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Business Policy & Strategic Management BUSINESS POLICY AND STRATEGIC MANAGEMENT UNIT I INTRODUCTION Business policy deals

s with the top level decision making thus in this subject one has to study both the aspects of business and policy making both of which are various serious, extensive and are usually handled by the top level of the organization. BUSINESS Business is considered as an enterprise, providing goods and services community needs and are willing to pay the taxes, rent, etc. Besides these, it should be a part of the society, works for a certain return (profit) and a clear motive (profit, service etc) OBJECTIVES OF BUSINESS: Every business that is started / or continues to exist is based on certain objectives. They explain the reason for existence of the business Some of the major reasons or objectives for establishing or continuing a business are listed below; 1. Earnings a livelihood 2. Earning profit 3. Accumulating wealth 4. Earning social approval 5. Prestige 6. Service motive 7. Getting recognition in your own inner circles or business circles 8. To protect family wealth and interests of business lan 9. achieving power- economic and political power 10. to exploit an opportunity available in the business environment 11. to invest surplus funds 12. to try out a new technology 13. to become a market leader 14. to finish off competition 15. to be engaged in a meaningful activity or an activity of ones own liking 16. to achieve self expression, esteem or actualization 17. to become a member of certain class of society 18. philanthropic activities or objectives like providing education, developing an area or providing medical care, etc 19. to provide / uphold or prove a countrys prestige while doing business in a foreign country. Dr.N.Kannan, Professor & Head MBA Page 1

Business Policy & Strategic Management These are some of the objectives listed by WHEELER as objectives for starting / continuing a business. POLICY Usually or generally policy goes on only for a particular period of time. Thus, policy can be defined as focusing attention on the allocation of crucial and scarce resources Prof. Radgen STRATEGY Strategy has been defined by several people in several ways. However, a strategy is called thus when it is used as long as it works. But some of the other well known definitions are A unified, comprehensive and integrated planning designed approach to assure that the objectives of the organization are achieved Prof. Glueck Another common definition which is used comprehensively for both policy and strategy is The pattern of an organization response to its internal and external environment over a period of time Another definition is The determination of basic long term goals and objectives of an enterprise and the adoption of the course of action and the allocation of resources necessary for carrying out these goals. There are three major ideas identified: i) determination of long term objectives ii) adopting a suitable course of action iii) allocation of sufficient resources Prof. Chandler Yet another definition says Developing and communicating the companys unique problem, making Trade-offs (let go off the loss) and forging fit (taking up activities that fit) among the other organizational activities. This involves i) planning a course of action ii) finding a common pattern iii) relating the activities within the organization to each other specialization areas or departments iv) find the resources required for each department and allocate accordingly v) connected to each strategic position to eliminate problems when they arise Prof. Micheal Poster

NATURE AND SCOPE OF BUSINESS POLICY: The nature and scope of business policy is as follows; Dr.N.Kannan, Professor & Head MBA Page 2

Business Policy & Strategic Management 1. Proactive and not reactive: In other works this helps in taking the right decision before any problem arises, rather than searching for a cure after the problem has caused trouble. For this purpose, opportunities are to be properly scanned and then decisions are to be taken. This helps the organization to excel 2. it is the idea or view of top management about the organization and the competitors 3. broad perspective and narrow or comprehensive perspective: The company should know i.e., the top level should have an idea if the company is ready to widen its market or restrict itself to selected companies. Like recruiting people with any degree (broad) or people with a technical degree (narrow). 4. long range impact: Any event which influences the market for a long period will affect the business. Hence organizations are supposed to think long range. 5. huge resources and large segments: Every organization involves the use of huge resources (money, people, etc) and large segments or departments. Thus, scope is large and diverse. 6. Multi-disciplinary approach: All disciplines of employees are employed so that even if any problem arises, the organization can overcome by using the skills of employees in other departments 7. legal and ethical standards: The organization established should meet the legal and ethical standards set up or established by the organisation, society and government. 8. clear action and clear direction The organisation should be forcussed in whatever it does and whatever path it is following. It should not change direction (business/policies) often 9. within the principles of management: The policies formulated should remain within the principles formulated by the organisation and should not cross over. 10. relevant to the objectives: The actions of the organisation should be suitable to the established objectives of the organisation. 11. stable yet dynamic: The organisation should be stable in growth, profits earned, etc, but dynamic in meeting challenges and organizational threats. SIGNIFICANCE OF THE SUBJECT: This subject has a certain significance they are broadly classified into three, they are; 1. knowledge uses: a) Knowledge of concepts, i.e., what concept to use and when to use. b) Knowledge about the business environment c) Real life knowledge about practical (happening) aspects of business d) Knowledge about standards and methods of evaluations ( of whatever is happening in the organisation and outside and how standards are set, modified and work evaluated)

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Business Policy & Strategic Management e) Build up business literature: all relevant, important happenings and related information about what is taking place in the organisation and outside, will help future plans, policies and decisions. 2. skill uses: a) Analytical skills: for developing the organisation and its standards. b) Empirical skills: for testing any concept which is to be introduced newly into the organisation, the organisation should be capable of testing from positive and negative angles. c) Decision making skills: to make the right decision, at the right time to help increase profit and improve the organisation. d) Intuitive skills: every business owner should have an idea to guess what may happen in the future and take suitable actions or develop policies in advance e) Communication skills: so as to help inform others and gather data from others, for overall organizational development. 3. attitude uses: a) Develop wholesome approach rather than narrow approach; this will involve the entire business than taking or giving importance to any one part of the organisation. Thus, a whole some approach covering he entire organisation is always better than a narrow approach. b) Creative and innovative approach: organizations should be creative, i.e., adopt new approaches to get better profits or make new product or they can also be innovative by altering the existing products slightly suit the existing markets, increase the market share or organisation image. c) Flexibility and dynamism: the organisation should be flexible to suit and change or modify itself to the changing environmental conditions. It should have dynamism to adopt new technology or changes as per new technology or changes as per organisation need and requirement d) Intuition: the people at the top level in the organisation should be capable to foresee the future of the organisation based on very limited data available at present. HISTORY AND EVOLUTION OF THE SUBJECT 1911 saw the introduction of strategic management as a subject in HARVARD BUSINESS SCHOOL. After 1930 too it was yet to gain acceptance among other business schools. In between 1920 and 1940 efforts were being taken to make this subject organized and systematic to make it suitable to academic purpose. In the period of 1940 and 1960 there was rapid industrialization and forced organizations and businesses to define the scope and interest of the subject with respect to the society. This became even more easy and possible as in 1959; there were tow sponsored studies by Ford and Carnegic Foundations. These foundations gave reports that there is need for the subject to be included in the curriculum of business studies. 1960 onwards it was accepted as a duty of the top management to initiate and practice strategies for their survival and growth. Thus, it became a compulsory subject in all business schools across the world. Dr.N.Kannan, Professor & Head MBA Page 4

Business Policy & Strategic Management

MISSION Mission of any organisation identifies with the scope of operations of an organisation. It gives the reason for the existence of an organisation and clearly an organisation with a mission finds it easier to succeed than an organisation without one. Thus, mission of any organisation is to see the scope of an organisation or the boundary of an organization, or the limit to which the organisation can expand or reach. EXAMPLE: IOCL (INDIAN OIL COPORATION LIMITED) has its mission statement as thus: Maintaining national leadership in oil refining, marketing and pipeline transportation. VISION These are long term goal projections as to what one is to be. What is intended to do over a long period. Vision of any organisation can be defined as; the goals that are the broadest, most general and all inclusive. The most effective visions are those that appeal to the emotions of the employees and the aspirations of the organiations management. Thus, they reveal what the organisation should be like in the future. EXAMPLE: IOCL vision states that Indian Oil aims to achieve international standards of excellence in all aspects of energy and diversified businesses with focus on customer delight through quality products and services. CURRENT VISION OF WIPRO as given by Azin Premji in Economic Times dated June 13, 2003 is as follows. BUSINESS LEADERSHIP: Among the top 10 IT companies (services) globally and the No.1 IT company in India. CUSTOMER LEADERSHIP: To be No.1 choice of customers through innovative solutions and by 6 (six sigma) processes. PEOPLE LEADERSHIP: Among the top 10 most preferred employers globally, by creating an environment of empowerment, intellectual challenge and wealth sharing. BRAND LEADERSHIP: WIRPO to be among the five most admired brands in India.

CHARACTERISTICS OF MISSION AND VISION STATEMENT The following are the chief or important characteristics of mission and vision statements. They are; 1. It should be feasible. Dr.N.Kannan, Professor & Head MBA Page 5

Business Policy & Strategic Management 2. 3. 4. 5. 6. 7. It should be precise. It should be clear. It should be motivating. It should be distinctive. It should indicate the major components of strategy. It should indicate how objectives are to be accomplished.

GOALS Goals denote what an organisation hopes to accomplish in future period of time. They represent a future state or an outcome of the effort put in now (both financial and non-financial issues, qualitative) to achieve objectives. OBJECTIVES the ends that state specifically what the goals should achieve. They are strong (concrete) and specifc, in contrast (comparative) to goals which can be generalized (qualitative). EXAMPLE: IOCLs objectives are to focus on cost, quality, customer care, value addition and risk management. ROLE OF OBJECTIVES: The following are the role of objectives; 1. Objectives define the organisation relationship with its environment. 2. Objectives help an organisation to pursue its vision and mission. 3. Objectives provide the basis for strategic decision making. 4. Objectives provide the standards for performance appraisal. CHARACTERISTICS OF OBJECTIVES The objectives have certain characteristics, they are; Understandable (clarity). Concrete and specific (specificity) Related to a time frame (periodicity) Measurable and controllable (verifiability) Challenging and good (quality) Correlate with other objectives (multi publicity) Set within constraints (reality)

FORMULATION OF OBJECTIVES The objectives of any organisation are formulated based on certain factors. They are; Forces in the business environment Realities of enterprises resources and internal power relationship The value (ethics) system of top executives Dr.N.Kannan, Professor & Head MBA Page 6

Business Policy & Strategic Management Awareness of management (top level) CHANGE OF OBJECTIVES Objectives of an organisation can be changed when; There is a change in the state of the organisation. Change in the organizations aspirations i.e., goals, vision, mission, etc Change in the management team. Demand for change in the objectives by the interest groups in the organisation like management, shareholders, stakeholders, financial institutions, etc Change in the internal or external business environment. Crisis/ emergencies situation of the organisation. TYPES OF OBJECTIVES The different types of objectives are Economic objectives: financial aspects, fiscal and other objectives Social objectives: objectives, which are societally suitable and acceptable Survival objectives: objectives established or taken up by companies to survive, or exist in the business Growth objectives: established by firms or organizations to grow and develop. Long term objectives: objectives established for a period of more than an year Short term objectives: objectives that are established for a period of less than a year. Higher level objectives: the objectives that are established for the strategic level or top level of the organisation Lower level objectives: the objectives that are established for lower level of the organisation or the middle level General objectives: objectives which cover the overall aspect of the business Specific objectives: objectives that are specific with clear instructions for any business are termed thus Comprehensive objectives: a concise, brief list of objectives covering all areas of the organisation Functional objectives: a set of objectives specifically developed for each functional area in the organisation like HR, R&D, finance, Quality Control, Marketing, and Production and so on. CLASSIFICATION OF POLICIES Similar to objectives policies are also classified. They are as follows; According to level of formation Functional area policies According to expression According to nature of origin According to scope of organisation According to the nature of managerial functions Situational or contingency policies I. ACCORDING TO LEVEL OF FORMULATION a) Top Management policies: Page 7

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Business Policy & Strategic Management These are usually developed by the MD, VC, and GM. They are usually about investments, diversification, acquisitions, available capital, HR requirement, R & D requirements, problems with promotion, transfer, and achieving organizational goals, etc b) Middle level Management policies: These are developed after talks between middle and upper level executives. They usually are about employee selection for a specific job, installation (fixing) new equipments, resources and their selection, deciding wages and salaries, and developing incentive plans, getting finance to solve problems, etc c) Lower Level Management policies: These are developed by the people who are usually supervisors. They are directly related in achieved. They are in-charge of providing tools, raw materials, training, quality, discipline, improving the morale of employees, motivating them and reducing absenteeism, etc d) Operational Level Management policies: This is usually written down rules and policies in manuals and work books which the operational level employees are supposed to follow. II. ACCORDING TO FUNCTIONAL AREA a) Production Policies: These involve policies regarding product line, type of product, selection of technology, process, equipment, tools, location of plant, layout, budget, maintenance, inventory control, quality, cost control, labour relations, etc. b) Marketing and sales policies: These are related to market analysis, trend, demand forecasting, total concept of product mix and market mix. Spotting present and potential market, the size and nature of customers, competitors, distribution of products, promotion and pricing, selection, training and developing sales force, division of market area, establishing sales volume and sales budgets, etc. c) Financial Policies: These are required for prosperity and long survival. They include capital requirement such as working, short, medium, and long term, methods of fund raising, utilization of funds, profit policy, accounting policy, allocation policy, finished goods inventory policy, provision for bad debts, etc

d) Personnel Policies: These are concerned with recruitments, selection, utilization of human resources. Sources of HR, training, promotion, transfer, wages, incentives, benefits, services, etc. III. ACCORDING TO EXPRESSION: a) Expressed Policies: These policies are stated in clear words, either orally or in writing. i) Oral policies:

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Business Policy & Strategic Management These are word of mouth policies adopted usually, when organizations are small and face to face communication is desired. Direct communication with better understanding is desired, for flexibility. However, it suffers from drawbacks like improper interpretation, easily forgotten when issued less frequently etc. ii) Written Policies: These are put in black and white and stated clearly, for the personnel to understand. Therefore, it is clear, complete, precise, contain legal terms use simple language and be warm to all those who read. It should be convenient and handy for reference and application wherever and whenever necessary. However, they too have disadvantages, as they are at times problem creating if not properly framed. b) Implied Policies: These can be understood from the behaviour of executives, they are not stated or written, they may be included in the philosophy of the business, social values and even traditions. Best suitable are dress codes, prohibition of smoking or drinking in working areas. Employing people of certain community, race, gender, etc can only be an implied policy, but written policies like above can cause legal problems. IV. ACCORDING TO NATURE OF ORIGIN: a) Originated Policies: These policies are derived from the company objectives, which are determined by the top management. Subordinate are supposed to readily accept such policies. b) Appealed Policies: These are also known as suggested policies, since these are based on the suggestions of employees, subordinate or consultant. They are more effective as they involve employees and the top management. c) Imposed Policies: These are not accepted willingly, but are rather forced by external forces like government, trade unions, legal acts, society, etc. they have to be followed whether they like it or not.

d) Derivate Policies: These are derived from the basic or major policies and are operational. They are guidelines in day-to-day operations and are usually developed by the respective departments or sections. V. ACCORDING TO THE SCOPE OF ORGANISATION: a) Basic Policies: They form the basis of the organization and are developed by top management. They give idea about the company, its activities, its environment, and their influence over other policies, which is very important to the organization. b) General Policies: Page 9

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Business Policy & Strategic Management They are usually developed by the middle level management. Such policies are very specific and apply to large segments of the organizations. c) Specific or departmental Policies: It is developed by a specific department, for managing its routine activities i.e., day-to-day activities of the department. VI. ACCORDING TO THE NATURE OF MANAGERIAL FUNCTIONS: a) Planning Policies: These are connected with the path of action, which leads to company activities, and achieving organizational goals. They include; Establishing corporate objectives. Collecting and classifying information Developing alternate course of action Comparison of objectives against feasibility, consequence etc Optimum (minimum use of resources) course of action Establishing standards, rules, policies, procedures, programs, budgets, etc b) Organizing Policies: These policies include Establishing and maintaining a clear and precise organizational structure Determining the role of each level of management Deciding authority, responsibility, degree of centralization, decentralization Line and staff relationship and their communication c) Directional Policies: They are also called actuating policies, they involve Providing effective leadership Assisting people in achieving their objectives and organizational goals. Integrating people to suitable tasks Effective communication with all members of the organization. Proper organizational climate for employee development and motivation d) Controlling Policies: These are established to measure results. They involve measuring actual results against standards or pre-established results. They involve Continuous observation of performance Measurement of results Finding deviation and taking corrective action Best mode of control Comparison of actual with standards Finding causes for deviations, pin-pointing deviations which are significant Implementing corrective action when there is deviation SITUATIONAL AND CONTINGENCY POLICIES: They involve the following types of policies; a) Normal Policies: Page 10


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Business Policy & Strategic Management These policies provide guidelines to the employees in routine day-to-day conduct of business and its smooth functioning. b) Contingency Policies: These policies are made to meet unexpected moments or situations like Sudden floods, earth quakes, fire, famine, market slump Change in business cycles, war, labour strike, political problems, and social sensitivity. Situational beyond the control of business unit like economic policy, fiscal policy changes, monetary policy, trade or industrial policy being unfavourable. Competitors strategies in production, R & D, innovations, quality improvement, new techniques of production. Most companies which are farsighted prepare contingency policies well in advance, to help them to meet the situations whenever they arise.

EFFECTIVE BUSINESS POLICY: The following are the characteristics of an effective business policy 1. It should be related to the original objectives. 2. Simple and easy to understand 3. let it be in black and white 4. policies should be stable but not rigid 5. policies should be comprehensive 6. they should be complementary to one another 7. they should be supplementary to overall corporate practices 8. they should be consistent with public policy 9. fair, first and reasonable 10. ethical 11. planned development should be possible 12. maintenance of individuality PROCEDURE OF POLICY MAKING Policy can be defined as follows; Business policy is an implied overall guide, setting up boundaries, that supply the general limits and direction in which management action will take place Prof. George Terry Besides a business policy is nothing more than a well developed statement of individuals and goals Prof. Peter and Wotrube STEPS IN POLICY MAKING


Business Policy & Strategic Management

TYPES OF POLICIES The well known scientist Sir Alfred came up with the following types of policies in modern organization. They are as follows; financial policies accounting policies operational policies foremans policies production policies marketing policies sales policies promotion policies product policies personnel policies research policies top management policies upper- middle management policies costing policies CHIEF FEATURES OF POLICY The following are the important features of any policy policies are general statements for the attainment of objectives policies have hierarchy policies limit the area within which the decision is to be taken Dr.N.Kannan, Professor & Head MBA Page 12

Business Policy & Strategic Management policies in general are meant for mutual application by subordinates they pre decide issues and avoid repetition it should be applied in all functional areas and at all levels it should provide the clearest guidelines to avoid confusion

PURPOSE OF POLICY The purposes of policy essentials or effect are; clarify objectives have a planning guide help subordinate in decision making facilitate overall coordination and control set up yard sticks for measuring the accomplishment of policies both qualitatively and quantitatively build up employee loyalty and enthusiasm ensure consistency and uniformity in decisions and so on MAKING OF EFFECTIVE BUSINESS POLICY Any business policy is considered effective if it has the following features it should be related to the original objectives simple and easy to understand let every policy be written policies should be stable but not rigid policies should be comprehensive policies should be complementary to one another supplementary to overall corporate practices consistent with public policy fair, just and reasonable planned development maintenance of individuality STRATEGY AND ITS PURPOSE Strategy has its purpose. Strategy is defined as; Strategy is the grand design or an overall plan which organizations choose in order to mover or react towards a set of objectives by using its resources. The strategy includes; a) awareness of mission, purpose and objectives b) unpredictability and uncertainty of events c) takes into account the probable behaviour of other in general and rivals in particular and so on. DIFFERENCE BETWEEN POLICY AND STRATEGY The following are the differences between policy and strategy; some of them are given below; CONCEPT Definition POLICY Statements or paths to reach a goal STRATEGY Pattern of action to achieve goals Page 13

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Business Policy & Strategic Management Orientation Power Long-run identity Concern Line of action Thought oriented Delegated to be implemented by subordinates Merely guidelines Generally only about fulfilling objectives Overall guide that governs and controls action Action oriented Everyone is empowered by a strategy Means to an end Uncertainty is in competitive situations, risks etc Used to mobilize available resources in the best interest of the company

PROGRAM AND ITS EFFECTIVENESS Program has the following definitions It is a single use comprehensive plan laying down the principle steps for accomplishing (completing) a specific job or objective in a specific time. Thus, it outlines by whom, when and where New product development programs, management programs, training, sales programs, etc EFFECTIVE PROGRAMS An effective program has the following steps: it is divided into several steps for achieving objectives it establishes relationship between several steps to ensure a smooth flow of the sequence of operations. It decides responsibility and accountability It determines the resources needed It fixes the time limit by assigning a time for each program, etc DIFFERENCE BETWEEN POLICIES AND PROGRAMS The differences between policies and programs are given below; CONCEPT Definition Time period Type Basics POLICY Broad and comprehensive guidelines about the future direction of the company Long range plan of action Broad in direction and has to be followed It is the foundation for programs PROGRAM Detailed step by step course of action Short and stable Simple and complex activities taken up to carry out the given policy It exists due to policies

PROCEDURES ITS IMPORTANCE Procedures can be definite in several ways; A series of functions or steps taken up to accomplish a specific task Dr.N.Kannan, Professor & Head MBA Page 14

Business Policy & Strategic Management It can also be defined as It is a precise means of making a step by step guide of action that operates within a policy frame work. IMPORTANCE OF PROCEDURES The importances of procedures are given bellows; It reduces directing work It indicates the steps to be taken and the required time and the order for performing certain activities It facilities training It reduces the problem of trail and error techniques Work operation gets simplified through a well planned steps Better results at lower costs The true limit in performance helps in effective control over operations STEPS IN EFFECTIVE PROCEDURE The following are the steps in effective procedures; List out the detailed and essential steps and then taken up performance Establish accountability and responsibility then standardize the procedure All the phases are to be linked with control so that performance can be reviewed They should be stable and not rigid Develop fruitful decisions in policies by taking into consideration, time, cost and environment Any changes to be made should be taken up well in advance and should be written down to help easy understanding These procedures should be understood, accepted and known to everyone involved with them. DIFFERENCE BETWEEN POLICIES AND PROCEDURES The following are the differences between policies and procedures; CONCEPT Definition Basis Responsibility Stability Emphasis Scope flexibility POLICY Guide for thought and action Foundation for procedures Top management Stable General approach and Broad and comprehensive PROCEDURE Guide for action and involves the method of doing a task They follow policies Middle and lower levels Changes in the short-run Step-by-step approach Rigid with no freedom Page 15

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Business Policy & Strategic Management Application Goal orientation Work methodology Long range plans Directly related Short range plans Indirectly related

Does not provide a method for A standard method for work doing work exists

STANDARDS AND ITS TYPES Standard is defined as A norm or oriented against which performance is compared and evaluated. They are an integral part of the control function in management. ESTABLISHING STANDARDS Standards are established based on Past experience Guess and estimates Scientific methods TYPES OF STANDARDS The different types of standards are established a) Based on Performance: i) service provide is good or bad ii) conduct behaviour of the employees b) Quantitative standards: i) Time determines the costs ii) Cost determines overall cost and price c) Qualitative standards: i) Charts quality charts to maintain quality standards ii) Statistical quality control to reduce quality problems TACTICS AND ITS APPLICATION Definitions of the tactics is as given below The detailed program prepared by the management for the effective implementation of strategies devised. Thus, while strategies are master documents and are broad in nature, tactics are minute. APPLICATION OF TACTICS The application of tactics is listed below; To meet competition effectively Wheel was introduced when Nirma came up. Continuous efforts to curb aggressive firms Surf to prevent Ariel Excel. To retain competitive position Colgate has introduced several different types of variants to meet everyone need To consolidate gains BPL withdrew certain products to consolidate on the existing range of products For retreating into certain specific areas Godrej soaps. Dr.N.Kannan, Professor & Head MBA Page 16

Business Policy & Strategic Management

DIFFERENCE BETWEEN STRATEGY AND TACTICS The following are the differences between strategy and tactics as suggested by Steiner, niner and gray; CONCEPT Level of conduct Regularity Value Alternatives Uncertainty Nature of problems Informative needs Time horizon Reference Details Evaluation Point-of-view Importance Top level Situational, so may or may not be continuous Weighed with subjective value Larger in number Greater as there are greater risks Unstructured Large, futuristic and as accurate as possible Longer in most of the times Original source Broad with few details Difficult and takes many years Corporate point of view Higher STRATEGY TACTICS Lower level Periodic with fixed time schedule Less subjective in nature Fewer in number Less risk due to well known and limited alternative Structural and often repetitive Internal data, greater use of historical information Short and uniform in all areas Within the persuit of strategy Many details Easy results are clear and quick with specifications Functional Lower

DIFFERENCE BETWEEN POLICY AND TACTICS The following are the differences between policy and tactics; CONCEPT Definitions Concern Range POLICY Broad guide lines Thinking, intellectual oriented Long range planning TACTICS Micro level actions and activities Operations, action oriented Short range for immediate Page 17

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Business Policy & Strategic Management problems Narrow and specific For best utilization of available resources within the organization Junior executives are given specific and clear responsibilities Goal and target oriented Derived Current mobilization and utilization of resources To solve existing problems Dynamic as they are formulated t suit the requirements of each separate problem

Scope Guidelines

Wide and broad

For entire business and external environment Implementation Delegation of authority based on and delegation the size of the firm Orientation Mission oriented Position Estimation Role Stability Primary Future availability of resources Guidance for the future course of action Stable and not rigid

RULES AND ITS CHARACTERISTICS Rules are usually defined as A principles to which an action or a procedure conforms (adopts) or is intended to conform. It is also defined as, A standard or a norm to be followed in the conduct of a business in a particular situation. It guides action and gives no discretion on its applicability. DIFFERENCE BETWEEN POLICIES AND RULES The following are the difference between policies and rules; CONCEPT Concern Nature Deviation POLICY Thought and action paths RULES Action only

Broad instructions, directions Specific with dos and donts and guidelines Allowed as it is broad in nature Not permitted and often leads to penalty

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Business Policy & Strategic Management STRATEGY MANAGEMENT PROCESS The following flow chart shows the strategic management process; DETERMINATION OF MISSION AND VISION







BUSINESS POLICIES IN VARIOUS ECONOMIC SYSTEMS Even though formulation of business policy is the same in all economies, the factors which influence the formation of a policy vary among different systems of politics or economics. The differences are as follows; CONCEPT Market Consumer awareness Rules and regulations CAPITALISTIC Largely privatized Greater Few SOCIALISTIC Mostly public or government owned Less More MIXED Both survive Greater More Page 19

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Business Policy & Strategic Management Liberalization thrust Investment Market structure Competition Product availability Quality Price Employment Inflation More Greater with foreign direct investment (FDI) Unprotected Less or more Not open to FDI Protected totally Moderate to more Greater FDI is allowed Not protected (unless there is no rule for privatization) Intense Large Marginal to best Variable with regulation Semi High to moderate

Intense Large Best Variable High Moderate

Less to nil Limited Marginal Regulated by the government Total Low

CORE COMPETENCIES These are identified as the special qualities possessed by an organization that make them to withstand the pressure of competition in the market place. They are also called as unique resources, core capabilities, invisible assets, embedded knowledge and so on. A few of the competencies listed are; Superior product quality in particular attribute Example: fuel efficient bikes TVS Creation of a market niche by supplying highly specialized products to a particular segment Example: tanishq range of watches Benz Differential advantage based on superior R & D skills of an organization not possessed by its competitors. Example: Himalaya Drugs, Pfizer An organizations access to a low cost financial source like equity share holders not available to its competitors. Example: reliance, tata chemincals, birla, kirloskars, BHEL, etc These are some of the crucial factors which were considered mainly responsible for setting up this approach. Example: C.K.Prahlad and Gary Hamel for the purpose of testing the competency of any core aspect, suggested there simple tests. Both happen to be gurus of core competence. It should be able to provide potential accesss to a wide variety of markets. It should make a significant contribution to the perceived benefits of the customer in the end product. It should be difficult for the competitor to imitate. Dr.N.Kannan, Professor & Head MBA Page 20

Business Policy & Strategic Management Example: Sony for miniaturization Honda Engines Canon photocopiers and printers Philips Optical media L & T project planning, execution and management KEY RESULT AREAS Peter F. Drucker gave a list of a Key Result Areas (KPA) in organizations, but under the specifications that they may vary from business to business and hence may not be suitable to all business environments. They are as follows: Market standing TVS Innovation TVS, Nutrine, Nokia, etc Productivity Hero cycles Physical and financial resources Reliance Industries Profitability Lakme Managerial performance and Development WIPRO Worker performance and attitude BHEL Public Responsibility TATA EXAMPLES FOR MISSION, VISION AND OBJECTIVES Classic examples of Mission and Vision statements are given below. Along side the corporate objectives may also be given. The specification is provided alongside in parentheses (brackets) EICHER CONSULTANCY: (MISSION) To make India an economic power in the lifetime, about 10 to 15 years, of its founding senior managers. HCL: (MISSION) To be a world class competitor. MARICO INDUSTRIES: (MISSION) The three Ps of Marico: People, Products and Profits. RANBAXY LABORATORIES: (MISSION) To become a research based international pharmaceuticals company. UNIT TRUST OF INDIA: (MISSION) To keep the common man in sharper focus; to encourage savings and investment habits among them. BAJAJ AUTO: (MISSION) To provide value for money, for years. INDIA TODAY: (MISSION) We aim at bring the complete news magazine. Dr.N.Kannan, Professor & Head MBA Page 21

Business Policy & Strategic Management

ASIAN PAINTS: (MISSION) Leadership through excellence in paints. CANARA BANK: (MISSION) To be the most competitive and progressive institution in the banking industry. CADBURY SCHWEPPS: (VISION) Superior shareholder value and a Cadbury in every pocket. TATA STEEL: (VISION) Tate Steel enters the new millennium with the confidence of a learning, knowledge based and happy organization. We will establish ourselves as a supplier of choice by delighting our customers with our service and products. In the coming decade, we will become the most cost competitive steel plant and so serve the community and the nation. INDIAN OIL CORPORATION: (VISION) Indian Oil aims to achieve international standards of excellence in all aspects of energy and diversified business with focus on customers delight through quality products and services. INDIAN OIL CORPORATION: (MISSION) Maintaining national leadership in oil refining, marketing and pipe line transportation. INDIAN OIL CORPORATION: (OBJECTIVES AND STRATEGIES) Objectives: Focusing on quality, customers care, value addition, and risk management Corporate Strategies: Expansion and diversification and integration through strategic alliances and joint ventures. Business Strategies: Harnessing new business opportunities in petrochemicals, power and lube marketing. Functional Strategies: Focusing on R & D, training and consultancy, exploration and production, LNG and fuel management in India and abroad. MICROSOFT CORPORATION: (VISION) 1999 To empower people through great software anytime, anywhere and on any device, including the PC and an incredibly rich variety of digital devices accessing the power of the internet. WARNER LAMBERT (PHARMA CO. IN USA): (VISION) To be the best and achieve it by nurturing imagination and prize creativity. We move fast to build competitive advantage. We use global reach to harvest ideas from all sources. We are willing to take well thought out risks and reward visionary action, even if results fall short of expectations. We recognize that excellence begins with focusing our resources on our most important opportunities and challenges. BHARATH HEAVY ELECTRICALS LTD: (MISSION)

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Business Policy & Strategic Management To achieve and maintain a leading position as suppliers of quality equipment, systems and services to serve the national and international markets in the field of energy. The ears of interest would be the conversion, transmission, utilization and conservation of energy for applications in the power, industrial and transportation fields. To strive for technological excellence and market leadership in these areas. INDIAN ALUMINIUM COMPANY LTD (INDAL): (MISSION) INDAL will be the most innovative, diversified aluminum company in India. To achieve this, INDAL will be a customer-oriented enterprise committed to excellence and cost effectiveness in this chosen aluminum business. Significant resources will be devoted to diversifying into high-tech and market-oriented business with superior growth and profit potential consistent with national goals, INDAL will progressively increase exports. In the nineties INDAL will achieved 14% and aim to achieve better returns on equity in the millennium. GENERAL ELECTRIC CORPORATION: (MISSION) We are in the energy business. CARRIER AIRCON: (MISSION) We are in the business of supplying systems components and services to a worldwide non-residential air-conditioning market. Air conditioning is defined as heating, cooling, cleaning, humidity control and air movement. KODAK INDIA: (Business definitions) We are in the business of providing quality photographic system appealing to the customer who desire instant photography. BHARATH HEAVY ELECTRICALS LTD: (Business definitions) Suppliers of equipment, systems and services in the field of energy, for customers interested in conversion, transmission, utilization and conservation of energy in the power sector as well as in the industrial and transportation fields, with technological excellence and market leadership. ASSOCIATED CEMENT COMPANIES (ACC): (CORPORATE OBJECTIVES) To strive continually to maintain the leadership of the cement industry by modernization, expansion and the establishment of a wide and efficient marketing network. To achieve a fair and reasonable return on the capital employed by promoting productivity throughout the company. To ensure a steady growth of business by strengthening the companys position in the cement sector and also by diversifying into other areas consistent with the overall corporate objectives. To maintain the high quality of the companys products and services, and ensure supply of these products and services at fair prices. To promote and maintain fair and harmonious industrial relations, and an environment for the effective involvement, welfare and development of staff at all levels. To promote research and development efforts in the areas of product development, energy and fuel conservation, to innovate and optimize productivity.

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Business Policy & Strategic Management To discharge its obligations to society, specifically in the areas of integrated rural development schemes and safe guarding of the environmental and natural ecological balance. BHEL VISION 2001 A world class, innovative, competitive and profitable engineering enterprise providing total business solutions mission. To be the leading engineering enterprise providing quality products, systems and services in the fields of energy, transportation, industry infrastructure and other potential areas. VOLTAS: (MISSION) Profit, growth and excellence INTEL: (Policy Objective) Cannibalize your product line with better products before competitor does it to you. GODREJ SOAPS: (VISION) Operate in existing and new businesses which profitability capitalizes on the Godrej Brand and our corporate image of reliability and integrity. Our objective is to delight our customers both in India and abroad. We shall achieve these objectives through continuous improvement in quality, cost and customer services. RALLIS INDIA: (MISSION) To provide the farmer with a package of inputs and services for optimum utilization of balanced primary plant nutrients, micro nutrients, plant protection chemicals, water, seeds, post harvest services, and to develop a genuine partnership with the farmer.

JINDAL GROUP: (MISSION) To become globally competitive player with a burning desire to become the number 1 in the steel industry. HEWLETT PACKARD INDIA: (MISSION) To be the leading manufacturer and supplier of measurement and computing solutions whilst achieving the higher levels of customer satisfaction, quality, and business ethics and contributing to Indias technological, economic and social needs. NOCIL (PESTICIDES & CHEMICALS): (MISSION) Intend to be a world class innovative, customer oriented chemical company with sound business values and ethics, having enduring commitment to safety and environment standards. ARVIND MILLS: (VISION) To achieve global dominance in select businesses built around its core competencies through continuous product and technical innovations and customer-orientation with a focus on cost effectiveness. JOHNSON AND JOHNSON: (MISSION) Dr.N.Kannan, Professor & Head MBA Page 24

Business Policy & Strategic Management We believe our first responsibility is to the doctors, nurses and patients, to mothers and all others who use our products and services. We are also responsible to the communities in which we live and work and to the world community as well. GENERAL MOTORS: (MISSION) The fundamental purpose of general motors is to provide products and services of such quality that our customers will receive superior value, our employees and business partners will share in our success, and our stock holders will receive a sustained superior return on their investment. METRO GOLDWYN MAYOR (MGM): (MISSION) We provide entertainment, not just movies. AVON: (MISSION) We are in the beauty business AT & T (CURRENT): (MISSION) We are into communication, not just telephones HALLMARK: (MISSION) Bring quality to social expression, when you care enough to send the very best. APPLE INC: (MISSION) We are design, develop, produce, market and service micro processor based personal computers in the United States and foreign countries. MICROSOFT CORPORATION: (VISION) A computer on every desk and in every home using great software as an empowering tool. INTEL INC: (VISION) Getting to a billion connected computers worldwide, millions of server and trillions of dollars of economic. INTEL INC: (MISSION) Core mission is being the building block supplier to the internet economy and spurring efforts to make the internet more useful. Being connected is now at the centre of peoples computing experience. We are helping to expand the capabilities of the PC platform and the internet. OTIS ELEVATORS: (MISSION) To provide any customer a means of moving people and things up, down and sideways over short distance with high reliability than any similar enterprise in the world. AMERICAN RED CROSS: (MISSION)

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Business Policy & Strategic Management To improve the quality of human life; to enhance self reliance and concern for others; and to help avoid, prepare for and cope with emergencies. RITZ CARLTON HOTELS: (MISSION) The Ritz Carlton Hotels is a place where the genuine care and comfort of our guests is our highest mission. We pledge to provide the finest personal service and facilities for our guests who will always enjoy a warm relaxed yet redefined ambience. The Ritz Carlton experience enlivens the sense, instills well-being, and fulfills even the unexpressed wishes and needs of our guests. DOMINO PIZZA: (STRATEGIC OBJECTIVES) To safely deliver a hot, quality pizza in 30 minutes or less at a fair price and a reasonable profits. FORD MOTOR COMPANY: (Strategic objectives) To satisfy our customers by providing quality cars and trucks, developing new products, reducing the time it takes to bring new vehicles to markets improving the efficiency of all our plants and processes and building on our team work with employees, unions, dealers and suppliers. AT & T: (early mission) To give a telephone to every American (Next revision) Connecting people anytime, anywhere.

UNILEVER: (MISSION) To make cleanliness common place, to lessen work for women, to foster health, and to contribute to personal attractiveness that life may be more enjoyable for the people who use our products. MERCK: (MISSION) To preserve and improve human life MCKINSEY & CO: (MISSION) To help business corporations and governments to be more successful. CADBURY INDIA: (MISSION) To attain leadership position in the confectionery market and achieve a strong national presence in the food drinks sector. TATA CONSULTANCY SERVICES: (MISSION) To be Indias most successful and most respected IT company. RELIANCE INDUSTRIES: (MISSION) Dr.N.Kannan, Professor & Head MBA Page 26

Business Policy & Strategic Management To become a major player in the global chemicals business and simultaneously grow in other growth industries like infrastructure. ROLE OF CEO IN STRATEGY FORMULATION The several roles played by a CEO in an organization are short listed below. The following are a few of the several roles. The CEO; Is the creator of the organisations policies and strategy Is the administrator of the organization Is the figure head Is the spokes person of the organization, to both the internal and the external environment Is the moulder of the organisations culture and philosophy An organization is said to be an extension/reflection of the CEO Sets the pace of the organization Sets the standard operating practices Is the disseminator of all information including policies Is the coordinator, negotiator and conflict handler Is the motivator It the resource allocator Is the innovator and trouble shooter Is a visionary and path finder Is the leader

UNIT II BUSINESS AND SOCIETY BUSINESS AS A SUBSYSTEM Business came into existence to fulfill the requirements of the society and of the many subsystems the society is made of business is one of the many subsystems the society is made of in other words. The other subsystems are; Economic subsystems Legal subsystem Demographic subsystem Government subsystem Technology subsystem Market forces Culture and traditions. Prof. Steiner This is the definition that a management Guru has given;

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Business Policy & Strategic Management Thus, a small change in one system leads to changes of varying proportions in the other systems. Business in given greater importance among these subsystems because; It is always in the public eye and hence is more visible to everyone It is financially viable because it can create or damage the wealth of the society It can be a contribution to the society in both positive and negative ways There is every need for the company or the business firm to stick to social value All these subsystems though interlinked pull away from each other in different directions due to different interests; there skill is a certain amount of equilibrium maintained. Thus, any small change in one system triggers a major change overall. CORPORATE SOCIAL RESPONSIBILITY The most talked about aspect of todays organization is the social side of it. Social responsibility has been defined differently by several management gurus, two such definitions are given below Social responsibility is to understand public consensus to recognize it and to cooperate and achieve this is some way to commensurate with its power. Prof.Steiner Another definition is The personal obligation of the people as they act in their own interests to assure that the rights and legitimate interests of others are not suppressed. Prof.Koontz & ODonnell

NECESSITY OF SOCIAL RESPONSIBILITY The need or necessity of social responsibility is because; Business and society mutually influence each other The basic resources for any business functions is the same as that of the society The end product of the company also goes to the society It is the highest or the largest power both financially and politically and hence there may be a misuse. Business, cultural and social factors are useful for maintaining and improving the health of the society. AREAS OF SOCIAL RESPONSIBILITY: The following are the clearly demarketed areas in which an organization can practice social responsibility. They are; Towards the owners and shareholders by fair dividends, efficient business, and by avoiding malpractices Towards employees job satisfaction, providing good quality of worklife, benefits, succession planning Towards customers - fair prices, safety and quality of the product need to be maintained

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Business Policy & Strategic Management Towards the society and government payment of taxes, employment without discrimination, observation of law and order, pollution and ecobalancing Towards competitors or inter business fair competition, effective collaboration, sharing of scarce resources. IMPLEMENTING SOCIAL RESPONSIBILITY: Now, it is almost mandatory for all organizations to practice social responsibility. The implementation is given below: Include social responsibility as a part of your mission (or) vision statement. Social responsibility projects should be attached to all senior managers as additional responsibilities Do some survey on what the community needs Give financial assistance in these areas. Have separate departments to identify separate aspects of social responsibility, such as sports, community development, family welfare, education, etc Try and join or assist government sponsored programs SOCIAL AUDIT The founding father of social audit stated or defined social audit as; This is an approach for monitoring, appraising and measuring the social performance of a business. Prof. Kreps Kreps along with Goven identified 8 areas where social audit is considered important; Price: It should not affect the customer or the competitors, verification if the price affects the society Advertising: Audit on the advertising if it affects the competition Wages: No discrimination and equitable wages R & D: The effluents (wastage) should not pollute or affect people outside i.e., the society Public Relations: With the customers, business compatiates, etc Human relations: With people of the society Community relations: With the community which is directly in the viscinity of the organization. Employment stabilization: By providing fixed and continuous employment opportunities.

Thus, social audit can be broadly defined as

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Business Policy & Strategic Management The purpose of helping to breakdown the broad term of social responsibility into identifiable component and to develop scales that can measure these components. Some of the other factors identified include: Transparency in business Providing information Environmental factors Charitable activities, etc Prof. Sethi

OBJECTIVES OF SOCIAL AUDIT The following are the objectives of social audit Identifying areas of social responsibility Develop scales for measuring performance Actual measurement process To measure the impact of social responsibility activities on the business and on the society NEED FOR SOCIAL AUDIT The need usually arises in four categories Community development and involvement Social performance directed to the well being of employees Physical resources and environmental contribution Production and service contribution In India, the Sacher committee was established in 1978 to look into the aspects of social audit and its uses. SPECIAL FEATURES OF SOCIAL AUDIT Some of the important features or aspects of social audit are; It is a delicate and difficult job The audit team must comprise of experts from all functional areas to facilitate better auditing It should include financial and non-financial assets, qualitative and quantitative aspects The audit team besides having the right orientation and expertise should also have correct ideas. Social and economic performance should be given equal importance It should be positive and encouraging and also give a definite future direction, but should not be critical in its assessment. APPROACHES TO SOCIAL AUDIT The following are some of the approaches to social audit Inventory Approach: Listing all the social activities carried out to know the extent of involvement. It is an exhaustive list of all the social activities taken up the company in which it also is actively involved Cost or balance sheet approach:

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Business Policy & Strategic Management This is also called financial outlay or budget approach. It aims at finding the amount of money spent on the project. The allotted amount that is spent towards these projects over a period of time by the company. Program management approach: It is an inventory of the activities that a company intends to have done or not. Cost benefit method: Benefits and costs are proportioned and the outcome is assessed both tangibly and intangibly. BENEFITS OF SOCIAL AUDITING: The benefits of social auditing are very simple and clear; Awareness on social responsiveness increases Generate data to identify the social responsibility targets Comparison of data of several social responsibility projects is possible It guarantees information which can be used to improve public relations The overall improvement in the conduct of business and business practices which help the business in future. BUSINESS ETHICS (OR) HONESTY IN BUSINESS Business and ethics they say dont go hand in hand. However, the movement of consumerism and the growing awareness among both the public, and the customer have made business houses understand the need to be honest about their products and about the practices too. Thereby, the concept of ethics in business came up; In general ethics in business is defined as; A business or a businessmans integrity so far as his conduct or behaviour in all fields of business as well as towards the society. This when formally defined by a few economists or strategists is put forth as; A law which is generally concerned only with the minimum regulation necessary for public order while ethics examines both the individual and the social good in all dimensions. Prof.Garrett President Woodrow Wilson of the US suggested four golden principles for the practices of business ethics. They are principles of; Transparency: Everything should be known to all within the business and outside. Equivalent Price: All the produce should have similar pricing. Conscience: Every business person should listen to his/her inner voice and act accordingly. Spirit of free services: One should be willing to serve the humanity for the spirit or interest of service. IMPROVEMENT OF ETHICS IN BUSINESS INSTITUTIONS Dr.N.Kannan, Professor & Head MBA Page 31

Business Policy & Strategic Management Ethics in any business institution can be improved with the following few guidelines; Reward and punish openly: Those who have practiced ethics or were unethical respectively Setting standards or norms in organizations on ethics: By clear demarcation on what is ethical and what is unethical Have role models in the top management: To observe and imbibe (the junior level) Differentiate between corruption and unethical practices Remember that corruption is just more than money Success at any cost is a big mistake. Aim reasonably in everything, be it targets, work loads, profits or growth.

UNIT III BUSINESS AND ENVIRONMENT BUSINESS ENVIRONMENT Business is dynamic in nature, it is affected and it affects the society. Thus, the business environment is vital to study before, during and after establishing a business. CLASSIFICATION OF BUSINESS ENVIRONMENT Business Environment is broadly classified as; INTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT Internal Environment can be controlled, while the External Environment cannot be controlled. Similarly, internal environment does not influence external environment. But external environment thoroughly influences the external environment. This is schematically represented below; These five forces are; 1. threat for new entrants 2. threat for substitutes 3. bargaining power of buyer 4. bargaining power of supplier 5. industry competitor rivalry These five forces are further subdivided as follows;

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Business Policy & Strategic Management THREAT FOR/FROM NEW ENTRANTS The list of factors under this are economics of scale Brand Identity Capital Requirement Proprietary Product differences Switching costs Access to distribution Proprietary learning curve Access to necessary inputs Low cost product design Government policy Expected competition THREAT OF SUBSTITUTES This threat is determined by Relative performance of substitutes Switching (changing costs) Buyers chances to substitute

BARGAINING POWER OF BUYERS The bargaining power of buyer constitute of Buyer concentration Buyer volume Switching costs Buyer information Buyer profits Substitute products Pull through Price sensitivity Price/ total purchase Product difference Brand loyalty Ability to integrate backward Impact of quality / performance Decision makers incentive BARGAINING POWER OF SUPPLIERS The sources of bargaining power of suppliers are Switching costs Differentiation of inputs Supplier concentration Prencence of substitute inputs Dr.N.Kannan, Professor & Head MBA Page 33

Business Policy & Strategic Management Importance of volume to suppliers Impact of inputs on cost or differentiation Threat of forward / backward integration Cost relative to total purchase in industry

INDUSTRY COMPETITORS RIVALRY The factors affecting rivalry are; Industry growth Concentration and balance Fixed costs / value added Intermitted over capacity Product differences Brand loyalty Switching costs Information complexity Diversity of competitors Corporate stakes Exit barriers

EXTERNAL (MACRO) ENVIRONMENT While these above listed factors a part of the micro environment, the macro environment constitutes of; Socio-cultural environment Economic environment Technical environment Political legal environment International (world) environment Natural environment All these play a crucial role, as these aspects of the environment, are uncontrollable. Thus, understanding them in detail we have; SOCIO CULTURAL ENVIRONMENT The cultural habits, values of the society, influence the society and culture, individuals and thus the business, since individuals buy or are the consumers of business. EXAMPLE: McDonalds shifting to Vegetarian, chicken and mutton Burgers in place of Beef and Hamburgers. ECONOMIC ENVIRONMENT The GNP, per capita income, growth rate, inflation and all these play a very important role. Besides the economic cycle of the country like boom, recession, depression or recovery. This will decide the companies to enter into the market, diversify, expand, etc. EXAMPLE: Growth rate decides investment in securities, Gold, etc., so, Gulf i.e., Middle Eastern and south eastern countries invest more in these. Dr.N.Kannan, Professor & Head MBA Page 34

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TECHOLOGICAL ENVIRONMENT The progress of technology in the country and the utilization of such technology in the industry also affects markets. EXAMPLE: up gradation of Hardware, software; use of equipment with do not harm environment. POLITICAL ENVIRONMENT The political situation i.e., stable/unstable government, the political philosophy of the party in power. The type of government, the policies that is adopting etc play vital role. The laws, acts and the legal machinery and establishment and enforcement of law too play a very vital role, even the relations with other countries is crucial EXAMPLE: the EXIM policy, Trade policy, Regional Associations, Economic Policy, Budget Customs, Duties, etc

INTERNAL OR MICRO ENVIRONMENT IN DETAIL Earlier the Five forces influencing Internal or Micro environment were given, the discussion now in detail; these five forces are; I) THREAT FOR / FROM NEW ENTRANTS Now understanding the factors a little more in detail we have; a) ECONOMICS OF SCALE Most of the existing organization are already when functioning well, would have achieved or will be on the verge of achieving the break even or even attaining economics of scale. Then, these new organizations or entrants will take a long time to gestate (come to original or living state) in the mean while, the existing organizations van either crush it or swallow it. There by eliminating new entrants However, the existing organizations do face problems when new entrants into the market. They need not take up R & D, but they can imitate the existing products and manufacture them at a lesser price. There by these new entrants not only enter the market with a lesser price product, but also sell more number of products. By these volume based sales, they achieve higher profits (sales maximization) and thus slowly either lead the market in any one segment or become 2nd or 3rd in the market leadership. By these two methods a new entrants faces threat in terms of economics of scale. b) BRAND IDENTITY Good brands which are well established and are deeply marked into the brains of the people, they cannot be easily removed from their brains, thus, the new entrants face threat. But that is one reason why duplicate can create a problem. c) CAPITAL REQUIREMENT

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Business Policy & Strategic Management The new entrants being small need only small amount of capital the plus point being that they need not invest in R & D or heavy infrastructure. However, being new entrants, the finance will be tight, and financiers do not lend or loan money in large sums unless the brand name is trusted. Thus, new entrants face trouble in meeting finance demands. d) PROPRIETORY PRODUCT DIFFERENCE Patented products cannot be imitated and thus, there need to be difference. These differences can be problems which are solved by the new products. These small differences make up for the big profits. However, unless these small differences exist the new products cannot survive. These small differences are the major threats the existing products. e) SWITCHING COSTS Each time technology is changed or products are modified there are additional costs added. This is a major problem with the existing products, as they need to keep changing their technology or modifying products to beat the imitators and competitors. Besides, they need to bring f) ACCESS TO DISTRIBUTION New entrants penetrate deep as they have greater access to all customers in a segment, i.e., they try to reach as many as possible. Others i.e., the existing players however reach only through the existing outlets only. There by they need to spend additional amount to reach the customers directly, so there is an additional requirements of sales force. Therefore this expenditure arises each time there is a new entrant. This is another threat. g) PROPRIETARY LEARNING CURVE The new entrants due to products aimed at the gaps will be able to reach the market at greater speed, so will imitations. The real researched or developed products take longer duration to reach. Yet though this is a drawback, it is an advantage to the existing firms because their research and learning is at their disposal. h) ACCESS TO NECESSARY INPUTS The availability of necessary inputs is an important factor that determines the position in the market. An existing firm can acquire a source of input or a holder of input may start a firm. Either way there is an advantage to the new entrant or the existing firm. i) LOW COST PRODUCT DESIGN Due to continuous research a firm may get a product design of low cost or an imitator without R & D can enter the market at low cost, better still, they may fill the gap with a better suited customer accepted design. j) GOVERNMENT POLICY The government may decide on open competition and more number of players may be asked to enter into the market. Further, the government may fix the price too without identifying imitator and original, thereby leading to further problems, of competition among rivals. k) EXPECTED COMPETITION There is an amount of competition that every organization expects, both the established and the unestablished. While established need to worry only about a few, the new entrants take the entire market as competition, thus, battling becomes difficult. II) THREAT OF SUBSTITUTES Now trying to understand the list of factors in detail, we have;

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Business Policy & Strategic Management a) RELATIVE PERFORMANCE OF SUBSTITUTES Any organization and product faces competition and rivalry. However, the competition is greater from rivals or competitors who perform well, as they become substitute to the products. But products which perform not upto mark wont trouble the competition. b) SWITCHING (CHANGING) COSTS When customers or consumers change or switch from one brand to another or from one companys product to another they face or problem of bringing those customers back and keeping them loyal to their product or brand, this is an expensive job, so it involves lot of costs and thus arises switching costs or changing costs. c) BUYERS CHANCES TO SUSTITUTE When the customer has a choice, then there are chances for substitution. However, if a certain product has that unique attribute or special feature due to which or by which they are distinguished, preferred, liked, and purchased, then there will be very little chance of substitution. Thus, unless an equally similar product with all the specialty, but with an additional attribute comes up, the chances of substituting remain slim, weak or little.

III) BARGAINING POWE OF BUYER The following are the factors that come under this, now understanding them in detail, we have a) BUYER CONCENTRATION The lesser the buyers, then greater in chance to bargain by them, since there are very few buyers, they can withdraw from buying the product and soon the manufacturer will be at loss. However, certain factors influence this aspect. They include; Number of companies manufacturing the product The extent of utility of the product Durability of the product Availability of foreign buyers Alternate uses of the product Storage details and so on If few manufacturers and large number of buyers exist in the market, then it becomes the other way around and the companys can manipulate the buyers and charge higher and make greater profits. b) BUYER VOLUME The volume of purchase also determines the capacity of the buyer to bargain. In other words, the larger the volume of purchases, the greater is their capacity to bargain and these influences the internal revenues or finance of the organization. c) SWITCHING COSTS A dissatisfied buyer or a more lucrative manufacturer, who is willing to sell his product at a lesser cost, will definitely take the buyer away. Thus, a manufacturer has to bring the customer (in this case the buyer) back, need to may be sell for lesser price, offer credit,

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Business Policy & Strategic Management discounts etc to regain them back. Each time a modification is made the manufacturer needs to take this up, so as to retain the customer and prevent them from switching. d) BUYER INFORMATION The buyers have access to some important information like the cost, availability, future increase or decline in price, government involvement, etc. these trigger a change in purchase pattern or bargaining patterns of buyers. Thereby either helping or hindering the manufacturers. e) BUYER PROFITS The amount of profit that a buyer makes is crucial for the buyer and the manufacturer. The buyer tries to maximize his profits, and the manufacturer wants to maximize his own profits. Thus, there is a keen battle between the two. The manufacturers offer greater benefits, discounts and price cuts for bulk purchase and thereby prompting the buyers to buy in bulk. However, the buyers want all the benefits that are offered for the amount or number of products that they buy or are willing to buy. Thus, since buyers are vital for the organization, many a time they wield to the buyers tactics.

IV) SUBSTITUTE PRODUCTS The type of products being made influence others to copy, because they are going well in the market. Thus, if the product does well, then naturally several other products which are imitations or similar crop up. They have some variations and may click, due to superior packaging, cheaper price and so on. Then they become a threat. a) PULL THROUGH Many products have highly successful marketing companies backing and usually are pulled through to success. So, there instead of going through early hiccups and slowly and steady pick up and reaching the top, end up getting a kick start and reach the top fast. Buyers especially know the value of brand. b) PRICE SENSITIVITY It is normal for consumers to be sensitive to pricing. Hence, the products which have similar quality or attributes compete only with price. c) PRICE / TOTAL PURCHASE Many times, it is not the cost of a single purchase or the price of a single product that is purchased, but the cost or sum total of all the purchases made in that brand, which matters. This is the reason why organizations go for tag on sales or discounted sales to improve the sale of their products as buyers may buy a product here, but will purchase an additional attachment to it from another. This is what makes the differences. d) PRODUCT DIFFERENCES Minor changes also make large change in purchase. In other words, small product changes or modification usually bring about large changes in purchase pattern of buyers. Thus, every organization has to watch out on the changes made by competitors e) ABILITY TO INTEGRATE BACKWARD Many buyers in other words, retailers and wholesalers after a period of time, start selling products in their own brand name. This becomes flexible when these middlemen have access to an economical source or they have their own manufacturing unit, on which they can depend

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Business Policy & Strategic Management upon. Thus, they make greater profits by overcoming the problem of giving percentage returns or commission to middlemen. Thus is called as backward integration. f) IMPACT OF QUALITY / PERFORMANCE Quality and / or performance play a major role in the purchase of any product. Thus, any product which has either quality or performance or both is a definite click with the market or with the buyers and hence succeed. Yet there are a segment of buyers for whom quality is not important I all cases, then it doesnt matter as performance too will be less. But then these products will be priced low too. However, if a high priced product which is said to be of good brand name or quality doesnt perform as expected, then it becomes a definite failure, as it wouldnt be accepted among the buyers. g) DECISION MARKERS INCENTIVES The benefit obtained by the decision maker also plays a key role in the purchase process. A customer may benefit from lesser price, or discount offer, tag on free purchase etc. but a retailer may benefit from free advertisements, better merchandise or free display, return or replacement of spoilt goods, greater handling of stock of by the company itself. These are indirect incentives given along with direct incentives of commission. These help in deciding Thus, these factors in combination constitute the bargaining power of buyers. V) BARGAINING POWER OF SUPPLIERS The various sources of bargaining power of suppliers include the following factors in detail; a) SWITCHING COSTS A dissatisfied supplier or more lucrative manufacturers, who are willing to sell his product at a lesser cost, will definitely take the buyer away. Thus, a manufacturer has to bring the customer (in this case the supplier) suitable to his need, need to may be buy for lesser price, offer credit, discounts etc., to regain them back. Each time a modification is made the manufacturer needs to take this up, so as to retain the customer and prevent from switching in case of supplier. In other words the suppliers have to be given the best otherwise, they end u p giving their supplies to others i.e., other manufacturers. b) DIFFERENTIATION OF INPUTS: The inputs given to the manufacturer for making a product not only vary from batch to batch but also from supplier to supplier. Thus, this differentiation in the inputs brings differences in the output also. Therefore, suppliers who give homogeneous input over a period of time or those who give quality input are accepted. Thus, suppliers who are able to provide similar quality input over a period of time have better bargaining power than the other suppliers over the manufacturer. These suppliers get better payment, credit and other facilities from the customer or manufacturer. c) SUPPLIER CONCENTRATION: The greater the suppliers the less is the chance for a supplier to bargain with the manufacturer. Thus, fewer suppliers have greater chance of bargaining, as they can become an oligopolistic market and then develop a fixed pattern of supply and price. This then provides a chance to bargain with manufacturers. Thus, suppliers never permit new entrants into the business. If they dare to then they either try to buyout their share or reduce the price so much that the new entrant will fail to reach that low price that they cant lose their business or get loss. So, they leave the business. Thus, the supplier leads again. d) PRESENCE OF SUBSTITUTE INPUTS: Dr.N.Kannan, Professor & Head MBA Page 39

Business Policy & Strategic Management When there are alternative inputs then naturally the bargaining power of suppliers goes down. Thus, substitute inputs are always threats to suppliers. However, suppliers do try to over come these by trying to provide the manufacturers with Bulk purchase discounts Quality assurance Out time delivery of supplies Replacement with supplies are not upto the mark, etc Besides this the substitute product should also be A close substitutes Should have same or more attributes Should be affordable Should have good quality Must be easily available Must be available in plenty Processing the input into output should not be difficult, etc When the substitute products have these qualities then the substitute is equally successful in the market. Thus, they become a threat to manufacturers suppliers. e) IMPORTANCE OF VOLUME TO SUPPLIERS: The suppliers should understand or realize the importance of volume ie., bulk orders. In other words bulk or voluminous orders bring about a lot of chance to negotiate, in terms of price-offs, discounts, credit terms, exchange risk taking and so on. This is vital for penetrating business. f) IMPACT OF INPUTS ON COST OR DIFFERENTIATION: Inputs or raw materials makes up 70% of the total cost of the product. Hence any change ie., reduction or increase in the cost of the input directly affects the cost and price of the product. Every manufacturer thus knows not to tamper with price due to the reasons that buyers will not be interested. However, the manufacturer should negotiate well so that the suppliers will not increase the price of the input, there by upsetting the entire cycle. Similarly, differentiation in inputs may change the product quality wise or in any other sense. But until the customers are convinced that the input or product has quality, (even when the supplier has increased the price) the products price should not be increased. Suppliers noting that the product is being sold well, try to increase the cost of the input, so that they make profits. All these have to be monitored. g) THREAT OF FORWARD OR BACKWARD INTEGRATION: The supplier just with his experience, reach or financial worthiness may plan to integrate forward and manufacture the product himself. This will then cause problem to manufacturers. Since, suppliers has raw materials available at lesser cost than manufacturer, their products can be sold in the market at cheaper prices. The other threat is if the supplier goes into backward integration and takes over a source of raw material. Then it has greater chances to bargain because, it can provide large volumes of raw material, may start to competitors, and so. On, all these act as threats from the suppliers. h) COST RELATIVE TO TOTAL PURCHASE IN THE INDUSTRY: The comparison in the cost with respect to the total amount purchased in the whole industry is to be taken up. If the product is purchased by many manufacturers and the amount of money involved in the purchase of material in the overall industry is more. Then the product is

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Business Policy & Strategic Management considered vital and suppliers start negotiating the price of the inputs. Thus, fluctuating markets. VI) INDUSTRY COMPETITORS RIVALRY: The major factors affecting this are listed as; Industry growth Concentration and balance Fixed costs / value added Intermittent over capacity Product differences They are discussed in detail below; a) INDUSTRY GROWTH: The industry growth ie., faster the industry grows, greater will be the number of competitors, as new entrants swarm the industry. In other words, the growth of an industry makes more people to invest, start associated companies, and also seek employment. This triggers a great competition as more and more the brand name, greater will be the investments. Thus, each company, big or small is a competitor or rival. b) CONCENTRATION AND BALANCE: The number of competitors in an industry is termed concentration. That is, the number of alternative products or services available for one need. Balance is that sensitive situation where there is enough demand and supply or may be a slight difference in the demand and supply. If there is vast difference then the balance collapses. Similarly, he competitors should be able to provide what the customer wants, and also, at time more that what the customer expects. Then the customers balance too is retained. c) FIXED COSTS OR VALUE ADDED COSTS: Every competitor provides a set of solutions or a gamut of services. What a customers requires besides these is the availability of value added services and their costs. The value added services can be; Free maintenance for the first year Free insurance for the first year Transportation to the premises free of cost Replacement when required 24 hour helpline easy availability of genuine spare parts and so on d) INTERMITTANT OVER CAPACITY: The competitors should be in a position to take up over production capacity, suddenly when there is a spurt in demand. If this is not possible by a company, then the competitors will take over that sudden spurt and the company tends to lose valuable customers. e) PRODUCT DIFFERENCES: Without differentiation, products cease to exist in the market. Thus, differentiation is the reason behind successful brand. Every product must compete on some unique selling proposition which is the platform by or on which a product is identified and holds value in the eye of the customers. Thus, in any industry rival products should be in a position to differentiate itself.

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Business Policy & Strategic Management EXTERNAL ENVIRONMENT FACTORS AFFECTING BUSINESS POLICY The factors constituting the external environment may be divided into two interrelated subcategories. Viz., remote environment and remote environment and operating environment REMOTE ENVIRONMENT: Remote environment consist of forces that originate beyond the generate approachable environment ie., the environment which cannot be handled. They constitute of; political economics social technological and industry factors POLITICAL Stable political conditions influence the environment in which the companys operated. This helps in identifying with the predictability of business activities. Political instability or unrest, threats to law and orders, change in the ruling party ideology etc influence business considerably. Categorically listing the factors which influence business environment on the outside and the sub factors under them we have some of the factors in the political environment which influence business are; political instability threat to law and order ideology of the ruling party interest in local business groups insurgency in border party dissent within ruling party international power associations foreign economics associations and their impact strength or power of the party in opposition trade agreements with trade unions coalition government, etc SOCIAL FACTORS: Some of the social factors influencing the business and the business policy are; population density inter-state migration rural urban mobility growth of educational opportunities change in life style marriageable age of men and women values and attitudes of people towards life, family, spending size of the family womens participation in the work force consumer behaviour Dr.N.Kannan, Professor & Head MBA Page 42

Business Policy & Strategic Management changes in the tastes and preferences of consumers corporate social responsibility of companys TECHNOLOGICAL FACTORS: The several technologies based or technological conditions which influences the following factors; advice on diffusion of technology than invention social and economic factors influencing technology adoption availability of proper infrastructure facilities availing chances of collaboration. Current product conditions, and the extent to which the people using them are advanced in using these products of the market is not developed, then it is not suitable to have a highly technical market. ECONOMIC ENVIRONMENT: Anticipating the changes in the economic environment might have a bearing on the progress of trade and industry in future needs information processing with respect to the following aspects; The existing state of economy and the stage of the business cycle (boom, depression, recession or recovery) The rate of growth of GNP and the per capita income at current and constant prices Rates of saving and investments Volume of imports and exports of different items Balance of payments and changes in foreign exchange reserves Fluctuations in currency exchange Percentage of interest of loans taken Agricultural and industrial production trends Changes in the distribution of income and wealth Expansion of transport and communication facilities Planned outlay in the private and public sectors, and priorities of development laid down in the five year plans Government budgetary, allocation, economic and fiscal policy provision Money in supply Rate of inflation Internal and external public debt etc LEGAL OR REGULATORY CONDITIONS: Legal or regulatory conditions and government policies too invariably affect the business and its policies. There are several such laws that govern Indian business houses. They include; The government should set right market failures. Which cause in equities and imbalances in the economy The government should ensure allocation of resources for proper economic development Industrial licensing Import restrictions Differential taxation Exemptions Dr.N.Kannan, Professor & Head MBA Page 43

Business Policy & Strategic Management Remissions Foreign exchange control including control over the flow of cash, technology, foreign collaboration and joint ventures under FERA act Capital issues control Act, 1956 Control over expansion of existing capacity Creation of excess capacity MRTP act Approval for Foreign Direct Investment (FDI) Securities Exchange Board of India (SEBI) for investor protection NATURAL ENVIORNMENT Natural environment affects businesses which are either dependent on it or are indirectly influenced. This factor plays a crucial role in several businesses. EXAMPLE: insufficient monsoon affects agro based industries lack of power, industries using water suffer. Floods, snow, fog, earthequakes, volcanoes, etc are to be taken care before establishing i.e., the climate of the area needs to be forecasted or judged by earlier records before going in for setting up business. That is the reason factories are not set up in earthquake belts, regions often flooded and are near to volcanoes. SCANNING THE ENVIRONMENT Environment scanning constitutes of internal and external appraisal; INTERNAL APPRAISAL: is also called SWOT analysis. At times it is called ETOP analysis (ENVIRONMENT AND OPPORTUNITY PROFILE) EXTERNAL APPRAISAL: is also called as STEP analysis or PEST analysis where Sstands for Social, T- Technical, E- Economic and P- Political. These are the two techniques which are used for scanning the environment, both internal and external. SWOT analysis is discussed in detail at the end of this unit, along with Key Success Factors (KSF). ENVIRONMENTAL SCANNING: Environmental scanning processors the several methods by which the information can be gained are a plenty. A few are listed below; inputs from industrial espionages forecasts given by economic survey or the finance ministry, Govt. of India census reports reserve Bank of India Reports ICICI portfolio studies Survey of Indian Industry (annual) Annual survey of agriculture Indian Trade journals Planning commission reports Business dailies like economic times Financial express, business standards Bombay stock exchange directory

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Business Policy & Strategic Management INTERNATIONAL BUSINESS INFORMATION: International business information is obtained from; United Nation Publication World Economic Survey Statistical year book International Financial Statistics Economic survey of Asia and the Far East Commodity Trade Statistics Overseas Business Report

SOURCES OF DATA AND TECHNIQUES The sources of data and techniques for analysis business environment are listed as follows; I. GOVERNMENT OF INDIA PUBLICATIONS a. Economic survey by ministry of finance b. Guidelines to industries c. Five year plans d. Planning commission reports e. Census reports f. RBI reports g. IDBI portfolio studies h. ICICI portfolio studies i. Indian trade journal j. NSE directory II. JOURNALS / WEEKLIES / DAILIES a. Business world b. Business today c. Business India d. Economic times e. Capital f. Commerce g. Foreign trade published by IIFT, New Delhi h. CII reports III. INTERNATIONAL PUBLICATIONS a. All publications of United Nations like i. World Economic Survey ii. Statistical Year Book iii. International Financial Statistics iv. Economic Survey of Asia and Far East v. Economic survey of Latin America vi. Economic bulletins of Europe, Latin, America and Africa Dr.N.Kannan, Professor & Head MBA Page 45

Business Policy & Strategic Management b. Exchange Journal NASDAQ, Export Promotion Council c. WTO Reports IV. PRIVATE PUBLICATIONS a. ORG MARG survey b. Auto industry survey c. SEWA survey d. Others

ENVIRONMENT FORECASTING TECHNIQUES The basic environment forecasting techniques are Single variable extrapolation Scholastic modeling Multivariate analysis Expert opinion techniques General forecasts Mapping Decision trees Delphi technique Demand and sales forecasting techniques Trend analysis etc Thus, internal organizational appraisal constitutes of SWOT analysis and key success factors. While external organizational appraisal constitutes of STEP analysis Thus, the study of business environment is in itself for the sustainance of the company. The CEO plays a vital role in this situation. His roles are given clearly below; STATISTICAL FORECASTING TECHNIQUES: The overall performance is based on statistics forecasts. They are; Single variable extrapolation Dynamic models Mapping Multivariate interaction analysis Structured expert opinion Unstructured expert opinion Structured inexpert opinion Unstructured inexpert opinion TYPES OF FORECASTS: These techniques of forecasting are use to find or determine; Economic forecasts Social forecasts Political forecasts and Dr.N.Kannan, Professor & Head MBA Page 46

Business Policy & Strategic Management Technological forecasts ECONOMIC FORECASTS: Economic forecasts can be made using general statistical techniques like trend analysis, econometric models, judgmental models etc. Here they try to determine the overall revenue and expenditure connected or related forecasts and estimates. SOCIAL FORECASTS: Social forecasts are very complex tasks. Trend analysis using time series, scenario development, and judgmental approaches are the most popular techniques in social forecasting in areas such as demographic trends, housing, health and nutrition, household income and expenditure patterns, government policy on social issues. POLITICAL FORECASTS: Political forecasts such as domestic political conditions and political developments across the borders including foreign international relations constitute important aspects of political forecasting. It takes into account such criteria as social development, technological advancement, natural resource endowment, level of domestic peace or calm (within the country) and type of political system in forecasting political conditions. The political factors depend on the unique hypothesis ie., assumption that if development in respect of any of the criteria, moves faster than in other criteria, than there is tension and violence. TECHNOLOGICAL FORECASTS: Technological forecasts have been done mostly using judgmental models, scenario development, brain storming and Delphi method. These methods have proven to be useful in forecasting technology. SCENARIO GENERATION: The next most suitable techniques is use of scenario, in other words scenario generation. This has been proven to be quite useful in interpreting the oft changing business environment. The first or primary reason for scenario generation is to reduce the risk and also the boundaries to decision making. This along with probability estimates and other qualitative and quantitative data, helps in generating a similar situation (simulates a similar situation) so that the ideas and strategies can be tested. These are a few techniques by which the external environment can be forecasted and found besides the ETOP/SWOT/PEST/SLEPT analysis. INTERNAL ENVIRONMENT ANALYSIS: The environmental analysis outside the company after being taken up. The next logical step is to find out the situation that exists internally. NEED FOR INTERNAL ANALYSIS: The need to have an internal analysis arises due to several reasons; All enterprises are not equally strong in their functional attributes Competitive advantage varies from company to company To assess the strengths or capabilities of the current organization vis a vis (when compared to the current market) The nature and magnitude of the skills and resources available compared to the requirement. Potential sources for supply of resources and skill need to be assessed and monitored Dr.N.Kannan, Professor & Head MBA Page 47

Business Policy & Strategic Management It helps (aids) in establishing a link between the resources and the strategic advantages (capability) of the organization. For the above purpose every organization under take a strategic advantage analysis. STRATEGIC ADVANTAGE ANALYSIS: Strategic advantage analysis is also termed as factors of common concern analysis or search for factors of common concern. In this search the strategists examine firms resources and capabilities in the key financial areas to determine where the firm has significant strengths (and weaknesses) so that they can be either expoited or met. The main reasons being; Following a course of action different from those of rival firms Developing a strategy which will provide different and better outcomes than those of its competitors Making it different for other firms to duplicate the strategy or enter the area of opportunity if the strategy works Usually every organizations internal resource succeed if, they have a common concern among strategists. These common concerns have been listed under five essential categories, but have been further sub divided. They are; MAJOR CATEGORIES ATTRIBUTES / FACTORS Organization organization form and structure Top Management interest and skills Standard operating procedure (SOP) The control systems The planning systems Personnel Employee attitude Technical skills Experience Number if employees Marketing Sales force Knowledge of the customers needs Product quality Breadth of the product line Reputation Customer service Technical production facilities Production techniques Product development Basic research Finance Financial size Price earning ratio Growth pattern SWOT ANALYSIS FOR ORGANISATIONS What are you looking for? STRENGHTS Potential resource strengths and competitive capabilities; A powerful strategy supported by competitive valuable skills and expertise in key areas. A strong financial condition; ample financial resource to grow the business Dr.N.Kannan, Professor & Head MBA Page 48

Business Policy & Strategic Management Strong brand name, image / company reputation A widely recognized market leader and an attractive customer base Ability to take advantage of economics of scale and / or learning and experience curve effects Proprietary technology / superior technological skills / important patents Superior intellectual capital relative to key rivals Cost advantages Strong advertising promotion Product innovation skills Proven skills in improving production processes Sophisticated use of e-commerce technologies and processes Superior skills in supply chain management Reputation for good customer service Better product quality relative to rivals Wide geographic coverage and / or strong global distribution capability Alliances / joint ventures with other firms that provide access to valuable technology, competencies and / or attractive geographic markets WEAKNESSES Potential resources weaknesses and competitive deficiencies: No clear strategic direction Obsolete facilities A weak balance sheet burden with too much debt Higher overall unit cost relative to key competitors Missing some key skills or competencies / lack of management depth / a deficiency of intellectual capital relative to leading rivals Profitability is low as plagued with internal operating problems Falling behind rivals in putting e-commerce capabilities and strategies in place Too narrow a product line relative to rivals Weak brand image or reputation Weaker dealer network than key rivals and / or lack of adequate global distribution capability Short on financial resources to fund promising strategic initiatives Subpar e-commerce systems and capabilities relative to rivals Lots of under utilized plant capacity Behind on product quality and / or R & D and / or technological know how Not attracting new customers as rapidly as rivals due to ho-hum product attributes. OPPORTUNITIES Potential company opportunities Serving additional customer groups or expanding into new geographic markets or product segments Expanding the companys product line to meet a broader range of customers needs Utilizing existing company skills or technological know how to enter new product line or new businesses

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Business Policy & Strategic Management Using the internet and e-commerce technologies to dramatically cut costs and / or to pursue new sales growth opportunities Integrating forward or backward Falling trade barriers in attractive foreign markets Openings to take market share away from rivals Ability to grow rapidly because of sharply rising demand in one or more market segments Acquisition of rival firms or companies with attractive technological expertise Alliances or joint ventures that expand the firms market coverage or boost its competitive capability Openings to exploit emerging new technologies Market openings to extend the companys brand name or reputation to new geographic areas THREATS Potential external threats to companys well being; Likely entry of potent new competitors Loss of sales to substitute products Mounting competition from new internet start up. Companies pursuing ecommerce strategies Increasing intensity of competition among industry rivals may cause squeeze on profit margins Technological changes or product innovations that undermine demand for the firms product Slow downs in market growth Adverse shifts in foreign exchange rates and trade policies of foreign governments Costly new regulatory requirement Growing bargaining power of customers or suppliers A shift in buyer needs and tastes, away from the industrys product Adverse demographic changes that threaten to curtail demand for the firms product Vulnerability to industry driving forces KEY SUCCESS FACTORS (KSF) KSFs are those things that most affect industry members ability to prosper in the market place the particular strategy elements, product attributes, resources, competencies, competitive capabilities, and business outcomes that spell the differences between profit and loss and ultimately, between competitive success or failure. They are categorized as follows; TECHNOLOGY RELATED; Scientific research expertise Technical capability to make innovative improvement in production processes Product innovation capability Expertise in a given technology Capability to use the internet for all kinds of e-commerce activities MANUFACTURING RELATED Low cost production efficiency Dr.N.Kannan, Professor & Head MBA Page 50

Business Policy & Strategic Management Quality of manufacture High utilization of fixed costs Low cost plant location Access to adequate supplies of skilled labour High labour productivity Low cost product design and engineering Ability to manufacture or assemble products that are customized to buyer specifications.

DISTRIBUTION RELATED A strong network of whole sale distributors/dealers ( or electronic distribution capacity via internet) Gaining ample space on retailer shelves Having company owned retail outlets Low distribution costs Accurate filling of customer orders Short delivery times MARKETING RELATED Fast, accurate technical assistance Courteous customer services Accurate filling of buyer orders (back orders, mistakes) Breadth of product line and product selection Merchandising skills Attractive styling and packaging Customer guarantee and warrantees Clear and clever advertising SKILL RELATED Superior workforce talent Quality control know-how Design expertise Expertise in a particular technology An ability to develop innovative products and product improvements An ability to quickly develop newly developed products past R & D into market. ORGANISATIONAL CAPABILITY Superior information systems Ability to respond quickly to shifting market conditions Superior ability to employ the internet and other aspects of electronic commerce to conduct business Managerial experience MISCELLANEOUS TYPES Favorable image or reputation Overall low cost Convenient locations Dr.N.Kannan, Professor & Head MBA Page 51

Business Policy & Strategic Management Pleasant courteous employees in all customers contact positions Access to financial capital Patent protection SWOT (INTERNAL) Thereby based on these attributes, the assessment of the strengths and weakness of a firm thus, centres around an analysis of the following factors under the functional groups of; Marketing / Distribution Finance and Accounting Production, Manufacturing, Engineering Personnel and Labour Relations Research and Development Corporate resources / Management Now understanding these functions in detail, we have; MARKETING ANALYSIS: The marketing function is considered to be a key area not just because its performance will result in the success or failure of business activities. Besides, it also provides a vital communication link between the organization and the external environment. The elements under this are Existence of a sizable market share and competition position Existence of a wide range and variety of design and qualities and sizes in the product line The phase of the life cycle are the main products Effectiveness of the pricing strategy The effectiveness of sales force Effectiveness of distribution channels in terms of market coverage Target market mass consumption or selective Creation of brand image by the advertising policy Existence of separate market research unit and its effectiveness Efficiency or effectiveness of packaging and similar services Consistency of marketing policy with competition, consumer preferences, technological change and other environmental factors. FINANCIAL AND ACCOUNTING ANALYSIS: The financial and accounting resources help in indicating the extent to which a firm can make commitment to implement a strategy. Besides, this they also plan the acquisition and utilization of funds, control over finances to the concerned top officials. The finance and accounting departments are also involved in; Availability of long term funds Whether funds can be procured consistently when in need Capital structure planning Cost of capital in comparison with the industry and competing firms Consistent dividend policy Consistent profit retention policies with shareholders expectations Efficiency in financial planning and budgeting procedures Dr.N.Kannan, Professor & Head MBA Page 52

Business Policy & Strategic Management Efficient accounting systems for cost accounting, budget accounting, profit planning and auditing Information about tax advantages, concessions through tax planning etc. PRODUCTION AND OPERATIONS ANAYLSIS: The production and operations departments contribute a great deal to a firms profitability through efficient use of capital and human resources. The production and operations management is closely related to the marketing and distribution departments. The assessment of capabilities of the departments can be done by the following; Comparative cost of operation among competing firms Efficiency of cost control Adequate production capacity to meet current and future demand Full capacity utilization If no, capacity not or under utilized Adequate production facilities, which are modern and well maintained Facilities when compared with competitors Relative cost of raw material and components Adequate availability of the above Congenial location of the plat facilities from strategic point of view Existence of effective purchasing and inventory control systems Efficient procedures relating to design, scheduling, testing, tooling and quality control Efficiency and effectiveness of management information and production control systems R & D DEPARTMENT ANAYLSIS: The success and growth of an enterprise depends on the R & D department and the work they do. The development of new product, innovations in product design and processes which are a part of R & D functions play a very vital role in the future of an organization. An R & D department may be involved in basic research, new product or process research, improvement research, cost reduction research, and raw material adaptation research. By these the company should gain competitive advantage. The capabilities of any R & D department can be assessed by; Adequacy of R & D facilities like laboratories, equipment, material and so on Consistency of facilities with the latest scientific advancement Efficiency in maintaining facilities that are being used Efficiency in utilizing the facilities Amount of R & D expenditure Basis for the outlay of R & D expenditure Meeting recurring expenses Results of the R & D efforts for the past five years Marketability of the efforts Profitability of those efforts Organizing and managing such efforts Comparison between technical personnel of the company with competitors Conductive ness of work environment for creativity and innovation Managers disposition towards change and innovation Dr.N.Kannan, Professor & Head MBA Page 53

Business Policy & Strategic Management Mix of basic, long term R & D projects and applied short term projects HUMAN RESOURCES ANALYSIS: Human resources capability and the organization are closely related. Together they yield corporate resources. The organizational environment and the associated managerial and technical quality of other employees can be easily identified from the following elements; Healthy organizational climate Consistency in employee performance record Effective implementation of company policies with respect to staffing, promotion, training and development, compensation and benefits and so on. Are these policies comparative with the competitive firms? The best way the organization can describe its managerial talent (delegative, participative, communicative or autocratic) Degree of unionization of employees of the organization Union and organization relationship Image of the company to provide a source of prided and loyalty to the employees OVERALL MANAGEMENT FUNCTION: The overall performance of the organization function and their ability to engage people to attain results and goals to attain objectives is clearly identified. This helps in analyzing the extent to which an organization is assessing and responding to organizational changes and also changes in the environment. This helps in identifying the competency of the managers and the organizations. Their mentality in dealing with internal or external problems Their propensity to take risks Their values and norm and personal goals Their critical success factors and behaviour The position of power of the manager in the firm His / her ambition to use or drive using the power Talents / personality Problem solving skills Leadership style / skills Knowledge about the environment in which the firm operates Personal work capacity and Work habits While the above set deals with managers, the following set identifies with the organizational climate, culture and competence. They are; Organisations attitude and interest towards change for the better Willingness to take risks Perspective towards problems Action oriented Interested in improving organizational behaviour factors that trigger (start) change organization perception to critical success factors proper distribution of power among groups with different culture stability of the power structure Dr.N.Kannan, Professor & Head MBA Page 54

Business Policy & Strategic Management organizational competence in solving problem (skills to solve) the problem solving process in itself (whether it is centralized or decentralized) the management process is it creative, anticipatory or backward in ideology the updation of information systems to scan the environment flexibility and adaptability of organization structure managerial rewards and incentives (growth based, performance based, creativity based) job description or definition narrow or open, encouraging initiative or venture extent of availability of technical devices to aid decision making the capacity of the management to handle different volumes of work

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Business Policy & Strategic Management VALUE CHAIN APPROACH: Michael Porter devised the value chain approach to assessment of internal resources across distinct functional areas. This approach consists of identifying the series of activities which are undertaken by the firm and are strategically relevant for meeting customer demand and it tries to identify in which respect the firm is better than its competitors. Thus, the internal factors of key (vital) importance are linked with the chain of value by systematically identifying the activities as potential source of strength and weaknesses. There are two broad categories of value activities; namely, primary activities and support activities The support activities are those which provide inputs or infrastructure for primary activities to be performed. The support activities and primary activities are classified based on technological and strategic distinctness: procurement of raw materials technology development human resources management firm infrastructure The primary activities are; inbound (incoming) logistics operations outbound (outgoing) logistics marketing and sales Service. The generic value chain can be seen below; FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT

Inbound Logistics


Outbound logistics

Marketing & Sales


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KEY FACTORS EVALUATION: The evaluation of key factors and value activities against attainable goals or standards determine which factors or activities are having potential strengths or which have potential weakness. Any factor is considered to have strengths if it has a competitive advantage over competitive firms. The list of factors is; past performance and capabilities evolution of product / market comparison with competitors success factors in the industry (internal to the value activities)

STRATEGIC ADVANTAGE PROFILE (SAP) A profile of strategic advantages is a summary statement which provides an overview of the advantages and disadvantages in key areas likely to affect future operations o f the firm. This profile gives a detailed analysis of the position and negative aspects of each functional area. The other relevant data useful for critical areas may go as a supplement to this profile. Based on the strategic advantage profile (SAP) a strategic capability grid can be drawn which gives an idea about the position where the company lies and the strategy that they need to adopt. Numerous Environmental Opportunities Cell 3: Turn around Strategy Cell 1: Aggressive growth oriented Strategy Substantial Internal Strengths Cell 4: Diversification Strategy Cell 2: Defensive Strategy

Critical Internal Weaknesses

Major Environmental Threats Thus, any internal analysis or strategic advantage profile is aimed at Dr.N.Kannan, Professor & Head MBA Page 57

Business Policy & Strategic Management intensifying functional differentiation avoid head on competition aggressive initiative maximize user benefit identifying core competency

GAP ANALYSIS Gap analysis aims at identifying the achieved level of goals in comparison with the set or stated goals. In other words GAP analysis aims at finding the difference between standards set and goals achieved. These achieved goals can be depend or below the set standards. But whether one have over achieved or underachieved the reasons behind are to be analyzed. The reasons are then used to reset these standards. The set standards may not be achieved due to troubles in the organization, which come suddenly, like strike, lockout, government order or accidents like fire, flood and so on. They may also be not achieved due to changes in the external environment like dynamic changes in the market, product ban in the market, consumer related issues, withdrawal of product from the market due to hazard in use and the standards may be set too high. The set standards may be achievable because or may be achieved in excess due to several reasons like understating of objectives, underestimating the strengths of the employees, downplaying the competence of the organization, overestimating market hurdles and so on, besides the standards may be set too low too. Invariably a GAP analysis plays a vital role in identifying our set standards vis a vis (as against) our achieved standards. EXPERIENCE CURVE EFFECT: The experience curve theory is based on the relationships between the total cost per unit and the number of unit produced (experience). The characteristic pattern of the experience curve is the value added net production costs decline 25 to 30 percent each time the total accumulated experience has been doubled. In other words, as the experience (number of units produced) doubles, the production costs decrease by 25 to 30%. Same is the case with labour costs. This theory is based on the hypothesis (assumption) that when an individual performs (does) a task repeatedly, they tend to get better (improve), thereby reducing the mistakes and increasing the production in the same limited period of time. Associates of BCG worked on the experience curve theory and propounded that if the vertical axis is used as an index of the cost per unit, and the horizontal axis is used to plot the number of units or cumulative experience, then the resulting slope of the experience curve will be used to analyze relative costs at various levels of production. Based on this curve the BCG associates came to a conclusion that, the cost of most value added items declines quite a lot each time the experience doubles.

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Cost per unit

No. of units (or) cumulative exp.

The experience curve effect is derived (got) by dividing the accumulated costs by the accumulated product outputs. The factors influencing these include economies of scale, the learning curve, critical masses of knowledge and specialization. In short, the more experience a company has in producing a product, the lower is its unit costs. The following factors produce the experience curve effect; Labour efficiency New processes and improved methods Product redesign Product standardization Scale effect and Substitution in the product The factors in the experience curve model are said to include; cost, volume and market share. The greater the volume, the lower the cost, and larger the market share, the larger the production volume. EXPANSION AN UNMIXED BLESSING: From the experience of executives, who have been on the look out and used opportunities for growth, have attained success, which happens to be the main objective of both individuals and the company. All organization prefer growth to no growth or zero growth. However, no organization can grow continuously (exponentially) for a long period. This may not be possible because there are external environmental pressures which suppress the growth. First the company itself is not bound to have limits (as a part of the strategy). Growth strategy is one of the most difficult to manage strategies. Among the several reasons cited the first reason has been stated above. Several serious problems will remain hidden till the growth rate stops or a decline is experienced. Usually after a period of time, as the rate of growth Dr.N.Kannan, Professor & Head MBA Page 59

Business Policy & Strategic Management accelerates, there is a decline in profitability. The relation between size and profitability also declines after a period. The second set of limits arising due to environmental limitations include scarcity of resources, decline in target market population, compulsive environment protection laws, government regulations, public attitudes, and side effects of technological advancement. Companies which actually show an increase in the number of employees, products and scales do not always improve their profits. Companies that expand quickly often lose sight and end up unable to focus on the strength that brought success in the first place. Many times the basic investments money itself becomes difficult to get back. Expansion often creates confusion and many companies get active in areas which are not suitable for them. Thus, in the long run, both the old and the new businesses will require large amounts of capital to survive, an the new business will yield losses more than profits. Thus, small scale operations and changes are better, as their force either constructive or destructive is very little or limited. Even if human error occurs it is easier to correct in small scale than large scale. Between these extremes, lies the third option. This option is that of sustained growth or sustainable growth. This strategy aims at a growth pattern that keeps a firm increase in output and productive capacity in line with increase in its external environment. This strategy implies that increase or decrease in the systems productive capacity with commensurate (equivalent) increase or decrease in its external environments carrying capacities. Thus, many firms are opting for this strategy to attain achievable and retainable growth or success. INTERNATIONAL ENVIRONMENT This too plays a crucial role as we are concerned with international trade, laws, regulations which will help industries to market their products world wide. Besides the active competition of international (MNC) companies functioning within the country and outside need to be monitored for successful marketing of products. Some of the major factors influencing the international Business Environment are listed below; FACTORS INFLUENCING POLICY FORMATION IN THE INTERNATIONAL ENVIRONMENT: There are several factors in the international environment which cause an impact on the business policy formulation. They are; monetary and fiscal policies international demand and supply pattern liberalization and globalization programs exchange rate and revaluation policies devaluation and revaluation of currencies EXIM policies Technologies advancement and obsolescence International bench marking of the countrys product quality Countrys productivity level Vs International level Declaration of war Relative economic strength GATT and other tariff agreement Dr.N.Kannan, Professor & Head MBA Page 60

Business Policy & Strategic Management Economic and financial policies of various countries Balance of trade consideration International terrorism Protectionist policies Dumping practices Law and order problems Comparative culture and traditions Patent laws and intellectual property rights Trade zones and military zones Different rules and regulations in the legal system Political relationship Different labour conventions Infrastructure facilities Different practices and documentations Speed schemes like export processing zones, encouragement to 100% EO units Free port, port of call etc Tax rebates and subsidies Socials security schemes Currency blocks like EURO, NATO, SAARC, etc Most favoured nation or non-favoured nation states Availability of international credit Credit rating schemes International corruption Foreign institutional investment Economic sanctions

Thus, these factors need to be given due importance before strategy formulation.

UNIT IV FORMULATION OF STRATEGY Dr.N.Kannan, Professor & Head MBA Page 61

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ROLE OF CEO IN STARTEGY FORMULATION 1. He / She is the creator of the organisations policies and strategy 2. He / She is the administrator of the organization 3. He / She is the figurehead 4. He / She is the spokesperson of the organization, to both the internal and external environment 5. He / She is the moulder of the organisations culture and philosophy. 6. an organization is said to be an extension /reflection of the CEO 7. he / she sets the direction and pace of the organization 8. he / she sets the standard operating practices (SOP) 9. he / she is the disseminator of all information including policies 10. he / she is the coordinator, negotiator and conflict handler 11. he / she is the motivator 12. he / she is the resource allocator 13. he / she is the innovator and troubleshooter 14. he / she is a visionary and pathfinder 15. he /she is the leader APPROACHES TO STRATEGY FORMULATION: The possible approaches to strategy formulation are many, the traditional approach designed by Frank Gilmore in 1971 comprised of; A size up of the situation of the company as a whole. This is done generally on the basis of size-ups of the functional department (HR, finance, production, etc) Determination of objective and Development of a program, which covers the various activities of the company, and then directs these activities in a single direction to achieve the objectives. This process was applicable to short term problems, sudden problems and as alternative strategy has to be adopted soon, to meet the existing situation. The new modern approach has evolved with emphasis on reappraisal of the existing strategy in the light of changing external conditions, constant survey of the environment to identify and make use of long term opportunities, developing alternative strategy if necessary. Any strategy at any time is reappraisal from time to time in the light of internal operating results, economic trends, competitors actions, and technological development. Based on the SWOT then the management proceeds. The usual procedure is followed for developing a has been arrived through a strategy. The procedure discussed in earlier units page number rational, normative idea. However, there are several other approaches to strategy formulation. They are; Intuition or intuitive approach Disjointed incrementalism Entrepreneurial approach inside out planning key factor approach integrated approach defensive and creative approach and strategic postured Dr.N.Kannan, Professor & Head MBA Page 62

Business Policy & Strategic Management Now, taking up each of these approaches in detail, we have; INTUITION OR INTUITIVE APPROACH: This method is also called Brain Child approach. In other words the strategy that evolves in the mind of the chief executives is implemented. This is done without ever being explicitly (clearly) stated and without any formal (official) procedure. However, strategists have clearly stated that this approach is good when combined with personal judgment. There are several examples of successful intuitive leaders; Example: Alfred Sloan of General Motors, Henry Ford, JRD Tata, GD Birla, GM modi, TT Krishnamachary are a few industrialists who are often remembered for their imagination, drive and vision, which led their companies to prosperity. The very nature of this strategy development or formation is because, strategic planning is essentially irregular. Problems, opportunities and bright ideas do not arise according to some set time table; they have to be dealt with whenever they happen to be perceived. However, any mathematical (analytical) model introduced should be based on the nature of problem being analysed. However, since such mathematical problems are rare or non existent (suitability based) there is very little help. Yet one needs to understand a systematic approach is quite likely to dampen the essential element of creativity. DISJOINED INCREMENTALISM: This method is also called muddling through. In other words the management acts only when forced to. then the management considers a few convenient alternative involving small or non-problematic changes in the organization. These decisions are usually remedial or problemsolving in nature. Therefore, it doesnt help further future development. The strategist in this particular situation instead of thinking for the future, or trying to understand how the current strategy will cause problems for the organization in the future, just implements the new strategy. The implementation is taken up considering only the current state of all functional areas and how they will differ from now once, the strategies are implemented. Strategist believe that this approach is not really possible, since it is very difficult for an individual to cope with complex problems, lack of information, cost analysis, time constraint and difficulty in stating achievable goals ENTREPRENEURIAL APPROACH: This approach is related with the role of the manager as an entrepreneur. The entrepreneurial manager is a systematic risk maker and a risk taker looking for opportunity and also who tries to find an opportunity. Entrepreneurship is essentially the acceptance of change as an opportunity and the acceptance of the leadership in change as the unique task of the entrepreneur. Thus the role of the entrepreneur is opportunity focused and not problem focused. In short there is no specific written role on how a function has to be taken up or how to perform. INSIDE OUT PLANNING: A basic approach to developing strategies could be inside out planning. Strategies according to this approach have to be first conceived in a thought process arising out of the unique talents and resources possessed by a company market forecasts should be considered later as a kind of check or constraint on strategies so developed. KEY FACTOR APPROACH: Dr.N.Kannan, Professor & Head MBA Page 63

Business Policy & Strategic Management This approach consists in finding out what the significant factors are, that are important in the success of a particular business and concentrating all the major decisions on them. Thus, any significant product, customer segment or market which has been crucial for the success of the company can be repeated made use of (used) to make the strategy a success. INTERNAL APPROACH: An integrative approach to the strategy making process provides as framework which consists of the following steps; analyzing the present internal and external conditions identifying and evaluating the present strategy the major objectives, policies and plans currently guiding the firm search for strengths and weaknesses viewed within the present strategy and environment considering changes in the present strategy generating alternatives to resolve the problems and exploit the opportunities developing alternative unified strategies by combining the various alternatives in each of the problem and opportunities area and trying to create synergies evaluation of each unified strategy in terms of the enterprises objectives and choosing the strategy that best satisfies the objectives DEFENSIVE AND CREATIVE APPROACH: A starting point for developing alternatives in business is to find out whether to continue the present line of activities / business or change. This identification of alternative can be taken up by the routine method or by using a creative alternative method. A passive or defensive approach involves developing alternatives to meet environmental pressures under the force of circumstances. This approach amounts to generating alternatives by routine methods, as used in the past. On the other hand, a creative approach is characterized by an action search for alternative in anticipation (expectation) of environmental threats and opportunities. This amounts to generating ideas the offensive way. The type of strategy to choose be it defensive, offensive or combined approach, would depend on the relative size of the organization in the market. Thus, small firms adopt active or defensive strategies for segments that are dominated by large firms, and try to develop active or offensive strategies in the markets segments where large firms do not exist. A large firm can do well by developing offensive strategy for quality products. Example: wheel, Surf Excel, Lipton Yellow label, Brook bond red label, etc

STRATEGIC POSTURES: A study of strategic postures adopted by firms in different industries revealed four types of approaches; Firms penetrating a narrow product market segment and holding on to it with intensive planning, centralized control, zealous cost efficient production, and limited concern for external conditions. These firms approach strategy making as defenders of the posture.

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Business Policy & Strategic Management Firms which may be called prospectors having broad-based planning, comprehensive environmental scanning, decentralized control and seeking new product market postures on the basis of unutilized resources. Firms which choose to be analysers in the sense of sometimes being defenders of their posture (position) and sometimes adopting the role of prospectors. Firms which are incapable of effecting a realignment of known environmental changes and strategies and thus reflect an unstable strategic posture. These firms called reactors must sooner or later, adopt any of the other three approaches, or else face extinction. GRAND STRATEGIES The grand strategies of business are broadly classified into three. They are I. STABILITY STRATEGIES II. GROWTH STRATEGIES III. RETRENCHMENT STRATEGIES These three strategies are further classified into several more; Now systematically, we shall proceed with one strategy after another; I) STABILITY STRATEGY: This strategy is also called as NO GO strategy. Organizations which are operating in a reasonably certain and predictable environment usually adopt this strategy. These organizations attempt at incremental or step by step improvements in its functional performance. Mostly these strategies are taken up by small or medium sized firms, or for short run, when such firms are satisfied with the current performance. They are basically classified into three; No change strategy Pause or proceed with caution strategy Profit strategies Now, taking up these strategies one after another first we have; a) NO CHANGE STRATEGY: This stability strategy is a conscious decision to do nothing new (ie) to continue with the present business. This even though appears to be very unbusiness like is actually a very wise business decision. The following may be the reasons why this strategy is chosen; It may not be profitable to change the strategy in the current business strategy There are no significant opportunities or threats in the environment There are also no major strengths and weaknesses within the organizations. Several small and medium scale firms offering products to a niche market or to a familiar market follow this strategy. This strategy will be successful till a major crisis or threat comes up in the environment. b) PAUSE OR PROCEED WITH CAUTION STRATEGY: This strategy is often employed by firms to test the ground before moving ahead with a full fledged grand strategy. Even firms which have been into expansion for a long time and wish to take rest before the next phase, use this strategy. There are several reasons for choosing this strategy. They are; Dr.N.Kannan, Professor & Head MBA Page 65

Business Policy & Strategic Management Companies need to know where they are and what they want to do in the future, and if it would be successful. Internal organization gets to know the idea and will be able to change suitably or accept strategic change will Structural changes needed to adapt to the new strategies can be made using these strategies. When major strategic changes are to be made, a firm has to be ready to move faster has to wait till the appropriate time arrives. Waiting for the right environment to implement a new strategy or to launch a new product. c) PROFIT STRATEGY: This strategy tries to maintain the profitability level when there is a sudden threat, which may not exist for a long time. When companies face the threat of being totally removed from the market, a situation arises to test the companys strategy development authorities If the company assumes that the problems are short lived or that they will be eliminated with the passage of time, it will adapt / adopt this strategy. In other words, a firm tries to maintain its profitability by artificial methods and adapting / adopting a profit strategy. A few methods are; i. Reducing investments, cutting costs, raising prices, increasing productivity or any other such measure to overcome the crisis and maintain the same level of profitability. ii. External factors such as economic recession, government attitude, industry downturn, competitive pressures and so on are very bad. If the company assumes that these problems are short term in nature and try to maintain profitability by selling away some unused assets, moving from the city premises to sub urban, leasing away non core business, outsourcing company facilities and expertise to other companies etc. CHARACTERTISTICS AND SCOPE OF STBILITY STRATEGY: The following are the characteristics and scope of stability strategy is as follows; A firm opting for stability strategy stays with the same business, same product market position and function, maintaining same level of effort as at present. The effort is to enhance the firms efficiencies in an incremental way, through better deployment and utilization of resources. The idea of the firm is that the desired income and profits would be available in the future. Through such incremental functional efficiencies. Naturally, the growth objective of firms employing this strategy will be quite modest. Or only that companys with modest (simple, humble) growth objectives will take up this strategy. Stability strategy does not include or involves a redefinition of the business of the corporation It is basically a safety oriented status quo oriented strategy It does not warrant much of fresh investment Dr.N.Kannan, Professor & Head MBA Page 66

Business Policy & Strategic Management The risk is also less It is a fairly frequently employed strategy With the stability strategy, the firm has the benefit of concentrating its resources and attention on the existing businesss / products and markets. But the strategy does not permit the renewal process of bringing in fresh investments and new products and markets for the firm. II) GROWTH STRATEGIES: These strategies are also called expansion strategies. There are several growth strategies which will be classified, and later discussed in detail in the following notes. Growth or expansion strategy is the opposite of stability strategy. While in stability strategy rewards are limited, in expansion strategy the rewards are high. However, the risks too are similarly high in expansion strategies. Thus, one can safely say that in stability strategy the rewards and risks are low. While in expansion strategy the rewards and risks are high. This strategy is the most frequently employed generic strategy Expansion strategy is the true growth strategy. A firm with a mammoth growth ambition can meet its objective only through the expansion strategy. Expansion strategy involves a redefinition of the business of the corporation. The process of renewal of the firm through fresh investments and new business / product / markets is facilitated or possible only be expansion strategy. Expansion strategy offers several permutations and combinations for growth A firm opting for the expansion strategy can generate many alternatives within the strategy by altering (changing) its proposition (plans) regarding products, markets and functions and pick the one that suits its most. Expansion strategy holds within its fold two major strategy routes; i. Intensification ii. Diversification Both the them are growth strategies, the difference lies in the way in which the firm actually per sues the growth. With intensification strategy, the firm pursues growth by working with its current businesses.

Intensification in turn has three alternatives; i. Market penetration strategy ii. Market development strategy iii. Product development strategy Diversification strategy involves expansion into new business that are outside the current business markets. There are three types of diversification; a. Vertically integrated Diversification b. Concentrated diversification c. Conglomerate diversification Dr.N.Kannan, Professor & Head MBA Page 67

Business Policy & Strategic Management Vertically integrated diversification involves going into new businesses, which are related to the current ones. It has two components a. Forward Integration b. Backward Integration The firm remains vertically within the given product process sequence. The intermediaries in the chain become new business. in concentric diversification too the new products are connected to the firms existing process / technology. But the new products are not vertically linked to the existing ones. They are not intermediaries. They serve new functions in new markets. A new business is taken up (span off) from the existing facilities. In conglomerate diversification too, a new business is added to the forms portfolio (list of businesses). But it is disjoined (separated) from the existing business. In process technology functions, there is no connection between the new business and the existing ones. Thus, it is an unrelated diversification. Thus, broadly, expansion strategies can be identified as expansion through A. Concentration B. Integration C. Diversification D. Cooperation and E. Internationalization CONDITIONS FOR ADOPTING EXPANSION STRATEGY: The following may be the conditions, circumstances for firms to adopt this generic strategy. When the corporate ambitions and objectives are high and keeps rising, ie. When the firm desires continuous and big growth in assets, income and profits, expansion becomes the choice as stability will not suit them. When enormous new opportunities are coming up in the environment and the firm is ready and willing to expand, its business opportunities / chances. Then this strategy is taken up. Forfighting competition in a growing business, firms find expansion through intensification the most suitable route. The very size of the company creates superiority in the competition. When a firm which is a leader or an aggressive contender in its industry and decides to protect its position, it has to constantly resort to expansion through intensification. This is because if it stops expanding then the company may stop being the leader. To overcome the vulnerability of a single business position or the limitations arising out of PLC of existing business. When they show signs of maturity, or saturation or leveling off, it means , they want to expand (and most probably diversify) In other words when a firm needs flexibility in business portfolio it turns to expansion through diversification as it facilitates such flexibility This is a method adopted by firms to minimize their risks by spreading it over other business

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Business Policy & Strategic Management Expansion strategy is chosen by firms when the industries are highly unstable. In this case substantial (great, considerable) growth is necessary to cushion or reduce shocks that might arise in such industries. Diversification would be especially useful to firm that are eager to achieve rapid and big growth. This is quite natural since diversification involves exploitation of new opportunities emerging in business, which are outside the existing fields of the firm. When the environment especially the regulatory scenario blocks the growth of the firm in its existing business, it turns to diversification for meeting its growth needs. When the firm has an advantage for synergy and for successful tapping of certain additional opportunities it opts for intensification / diversification. By using this competitive advantages in obtained in terms of cost of differentiation. Often economies of scale result (happen, occur) due to such actions (due to synergy). This result in a cost advantage for the firm. A) CONCENTRATION STRATEGY In concentration strategy, a firm directs its resources to the profitable growth of a single product in a single market and with a single technology. Concentration has the lowest risk and it only requires more amount of the same resources However, companies practicing this strategy have a steady growth and profitability, but they achieve it very slowly. They also have reduced and narrow range of investment options. Due to the reason that they have very narrow level of competition, they suffer from performance variations, resulting from industrial trends By concentrating on one product, one market and with one technology, a company can gain competitive advantage over other competitors. This competitive advantage can be in production skills, marketing know-how customer sensitivity or reputation in the market place. The business can also attempts to capture larger market share, by increasing the usage of the product among the existing customers or by attracting customers of competitors. It can also create interest among non-users of the product.

OPTION UNDER CONCENTRATION The following are the specific options under concentration; Increasing the usage rate of the current or existing customers by; a. Increasing the size (bulk) of purchase b. Increasing the rate of product obsolescence i.e., expiry or life of the product c. Advertising other uses d. Giving price incentives for increased use Attracting the competitors customers is another method. This can be done by; a. Establishing sharper brand differentiation b. Increasing promotional effort c. Initiating price cuts Dr.N.Kannan, Professor & Head MBA Page 69

Business Policy & Strategic Management Attracting non users to buy the product by; a. Inducing trail use through sampling b. Price incentives and so on c. Pricing up or pricing down d. Advertising new uses PRODUCT DEVELOPMENT AND MARKET DEVELOPMENT When strategic managers forecast that the combination of their current products and their markets will not provide a basis for achieving the companys mission, then the organizations have two options that involve moderate risk and cost. They are; I. MARKET DEVELOPMENT II. PRODUCT DEVELOPMENT I. MARKET DEVELOPMENT: It is the second most commonly employed strategy It is also the least costly and least risky among the 12 grand strategy It consist of marketing present products with only cosmetic / peripheral / superficial / just outwardly modification They are sold to customers in related market areas by adding different channels of distribution or by changing the content of advertising or the promotional media Thus, this strategy aims at Selling present products in new market Selling slightly modified products in the existing market SPECIFIC OPTIONS UNDER MARKET DEVELOPMENT: There are several specific options under market development. They are; Opening additional geographic markets Regional expansion National expansion International expansion Attracting other market segments Developing product versions to appeal to other segments Entering other channels of distributions and Advertising in other media II. PRODUCT DEVELOPMENT This strategy involves substantial (great or large) modifications of existing products Also creation of new but related items, that can be marketed to current customers through established channels This strategy is often adopted either to prolong the life cycle of current products or to take advantage of favourable reputation or band name. The idea is to attract satisfied customers to new products as a result of their positive or good experience with the companys initial offerings. Thus, the strategy involves; Developing new products for present markets Developing new products for new markets Dr.N.Kannan, Professor & Head MBA Page 70

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SPECIFIC OPTIONS UNDER PRODUCT DEVELOPMENT The specific options under product development are as follows; Developing new product features Adapt (to other ideas, development) Modify (change colour, motion, sound. Odour, form and shape) Magnify (stronger, longer, thicker, extra value) Substitute (other ingredients, process, power) Rearrange (other patterns, layout, sequencing components) Reverse (inside out) Combine (blend, alloy, assortment, assemble, combine units, purpose, appeals, ideas) Developing quality variations Developing additional models and sizes (product proliferation) B) INTEGRATION STRATEGY The essence of integration strategy is as follows; Integration basically means combining related activities to the current activity of the firm So, a company may move up or down the value chain to concentrate more closely on the customers groups and the needs of that group which they are serving A firm that expands using integration strategy commits itself to its adjacent business as well Integration is an expansion strategy which results in the widening the scope of the business definition of a firm Integration also means a set of diversification strategy as it involves doing something different from what the firm has been doing presently CONDITIONS SUITING INTEGRATION STRATEGY The conditions under which the firms are motivated to adopt integration strategies; When the cost of a product used in production is evaluated and make or buy decision has to be taken up Selling of finished goods against selling through a retailer and the cost associated with it Forms usually operate on two dimensions New products New functions New products can be made through related or unrelated technology New functions can range from the firm being its own customer to having an entirely new products Based on these dimensions, it is possible to have four types of integration strategies Integration strategies are broadly classified into two; Vertical integration Horizontal integration FEATURES UNDER VERTICAL INTEGRATION Features under vertical integration; Dr.N.Kannan, Professor & Head MBA Page 71

Business Policy & Strategic Management When an organization starts making new products that serve its own needs, vertical integration takes place Thus, any new activity under taken with the purpose of either supplying inputs (such as raw materials) or serving as a customer for output (such as marketing of the firms products) can be called vertical integrations. Vertical integration can be classified as; Backward integration Forward integration Backward integration means going back to the source of raw materials Forward integration means the organization moves nearer to the ultimate customer, even taking up distribution directly Usually, companies integrate completely but at times due to lack of resources, or uncertainty in the strategy adopted companies opt for partial integration. Two such partial vertical integration strategies are; Taper integration Quasi integration Taper integration strategies require firms to manufacture a part of their own requirements and to buy the remaining part Quasi integration strategy following firms purchase most of their requirement from other firms in which they have an ownership stake. Example: Maruthi Udyog Ltd, AV Birla Group etc Setting or using ancillary industrial units and outsourcing through sub contracts are different forms of quasi integration Firms can create their own supply sources by providing these ancillary units with manufacturing requirements such as Design and blue prints Raw materials Sub contractors and specialists Example: Dr Reddy Labs, Philips lighting systems, Hindustan pencils Ltd Ancillary units can produce as per the company requirements due to the help provided by the mother company. HORIZONTAL INTEGRATION When an organization takes up the same type of products at the same level of product or marketing process, it is said to follow horizontal integration strategy Horizontal integration strategy may be frequently adopted with a view to expand geographically by buying competitors business. It may be for; Increasing market share (or) Benefit form economies of scale Example: Madhusudan ceramics, manufacturers of Hind sanitary ware was taken over by EID parry to expand geographically Epartek ceramic floor tiles integrated with Neyveli Ceramics and refractories to increase production facilities. ADVANTAGES OF INTEGRATION STRATEGIES: The advantages of integration strategies are as follows; Dr.N.Kannan, Professor & Head MBA Page 72

Business Policy & Strategic Management Quality can be maintained as the company is committed to manufacture the product totally Better R & D can be taken up New designs and innovations can be patented Consumer needs are better understood Increased brand loyalty is possible as the company provides all benefits to the customers Better control over the value chain right from raw material to the market. DISADVANTAGES OF INTEGRATION STRATEGY: The disadvantages of integration strategy are The risk of investing in the same business is very large If the product fails, it faces great risk as the specific set of customers are totally lost Costly products and high expenditure on process and patenting go waste if the product fails Any future development on the product has to be decided by the customer. If it is not done so, consumers may shift loyalty C) DIVERSIFICATION STRATEGY Diversification involves a substantial change in the business definition either as a single entity or as a joint entity. It can be in terms of customer satisfaction with functions. Customer groups or alternate technologies of one or more of a firms business These strategies involve all the dimensions of strategic alternatives Diversification may involve or be Internal or External Related or Unrelated Horizontal or Vertical Active or Passive dimensions either Singly or Jointly The following types of diversification strategies are; Concentric diversification Market related Technology related Marketing and technology related and Conglomerate diversification REASONS FROR ADOPTING DIVERSIFICATION: There are several reasons for adopting diversification strategy. They may be Minimizing risk by spreading it over several businesses For capitalizing on organizational strengths and minimizing weakness When existing business is blocked due to environmental and regulatory factors reducing chances of growth Scope for higher profitability Availability for existing synergies and emerging opportunities Dr.N.Kannan, Professor & Head MBA Page 73

Business Policy & Strategic Management Revising mission statement CONCENTRIC DIVERSIFICATION Concentric diversification when taken up by an organization can be defined as Organizations taking up an actively in such a manner that is related to the existing business are said to be diversifying concentrically. Thus the changes in the firm can be a combination of customer groups, functions or alternative technologies a) MARKET RELATED CONCENTRIC DIVERSIFICATION When a new product is offered to the same target market When a similar product is offered with the help of unrelated technology or alternative technology Then it is called market related concentric diversification Example: Medicar Shampoo new Medikar Hairoil b) TECHNOLOGY RELATED CONCENTRIC DIVERSIFICATION Same product is offered with new technology New type of product is offered with the help of related technology Example: Solar Cookers, Water Heaters, Vehicles. Lighting systems, etc c) MARKETING AND TECHNOLOGY RELATED CONCENTRIC DIVERSIFICATION: A similar type of product / service is provided with the help of related technology to the same market. The existing product and technology are extended into new markets. Example: Rural telephony CONGLOMERATE DIVERSIFICATION When an organization adopts a strategy which requires taking up activities which are unrelated to the existing business definition, it is called Conglomerate Diversification. This diversification can be in terms of customer groups or functions and technology. CONDITIONS FOR SUCCESS IN DIVERSIFICATION Diversification requires meticulous preparation As it is a resource intensive strategy; diversification can succeed only when it is backed up by adequate resources Managers handling diversification should be very competent All proposals must be screened and pre tested The industry chosen must be attractive or it should be suitable for being made attractive By entering into the industry, the company should gain profits and should not lose what it already has CRUCIAL TESTS FOR SUCCESS IN DIVERSIFICATION There are three crucial tests which indicate the success of a diversification strategy. They are; Attractive test Cost of entry test Dr.N.Kannan, Professor & Head MBA Page 74

Business Policy & Strategic Management Better off test The attractive test involves in determining if the industry in which or into which diversification is taking place is attractive or not (suitable unsuitable). It is done by the following factors; Industry growth rate Industry potential Industry profitability Competitive structure of the industry Likely future or pattern of the industry Technology related issues and Other environmental factors The cost of entry test: Economics of scale in production Marketing R&D Level of product differentiation Brand domination Channels of distribution Loss of favourable locations Better off test should satisfactorily answer the following EIGHT questions; Does the diversification add to the corporate fit? Does it strain the corporate balance? Is the diversification built around the existing business of the firm? Is the firm moving into totally unrelated areas? Where does the balance of advantage lie? It is advantageous to develop concentrically? What organizational competence needs to be developed for managing a diversified firm? And List advantageous to diversify into unrelated areas? D) MANAGING THROUGH COOPERATION EXPANSION STRATEGIES Corporate strategies take into account the possibility of mutual cooperation with the competitors. This helps in expanding the market potential. The term cooperation expresses the idea of simultaneous competition and cooperation among rival firms for mutual benefit. Cooperative strategies can be of the following types; a) Mergers b) Acquisitions c) Joint Ventures d) Strategic alliances Dr.N.Kannan, Professor & Head MBA Page 75

Business Policy & Strategic Management DEFINITION: The following are the nearest definitions of the cooperative strategies listed. MERGER: It denotes the fusion of two or more firms into one company or organization. ACQUISITION: This is also termed take over. It is a transaction through which on firm buys up a part or whole of the assets of another company by paying compensation. JOINT VENTURE: Two or more firms join together to share the stake and float the business STRATEGIC ALLIANCES: Two or more firms arrive at an agreement on certain issues of mutual interest but however no new firm is created, only working agreement are taken up. MERGER There are several reasons for the taking up of mergers; they are as given below; PURPOSE FOR MERGER Procurement of suppliers: Protect source of raw materials Obtain discounts and savings Transportation costs are reduced Standardizing raw materials Revamping production facilities: To achieve economies of scale Better utilization of plant and resources Standardize product specifications Improving quality Introducing better technology Market expansion and strategy: Eliminate competition To obtain new market outlets For diversification or substitution for the present products Reducing advertising costs Strategic control of patents and copyrights Financial strengths: Improve cash resources Dispose outdated assets Enhance borrowing capacity Avail tax benefits To improve EPS General gains: Improve the company image Attract superior managerial talent offer better satisfaction to consumers For developing a companys own mobile TYPES OF MERGERS: There are basically four types of mergers Vertical Merger Dr.N.Kannan, Professor & Head MBA Page 76

Business Policy & Strategic Management Horizontal Merger Concentric Merger Conglomerate Merger Demerger

VERTICAL MERGER: It is a combination of two or more organizations not necessary in the same business. They create complementary either in terms of supply of materials or marketing of goods / services Example: Godrej and Procter and Gamble merged their distribution network for better distribution of their products. HORIZONTAL MERGER: It take s place when there is a combination of two or more organizations in the same business. Organizations are engaged in certain aspects of production or marketing aspects. Example: BrookBond merged with Lipton India Ltd CONCENTRIC MERGER: This takes place when there is a combination of two or more organizations related to each other in terms of customer focus or technologies used. Example: Dr.Reddy labs combining with centre for Cellular and Molecular Biophysics (CCMB) for testing drugs and pharmaceuticals Ranbaxy merging with Elility for better R & D facilities in Pharmaceutical sector. CONGLOMERATE MERGER: This take place when there is a combination of two or more organizations unrelated to each other come together to provide benefits to a group of customers. Example: The RPG group previously established in the two wheeler industry shifted its prospects into a totally unrelated field of Music by first merging with Music India Ltd and the with HMV They have now ventured into the retail business DEMERGER: Mergers carried out in the reverse are called demergers or spin off. In other words when an existing business unit of the firm is detached from the main business unit then it is called demerger. Demerger involves spinning off (separating) an unrelated business in a diversified company into a unit which stands separate It involves free distribution of the companys shares to the existing shareholders of the original company Example: Aptech was demerged from Apple Industries Ltd MOTIVES BEHIND MERGERS: They are basically of two types; Defensive / Passive Offensive / Active Dr.N.Kannan, Professor & Head MBA Page 77

Business Policy & Strategic Management

DEFENSIVE MERGER MOTIVES: This can be further sub-divided into; Survival requirement motives Protection motives The reasons behind survival requirement motives are; i. Prevention form deterioration of capital structure which results in losses ii. Technological obsolescence iii. Loss of raw materials can be reduced iv. Prevention of market loss to superior products The reasons behind protection motive can be; i. Protection form market infringement ii. Lower cost position of a competitor iii. Product innovation by others iv. An unwanted take over OFFENSIVE MERGER MOTIVE: This can be further diversified into; Diversification motive Gains motive Diversification motive might arise due to; i. Counter any problems arising due to cyclical changes ii. To counter seasonal problems iii. International operations iv. Multiple strategic plans Gains motive can be taken up due to; i. Market position ii. Technological edge iii. Financial strength iv. Managerial talents ASPECTS LOOKED INTO BEFORE MERGERS: The following are the aspects that need to be considered before mergers; Financial consideration: How much is the company worth? How does the acquire pay for it? Legal consideration: Will the government approve the merger? What are the tax laws? What legal considerations may prompt take over attempt? Human resource consideration: Are the executives of the acquiring company threatening the target company?

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Business Policy & Strategic Management Are the executives of the target company fearing that they will have to leave the firm? POST MERGER SUCCESS FORMULA: The following strategies create better chances of success in the post merger phase; also called the post merger success formula; Focusing on limiting the financial risk. This can be done by; Maintaining price disciplines Pricing ahead of inflation Reducing the response time to price changes and Pricing to value Emphasize on cost discipline to maintain margin Emphasize financial control over balance sheet items Emphasize on product discipline by Exploiting winning products and getting rid of losses Redesigning products Raising the hurdle required for margins on new product entry Stay close to respective markets by Building the strength of core product lines Avoiding excessive diversification Finding specialized niches for opportunity SEVEN DEADLY SINS OF MERGERS: The seven sins which cause the failures of mergers are as given below; Paying too must when merging Assuming that a boom market will not crash Leaping before looking Straying too far away form the field in which they currently specialize Swallowing (merging) a company that is too big Marrying (merging) two diverse corporate culture Counting that the key employees will stay forever TAKEOVER STRATEGIES: Take over and acquisitions are use interchangeably. This strategy has been adopted by several Indian companies in the post liberalization scenario. REASONS FOR TAKE OVER (ADVANTAGES) The reasons for takeover or taking over of a company; For presence over large geographical area To avoid long gestation period (the period taken for the company to function from the time of starting or initiation to completion) To attain increased growth rate To achieve a sudden increase in resources To improve market prices of shares For investing surplus funds Dr.N.Kannan, Professor & Head MBA Page 79

Business Policy & Strategic Management To acquire trained man power To fill in the gaps in the existing product line To have access to another companys markets To benefit from tax advantages For distributing risks To take a chance to turnaround a sick unit Benefits of economies of scale Procedure for takeover: The following is the procedure for take over; Spell out the objective clearly Indicate how the objective would be achieved Assess managerial quality Check the compatibility of business styles of both the firms Anticipate and solve problems early Treat people with dignity and concern TYPES OF TAKEOVERS: There are basically two types of takeovers; Friendly Takeovers Hostile Takeovers Friendly Takeovers have negotiations done through intermediaries who bring the concerns of both the company the result or complete a takeover Hostile Takeovers are those which are resisted or expected to be opposed by the existing management or professionals.

DISADVANTAGES OF TAKE OVERS: The following are the disadvantages of takeovers; Professionalism is replaced by money power They are detrimental (bad) to the nations economy Interests of minority shareholders is not protected Stress and strain are created in the companys that are taking over and also among those facing takeover TEN COMMANDMENTS FOR ACQUIRING A FIRM: The following are the Ten Commandments for acquiring a firm, they are; 1. pin point merger objectives (especially financial ones) 2. specify the gains to the stock holders of both the companys (the company that is being acquired and the company that has been acquired) 3. convince that the acquired company can be made competent 4. do not expect perfection but certify all important resources 5. involve everybody in the merger program 6. clearly define / redefine the business you are in Dr.N.Kannan, Professor & Head MBA Page 80

Business Policy & Strategic Management 7. take up an in depth SWOT and KSP of both the companies 8. create a climate of mutual trust by trusting problems can be solved 9. do not threaten the management and the employees that are to be acquired 10. make people your number one consideration in structuring (developing) your merger plan JOINT VENTURE STRATEGIES: Merger can take place in two ways; absorption consolidation Absorption takes place in mergers and acquisitions among companies Consolidation takes place when two or more companies combine to form a new company Joint ventures are a special case of consolidation where two or more companies form a temporary partnership for a specified purpose CONDITIONS FOR JOINT VENTURES: Joint Ventures (JV) are useful under four conditions; When an activity is uneconomical for an organization to do alone When the risk of business has to be shared and is therefore reduced when there are participating firms When the distinctive competence of two or more organizations can be brought together When setting up an organization requires surmounting or overcoming hurdles such as import quotas, tariffs, nationalistic and political interests and cultural barriers.

TYPES OF JOINT VENTURES: From the Indian point of view the following types of Joint Ventures are possible; Between two firms in one industry Between two firms across different industries Between an Indian firm and a foreign company in India Between an Indian firm and a foreign company in foreign Between an Indian firm and foreign firm in a 3rd country STRATEGIC ISSUES IN JOINT VENTURE: The following are the strategic issues in JV; They offer advantages of achieving objectives mutually by participating firms Eliminating, controlling or reducing competition An increase in the market share can be achieved Diversification strategies may be adopted by the participating teams If technology is a critical factor, then JVs in foreign companies can be feasible Legal and regulatory hurdles which can arise in external expansion can be overcome when a JV is established in a third country Page 81

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Business Policy & Strategic Management Besides the environmental threats in one country, can be overcome by utilizing opportunities in another company ADVANTAGES OF JOINT VENTURES There are several advantages of joint ventures; Risk minimization Reduction in investment by an individual company Access to foreign technology Broad based equity participation Access to government and political support Entering new fields of business Synergistic advantages DISADVANTAGES OF JOINT VENTURES Problems in equity participation Foreign exchange regulations Lack of proper coordination among participating firms Cultural and behavioral differences Possibility of conflict among partners STRATEGIC ALLIANCES They can be defined as, Cooperation between two or more independent firms involving shared control and continuing contribution by all partners for mutual benefit. Example: TVS & Suzuki, Mahindra & Ford, BPL & SANYO, Taj Hotels & British Airways, Airlndia & Oberoi TYPES OF STRATEGIC ALLIANCES The types of strategic alliances are as follows; Pro competitive alliances Non competitive alliances Competitive alliances Pre competitive alliances PRO COMPETITIVE ALLIANCES: (Low interaction and low conflict) They are usually inter industry with vertical value chain relationships, such as between suppliers and manufacturers NON COMPETITIVE ALLIANCES: (High interaction and low conflict) These are intra industry partnerships between non competitive firms COMPETITIVE ALLIANCES: (High interaction and high conflict) These firms entering into partnership are rival firms PRE COMPETITIVE ALLIANCES: (Low interaction and high conflict) Two firms from different and often unrelated industries are brought together to work on well defined activities.

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Business Policy & Strategic Management REASONS FOR ENTERING STRATEGIC ALLIANCES: There may be several reasons for entering into strategic alliances; a few are listed below; Entering new markets which may be difficult to enter on its own Reducing manufacturing costs and achieving economies of scale Developing and diffusing technology by getting the best technical expertise MANAGING STRATEGIC ALLIANCES The following are the four principles to manage alliances successfully; Clearly define a strategy and assign responsibility Build up relationships between the partners Blend the cultures of the partners Provide a chance for an exit strategy

EXPANSION THROUGH INTERNATIONALIZATION The expansion strategy of a company beyond the boundaries of a nation is termed as internationalization. MOTIVES BEHIND INTERNATIONALIZATION The national characteristics which are the reason behind internationalization are as follows; FACTOR CONDITIONS: such as raw materials, labour, are cheap or in plenty, then that place is chosen for establishing units DEMAND CONDITIONS: Low, and high fluctuations, high quality requirement and so on, influence the prospects of internationalization RELATED AND SUPPORT industries existence of such industries will help in expanding to new countries FIRMS STRATEGY if the firms vision is to expand to off shore areas too THE COMPANY STRUCTURE- too at time causes this, if a part of the production unit is off shore due to specific reasons RIVALRY OF COMPETING FIRMS also causes companies to expand off-shore, in search of new markets which have either no competitors, new market have few competitors, or create fresh markets. ENTRY MODES FOR INTERNATIONALISATION The entry modes for internationalization are three in nature. They are; Export entry mode Contractual entry mode Investment entry mode Discussing a little in detail, we have; EXPORT ENTRY MODE: This mode can be both direct and indirect. Any organization, which exports directly to the company or customer is in the internationalization mode. Similarly many organizations use channelized export (indirect) mode. Where in the export order and material are sent to an

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Business Policy & Strategic Management organization, which in turn sells it the customer. This occurs due to government sanction or for secrecy Example: In India all edible oils, Spices and movies etc come through indirect mode NDDB, Spices Board, and NFDC are the channel agents, they also are the mode for export. Machinery, software etc are usually purchased and sold directly in the export market. CONTRACTUAL ENTRY MODE: Organizations can enter into contract with their off-shore partners. There are usually three types of off-shore partnering, they are; Licensing Franchising and Contracts LICENSING: It is a system where the organization plans to give the acceptance for another organization on an off-shore land to do their job (given the key material and also the blue prints). In other words the off-shore organization is more like an assembling unit and doesnt manufacture by its own rule (the R & D, and related decisions). The local company is supposed to pay, royalty for using the trade mark, logo, brand name etc. the exporting company doesnt pay a single dime. But gives the use of copyright and patenting. However, when considered important R & D is taken up by the licensee also. FRANCHISEE: On the other hand is an exclusive retailer or marketer of the organizations services or products. The franchisee (an independent business person) abides by the marketing plan of the original company. They also pay royalty to use the brand and know-how. At times a franchisee is also a licensee with a clause to manufacture too. Thus, franchisees are licensee and franchisee or they are only franchisees. Example: Licensee and franchisee Pizza hut, Coke etc. Franchisee DHL, standard-chartered, Citibank CONTRACTS: Manufactures can be either a franchisee or a licensee for a special period of time, which is also termed the contract period, which is clearly specified in the written documents called contract. This contract also specifies the terms and conditions of the contract or the arrangement (agreement) during the period of the contract. INVESTMENT ENTRY MODE: The types of investment entry mode in internationalization are; Joint Venture Foreign Direct Investment Subsidiaries JOINT VENTURE Dr.N.Kannan, Professor & Head MBA Page 84

Business Policy & Strategic Management Strategy where in an organization joins another counterpart off-shore to invest in mutually beneficial venture which provide greater profits. Also , to get synergistic results. Example: Suzuki motors with Maruthi and TVS. Electrolux with Kelvinator FOREIGN DIRECT INVESTMENT: In this form of internationalization, the partnering organization only invests into the financial part of the firm. This investment can be in the initial investment of the firm (capital) or it can be made for the working capital, expansion capital, capital for R & D etc Example: Hyundai, HM with GM, etc SUBSIDIARIES These are branches or ancillary units of the main organization existing off-shore. They also can be sister concern which offer allied services to the consumers along with the original brands. So, a subsidiary provides services suitable to the customers of that area along with the original ones. Example: HLL for Unilever, Kwalitywalls for Walls etc

TYPES OF INTERNATIONAL STRATEGIES Based on the response given by local customers (local responsiveness) to international products. Besides this, the cost pressures, which arises due to distribution, R & D services etc, which are to be provided, the international strategies are classified into four: High Pressures for Local Responsiveness GLOBAL STRATEGY Cost Pressures Low




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Understanding the key features of these four strategies, we have; GLOBAL STRATEGY The features of global strategy are; Stick to a few products Concentrate on production standards Provide the same products through out the world TRANSNATIONAL STRATEGY The features of this strategy are; Flows of expertise are better Creativity to reduce costs and maintain local responsiveness INTERNATIONAL STRATEGY: The features of this strategy include Creation of value by transferring products and services Offer standardized products with little (or) no differentiation worldwide Keep a tight control over the overseas operations MULTI DOMESTIC STRATEGY The features of this strategy include Try to match the products and services offered in the local market to the ones offered in the international market Customize products and services to the local conditions Example: Lux, Colgate, etc

MERITS OF INTERNATIONAL STRATEGIES Firms opting for International strategies will have following merits; Lower costs Increased sales and higher profits Ample opportunities Economies of scale Use of extra operational capacity and Above average returns DEMERITS OF INTERNATIONAL STRATEGIES The following are the demerits when a firm opts for international strategy; Greater (or) higher costs if failure occurs Uncertainty in economic and political environment Difficulty in managing cultural diversities Cost of co-ordination is high Communication and distribution are difficult and Trade barriers Dr.N.Kannan, Professor & Head MBA Page 86

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HARVESTING STRATEGY It is one of the internal growth strategies. It is also called as Profit Sub-Strategy. It is usually taken up by large organizations for specific businesses (product (or) market division) when generations of cash flow are important (or) are the prime concern. This is taken up to ensure stability in the organization. The circumstances promoting such a strategy may be one (or) more of the following; Declining product market of a unit Nature of expansion required being too costly Small percentage contribution of the business unit to the total scale of the organization Funds available having better use Maximizing the return on investment when it is the right time, and To quit the product market before it is too late FORCED STABILITY STRATEGY This is considered desirable when external and internal conditions are not favourable for growth. The usually created problems are pertaining to resource constraints. They are as follows; Tight conditions in capital and money markets Normally accessible sources of finance can no longer to tapped The drying of loan able revolving funds of development banks Changes in income distribution in the economy, and Competition due to liberalization of imports

INTENSIVE GROWTH STRATEGY The strategy has the following features; Internal growth consists of Increasing sales revenue Increase of profits Increase in the market share of the existing product line or services It involves the concentration of resources in a high growth (or) market segment and is widely used in the industry If the product is not in the maturity stage of the life cycle, this is an attractive strategy It is often limited to firms with a small market share irrespective of whether the product is in the high growth stage (or) maturity stage of the life cycle There are several ways to achieve it: Increasing the volume of scales of existing products in unexplored sectors of the economy Increasing sales by encouraging new uses of the existing product in the same market

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Business Policy & Strategic Management Increasing primary demand for the product at the same price and with the existing organizational set up Increasing the sales volume by introducing minor modifications in the product and entering new product segments Increasing sales in new geographic areas with in the country (or) in markets abroad Increasing sales volume on the basis of new pricing policy, offering economy packs, exchanging old goods for new at discounted rates, discriminatory pricing in rural and urban areas RETRENCHMENT STRATEGIES This grand strategies is followed when an organization substantially reduces the scope of its activities This is done through an attempt to find out the problem areas and diagnose the causes of the problem Steps are to be taken to solve the problems There are different kinds of retrenchment strategies, they are; Turnaround strategy Disinvestment / Divestment / Divestiture Liquidation strategy

SITUATIONS WHEN RETRENCHMENT STRATEGY CAN BE ADOPTED: The prospects of industries and markets are threatened by various external and internal developments. The external development can be; Adverse government policies Demand saturation for the product Emergence of substitute products Changing customer needs and preferences

The internal or company specific developments are; Power management Wrong strategies Poor quality of functional management SYMPTOMS OF DECLINE Symptoms of decline are reflected in Diminishing profitability Dwindling cash flow Falling sales Dr.N.Kannan, Professor & Head MBA Page 88

Business Policy & Strategic Management Shrinking market share or land Increasing debt RECOVERY SITUATION All downfall or decline situations are not hopeless. There are chances of recovery. There are basically four recovery situations; Realistically non recoverable situations Temporary recovery situation Sustained recovery situation Sustained survival situation REALISTICALLY NON RECOVERABLE SITUATIONS This situation arises when; The company is no longer competitive The potential for improvement is low There is a cost disadvantage The demand for the basic products or service is in decline In this case the company has very little chance of survival. TEMPORARY RECOVERY SITUATION This situation arises when in a company; There could be initial successful retrenchment but no turnaround Repositioning of the products is possible New forms of competitive advantage have to be found Cost reduction and revenue generation is possible SUSTAINED RECOVERY SITUATION A genuine and successful turnaround is possible in these cases; It is usually because of new product development and / or market repositioning However, the industry must still be attractive enough Possibly, the decline was caused by more of internal reasons than external reasons SUSTAINED SURVIVAL SITUATION In these cases turnaround is achievable. The industry in this case may be in the process of slow decline. A company in this case can go for divestment or turnaround This is possible only if the company sees a niche market in the industry The company can by itself have a niche and thus seize the chances of surviving and then becoming the leader later on PATH CHOSEN If the organization chosen to focus on ways and means to reverse the process of decline, it adopts the turnaround strategy If it cuts off loss making units, divisions or strategic business units, similarly reduces its product line or the functions performed, then it can adopt a divestment strategy

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Business Policy & Strategic Management If none of these actions work, then it may choose to abandon the activities totally resulting in a liquidation strategy DANGER SIGNS BEFORE TURNAROUND An organization which faces one or more of the problems referred below, is termed as a sick company Persistent negative cash flow Declining market share Deterioration in physical facilities Over manning, high turnover of employees and low morale Uncompetitive products or services Mismangement MAJOR APPROACHES FOR TURNAROUND STRATEGIES The major approaches include; Reducing costs Increasing revenue Reducing assets Reorganizing products and / or markets REDUCING COSTS: This can be achieved by; Cutting down the number of employees by lay offs Reducing less crucial maintenance work Trimming allowances to executives Using less expensive stationary Leasing equipment and machinery than purchasing it INCREASING REVENUE This can be done by; Better investment of cash and current assets Tighter inventory control Better collection of receivable Use of more effective advertising, sales promotion etc Generating and increasing the sales and profit without increasing expenditure REDUCING ASSETS: This can be any one or many of the following; Selling unutilized land Selling away equipment no longer needed Selling away prior purchased equipment which was bought for expansion plans, but due to known or unknown reasons, the expansion didnt take place REORGANISING PRODUCTS AND / OR MARKETS: can be taken up in the following way; Dr.N.Kannan, Professor & Head MBA Page 90

Business Policy & Strategic Management Change in the pace of production Dropping some products or markets Dropping pans of vertical integration Selective price increase Cost control without price reduction

FORCES COUNTER ACTING TURNAROUND Porter stated that there are three very important factors which act against turnaround, they are; Structural factors (the company, its structure, staff etc): since larger the company, bigger the structure with more levels, and greater the number of employees, it is more difficult to turnaround Example: NTC (staff), Binny (structure) Corporate strategy factors (expanding etc) Managerial factors (efficient staff, autocratic managers, etc) ELEMENTS IN A TURNAROUND STRATEGY The ten most important elements in a turnaround strategy are; Changes in the top management Initial credibility building actions Neutralizing external pressures Initial control Identifying quick pay off activities Quick cot reductions Revenue generation Asset liquidation for generating cash Mobilization of the organizations Better internal coordination APPROACHES TO TURNAROUND There are three ways in which turnaround can be handled; The existing CEO and management take advice from an expert and handle the turnaround. This will successful if the CEO has any credibility (good connections) left with the financial institutions (banks, lenders, etc) but it is very rarely attempted The second situation is when the existing team withdraws temporarily and an executive consultant or turnaround expert is employed to do the job. This persons is usually deputed by the financial institutions. Once the job is over, the situation gets back to the original state, and the expert leaves the company. This is rarely used in India The last and the most difficult method to attempt but most often used, involves the replacement of the existing teams, especially the CEO, or by merging the sick unit with a healthy one. DIVESTMENT STRATEGY The divestment strategy is having the following characteristics; It is also called disinvesting or divestiture or cut back

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Business Policy & Strategic Management This strategy involves the sale or liquidation of a portion of the business, or a major division or a profit centre or strategic business unit Divestment is a part of the rehabilitation or restructuring plan that is adopted when a turnaround has been attempted but has proved to be successful The reason for disinvestment is taken up, can also be because a turnaround strategy cannot be used. REASONS FOR DIVESTMENT The reasons for divestment may be; A business that had been acquired proves to be a mismatch and cannot be integrated within the company Continuous negative cash flows from a particular business creates financial problems for the whole company Severity of competition and the inability of a firm to cope with it may cause it to divest Investing the required technological up gradation, essential for the survival of business is not possible here Better alternative may be available for investment, so selling away unprofitable businesses will create chances for investment Due to legal provision It may also be a part of a merger plan or exchange plan with another company

APPROACHES TO DIVESTMENT There are two approaches basically; A part of the company is divested by separating it from the main company and spinning it off (functioning) as a financially and managerially independent company. The parent company may or may not retain partial ownership right Example: Timex division being separated from Titan Division The next option is to sell it out right Example: TOMCO (Tate Oil Mills Company) was sold outright to HLL Lakme was sold outright to HLL by Tatas Thus, it is not just failures that are disinvested careful thinking and planning give raise to ideas of disinvesting unprofitable lines of business and divesting the resources to better investment option. Or companies may try to concentrate in a core sector where there are larger or greater chances of expansion or market leadership, due to better edge over competitors (core competency) and so on. LIQUIDATION STRATEGIES An extreme form of retrenchment strategy is the liquidation strategy. It involves closing down a firm and selling its assets Liquidation: (Undesirable or Difficult) Liquidation is undesirable or difficult because; Dr.N.Kannan, Professor & Head MBA Page 92

Business Policy & Strategic Management It is considered as a lost resort because it leads to serious consequences such as unemployment of worker, termination of opportunities, where a firm could persue any future activities and the stigma (feeling) of failure Political, legal and social problems arise buyers for a company is difficult to find. There is usually inadequate compensation as the assets are considered unusable or scrap LEGAL ASPECTS OF LIQUIDATION Under the Companies Act 1956 in India, liquidation is termed as winding up. Liquidation or winding up according to the act may be done in three ways. Compulsory winding up under an order of the court Voluntary winding up Voluntary winding up under the supervision of the court COMBINATION STRATEGY Companies adopt more than one grand strategy at times, then they are said to persue combination strategies. The combination strategies (usually stability, expansion and at times retrenchment) are adopted by any organization in three ways; Simultaneous adoption two or more strategies are taken up at the same time Sequential adoption adopting one strategy after another Simultaneous and sequential adoption Example: The TATAs after disinvesting in TOMCO, Lakme, used the amount obtained in the development of R & D infrastructure in TATA motors for developing LCVs like INDICA. Also this amount was partially invested in establishing textile retailing of readymade apparels WESTSIDE END GAME STRATEGIES Successful end game strategies are Internal expansion Internal stability Internal retrenchment External stability External retrenchment The possible strategy variations are; Internal like: - reducing costs and assets Dropping products, markets and / or functions External like: - Liquidation Divestment and bankruptcies Related like: - Elimination of related products markets or functions Un related Like: - Elimination of unrelated products, markets or functions Horizontal like: - elimination complementary products or markets Vertical like: - reducing functions These in short are end game strategies Dr.N.Kannan, Professor & Head MBA Page 93

Business Policy & Strategic Management Thus, this clearly gives a picture of the various strategies adopted by industries in day to day functioning of organizations.

UNIT V EVALUATION / CHOICE OF STRATEGY STRATEGY IMPLEMENTAION DEFINITION Strategy Implementation is the process by which strategies and policies are put into action through the development of programs, budgets and procedure MICHEAL The sum total of the activities and choices required for the execution of a strategic plan Once the strategy is formulated, they are implemented on the basis of the following six steps, namely; Structure Policies and directions Resources commitment Leadership Motivation Power and politics STRUCTURE Dr.N.Kannan, Professor & Head MBA Page 94

Business Policy & Strategic Management The organization and the interrelations within the organization constitutes the structure. It is essentially (required) for the implementation of the strategy formulated. Chandler said that, The structure should follow the strategy. But on understanding the essence of both, it has been clarified that both structure and strategy are inter related as it suits the strategy, then the decision is made. POLICIES AND DIRECTIONS Within the organizations both policies and directions plays a very important role. As these policies are what is going to determine our destiny. They are the path on which (or) with the help of which are attain (or) reach our destination (or) goals even objectives. We have different types of policies like marketing policy, financial policy etc, and these can be written, oral, expressed, implied, etc all these have to be considered RESOURCES COMMITMENT The amount of resources available, the resources planned, the resources to be procured, all play a vital role. Thus, proper care is to be taken in allocating resources which can be like Physical Financial Human

LEADERSHIP The potential of leadership is when in the hands of a right leader increases since a good leader can reach heights and help in the prosperity of firm by good strategy implementation. The least leader can achieve good goals and objectives set up with optimal resources on time. The leadership grid of Blake and Mouten as follow;



Care for the Worker


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Business Policy & Strategic Management care for the task 1 , 1 impoverished Manager 1 , 9 country club Manager 5 , 5 Middle of the Road Manager 9 , 1 task Manager 9 ,9 Team Manager MOTIVATION Proper motivation can be achieved by using the proper care like coercive power, rewarding power. Thus, properly motivating people to go ahead. Here one should mention the Mckinseys 7s frame work as all those elements together form a structure and together work motivated, a loss of one S will result in the loss of entire structure.


POWER AND POLITICS The upliftment and also the downfall can be caused due to power. Thus, proper care has to be taken exercised while using power whereas the politics is the undue influence exercised for the good (or) lead for an individual (or) the occurrence of an event away from the path (or) course of action When these steps are properly taken care, then strategy implementation becomes easy and also it becomes easy to achieve our goals MANAGEMENT BY OBJECTIVES (MBO) MBO or management by objectives is defined as; a technique need for improving the performance of management. It shapes a clearly structured, generally applicable implementation methodology out of the various new concept and theories of management. It is also called as result management or management by results.

STEPS IN MBO OR PROCESS OF MBO The following are the steps in MBO; Setting objectives Developing action plan Conducting periodic review Appraising annual performance

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PRECAUTIONS FOR MBO PROCESS: The following are the precautionary measures that are to be taken for establishing objectives; Setting clear and well defined objectives Communicating the objectives to achieve results Integration of departmental objectives with overall organizational objectives Set reasonably attainable objectives Consideration for uncontrollable factors while fixing the individual factors, i.e, objectives Review of objective periodically and change if necessary Complete participation by all personal

RESPONSIBILITY OF MBO The responsibilities of MBO are; Performance of ones own managerial unit Contribution of ones unit to other units Contribution expected from other units

FLOW CHART FOR MBO The formal flowchart of annual MBO appraisal is similar to the flow chart given below;

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Business Policy & Strategic Management OBJECTIVE ACHIEVEMENT















ADVANTAGES The advantages of MBO are as follows; Provides a basis for planning It provides meaning and direction to people Better coordination is possible It constitutes standards and so it is a controlling measure It is a motivating device It shows the path to the management to think ahead It makes individual know what is expected to them It makes individual more aware of the organsiational goals It makes evaluation process more equitable by focusing on specific accomplishment. It also lets subordinates know their objectives will DISADVANTAGES The limitations of MBO are as follows; Not all accomplishments can be quantified This may cause tension and resentment It is difficult for the superiors to help instead of judging the subordinate Not all people are capable of participating and Awareness of MBO is very limited among personnel, especially about its merits.

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Business Policy & Strategic Management MANAGEMENT BY EXCEPTION (MBE) Management by Exception or MBE is a system of identification and communication that signals to the manager when his attention is needed. This involves the use of MBE particularly in the controlling aspect. Thus, it can be stated that MBE is a controlling technique PROCESS OF MBE The basic steps in the process of MBE are Measurement Projection Selection Observation Comparison Decision-making Now, understanding each of these steps in detail. We have, Measurement: By assigning values to past and present performances, exceptional areas can be identified. Projection: All the values that are meaningful to the organizational objectives are to be extended (projected) to see further or future requirements (whether they can be achieved or not) Selection: this involves criteria and method which the management will use to follow the progress path towards organizational objectives. Observation: Current performances are observed and measured so that managers are aware of the current state of affairs in the organization. Comparison: It involves the evaluation of the actual performance against planned performance, identifying the exceptions that require attention and reporting the variations to the management. Decision-Making: This involves prescribing the action that must be taken in order to bring performance back into control or to adjust expectations to reflect changing conditions within and outside the organization or to exploit the opportunity. DIFFERENCE BETWEEN MBE AND OTHER PRACTICES The difference between MBE and other practices is as follows; Superiors attention is drawn only in the case of exceptional difference between planned performance and actual performance. When there is no such large or exceptional differences, the decisions are taken by subordinate manager All exceptional work should go through the entire process till normally is established. ADVANTAGES The following are the advantages of MBE Executives are left with more time to tackle bigger and tougher issues as the details of small problems are left to the subordinates Dr.N.Kannan, Professor & Head MBA Page 99

Business Policy & Strategic Management There is better utilization of managerial talent across the organization as, even the subordinates get to implement their own decisions and solve problems in their own way, however small they may be It increases the span of management and delegation of authority is improved It provides greater opportunities and thus increases confidence and motivation It uses the latest knowledge on trends, history and business data It forces every manager to be thorough and precise and also upto date with all relevant information. It helps to identify problems before they become big It also prevents last minute rush and panic Qualitative and quantitative yardsticks can be established judging the situations and people Increased chances of better performance appraisal and hence improves motivation Communication is improved between different segments of an organization Better organizational cohesiveness for the achievement of objectives The focus on results causes it to identify any problem in any part of the organization LIMITATION The limitations on MBE are as follows; Newly established organisations and organizations with a dynamic environment (fast changing) cannot adapt this technique easily Establishing standards i.e., both qualitative and quantitative takes a lot of time and involves a lot of effort and precision (accuracy) Proper (situation) and knowledgeable subordinates need to be found, which is a difficult process Subordinate act out of over confidence and think they can handle bigger problems too. Thus, often tougher problem go unreported and by the time it comes to the superior, it is many times too late to set things right. Keeping track of all the latest trends is often tedious (tough) and at times inaccessible (unreachable) to all subordinates Too much of precision and accuracy leads to magnifying even the slightest change in trend and creating problems for the organization and the executive Superseding (over looking) superiors in the vital communication process is possible Training subordinates to be almost at the level of superiors, but still retaining them at the lower level, often leads to demotivation and stress among individuals. Too much of focus on result leads to lack of quality in the process.

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Business Policy & Strategic Management MCKINSEYS 7S (6S) FRAME WORK: Peters and Watermann, the two organizational scientists came forward with the Mckinsey 7S frame work to give an idea about the inter relations that exists in the organizations among the staff or workers and the management. They evaluated and categorized 22 components into 7 distinguishing or distinguished categories. They are; 1. structure 2. strategy 3. system 4. styles 5. skills 6. staff and 7. shared values Now understanding these categories in detail, we have; STRUCTURE: The attributes of the organization which can be expressed through an organization chart such as span of control, line of command, communication network, authority, responsibility, centralization, decentralization etc come under this. STRATEGY: Actions that an organization plans or undertakes in response to a particular situation or in anticipation of any future development in the external environment are termed strategy. Example: an increase in the demand (future) if expected results in extra production. This in term means greater intake of raw materials (inventory policy) adjustments and reallocation of personnel (production policy) to the production department. These may lead to vacancies resulting in new recruitment (personnel policy). All this would require additional financial resources (financial policy) and to bet back the investment, the product should be thoroughly marketed (sales and marketing policy). SYSTEMS: Procedures and process regularly followed by an organization, so as to improve its efficiency and eliminate wastage. STAFF: The kinds of specialties / professions that are required and represented in an organization. Because specialized staff handle specialized jobs. Example: engineers in production, accounting and financial experts for income and profit calculations, MBAs for administration etc. SKILLS: Distinctive attributes and capabilities of the organization and its people in comparison with its competitors. Example: Highly expertise technical staff, greater creativity among employees etc.

STYLE: Patterns of behaviour and managerial styles of senior managers which influence all the employees positively.

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Business Policy & Strategic Management SHARED VALUES: Spiritual or philosophical principles and concepts that an organization is able to instill in its members. The first three components i.e., the systems, structure and strategy do not change or vary regularly. They are adapted according to the changes in the organizations environment and thus are termed HARDWARE. The remaining three in other words, staffs, styles and skills, need to be altered on a regular basis to help in effective and efficient functioning of the organization. That is the reason why the overall skills of the staff are repetitively altered through training. The styles are modified by giving additional responsibilities and thus the entire staff can be improved by job enlargement, enrichment or rotation. Hence as these components are very malleable, they put together are termed SOFTWARE. The key binding factor between these two is the core ideology, mission, vision or the core values for which the organization has been established and exists. This frame work is the idea of an ideal organization. STRATEGY EVALUATION TOOLS AND TECHNIQUES: The strategies made by the companys or chosen by the organizations have be evaluated. There is a need to assess if the strategy chosen is correct or not. It is for the purpose that the following tools or techniques are use. They are; Boston Consultancy Group Matrix (BCG Matrix) General Electric Company Matrix (GEC Matrix) HOFERS product / Market Evolution Matrix Directional Policy Matrix Strategic Position and Action Evolution (SPACE) strategy Matrix Corporate Parenting Analysis (or) Parenting Fit Matrix TOWS Matrix ARTHUR DLITTLE company Matrix Now understanding each of these matrices in detail we have;

BOSTON CONSULTANCY GROUP (BCG) MATRIX: The Boston Consultancy Group which actively involves in developing strategies for organizations, based on their products, market share in relation with the market growth rate come up with the concept of the BCG Matrix:-


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The relative market share refers to the organizations (strategic Business Unit or SBU) market share in relation to the largest competitors in the segment. It serves as a measure of the companys strength in the relative market segment. The market growth rate indicates the annual growth rate of the market in which the business operates. QUESTION MARKS: These are the products of an organization or SBUs which are surviving in a high growth market but have relatively low market share. A lot of cash is required to maintain them as functioning products / SBUs It also requires a lot of person plant, equipment and time. The organization has to think hard whether to keep it or remove it because maintenance involves lot of cash. If they are successful, they increase the companys image and thus bring out cash later. Every company is thus advised to invest in one or two question marks. STARS: If a question mark is successful, then it is termed as a star It is a market leader in a high growth market. However, it need not necessarily produce positive cash flow for the organization The organization has to spend large amounts of money to keep up the fight against competition. Example: Rin soap during its introductory period Ujala liquid blue .. CASH COWS: When the markets annual growth rate slows down, then a star becomes cash cow They have large market share They earn a lot of cash for the company There is no need to expand the organization as the market is slow Economies of scale are practiced as it is a leader They bring high profit margins This money can be used to develop future SBUs or Products DOGS: Weak products in weak markets are termed dogs, same in the case of SBUs They have low profits and so may even bring losses For sentimental reasons, they are continued in production Unless a term around take place they can be let off. The general tendencies of the market are to build on the question marks as they may in the future become stars. The cash cows are to be milked for the maximum profits possible. Harvesting i.e., R & D, investment, to eliminate wastage, wear and tear are taken up for be Dr.N.Kannan, Professor & Head MBA Page 103

Business Policy & Strategic Management earned. Lastly, the products or SBUs which are functioning bad under question marks and dogs need to be divested or let off. GENERAL ELECTRIC COMPANY MATRIX: The GEC Matrix identifies the business strengths and find out or give solution about how to proceed. BUSINESS STRENGHTS STRONG PROTECT POSITION MEDIUM INVEST TO BUILD WEAK BUILD SELECTIVELY LIMITED EXPANSION (OR) HARVEST THRUST DIVEST







PRODUCT POSITION: Invest to grow at maximum digestible speed Concentrate effort on maintaining strength Example: Colgate

INVEST TO BUILD: Challenges for leadership Build selectively on strengths Reinforce vulnerable areas Example: Chick Shampoo BUILD SELECTIVELY: I Specialize around limited strengths Seek ways to overcome weakness Withdraw if indications sustainable growth are lacking Example: Tide Washing Powder BUILD SELECTIVELY: II Dr.N.Kannan, Professor & Head MBA Page 104

Business Policy & Strategic Management Invest heavily in most attractive segments Build up ability to counter act competition Emphasize profitability by arising productivity Example: Ariel washing powder, Whirlpool home appliances. SELECTIVELY MANAGE FOR EARNINGS: Protect existing programs / products Concentrate investments in segments where Profitability is good and risks are relatively low. Example: Pepsodent G LIMITED EXPANSION (OR) THRUST FOR HARVEST: Look for ways to expand without high risk or Minimize investment and rationalize operations Example: Aircel (RPG wings) PROTECT AND REFOCUS: Manage current earnings Concentrate on attractive segments Defend strengths Example: Pizza hut, Basking Robbins MANAGE FOR EARNINGS: Protect position in most profitable segments Upgrade product line Minimize investment Example: Fair and Lovely, Dettol DIVEST: Sell at a time that will maximize cash value Cut fixed costs and avoid investment till the asset can be disposed off or turnaround Example: Chandrika

HOFERS PRODUCT / MARKET EVOLUTION MATRIX: The following is the grid or matrix for Hofers product / market evolution, where in A, B, C, D and E are assumed to be different products or businesses.


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Hofer and Schnnedel proposed a 15 cell matrix, similar to the 9 cell GEC matrix. This matrix considers the stages of development of the product or market the competitive position of these different products / business of a companys corporate portfolio or list. Business A is a high potential one and thus deserves lot of investment to expand Business B has to expand cautiously as it may have to drop off heavy loads when entering the next stage. So, during investment if proper care is taken then unnecessary investment can be stopped, saved or reduced. Business C is a losing business and thus has to be discarded or shaken out. Business D is an old business which is well established and generates a lot of cash which can be diverted to A and B Business E is a potential loses which is declining and can be considered for disinvestments This matrix thus, portrays a corporate portfolio with high level of accuracy and completeness.

DIRECTIONAL POLICY MATRIX: This policy matrix was developed by shell chemicals UK, using the two parameters of Business Sector prospects and companys competitive activities. Factors affecting business sector prospects as unattractive average or attractive, such as Market growth Market quality Market supply and so on





Dr.N.Kannan, Professor & Head MBA

Business Policy & Strategic Management SEGMENTATION INNOVATION

COMPANYS COMPETITIVE ABILITIES These are combined with the organisations strengths and weakness to evaluate the risk to the organiations and its products based on the environmental threats and the probability of their occurrence.

STRATEGIC POSITION AND ACTION EVALUATION (SPACE) STRATEGY MATRIX: This approach considers the companys strategic position in relation with the strategic position of the industry.


The companys strategic position is determined on the basis of the financial strength (ROI, leverage, liquidity, etc) and competitive advantage (market share, product quality, etc). The industrys strategic position is based on industry strength (growth and profit potential etc) and environment stability (technological changes, competitive pressures etc) When these two positions are combined four strategies are evolved. They are; Aggressive - divestment, liquidation and vertical integration Defensive - divestment, liquidation and retrenchment Conservative - stability, conglomerate diversification Concentric - concentric merger, conglomerate merger and turnaround

CORPORATE PARENTING ANALYSIS: PARENT FIT MATRIX This matrix analyses the aspects of a new venture. Compbell, Goold and Alexander suggested that the manner in which the centre manage and nurtures the individual business is known as corporate planning. The total corporation is viewed in terms of resources and capabilities, which can be used to build individual business as well as create synergies across these businesses. (Especially and only diversified business)

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Besides, this matrix views the organization in totality as a diversified corporation and focuses on the value added or created from this relationship between the parent (main company) and its children (other business) Thus, this matrix mainly addresses what businesses should a diversified corporation own and why? What organizational structure, management process and philosophy will faster superior performance from the individual business unit? The following five different strategic positions results, with its own rules for corporate strategy and critical success factor. HEARTLAND BUSINESSES: The parent company plays a good role of knowing the critical success factors of the child business and thus, there are opportunities for the parent to make improvement. EDGE OF HEARTLAND BUSINESS: In this some characteristics are known by the parent company and they fit well into the parent company, but a few do not. Thus, these are a need for understanding between the parent and the child. Expansion strategies are suitable provided if the parent has the necessary confidence to devote a large investment of both time and money to these businesses. BALLAST BUSINESS: These fit well with the parent company, but have very few opportunities for improvement by the parent. These are business which have been established long time back and are still surviving. They contribute (or give) a lot to the business, but may also drag the parent. A is the parent cannot do anything it is better to retrench these at the right time if the opportunity cost is higher than the expected future cash flows. ALIEN TERRITORY BUSINESS: They have very little opportunity as they are misfits between the characteristics of the parents and the business and critical success factors. These are a result of misguided diversification in the past. Retrenchment strategy is the best under the circumstances. VALUE TRAP BUSINESS: These have good parenting opportunities but are a misfit with the understanding of the other units of the parent. These are the business which have very good growth but do not suit Dr.N.Kannan, Professor & Head MBA Page 108

Business Policy & Strategic Management the parents core competencies. They should be avoided, retrenched or left to function separately. TOWS MATRIX: This theory was proposed by Heinz Weihrich. This is an important strategy formulation matching tool. The TOWS matrix alternative strategies are listed below;


W T STRATEGY: The W T or the mini mini strategy seeks to minimize the weakness and threats. They can be even overcome. In some cases an unprofitable business that cannot be revived may be given up. W O STRATEGY: The W O or mini maxi strategy aims at mini missing the weaknesses and maximizing the opportunities. The solutions are to given thrust to R & D and to develop technology. Measures to reduce the time lag and this is to be in a better position to exploit the opportunities. Maximize on the growing demand. S T STRATEGY: The S T or maxi mini strategy attempts to use the organizations strategy to deal with environmental threats. Dr.N.Kannan, Professor & Head MBA Page 109

Business Policy & Strategic Management S O STRATEGY: This maxi maxi strategy, which is the most desirable and advantageous strategy, seeks to mass up a firms strengths to exploit the opportunities. ARTHUR DLITTLES COMPANY MATRIX:










This matrix identifies the product life cycle (PLC) with the business positions. This uses the link of whether or not to continue in the business of manufacturing a product, if the product in itself is on the decline then, there is no need to further proceed in the business in its self. i.e., manufacturing of the product. Based on the above criterion, the four stages of PLC can be plotted against the 5 stages of business strengths to get four strategies. They are; Dr.N.Kannan, Professor & Head MBA Page 110

Business Policy & Strategic Management Build (increase investment, and time) Hold (expand, improve R & D) Harvest (encash as mush as possible) Unacceptable (Sell off it ROI is difficult) These in brief are the commonly used strategy evaluation tools or techniques. GENERIC COMPETITIVE STRATEGIES: These strategies are also called Michael Posters Generic strategies. They are the types of competitive advantage being pursued against the target market.


The different types of strategies are Overall cost leadership strategy Broad differentiation strategy Best cost provider strategy Focused low cost strategy Focused differentiation strategy Now, understanding these strategies in detail we have;

LOW COST PROVIDER STRATEGY: This is also called cost leadership strategy. The overall low cost leadership strategy is the appeal (favour) to a large and varied (different) customers based on being the overall low cost provider of a product or services. Dr.N.Kannan, Professor & Head MBA Page 111

Business Policy & Strategic Management BROAD DIFFFERENTIATION STRATEGY: Seeking to differentiate (separate) the companys product, offering in such a way which is different from the competitors that will be appealing (liked) by a wide variety of customers. FOCUSSED LOW COST STRATEGY: Concentrating on a narrow buyer segment (niche) and overcoming competition by serving these members at lower cost than rival companies. FOCUSSED DIFFERENTIATION STRATEGY: Concentrating on a narrow buyer segment (niche) and overcoming the rivals by offering these consumers certain specific product attributes (quality, cost, range, availability, guarantees, service, etc) that meet their, tastes and requirement better than rivals product BEST COST PROVIDER STRATEGY: Giving customers more value for their money by incorporating good to excellent product attributes at a lower cost than competitors. The target is to have the lowest (best) costs and prices compared to competitors who are offering products with comparatively costlier or higher attributes. Each of these strategies is unique to compete and operate. Thus, we can define strategic implementation clearly now. RELATIONSHIP OF IMPLEMENTATION TO THE PRODUCT LIFE CYCLE Functional R&D Production Marketing Physical focus distribution Pre Coordination Reliability Production Test Plan commercialization of R & D tests release design process marketing shipping and other blueprints planning detailed schedules, functions purchasing marketing mixed department plan carloads lines up rent vendors and warehouse subcontractors space, trucks Introduction Engineering: debugging in R & D production, and field Production Technical corrections (engineering changes) Subcontracting centralize pilot plants; test various processes; develop standards Centralize production phase out subcontractors expedite vendors Induce trial: fill pipeline: sales agents or commissioned salespeople; publicity Channel commitment brand emphasis salaried sales force, reduce Plan a logistics system


Start successor product

Expedite deliveries shift to owned facilities

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Business Policy & Strategic Management output; long runs Develop Many short minor runs variants decentralize reduce costs import parts, through low priced value models analysis routinization originate cost reduction major adaptations to start new cycle Withdraw Revert to all R & D subcontracting from initial simplify version production line careful inventory control; buy foreign or competitive goods; stock spare parts price if necessary Short-run promotions salaried sales people cooperative advertising forward integration routine marketing research: panels, audits Revert to commission basis; withdraw most promotional support raise price selective distribution careful phaseout, considering entire channel


Marketing and logistic

Reduce costs and raise customer service level control finished goods inventory



Personnel Pre Recruit for commercialization new activities negotiate operational changes with unions

Finance Life cycle plan for cash flows profits, investments subsidiaries


Staff and train middle management stock options

Accounting deficit; high net cash outflow

Management accounting Payout planning; full costs/revenues determine optimum lengths of life-cycle stages through present-value method Help develop production and distribution




Final legal Panels and clearances other test (regulatory respondents hurdles, patents) appoint lifecycle coordinator Innovators and some early adopters Page 113

Neglects opportunit is workin similar ide

(monopoly disparagem of legal extra

Dr.N.Kannan, Professor & Head MBA

Business Policy & Strategic Management for executives authorize large production facilities Growth Add suitable personnel for plants many grievances heavy overtime Transfers, advancements incentives for efficiency safety; and so on suggestions system Very high profits; net cash outflow still rising sell equities Declining profit rate but increasing net cash flow standards prepare sales aids, sales management portfolio Short term analyses based on return per scarce resource Analyze differential cost/revenue spearhead cost reduction, value analysis and efficiency drives Analyse escapable costs pinpoint remaining outlays


Early adopters and early majority Pressure for resale price maintenance price cuts bring price wars; possible price collusion Accurate sales forecast very important Early adopters, early and late majority, some laggards; first discontinued by late majority Mainly laggards

(oligopoly few im improve, o price


(monopoly competitio first shak yet many r


Find new slots encourage early retirement

Administer system; retrenchment sell unneeded equipment export the machinery

(oligopoly after se stakeouts, few rivals

POLICIES CHANGES AND IMPLEMENTATION Changes in the strategic direction do no occur automatically. Operational plans and tactics must be established to make a strategy work

DEVELOPMENT OF PLANS AND POLICIES Creating plans and policies leads to conditions where sub ordinate managers will know what they are supposed to do and willingly implement the decision Managers create plans and policies to make the strategy work. Policies provide the means for carrying out plans and strategic decisions. The amount of planning and policymaking in the formal sense will vary with the size and complexity of the firm. The processes involved in establishing plans and policies are quite similar to those influencing strategy formation and choice. Plans and policies should be flexible to help repeated work and inflexible

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Business Policy & Strategic Management to stop any problems arising after the first attempt. So, criteria for judging the adequacy of plans and policies developed would include the following; Do they reflect present (or) desired company practices and behaviour? Are they practical, given existing or expected situation? Do they exist in areas critical to the firms success? Are they consistent with one another and do they reflect the timing needed to accomplish goals? As such the plans and policies will: Specify more precisely how the strategic choice will come to be what is to be done, who is to do it, how it is to be done and when it should be finished? Establish a follow up mechanism to make sure the strategic choice, plans and policy decision will take place Lead to new strength which can be used for strategy in the future FINANCIAL AND ACCOUNTING POLICIES AND PLANS Financial and accounting plans and policies are closely related to the resources allocation process. These are set to provide guidelines in advances about the following issues; Where the capital will come from? How the capital will, may or may not be used? How the recurring needs will be met? How to handle inventories? Which accounts to capitalize? What tax approaches to use? And How to treat expenses and costs? These policies can make a huge difference in the firms appearance of success (or) failure Basically the main areas of focus are capital, lease (or) buy decisions, risk and use of assets. Hence, some of the crucial financial questions needing implementation include; Where will we get additional funds to expand, either internally or externally? If external expansion is desired, how and where will it be accomplished? What will the strategy do to our cash flow? What accounting systems and policies do we use? (LIFO or FIFO) What capital structure policies do us persue? No debt or a heavily leveraged structure How much should we pay out in dividends? How much cash and how many other assets do we keep on hand? Should we hedge our foreign currency exchange risk? It is crucial that the financial plans and policies are such that the funds needed are available at the right time and at lower cost. MARKETING PLANS AND POLICIES If marketing plans and policies dont rest with the corporate strategy, and if marketing plans dont fit carefully with other functional policies, the objectives of the company will not be Dr.N.Kannan, Professor & Head MBA Page 115

Business Policy & Strategic Management met. The major areas are products and markets, distribution and promotion, price and packaging. Some of the critical marketing plans and policy questions include; Specifically, which product or services will be focused on, present one or new ones? Which channels will be used to market these products or services? Will we use exclusive dealership? Or multiple channels? How ill we promote these products or services? Is it our policy to use large amounts of TV advertising or no advertising? Heavy personal selling expenses or none? Price competition or non price competition Do we have adequate sales force? PRODUCTION OPERATIONS MANAGEMENT (POM) POLICIES AND PLANS POM is another area needing implementation plans and policies, the areas include; capacity & utilization, location of facilities. Processes, equipment, and maintenance and sourcing. Critical questions in this area include; Can we handle the business with our present facilities and number of shifts? Must we add equipment, facilities and shifts? Where? Are lay offs is needed? Should we sub contract? What is the firms inventory safety level? How many suppliers do we need for purchases of major supplies? What level of productivity and costs should the firm seeks? How much emphasis should there be on quality control and maintenance? How far ahead should we schedule production? How is the management of production and operations integrated with our strategy? Should we locate facilities in foreign countries or exit countries where facilities are at risk? RESEARCH AND DEVELOPMENT PLANS AND POLICIES R & D function which takes care of production, operations and marketing. The crucial areas are; Products and processes Basic and applied research Offensive or defensive strategies and Allocating R & D resources The crucial implementation questions include; Will we emphasize product (or) process improvement? Should we encourage basic research (or) focus on commercial development? Are we going to be the leaders (or) followers? How much will we spend on R & D? Which technology should we persue, and when should we persue it? How can we manage the transition from one technology to another? How do we prepare the firm for technological change? Dr.N.Kannan, Professor & Head MBA Page 116

Business Policy & Strategic Management But care needs to be taken while R & D policies are finalized.

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Business Policy & Strategic Management PERSONNEL, LEGAL AND PUBLIC RELATIONS POLICIES AND PLANS: Besides the four major line functions, major staff functions need the functional policy implementation too. The major areas are Personnel Legal issues and Public relations The crucial implementation questions for personnel include; Will we have an adequate work force? How much hiring and retraining are necessary? What types of individuals do we need to recruit? College graduates? Members of minority groups? How should we recruit through advertising (or) personal contact? What methods of selection should we use informal interviews or very sophisticated testing? What standards and methods are used for promotion? (Internal Promotion, Basis for seniority) What will our payment policies, Incentives plans, benefits, labour relations, policies etc? Is executive compensation tied to strategic objectives? The basic questions for the legal staff include: Are the policies and plans in other areas legal? What are the implementations of testing the law? Finally, the public relations policies deal with the presentation of the corporate image and involvement in community activities Theses are the major areas to be noted and identified while implementing plans and policies in the different strategies in the strategic choice.

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