Download MBA IB and Marketing 1st and 2nd Semester Strategic Management

Download MBA (Master of Business Administration) IB and Marketing 1st and 2nd Semester Strategic Management

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ON
S

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1 Concept of Corporate Strategy

S

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E
L

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LESSON OUTLINE

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Introduction
What is strategy?
Why corporate strategy?
Levels of strategy

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Crafting a strategy
An ongoing process
Summary
Self assessment questions
Activities

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References

LEARNING OBJECTIVES
After reading this lesson you should be
able to

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Define and understand the concept of

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corporate strategy

Identify the different levels
of corporate strategy
Examine the reasons for developing

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strategies

See corporate strategy as an on going

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process

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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

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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

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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

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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..

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TABLE 1.1 - INDIA'S TOP TEN STRATEGISTS

Position in the

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Name of the company

industry

Infosys Technologies

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1

Reliance Industries

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2

Wipro

3

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Hindustan Lever

4

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Maruti Udyog

5

Dr. Reddy's Laboratories

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6

HDFC Bank

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7

Jet Airways

8

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ICICI Bank

9

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Ranbaxy Laboratories

10

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* Source - Internet

What is strategy?

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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

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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

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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

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how the organization will achieve its mission and objectives.

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I keep six honest serving men.

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They taught me all I know. Their names

are What, Why, When, How, Where and

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Who.

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- Rudyard Kipling

Here are some definitions of strategy.

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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

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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

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Porter (1996) Strategy is about being different. It means deliberately
choosing a different set of activities to deliver a unique mix of value

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Mintzberg has identified the 5 P's of strategy. Strategy could be a plan, a pattern, a position, a

ploy, or a perspective.

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1. A plan, a "how do I get there"

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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.

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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

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is to become.

Why Corporate Strategy?

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Strategic management is basically needed for every organization and it offers several benefits.

1.Universal

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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

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pursuit of particular ends. Nations have, in the management of their national policies, found it

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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

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that we should take for the journey that we actually make.

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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

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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

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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.

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3. Minimizes competitive disadvantage

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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

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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

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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

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takeovers do not help and there is a need to reposition their products and reengineer their brands.

The strategy worked.

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4. Clear sense of strategic vision and sharper focus on goals and objectives

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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

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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

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providing vision and encouraging to define mission.

5.Motivating employees

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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

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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

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loyalty which results into industrial peace and good returns are the results of broad-based

policies adopted by the strategic management

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6. Strengthening Decision-Making

Under strategic management, the first step to be taken is to identify the objectives of the

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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.

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7. Efficient and effective way of implementing actions for results

Strategy provides a clear understanding of purpose, objectives and standards of

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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.

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8. Improved understanding of internal and external environments of
business

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Strategy formulation requires continuous observation and understanding of environmental

variables and classifying them as opportunities and threats. It also involves knowing whether the

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threats are serious or casual and opportunities are worthy or marginal. As such strategy provides

for a better understanding of environment.

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Levels of strategy

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A typical business firm should consider three types of strategies, which form a hierarchy

as shown in Figure 1.1

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Corporate strategy ? Which describes a company's overall direction towards growth by

managing business and product lines? These include stability, growth and retrenchment.

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For example, Coco cola, Inc., has followed the growth strategy by acquisition. It has

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acquired local bottling units to emerge as the market leader.

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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

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segment served by that business unit. Business strategy falls in the in the realm of corporate

strategy.

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For example, Apple Computers uses a differentiation competitive strategy that

emphasizes innovative product with creative design. In contrast, ANZ Grindlays merged with

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Standard Chartered Bank to emerge competitively.

Functional strategy ? It is the approach taken by a functional area to achieve corporate

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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

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advantage.

For example, Procter and Gamble spends huge amounts on advertising to create customer

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demand.

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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,

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processes and people. They are at departmental level and set periodic short-term targets for

accomplishment.

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Figure 1.1 Hierarchy of strategy

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Responsibility of

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corporate-level managers

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Responsibility of

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business ?level general

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managers

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Res ponsibili ty of hea

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ds of

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maj or functi onal acti

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vities

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wit hin a busi ness unit or

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division

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Res

ponsibility of plant

ma

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nagers,

geographic

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unitCr

m a

a f

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natin

ger g

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s, a

an sdt rategy

low er-level supervisors

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Companies and strategists craft strategies in different ways. In extreme cases it is only

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the Chairman cum Managing Director who crafts the strategy. But in firms, which have

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participative management style of functioning, it is a group or team exercise involving key

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personnel and all functional executives in the organization.

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There are basically four approaches to crafting a strategy

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1. The Chief Architect approach A single person ? the owner or CEO ?assumes the role of

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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

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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.

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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

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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.

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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

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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

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particular process or function, or, more rarely, a team of consultants brought in

specifically to help develop new strategic initiatives.

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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

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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

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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

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over the world.

Nokia Group, a Finland-based global leader in wireless telecommunications, involved

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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.

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4. The Corporate Intrapreneur Approach: In the corporate intrapreneur approach, top

management encourages individuals and teams to develop and champion proposals for

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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

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support, give company intrapreneurs the needed organizational and budgetary support,

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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

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intrapreneur approach to strategy making. Gore expects all employees to initiate

improvements and to display innovativeness.

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As on going process

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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

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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.

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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

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methodology for achieving the objectives, purposes, and the philosophy of the

organization adequately reflected in the vision statement.

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Defining the company profile that includes the internal analysis of culture, strengths and

capabilities of an organization.

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Making external environmental analysis to identify factors as threats, opportunities

etc.

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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

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organization

Selecting a set of long-term objectives and also the corresponding strategies to be

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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.

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Implementing the chosen strategies in a planned way based on budgets and allocation of

resource, outlining the action programs and tasks.

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Installation of a continuous comparable review system to create a controlling mechanism

and also generate data for selecting future course of action

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The over all corporate strategy of a diversified company is depicted in Figure 1.2

Figure 1.2 Strategy of a diversified company.

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Whether diversificat ion

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is based narrowly in a

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few industries or broadly

in many industries

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Whether the businesses

Approach to allocating

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the company has

investment capital and

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diversified into are

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resources across

related, unrelated, or a

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business units

mixture of both

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Whether the

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scope of

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company

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Efforts to capture

Corporate strategy

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operations is

cross-business

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(The action plan

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mostly

for managing a

strat egic fits

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domestic,

diversified

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increasingly

multinational,

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company)

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or global

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Moves to divest

Moves to

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weak or

strengthen

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unattractive

positions in

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Source : Thompson & Strickland (2003), Strategic Management, Tata McGraw Hill, New Delhi.

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The process of developing corporate strategy or the overall managerial plan for involves the

following processes.

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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

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diversified into.

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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

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business units

Summary

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In the globalized business, companies require strategic thinking and only by evolving

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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

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pace with changing environs, provides better understanding of external environment, minimizes

competitive disadvantage by forcing to think clearly about mission, vision and objectives of

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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

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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

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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.

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Self -assessment questions

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1. Define the concept of strategy

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2. Write two definitions of strategy and identify the key elements in them.

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3. Distinguish strategy and plan. Which one is more suitable in a competitive environment?

4. What are the 5 Ps of a strategy?

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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

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8. Explain the different approaches to strategy making.

9. "Corporate strategy making is an on going process " ?Discuss

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10. Explain the strategy of a diversified company.

Activities

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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

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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

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prepare a write up on " Strategy for modern organizations".

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References

1. Lomash Sukul & Mishra P.K.(2003) Business policy and Strategic Management, Vikas

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Publishing House, New Delhi

2. Thomas L. Wheelen and Hunger J. David (2002) Concepts in Strategic Management and

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Business Policy, Pearson Education Asia, New Delhi.

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3. Thompson & Strickland (2003), Strategic Management: Concepts and Cases, Tata

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McGraw Hill: New Delhi

4. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books, New

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Delhi.

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Unit I

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2

Strategic Management Process

S

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S

E

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LESSON OUTLINE

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Introduction
Process of Strategic
Management ? Basic model
Role of strategists
Mintzberg's modes of

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strategic decision making
Strategic Management in India

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Summary
Self assessment questions

LEARNING

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Activities

OBJECTIVES

References

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After reading this lesson

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you should be able to

Describe the strategic

LEARNING

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management process

OBJECTIVE

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Once there were two company

Know the role of

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presidents

different persons in

who competed in the same industry. These

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two presidents

an organization in

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decided to go on a camping trip to discuss a

strategy making

possible

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merger. They hiked deep into the woods.

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Suddenly,

Explain Mintzberg's

they came upon a grizzly bear that rose up on

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modes of executive

its hind legs

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decision making

and snarled. Instantly, the first president took

off

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his

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knapsack and got out a pair of jogging shoes.

Appreciate

the

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The

second

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initiatives taken by

president said, "Hey, you can't outrun that

bear. The first

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corporate in India for

president responded, " May be I can't outrun

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effective

strategy

that bear but I

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management

surely can outrun you!" (Fred R. David,

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2003,p.5)

This story captures the notion of strategic management, which is to achieve and maintain

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competitive advantage. How do business organizations operate successfully in the changing

business environment? Strategic management has evolved as a primary value in helping

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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.

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Most successful companies like General Electric have found internet mentors to tutor

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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.

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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

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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

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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,

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which range from 5 to 20 years.

Process of Strategic Management

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Strategic management consists of four basic elements.

Environmental scanning

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Strategy formulation

Strategy implementation

Evaluation and control

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Figure 2. 1 shows simply how these elements interact. Figure 2 .2 expands each of these

elements and serves as the model for discussion.

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Environment

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Strategy

Strategy

Evaluation

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al Scanning

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formulatio

imple-

and

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mentation

control

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Figure 2.1 Basic model

External

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Perfor-

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Mission

___________

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Program

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mance

_

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Objectives

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Societal

Reason for

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Programs

E nvironment

Existence What results Activities

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General

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To be

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Ne

e ds

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F orces

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Task

Budget

Strategies

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E nvironment

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s

Achieved

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Budgets

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I ndustry

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Analysis

Procedures

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Figure 2.2 Expanded model for strategic Management.

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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

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identity strategic factors ? those external and internal elements that will determine the future of

the corporation.

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The external environment consists of variables (Opportunities and Threats) that are

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outside the organization and not typically within the short-run control of top management. These

variables form the context within which the corporation exists.

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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

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management. These variables form the context in which work is done. They include the

corporation's structure, culture, and resources.

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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

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that are strategic factors for a specific company

Strategy formulation is the development of long-range plans for the effective management of

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environmental opportunities and threats, in light of corporate strengths and weaknesses. It

includes defining the corporate mission, specifying achievable objectives, developing strategies

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and setting policy guidelines.

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LIC of India is going global by entering into alliances with local

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Strategy

counterparts in South east Asian Countries like Malaysia, China,

implementation is

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Bangladesh and Singapore. This was never thought of by this public
sector Insurance giant earlier.

the

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process

by

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which

strategies

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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

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cheque book for maintaining a minimum balance of Rs.250/- to attract

into action through

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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

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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

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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

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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

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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.

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Role of strategists

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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.

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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

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individuals or in groups, are concerned with and play a role in strategic management.

1.

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Consultants

2.

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Entrepreneurs

3.

Board of Directors

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4.

Chief Executive Officer

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5.

Senior management

6.

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Corporate planning staff

7.

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Strategic business unit (SBU) level executives

8.

Middle level managers

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9.

Executive Assistant

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A brief description of how the different strategists approach the process is outlined here.

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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,

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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.

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McKinsey and Company, specializes in offering consultancy in the areas of fundamental

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change management and strategic visioning; Andreson Consulting, is in business

restructuring, and info tech and systems; Boston Consulting helps in building

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competitive advantage; and KPMG Peat Marwick is in strategic financial management

and feasibility studies for strategy implementation.

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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

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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

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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

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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

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women entrepreneur.

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Kiran Mazumdar Shaw, a young entrepreneur, set up an export-oriented unit

manufacturing a range of enzymes. As an expert in brewing technology, Mazumdur

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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

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involved in all aspects of policy formulation and implementation for her companies.

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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.

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They are responsible for the general administration of the organization. They are

supposed to guide the top management in framing business strategies for accomplishing

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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

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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).

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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

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directors which should have a core group of excellent, professionally-acclaimed,

non-executive directors who understand their dual role of appreciating the issues

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put forward by the management and honesty discharging their fiduciary

responsibilities towards the company's shareholders as well as creditors.

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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

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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

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important strategist being responsible to play major role in strategic decision-making.

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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.

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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

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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.

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Strategic planning at MRF Ltd. used senior management expertise by dividing them into

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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

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in SWOT analysis through the help of managers and assistant managers.

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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

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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

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amount of authority and responsibility within their strategic business units.

At Shriram Fibres, the strategic planning system covered the different businesses ranging

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from nylon yarn manufacture to the provision of financial services. Strategic plans were

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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.

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7) Corporate-planning staff plays a supporting role in strategic management. It assists the

management in all aspects of strategy formulation, implementation and evaluation.

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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

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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,

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working, and maintenance of the strategic management system.

8) Middle level managers: They are basically operational planners they may, at best, be

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involved as `sounding boards' for departmental plans, as implementers of the decisions

taken above, followers of policy guidelines, and passive receivers of communication

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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.

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9) Executive Assistant: An executive assistant is a person who assists the chief executive in

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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

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relations and liaison functions, coordinating activities with the internal staff and

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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".

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Mintzberg's modes of strategic decision-making

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Henry Mintzberg has given three most typical approaches of strategic decision making

which include:

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Entrepreneurial mode

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Adaptive mode

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Planning mode

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We will now examine the three modes of strategic decision making

Entrepreneurial Mode: Strategy is made by one powerful individual who has

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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.

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The success of Biocon India founded by Kiran Mazumdur shaw is an example of this

mode of strategic decision making.

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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

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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

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agencies.

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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

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search for new opportunities and the reactive solution of existing problems.

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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

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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

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provider of information appliances, highly reliable information technology infrastructure and

electronic commerce service.

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A fourth mode of `logical incrementalism' was later added by Quinn.

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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

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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

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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,

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it is important to build consensus, and

needed resources are to be developed before committing the

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entire corporation to a specific strategy.

Dr. Reddy's Laboratories follows this mode

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Strategic management in India

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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

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strategic management. In view of this to make strategic management effective organizations are

showing some new initiatives described here.

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1. The abolition of public sector monopoly or dominance in a number of

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industries has enormously increased business opportunities. Many of

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them are high-tech and heavy investment sectors which make

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strategic management all the more relevant.

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2. The delicensing has removed not only an important entry and growth

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barrier but also a consumption (and, therefore, demand) barrier. In

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the past, because of non-production/limited production and import

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restrictions, many goods were non-available or had limited

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availability (in quantity and /or variety).

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3. The scrapping of most of the MRTP Act restrictions on entry, growth

and Mergers &Acquisitions (M&As) , along with the dereservation

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and delicensing of industries referred to above, have opened up flood-

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gates of business opportunities for large enterprises.

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4. The liberalization in policy towards foreign capital and technology,

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imports and accessing foreign capital markets provides companies

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opportunities for enhancing their strengths to exploit the

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Figure 2.3 Trend setters in Indian economy

Source: Cherunilam, Francis( 2002) Strategic Management,

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Himalaya Publishing Company, New Delhi

(i)

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Developing learning organization

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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

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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

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product development.

For example, Hewlett-Packard uses an extensive network of informal committees to transfer

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knowledge among its cross-functional teams and to help spread new sources of knowledge

quickly.

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(ii) TQM implementation

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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

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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

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activities of the organization. Most of the Japanese companies adopted TQM practices in 1970

itself.

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TQM method measures customers' needs, measures and evaluate customer

satisfaction delivered by the product or service ,and engages the organization in continuous

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improvement to stay tuned-in to changes in customers' needs". The essential characteristics

of TQM are:

o

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A customer-driven definition of quality

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o

Strong quality leadership

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o

Emphasis on continuous improvement

o

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Reliance on facts, data, and analysis

o

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Encouragement of employee participation

ISO 9000 certification and ISP 9002 etc., encourage organizations to embody these

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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

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four characteristics.

Customers are intensely loyal. They are more than satisfied because the

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organization meets their needs and exceeds their expectations.

The organization can respond to problems, needs and opportunities with minimal

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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

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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

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toward a state of continuous improvement.

It is imperative for a company, which has adopted the TQM to integrate it with every phase of

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the strategic management.

Environmental Analysis and TQM : The environmental analysis of a company with TQM

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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.

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Organizational Decision and TQM : TQM influences the organizational direction by

embodying the quality philosophy in the organizational mission. Indeed, the missions of

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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

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efficient because of the clarity of organizational goals and direction, and the work and

relationships culture fostered by TQM.

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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.

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Information technology adaptation

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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

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mortar retailing at all. All their sales come from online business only today.

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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.

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Globalizing operations

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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

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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

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are now considered key for anyone interested in reaching top management.

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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-

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term competitive advantage.

Summary

Strategic management has evolved as a primary value in helping organization operate

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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

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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

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Executive Officer, Senior management, Corporate planning staff, Strategic business unit (SBU)

level executives, Middle level managers and Executive Assistant. Henry Mintzberg has given

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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,

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expanding foreign markets and competition and grant of autonomy to navarathnas etc., created

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the need for strategic management. The key elements in strategic management are: developing

learning organization, TQM implementation, and information technology adaptation and

globalsing operations.

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Self -assessment questions

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1. Describe the strategic management process with examples.

2. Explain environment canning and analysis.

3. What do you understand by strategy implementation and control?

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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?

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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?

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8. Describe with examples the initiatives taken by corporate in India for effective strategy

management.

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9. What is TQM and how it is made an element in strategy?

10. What is the impact of IT on corporate strategy?

Activities

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1. Read the Chairman's speech of two different companies in the Annual General Meetings

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and prepare a note on their strategies.

2. Refer the websites of three organizations ?one from service sector, one from

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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,

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Himalaya Publishing House, New Delhi.

4. Wheelen L Thomas and Hunger J. David( 2002), Concepts in

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Strategic Management and Business Policy, Pearson Education Asia, New Delhi.

5. Kachru Upendra(2005), Strategic Management Concepts and cases, Excel Books, New

Delhi

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6. Kazmi Azhar(2002) , Business policy and Strategic Management, Tata Mc Graw Hill,

New Delhi.

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5. Fred R. David (2003), Strategic Management : Concepts and Cases, Pearson Education,

New Delhi.

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Unit I

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ON
S 3

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Mission and Objectives

S
E

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L

LESSON OUTLINE

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Introduction
Process of establishing
Organizational direction

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Strategic intent

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Mission or purpose

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Objectives
Synergy
Summary
Self assessment questions
Activities

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References

LEARNING OBJECTIVES

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After reading this lesson you

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should be able to

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Understand and need

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for strategic direction

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and strategic intent

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Define

mission

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statements for different

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organizations

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Appreciate the types of

organization objectives

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Know how to set

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objectives in of Key

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Result Areas (KRAs)

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Introduction

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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

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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.

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Process of establishing organizational direction

The process of establishing direction consists of three major step as shown in Figure 3.1

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(1)

Reflecting on the results of an environmental analysis,

(2)

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Establishing an appropriate organizational mission, and

(3)

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Establishing appropriate organizational objectives.

Figure 3.1 Strategic Management ?Process focus

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MISSION

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LONG-RUN OBJECTIVES

SHORT-RUN OBJECTIVES

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Gre

at

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Scot

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Ma

ke

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Achi eve

S

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upermarkets is

Serves as

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Great

Serves as

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major

a

progressive

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foundation

Scot

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foundation

reductions in

gro

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wth

? for..

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above the

for..

wage

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orie nted

grocery

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expenses

com pany

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store

Reduce

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reco gnized as a

industry

warehouse

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regi onal leader

average

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expenses

in r etails foods.

profitabili

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Buy quality

We

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will

ty

products at

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cont inue

to

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lower costs

striv e

to

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Review and

im

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prove

our

Improve

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evaluate sales

res

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ponsiveness

competiti

run by

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to t he needs

ve

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competition.

and concerns of

position

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Match prices

When

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When

our custo

mers,

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within

offered by

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a ccompli s-

accomplis-

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emp loyees, an hed result in

market

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hed result in

competition

emp hasis on t he

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areas.

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the

on high-

volu me,

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a n d a c complish

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accomplish

volume items

profitability.

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ment of....

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ment of....

Encourage

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We intend to

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store tours by

expand within

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community

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our

existing

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groups.

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Source: Samuel C. Certo & J Paul Peter, Strategic Management ? A Focus on Process,

Mc Graw Hill International, New York. p

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Developing mission and objectives helps a manager

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contribute primarily to manager's purpose

identify primarily among manager's tasks

examine the pervasiveness of planning and

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outline the efficiency of resulting plans.

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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

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achieve the objectives) and goals lead to targets (which are set to achieve the goals) as shown in

Figure3.2.

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Figure 3.2 Elements in Strategy Formulation

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F

Mission

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A

O

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R

H

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Objectives

I

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U

E

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Goals

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I

E

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O

N

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N

Targets

T

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Strategic Intent

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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

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and capabilities. They explain the term `strategic intent' like this.

"On the one hand, strategic intent envisions a desired leadership position and establishes the

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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

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process that includes:

o focusing the organization's attention on the essence of winning,

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o motivating people by communicating the value of the target,

o leaving room for individual and team contributions,

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o sustaining enthusiasm by providing new operational definitions as circumstances change

and

o using intent consistently to guide resource allocations".

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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

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been proposed by them to explain the lead taken by Japanese firms over their American and

European counterparts.

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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

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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

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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.

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Mission or Purpose

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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.

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Mission statements can vary in length, content, format, and specificity. Most

practitioners and academicians of strategic management feel that an effective statement exhibits

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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:

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1. Customers: Who are the firm's customers?

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2. Product or services: What are the firm's major products or services?

3. Markets: Geographically, where does the firm compete?

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4. Technology: Is the firm technologically current?

5. Concern for survival, growth and profitability: Is the firm committed to growth

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and financial soundness?

6. Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities

of the firm?

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7. Self-concept: What is the firm's distinctive competence or major competitive

advantage?

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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?

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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;

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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

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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

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stability.

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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

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the organizational will succeed. Having an established and documented organizational mission

accomplishes several important things. A mission statement once established serves an

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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

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broad enough to accommodate any new changes to avoid reformulation.

Objectives

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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

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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.

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Figure 3.3 Hierarchy of objectives

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B

1.

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Socio

Top Down

Board of Directors

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t

econom

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Approach

(BOD)

t

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2. ic

Mission

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3. Overall

o

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Top Management

objectives of the

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m

organization

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4. KRAs

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Middle

u

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5. Division objectives

Management

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p

6. Department & unit

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a

7. Individual objectives

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Lower

p

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* Performance

Management p

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* Personal development

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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

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lower level, group personal objectives are set. The objectives can be top down or bottom up

taking the initiative from lower management.

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Managers should develop organizational objectives that are

o specific
o require a desirable level of effort

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o flexible
o measurable and operational
o consistent in the long and short run

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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

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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

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of the firm are covered. Eight key areas in which organizational objectives should normally be

set are:

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1. Market standing: the position of an organization ? where it stands ? relative to its

competitors

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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

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produce a specified level of products are said to be more `productive than organizations
that require more resources to produce at the same level.

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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.

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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.

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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.

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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

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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.

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Table 3.1 shows the usage of the different objectives by various companies.

Table 3-1

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Types and Usage Levels of Organizational Objectives

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Type of objective

Number of companies

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Percent of

studied having objective

companies studied

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type

having objective

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type

Profitability

73

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89

Growth

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67

82

Market share

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54

66

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Social responsibility

53

65

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Employee welfare

51

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62

Product quality and

49

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60

service
Research and

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44

54

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Development
Diversification

42

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31

Efficiency

41

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50

Financial stability

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40

49

Resource conservation

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32

39

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Management

29

35

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development
Multinational

24

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29

enterprise
Consolidation

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14

17

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Miscellaneous other

15

18

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goals

*Adds to more than 100 percent because most companies have more than one goal

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Source : Y.K. Shetty, New Look at Corporate Goals," California Management Review, 22 ,
No.2 (Winter 1979).

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Synergy

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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.

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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

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through their own portfolio diversification decisions.

Synergy exists when the value created by business units, working together exceeds the value

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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

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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

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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

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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

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leader, a low-cost producer, a technologically superior competitor, or an ideal employer. For

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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

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supported by an aggressive promotion policy. The other functional area plans and policies

would have to supplement these marketing policies.

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Summary

Two main organizational ingredients are commonly used to establish organizational direction:

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Organizational mission and organizational objectives. Organizational mission is the purpose for

which, or reason why, the organization exists. An organizational mission should help focus

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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

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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

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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

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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.

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The other functional area plans and policies would have to supplement these marketing policies.

Self-assessment questions

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1. Define mission and objectives and give examples.

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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

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examples

4. Explain why a mission statement should accommodate the future growth of a company

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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

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8. What are the characteristics of goals?

9. Describe the concept of `synergy' and discuss its significance to strategic planning.

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10. Identify companies having clear strategic direction, mission and objectives.

Activities

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1. Find the mission statements of the following organizations:

(a) Procter & Gamble India Ltd (a) Glaxo Laboratories (c) Appolo Hospitals

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2. Study the objectives of Bharat Heavy Electrical Limited. Figure out the strategic intent

of the company.

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References

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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,

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New Delhi

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Unit I

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ON

4 Strategic Business Unit and

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S
S

Functional Level Strategies

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E
L

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LESSON OUTLINE

Introduction
Strategy management outcomes

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Evolution of structures
Types of structures

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Decision-making hierarchy of
Business firms
Strategy - Structure combinations

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LEARNING OBJECTIVES

Role of SBU level executives and
Strategies

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After reading this lesson you

Functional level strategies

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should be able to

Summary
Self assessment questions

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Understand

Activities

significance of strategy

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References

implementation

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Know

different

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structures

of

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organizations.

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Explain

strategy

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structure relationships

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Outline the role of SBU

level executive

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Know what functional

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strategies are

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Introduction

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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

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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

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understand the hen and egg dilemma-strategy follows structure or structure follows strategy.

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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.

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STRATEGY FORMULATION

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Good

Poor

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STRATEGY

Success

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Roulette

Good

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Trouble

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Failure

IMP

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LEMENTATION

Poor

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Success is the most likely outcome when an organization has a good strategy and

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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

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changes may still make a strategy unsuccessful. However, organizational objectives have the

best chance of being achieved in this cell.

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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

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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.

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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.

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The trouble cell is characterized by situations wherein a well-formulated strategy is

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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

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whether the implementation was effective. The new (and often less appropriate) strategy is then

reimplemented and continues to fail.

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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

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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

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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.

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First, strategy implementation is atleast as important as strategy formulation

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Second, the quality of a formulated strategy is difficult to assess in the absence of

effective implementation.

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Evolution of structures

A firm's organizational structure is a formal configuration that largely determines what

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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

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structure. The cost leadership strategy requires a centralized functional structure-one in which

manufacturing efficiency and process engineering are emphasized. The evolution from the

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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.

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Divisional incentives are linked to overall corporate performance. The related-linked SBU M-

form structure establishes separate profit centers within the diversified firm.

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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

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by management. The formal organizational structure is conveyed in the organization chart.

Then there is the informal organizational structure, which represents the social relationships

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based on friendships or interests shared among various members of an organization. The

informal organizational structure is evidenced in the patterns of communication commonly

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called the "grapevine." The informal network can be used to encourage rapid execution of

strategies.

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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,

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strategic business unit (SBU), and matrix structures. A schematic diagram of each of these

structures is shown in Figure 4-1

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Simple

Functional

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Owner-Manager

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CEO

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Employees

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Operations

Marketing

Finance

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Divi

s

ional

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SBU

CEO

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CEO

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Divi

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sion 1

Division 2

VP

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VP

Ma

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nager

Manager

SBU 1

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SBU 2

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Division

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Division

Managers

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Managers

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2

3

2

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Matrix type

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CEO

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VP

VP

VP

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Production

Marketing

R & D

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Finance

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Pro ject

Man

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ager 1

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Proj

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c t S

Mana

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Figure 4-1 Different organization structures

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Simple Organizational Structure

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A simple organizational structure has only two levels, the owner-manager and the employees.

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Small firms with one product or only a few related ones usually exhibit this structure.

Functional Organizational Structure

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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

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functions as production and operations, marketing and research and development (R&D) may be

organized in departments.

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Divisional Organizational Structure

As firms acquire or develop new products in different industries and markets, they may evolve a

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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

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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

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strategies on its own with the approval of the CEO.

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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

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strategic groups. This structure groups a number of divisions together on the basis of such things

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as the similarity of product lines or markets. Vice presidents are appointed to oversee the

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operations of the newly formed strategic business units, and these executives report directly to

the CEO.

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Matrix Organizational Structure

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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

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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

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strategies.

The advantages and disadvantages of the different structures are presented below.

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Simple

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Advantages

Disadvantages

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1. Facilitates control of all the business 1. Relies totally on the owner-

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activities.

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manger

2. Makes possible rapid decision- 2. Grows increasingly inadequate as

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making and ability to change with

volume expands.

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market signals.

3. Does not facilitate development

3. Offers

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simple

and

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informal

of future managers

motivation/reward/control systems.

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4. Owner-manager is forced to

focus on day-to-day matters and
not on future strategy.

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Functional

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Advantages

Disadvantages

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Divisional

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through 1. P

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overhead costs that is acceptable

business planning at the corporate

the group vice president difficult

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making

for performance.

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to different division managers with

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and

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profit responsibility.

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business firms

strategic managers.

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tremendous

for strategic mangers.

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3. Maximizes efficient use of functional

horizontal

and

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vertical

typically

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managers.

coordination.

contains three

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4. Fosters

creativity

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and

multiple

sources of diversity.

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levels as

5. Provides broader middle management

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shown

in

exposure to strategic issues for the

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business.

Figure 4.2 At

the top is the corporate level, composed principally of members of the board of directors and the

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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,

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corporate image and social responsibility.

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The second rung of the decision-making hierarchy is the business level composed

principally of business and corporate mangers. These managers

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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

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compete in the selected product-market arena.

The third rung is the functional level, composed principally of managers of product,

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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

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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

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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

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shares.

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Figure 4.2 Decision Making hierarchy

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Corporate

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Corporate Level

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strategy

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B

usiness 1

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Business 2

Business 3

Business Level

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Corp

orate

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Corporate

Corporate

Corporate

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Functional

strate gy

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strategy

strategy

strategy

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Level

Table 4-1 depicts the characteristics of strategic management decisions at different

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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

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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

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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-

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level decisions involve plant location marketing segmentation and geographic coverage, and

distribution channels.

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Table 4-1 Characteristics of strategic management decisions at different levels

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Level of strategy

Characteristic Corporate

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Business

Functional

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Type

Conceptual

Mixed

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Operational

Measurability

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Value

judgments Semi quantifiable

Usually

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dominant

quantifiable

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Frequency

Periodic

or Periodic

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or Periodic

sporadic

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sporadic

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Adaptability

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Low

Medium

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High

Relation

to Innovative

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Mixed

Supplementary

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present
activities
Risk

Wide range

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Moderate

Low

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Profit potential Large

Medium

Small

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Cost

Major

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Medium

Modest

Time horizon

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Long range

Medium range

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Short range

Flexibility

High

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Medium

Low

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Cooperation

Considerable

Moderate

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Little

required

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Corporate level Strategy and structure combinations

The need for having the right structure for implementation of strategy need not be over

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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

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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

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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

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of the form of the functional structure used to implement the differentiation strategy are shown in

Figure 4-4

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r
e

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Office of the President

t
u

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c

l
l

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s
t
r
u

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t
a
r
t

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o

f

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l
a

Cost leadership strategy

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Centralized Staff

e
l
y

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t
i
v

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e

r
e
l

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a

b
y

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a

Engineering

Marketing

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Operations

Personnel

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Accounting

M

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Figure 4-3 Functional organization for cost leadership strategy

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Figure ? 4-4 Differentiation through functional structure

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President and Limited staff

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R & D

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Marketing

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New Product Operations Marketing Human Finance
R & D

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Resources

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Notes:

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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

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that work closely with each other.

Formalisation is limited so that new product ideas can emerge easily and change is more

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readily accomplished.

Overall structure is organic. Job roles are less structured.

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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

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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

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also works in coordination with other SBUs.

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Functional

Many public and private sector companies have adopted the SBU concept

strategies

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in some form or the other "There are several family-managed groups today

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who boast of their professionally-managed organizations structure. Each of

Functional

their companies has a chief executive who has total responsibility and

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authority over the profit center.

strategies which

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are

short-term

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Strategic planning at MRF Ltd used senior management expertise by
dividing them into five groups

dealing with products and markets,

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game plans for

environment, technology, resources, and manpower. Each group had a

the key functional

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leader who helped to prepare position papers for presentation to the board.
The executive directors in the company were actively involved in SWOT

areas

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are

the

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analysis through the help of managers and assistant managers.

means

to

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At Shriram Fibers, the strategic planning system covered the

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different businesses ranging from nylon yarn manufacture to the provision

accomplish

the

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of financial services. Strategic plans were formulated at the level of each

annual

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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.

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Functional

Each SBU had its own strategic planning cell

strategies

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clearly specifying

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the various measures to be taken in different functional areas in different time horizons help

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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

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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

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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."

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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

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Long-term obj ective

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Figure.4.5

Double Sales

within

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Annual

3 years

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objectives and

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functional

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strategies

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Annual objective

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Increase sales by

Rs. 86 crores

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Division A

Division C

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Annual

Division B

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Annual objective

objec

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tive

Annual objective

Increase sales

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Increase sales

by Rs.18 crores

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Increase sales
by Rs.30 crores

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R & D Annual

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Production Annual

Marketing Annual

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Personnel

Objectives

Objectives

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Objectives

Annual

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Develop one

Increase

Increase no.

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Objective

new product

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productivity by

Increase no. of

Reduce no. of

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Improve

15 %. Increase

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dealers by 50

employees by

features of

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production by 25%

Increase field sales

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500 Organize

product Y

force by 10

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two Epps

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The annual objective is to increase sales by Rs. 86 crores. Strategies for this include, for

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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

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filed sales force, increasing the number of dealers etc.

The functional strategy for marketing must cover all the factors of the marketing mix.

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Mutually consistent strategies for each of the factors must be developed to help achieve the

annual marketing objective.

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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

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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

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systems and marketing

Summary

The true success of an organization depends upon effective formulation and implementation of

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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

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matrix form suggests four probable outcomes of the four combinations of variables: Success,

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roulette, trouble and failure. Designing sound organization structures would enable strategists to

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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

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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.

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Self Assessment questions

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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

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path of structure following strategy and then strategy following structure."

3. Explain the different types of organizational structures and state their merits and demerits.

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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

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differentiation ?

7. What organizational structures should be used to implement the multi domestic, global,

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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?

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10. Explain the significance of functional strategies.

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Activities

1. From the management journals collect two articles on corporate strategy and structure

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and draw conclusions on the question whether strategy follows structure.

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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

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1. Azhar Kazmi (2003), Business policy and Strategic Management 2nd edition , Tata

McGraw Hill,New Delhi.

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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

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4. Hitt , M.A, R.D Ireland and R E Hoskission, (1996) Strategic Management :

Competitiveness and globalization, West publishing New York

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Unit II

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ON

5 Environmental Analysis

S

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S

EL

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LESSON OUTLINE

Introduction

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Concept of environment
Taxonomy of a firm's environment
Macro environment analyzed
Impact of macro environment on
business

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Environment and strategic analysis
Environmental changes in India
Summary
Self assessment questions
Activities

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References

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LEARNING OBJECTIVES

After reading this lesson you should be

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able to

Understand the concept and different

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types of environment

Examine the elements of external

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environment and their influences on
business

Know how strategic analysis and

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response

takes

place

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relating

to

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environment

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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

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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

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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

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the environment.

Concept of environment

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Prof. Keith Davis defines business environment as, "the aggregate of all conditions events and

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influences that surround and affect it." These surroundings are constantly changing and

uncertain.

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Unilever recently sued Proctor & Gamble (P&G) over that company's

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corporate espionage activities to obtain the secrets of its Unilever hair-care

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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

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eighty documents from garbage bins outside Unilever' s hair-care brands such

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as ThermaSilk, Suave, Salon Selective, and Finesse.

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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.

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Taxonomy of a firm's environment

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The total environment can be classified into two broad categories

Internal environment
External environment

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The internal environment includes the goals and value system, the hierarchical authority

structure, the technological equipment and processes, the social groups and teams, the

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management groups, organizational climate and culture,etc.

The external environment can be classified into two segments.

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Macro environment or Mega environment, or

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Micro environment or task environment.

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Figure 4-1 Environment types

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Socio Cultural environment Economic environment

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Internal

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Environment

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Customers

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Suppliers

Competitors

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Firm

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Special Shareholders

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Interest

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Groups

Employees

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Creditors

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Pol?tico-legal environment Technological environemnt

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Macro Environment

Also referred to as general or remote environment, Mega' environment, skirts the `micro', or

the relevant environments.

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The major constituents of mega environment are PEST or STEP (P

refers to Politico-legal environment, E-Economic environment, S-Socio-cultural environment

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and T-Technological environment) or PESTEL (Political, environmental, socio-cultural,

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technological, economic and legal). These environments can further be classified into

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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

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environment.

Micro Environment

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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

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substantial impact on an organization's current business. Consequently, developments in

microenvironment become the dominant preoccupation of the management for strategic

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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.

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Macro environment Analyzed

Now, we will examine the various factors in the macro environment and identify the type of

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impact they make on business organizations.

Socio -cultural

environment

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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

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necessary information should be gathered by L & T from the relevant

environment.

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The socio cultural environment is one of the key elements of macro environment. Figure 4-3

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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

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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

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include ?

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Growing fast food culture
Women moving from kitchens to corporate
Burgeoning middle class
Increasing literacy levels

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Declining birth rates and increasing senior citizens
Increasing health consciousness

Socio-cultural factors affect buying preferences, usage patterns and life style adaptations. Firms,

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which ignore the socio cultural environments, tend to loose.

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McDonalds, the world's fastest growing fast food chains extended Indian

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Figure 4-3 Key

market with beef and pork as ingredients in its pizzas and burgers. Since

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Social, Cultural

Hindus are religiously against cow slaughter and do not consume beef

and

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and Muslims hate pork these was great opposition in Bombay and the

Demographic

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local shiv sena activities broke down McDonald's fast food center at

Variables

Mumbai. Today the company relaunched its products with `no beef and

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no pork' sign boards and even gave wide publicity that animal fat is not

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1.

C

used in its restaurants. Further to Indianise its products new versions for

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hi

Indians like Mc. Imli (with tamarind), Mc spic (with Indian spices) etc

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ld

are introduced exclusively for Indian market.

b

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Peculiar usage forms include:

ar

Vicks Vaporub is used as a mosquito repellent in some tropical countries.

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in

Hair dyes are used for marking animals and washing machines for

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g

making Lassi in some rural areas of Punjab.

ra

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s

2.

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Number of specific interest groups

3.

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Birth and death rates

4.

Life expectancy rates

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5.

Attitude towards work and organization

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6.

Attitude towards government

7.

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Attitude towards authority

8.

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Ethical norms

9.

Value system

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10. Composition of work force
11. Attitude towards income, savings and capital formation
12. Social ethos towards work and organization

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Technological environment

Technology is knowledge to create new things. Mangers need technology to design, produce,

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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

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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,

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loss of privacy, traffic jam etc. A balanced approach is therefore needed.

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1975,

Xerox dominated the world photocopier market with 93 percent of the

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revolutionary

market share. It guarded its technology with over 500 patents. Cannon
was a camera company from Japan that entered into this business around

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technological

1970. It did not have the process technology to by-pass Xerox's patents. changes

and

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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

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have

around Rs.300,000 crore in annual revenues and it sells more copiers than

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brought

about

Xerox does. Canon succeeded, not by coping Xerox, but Canon believed

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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

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organizations.

therefore be different from Xerox's patent protected technologies.

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Among

such

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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

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such areas as transport, utility, health care, electrical and computers.

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Technological change is of two types

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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,

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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.

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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,

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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

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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

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in the following Table 4-1.

Table 4-1: Disruptive Technologies : Winners and Losers

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Dominant Firm

Product

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Disruptive

Winning

Technology

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Challengers

GM and Ford

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Small cars

Japanese quality

Totyoto and

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& manufacturing

Honda

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expertise

Gillette

Razor blades

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Stainless steel

Wilkensen

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technology

Gillette

Cheap razors Plastic

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Bic

technology

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Parker

Fountain

Ball point pen

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Timex

pens

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technology

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Swiss

Time pieces

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Lever-action

Timex

watchmakers

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watch technology

Timex

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Watches

Electronic

Casio. Etc.

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technology

Economic environment

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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

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banks.

Labour ?availability of skilled labor at affordable wage rates.

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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

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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.

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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

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is high people don't buy.

Customers- Customers are the foundation of business. Business must serve the

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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

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(customer relationship management) programs in many organizations today.

General Economic Conditions - The general economic conditions like national

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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

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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

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will be brighter; investment will get automatic attraction. Recently growing
income of middle class in India, encouraged foreign investors to operate in India.

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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

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been noticed that with the collapse of communist Soviet Union multinational
corporations are searching their market in East European Countries.

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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

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of liberalization and globalization, the era of protectionism and preferential
treatment is giving way to competition and cost-consciousness.

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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

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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

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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

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company. When rates of interests are lower, companies can adopt ambitious
strategy with borrowed funds.

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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.

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Taxes- the imposition of taxes like income tax, sales tax and excise duties have

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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

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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.

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Politico- legal environment

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The various forces in political and legal environment direct and restrict business decision-
making.

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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

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also constrains business. Promotion is possible by stimulating economic extension and

development, by providing subsidies to SSIs, tax advantages, support to R&D and

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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,

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1991.

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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."

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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

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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

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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

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and tribunals.

Indian business environment is undergoing a sea change since 1991 after economic reforms were

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introduced. Fredrick Gluck, Director of Mckinsey & Company concludes his observations in the

following words:

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"It is no exaggeration that in an industry that is, or is rapidly becoming global,

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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

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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

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already become. Hewlett Packard's manufacturing chain reaches half-way around

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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.

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A number of measures have been announced to facilitate private entry into areas of infrastructure

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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.

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1. The National Mineral Policy was revised and the Mines and Mineral Development Act

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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

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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

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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

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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

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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

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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.

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Natural Environment: Geographical and ecological factors, such as natural resources

endowments, weather and climatic conditions, topographical factors, location aspects in the

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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

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and ecological factors also influence the location of certain industries.

Natural Resource availability

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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

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affect the demand pattern.

For example, in hilly areas with a difficult terrain, jeeps may be in greater demand than cars.

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Ports - Air ports and seaports offer an advantage in transport. Many commercial cities are those,

which have this port advantage.

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In India business has flourished near ports. For example, Visakhapatnam in Andhra Pradesh,

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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

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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

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and natural water resources

Cliamtic conditions Variations in climatic conditions cause differences in demand for goods.

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More number of air conditioners and refrigerators are sold in the South India during summer due

to warm weather.

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Impact of macro environment on business

The trends in mega environment, from the viewpoint of a company, have long-term implications.

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Figure 4-2 shows some of the trends that impacted business.

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The following

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.have potentially

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.....Probably won't

...have potentially

Environmental trends.....

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positive effects on

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affect these much negative effects on

DEMOGRAPHIC

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Aging population

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Medical services Steel

Colleges and

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Universities

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Increased purchasing

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Luxury automobiles

power of baby boomers

SOCIOCULTURAL

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More women in the force Convenience foods Farm Home baking
Equipment

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Supplies

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Greater health and fitness

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Exercise equipment

Mest products

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awareness

POLITICAL/LEGAL

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Trucking

Banking

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Deregulation
Book

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Increased environmental

Waste management publishing Automobiles

legislation

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TECHNOLOGICAL
Advances in laser compact discs

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Long playing technology

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records

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Progress in Ethical drugs Building
Bio-technology materials

MACROECONOMIC Housing construction Prescription

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Declining interest rates drugs

GLOBAL Global Domestic stores
Growing competitive telecommunications manufacturing

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strength of newly industrialized

Countries (NICs)

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Opening of eastern bloc Fast foods Defense

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countries
,
,
,

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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.

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Environment and strategic analysis

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By the very principle of its operation, industry never reaches a point of equilibrium. Strategic

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analysis provides the framework on study, forecast, anticipates and prepares the organization to

tackle the challenges posed by the changes, head on.

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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

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number of sources, resulting in a complex play of forces that are not easy to analyze in their

totality

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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

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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

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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.

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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

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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,

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processes, products, and relationship with customers, shareholders, suppliers and employees;

information; and contractual commitments.

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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

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of these schools views strategy differently, as a result of which strategic capability is also viewed

differently.

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The `Fit' Concept

The traditional concept of organizational strategy is based on the `fit' concept. This

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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

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achieving fit between environment and organizations.

The `Stretch' Concept

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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

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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

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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

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leveraging resources so as to extend the capabilities of the organization and its competitiveness is

called `stretch'.

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Summary

Business organizations are subject to its internal and external environmental factors. The

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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

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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

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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

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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

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the `positioning school' and the `stretch' concept of the resource based' school

Self assessment Questions

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1. What do you understand by environment? How do you classify it?

2. What is internal environment? Is it controllable?

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3. What PESTEL means to you? Which of the external factors are controllable ?

4. What factors in social environment affect business and how?

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5. Discuss the implications of political environmental forces in India?

6. Examine the impact of changing technology on business.

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7. What are the major economic environmental factors?

8. Identify the major changes in Indian environment impacting domestic and foreign

business.

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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

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and Dess in the lesson.

Activities

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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.

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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..

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References

1. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books, New

Delhi.

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2. John Pearce II and Richard B. Robinson Jr(1996), Strategic Management, A.I.T.B.S, New

Delhi

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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,

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New Delhi.

5. Francis Cherunilam(2000),Strategic Management, Himalaya Publishing House, Mumbai

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Unit II

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S 6

Environmental Scanning Techniques

S

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E

L

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LESSON OUTLINE

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Introduction
Why scanning?
Techniques of scanning
Issues Priority matrix

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Environmental Threats and

opportunities Profile (ETOP)

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Strategic advantage profile (SAP)

Functional ? area profile and resource

deployment matrix

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SWOT Analysis

The opportunity and Threat matrices

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The Impact Matrix

The Impact scale

Gap Analysis

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Balanced Score card
Summary
Self Assessment questions
Activities

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References

LEARNING OBJECTIVES

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After reading this lesson you
should be able to

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Understand the importance of scanning

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techniques.

Describe the different scanning techniques

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Since the Strategic Advantage Profile is a summary statement of corporate capabilities, in

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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

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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.

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III. Functional ? area profile and resource deployment matrix.

Developed by Hofer and Schendel, this method requires the preparation of a matrix of functional

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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

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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

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Matrix

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Techniques of Scanning

There are various scanning techniques used by organizations

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ii)

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Issues Priority matrix

iii)

Environmental Threats and opportunities Profile (ETOP)

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iv)

Strategic advantage profile (SAP)

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v)

Functional ? area profile and resource deployment matrix

vi)

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SWOT Analysis

vii)

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The opportunity and Threat matrices

viii)

The Impact Matrix

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ix)

The Impact scale

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x)

Gap Analysis

xi)

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Balanced Score card

I)

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Issues Priority Matrix (IPM)

One way to identify and analyze developments in the external environment is to use the issues

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priority matrix (Figure 8-1) as follows:

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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.

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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.

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Figure 8-1

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Issues Priority Matrix

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Probable Impact on Corporation

High

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Medium

Low

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gh

High

High

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Medium

e

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Priority

Priority

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Priority

r
e
nc

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ur

um

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e
di

Oc

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High

Medium

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Low

Priority

Priority

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Priority

l
i

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t
y

bi

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r
oba

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Medium

Low

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Low

ow

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Priority

Priority

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Priority

L

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Source: L. L. Lederman, "Foresight Activities in the U.S.A: Time for a Re-Assessment?" Long ? Range Planning (June

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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

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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

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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.

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II)

Environmental threats and opportunities Profile (ETOP )

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Assessment of the environmental information and determining the relative significance of

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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

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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.

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BHEL: ENVIRONMENTAL THREAT AND OPPORTUNITY PROFILE (ETOP)

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Environmental Sector

Impact

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( +) Opportunity (-) Threat

Socio ? economic

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(+_) continued emphasis on infrastructural
development which includes power supply for
industry, transport, and domestic consumption.

(-) Severe resource constraints.

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Technological

(+) High growth envisaged in industrial
production and technology upgradation.

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Supplier

(-) Sources of technology will become scarce due
to formation of technology cartels.

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Government

(+) Liberalization of technology import policy

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Competition

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(-) Customers will become more discerning in
their requirements due to an increasing role of
power plant consultants.

(-) Public sector will find it increasingly difficult

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to retain specialists and highly qualified

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personnel.

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Figure 8-2 Environmental analysis at BHEL

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III.

Strategic advantage profile

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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

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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,

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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

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relates to a food processing company in India.

Figure 8-3 Strategic Advantage Profile (SAP) of ABC India Ltd.

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Internal Area

(+) Strength (-) Weakness

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Marketing

(+) Capable sales force; sales agents
dispensed with.

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(-) Shrinking market for most
products.

Operations

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(-) Stagnating sales performance.
(+) Profits after tax picking up after
1982.
(-) Plant facilities are old.

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R&D

(-) No R&D effort so far.
(+) Backing in R &D expected from
parent US company.

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Finance

(-) No additional investment since

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1980.
(-) Heavy reliance on fixed deposits
and bank loans.
(+) Parent US company now
interested in expansion.

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Corporate Resources

(+) Management team comprises
young, ambitious executives.

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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

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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

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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.

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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

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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

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presented also in the form of a matrix. Figure 8-4 Functional ? Area Resource ? Deployment

Matrix

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Figure 8-4 Functional ? Area Resource ? Deployment Matrix

Functional

Resource

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a
r

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Area

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Deployment

-
82

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-
83

-

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84

-
85

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-
86

-
86

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-
88

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and Focus of

s

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ye

xt

hi

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a
r

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Efforts

1981

1982

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1983

1984

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1985

1986

T

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1987

Ne

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ye

Development

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Marketing

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Focus of

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Effort

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Development

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outlay (%)

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Amount Rs.)

Production

Focus of

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Effort

Development

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outlay (%)

Amount Rs).

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Finance

Focus of

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Effort

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Development

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outlay (%)

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R&D

Amount Rs.)
Focus of

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Effort

Development

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Management outlay (%)

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Amount (rs.)
Focus Effort

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V.

SWOT Analysis

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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

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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

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powerful implications for successfully choosing and designing an effective strategy.

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Opportunities

An opportunity is a major favorable situation in the firm's environment. Key trends represent

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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.

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Threats

A threat is a major unfavorable situation in the firm's environment. It is a key impediment to

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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.

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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

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examination of the company profile. Strengths and weaknesses can be defined as follows:

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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

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firm a comparative advantage in the marketplace. Financial resources, image, market leadership,

and buyer / supplier relations are examples.

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Weaknesses

A weakness is a limitation (or) deficiency in resources, skills, and capabilities that seriously

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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

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in the personal computer market.

How is it useful?

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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

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framework for making the best strategic choice.

SWOT analysis can be used in at least three in strategic choice decisions. The most common

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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.

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A second application of SWOT analysis is illustrated in Figure.8-5. Key external opportunities

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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.

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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

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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.

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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.

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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

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strategy for such firms is eliminating internal weaknesses to more effectively pursue market
opportunity.

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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.

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Numerous

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environmental

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opportunities

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Cell 3: Supports a

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turnaround ?

Cell 1: Supports an

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oriented strategy

aggressive strategy

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Critical internal

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Substantial

weaknesses

internal

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strengths

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Cell 4: Supports

Cell 2: Supports

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defensive strategy

a diversification

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strategy

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Major

environmental

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threats

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Figure 8-5 SWOT analysis

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SWOT analysis helps resolve one fundamental concern in selecting a strategy: What will

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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

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grand strategies: the grand strategy selection matrix.

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VI. The opportunity and Threat matrices

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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

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1

2

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High

Major threat

Moderate threats

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Seriousness

3

4

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Moderate threats

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Minor threats

Low

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High

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low

Probability of Occurrence

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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.

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Figure 8-7 Opportunity Matrix

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2

High

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Very attractive

Moderately

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attractive

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Seriousness

3

4

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Moderately

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Least attractive

Low

attractive

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High

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low

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Probability of Occurrence

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A company's success probability with a particular opportunity depends on whether to strength

(distinctive competence) matches the success requirement of the industry.

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Ex: - Entry into LCVs is an attractive opportunity for TELCO.

VII. The Impact Matrix

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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

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unit or to overall company Eg. Diversified company.

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Figure 8-8 The Impact Matrix

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Impact on strategies

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Trends

Pr. of

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S1

S2

S3

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S4

occurrence

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T2
T3
T4

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VIII. The Impact scale

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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

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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:

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+ 2

-

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Extremely favorable impact

+1

-

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Moderately favorable impact

0

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-

No impact favorable impact

-1

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-

Moderately unfavorable impact

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-2

-

Extremely unfavorable impact

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For each trend probabilities of occurrences can be assigned.

IX. Gap Analysis

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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.

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Figure 8-9 Gap analysis

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X A

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Profit Gap

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Gap

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Time span (years)

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Profit Gap :- Gap between profit for the past few years and profit projection based on

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freehand projection, linear regression coefficient or exponential smoothing.

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Sales Gap:- Gap between planned & actual sales.

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Product gap :- Difference between what a firm offers in terms of product items and what

the industry provides in terms of product line.

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Risk gap:- Gap between anticipated risk with strategic decision and the actual

happening.

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X.

Balanced Score card

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Balanced Scorecard is another useful tool to assess the internal strength and weakness of a

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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

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of them.

To generate superior return for shareholders, company should have competitive advantage

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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

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responsiveness to fulfill orders. To facilitate quality operations, company needs

organization with required creativity, skill and learning. Thus financial score board is

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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.

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Therefore we consider these four perspectives of the Balanced Scorecard: financial,

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Customer, Operations and Organizational.

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Perspective

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Assessed through analysis of:

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EVA

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Financial

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Profitability

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Growth

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Differentiation

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Customer

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Cost

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Quick Response

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Product Development

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Demand Management

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Order Fulfillment

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Operations

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Leadership

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Organizational

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Organizational Learning

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Ability to Change

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Source: Alex Miller and Gregory G. Dess, Strategic Management, McGraw Hill, New York,
1996, Page 117.

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This balanced scorecard, as a tool of internal analysis, provides definite advantages to the

company.

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First, it evaluates the strengths and weaknesses of a company by providing equal and

balanced weight to different factors.

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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).

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Third, it explicitly cites competitive advantage as the core element for the success of a

strategy.

Glueck's scanning techniques

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Glueck Suggests three major search techniques for environmental scanning.

(A) Information gathering (B) Spying

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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:

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(a) business magazines like Business Today, Business India, Adverisign and Marketing,

Harvard Business Review, etc;

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(b) newspapers like Economic Times, Financial Express, Business Line, etc;

(c) publications of Trade Directories, Reports, Guides;

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(d) annual reports and profiles of companies; etc.

(B) Spying

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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

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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.

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"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

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Drucker, he also agrees that future managers will be more anticipators and proactive than

problem solver or reactors.

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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

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correlating the various parameters through their analysis and combining intuitions with that

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analysis.

Some of the popular techniques of forecasting include

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Time series analysis

-

Casual modeling and

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-

Delphi Technique

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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

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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

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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.

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xii)

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Issues Priority matrix

xiii)

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Environmental Threats and opportunities Profile (ETOP)

xiv)

Strategic advantage profile (SAP)

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xv)

Functional ? area profile and resource deployment matrix

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xvi)

SWOT Analysis

xvii) The opportunity and Threat matrices

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xviii) The Impact Matrix

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xix)

The Impact scale

xx)

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Gap Analysis

xxi)

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Balanced Score card

Self Assessment Questions

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1. Explain the significance of scanning techniques.

2. Describe Issues Priority matrix

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3. Using Environmental Threats and opportunities Profile (ETOP), find the threats and

opportunities a of a firm

4. What is Strategic advantage profile (SAP)?

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5. Explain the utility of Functional ? area profile and resource deployment matrix

6. Conduct SWOT Analysis for a firm of your choice.

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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

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10. Explain Gap Analysis

11. Why do you think balanced score card is a better techniques of scanning?

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Activities

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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.

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2)

Identify the scanning system of Hindustan Lever Limited by discussing with their local dealers

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and executives carefully record their observations.

References

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1.

P.K. Ghosh (2001), Strategic Planning and Management, Sultan Chand & Sons, New
Delhi

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John A. Pearce II and Richard B. Robinson Jr.(1996), Strategic

Management, AITBS, New Delhi

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3.

Veerendra Kumar (2005), Business Policy and Strategic Analysis, Kalyani Publishers,
Ludhiana

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4.

Thomas L. Wheelen and Hunger J. David (2002) Concepts in Strategic Management and
Business Policy, Pearson Education Asia, New Delhi

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5.

P. Subba Rao (2003), Business Policy and Strategic Management , Hima Publsihing
house, Mumbai

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Unit II

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ON

7

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Internal Analysis

S

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S

E

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LESSON OUTLINE

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Introduction
Internal analysis ?Definition
Companies with strong internal
environment

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Internal analysis ?Process
Resource audit

o VRIO frame work
o Grant's approach

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o Continuum of sustainability

Value chain Analysis

o Upstream

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o Downstream

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Core competence identification
Experience curve
Summary
Self Assessment questions
Activities LEARNING OBJECTIVES

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References

After reading this lesson you

should be able to

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Understand the concept importance and process

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of internal analysis

Know the techniques of conducting internal

analysis

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Identify firms with internal capabilities and their

strategies

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Introduction

Understanding the elements of external environment helps identify opportunities and threats and

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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

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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

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Lawrence R. Jauch and William F. Gleuck define Internal analysis and Internal diagnosis in

following words:

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"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

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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

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repairing weakness in order to build sustainable competitive advantage."

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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).

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As is obvious from the above words, that the internal analysis involves three steps as shown in

Figure 7-1:

1. Resource Audit.

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2. Value Chain Analysis
3. Core-competence Identification.

FIGURE 7.1 Steps in Internal Analysis

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Resource Audit

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Value Chain Analysis

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Core ? Competence Identification

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Companies with strong internal environment

Examples of firms with strong strength which pertain to the internal environment are many.

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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

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below.

TABLE: 7.1 ASIA'S 50 MOST COMPETITIVE COMPANIES

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Rank Company

Country Industry

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Competitive Strength

1

SONY CORP

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Japan

Electronics

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Possesses one of the
world's best ? known brand
names

2

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ACER INCE.

Taiwan

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Computers

Has become a global player
with its
user ? friendly PCs

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3

HONDA

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Japan

Automobiles

Moving more and more

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MOTOR CO.

production to North
America

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4.

TOYOTA MOTOR

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Japan

Automobiles

Combated rising costs at

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CORP.

home with
more factories abroad

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5

CANON INC.

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Japan

Electronics

Thrives on cameras,

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printers, and PC-related
products.

6

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TAIWAN SEMI

Taiwan

Semiconductors

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World's targets silicon ?

CONDUCTOR

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foundry, supplying global
chip-makers.

7.

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SUZUKI

Japan

Automobiles

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Well ? positioned to

MOTOR CORP.

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penetrate Asian mobiles
markets.

8.

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HYUNDAI

South

Automobiles

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Executing major plans for

MOTORS CORP.

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Korea

automobiles
in China and India

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9

RELIANCE

India

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Petro chemicals /

A powerful Vertically ?

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INDUSTRIES

textiles

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integrated
textile manufacturer.

10.

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ROHM CO.

Japan

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Electronic

Profitable niche player in

components

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resistors and LCD screens

11.

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RANBAXY

India

Petrochemicals

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Has stepped up R & D and

LABORATORIES

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penetrated developing
markets

12

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SHANGRI ? LA

Hong

Hotels

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Operates as many as 34

ASIA

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Kong

hotel chains in 12 Asian
countries

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13

SINGAPORE INTL

Singapore Aviation

--- Content provided by⁠ FirstRanker.com ---

Runs are of the world,

AIRLINES

--- Content provided by‌ FirstRanker.com ---

most highly-rated airlines

14

GIORDANO INTL

--- Content provided by⁠ FirstRanker.com ---

Hong

Retail clothing

--- Content provided by‍ FirstRanker.com ---

Manager 450 high-profile

Kong

fashion outlets in 12

--- Content provided by‍ FirstRanker.com ---

countries

15

JOLLIBEE FOODS

--- Content provided by‍ FirstRanker.com ---

Philippines Food

Holds 55 per cent of the

--- Content provided by‍ FirstRanker.com ---

CORP

Philippines
fast-food market

--- Content provided by‌ FirstRanker.com ---

16

SUNDRAM

Indian

--- Content provided by‌ FirstRanker.com ---

Auto pars

A prominent supplier of auto

--- Content provided by‍ FirstRanker.com ---

FASTENERS

parts, notably radiator caps.

17.

--- Content provided by‍ FirstRanker.com ---

VENTURE MFG.

Singapore Contract

--- Content provided by FirstRanker.com ---

Produces over 200 varieties

manufacturing

of electronic equipment

--- Content provided by‌ FirstRanker.com ---

18.

UNITED

--- Content provided by‍ FirstRanker.com ---

Taiwan

Semiconductors

A fully ? integrated firm,

--- Content provided by‍ FirstRanker.com ---

MICROELEC.

which is reverting to a
foundry business

--- Content provided by FirstRanker.com ---

19.

ARVIND MILLS

--- Content provided by‌ FirstRanker.com ---

India

Textiles

Soon to be the world's

--- Content provided by FirstRanker.com ---

second-largest denim-maker

20.

BAJAJ AUTO

--- Content provided by‌ FirstRanker.com ---

India

Automobiles

--- Content provided by FirstRanker.com ---

Leads scooter manufacture
in India, with exports to
Thailand

21.

--- Content provided by‍ FirstRanker.com ---

MOSEL VITELIC INC. Taiwan

Semiconductors

--- Content provided by FirstRanker.com ---

Makes specialized chips
with a plant under way in
China

22.

--- Content provided by FirstRanker.com ---

AYALALAND INC

Philippines Real estate

--- Content provided by FirstRanker.com ---

A big developer in Hong
Kong, Singapore, and the
Philippines

23

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TELEVISION

Hong

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Media

Has the world's largest

BROADCASDTS

--- Content provided by FirstRanker.com ---

Kong

Chinese film library for TV

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24

NINTENDO CO.

Japan

--- Content provided by‍ FirstRanker.com ---

Electronic games

Has launched powerful
game machines to fight

--- Content provided by FirstRanker.com ---

competitors

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

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SAMSUNG

Korea

--- Content provided by FirstRanker.com ---

Electronics

Has added global reach by

ELECTRONICS

--- Content provided by FirstRanker.com ---

buying AST Research

26

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ASIA PACIFIC

Singapore Brewing

Is brewing foreign JVs to

--- Content provided by⁠ FirstRanker.com ---

BREWERIES

combat stagnant home sales

--- Content provided by FirstRanker.com ---

27

PT INDOFOODSM

Indonesia Food

--- Content provided by FirstRanker.com ---

Has a virtual monopoly in
the home noodles marker

28

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KEEPPEL LAND

Singapore Real estate

--- Content provided by‍ FirstRanker.com ---

Thriving property arm of the
well-known Keppel Corp.

29

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GENTING BHD

Malaysia Gaming/leisure

Concentrating on expanding

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casino business abroad

30

HITACHI

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Japan

Electronics

--- Content provided by‌ FirstRanker.com ---

Business cover semicon-
doctor, printing, and
property

31

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GOLD PEAK

Hong

--- Content provided by⁠ FirstRanker.com ---

Electronics

Has achieved economics

INDUSTRIES

--- Content provided by‌ FirstRanker.com ---

Kong

of scale with battery ?
aking

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32

EVERGREEN

--- Content provided by FirstRanker.com ---

Taiwan

Shipping/ aviation One of the world's largest

MARINE CORP.

--- Content provided by‌ FirstRanker.com ---

shippers with an airline in
addition

33

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SAN MIGUEL CORP

Philippines Food / brewing

--- Content provided by‍ FirstRanker.com ---

Excels at training and is
expanding its food
Business

34

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CREATIVE

Singapore Electronics

--- Content provided by‌ FirstRanker.com ---

Has set a new standard with

TECHNOLOGY

its sound blaster cards

--- Content provided by⁠ FirstRanker.com ---

35

KOMATSU

--- Content provided by⁠ FirstRanker.com ---

Japan

Construction

Operates a construction ?

--- Content provided by‍ FirstRanker.com ---

equipment

tools business on four
continents

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36

SUNHUNG

--- Content provided by‌ FirstRanker.com ---

Hong

Real estate

Owns a broad investment

--- Content provided by FirstRanker.com ---

KAI PROPS

Kong

--- Content provided by FirstRanker.com ---

portfolio and substantial
Land

37

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TOSHIBA CORP.

Japan

Electronics

--- Content provided by‌ FirstRanker.com ---

Very strong in laptop PCs,
multimedia, and chips

38

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KYOCERA CORP

Japan

--- Content provided by FirstRanker.com ---

Electronics

Leads the world in ceramic
semiconductor components

--- Content provided by‍ FirstRanker.com ---

39

AZTECH SYSTEMS

Singapore Electronics

--- Content provided by FirstRanker.com ---

Expanding into internet and
PC photo-output products

40

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CHAROEN

Thailand Agro-business

--- Content provided by‍ FirstRanker.com ---

A huge agricultural

POKPHAND

business, with interests in

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poultry

41

FUJI PHOTO FILM CO.Japan

--- Content provided by FirstRanker.com ---

Electronics

Diversifying from photo-
film into hardware

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

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BROKEN HILL

Australia Mining

A mining giant, with

--- Content provided by FirstRanker.com ---

PROPRIETARY

worldwide interests in
exploration

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43

BRIDGESTONE

--- Content provided by‍ FirstRanker.com ---

Japan

Auto parts

Became the `highest tyro-

--- Content provided by⁠ FirstRanker.com ---

CORP.

maker after buying
Firestone

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44

CHEUNG KONG

--- Content provided by FirstRanker.com ---

Hong

Real Estate

Holds a controlling interest

--- Content provided by FirstRanker.com ---

Kong

in Hutchison Whampoa

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45

PT INDAH KIAT

Indonesia Pulp and paper

--- Content provided by⁠ FirstRanker.com ---

A pulp and paper ? maker,

PULP

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part of the Sinar Mas
Group

46

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PTPOLYSINDOEP

Indonesia Textilies

A major polyester ? maker

--- Content provided by FirstRanker.com ---

on a self ? sufficiency
Drive

47

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AIR NEW ZEALAND New

Aviation

Has broken out of its

--- Content provided by‌ FirstRanker.com ---

Zealand

corner through a deal with
UA

--- Content provided by‌ FirstRanker.com ---

48

SWIRE PACIFIC

--- Content provided by‌ FirstRanker.com ---

Hong

Diversified / aviation Investments include a

LTD.

--- Content provided by FirstRanker.com ---

Kong

majority holding in
Cathay Pacific

--- Content provided by‌ FirstRanker.com ---

49

SHINAWATRA

--- Content provided by⁠ FirstRanker.com ---

Thailand Telecommunications Businesses cover

COMPUTER

cellophanes and

--- Content provided by FirstRanker.com ---

Sitcom

50

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POHANG IRON &

Korea

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Steel

Has shrugged off the

STEEL

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financial problems of its
steel business

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Source: Business Today, July 7-21, 1997.

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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

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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

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has lesser strength than competitors".

--- Content provided by‍ FirstRanker.com ---

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--- Content provided by‍ FirstRanker.com ---

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(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

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potential benefits by examining their age, condition, location, capabilities, etc.

(2) Financial Resources. Financial resources include cash, bank, debtors, marketable

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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

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and solvency of the firm is examined.

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(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,

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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

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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.

--- Content provided by FirstRanker.com ---

Companies like Asea Braun Boveri, General Electric, Intel, 3M or even Infosys have

made that shift.

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Sumantra Ghoshal remarks.

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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

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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?

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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

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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

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imitate."

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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

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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

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Reliance, BPL, Krebs Biochemical's, etc. are reporting about their intangible assets. Consider

the aspects in Figure 7-2:

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Figure 7-2 The Intangible Advantage

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Brand/reputation

Intellectual property

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Non ? Physical Assets

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People create the

intangible assets

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Distinctive competencies

which drive
performance

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Special relationships

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Databases /software

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Distribution

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

Content

Knowledge management

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

Project finance

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Talent management

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Marketing

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Innovation

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

Supply chain

/logistics

--- Content provided by FirstRanker.com ---

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--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Government access

--- Content provided by FirstRanker.com ---

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Web

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Business ? to- business

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

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Retail customers

Source: McKinsey & Co.. adapted from Business World, 9-22 November ? 6 December, 1998).

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We will now consider the three approaches to internal analysis

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VRIO framework

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Grant's approach

Continuum of sustainability

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VRIO framework

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The framework help raise the following questions.

o VALUE: Does it provide competitive advantage?

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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?

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If the answer is `yes', there is distinctive competence. Measure these with

- the company's past performance,
- the company's key competitors, and

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- the industry as a whole

Grant's approach

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It is a five step approach

(i)

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Identify and classify a firm's strengths & weaknesses

(ii)

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Combine the strengths to core competencies

(iii)

Appraise the profit potential of these resources and capabilities.

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(iv)

Select the strategy that exploits the firms resources and capabilities to external
opportunities

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(v)

Identify resource gaps and invest in upgrading weaknesses.

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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

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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.

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So far, no one knows the competitive advantage of SWA. SWA had two capabilities:

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o low costs per passenger mile
o Energizing its people to provide safe, on time flight service.

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Continuum of sustainability

Sustainability of an advantage can be determined by considering two factors

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Durability--rate at which a firm's resources and capabilities depreciate or become

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obsolete Ex: Intel's R&D weakness & mere imitation.

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Immutability--Rate at which others can duplicate a firm's core competencies. It can

duplicated early when it is

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- Transparent Ex: Gillette's sensor blades, difficult to copy, expensive manufacturing

equipment.

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- Transferable Ex: French winery's land and climate.
- Replicable Ex: Brand Mgt of P&G cannot be replicable

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An organization's resources and capabilities can be placed on a continuum as follows ?

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Level of Resource Sustainability

High

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Low

(Hard to imitate)

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(Easy to imitate)

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SLOW CYCLE

STANDARD CYCLE

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FAST CYCLE

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RESOURCES

RESOURCES

RESOURCES

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Strongly

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Easy to

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shielded

duplicated

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Standardized

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Patents, brand

mass

Idea driven

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name

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production

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Ex: Gillette's sensor

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Economies of

Ex: Sony Walkman

--- Content provided by FirstRanker.com ---

razor

scale
complicated

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processes

Ex: Chrysler Minivan

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Value chain Analysis

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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

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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

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generating reasonable profits, it is imperative that the company should gain a competitive edge over

its competitors.

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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.

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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"

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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

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(a) Primary activities, and

(b) Support activities.

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The primary activities are concerned with physical creation of the product, its marketing and

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delivery to buyers and after-sales service. The support activities provide the inputs and

infrastructure for the primary activities.

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Figure 7-3 Value chain

Company Infrastructure

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Support

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Activities

Information Systems

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Human Resources

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Research & Development

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Materials Management

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Manufacturing

Marketing Service
& Sales

--- Content provided by FirstRanker.com ---

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Primary Activities

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Primary Activities

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Some authors classify primary activities into five categories ?

(a) Inbounded logistics (activities concerned with receiving, storing and distributing the

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material, inventory control, warehousing, etc.)

(b) Operations (activities concerned with transformation of inputs into final product or

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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)

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(d) Marketing and sales (activities concerned with advertising, selling, administration of

sales personnel, etc.)

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(e) Service (activities that enhance or maintain the value of a product / service, such as

installation, repair, training, etc.)

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Some others classify primary activities into two main functions

(a) Manufacturing (physical creation of the product)

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(b) Marketing (concerned with marketing, delivery and after sales service)

Support Activities

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The support activities that provide inputs and infrastructure for primary activities of

manufacturing and marketing are classified as follows:

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(a) Material management activities

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(b) Research and Development activities

(c) Human Resources activities

(d) Information systems activities

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(e) Company infrastructure activities

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Material Management activities are concerned with procurement, storage and issuance of

material to the production departments. The inventory control that aims at keeping uninterrupted

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supply of material at minimum associated costs is undertaken under this function.

Research and Development activities permeate manufacturing as well as marketing

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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.

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The human resource activities aim at meeting the personnel requirement of manufacturing

and marketing departments by proper selection of staff, their training and development.

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The information system activities ensure efficient and expeditious flow of needed

information to the concerned managers for taking decisions and actions.

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The infrastrucrre activities embraces all other activities like finance, legal, public relations,

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etc which are essential for the company.

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Corporate Value Chain Analysis

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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

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- Identify the linkages in product lines value chain

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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.

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Ex: Cost of advertising, production etc jointly will be cheaper

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Firm infrastructure

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(General Mgt, Accounting, Finance, Strategic planning)

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Human Resource Management

Support

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(Recruiting, training, development)

Activities

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Technology Development

(R&D, product and process improvement)

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Procurement

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(Purchasing of materials, machines, supplies)

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In bound

Operations

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Out bound

Marketing & Service

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Logistics

Logistics

sales

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(Raw

(Machining (Warehousing (Advertising, (Installation,

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materials

assembling and

promotion,

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repair, parts)

handling and testing)

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distribution of pricing,

ware

finished

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channel

housing)

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product)

relations)

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Primary activities

Figure 7.4 A Corporate value chain

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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

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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.

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Raw

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Product

Primary

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Fabrication

materials

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Producer

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manufacturing

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Distributor

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Figure 7-5 Corporate value chain

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Retailer

Industry value chain analysis

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This can be split into two

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Upstream ? Ex: Refers to oil exploration, drilling, moving crude to refiners
Downstream ? Ex: Refining the oil + transporting and marketing to distributors &

retailers.

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Some companies are experts in down stream like P&G & Texaco and some in upstream like

British Petroleum.

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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

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value chain to reduce costs, access to raw material and guarantee distribution. This process is

VERTICAL INTEGRATION.

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Core Competence Identification

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A detailed discussion on the concept of core competence is given in lesson 4 of Unit I in this

material.

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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.

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To Gary Hamel and C.K. Prahalad,

"A core- competence is a bundle of skills and technologies that enables a company to provide a

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particular benefit to customers".

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Following are the examples of core-competence at global level:

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Company

Benefit to customer

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Core ? competence

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Sony

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Pocketability

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Miniaturization

Federal Express

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on ?time Delivery

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Logistics Management

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Wal-Mart

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Choice, availability, value

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Logistics Management

E D S

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Seamless Information

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Systems Integration

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Motorola

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Unlettered' communication.

Wireless communication

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According to C.K. Prahalad and Gary Hamel,

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"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

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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."

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Core competence provides strategic advantage to the company. In the short run, a company

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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

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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.

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Features of Core Competence

Core competence exhibits the following features(Gary Hamel andC.K.Prahalad ).

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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

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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

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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."

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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

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in a single individual or small team." This Core-competence has to be nurtured through
collective learning of the team members.

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Competitive Cannons of Indian Companies

Some of the Indian companies with ability to use internal strengths to make strategies effective

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are explained here.

RELIANCE

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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

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Service the customer at his door- step.

RANBAXY LABORATORIES

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Benchmark costs globally to keep them in check
Focus relentlessly on only some chosen products
Seek out niches unprofitable for the bigger players

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Use R &D to build unique, unmatched skills
Seek differentiation in delivery, not product
Integrate vertically to attain economies of scale

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SUNDRAM FASTENERS

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Focus on only one segment of customers

Adopt the customer's quality standards to avoid rejection
Use demanding customers to raise quality levels

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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

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ARVIND MILLS

Create global capacities quickly to attack older players
Target large commodity buyers for the benefits of scale

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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

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BAJAJ AUTO

Control costs to keep the product affordable

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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

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Summary

For formulation of strategy, identification of market opportunities and threats is not enough,

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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

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process of reviewing organizational resources (resource audit) scanning organizational activities

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and linking them with creation of value to organization (Value chain analysis), and identifying the

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unique strength and capabilities (core competence).

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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

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(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,

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etc)

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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

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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

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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

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manufacturing physical creation.

A company has to identify its Core competence for internal analysis. This core competence

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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

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from its price/performance attributes, but in the long run core competence will provide profitability.

Core-competence arises from two complementary sources:

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(a) Company's resources and (b) Company's capabilities.

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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

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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.

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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?

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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?

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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

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strategy?

10. Take a company of your choice and conduct SWOT analysis for it.

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Activities

1.

Take an industry and identify the major firms for three of them conduct SWOT analysis

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and identify core competencies

2.

Visit websites of any two companies in pharma industry and identify the major threads

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and the strategies adopted by them to face them

References

1. Wheelen L Thomas and Hunger J. David ( 2002), Concepts in Strategic Management and

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Business Policy, Pearson Education Asia, New Delhi.

2. Thompson & Strickland (2003), Strategic Management: Concepts and Cases, Tata

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McGraw Hill: New Delhi

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3. Hitt , M.A, R.D Ireland and R E Hoskission, (1996) Strategic Management :

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Competitiveness and globalization, West publishing New York

4. Veerendra Kumar (2005), Business Policy and Strategic Analysis, Kalyani Publishers,

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Ludhiana

5. N.S. Gupta, Business Policy and Strategic Management, Himalaya Pubnlishing House,

Mumbai

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Unit II

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8 Competitive Analysis

ON

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S

SE

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LESSON OUTLINE

Introduction

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Concept and types of competition
Hyper competition
Analysis for developing competitive
strategy

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o Porter's analysis
o McKinsey's framework
o Key factors for success

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Competitive strategies

Generic strategies of Porter
Marketing warfare

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Summary
Self Assessment Questions
Activities

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Reference LEARNING OBJECTIVES

After reading this lesson you should be
able to

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Know the concept and types of competition
Analyze competition from strategic point of

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view

Illustrate and explain Porter's five forces

analysis, Mckinsey's 7-s framework and

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Key success factor approach

Outline the generic competitive strategies

and explain marketing warfare

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Introduction

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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

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striving and `means' by which it is seeking to get there.

Concept and types of competition

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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

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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.

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o Economist's view of competition form seller point of view
o Marketer's view of competition from buyer point of view

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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

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industry structure. Industry is defined as a collection of sellers who offer similar or same product

to the same type of customers.

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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.

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Take for example, toothpastes. There are several competitors. For instance,

Table

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7-1.

HLL (Close up), Colgate (Colgate), and Balsara (Promise) are in the race

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Market

along with many others.

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structures

Type

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of Perfect

Monopoly

Oligopoly

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Monopoli

competition/

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competition

stic

Characteristics

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Number of sellers Many

One

Few (around 20)

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Many

Number of buyers Many

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Many

Many

Many

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Type of product

Homogeneou

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Unique

Homogeneous/Hetero

Similar

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s

geneous

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Entry and Exit

Free.

No Barriers

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Barriers

exist Barriers

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restrictions

exist.

Restrictions

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like exist

Restrictions patent

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laws

and Restrictio

like patent licensing

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ns

like

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laws

and

patent

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licensing

laws and
licensing

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Transportation

Nil

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Exist

Exist

Exist

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costs
Price

of

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the Uniform and High price Kinky demand curve. Non-

product

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varies

with with

Leadership of a firm price

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changes

in limited

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or

collusion

of competiti

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demand and supply

or marketers fixes Price. on.

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supply forces. Low price Price

rise

is

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not Products

with large followed.

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Secret are

supply.

discounts

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are offered

Price

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common.

dependin

discriminati

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g

upon

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on is often

the

found.

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quality in
price
range.
Promotio

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n

and

product

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differenti
ation

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(positioni
ng) play
a

big

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role.

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Vegetable

Electricity

Steel, oil and cement

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Soaps,

Examples

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markets and

detergent

stock market

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s,

and

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TVs

Marketing view of competition

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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.

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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

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movie, playing cards, going for a picnic, watching T.V and so on.

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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

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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.

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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.

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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.

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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.

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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.

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4. Brand competitors. Different marketers of different brands of a particular product form. The

consumer now focuses on brand choices. Say India coffee house.

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Figure 7-1 : The Marketing View of Competition

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What desire

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What do I

Which type

Which South

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do I want

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want to eat?

of restaurant I

Indian

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to Satisfy?

want to visit?

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restaurant I

(Break

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want to visit

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Sports

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Home F ood

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S outh I

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ndian

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Lodhi Hotel

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Restaurant

Mughlai

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Andhra

Video Film

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Pradesh

Eat Ou

t

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Fast Fo

od

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C hinese

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Bhawan

Desire

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Generic

Product Form

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Brand Competitor

Competitor Competitor Competitor

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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

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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

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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

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dishes and have thus expanded their market size and fairly their opportunities.

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This kind of a view provides a wide terrain to radar the competitive

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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.

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Hyper competition

Most industries today are facing an ever-increasing level of environmental uncertainty. They are

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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

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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,

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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.

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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.

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According to D'Aveni:

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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

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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

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higher and higher levels of uncertainty, dynamism, heterogeneity of the players and hostility.

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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

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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.

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Exhibit 7-1:Hyper competition-The case of Microsoft

Microsoft is a hyper competitive firm operating in a hyper competitive industry. It

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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

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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

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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.

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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

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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

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software as well.

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Analysis for developing a competitive strategy

Every business has a competitive strategy. However, some strategies are implicit, having

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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

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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,

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the organization must be in a position to answer the following questions:

What is the current strategy, implicit or explicit?

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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?

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How will the selling/buying decisions be made?
How will we distribute our products and services?
What technologies will we employ?

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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?

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On what basis will be compete?

We will now discuss three analytical procedures given by Porter, Mckinsey and Ohmae in that
order.

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Porter's five forces analysis of competition

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A useful approach to formulating business strategies is based on Michael Porter's

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"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).

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1. Threat of new entrants,
2. Bargaining power of suppliers,

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3. Bargaining power of buyers,
4. Threat of substitute products,
5. Rivalry among existing firms.

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Threat of New Entrants

Firms entering an industry bring new capacity and a desire to gain market share and profits, but

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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

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per-unit costs below those of inexperienced firms. Is general, the higher the entry barriers, the less

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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

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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

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determinants of supplier power are listed in Figure7-2

Bargaining Power Buyers

Buyers compete with the industry by forcing prices down, bargaining for higher

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quality or more services, and playing competitors off against each other ?

all at the expense of industry profitability. Some determinants of buyer power

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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

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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

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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

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substitution threat are shown in Figure 7-2

Rivalry Among Existing Competitors
Rivalry determinants include industry growth, product differences and barriers. This is the

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conventional type of competition in which firms try to take customers from one another.

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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.

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Figure 7.2 Rivalry factors

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Threat of

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NEW

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New Entrants

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ENTRANTS

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INDUSTRY

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COMPETITORS

Bargaining Power

Bargaining power

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SUPPLIERS

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BUYERS

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of Buyers of suppliers

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Intensity

of Rivalry

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SUBSITUTES

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Threat of

McKinsey's 7- s framework

This framework developed in the 1970's by US based management consulting firm McKinsey and

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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

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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

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made in one area (e.g., strategy) unless corresponding progress is made in other areas too.

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Structure

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Systems

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Strategy

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Super

ordinate

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goals

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Style

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Skills

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Staff

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Figure 7-3 Mckinsey 7-s Framework

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1. Structure refers to the authority relationships, the hierarchical arrangement of positions in

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the organization.

2. Systems' may be called the `infrastructure' and include sub-systems relating to production

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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

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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

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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

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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

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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.

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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

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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.

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Mckinsey's framework has significance in strategic planning. The following

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points explain it.

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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

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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

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seven dimensions)

Ohmae's Key factors for success

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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.

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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.

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2. The other is to discover what distinguishes successful companies from losers, and then

analyze the differences between them.

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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

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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.

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Table 7-2 Key Factors for Success

Key factor or function... ....to Increase profit

.....to gain share

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Raw materials sourcing

Uranium

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Petroleum

Production

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facilities Shipbuilding,

Shipbuilding,

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Steel

(economic of scale)

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Steelmaking

making

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Design

Aircraft

Aircraft, Hi-Fi

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Production technology

Soda, Semiconductctors Semiconductctors

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Product rage/variety

Departmental stores

Components

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Application

Minicomputers

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LSI, Microprocessors

engineering/engineers
Sales Force (quality & ECR

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Automobiles

quantity)
Distribution network

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Beer

Films, Home appliances

Servicing

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Elevators

Commercial

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vehicles

e.g. taxis

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Ohmae observes:

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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

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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

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strategies based on KFS.

Competitive strategies

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We will now discuss the generic strategies given by Porter and the generally found marketing

warfare strategies.

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Generic strategies

According to Porter there are three potentially successful generic strategies (see Figure 7-3) to

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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

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o Differentiation and
o Focus

Figure 7- 2 Three Generic Strategies

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Strategic Advantage

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Industry wide

Strategic

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Differentiation

Overall Cost

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Leadership

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Target

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Particular

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Segment

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only FOCUS

Uniqueness Perceived

by

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Low cost

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the Customer

Position

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Overall Cost Leadership

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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

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decisions to keep the costs low.

Baja Auto Limited and TELCO appear to be following this strategy in India

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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,

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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.

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Chiragh Din Shirts, Bata Shoes, OTIS Elevators, Cini Fans are some examples where this
strategy seems to be the dominant guiding force.

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Focus

The underlying assumption in `Focus' is that a firm should be able to serve a narrow strategic

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target effectively and efficiently. As a result the firm achieves either differentiation from meeting

the need of a particular target, on both.

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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

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Generic strategy Commonly required skills and Common

organizational

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resource s

requirements

Overall

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Cost

o Sustained

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capital investment o Tight cost control

Leadership

and access to capital

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o Frequent,

detailed

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o Process engineering skills

control reports

o Intense supervision of labour

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o Structured organization

o Products designed for ease of

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and responsibilities

manufacture

o Incentives

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based

on

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o Low-cost distribution system `

meeting

strict

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quantitative tares

Differentiation

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o Storing marketing abilities

o Strong

coordination

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o Product engineering

among fucntons in R &

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o Creative fair

D product development,

o Strong

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capability

in

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basic

and marketing

research

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o Subjective measurement

o Corporate reputation for quality

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and incentives instead of

or technological leadership.

quanttiate meastues

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o Long tradition in the industry or o Amenities

to

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attract

univque combination of skills

hightly skilled labour,

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drawn from other businesses

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scientists or creative

o Storing

cooperation

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from

people.

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channels

Foucs

o Combination

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of the above Combination

of

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the

policies

directed

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at

the above policies directed at

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particular strategic target

the particular strategic
target.

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Source: Adaped/reprinted with permission of The Free Press, an important of Simon & Schuster,

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from Competitive strategy. Techniques for Analyzing Industries and Competitors by
Michael E. Porter, pp 40-41. Copyright ? 1980, by The Free Press.

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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

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successful marketing campaigns will have to be planned like military campaigns".

Four types of combat positions are identified here for discussion.

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The Defensive Warfare

This is essentially recommended for market leaders. It aims at protecting against regulatory

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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

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products, which may appear to make the leadership position vulnerable. The three principles of

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defensive warfare are:

(i) Only the market leader should consider playing the defense,

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(ii)

The best defensive strategy is the courage to attract yourself,

(iii)

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Strong competitive moves should always be blocked.

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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

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strength and at that point. The principles of `offensive warfare' are

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(i)

The main consideration is the strength of the leaders position,

(ii)

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Find a weakness in the leader's strength and attack at that point.

(iii)

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Launch the attack on as narrow a front as possible.

The Flanking Warfare

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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

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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

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size, flanking with distribution, flanking with product form. The principles of flanking warfare

are:

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(i)

A good flanking move must be made in an uncontested area

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(ii)

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Tactical surprise ought to be an important element of the plan

(iii)

Consider the pursuit as critical as the attack itself.

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The Guerrilla Warfare

The last form is the guerrilla warfare. Most of the players in a marketing war would be fighting in

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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

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form there can be many guerrillas; geographic guerrillas, demographic guerrillas, industry

guerrillas, product guerrillas and high end guerillas.

The principles of guerrilla warfare are:

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(i)

Find a segment of the market small enough to defend,

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(ii)

No matter how successful you become, never act like the leader

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(iii)

Be prepared to a buyout at a moment's notice.

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Summary

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,

Analyzing competition is key to evolving a durable strategy for firms to stay and succeed in the

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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.

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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

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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

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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.

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4. Explain the role of marketer in perfect and monopoly situations

5. Examine the role of marketer in oligopoly and monopolistic situations.

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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.

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9. What are merits of Key success factor method?

10. Identify and explain generic strategies.
11. Discuss military strategies used by marketer.

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Activities

1. From marketing magazines, collect information about strategies of select companies of a

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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.

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References

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1. Philip Kotler(1988) Marketing Management, Prentice ?Hall, Englewood Cliffs: New

Jersey

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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,

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New Delhi

4. Francis Cherunilam(2000),Strategic Management, Himalaya Publishing House, Mumbai

5. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books, New

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Delhi

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Unit ? III

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ON

9

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Strategic Alternatives & Choice of Strategy

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S
E

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LESSON OUTLINE

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Introduction

Strategic alternatives

Generic Strategies

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Grand strategies

Growth strategies

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Stability strategies

Retrenchment

Portfolio restructuring

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Summary

Self assessment questions

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Activities
References LEARNING OBJECTIVES

After reading this lesson you should be able to

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Identify generic and grand strategies.
Understand generic strategies and know how to

adopt in different strategic situations.

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Examine how portfolio restructuring helps in

strategic choices.

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Introduction

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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

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this process, there identify multiple strategies that they can adopt.

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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

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and future operations. Then, how do these companies make the choices? What factors influence

their decisions?

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Kent Nelson, former chair of UPS, explains why his company has created a new strategic

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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

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wrong direction".

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Tomorrow always arrives. It is always different. And

even the mightiest company is in trouble if it has not

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worked on the future. Being surprised by what happens is

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a risk that even the largest and richest company cannot

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afford, and even the smallest business need not run.

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Peter Drucker

DRUCKER

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Strategic Alternatives

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After analyzing the environment and assessing the internal environment, the next step in

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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.

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Strategic alternatives

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Generic Strategies

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Grand strategies

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Overall cost leadership

Differentiation

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Growth Stability Retrenchment Portfolio

Focus

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Turnaround

Maintaining

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Restructuring

Concentration

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Divestment

status quo

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Liquidation

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Combination

Integration

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Sustainability

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strategy

Diversification

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growth

Mergers and

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Acquisitions

Joint Ventures

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Figure 9-1 Types of strategic alliances

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Generic strategies

According to Micheal E. Porter strategies allow organisations to gain competitive advantage
from three different bases.

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Overall cost leadership

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Differentiation, and

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Focus.

Organizations achieve competitive advantage by providing their customers with what they want,

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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

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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

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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

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outperform competition and defend its position in the industry. These strategies are:

Cost Leadership

Differentiation, and

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Focus and Niche Strategies.

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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.

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Competitive Advantage

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Lower Cost

Differentiation

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Broad

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Target

c

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ope

S

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t
i
t

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i
ve

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pe

om

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1. Cost Leadership

2. Differentiation

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3. Cost Focus

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4.

Differentiation

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Narrow

Focus

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Target

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Figure 9-2 Strategies for competitive advantage

Overall cost leadership emphasizes producing standardized products at a very low per-unit for

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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-

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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

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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

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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.

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Reliance became number one company of India because of its cost
leadership strategy. Presently it is the lowest-cost polyester producer in

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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.

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"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'

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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

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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,

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vertical integration and benchmarking against international competitors.

Gujarat Ambuja made a success by following this cost leadership

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strategy. It benchmarked itself against the best practices of cement

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Differentiation involves creating and marketing unique products for the mass market.

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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

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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

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creates a defensible position for coping with the five competitive forces.

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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

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design, was able to charge a premium price and gain more market share.

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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

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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

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rather than trying to compete in the mass market.

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Strategy of opening hotels in Himachal is focused strategy of

Himachal Tourism Development Corporation, which is pursued on

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geographic grounds. Rolls ? Royce pursues the strategy of selling cars to
status conscious high ?income consumers. Ranbaxy focused on just two

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categories of drugs ? antibiotics and antibacterial (product ? line)

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Choices

The requirements for adopting the strategies are listed in Table 9-1 and risks associated with

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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.

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Table 9-1
Porter's three Generic Strategies and their requirements

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Generic

Required skills and resources

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Organizational requirements

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strategy

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Overall

Cost Sustained capital investment and Tight cost control

Leadership

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access to capital

Frequent,

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detailed

control

Process engineering skills Intense reports

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supervision of labor

Structured

organization

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and

Products designed for ease in responsibilities
manufacture

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Incentives based on meeting

Low-cost distribution system

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strict quantitative targets

Differentiation Strong marketing abilities

Strong

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coordination

among

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Product engineering

functions in R&D, product

Creative flair

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development, and marketing

Strong capability in basic research

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Subjective measurement and

Corporate reputation for quality or incentive instead of quantitative
technological leadership

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measures

Long tradition in the industry or Amenities to attract highly
unique combination of skills drawn skilled labor, scientists, or
from other businesses

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creative people

Strong cooperation from channels

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Focus

Combination of the above policies Combination of the above
directed at the particular strategic policies

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directed

at

the

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target

particular strategic target

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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

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Risks

of

cost Risks of differentiation

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Risks of focus

leadership
Cost leadership is not Differentiation

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is

not The focus strategy is imitated

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sustained

sustained

The

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target

segment

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becomes

Competitors

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structurally unattractive

imitate

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Competitors imitate

structure erodes

Technology

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bases

for demand disappears

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changes

differentiation

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other bases for cost

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become

less

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leadership erode

important to buyers

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Proximity

in Cost proximity is lost

Broadly

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targeted

competitors

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differentiation is lost

overwhelm the segment

the segment's differences from

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other segments narrow

the advantages of a a broad line

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increase

Cost focusers achieve Differentiation focusers New focusers sub-segment the

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even lower cost in achieve

even

greater industry

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segments

differentiation

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in

segments

Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior

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Performance.
The Free Pres, New York.

Grand Strategies

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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

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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

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categories.

1. Growth

2. Stability

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3. Retrenchment

4. Portfolio restructuring

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We will now discuss each one of them.

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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:

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Concentration

Integration

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Diversification

Mergers and acquisitions

Joint Ventures

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Concentration

The most common grand strategy is concentration on the current business. A

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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

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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

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Foods, which are known for their product; Shaklee, which concentrates on geographic

expansion; and Lincoln Electric, which bases its growth on technological advances.

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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

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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

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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

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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,

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concentrated firms are especially susceptible to performance variations resulting from industry

trends.

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Integration

Integration may take two forms: vertical and horizontal integration.

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Vertical integration

Vertical integration strategy involves growth through acquisition of other organizations in a

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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.

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Vertical integration is used to obtain greater control over a line of business and to increase profits

through greater efficiency or better selling efforts.

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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

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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.

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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,

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hydel, and nuclear power generation equipment.

Diversification

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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

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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.

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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

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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

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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-

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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.

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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.

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McDonald's currently operates through 48 outlets in the country, and has set a target of
100 restaurants by 2005.

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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

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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

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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.

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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

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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.

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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

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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

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withdrew Parachute anti-dandruff hair oil since it was not generating the necessary
volumes

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Mergers and acquisitions

In a merger, a company joins with another company to form a new organization.

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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..

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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

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countries may work together to overcome trade barriers in the international market or to share

resources more efficiently.

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For example, GMF Robotics is a joint venture between General Motors Corporation and
Japan's Fanuc Ltd. to produce industrial robots.

Stability Strategy

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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

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Sustainability- reinforcing the organization with more competencies to carry on things in a

better or innovative way.

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This is a useful strategy in several situations.

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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

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the industry.

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Another organization may find that further growth is too costly and could have

detrimental effects on profitability.

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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.

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.
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

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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.

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Retrenchment Strategies

When an organization's survival is threatened and it is not competing effectively, retrenchment

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strategies are often needed. The three basic types of retrenchment are

Turnaround,

Divestment, and

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Liquidation.

Turnaround strategy is used when an organization is performing poorly but has not yet reached a

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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

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efficient. If the turnaround is successful, the organization may then focus on growth strategies.

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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

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position of the divesting organization.

Liquidation strategy involves closure of the business, which is no longer profitable. It may be

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technologically obsolete or out of times with market trends.

Choices

How do firms choose strategies?

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Stability strategy is adopted because

1. It is less risky, involves fewer changes and people feel comfortable with things as

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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.

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5.

Expansion strategy is adopted because

6. It may become imperative when environment demands increase in pace of activity

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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.

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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:

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10. The management no longer wishes to remain in business either partly or wholly

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due to continuous losses and inviability

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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:

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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

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Portfolio restructuring

Large, diversified organizations commonly use a number of these strategies in combination. For

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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

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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

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designed to help managers deal with this problem.

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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

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include:

Boston Consulting Group (BCG) growth ? share matrix
General Electric's (GE's) multi-factor portfolio matrix.

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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

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Figure 9-3. The basic idea underlying this approach is that a firm should have a balanced

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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

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that it enjoys.

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Stars

Question Marks

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*

? ?

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22

* *

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20

)

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16

r

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c
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14

BUILD STRATEGY

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12

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(
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10

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6

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Cash Cows

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Dogs

4

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0

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HOLD STRATEGY

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10x

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1.5x

1x

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0.5x

0.4x

0.3x

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0.2x

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0.1x

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Relative Market Share

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Figure9-3 BCG's Growth ? Share Matrix (Source: Adapted from B. Hedley, "Strategy and the

Business Portfolio," Long Range Planning, February 1977, p.12.

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The vertical axis indicates the market growth rate, what is the annual growth percentage

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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).

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The growth ? share matrix has four cells, which reflect the four possible combinations of

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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:

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1. Question marks (sometimes called problem children): Company business that operate in a

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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

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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

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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

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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

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growth and fighting off competitors' attacks. Stars are often cash ?using rather than cash

?generating Even so, they are usually profitable in time.

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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

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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

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organization uses its cash-cow businesses to pay its bills and support its other struggling

businesses.

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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

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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.

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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

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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

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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

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be forgone to gain market share and future long-term profits.

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2. Hold market share: This strategy is appropriate for cash cows with strong share

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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.

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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

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and dogs.

4. Divest: Divesting involves selling or liquidating a business because the resources

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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.

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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

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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

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investment. But research proves that only a 10% change in market share is associated

with only `percent change in return on investment.

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- 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

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investment opportunities. For example it is difficult to decide between two question

marks and decide which should be developed into a star.

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- Offers only general strategy recommendations without specifying how to implement

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them.

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GE Multi-factor Port folio matrix

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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

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shaded portion represents the organization's business market share

Each of an organization's businesses is plotted in the matrix on two dimensions, industry

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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

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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

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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.

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INDUSTRY ATTRACTIVENESS

BUSINESS STRENGTH

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Market Factors
Size (dollars, units or both)

Your share (in equivalent terms)

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Size of key segments

Your share of key segments

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Growth rate per year:

Your annual growth ratae:

Total

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Total

Segments

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Segments

Diversity of market

Diversity of your participation

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Sensitivity to price, service features, and Your influence on the market

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external factors

Cyclicality

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Lags or leads in your sales

Seasonality

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Bargaining Power of Upstream Suppliers

Bargaining power of your suppliers

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Bargaining Power of Downstream Suppliers

Bargaining power of your customers

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Competition
Types of competitors

Where you fit, how you compare in terms

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Degree of concentration

of

products,

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marketing

capability,

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Changes in type and mix

service, production strength, financial

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strength, management

Entries and exits

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Segments you have entered or left

Changes in share

Your relative share change

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Substitution by new technology

Your vulnerability to new technology

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Degrees and types of integration

Your own level of integration

Financial and Economic Factors

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Contribution margins

Your margins

Leveragign factors, such as economies of Your scale and experience

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scale and experience

Barriers to entry or exit (both financial and Barriers to your entry or exit (both

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non-financial)

financial and non-financial)

Capacity utilization

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Your capacity utilization

Technological Factors
Maturity and volatility

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Your ability to cope with change

Complexity

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Depths of your skills

Differentiation

Types of your technological skills

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Patents and copyrights

Your paten protection

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Manufacturing process technology required

Your manufacturing technology

Socio-Political Factors in Your Environment

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Social attitudes and trends

Your company's responsiveness and

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flexibility

Laws and government agency regulations

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Your company's ability to cope

Influence with pressure groups and Your company's aggressiveness
government representatives

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Human factors, such as unionization and Your company's relationships.

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community acceptance.

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Figure 9-4 GE Matrix
General Electric's nine- cell planning grid

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LEGEND

Market size

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Cyclical

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Invest /grow

and growth rate

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Economies of scale

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Industry profit margins Technology Social,

Selectivity / earning

Competitive intensity environmental, legal,

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Seasonality

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and human impacts

Harvest /divest

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Industry (product ? market) attractiveness

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High Medium Low

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100

Relative market

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Competitive

h

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strengths and

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Profit margins

weaknesses

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Ability to

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Technological

t
rong

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Compete on

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capability

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price and quality

Caliber of

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s
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r
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Knowledge of

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management

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v

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Customer and

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market

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e
a

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k

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100

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Relative market

Competitive

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h

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rong

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strengths and

Profit margins

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weaknesses

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Ability to

Technological

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Compete on

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capability

e
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ge

v

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price and quality

Caliber of

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s
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r
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Knowledge of

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management

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Customer and

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market

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W 0

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Depending on where businesses are plotted on the matrix, three basic strategies are formulated:

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Invest/grow,

Selective investment, and

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Harvest/divest.

Businesses falling in the cells that form a diagonal from lower left to upper right are medium-

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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

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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.

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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

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formulating strategy.

Second, as we have noted, the two dimensions of industry attractiveness and business

strength are excellent criteria for rating potential business success.

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Third, the approach forces managers to be specific about their evaluations of the impact of

particular variables on overall business success.

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However, the multifactor portfolio matrix also suffers some of the same limitations as the
growth ?share matrix.

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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

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considering different businesses.

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Portfolio models provide graphical frameworks for analyzing relationships among the

businesses of large, diversified organizations, and they can yield useful strategy

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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

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managerial judgment and experience.

Summary

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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,

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differentiation and focus. Glueck and others have identified grand strategies that fall under four

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categories-Growth, stability, retrenchment and portfolio restructuring. These alternative

strategies suggest the direction for top management and help exploit opportunities.

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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

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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

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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

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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

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for sound managerial judgment and experience.

Self -assessment questions

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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

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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?

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9 Explain retrenchment strategy? Do firms employ it?
10. Examine the significant of portfolio strategies.

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Activities

1. Go to a business firm near your college. Discuss with the Managing Director and top

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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

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www.blonnet.com website of The Hindu ? Business Line and list them briefly.

References

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1. P. Subba Rao (2003) Business policy and Strategic Management, Himalaya

Publishing House, New Delhi.

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2. Fred R. David (2003), Strategic Management: Concepts and Cases, Pearson Education,

New Delhi.

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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

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All India Traveller Book Seller(AITBS), New Delhi.

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Unit III

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10 Strategic alliances and Joint Ventures

S
S
E

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L

LESSON OUTLINE

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Introduction
Strategic alliances
Reasons for forming alliances
Types of alliances
Typology of alliance

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Continuum of alliances

o Mutual service consortia
o Joint venture

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licensing arrangement

o Value-chain partnership

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Forms of alliances in India
Managing strategic alliances

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After reading this lesson you should be
able to

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Understand and define strategic alliances
Examine the reasons for forming

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alliances

Outline the types of alliances
Know how Indian companies have

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formed alliances

Explain the methods of managing

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alliances

Introduction

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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

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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

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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

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common objective. Yoshino and Rangan define strategic alliances in terms of three necessary

and sufficient characteristics

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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

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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

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areas, for example, technology, product, and so forth.

In similar words , Lando Zeppi, Managing partner of Booz, Allen and Hamilton, defines strategic

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alliance as :

a cooperative arrangement between two or more companies where:

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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

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specific strengths with each other, thus lending power to the
enterprise.

A pooling of resources, investments, and risks occurs for mutual

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(rather than individual gain)

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Strategic alliances can be defined simply as:

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"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

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The basic reason for entering into strategic alliance is to enhance their organizational

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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.

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1. To obtain technology and / or manufacturing capabilities
For example, Intel formed a partnership with Hewlett-Packard to use HP's capabilities in

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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,

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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.

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3. To reduce financial risk

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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

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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.

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4 To reduce political risk

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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.

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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.

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5 To achieve or ensure competitive advantage
Alliances may be formed for mutual advantage to use of the specialized nature of resources
or skills.

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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.

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IBM's strategy

IBM's current alliance strategy in large measure is due to several key

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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

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restructure some existing operations, and (6) to block other key rivals from

encroaching on the U.S. and European markets too quickly.

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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

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funds to build ultra-modern facilities that are beyond the financial means of any one

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company. The following Table 10-1 portrays some of the most significant alliance

relationships the IBM has entered as of December 1997.

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Table 10-1: IBM Alliance Strategy

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Personal Computers

Semiconductor

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Software

and

Technology

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Processing

Matsushita

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Micron Technology

Microsoft

(Lowend PCs)

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Motorola

(X-ray Oracle

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Ricoh (Hand-held

lithography)

Sun Microsystems

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PCs)

Motorola

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(Micro Silicon Graphics

Computer

processor designs)

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Metaphor

Hardware/Screens

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Sematech

(U.S. Hewlett-Packard

Toshiba (Display

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Consortium)

Netscape

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tech)

Intel (Microprocessor

Communications

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Mitsubishi

designs)

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Customer Linkages

(Mainframes)

Siemens ( 16 M and Mitsubishi Bank

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Canon (Printers)

64 Megabit chips)

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Eastman Kodak

Hitachi

(Large Apple

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Computer Baxter Healthcare

printers)

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(Operating

Systems Xerox

Factory Automation

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and multimedia

Consumer Electronics

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Texas Instruments Integration

Philips Electronics

Sumitomo Metal Elec (Electron bean Sega

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Nippon

Kokan

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technology)

Blockbuster

technology

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Toshiba & Siemens

Entertainment

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Nissan Motor

(256 Megabit chips)

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Sony

Telecommunications

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Toshiba

(Flash

NTT

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(Value-

memories)

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added Networks)

Motorola (Mobile Advanced

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Micro

data mets)

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Devices
(Microprocessors)

Silicon Valley Group

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(Photolithography)

Typology of strategic alliances

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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

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dimensions being, the extent of organizational interaction and conflict potential between alliance

patterns. The classification is shown in Figure 10-1.

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Figure 10-1 Typology of Strategic Alliances

Low Conflict high

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high

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Non-competitive

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Competitive

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i
on

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Pro-competitive

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Pre-competitive

t
eract

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low

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I
n

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Pro-competitive Alliances

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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

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constitute pro-competitive alliances.

Noncompetitive Alliances

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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

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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

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automotive manufacturers in Europe have entered into a strategic alliance for engine

development.

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Competitive Alliances

These are relationships that bring rival organizations in a cooperative arrangement. These

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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.

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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

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environmental and social issues. Sometimes inter industry and inter disciplinary cooperation is

necessary for development.

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For example, Intel has pre-competitive alliances with software, hardware and other

manufacturers.

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Continuum of alliances

The types of alliances range from mutual consortia to value chain partnerships as described
below.

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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

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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

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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.

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o Licensing arrangement ? A licensing arrangement is an agreement in

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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.

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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.

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Forms of alliances in India

A statistical sample of different strategic alliances in India with number of companies in different

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alliances and their percentage is listed in Table 10-2.

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Table 10-2 Type of alliances in India

Type of alliance

Number of Companies

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Percentage (%)

Marketing tie ups

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34

26.3

Operations handling

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21

16.2

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Joint ventures

15

11.6

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Technology licensing

14

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108

Manufacturing

14

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10.8

MOUs

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9

6.9

6

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4.6

Services

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6

4.6

Supply

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6

4.6

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Setting

up

new

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business

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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.

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Source of learning and development
Access to better infrastructure

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Access to greater market share
Availability of raw materials

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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-

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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.

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The opening up of infrastructure sector in India led to forming of a number of
alliances.

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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

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(GSM) and Brtisih Telecom, Usha Martin and Telecom Malaysia, among several others.

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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.

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Liberalization and globalization have spurred the growth of strategic alliances. A good example

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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

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services.

Besides this, other reasons, which lead to strategic alliances, are the availability of professional

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management expertise, international reputation, global brand name and brand equity, and

confidence to gain a foothold in the international markets.

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Alliances are often used by not- for- profit organization as a way to enhance their capacity to

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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.

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Four Ohio Universities agreed to start a new school of international business at a cost of $ 30

million. This cannot be done singly.

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Managing Strategic Alliances

The following guidelines will be of help in successfully managing alliances.

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Have a clear strategic purpose. Integrate the alliance with each partner's strategy.

Ensure that mutual value is created for all partners.

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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.

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Create incentives for cooperation to minimize differences in corporate culture or

organization fit.

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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

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comprehensive cross-cultural knowledge.

Exchange human resources to maintain communication and trust. Don't allow

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individual egos to dominate

Operate with long-term time horizons. The expectations of future gains can

minimize short-term conflicts.

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Develop multiple joint projects so that any failures are counterbalanced by

successes

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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

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environmental changes and new opportunities.

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Agree upon an exist strategy for when the partners' objectives are achieved or the

alliance is judged a failure

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Summary

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The formation of different alliances is a recent trend in India with globalization and

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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

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typologies of strategic alliances are available in business literature. One such classification is by

Yoshino and Rangan- non-competitive, competitive, precompetitive and procompetitive. The

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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

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new business. Managing alliances starts with defining purpose and making suitable arrangements

for venturing.

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Self -Assessment Questions

1. What do you understand by strategic alliances?
2. Why are strategic alliances necessary?

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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.

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8. Why do joint ventures fail? Explain with examples.

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9. In the globalization era, which form of alliances work?

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10. How do you make strategic alliances successful?

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Activities

1. Describe the long-term strategy of the firm or institution in which you are working or

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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

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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

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1. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books,

New Delhi.

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2. Veerendra Kumar (2005), Business Policy and Strategic Analysis, Kalyani Publishers,

Ludhiana

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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

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and Business Policy, Pearson Education Asia, New Delhi

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Unit III

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11 Diversification strategies

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ON

S

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S
E

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L

LESSON OUTLINE

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Introduction
Why diversify?
Types of diversification

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Advantages and disadvantages of
Diversification
Diversifications in India
Planned Diversification

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o Assessment of industry
attractiveness
o Assessment of degree of mesh

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o Combination of attractiveness

And mesh

When to diversify

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When not diversify
Summary
Self assessment questions
Activities
References

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After reading this lesson you should be
able to

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Understand

the

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concept

of

diversification

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Describe the types, merits and demerits

of diversification

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Know how to assess systematically for

diversification

Know when to diversify and not

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diversify

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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,

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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

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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

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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,

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"Management fount [it] couldn't manage the beast." Hence, businesses are selling or closing,

less profitable divisions in order to focus on core business.

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Why diversify?

Organizations diversify due to the following reasons. Some of the common reasons are as

follows.

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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 =

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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.

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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

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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.

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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.

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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

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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

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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

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products. Same production facilities and technology can be utilized sometimes adding more

capacity to it.

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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.

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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.

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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

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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.

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Source: "The Comeback kids" "Business week, September 29, 2003 p.
122

Types of diversification

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There are three general types of diversification strategies: concentric horizontal, and

conglomerate.

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Concentric Diversification

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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

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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.

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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

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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

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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.

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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

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successful in future also.

Horizontal Diversification

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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

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known. The organization is fully acquainted with their consumers' preference and their

expectations about the quality and price of the goods and services.

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Horizontal diversification can be accomplished by acquiring the shareholding of the competitor,

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by the purchase of the assets or by pooling of the interests of two organizations. .Horizontal

diversification seeks to eliminate competitors.

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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.

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Conglomerate Diversification

Conglomerate diversification is a growth strategy in which new products and services are added

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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.

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Mechanics for adopting conglomerate diversification has been summarized as follows:

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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

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payment of taxes from the first division.

3. Encouraging growth for its own sake or to satisfy the values and ambitions of

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management or the owners.

4. Taking advantage of unusually attractive growth opportunities.
5. Distributing risk by serving several different markets.

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6. Improving overall profitability and flexibility of the organization by moving into

industries that have better economic prospects than those of the acquiring

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organizations.

7. Gaining better access to capital markets and better stability or growth in the

earnings.

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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

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operating independently.

The scheme of Conglomerate Diversification should be implemented with caution and patience.

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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

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diversification will depend on the following factors:

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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.

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3. Establishment of specific criteria for purchasing other organizations
4. A comprehensive search for organizations and their evaluation against the criteria.

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Examples of companies that have diversified into related business concentric diversification

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GILLETTE:

o Blades and razors
o Toiletries (Right Guard, Foamy, Dry Idea, Soft & Dry , White Rain)
o Oral-B toothbrushes

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o Braun shavers, coffeemakers, alarm clocks, mixers, hair dryers, and electric

toothbrushes

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o Duracell batteries.

JOHNSON & JOHNSON

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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)

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o Prescription drugs
o Prosthetic and other medical devices
o Surgical and hospital products
o Accuvue contact lenses

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PEPSICO

o Soft drinks (Pepsi, Diet Pepsi, Pepsi One, Mountain Dew, Mug, Slice)

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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)

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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)

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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)

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Examples of companies that have diversified into unrelated business.

THE WALT DISNEY COMPANY

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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,

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Network, EPSN and EPSN2, E!, Lifetime, and A&E networks)

o Radio broadcasting (Disney Radio)
o Musical recordings and sales of animation art

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o Anaheim Angles major league baseball franchise (25 percent ownership)
o Books and magazine publishing

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o Interactive software and Internet sites
o The Disney Store retail shops.

THE TVS GROUP

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o Auto & auto parts
o Coach body building
o Transport
o Fasteners
o Brake linings & clutch facings

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o A citation systems for commercial vehicles
o Hire purchase
o Wheel structure & parts
o Foundation brakes
o Two wheelers

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o Automobile electrical parts
o Tyres & tubes.

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Advantages and disadvantages of diversification

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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

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different types of diversification.

Table 11-1 Advantages and disadvantages of diversification strategies

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Diversification strategy

Advantages

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Disadvantages

Horizontal integration

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Eliminates competitors.

Less flexibility.

Access to new markets.

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Increasing risk and

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commitment.

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Concentric diversification

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Synergy by sharing skills

Reduction is flexibility.

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and resources.

Additional investment.

Economics of scale and tax

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Untried markets and

benefits.

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technologies.

Conglomerate

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Better management and

Lack of concentration.

diversification

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high ROI.

Risks of managing entirely

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Reducing risk by spreading

new business.

business.

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Diversifications in India

Diversification strategy is widely adopted in India. Some examples are given here.

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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-

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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

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systems, and marketing of branded toys.

o Unitech in civil engineering is into steel-making, exports, consumer electronics, power

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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

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banking and mutual funds.

o Peerless General Finance & Investment Co, one of the country's larger non-banking

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investment companies, has moved into related areas of finance, adopting a defensive
diversification strategy to generate more resources to contain rising establishment costs.

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Planned diversification

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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

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organic part of the comprehensive strategic planning.

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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

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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,

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which helps in arriving at diversification decision.

The basic problem in a diversification strategy is to identify the suitable industry sector, which

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meets basic criteria of diversification. Figure 11-1 presents a process thorough which

identification of diversification opportunities becomes systematic. The process provides the

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facility for assessing and measuring each business sector against a number of different criteria so

that judgment can be reached on two separate factors .

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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.

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There are basically three major measurements involved in this process.

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o Measurements of industry attractiveness,

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o Measurement of mesh, and

Combination of attractiveness and mesh to arrive at some strategic alternatives

Figure11-1 Process for identifying diversification opportunities

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Organizational objectives and

Industry

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strengths

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Sel ect sect

or meeti

ng broad

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Define broad initial

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initi al criteri a

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criteria

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Place s ector on

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attra ctivenes s/mesh

matrix

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Assess sector

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As sess

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attractiveness

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m esh

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(i) Assessment of industry Attractiveness

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Define alternative

Select industry sector

At the initial stage, various sectors of the industry can be taken for identifying diversification

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strategies

for entry

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opportunities. Such criteria may be in the form of:

(i)

Acceptable product groups or functions,

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(ii)

Minimum sales volume within a specified period of time, say five
years or so,

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(iii)

Minimum projected growth rate in the market

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(iv)

Minimum profitability criteria,

(v)

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Maximum and minimum investment required in the project, and so
on.

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These criteria may be used in weeding out the industry sectors which cannot be considered. The

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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

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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

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levels of profitability:

Business Policy: Strategic Management

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ROI per cent

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Scores

Less than 10

2

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10 -15

4

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15-20

6

20-25

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8

25-30

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10

Above 30

12

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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

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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

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of time taken by a sector to move from one stage to another and scores can be assigned in the

following way.

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Maturity level

Scores

Ageing

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0

Late mature

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2

Early mature

4

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Late growth

6

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Growth

8

Early growth

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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

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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

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critical success factors (CSFs) required for success in the industry sector. CSFs

are

those

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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

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industry. From the structure and maturity of sector, certain general conclusions can be drawn on

CSFs and its investment characteristics.

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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.

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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.

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3. In ageing sector, a high market share at the time of entry is critical. Little or no

further investment is desirable.

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Taking both the factors-organizational strengths and CSFs, mesh matrix can be constructed as
depicted in Figure 11-2.

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Importance of CSFs

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Excellent

High

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Medium

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Critical High Medium Low

l strengt

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Low

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(4)

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(3)

(2)

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(1)

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Figure11-2 Mesh Matrix

(4)

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16

12

8

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(3)

12

9

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6

3

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z
a
t
i
ona

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(2)

8

6

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4

2

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High scorgae in the matrix will increase the upside

(1)

4

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3

2

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1

potential Orof investment because

o the organization can add something to the operation of the new business, and

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o will decrease the downside risk because the management will have experience of the sort

of problems that are likely to occur.

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(iii)

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Combination of Attractiveness and Mesh

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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

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mesh. The attractiveness/mesh matrix has been presented in Figure 11-3 below

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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

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selects.

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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

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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

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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

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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.

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Degree of mesh

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s
s

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High (3)

Medium (2) Low (1)

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ne

High (3)

9

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6

3

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Medium (2)

8

5

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2

a

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t
t
r
a
c

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t
i
ve

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7

4

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1

e
e

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of

Low (1)

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Figure 11-3 Attractiveness/mesh matrix

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When to diversify

Diversification merits strong consideration whenever a single-business company is faced with

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diminishing market opportunities and stagnating sales in its principal business. But there are

four other instances that signal the for diversifying:

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o When it can expand into industries whose technologies and products complement its

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present business.

o When it can leverage existing competencies and capabilities by expanding into

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businesses where these same resource strengths are valuable competitive assets.

o When diversifying into closely related businesses open new avenues for reducing

costs.

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o When it has a powerful and well-known brand name that can be transferred to the

products of other businesses.

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When not diversify?

All the organizations cannot think of diversification as a strategy. Organizations do not diversify
under the following conditions.

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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.

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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

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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

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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).

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Managerial motives to diversify can lead to over diversification. On the other hand, managers

can also be good stewards of the firm's assets.

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The level of a firm's diversification is a function of the incentives the firm has to diversify, its

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resources, and the managerial movies to diversity. Related diversification can create value by

sharing activities of transferring core competencies. Sharing activities usually involves sharing

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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

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controls accomplish successful unrelated diversification.

Self -assessment questions

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1. What do you understand by diversification? Is diversification now popular?
2. What motivates a company to diversify?

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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.

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6. What advice would you like to give to a small business owner who is planning to

diversify his business?

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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

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upon diversification scheme? Discuss the importance of planned diversification
in today's business.

9. Critically examine the corporate diversification activity in India.

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10. What suggestions you would like to make so that diversification activity in India

proceeds on a sound basis?

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Activities

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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.

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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.

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References

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1

Thompson & Strickland (2003), Strategic Management: Concepts and Cases, Tata
McGraw Hill: New Delhi

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2

Azhar Kazmi (2003), Business Policy and Strategic Management, Tata McGraw
Hill, New Delhi

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3

P.K. Ghosh (2001), Strategic Planning and Management, Sultan Chand & Sons,
New Delhi

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4

William F. Glueck(1980), Business Policy and Strategic Management, McGraw
Hill, New York

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5

Michael A. Hitt (2001), R. Duane Ireland and Robert E.
Hoskisson, Strategic Management Competitiveness and Globalization, South

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western

6

Fred David (2003), Strategic Management Concepts and Cases, Pearson

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Education , New Delhi

.

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Unit III

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O
S

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12 Turnaround strategies &

S
E Corporate restructuring

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L

LESSON OUTLINE

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Introduction
Turnaround defined
Signals of turnaround
Turnaround process models

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Turnaround management
Corporate restructuring
Forms of restructuring
Types of restructuring
Process and barriers

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Summary
Self Assessment questions
Activities
References

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LEARNING OBJECTIVES

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After reading this lesson you should be
able to

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Define turnaround strategy
Identify the signals of corporate sickness
Know the process models of turnaround

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and analyze turnaround management
issues

Understand the forms, types, process and

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barriers of corporate restructuring

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Introduction

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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

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long run efficiency of operation.

Turnaround defined

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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

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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,

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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

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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

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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

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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

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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.

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Gram co, a subsidiary of UK based EMI UK was successful in the early seventies with brand

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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.

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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

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also. However the turnaround is a failure

Signals of turnaround

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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.

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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

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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

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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.

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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.

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3 Decreasing profitability Profit figures are a good indication of a company's health. Care

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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.

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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

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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.

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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.

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6 Failure to reinvest sufficiently in the business: For a company to stay competitive and

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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

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brakes in the path of growth.

7 Diversification at the expense of the core business It is a well-observed fact that once

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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.

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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

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major setbacks as limited thought or planning go into the actions and their consequences.

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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.

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10 Management succession problems When nearly all the top managers are in their mid-

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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.

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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

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questioning or cautioning the CEO about his actions.

12 A Management team unwilling to learn from its competitors: Companies in decline

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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.

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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

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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

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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.

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Turn around process models

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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

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the causes of decline and the appropriate strategies required.

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Poor Management

o New Management

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o Decentralization & change

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o New Management

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Inadequate financial

o Improved financial control

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control

o Decentralization

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o Cost reduction

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High cost structure

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o Product Market

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Lack of marketing effort

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Improved marketing

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o Product market

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Competitive weakness

o Cost reduction

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o Improved marketing

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o Asset reduction

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o Growth via

a

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Big projects acquisitions

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o Asset Reduction

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o Asset reduction

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Financial policy

o New financial strategy

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Figure12-1 Causes of decline and appropriate strategies

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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

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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

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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

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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

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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.

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Reinforcement and

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1f satisfactory

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elaboration of recipe

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Adoption

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Development

Corporate

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of recipe

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of strategy

Implementation

performance

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Stage 3

Stage 2

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Adopt new

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Stage 1

recipe, may

Reconstruct

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Tighten

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be with new

or develop

1f Satisfactory

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controls

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senior mgt

new strategy

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Figure 12-2 A Model of Turnaround Process

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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

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Turnaround process can be summarized as a five-step change process as shown in Figure 12-3

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Step -1 Assessment of current problems

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Step -2 Analyzing the situation

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Step ?3 Implementing an emergency action plan

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Step ?4 Restructuring the business

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Step ?5 Returning to normal

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Figure 12-3: Turnaround as change process model

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Turnaround Management

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The focus of turn around is on reduction in assets and costs and increases in revenues and profits.

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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.

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o Rid of unprofitable products, pursuing workforce, trimming distribution outlets

and seeking methods to make the organization more efficient

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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.

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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

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impact of liquidation of one business may not be much.

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Consolidation ? A programme to stabilize a leaner corporation. Reducing overheads to make the
firm cost effective

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Another way of carrying turnaround may be as follows.

Stage One ? Cost Cutting

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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

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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

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implemented across the organization. Support why the cost cutting should take the form you

propose.

Stage Two-Re-engineering

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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

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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.

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Stage Three -Downsizing

Downsizing means laying-off people. It is a good way to cut costs quickly. But unless

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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

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recommend should fit logically with the strategy proposed.

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Measures

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The ten elements of turnaround strategy as identified by Pradip N. Khandwalla are as follows.

1.

Changes in the top management

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2.

Initial credibility-building actions

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3.

Neutralizing external pressures

4.

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Initial control

5.

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Identifying quick payoff activities

6.

Quick cost reductions

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7.

Revenue generation

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8.

Asset liquidation for generating cash

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9.

Mobilization of the organizations

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10.

Better internal coordination

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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.

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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

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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

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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,

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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.

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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

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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

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units.

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Finance Management Arranging additional finance, financial discipline, financial restructuring

(described under Business Reorganization) etc., are usually an inevitable part of the turnaround

management.

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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

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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

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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

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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

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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.

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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

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of the business.

Restructuring strategies involve divesting some businesses and acquiring other so as to put a

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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:

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o Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive

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industries.

o Too many competitively weak businesses.
o Ongoing declines in the market shares of one or more major business units that are falling

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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.

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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

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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,

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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).

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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

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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

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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

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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.

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Forms of corporate restructuring

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The important forms of restructuring are:

o Mergers & Acquisitions
o Tender Offers

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o Joint Ventures
o Divestitures
o Spin-Offs
o Corporate Control
o Changes in Ownership Structure

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o Exchange Offers
o Share Repurchases
o Leveraged Buy-outs

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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

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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,

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structural deficiencies and diverse values.

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2. Tender offers

Alternatively a public Tender Offer may be made to the shareholders for purchase of shares.

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These are easy only when the shareholding by the management and directors is comparatively

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very low. In many Indian companies such shareholding is comparatively very low and, they are

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easily vulnerable to hostile takeovers.

3. Joint ventures

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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.

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4. Divestitures

Divestiture strategy involves the sale or liquidation of a portion of business, a major division

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profit centre of SBU. Divestment is usually a part of restructuring plan and is adopted when an

unsuccessful turnaround has been attempted.

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5. Spins offs

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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

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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

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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.

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In the case of a Split-off, a portion of existing shareholders receives stocks in a subsidiary in

exchange for parent company stock.

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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.

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5. Corporate Control

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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

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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

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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.

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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

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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

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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

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to be achieved by an outside group, referred to as dissidents or insurgents obtaining

representation on the board of defectors of the company.

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6. Changes in Ownership Structure

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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

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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.

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7. Exchange Offers

Exchange offer may involve exchange of debt or preferred stock for common stock, or

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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

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cash outflow by loan repayment also.

8. Share Repurchase

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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

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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

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management.

9. Buy-Outs

Management buy-out may involve the purchase of a division of a company or even a whole

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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

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risky because of the high interest burden and loan repayment obligation. A default in repayment

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would aggravate the interest burden and cash flow problem. LBOs have landed many companies

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is serious crisis.

Types of restructuring

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1. Portfolio restructuring
2. Organizational restructuring
3. Functional restructuring

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4. Financial restructuring

Portfolio restructuring

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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

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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,

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liberalization of policy towards foreign technology and capital participation, etc.) has opened up

enormous new opportunities for expanding the business.

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Organizational Restructuring

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Decentralization, delayering or flattering and regrouping of activities are important

organizational restructuring measures.

Changes in corporate strategy, such as portfolio

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strategy, sometimes call for organizational restructuring. Often, structure follows strategy.

Increase or decrease in activity levels, expansion or contraction of portfolio or functions etc.

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may cause modification of organizational structure.

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Functional Restructuring

The AMA survey reveals that restructuring of corporate functions (marketing operations,

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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

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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

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emphasis was on improving the financial reporting system.

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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.

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4. Personnel Function. Personnel function was found to receive high priority in

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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.

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Process and barriers of restructuring

According to the American Management Association (AMA)survey, the common process

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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.

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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

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sector. The public sector has, because of rigidities due to its ownership, far less flexibility in this

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action. Along with these were measures to improve quality, creating strategic business units,

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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

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etc.

The major barrier to restructuring has been the cost of doing it. In private sector lack of

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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

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problems of labour are not serious barriers to restructuring

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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,

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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

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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

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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

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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.

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Self -assessment questions

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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?

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4. Explain the process of turnaround management.

5. Explain any one model of turnaround.

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6. What is corporate restructuring?

7. Discuss the different forms of restructuring

8. Explain the process and barriers to restructuring

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9. Examine the different types of restructuring with examples

10. Explain: (i) leveraged by outs (ii) Spin offs (iii) Divestitutes

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Activities

1. Visit the state Finance Corporation. Discuss with the executives and find out how the

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organization could turnaround sick units.

2. Identify a sick unit and interview its manages about the reasons for its sickness

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3. Visit the website of Board for Industrial Financial Reconstruction (BIFR) and examine their

successful cases of turnaround.

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References

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1. Fransis Cherunilam , Strategic Management, Himalaya Publishing House,Mumbai

Publishing House,

2. Thomas L.Wheelen and Hunger J. David, Concepts in Strategic Management and

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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,

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Mumbai

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Unit III

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O
S

13 Mergers and Acquisitions

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S
E

L

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LESSON OUTLINE

Introduction

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Corporate growth strategies
Concept and types of mergers
Mergers and acquisitions in India
International scenario
Merger motives

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Screening and valuation process
Summary
Self Assessment questions
Activities
References

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Improve valuation theory(last sub head)

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After reading this lesson you should be
able to

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Understand corporate growth through

mergers and acquisitions

Describe the types of mergers

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Discuss

Indian

and

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international

examples of mergers and acquisitions

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Explain why mergers takes place
Describe the screening and valuation

processes of mergers and acquisitions

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Introduction

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Mergers and acquisitions as external growth strategies have been the regular feature of corporate

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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

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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.

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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

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outside ?that is combinations. Different forms of combinations are:

1. Amalgamation/Merger: Merger take place when there is a combination of two or more

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organizations. Merger does create a new corporation.

2. Acquisition/takeovers: One Company acquires another company's controlling interest. The

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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.

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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.

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Concept and types of mergers

A merger is a combination (other terms used: amalgamation, consolidation, or integration) of

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two or more organizations in which one acquires the assets and liabilities of the other in

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exchange for shares or cash, or both the organizations are dissolved, and the assets and liabilities

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are combined and new stock is issued. In mergers, all the combining firms relinquish their

independence and cooperate, resulting in common cooperation.

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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

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three types: horizontal mergers, vertical mergers and concentric mergers.

1. Horizontal mergers take place when there is a combination of two or more organizations

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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.

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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).

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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

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related to each other either in terms of customer functions, customer groups, or the
alternative technologies used.

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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.

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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.

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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.

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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

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renamed as Chariant India, and Aptech from Apple Industries Ltd.

Mergers and acquisitions in India

Mergers and acquisitions in India are as given below.

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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

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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:

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Spartek acquired Neycer India a sick company under BIFR in 1985. It acquired

Styles India in 1998.

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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

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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

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turnover mark in June 1996.

Murugappa group: Growth of Acquisition 1980-95

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Company

Products

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EID Parry

Fertilizers, sugar, ceramics

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confectionery

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Coromandal Fertilizers

Fertilizers

Bharat Pulverizing Mills

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Pesticides

Pugalur syars

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sugar

Falcon Gulf ceramics

Sanitayware

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Parma Agro

Plantation

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Wedt (India)

Cutting tools

Press Metal corp.

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Metal sections

Satavahara Chains

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chains

Sterling Abrasives

Abrasives

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Eastern Abrasives

Abrasives

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Cut fast Abrasives

Abrasives

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RPG has grown from Rs 80 crore in 1979-80 to Rs 5,600 crore in 1996. RPG Groups

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acquisitions include cables, tyres, transmission and electronics. The list includes

- Asian cables
- Ceat Ltd

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- Calcutta Electric Supply Corporation Ltd
- Carbon & Chemicals industries

UB group acquired

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- Tamil channel GEC (Vijay TV)
- Berger Jenson & Nicholson UK with manufacturing base in 21 countries
- Sold away petrochemicals to SPIC
- Acquired Best & Cromption

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The other groups include Shaw Wallace, Rajarathinam group, Manu Chabbria group, JVG,
etc MA Chidambaram group, BPL, Sri ram group, Videocan, Maxworth Orchards,

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HLL growth map is as given below

1992--Acquires Kothari foods
1993--Dollops from Cadburys

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Kissan from UB groups &

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Brooke Bond & Lipton (BBLIL)

1993--Merges with TOMCO

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1994--Alliance with Quality ice cream
1995--Acquired Milk food
1995--Alliance with Lakme to form Lakme lever Ltd

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- Ponds

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International scenario

We will now survey different nations to have a feel of mergers and acquisitions taking place

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globally.

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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

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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

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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

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companies with a large market share. However, the extent of litigation is low.

Europe:

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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

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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

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& 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

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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

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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

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and the stock movements regulated.

India

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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.

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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

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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

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limit is 40%.

Merger motives

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Sellers opt for mergers and acquisitions to reduce taxes, to diversify, to restrict working capital

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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;

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there is more control of patents and tax advantages.

Organizations opt for merges with the following motives.

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o Improving economies of scale
o Gaining managerial expertise
o Market supremacy
o Acquiring a new product or brand name

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o Diversifying the Portfolio
o Reducing risk and borrowing costs
o Taxation or investment incentives

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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.

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Identification of industries
Selection of sectors

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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)

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After going through the screening process the fooling considerations merit attention.

Funds availability
Likely positive synergies

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Negative synergies an weaknesses
Appropriate timing

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Availability of required management style.

Next step is valuation. Valuation determines the worth or value of the M & A. Mergers &

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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.

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Market price per share

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= ------------------------------

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Net earnings after tax per share

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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

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back its current price. The differences in P/E ratio for different companies are attributed to

differences in the following.

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- Growth rate of a company
- Risk associated with investment
- Competition & environment

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Essential commodities have shorter business cycles and more uniform earning compared to

sectors like heavy Engineering which are linked with growth of the economy.

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(2) Earnings Per Share (EPS)

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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.

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(3) Divest loss making operations

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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.

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(4) Use ratio analysis:Calculate key ratios

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(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

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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

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current liability like bank over draft and working capital loans to save on interest charges.

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(b) Level of stock (in months) = (Stocks/Cost of goods sold) x 12

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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.

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( 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

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one.

(d) Revise Balance sheet and profit & loss account-
The new EPS after merger should be better for the new company.

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(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

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strength.

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(7) Replacement value (RV) of assets

Replacement cost is better than historical cost particularly in an inflationary economy.

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Replacement value of an asset = 1- Age of Assets/ Total Economic life of Asset) x Current value
of asset.

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Summary

Mergers and acquisitions as external growth strategies have been the regular feature of corporate

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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

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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

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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

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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.

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Self -assessment Questions

1. Explain the concept of mergers and acquisitions.

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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

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5. Evaluate and assess the suitability of a merger proposal.

6. Why do sellers opt for mergers

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7. Examine why buyers opt for mergers

8. Explain the international scenario of mergers and acquisitions

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Activities

1. Visit the website of Hindustan Lever Ltd and list the companies that are merged with it.

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Also evaluate the reasons for the mergers.

2. Examine how NRIs like Lakhsmi Mittal have additional advantages to work out mergers

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and acquisitions in India than their Indian counterparts.

References

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1. Azar Kazmi (2003), Business Policy and Strategic Management, Tata McGraw Hill,

New Delhi.

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2. Thomas L. Wheelen and Hunger J. David (2002) Concepts in Strategic Management and

Business Policy, Pearson Education Asia, New Delhi

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Unit III

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14

Functional Strategies -1

ON

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S

S
E
L

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LESSON OUTLINE

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Introduction
Functional strategies
R & D strategy

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Operation strategy
Logistics /supply chain strategy
Information systems strategy
Coordination of strategies
Summary

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Self Assessment questions
Activities
References

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LEARNING OBJECTIVES

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After reading this lesson you should be
able to

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Examine the characteristics of functional

strategies

Understand functional strategies in R&D

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and operations

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Coordinate the strategies for maximum

effectiveness

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Introduction

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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

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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

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context that we need to study functional strategies in detail.

Functional Strategies

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Functional experts like R&D, operations, finance, marketing and human resources devise

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functional strategies. The characteristics of functional strategies are as follows.

Short term

They provide short-term operational details for achieving long-term objectives systematically.

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Limited scope

Functional strategy deals with a relatively restricted plan, which provides the objectives for a

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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.

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Derivative

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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

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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.

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To continue as market leader in FMCGs in India and

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expanding the market. Also capturing the markets of

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- Corporate

Proctor and Gamble India Ltd.

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Strategy

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To develop a range of popular and premium toilet

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s oaps fo r all inc ome gr

oups (D ove to

Lifebuo

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y)

- Toilet soap

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Division strategy

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T

o brand r eengine er Life

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buoy fr

om a ca

rbolic t

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o a toile

t

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soa p in dif f

e r

e -De

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nt f pa

ra rt

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gr m

a e

ncn

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eta

s l

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a

n

d colors for more

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us t o

m e

r

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pu l l

a

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n

d r

e

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po s

it i

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o

ni

ng strategy

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Figure 14-1 Derivative nature of functional strategy

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R & D Strategy

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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.

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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

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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

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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

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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

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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

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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

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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

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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.

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A number of Japanese electronics companies were quite successful in copying American

technology and, by avoiding many R&D costs, improved their competitive positions

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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

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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

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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

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includes the following steps

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Idea generation

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Screening

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Product planning & Development

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Test marketing

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Operations strategy

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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

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cost-reduction while enhancing quality. Areas like safety, breakdown, downtime, inventory

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control scheduling etc. should be adequately covered with policies and strategies at functional

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level.

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Table 14-1: Categories of Strategy Decisions in Manufacturing Operations

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1 Capacity ? amount, timing, type

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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

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7 Production planning materials control ? sourcing polices, centralization, decision rules
8 Organization ? structure, control/reward systems, role of staff groups.

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(a) Inventories

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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

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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

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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.

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(b) Training to workers

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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

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with plant arrangements and equipment that can easily changed over from one product to

another, provides greater flexibility without a significant increase in cost.

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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

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to enable managers to work according to them.

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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,

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Mumbai and Calcutta have also strategic advantage of location not only for getting raw material

but also for shipping finished products.

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(d) Product Design ? Technology and Marketing Concerns

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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,

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taking into account the kind and amount of materials, labour and processing equipment that each

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alternative design will require.

The company must also recognize that the potential consumer will also perform some sort of

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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

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necessary or the aesthetic appeal of the results justifies the expense.

Myriad alternative designs for a product are usually possible, and alternative production

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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

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produce.

Here is an example of retail firm design of products and operations for consumer

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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

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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.

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Spread over 18,000 sq.ft of space, The Loft stocks almost 100 plus brands, has facilities

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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

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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 )

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Information systems strategy

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Corporations are increasingly adopting information system strategies in that they are

turning to information systems technology to provide business units with competitive advantage.

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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

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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.

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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

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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.

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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.

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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

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Bentonville, Arkansas. The company collected sales and customer

related information for each store and fed that information into the

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warehouse systems.

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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

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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.

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To make shopping at Wal-Mart a pleasant experience, Wal-Mart

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installed customer information kiosks in its stores in 1996. The kiosks

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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.

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IT played an important role in improving the efficiency of

operations at Wal-Mart. The benefits which accrued were passed on to

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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

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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

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shareholders".

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At the dawn of the new millennium, Wal-Mart was one of the

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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

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was the world's largest company, with revenues in fiscal 2002

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Logistics /Supply chian Strategy

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Logistics/supply chain strategy deals with the flow of products into and out of the manufacturing

process. Three trends are evident.

o Centralization,

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o Outsourcing, and
o Use of the Internet.

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To gain logistical synergies a cross business unit, corporations began centralizing logistics in

the headquarters group. This centralized logistics group usually contains specialists with

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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

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function as an important way to differentiate themselves from the competition, to add value, and

to reduce costs.

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May companies have found that outsourcing of logistics reduces costs and improves

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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.

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Coordination

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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

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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

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operations and R&D management.

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Table 14-2 Impact of Strategy Elements on Operation and R&D Management

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S.No Elements of

Operations management R&D Management

Strategy

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1.

Compete as

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Requires longer

Research on cheap

low ? cost

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production runs and

input alternatives

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provider of

fewer product changes

Low cost processing

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goods or

Requires special ?

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equipments

services

purpose equipment and

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facilities

2.

Compete as

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Requires more quality ?

Quality inputs

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high quality

assurance effort and

High tech, high

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provider

higher operating cost

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quality processes

Requires more precise
equipment, which is
more expensive

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Requires highly skilled
workers, necessitating
higher wages and
greater training efforts

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3.

Strive for

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Requires accepting

New product

absolute

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some projects or

alternatives

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growth

products with lower
marginal value, which

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reduces ROI

4.

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Maintain

Requires

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capital -

reserve

investment

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in

idle

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capacity

for capacity

flexibility

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5.

Consolidate

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Locate near one major

Technology

processing

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customer or supplier

improvements

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(Centralize)

6.

Disperse

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Requires more complex Product

processing of

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coordination

network: improvements and

service

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perhaps expensive data differentiation

(Decentralize) transmission

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and

duplication

of

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some

personnel

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and

equipment

at

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each

location.

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If

each

location

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produces one product in
the line, then other
products still must be
transported

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to

be

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available

at

all

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locations.

If each location
specializes in a type of

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component for all
products, the company
is vulnerable to strike,
fire, flood, etc.

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If each location
provides total product
line, then economies of
scale may not be

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realized

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Summary

Functional strategies give more clarity to corporate and business level strategies and

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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

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product development. Logistics minimize transportation and delay costs. Information systems

provide effective communication and knowledge sharing opportunities. One must understand

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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.

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Self -assessment questions

1. Outline the various functional strategies and examine their significance in the process of

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strategic management.

2. Review the major R & D strategies of firms with examples.

3. What are the concerns of operations plans and policies?

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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

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strategy - formulation activities? Why can this be a major organization weakness?

6. How can you coordinate operations and R&S strategies?

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7. What is the significance of information systems strategy?

8. How can logistics strategy help a firm achieve its goals?

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Activities

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References

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Unit IV

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Functional Strategies

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ON
S
S

15

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Finance Marketing, Human Resource,

E
L

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Management Information Systems and

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logistics

LESSON OUTLINE

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Introduction
Functional strategies
Marketing strategies

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o Marketing warfare
o Promotion strategies

Finance strategies

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HR strategies
Information systems strategies
Logistics
Strategies to avoid
Selecting the best strategy

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LEARNING OBJECTIVES

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After reading this lesson you should be
able to

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Synchronies the functional strategies for

organizational effectiveness

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Understand and translate functional

strategy at corporate level to action
plans.

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Examine the synergies among functional

strategies

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Functional strategies are devised by specialist in each functional area of business. They

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spell out the spell out the specific tasks that must be performed to implement business strategy.

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Companies may vary in organizational responsibilities and also devise varieties of functional

strategies.

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Marketing specialists focus on determining the appropriate markets for business offerings

and on developing effective marketing mixes. The marketing mix includes four strategic

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elements: price, product, promotion, and channels of distribution.

Financial specialists are responsible for forecasting and financial planning evaluating

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investment proposals, securing financing for various investments, and controlling financial

resources. Financial specialists contribute to strategy formulation by assessing the potential

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profit impact of various strategic alternatives and evaluating the financial condition of the

business.

MARKETING STRATEGIES--COMPETITION BASED

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Marketers have to evolve strategies to fight competition, to gain and retain market shares.

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The right tool for analyzing market situation is SWOT analysis. Based on the SWOT analysis

competitors can be classified as follows:

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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

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These competitors can, in turn, be assigned following competitive positions.

Market leader--the firm with largest market share and strong in designing and

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implementation plans.

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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

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and challenger.

Market Nicher--the independent, non-fighter, who carves his niche for peaceful and

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profitable specialized operations.

Market shares of the competitive firms are:

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40%

30%

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20%

10%

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Leader challenger Follower Nicher

What are the moves of the competitors? Are they preemptive or predatory? Are they defensive

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or offensive? Companies in different competitive positions work different strategies. The

possible moves of a leader, challenger, follower and nicher are:

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Grow strong--become invincible

Defend--develop protection against attack

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Offend--weaken or destroy competitor

Play safe--select less competitive areas and cultivate.

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Leader

Expansion strategy

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Market penetration strategy

- Increase use of the product

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- Find new uses for the product

Market development strategy

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- Convert non-users to users
- Find new markets in other places

Product development strategies

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- Create new products/services
- Modify existing products

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Defending strategy

Continuous innovation and quality platform

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Position defense

- Product--Line complete

Flanking defense

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- Varieties of Variants

Preemptive defense -Price reduction through sales promotion
Counter offensive defense -Match with ads and others attacks

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Mobile defense

-Concentrate in successful markets

Contraction defense - Prune brands

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Market Challenger

A market challenger may choose to attack

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The leader
The followers
The nichers.

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By pass attack -- Diversifying into unrelated products

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Diversifying into new geographic markets

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Leap frogging into new technologies

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Frontal attack -- Price and promotion aggressiveness

Flank attack -- find gaps in product line and set up variety competition

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Encirclement attack- Wide range of products with heavy advertising and

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promotion

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Guerilla attack -- New product or promotions of short life cycle with

marketing blitzkrieg

Market follower

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The options are:

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Following closely--imitate immediately
Following at a distance--slow imitation
Following selectively--imitation in select areas

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The companies are generally small in size. Some companies in the unorganized sector may
follow `fakes' strategy.

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Market--Nicher:

The niche is sufficient size in size and purchasing power to be profitable.

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The niche has growth potential

The niche is of negligible interest to major competitors

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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.

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Computer companies are among the newest converts to the "end user" type of niche

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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

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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

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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

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customized the computer hardware and software for individual clients or customer segments and

earned a price premium in the process.

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Designing a promotion strategy

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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.

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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

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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'

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Choosing Pull or Push Strategy for sales promotion:

(a) Push strategy ? A promotion strategy mainly aimed at channels of distribution is called a

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push strategy. Marketers promote their products heavily among distributors wholesalers

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and retailers. Retailer promotes to customers. This includes trade shows, personal

selling and contests.

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Producer Distributor Wholesaler Retailer Consumer

(b) Pull Strategy ? Here promotion is directed towards ultimate consumers. Manufacture

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tries to stimulate demand and attracts consumers to buy his product.

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Manufacturer Consumer

This includes advertising, publicity and sales promotion like discounts, free goods and

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contests.

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Tools of Sales Promotion:

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The most commonly used sales promotion tools in India are

(i)

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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.

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(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

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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

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of any sales tax.

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(iii)

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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

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eliminates the need for inspection or testing of goods by the buyer.

(iv)

Correspondence: Sending letters or brochures. A specialized correspondence section

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can communicate very effectively with prospects as well as potential customers.

(v)

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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:

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-- To get orders

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-- To make the customers aware about the specifications

-- To provide detailed information

-- To solicit product sales

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(vi)

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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:

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(a) It should not be a high cost item

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(b) The novelty item should be usually eye-catching

(c) The item should be useful.

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(vii)

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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.

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(viii) Sales Contests: The main aim of sales contests is to motivate the sales personnel and

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increase sales, and bring more profit to the company. Under this scheme special

incentives in the form of prizes or awards are offered.

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(ix)

Price--off: A price-off is simply a reduction in the price of the product to increase

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sales and is very often used in introducing a new product. Price-offs should generally

be considered:

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-- For introducing new brands or existing brands with new uses

-- For products/brands which are already doing better than the competing brands

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-- 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

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introduced Pril scouring concentrate

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(x)

Refunds: It is an offer made by a manufacturer to give back a certain amount of

money to a consumer.

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(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

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Gamble, Nestle and Parle.

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(xii)

Boosters for Dealers: In a bid to reduce its mounting inventories and boost the

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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

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offered to expedite payments.

Strategy for new products:

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Train salesmen about the product, familiarize with the market segment and integrate

advertising & sales promotion

ii)

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Let the dealer be given details of the new product, his margins and promotion support

iii)

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Ensure sufficient quantity to get orders from dealers

iv)

Deliver the merchandise at the retail outlets

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v)

Arrange to advertise in media

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vi)

Sample the product door to door with coupons

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Promotion strategy should be focused on

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(i)

Sales force promotion

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-- Bonuses

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-- Sales rallies
-- Best salesman award

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(ii)

Trade promotion

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-- Discounts
-- Displays
-- Force good
-- Best dealer awards

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(iii)

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Consumer promotion

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-- Point of purchase promotion
-- Free samples
-- Cash discounts
-- Free trials
-- Demonstrations

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-- Prizes
-- Contests

Promotion Strategy for Industrial Products:

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Industrial products require different promotion strategies due to varied price range

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(a) Documentation: Documentation is essential for improving the marketing

effectiveness of a company. Documentation may include;

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--

Product literature

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--

Selection and performance charts

--

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Technical manuals

--

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Operation manuals

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Installation manuals

--

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Price lists

(b) Working models: Many firms supply the working or cutout models of their

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products to the dealers for display. This helps the customer understand the

product easily. In addition, the companies also supply photographs and other

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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

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Machine Tools Exhibition (IMTEX). Hanover (Germany) Engineering Trade Fair

and many other such exhibitions has proved beneficial to many engineering units.

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Financial Strategy

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May types of financial analyses are used in strategic decision making these include ration

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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.

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2. To lease or buy fixed assets.

3. To determine an appropriate dividend payout ration.

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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.

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6. To establish a certain percentage discount on accounts within a specified period of time.

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7. To determine the amount of cash that should be kept on hand.

1. Ratio analysis

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(i)

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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

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between two sets of phenomena. For instance, the proportion (ratio) of gross

profit to sale.

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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

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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

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preceding year to ascertain the level of improvement or deterioration.

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This trend analysis may be the pace setter or the eye opener for future performance of the

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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

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comparison will provide the basis of assessing the strength and weaknesses of other competitors

in the market.

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Ratios may be classified under four broad heads:

1. Liquidity

2. Activity

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3. Profitability

4. Capital structure / Leverage Ratio.

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(ii)

Liquidity Ratios

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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

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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.

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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.

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(iii)

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Acid test ratio / quick ratio

= Current assets ? (Inventories + Repayments)

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Current liabilities

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(iv)

Turnover Ratios /Activity Ratios

Another way to ascertain the liquidity is how quickly a certain current asset could be

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converted into cash. Ratios measuring its ability is known as turnover ratios. These

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ratios may be classified under three heads: (1) Total Assets Turnover Ratio (2) Accounts

Receivable Turnover Ratio (3) Inventory Turnover Ratio.

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Inventory / Turnover Ratio

Inventory / Turnover Ratio may be worked out in the following manner.

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Cost of goods sold

(Inventory I year + Inventory II year) ? 2

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Profitability Ratios

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Profit is the end result of all business activities including the use of capital. Profit is an objective

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index of judging the efficiency of the business enterprise.

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Profitability ratios may be of two kinds:

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(i) Return on sales (ROS) and (ii) Return on Assets (ROA)

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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

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sub-optimal product or a few strong and more weaker products which lower down ROA or even

ROI.

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Capital Structure / Leverage Ratios

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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.

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"This ratio reflects the relative claims of creditors and shareholders against the assets of the

firm".

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Long ?term Debt

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D/E Ratio =

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Shareholders Equity

Earnings per Share (EPS)

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Another way of computing the profitability of a company from share holder's view point

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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.

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Net Profit ? (Interest + Tax + Preference dividend)

EPS =

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(No . of ordinary Shares I year + Ordinary Shares II Year ) ? 2

Price Earning Ratio

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It may be worked out as follows:

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Market Price of the Share

Price Earning Ratio =

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EPS

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2. Break ? Even analysis ? Case

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3. Net Present Value (NPV) analysis.

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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

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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

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ranked in the descending order of the net present values. The market value of shares may

increase with projects with positive NPVs are accepted.

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HR Strategies

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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

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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.

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The number of employees who work only part ? time is steadily increasing. Part-timers

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are attractive to a company because the firm does not need to pay fringe benefits, such as health

insurance and pension plans.

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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

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cosmetic firms like Avon could turnaround unprofitable inner city markets by taking local

persons to manage local markets.

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Information systems strategy

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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

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its data warehouse systems located at its headquarters at Bentonville, Arkansas.

The company collected sales and customer related information for each store

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and fed that information into the warehouse systems.

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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

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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.

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To make shopping at Wal-Mart a pleasant experience, Wal-Mart

installed customer information kiosks in its stores in 1996. The kiosks helped

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customers find out the price of any product and get a brief description of it. In

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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

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sales.

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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

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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

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ns for our shareholders".

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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

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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.

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Multinational corporations are finding that the use of a sophisticated intranet for the use

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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

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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

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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.

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Logistics Strategy

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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

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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

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different transportation modes such as rail or trucking. They work to aggregate shipping

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volumes across the entire corporation to gain better contracts with shippers. Companies like

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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

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costs.

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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.

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Strategies to avoid

If managers lack analysis and creativity they may get trapped into weak strategies leading to

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failure. The following strategies should be avoided.

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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.

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Hit Another Home Run: If a company is successful because it pioneered an extremely

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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

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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.

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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

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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

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margins.

Do Everything: When faced with several interesting opportunities, management might

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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

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many projects demand large infusions of resources.

Ex:- Walt Destney

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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

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to quit, the corporation continues to throw" good money after bad".

Ex:- Indian Airlines is one such company.

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Selecting the best strategy

Perhaps the most important criterion is the ability of the proposed strategy to deal with

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the specific strategic factors developed earlier in the SWOT analysis. IF the alternative doesn't

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take advantage of environmental opportunities and corporate strengths / competencies, and lead

away from environmental threats and corporate weaknesses, it will probably fail.

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Another important consideration in the selection of a strategy is the ability of each

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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.

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Conclusion

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Self Assessment questions

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References:

1.

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Peter

2.

Fred David

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3.

Wheelen L Thomas and Hunger J. David( 2002), Concepts in Strategic Management and

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Business Policy, Pearson Education Asia, New Delhi.

4. R L Varshey and SL Gupta, Marketing Management ? An Indian

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Perspective, pp

465 ? 483.

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5. C S G Krishnamacharyulu and Lalitha Ramakrishnan, Rural marketing, pp

239 ? 263.

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Unit V

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ON
S
S
E

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17

Planning

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and

Resources

L

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Allocation

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LESSON OUTLINE

Introduction

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Planning defined
Nature of planning
Types of plans
Steps in planning
Resource allocation

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Methods of resource allocation
Resource allocation process
Problems in resource allocation
Summary
Self assessment questions

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Activities
References

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After reading this lesson you should be
able to

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Understand the concept of planning and

examine its nature

Illustrate and explain the steps in the

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process of planning

Examine the elements of planning

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Introduction

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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

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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

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resource allocation needs and make right allocations.

Planning ? defined:

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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

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"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

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achieve them; it requires decision making."

BHEL used Delphi technique to explore future direction of power development. Firstly, it

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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

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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

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projects.

Coke used a similar technique and conducted tests studies 30 cities in US to develop `diet coke'.

Nature of Planning:

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There are four major aspects here.

(i)

Its contribution to purpose and objectives;

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(ii) Its primacy among the manager's tasks;
(iii) Its pervasiveness, and
(iv) The efficiency of resulting plans

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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.

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Figure 17.1 show the kind of contribution planning makes.

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What kind of organisation

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structure to have

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Which helps us know

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What kind of people we
need and when

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PLANS objectives

Necessary for deciding

Which effects the kind of

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and how to achieve

leadership we have and

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them

direction

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How most effectively to
lead people

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In order to ensure success

of plans

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By furnishing standards of

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Primacy

control

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Figure 17.1. Key decisions in planning

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Planning is the first function leading to other functions in management. Figure 17-2 shows the
linkages.

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PLANNING

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Setting Objectives

Deciding how to

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accomplish them

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Organizing-teaming

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Productivity

for

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Leading-performance

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Controlling-results

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Figure 17.2: Planning in Management.

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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

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be in dark not knowing where to go.

Efficiency of plans

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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

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programmes are good but failed due to poor morals.

Types of Plans:

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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

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vary as under.

* Purposes or missions

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* Objectives or goals

* Strategies

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* Policies

* Procedures

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* Rules

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* Programmes

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* Budgets

Purposes or missions:

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Identifies the basic task of a firm or agency. Ex. Purpose of business is the production and

distribution of goods and services

Dupont

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-

Better things through chemistry

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Kleenex

-

Production and sale of paper & products

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Hallmark

-

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Social expression of business

J & J

-

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First responsibility to doctors, nurses, patients and mothers

Dow chemical -

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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.

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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

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distinguish the organization from others.

Objectives and goals:

Planning aims at goal setting. Goals and objectives are ends towards the activity aimed. They

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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.

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Production department

Producing 22 units per day

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Marketing department

Selling 25 units per day

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Personnel department

Training 200managers in the first quarter.

Finance department

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Invest Rs. 200 crores with 32% return on
investment in the current year.

Goals serve many purposes like the following

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* Increase performance

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* Clarify expectations

* Facilitate the controlling function

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* Increased motivation

Goals have levels that compare with hierarchy of organization as depicted in Table 17-1

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Table 17-1 Plan types

Type of plans

Type of goals

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Description

Time

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Management

Focus o f plans

range

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level

Strategic plans

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Strategic goals

Broadly defined 5 years

Top

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Organization level

targets or future

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management

end results set
up

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by

top

management

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Tactical plans

Tactical goals

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Future

end 1-5 years Middle

Department level

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results set up by

management

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middle

management for

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specific
departments or
units

Operational

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Operational

Set by lower One year Lower

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Unit/group/level

plans

goals

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management

management

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individual

that

address

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measurable
outcomes
required

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from

the lower levels

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Peter F. Drucker gives eight major areas for goal setting by organizations.

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*Market standing

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*Innovation

*Human resources

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*Financial resources

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*Physical resources

*Productivity

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*Social responsibility

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*Profit requirements

Strategies:

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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.

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"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

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concentrating on proprietary products of having a full time of autos ex: General Motors.

Strategies are of two types:

Generic strategies

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-

involve organization expansion in some select areas.

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The generic strategies include ?

Overall cost leadership
Differentiation
Focus

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Grand strategies

-

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A master strategy that provides direction at the corporate level

Concentration

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Growth strategy

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Integration (vertical horizontal)

Diversification

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Grand strategies

Stability strategy

Harvest

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Turnaround

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Policies:

Divestiture

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Defensive strategy

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Bankruptcy

Liquidation

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Policies are plans or general statements or understandings that guide or channel thinking in

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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

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hiring trained engineers, encouraging employee suggestions, confirming to high standards,

setting competitive prices, cost plus pricing etc. Companies can have policy manuals which may

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stipulate non-acceptance of gifts from suppliers, favours of entertainment or seek outside

employment.

Making policies is difficult for

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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.

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Policies are necessary at different hierarchical levels as shown in Figure 17-4

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President

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Vice-president sales

Company policy of aggressive price competition

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Policy of competing aggressively only in non proprietary

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Regional sales manager

product lines

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Policy of limiting district sales managers to special price

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District sales manager

concessions not exceeding 10% - then only when necessary

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to get an order.

Figure 17.4 Policies

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at different levels

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Procedures:

Procedures are plans that establish a required method of handling future activities. They are

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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:

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In Banks SOPs govern how tellers handle deposits.

The following procedures are common and are across different departments.

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Production Department -

release of stock

Traffic Department

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-

shipping means & route

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Finance Department

-

customer credit approval, acknowledgement receipts

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Marketing Department

-

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for original order

Rules:

"A statement that spells out specific actions to be taken or not taken in a given situation"

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Unlike procedures, rules do not normally specify a series of steps. They dictate what must or
must not be done.

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Ex: 1. "No Smoking" is a rule unrelated to procedure.

2. Fraction of more than half ounce should be treated as one ounce.

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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

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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".

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"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".

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Examples of programmes are :

1. A major airline acquiring $400 million fleet of jets

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2. Five year programme to improve status and quality of supervisors.
3. A minor programme of a supervisor to improve morale of workers.

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Making programmes include six steps:

i) Dividing the project into parts
ii) Determining relationships and pulling in a sequence

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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

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A primary programme may trigger off a series of small programmes.

Budgets:

Budget is a numberized programme. It can be defined as follows.

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"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.

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A budget is a fundamental planning instrument. Budget forces precision in planning.

Flexible/variable budgets -

vary according to the level of output

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Programme budgets

-

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an agency to identify goals, develop programmes to meet
them and give cost estimates.

Operating budget

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-

A finance plan for each responsibility during budget
period.

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Capital budget

-

Budget for Mergers & Acquisitions, divestiture of fixed

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assets

Steps in planning

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Planning is a step by step process. It involves the following steps.

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(i)

Being aware of opportunities:

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Every planner should scan the external environment for opportunities and threats.

(ii) Establishing objectives:

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Planner has to identify the objectives for the enterprise or unit. They should be specific and
measurable.

(iii) Developing premises:

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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.

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(iv) Determining alternative courses:

Planner has to develop a large number of alternative courses of action for examination.

(v) Evaluating alternative courses

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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.

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(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.

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(vii) Formulating derivative plans:

To support basic plan it will be necessary to develop a series of minor plans. .

(viii) Numberzing plans by budgeting:

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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.

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Resource allocation

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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.

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Money

ii)

Facilities and equipments

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iii)

Materials, supplies and services

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iv)

Personnel

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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

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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.

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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.

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Methods of Resource allocation

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(i)

Based on percentages:

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Usually, companies have been following system of allocation of resources by percentages.

The following arguments reject this method.

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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

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its future competitive position and growth. The decisions of resource allocation
are also closely connected with the objectives of a company.

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(ii)

Based on modern methods

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Other methods include -Portfolio models, product life-cycle charts, balance sheets, profit and

loss statements income statements. When retrenchment or turnaround strategies are implemented

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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

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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.

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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

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A framework for the strategic budgeting process is shown in the following chart.

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Corporate Level

Corporate

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Goals and

Tentative

Budget re- Summary

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objectives

strategy

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resource allo- quests are re- Budgets are

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and strategy either ap- cations are

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viewed and prepared

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are stated proved or made and approved

along with altered

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budgets are

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assumptions

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SBU object- Premises

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Preliminary

Changes in

Approved

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tives and

and force-

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budgets are resource budgets are

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SBU Level strategy are casts are prepared requirements received and

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defined prepared are proposed final plants

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are made

Source: William F. Glueck & Lawrence R. Jauch, Strategic Management . p. 316)

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Figure. 17.5.The resource allocation process

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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.

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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

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(organizational units).

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SBU initiative They in turn draw up preliminary budgets after defining the unit-wise objectives

and strategies.

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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.

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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

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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

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SBUs.

Approval Only on approval of the proposals the
Problems in resource allocation

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There are several difficulties in resource allocation. The following are some of the identified
problems.

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i) Scarcity of resources.

Financial, physical, and human resources are hard to find. Firms will usually face difficulties in

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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

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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

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firm's finances and this places a restriction on firms wishing to procure physical resources. Human

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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

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restrictions on firms wishing to attract and retain personnel. In sum, the availability resources is a

very real problem.

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ii) Restrictions on generating resources

In the usual budgeting process these are several restrictions for generating resources due to the SBU

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concept especially for new divisions and departments.

iii) Overstatement of needs

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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

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do not get resources according to their expectations. Such negative reactions may hamper the

process of strategic planning itself.

Summary

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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.

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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,

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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.

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Self -assessment questions

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1. Define planning and illustrate it as an important function of management
2. Outline the steps in planning process.

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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

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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.

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Activities

1. Visit the website of a public sector unit and examine how corporate planning is done in that

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organization. Note the details.

2.

Go to an educational institution (a college or a university) in your place. Discuss with

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strategists Viz.,Vice?Chancellors, Principals, Registrars, Deans or Secretary and
Correspondents and discuss how they allocate resources to the departments. Record the
findings.

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References

5. Lomash Sukul & Mishra P.K.(2003) Business policy and Strategic Management, Vikas

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Publishing House, New Delhi

6. P.K. Ghosh (2001), Strategic Planning and Management, Sultan Chand & Sons, New

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Delhi

7. Kachru Upendra (2005), Strategic Management- Concepts and Cases, Excel Books,

New Delhi.

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8. Azar Kazmi (2003), Business Policy and strategic management, Tata Mc Graw Hill,

New Delhi .

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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.

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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

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edition, Mc Graw Hill International Services, Singapore.

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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

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Delhi.

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*******

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Unit V

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ON
S
S
E

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18 Organization structure and culture

L

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LESSON OUTLINE

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Introduction
Concepts
Key elements of organization
structure and design
Organization design decisions

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Boundary less organization
Learning organization

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Organization culture -Concept
Influence of culture on strategy

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Cultural web

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Cultural audit

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Summary

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Self Assessment Questions

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Activities

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References

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LEARNING OBJECTIVES

After reading this lesson you should be

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able to

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Define organization structure and

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design

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Describe the key elements of

Structure and differentiate them

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Introduction

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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

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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

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leads to survival and success of organizations.

Concepts

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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

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decisions about six key elements: work specialization, departmentalization, chain of command,

span of control, centralization and decentralization, and formalization.

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What is organizational culture? It's a system of shared meaning and beliefs held by

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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

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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

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determine to a large degree what employees see and how they respond to their world. When

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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.

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Key elements of organizational structure and design

The key elements in organization structure and design are:

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o Departmentation
o Chain of command
o Span of control

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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?

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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?

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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.

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Functions

ii)

Geographical areas

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iii)

Product

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iv)

Process

v)

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Customers

Figure 18.1 to 18.5 illustrate the arrangements along with advantages and disadvantages

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Functional Departmentalization

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Plant Manager

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Manager,

Manager,

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Manager,

Manager,

Manager,

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Engineering

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Accounting

Manufacturing

Human Resources

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Purchasing

Figure 18.1 Five Common Forms of Departmentalization

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+

Efficiencies from putting together similar specialties and people with common

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skills, knowledge, and orientations
+

Coordination with functional area

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+

In-depth specialization

-

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Poor communication across functional areas

-

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Limited view of organizational goals

Geographical Departmentalization

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Vice President

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for sales

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Sales Director

Sales Director

Sales Director

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Sales Director

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Western Region

Southern Region

Midwestern Region

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Eastern Region

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Figure.18.2 Geographic departmentalization

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+

More effective and efficient handling of specific regional issues that arise

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+

Serve needs of unique geographic markets better

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-

Duplication of functions

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-

Can feel isolated from other organizational areas

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Product Departmentalization

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Bombardier,

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Ltd.,

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Mass Transit

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Recreational and

Rail Products

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Sector

Utility Vehicles Sector

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Sector

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Retail and Diesel

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Mass Transit

Bombardier-Rotax

Products Division

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Division

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(Vienna)

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Recreational

Logistic

Industrial Equipment

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Bombardier-Rotax

Source : Bombardier Company's Annual Report

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Product Division

Equipment Division

Division

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(Gunskirchen)

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Figure.18.3 Product departmentalization

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Allows specialization in particular products and services

+

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Managers can become experts in their industry

+

Closer to customers

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-

Duplication of functions

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-

Limited view of organizational goals

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Process Departmentalization

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Plant

Superintendent

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Sawing

Planning and

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Assembling

Lacquering

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Finishing

Inspection

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Department

Milling

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Department

and Sanding

Department

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and

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Manger

Department

Manager

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Department

Manager

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Shipping

Management

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Manager

Department

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+ More efficient flow of work activities

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-

Can only be used with certain types of products

Figure.18.4 Process departmentalization

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Customer Departmentalization

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Director

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of sales

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Manager,

Manager,

Manager,

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Retail Accounts

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Wholesale Accounts

Government Accounts

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Figure.18.5 Geographic departmentalization

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+ Specialists can meet Customers' needs and problems

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-

Duplication of functions

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-

Limited view of organizational goals

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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?"

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You can't discuss the chain of command without discussing the other concepts: authority,

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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

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principles of management) helps preserve the concept of a continuous line of authority. It states

that a person should report to only one manager.

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Span of control

Span of control (or supervision or management) refers to the number of employees a supervisor

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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

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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

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directly report to a manager represent the manager `span of control'.

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Wide Span

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Narrow Span

Figure 18-6 Span types

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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.

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Table 18-1 Advantages and disadvantages of different spans.

Narrow Span

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Wide Span

Advantages

Disadvantages

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Advantages

Disadvantages

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1. Close

1. Superior

1. Superiors are

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1. Decision

supervision

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interferes

too

forced

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to

bottlenecks due

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2. Close

much

delegate

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to overloaded

control

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2. Many levels

2. Clean

2. danger

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of

3. Fast

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3. High costs

policies

loss of control

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communication

4. Excessive

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3. Carefully

3. Requires

vertical distance

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selected

exceptional

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subordinates

quality
managers

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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

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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

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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

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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.

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Table 18-2 Factors influencing centralization

When more Centralization

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When more Decentralization

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Environment is stable

Environment is complex, uncertain

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Lower-level managers are not as

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Lower-level mangers are capable

capable or experienced at making

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and experienced at making decisions

decisions as upper-level mangers

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Decisions are relatively minor

Lower-level manages do not

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Corporate culture is open to

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want to have a say in decisions

allowing managers to have a say in

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Decisions are significant

what happens

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Organization is facing a crisis or

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Company

is

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geographically

the risk of company failure

dispersed

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Company is large

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Effective

implementation

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Effective

implementation

of

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company

strategies

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depends

on

company

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strategies

depends

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on

manages having involvement and

mangers retaining say over what

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flexibility to make decisions

happens

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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

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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.

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Organization design decisions

Structuring organization is an engineering job. The way the structures are used determine the

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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.

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Mechanistic
Organic

Table 18-3 describes the two organizational forms. The mechanistic organization is a rigid and

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tightly controlled structure. It's characterized by high specialization, rigid departmentalization,

narrow spans of control, high formalization, a limited information network (mostly downward

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communication) and little participation in decision-making by lower-level employees.

Table 18-3 Mechanistic vs organic structures

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Mechanistic

Organic

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High specialization

Cross-Functional Teams

Rigid Departmentalization

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Cross-Hierarchical

Clear Chain of Command

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Teams

Narrow Spans of Control

Free Flowof information

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Centralization

Wide Spans of Control

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High Formalization

Decentralization
Low Formalization

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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

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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

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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.

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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

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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

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Table 18-4
Table 18-4 Choosing mechanistic or organic structure
Factor

Mechanistic

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Organic

Size

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Large size organizations

Small organizations tend to

become more formal.

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be more team based,

Emphasis is on more

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decentralized, goal driven

specialization,

and result oriented.

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centralization and rules and
regulations.

Strategy

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Productivity

and

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Cost Focus on innovation and

minimization

sustainable

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competitive

advantage

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Technology

Mass production

Unit production and process

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production.

Environment

Simple ,stable and certain

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Complex, unstable and

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uncertain

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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

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second category, mass production described large-batch manufacturing. Finally, the third and

most technically complex group, process production, included continuous-process production.

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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.

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Table 18.5 Production types and organization structures

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Unit

Mass

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Process

Production

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Production

Production

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Low

vertical

M

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oderate

High Vertical

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differentiation

vertical

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differentiation

d ifferentiation

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Low horizontal

H igh horizontal

Low horizontal

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differentiation

differentiation

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Differentiation

Low

High

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Low

Formalization

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formalization

formalization

Organic

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Mechanistic Organic

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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

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the company and its customers and suppliers. This idea may sound odd, yet many of today's

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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

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to replace departments with empowered teams.

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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

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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.

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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

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organization, employees are practicing knowledge management by continuously acquiring and

sharing new knowledge and are willing to apply that knowledge in making decisions or

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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.

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Exhibit

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Characteristic

Organizational Design

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s

of

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a

Boundary less

learning

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Teams

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Organization

Empowerment

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Organizational Culture

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S t r

o

ng

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M

ut

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ua l

T

HE Information Sharing

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Relationships

LEARNING

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Open

ORGANISITON

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Sense of Community

Timely

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Caring

Accurate

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Trust

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Leadership

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Shared Vision

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Collaboration

Figure 18.7 Learning organisation

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Organization Culture-Concept

The culture of an organization has been considered to consist of three layers: Values about the

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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

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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.

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Matching strategic positioning and organizational culture is a critical feature of successful

organizations.

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Influence of culture on strategy

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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

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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

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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

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reference are shown in Figure 18-8. Different group categories have been shaded differently in

the figure.

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Functional

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/divisional

Organizational

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The

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Individual

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Professional

Industrial

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(or

Sector

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Institutional)

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National

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Cultural Web

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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

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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

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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

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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,

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complete with myths, legends, heroes and taboos.

Routines and rituals `Routine' is the way members behave towards each other and towards

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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

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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

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relationships within the organization.

Control Systems: These are the measurement and reward systems that represent what are

important areas of focus of the organization.

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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

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Stories

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Symbols

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Rituals and

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Routines

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Power &

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Paradigm

Structure

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Control

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Systems

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Organization

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Structures

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Figure 18.9 The cultural Web

Cultural audit

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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

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carried out. The cultural audit analyzes different aspects of the organization's cultural web. A

cultural audit is conducted through:

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Listening to people talk about their organization

Observing the organization's day to day operations

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Asking mangers to audit themselves using a checklist.

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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.

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Table 18.6 Analysis of the Cultural Web

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Element

Components

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Stories

What core beliefs do stories reflect?

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How pervasive are these beliefs?

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Do stories relate to strengths or weaknesses,

success or failures, conformity or mavericks

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Who are the heroes and villains?

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What norms do the mavericks deviate from?

Routines and Rituals

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Which routines are emphasized?

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Which would look odd if changed?

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What behavior do routines encourage?

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What are the key rituals?

What core beliefs do they reflect?

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What do training programs emphasize?

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How easy are rituals/routines to change?

Symbols

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What language and jargon is used ?

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How internal or accessible is it?

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What aspects of strategy are highlighted in

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publicity?

What status symbols are there?

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Are there particular symbols which denote the

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organization?

Organisitnal structure

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How mechanistic/organic are the structures?

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How flat/hierarchical are the structures?

How format/informal are the structures?

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structures

encourage

collaboration

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or

competition?

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What type of power structures which denote the

organization?

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Control Systems

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What is most closely monitored/controlled?

Is the emphasis on reward or punishment?

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Are controls related to history or current

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strategies?

Are there many/few controls?

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Power Structures

What are the core beliefs of the leadership?

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How strongly held are these beliefs?

How is power distributed in the organization?

Where are the main blockages to chage?

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Summary

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The strategy implementation phase includes planning, resource allocation, analysis of

organization structure and establishing a culture for the organization. The structure of the

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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

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organization chart is that vertical linkages primarily show control, while horizontal linkages

indicate coordination and collaboration. There are different organizational.

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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

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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

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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.

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Self -assessment Questions

1.

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How do you define organization structure and culture?

2.

What are the key elements in designing structures?

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3.

Examine the different types of structures and analyze their merits and demerits

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4.

What size of span is ideal ? wide or narrow? Justify your answer

5.

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When do you prefer mechanistic design?

6.

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Outline the significance of a boundary less organization and learning organization

7.

How does culture influence strategy?

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8.

Illustrate and explain the `cultural web'.

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9.

Describe cultural audit and examine its significance

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10.

Will structure follow strategy or strategy follow structure? Explain in detail.

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Activities

1.

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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.

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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.

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References:

1. Stephen P. Robbins and Mary Coulter, 7th edition (2002) , Management, Printice Hall of

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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

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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)

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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.

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Unit V

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ON
S

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S
E

19 Managing change

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LESSON OUTLINE

Introduction
Change defined

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Levels of change
Systems model of change
Reasons for change
Approach to manage change

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o Lewin's three step model
o Action research
o Organizational development

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Sensitivity training

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Survey feed back

Process consultation

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Team building

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Inter group development

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Appreciative enquiry

Methods of dealing with change
Summary

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Self Assessment questions
References

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LEARNING OBJECTIVES
After reading this lesson you should be

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able to

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Describe concept and the levels of change

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Outline the systems model of change
Discuss the reasons for change
Describe approaches to manage change
Examine the methods of dealing with change.

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Introduction

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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.

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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

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effectively.

Change ? defined

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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

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structure or process of a system. It may be good or bad, the
concept is descriptive only."

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In the context of change we come across certain terms like change agent, change

intervention and change targets.

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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.

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o Change targets are individuals and groups who are subject to change.

Levels of change

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Change occurs at three levels

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i)

Individual level

ii)

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Group level and

iii)

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Organization level

At the individual level change is reflected in such developments as changes in a job assignment,

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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.

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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

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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

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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

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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.

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Systems model of change

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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,

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design and strategy. Figure 19-1 depicts them as system variables ? interrelated components.

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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.

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The culture variable is a reflection of their shared beliefs, values, expectations and norms of

organizational members

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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

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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

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structure, its systems of communication, control, authority and responsibility.

The strategy variable refers to the organization's planning and decision making process with

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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.

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Figure: 19.1 A systems model of change

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People

Culture

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Task

Technology

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Design

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Strategy

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Reasons for change

More and more organizations today face a dynamic changing environment. This, in turn,

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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.

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Table 19-1 Forces for Change

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Force

Specific change variables

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Nature of the

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More cultural diversity

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workforce

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Increase in professionals

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Many new entrants with

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inadequate skills

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Technology

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Faster and cheaper

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computers

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New mobile communication

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devices

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Decline of the human genetic code

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Competition

Global competitors

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Mergers and consolidations

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Growth of e-commerce

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Social trends

Internet chat rooms

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Retirement of Baby

Boomers

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Increased interest in urban

living

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World politics

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Escalation of hostilities in

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the Middle East

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Opening of markets in China

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The war on terrorism

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following 9/11/01

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Workforce diversiy

For instance, almost every organization has to adjust to a multicultural

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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

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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

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segment of the population.

Competition. The global economy means that competitors are as likely to come from across the

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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

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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

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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.

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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

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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,

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employee security, employee stereotyping and profiling, and post-terrorist-attack anxiety.

Approaches to managing change

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The three most popular approaches to manage change are

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i)

-

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Lewin's three step model

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ii)

-

Action research and

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iii)

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-

Organizational development

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i)

Lewin's three step model

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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

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transforming form old to new situation or to a new state. Refreezing is consolidation in the new

situation to make change permanent.

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Lewin's Three-Step Change

Model

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F
i
gur

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Unfreezing

Movement

Refreezing

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-
2

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Every change situation Kurt Lewin presents as a force field as depicted in Figure 19-3. The

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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

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necessary. It can be achieved in one of three ways.

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The driving forces, which lead to change, can be strengthened. The restraining forces, which

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hinder movement from the existing equilibrium, can be decreased. A third alternative is to

combine the first two approaches.

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Figure

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19.3

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Lewin's force field

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analysis model

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Res training

Desired -- -

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f

orces

conditions

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Driving

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forces

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Restraining

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forces

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Dri

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ving

Restraining

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for ces

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forces

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Current

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conditions

Driving

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forces

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Before change After change

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ii)

Action research

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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

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research process is given in Figure 19-4

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Figur

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e 19.4

The action research process

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Diagnose need

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Introduce

Evaluate and

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for change

intervention

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stabilize change

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Establish

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Disengage

client

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Gather data,

Implement

Determine

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consultant's

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consultant

analyze data,

desired

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effectiveness of

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services

relationship

and decide

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incremental or

change and

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intervention

quantum

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refreeze new

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objectives

change

conditions

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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

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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

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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

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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.

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Evaluate and stabilize change ? Action research recommends evaluating the

effectiveness of the intervention against the standards established in the diagnostic
stage.

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The action research approach has dominated organizational change thinking eve since it was
introduced in the 1940s.

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iii)

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Organizational development (OD)

Organizational development (OD encompasses a collection of planned-change interventions

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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.

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1. Respect for people. Individuals are perceived as being responsible, conscientious, and

caring. They should be treated with dignity and respect.

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2. Trust and support. The effective and healthy organization is characterized by trust,

authenticity, openness, and a supportive climate.

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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.

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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.

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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

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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

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learn through observing and participating rather than being told.

Survey feed back ? Uses questionnaire to identify discrepancies among member

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perceptions; discussion follows and remedies are suggested.

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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

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communication channels. Process Consultation is more tasks-directed than is
sensitivity training.

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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.

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Inter group development ? These include efforts to change the attitudes, stereotypes

and perceptions that groups have of each other. This approach used problem solving

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techniques.

Appreciative enquiry - Seeks to identify the unique qualities and special strengths

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of an organization, which can then be built on to improve performance.

Methods for dealing with change

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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.

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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.

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Table 19-2 Methods for dealing with resistance to change

Approach

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Commonly used situations

Advantages

Drawbacks

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Education +

Where there is a lack of

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Once persuaded

Can be very time

Communication information or inaccurate

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people will often help

consuming if lots of

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information and analysis

with the

people are involved

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implementation of the
change

Participation +

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Where the initiators do not

People who

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Can be very time

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Involvement

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have all the information they participate will be

consuming if

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need to design the change

committed to

participators design an

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and where others have

implementing change

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inappropriate change.

considerable power to resist. and any relevant

information they have

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will be integrated into
the change plan.

Facilitation +

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Where people are resisting

No other approach

Can be time

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support

because of adjustment

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works as well with

consuming expensive,

problems

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adjustment problems.

and still fail

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Negotiaton +

Where someone or some

Sometimes it is a

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Can be too expensive

agreement

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group will clearly lose out in relatively easy way to

in many cases if it

a change and where that

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avoid major resistance alters others to

group has considerable

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negotiate for

power to resist.

compliance

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Manipulation +

Where other tactics will not

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It can be a relatively

Can lead to future

co-option

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work or too expensive

quick and inexpensive problems if people
solution to resistance

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feel manipulated.

problems.

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Explicit

Where speed is essential and It is speedy and can

Can be risky if it

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+implicit

the change initiators possess

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overcome any kind of

leaves people angry at

coercion

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considerable power.

resistance

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the initiators.

(Soruce: Kotler & Schlesinger, "Choosing Strategies for Change" Harvard Business Review ,

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March-April 1979.

Summary

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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

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globalization, the new information technology age and the workforce diversity.

The systems model of change describes the organization as comprising of six interacting

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variables which can serve as the focus of planned change ? people, culture ask, technology,

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design and strategy. Organizational diagnosis (or planned) change includes ascertaining cause

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(s) of problems before going for managing change, changing people behavior, changing

technology, changing organizational design and changing organization culture. As per Kurt

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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

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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,

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adopting Lewin's three step approach, empathy and support, communication and participation

and involvement of employees.

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Self -assessment Questions

1.

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Define change. Identify and illustrate the levels of change

2.

Briefly explain the systems model of change

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3.

Outline the forces that drive change.

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4.

What are the approaches to manage change?

5.

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What is the contribution of Kurt Lewin to managing change?

6.

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What is Action research? Explain its significance as a OD techniques.

7.

Describe how sensitivity training can be used in managing change.

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8.

What are the popular methods of managing resistance to change in organizations
from the human relations point of view.

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9.

Describe the terms
a. Negotiation

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b. Cooptation and manipulation

10.

What do you understand by implicit and implicit coercion

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Activities

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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.

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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.

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References

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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

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4. Steven L. McShane, Mary Ann Von Glinow (2005), Organizational behavior, Tata

McGraw Hill, New Delhi

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Unit V

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S
S
E

20 Power, Politics and Leadership

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LESSON OUTLINE

Introduction
Concept and sources of power

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Leadership and Use of power
Politics
Summary
Self Assessment questions
Activities

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References

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LEARNING OBJECTIVES

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After reading this lesson you should be

able to

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Explain the concept and dynamics of

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organization power

Describe organizational politics diagnose the

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factors that contribute to politics

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INTRODUCTION

An organization is a social system and it contains dynamic elements like power and politics that

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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.

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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

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towards its goals.

CONCEPT AND SOURCES OF POWER

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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.

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Power is the capacity to influence the behavior of others.

There are different sources of power. They are broadly divided into (i) interpersonal

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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

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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

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rewards he has offered are valuable to the subordinates.

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Coercive power is an individual's ability to influence others' behaviors by punishing their

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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

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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.

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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

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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

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competence in implementing, analyzing, evaluating, and controlling the tasks of subordinates,

they will acquire expert power.

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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

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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

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influence the behavior of the younger manager.

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Effective / Ineffective

Interpersonal

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Application of Power

Sources of Power

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Relationships among

power bases

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Reward

Selection of

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Coercive

influence strategies

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L

egitimat e

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Expert
Referent

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Power

Influence

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over Others

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Structural Sources of

Power

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Knowledge

Resources

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Decision making
Networks

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Figure 20-1 Power dynamics

(ii) Structural sources of power

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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

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decision making.. Any of the situational factors could be a source of power in an organization,

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which include knowledge, resources, decision- making and networks.

i)

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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

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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.

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ii)

Resources power ? Organizations need a variety of resources, including human

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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.

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Today companies are adopting retention strategies to retain
competent employees. Skilled people have power advantage over
the less skilled people.

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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.

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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.

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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

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networks can be information links, supply links and support links.

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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.

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For example, an office assistant who can use windows 98 spread sheet
can influence his manager if he is not familiar with the same.

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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

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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.

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Table 20-1The Uses and Outcomes of Power

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Source of

Leader

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Types of Outcome

Influence

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Commitment

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Compliance

Resistance

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Referent

Likely;

Possible;

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Possible;

Power

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If request is believed to be

If request is perceived to be

If request is Something that is

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important to the leader.

important to the leader.

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unimportant to the leader.

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Expert

Likely;

Possible

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Possible;

Power

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If request is persuasive and

If request is persuasive.

If leader is arrogant

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subordinates share

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and insulting or subordinates

leader's task goals

are

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apathetic about task and
goals.

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Legitimate

Possible; If request is polite

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Likely; If request or order is

Possible;

Power

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and very appropriate

seen as legitimate.

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If arrogant demands

are made or request

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does not appear

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proper in the interests of the
organisation or individual.

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Reward

Possible; When reward is

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Likely; If used in a

Possible; If used in a

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used in a subtle, very

mechanical, impersonal way

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manipulative,

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personal way

arrogant way

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Likely; If used in a hostile,

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Coercive

Very unlikely

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Possible;

nonpunitive way or

Power

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If used in a helpful

manipulative way.

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way.

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(ii) Use of structural power

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These sources don't operate independently. A study conducted in two paper mills provides an

example of how power sources are related.

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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

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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

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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.

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Table 20-2 The Uses and Outcomes of Structural Power

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Source of

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Leader

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Types of Outcome

Influence

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Commitment

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Compliance

Resistance

Knowledge

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Likely;

Possible

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Possible;

If request is persuasive and

If request is logical and

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If leader is arrogant

subordinates share

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appropriate.

and insulting or subordinates

leader' s task and goals

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are
apathetic about task and
goals.

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Resources

Likely;

Possible;

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Possible;

If request is believed to be

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If request is perceived to be

If request is Something that is

important to the leader.

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important to the leader.

unimportant to the leader.

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Decision

Possible; If request is polite

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Likely; If request or order is

Possible;

making

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and very appropriate.

seen as legitimate.

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If arrogant demands

are made or request

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does not appear
proper in the interests of the

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organization or individual.

Networks

Possible; When power is

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Likely; If used in a

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used in a subtle way.

Way beneficial to

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organizational interests.

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Possible; If used in a
manipulative,
arrogant way

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(iii) Power tactics of leaders

Power is used with influence tactics in organizations. There are some standardized ways by

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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.

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Tactics

Description

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Reason

Use of facts and data to make a logical or rational presentation of ideas

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Friendliness

Use of flattery, creation of goodwill, acting humble, and being friendly
prior to making a request

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Coalition

Getting the support of other people in the organization to back up the
request

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Bargaining

Use of negotiation though the exchange of benefits or favors

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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

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Higher authority

Gaining the support of higher levels in the organization to back up requests

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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.

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Use of Power Tactics: From most to Least Popular

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F
I

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GUR

When Managers When Managers

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Influenced Superiors* Influenced Subordinates

E

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