitation (or) deficiency in resources, skills, and capabilities that seriously
impedes effective performance. Facilities, financial resources, management capabilities,
marketing skills, and brand image could be sources of weaknesses. Sheer size and level of
customer acceptance proved to be key strengths around which IBM built its successful strategy
in the personal computer market.
How is it useful?
Understanding the key strengths and weaknesses of the firm further aids in narrowing the choice
of alternatives and selecting a strategy. Distinct competence and critical weakness are identified
in relation to key determinants of success for different market segments; this provides a useful
framework for making the best strategic choice.
SWOT analysis can be used in at least three in strategic choice decisions. The most common
application provides a logical framework guiding systematic discussions of the business's
situation, alternative strategies, and ultimately, the choice of strategy. What one manager sees as
an opportunity, another may see as a potential threat.
A second application of SWOT analysis is illustrated in Figure.8-5. Key external opportunities
and threats are systematically compared to internal strengths and weaknesses in a structured
approach. The objective is identification of one of four distinct patterns in the match between
the firm's internal and external situation. The four cells in Figure 8-5 represent these patterns.
Cell 1 is the most favorable situation; the firm faces several environmental opportunities and
has numerous strengths that encourage pursuit of such opportunities. This condition suggests
growth ? oriented strategies to exploit the favorable match. IBM's intensive market
development strategy in the personal computer market was the result of a favorable match
between strengths in reputation and resources and the opportunity for impressive market
growth.
Cell 2, a firm with key strengths faces an unfavorable environment. In this situation,
strategies would use current strengths to build long ? term opportunities in other products/
markets.
Cell 3 faces impressive market opportunity but is constrained by several internal weaknesses.
Businesses in this predicament are like the question marks in the BCG matrix. The focus of
strategy for such firms is eliminating internal weaknesses to more effectively pursue market
opportunity.
Cell 4 is the least favorable situation, with the firm facing major environmental threats from a
position of relative weakness. This condition clearly calls for strategies that reduce or
redirect involvement in the products markets examined using SWOT analysis.
Numerous
environmental
opportunities
Cell 3: Supports a
turnaround ?
Cell 1: Supports an
oriented strategy
aggressive strategy
Critical internal
Substantial
weaknesses
internal
strengths
Cell 4: Supports
Cell 2: Supports
defensive strategy
a diversification
strategy
Major
environmental
threats
Figure 8-5 SWOT analysis
SWOT analysis helps resolve one fundamental concern in selecting a strategy: What will
be the principal purpose of the grand strategy? Is it to take advantage of a strong position or to
overcome a weak one? SWOT analysis provides a means of answering this fundamental
question. And this answer is input to one dimension in a second, more specific tool for selecting
grand strategies: the grand strategy selection matrix.
VI. The opportunity and Threat matrices
A company, after identifying the threats, can use judgment to place the threats in any of the
four cells shown in Figure 8-6
Figure 8-6 Threat Matrix
1
2
High
Major threat
Moderate threats
Seriousness
3
4
Moderate threats
Minor threats
Low
High
low
Probability of Occurrence
For an aluminum plant erratic and high cost of power can became a threat if the probability of
occurrence is high (cell.1). There is a need to set up captive plant or shifting the plant to another
location.
Figure 8-7 Opportunity Matrix
1
2
High
Very attractive
Moderately
attractive
Seriousness
3
4
Moderately
Least attractive
Low
attractive
High
low
Probability of Occurrence
A company's success probability with a particular opportunity depends on whether to strength
(distinctive competence) matches the success requirement of the industry.
Ex: - Entry into LCVs is an attractive opportunity for TELCO.
VII. The Impact Matrix
The impact of various strategies (opportunities and threats) is examined with the help of impact
matrix. After identifying the trends in mega, micro and relevant environments the degree of
impact can be measured on an impact scale. The impact matrix can be for a specific business
unit or to overall company Eg. Diversified company.
Figure 8-8 The Impact Matrix
Impact on strategies
Trends
Pr. of
S1
S2
S3
S4
occurrence
T1
T2
T3
T4
VIII. The Impact scale
A futuristic orientation and an ability to synthesize are two critical requirements for strategic
decisions. On studying the environmental issues, the major trends can be identified and examine
for the degree of impact they make on the business. A `five point ` scale can be used to assess the
`degree' and `quality' of impact of each trend on different strategies. The scoring pattern can be:
+ 2
-
Extremely favorable impact
+1
-
Moderately favorable impact
0
-
No impact favorable impact
-1
-
Moderately unfavorable impact
-2
-
Extremely unfavorable impact
For each trend probabilities of occurrences can be assigned.
IX. Gap Analysis
It is a useful method to describe the process involved in deciding what course of action should be
taken to remove any potential profit or sales gap or risk gap.
Figure 8-9 Gap analysis
X A
Profit Gap
B
Gap
94
93
92
91
Time span (years)
Profit Gap :- Gap between profit for the past few years and profit projection based on
freehand projection, linear regression coefficient or exponential smoothing.
Sales Gap:- Gap between planned & actual sales.
Product gap :- Difference between what a firm offers in terms of product items and what
the industry provides in terms of product line.
Risk gap:- Gap between anticipated risk with strategic decision and the actual
happening.
X.
Balanced Score card
Balanced Scorecard is another useful tool to assess the internal strength and weakness of a
company. This Balanced Scorecard attempts to examine firm's strengths and weaknesses
from different perspective, instead of focusing on a narrow set of criteria. This Balanced
Scorecard does not out weigh one perspective and underscores other, rather it balances all
of them.
To generate superior return for shareholders, company should have competitive advantage
that depends upon its ability to provide certain values to customers. These values can be
provided by offering them better, cheaper and faster products or services. For this
company requires development of operations that supports product development and
responsiveness to fulfill orders. To facilitate quality operations, company needs
organization with required creativity, skill and learning. Thus financial score board is
dependent upon many dimensions which contribute to the strength and success of the
company. It requires to delve deeper to those perspective (beyond financial perspective) to
have balanced insight of the company's internal analysis.
Therefore we consider these four perspectives of the Balanced Scorecard: financial,
Customer, Operations and Organizational.
Perspective
Assessed through analysis of:
EVA
Financial
Profitability
Growth
Differentiation
Customer
Cost
Quick Response
Product Development
Demand Management
Order Fulfillment
Operations
Leadership
Organizational
Organizational Learning
Ability to Change
Source: Alex Miller and Gregory G. Dess, Strategic Management, McGraw Hill, New York,
1996, Page 117.
This balanced scorecard, as a tool of internal analysis, provides definite advantages to the
company.
First, it evaluates the strengths and weaknesses of a company by providing equal and
balanced weight to different factors.
Second it "reflects the idea of a hierarchy of intent with elements linked in a series of
means ? ends relationship" (Alex Milles and Gregory G. Dess,1996).
Third, it explicitly cites competitive advantage as the core element for the success of a
strategy.
Glueck's scanning techniques
Glueck Suggests three major search techniques for environmental scanning.
(A) Information gathering (B) Spying
(C) Forecasting.
(A) Information Gathering
By gathering information, strategic manager can know about the business environment.
The soures of information may be either written or verbal.
The written sources of information may be published in various publications:
(a) business magazines like Business Today, Business India, Adverisign and Marketing,
Harvard Business Review, etc;
(b) newspapers like Economic Times, Financial Express, Business Line, etc;
(c) publications of Trade Directories, Reports, Guides;
(d) annual reports and profiles of companies; etc.
(B) Spying
Spying is one of the methods of collecting and analyzing the information required for
business scanning. For this, specialized individuals can be employed to get trade secrets or clues
about strengths of supplier, customer or competitor. These clues are further processed for
scanning business environment. Here business has to ensure avoiding breach of law.
(C) Forecasting
"Good anticipation is the result of good strategic exploration." Joel Arthur Barker, author
of the book Paradigms: The Business of discovering the future, rightly remarks. Like Peter
Drucker, he also agrees that future managers will be more anticipators and proactive than
problem solver or reactors.
Forecasting is the techniques of estimating those events that may occur in the future.
Though future is uncertain and unexpected, yet it can be predicted to a certain extent by
correlating the various parameters through their analysis and combining intuitions with that
analysis.
Some of the popular techniques of forecasting include
-
Time series analysis
-
Casual modeling and
-
Delphi Technique
Summary
Policy changes and adjustments are called for to suit the existing conditions. Policy changes can
be made only when there is a through understanding of the environment. Environmental
scanning is the process by which strategists examine the strengths, weaknesses, opportunities and
threats of a firm as well as the impact of trends on the business. Various scanning techniques are
used by organizations. Every organization has to make a right choice of the instruments and
apply them to improve their understanding of the environment and its impact on their
organizations.
xii)
Issues Priority matrix
xiii)
Environmental Threats and opportunities Profile (ETOP)
xiv)
Strategic advantage profile (SAP)
xv)
Functional ? area profile and resource deployment matrix
xvi)
SWOT Analysis
xvii) The opportunity and Threat matrices
xviii) The Impact Matrix
xix)
The Impact scale
xx)
Gap Analysis
xxi)
Balanced Score card
Self Assessment Questions
1. Explain the significance of scanning techniques.
2. Describe Issues Priority matrix
3. Using Environmental Threats and opportunities Profile (ETOP), find the threats and
opportunities a of a firm
4. What is Strategic advantage profile (SAP)?
5. Explain the utility of Functional ? area profile and resource deployment matrix
6. Conduct SWOT Analysis for a firm of your choice.
7. What is the benefit of using opportunity and threat matrices?
8. Explain the Impact Matrix
9. How do you make use of the Impact scale
10. Explain Gap Analysis
11. Why do you think balanced score card is a better techniques of scanning?
Activities
1)
Motorola is a company with a highly efficient scanning system. Visit its website to identify
how they are using market research and technology research to scan their internal and external
environment. Note them down.
2)
Identify the scanning system of Hindustan Lever Limited by discussing with their local dealers
and executives carefully record their observations.
References
1.
P.K. Ghosh (2001), Strategic Planning and Management, Sultan Chand & Sons, New
Delhi
2.
John A. Pearce II and Richard B. Robinson Jr.(1996), Strategic
Management, AITBS, New Delhi
3.
Veerendra Kumar (2005), Business Policy and Strategic Analysis, Kalyani Publishers,
Ludhiana
4.
Thomas L. Wheelen and Hunger J. David (2002) Concepts in Strategic Management and
Business Policy, Pearson Education Asia, New Delhi
5.
P. Subba Rao (2003), Business Policy and Strategic Management , Hima Publsihing
house, Mumbai
Unit II
ON
7
Internal Analysis
S
S
E
L
LESSON OUTLINE
Introduction
Internal analysis ?Definition
Companies with strong internal
environment
Internal analysis ?Process
Resource audit
o VRIO frame work
o Grant's approach
o Continuum of sustainability
Value chain Analysis
o Upstream
o Downstream
Core competence identification
Experience curve
Summary
Self Assessment questions
Activities LEARNING OBJECTIVES
References
After reading this lesson you
should be able to
Understand the concept importance and process
of internal analysis
Know the techniques of conducting internal
analysis
Identify firms with internal capabilities and their
strategies
Introduction
Understanding the elements of external environment helps identify opportunities and threats and
decide which opportunities to tap. But for formulation of strategy mere identification of the
environment is not enough. A firm needs to identify its internal strengths and weaknesses and
find ways to overcome the weaknesses. Therefore an integrated strategy must emerge from the
combined assessment of market attractiveness and internal strength.
Internal analysis ? Definition
Lawrence R. Jauch and William F. Gleuck define Internal analysis and Internal diagnosis in
following words:
"Internal analysis is the process by which the strategists examine the firm's marketing
and distribution, research and development, production and operations, corporate resources and
personnel, finance and accounting factors to determine where the firm has significant strengths
and weaknesses. Internal diagnosis is the process by which strategists determine how to exploit
the opportunities and meet the threats the environment is presenting by using strength and
repairing weakness in order to build sustainable competitive advantage."
Internal analysis is the process of reviewing organizational resources (resource audit),
scanning organizational activities and linking them with creation of value to the organization
(value chain analysis) and identifying the unique strengths and capabilities (core competences).
As is obvious from the above words, that the internal analysis involves three steps as shown in
Figure 7-1:
1. Resource Audit.
2. Value Chain Analysis
3. Core-competence Identification.
FIGURE 7.1 Steps in Internal Analysis
Resource Audit
Value Chain Analysis
Core ? Competence Identification
Companies with strong internal environment
Examples of firms with strong strength which pertain to the internal environment are many.
According a report in Business Today published in 1997 the strengths of Asia's top twenty
companies and commons of Indian companies with internal distinctive competencies is given
below.
TABLE: 7.1 ASIA'S 50 MOST COMPETITIVE COMPANIES
Rank Company
Country Industry
Competitive Strength
1
SONY CORP
Japan
Electronics
Possesses one of the
world's best ? known brand
names
2
ACER INCE.
Taiwan
Computers
Has become a global player
with its
user ? friendly PCs
3
HONDA
Japan
Automobiles
Moving more and more
MOTOR CO.
production to North
America
4.
TOYOTA MOTOR
Japan
Automobiles
Combated rising costs at
CORP.
home with
more factories abroad
5
CANON INC.
Japan
Electronics
Thrives on cameras,
printers, and PC-related
products.
6
TAIWAN SEMI
Taiwan
Semiconductors
World's targets silicon ?
CONDUCTOR
foundry, supplying global
chip-makers.
7.
SUZUKI
Japan
Automobiles
Well ? positioned to
MOTOR CORP.
penetrate Asian mobiles
markets.
8.
HYUNDAI
South
Automobiles
Executing major plans for
MOTORS CORP.
Korea
automobiles
in China and India
9
RELIANCE
India
Petro chemicals /
A powerful Vertically ?
INDUSTRIES
textiles
integrated
textile manufacturer.
10.
ROHM CO.
Japan
Electronic
Profitable niche player in
components
resistors and LCD screens
11.
RANBAXY
India
Petrochemicals
Has stepped up R & D and
LABORATORIES
penetrated developing
markets
12
SHANGRI ? LA
Hong
Hotels
Operates as many as 34
ASIA
Kong
hotel chains in 12 Asian
countries
13
SINGAPORE INTL
Singapore Aviation
Runs are of the world,
AIRLINES
most highly-rated airlines
14
GIORDANO INTL
Hong
Retail clothing
Manager 450 high-profile
Kong
fashion outlets in 12
countries
15
JOLLIBEE FOODS
Philippines Food
Holds 55 per cent of the
CORP
Philippines
fast-food market
16
SUNDRAM
Indian
Auto pars
A prominent supplier of auto
FASTENERS
parts, notably radiator caps.
17.
VENTURE MFG.
Singapore Contract
Produces over 200 varieties
manufacturing
of electronic equipment
18.
UNITED
Taiwan
Semiconductors
A fully ? integrated firm,
MICROELEC.
which is reverting to a
foundry business
19.
ARVIND MILLS
India
Textiles
Soon to be the world's
second-largest denim-maker
20.
BAJAJ AUTO
India
Automobiles
Leads scooter manufacture
in India, with exports to
Thailand
21.
MOSEL VITELIC INC. Taiwan
Semiconductors
Makes specialized chips
with a plant under way in
China
22.
AYALALAND INC
Philippines Real estate
A big developer in Hong
Kong, Singapore, and the
Philippines
23
TELEVISION
Hong
Media
Has the world's largest
BROADCASDTS
Kong
Chinese film library for TV
24
NINTENDO CO.
Japan
Electronic games
Has launched powerful
game machines to fight
competitors
25
SAMSUNG
Korea
Electronics
Has added global reach by
ELECTRONICS
buying AST Research
26
ASIA PACIFIC
Singapore Brewing
Is brewing foreign JVs to
BREWERIES
combat stagnant home sales
27
PT INDOFOODSM
Indonesia Food
Has a virtual monopoly in
the home noodles marker
28
KEEPPEL LAND
Singapore Real estate
Thriving property arm of the
well-known Keppel Corp.
29
GENTING BHD
Malaysia Gaming/leisure
Concentrating on expanding
casino business abroad
30
HITACHI
Japan
Electronics
Business cover semicon-
doctor, printing, and
property
31
GOLD PEAK
Hong
Electronics
Has achieved economics
INDUSTRIES
Kong
of scale with battery ?
aking
32
EVERGREEN
Taiwan
Shipping/ aviation One of the world's largest
MARINE CORP.
shippers with an airline in
addition
33
SAN MIGUEL CORP
Philippines Food / brewing
Excels at training and is
expanding its food
Business
34
CREATIVE
Singapore Electronics
Has set a new standard with
TECHNOLOGY
its sound blaster cards
35
KOMATSU
Japan
Construction
Operates a construction ?
equipment
tools business on four
continents
36
SUNHUNG
Hong
Real estate
Owns a broad investment
KAI PROPS
Kong
portfolio and substantial
Land
37
TOSHIBA CORP.
Japan
Electronics
Very strong in laptop PCs,
multimedia, and chips
38
KYOCERA CORP
Japan
Electronics
Leads the world in ceramic
semiconductor components
39
AZTECH SYSTEMS
Singapore Electronics
Expanding into internet and
PC photo-output products
40
CHAROEN
Thailand Agro-business
A huge agricultural
POKPHAND
business, with interests in
poultry
41
FUJI PHOTO FILM CO.Japan
Electronics
Diversifying from photo-
film into hardware
42
BROKEN HILL
Australia Mining
A mining giant, with
PROPRIETARY
worldwide interests in
exploration
43
BRIDGESTONE
Japan
Auto parts
Became the `highest tyro-
CORP.
maker after buying
Firestone
44
CHEUNG KONG
Hong
Real Estate
Holds a controlling interest
Kong
in Hutchison Whampoa
45
PT INDAH KIAT
Indonesia Pulp and paper
A pulp and paper ? maker,
PULP
part of the Sinar Mas
Group
46
PTPOLYSINDOEP
Indonesia Textilies
A major polyester ? maker
on a self ? sufficiency
Drive
47
AIR NEW ZEALAND New
Aviation
Has broken out of its
Zealand
corner through a deal with
UA
48
SWIRE PACIFIC
Hong
Diversified / aviation Investments include a
LTD.
Kong
majority holding in
Cathay Pacific
49
SHINAWATRA
Thailand Telecommunications Businesses cover
COMPUTER
cellophanes and
Sitcom
50
POHANG IRON &
Korea
Steel
Has shrugged off the
STEEL
financial problems of its
steel business
Source: Business Today, July 7-21, 1997.
Resource audit
This audit reviews the resources of an organization for the purpose of assessing the inherent
strengths of those resources. Resources include physical, financial, human and intangible assets of
an organization, "a Resource is an asset, competency, process, skill or knowledge controlled by an
organization". It can be a positive strength if competitors do not possess it or negative when a firm
has lesser strength than competitors".
(1) Physical Resources. The physical resources include plant and machinery, land and
building, vehicles, stock, etc. Their numbers and book values are not as important as
their expected benefits are. Therefore an assessment is made in terms of their
potential benefits by examining their age, condition, location, capabilities, etc.
(2) Financial Resources. Financial resources include cash, bank, debtors, marketable
securities, etc. In assessing the financial resources, the various sources of finance like
equity shares, debentures, retained earnings, long ? term and short term loans are
considered. Their cost of capital, availability and their effect on the overall liquidity
and solvency of the firm is examined.
(3) Human Resources. Human resources are the most valuable assets of the
organization, especially in the present business scenarios ? where we find people
competing than corporations. Traditionally top management were grand strategists,
junior managers were implementers and middle the administrators of the strategy.
Now the trend has been changed. Top managers are creators of vision for the
organization and expect others to deliver. Therefore emphasis has shifted from
`strategy, structure and systems' model towards `purpose process and people' model.
To implement the second model you must have a lot of faith in your people.
Companies like Asea Braun Boveri, General Electric, Intel, 3M or even Infosys have
made that shift.
Sumantra Ghoshal remarks.
Therefore the human resources audit is done to assess the quality of human resources. Their
individual qualities like knowledge, capabilities, learning skill, etc. as well as their loyalty and
commitment to organization are assessed.
(4) Intangible Assets. In the contemporary business world, organizations stress on building
intangible assets such as brand, customer relationship, intellectual property, etc. Why so?
Earlier capital, technology etc., are scarce and are difficult to obtain. Therefore, they were
considered as competitive advantage. Now hey are available and tradable. Something is of
competitive advantage is to be hence created. It should be not openly available; not easily
leverageable across businesses and not easily substitutable. Intangible assets meet all the
three requirements, for example employee commitment or relationships are difficult to
imitate."
Look at the tangible assets like machinery in a factory. If company has required capital,
it can buy. Look at money which was considered as competitive advantage, is now easily
available at inexpensive rates from any where on the globe. Globalization and deregulation of
markets have facilitated their easy and cheap accessibility. Only non-replicable and unique
competitive advantages of the company are its intangible assets. That is why companies like
Reliance, BPL, Krebs Biochemical's, etc. are reporting about their intangible assets. Consider
the aspects in Figure 7-2:
Figure 7-2 The Intangible Advantage
Brand/reputation
Intellectual property
Non ? Physical Assets
People create the
intangible assets
Distinctive competencies
which drive
performance
Special relationships
Databases /software
Distribution
Content
Knowledge management
Project finance
Talent management
Marketing
Innovation
Supply chain
/logistics
Government access
Web
Business ? to- business
Retail customers
Source: McKinsey & Co.. adapted from Business World, 9-22 November ? 6 December, 1998).
We will now consider the three approaches to internal analysis
VRIO framework
Grant's approach
Continuum of sustainability
VRIO framework
The framework help raise the following questions.
o VALUE: Does it provide competitive advantage?
o RARENESS: Do other competitors posses it?
o IMITABILITY: Is it costly for others to imitate?
o ORGANISATION: Is the firm organized to exploit the resource?
If the answer is `yes', there is distinctive competence. Measure these with
- the company's past performance,
- the company's key competitors, and
- the industry as a whole
Grant's approach
It is a five step approach
(i)
Identify and classify a firm's strengths & weaknesses
(ii)
Combine the strengths to core competencies
(iii)
Appraise the profit potential of these resources and capabilities.
(iv)
Select the strategy that exploits the firms resources and capabilities to external
opportunities
(v)
Identify resource gaps and invest in upgrading weaknesses.
United Airlines is a very successful, full service international airline. However, South
West Airlines was dominating in California due to low cost carriers. UA tried to imitate
SWA and had to reduce flying costs form 10.5/- to 7.4/-, speed up boarding and take offs
and reduce idle time on the ground. The same being 737 was introduced in 1994. By
Feb, 1996 only 8/- cost per passenger mile could be discounted compared to SWAS 7.1/-.
It had to pull out from all routes that did not connect with carrier's hubs in San Francisco
and Los Angels. For shorter flights like San Francisco to California UA's tariff was
higher by $30 while SWA's was $ 69. Slowly UA lost its loyal customers for short route
flights to SWA.
So far, no one knows the competitive advantage of SWA. SWA had two capabilities:
o low costs per passenger mile
o Energizing its people to provide safe, on time flight service.
Continuum of sustainability
Sustainability of an advantage can be determined by considering two factors
Durability--rate at which a firm's resources and capabilities depreciate or become
obsolete Ex: Intel's R&D weakness & mere imitation.
Immutability--Rate at which others can duplicate a firm's core competencies. It can
duplicated early when it is
- Transparent Ex: Gillette's sensor blades, difficult to copy, expensive manufacturing
equipment.
- Transferable Ex: French winery's land and climate.
- Replicable Ex: Brand Mgt of P&G cannot be replicable
An organization's resources and capabilities can be placed on a continuum as follows ?
Level of Resource Sustainability
High
Low
(Hard to imitate)
(Easy to imitate)
SLOW CYCLE
STANDARD CYCLE
FAST CYCLE
RESOURCES
RESOURCES
RESOURCES
Strongly
Easy to
shielded
duplicated
Standardized
Patents, brand
mass
Idea driven
name
production
Ex: Gillette's sensor
Economies of
Ex: Sony Walkman
razor
scale
complicated
processes
Ex: Chrysler Minivan
Value chain Analysis
The resources audit provides an understanding of an organization's capabilities. The next
step is to identify how the organizational activities contribute to the value - the price the customers
are willing to pay for the goods and services of the organization. If this value exceeds the costs of
performing those activities, company is said to be profitable, otherwise it is a loss making company.
Therefore to achieve the long run objective of maximization of wealth and short ?run goals of
generating reasonable profits, it is imperative that the company should gain a competitive edge over
its competitors.
Charles W.L. Hill and Gareth R. Jones maintain:
"To gain a competitive advantage, a company must either perform value ? creation functions at a
lower cost then its rivals or perform them in a way that leads to differentiation and a premium price.
To do either, it must have a distinctive competence in one or more of its value ? creation functions.
If it has significant weaknesses in any of these functions, it will be at a competitive disadvantage"
Michael Porter suggested the concept of "value ? chain" that sequences the activities related with
creation of value (figure 7-3). These activities can be divided between
(a) Primary activities, and
(b) Support activities.
The primary activities are concerned with physical creation of the product, its marketing and
delivery to buyers and after-sales service. The support activities provide the inputs and
infrastructure for the primary activities.
Figure 7-3 Value chain
Company Infrastructure
Support
Activities
Information Systems
Human Resources
Research & Development
Materials Management
Manufacturing
Marketing Service
& Sales
Primary Activities
Primary Activities
Some authors classify primary activities into five categories ?
(a) Inbounded logistics (activities concerned with receiving, storing and distributing the
material, inventory control, warehousing, etc.)
(b) Operations (activities concerned with transformation of inputs into final product or
service: for example, matching, packing, assembly testing etc.
(c) Outbounded logistics (activities concerned with collection, storage and physical
distribution of finished goods to the consumers)
(d) Marketing and sales (activities concerned with advertising, selling, administration of
sales personnel, etc.)
(e) Service (activities that enhance or maintain the value of a product / service, such as
installation, repair, training, etc.)
Some others classify primary activities into two main functions
(a) Manufacturing (physical creation of the product)
(b) Marketing (concerned with marketing, delivery and after sales service)
Support Activities
The support activities that provide inputs and infrastructure for primary activities of
manufacturing and marketing are classified as follows:
(a) Material management activities
(b) Research and Development activities
(c) Human Resources activities
(d) Information systems activities
(e) Company infrastructure activities
Material Management activities are concerned with procurement, storage and issuance of
material to the production departments. The inventory control that aims at keeping uninterrupted
supply of material at minimum associated costs is undertaken under this function.
Research and Development activities permeate manufacturing as well as marketing
activities. It aims at developing new products or process technology that provide additional benefits
to customers, improve quality, lower the cost of manufacturing and ultimately contribute to the
creation of value.
The human resource activities aim at meeting the personnel requirement of manufacturing
and marketing departments by proper selection of staff, their training and development.
The information system activities ensure efficient and expeditious flow of needed
information to the concerned managers for taking decisions and actions.
The infrastrucrre activities embraces all other activities like finance, legal, public relations,
etc which are essential for the company.
Corporate Value Chain Analysis
It involves the following steps. Figure 7-4 depicts a corporate value chain.
- Examine each product lines value chain in terms of various activities involved in
producing a product or service. Examine the S&W
- Identify the linkages in product lines value chain
Ex: quality control, check 100% instead of 10% to avoid repairs and returns
- Examine the synergies among value chains of different product lines or SBUS.
Ex: Cost of advertising, production etc jointly will be cheaper
Firm infrastructure
(General Mgt, Accounting, Finance, Strategic planning)
Human Resource Management
Support
(Recruiting, training, development)
Activities
Technology Development
(R&D, product and process improvement)
Procurement
(Purchasing of materials, machines, supplies)
In bound
Operations
Out bound
Marketing & Service
Logistics
Logistics
sales
(Raw
(Machining (Warehousing (Advertising, (Installation,
materials
assembling and
promotion,
repair, parts)
handling and testing)
distribution of pricing,
ware
finished
channel
housing)
product)
relations)
Primary activities
Figure 7.4 A Corporate value chain
JR Galbraith suggests the other method of analyzing a firm's value chain. This analysis helps
ascertain where a firm's products are located in the overall value chain. An illustrative value
chain is given in Figure 7-5 below. Henry ford I during 1920s and 1930s did this Value Chain
analysis. Visitors watched the entire process from an elevated walk way.
Raw
Product
Primary
Fabrication
materials
Producer
manufacturing
Distributor
Figure 7-5 Corporate value chain
Retailer
Industry value chain analysis
This can be split into two
Upstream ? Ex: Refers to oil exploration, drilling, moving crude to refiners
Downstream ? Ex: Refining the oil + transporting and marketing to distributors &
retailers.
Some companies are experts in down stream like P&G & Texaco and some in upstream like
British Petroleum.
According to Galbraith firm's centre of gravity is usually the point at which the company
started. After a firm establishes well in this point it can move forward or backward along the
value chain to reduce costs, access to raw material and guarantee distribution. This process is
VERTICAL INTEGRATION.
Core Competence Identification
A detailed discussion on the concept of core competence is given in lesson 4 of Unit I in this
material.
After identifying the resources and relating them to strategic purpose through value
chain analysis, the next step is identification of company's core competence. The core competence
refers to unique strength of the company that competitors cannot easily match or imitate.
To Gary Hamel and C.K. Prahalad,
"A core- competence is a bundle of skills and technologies that enables a company to provide a
particular benefit to customers".
Following are the examples of core-competence at global level:
Company
Benefit to customer
Core ? competence
Sony
Pocketability
Miniaturization
Federal Express
on ?time Delivery
Logistics Management
Wal-Mart
Choice, availability, value
Logistics Management
E D S
Seamless Information
Systems Integration
Motorola
Unlettered' communication.
Wireless communication
According to C.K. Prahalad and Gary Hamel,
"The diversified corporation is a large tree. The trunk and major limbs are core products, the
smaller branches are business units; the leaves, flowers and fruit are end products. The root system
that provided nourishment, sustenance, and stability is the core competence. You can miss the
strength of competition by looking only at their end products in the same way you miss the strength
of a tree if you look only at its leaves."
Core competence provides strategic advantage to the company. In the short run, a company
can achieve competitiveness from its price / Performance attributes; but in the long run core
competence will provide profitability. With its core ? competence, company can produce at lower
cost and more speedily than competitors and can differentiate. Thus the real strategic advantage to
a company comes from its core competence. Thus core- competence is the bedrock of a company's
strategy.
Features of Core Competence
Core competence exhibits the following features(Gary Hamel andC.K.Prahalad ).
1. Core competence does not reside in one particular product or business unit. It underlies
leadership in a range of products or services. "Core competencies transcend any single
business unit within the corporation. Core competences are also longer lasting than any
individual product or service." Sony's miniaturization competence is not only confined
to walkman, but also other products like portable CD player, pocket television, etc.
2. As Core ? competence contributes to competitiveness as winning or losing the battle for
leadership is highly dependent upon it. "If Motorola lost its leadership position in
wireless competencies, a broad spectrum of business would suffer including pagers, two
? way mobile radios and cellular telephones."
3. A Core ? competence is not a single discrete skill or technology, rather a bundle of skills
and technologies. Thus a core competence "represents the sum of learning across
individual skill sets and individual organizational units unlikely to reside in its entirety
in a single individual or small team." This Core-competence has to be nurtured through
collective learning of the team members.
Competitive Cannons of Indian Companies
Some of the Indian companies with ability to use internal strengths to make strategies effective
are explained here.
RELIANCE
Use vertical integration to control the market
Attain global scales in each and every product ?line
Build production capacities ahead of demand
Leverage technology for process efficiencies
Manage project engineering to control costs
Service the customer at his door- step.
RANBAXY LABORATORIES
Benchmark costs globally to keep them in check
Focus relentlessly on only some chosen products
Seek out niches unprofitable for the bigger players
Use R &D to build unique, unmatched skills
Seek differentiation in delivery, not product
Integrate vertically to attain economies of scale
SUNDRAM FASTENERS
Focus on only one segment of customers
Adopt the customer's quality standards to avoid rejection
Use demanding customers to raise quality levels
Seek out large customers to operate on a global scale
Develop a full range of products to meet complete buyer needs
Build unique skills that are expensive to duplicate
ARVIND MILLS
Create global capacities quickly to attack older players
Target large commodity buyers for the benefits of scale
Focus on one basic product, but diversify into new markets
Use value ? addition to provide a basket of related products
Keep every element of cost below the level of competitors
Integrate forward to cash in on low-cost in ?house supplies
BAJAJ AUTO
Control costs to keep the product affordable
Reengineer processes to improve time utilization
Forge relationships with vendors to minimize costs
Build global capacities if the domestic market is large enough
Steer clear of diversification even if synergies are available
Focus on chosen segments without straying into new ones
Summary
For formulation of strategy, identification of market opportunities and threats is not enough,
business has to analyze and diagnose its strengths and weaknesses and devise ways to exploit its
strengths and overcome its weaknesses for this Internal analysis is done. Internal analysis is the
process of reviewing organizational resources (resource audit) scanning organizational activities
and linking them with creation of value to organization (Value chain analysis), and identifying the
unique strength and capabilities (core competence).
Resource audit attempts to review the resources an organization has for the purpose of assessing the
internal strength of those resources. In resource audit not only legal resources but also resources,
expected to benefit business in future, are considered. These resources may be physical resources
(like plant and machinery, building, vehicles, etc),financial resources (like cash, bank, debtors, etc)
and human resources and intangible assets (like brand, customer relationship, intellectual property,
etc)
After having an understanding of the strategic capabilities of the organization through
resource audit, the company tries to identify how the organizational activities contribute to the
value ? the price the customers are willing to pay for the goods and services of the organization. If
this value exceeds the costs of performing those activities, the company is said to be profitable
otherwise it is loss ? making company. Michael Porter suggests the concept of "value ? chain" that
sequences the activities related with creation of value. These activities can be divided between (a)
primary activities and (b) support activities. The primary activities are concerned with
manufacturing physical creation.
A company has to identify its Core competence for internal analysis. This core competence
is the unique strength of the company that competitors can not easily match or imitate. It provides
real strategic advantage to the company. In the short run, a company can achieve competitiveness
from its price/performance attributes, but in the long run core competence will provide profitability.
Core-competence arises from two complementary sources:
(a) Company's resources and (b) Company's capabilities.
Core-competencies are invisible and intangible. Because of their invisible nature,
competitor cannot imitate these. It requires time. Greater is such time gap in imitation; it
provides opportunity for the company to exploit. On the other hand, if core competence can be
imitated quickly it is a threat to the company.
Self assessment questions
1. What is internal resource analysis? How does it help in strategy formulation?
2. What is internal resource audit? Discuss the internal resources of a company.
3. What is competitive advantage of a firm? How a firm can have competitive advantage?
4. What is value chain analysis? Discuss in detail.
5. What is core- competence? How it can be exploited to have competitive advantage?
6. What is the relevance of the resource ? based view of the firm to strategic management in a
global environment?
7. How can value ? chain analysis help identify a company's strengths and weaknesses?
8. In what ways can a corporation's structure and culture be internal strengths or weaknesses?
9. What are the pros and cons of management's using the experience curve to determine
strategy?
10. Take a company of your choice and conduct SWOT analysis for it.
Activities
1.
Take an industry and identify the major firms for three of them conduct SWOT analysis
and identify core competencies
2.
Visit websites of any two companies in pharma industry and identify the major threads
and the strategies adopted by them to face them
References
1. Wheelen L Thomas and Hunger J. David ( 2002), Concepts in Strategic Management and
Business Policy, Pearson Education Asia, New Delhi.
2. Thompson & Strickland (2003), Strategic Management: Concepts and Cases, Tata
McGraw Hill: New Delhi
3. Hitt , M.A, R.D Ireland and R E Hoskission, (1996) Strategic Management :
Competitiveness and globalization, West publishing New York
4. Veerendra Kumar (2005), Business Policy and Strategic Analysis, Kalyani Publishers,
Ludhiana
5. N.S. Gupta, Business Policy and Strategic Management, Himalaya Pubnlishing House,
Mumbai
Unit II
8 Competitive Analysis
ON
S
SE
L
LESSON OUTLINE
Introduction
Concept and types of competition
Hyper competition
Analysis for developing competitive
strategy
o Porter's analysis
o McKinsey's framework
o Key factors for success
Competitive strategies
Generic strategies of Porter
Marketing warfare
Summary
Self Assessment Questions
Activities
Reference LEARNING OBJECTIVES
After reading this lesson you should be
able to
Know the concept and types of competition
Analyze competition from strategic point of
view
Illustrate and explain Porter's five forces
analysis, Mckinsey's 7-s framework and
Key success factor approach
Outline the generic competitive strategies
and explain marketing warfare
Introduction
Developing a competitive strategy is developing a broad framework for the business-how is it
going to compete; what are its objectives; and what policies will be needed to carry out its
objectives. The competitive strategy is a combination of `ends' for which an organization is
striving and `means' by which it is seeking to get there.
Concept and types of competition
The exchange process between seller and buyer characterizes market. Seller has a product to
offer at a price and buyer has a need that can be satisfied by the product. In this sense, the seller
and buyer are major actors in the market. Competition is said to exist when there is more than
one seller and more than one buyer. Thus there are two views of competition.
o Economist's view of competition form seller point of view
o Marketer's view of competition from buyer point of view
The economists view of competition
Economists have taken the resource distribution trough price mechanism as the keyhole and
viewed competition. They analyzed competition, therefore, from sellers' point of view or the
industry structure. Industry is defined as a collection of sellers who offer similar or same product
to the same type of customers.
Economists describe the industry or market structures based on demand and supply forces.
Table 7-1 shows the different market situations and describes their characteristics.
Take for example, toothpastes. There are several competitors. For instance,
Table
7-1.
HLL (Close up), Colgate (Colgate), and Balsara (Promise) are in the race
Market
along with many others.
structures
Type
of Perfect
Monopoly
Oligopoly
Monopoli
competition/
competition
stic
Characteristics
Number of sellers Many
One
Few (around 20)
Many
Number of buyers Many
Many
Many
Many
Type of product
Homogeneou
Unique
Homogeneous/Hetero
Similar
s
geneous
Entry and Exit
Free.
No Barriers
Barriers
exist Barriers
restrictions
exist.
Restrictions
like exist
Restrictions patent
laws
and Restrictio
like patent licensing
ns
like
laws
and
patent
licensing
laws and
licensing
Transportation
Nil
Exist
Exist
Exist
costs
Price
of
the Uniform and High price Kinky demand curve. Non-
product
varies
with with
Leadership of a firm price
changes
in limited
or
collusion
of competiti
demand and supply
or marketers fixes Price. on.
supply forces. Low price Price
rise
is
not Products
with large followed.
Secret are
supply.
discounts
are offered
Price
common.
dependin
discriminati
g
upon
on is often
the
found.
quality in
price
range.
Promotio
n
and
product
differenti
ation
(positioni
ng) play
a
big
role.
Vegetable
Electricity
Steel, oil and cement
Soaps,
Examples
markets and
detergent
stock market
s,
and
TVs
Marketing view of competition
Here, competition is visualized through a buyer's viewpoint. In a drive to satisfy his or
her need, a buyer may have many alternatives or choices.
For example, if the need is `entertainment', a buyer may consider choices like visit to part,
a social call on friends, a visit to a restaurant, listening to music, going to a theatre, seeing
a
movie, playing cards, going for a picnic, watching T.V and so on.
In this sense, even though `physical products' may belong to different industries or technologies,
they become competitors to each other to satisfy a specific need or desire. This ubiquitous view
can be perceived as belonging to four types of competitors. Kotler( (1988) has labeled them as
desire competitors, generic competitors, form competitors and brand competitors.
Figure 7-1 provides an illustration for a situation where the need is to `break monotony' at the
`desire level' and terminates into a specific `brand' situation for a south Indian Restaurant.
1. Desire competitors ? the alternative suppliers of different products that can satisfy a basic
desire- the need expression of a consumer. For example, you desire to break monotony. You
have several options and you choose to eat out.
2. Generic competitors. The suppliers of a specific product/service category. In this example,
the next question is where and what? The physical product or service is visualized here. You
have again options by variety of foods and places. You decide, say, in favor of restaurant.
3. Form competitors. The suppliers of different product/service form. They are explored here.
Which form of restaurant? is the next choice problem. Say South Indian.
4. Brand competitors. Different marketers of different brands of a particular product form. The
consumer now focuses on brand choices. Say India coffee house.
Figure 7-1 : The Marketing View of Competition
What desire
What do I
Which type
Which South
do I want
want to eat?
of restaurant I
Indian
to Satisfy?
want to visit?
restaurant I
(Break
want to visit
Sports
Home F ood
S outh I
ndian
Lodhi Hotel
Restaurant
Mughlai
Andhra
Video Film
Pradesh
Eat Ou
t
Fast Fo
od
C hinese
Bhawan
Desire
Generic
Product Form
Brand Competitor
Competitor Competitor Competitor
In the backdrop of this framework, the South Indian Restaurant owners will be myopic if they
focus only on their brand competitors. A challenge to any marketer is to expand the primary
demand and hence enhance the area of opportunities. To do this, the South Indian Restaurant
owners have to be concerned about the trends in the `eating-out' environment. And this has been
done very successfully by some of the South Indian Restaurants in large cities. Having gained a
wide popularity amongst a large segment, they have also started offering Non-South Indian
dishes and have thus expanded their market size and fairly their opportunities.
This kind of a view provides a wide terrain to radar the competitive
environment.Theodore Leavitt's classic article. "The Marketing Myopia", is
an excellent illustration of shifting the focus from product to need to ensure
long-term survival and growth of a firm.
Hyper competition
Most industries today are facing an ever-increasing level of environmental uncertainty. They are
becoming more complex and more dynamic. Industries that used to be multi domestic are
becoming global. New flexible, aggressive, innovative competitors are moving into established
markets to erode rapidly the advantages of previously dominant firms. Distribution channels vary
from country to country and are being altered daily through the use of sophisticated information
systems. Closer relationships with suppliers are being forged to reduce costs, increase quality,
and gain access to new technology. Companies learn to quickly initiate the successful strategies
of market leaders, and it becomes harder to sustain any competitive advantage for very long.
Consequently, the level of competitive intensity is increasing in most industries. Richard
D'Aveni (1994) contends that as this type of environmental turbulence reaches more industries,
competition becomes hyper competition.
According to D'Aveni:
In hyper -competition the frequency, boldness, and aggressiveness of dynamic movement
by the players accelerates to create a condition of constant disequilibria and change. Market
stability is threatened by short product life cycles, short product design cycles, new technologies,
frequent entry by unexpected outsiders, repositioning by incumbents, and tactical redefinitions of
market boundaries as diverse industries merge. In other words, environments escalate toward
higher and higher levels of uncertainty, dynamism, heterogeneity of the players and hostility.
In hyper-competitive industries such as computers, competitive advantage comes from an
up-to-date knowledge of environmental trends and competitive activity coupled with a
willingness to risk a current advantage for a possible new advantage. Exhibit 7-1 describes how
Microsoft is operating in the hyper competitive industry of computer software.
Exhibit 7-1:Hyper competition-The case of Microsoft
Microsoft is a hyper competitive firm operating in a hyper competitive industry. It
has used its dominance in operating systems (DOS and Windows) to move into a
very strong position in application programs like word processing and spreadsheets
(Word and Excel). Even though Microsoft held 90% of the market for personal
computer operating systems in 1992, it still invested millions in developing the next
generation ? Windows 95 and Windows NT. Instead of trying to protect its
advantage in the profitable DOS operating system, Microsoft actively sought to
replace DOS with various versions of Windows. Before hyper competition, most
experts argued against cannibalization of a company's own product line because it
destroys a very profitable product instead of harvesting it like a "cash cow."
According to this line of thought, a company would be better off defending its older
products. New products would be introduced only if it could be proven that they
would not take sales away from current products. Microsoft was one of the first
companies to disprove this argument against cannibalization.
Bill Gates, Microsoft's Confounder, Chairman, and CEO, realized that if his
company didn't replace its own DOS product line with a better product, someone
else would (such as IBM with OS/2 Wrap). He knew that success in the software
industry depends not so much on company size but on moving aggressively to the
next competitive advantage before a competitor does. "This is a hyper competitive
market," explained Gates. "Scale is not all positive in this business. Cleverness is
the position in this business." By 2000, Microsoft still controlled over 90% of
operating systems software and had achieved a dominant position in applications
software as well.
Analysis for developing a competitive strategy
Every business has a competitive strategy. However, some strategies are implicit, having
evolved over time, rather than having been explicit (evolved by deliberate planning process).
Implicit strategies lack focus, produce inconsistent decisions, and unknowingly become obsolete.
Without a well-defined strategy, organizations will be driven by current operational issues rather
than by a planned future vision. The broad considerations in an effective competitive strategy
can be extended into a generalized approach to the formulation of strategy. In order to do this,
the organization must be in a position to answer the following questions:
What is the current strategy, implicit or explicit?
What assumptions have to hold for the current strategy to be viable?
What is happening in the industry, with our competitors, and in general?
What are our growth, size, and profitability goals?
What products and services will we offer?
To what customers or users?
How will the selling/buying decisions be made?
How will we distribute our products and services?
What technologies will we employ?
What capabilities and capacities will we require?
Which ones are core?
What will we make, what will we buy, and what will we acquire through alliance?
What are our options?
On what basis will be compete?
We will now discuss three analytical procedures given by Porter, Mckinsey and Ohmae in that
order.
Porter's five forces analysis of competition
A useful approach to formulating business strategies is based on Michael Porter's
"competitive analysis". Porter's model provides a process to make your competitive strategy
explicit so it can be examined for focus, consistency, and comprehensive. Porter's approach is
based on the analysis of five competitive forces (see Figure 7-2).
1. Threat of new entrants,
2. Bargaining power of suppliers,
3. Bargaining power of buyers,
4. Threat of substitute products,
5. Rivalry among existing firms.
Threat of New Entrants
Firms entering an industry bring new capacity and a desire to gain market share and profits, but
whether new firms enter an industry depends on the barriers to entry. ( A number of these are shown
in Figure7-2). In addition, established firms in an industry may benefit from "experience curve"
effects. That is, their cumulative experience in producing and marketing a product often reduces their
per-unit costs below those of inexperienced firms. Is general, the higher the entry barriers, the less
likely outside firms are to enter the industry.
Bargaining Power of Suppliers
Suppliers can be a competitive threat in an industry because they can raise the price of raw material or
reduce their quality. Powerful suppliers can reduce the profitability of an industry if companies in the
industry cannot pay higher prices to cover price increases that the supplier imposes. Some
determinants of supplier power are listed in Figure7-2
Bargaining Power Buyers
Buyers compete with the industry by forcing prices down, bargaining for higher
quality or more services, and playing competitors off against each other ?
all at the expense of industry profitability. Some determinants of buyer power
are shown in Figure 7-2
Threat of Substitute Products
In a broad sense, all firms in an industry are competing with industries producing substitute
products. Substitutes limit the potential return in an industry by placing a ceiling on the prices
that firms in the industry can profitably chare. The more attractive the price-performance
alternative offered by substitutes, the tighter the lid on industry profits. For example, the price of
candy, such as Raisinettes chocolate-covered raisins, may limit the price Del Monte can charge
for "healthy snacks," such as Strawberry Yogurt Raisins. Some determinants of the degree of
substitution threat are shown in Figure 7-2
Rivalry Among Existing Competitors
Rivalry determinants include industry growth, product differences and barriers. This is the
conventional type of competition in which firms try to take customers from one another.
Strategies such as price competition, advertising battles, new product introductions, and
increased customer service are commonly used to attract customers from competitors. The
factors influencing intensity of rivalry are shown in Figure 7-2.
Figure 7.2 Rivalry factors
Threat of
NEW
New Entrants
ENTRANTS
INDUSTRY
COMPETITORS
Bargaining Power
Bargaining power
SUPPLIERS
BUYERS
of Buyers of suppliers
Intensity
of Rivalry
SUBSITUTES
Threat of
McKinsey's 7- s framework
This framework developed in the 1970's by US based management consulting firm McKinsey and
Company has received attention from strategists. The framework rests on the proposition that
effective organizational change is best understood in terms of the complex relationship between
the seven S's. as shown in Figure 7-3. Stated in general terms, the proposition of the7-S model
suggests that there are multiple factors which influence an organization's ability to change and its
proper mode of change. Since the variables are interconnected, significant progress cannot be
made in one area (e.g., strategy) unless corresponding progress is made in other areas too.
Structure
Systems
Strategy
Super
ordinate
goals
Style
Skills
Staff
Figure 7-3 Mckinsey 7-s Framework
1. Structure refers to the authority relationships, the hierarchical arrangement of positions in
the organization.
2. Systems' may be called the `infrastructure' and include sub-systems relating to production
planning and control, cost accounting procedures, capital budgeting, recruitment, training
and development, planning and budgeting, performance evolution, etc. Rules, regulations
and procedures constitute `systems' in the framework, which complement the
organizational structure
3. Strategy refers to the long range plan of action with a set of goals for accomplishment
4. Staff' carriers a specific meaning in the 7-S framework. It refers to the way organizations
induct young recruits into the mainstream of activities and the manner in which they
manage their careers as the new entrants develop into managers.
5. Skills refer to the `distinctive competence' which reflects the dominant skills of an
organization, and may consist of competence in terms of engineering skills, or competence
in the area of new product development, customer service, quality commitment, market
power, and so on.
6. Style is another variable, which may determine the effectiveness of organizational change
effort. According to the 7-S framework, the style of an organization becomes evident
through the patterns of actions of the top management team over a period of time, the
emphasis laid on aspects of business, reporting relationships and aspects of organizational
culture.
7. Shared values (or super ordinate goals) in the Mckinsey model refer to the set of values
and aspirations that go beyond the formal statement of corporate objectives. In other
words, these are fundamental ideas around which a business is built and which constitute
its main values. Typical examples are: Hewlett-Packard's "innovative people at all levels
in organization" as the dominant aspiration or value; A T & T's "universal services" goal;
"customer service" which guides IBM's marketing drive.
Mckinsey's framework has significance in strategic planning. The following
points explain it.
It provides a good framework of the seven `s' and align them to energies and executive
strategies
It is an excellent multivariate model of organizational change
It provides a convenient means of checking whether an organization has the necessary
conditioning for implementing strategy
Organizational capabilities (strengths and weaknesses may be evaluated along each of the
seven dimensions)
Ohmae's Key factors for success
Ohmae suggests that in the event of limited resources, it may be wise to concentrate on
key functional or operating areas that are the determinants of success for a particular business.
This calls for identifying the key factors of success (KFS) for a given industry. There are two
approaches to identify the KPS.
1. The first is to dissect the market as imaginatively as possible to identify its key segments.
2. The other is to discover what distinguishes successful companies from losers, and then
analyze the differences between them.
The key factors for success of different industries may live in different functions, areas,
distribution, channels and so on. These can be identified along the various functional activities of
business starting from raw material to customer servicing. Table 7-2 provides the key factors for
success to increase profit and gain market share for various industries.
Table 7-2 Key Factors for Success
Key factor or function... ....to Increase profit
.....to gain share
Raw materials sourcing
Uranium
Petroleum
Production
facilities Shipbuilding,
Shipbuilding,
Steel
(economic of scale)
Steelmaking
making
Design
Aircraft
Aircraft, Hi-Fi
Production technology
Soda, Semiconductctors Semiconductctors
Product rage/variety
Departmental stores
Components
Application
Minicomputers
LSI, Microprocessors
engineering/engineers
Sales Force (quality & ECR
Automobiles
quantity)
Distribution network
Beer
Films, Home appliances
Servicing
Elevators
Commercial
vehicles
e.g. taxis
Ohmae observes:
Business history indicates that the "most effective shortcut to major success appears to be to
jump quickly to the top by concentrating major resources early on a single strategically
significant function, become really good and competitive at it, and then move to consolidate a
lead in the other functions by using the profit structure that the early top status has been made
possible. All of to-day's industry leaders without exception began by bold deployment of
strategies based on KFS.
Competitive strategies
We will now discuss the generic strategies given by Porter and the generally found marketing
warfare strategies.
Generic strategies
According to Porter there are three potentially successful generic strategies (see Figure 7-3) to
cope up with the five competitive forces as well as gain advantage (See Figure 7-2and Table 7- 3).
These are:
o Overall cost leadership
o Differentiation and
o Focus
Figure 7- 2 Three Generic Strategies
Strategic Advantage
Industry wide
Strategic
Differentiation
Overall Cost
Leadership
Target
Particular
Segment
only FOCUS
Uniqueness Perceived
by
Low cost
the Customer
Position
Overall Cost Leadership
In this strategy company makes all possible attempts to achieve the lowest costs in production and
marketing. The aim is to gain a large market share. Efficiency is the keyword guiding all
decisions to keep the costs low.
Baja Auto Limited and TELCO appear to be following this strategy in India
Differentiation
Here the aim is to achieve class leadership by creating something, which is perceived as unique.
Creating highly differentiated products and marketing programmes-like design or brand image,
customer service or dealer network, or any other feasible dimension can achieve it. Companies
pursuing this strategy have major strengths in R&D design, quality control and marketing.
Chiragh Din Shirts, Bata Shoes, OTIS Elevators, Cini Fans are some examples where this
strategy seems to be the dominant guiding force.
Focus
The underlying assumption in `Focus' is that a firm should be able to serve a narrow strategic
target effectively and efficiently. As a result the firm achieves either differentiation from meeting
the need of a particular target, on both.
Genteel', a liquid detergent for expensive clothes by Swastik, and Ponds Talcum Powder are
some handy examples for this strategy.
Table 7-3 Requirements for generic competitive strategies
Generic strategy Commonly required skills and Common
organizational
resource s
requirements
Overall
Cost
o Sustained
capital investment o Tight cost control
Leadership
and access to capital
o Frequent,
detailed
o Process engineering skills
control reports
o Intense supervision of labour
o Structured organization
o Products designed for ease of
and responsibilities
manufacture
o Incentives
based
on
o Low-cost distribution system `
meeting
strict
quantitative tares
Differentiation
o Storing marketing abilities
o Strong
coordination
o Product engineering
among fucntons in R &
o Creative fair
D product development,
o Strong
capability
in
basic
and marketing
research
o Subjective measurement
o Corporate reputation for quality
and incentives instead of
or technological leadership.
quanttiate meastues
o Long tradition in the industry or o Amenities
to
attract
univque combination of skills
hightly skilled labour,
drawn from other businesses
scientists or creative
o Storing
cooperation
from
people.
channels
Foucs
o Combination
of the above Combination
of
the
policies
directed
at
the above policies directed at
particular strategic target
the particular strategic
target.
Source: Adaped/reprinted with permission of The Free Press, an important of Simon & Schuster,
from Competitive strategy. Techniques for Analyzing Industries and Competitors by
Michael E. Porter, pp 40-41. Copyright ? 1980, by The Free Press.
Marketing warfare strategies
Al Ries and Trout (1986) observed:
In the plan for future, many more pages will be dedicated to the competition. More and more
successful marketing campaigns will have to be planned like military campaigns".
Four types of combat positions are identified here for discussion.
The Defensive Warfare
This is essentially recommended for market leaders. It aims at protecting against regulatory
provisions like M.R.T.P industrial licensing restrictions, etc. according to authors, a leader has to
spend more time in safeguarding its interests against government, social and public environment
rather than the immediate next competitor. A leader should also be able to attack itself i.e., drop
products, which may appear to make the leadership position vulnerable. The three principles of
defensive warfare are:
(i) Only the market leader should consider playing the defense,
(ii)
The best defensive strategy is the courage to attract yourself,
(iii)
Strong competitive moves should always be blocked.
The Offensive Warfare
`Offensive' warfare is almost like a mirror image of the defensive warfare. The numbers twos of
the industry are suggested to follow the offensive strategy by identifying a weakness in leaders
strength and at that point. The principles of `offensive warfare' are
(i)
The main consideration is the strength of the leaders position,
(ii)
Find a weakness in the leader's strength and attack at that point.
(iii)
Launch the attack on as narrow a front as possible.
The Flanking Warfare
According to Ries and Trout, `flanking' the most innovative form of marketing warfare. Over the
years, most of the biggest marketing success has been flanking moves. It is recommended to
firms with limited resources. These firms cannot afford to fight the large firms holding number
one or two positions on the same battleground. Flanking can be achieved in any manner such as
flanking with low price, flanking with high price, flanking with small size, flanking with large
size, flanking with distribution, flanking with product form. The principles of flanking warfare
are:
(i)
A good flanking move must be made in an uncontested area
(ii)
Tactical surprise ought to be an important element of the plan
(iii)
Consider the pursuit as critical as the attack itself.
The Guerrilla Warfare
The last form is the guerrilla warfare. Most of the players in a marketing war would be fighting in
the market place like the guerrillas. According to Ries and Trout, "smaller companies can be
highly successful as long as they do not try to emulate the giants in their field, "Like flanking
form there can be many guerrillas; geographic guerrillas, demographic guerrillas, industry
guerrillas, product guerrillas and high end guerillas.
The principles of guerrilla warfare are:
(i)
Find a segment of the market small enough to defend,
(ii)
No matter how successful you become, never act like the leader
(iii)
Be prepared to a buyout at a moment's notice.
Summary
,
Analyzing competition is key to evolving a durable strategy for firms to stay and succeed in the
market place. From industry point of view, explained by economists, there are four types of
competition-perfect, monopoly, oligopoly and monopolistic. From marketer's point of view, the
competitors are at four levels of need satisfaction of buyers- desire, generic, form and brand.
Competition can be analyzed using Porter's model, Mckinsey's 7-s framework or Key success
factor approach. Competitive intelligence is necessary to become aware of competitor's moves
and design proactive or reactive counter moves. Competitive strategies are generic-overall cost
leadership, differentiation and focus or warfare type ? defensive, offensive, franking and guerilla.
Self-assessment Questions
1. Explain the concept of competition with suitable examples.
2. What are the competitive situations according to economists?
3. Identify the competitive situations from marketing point of view.
4. Explain the role of marketer in perfect and monopoly situations
5. Examine the role of marketer in oligopoly and monopolistic situations.
6. With example, explain how marketer identifies competition taking buyer point of view.
7. How do you analyze competition situation using porter model?
8. Using Mckinsey framework analyze competition.
9. What are merits of Key success factor method?
10. Identify and explain generic strategies.
11. Discuss military strategies used by marketer.
Activities
1. From marketing magazines, collect information about strategies of select companies of a
specific product and analyze competitive situation and strategy directions.
2. Visit websites of companies and examine the competitive situation in which a company of
you choice is. Gather information from business news papers on their moves regularly.
References
1. Philip Kotler(1988) Marketing Management, Prentice ?Hall, Englewood Cliffs: New
Jersey
2. Richard D'Aveni (1994), Hyper competition, The Free Press: New York
3. John A. Pearce II and Richard B. Robinson Jr.(1996), Strategic Management, AITBS,
New Delhi
4. Francis Cherunilam(2000),Strategic Management, Himalaya Publishing House, Mumbai
5. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books, New
Delhi
Unit ? III
ON
9
Strategic Alternatives & Choice of Strategy
S
S
E
L
LESSON OUTLINE
Introduction
Strategic alternatives
Generic Strategies
Grand strategies
Growth strategies
Stability strategies
Retrenchment
Portfolio restructuring
Summary
Self assessment questions
Activities
References LEARNING OBJECTIVES
After reading this lesson you should be able to
Identify generic and grand strategies.
Understand generic strategies and know how to
adopt in different strategic situations.
Examine how portfolio restructuring helps in
strategic choices.
Introduction
Most companies today including most successful Indian companies like Bajaj Auto, Reliance
and ITC have embraced strategic planning fully in their quest for higher revenues and profits. In
this process, there identify multiple strategies that they can adopt.
Strategic alternatives revolve around the question of whether to continue or change the
business an enterprise is currently in or improve the efficiency and effectiveness of its current
and future operations. Then, how do these companies make the choices? What factors influence
their decisions?
Kent Nelson, former chair of UPS, explains why his company has created a new strategic
planning department: "Because we're making bigger bets on investment in technology, we can't
afford to spend a whole lot of money in one direction and then find out five years later it was the
wrong direction".
Tomorrow always arrives. It is always different. And
even the mightiest company is in trouble if it has not
worked on the future. Being surprised by what happens is
a risk that even the largest and richest company cannot
afford, and even the smallest business need not run.
Peter Drucker
DRUCKER
Strategic Alternatives
After analyzing the environment and assessing the internal environment, the next step in
the strategic planning process is to develop strategic alternatives to help the organization in
achieving its objectives. Different kinds of strategic alternatives are presented in Figure9-1.
Strategic alternatives
Generic Strategies
Grand strategies
Overall cost leadership
Differentiation
Growth Stability Retrenchment Portfolio
Focus
Turnaround
Maintaining
Restructuring
Concentration
Divestment
status quo
Liquidation
Combination
Integration
Sustainability
strategy
Diversification
growth
Mergers and
Acquisitions
Joint Ventures
Figure 9-1 Types of strategic alliances
Generic strategies
According to Micheal E. Porter strategies allow organisations to gain competitive advantage
from three different bases.
Overall cost leadership
Differentiation, and
Focus.
Organizations achieve competitive advantage by providing their customers with what they want,
or need, better or more effectively than competitors and in ways the competitors find difficult to
imitate. A firm's relative position within its industry determines whether a firm's profitability is
above or below the industry average. The fundamental basis of above average profitability in the
long run is sustainable competitive advantage. There are two basic types of competitive
advantage a firm can possess: low cost or differentiation. The two basic types of competitive
advantage combined with the scope of activities by which a firm seeks to achieve them, lead to
three internally consistent generic competitive strategies that can be used by the organization to
outperform competition and defend its position in the industry. These strategies are:
Cost Leadership
Differentiation, and
Focus and Niche Strategies.
Each of these strategies is designed to give a firm a competitive advantage. The focus strategy
has two variants, cost focus and differentiation focus as shown in Figure 9-2.
Competitive Advantage
Lower Cost
Differentiation
Broad
Target
c
ope
S
t
i
t
i
ve
pe
om
C
1. Cost Leadership
2. Differentiation
3. Cost Focus
4.
Differentiation
Narrow
Focus
Target
Figure 9-2 Strategies for competitive advantage
Overall cost leadership emphasizes producing standardized products at a very low per-unit for
consumers who are price ? sensitive. Differentiation is a strategy aimed at producing products
and services considered unique industry wide and directed at consumers who are relatively price-
insensitive. Focus means producing products and services that fulfill the needs of small groups
of consumers.
Overall cost leadership yields a firm above ? average returns in its industry despite the presence
of strong competitive forces. However, this strategy often requires high relative market share or
other advantages, such as favorable access to raw materials or the ready availability of cash to
finance the purchase of the most efficient equipment. National Can Company, for example, is in
a no-growth industry but depends on being the low-cost producer of cans and bottles to increase
its profits.
Reliance became number one company of India because of its cost
leadership strategy. Presently it is the lowest-cost polyester producer in
the world. Reliance's project management skills, among the best in its
business anywhere in the world, and its competencies in mobilizing large
amount of low-cost finance enables them to set up world ?scale plants at
the highest speeds and lowest capital costs.
"In the competition for markets, it has won through an aggressive
strategy based largely on scale and pre-emption. By continuously
investing in capacity, often ahead of manifest demand, Reliance has not
only expanded its market share but has also wrested all investment
initiative from its competitors. In essence, it has played a `chicken game'
to see who blinks first ? and given its reputation of always putting its
money where its mouth is, it is competitors who have blinked. The net
result is that Reliance has come to command between 33 and 80% market
share in India for all its key products. These market shares have
translated into cost advantages making Reliance the most profitable
company in its industry during an upswing and robust in a downswing."
Sumantra Ghoshal profoundly remarks.
Ranbaxy laboratories, number two most competitive company of India
(after Reliance) attained cost leadership through upgrading technology,
vertical integration and benchmarking against international competitors.
Gujarat Ambuja made a success by following this cost leadership
strategy. It benchmarked itself against the best practices of cement
Differentiation involves creating and marketing unique products for the mass market.
Approaches to differentiation include developing unique brand images (Levi's jeans), unique
technology (MacIntosh stereo components), unique featues (Jenn ? Air electric ranges), unique
channels (Tupperware), unique customer service (IBM), or the like. In other words, the key to
differentiation is obtaining a differential advantage that is readily perceived by the consumer.
Differentiation is a viable strategy for earning above ? average returns in an industry, because it
creates a defensible position for coping with the five competitive forces.
Presently Titan and its sister company Timex together hold 77%
market share while HMT has 12%. There was time when HMT had 90%
share because of its low price strategy. Titan with its focus on exterior
design, was able to charge a premium price and gain more market share.
Focus is essentially a strategy of segmenting markets and appealing to only one or a few groups
of consumers or industrial buyers. The logic of this approach is that a firm that limits its
attention to one or a few market segments can serve those segments better than firms that seek to
influence the entire market. For example, products such as Rolls ? Royce automobiles, Cross
pens, and Hartmann luggage are designed to appeal to the upscale market and serve it well
rather than trying to compete in the mass market.
Strategy of opening hotels in Himachal is focused strategy of
Himachal Tourism Development Corporation, which is pursued on
geographic grounds. Rolls ? Royce pursues the strategy of selling cars to
status conscious high ?income consumers. Ranbaxy focused on just two
categories of drugs ? antibiotics and antibacterial (product ? line)
Choices
The requirements for adopting the strategies are listed in Table 9-1 and risks associated with
them are given in Table 9-2. Of course, the specific strategies that it is best to use depend on the
characteristics of, and opportunities and constraints in, the industry.
Table 9-1
Porter's three Generic Strategies and their requirements
Generic
Required skills and resources
Organizational requirements
strategy
Overall
Cost Sustained capital investment and Tight cost control
Leadership
access to capital
Frequent,
detailed
control
Process engineering skills Intense reports
supervision of labor
Structured
organization
and
Products designed for ease in responsibilities
manufacture
Incentives based on meeting
Low-cost distribution system
strict quantitative targets
Differentiation Strong marketing abilities
Strong
coordination
among
Product engineering
functions in R&D, product
Creative flair
development, and marketing
Strong capability in basic research
Subjective measurement and
Corporate reputation for quality or incentive instead of quantitative
technological leadership
measures
Long tradition in the industry or Amenities to attract highly
unique combination of skills drawn skilled labor, scientists, or
from other businesses
creative people
Strong cooperation from channels
Focus
Combination of the above policies Combination of the above
directed at the particular strategic policies
directed
at
the
target
particular strategic target
Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and
Competitors. The Free Pres, New York
Table 9-2 Risks of the Generic Strategies
Risks
of
cost Risks of differentiation
Risks of focus
leadership
Cost leadership is not Differentiation
is
not The focus strategy is imitated
sustained
sustained
The
target
segment
becomes
Competitors
structurally unattractive
imitate
Competitors imitate
structure erodes
Technology
bases
for demand disappears
changes
differentiation
other bases for cost
become
less
leadership erode
important to buyers
Proximity
in Cost proximity is lost
Broadly
targeted
competitors
differentiation is lost
overwhelm the segment
the segment's differences from
other segments narrow
the advantages of a a broad line
increase
Cost focusers achieve Differentiation focusers New focusers sub-segment the
even lower cost in achieve
even
greater industry
segments
differentiation
in
segments
Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior
Performance.
The Free Pres, New York.
Grand Strategies
Grand strategies, which are often called master or business strategies, are intended to provide
basic direction for strategic actions. Thus, they are seen as the basic of coordinated and
sustained efforts directed toward achieving long-term business objectives. Grand strategies
indicate how long-range objectives will be achieved, thus, a grand strategy can be defined as a
comprehensive general approach that guides major actions. Grand strategies fall under four
categories.
1. Growth
2. Stability
3. Retrenchment
4. Portfolio restructuring
We will now discuss each one of them.
Growth strategies
Organizations usually seek growth in sales, profits, market share, or some other measure as a
primary objective. The different grand strategies in this category are:
Concentration
Integration
Diversification
Mergers and acquisitions
Joint Ventures
Concentration
The most common grand strategy is concentration on the current business. A
concentration strategy is one in which an organization focuses on a single line of business The
firm directs its resources to the profitable growth of a single product, in a single market, and with
a single technology. Some of America's largest and most successful companies have
traditionally adopted the concentration approach. For example, Mc Donald's concentrates on
the fast food industry and Holiday Inns. Other examples include W.K. Kellogg and Gerber
Foods, which are known for their product; Shaklee, which concentrates on geographic
expansion; and Lincoln Electric, which bases its growth on technological advances.
Concentration strategies succeed for so many businesses ? including the vast majority of smaller
firms ? because of the advantages of business ? level specialization. By concentrating on one
product, in one market, and with one technology, a firm can gain competitive advantages over its
more diversified competitors in production skill, marketing know-how, customer sensitivity, and
reputation in the marketplace. The reasons for selecting a concentration grand strategy are easy
to understand. Concentration is typically lowest in risk and in additional resources required. It is
also based on the known competencies of the firm. On the negative side, for most companies
concentration tends to result in steady but slow increases in growth and profitability and a
narrow range of investment options. Further, because of their narrow base of competition,
concentrated firms are especially susceptible to performance variations resulting from industry
trends.
Integration
Integration may take two forms: vertical and horizontal integration.
Vertical integration
Vertical integration strategy involves growth through acquisition of other organizations in a
channel of distribution. When an organization purchases other companies that supply it, it
engages in backward integration. The organization that purchases other firms that are closer to
the end users of the product (such as wholesalers and retailers) engages in forward integration.
Vertical integration is used to obtain greater control over a line of business and to increase profits
through greater efficiency or better selling efforts.
Horizontal integration.
This strategy involves growth through the acquisition of competing firms in the same line of
business. It is adopted in an effort to increase the size, sales, profits, and potential market share
of an organization. This strategy is sometimes used by smaller firms in an industry dominated
by one or a few large competitors, such as the soft drink and computer industries.
BHEL had undertaken the path of backward integration for the manufacture of assorted
equipments such as, switchgears and transformers, to the full-fledged production of thermal,
hydel, and nuclear power generation equipment.
Diversification
This strategy involves growth through the acquisition of firms in other industries or lines of
business as explained below.
1. Organizations in slow-growth industries may purchase firms in faster-growing
industries to increase their overall growth rate.
2. Organizations with excess cash often find investment in another industry (particularly
a fast-growing one) a profitable strategy.
3. Organizations may diversify in order to spread their risks across several industries.
4. The acquiring organization may have management talent, financial and technical
resources, or marketing skills that it can apply to a weak firm in another industry in
the hope of making it highly profitable.
Diversification may be of different types.
Related or concentric diversification When the acquired firm has production technology,
products, channels of distribution, and /or markets similar to those of the firm purchasing it, the
strategy is called concentric diversification.. This strategy is useful when the organization can
acquire greater efficiency or market impact through the use of shared resources. A case of
related or concentric diversification is the tie-up of McDonald with Coco-cola.
McDONALD'S India Pvt Ltd (MIPL), the wholly-owned subsidiary of the US-based fast-
food giant McDonald's Corporation, along with Coca-Cola, is developing a fruit-based
beverage, to be retailed exclusively at McDonald's outlets. The beverage will be made
available under the Maaza brand name, but will be different from the regular Maaza
brand.
McDonald's has an international tie-up with Coca-Cola, which extends to the domestic
market as well. Apart from Coca-Cola, in India, McDonald's has an existing tie-up with
Cadbury India, for McSwirl ice-cream cones. McDonald's India is also running a
promotion with foods major Nestle, specific to the KitKat chocolate brand. The quick
service chain, meanwhile, is in talks with synergistic marketers for similar associations.
McDonald's currently operates through 48 outlets in the country, and has set a target of
100 restaurants by 2005.
The quick service chain is looking to set up larger format restaurants for now, rather than
exploring the option of setting up smaller format convenience outlets. The company will
consider the small format stores option in the second stage of expansion. For the time
being, the focus is on setting up larger restaurants. In addition to setting up standalone
outlets in residential areas and entertainment complexes, they have set up outlets on
highways and railway stations
Unrelated or conglomerate diversification When the acquired firm is in a completely different
line of business, the strategy is called unrelated or conglomerate diversification An example of
unrelated conglomerate diversification is Marico's venture into cooling oil segment.
TAKING a cue from Dabur's recent entry into the cooling oil segment with its Himsagar
brand, the market leader in hair oils, Marico Industries, has decided to venture into the
same segment with its Shanti brand. Under the sub brand of `Thanda Tel', the Shanti
brand will soon see an extension from its existing Amla hair oil. Pegged at Rs 38 for 100
ml, the `value-added' oil will have ingredients such as neem and camphor to induce the
cooling effects.
"Cooling oil is the fastest growing segment under hair oils pegged at 16 per cent. It is a
category that is growing even faster than shampoos." Even the coconut oil market is
pegged to grow at 0-2 per cent while the hair oil segment has been generally stagnant.
The market leader in hair oils with its leading brand of Parachute has thus decided to
venture into the category previously untapped except for a few players with brands such
as Himsagar, Himtej and Navratan. They intend spending heavily behind this brand and
the ad agency Triton is developing a new campaign for the brand. Its existing Shanti
Amla brand of hair oil enjoys a 13 per cent volume and has a second position in the amla
segment after Dabur Amla. Besides, in the overall non-coconut oil segment, the company
enjoys a 15 per cent share together with its brands such as Mediker. In fact, in the recent
past, Mediker did stretch the franchise of its Mediker shampoo with an anti-lice oil,
including the same cooling ingredients such as neem and camphor. Marico claims it has
made a success of its Parachute Jasmine variant with a turnover of Rs 23 crore. It also
withdrew Parachute anti-dandruff hair oil since it was not generating the necessary
volumes
Mergers and acquisitions
In a merger, a company joins with another company to form a new organization.
There are several examples of mergers. Ponds, Lakme, Lipton, Brooke bond India, Milk
food ice creams etc have merged with Hindustan Lever Ltd. More examples are given in
the lesson on Mergers and Acquisitions in the same Unit..
Joint ventures
In a joint venture, an organization works with another company on a project too large to handle
by itself, such as some elements of the space program. Similarly, organizations in different
countries may work together to overcome trade barriers in the international market or to share
resources more efficiently.
For example, GMF Robotics is a joint venture between General Motors Corporation and
Japan's Fanuc Ltd. to produce industrial robots.
Stability Strategy
The organization that adopts a stability strategy focuses on its existing line or lines of business
and attempts to maintain them through one of the following ways.
Maintaining status quo-continue to do what it has been doing
Sustainability- reinforcing the organization with more competencies to carry on things in a
better or innovative way.
This is a useful strategy in several situations.
An organization that is large and dominates its market(s) may choose a stability
strategy in an effort to avoid government controls or penalties for monopolizing
the industry.
Another organization may find that further growth is too costly and could have
detrimental effects on profitability.
Finally, an organization in a low- growth or no-growth industry that has no other
viable options may be forced to select a stability strategy.
.
Hindusthan Lever keeps its Lux soap updated to retain its hold in market. According to a
press release, recently the soap has been enriched with nourishing natural ingredients,
which are visible in the soap. There are four variants - Rose extracts, Almond oil, Fruit
extracts and Sandal saffron with a base of rich milk cream. The last is a completely
different and new variant. These soaps are packed in a metallic wrapper to retain the
freshness and fragrance for a longer period than usual, the press release said. The content
of TFM (Total fatty matter) has been raised from 60 per cent to 71 per cent.
Retrenchment Strategies
When an organization's survival is threatened and it is not competing effectively, retrenchment
strategies are often needed. The three basic types of retrenchment are
Turnaround,
Divestment, and
Liquidation.
Turnaround strategy is used when an organization is performing poorly but has not yet reached a
critical stage. It usually involves getting rid of unprofitable products, pruning the work force,
trimming distribution outlets, and seeking other methods of making the organization more
efficient. If the turnaround is successful, the organization may then focus on growth strategies.
Divestment strategy involves selling the business or setting it up as a separate corporation.
Divestment is used when a particular business doesn't fit well in the organization or consistently
fails to reach the objectives set for it. Divestment can also be used to improve the financial
position of the divesting organization.
Liquidation strategy involves closure of the business, which is no longer profitable. It may be
technologically obsolete or out of times with market trends.
Choices
How do firms choose strategies?
Stability strategy is adopted because
1. It is less risky, involves fewer changes and people feel comfortable with things as
they are
2. The environment faced is relatively stable
3. Expansion may be perceived as being threatening
4. Consolidation is sought through stabilizing after a period of rapid expansion.
5.
Expansion strategy is adopted because
6. It may become imperative when environment demands increase in pace of activity
7. Psychologically, strategists may feel more satisfied with the prospects of growth
from expansion: chief executives may take pride in presiding over organizations
perceived to be growth-oriented.
8. Increasing size may lead to more control over the market vis-?-vis competitors
9. Advantages from the experience curve and scale of operations may accrue
Retrenchment strategy is adopted because:
10. The management no longer wishes to remain in business either partly or wholly
due to continuous losses and inviability
11. The environment faced is threatening
12. Stability can be ensured by reallocation of resources from unprofitable to
profitable businesses. Combination strategy is adopted because:
13. The organization is large and faces a complex environment
The organization is composed of different businesses, each of which lies in a different industry
requiring a different response
Portfolio restructuring
Large, diversified organizations commonly use a number of these strategies in combination. For
example, an organization may simultaneously seek growth through the acquisition of new
businesses, employ a stability strategy for some of its existing businesses, and divest itself of
other businesses. Clearly, formulating a consistent organizational strategy in large, diversified
companies is very complicated, because a number of different business ? level strategies need to
be coordinated to achieve overall organizational objectives. Business portfolio models are
designed to help managers deal with this problem.
Business portfolio models are tools for analyzing (1) the relative position of each of an
organization's businesses in its industry and (2) the relationships among all the of the
organization's businesses. Two well-known approaches to developing business portfolios
include:
Boston Consulting Group (BCG) growth ? share matrix
General Electric's (GE's) multi-factor portfolio matrix.
BCG's Growth ? Share Matrix
The Boston Consulting Group, a leading management consulting firm, developed and
popularized a strategy formulation approach called the growth ? share matrix, which is shown in
Figure 9-3. The basic idea underlying this approach is that a firm should have a balanced
portfolio of businesses such that some generate more cash than they use and can thus support
other businesses that need cash to develop and become profitable. The role of each business is
determined on the basis of two factors: the growth rate of its market and the share of that market
that it enjoys.
Stars
Question Marks
*
? ?
22
* *
20
)
18
16
r
c
e
nt
14
BUILD STRATEGY
12
a
t
e
(
pe
10
R
h
8
6
owt
Cash Cows
Dogs
4
t
Gr
2
0
a
r
ke
M
HOLD STRATEGY
10x
4x
2x
1.5x
1x
0.5x
0.4x
0.3x
0.2x
0.1x
Relative Market Share
Figure9-3 BCG's Growth ? Share Matrix (Source: Adapted from B. Hedley, "Strategy and the
Business Portfolio," Long Range Planning, February 1977, p.12.
The vertical axis indicates the market growth rate, what is the annual growth percentage
of the market (current or forecasted) in which the business operates. The horizontal axis
indicates market share dominance or relative marker share. It is computed by dividing the firm's
market share (in units) by the market share of the largest competitor).
The growth ? share matrix has four cells, which reflect the four possible combinations of
high and low growth wit high and low market share. These cells represent particular types of
businesses, each of which has a particular role to play in the overall business portfolio. The cells
are labeled:
1. Question marks (sometimes called problem children): Company business that operate in a
high-growth market but have low relative market share. Most businesses start off as
question marks, in that they enter a high ? growth market in which there is already a
market leader. A question mark generally requires the infusion of a lot of funds. It has to
keep adding plant, equipment, and personnel to keep up with the fast ? growing market,
and it wants to overtake the leader. The term question mark is well chosen, because the
organization has to think hard about whether to keep investing funds in the business or to
get out.
2. Stars: They are question ? mark businesses that have become successful. A star is the
market leader in a high ? growth market, but it does not necessarily provide much cash.
The organization has to spend a great deal of money keeping up with the market's rate of
growth and fighting off competitors' attacks. Stars are often cash ?using rather than cash
?generating Even so, they are usually profitable in time.
3. Cash cows: Businesses in markets whose annual growth rate is less than 10 percent but
that still have the largest relative market share. A cash cow is so called because it
produces a lot of cash for the organizations. The organization does not have to finance a
great deal of expansion because the market's growth rate is low. And the business is a
market leader, so it enjoys economies of scale and higher profit margins. The
organization uses its cash-cow businesses to pay its bills and support its other struggling
businesses.
4. Dogs: Businesses that have weak market shares in low-growth markets. They typically
generate low profits or losses, although they may bring in some cash. Such businesses
frequently consume more management time than they are worth and need to be phased
out. However, an organization may have good reasons to hold onto a dog, such as an
expected turnaround in the market growth rate or a new chance at market leadership.
After each of an organization's businesses is plotted on the growth ? share matrix, the next step
is to evaluate whether the portfolio is healthy and well balanced. A balanced portfolio has a
number of stars and cash cows and no too many questions marks or dogs. This balance is
important because the organization needs cash not only to maintain existing businesses but also
to develop new businesses. Depending on the position of each business, four basic strategies can
be formulated:
1. Build market share: This strategy is appropriate for question marks that must increase
their share in order to become stars. For some businesses, short-term profits may have to
be forgone to gain market share and future long-term profits.
2. Hold market share: This strategy is appropriate for cash cows with strong share
positions. The cash generated by mature cash cows is critical for supporting other
businesses and financing innovations. However, the cost of building share for cash cows
is likely to be too high to be a profitable strategy.
3. Harvest: Harvesting involves milking as much short-term cash from a business as
possible, even allowing market share to decline if necessary. Weak cash cows that do not
appear to have a promising future are candidates for harvesting, as are question marks
and dogs.
4. Divest: Divesting involves selling or liquidating a business because the resources
devoted to it can be invested more profitably in other businesses. This strategy is
appropriate for those dogs and question marks that are not worth investing in to improve
their positions.
However the growth share matrix is not fool proof. It has the following loopholes.
- Focuses on balancing cash flows only but organizations are mostly interested in return on
investments.
- Is not always clear what share of what market is relevant in the analysis.
- Believes that there is a strong relationship between market share and return on
investment. But research proves that only a 10% change in market share is associated
with only `percent change in return on investment.
- The other factors like size and growth profile of the market and distinctive competences
of the firm, competition etc is not considered.
- It does not provide direct assistance in comparing different businesses in terms of
investment opportunities. For example it is difficult to decide between two question
marks and decide which should be developed into a star.
- Offers only general strategy recommendations without specifying how to implement
them.
GE Multi-factor Port folio matrix
This approach has a variety of names, including the nine -cell GE matrix, GE's nine-cell
business portfolio matrix, and the market attractiveness ? business strengths matrix. The basic
approach is shown in Figure 9-4. Each circle in this matrix represents the entire market, and the
shaded portion represents the organization's business market share
Each of an organization's businesses is plotted in the matrix on two dimensions, industry
attractiveness and business strength. Each of these two major dimensions is a composite
measure of a variety of factors. To use this approach, an organization must determine what
factors are most critical for defining industry attractiveness and business strength. Table below
lists some of the factors that are commonly used to locate businesses on these dimensions.
The next step in developing this matrix is to weight each variable on the basis of its perceived
importance relative to the other factors (hence the total of the weight must be 1.0). Then
managers must indicate, on a scale of 1 to 5, how low or high their business scores on that factor.
Table 9-3 Factors Contributing to Industry Attractiveness and Business Strength.
INDUSTRY ATTRACTIVENESS
BUSINESS STRENGTH
Market Factors
Size (dollars, units or both)
Your share (in equivalent terms)
Size of key segments
Your share of key segments
Growth rate per year:
Your annual growth ratae:
Total
Total
Segments
Segments
Diversity of market
Diversity of your participation
Sensitivity to price, service features, and Your influence on the market
external factors
Cyclicality
Lags or leads in your sales
Seasonality
Bargaining Power of Upstream Suppliers
Bargaining power of your suppliers
Bargaining Power of Downstream Suppliers
Bargaining power of your customers
Competition
Types of competitors
Where you fit, how you compare in terms
Degree of concentration
of
products,
marketing
capability,
Changes in type and mix
service, production strength, financial
strength, management
Entries and exits
Segments you have entered or left
Changes in share
Your relative share change
Substitution by new technology
Your vulnerability to new technology
Degrees and types of integration
Your own level of integration
Financial and Economic Factors
Contribution margins
Your margins
Leveragign factors, such as economies of Your scale and experience
scale and experience
Barriers to entry or exit (both financial and Barriers to your entry or exit (both
non-financial)
financial and non-financial)
Capacity utilization
Your capacity utilization
Technological Factors
Maturity and volatility
Your ability to cope with change
Complexity
Depths of your skills
Differentiation
Types of your technological skills
Patents and copyrights
Your paten protection
Manufacturing process technology required
Your manufacturing technology
Socio-Political Factors in Your Environment
Social attitudes and trends
Your company's responsiveness and
flexibility
Laws and government agency regulations
Your company's ability to cope
Influence with pressure groups and Your company's aggressiveness
government representatives
Human factors, such as unionization and Your company's relationships.
community acceptance.
Figure 9-4 GE Matrix
General Electric's nine- cell planning grid
LEGEND
Market size
Cyclical
Invest /grow
and growth rate
Economies of scale
Industry profit margins Technology Social,
Selectivity / earning
Competitive intensity environmental, legal,
Seasonality
and human impacts
Harvest /divest
Industry (product ? market) attractiveness
High Medium Low
100
Relative market
Competitive
h
share
strengths and
Profit margins
weaknesses
Ability to
Technological
t
rong
Compete on
capability
S
price and quality
Caliber of
s
s
s
t
r
e
ngt
Knowledge of
management
i
ne
e
r
a
ge
v
us
Customer and
B
market
A
e
a
k
W
0
100
Relative market
Competitive
h
t
rong
share
strengths and
Profit margins
weaknesses
S
Ability to
Technological
Compete on
capability
e
r
a
ge
v
price and quality
Caliber of
s
s
s
t
r
e
ngt
Knowledge of
management
i
ne
us
Customer and
A
market
B
e
a
k
W 0
Depending on where businesses are plotted on the matrix, three basic strategies are formulated:
Invest/grow,
Selective investment, and
Harvest/divest.
Businesses falling in the cells that form a diagonal from lower left to upper right are medium-
strength businesses that should be invested in only selectively. Businesses in the cells above and
to the left of this diagonal are the strongest; they are the ones for which the company should
employ an invest/grow strategy. Businesses in the cells below and to the right of the diagonal
are low in overall strength and are serious candidates for a harvest/divest strategy.
This approach has several advantages over the growth-share matrix.
First, it provides a mechanism for including a host of relevant variables in the process of
formulating strategy.
Second, as we have noted, the two dimensions of industry attractiveness and business
strength are excellent criteria for rating potential business success.
Third, the approach forces managers to be specific about their evaluations of the impact of
particular variables on overall business success.
However, the multifactor portfolio matrix also suffers some of the same limitations as the
growth ?share matrix.
o It does not solve the problem of determining the appropriate market, and it does not offer
anything more than general strategy recommendations.
o The measures are subjective and can be very ambiguous, particularly when one is
considering different businesses.
Portfolio models provide graphical frameworks for analyzing relationships among the
businesses of large, diversified organizations, and they can yield useful strategy
recommendations. However, no such model yet devised provides a universally accepted
approach to dealing with these issues. Portfolio models should never be applied in a mechanical
fashion, any conclusion they suggest must be carefully considered in the light of sound
managerial judgment and experience.
Summary
After environmental scanning and organizational appraisal, the company has to identify the
alternative strategies that match their resources and capabilities with the external threats and
opportunities. Micheal E. Porter suggested three generic strategies-overall cost leadership,
differentiation and focus. Glueck and others have identified grand strategies that fall under four
categories-Growth, stability, retrenchment and portfolio restructuring. These alternative
strategies suggest the direction for top management and help exploit opportunities.
Two business portfolio models-BCG matrix and GE nine cells help top management
decide how to deploy the various businesses that make up he firm and how to allocate resources
among them. The growth-share matrix enables managers to classify every business as a question
mark, a star, a cash cow, or a dog; to ascertain whether the firm's roster of businesses is well
balanced among the four; and to determine what strategy is appropriate for each. The multifactor
portfolio matrix attempts to quantify the strength of a business and the attractiveness of the
industry it operates in. The sum of these two numbers is taken as an indication of whether
investing aggressively, investing selectively, or refraining from further investment is the best
strategy. Both models offer useful information in an interesting graphical format, but it is
important to remember that they do not dictate the course to take and that they are no substitute
for sound managerial judgment and experience.
Self -assessment questions
1. "Grand strategies are intended to provide basic direction for strategic actions" ? Discuss.
2. Identify generic and grand strategies that firms adopt.
3. Explain the generic strategies given by Michel E. Porter with Indian
examples.
4. Examine the significance of Gluek's grand strategies and discuss how they
help achieve overall objectives of a firm.
5. Explain horizontal and vertical integration strategies.
6. What is diversification? Explain why it is followed.
7. What are stability strategies? When do firms employ them?
8. What are the methods adopted for turnaround?
9 Explain retrenchment strategy? Do firms employ it?
10. Examine the significant of portfolio strategies.
Activities
1. Go to a business firm near your college. Discuss with the Managing Director and top
level strategists and identify the generic strategies you believe they are using.
2. Identify the Indian companies that have adopted the grand strategies in India from
www.blonnet.com website of The Hindu ? Business Line and list them briefly.
References
1. P. Subba Rao (2003) Business policy and Strategic Management, Himalaya
Publishing House, New Delhi.
2. Fred R. David (2003), Strategic Management: Concepts and Cases, Pearson Education,
New Delhi.
3. Kachru Upendra(2005), Strategic Management Concepts and cases, Excel Books, New
Delhi
4. John A.& Pearce II, Richard B. Robinson, Jr ( 1996) Strategic Management3rd Edition
All India Traveller Book Seller(AITBS), New Delhi.
Unit III
ON
10 Strategic alliances and Joint Ventures
S
S
E
L
LESSON OUTLINE
Introduction
Strategic alliances
Reasons for forming alliances
Types of alliances
Typology of alliance
Continuum of alliances
o Mutual service consortia
o Joint venture
licensing arrangement
o Value-chain partnership
Forms of alliances in India
Managing strategic alliances
After reading this lesson you should be
able to
Understand and define strategic alliances
Examine the reasons for forming
alliances
Outline the types of alliances
Know how Indian companies have
formed alliances
Explain the methods of managing
alliances
Introduction
Intense competition, changing technology and need for expansion drive firms to look out for
opportunities to take over other firms or form alliances. When geographical boundaries are open
for business operations, international tie-ups are common. Strategic alliances may take different
forms from just marketing or production tie-ups to mergers. Managing alliances requires special
caution, and managers should be aware of the principle of managing them.
Strategic alliances ? defined
Strategic alliances are cooperation arrangements between two or more companies for achieving a
common objective. Yoshino and Rangan define strategic alliances in terms of three necessary
and sufficient characteristics
Two or more firms unite to pursue a set of agreed upon goals but remain
independent subsequent to the formation of the alliance,
The partner firms share the benefits if the alliance and control over the
performance of assigned tasks ?perhaps the most distinctive characteristic of
alliances and the one that makes them so difficult to manage,
The partner firms contribute on a continuing basis on one or money key strategic
areas, for example, technology, product, and so forth.
In similar words , Lando Zeppi, Managing partner of Booz, Allen and Hamilton, defines strategic
alliance as :
a cooperative arrangement between two or more companies where:
A common strategy is developed in unison and a win-win attitude is
adopted by all parties
The relationship is reciprocal, with each partner prepared to share
specific strengths with each other, thus lending power to the
enterprise.
A pooling of resources, investments, and risks occurs for mutual
(rather than individual gain)
Strategic alliances can be defined simply as:
"a cooperation between two or more independent firms involving shared control and
contributing contributions by all partners for mutual benefit".
Some alliances are short term and some are long term leading to full mergers of companies.
Reasons for forming strategic alliances
The basic reason for entering into strategic alliance is to enhance their organizational
capabilities and there by gain competitive advantage. Towards this they strive to gain access to
new markets and new supply resources sufficiently they enter into strategic alliances.
Specifically speaking the following are the principal reasons.
1. To obtain technology and / or manufacturing capabilities
For example, Intel formed a partnership with Hewlett-Packard to use HP's capabilities in
RISC technology in order to develop the successor to Intel's Pentium microprocessor.
2. To obtain access to specific markets
Rather than buy a foreign company or build breweries of its own in other countries,
Anheuser-Busch chose to license the right to brew and market Budweiser to other brewers,
such as Labatt in Canada, Modelo in Mexico, and Kirin in Japan.
The alliance of coco
cola Inc. with local bottling mergers in the global market and even in India.
3. To reduce financial risk
To reduce the risk of financial investment a company may join hands with another company
or companies
Because the costs of developing a new large jet airplane is becoming too high for any
manufacturer, Boeing, Aerospatiale of France, British Aerospace, Constucciones Aeronautics
of Spain, and Deutsche Aerospace of Germany planned a joint venture to design such a
plane.
4 To reduce political risk
Political risk is another important factor. Besides cultural factors, political factors are
complex and difficult to mange. It is better to tie up with a local firm to find way s of
overcoming such risks.
To gain access to China while ensuring a positive relationship with the often
restrictive Chinese government, Maytag Corporation formed a joint venture with
the Chinese appliance maker, RSD.
5 To achieve or ensure competitive advantage
Alliances may be formed for mutual advantage to use of the specialized nature of resources
or skills.
General Motors and Toyota formed Nummi Corporation as a joint venture to
provide Toyota a manufacturing facility in the United States and GM access to
Toyota's low-cost, high-quality manufacturing expertise.
IBM's strategy
IBM's current alliance strategy in large measure is due to several key
driving factors:
(1) to enter new markets, (2) to fill gaps in its product line with other firm's offerings,
(3) to shorten product development time, (4) to learn new technologies, (5) to
restructure some existing operations, and (6) to block other key rivals from
encroaching on the U.S. and European markets too quickly.
IBM has formed more than 500 strategic alliances (of varying degrees of complexity)
with partners around the world. These strategic alliances involved not only shared
marketing and software development efforts, but also major commitments of investment
funds to build ultra-modern facilities that are beyond the financial means of any one
company. The following Table 10-1 portrays some of the most significant alliance
relationships the IBM has entered as of December 1997.
Table 10-1: IBM Alliance Strategy
Personal Computers
Semiconductor
Software
and
Technology
Processing
Matsushita
Micron Technology
Microsoft
(Lowend PCs)
Motorola
(X-ray Oracle
Ricoh (Hand-held
lithography)
Sun Microsystems
PCs)
Motorola
(Micro Silicon Graphics
Computer
processor designs)
Metaphor
Hardware/Screens
Sematech
(U.S. Hewlett-Packard
Toshiba (Display
Consortium)
Netscape
tech)
Intel (Microprocessor
Communications
Mitsubishi
designs)
Customer Linkages
(Mainframes)
Siemens ( 16 M and Mitsubishi Bank
Canon (Printers)
64 Megabit chips)
Eastman Kodak
Hitachi
(Large Apple
Computer Baxter Healthcare
printers)
(Operating
Systems Xerox
Factory Automation
and multimedia
Consumer Electronics
Texas Instruments Integration
Philips Electronics
Sumitomo Metal Elec (Electron bean Sega
Nippon
Kokan
technology)
Blockbuster
technology
Toshiba & Siemens
Entertainment
Nissan Motor
(256 Megabit chips)
Sony
Telecommunications
Toshiba
(Flash
NTT
(Value-
memories)
added Networks)
Motorola (Mobile Advanced
Micro
data mets)
Devices
(Microprocessors)
Silicon Valley Group
(Photolithography)
Typology of strategic alliances
Several typologies of strategic alliances are available in business literature. One such
classification is by Yoshino and Rangan. This is a two-dimensional model with the two
dimensions being, the extent of organizational interaction and conflict potential between alliance
patterns. The classification is shown in Figure 10-1.
Figure 10-1 Typology of Strategic Alliances
Low Conflict high
high
Non-competitive
Competitive
i
on
Pro-competitive
Pre-competitive
t
eract
low
I
n
Pro-competitive Alliances
These are generally alliances within the industry exemplified by vertical value-chain
relationships between manufactures and their suppliers and distributors. Such relationships are
advantageous to both parties. Supplier and buyer organizations entering upon long-term contracts
constitute pro-competitive alliances.
Noncompetitive Alliances
These are partnerships within the industry. Such alliances are entered upon by organizations that
operate in the some industry yet do not perceive each other's as rivals. This can be because their
areas of activity do not coincide and/or their products and services are sufficiently dissimilar to
prevent competition. Organizations that have carved out distinct areas in the industry
geographically or otherwise, adopt the noncompetitive alliances. For example, a number of
automotive manufacturers in Europe have entered into a strategic alliance for engine
development.
Competitive Alliances
These are relationships that bring rival organizations in a cooperative arrangement. These
alliances may be intra ?industry or inter-industry.
For example Coca-Cola entered into an agreement with Parle Products, the manufacturers of
Thumps Up their main competitors in western India.
Pre-competitive Alliances
These partnerships bring two organizations from different, often unrelated industries to work on
well-defined activities. This is often seen in activities such as, mass awareness campaigns or
environmental and social issues. Sometimes inter industry and inter disciplinary cooperation is
necessary for development.
For example, Intel has pre-competitive alliances with software, hardware and other
manufacturers.
Continuum of alliances
The types of alliances range from mutual consortia to value chain partnerships as described
below.
o Mutual service consortia- A mutual service consortium is a partnership of
similar companies in similar industries who pool their resources to gain a
benefit that is too expensive to develop alone, such as access to advanced
technology. For example, IBM of the United States, Toshiba of Japan, and
Siemens of Germany formed a consortium to develop new generations of
computer chips.
o Joint venture ? A joint venture is a "cooperative business activity formed
by 2 or more separate organizations for strategic purposes, that creates an
independent business entity and allocates ownership, operational
responsibilities, and financial risks and rewards to each member, while
preserving their separate identity autonomy.
o Licensing arrangement ? A licensing arrangement is an agreement in
which the licensing firm grants rights to another firm in another country or
market to produce and / or sell a product. The licensee pays compensation
to the licensing firm in return for technical expertise.
Value-chain partnership ? The Value-chain partnership is a strong and
close alliance in which one company or unit forms a long-term
arrangement with a key supplier or distributor for mutual advantage.
Forms of alliances in India
A statistical sample of different strategic alliances in India with number of companies in different
alliances and their percentage is listed in Table 10-2.
Table 10-2 Type of alliances in India
Type of alliance
Number of Companies
Percentage (%)
Marketing tie ups
34
26.3
Operations handling
21
16.2
Joint ventures
15
11.6
Technology licensing
14
108
Manufacturing
14
10.8
MOUs
9
6.9
6
4.6
Services
6
4.6
Supply
6
4.6
Setting
up
new
business
After liberalization, JVs are less since MMCs can set up a 100% subsidiary after 1991. Therefore
Indian market is witnessing breaking up of joint ventures. On the other hand, Indian firms are
going for JV abroad for reasons like.
Source of learning and development
Access to better infrastructure
Access to greater market share
Availability of raw materials
Delta Industries took over Netherlands Jute Industries (NJI) in 1994 which led to cost
effective production in the country with advanced technology. Several alliances such as TVS-
Sujuki, Mahindra-Ford, BPL-Sanyo and Videocon- Sansui have withstood the test of the time.
Ranbaxy went into a strategic alliance with Eli Lilly of the US to realize its mission of
becoming a research based international and pharmaceutical company.
The opening up of infrastructure sector in India led to forming of a number of
alliances.
The telecommunications sector has witnessed the coming together of several local and
global firms such as Crompton Greaves and Millicom, the SPIC group and Telstra, Max
(GSM) and Brtisih Telecom, Usha Martin and Telecom Malaysia, among several others.
The roads and highways sector has created conditions for several global giants joining
hands with reputed Indian companies like the alliances of Unitech and Hyndai,
Engineering and Constructions, THC India and Trafalgar House International, Tarmat
and Samsung, and others.
Liberalization and globalization have spurred the growth of strategic alliances. A good example
of synergetic benefits arising out of a strategic alliance is that of Taj Hotels and British Airways,
where both create advantages for each other through complementarities of airline and hotel
services.
Besides this, other reasons, which lead to strategic alliances, are the availability of professional
management expertise, international reputation, global brand name and brand equity, and
confidence to gain a foothold in the international markets.
Alliances are often used by not- for- profit organization as a way to enhance their capacity to
serve clients or to acquire resources while still enabling them to keep their identity services can
be provided efficiently through cooperation with other organizations them if they are done alone.
Four Ohio Universities agreed to start a new school of international business at a cost of $ 30
million. This cannot be done singly.
Managing Strategic Alliances
The following guidelines will be of help in successfully managing alliances.
Have a clear strategic purpose. Integrate the alliance with each partner's strategy.
Ensure that mutual value is created for all partners.
Find a fitting partner with compitable goals and complementary capabilities
Identify likely partnering risks and deal with them when the alliance is formed.
Allocate tasks and responsibilities so that each partner can specialize in what it
does best.
Create incentives for cooperation to minimize differences in corporate culture or
organization fit.
Minimize conflicts among the partners by clarifying objectives and avoiding direct
competition in the market place.
If an international alliance, ensure that those managing it should have
comprehensive cross-cultural knowledge.
Exchange human resources to maintain communication and trust. Don't allow
individual egos to dominate
Operate with long-term time horizons. The expectations of future gains can
minimize short-term conflicts.
Develop multiple joint projects so that any failures are counterbalanced by
successes
Agree upon a monitoring process. Share information to build trust and keep
projects on target. Monitor customer responses and service complaints.
Be flexible in terms of willingness to renegotiate the relationship in terms of
environmental changes and new opportunities.
Agree upon an exist strategy for when the partners' objectives are achieved or the
alliance is judged a failure
Summary
The formation of different alliances is a recent trend in India with globalization and
liberalization. Several strategic alliances are formed by Indian Companies to obtain
technology/and or manufacturing capabilities, to obtain access to specific markets, to reduce
financial risk, to reduce political risk and to achieve or ensure competitive advantage. Several
typologies of strategic alliances are available in business literature. One such classification is by
Yoshino and Rangan- non-competitive, competitive, precompetitive and procompetitive. The
types of alliances range from mutual consortia to joint ventures, licensing arrangements and
value chain partnerships. Marketing tie ups in India include the following: Operations handling,
Joint ventures, Technology licensing, Manufacturing, MOUs, Services, supply and setting up
new business. Managing alliances starts with defining purpose and making suitable arrangements
for venturing.
Self -Assessment Questions
1. What do you understand by strategic alliances?
2. Why are strategic alliances necessary?
3. What are the forms of strategic alliances?
4. Illustrate and explain the continuum of Alliances
5. What are joint ventures? When are they formed?
6. With examples of Indian companies, discuss the significance of joint ventures
7. Examine the advantages and disadvantages of join ventures.
8. Why do joint ventures fail? Explain with examples.
9. In the globalization era, which form of alliances work?
10. How do you make strategic alliances successful?
Activities
1. Describe the long-term strategy of the firm or institution in which you are working or
studying. Identify the alliances needed to make the institution strong in the globalized set
up.
2. Identify the companies that have entered into mutual service consortia, joint venture
licensing agreement and value chain partnerships in India. Visit a library, search dailies
and business, weeklies and identify some of them and prepare a list.
References
1. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books,
New Delhi.
2. Veerendra Kumar (2005), Business Policy and Strategic Analysis, Kalyani Publishers,
Ludhiana
3. Azar Kazmi (2003), Business Policy and Strategic management, Tata Mc Graw Hill,
New Delhi
4. Thomas L. Wheelen and Hunger J. David (2002) Concepts in Strategic Management
and Business Policy, Pearson Education Asia, New Delhi
Unit III
11 Diversification strategies
ON
S
S
E
L
LESSON OUTLINE
Introduction
Why diversify?
Types of diversification
Advantages and disadvantages of
Diversification
Diversifications in India
Planned Diversification
o Assessment of industry
attractiveness
o Assessment of degree of mesh
o Combination of attractiveness
And mesh
When to diversify
When not diversify
Summary
Self assessment questions
Activities
References
After reading this lesson you should be
able to
Understand
the
concept
of
diversification
Describe the types, merits and demerits
of diversification
Know how to assess systematically for
diversification
Know when to diversify and not
diversify
Introduction
Diversification is one of the grand strategies, which basically is a growth strategy. Basically
diversification involves a substantial change the business definition in terms of product range,
customers or alternative technologies. Diversification strategies have been adopted a number of
business groups and individual companies both in the public and private sectors. In the 1960s
and 1970s, the trend was to diversify so as not to be dependent on any single industry, but the
1980s saw a general reversal of that thinking. Overall, diversification strategies are becoming
less popular as organizations are finding it more difficult to manage diverse business activities.
Diversification is now on the retreat. Michael Porter of the Harvard Business School says,
"Management fount [it] couldn't manage the beast." Hence, businesses are selling or closing,
less profitable divisions in order to focus on core business.
Why diversify?
Organizations diversify due to the following reasons. Some of the common reasons are as
follows.
Synergy Synergy is cited in the most common cause of diversification. Synergy occurs when
two or more activities produce their combined effect greater than the sum of its parts i.e., 2 + 2 =
More than 4.
o Related diversification produces synergies rooted in production technology. With the
additional technical facilities, a by-product or joint product may be produced.
o Both related and unrelated enable the companies to sell the products with same
distribution network and advertisement facilities. The advertisement of one product
spontaneously advertises other products with enhanced brand loyalty. This is marketing
synergy.
o Synergetic effect can also be noticed in financial operations, when the positive cash flow
of one business utilized in other business helps to generate more positive cash flows.
Spreading of Risk. Diversification helps to avoid over dependence on one product/market. It
spreads the risk associated with one product line or few products.
Better opportunities. With diversification, company can exploit the better opportunities in new
product line. Every product has it own product life cycle. To gain better market share, company
has to either differentiate or diversify.
Better utilization of Resources. With diversification, company can better use hitherto
unexploited resources like finance, market channels, production facilities, technological
capabilities, managerial knowledge, etc. The idle retained earnings could be utilized to produce
new products. Their marketing may not be a problem because the same dealers will sell the new
products. Same production facilities and technology can be utilized sometimes adding more
capacity to it.
Competitive Strategy. Diversification is a good competitive strategy. A company may enter
new product lines of business to gain a competitive edge over the competitors or discourage
them by entering before their arrival.
Market Dominance. Diversification take place to exploit tremendous market opportunities in
home as well as in foreign countries with the objective of gaining market dominance.
Finnish producer Nokia leads the world in sales of cell-phone handsets. When
the telecom industry crashed in 2000. Chairman Jorma Ollila invested heavily
to turn Nokia into a major mobile phone software player. Under his
leadership, the organization licensed its interface software to cell-phone
competitors. It also invested heavily in billing and messaging service
software. The result: millions of customers using Nokia and other software
can now use their handsets to get e-mail, send photos, and download games.
Research organization IDC forecasts that global mobile-data business will
increase almost 47% in 2003 to $29.5 billion. Diversifying into mobile phone
software helped keep Nokia on top of a troubled industry.
Source: "The Comeback kids" "Business week, September 29, 2003 p.
122
Types of diversification
There are three general types of diversification strategies: concentric horizontal, and
conglomerate.
Concentric Diversification
Under concentric diversification new products and services are added to the line with the
condition that these products and services are related to their existing products/services carried
by the organization. For concentric diversification it becomes necessary that the products or
services that ate added must be within the framework of the know how and experience in
technology, product line, distribution channels or customer base of the organization.
When the industry grows, the organization will get strength where concentric diversification
becomes an important strategy for its survival and growth. A study of 460 corporations
accounting for two/thirds of the US corporate industrial assets concluded, "that diversification
that has led to relatively rapid rates of corporate growth has been to markets that are related to
the entering organization's original market. Concentric diversification has been successfully
practiced by a large number of organizations in India. For instance "Amul" has diversified in
chocolates, Ice creams, Butter, Ghee etc. On the same pattern, "Milk Food" has diversified.
Similarly, Honda has diversified into to Motor Cycles, Cars etc. In conclusion, it may be stated
that concentric diversification has been quite successful in the past; it is expected to be
successful in future also.
Horizontal Diversification
Where an organization adds unrelated products and services for existing customers, this is called
horizontal diversification. The strategy is comparatively less risky because the customers are
known. The organization is fully acquainted with their consumers' preference and their
expectations about the quality and price of the goods and services.
Horizontal diversification can be accomplished by acquiring the shareholding of the competitor,
by the purchase of the assets or by pooling of the interests of two organizations. .Horizontal
diversification seeks to eliminate competitors.
In our country a T.V. manufacturing company Uptron has created a new division for spreading
computer education in the country.It is a combination of hardware and software.
Conglomerate Diversification
Conglomerate diversification is a growth strategy in which new products and services are added
which are significantly different from the organization's present product and services.
Conglomerate diversification is effected in the hope that the addition of new products and
services may bring about some turnaround by way of conversion of losses into profits.
Mechanics for adopting conglomerate diversification has been summarized as follows:
1. Supporting some divisions with cash flow from other divisions during the period
of development or temporary difficulty.
2. Using the profits of one division to cover the expenses of another division without
payment of taxes from the first division.
3. Encouraging growth for its own sake or to satisfy the values and ambitions of
management or the owners.
4. Taking advantage of unusually attractive growth opportunities.
5. Distributing risk by serving several different markets.
6. Improving overall profitability and flexibility of the organization by moving into
industries that have better economic prospects than those of the acquiring
organizations.
7. Gaining better access to capital markets and better stability or growth in the
earnings.
8. Increasing the price of an origination's stock
9. Reaping the benefits of synergy. Synergy results from "a conglomerate merger
when the combined organization is more profitable than the two organizations
operating independently.
The scheme of Conglomerate Diversification should be implemented with caution and patience.
It will create big business and will bring in turn, the problems of management associated with
big businesses. Big businesses involve greater risk in the event of abnormal economic situation
like recession or stagflation. In the light of the above, the success of the conglomerate
diversification will depend on the following factors:
1. A clear definition of organizational objectives.
2. A determination of the organization's ability to diversify, which includes an analysis of
its present operations (internal organizational analysis) and resources available for
diversification.
3. Establishment of specific criteria for purchasing other organizations
4. A comprehensive search for organizations and their evaluation against the criteria.
Examples of companies that have diversified into related business concentric diversification
GILLETTE:
o Blades and razors
o Toiletries (Right Guard, Foamy, Dry Idea, Soft & Dry , White Rain)
o Oral-B toothbrushes
o Braun shavers, coffeemakers, alarm clocks, mixers, hair dryers, and electric
toothbrushes
o Duracell batteries.
JOHNSON & JOHNSON
o Baby products (powder, shampoo, oil, lotion)
o Band-Aids and other first-aid products
o Women's health and personal care products (Stay free, Carefree, Sure & Natural)
o Neutrogena and Aveeno skin care products
o Nonprescription drugs (Tylenol, Motrin, pepcid AC, Mylanta, Monistat)
o Prescription drugs
o Prosthetic and other medical devices
o Surgical and hospital products
o Accuvue contact lenses
PEPSICO
o Soft drinks (Pepsi, Diet Pepsi, Pepsi One, Mountain Dew, Mug, Slice)
o Fruit juices (Tropicana and Dole)
o Sports drinks (Gatorade)
o Other beverages (Aquafina bottled water, SoBe, Lipton ready-to-drink tea,
Frappucino-in partnership with Starbucks, international sales of 7UP)
o Snacks foods (Fritos, Lay's Ruffles, Doritos, Tostitos, Santitas, Smart Food, Rold
Gold pretzels, Chee-tos, Grandma's cookies, Sun Chips, Cracker jack, Frito-Lay
dips and salsas)
o Cereals, rice, and breakfast products (Quaker oatmeal, Cap'n Crunch, Life, Rice-
A-Roni, Quaker rice cakes, Aunt Jemina mixes and syrups, Quaker grits)
Examples of companies that have diversified into unrelated business.
THE WALT DISNEY COMPANY
o Theme parks
o Disney Cruise Line
o Resort properties
o Move, video, and theatrical productions (for both children and adults)
o Television broadcasting (ABC, Disney Channel, Toon Disney, Classic Sports,
Network, EPSN and EPSN2, E!, Lifetime, and A&E networks)
o Radio broadcasting (Disney Radio)
o Musical recordings and sales of animation art
o Anaheim Angles major league baseball franchise (25 percent ownership)
o Books and magazine publishing
o Interactive software and Internet sites
o The Disney Store retail shops.
THE TVS GROUP
o Auto & auto parts
o Coach body building
o Transport
o Fasteners
o Brake linings & clutch facings
o A citation systems for commercial vehicles
o Hire purchase
o Wheel structure & parts
o Foundation brakes
o Two wheelers
o Automobile electrical parts
o Tyres & tubes.
Advantages and disadvantages of diversification
A company planning to diversification should define its business, conduct SWOT analysis, Risk
analysis, competition and Gap analysis and also assess the advantages and disadvantages of
diversification. The following Table11-1 briefly outlines the advantages and disadvantages of
different types of diversification.
Table 11-1 Advantages and disadvantages of diversification strategies
Diversification strategy
Advantages
Disadvantages
Horizontal integration
Eliminates competitors.
Less flexibility.
Access to new markets.
Increasing risk and
commitment.
Concentric diversification
Synergy by sharing skills
Reduction is flexibility.
and resources.
Additional investment.
Economics of scale and tax
Untried markets and
benefits.
technologies.
Conglomerate
Better management and
Lack of concentration.
diversification
high ROI.
Risks of managing entirely
Reducing risk by spreading
new business.
business.
Diversifications in India
Diversification strategy is widely adopted in India. Some examples are given here.
o A public sector giant, Oil India Ltd. (OIL), which had been operating in oil exploration
and production, diversified into related areas, such as, gas cracking.
o The reputed multinational affiliate, ITC Ltd. has diversified into hotels, papers, agri-
business packaging, and priming from its original cigarette business in response to
national objectives and priorities.
o Smaller companies, like, Blowplast in the moulded luggage industry is in plastic seating
systems, and marketing of branded toys.
o Unitech in civil engineering is into steel-making, exports, consumer electronics, power
transmission, and real estate.
o The service sector has not been left untouched by the motivation to diversify.
o LIC in the insurance business is also in a related area of mutual funds.
o Banks, like SBI and Canara Bank too have moved from traditional banking to merchant
banking and mutual funds.
o Peerless General Finance & Investment Co, one of the country's larger non-banking
investment companies, has moved into related areas of finance, adopting a defensive
diversification strategy to generate more resources to contain rising establishment costs.
Planned diversification
The one best way of diversifying an organization is to carry the work through systematic
planning. Though many organizations have diversified without any systematic planning, the
chances for a successful outcome are considerably increased when diversification decision is
organic part of the comprehensive strategic planning.
In this process, it is preferable to constitute a tasks force, which is entrusted with the total work
of diversification because it requires separate emphasis on some aspects at least for some period
of time. When this task force is created, it can move in the direction of thinking about possible
diversification. The work of the task force becomes easier if it has the full support of top
management. The role of this task force may be to collect and analyze relevant information,
which helps in arriving at diversification decision.
The basic problem in a diversification strategy is to identify the suitable industry sector, which
meets basic criteria of diversification. Figure 11-1 presents a process thorough which
identification of diversification opportunities becomes systematic. The process provides the
facility for assessing and measuring each business sector against a number of different criteria so
that judgment can be reached on two separate factors .
o Attractiveness of the sector as an investment in its own right and
o The extent to which the qualities required for success in the sector match the own
strengths of the organization.
There are basically three major measurements involved in this process.
o Measurements of industry attractiveness,
o Measurement of mesh, and
Combination of attractiveness and mesh to arrive at some strategic alternatives
Figure11-1 Process for identifying diversification opportunities
Organizational objectives and
Industry
strengths
Sel ect sect
or meeti
ng broad
Define broad initial
initi al criteri a
criteria
Place s ector on
attra ctivenes s/mesh
matrix
Assess sector
As sess
attractiveness
m esh
(i) Assessment of industry Attractiveness
Define alternative
Select industry sector
At the initial stage, various sectors of the industry can be taken for identifying diversification
strategies
for entry
opportunities. Such criteria may be in the form of:
(i)
Acceptable product groups or functions,
(ii)
Minimum sales volume within a specified period of time, say five
years or so,
(iii)
Minimum projected growth rate in the market
(iv)
Minimum profitability criteria,
(v)
Maximum and minimum investment required in the project, and so
on.
These criteria may be used in weeding out the industry sectors which cannot be considered. The
assessment of the attractiveness of a sector as an area for potential investment is based on its
profitability and maturity. The profitability of a sector is measured in terms of return on
investment (ROI) of the principal companies within the sector. The profitability ratio may be
assigned scores. Scoring pattern may differ from organization to organization depending on
manager's preference and interpretation. For example, following scores may be given to various
levels of profitability:
Business Policy: Strategic Management
ROI per cent
Scores
Less than 10
2
10 -15
4
15-20
6
20-25
8
25-30
10
Above 30
12
The maturity of industry is taken on the basis of level of growth and future potential.
Thus industry sectors can be classified into growing, maturing, ageing. In growing sector, the
rate of growth is more than the rate of gross national product; in maturing industry, the rate of
growth is almost similar to gross national product; while in ageing sector, the rate of growth is
lower than the rate of gross national product. These stages can further be classified on the basis
of time taken by a sector to move from one stage to another and scores can be assigned in the
following way.
Maturity level
Scores
Ageing
0
Late mature
2
Early mature
4
Late growth
6
Growth
8
Early growth
10
Adding the scores for profitability to the sector maturity arrives at the scoring for over all
attractiveness of each sector.
(ii) Assessment of Degree Mesh
Degree of mesh suggests the extent to which a particular organization can match the
requirements of an industry sector. It is assess on the basis of organizational strengths and
critical success factors (CSFs) required for success in the industry sector. CSFs
are
those
characteristics, conditions, or variables that when properly sustained, maintained, or managed
can have a significant impact on the success of an organization competing in a particular
industry. From the structure and maturity of sector, certain general conclusions can be drawn on
CSFs and its investment characteristics.
1. In growth sector, high market share at the time of entry is not crucial because
opportunities exist for rationalization and consolidation. Further investment is
normally needed.
2. In mature sector, high market share at the time of entry is critical; cost cutting and
control is important and further investment is generally not appropriate.
3. In ageing sector, a high market share at the time of entry is critical. Little or no
further investment is desirable.
Taking both the factors-organizational strengths and CSFs, mesh matrix can be constructed as
depicted in Figure 11-2.
Importance of CSFs
hs
Excellent
High
Medium
Critical High Medium Low
l strengt
Low
(4)
(3)
(2)
(1)
Figure11-2 Mesh Matrix
(4)
16
12
8
4
(3)
12
9
6
3
z
a
t
i
ona
ni
(2)
8
6
4
2
High scorgae in the matrix will increase the upside
(1)
4
3
2
1
potential Orof investment because
o the organization can add something to the operation of the new business, and
o will decrease the downside risk because the management will have experience of the sort
of problems that are likely to occur.
(iii)
Combination of Attractiveness and Mesh
Having rated each sector's attractiveness and mesh, we can combine both to form another matrix.
Because two measures are independent of each other, we can expect some sectors to score high
on attractiveness but low on mesh whereas other sectors score low on attractiveness and high on
mesh. The attractiveness/mesh matrix has been presented in Figure 11-3 below
According to this matrix, best diversification opportunities are those that score high on both
characteristics having score of 9; least proffered is with low degree of both characteristics having
score of 1. The selection of sectors from elsewhere depends on the strategy the organization
selects.
o If it wishes to go for growth and earnings, pays low regard to the relationship which a
sector has with the organizational strengths may select the alternatives in order of sectors
failing in 6,3,8,5,7 and 4 in that preference order. In such a case, the rate of growth and
profitability may be high but the risk involved is also high.
o If the organization wishes to minimize mesh risk and pursues business in those sectors
which mesh high with its own strengths, it would select sectors in the order of 8,7,6,5,4,3
and 2. These strategies are low-risk ones for the organization.
o If the organization wishes to select business on the basis of both measures, it would select
in the order of 9,6,8(6 and 8 equal) 5.
o In the remaining sector, the preference would be in the order of 3,7 (equal) and 2,4
(equal). The strategies in the third alternatives would be balanced ones.
Degree of mesh
s
s
High (3)
Medium (2) Low (1)
ne
High (3)
9
6
3
Medium (2)
8
5
2
a
t
t
r
a
c
t
i
ve
7
4
1
e
e
of
Low (1)
gr
De
Figure 11-3 Attractiveness/mesh matrix
When to diversify
Diversification merits strong consideration whenever a single-business company is faced with
diminishing market opportunities and stagnating sales in its principal business. But there are
four other instances that signal the for diversifying:
o When it can expand into industries whose technologies and products complement its
present business.
o When it can leverage existing competencies and capabilities by expanding into
businesses where these same resource strengths are valuable competitive assets.
o When diversifying into closely related businesses open new avenues for reducing
costs.
o When it has a powerful and well-known brand name that can be transferred to the
products of other businesses.
When not diversify?
All the organizations cannot think of diversification as a strategy. Organizations do not diversify
under the following conditions.
o When they are small and cannot afford to try
o When they have no power to sustain
o When they anticipate some pitfalls
o When they are the first to bell the cat in that area.
o When on checking they find their functional skills are insufficient to diversify
o When they don't want to gamble with public investments
o When they do not have attractive tax benefits after diversification
Summary
Pursuing a single-or dominant-business may be preferable to seeking a more diversified business
strategy, unless a corporation can develop competitive advantage. The primary reasons for
diversification are value creation through economies of scope, financial economies, or market
power; some actions are taken because of government policy, performance problems,
uncertainties about future cash flow, or managerial motivations (e.g. to increase compensation).
Managerial motives to diversify can lead to over diversification. On the other hand, managers
can also be good stewards of the firm's assets.
The level of a firm's diversification is a function of the incentives the firm has to diversify, its
resources, and the managerial movies to diversity. Related diversification can create value by
sharing activities of transferring core competencies. Sharing activities usually involves sharing
tangible resources between businesses. Transferring core competencies involves transferring the
core competencies developed in one business to another business. Efficiently allocating
resources or restructuring a target firm's assets and placing them under rigorous financial
controls accomplish successful unrelated diversification.
Self -assessment questions
1. What do you understand by diversification? Is diversification now popular?
2. What motivates a company to diversify?
3. What are the major considerations in diversification?
4. What are the advantages and advantages of various diversification strategies?
5. Explain why unrelated diversification is often said to be riskier than related
diversification.
6. What advice would you like to give to a small business owner who is planning to
diversify his business?
7. What are the major areas of synergy in related diversification? Is it possible to
develop any synergistic effects in case of unrelated diversification? If yes, how?
8. What step as an entrepreneur would you like to take before, actually embarking
upon diversification scheme? Discuss the importance of planned diversification
in today's business.
9. Critically examine the corporate diversification activity in India.
10. What suggestions you would like to make so that diversification activity in India
proceeds on a sound basis?
Activities
1) Study the product/service portfolio of ITC group. ITC is considered to be one of the
most diversified firms in India. List its major products and services.
2) Find out from different published sources and the website of Shri Ram group of
companies or contact its local office in your place and identify its diversification
activity. Record it carefully in writing.
References
1
Thompson & Strickland (2003), Strategic Management: Concepts and Cases, Tata
McGraw Hill: New Delhi
2
Azhar Kazmi (2003), Business Policy and Strategic Management, Tata McGraw
Hill, New Delhi
3
P.K. Ghosh (2001), Strategic Planning and Management, Sultan Chand & Sons,
New Delhi
4
William F. Glueck(1980), Business Policy and Strategic Management, McGraw
Hill, New York
5
Michael A. Hitt (2001), R. Duane Ireland and Robert E.
Hoskisson, Strategic Management Competitiveness and Globalization, South
western
6
Fred David (2003), Strategic Management Concepts and Cases, Pearson
Education , New Delhi
.
Unit III
N
O
S
12 Turnaround strategies &
S
E Corporate restructuring
L
LESSON OUTLINE
Introduction
Turnaround defined
Signals of turnaround
Turnaround process models
Turnaround management
Corporate restructuring
Forms of restructuring
Types of restructuring
Process and barriers
Summary
Self Assessment questions
Activities
References
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Define turnaround strategy
Identify the signals of corporate sickness
Know the process models of turnaround
and analyze turnaround management
issues
Understand the forms, types, process and
barriers of corporate restructuring
Introduction
Turn round strategy is often necessitated during recession times in an industry or in the economy
as a whole. It is aimed at halting the present declining trend in performance while improving the
long run efficiency of operation.
Turnaround defined
Turnaround derives its name from the action involved that is reversing a negative trend.
Turnaround management refers to the measures, which reverse the negative trends in the
performance indicators of the company. In other words, turnaround management refers to the
management measures which turn a sick-company back to a be healthy one or those measures
which reverse the deteriorating trends of the performance indicators such as falling market share,
sales (in constant rupees), and profitability and worsening debt-equity ratio.
Examples of turn around
During 1970-80 IBM dominated the computer industry world wide particularly the PCS. During
early 1990s computer sales were falling. HP, Dell, Compaq, Gateway etc entered the market PC
clones in IBM style were offered cheaply by them. Industry experts called IBM "bureaucratic
dinosaur" and profits kept on falling in 1992-93. The BOD hired a new CEO, Louis Gerstner to
lead a `Corporate turn around' who leads the `BIG BLUE' strategy following the rigid dress
code. The work force was reduced to 40%. Emphasis was on quicker decision making and
strong customer orientation. The CEO spoke to atleast one customer a day. A new mainframe
was released once in a year. PC business increased its market share to 8.9% in 1996. Stock price
moved from $ 40 in 1990 to $ 140 in 1996. Revenue increased by 40% and profits rose by 3.6%.
IBM is still in the process of turning around.
Gram co, a subsidiary of UK based EMI UK was successful in the early seventies with brand
name HU. The cassette boom hit the company and EMI UK reduced its equity from 38.9% to
20%. RPG was given an equity participation of 16%, financial institutions 26%. Udayam Bose
was appointed as MD to run on profit sharing that is from credit capital Finance Corporation.
Grams co expanded to consumer electronics & cassette making and diversified into domestic
kitchen equipment, furniture, pumps and automotives. It planned to revive its packaging section
also. However the turnaround is a failure
Signals of turnaround
We need to examine whether companies suddenly turn sick or qualify as potential candidates for
turnaround. Sometimes the companies themselves may not be able to identify that they are
turning into red. If recognized early prevention can be tried instead of curing the problem.
Though the factors leading to industry varies from one firm to the other, there are some common
signals of sickness which herald on the onset of sickness. Companies becoming sick would
exhibit one or more of the following characteristics.
1 Decreasing market share This is the most significant symptom of a major sickness. A
company, which is losing its market share to competition, needs to sit up and take careful
note. Regular monitoring of market share helps companies to keep a tab on their
performance in the market vis-a-vis their competitors. Any indication of declining
market share should trigger-off immediate corrective action.
2 Decreasing constant rupee sales Sales figures, to be meaningful, should be adjusted for
inflation. If constant rupees sales figures are showing a declining trend, then this is a
danger signal to watch out.
3 Decreasing profitability Profit figures are a good indication of a company's health. Care
must be taken to interpret the profit figures correctly, so as to avoid any misjudgments.
Decreasing profitability can show up as smaller profits in absolute terms or lower profits
per rupee of sale or decreasing return on investment or smaller profit margins.
4 Increasing dependence on debt A company overly reliant on debts soon gets into a tight
corner with very few options left. A substantial rise in the amount of debt, a lopsided
debt to equity ratio and a lowered corporate credit rating may cause banks and other
financial institutions to apply restrictions and become reluctant to lend more. Once
financial institutions are hesitant to lend money, the company's rating on the stock
market also slides and it becomes very difficult for the company to raise funds from the
public too.
5 Restricted dividend policies Dividends frequently missed or restricted dividends signal
danger. Often such companies may have earlier paid substantially higher proportion of
earnings as dividends ? when in fact they should have been reinvesting in the business.
Current inability to pay dividends in an indication of the gravity of the situation.
6 Failure to reinvest sufficiently in the business: For a company to stay competitive and
keep on the fast growth track, it is essential to reinvest adequate amounts in plant,
equipment and maintenance, when a business is growing, the combinations of new
investments and reinvestments often warrants borrowing. Companies, which fail to
recognize this fact and try to finance growth with only their internal funds, are applying
brakes in the path of growth.
7 Diversification at the expense of the core business It is a well-observed fact that once
companies reach a particular level of maturity in the existing business they start looking
for diversifications. Often this is done at the cost of the core business, which then starts
to deteriorate and decline. Diversification in new ventures should be sought as a
supplement and not as a substitute for the primary core business.
8 Lack of planning In many companies, particularly those built by individual
entrepreneurs, the concept of planning is generally lacking. This can often result in
major setbacks as limited thought or planning go into the actions and their consequences.
9 Inflexible chief executives A chief executive who is unwilling to listen to fresh ideas
from others is a signal of impending bad news. Even if the CEO recognizes the danger
signals, his unwillingness to accept any proposal from his subordinates further blocks the
path towards recovery.
10 Management succession problems When nearly all the top managers are in their mid-
fifties there may be a serious vacuum at the second line of command. As these older
managers retire or leave because of perception of decreasing opportunities there is bound
to be serious management crisis.
11 Unquestioning board of directors: Directors who have family, social or business ties
with the chief executive or have served every long on the board, may no longer be
objective in their judgment. Thus these directors serve limited purpose in terms of
questioning or cautioning the CEO about his actions.
12 A Management team unwilling to learn from its competitors: Companies in decline
often adopt a closed attitude and are not willing to learn anything from their competitors.
Companies, which have survived tough competitive times continuously, analyze their
competitors' moves.
13 Legal requirements for turnaround: Turnaround is applicable to sick industrial units.
An organization is sick when the accumulated losses at the end of a financial year exceed
50% of the peak net worth attained during the preceding five years. In order to an Indian
company to quality for turnaround, it has to be first declared as a sick company. This
declaration is required under the Sick industrial Companies (Special Provisions) Act
(SICA), 1985 which provides for the Board for industrial and Financial Reconstruction
(BIFR) to act as the `corporate doctor' whenever companies fall sick. Though this act
was initially envisaged to be applicable to private sector units only, as a part of
restructuring of public sector enterprises, the SICA was amended to bring Central and
State public sector units under its purview.
Turn around process models
Hoffer has identified choice of strategies that include changes in management, organizational
process, improved financial controls, growth via acquisition and new financial strategies in
addition to the strategic and operating turnaround suggested by him. Figure12-1 below presents
the causes of decline and the appropriate strategies required.
Poor Management
o New Management
o Decentralization & change
o New Management
Inadequate financial
o Improved financial control
control
o Decentralization
o Cost reduction
High cost structure
o Product Market
Lack of marketing effort
Improved marketing
o Product market
Competitive weakness
o Cost reduction
o Improved marketing
o Asset reduction
o Growth via
a
Big projects acquisitions
o Asset Reduction
o Asset reduction
Financial policy
o New financial strategy
Figure12-1 Causes of decline and appropriate strategies
Grinyer and spender have suggested a process of turnaround shown in Figure 12-2. As soon as
the parameters of corporate performance are indicative of unsatisfactory corporate performance,
it becomes necessary to immediately tighten the controls within the organization. Effective
controls have a positive impact on cost-reduction, that is, profit improvement and also on the net
cash-flows of the firm. But this tightening of the financial and administrative control do not
guarantee a stable turnaround process. In fact-controls coupled with poor quality image of the
product may hasten the process of corporate failure. So while the controls are being affected, it
is necessary that the strategic posture of the company may also be overhauled. This involves
major changes in the product-mix, customer-mix and the patterns of resources deployment in the
company. These two stages of change further need to be complemented by changes in top
management and may organizational processes. If these changes produce early results which are
satisfactory, then for long-term effects it is necessary to reinforce these changes.
Reinforcement and
1f satisfactory
elaboration of recipe
Adoption
Development
Corporate
of recipe
of strategy
Implementation
performance
Stage 3
Stage 2
Adopt new
Stage 1
recipe, may
Reconstruct
Tighten
be with new
or develop
1f Satisfactory
controls
senior mgt
new strategy
Figure 12-2 A Model of Turnaround Process
Source : O.H. Grinyer and I.C Spender , "Recipes, Crises and Adaptation in Mature Business",
International Studies of Management and Organization. Vol. IX No.3
Turnaround process can be summarized as a five-step change process as shown in Figure 12-3
Step -1 Assessment of current problems
Step -2 Analyzing the situation
Step ?3 Implementing an emergency action plan
Step ?4 Restructuring the business
Step ?5 Returning to normal
Figure 12-3: Turnaround as change process model
Turnaround Management
The focus of turn around is on reduction in assets and costs and increases in revenues and profits.
This is similar to a weight reduction direct where two basic issues are :contraction and
consolidation.
Contraction ? "Stop the bleeding" attempt. Cutting back size and costs. It involves harsh
decisions like the following.
o Rid of unprofitable products, pursuing workforce, trimming distribution outlets
and seeking methods to make the organization more efficient
o Divestment, which involves selling the business and setting up a new corporation.
This strategy improves the financial performance of a company and is opted when
fit well to reach the organization's objectives.
o Liquidation is termination of assets and selling off. This is less preferred since it
involves losses to stockholders and employees. But in a multi- business firm the
impact of liquidation of one business may not be much.
Consolidation ? A programme to stabilize a leaner corporation. Reducing overheads to make the
firm cost effective
Another way of carrying turnaround may be as follows.
Stage One ? Cost Cutting
A cost cutting program should be preceded by careful thought and analysis. The possibilities
are that some departments or projects may need additional funding, while others need modest
cuts, and still others need drastic cuts or need to be eliminated altogether. If you consider cost
cutting as part of your strategy implantation in a case, be sure to specify exactly how it would be
implemented across the organization. Support why the cost cutting should take the form you
propose.
Stage Two-Re-engineering
Reengineering involves casting aside old assumptions about how an organization's business
processes should be done and starting form scratch to design more efficient processes. This may
cut costs. This is easiest to see in a manufacturing process, where each step of assembly is
scrutinized for improvement or elimination. Be sure to recommend wise use of reengineering. It
is better to abandon processes that are not efficient.
Stage Three -Downsizing
Downsizing means laying-off people. It is a good way to cut costs quickly. But unless
downsizing is tied to a rational strategy, problems can result. Cutting staff without changing the
amount and type of work may result in costs cuts, but product quality and customer service may
suffer, if they do, the organization's performance measures will suffer. The downsizing plan you
recommend should fit logically with the strategy proposed.
Measures
The ten elements of turnaround strategy as identified by Pradip N. Khandwalla are as follows.
1.
Changes in the top management
2.
Initial credibility-building actions
3.
Neutralizing external pressures
4.
Initial control
5.
Identifying quick payoff activities
6.
Quick cost reductions
7.
Revenue generation
8.
Asset liquidation for generating cash
9.
Mobilization of the organizations
10.
Better internal coordination
These ten elements are identified based on the case studies of turnaround of 10 companies in
India.The following are the factors that are commonly employed in turnaround management.
Management Factor Managerial inefficiency is the root cause of the problems in a number of
cases. Therefore, improvement of the management becomes a prerequisite. For carrying out the
turnaround management, a new efficient chief executive officer is usually appointed. The new
CEO should streamline things and in many cases will have to change the organizational culture.
This was true of several successful cases of turnaround management such as E.I.D Parry and
Travancore Cochin Chemicals (TCC).
Human Resource Factor In many of the companies, which are in very bad shape, the human
resource is redundant, demoralized and surplus. The surplus manpower should be got rid of,
morale should be restored and the quality of the manpower should be improved through training
and recruitment of competent people for the key positions, if needed.
Production Facilities Modernization and other improvements of plant, equipments etc., are also
often an important part of the turnaround management. Such measures helps to achieve
uninterrupted production flow and better capacity utilization, quality improvement, and reduction
in wastage, increase in productivity and cost reduction. Proper management of the plant and
equipments like preventive maintenance etc., have also been found to be absent in several sick
units.
Finance Management Arranging additional finance, financial discipline, financial restructuring
(described under Business Reorganization) etc., are usually an inevitable part of the turnaround
management.
Product Mix Modification A number of turnaround management cases involve modification of
the product mix. Unprofitable products may have to be dropped and new products may have to
be introduced. Sometimes current products require quality improvement or some other
modification. In some cases new models may have to be introduced.
Marketing Strategy Absence of a proper marketing strategy is a major reason for the problems
of several companies. An appropriate marketing strategy could help improve such cases. Even
product mix modification may form a part of such strategy. Marketing strategy may also involve
market modification like entering new markets or market segments, withdrawing from certain
markets/segments, developing new customers etc.
Miscellaneous Turnaround management may also involve several measures like liquidation of
assets which are not in use, closing down of some divisions or lines of business, restraints on
emoluments of employees, better management of procurement of raw materials etc.
Corporate Restructuring
Corporate restructuring may involve expansion or contraction of the portfolio or changes in the
nature and volume of business. Change in the business conditions may necessitate restructuring
of the business.
Restructuring strategies involve divesting some businesses and acquiring other so as to put a
whole new face on the company's business line up. Performing radical surgery on the group of
businesses a company is in becomes an appealing strategy alternative when a diversified
company's financial performance is being squeezed or eroded by:
o Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive
industries.
o Too many competitively weak businesses.
o Ongoing declines in the market shares of one or more major business units that are falling
prey to more market-savvy competitors.
o An excessive debt burden with interest costs that eat deeply into profitability.
o Ill-chosen acquisitions that haven't lived up to expectations.
Over the past decade corporate restructuring has become a popular strategy at many diversified
companies, especially those that had diversified broadly into many different industries and lines
of business.
One struggling diversified company over a two-year period divested four business units,
closed down the operations of four others, and added 25 new lines of business units,
closed down the operations of four others and added 25 new lines of business to its
portfolio (16 through acquisition and 9 through internal start-up).
During Jack Welch's first four years as CEO of General Electrical (GE), assets: these
divestitures, coupled with several important acquisitions, provided GE with 14 major
business divisions and led to Welch's challenges to the managers of GE's divisions to
become number one or number two in their industry. Ten years after Welch became
CEO, GE was a different company, having divested operations worth $9 billion, made
new acquisitions totaling $ 24 billion, and cut its workforce by 100,00 people. Then,
during the 1990-2001 period, GE continued to reshuffle its business lineup, acquiring
over 600 new companies including 108 in 1998 and 64 during a 90-day period in 1999.
Most of the new acquisitions were in Europe, Asia, and Latin America and were aimed at
transforming GE into truly global enterprise.
Forms of corporate restructuring
The important forms of restructuring are:
o Mergers & Acquisitions
o Tender Offers
o Joint Ventures
o Divestitures
o Spin-Offs
o Corporate Control
o Changes in Ownership Structure
o Exchange Offers
o Share Repurchases
o Leveraged Buy-outs
1. Mergers and Acquisitions
An organization can expand through mergers and acquisitions. In a merger a company joins with
the other company to form a new organization Acquisitions occur between firms in the same
basic industry. For example Nestle acquired Richardson Vicks (both in Consumer Products).
The acquiring firm not only obtains new product and markets but also confronts legal problems,
structural deficiencies and diverse values.
2. Tender offers
Alternatively a public Tender Offer may be made to the shareholders for purchase of shares.
These are easy only when the shareholding by the management and directors is comparatively
very low. In many Indian companies such shareholding is comparatively very low and, they are
easily vulnerable to hostile takeovers.
3. Joint ventures
Joint ventures occur when an independent firm is created by at least two other firms. In an era of
globalization, joint ventures have proved to be an invaluable strategy for companies looking for
expansion opportunities globally.
4. Divestitures
Divestiture strategy involves the sale or liquidation of a portion of business, a major division
profit centre of SBU. Divestment is usually a part of restructuring plan and is adopted when an
unsuccessful turnaround has been attempted.
5. Spins offs
Spin - off refers to creation of new legal entity by the parent company. The existing shareholder
of the parent company will be allocated shares in the new entity on a prorata basis. Unlike in a
divestiture, the parent company does not receive any payment in case of a spin-off.
Spin-offs are resorted mostly for the purpose of better focus on different businesses. The new
entity can develop its own strategies for the development of its business. The original parent,
on the other hand, can now concentrate more on its core businesses. There are two variations
of Spin-off: Split-off and split-up.
In the case of a Split-off, a portion of existing shareholders receives stocks in a subsidiary in
exchange for parent company stock.
In the case of a Split-up, the entire firm is broken up in a series of spin-offs, so that the parent
ceases to exist.
5. Corporate Control
There are several means of consolidating and enhancing corporate control. "Premium buy-backs
represent the repurchase of a substantial stockholder's ownership interest at a premium above the
market price (called greenmail). Often in connection with such buy-back, a standstill agreement
is written. This represents a voluntary contract in which the stockholder agrees not to make
further attempts to take over the company in the future. When a standstill agreement is made
without a buy-back, the substantial stockholder is simply agrees not to increase his or her
ownership which presumably would put him or her in an effective control position.
Anti-takeover amendments seek to make an acquisition of the company more difficult or
expensive. These include (1) supermajority voting provisions requiring a high percentage (for
example, 80 percent) of stockholders to approve a merger, (2) staggered terms for directors
which can delay change of control for a number of years, and (3) golden parachutes which award
large termination payment to existing management if control of the firm is changed and
management is terminated.
The proxy contest is a dubious way by which the management of a company seeks to
undermine the control position of the `incumbents' or existing board of directors. This is sought
to be achieved by an outside group, referred to as dissidents or insurgents obtaining
representation on the board of defectors of the company.
6. Changes in Ownership Structure
The ownership structure of a firm may be changed due to various reasons. As a firm grows the
ownership structure may undergo change. For example, a sole proprietorship may be converted
into a partnership, when a partnership firm grows and when more ownership capital needs to be
brought in a private limited company may be formed.
7. Exchange Offers
Exchange offer may involve exchange of debt or preferred stock for common stock, or
conversely, of common stock for more senior claims. Several cases of turnaround involve
exchange of debt for equity. For example, the government loan to a public or joint sector unit
may be converted into equity. Such a measure helps to reduce the interest burden and reduces
cash outflow by loan repayment also.
8. Share Repurchase
Buy-back of shares by a company help tilt the management control. If the company buys back
shares from those who hold substantial shares it could tilt the control in favour of the promoters,
although the percentage of shares they hold does not increase. Buy back of shares can also guard
against take-overs to some extent. It can also help stabilize the share prices. A major objection
to the buy back of shares is that it provides scope for manipulation of share prices by the
management.
9. Buy-Outs
Management buy-out may involve the purchase of a division of a company or even a whole
company by a new entity formed specifically for this purpose. When such a purchase is financed
by large debt (i.e., highly leveraged) it is referred to as Leveraged buy-out(LBO). LBOs are very
risky because of the high interest burden and loan repayment obligation. A default in repayment
would aggravate the interest burden and cash flow problem. LBOs have landed many companies
is serious crisis.
Types of restructuring
1. Portfolio restructuring
2. Organizational restructuring
3. Functional restructuring
4. Financial restructuring
Portfolio restructuring
Portfolio restructuring refers to change in the portfolio of businesses of the company. This has
become widespread since the liberalization ushered in 1991. The increase in competition has
provoked many companies to divest businesses in which they are not competitive and to
concentrate on their core businesses in which they tend to grow by setting up new capacity
and/or by acquisition. The dismantling of the entry barriers (delicensing, derservation,
liberalization of policy towards foreign technology and capital participation, etc.) has opened up
enormous new opportunities for expanding the business.
Organizational Restructuring
Decentralization, delayering or flattering and regrouping of activities are important
organizational restructuring measures.
Changes in corporate strategy, such as portfolio
strategy, sometimes call for organizational restructuring. Often, structure follows strategy.
Increase or decrease in activity levels, expansion or contraction of portfolio or functions etc.
may cause modification of organizational structure.
Functional Restructuring
The AMA survey reveals that restructuring of corporate functions (marketing operations,
personnel and finance) has been very significant both in the public and private sectors.
1. Marketing Function: The survey results show that the revamping of the marketing
function meant the creating of a product management team, building up sales force,
restructuring distribution system, and creating marketing research cell.
2. Financial Function: As far as the modifying of the financial function was concerned the
emphasis was on improving the financial reporting system.
3. Operations . Restructuring of operations has been very significant. Re-engineering has
become very popular. Technological up gradation has been an important concern. The
acceptance of total quality management and the requirements of ISO 9000 certification
etc. have had significant influence on operational restructuring.
4. Personnel Function. Personnel function was found to receive high priority in
restructuring. The emphasis in both public and private sectors was on training and
succession planning. The private sector also gave the creation of appropriate rewards and
punishments for performance high priority. This was, however, not so in the case of the
public sector.
Process and barriers of restructuring
According to the American Management Association (AMA)survey, the common process
adopted by a majority of the responding units was decentralization of decision making.
Retraining and redeployment of staff was the second most important process of corporate
restructuring in the private sector.
Flattering of organizational hierarchies was found to be the next important restructuring
process adopted by companies. This was of greater importance in the private than in the public
sector. The public sector has, because of rigidities due to its ownership, far less flexibility in this
action. Along with these were measures to improve quality, creating strategic business units,
and creating representation in more market segments. These processes are giving importance.
Considered to be of even less importance in the public sector. Other factors revealed by the
survey include going for joint ventures, overseas expansion, acquisition of synergistic businesses
etc.
The major barrier to restructuring has been the cost of doing it. In private sector lack of
accountability for key performance indicators is also one reason. Some top managements lacked
entrepreneurial skills. Salary structures based on seniority, which need to be changed to
performance, related structures are the next immediate barriers. Contrary to general impressions
problems of labour are not serious barriers to restructuring
Summary
Turnaround strategy is adopted when an organization is performing poorly but has not yet
reached a critical stage. It involves getting rid of unprofitable products, pruning the workforce,
training distribution outlets and seeking all the measures to make organization efficient. An
organization may concentrate on focus only after successful turnaround. Industrial sickness is
growing in India due to increasing competition, obsolete technology, poor product quality, lack
of financial and administrative disciple and poor mgt. Turnaround is the most appropriate way
of reviving sick units. Corporate restructuring strategies involve divesting some businesses and
acquiring other so as to put a whole new face on the company's business line up. Four types of
restructuring are found: portfolio restructuring, organizational restructuring, functional
restructuring and financial restructuring. The forms of restructuring are :Mergers & Acquisitions,
Tender Offers, Joint Ventures, Divestitures, Spin-Offs, Corporate Control, Changes in
Ownership Structure, Exchange Offers, Share Repurchases and Leveraged Buy-outs.
Self -assessment questions
1. Define turnaround strategy and outline its significance.
2. What are the various indicators of industrial sickness?
3. What could be the major issues in turn around management?
4. Explain the process of turnaround management.
5. Explain any one model of turnaround.
6. What is corporate restructuring?
7. Discuss the different forms of restructuring
8. Explain the process and barriers to restructuring
9. Examine the different types of restructuring with examples
10. Explain: (i) leveraged by outs (ii) Spin offs (iii) Divestitutes
Activities
1. Visit the state Finance Corporation. Discuss with the executives and find out how the
organization could turnaround sick units.
2. Identify a sick unit and interview its manages about the reasons for its sickness
3. Visit the website of Board for Industrial Financial Reconstruction (BIFR) and examine their
successful cases of turnaround.
References
1. Fransis Cherunilam , Strategic Management, Himalaya Publishing House,Mumbai
Publishing House,
2. Thomas L.Wheelen and Hunger J. David, Concepts in Strategic Management and
Business Policy, Pearson Education Asia, New Delhi.
3. Thompson & Strickland, Strategic Management concepts and cases, Tata Mc Graw Hill
4. N.S. Gupta, Business Policy and Strategic Management, Himalaya Pubnlishing House,
Mumbai
Unit III
N
O
S
13 Mergers and Acquisitions
S
E
L
LESSON OUTLINE
Introduction
Corporate growth strategies
Concept and types of mergers
Mergers and acquisitions in India
International scenario
Merger motives
Screening and valuation process
Summary
Self Assessment questions
Activities
References
Improve valuation theory(last sub head)
After reading this lesson you should be
able to
Understand corporate growth through
mergers and acquisitions
Describe the types of mergers
Discuss
Indian
and
international
examples of mergers and acquisitions
Explain why mergers takes place
Describe the screening and valuation
processes of mergers and acquisitions
Introduction
Mergers and acquisitions as external growth strategies have been the regular feature of corporate
enterprises in all developed countries. The largest number of mergers took place at the turn of
the century, which transformed many industries. The Indian business environment has altered
radically since 1991 with the changes in economic policies. The Indian corporate though
benefited due to decontrol and deregulation has been threatened by hostile takeovers.
Pharmaceuticals and ad agencies are the primary targets of merger and acquisitions in India.
Family businesses are finding it hard to survive with low profiles and credit availability.
Corporate growth strategies
Growth can be achieved by different means. One approach is form within and another is from
outside ?that is combinations. Different forms of combinations are:
1. Amalgamation/Merger: Merger take place when there is a combination of two or more
organizations. Merger does create a new corporation.
2. Acquisition/takeovers: One Company acquires another company's controlling interest. The
acquired company operates as a separate division or subsidiary by offering cash or securities
in exchange for majority of shares of another company.
3. Sales of Assets: A company can sell its assets to another and cease to exist.
4. Holding company acquisition: This is a quasi merger. Either the total or majority of a firm's
stock will be acquired. The purpose is only management and control of other.
Concept and types of mergers
A merger is a combination (other terms used: amalgamation, consolidation, or integration) of
two or more organizations in which one acquires the assets and liabilities of the other in
exchange for shares or cash, or both the organizations are dissolved, and the assets and liabilities
are combined and new stock is issued. In mergers, all the combining firms relinquish their
independence and cooperate, resulting in common cooperation.
For the organization, which acquires another, it is an acquisition. For the organization, which
is acquired, it is a merger. If both organizations dissolve their identity to create a new
organization, it is consolidation More time is taken for merger than acquisition. Mergers are
three types: horizontal mergers, vertical mergers and concentric mergers.
1. Horizontal mergers take place when there is a combination of two or more organizations
in the same business, or of organizations engaged in certain aspects of the production or
marketing process.
For instance a company making footwear combines with another retailer
in the same business.
2. Vertical mergers take place when there is a combination of two or more organizations not
necessarily in the same business, which complement either in terms of supply of
materials (inputs ) or marketing of goods and services (outputs).
For instance a footwear company combines with a leather tannery or
with a chain of she retail stores.
3. Concentric mergers take place when there is a combination of two or more organizations
related to each other either in terms of customer functions, customer groups, or the
alternative technologies used.
A footwear company combining with a hosiery firm making socks or another specialty
footwear company, or with a leather goods company making purses, handbags, and so on.
4. Conglomerate mergers take place when there is a combination of two more organizations
unrelated to each other, either in terms of customer functions, customer groups, or
alternative technologies used.
A foot wear company combining with a pharmaceuticals firm.
Mergers carried out in reverse are known as demergers or spin-offs. Demerger involves spinning
off an unrelated business/division in a diversified company into a stand-alone company along
with a free distribution of its shares to the existing shareholders of the original company.
There are a few cases of demergers in India namely the demerger of Hoechst Schering Agrevo
Ltd. From Hoeschst India Ltd, Ciba Specialty from Hindustan Ciba Geigy Ltd., from Sandoz
renamed as Chariant India, and Aptech from Apple Industries Ltd.
Mergers and acquisitions in India
Mergers and acquisitions in India are as given below.
The Murugappa group and RPG group have benefited of merger and acquisitions by
becoming conglomerates of diverse businesses into one group. There are several examples of
mergers in the Indian corporate world, such as, Polyolefin Industries with NOCIL, TVS
Whirlpool Ltd with Whirlphool of India ltd., Sandoz (India) Ltd with Hindustan Ciba Geigy
Ltd., and Shiva Soaps and Detergents Ltd with Nirma Ltd. Other examples are:
Spartek acquired Neycer India a sick company under BIFR in 1985. It acquired
Styles India in 1998.
Godrej soaps acquired Transelektra Domestic Products Ltd (TDPL) and formed
Godrej Hicone. TDPL has good brand equity and wide distribution network. It
wanted a partner with strong finance, managment and systems competencies
Tata Telecom merged with Tata Keltron in 1995. Tata Keltron was named Tatafone
and made it profitable which was earlier with BIFR
Sterlite communications & Sterlite industries merged to cross Rs, 1,000 crore
turnover mark in June 1996.
Murugappa group: Growth of Acquisition 1980-95
Company
Products
EID Parry
Fertilizers, sugar, ceramics
confectionery
Coromandal Fertilizers
Fertilizers
Bharat Pulverizing Mills
Pesticides
Pugalur syars
sugar
Falcon Gulf ceramics
Sanitayware
Parma Agro
Plantation
Wedt (India)
Cutting tools
Press Metal corp.
Metal sections
Satavahara Chains
chains
Sterling Abrasives
Abrasives
Eastern Abrasives
Abrasives
Cut fast Abrasives
Abrasives
RPG has grown from Rs 80 crore in 1979-80 to Rs 5,600 crore in 1996. RPG Groups
acquisitions include cables, tyres, transmission and electronics. The list includes
- Asian cables
- Ceat Ltd
- Calcutta Electric Supply Corporation Ltd
- Carbon & Chemicals industries
UB group acquired
- Tamil channel GEC (Vijay TV)
- Berger Jenson & Nicholson UK with manufacturing base in 21 countries
- Sold away petrochemicals to SPIC
- Acquired Best & Cromption
The other groups include Shaw Wallace, Rajarathinam group, Manu Chabbria group, JVG,
etc MA Chidambaram group, BPL, Sri ram group, Videocan, Maxworth Orchards,
HLL growth map is as given below
1992--Acquires Kothari foods
1993--Dollops from Cadburys
Kissan from UB groups &
Brooke Bond & Lipton (BBLIL)
1993--Merges with TOMCO
1994--Alliance with Quality ice cream
1995--Acquired Milk food
1995--Alliance with Lakme to form Lakme lever Ltd
- Ponds
International scenario
We will now survey different nations to have a feel of mergers and acquisitions taking place
globally.
USA:
The US government promotes free competition. However M & A result in monopolistic
situations where barriers are created for entry of small firms. The Sherman Anti Trust Act of
1890 restricts building up monopoly beyond a market share of 75%. US law prohibits horizontal
mergers. In the US 75% of the M&As are failure while in UK 8 out of 9 is failures. In US
M&As resulted in legal battles. Huge legal costs and waste of time are common.
Japan:
Adopted from US and revised in 1977, the Japanese policy allows break up of powers to
companies with a large market share. However, the extent of litigation is low.
Europe:
Market domination is restricted in Rome at 40%, in UK at 25% and in West Germany at 33%.
The Federal cartel office may divorce a merger after one year in West Germany. Tax levies on
premium values above books values are there. In UK the Monopolies & Mergers Commission
tends to delay and restrict creation of monopolies. The Restrictive Trade Practices Act of 1956
& Company Fair Trading Act of 1975 and Consolidating Act of 1975 control the power of
concentrated private companies. In 1978, it was reviewed that concentration is required for
international trade in UK
In France, Control of merger started in 1977. Mergers (horizontal) causing market share of 40%
and mergers with companies of a market share of over 25% are allowed when advantages out
weigh disadvantages. Take over bids are to be submitted to bankers, chamber syndicates and
stock brokers appointed by the ministry of economy. The proposals should be published in
newspapers and must undergo extended legal formalities. The share holders should be informed
and the stock movements regulated.
India
The companies Act brought the system misused by British to an end in 1956. The Government
also controls the number and remuneration of Board of Directors. The companies are restricted
in loans given to other companies to avoid interlocking of funds.
The MRTP Act of 1970 and FERAof 1973 impose control in the conduct of comparies.
MRTP act restricts concentration of economic power and encourages free trade. The asset limit
for MRTP firms is raised to Rs.1000 million.
FERA gives guidelines for foreign business in India. Permissible foreign shareholding is
74% and in other manufacturing items' like construction, consultancy & non tea plantation the
limit is 40%.
Merger motives
Sellers opt for mergers and acquisitions to reduce taxes, to diversify, to restrict working capital
financing, for technological synergies, when worthy successor is not there and due to the
inability to cope with competition. Buyers go for mergers to acquire new product or capacities
or permanent, or more synergy, to achieve economies of scale, when outside capital is available;
there is more control of patents and tax advantages.
Organizations opt for merges with the following motives.
o Improving economies of scale
o Gaining managerial expertise
o Market supremacy
o Acquiring a new product or brand name
o Diversifying the Portfolio
o Reducing risk and borrowing costs
o Taxation or investment incentives
Screening and valuation process
A Taker over company scans the environment to find out the right candidate for take over. The
process involves following steps.
Identification of industries
Selection of sectors
Choosing companies (which are 5 to 10% of size bidding companies)
Finding cost of acquisition and returns: compare candidates with respect to ROIs.
Ranking of candidates
Identify good candidate(s)
After going through the screening process the fooling considerations merit attention.
Funds availability
Likely positive synergies
Negative synergies an weaknesses
Appropriate timing
Availability of required management style.
Next step is valuation. Valuation determines the worth or value of the M & A. Mergers &
Acquisitions involve share of stocks of different companies and exchange. The valuation
procedures are similar to the capital budgeting procedures.
(1) Valuation by P/E Ratio.
Market price per share
= ------------------------------
Net earnings after tax per share
If market price of a share is Rs 40/- and EPS is Rs 2/- the PE ratio = 40/2=20.
This means this company would have to sustain profit at this level for 20 years to pay
back its current price. The differences in P/E ratio for different companies are attributed to
differences in the following.
- Growth rate of a company
- Risk associated with investment
- Competition & environment
Essential commodities have shorter business cycles and more uniform earning compared to
sectors like heavy Engineering which are linked with growth of the economy.
(2) Earnings Per Share (EPS)
Compare the EPS of acquirer and acquired and two together. Refer the balance sheet and profit
and loss account for sources and uses of funds.
(3) Divest loss making operations
The acquirers should divest loss making subsidiaries and reduce cash drain to invest in attractive
ventures. Unwanted assets should be disposed off at book value.
(4) Use ratio analysis:Calculate key ratios
(a) Current ratio = Current Assets /Current liabilities
This should be checked with industry's average to know if it is on the higher side. If high, the
individual assets and liabilities should be checked. If current assets are high excess money will
be with debtors or stocks may be high. This should be checked with industry's average. Reduce
current liability like bank over draft and working capital loans to save on interest charges.
(b) Level of stock (in months) = (Stocks/Cost of goods sold) x 12
If the firm's level of stock is 8 months and industry's average is 6 months then the stock level
should be reduced. The funds should be deployed for better purposes.
( c) Average age of debtors (in days) = (Debtors / Sales) x 365
If the acquiring company's average age of debtors is low follow the same policy of the acquired
one.
(d) Revise Balance sheet and profit & loss account-
The new EPS after merger should be better for the new company.
(5) Incorporate growth and expectation rates
Prepare proforma statements with expected growth rates.
(6) Market value of assets: Find the current market value of assets. It is a good measure of
strength.
(7) Replacement value (RV) of assets
Replacement cost is better than historical cost particularly in an inflationary economy.
Replacement value of an asset = 1- Age of Assets/ Total Economic life of Asset) x Current value
of asset.
Summary
Mergers and acquisitions as external growth strategies have been the regular feature of corporate
enterprises in all developed countries. The largest number of mergers took place at the turn of
the century, which transformed many industries. Mergers are also called amalgamation and
acquisitions. Sellers opt for mergers and acquisitions to reduce taxes, to diversify, to restrict
working capital financing, for technological synergies, when worthy successor is not there and
due to the inability to cope with competition. Buyers go for mergers to acquire new product or
capacities or permanent, or more synergy, to achieve economies of scale, when outside capital is
available; there is more control of patents and tax advantages. In India the companies that have
grown with mergers are HLL, RPG group, Spartek, Godrej etc. If a company plans to take over,
it should find right candidate. It involves screening, suitability examination and valuation.
Self -assessment Questions
1. Explain the concept of mergers and acquisitions.
2. Describe the process of merger as a method of corporate growth
3. Examine the different types of mergers and acquisitions
4. Describe the screening process of mergers and acquisitions
5. Evaluate and assess the suitability of a merger proposal.
6. Why do sellers opt for mergers
7. Examine why buyers opt for mergers
8. Explain the international scenario of mergers and acquisitions
Activities
1. Visit the website of Hindustan Lever Ltd and list the companies that are merged with it.
Also evaluate the reasons for the mergers.
2. Examine how NRIs like Lakhsmi Mittal have additional advantages to work out mergers
and acquisitions in India than their Indian counterparts.
References
1. Azar Kazmi (2003), Business Policy and Strategic Management, Tata McGraw Hill,
New Delhi.
2. Thomas L. Wheelen and Hunger J. David (2002) Concepts in Strategic Management and
Business Policy, Pearson Education Asia, New Delhi
Unit III
14
Functional Strategies -1
ON
S
S
E
L
LESSON OUTLINE
Introduction
Functional strategies
R & D strategy
Operation strategy
Logistics /supply chain strategy
Information systems strategy
Coordination of strategies
Summary
Self Assessment questions
Activities
References
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Examine the characteristics of functional
strategies
Understand functional strategies in R&D
and operations
Coordinate the strategies for maximum
effectiveness
Introduction
Strategic management process involves determining appropriate courses of action for achieving
objectives. In the process of formulation it is necessary to gear the organization in such a way
that all the functional areas are synchronized viz, finance, marketing, human resources and
operations. Off late logistics is also included as a key functional area. Further the functional
strategies must cover all the three levels of management ? top, middle and lower. It is in this
context that we need to study functional strategies in detail.
Functional Strategies
Functional experts like R&D, operations, finance, marketing and human resources devise
functional strategies. The characteristics of functional strategies are as follows.
Short term
They provide short-term operational details for achieving long-term objectives systematically.
Limited scope
Functional strategy deals with a relatively restricted plan, which provides the objectives for a
specific function, for the allocation of resources among different operations within that
functional area and for enabling coordination between them for an optimal contribution to the
achievement of the business-and corporate-level objectives.
Derivative
Functional strategies are derived from business and corporate strategies. Functional strategies
specify the grand plans in different functional areas in time horizons and help operationalize the
strategies. They cascade down the hierarchy and percolate from corporate strategies to divisional
strategies and further down to departmental strategies. Hindustan Lever Ltd's functional
strategies at the above three levels can be depicted as follows in Figure 14-1.
To continue as market leader in FMCGs in India and
expanding the market. Also capturing the markets of
- Corporate
Proctor and Gamble India Ltd.
Strategy
To develop a range of popular and premium toilet
s oaps fo r all inc ome gr
oups (D ove to
Lifebuo
y)
- Toilet soap
Division strategy
T
o brand r eengine er Life
buoy fr
om a ca
rbolic t
o a toile
t
soa p in dif f
e r
e -De
nt f pa
ra rt
gr m
a e
ncn
eta
s l
a
n
d colors for more
c
us t o
m e
r
pu l l
a
n
d r
e
po s
it i
o
ni
ng strategy
Figure 14-1 Derivative nature of functional strategy
R & D Strategy
New technologies may make the business obsolete like the way Photostat technology rooted out
the carbon paper technology. Software and pharma companies need good R & D strategies for
survival itself.
Motorola recently announced that it had figured out how to combine silicon and gallium
arsenide in one semiconductor chip. The company said this discovery will greatly reduce
manufacturing process costs and result in smaller, faster products. The discovery is expected to
yield products by the end of 2003 and may lead to cell phones as small as shirt buttons. Intel and
Microsoft are continuing to increase their expenditures on research and development. Intel spent
just over $4 billion on R&D in 2001, nearly 15 percent of sales, while Microsoft spent $4.8
billion, up 37 percent from two years earlier. Both companies expect to increase R&D spending
an additional $500 million in 2002. Intel is developing more powerful and smaller chips to
power computers, while Microsoft is improving its Windows XP operating system. In India we
can take the example of companies like Dr. Reddy's Laboratories who are spending huge
amounts for developing new drugs and vaccine. Linked to this R & D strategy they are bringing
back outstanding Indian scientists from countries like USA and UK but paying them heavily in
dollars a HR strategy they proudly claim as `reverse brain drain'.
But the disadvantage of R & D strategy is the high costs and time involved, also the risk
associated with. According to a finding an average of 30 to 35 percent of new products fail after
being put on the market, so innovation strategies ?those that focus heavily on developing new
products-can be very risky. For this reason, many organizations use imitation strategies, that is,
they rapidly copy new competitive products that are doing well.
A number of Japanese electronics companies were quite successful in copying American
technology and, by avoiding many R&D costs, improved their competitive positions
significantly.
Today Chinese manufactures are considered to be good at imitation strategies. A Hero
Honda Motor Cycle manufactured in Japan is costlier by 50% in Japan compared to India and
Chinese can make it at half the price with the same features but a different brand name. Even
within Japan we can give legendary examples like that of Kodak who are pioneers in photo film
making but lost their market to Fuji, an imitator when Kodak had to leave Japan during second
world war for a few years.
According to Philip Kotler R&D is new product development, which
includes the following steps
Idea generation
Screening
Product planning & Development
Test marketing
Operations strategy
This strategy adds value to the raw materials to create a product or service. This value addition
should be cost effective, fast and without quality rejects or reworks. The emphasis should be on
cost-reduction while enhancing quality. Areas like safety, breakdown, downtime, inventory
control scheduling etc. should be adequately covered with policies and strategies at functional
level.
Table 14-1: Categories of Strategy Decisions in Manufacturing Operations
1 Capacity ? amount, timing, type
2 Facilities ? size, location, specialization
3 Technology ? equipment, automation, linkages
4 Vertical integration ? direction, extent, balance
5 Work force ? skill level, wage polices, employment security
6 Quality ? defect prevention, monitoring, intervention
7 Production planning materials control ? sourcing polices, centralization, decision rules
8 Organization ? structure, control/reward systems, role of staff groups.
(a) Inventories
India is known for high cost of inventories. Companies spend huge amounts on storage and
warehousing in this country unlike countries like Japan which follow `Just in time (JIT) in
production and operations.
Raw materials arrive eight hours before they are put in process for making finished goods
in Japan. This is true with M/S Toshiba of Japan, where they can get the required plates from just
across the waters from M/S Nippon steels unlike many companies in India who have to order
thick plates at least eight to ten months in advance.
(b) Training to workers
Many Japanese manufacturers have also provided extensive training and cross training of
their workers so that they will have multi- skilled workers. This versatile work force, coupled
with plant arrangements and equipment that can easily changed over from one product to
another, provides greater flexibility without a significant increase in cost.
(c) Low cost materials by strategic location
Regarding procurement of materials, strategies on right qualities of material, at the right
qualities of material, at the right time and price, the number of sources, their reliability and price
patterns analysis and decision, vendor relationships, forward buying etc. must be chalked down
to enable managers to work according to them.
Industries like Bharat Heavy Plates and Vessels which are strategically located closer to steel
plant in Visakapatnam in Andhra Pradesh have the advantage to get raw materials like steel and
coke with less carrying cost and storage cost. Industries located closer to ports like Chennai,
Mumbai and Calcutta have also strategic advantage of location not only for getting raw material
but also for shipping finished products.
(d) Product Design ? Technology and Marketing Concerns
The product, or output, desired from the operations system will certainly affect the type of
inputs needed and the capabilities that must be available to transform the inputs into the desired
goods or services. As the product is designed, a cost-benefit evaluation should be performed,
taking into account the kind and amount of materials, labour and processing equipment that each
alternative design will require.
The company must also recognize that the potential consumer will also perform some sort of
cost-benefit evaluation before deciding whether to purchase the product. Some processes and
materials are more expensive and should be used only if the functions of the product make them
necessary or the aesthetic appeal of the results justifies the expense.
Myriad alternative designs for a product are usually possible, and alternative production
methods may be possible even after the product is designed. Production engineers often serve as
advisers to designers, helping them develop product designs that are reasonably economical to
produce.
Here is an example of retail firm design of products and operations for consumer
acceptance The Loft, the first of its kind multi brand footwear store in India, is based in Mumbai.
The Loft is a one-stop shop for anyone who is looking for a good pair of footwear. It has found
favour with many first time, visitors, thanks to its unique services, intensely trained sales men
who understand shoes and customer preferences intimately and all that it takes to give the right
footwear to the discerning customer.
Spread over 18,000 sq.ft of space, The Loft stocks almost 100 plus brands, has facilities
like pedicure, cobbler, and jogging track. It also boasts of the biggest socks shop which houses a
staggering 15,000 pairs of stocks from over ten brands and all price points. The Loft also stocks
numerous footwear accessories like, shoe polishes, shoe trees, brushes, shoe cleaners, shoe
shiners, insoles, laces, shoe norms, shoe bags etc. In short, The Loft is the destination if one is
looking for anything in footwear or foot care. (Source: www.thelofitnindia.cpm )
Information systems strategy
Corporations are increasingly adopting information system strategies in that they are
turning to information systems technology to provide business units with competitive advantage.
Multinational corporations are finding that the use of a sophisticated intranet for the use
of its employees allows them to practice follow ? the ?sun management, in which project team
members living in one country can pass their work to team members in another country in which
the work day is just beginning. Thus, night shifts are no longer needed.
The development of instant translation software is also enabling workers to have online
communication with coworkers in other countries who use a different language. Lotus
Translation Services for Sametime is a Java ?based application that can deliver translated text
during a chart session or an instant in 17 languages. Software, e-lingo (www.e-lingo.com) offers
a multilingual search function and Web surfing as well as text and e-mail translation.
The use of information systems for improving competitive advantage has become common.
The case of Wal-Mart described in Exhibit 14-1 exemplify this argument.
Exhibit 14-1 Wal-Mart Information Strategy
In 1989, Wal-Mart started building a huge database of customer
information in its data warehouse systems located at its headquarters at
Bentonville, Arkansas. The company collected sales and customer
related information for each store and fed that information into the
warehouse systems.
In the early 1990s, Wal-Mart continued to employ new
technologies to facilitate better analysis of customer data as they became
available. Wal-mart's IT experts used 3-D visualization tools to make
accurate estimates of products most likely to be bought by customers on
the basis of parameters such as ethnicity, geographic location, weather
patterns, local sports affiliations, and around 10,000 other varied
parameters. Wal-Mart made around 90% of its stock replenishments
every month, based on the analysis of customer data generated through
the data warehouse.
To make shopping at Wal-Mart a pleasant experience, Wal-Mart
installed customer information kiosks in its stores in 1996. The kiosks
helped customers find out the price of any product and get a brief
description of it. In 1996, Wal-Mart launched its website ?
www.walmart.com - to provide information to its customers on all the
products it stocked and to enable online sales.
IT played an important role in improving the efficiency of
operations at Wal-Mart. The benefits which accrued were passed on to
customers, as per Wal-Mart's policy. Wal-Mart's annual report 1999
said, "The first and the most important thing about Wal-Mart's
information systems is precisely that the customer's needs come first.
By using technology to reduce inventory, expenses and shrinkage, we
can create lower prices for our customers and better returns for our
shareholders".
At the dawn of the new millennium, Wal-Mart was one of the
world's largest companies, with revenues of $165 bn in fiscal 2000.
Wal-Mart's `store of the community' program made effective use of bar
code technology and advanced data mining techniques. The `store of the
community' program was a very successful initiative by Wal-Mart,
which contributed to increased customer loyalty. By 2003, Wal-Mart
was the world's largest company, with revenues in fiscal 2002
Logistics /Supply chian Strategy
Logistics/supply chain strategy deals with the flow of products into and out of the manufacturing
process. Three trends are evident.
o Centralization,
o Outsourcing, and
o Use of the Internet.
To gain logistical synergies a cross business unit, corporations began centralizing logistics in
the headquarters group. This centralized logistics group usually contains specialists with
expertise in different transportation modes such as rail or trucking. They work to aggregate
shipping volumes across the entire corporation to gain better contracts with shippers. Companies
like Amoco Chemical, Georgia ? Pacific, Marriott, and Union Carbide view the logistics
function as an important way to differentiate themselves from the competition, to add value, and
to reduce costs.
May companies have found that outsourcing of logistics reduces costs and improves
delivery time. Many companies are using the Internet to simplify their logistical system. For
example, Ace Hardware created an online system for its retailers and suppliers.
Coordination
The functional strategies can be effective only when they are aligned with corporate
strategies and integrated with one another. One must understand that strategies must be
coordinated to have a vertical fit which aligns the functional areas. Simultaneously, horizontal
fit leads to alignment of activities. Table 14-2 shows the impact of strategy elements on
operations and R&D management.
Table 14-2 Impact of Strategy Elements on Operation and R&D Management
S.No Elements of
Operations management R&D Management
Strategy
1.
Compete as
Requires longer
Research on cheap
low ? cost
production runs and
input alternatives
provider of
fewer product changes
Low cost processing
goods or
Requires special ?
equipments
services
purpose equipment and
facilities
2.
Compete as
Requires more quality ?
Quality inputs
high quality
assurance effort and
High tech, high
provider
higher operating cost
quality processes
Requires more precise
equipment, which is
more expensive
Requires highly skilled
workers, necessitating
higher wages and
greater training efforts
3.
Strive for
Requires accepting
New product
absolute
some projects or
alternatives
growth
products with lower
marginal value, which
reduces ROI
4.
Maintain
Requires
capital -
reserve
investment
in
idle
capacity
for capacity
flexibility
5.
Consolidate
Locate near one major
Technology
processing
customer or supplier
improvements
(Centralize)
6.
Disperse
Requires more complex Product
processing of
coordination
network: improvements and
service
perhaps expensive data differentiation
(Decentralize) transmission
and
duplication
of
some
personnel
and
equipment
at
each
location.
If
each
location
produces one product in
the line, then other
products still must be
transported
to
be
available
at
all
locations.
If each location
specializes in a type of
component for all
products, the company
is vulnerable to strike,
fire, flood, etc.
If each location
provides total product
line, then economies of
scale may not be
realized
Summary
Functional strategies give more clarity to corporate and business level strategies and
operate at third level. They provide specific plans for achieving objectives with optimal
contribution for organizational advancement. Operational strategies take into account production
system, operations planning and control and R & D. R & D strategies aim at innovation and new
product development. Logistics minimize transportation and delay costs. Information systems
provide effective communication and knowledge sharing opportunities. One must understand
that strategies must be coordinated to have a vertical fit which aligns the functional areas.
Simultaneously horizontal fit leads to alignment of activities. Operational implementation
adopted by a firm achieves more effectiveness and perform value-creating opportunities.
Self -assessment questions
1. Outline the various functional strategies and examine their significance in the process of
strategic management.
2. Review the major R & D strategies of firms with examples.
3. What are the concerns of operations plans and policies?
4. Examine the impact of corporate strategies on the operational management of a firm.
5. Why do you think production / operations managers often are not directly involved in
strategy - formulation activities? Why can this be a major organization weakness?
6. How can you coordinate operations and R&S strategies?
7. What is the significance of information systems strategy?
8. How can logistics strategy help a firm achieve its goals?
Activities
References
Unit IV
Functional Strategies
ON
S
S
15
Finance Marketing, Human Resource,
E
L
Management Information Systems and
logistics
LESSON OUTLINE
Introduction
Functional strategies
Marketing strategies
o Marketing warfare
o Promotion strategies
Finance strategies
HR strategies
Information systems strategies
Logistics
Strategies to avoid
Selecting the best strategy
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Synchronies the functional strategies for
organizational effectiveness
Understand and translate functional
strategy at corporate level to action
plans.
Examine the synergies among functional
strategies
Functional strategies are devised by specialist in each functional area of business. They
spell out the spell out the specific tasks that must be performed to implement business strategy.
Companies may vary in organizational responsibilities and also devise varieties of functional
strategies.
Marketing specialists focus on determining the appropriate markets for business offerings
and on developing effective marketing mixes. The marketing mix includes four strategic
elements: price, product, promotion, and channels of distribution.
Financial specialists are responsible for forecasting and financial planning evaluating
investment proposals, securing financing for various investments, and controlling financial
resources. Financial specialists contribute to strategy formulation by assessing the potential
profit impact of various strategic alternatives and evaluating the financial condition of the
business.
MARKETING STRATEGIES--COMPETITION BASED
Marketers have to evolve strategies to fight competition, to gain and retain market shares.
The right tool for analyzing market situation is SWOT analysis. Based on the SWOT analysis
competitors can be classified as follows:
1. Based on the ability to engage and sustain warfare--strong and weak
2. Based on the percentage of market share--close and distant held by a competitor
These competitors can, in turn, be assigned following competitive positions.
Market leader--the firm with largest market share and strong in designing and
implementation plans.
Market challenger--close and strong competitors to market leader, who aggressively or
mildly challenge him
Market follower--the distant and weak competitor who is content in following leaders
and challenger.
Market Nicher--the independent, non-fighter, who carves his niche for peaceful and
profitable specialized operations.
Market shares of the competitive firms are:
40%
30%
20%
10%
Leader challenger Follower Nicher
What are the moves of the competitors? Are they preemptive or predatory? Are they defensive
or offensive? Companies in different competitive positions work different strategies. The
possible moves of a leader, challenger, follower and nicher are:
Grow strong--become invincible
Defend--develop protection against attack
Offend--weaken or destroy competitor
Play safe--select less competitive areas and cultivate.
Leader
Expansion strategy
Market penetration strategy
- Increase use of the product
- Find new uses for the product
Market development strategy
- Convert non-users to users
- Find new markets in other places
Product development strategies
- Create new products/services
- Modify existing products
Defending strategy
Continuous innovation and quality platform
Position defense
- Product--Line complete
Flanking defense
- Varieties of Variants
Preemptive defense -Price reduction through sales promotion
Counter offensive defense -Match with ads and others attacks
Mobile defense
-Concentrate in successful markets
Contraction defense - Prune brands
Market Challenger
A market challenger may choose to attack
The leader
The followers
The nichers.
By pass attack -- Diversifying into unrelated products
Diversifying into new geographic markets
Leap frogging into new technologies
Frontal attack -- Price and promotion aggressiveness
Flank attack -- find gaps in product line and set up variety competition
Encirclement attack- Wide range of products with heavy advertising and
promotion
Guerilla attack -- New product or promotions of short life cycle with
marketing blitzkrieg
Market follower
The options are:
Following closely--imitate immediately
Following at a distance--slow imitation
Following selectively--imitation in select areas
The companies are generally small in size. Some companies in the unorganized sector may
follow `fakes' strategy.
Market--Nicher:
The niche is sufficient size in size and purchasing power to be profitable.
The niche has growth potential
The niche is of negligible interest to major competitors
The firm has the required skills and resources to serve the niche effectively
The firm can defend itself against and attacking major competitor through the customer
good will it has built up.
Computer companies are among the newest converts to the "end user" type of niche
marketing, but they call it vertical marketing. For years, computer fought to sell general
hardware and software systems horizontally across many markets, and the price battles got
rougher. Smaller companies started to specialize by vertical slices--law firms, medical
practices, banks, etc,--studying the specific hardware and software needs of their target group
and designing high-value added products that had a competitive advantage over more general
products. Their sales forces were trained to understand and service the particular vertical market.
Computer companies also worked with independent value-added resellers (VARS), who
customized the computer hardware and software for individual clients or customer segments and
earned a price premium in the process.
Designing a promotion strategy
There are many successful companies which proved professional with faster growth due
to high power promotion. A good example is reliance group in India. It has built brand loyalty
with a different mix of a media.
Reliance has a high budget promotion for all its textile brands. It has specific promotion
strategies for suitings, dress materials and saris. "ONLY VIMAL" `ONLY' concept in the
promotion made Reliance a super success. Effective media selection and 80% budget for press
and after 1978 more focus on TV ads made their promotion No.1. Miss Universe Contest'
`Oscar awards nite' etc were sponsored including the `Reliance cup'
Choosing Pull or Push Strategy for sales promotion:
(a) Push strategy ? A promotion strategy mainly aimed at channels of distribution is called a
push strategy. Marketers promote their products heavily among distributors wholesalers
and retailers. Retailer promotes to customers. This includes trade shows, personal
selling and contests.
Producer Distributor Wholesaler Retailer Consumer
(b) Pull Strategy ? Here promotion is directed towards ultimate consumers. Manufacture
tries to stimulate demand and attracts consumers to buy his product.
Manufacturer Consumer
This includes advertising, publicity and sales promotion like discounts, free goods and
contests.
Tools of Sales Promotion:
The most commonly used sales promotion tools in India are
(i)
Prize schemes: A prize scheme is designed for both the public and the dealers. Sales
competition is arranged, prizes are announced or special offers are made.
(ii)
Trade Fairs and Exhibitions: These exhibitions attract a lot of people especially from
rural areas who find them as a very convenient place to make their purchases of
consumer goods. Many state Governments announce relief or concession in sales
Tax; for example, a passenger car can be purchased in Gwalior Mela without payment
of any sales tax.
(iii)
Free Samples: Free samples are generally used to introduce a new product and as a
sales tool to attract the attention of prospects, not only much time is saved, but it also
eliminates the need for inspection or testing of goods by the buyer.
(iv)
Correspondence: Sending letters or brochures. A specialized correspondence section
can communicate very effectively with prospects as well as potential customers.
(v)
Catalogues: Catalogues are largely used when a firm manufactures different types of
products which are distinguished by size, shape and other features. The following
purpose can be served by catalogues:
-- To get orders
-- To make the customers aware about the specifications
-- To provide detailed information
-- To solicit product sales
(vi)
Advertising Novelties: Small, interesting, or personally useful items, etc., can be used
for sales promotion. To be effective an advertising novelty should meet the following
requirements:
(a) It should not be a high cost item
(b) The novelty item should be usually eye-catching
(c) The item should be useful.
(vii)
Entertainment of Customers: Entertainment of customers acts as a primary
promotional device. But when the product is sold on a routine basis, customer
entertainment is neither necessary nor justified.
(viii) Sales Contests: The main aim of sales contests is to motivate the sales personnel and
increase sales, and bring more profit to the company. Under this scheme special
incentives in the form of prizes or awards are offered.
(ix)
Price--off: A price-off is simply a reduction in the price of the product to increase
sales and is very often used in introducing a new product. Price-offs should generally
be considered:
-- For introducing new brands or existing brands with new uses
-- For products/brands which are already doing better than the competing brands
-- In conjunction with sales activities aimed at increasing retail distribution
Henkel, the German toiletries major, gave Rs. 10 off on a Rs. 40 pack when it
introduced Pril scouring concentrate
(x)
Refunds: It is an offer made by a manufacturer to give back a certain amount of
money to a consumer.
(xi)
Point-of-sales materials: The POS display persuades reminds and gives details to the
consumers about a specific brand. Companies using this method are Procter and
Gamble, Nestle and Parle.
(xii)
Boosters for Dealers: In a bid to reduce its mounting inventories and boost the
sagging morale of its dealers, Telco offered a 2 per cent discount to dealers on
purchase of a truck if payment is made up-front. Also confessional interest rates were
offered to expedite payments.
Strategy for new products:
i)
Train salesmen about the product, familiarize with the market segment and integrate
advertising & sales promotion
ii)
Let the dealer be given details of the new product, his margins and promotion support
iii)
Ensure sufficient quantity to get orders from dealers
iv)
Deliver the merchandise at the retail outlets
v)
Arrange to advertise in media
vi)
Sample the product door to door with coupons
Promotion strategy should be focused on
(i)
Sales force promotion
-- Bonuses
-- Sales rallies
-- Best salesman award
(ii)
Trade promotion
-- Discounts
-- Displays
-- Force good
-- Best dealer awards
(iii)
Consumer promotion
-- Point of purchase promotion
-- Free samples
-- Cash discounts
-- Free trials
-- Demonstrations
-- Prizes
-- Contests
Promotion Strategy for Industrial Products:
Industrial products require different promotion strategies due to varied price range
(a) Documentation: Documentation is essential for improving the marketing
effectiveness of a company. Documentation may include;
--
Product literature
--
Selection and performance charts
--
Technical manuals
--
Operation manuals
--
Installation manuals
--
Price lists
(b) Working models: Many firms supply the working or cutout models of their
products to the dealers for display. This helps the customer understand the
product easily. In addition, the companies also supply photographs and other
display material.
(c) Exhibitions: Participation in a technical exhibition gives a higher visibility to a
company. It is a meeting place for sellers and the buyers. Participation in India
Machine Tools Exhibition (IMTEX). Hanover (Germany) Engineering Trade Fair
and many other such exhibitions has proved beneficial to many engineering units.
Financial Strategy
May types of financial analyses are used in strategic decision making these include ration
analysis, break ?even analysis and not present value analysis. Financial strategies are needed to
1. To raise capital with short-term debt, long-term debt, preferred stock, or common stock.
2. To lease or buy fixed assets.
3. To determine an appropriate dividend payout ration.
4. To use LIFO (Last ?in, First ?out), FIFO (First-in, First ? out), or a market-value
accounting approach.
5. To extend the time of accounts receivable.
6. To establish a certain percentage discount on accounts within a specified period of time.
7. To determine the amount of cash that should be kept on hand.
1. Ratio analysis
(i)
Ration analysis has been accepted as an effective tool of financial analysis. The
systematic use of ratios leads to interpreting financial statements of a business
enterprise. Ration is expressed in terms of proportion or percentage relationship
between two sets of phenomena. For instance, the proportion (ratio) of gross
profit to sale.
Analysis of financial ratios as a tool of strategic analysis may be utilized in two
ways: Firstly ? an analyst may compare the present ratio with the past and the
expected future. For instance, the current ratio i.e. the ratio of current assets to
current liabilities ? for the present year may be compared with current ratio of the
preceding year to ascertain the level of improvement or deterioration.
This trend analysis may be the pace setter or the eye opener for future performance of the
organization. Secondly ? ratios may trend analysis may be the pace setter or the eye opener for
future performance of the organization. Secondly ? ratios may also be utilized to compare the
performance of the firm with an identical firm in the same industry or the other industry. This
comparison will provide the basis of assessing the strength and weaknesses of other competitors
in the market.
Ratios may be classified under four broad heads:
1. Liquidity
2. Activity
3. Profitability
4. Capital structure / Leverage Ratio.
(ii)
Liquidity Ratios
Liquidity ratios seek to confirm the ability of the firm to fulfil its short term
obligations. If the firm has greater liquidity than the commitments due for payment, it
means the firm has unutilized surplus which may be invested or used in such a manner
that the rate of return is optimal. The firm may also put the funds in the expansion of
business or diversification of its activities to increase rate of return on investment.
The ratios which indicate the liquidity of the firm are: (i) Net working capital
(current assets ? current liabilities) (ii) Current ratio (current assets ? current liabilities
(iii) Acid Test Ratio/ quick Ratio (iv) Super quick ratios (v) Turnover Ratios.
(iii)
Acid test ratio / quick ratio
= Current assets ? (Inventories + Repayments)
Current liabilities
(iv)
Turnover Ratios /Activity Ratios
Another way to ascertain the liquidity is how quickly a certain current asset could be
converted into cash. Ratios measuring its ability is known as turnover ratios. These
ratios may be classified under three heads: (1) Total Assets Turnover Ratio (2) Accounts
Receivable Turnover Ratio (3) Inventory Turnover Ratio.
Inventory / Turnover Ratio
Inventory / Turnover Ratio may be worked out in the following manner.
Cost of goods sold
(Inventory I year + Inventory II year) ? 2
Profitability Ratios
Profit is the end result of all business activities including the use of capital. Profit is an objective
index of judging the efficiency of the business enterprise.
Profitability ratios may be of two kinds:
(i) Return on sales (ROS) and (ii) Return on Assets (ROA)
Return on Investment (ROI) is not different from Return on Assets (ROA). In a multi-
product organization, a Return on Investment (ROI) is not different from Return on Assets
(RoA). In a multi-product organization, a lower Return on Assets indicates a weak product or
sub-optimal product or a few strong and more weaker products which lower down ROA or even
ROI.
Capital Structure / Leverage Ratios
Financial solvency of the firm may be computed by establishing relationship between
borrowed funds and owner's capital. Debt /Equity ratio seeks to establish this relationship.
"This ratio reflects the relative claims of creditors and shareholders against the assets of the
firm".
Long ?term Debt
D/E Ratio =
Shareholders Equity
Earnings per Share (EPS)
Another way of computing the profitability of a company from share holder's view point
is the Earnings per share. It measures the profit available to equity holders. Profit available to
equity holders are represented by the net profits after taxes and preference divided divided by the
number of ordinary shares.
Net Profit ? (Interest + Tax + Preference dividend)
EPS =
(No . of ordinary Shares I year + Ordinary Shares II Year ) ? 2
Price Earning Ratio
It may be worked out as follows:
Market Price of the Share
Price Earning Ratio =
EPS
2. Break ? Even analysis ? Case
3. Net Present Value (NPV) analysis.
This method involves calculation of the present value of estimated cash inflows using the
cost of capital as the discounting rae and subtracting from the aggregate present value of
inflows the present value of cash outflows using the same discounting rate. IF NPV is
positive or equal to zero, the investment project is accepted as economically viable. If it
is negative the proposal is rejected. Using this, strategic investment proposals may be
ranked in the descending order of the net present values. The market value of shares may
increase with projects with positive NPVs are accepted.
HR Strategies
The HR strategy of many multinational companies to take part time temporary employees
or leasing temporary employees from learing companies. Employees specially working in IT
firms in India are working on one to five year projects and re experiencing `Pink ? slip
syndrome' as to what to do after the project is completed. The worst hit are those employees
who are sacked from their jobs after September, 11 2002 attack of world trade centre.
The number of employees who work only part ? time is steadily increasing. Part-timers
are attractive to a company because the firm does not need to pay fringe benefits, such as health
insurance and pension plans.
Telecommuting, office at home, flexi time and career breaks are the order of the day
firms also resort for employing from diverse cultures. Pharma companies like Hoechst and
cosmetic firms like Avon could turnaround unprofitable inner city markets by taking local
persons to manage local markets.
Information systems strategy
Corporations are increasingly adopting information system strategies in that they are
turning to information systems technology to provide business units with competitive advantage.
In 1989, Wal-Mart started building a huge database of customer information in
its data warehouse systems located at its headquarters at Bentonville, Arkansas.
The company collected sales and customer related information for each store
and fed that information into the warehouse systems.
In the early 1990s, Wal-Mart continued to employ new technologies to
facilitate better analysis of customer data as they became available. Wal-mart's
IT experts used 3-D visualization tools to make accurate estimates of products
most likely to be bought by customers on the basis of parameters such as
ethnicity, geographic location, weather patterns, local sports affiliations, and
around 10,000 other varied parameters. Wal-Mart made around 90% of its
stock replenishments every month, based on the analysis of customer data
generated through the data warehouse.
To make shopping at Wal-Mart a pleasant experience, Wal-Mart
installed customer information kiosks in its stores in 1996. The kiosks helped
customers find out the price of any product and get a brief description of it. In
1996, Wal-Mart launched its website ? www.walmart.com - to provide
information to its customers on all the products it stocked and to enable online
sales.
IT played an important role in improving the efficiency of operations at
Wal-Mart. The benefits which accrued were passed on to customers, as per
Wal-Mart's policy. Wal-Mart's annual report 1999 said, "The first and the most
important thing about Wal-Mart's information systems is precisely that the
customer's needs come first. By using technology to reduce inventory,
expenses and shrinkage, we can create lower prices for our customers and better
retur
ns for our shareholders".
At the dawn of the new millennium, Wal-Mart was one of the world's
largest companies, with revenues of $165 bn in fiscal 2000. Wal-Mart's `store
of the community' program made effective use of bar code technology and
advanced data mining techniques. The `store of the community' program was a
very successful initiative by Wal-Mart, which contributed to increased customer
loyalty. By 2003, Wal-Mart was the world's largest company, with revenues in
fiscal 2002 amounting to $244.5 bn.
Multinational corporations are finding that the use of a sophisticated intranet for the use
of its employees allows them to practice follow ? the ?sun management, in which project team
members living in 1 country can pass their work to team members in another country in which
the work day is just beginning. Thus, night shifts are no longer needed. The development of
instant translation software is also enabling workers to have online communication with
coworkers in other countries who use a different language. Lotus Translation Services for
Sametime is a Java ?based application that can deliver translated text during a chart session or an
instant in 17 languages. Software, e-lingo (www.e-lingo.com) offers a multilingual search
function and Web surfing as well as text and e-mail translation.
Logistics Strategy
Logistics strategy deals with the flow of products into and out of the manufacturing process.
Three trends are evident: centralization, outsourcing, and the use of the Internet. To gain
logistical synergies a cross business unit, corporations began centralizing logistics in the head-
quarters group. This centralized logistics group usually contains specialists with expertise in
different transportation modes such as rail or trucking. They work to aggregate shipping
volumes across the entire corporation to gain better contracts with shippers. Companies like
Amoco Chemical, Georgia ? Pacific, Marriott, and Union Carbide view the logistics function as
an important way to differentiate themselves from the competition, to add value, and to reduce
costs.
May companies have found that outsourcing of logistics reduces costs and improves
delivery time. Many companies are using the Internet to simplify their logistical system. For
example, Ace Hardware created an online system for its retailers and suppliers.
Strategies to avoid
If managers lack analysis and creativity they may get trapped into weak strategies leading to
failure. The following strategies should be avoided.
Follow the Leader: Imitating a leading competitor's strategy might seem to be a good
idea, but it ignores a firm's particular strengths and weaknesses and the possibility that
the leader may be wrong.
Hit Another Home Run: If a company is successful because it pioneered an extremely
successful product, it tends to search for another super product that will ensure growth
and prosperity. Like betting on long shots at the horse races, the probability of finding a
second winner is slight. Polaroid spent a lot of money developing an "instant" movie
camera, but the public ignored it in favor of the camcorder.
Arms Race: Entering into a spirited battle with another firm for increased market share
might increase sales revenue, but that increase will probably be more than offset by
increases in advertising, promotion, R&D, and manufacturing costs. Since the
deregulation of airlines, price wars and rate "specials" have contributed to the low profit
margins.
Do Everything: When faced with several interesting opportunities, management might
tend to lead at all of them. At first, a corporation might have enough resources to
develop each idea into a project, but money, time, and energy are soon exhausted as the
many projects demand large infusions of resources.
Ex:- Walt Destney
Losing Hand: A corporation might have invested so much in a particular strategy that
top management is unwilling to accept its failure. Believing that it has too much invested
to quit, the corporation continues to throw" good money after bad".
Ex:- Indian Airlines is one such company.
Selecting the best strategy
Perhaps the most important criterion is the ability of the proposed strategy to deal with
the specific strategic factors developed earlier in the SWOT analysis. IF the alternative doesn't
take advantage of environmental opportunities and corporate strengths / competencies, and lead
away from environmental threats and corporate weaknesses, it will probably fail.
Another important consideration in the selection of a strategy is the ability of each
alternative to satisfy agreed ? on objectives with the least resources and the fewest negative side
effects. It is, therefore, important to develop a tentative implementation plan so that the
difficulties that management is likely to face are addressed.
Conclusion
Self Assessment questions
References:
1.
Peter
2.
Fred David
3.
Wheelen L Thomas and Hunger J. David( 2002), Concepts in Strategic Management and
Business Policy, Pearson Education Asia, New Delhi.
4. R L Varshey and SL Gupta, Marketing Management ? An Indian
Perspective, pp
465 ? 483.
5. C S G Krishnamacharyulu and Lalitha Ramakrishnan, Rural marketing, pp
239 ? 263.
Unit V
ON
S
S
E
17
Planning
and
Resources
L
Allocation
LESSON OUTLINE
Introduction
Planning defined
Nature of planning
Types of plans
Steps in planning
Resource allocation
Methods of resource allocation
Resource allocation process
Problems in resource allocation
Summary
Self assessment questions
Activities
References
After reading this lesson you should be
able to
Understand the concept of planning and
examine its nature
Illustrate and explain the steps in the
process of planning
Examine the elements of planning
Introduction
While planning is the first step in formulating strategies resource allocation in the creative
process of allocating resources into competences that could be used to garner competitive
advantages. C.K. Prahlad and Hamel see resource allocation in an organization as a portfolio of
resources and competences. Strategic managers have to take adequate care in identifying the
resource allocation needs and make right allocations.
Planning ? defined:
Planning is a way of organizational life. Planning is futuristic, decision oriented and goal
driven. It is the first function of management and is the foundation for other functions like
organizing and controlling. Here are some definitions on planning
"Planning bridges the gap from where we are to where we want to go. It makes it
possible for things to occur that would not otherwise happen".
"Planning involves selecting missions and objectives and
achieve them; it requires decision making."
BHEL used Delphi technique to explore future direction of power development. Firstly, it
canvassed an open ended questionnaire to the engineers in several plants to give ideas for
technological breakthrough for 30 to 40 years. In the second round these were summarized and
asked to be prioritized. In the third round the estimated timings and rationale for forecast was
asked. This helped BHEL not only to get 19 different forms of energy sources but also provided
"refined guest mates". The results were helpful in corporate planning and for formulating R & D
projects.
Coke used a similar technique and conducted tests studies 30 cities in US to develop `diet coke'.
Nature of Planning:
There are four major aspects here.
(i)
Its contribution to purpose and objectives;
(ii) Its primacy among the manager's tasks;
(iii) Its pervasiveness, and
(iv) The efficiency of resulting plans
Contribution
Planning precedes all the other managerial functions. It involves setting up objectives necessary
for all group efforts. Every executive should plan about recruitment, structure and controls.
Figure 17.1 show the kind of contribution planning makes.
What kind of organisation
structure to have
Which helps us know
What kind of people we
need and when
PLANS objectives
Necessary for deciding
Which effects the kind of
and how to achieve
leadership we have and
them
direction
How most effectively to
lead people
In order to ensure success
of plans
By furnishing standards of
Primacy
control
Figure 17.1. Key decisions in planning
Planning is the first function leading to other functions in management. Figure 17-2 shows the
linkages.
PLANNING
Setting Objectives
Deciding how to
accomplish them
Organizing-teaming
Productivity
for
Leading-performance
Controlling-results
Figure 17.2: Planning in Management.
Pervasiveness
Planning is the function of all managers; from the head of a gang to a factory crew. Managers at
all levels and in all functions have to engage themselves in planning. Without planning they will
be in dark not knowing where to go.
Efficiency of plans
Planning and Controlling are the Siamese twins of management. Plans are efficient if they
achieve their purpose at a reasonable cost where cost is measured not only with cost or
production but also in the level of individual and group satisfaction. There are occasions where
programmes are good but failed due to poor morals.
Types of Plans:
The failure of managers to recognize that there are several types of plans has often caused
difficulty in making planning effective. Plans encompass any cause of future action and hence
vary as under.
* Purposes or missions
* Objectives or goals
* Strategies
* Policies
* Procedures
* Rules
* Programmes
* Budgets
Purposes or missions:
Identifies the basic task of a firm or agency. Ex. Purpose of business is the production and
distribution of goods and services
Dupont
-
Better things through chemistry
Kleenex
-
Production and sale of paper & products
Hallmark
-
Social expression of business
J & J
-
First responsibility to doctors, nurses, patients and mothers
Dow chemical -
Sharing world's obligation for the protection of the environment
Conglomerates express their mission as `synergy' which is achieved through combination of a
variety of companies.
Therefore mission is the organization's purpose and fundamental reason for existence. A
mission statement is the broad declaration of the basic. Unique purpose and scope of operations
distinguish the organization from others.
Objectives and goals:
Planning aims at goal setting. Goals and objectives are ends towards the activity aimed. They
represent the end toward organizing, staffing, leading and controlling. Each department may
have its own goals, which contribute to objectives of organizations as illustrated below.
Production department
Producing 22 units per day
Marketing department
Selling 25 units per day
Personnel department
Training 200managers in the first quarter.
Finance department
Invest Rs. 200 crores with 32% return on
investment in the current year.
Goals serve many purposes like the following
* Increase performance
* Clarify expectations
* Facilitate the controlling function
* Increased motivation
Goals have levels that compare with hierarchy of organization as depicted in Table 17-1
Table 17-1 Plan types
Type of plans
Type of goals
Description
Time
Management
Focus o f plans
range
level
Strategic plans
Strategic goals
Broadly defined 5 years
Top
Organization level
targets or future
management
end results set
up
by
top
management
Tactical plans
Tactical goals
Future
end 1-5 years Middle
Department level
results set up by
management
middle
management for
specific
departments or
units
Operational
Operational
Set by lower One year Lower
Unit/group/level
plans
goals
management
management
individual
that
address
measurable
outcomes
required
from
the lower levels
Peter F. Drucker gives eight major areas for goal setting by organizations.
*Market standing
*Innovation
*Human resources
*Financial resources
*Physical resources
*Productivity
*Social responsibility
*Profit requirements
Strategies:
Strategies are grand plans in the light of what it was believed an adversary might or might not
do. Strategy may be defined as follows.
"Strategy is the determination of basic long term objectives of an enterprise and the adoption
of courses of action and allocation of resources necessary to achieve these goals".
A strategy might include such as marketing directly rather than through distributors or
concentrating on proprietary products of having a full time of autos ex: General Motors.
Strategies are of two types:
Generic strategies
-
involve organization expansion in some select areas.
The generic strategies include ?
Overall cost leadership
Differentiation
Focus
Grand strategies
-
A master strategy that provides direction at the corporate level
Concentration
Growth strategy
Integration (vertical horizontal)
Diversification
Grand strategies
Stability strategy
Harvest
Turnaround
Policies:
Divestiture
Defensive strategy
Bankruptcy
Liquidation
Policies are plans or general statements or understandings that guide or channel thinking in
decision making. Policies define an area in which decision is to be made and ensure consistency
to objectives. Policies help managers maintain control and delegate authority.
Policies exist at all levels in an organization. They may be major or minor. Policies include
hiring trained engineers, encouraging employee suggestions, confirming to high standards,
setting competitive prices, cost plus pricing etc. Companies can have policy manuals which may
stipulate non-acceptance of gifts from suppliers, favours of entertainment or seek outside
employment.
Making policies is difficult for
They are seldom defined in writing
Delegation of authority will create confusion
Actual policy may be difficult to ascertain and intended policy may not be clear.
Policies are necessary at different hierarchical levels as shown in Figure 17-4
President
Vice-president sales
Company policy of aggressive price competition
Policy of competing aggressively only in non proprietary
Regional sales manager
product lines
Policy of limiting district sales managers to special price
District sales manager
concessions not exceeding 10% - then only when necessary
to get an order.
Figure 17.4 Policies
at different levels
Procedures:
Procedures are plans that establish a required method of handling future activities. They are
guides to action, rather than thinking and they detail the exact manner in which certain activities
must be accomplished. Procedure is thus a prescribed series of steps to be taken under certain
recurring circumstances. Well-established ones are called `Standard Operating Procedures'. Ex:
In Banks SOPs govern how tellers handle deposits.
The following procedures are common and are across different departments.
Production Department -
release of stock
Traffic Department
-
shipping means & route
Finance Department
-
customer credit approval, acknowledgement receipts
Marketing Department
-
for original order
Rules:
"A statement that spells out specific actions to be taken or not taken in a given situation"
Unlike procedures, rules do not normally specify a series of steps. They dictate what must or
must not be done.
Ex: 1. "No Smoking" is a rule unrelated to procedure.
2. Fraction of more than half ounce should be treated as one ounce.
Policies guide decision making, but rules allow no discretion in decision making.
Programmes:
Programmes involve different departments or units of organization composed of several different
projects which may take about one year to complete. Programme may be defined as follows.
"A programme is a comprehensive plan that coordinates a complex set of activities related
to a major non recurring goal".
"Programmes are a complex of goals, policies procedures, rules, task assignments, steps to be
taken, resources to be employed and other elements necessary to carry out a given course of
action supported by budgets".
Examples of programmes are :
1. A major airline acquiring $400 million fleet of jets
2. Five year programme to improve status and quality of supervisors.
3. A minor programme of a supervisor to improve morale of workers.
Making programmes include six steps:
i) Dividing the project into parts
ii) Determining relationships and pulling in a sequence
iii) Deciding responsibilities for mangers
iv) Determining how to complete and what resources are necessary
v) Estimating time requirements
vi) Developing a schedule of implementation
A primary programme may trigger off a series of small programmes.
Budgets:
Budget is a numberized programme. It can be defined as follows.
"Budget is a statement of expected results expressed in numerical terms"
Budget can be expressed in financial terms, labour hours, units, machine hours etc. It may show expenses, capital outlays, cash flows etc.
A budget is a fundamental planning instrument. Budget forces precision in planning.
Flexible/variable budgets -
vary according to the level of output
Programme budgets
-
an agency to identify goals, develop programmes to meet
them and give cost estimates.
Operating budget
-
A finance plan for each responsibility during budget
period.
Capital budget
-
Budget for Mergers & Acquisitions, divestiture of fixed
assets
Steps in planning
Planning is a step by step process. It involves the following steps.
(i)
Being aware of opportunities:
Every planner should scan the external environment for opportunities and threats.
(ii) Establishing objectives:
Planner has to identify the objectives for the enterprise or unit. They should be specific and
measurable.
(iii) Developing premises:
Planner has to go about understanding the current and future environment in which the
goals can be accomplished. Forecasting based on published reports and research is
necessary to know the future scenarios. Clear assumptions about the environment are
outcome of this step.
(iv) Determining alternative courses:
Planner has to develop a large number of alternative courses of action for examination.
(v) Evaluating alternative courses
Evaluation can be done only when a planner has clear guidelines for determining and
comparing worth of each alternative course of action. Criteria like return on investment,
risk, time horizon and limiting factor may be employed to evaluate the alternatives.
(vi) Selecting a course:
On evaluation the planner will use his or her judgment to decide upon one course of action,
which is appropriate or right for the company.
(vii) Formulating derivative plans:
To support basic plan it will be necessary to develop a series of minor plans. .
(viii) Numberzing plans by budgeting:
For each department budget allocations will be necessary to facilitate the implementation
of the plans. Planner has to make the resource allocation as such properly.
Resource allocation
The resources may be existing with a company or many be acquired through capital allocation.
Resources include physical ,financial and human resources essential for implementing plans.
Resources are broadly of four categories.
i)
Money
ii)
Facilities and equipments
iii)
Materials, supplies and services
iv)
Personnel
Decisions involved in allocation of resources have vital significance in strategy
implementation. In single product firms it may involve assessment of the resource needs of
different functional departments. In the multi divisional organization it implies assessing the
resource needs of different SBUs (discussed in lesson 4 of Unit I) or product divisions
Redeployment or reallocation of resources becomes necessary when changes take place.
The redeployment of resources is quite critical when there are major changes and shifts in
strategic posture of company. Redeployment of resources may arise due to strategies of a
company to grow in certain areas and withdraw from the other.
Methods of Resource allocation
(i)
Based on percentages:
Usually, companies have been following system of allocation of resources by percentages.
The following arguments reject this method.
It may not serve much purpose these days. They may be of help only in making
some comparisons.
The allocation of resources should not be based on their availability or scarcity as
it may prove to be counter productive.
The resource allocation should be made with regard to strategies of a company for
its future competitive position and growth. The decisions of resource allocation
are also closely connected with the objectives of a company.
(ii)
Based on modern methods
Other methods include -Portfolio models, product life-cycle charts, balance sheets, profit and
loss statements income statements. When retrenchment or turnaround strategies are implemented
zero-based budgeting is used. During mergers, acquisitions and expansion, capital budgeting
techniques are suggested.
Resource allocation is not purely a rational technique but is based on several behavioral
and political considerations. The other analytical conceptual models used for strategic choice are
growth share matrix, `stop light', and Directional Policy Matrix used in multi divisional firms.
A more comprehensive approach to management decisions on resource allocation is provided by
the budgeting system carefully geared to the chosen strategy.
Resource allocation process
A framework for the strategic budgeting process is shown in the following chart.
Corporate Level
Corporate
Goals and
Tentative
Budget re- Summary
objectives
strategy
resource allo- quests are re- Budgets are
and strategy either ap- cations are
viewed and prepared
are stated proved or made and approved
along with altered
budgets are
assumptions
SBU object- Premises
Preliminary
Changes in
Approved
tives and
and force-
budgets are resource budgets are
SBU Level strategy are casts are prepared requirements received and
defined prepared are proposed final plants
are made
Source: William F. Glueck & Lawrence R. Jauch, Strategic Management . p. 316)
Figure. 17.5.The resource allocation process
Top management initiates the process. In large organizations the budget department at the
headquarters provides all information to the SBUs and advises them in connection with preparation
of budget proposals.
Strategy communication As the first step in the process, the corporate objectives and strategy are
stated along with the environmental and competitive conditions to be communicated to the SBUs
(organizational units).
SBU initiative They in turn draw up preliminary budgets after defining the unit-wise objectives
and strategies.
Negotiation The process involves a series of negotiations among managers at the SBU and
corporate levels. For instance, unit manages having defined the objectives and strategy of the
unit prepare the premises and forecasts which are sent for approval by the top management.
Preliminary budget Tentative allocation of resources takes place at the corporate level and
budget proposals are called for on that basis. The preliminary budgets indicate changes in the
resource requirements as compared with the previous period.
Proposals sent Based on the preliminary budget units draw up their plans and programmes.
And make proposals. The proposals are sent for consideration of the top management by the
SBUs.
Approval Only on approval of the proposals the
Problems in resource allocation
There are several difficulties in resource allocation. The following are some of the identified
problems.
i) Scarcity of resources.
Financial, physical, and human resources are hard to find. Firms will usually face difficulties in
procuring finance. Even if fianc? is available, the cost of capital is a constraint. Those firms that
enjoy investor confidence and high credit worthiness possess a competitive advantage as it increases
their resource-generation capability. Physical resources would consist of assets, such as, lard
machinery, and equipment. In a developing country like India, many capital goods have to be
imported. The government may no longer impose many conditions but it does place a burden on the
firm's finances and this places a restriction on firms wishing to procure physical resources. Human
resources are seemingly in abundance in India but the problem arises due to the non-availability of
skills that are specially required. Information technology and computer professionals, advertising
personnel, and telecom, power and insurance experts are scarce in India. This places severe
restrictions on firms wishing to attract and retain personnel. In sum, the availability resources is a
very real problem.
ii) Restrictions on generating resources
In the usual budgeting process these are several restrictions for generating resources due to the SBU
concept especially for new divisions and departments.
iii) Overstatement of needs
Over statement of needs is another frequent problem in a bottom-up approach to resource allocation.
The budgeting and corporate planning departments may have to face the ire of those executives who
do not get resources according to their expectations. Such negative reactions may hamper the
process of strategic planning itself.
Summary
Planning is the first and very important step in strategic management Planning involves forecasting and decision making to design future
operations. Planning involves deciding purposes or missions, objectives or goals, strategies, policies, procedures, rules, programmes and budgets.
Planning involves lower(operational), middle(tactical), and top(strategic ) management levels and covers both long and short range time
periods. The next step to planning is resource allocation that is budgeting. There are several methods which include portfolio models, product -
life cycle analysis, zero based budgeting and capital budgeting techniques. Resource allocation involves some problems. Scarcity of resources,
restrictions on SBUs and over statement of needs are problems. Redeployment of resources is essential when changes take place in the strategies
of the firm.
Self -assessment questions
1. Define planning and illustrate it as an important function of management
2. Outline the steps in planning process.
3. What are the elements of planning? Explain them with examples.
4. Examine the significance of planning function.
5. What is resource allocation? Explain why it is studied with planning.
6. What are the different methods of resource allocation? How is it done at different strategic
levels?
7. What are the steps in developing resource plan of organizations?
8. Examine the problems in resource allocation and how companies overcome the problems.
Activities
1. Visit the website of a public sector unit and examine how corporate planning is done in that
organization. Note the details.
2.
Go to an educational institution (a college or a university) in your place. Discuss with
strategists Viz.,Vice?Chancellors, Principals, Registrars, Deans or Secretary and
Correspondents and discuss how they allocate resources to the departments. Record the
findings.
References
5. Lomash Sukul & Mishra P.K.(2003) Business policy and Strategic Management, Vikas
Publishing House, New Delhi
6. P.K. Ghosh (2001), Strategic Planning and Management, Sultan Chand & Sons, New
Delhi
7. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books,
New Delhi.
8. Azar Kazmi (2003), Business Policy and strategic management, Tata Mc Graw Hill,
New Delhi .
9. Robert Kreitner (1999), Management, 7th edition AITBS Publishers, New Delhi.
10. Terry R. George and Franklin G. Stephen (1999), Principles of Management 8th edition
ATTBS publishers, New Delhi.
11. Davar R. S., The Management Process (1984), 8th edition progressive corporation
(private) Ltd., Bombay.
12. Weirich Hernz and Koontz Herald (1993), Management ? A global perspective, 10th
edition, Mc Graw Hill International Services, Singapore.
13. Kast E. Premont and Rosenweigh E. James (1985), Organisation and Management 4th
edition, Mc Graw Hill International Series, Singapore.
14. Agarwal D. Organisation and Management (1986), Tata Mc Graw Hill Publication, New
Delhi.
*******
Unit V
ON
S
S
E
18 Organization structure and culture
L
LESSON OUTLINE
Introduction
Concepts
Key elements of organization
structure and design
Organization design decisions
Boundary less organization
Learning organization
Organization culture -Concept
Influence of culture on strategy
Cultural web
Cultural audit
Summary
Self Assessment Questions
Activities
References
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Define organization structure and
design
Describe the key elements of
Structure and differentiate them
Introduction
No other topic in strategic management has undergone as much change in the past few years as
that of organization structure and culture. In the lesson 4 of Unit I a detailed discussion on
structures is given with illustration while discussing the SBU structure. The creation of right
structure and the right kind of norms, customs, habits and beliefs are important for enduring
employer ?employee relationships. In this competitive era, trust and ideal cooperation alone
leads to survival and success of organizations.
Concepts
Just what is an organization's structure? An organizational structure is the formal framework by
which job tasks are divided, grouped, and coordinated. When managers develop or change an
organization's structure, they are engaged in organizational design, a process that involves
decisions about six key elements: work specialization, departmentalization, chain of command,
span of control, centralization and decentralization, and formalization.
What is organizational culture? It's a system of shared meaning and beliefs held by
organizational members that determines, in large degree, how they act. It represents a common
perception held by the organization's members. Just as tribal cultures have rules and taboos that
dictate how members will act toward each other and outsiders, organizations have cultures that
govern how its members should behave. In every organization, there are systems or patterns of
values, symbols, rituals, myths, and practices that have evolved over time. These shared values
determine to a large degree what employees see and how they respond to their world. When
confronted with problems or work issues, the organizational culture-the "way we do things
around here"-influences what employees can do and how they conceptualize, define, analyze,
and resolve issues.
Key elements of organizational structure and design
The key elements in organization structure and design are:
o Departmentation
o Chain of command
o Span of control
o Centralization and decentralization
o Formalization
We will now examine each one of them and see how they affect the design questions
What type of arrangement is suitable for the effective functioning of the organization?
Should the chain of command be long or short? Should it allow lateral relationships?
How many employees should a supervisor manage?
Should the decision authority be concentrated at the top or diffused?
Should there be informal work relationships?
Departmentation
Once activities are divided based on work specialization common tasks are to be grouped
together. This is called departmentalization. There are five bases for departmentation.
i)
Functions
ii)
Geographical areas
iii)
Product
iv)
Process
v)
Customers
Figure 18.1 to 18.5 illustrate the arrangements along with advantages and disadvantages
Functional Departmentalization
Plant Manager
Manager,
Manager,
Manager,
Manager,
Manager,
Engineering
Accounting
Manufacturing
Human Resources
Purchasing
Figure 18.1 Five Common Forms of Departmentalization
+
Efficiencies from putting together similar specialties and people with common
skills, knowledge, and orientations
+
Coordination with functional area
+
In-depth specialization
-
Poor communication across functional areas
-
Limited view of organizational goals
Geographical Departmentalization
Vice President
for sales
Sales Director
Sales Director
Sales Director
Sales Director
Western Region
Southern Region
Midwestern Region
Eastern Region
Figure.18.2 Geographic departmentalization
+
More effective and efficient handling of specific regional issues that arise
+
Serve needs of unique geographic markets better
-
Duplication of functions
-
Can feel isolated from other organizational areas
Product Departmentalization
Bombardier,
Ltd.,
Mass Transit
Recreational and
Rail Products
Sector
Utility Vehicles Sector
Sector
Retail and Diesel
Mass Transit
Bombardier-Rotax
Products Division
Division
(Vienna)
Recreational
Logistic
Industrial Equipment
Bombardier-Rotax
Source : Bombardier Company's Annual Report
Product Division
Equipment Division
Division
(Gunskirchen)
Figure.18.3 Product departmentalization
+
Allows specialization in particular products and services
+
Managers can become experts in their industry
+
Closer to customers
-
Duplication of functions
-
Limited view of organizational goals
Process Departmentalization
Plant
Superintendent
Sawing
Planning and
Assembling
Lacquering
Finishing
Inspection
Department
Milling
Department
and Sanding
Department
and
Manger
Department
Manager
Department
Manager
Shipping
Management
Manager
Department
+ More efficient flow of work activities
-
Can only be used with certain types of products
Figure.18.4 Process departmentalization
Customer Departmentalization
Director
of sales
Manager,
Manager,
Manager,
Retail Accounts
Wholesale Accounts
Government Accounts
Figure.18.5 Geographic departmentalization
+ Specialists can meet Customers' needs and problems
-
Duplication of functions
-
Limited view of organizational goals
Chain of command is the continuous line of authority that extends from upper organizational
levels to the lowest levels and clarifies who reports to whom. It helps employees answer
questions such as "who do I go to if I have a problem?" or "To whom am I responsible?"
You can't discuss the chain of command without discussing the other concepts: authority,
responsibility and unity of command. Authority refers to the rights inherent in a managerial
position to tell people what to do and to expect them to do it. This obligation or expectation to
perform is known as responsibility. Finally, the unity of command principle (one of Fayol's 14
principles of management) helps preserve the concept of a continuous line of authority. It states
that a person should report to only one manager.
Span of control
Span of control (or supervision or management) refers to the number of employees a supervisor
can effectively manage. Organizational levels exist since there is a limit to the number of people
one can supervise effectively. This limit varies upon situations. Figure 18-6 shows span types
and Table 18-1 discusses their advantages and disadvantages. . A wide span is associated with
few levels in the organization and a narrow span, many levels. The number of subordinates a
manager can effectively supervisor ranges from three to eight. The number of people who
directly report to a manager represent the manager `span of control'.
Wide Span
Narrow Span
Figure 18-6 Span types
Ex: Sears, Roebuck & Co, etc, reported good results with spans of control of over six. There
were 36 managers reporting to one boss and five reporting to one and both worked. Wider spans
are preferred today for less administrative expense and more self-management.
Table 18-1 Advantages and disadvantages of different spans.
Narrow Span
Wide Span
Advantages
Disadvantages
Advantages
Disadvantages
1. Close
1. Superior
1. Superiors are
1. Decision
supervision
interferes
too
forced
to
bottlenecks due
2. Close
much
delegate
to overloaded
control
2. Many levels
2. Clean
2. danger
of
3. Fast
3. High costs
policies
loss of control
communication
4. Excessive
3. Carefully
3. Requires
vertical distance
selected
exceptional
subordinates
quality
managers
Centralization and decentralization In some organizations, top managers make all the
decisions and lower-level mangers and employees simply carry out their directives. At the other
extreme are organizations in with decision making is pushed down to the managers who are
close to the scene of action. The former organizations are highly centralized, and the latter are
decentralized. Centralization describes the degree to which decision-making is concentrated at a
single point in the organization. In contrast, the more that lower-level employees provide input
or actually make decisions, the decentralization is more. Table 18-2 lists some of the features
and factors that have been identified as influencing the amount of centralization or
decentralization an organization.
Table 18-2 Factors influencing centralization
When more Centralization
When more Decentralization
Environment is stable
Environment is complex, uncertain
Lower-level managers are not as
Lower-level mangers are capable
capable or experienced at making
and experienced at making decisions
decisions as upper-level mangers
Decisions are relatively minor
Lower-level manages do not
Corporate culture is open to
want to have a say in decisions
allowing managers to have a say in
Decisions are significant
what happens
Organization is facing a crisis or
Company
is
geographically
the risk of company failure
dispersed
Company is large
Effective
implementation
of
Effective
implementation
of
company
strategies
depends
on
company
strategies
depends
on
manages having involvement and
mangers retaining say over what
flexibility to make decisions
happens
Formalization refers to the degree to which jobs within the organization are standardized and the
extent to which employee behavior is guided by rules and procedures. If a job is highly
formalized, then the person doing that job has a minimum amount of discretion over what is to
be done, when it's to be done, and how he or she could do it.
Organization design decisions
Structuring organization is an engineering job. The way the structures are used determine the
effectiveness of an organization structure. It implies that the philosophy of management counts.
There are two generic of organizational design followed by the philosophical factors.
Mechanistic
Organic
Table 18-3 describes the two organizational forms. The mechanistic organization is a rigid and
tightly controlled structure. It's characterized by high specialization, rigid departmentalization,
narrow spans of control, high formalization, a limited information network (mostly downward
communication) and little participation in decision-making by lower-level employees.
Table 18-3 Mechanistic vs organic structures
Mechanistic
Organic
High specialization
Cross-Functional Teams
Rigid Departmentalization
Cross-Hierarchical
Clear Chain of Command
Teams
Narrow Spans of Control
Free Flowof information
Centralization
Wide Spans of Control
High Formalization
Decentralization
Low Formalization
Mechanistic types of organizational structures tend to be efficiency machines, well oiled by
rules, regulations standardized tasks, and similar controls. This organizational design tries to
minimize the impact of differencing personalities, judgments and ambiguity because these
human traits are seen as inefficient and inconsistent. Although no pure form of a mechanistic
organization exists in reality, almost all large corporations and governmental agencies have at
least some of these mechanistic characteristics.
In direct contrast to the mechanistic form of organization is the organic organization, which is
as highly adaptive and flexible, a structure as the mechanistic organization is rigid and stable.
Rather than having standardized jobs and regulation, the organic organizations is flexible, which
allows is to change rapidly as needs require, Organic organizations have division of labour, but
the jobs people do are not standardized. Employees are highly trained and empowered to handle
diverse job activities and problems, and these organizations frequently use employee teams
The choice of mechanistic or organic structures depends upon several factors as shown in
Table 18-4
Table 18-4 Choosing mechanistic or organic structure
Factor
Mechanistic
Organic
Size
Large size organizations
Small organizations tend to
become more formal.
be more team based,
Emphasis is on more
decentralized, goal driven
specialization,
and result oriented.
centralization and rules and
regulations.
Strategy
Productivity
and
Cost Focus on innovation and
minimization
sustainable
competitive
advantage
Technology
Mass production
Unit production and process
production.
Environment
Simple ,stable and certain
Complex, unstable and
uncertain
British scholar Woodward categorized organizations based on three distinct technologiesThe first
category, unit production, described the production of times in units or small batches. The
second category, mass production described large-batch manufacturing. Finally, the third and
most technically complex group, process production, included continuous-process production.
In general, the more routine the technology, the more standardized and mechanistic the structure
can be. Organizations with more non-routine technology are more likely to have organics
structures.
Table 18.5 Production types and organization structures
Unit
Mass
Process
Production
Production
Production
Low
vertical
M
oderate
High Vertical
differentiation
vertical
differentiation
d ifferentiation
Low horizontal
H igh horizontal
Low horizontal
differentiation
differentiation
Differentiation
Low
High
Low
Formalization
formalization
formalization
Organic
Mechanistic Organic
Boundary less organization
The term was coined by jack Welch, former chairman of General Electric, who wanted to
eliminate vertical and horizontal boundaries within GE and break down external barriers between
the company and its customers and suppliers. This idea may sound odd, yet many of today's
most successful organizations are finding that they can most effectively operate in today's
environment by remaining flexible, not having a rigid, predefined structure. The boundary less
organization seeks to eliminate the chain of command, to have appropriate spans of control, and
to replace departments with empowered teams.
By removing vertical boundaries through such structural approaches as cross-hierarchical
teams and participative decision making, the hierarchy is flattended. Managers can remove
horizontal boundaries by using cross-functional teams and organizing work activities around
work processes instead of round functional departments. And external boundaries can be
minimized or eliminated by using strategic alliances with suppliers, or value chain management.
Learning organization
It's an organization that has developed the capacity to continuously adapt and change because all
members take an active role in identifying and resolving work-related issues. In a learning
organization, employees are practicing knowledge management by continuously acquiring and
sharing new knowledge and are willing to apply that knowledge in making decisions or
performing their work. Some organizational design theories even go so far as to say that an
organization's ability to do this-that is, to learn and to apply that learning as they perform the
organization's work-may be the only sustainable source of competitive advantage.
Exhibit
Characteristic
Organizational Design
s
of
a
Boundary less
learning
Teams
Organization
Empowerment
Organizational Culture
S t r
o
ng
M
ut
ua l
T
HE Information Sharing
Relationships
LEARNING
Open
ORGANISITON
Sense of Community
Timely
Caring
Accurate
Trust
Leadership
Shared Vision
Collaboration
Figure 18.7 Learning organisation
Organization Culture-Concept
The culture of an organization has been considered to consist of three layers: Values about the
organization's mission, objectives or strategies; Beliefs which people in the organization talk
about; Taken ?for-granted assumptions or the organizational paradigm. The public statements of
the organization's values, beliefs and purposes are not descriptions of the organizational
paradigm. This `real' culture is evidenced by the way the organization actually operates.
Matching strategic positioning and organizational culture is a critical feature of successful
organizations.
Influence of culture on strategy
Henry Mintzberg said that one of the basic building blocks of organizational design is the
ideology or culture of the organization. There are many frames of reference which exist at the
organizational level and can be especially important as an influence on the development of
organizational strategy. The social and cultural influences that impact the organization can be
based on many different influences. These can be segregated into two groups, external and
internal. The combination of these two has its impact on the individual. The external influences
are the national or regional, professional/institutional, and industry influences; and the internal
influences are those of the organization and the functional/ divisional influences. The frames of
reference are shown in Figure 18-8. Different group categories have been shaded differently in
the figure.
Functional
/divisional
Organizational
The
Individual
Professional
Industrial
(or
Sector
Institutional)
National
Cultural Web
The cultural web is a useful way of considering forces for and against change. The cultural web
provides an understanding on how an organization's culture will affect its ability to change and
adapt to new policies or environments. The organization's cultural web is a set of assumptions
about the organization that have been internalized. It represents the collective experience built
up over years and all organizations develop a degree of coherence in their culture to be able to
function effectively. Because organizational cultures are not easy to change, they have an
important impact on strategy.
Figure 18.8 is a schematic representation of the cultural web. The different elements of the
cultural web are described in greater detail below:
Stories: Stories are told about the organization by its members to each other and to new recruits.
They distil the organization's past and legitimize behaviour, in the tradition of tribal love,
complete with myths, legends, heroes and taboos.
Routines and rituals `Routine' is the way members behave towards each other and towards
those outside the organization. `Rituals' are the special events through which the organization
emphasizes what is important and how things are done in the organization.
Symbol: These are the trappings of status and privilege in the organization. Symbols such as
logos, offices, cars and titles become a representation of the nature of the organization.
Organizational structure: This reflects the power structure and sets down important
relationships within the organization.
Control Systems: These are the measurement and reward systems that represent what are
important areas of focus of the organization.
Power Structures: The powerful managerial groupings are likely to be associated with the set
of core assumptions and beliefs of the organization.
The Cultural Web
Stories
Symbols
Rituals and
Routines
Power &
Paradigm
Structure
Control
Systems
Organization
Structures
Figure 18.9 The cultural Web
Cultural audit
In order to understand how the culture contributes to the problem, and work out how it needs to
change in order for the organization to deliver the strategy effectively, a cultural audit can be
carried out. The cultural audit analyzes different aspects of the organization's cultural web. A
cultural audit is conducted through:
Listening to people talk about their organization
Observing the organization's day to day operations
Asking mangers to audit themselves using a checklist.
An audit of the cultural web should bring up a number of questions that have been shown in
Table. This is representative of the different influences that play on the organization.
Table 18.6 Analysis of the Cultural Web
Element
Components
Stories
What core beliefs do stories reflect?
How pervasive are these beliefs?
Do stories relate to strengths or weaknesses,
success or failures, conformity or mavericks
Who are the heroes and villains?
What norms do the mavericks deviate from?
Routines and Rituals
Which routines are emphasized?
Which would look odd if changed?
What behavior do routines encourage?
What are the key rituals?
What core beliefs do they reflect?
What do training programs emphasize?
How easy are rituals/routines to change?
Symbols
What language and jargon is used ?
How internal or accessible is it?
What aspects of strategy are highlighted in
publicity?
What status symbols are there?
Are there particular symbols which denote the
organization?
Organisitnal structure
How mechanistic/organic are the structures?
How flat/hierarchical are the structures?
How format/informal are the structures?
Do
structures
encourage
collaboration
or
competition?
What type of power structures which denote the
organization?
Control Systems
What is most closely monitored/controlled?
Is the emphasis on reward or punishment?
Are controls related to history or current
strategies?
Are there many/few controls?
Power Structures
What are the core beliefs of the leadership?
How strongly held are these beliefs?
How is power distributed in the organization?
Where are the main blockages to chage?
Summary
The strategy implementation phase includes planning, resource allocation, analysis of
organization structure and establishing a culture for the organization. The structure of the
organization determines three key components pertaining to organizing the activities of the
people in the organization. The organization chart is the visual representation of underlying
activities and processes being undertaken by the organization. The principle underlying the
organization chart is that vertical linkages primarily show control, while horizontal linkages
indicate coordination and collaboration. There are different organizational.
The culture of an organization has been considered to consist of three layers: Values
about the organization's mission, objectives or strategies; Beliefs which people in the
organization talk about; Taken ?for-granted assumptions or the organizational paradigm. The
public statements of the organization's values, beliefs and purposes are not descriptions of the
organizational paradigm. This `real' culture is evidenced by the way the organization actually
operates. Matching strategic positioning and organizational culture is a critical feature of
successful organizations. The cultural web is a means of assessing the dominant culture of the
organization.
Self -assessment Questions
1.
How do you define organization structure and culture?
2.
What are the key elements in designing structures?
3.
Examine the different types of structures and analyze their merits and demerits
4.
What size of span is ideal ? wide or narrow? Justify your answer
5.
When do you prefer mechanistic design?
6.
Outline the significance of a boundary less organization and learning organization
7.
How does culture influence strategy?
8.
Illustrate and explain the `cultural web'.
9.
Describe cultural audit and examine its significance
10.
Will structure follow strategy or strategy follow structure? Explain in detail.
Activities
1.
Draw the structure of the organization in which you are studying or working.
Examine how you can make it a learning organization and a boundary less organization.
Illustrate and explain them.
2.
Write a short report on a chosen Chief Executive of an organization you are
familiar with. Describe how/she has been instrumental in establishing the culture in the
organization.
References:
1. Stephen P. Robbins and Mary Coulter, 7th edition (2002) , Management, Printice Hall of
India, New Delhi
2. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books, New
Delhi.
3. Lomash Sukul & Mishra P.K.(2003) Business policy and Strategic Management, Vikas
Publishing House, New Delhi
4. Stephen P. Robbins and Mary Coulter (2002), Management, Prentice Hall of India, New
Delhi. Robert Kreitner (1999), Management, 7th edition AITBS Publishers, New Delhi.
5. Terry R. George and Franklin G. Stephen (1999), Principles of Management 8th edition
ATTBS publishers, New Delhi.
6. Davar R. S., The Management Process (1984), 8th edition progressive corporation (private)
Ltd., Bombay.
7. Weirich Hernz and Koontz Herald (1993), Management ? A global perspective, 10th edition,
Mc Graw Hill International Services, Singapore.
8. Kast E. Premont and Rosenweigh E. James (1985), Organisation and Management 4th
edition, Mc Graw Hill International Series, Singapore.
Unit V
ON
S
S
E
19 Managing change
L
LESSON OUTLINE
Introduction
Change defined
Levels of change
Systems model of change
Reasons for change
Approach to manage change
o Lewin's three step model
o Action research
o Organizational development
Sensitivity training
Survey feed back
Process consultation
Team building
Inter group development
Appreciative enquiry
Methods of dealing with change
Summary
Self Assessment questions
References
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Describe concept and the levels of change
Outline the systems model of change
Discuss the reasons for change
Describe approaches to manage change
Examine the methods of dealing with change.
Introduction
Change is law of life. Change is an inevitable and unavoidable process in organizations. It is only
difficult in small firms but in large organizations it requires monumental effort and persistence.
Uncertain consequences, organizational policies, various forms of resistance from employees
and suppliers buffet change process. Managers as such have to appreciate the needs for
change, understand the complexities of change process and handle the change process
effectively.
Change ? defined
According to Stephen P. Robbins change is concerned with making things different. Change
occurs when an organizational system is disturbed by some internal or external force, occurs.
Change, as a process, is simply modification of the
structure or process of a system. It may be good or bad, the
concept is descriptive only."
In the context of change we come across certain terms like change agent, change
intervention and change targets.
o Change agent is the person or persons who acts as a catalyst, and assumes
the responsibility for managing the change process.
o Change intervention, is a planned section to make things different.
o Change targets are individuals and groups who are subject to change.
Levels of change
Change occurs at three levels
i)
Individual level
ii)
Group level and
iii)
Organization level
At the individual level change is reflected in such developments as changes in a job assignment,
physical move to a different location, or the change in maturity of a person which occurs
overtime. It is said that changes at the individual level will seldom have significant implications
for the total organization.
Most organizational changes have their major effects at the group level. This is because
most activities in organizations are organized on a group basis. The groups could be
departments, or informal work groups. Changes at the group level can affect work flows, job
design, social organization, influence and status systems, and communications patterns.
Changes at the organization level involve major programmes that affect both individuals and
groups. Decisions regarding these changes are generally made by senior management and are
seldom implemented by only a single manager. Frequently, they occur over long periods of time
and require considerable planning for implementation. Example of these changes would be
reorganization of the organizational structure and responsibilities, revamping of employee
remuneration system, or major shifts in an organization's objectives.
Systems model of change
While planning a change, care is necessary to have organizational coverage.
According to the systems model of change, the organization can be described as six interacting
variables which could serve the focus of planned change-? people, culture task, technology,
design and strategy. Figure 19-1 depicts them as system variables ? interrelated components.
The people variable is applicable to individuals working for the organization; it is inclusive
of their individual differences like their personality, attitudes, perceptions, attributions, needs
and motives.
The culture variable is a reflection of their shared beliefs, values, expectations and norms of
organizational members
The task variable refers to the nature of the work itself i.e., whether the job is simple or
complex, novel or repetitive, standardized or unique.
The technology variable involves the problem solving methods and techniques used and the
application of knowledge to the various organizational processes (ie., the task and technology
in job design.)
The design variable refers to the organizational design in terms of the formal organizational
structure, its systems of communication, control, authority and responsibility.
The strategy variable refers to the organization's planning and decision making process with
specific reference to the activities undertaken to identify organizational goals and prepare
specific plans to acquire, and sue resources in order to accomplish those goals.
Figure: 19.1 A systems model of change
People
Culture
Task
Technology
Design
Strategy
Reasons for change
More and more organizations today face a dynamic changing environment. This, in turn,
requires them to adapt. "Change or chaos", is the rallying cry among mangers today world wide.
Table 19-1 summarizes the six specific forces that are acting as stimulants for change.
Table 19-1 Forces for Change
Force
Specific change variables
Nature of the
More cultural diversity
workforce
Increase in professionals
Many new entrants with
inadequate skills
Technology
Faster and cheaper
computers
New mobile communication
devices
Decline of the human genetic code
Competition
Global competitors
Mergers and consolidations
Growth of e-commerce
Social trends
Internet chat rooms
Retirement of Baby
Boomers
Increased interest in urban
living
World politics
Escalation of hostilities in
the Middle East
Opening of markets in China
The war on terrorism
following 9/11/01
Workforce diversiy
For instance, almost every organization has to adjust to a multicultural
environment. Human resource policies and practices have to change in order to attract and keep
this more diverse workforce. And many companies have to spend large amounts of money on
training to upgrade reading, match, computer, and other skills of employees.
Technology For instance, computers are now common place in almost every organization; and
cell phones and hand-held PDAs are being increasingly perceived as necessities by a large
segment of the population.
Competition. The global economy means that competitors are as likely to come from across the
ocean as from across town. Heightened competition also makes it necessary for established
organizations to defend themselves against both traditional competitors who develop new
products and services and small, entrepreneurial firms with innovative offerings. Successful
organizations will be the ones that can change in response to the competition.
Social trends Society doesn't remain static. For instance, in contrast to just ten years ago, people
are meeting and sharing information in Internet chat rooms; The youth has become more
aggressive. The old aged people are increasing in number. Rural areas are developing and rual
market is becoming attractive.
World politics No one could have imagined how world politics would change in recent years.
We've seen the breakup of the Soviet Union; the opening up of South Africa and China; almost
daily suicide bombings in the Middle East; and, of course, the rise of Muslim fundamentalism.
The attacks on New York and Washington on September 11, and the subsequent war on
terrorism, has led to changes in business practices related to the creation of backup systems,
employee security, employee stereotyping and profiling, and post-terrorist-attack anxiety.
Approaches to managing change
The three most popular approaches to manage change are
i)
-
Lewin's three step model
ii)
-
Action research and
iii)
-
Organizational development
i)
Lewin's three step model
Kurt Lewin argued that successful change in organizations should follow three steps as shown in
Figure 19-2. Unfreezing is the release of forces dormant in the status quo. Movement is
transforming form old to new situation or to a new state. Refreezing is consolidation in the new
situation to make change permanent.
Lewin's Three-Step Change
Model
F
i
gur
e
19
Unfreezing
Movement
Refreezing
-
2
Every change situation Kurt Lewin presents as a force field as depicted in Figure 19-3. The
status quo can be considered to be an equilibrium state. To move from this equilibrium-to
overcome the pressures of both individual resistance and group conformity ?unfreezing is
necessary. It can be achieved in one of three ways.
The driving forces, which lead to change, can be strengthened. The restraining forces, which
hinder movement from the existing equilibrium, can be decreased. A third alternative is to
combine the first two approaches.
Figure
19.3
Lewin's force field
analysis model
Res training
Desired -- -
f
orces
conditions
Driving
forces
Restraining
forces
Dri
ving
Restraining
for ces
forces
Current
conditions
Driving
forces
Before change After change
ii)
Action research
Action research is a data-based, problem-oriented process that diagnose the need for change,
introduce the intervention and then evaluates and stabilizer the deserved changes. The Action
research process is given in Figure 19-4
Figur
e 19.4
The action research process
Diagnose need
Introduce
Evaluate and
for change
intervention
stabilize change
Establish
Disengage
client
Gather data,
Implement
Determine
consultant's
consultant
analyze data,
desired
effectiveness of
services
relationship
and decide
incremental or
change and
intervention
quantum
refreeze new
objectives
change
conditions
Establish client-consultant relationship ? Action research usually assumes that the
change agent originates outside the system (such as a consultant), so the process
begins by forming the client-consultant relationship. Process consultation is a
method of helping people within the system solve their own problems by making
them aware of organizational processes, the consequences of those processes, and the
means by which they can be changed.
Diagnose the need for change ? Action research is a problem-oriented activity that
carefully diagnoses the problem through systematic analysis of the situation
Introduce intervention ? This stage in the action research model applies one or more
actions to correct the problem. It may include any of the prescriptions mentioned in
this textbook, such as building more effective teams, managing conflict, building a
better organizational structure, or changing the corporate culture. Some experts
recommend incremental change in which the organization fine-tunes the system and
takes small steps toward a desired state. Others claim that quantum change is often
required in which the system is overhauled decisively and quickly.
Evaluate and stabilize change ? Action research recommends evaluating the
effectiveness of the intervention against the standards established in the diagnostic
stage.
The action research approach has dominated organizational change thinking eve since it was
introduced in the 1940s.
iii)
Organizational development (OD)
Organizational development (OD encompasses a collection of planned-change interventions
built on humanistic-democratic values that seek to improve organizational effectiveness and
employee well-being. The following briefly identifies the underlying values in most OD efforts.
1. Respect for people. Individuals are perceived as being responsible, conscientious, and
caring. They should be treated with dignity and respect.
2. Trust and support. The effective and healthy organization is characterized by trust,
authenticity, openness, and a supportive climate.
3. Power equalization. Effective, organizations deemphasize hierarchical authority and control
4. Conformation. Problems shouldn't be swept under the rug. They should be openly
confronted.
5. Participation. The more that people who will be affected by a change are involved in the
decisions surrounding that change, the more they will be committed to implementing those
decisions.
There are broadly six OD interventions discussed by experts of organizational behavior
Sensitivity training ? This is done in training groups that seek to change behavior
through unstructured group interaction. It can go by a variety of names ? sensitivity
training, laboratory training, encounter groups, or T-groups (training groups.
Members are brought together in a free and open environment in which participants
discuss themselves and their interactive processes, loosely directed by a professional
behavioral scientist. The group is process-oriented, which means that individuals
learn through observing and participating rather than being told.
Survey feed back ? Uses questionnaire to identify discrepancies among member
perceptions; discussion follows and remedies are suggested.
Process consultation ? A consultant assist a client to understand process events with
which he or she must deal and identify processes that need improvement. These
might include work flow, informal relationships among unit members, and formal
communication channels. Process Consultation is more tasks-directed than is
sensitivity training.
Team building ? uses high-interaction group activities to increase trust and openness
among team members. Team building can be applied within groups or at the inter
group level, at which activities are interdependent.
Inter group development ? These include efforts to change the attitudes, stereotypes
and perceptions that groups have of each other. This approach used problem solving
techniques.
Appreciative enquiry - Seeks to identify the unique qualities and special strengths
of an organization, which can then be built on to improve performance.
Methods for dealing with change
Kotler and Schlesinger have suggested six methods of introducing changes .tabl e19- The
change agent must understand that there is no one universal approach to overcome resistance.
Depending on each situation a different approach needs to be adopted. Change is a situational
problem and a realization of this fact is essential for bringing about a change.
Table 19-2 Methods for dealing with resistance to change
Approach
Commonly used situations
Advantages
Drawbacks
Education +
Where there is a lack of
Once persuaded
Can be very time
Communication information or inaccurate
people will often help
consuming if lots of
information and analysis
with the
people are involved
implementation of the
change
Participation +
Where the initiators do not
People who
Can be very time
Involvement
have all the information they participate will be
consuming if
need to design the change
committed to
participators design an
and where others have
implementing change
inappropriate change.
considerable power to resist. and any relevant
information they have
will be integrated into
the change plan.
Facilitation +
Where people are resisting
No other approach
Can be time
support
because of adjustment
works as well with
consuming expensive,
problems
adjustment problems.
and still fail
Negotiaton +
Where someone or some
Sometimes it is a
Can be too expensive
agreement
group will clearly lose out in relatively easy way to
in many cases if it
a change and where that
avoid major resistance alters others to
group has considerable
negotiate for
power to resist.
compliance
Manipulation +
Where other tactics will not
It can be a relatively
Can lead to future
co-option
work or too expensive
quick and inexpensive problems if people
solution to resistance
feel manipulated.
problems.
Explicit
Where speed is essential and It is speedy and can
Can be risky if it
+implicit
the change initiators possess
overcome any kind of
leaves people angry at
coercion
considerable power.
resistance
the initiators.
(Soruce: Kotler & Schlesinger, "Choosing Strategies for Change" Harvard Business Review ,
March-April 1979.
Summary
Change means making things different. Organizations today are adapting to changes and
becoming more flexible to match the current market challenges. The causes can be impact of
globalization, the new information technology age and the workforce diversity.
The systems model of change describes the organization as comprising of six interacting
variables which can serve as the focus of planned change ? people, culture ask, technology,
design and strategy. Organizational diagnosis (or planned) change includes ascertaining cause
(s) of problems before going for managing change, changing people behavior, changing
technology, changing organizational design and changing organization culture. As per Kurt
Lewin's phases of change process, there are three phases ? unfreezing, changing and refreezing..
Resistance to change can occur at individual level (which may be due to perception, personality,
habit, fear or losing power of the unknown and/or economic considerations) and at
organizational level (organization, design, organizational culture, limited resources or/and fixed
investment liability). Resistance to change can be over come by using a force field analysis,
adopting Lewin's three step approach, empathy and support, communication and participation
and involvement of employees.
Self -assessment Questions
1.
Define change. Identify and illustrate the levels of change
2.
Briefly explain the systems model of change
3.
Outline the forces that drive change.
4.
What are the approaches to manage change?
5.
What is the contribution of Kurt Lewin to managing change?
6.
What is Action research? Explain its significance as a OD techniques.
7.
Describe how sensitivity training can be used in managing change.
8.
What are the popular methods of managing resistance to change in organizations
from the human relations point of view.
9.
Describe the terms
a. Negotiation
b. Cooptation and manipulation
10.
What do you understand by implicit and implicit coercion
Activities
1) Question yourself: `how well do I respond to turbulent change?' List and explain how
you overcame resistance to changes that have taken place in you work environment.
2) Visit the website of Indian Tourism Development Corporation (ITDC). Identify the
change process in the context of globalization and privatization. Examine the impact of
change and note down the same.
References
1. Suja R. Nair (2004), Organizational Behavior, Himalaya Publishing House, New Delhi
2. Stephen P. Robbins (2204),Organizational behavior, Pearson education, New Delhi
3. Dr. K Aswathappa (1999), Organsiitonal Behavior,Himalaya Publishing House, Mumbai
4. Steven L. McShane, Mary Ann Von Glinow (2005), Organizational behavior, Tata
McGraw Hill, New Delhi
Unit V
ON
S
S
E
20 Power, Politics and Leadership
L
LESSON OUTLINE
Introduction
Concept and sources of power
Leadership and Use of power
Politics
Summary
Self Assessment questions
Activities
References
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Explain the concept and dynamics of
organization power
Describe organizational politics diagnose the
factors that contribute to politics
INTRODUCTION
An organization is a social system and it contains dynamic elements like power and politics that
influence behavior of people. Both the terms are often emotional and sometimes felt negative.
Since they are part of social life they should be managed properly to get positive outcomes.
Leadership balances power and politics. Managers as leaders have to examine the source of
power and its effective use. At the same time they should also explore the political behavior in
organizations. They have to then balance power and politics, to effectively steer an organization
towards its goals.
CONCEPT AND SOURCES OF POWER
The term power may be applied to individuals, groups, teams, departments, organizations, and
countries. Power influences may affect resource allocations, space assignments, goals, hiring
decisions, and many other outcomes and behaviors in an organization. It is defined as follows.
Power is the capacity to influence the behavior of others.
There are different sources of power. They are broadly divided into (i) interpersonal
sources and (ii) structural sources. They are further classified as shown in Figure 20-1.
(a) Interpersonal sources of power
Reward power is individual's ability to influence others' behaviors by rewarding their desirable
behaviors. Compliance with requests and directives depends on rewards and the value of
rewards to the recipients. Therefore, a superior can get desirable behaviors only when the
rewards he has offered are valuable to the subordinates.
Coercive power is an individual's ability to influence others' behaviors by punishing their
undesirable behaviors. For example, subordinates may comply because they expect to be
punished for failure to respond favorably to managerial directives. Punishment may take the
form of reprimands, undesirable work assignments, closer supervision, tighter enforcement of
work rules, suspension without pay, and the like. The organization's ultimate punishment is to
fire the employee.
Legitimate Power most often refers to a manager's ability to influence subordinates' behaviors
because of the manager's formal position in the organization. Subordinates may respond to such
influence because they acknowledge the manger's legitimate right to prescribe certain behaviors.
Expert power is an individual's ability to influence others' behaviors because of recognized
competencies, talents, or specialized knowledge. To the extent that mangers can demonstrate
competence in implementing, analyzing, evaluating, and controlling the tasks of subordinates,
they will acquire expert power.
Referent Power is an individual's ability to influence others' behaviors as a result of being
respected, admired, or liked. For example, subordinates' identification with a manager often
forms the basis for referent power. This identification may include the desire of subordinates to
emulate the manager. A young manager may copy the leadership style of an older, admired, and
more experienced manager. The older manager thus has some ability-some referent power-to
influence the behavior of the younger manager.
Effective / Ineffective
Interpersonal
Application of Power
Sources of Power
Relationships among
power bases
Reward
Selection of
Coercive
influence strategies
L
egitimat e
Expert
Referent
Power
Influence
over Others
Structural Sources of
Power
Knowledge
Resources
Decision making
Networks
Figure 20-1 Power dynamics
(ii) Structural sources of power
Structural sources of power are related to the division of labor and position in different teams
and departments work assignments, locations and roles. The positions in hierarchy naturally
result in a variety of situations in which there is unequal access to information, resources, and
decision making.. Any of the situational factors could be a source of power in an organization,
which include knowledge, resources, decision- making and networks.
i)
Knowledge power ? This power is from knowledge-information and know-how that
exists in an organization. Those in a position to control information about current operations,
develop information about alternatives, or acquire knowledge about future events and plans
have enormous power to influence the behaviors of others.
Personal computers and computerized workstations are having a dramatic impact on the
access to and use of information-and thus on power relationships-in many organizations.
ii)
Resources power ? Organizations need a variety of resources, including human
resources, money, equipment, materials, supplies, and customers, to survive. The importance
of specific resources to a firm's success and the difficulty of obtaining them vary. The old
saying that "he who has the gold makes the rules" sums up the idea that resources are power.
Those having resources exercise power.
Today companies are adopting retention strategies to retain
competent employees. Skilled people have power advantage over
the less skilled people.
iii) Decision-making power ? Decisions in organizations often are made sequentially, with
individuals, groups, or teams participating. The decision-making process creates additional
power differences. Those who are in the critical positions of decision-making process might
influence power. They influence the goals being developed, premises being used in evaluating
an issue, alternatives being considered, outcomes being projected, and so on.
Consider, purchase process of a firm. If the plant superintendent is the one who has to approve the quotation
submitted by the suppliers, the purchase manager has to wait for the decision of Plant superintendent.
iv) Network power ? Managers and departments that have connecting links with other
individuals and departments in the organization will be more powerful than those who don't.
The concept of networks as power implies that various affiliations, channels of information,
and coalitions, both inside and outside the organization, represent sources of power. These
networks can be information links, supply links and support links.
v)
Lower level employee power ? In organizations lower level employees also may wield
considerable power. One of the sources can be expert power, which may allow subordinates to
influence their managers.
For example, an office assistant who can use windows 98 spread sheet
can influence his manager if he is not familiar with the same.
Leadership and Use of power
Power can be used by a variety of people in a variety of ways. A useful perspective for studying the uses
of power is illustrated in Table 20-1
(i) Use of interpersonal power
Table 20-1 shows the various uses of power and their outcomes.
Table 20-1The Uses and Outcomes of Power
Source of
Leader
Types of Outcome
Influence
Commitment
Compliance
Resistance
Referent
Likely;
Possible;
Possible;
Power
If request is believed to be
If request is perceived to be
If request is Something that is
important to the leader.
important to the leader.
unimportant to the leader.
Expert
Likely;
Possible
Possible;
Power
If request is persuasive and
If request is persuasive.
If leader is arrogant
subordinates share
and insulting or subordinates
leader's task goals
are
apathetic about task and
goals.
Legitimate
Possible; If request is polite
Likely; If request or order is
Possible;
Power
and very appropriate
seen as legitimate.
If arrogant demands
are made or request
does not appear
proper in the interests of the
organisation or individual.
Reward
Possible; When reward is
Likely; If used in a
Possible; If used in a
used in a subtle, very
mechanical, impersonal way
manipulative,
personal way
arrogant way
Likely; If used in a hostile,
Coercive
Very unlikely
Possible;
nonpunitive way or
Power
If used in a helpful
manipulative way.
way.
(ii) Use of structural power
These sources don't operate independently. A study conducted in two paper mills provides an
example of how power sources are related.
One of the mills dropped an incentive pay plan based on performance in favor of a pay plan
based strictly on seniority. Compared to the second plant, which retained the performance
system, subordinates perceptions of the use of various sources of power by supervisors in the
first plant changed noticeably. Discontinuing the incentive plan lowered the perceived reward
power of supervisors' use of punishment increased (attribute perhaps to less control over
rewards). The perceived use of referent and legitimate power decreased, but expert power
appeared to be unaffected. These findings suggest that the interpersonal sources of power that
influence behavior are complex and interrelated.
Table 20-2 The Uses and Outcomes of Structural Power
Source of
Leader
Types of Outcome
Influence
Commitment
Compliance
Resistance
Knowledge
Likely;
Possible
Possible;
If request is persuasive and
If request is logical and
If leader is arrogant
subordinates share
appropriate.
and insulting or subordinates
leader' s task and goals
are
apathetic about task and
goals.
Resources
Likely;
Possible;
Possible;
If request is believed to be
If request is perceived to be
If request is Something that is
important to the leader.
important to the leader.
unimportant to the leader.
Decision
Possible; If request is polite
Likely; If request or order is
Possible;
making
and very appropriate.
seen as legitimate.
If arrogant demands
are made or request
does not appear
proper in the interests of the
organization or individual.
Networks
Possible; When power is
Likely; If used in a
used in a subtle way.
Way beneficial to
organizational interests.
Possible; If used in a
manipulative,
arrogant way
(iii) Power tactics of leaders
Power is used with influence tactics in organizations. There are some standardized ways by
which power holders attempt to get what they want. A research study of 165 managers and 750
employees revealed how managerial employees influence others. The findings identified seven
tactical dimensions or strategies .How they vary in popularity is shown in Figure 20-2.
Tactics
Description
Reason
Use of facts and data to make a logical or rational presentation of ideas
Friendliness
Use of flattery, creation of goodwill, acting humble, and being friendly
prior to making a request
Coalition
Getting the support of other people in the organization to back up the
request
Bargaining
Use of negotiation though the exchange of benefits or favors
Assertiveness
Use of a direct and forceful approach such as demanding compliance with
requests, repeating reminders, ordering individuals to do what is asked, and
point out that rules require compliance
Higher authority
Gaining the support of higher levels in the organization to back up requests
Sanctions
Use of organizationally derived rewards and punishments such as
preventing or promising a salary increase, threatening to give an
unsatisfactory performance evaluation, or withholding a promotion.
Use of Power Tactics: From most to Least Popular
F
I
GUR
When Managers When Managers
Influenced Superiors* Influenced Subordinates
E
Most Popular Reason Reason
Coalition Assertiveness
Friendliness Friendliness
Bargaining Coalition
Assertiveness Bargaining
Higher authority Higher authority
20.2
Sanctions
Least Popular
*The dimension of sanctions is omitted in the scale that measures upward
influence
(iv) Power Coalitions
The natural way to gain influence is to gain power. Therefore, those who want power will
attempt to build a personal power base by forming a coalition. By joining together, managers
can combine their resources to increase rewards for themselves. Successful coalitions have been
found to contain fluid membership and are able to form swiftly, achieve their target issue, and
quickly disappear.
Many employees hold power by joining trade unions. If a trade union is unable to get
success, almost all the trade unions of the organization join together to fight against management
for achieving their demands fulfilled.
Participative management is visible in coalitions. The coalition continues till all the
members are co-operative and tolerant. If their interests clash, they disintegrate and the benefits
of coalitions are not achieved. Dictatorial system does not like coalition. Coalition provides
interdependence. It is needed where resources are huge and require to be managed effectively.
POLITICS
Politics is the art of acquiring and enhancing power. Employees have a certain role to play.
Therefore, their exercise of power is limited to a large extent by the role obligations. Political
behavior is of two types.
Legitimate - It includes normal every day's politics. It includes:
Complaining to one's superiors,
By passing the chain of command,
Forming coalitions,
Obstructing organizational policies through excessive adherence to rules and
Developing contacts outside through professional activities.
Illegitimate ? It includes influences that are extreme and violate the implied "rules of the
game." Such activities include
Sabotage,
Whistle blowing,
Symbolic protest such as wearing unorthodox dress and
Groups of employees cumulatively calling in sick.
It may be stated that the vast majority of political actions are of the legitimate variety. The
reasons are pragmatic ? the extreme and illegitimate forms of political behavior pose a very real
risk of loss of organizational membership, or extreme sanctions against those who use them and
then fall short in having enough power to insure that they work.
Factors causing political behavior
Research has indicated a number of factors, which can contribute to political behavior. Some of
these factors are individual and derived from the unique qualities of the employees in the
organization and others are derived from the organization's internal culture or environment.
Figure 20-3 Factors causing political behavior
Individual Factors
Organizational Factors
Need for power and
,
high expectations of
Politi
a) Situational
cking
success
Beha
Re-allocation of
vior
resources
Machiavellianism
Opportunity for
Locus of control
promotion
Risk seeking propensity
Low trust within
based on investment in
t
Role ambiguity
he organization and
Performance evaluation
alternative job
Customers
system.
opportunity
b) Culture
Win-lose approach
Excess pressure to
perform,
Managers unwilling to
Reward
Avoid
share information
Punishment
Politicking by top
management itself
a) Individual factors
A few prominent individual factors are examined here.
i)
Need for power and high expectations of success ? Some managers who are status and ego driven
often resort to politics to gain access to power corridors. They use the power for their personal
growth and pleasures. Some managers who are in-charge of teams or units, may also engage in
politics to safeguard their positions and have more benefits for their units. For effective
management to take place, managers must be cautioned against the use of `Need for Power' for
personal means ? to dominate others, seek loyalty for own self rather than the organization. It
will always be preferable to adopt a `Need for power for institutional purpose'. This will help in
creating a good work climate or culture for effective work and also help to develop
subordinate's understanding and loyalty to the organization.
ii) Machiavellianism - Machiavellians are people who use deceit and opportunism in
interpersonal relations and manipulate others for their own purpose. Such Machiavellists also have
a cynical view of the nature of other people and do not care for conventional morality.
Obviously, politics of this kind is undesirable in organizations.
iii) Locus of control Locus of control is the extent to which people believe that they can control
events which affect them. Individuals can either have a high internal locus of control or a high
external locus of control. Those individuals with a high internal locus of control hold a belief
that events result primarily from their own behavior and are likely to engage in a political
behavior in an attempt in influence other people. Those who have external locus of control
believe in external forces from other individual managers, other groups or fate, which affect their
success.
iv)
Risk seeking propensity Managers differ in risk taking. Some are risk seekers. Some are
risk moderators. There are marked individual differences in their willingness to take risks or in
their risk seeking prosperity. Some individuals can be descried as risk seekers. Negative
outcomes like low performance ratings, demotions etc., can be the risks associated with persons
who engage in political behavior in organizations. Knowing this and yet engaging oneself in
political activities can be called risk seekers. While risk avoiders are those who avoid such due
to the possible negative outcomes.
(b) Organizational factors
Organizational factors also influence the politicking in organizations. These are as follows.
Reallocation of resources ? when organizations downsize the changes many stimulate
conflict and politicking to have advantage in allocation.
Advancement or promotion ? people resort to politics for quickly getting advancement
or promotion in their careers
Low trust ? A low trust within the organization can increase political behavior, which
can become illegitimate also.
Role ambiguity ? When there is confusion in the scope and functions, employees resort
to politicking to have a favorable situation.
SUMMARY
Organizational behaviors include power and political dimensions. When strategy implementation
is undertaken, managers have to be leaders in the process and exercise influences. Influencing
behavior requires power, Power sources are mainly categorized into inter personal and
organizational. Interpersonal sources are: coercive, expert, legitimate, referent, and reward.
Organizational power sources are: knowledge, resources, decision- making and networks. Power
tactics employed by managers include: reason, coalition, friendliness, bargaining and
assertiveness. Politics is the art of acquiring and enhancing power. Employees have a certain
role to play. Therefore, their exercise of power is limited to a large extent by the role
obligations. Political behavior is of two types-legitimate and illegitimate. Research has indicated
a number of factors, which can contribute to political behavior. Individual factors include: Need
for power and high expectations of success, machaivellinism locus of control and risk taking
propensity. Organizational factors include: reallocation of resources, promotion or advancement,
low trust and roleambiguity.
SELF-ASSESSMENT QUESTIONS
1. Explain what do you understand by power and politics.
2. What are the interpersonal sources of power?
3. What are the organizational sources of power?
4. How do you exercise interpersonal power as a leader?
5. How do you exercise organizational power as a leader?
6. Why do mangers resort to politics? Are there risks?
7. What factors of individual are responsible for politics?
8. What factors of organization can be responsible for politics?
9. Draw a model of power dynamics in organizations.
10. Draws a model of political behavior in organizations.
Activities
1. Think about behaviors in your organization. Are there politics and power
influences? Make a report.
2. Recall the way you have used power to influence behaviors of family members and
friends. Make an inventory of power influences identifying the sources.
3. Prepare a short questionnaire to find out political behavior in organizations. Find out the
political issues, outcomes and strategies adopted for reducing undesirable behaviors.
4. Visit a local bank. Inquire the role played by politics and power during
computerization. Also find out how they were used for advantage by management of
bank.
REFERENCES
1. Suja R. Nair (2004) Organizational Behavior Text & Cases , Himalaya Publishing
House, New Delhi
2. Don Hellriegel, John W. Slocum, Jr. & Richard W. Woodman (2001), Organizational
Behavior, South-Western Thomson Learning, Australia
3. Stephen Robbins (2004), Organizational Behavior, Pearson Education, Delhi
4. Mirza S. Saiyadain (20030, Organizational Behavior, Tata Mc Graw Hill Publishing
Company Ltd., New Delhi.
Unit V
21
Strategy Implementation
21
SSON
E
L
LESSON OUTLINE
Introduction
Implementation-Defined
Significance of Implementation
Process of implementation
Strategic evaluation and control
Summary
Self assessment questions
Assignments
References
LEARNING OBJECTIVES
After reading this lesson you should be
able to
Understand the concept of strategy
implementation
Identify the different types of control
Examine the process of strategy
implementation
Introduction
Planning is said to be effective only when it produces desired results. It is hence said that
planning and controlling are Siamese twins of management. Once a strategy is chosen, it has to
be put into action, in such a way that the expected outcomes are realized. This process is called
`implementation'. It covers a wide range of strategic issues, decisions and actions, which are
often critical for the success of a strategy.
Implementation-Defined
Implementation involves putting into action the conceptualized strategy, by formulating various
programs, budgets, procedures and policies. Miller defined strategy implementation in the
following words.
"Strategy implementation is the process by which strategies and policies are
put into action through the development of programs, budgets and
procedures."
Significance of Implementation
The significance of implementation of strategy can be understood from the following points of
view.
(i)
It is part of strategy making
Strategy making process involves several steps (shaded boxes)as shown in Figure 21-1.it
involves steps like resource allocation, designing organization culture, leadership that
balances power and politics, and evaluation of
performance at every step through standards and audit systems. If these steps are not
properly taken care of faire in strategy is inevitable. PepsiCo example illustrates how
culture can be a cause of failure.
Strategist
Environmental
Internal
Strategic
Selecting
Analysis
Analysis
alternatives
Strategy
Enterprise
objectives
Resource
Leadership
Post
allocation &
functional policies
implementation
structure
systems
evaluation
Figure 21-1 Strategy evaluation and control in strategic formulation framework.
Pepsi Co, selected a relatively inexperienced manager to implement strategy at Brazil.
Mr Charles Beach from Coca-Cola was selected as franchisee for North Carolina, Pueto Rica and
later for the entire South America. This fast `changing culture' and `ready fire aim culture' of
Pepsi Co, became a problem. While Coca-Cola adds territories slowly, Pepsi Co, is very fast, this
led its Brazilian operations into Chaos.
Process of implementation
Implementation includes the following steps. Many of the steps are discussed in the earlier
lessons. We will now briefly discuss them.
i)
Resource allocation
ii)
Organisation structure design
iii)
Planning framework
iv)
Leading and staffing
v)
Change and communication.
vi)
Evaluation
Resource allocation
This has vital significance in strategy implementation. In a single product firm, it may involve
assessment of the resource needs of different functional departments. In a multi divisional
organisation, it implies assessing the resource needs of different SBUs or product divisions.
Methods of resource allocation include use of:
Percentage of sales or profits
BCG matrix
Budgeting system
Organization structure design
Appropriate organization structure is to be designed to make strategy implementable. The
relation between strategy and structure is established based on organizational life cycle,
corporate development stages and international businesses. Organization design involves
changes like:
Job design- Making the jobs more challenging by job analysis and role redefinition.
Reengineering- Reengineering is a radical redesign of business process to achieve major
gains in cost, service and time. It is an effective way of implementing turn around
strategy. It breaks away old rules and procedures
Planning frame work
The managers involved in implementation should plan and develop programmes, budgets and
procedures. They should also work for achieving synergy among the divisions and functional
areas in order to maintain distinctive competence.
Programme
Programmes make strategy action oriented. Ex: Reliance vertical (forward)
integration strategy for growth.
Budgets
This begins after programmes. It is a check on the feasibility of selected strategy.
Budget is expression of programmes in quantitative terms. Without budgets
implementation becomes impractical
Procedures
After programmes and budgets, studied operating procedures (SOPS) must be developed. They
detail the various activities that must be carried out to complete a corporation's programme. The
change during the change process, Ex: Mc Donald's developed very detailed procedure to ensure
that policies are carried out in its fast food retail outlets.
Leadership and staffing:
Implementation involves leading people to utilize their abilities and skill efficiently and
effectively to meet organisational goals. Leaders are the key organic elements, who help the
organization cope with changes. Failure of leadership may result in goal incongruence,
communication break down, ambiguity etc,. Leaders help in transformation in three phases
Recognising need for revitalization
Creating a new vision
Institutionalizing change
A leader may follow any of the following leadership styles
Entrepreneurial-risk taking, dynamic , change oriented.
New scientific ? Questioning the existing practices and discovering and experimenting
new approaches.
Quasi-scientific- Balancing the tradition and innovation to maintain stability.
Muddling through ? Pushing through different situations with reactive planning
Conservative ?Making approaches of implementation carefully as per procedures.
Democratic-Participative in style involving people indecision making.
Middle of the road- Using an approach that is in between the democratic and task
oriented.
Staffing issues involve hiring new people with new skills, firing unskilled or inappropriately
skilled people, or training employed to acquire new skills. Staffing requirements are likely to
follow a change in human resource strategy relating to number and quality of people.
GE's aircraft engine group used training to maintain its market shone even though work force
was cut from 42,000 to 33,000 between, 1991 to 1993.
`Downsizing' has become one of the practices of late in modernization strategy of banks. It
involves planned elimination of positions or jobs during strategy implementation. It involves.
Elimination of unnecessary work
Contract out those works that can be done cheaper
Plan long run efficiencies
Communicate the resources for downsizing
Invest in remaining employees
Develop value added jobs.
Change and communication:
Change is inevitable during implementation. Rationale for strategic changes should be
communicated to workers through news letters and speeches and even in training programmes.
Companies in which major cultural changes took place have the following.
The CEO with strategic vision, who communicated their vision to employees at all levels
and constantly compared themselves with competitors for updating.
Vision , that is translated into key elements for implementation. They are widely
communicated through contests, recognition, rewards etc,
Evaluation
The importance of strategic evaluation lies in its ability to coordinate the tasks performed by
individual managers, and also groups, division or SBUs, through the control of performance. In
the absence of coordinating and controlling mechanisms, individual managers may pursue goals,
which are inconsistent with the overall objectives of the department, division, SBU or the whole
organization. We will now discuss evaluation and control in detailed way.
Strategic evaluation and control
The process of evaluation basically deals with four steps:
1. Setting standards of performance-Standards refer to performance expectations. Table 21-
1 illustrates standards
2. Measurement of performance-Measurement of actual performance or results requires
appraisal based on standards.
3. Analyzing variances- The comparison between standards and results gives variances.
Table 21-2 shows how variances can be found.
4. Taking corrective action-The identifications of undesirable variances prompt managers to
think about ways of corrective them.
Table 21.1 Illustrative Performance Indicators in Functional Areas Across Different Grand
Strategies
Stability
Expansion
Retrenchment
Focus of
Efficiency- oriented
Growth-oriented
Cost
reduction
Evaluation
oriented
Financial area
Profitability
and Leverage
ratios; Liquidity and activity
activity
ratios; credit ratings; break- ratios
divided and earnings even point
per share
Marketing area
Sales revenues and Sales growth (current Marketing
costs
quotas;
sales to base year's divided
by
sales;
sales
force sale); new accounts marketing
costs
productivity;
opened per year; new divided by orders;
accounts
eceivable products
sales sales
expenses
divided by sales;
divided by total sales
divided
by
total
number of customer
number of sales calls
complaints
Performance indicator
Standard
Actual
Variance
Profit over sales (%)
12
10
-2
Sales revenue (Rs.crores)
26
22
-4
Capacity utilization (%)
85
90
+5
Training costs per employee (Rs)
20
22
+2
Maintenance costs as % of IT investments
15
20
-5
Importance
Strategic evaluation is important due to several factors.
Need for feedback Within an organization, there is a need to receive feedback on current
performance, so that good performance is rewarded and poor performance is corrected.
Validates strategic choice Strategic evaluation helps to keep a check on the validity of a
strategic choice. An ongoing process of evaluation would, in fact, provide feedback on the
continued relevance of the strategic choice made during the formulation phase. ; Congruence
between decisions and intended strategy During the course of strategy implementation
managers are required to take scores of decisions. Strategic evaluation can help to assess whether
the decisions match the intended strategy requirements.
New Strategy planning Lastly, the process of strategic evaluation provides a considerable
amount of information and experience to strategists that can be useful in new strategic planning.
Participants in Strategic Evaluation
The various participants in strategic evaluation and control and their respective roles are
Shareholders, lenders and the public They have ownership claim on the assets of the enterprise
and are therefore responsible to the strategic performance and evaluation.
Board of Directors enacts the formal role of reviewing and screening executive decisions in the
light of the environment and business organizational implications.
Chief executives are ultimately responsible for all the administrative aspects of strategic
evaluation and control.
SBU or profit-centre heads may be involved in performance evaluation at their levels and may
facilitate evaluation by corporate-level executives.
Financial controllers, company secretaries, and external and internal auditors form the group
of persons who are primarily responsible for operational control based on financial analysis,
budgeting, and reporting. Audit and executive committees, set up by the Board or the chief
executive, may be charged with the responsibility of continuous screening of performance.
Corporate planning staff or department may also be involved in strategic evaluation.
Middle-level managers may participate in strategic evaluation and control as providers of
information and feedback, and as the recipients of directions from above, to take corrective
actions.
Types of strategic controls
Controls can be broadly classified into two categories. : Strategic and operational control.
Strategic control is aimed at monitoring the course of progress in the predetermined direction,
and operational control with the allocation of organizational resources and evaluation of the
performance of organizational units, such as, divisions, SBUs, and so on, to assess their
contribution to the achievement of organizational objectives. Table 21-3 shows the differences.
Table 21-3 Differences between strategic Control and Operational Control
Attribute
Strategic control
Operational control
Basic question
"Are we moving in the right How are we performing"?
direction"?
Aim
Proactive,
continuous Allocation
and
use
of
questioning of the basic direction organizational resources
of strategy
Main concern
Steering'
the
organization's Action control
future direction
Focus
External environment
Internal organization
Time horizon
Long-term
Short-term
Exercise of control
Exclusively by top management, Mainly by executive or
may be through lower-level middle level management
support
on the direction of the top
management
Main techniques
Premise control, Implementation
control
Internal
analysis
(Value
Strategic surveillance,
chain analysis, operational
Strategic momentum control standards)
(Responsibility control centers, Comparative
analysis,
Critical success factors, and (Historical
standards,
Generic strategies)
Industry
norms
and
Special
alert
control,
and benchmarking) and
strategic
leap
control
C
o
m
prehensive
analysis
(Strategic issue management, (Balanced score card, Key
strategic field analysis, systems factor rating and MBO)
modeling, and scenarios).
Source: Based on J A Pearce-III and R B Robinson, Jr. Strategic Management:
Strategy Formulation and Implementation, 3rd edn, Richard D Irwin,
Homewood, Ill, 1988,pp 404-19.
Strategic controls
The different types of strategic controls are discussed in brief here.
Premise control A company may base its strategy on important
assumptions related to environmental factors (e.g., government policies),
industrial factors (e.g. nature of competition), and organizational factors (e.g.
breakthrough in R&D). Premise control continually verifies whether such
assumptions are right or wrong. If they are not valid corrective action is
initiated and strategy is made right. The responsibility for premise control can
be assigned to the corporate planning staff who can identify for assumptions
and keep a regular check on their validity.
Implementation control Implementation control can be done using
milestone review. This is similar to the identification-albeit on a smaller
scale-of events and activities in PERT/CPM networks. After the identification
of milestones, a comprehensive review of implementation is made to reassess
its continued relevance to the achievement of objectives.
Strategic Surveillance This is aimed at a more generalized and
overarching control. Strategic surveillance can be done through a broad-
based, general monitoring on the basis of selected information sources to
uncover events that are likely to affect the strategy of an organization.
Special Alert Control This is based on a trigger mechanism for rapid
response and immediate reassessment of strategy in the light of sudden and
unexpected events. Special alert control can be exercised through the
formulation of contingency strategies and assigning the responsibility of
handling unforeseen events to crisis management teams. Examples of such
events can be the sudden fall of a government at the central or state level,
instant change in a competitor's posture, an unfortunate industrial disaster,
or a natural catastrophe.
Strategic momentum control These types of evaluation techniques are
aimed at finding out what needs to be done in order to allow the organization
to maintain its existing strategic momentum. There are three techniques ,
which could be used to achieve these aims:
Responsibility control centers,
Critical success factors, and
Generic strategies.
Responsibility controls form the core of management control systems and are
of four types: revenue, expense, profit, and investment centers.
CSFs form the bases for strategists to continually evaluate the strategies to
assess whether or not these are helping the organization to achieve the
objectives.
The generic strategies approach to strategic control is based on the assumption
that the strategies adopted by a firm similar to another firm are comparable.
Based on such a comparison, a firm can study why and how other firms are
implementing strategies and assess whether or not its own strategy is
following a similar path. In this context, the concept of strategic group is also
relevant, A strategic group is a group of firms that adopts similar strategies
with similar resources. Firms within a strategic group, often within the same
industry and sometimes in other industries too, tend to adopt similar
strategies.
2
Strategic leap control Where the environment is relatively unstable,
organizations are required to make strategic leaps in order to make significant
changes. Strategic leap control can assist such organizations by helping to
define the new strategic requirements and to cope with emerging
environmental realities. There are four techniques of evaluation used to
exercise strategic leap control:
strategic issue management, strategic field analysis, systems modeling, and
scenarios.
(i) Strategic issue management is aimed at identifying one or more strategic
issues and assessing their impact on the organization. A strategic issue is "a
forthcoming development, either inside or outside of the organization, which
is likely to have an important impact. On the basis of strategic issues, the
strategists can avoid surprises and shocks, and design contingency plans to
shift strategies whenever required.
(ii) Strategic field analysis is a way of examining the nature and extent of
synergies that exist or are lacking between the components of an organization.
Whenever synergies exist the strategists can assess the ability of the firm to
take advantage of those. Alternatively, the strategists can evaluate the firm's
ability to generate synergies where they do not exist.
(iii)Systems modeling is based on computer-based models that simulate the
essential features of the organization and its environment. Through systems
modeling, organizations may exercise pre-action control by assessing the
impact of the environment on organization because of the adoption of a
particular strategy.
(iv) Scenarios are perceptions about the likely environment a firm would face
in the future. They enable organizations to focus strategies on the basis of
forth-coming developments in the environment.
3
Several of the above techniques for strategic control-with the possible
exception of responsibility centers-are of a relatively recent origin. The
development of these techniques is an evidence of the expanding body of
knowledge in business policy and strategic management.
In the next part of this section, we look at techniques for operational control.
Operational control
Operational control is aimed at the allocation and use of organizational
resources. Evaluation techniques for operational control, therefore, are based
on organizational appraisal rater than environmental monitoring, as is the case
with strategic control. Evaluation techniques can be classified into three parts.
Internal analysis,
Comparative analysis, and
Comprehensive analysis.
Internal analysis Internal analysis deals with the identification of the
strengths and weakness of a firm in absolute terms.
Value chain analysis focuses on a set of inter-related activities performed in a
sequence for producing and marketing a product or service. The utility of
value-chain analysis for the purpose of operational evaluation lies in its ability
to segregate the total tasks of a firm into identifiable activities, which can then
be evaluated for effectiveness.
An operational standard takes up the financial parameters and the non-
financial quantitative parameters, such as, physical units or time, in order to
assess
Performance. The obvious benefit of using quantitative factors (either
financial or physical parameters) is the ease of evaluation and the verifiability
of the assessment done. These are probably the most-used methods for
evaluation for operational control. Among the scores of financial techniques
are traditional techniques, such as, ratio analysis, or newer techniques, such
as, economic value-aided (EVA) and its variations, and activity-based costing
4
(ABC). These are proven methods so far as their efficacy for evaluating
operational effectiveness is concerned. Apart from the financial quantitative
techniques, there are several non-financial control, such as; computation of
absenteeism, market ranking, rate of advertising recall, total cycle time of
production, service call rate, or number of patents registered per period
Qualitative analysis supplements the quantitative analysis by including those
aspects which it is not feasible to measure on the basis of figures and
numbers. The methods that could be used for qualitative analysis are based on
intuition, judgement, and informed opinion. Techniques like surveys and
experimentation can be used for the evaluation of performance for exercising
operational control.
Comparative analysis It compares the performance of a firm with its own
past standards, or standards of other firms.
1. Historical analysis compares the present performance of a firm with
performance over a given period of time. This method help analyse the
trend or pattern.
2. Industry norms Performance of a company I is compared with the
performance of its peers in the same industry. Evaluation on the basis
of industry norms enables a firm to bring its performance at least up to
the level of other firms and then attempt to surpass it.
3. Bench marking is a comparative method where a firm finds the best
practices in an area and then attempts to bring its own performance in
that area in line with the best practice. In order to excel, a firm shall
have to exceed the benchmarks. In this manner, benchmarking offers
firms a tangible method to evaluate performance.
Comprehensive analysis This analysis adopts a total approach rather than
focusing on one area of activity, or a function or department.
1. Balanced scorecard method is based on the identification of four key
performance measures of customer perspective, internal business
perspective, innovation and learning perspective, and the financial
5
perspective. This method is a balanced approach to performance
measurement as a range of parameters are taken into account for
evaluation.
2. Key factor rating is a method that takes into account the key factors
in several areas and then sets out to evaluate performance on the basis
of these. This is quite a comprehensive method as it takes a holistic
view of the performance areas in an organization.
3. Management by Objectives (MBO) is a system, proposed by
Drucker, which is based on a regular evaluation of performance
against objectives, which are decided upon, mutually by the superior
and the subordinate. By the process of consultation, objective setting
leads to the establishment of a control system that operates on the basis
of commitment and self-control.
4. Memorandum of understanding (MoU) is "an agreement between a
public enterprise and the Government, represented by the
administrative ministry in which both parties clearly specify their
commitments and responsibilities". Having done that, the enterprises
are evaluated on the basis of the MoU.
Summary
The success of a strategy depends upon the efficacy of implementation. It
involves adjustments in structure; systems, skills, culture, resources etc
needed and demands matching them all. These organizational adjustments are
a must to manage change. Implementation includes -Resource allocation,
Organization structure design, Planning framework, Leading and staffing ,
Change and communication and Evaluation.
The importance of strategic evaluation lies in its ability to coordinate
the tasks performed by individual managers, and also groups, division or
SBUs, through the control of performance. Controls can be broadly classified
6
into two categories. : Strategic and operational control. Strategic control is
aimed at monitoring the course of progress in the predetermined direction, and
operational control with the allocation of organizational resources and
evaluation of the performance of organizational units, such as, divisions,
SBUs, and so on, to assess their contribution to the achievement of
organizational objectives. Strategic controls include: Premise control,
Implementation control
Strategic surveillance, Strategic momentum control (Responsibility control
centers, Critical success factors, and Generic strategies)
Special alert control, and strategic leap control (Strategic issue
management, strategic field analysis, systems modeling, and scenarios).
Operational controls include: Internal analysis (Value chain analysis,
operational standards) Comparative analysis, (Historical standards, Industry
norms and benchmarking) and Comprehensive analysis (Balanced score card,
Key factor rating and MBO).
Self -assessment Questions
1. What is strategy implementation? Explain its significance.
2. Explain the process of strategy implementation.
3. What is strategy evaluation and control?
4. How do you classify strategy controls? Distinguish them.
5. What are the strategy control techniques? Explain any three of them.
6. What are the operational control techniques? Explain any three of
them.
7. Describe (i) Benchmarking (ii) Balanced score card (iii) MBO
8. Explain how performance indicators can beset for different functional
areas
9. What are the benefits of strategy control measures?
10. Identify the use of qualitative standards in strategy evaluation.
Assignments
7
1. Visit websites of two companies one in consumer goods and another in
industrial
goods sector, and find out the performance indicators used by them.
2. Visit a company of your choice and discuss the control measures
relating to
strategy implementation in the company in
References:
1. Miller Alex(1998), Strategic Management, Mc Graw Hill International
series, USA.
2. Ghosh P.K(2001), Strategic Planning & Management , Sultan Chand
& Sons, New Delhi.
3. Study material of IGNOU on `Corporate policies and practices'.
4. Cheruniliam Francis (2000), Strategic Management, Himalaya
Publishing House, New Delhi.
5. Hunger David J and Wheelen L. Thomas (1999), Strategic
Management., Addison Wesley (Singapore) P. Ltd.
**********
8
Case Method
It goes without saying that case method is one of the popular techniques of
teaching. It requires students to do most of their studying before class. You
must be prepared before hand to understand the arguments and presentations
of your fellow students, not to mention to give good presentations of your
own. You must place yourself in the role of responsible manager in the case
and make decision and plan the action called for by the facts as you interpret
them.
What is case?
Case consists of a number of pages of prose description of a real life situation.
It may include quantitative as well as qualitative data.
Steps in Study:
The following steps will be helpful in case study.
1. Quick reading: Read the case once, very quickly to make you familiar
with the case characters, the general nature and quality of evidence, and
idea of problems to be solved.
Jot down key words (indicating name of the company, names of persons and
designations, and key issues). They help in developing a view about the case
situation.
Look at the type of questions you have to answer.
2. Thorough reading: Read the case slowly at a thoughtful rate-taking note
of important points, studying exhibits, tables, graphs and examining
validity of options, feelings and views of case characters.
NOTE
Write the name of the company, location, and year of establishment.
9
List the name of persons with designations.
In chronological order make a note of events.
Identify the facts, assumptions and estimations given in the case.
Check for statement of problem; if it is not given or look for symptoms
3. Check reading: Check the various important facts identified to make sure
that your view of the situation is consistent with all the facts.
VALIDATE
Validate all the above. Now you have the right picture of the situation in
your mind.
Case Type -I
At the end of the case, questions are not given. The problem is within the
case. The reader has to identify it and provide solution.
For arriving at an appropriate solution, the following steps are essential.
Step 1: Analyze the present situation: The present situation as the manager
sees it comprising the environment representing constraints and
opportunities is to be identified for instance, in the following:
1.
Economic conditions
2. Competition
3.
Laws & regulations
4. Supplies availability
5.
Markets etc
10
The specific status of firm is to be then made known.
1.
Recent history
2.
Products and processes
3.
Resources
4.
Money
5.
Manpower
6.
Management
7.
Assets (land, building, etc)
The analysis and putting facts together show draw attention to cause and effect
relationships.
Step 2: Forecasting the future situations: If the case is dealing with short time range
present situation is valid. Then step is not necessary. But if it deals with long
range future, a forecast of future situation based on the present one is to be
developed.
Step 3: Define objectives: An objective is a desired future state of the firm
described in terms of those effects which the manager can
influence. It is often said that objectives should be stated in such
terms that you could measure results. They should also be given in
terms of days for completion. Ex: If the production, rate has fallen
from 4000 units per day, the objective may be to return to the
standard rate of production within five days.
In more complex problems and those involving long range planning
objectives often involve changes in scale of operations, in selling
prices, in man power and other variables under the control of
manager.
Step 4: Define problem: Problem statements how can be expressed in terms
of the differences between the present situation and the desired future
situation of the firm (objectives). If surface facts are taken without
identifying causes and without a reference to objectives, the approach
becomes hasty. If often results in treating the symptoms of the
problems rather than the problem itself.
11
Step 5: List possible alternative courses of action: Some cases may present
potential alternatives and their outcomes whereas some others may be
silent about them. Where alternatives are not given devise
alternatives predict their outcomes.
Step 6: Evaluating the alternatives: Often you come up with five or six
alternative courses of action. However you may need to dismiss,
some of these alternatives as unfeasible because they do not meet the
objectives. The remaining alternatives are to be evaluated in detail
very carefully.
Step 7: Decision: You should now select the action alternative that provides the best
means to problem solving and attainment of objectives. If so doing compare
and contrast the advantages and disadvantages of the alternatives and make your
selection. You articulate the main reasons why you have selected one
alternative over the others. For each rejected alternative, state why your chosen
alternative is better.
Step 8 : Implementation : Your decision is not complete until you prepare
operational plans for its implementation. Draw up a statement of
What must be done to carry out your decision ;
Who must be assigned to do it;
When it should be carried out;
Where it should be performed and
How must should be expended on it, etc.
In most cases, you cannot give highly detailed or precise answers to the
questions however gross estimates are infinitely better than no estimates at all.
Report writing
Prepare the report with the following subheads
Brief
Give a brief of the situation in 10 lines. Highlight
the name of the company , the principal roles, the
12
events and the problem or symptoms apparent in
the situation
Situation analysis
State important facts about the present situation
Make forecast of changes in the situation. State
the premises on which your future outlook is
based. Use graphics and models if possible.
Objectives and
What are your future and current objectives? Or
constraints
what do you want to achieve? What constraints
do you see n your way? Use force filed diagram
like techniques for effective presentation.
Problem/opportunity What is the focus for your decision or action?
Alternative courses
State several alternatives. Jot down your
of action
thoughts. From them develop few alternatives for
discussion.
Evaluate
State criteria for evaluation- risk, return. time
alternatives
horizon, satisfaction, payback, liquidity, control,
harmony- like that there are certain things of
value to you in a problem or opportunity situation
. Which one you do consider appropriate in the
present situation. Highlight them and use them
for evaluation. Draw comparisons or use for
and against arguments.
Selection of an
State the alternative you have chosen. Say why
appropriate action
you have chosen it and why you have not chosen
the other ones. Make a diagrammatic
presentation of how the problem can be solved by
this alternative
Follow up action
Outline how do you go about in implementing it.
plan
Just give hints in terms of resources required,
13
measures to be taken to remove constraints if any
etc. Make a table of focus points, problem or
constraints and action suggested.
Case Type ?2
Questions are given at the end Case type II
At the end of the case, questions are given . For instance, questions can be as
follows.
Question
Answer contents
What is the problem of XYZ
Situation analysis
company /Mr DD?
Problem statement
What actions do you recommend?
State objectives
Or
State alternative courses of action
How would you go about in this
State the criteria you would
situation ?
employ to evaluate
Evaluate the alternatives and select
the right one
State your choice supporting your
decision and give action plan
Is Mr GG right in his decision, if
State how a decision is to be taken.
yes, why? If no, why?
Then based on the process or
procedure you gave, check Mr
GG's decision. Now say how you
differ from Mr GG.
Why the implementation failed?
State the standard approach of
implementation and compare it
with the actual implementation in
the case. Check for deviations. If
you find some, say what failures
are there.
Watch your presentation: - Be brief and objective, avoid lengthy sentences
and paragraphs. Be realistic; do not include every conceivable alternative to
14
make analysis look more complete. It looks ridiculous if you describe in 50
words alternative and demolish it in 10 words. Avoid setting up of straw men.
Be clear; include those figures and charts without which report will be
incomplete and difficult to understand however supportive. Charts, figures
and tables may be planned in appendix if they are not important as immediate
reference. Give a final summary only when your report is more than ten page
long.
*****
Case-1
LUBRICATING
LUBE BUSINESS
Difficult times have their own merits. This is as much true for an individual
as it is for an organization. These are the times when the entire organization
gets an opportunity to display its resilience through its innovative skills and
creative abilities. Naveen K Kshatriya, Chief Executive and Managing
Director of Castrol India Limited (CIL), echoed similar thoughts while
reflecting on his company in October 2002.
Lube industry
The lubricant industry in general has three broad segments, namely,
automobile, industrial, and marine. As per the global trends, the automobile
15
segment dominates the industry, and, within the automobile industry, the
diesel industry, the diesel engine lubricants from the major part of the market.
Market size
The total market size and production of the lubricant industry in India in the
year 2000-01 were Rs.101.034 billion and 13,898 thousand litres (Table ?1)
respectively. The lubricant industry witnessed a cumulative annual growth
rate of 15 per cent during the period 1995-96 to 2000--01.
Table 1: Company-wise Trend in Production: 1995-96 to 2000-01
Name
of
the Unit
1995-96
1996-97
1997-98
1998-99
1990-00
2000
company
Indian
Oil 000
114
122
110
112
121
Corporation
tonne
Castrol India
000 litre 156,270 173,002
192,019
208,690
216,541
218,972
Hindustan
000
Petroleum
tonne
437
443
494.4
465.6
537.2
494.4
corporation
Bharat Petroleum 000
86
84
86.9
102.7
100.4
96.6
Corporation
tonne
Gulf Oil
000 litre -
27,540
48,630 51,383 60,273 57,266
Bharat Shell
000 litre -
-
-
39.3
41.9
41.4
Savita Chemicals 000 litre 34,370
37,760
40,220
39,290
50,287
59,508
IBP Co.
000 litre -
-
21,272
21,423
15,764
11,266
Tide Water Oil 000 litre 41,110
42,020
41,820
42,409.7 38,760.2 29457
Corporation
Apar industries
000 litre -
-
62,100
69671
78,304
41,911
Source: Centre for Monitoring Indian Economy, August ,2002
Market shares
Indian Oil Corporation is market leader with 18.53 per cent (Table 2) and
24.49 per cent share in the years 2000-01 and 2001-02 respectively. CIL
16
enjoyed a market share of 12.03 per cent and 17.48 per cent during these two
years.
Table-2 Market shares
Company name
1995-
1996-
1997-98 1998-
1999-
2000-01
96
97
99
00
Indian
Oil 33.04
32.46
29.44
28.75
26.21
18.63
Corpn
Castrol India
13.82
15.89
15.9
15.92
15.96
12.03
Hindusthan
16.27
15.94
14.83
12.69
10.58
9.23
Petroleum
Corpn
Bharat
7.36
7.59
7.00
7.06
6.83
5.56
Petroleum
Corpn
Gulf Oil
-
2.76
4.15
3.92
3.78
2.54
Burma Shell
-
-
-
2.92
2.70
2.21
Savita
1.95
2.24
2.12
1,64
2.04
1.83
Chemicals
IBP Co
-
1.96
1.93
2.17
2.20
1.69
Tide Water Oil 3.32
2.98
3.05
3.06
2.81
2.40
Corpn
Apar Industries
-
-
1.91
1.90
1.76
1.34
Total
75.75
81.81
80.33
79.96
74.46
56.47
The lubes of the public sector oil companies are sold through their own well-
established petrol pumps network. These petrol pumps are not allowed to
market the lubes of the MNC s which are marketed through autorepair shops,
garages, and service stations. CIL has clearing and forwarding agents,
distributors, and dealers in their distribution chain in case of retail lubricant
market popularly known as `bazaar trade' and clearing and forwarding agents
only for institutional sales. CIL dominates the retail lubricant market and has
access to over 70,000 retail outlets. It has grown by 12 percent on a
17
cumulative annual basis. However, the last two years have been difficult
not just for CIL but for the lubricant industry as a whole.
Marketing at CIL
CIL is essentially a marketing company and its sales were made through two
channels namely `bazaar trade' (retail segment) and `institutional sales'. The
institutional sales accounted for 40 per cent of the lubricant market. The
players in the retail channel were clearing and forwarding (C&F) agents,
distributors, and dealers and only C&F agents in the case of institutional sales.
The company prepared a purchase plan for each distributor SKU- wise and
monitored the inventory norms for the distributors. It captured secondary sales
data (distributor sales) by having Turview software at the distributors' end. Its
focus was on actual sales loss rather than sales loss in the pipeline. It also
captured the distributors' penetration level data. The data flow to CIL took
place on a monthly basis. The company had plans to integrate Turview and JD
Edward's software in the year 2003.
Vision of CIL
CIL has maintained growth in the
strategically important and growing
segments, namely, engine oil for cars,
two wheelers, and new trucks. The
overall sales volume continued to
18
decline due to shortfall in commercial
vehicles segment, which account for a
significant part of their portfolio. The
market volumes of commercial
vehicles segment have declined
because of increase in the less old
technology trucks extending oil
exchange periods because of cost
pressures; and lower tractor utilization
because of difficult conditions in
agriculture sector. The market trend
will continue until there is a revival in
freight market and agricultural activity.
CIL has been able to maintain its
strong financial performance by unit
19
price improvement, lower material
costs, and efficiency in supply chain
and cost reduction initiatives.
The vision of CIL is to be undisputed
leader in the premium automotive
lubricant market. The company plans
to focus on customer, channel-partner
and OEM relationships using brands as
the primary driver of their business
with technology ?based innovations;
with novel customer communications
and interactions; and innovations in
`route to market' and customer
20
management `world class supply chain
and business processes.
The challenge before Kshatriya is to
effectively leverage the power of their
two brands ?Castrol and BP- and to
facilitate the implementation of the
company's strategic initiatives.
Strategy outlook
The responses of senior management of Hindustan petroleum Corporation
Ltd., Gulf Oil Corporation Ltd., Indian Oil Corporation Ltd., and Bharat
Petroleum Corporation Ltd., to the survey questionnaire exploring the reasons
for difference in performance in the Indian lubricants industry and for
developing a framework in the choice of competitive strategy are given in
Annexure 1.
Annexure ?1
Responses of Senior Managers on Different Strategic Dimensions
Strategic
Elements HPCL Gulf Oil
21
dimensions
The degree
Width of
Medium High
to which you product
to high
focus your line
efforts in
Target
Medium High
terms of
customer
to high
segments
High
Medium
to high
Geographical
spread
of market served
The degree
Price
Medium Low
to which you
to high
seek brand Other
Medium Medium
identification variables
to high
rather than
competition
based on
22
The degree
Directly on Medium Medium
to which you your own
to high to high
seek to
develop
brand
identification
with the
ultimate
consumer
Support of Medium Low
distribution
channels
The choice
Company
Medium Medium
of
owned
distribution
channels
channel
Petrol pumps
Medium Low
ranging from
to high
Broad line outlets
Low
Medium
to high
The level of Raw materials (base oil, Low
High
additives )
product
Medium High
Adherence to tolerance
23
quality in
Features
Medium High
terms of
to high
The degree
-
Medium High
to which you
seek
technological
leadership as
an innovator
The degree
-
Medium Medium
to which you
to high
provide
ancillary
services with
your product
line such as
engineering,
assistance,
training.
The extent of Forward
Medium Medium
vertical
vertical
to high
24
integration
Backward
Low
Medium
adopted in
vertical
the process
of
The extent to Manufacturing Medium Medium
which you
to high
seek low-
Distribution
Medium Medium
cost position
to high to high
through
investment
in cost ?
minimizing
facilities and
equipment in
The price position of Cost
Medium Medium
your product in the
position
to high to high
market relative to
Product
Low
Medium
quality
to high
The relationship of
Home
Medium Medium
the MNC to have
government to high to high
25
access to
Government Low
Medium
resources/regulations of India
to high
with:
The size of fixed
-
Medium Low
costs which have
been committed in
the manufacturing
facilities
The requirements on -
Medium Medium
firm behavior based
to high
on the relationship
between the firm and
the parent company
Questions
1. Analyze the competitive environment of CASTROL
2. Develop strategy outline based on the analysis.
26
Case -2
PLANNED STRATEGIC CHANGE
Dales Pickles (Dales) is a longstanding manufacturer of luxury foodstuffs. It
has over 2000 employees split evenly between three food processing factories
and a head office, all located in the north-east of England. Within its market
Dales enjoyed a leading but not dominant position with around 20 per cent
market share. Between 2002 and 2005, however, aggressive competition
based around innovative niche marketing and cost efficiency had reduced its
market share to 15 per cent leading the Board of Directors to conduct a major
strategic review at the end of this period.
Strategic review
The Board was forced to recognize that it had become complacent over the
years relying too much on historical brand loyalty. The strategic review
resulted in two major decisions.
First, the Board determined to restore the company's market share
then, longer-term, to move beyond that to establish a dominant market
position.
Second, designation as a `world class manufacture' would be pursued
to support these marketing imperatives.
Progress up to 2005 would be evaluated internally using three performance
goals:
To become the lowest-cost producer in the UK;
To develop a quality assurance culture that would permeate the whole
organization; and
To become the market leader for new product innovation and
development.
27
These goals were to be pursued through transforming the company's
Tayloristic production line systems to a high-involvement, autonomous work
group operation labeled `work cells'.
Structure
Of the 2000 employees approximately half were engaged on direct production
activities organized through 36 manufacturing departments split between the
three factories. Each department produced a specific suite of products and
employed 25 to 35 operatives when it was running at peak capacity of which
approximately 25 per cent would be peripheral workers on casual or short-
term contracts. This reflected the need for flexible staffing arrangements to
accommodate seasonal production peaks prior to Christmas and Easter.
Departments were managed by a supervisor and clusters of six
departments reported to a production superintendent who in turn reported to
the production Manager for each site who reported to the Manufacturing
Director, based at Head Office. Parallel to this structure were a series of
production service departments covering material control, purchasing,
production control, quality control and plant design and maintenance. These
departments were again organized on a site basis through an identical
structure reporting ultimately to the production services Director.
Review of Production function
The introduction of `work cells' was preceded by a through review of current
production processes against the goals of cost, quality and innovation referred
to earlier. It was concluded that:
A rigid and expensive bureaucratic hierarchy operated against
effective communication and collaborative problem solving.
28
The structure had fuelled a culture of `management prerogative' that
stifled innovation and co-operation. From an employee perspective
expressions such as `we've always done it that way', `if it ain't broke
don't fix it' and `we know best' represented the language of
management.
Employees adopted a minimalist approach sticking rigidly to their job
description, meaning among other things, that quality issues often
went unreported. Production operatives enjoyed seeing management
`dropped in it'.
Operator training reflected Tayloristic principles of job design. It was
strictly geared to meeting immediate job requirements and mainly
comprised `sitting next to Nellie'. Any operating problems were
reported to supervisors and after flowing through the communication
hierarchy an appropriate production service specialist would arrive to
rectify it. The downtime that resulted was excessive.
Change directions
(i) Work cells The manufacturing departments were to remain the basis for
production but would be transformed into `cells' using both horizontal and
vertical restructuring and team building principles.
(ii) Job changes This would involve employees undertaking additional
roles of similar and higher levels of skill and responsibility (job enlargement
and job enrichment respectively) thereby enabling each department to act as a
mini-business taking initial responsibility for quality, production scheduling,
inventory control, maintenance of equipment and safety.
(iii) Employee empowerment The vital ingredient was to be the creation of
self-directed teams that would be able to identity and rectify problems,
communicate effectively within the team and across the organization, operate
in the spirit of continuous improvement, and adopt innovatory and risk-taking
behaviours. Through employee empowerment this initiative was intended to
make a significant contribution to the `world class' strategy not least because
of its potential to enrich work experience of employees.
(iv) Organization structure changes Consistent with work restructuring
initiatives generally and the performance goals specifically the introduction of
`work cells' would take place alongside major changes to the organizational
structure. Direct production and production services functions were to be
combined under a production operations director and two tiers of management
removed-supervisors and production Managers/production services Managers-
with superintendents absorbing the responsibilities of the latter and reporting
to the Director. Further downsizing would occur in the production services
29
departments as some of their functions were absorbed into the manufacturing
cells. Where possible displaced staff would be redeployed into the
manufacturing cells or consultant roles which were created to underpin the
transformation.
Resistance to change
Initial and continuing staff development strategies were identified as the key
to the successful implementation of the work and organizational restructuring
initiatives. However, during the strategy formulation stage a number of
potential human resource impediments that could frustrate management's
plans were identified. A number of employees were resistant to the changes
because they had doubts about their own motivation or competency. Several
production services staff had intimated that they would try to sabotage the
change strategies through uncooperative behaviour irrespective of whether
they were to be redeployed into the manufacturing cells or consultant roles.
Many managers had voiced extreme skepticism over the principles of
employee involvement embedded in the work restructuring plans and
throughout two of the factories there existed a strongly held view that `all this
business re-engineering stuff was just another management fad'
HRD Initiatives
Shortly before developing training and development strategies it was decided
to create a `Consultant' role which it was anticipated would help address these
issues particularly through a direct contribution to HRD. Ten consultants were
to be recruited, each servicing three or four manufacturing cells against the
following role brief:
Assist managers and cells to identify training needs.
Contribute actively to the development and implementation of training
strategies.
Accelerate the development of team working skills.
Improve lateral and vertical communications across the organization.
Support the creation of a continuous improvement environment.
Challenge bureaucracy and inertia.
30
Generally act as change agents.
At this stage it was anticipated that training would need to be targeted at three
different groups: production operatives, line managers and consultants.
Questions
1. What will be the short to medium term training needs resulting from
the `work cells' initiative for the three groups identified?
2. How would you seek to address these training needs?
3. What other organizational changes are occurring at Dales besides work
restructuring and how might HRD facilitate their introduction?
4. To what extent do your HRD proposals take the organization in this
direction and how do you think further progress could be made?
31
CASE with analysis
Downsizing at
Energyco
Energyco emerged as a private sector company from a large public sector
provider of power in the early 1990s. This larger organization was
technologically advanced but highly staffed. The assets of the public sector
provider had been divided between the new firms that superseded it with the
result that Energyco had acquired dispersed facilities and a larger than
required workforce.
Benchmarking
The company set about evaluating its requirements for both people and
physical assets. It commenced this process using a benchmarking exercise that
looked at the staffing requirements for power stations-the core of its business.
This suggested that, in comparison to power companies in a number of
countries, it had a staffing level that could be reduced by about 50 per cent or
more in its power stations. In addition, a number of relatively smaller and
older power stations were identified for closure. This early planning work
suggested that the organization would need to downsize by approximately 30
per cent in terms of total numbers employed in Energyco.
Downsizing approach
The approach of Energyco can be described as under.
Voluntary: As a public corporation, it had become highly unionized. As the
organization in its privatized form was now embarking on a major downsizing
programme, it made sense to follow a voluntary strategy given the continued
existence of strong trade union representation. In addition, the age profile,
with a significant proportion of employees over 50, meant that many older
workers were happy to take the severance terms being offered.
32
Focus on performers The organization was also not particularly sensitive
about which employees volunteered given the highly qualified and
experienced profile of the workforce, providing it with an abundance of skills
in relation to the target size for the new organization. However, the
organization did not have an effective performance management system
which made it difficult to identify effective performers. This meant that it
would have been more difficult for the organization to target those to be made
redundant if it had not been fortunate in terms of its age profile and the sheer
surplus of skills that it possessed amongst its workforce. The combination of
these factors therefore meant that it was possible to allow most volunteers to
leave even though some were identified as necessary to retain, at least for a
given period.
Phased Once initial downsizing had occurred in the operational areas the
focus shifted to the support areas. It was decided to reduce the aggregate
proportion of those engaged in `overhead' activities to 20 per cent, from 30
per cent of the total workforce. The organization again used a benchmarking
approach to identify where savings could be made and an evaluation of
activities undertaken. For example, in relation to human resources, those who
were the `customers' of this function were asked what type of support they
required with the result that this provision was restructured with the loss of
over 200 jobs (over 50 per cent).
Communication Each part of the organization is supplied with information
about the company's plans. This direct communication to employees also
provided them with details about the severance terms on offer if they
volunteered. The scale of the downsizing and its fairly open nature,
combined with the age profile of the workforce, the terms on offer and the
recognition that those who stay would have to adapt to organizational culture,
meant that the strategy adopted was successful in attracting volunteers.
33
Tactics However, there was a conscious effort on the part of those managing
the downsizing process to control the acceptance of the terms on offer in those
parts of the organization where there was no future demand for employees. A
number of tactics were used to achieve this acceptance in practice. The terms
on offer included
an additional payment for early leavers.
Additional benefits were also offered to those in areas where they were
not considered to be core to the future of the organization.
Line managers were given discretion to discuss each employee's
future status and to offer certain inducements such as additional
training or outplacement.
Outcome So successful was this strategy that the organization had
downsized itself by approximately 60 per cent after about four years of
privatization. Further workforce reductions have since occurred.
Role of line mangers and communication
It was recognized that this change had damaged morale, even though
employees remained committed to the purpose of the business. It was thus
part of the line managers' role to demonstrate appropriate change management
skills to provide a sense of direction and a face-to-face means of
communication to address concerns about the future of the business.
Communication, involving the line managers as well as other means,
was seen to be an important link between the establishment, or re-
establishment, of the link between morale and efficiency.
All of the organization's line managers, numbering several hundred in total,
and including its directors, attended a two day training program which focused
on communication and counseling skills to prepare them for their role
managing the downsizing process.
In this way, the use of communication and the skills of the line
managers were two of the ways in which the culture was changed around the
incidence of the downsizing and restructuring programs, which occurred in
34
the organization. The use of communication and the skills of the line
managers were also intended to be focused on creating a positive impression
amongst a number of key stakeholders involved in, or around, the advent of
downsizing. The organization was consciously attempting to retain the
goodwill of those who left the organization-the creation of `happy leavers'. It
also wished to avoid negative publicity or any industrial action, which might
have adverse effects on its share price or its industrial relations. It was also
concerned about the perceptions of those who stayed in the downsized
organization- the survivors of these changes.
Energyco introduced a performance management system, which was
linked to a career development plan for each employee. This was a powerful
means to indicate the concurrent attempt to bring about a change in the culture
of the organization. The previous public sector ethos of a job for life was
intended to be replaced by an attempt to make tangible the concept of
`employability', linked to a performance culture associated with performance
related pay.
QUESTIONS
1. Is Energyco's approach right to achieving downsizing?
2. How might you explain the assertion that although `it was recognized
that this change had damaged morale, employees remained committed
to the purpose of the business'?
Model case analysis
Brief
Energyco emerged as a private sector company from a large public sector
provider of power in the early 1990s. This larger organization was
technologically advanced but highly staffed. It undertook a downsizing
35
exercise. In this process it has taken care to see that though morale was
affected commitment was not.
Question ?1: Is Energyco's approach right to achieving downsizing?
Energyco's approach to downsizing can be considered systematic and
humanistic. Systematic because it followed sequentially the steps required in a
change process and humanistic because it showed concern for people.
A comparison between the theoretical model of change with the actual process
in
Energyco would help in assessing how systematic the company is in this.
Standard model
Energyco model
Identify the need for
Energyco had acquired dispersed facilities
change
and a larger than required workforce. The
company set about evaluating its
requirements for both people and physical
assets. It commenced this process using a
benchmarking exercise that looked at the
staffing requirements for power stations-the
core of its business. This suggested that, in
comparison to power companies in a number
of countries, it had a staffing level that could
be reduced by about 50 per cent or more in its
power stations. In addition, a number of
relatively smaller and older power stations
were identified for closure. This early
planning work suggested that the
organization would need to downsize by
approximately 30 per cent in terms of total
numbers employed in Energyco
Communicate the need
Communication, involving the line managers
for change and planned
as well as other means, was seen to be an
change to employees
important link between the establishment, or
concerned
re-establishment, of the link between morale
and efficiency. Each part of the
organization is supplied with information
about the company's plans. This direct
communication to employees also provided
them with details about the severance terms
on offer if they volunteered. The terms on
36
offer and the recognition that those who stay
would have to adapt to organizational culture,
was communicated.
Make a detailed plan of
Downsizing had occurred in the operational
change
areas first and then the focus shifted to the
support areas. It was decided to reduce the
aggregate proportion of those engaged in
`overhead' activities to 20 per cent, from 30
per cent of the total workforce. The
organization again used a benchmarking
approach to identify where savings could be
made and an evaluation of activities
undertaken. For example, in relation to
human resources, those who were the
`customers' of this function were asked what
type of support they required with the result
that this provision was restructured with the
loss of over 200 jobs (over 50 per cent).
A number of tactics were used to achieve this
acceptance in practice. The terms on offer
included
an additional payment for early
leavers.
Additional benefits were also offered
to those in areas where they were not
considered to be core to the future of
the organization.
Organize for change
All of the organization's line managers,
process
numbering several hundred in total, and
including its directors, attended a two day
training program which focused on
communication and counseling skills to
prepare them for their role of managing the
downsizing process
Have change agents and
Line managers were given discretion to
define their role s
discuss each employee's future status and to
offer certain inducements such as additional
training or outplacement.
Effect the change process The organization was not particularly
37
and continually evaluate
sensitive about which employees volunteered
given the highly qualified and experienced
profile of the workforce, providing it with an
abundance of skills in relation to the target
size for the new organization.
However, the organization did not have an
effective performance management system
which made it difficult to identify effective
performers. This meant that it was possible to
allow most volunteers to leave even though
some were identified as necessary to retain, at
least for a given period.
It was recognized that this change had
damaged morale, even though employees
remained committed to the purpose of the
business.
Take right steps to
Line managers' role was to demonstrate
resolve conflicts
appropriate change management skills to
provide a sense of direction and a face-to-
face means of communication to address
concerns about the future of the business. The
organization was consciously attempting to
retain the goodwill of those who left the
organization-the creation of `happy leavers'.
It also wished to avoid negative publicity or
any industrial action, which might have
adverse effects on its share price or its
industrial relations. It was also concerned
about the perceptions of those who stayed in
the downsized organization- the survivors of
these changes.
Stabilize the post-change Energyco introduced a performance
situation
management system, which was linked to a
career development plan for each employee.
This was a powerful means to indicate the
concurrent attempt to bring about a change in
the culture of the organization. The previous
public sector ethos of a job for life was
intended to be replaced by an attempt to
make tangible the concept of `employability',
linked to a performance culture associated
38
with performance related pay.
2. How might you explain the assertion that although `it was
recognized that this change had damaged morale, employees
remained committed to the purpose of the business'?
It was recognized that this change had damaged morale, even though
employees remained committed to the purpose of the business. It is true
because of the effort of the company in the positive direction.
It was made part of the line managers' role to demonstrate appropriate
change management skills to provide a sense of direction and a face-
to-face means of communication to address concerns about the future
of the business.
Communication, involving the line managers as well as other means,
was seen to be an important link between the establishment, or re-
establishment, of the link between morale and efficiency.
The use of communication and the skills of the line managers were
also intended to be focused on creating a positive impression amongst
a number of key stakeholders involved in, or around, the advent of
downsizing.
The organization was consciously attempting to retain the goodwill of
those who left the organization-the creation of `happy leavers'.
It also wished to avoid negative publicity or any industrial action,
which might have adverse effects on its share price or its industrial
relations.
It was also concerned about the perceptions of those who stayed in the
downsized organization- the survivors of these changes.
39
40
41
This post was last modified on 14 March 2022