Sie sind auf Seite 1von 230




The term strategic management is used to refer to the entire scope of

strategic-decision making activity in an organization. The following statements serve as a number of workable definitions of strategic management: Strategic management is the process of managing the detection of organizational mission while managing the relationship of the organization to its environment (James M. Higgins). Strategic management is defined as the set of decisions and actions resulting in the formulation and implementation of strategies designed to achieve the objectives of the organization.

What is strategy?
Overall Definition: "Strategy is the direction and scope of an organization over the long-term: Strategy, a word of military origin, refers to a plan of action designed to achieve a particular goal. In military usage strategy is distinct from tactics, which are concerned with the conduct of an engagement, while strategy is concerned with how different engagements are linked. Strategy at Different Levels of a Business Strategies exist at several levels in any organization - ranging from the overall business (or group of businesses) through to individuals working in it. Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated clearly in a "mission statement". Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc. Operational Strategy - is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc. How Strategy is Managed - Strategic Management


Page 2

In its broadest sense, strategic management is about taking "strategic decisions" - decisions that answer the questions above. In practice, a thorough strategic management process has three main components, shown in the figure below:

Strategic Analysis This is all about the analysing the strength of businesses' position and understanding the important external factors that may influence that position. The process of Strategic Analysis can be assisted by a number of tools, including: PEST Analysis - a technique for understanding the "environment" in which a business operates Scenario Planning - a technique that builds various believable views of possible futures for a business Five Forces Analysis - a technique for identifying the forces which affect the level of competition in an industry Market Segmentation - a technique which seeks to identify similarities and differences between groups of customers or users Directional Policy Matrix - a technique which summarises the competitive strength of a businesss operations in specific markets Competitor Analysis - a wide range of techniques and analysis that seeks to summarise a


Page 3

businesses' overall competitive position Critical Success Factor Analysis - a technique to identify those areas in which a business must outperform the competition in order to succeed SWOT Analysis - a useful summary technique for summarising the key issues arising from an assessment of a businesses "internal" position and "external" environmental influences. Strategic Choice This process involves understanding the nature of stakeholder expectations (the "ground rules"), identifying strategic options, and then evaluating and selecting strategic options. Strategy Implementation Often the hardest part. When a strategy has been analysed and selected, the task is then to translate it into organisational action.

The Nature of Strategic Management:

Defined: Art & science o f for mu lating, imp le ment ing, and e va lu at ing, cr o s s- fu nct io na l d ec is io ns t hat e na b le a n o r ga n iz at io n t o achie ve it s o bje ct ive s.


Page 4

Achieving Sustained Competitive Advantage:

1. Adapting to change in external trends, internal capabilities and resources 2. Effectively formulating, implementing & evaluating strategies Adapting to Change Key Strategic Management Questions:

What kind of business should we become? Are we in the right fields Are there new competitors What strategies should we pursue? How are our customers changing?


Page 5

Key Terms: Vision Statement What do we want to become? Mission Statement What is our business? Opportunities & Threats (External) Analysis of Trends: Economic Social Cultural Demographic/Environmental Political, Legal, Governmental Technological Competitors

Strengths & Weaknesses (Internal): Typically located in functional areas of the firm Management Marketing Finance/Accounting Production/Operations Research & Development Computer Information Systems


Page 6

Comprehensive strategic management model:

Benefits of Strategic Management: Financial Benefits: y y y Improvement in sales Improvement in profitability Productivity improvement

Non-Financial Benefits: Improved understanding of competitors strategies Enhanced awareness of threats Reduced resistance to change Enhanced problem-prevention capabilities

Advantages of International Operations:     Absorb excess capacity Reduce unit costs Spread risk over wider markets Low-cost production facilities


Page 7

Disadvantages of International Operations

    Difficult communications Underestimate foreign competition Cultural barriers to effective management Complications arising from currency differences

Scope of strategic management:

j. Constable has defined the area addressed by strategic management as "the management processes and decisions which determine the long-term structure and activities of the organization". This definition incorporates five key themes: * Management process. Management process as relate to how strategies are created and changed. * Management decisions. The decisions must relate clearly to a solution of perceived problems (how to avoid a threat; how to capitalize on an opportunity). * Time scales. The strategic time horizon is long. However, it for company in real trouble can be very short. * Structure of the organization. An organization is managed by people within a structure. The decisions which result from the way that managers work together within the structure can result in strategic change. * Activities of the organization. This is a potentially limitless area of study and we normally shall centre upon all activities which affect the organization.

Components of a Strategy Statement The strategy statement of a firm sets the firms long-term strategic direction and broad policy directions. It gives the firm a clear sense of direction and a blueprint for the firms activities for the upcoming years. The main constituents of a strategic statement are as follows: 1. Strategic Intent An organizations strategic intent is the purpose that it exists and why it will continue to exist, providing it maintains a competitive advantage. Strategic intent gives a picture about what an organization must get into immediately in order to achieve the companys vision. It motivates the people. It clarifies the vision of the company. Strategic intent helps management to emphasize and concentrate on the priorities. Strategic intent is,

nothing but, the influencing of an organizations resource potential and core competencies to achieve what at first may seem to be unachievable goals in the competitive environment. A well expressed strategic intent should guide/steer the development of strategic intent or the setting of goals and objectives that require that all of organizations competencies be controlled to maximum value. Strategic intent includes directing organizations attention on the need of winning; inspiring people by telling them that the targets are valuable; encouraging individual and team participation as well as contribution; and utilizing intent to direct allocation of resources. Strategic intent differs from strategic fit in a way that while strategic fit deals with harmonizing available resources and potentials to the external environment, strategic intent emphasizes on building new resources and potentials so as to create and exploit future opportunities. 2. Mission Statement Mission statement is the statement of the role by which an organization intends to serve its stakeholders. It describes why an organization is operating and thus provides a framework within which strategies are formulated. It describes what the organization does (i.e., present capabilities), who all it serves (i.e., stakeholders) and what makes an organization unique (i.e., reason for existence). A mission statement differentiates an organization from others by explaining its broad scope of activities, its products, and technologies it uses to achieve its goals and objectives. It talks about an organizations present (i.e., about where we are).For instance, Microsofts mission is to help people and businesses throughout the world to realize their full potential. Wal-Marts mission is To give ordinary folk the chance to buy the same thing as rich people. Mission statements always exist at top level of an organization, but may also be made for various organizational levels. Chief executive plays a significant role in formulation of mission statement. Once the mission statement is formulated, it serves the organization in long run, but it may become ambiguous with organizational growth and innovations. In todays dynamic and competitive environment, mission may need to be redefined. However, care must be taken that the redefined mission statement should have original fundamentals/components. Mission statement has three main components-a statement of mission or vision of the company, a statement of the core values that shape the acts and behaviour of the employees, and a statement of the goals and objectives. Features of a Mission a. b. c. d. e. f. g. Mission must be feasible and attainable. It should be possible to achieve it. Mission should be clear enough so that any action can be taken. It should be inspiring for the management, staff and society at large. It should be precise enough, i.e., it should be neither too broad nor too narrow. It should be unique and distinctive to leave an impact in everyones mind. It should be analytical,i.e., it should analyze the key components of the strategy. It should be credible, i.e., all stakeholders should be able to believe it.


Page 9

2. Vision A vision statement identifies where the organization wants or intends to be in future or where it should be to best meet the needs of the stakeholders. It describes dreams and aspirations for future. For instance, Microsofts vision is to empower people through great software, any time, any place, or any device. Wal-Marts vision is to become worldwide leader in retailing. A vision is the potential to view things ahead of themselves. It answers the question where we want to be. It gives us a reminder about what we attempt to develop. A vision statement is for the organization and its members, unlike the mission statement which is for the customers/clients. It contributes in effective decision making as well as effective business planning. It incorporates a shared understanding about the nature and aim of the organization and utilizes this understanding to direct and guide the organization towards a better purpose. It describes that on achieving the mission, how the organizational future would appear to be. An effective vision statement must have following featuresa. b. c. d. e. It must be unambiguous. It must be clear. It must harmonize with organizations culture and values. The dreams and aspirations must be rational/realistic. Vision statements should be shorter so that they are easier to memorize.

In order to realize the vision, it must be deeply instilled in the organization, being owned and shared by everyone involved in the organization. 3. Goals and objectives A goal is a desired future state or objective that an organization tries to achieve. Goals specify in particular what must be done if an organization is to attain mission or vision. Goals make mission more prominent and concrete. They co-ordinate and integrate various functional and departmental areas in an organization. Well made goals have following featuresa. b. c. d. e. These are precise and measurable. These look after critical and significant issues. These are realistic and challenging. These must be achieved within a specific time frame. These include both financial as well as non-financial components.

Objectives are defined as goals that organization wants to achieve over a period of time. These are the foundation of planning. Policies are developed in an organization so as to achieve these objectives. Formulation of objectives is the task of top level management. Effective objectives have following features-


Page 10

f. These are not single for an organization, but multiple. g. Objectives should be both short-term as well as long-term. h. Objectives must respond and react to changes in environment, i.e., they must be flexible. i. These must be feasible, realistic and operational. Dimensions of Strategic Management Strategic management process involves the entire range of decisions. Typically, strategic issues have six identifiable dimensions: * Strategic issues require top-management decisions * Strategic issues involve the allocation of large amounts of company resources * Strategic issues are likely to have significant impact on the long-term success of the firm * Strategic issues are future oriented * Strategic issues usually have major multifunctional or multibusiness consequences * Strategic issues necessitate considering factors in the firm's external environment.

Importance of strategic management:

Strategic management used to play a different role in more predictable times after the Second Word War. Strategic plans of the past usually range 3 to 5 years. Some companies could even have plans for 10 good years. That's not possible today given rapid evolution of our society. What still matters in strategic management lies in the value of planning ahead. There's an old saying that if you fail to plan, you are planning to fail. By acting on this, strategic management actually gives the organization direction, a sense of identity and unity towards what the business goal. Therein lays the continued importance of strategic management towards business success. Every business has a vision and a mission. Strategic management takes into consideration both of these. Strategic management helps in achieving the organizational goals in an effective and efficient manner. Improved strategic management processes may also facilitate the development of the more complex management structural that are needed as firms grow. It also helps firms to articulate, communicate and monitor the implementation of strategy using a system interlinked with the long-term vision of the corporations.

Why Strategic Management is so important?

Today management is needed in all types of organizations regardless of their size, at all organizations levels and in all work areas. Because management is universally needed,


Page 11

improving the way an organization is managed is one of the keys to success, and the importance of strategic management to achieve this goal is recognised around the world. Gives everyone a role Makes a difference in performance levels Provides systematic approach to uncertainties Coordinates and focuses employees

Like mentioned before, strategic management can and will influence the organizations performance. Thats why you can have organizations that face the same environmental conditions, but with different performance levels and considering recent studies, there is a wide belief that organizations that use strategic planning usually have better performance that the ones that dont. Another reason that supports the importance of strategic management has to do with the continually changing situation that organizations face these days, because it helps managers to examine relevant factors before deciding their course of action, thus helping them to better cope with uncertain environments. Finally, strategic management is important most organizations are composed by diverse divisions and departments that need to be coordinated, else there would be no focus on achieving the organization's goals.

Strategic Management Process

Much can be said about this process, but here i'll only present the general steps to give you an idea of what is this all about. The strategic management consists of six steps:


Page 12

1. Mission, goals and strategies: If you Google one of the well know companies, and search their website, you'll always find a section dedicated to their mission. That's because every organization needs a mission. Why? Because it defines the organization's purpose, their reason for being in business. It is also important to identify goals, because they are the foundation of planning and give managers a way to measure the performance their success. Finally, a manager needs to know the organizations strategies, to evaluate them and make the necessary changes. 2. External Analysis: Pretty straightforward. A manager needs to know what the competition is doing, to know how the current legislation affects the organization's activities...and so on. An external analysis is needed to examine the changes occurring in the environment, in order to adapt to those changes. 3. Internal Analysis: Now we move to inside of the organization, instead of the outside. basically in this step a manager has to analyse the organization's resources, capabilities, and spot the strengths and weaknesses in order to improve his decisions (this is also know as SWOT analysis). 4. Formulate Strategies: Considering the realities described above, managers formulate corporate, business and functional strategies. 5. Implement Strategies: Sounds logical doesn't it? After strategies are formulated they must be implemented, and like in other aspects of life, a strategy is only as good as its implementation. 6. Evaluate the Results: And now the final step where we evaluate the results. A manager should ask himself if the implemented strategies helped the organization to reach their goals. Strategic Management Process - Meaning, Steps and Components The strategic management process means defining the organizations strategy. It is also defined as the process by which managers make a choice of a set of strategies for the organization that will enable it to achieve better performance. Strategic management is a continuous process that appraises the business and industries in which the organization is involved; appraises its competitors; and fixes goals to meet all the present and future competitors and then reassesses each strategy. Strategic management process has following four steps: 1. Environmental Scanning- Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in analyzing the internal and external factors influencing an organization. After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it.


Page 13

2. Strategy Formulation- Strategy formulation is the process of deciding best course of action for accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies. 3.Strategy Implementation- Strategy implementation implies making the strategy work as intended or putting the organizations chosen strategy into action. Strategy implementation includes designing the organizations structure, distributing resources, developing decision making process, and managing human resources. 4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The key strategy evaluation activities are: appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the organizational strategy as well as its implementation meets the organizational objectives.

These components are steps that are carried, in chronological order, when creating a new strategic management plan. Present businesses that have already created a strategic management plan will revert to these steps as per the situations requirement, so as to make essential changes.

Components of Strategic Management Process Strategic management is an ongoing process. Therefore, it must be realized that each component interacts with the other components and that this interaction often happens in chorus.

Characteristics of Strategic Management:

1. Strategy often makes the difference between success and failure of a firm.
Strategic management is a branch of management that studies how to organize the structure of a firm, what products the firm should sell, how it should position itself in the marketplace, where it should get its supplies and whether it needs to differentiate or compete on costs. Strategic management also deals with other issues, such as human resources policies, employee


Page 14

compensation plans, competitiveness and productivity. A course in strategic management is a part of many MBA programs.


Long-Term Issues
Strategic management deals primarily with long-term issues that may or may not have an immediate effect. For example, investing in the education of the company's work force may yield no immediate effect in terms of higher productivity. Still, in the long run, their education will result in higher productivity, and therefore enhanced profits.

Competitive Advantage

Strategic management helps managers find new sources of sustainable competitive advantage. Executives that apply the principles of strategic management in their work continuously try to deliver products or services cheaper, produce greater customer satisfaction and make employees more satisfied with their jobs.

Effect on Operations

Good strategic management always has a sizable effect on operational issues. For example, a decision to link pay to performance will result in operational decisions being more effective as employees try harder at their jobs. Operational decisions include decisions that deal with questions such as how to sell to certain customers or whether to open a credit line to them. Operational decisions are made in the lower echelons of the organizational hierarchy.


Managing the organization in a strategic fashion requires that the interests of shareholders be put at the heart of all issues. Whether the question at hand is expansion into a new market or negotiating mergers and acquisitions, shareholder value should be at the core at all times.

Companys strategy and its business model:

People will always stress that having a well researched business plan is key before you start your business. Although creating a business plan is often an important step in the evolution of a business, particularly if you need financing or you are not experienced at running a business, it is not necessarily the essential first step. There are two key elements that should be completed prior to the business plan: y y The business model The strategy

What is a Business Model? While the word model often stirs up images of mathematical formulas, a business model is in fact a story of how a business works. In general terms, a business model is the method of doing business by which a company can generate revenue. Both start-up ventures and established companies take new products and services to the market through a venture shaped by a specific business model. In their paper, The Role of the Business Model in Capturing Value from Innovation,


Page 15

Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a business model: 1. Articulate the value proposition the value created to users by using the product 2. Identify the market segment to whom and for what purpose is the product useful; specify how revenue is generated by the firm. 3. Define the value chain the sequence of activities and information required to allow a company to design, produce, market, deliver and support its product or service. 4. Estimate the cost structure and profit potential using the value chain and value proposition identified. 5. Describe the position of the firm with the value network link suppliers, customers, complementors and competitors. 6. Formulate the competitive strategy how will you gain and hold your competitive advantage over competitors or potential new entrants. Joan Magretta in her article Why Business Models Matter took the concept of the business model a little further. Magretta suggests every business model needs to pass two critical tests, the narrative test and the numbers test. The narrative test must tell a good story and explain how the business works, who is the customer, what do they value and how a company can deliver value to the customer. The numbers test means your profit and loss assumptions must add up. At the most basic level, if your model doesnt work, then your model has failed one of the two tests. To begin the modeling process you need to articulate a value proposition on the product or service being provided. The model must then describe the target market. The customer will then value the product on its ability to reduce costs, solve a problem or create new solutions. A market focus is needed to identify what product attributes need to be targeted and how to resolve product trade-offs such as quality versus cost. You also need to identify how much to charge and how the customer will pay. Think of business modeling as the managerial equivalent of the scientific method - you start with a hypothesis, which you then test in action and revise when necessary. The business model also plays a part of a planning tool by focusing managements on how all the elements and activities of the business work together as a whole. At the end of the day, the business model should be condensed onto one page consisting of: a diagram outlining how the business generates revenue, how cash flows through the business and how the product flows through the business and; a narrative describing the product/ service components, financial projections or other important elements not captured in the diagram. Business Models and Strategy It is important to note that completing a business model does not constitute strategic planning. Strategic planning factors in the one thing a business model doesnt; competition. What is strategy? According to the Collins English Dictionary, strategy is a particular long-term plan for success". For our purposes, we will consider the essence of strategy as a formula for coping with the competition. Competitive strategy is about being different and the goal for a corporate strategy is to find a position in the industry where the company is unique and can


Page 16

defend itself against market forces. To do this the company must choose a set of activities that can deliver a unique mix of value. Market Forces and Strategy The determination of a strategy is rooted in determining how a company stacks up against basic market forces, how it can defend itself against these forces and how it can influence these forces. Fortunately, Michael E. Porter in his article How Competitive Forces Shape Strategy defined these market forces for us. Known as Porters 5 forces they consist of: 1. The industry this is the jockeying for position among current competitors, this can consists of price competition, new product introduction or advertising slugfests. 2. The threat of new entrants - the seriousness of the threat of entry depends on the barriers to entry and reaction from existing companies. There are 6 major barriers to entry: 1) economies of scale 2) product differentiation 3) capital requirements 4) cost disadvantages independent of size 5) access to distribution channels 6) government policy. A new company will generally have second thoughts about entering an industry if the incumbent has substantial resources to fight back, the incumbent seems likely to cut prices or industry growth is slow. 3. The threat of substitute products/services - substitutes can place a ceiling on prices that are charged and limit the potential of an industry. 4. The bargaining power of suppliers - suppliers can squeeze profitability by increasing prices or lowering the quality of the goods. 5. The bargaining power of buyers (customers) - customers can force down prices, demand better quality, more service or play competitors off on each other. Once you assess how the market forces are affecting competition in your industry and their underlying causes, you can identify the underlying strength and weaknesses of your company, determine where it stands against each force and then determine a plan of action. Plans of action may include: y Positioning the company match your strengths and weaknesses to the companys industry, build defenses against competitive forces or find a position in the industry where forces are the weakest. You need to know your companys capabilities and the causes of the competitive forces Influencing the balance take the offensive, for example innovative marketing can raise brand identification or differentiate the product. Exploiting industry change an evolution of an industry can bring changes in competition. For example, in an industry life-cycle growth rates change and/or product differentiation declines; anticipate shifts in the factors underlying these forces and respond to them.

y y

The framework for analyzing the industry and developing a strategy provides the road map for answering the question what is the potential of this business?" Reconciling the Business Model and Strategy I will use a short example to illustrate the difference between a business model and strategy. Although you may think that Wal-Mart pioneered a new business model on its road to success, the reality is that the model was really no different than the one Kmart was using at the time. But it was what Sam Walton chose to do differently than Kmart, such as focusing on small towns as opposed to large cities and everyday low prices, that was the


Page 17

real reason for his success. Although Sam Waltons model was the same as Kmart's, his unique strategy made him a success.

Strategy Formulation:
INTRODUCTION It is useful to consider strategy formulation as part of a strategic management process that comprises three phases: 1. Diagnosis, 2. formulation, and 3. Implementation. Strategic management is an ongoing process to develop and revise future-oriented strategies that allow an organization to achieve its objectives, considering its capabilities, constraints, and the environment in which it operates. Formulation, the second phase in the strategic management process, produces a clear set of recommendations, with supporting justification, that revise as necessary the mission and objectives of the organization, and supply the strategies for accomplishing them. In formulation, we are trying to modify the current objectives and strategies in ways to make the organization more successful. This includes trying to create "sustainable" competitive advantages -- although most competitive advantages are eroded steadily by the efforts of competitors. The remainder of this chapter focuses on strategy formulation, and is organized into six sections: Three Aspects of Strategy Formulation,


Page 18

Corporate-Level Strategy, Competitive Strategy, Functional Strategy, Choosing Strategies, and Troublesome Strategies. THREE ASPECTS OF STRATEGY FORMULATION: The following three aspects or levels of strategy formulation, each with a different focus, need to be dealt with in the formulation phase of strategic management. The three sets of recommendations must be internally consistent and fit together in a mutually supportive manner that forms an integrated hierarchy of strategy, in the order given. Corporate Level Strategy: In this aspect of strategy, we are concerned with broad decisions about the total organization's scope and direction. Basically, we consider what changes should be made in our growth objective and strategy for achieving it, the lines of business we are in, and how these lines of business fit together. It is useful to think of three components of corporate level strategy: (a) Growth or directional strategy (what should be our growth objective, ranging from retrenchment through stability to varying degrees of growth - and how do we accomplish this) (b) Portfolio strategy (what should be our portfolio of lines of business, which implicitly requires reconsidering how much concentration or diversification we should have), and (c) Parenting strategy (how we allocate resources and manage capabilities and activities across the portfolio -- where do we put special emphasis, and how much do we integrate our various lines of business). Competitive Strategy (often called Business Level Strategy): This involves deciding how the company will compete within each line of business (LOB) or strategic business unit (SBU). Functional Strategy: These more localized and shorter-horizon strategies deal with how each functional area and unit will carry out its functional activities to be effective and maximize resource productivity. CORPORATE LEVEL STRATEGY This comprises the overall strategy elements for the corporation as a whole, the grand strategy, if you please. Corporate strategy involves four kinds of initiatives: * Making the necessary moves to establish positions in different businesses and achieve an appropriate amount and kind of diversification. A key part of corporate strategy is making decisions on how many, what types, and which specific lines of business the company should be in. This may involve deciding to increase or decrease the amount

and breadth of diversification. It may involve closing out some LOB's (lines of business), adding others, and/or changing emphasis among LOB's. * Initiating actions to boost the combined performance of the businesses the company has diversified into: This may involve vigorously pursuing rapid-growth strategies in the most promising LOB's, keeping the other core businesses healthy, initiating turnaround efforts in weak-performing LOB's with promise, and dropping LOB's that are no longer attractive or don't fit into the corporation's overall plans. It also may involve supplying financial, managerial, and other resources, or acquiring and/or merging other companies with an existing LOB. * Pursuing ways to capture valuable cross-business strategic fits and turn them into competitive advantages -- especially transferring and sharing related technology, procurement leverage, operating facilities, distribution channels, and/or customers. * Establishing investment priorities and moving more corporate resources into the most attractive LOB's. It is useful to organize the corporate level strategy considerations and initiatives into a framework with The following three main strategy components: growth, portfolio, and parenting. These are discussed in the next three sections. What Should be Our Growth Objective and Strategies? Growth objectives can range from drastic retrenchment through aggressive growth. Organizational leaders need to revisit and make decisions about the growth objectives and the fundamental strategies the organization will use to achieve them. There are forces that tend to push top decision-makers toward a growth stance even when a company is in trouble and should not be trying to grow, for example bonuses, stock options, fame, ego. Leaders need to resist such temptations and select a growth strategy stance that is appropriate for the organization and its situation. Stability and retrenchment strategies are underutilized. Some of the major strategic alternatives for each of the primary growth stances (retrenchment, stability, and growth) are summarized in the following three sub-sections. Growth Strategies All growth strategies can be classified into one of two fundamental categories: concentration within existing industries or diversification into other lines of business or industries. When a company's current industries are attractive, have good growth potential, and do not face serious threats, concentrating resources in the existing industries makes good sense. Diversification tends to have greater risks, but is an appropriate option when a company's current industries have

little growth potential or are unattractive in other ways. When an industry consolidates and becomes mature, unless there are other markets to seek (for example other international markets), a company may have no choice for growth but diversification. There are two basic concentration strategies, vertical integration and horizontal growth. Diversification strategies can be divided into related (or concentric) and unrelated (conglomerate) diversification. Each of the resulting four core categories of strategy alternatives can be achieved internally through investment and development, or externally through mergers, acquisitions, and/or strategic alliances -- thus producing eight major growth strategy categories. Comments about each of the four core categories are outlined below, followed by some key points about mergers, acquisitions, and strategic alliances. 1. Vertical Integration: This type of strategy can be a good one if the company has a strong competitive position in a growing, attractive industry. A company can grow by taking over functions earlier in the value chain that were previously provided by suppliers or other organizations ("backward integration"). This strategy can have advantages, e.g., in cost, stability and quality of components, and making operations more difficult for competitors. However, it also reduces flexibility, raises exit barriers for the company to leave that industry, and prevents the company from seeking the best and latest components from suppliers competing for their business. A company also can grow by taking over functions forward in the value chain previously provided by final manufacturers, distributors, or retailers ("forward integration"). This strategy provides more control over such things as final products/services and distribution, but may involve new critical success factors that the parent company may not be able to master and deliver. For example, being a world-class manufacturer does not make a company an effective retailer. Some writers claim that backward integration is usually more profitable than forward integration, although this does not have general support. In any case, many companies have moved toward less vertical integration (especially backward, but also forward) during the last decade or so, replacing significant amounts of previous vertical integration with outsourcing and various forms of strategic alliances. 2. Horizontal Growth: This strategy alternative category involves expanding the company's existing products into other locations and/or market segments, or increasing the range of products/services offered to current markets, or a combination of both. It amounts to expanding sideways at the point(s) in the value chain that the company is currently engaged in. One of the primary advantages of this alternative is being able to choose from a fairly continuous range of choices, from modest extensions of present products/markets to major expansions -- each with corresponding amounts of cost and risk.


Page 21

3. Related Diversification (aka Concentric Diversification): In this alternative, a company expands into a related industry, one having synergy with the company's existing lines of business, creating a situation in which the existing and new lines of business share and gain special advantages from commonalities such as technology, customers, distribution, location, product or manufacturing similarities, and government access. This is often an appropriate corporate strategy when a company has a strong competitive position and distinctive competencies, but its existing industry is not very attractive. 4. Unrelated Diversification (aka Conglomerate Diversification): This fourth major category of corporate strategy alternatives for growth involves diversifying into a line of business unrelated to the current ones. The reasons to consider this alternative are primarily seeking more attractive opportunities for growth in which to invest available funds (in contrast to rather unattractive opportunities in existing industries), risk reduction, and/or preparing to exit an existing line of business (for example, one in the decline stage of the product life cycle). Further, this may be an appropriate strategy when, not only the present industry is unattractive, but the company lacks outstanding competencies that it could transfer to related products or industries. However, because it is difficult to manage and excel in unrelated business units, it can be difficult to realize the hoped-for value added. Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy categories just discussed can be carried out internally or externally, through mergers, acquisitions, and/or strategic alliances. Of course, there also can be a mixture of internal and external actions. Various forms of strategic alliances, mergers, and acquisitions have emerged and are used extensively in many industries today. They are used particularly to bridge resource and technology gaps, and to obtain expertise and market positions more quickly than could be done through internal development. They are particularly necessary and potentially useful when a company wishes to enter a new industry, new markets, and/or new parts of the world. Despite their extensive use, a large share of alliances, mergers, and acquisitions fall far short of expected benefits or are outright failures. For example, one study published in Business Week in 1999 found that 61 percent of alliances were either outright failures or "limping along." Research on mergers and acquisitions includes a Mercer Management Consulting study of all mergers from 1990 to 1996 which found that nearly half "destroyed" shareholder value; an A. T. Kearney study of 115 multibillion-dollar, global mergers between 1993 and 1996 where 58 percent failed to create "substantial returns for shareholders" in the form of dividends and stock price appreciation; and a Price-Waterhouse-Coopers study of 97 acquisitions over $500 million from 1994 to 1997 in which two-thirds of the buyer's stocks dropped on announcement of the transaction and a third of these were still lagging a year later. Many reasons for the problematic record have been cited, including paying too much, unrealistic expectations, inadequate due diligence, and conflicting corporate cultures; however,

the most powerful contributor to success or failure is inadequate attention to the merger integration process. Although the lawyers and investment bankers may consider a deal done when the papers are signed and they receive their fees, this should be merely an incident in a multi-year process of integration that began before the signing and continues far beyond. Stability Strategies There are a number of circumstances in which the most appropriate growth stance for a company is stability, rather than growth. Often, this may be used for a relatively short period, after which further growth is planned. Such circumstances usually involve a reasonable successful company, combined with circumstances that either permit a period of comfortable coasting or suggest a pause or caution. Three alternatives are outlined below, in which the actual strategy actions are similar, but differing primarily in the circumstances motivating the choice of a stability strategy and in the intentions for future strategic actions. 1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout) may be appropriate in either of two situations: (a) the need for an opportunity to rest, digest, and consolidate after growth or some turbulent events - before continuing a growth strategy, or (b) an uncertain or hostile environment in which it is prudent to stay in a "holding pattern" until there is change in or more clarity about the future in the environment. 2. No Change: This alternative could be a cop-out, representing indecision or timidity in making a choice for change. Alternatively, it may be a comfortable, even long-term strategy in a mature, rather stable environment, e.g., a small business in a small town with few competitors. 3. Grab Profits While You Can: This is a non-recommended strategy to try to mask a deteriorating situation by artificially supporting profits or their appearance, or otherwise trying to act as though the problems will go away. It is an unstable, temporary strategy in a worsening situation, usually chosen either to try to delay letting stakeholders know how bad things are or to extract personal gain before things collapse. Recent terrible examples in the USA are Enron and WorldCom. Retrenchment Strategies Turnaround: This strategy, dealing with a company in serious trouble, attempts to resuscitate or revive the company through a combination of contraction (general, major cutbacks in size and costs) and consolidation (creating and stabilizing a smaller, leaner company). Although difficult, when done very effectively it can succeed in both retaining enough key employees and revitalizing the company. Captive Company Strategy: This strategy involves giving up independence in exchange for some security by becoming another company's sole supplier, distributor, or a dependent subsidiary.

Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or captive company strategy, it has few choices other than to try to find a buyer and sell itself (or divest, if part of a diversified corporation). Liquidation: When a company has been unsuccessful in or has none of the previous three strategic alternatives available, the only remaining alternative is liquidation, often involving a bankruptcy. There is a modest advantage of a voluntary liquidation over bankruptcy in that the board and top management make the decisions rather than turning them over to a court, which often ignores stockholders' interests. What Should Be Our Portfolio Strategy? This second component of corporate level strategy is concerned with making decisions about the portfolio of lines of business (LOB's) or strategic business units (SBU's), not the company's portfolio of individual products. Portfolio matrix models can be useful in reexamining a company's present portfolio. The purpose of all portfolio matrix models is to help a company understand and consider changes in its portfolio of businesses, and also to think about allocation of resources among the different business elements. The two primary models are the BCG Growth-Share Matrix and the GE Business Screen (Porter, 1980, has a good summary of these). These models consider and display on a two-dimensional graph each major SBU in terms of some measure of its industry attractiveness and its relative competitive strength The BCG Growth-Share Matrix model considers two relatively simple variables: growth rate of the industry as an indication of industry attractiveness, and relative market share as an indication of its relative competitive strength. The GE Business Screen, also associated with McKinsey, considers two composite variables, which can be customized by the user, for (a) industry attractiveness (e.g, one could include industry size and growth rate, profitability, pricing practices, favored treatment in government dealings, etc.) and (b) competitive strength (e.g., market share, technological position, profitability, size, etc.) The best test of the business portfolio's overall attractiveness is whether the combined growth and profitability of the businesses in the portfolio will allow the company to attain its performance objectives. Related to this overall criterion are such questions as: * Does the portfolio contain enough businesses in attractive industries? * Does it contain too many marginal businesses or question marks? * Is the proportion of mature/declining businesses so great that growth will be sluggish? * Are there some businesses that are not really needed or should be divested? * Does the company have its share of industry leaders, or is it burdened with too many businesses in modest competitive positions?

* Is the portfolio of SBU's and its relative risk/growth potential consistent with the strategic goals? * Do the core businesses generate dependable profits and/or cash flow? * Are there enough cash-producing businesses to finance those needing cash * Is the portfolio overly vulnerable to seasonal or recessionary influences? * Does the portfolio put the corporation in good position for the future? It is important to consider diversification vs. concentration while working on portfolio strategy, i.e., how broad or narrow should be the scope of the company. It is not always desirable to have a broad scope. Single-business strategies can be very successful (e.g., early strategies of McDonald's, Coca-Cola, and BIC Pen). Some of the advantages of a narrow scope of business are: (a) less ambiguity about who we are and what we do; (b) concentrates the efforts of the total organization, rather than stretching them across many lines of business; (c) through extensive hands-on experience, the company is more likely to develop distinctive competence; and (d) focuses on long-term profits. However, having a single business puts "all the eggs in one basket," which is dangerous when the industry and/or technology may change. Diversification becomes more important when market growth rate slows. Building stable shareholder value is the ultimate justification for diversifying -- or any strategy. What Should Be Our Parenting Strategy? This third component of corporate level strategy, relevant for a multi-business company (it is moot for a single-business company), is concerned with how to allocate resources and manage capabilities and activities across the portfolio of businesses. It includes evaluating and making decisions on the following: * Priorities in allocating resources (which business units will be stressed) * What are critical success factors in each business unit, and how can the company do well on them * Coordination of activities (e.g., horizontal strategies) and transfer of capabilities among business units * How much integration of business units is desirable. COMPETITIVE (BUSINESS LEVEL) STRATEGY In this second aspect of a company's strategy, the focus is on how to compete successfully in each of the lines of business the company has chosen to engage in. The central thrust is how to build and improve the company's competitive position for each of its lines of business. A

company has competitive advantage whenever it can attract customers and defend against competitive forces better than its rivals. Companies want to develop competitive advantages that have some sustainability (although the typical term "sustainable competitive advantage" is usually only true dynamically, as a firm works to continue it). Successful competitive strategies usually involve building uniquely strong or distinctive competencies in one or several areas crucial to success and using them to maintain a competitive edge over rivals. Some examples of distinctive competencies are superior technology and/or product features, better manufacturing technology and skills, superior sales and distribution capabilities, and better customer service and convenience. Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value. (Michael E. Porter) The essence of strategy lies in creating tomorrow's competitive advantages faster than competitors mimic the ones you possess today. (Gary Hamel & C. K. Prahalad) We will consider competitive strategy by using Porter's four generic strategies (Porter 1980, 1985) as the fundamental choices, and then adding various competitive tactics. Porter's Four Generic Competitive Strategies He argues that a business needs to make two fundamental decisions in establishing its competitive advantage: (a) whether to compete primarily on price (he says "cost," which is necessary to sustain competitive prices, but price is what the customer responds to) or to compete through providing some distinctive points of differentiation that justify higher prices, and (b) how broad a market target it will aim at (its competitive scope). These two choices define the following four generic competitive strategies. which he argues cover the fundamental range of choices. A fifth strategy alternative (best-cost provider) is added by some sources, although not by Porter, and is included below: 1. Overall Price (Cost) Leadership: appealing to a broad cross-section of the market by providing products or services at the lowest price. This requires being the overall low-cost provider of the products or services (e.g., Costco, among retail stores, and Hyundai, among automobile manufacturers). Implementing this strategy successfully requires continual, exceptional efforts to reduce costs -- without excluding product features and services that buyers consider essential. It also requires achieving cost advantages in ways that are hard for competitors to copy or match. Some conditions that tend to make this strategy an attractive choice are: * The industry's product is much the same from seller to seller * The marketplace is dominated by price competition, with highly price-sensitive buyers


Page 26

* There are few ways to achieve product differentiation that have much value to buyers * Most buyers use product in same ways -- common user requirements * Switching costs for buyers are low * Buyers are large and have significant bargaining power 2. Differentiation: appealing to a broad cross-section of the market through offering differentiating features that make customers willing to pay premium prices, e.g., superior technology, quality, prestige, special features, service, convenience (examples are Nordstrom and Lexus). Success with this type of strategy requires differentiation features that are hard or expensive for competitors to duplicate. Sustainable differentiation usually comes from advantages in core competencies, unique company resources or capabilities, and superior management of value chain activities. Some conditions that tend to favor differentiation strategies are: * There are multiple ways to differentiate the product/service that buyers think have substantial value * Buyers have different needs or uses of the product/service * Product innovations and technological change are rapid and competition emphasizes the latest product features * Not many rivals are following a similar differentiation strategy 3. Price (Cost) Focus: a market niche strategy, concentrating on a narrow customer segment and competing with lowest prices, which, again, requires having lower cost structure than competitors (e.g., a single, small shop on a side-street in a town, in which they will order electronic equipment at low prices, or the cheapest automobile made in the former Bulgaria). Some conditions that tend to favor focus (either price or differentiation focus) are: * The business is new and/or has modest resources * The company lacks the capability to go after a wider part of the total market * Buyers' needs or uses of the item are diverse; there are many different niches and segments in the industry * Buyer segments differ widely in size, growth rate, profitability, and intensity in the five competitive forces, making some segments more attractive than others * Industry leaders don't see the niche as crucial to their own success * Few or no other rivals are attempting to specialize in the same target segment

4. Differentiation Focus: a second market niche strategy, concentrating on a narrow customer segment and competing through differentiating features (e.g., a high-fashion women's clothing boutique in Paris, or Ferrari). Best-Cost Provider Strategy: (although not one of Porter's basic four strategies, this strategy is mentioned by a number of other writers.) This is a strategy of trying to give customers the best cost/value combination, by incorporating key good-or-better product characteristics at a lower cost than competitors. This strategy is a mixture or hybrid of low-price and differentiation, and targets a segment of value-conscious buyers that is usually larger than a market niche, but smaller than a broad market. Successful implementation of this strategy requires the company to have the resources, skills, capabilities (and possibly luck) to incorporate up-scale features at lower cost than competitors. This strategy could be attractive in markets that have both variety in buyer needs that make differentiation common and where large numbers of buyers are sensitive to both price and value. Porter might argue that this strategy is often temporary, and that a business should choose and achieve one of the four generic competitive strategies above. Otherwise, the business is stuck in the middle of the competitive marketplace and will be out-performed by competitors who choose and excel in one of the fundamental strategies. His argument is analogous to the threats to a tennis player who is standing at the service line, rather than near the baseline or getting to the net. However, others present examples of companies (e.g., Honda and Toyota) who seem to be able to pursue successfully a best-cost provider strategy, with stability. Competitive Tactics Although a choice of one of the generic competitive strategies discussed in the previous section provides the foundation for a business strategy, there are many variations and elaborations. Among these are various tactics that may be useful (in general, tactics are shorter in time horizon and narrower in scope than strategies). This section deals with competitive tactics, while the following section discusses cooperative tactics. Two categories of competitive tactics are those dealing with timing (when to enter a market) and market location (where and how to enter and/or defend). Timing Tactics: When to make a strategic move is often as important as what move to make. We often speak of first-movers (i.e., the first to provide a product or service), secondmovers or rapid followers, and late movers (wait-and-see). Each tactic can have advantages and disadvantages. Being a first-mover can have major strategic advantages when: (a) doing so builds an important image and reputation with buyers; (b) early adoption of new technologies, different components, exclusive distribution channels, etc. can produce cost and/or other advantages over

rivals; (c) first-time customers remain strongly loyal in making repeat purchases; and (d) moving first makes entry and imitation by competitors hard or unlikely. However, being a second- or late-mover isn't necessarily a disadvantage. There are cases in which the first-mover's skills, technology, and strategies are easily copied or even surpassed by later-movers, allowing them to catch or pass the first-mover in a relatively short period, while having the advantage of minimizing risks by waiting until a new market is established. Sometimes, there are advantages to being a skillful follower rather than a first-mover, e.g., when: (a) being a first-mover is more costly than imitating and only modest experience curve benefits accrue to the leader (followers can end up with lower costs than the first-mover under some conditions); (b) the products of an innovator are somewhat primitive and do not live up to buyer expectations, thus allowing a clever follower to win buyers away from the leader with better performing products; (c) technology is advancing rapidly, giving fast followers the opening to leapfrog a first-mover's products with more attractive and full-featured second- and thirdgeneration products; and (d) the first-mover ignores market segments that can be picked up easily. Market Location Tactics: These fall conveniently into offensive and defensive tactics. Offensive tactics are designed to take market share from a competitor, while defensive tactics attempt to keep a competitor from taking away some of our present market share, under the onslaught of offensive tactics by the competitor. Some offensive tactics are: * Frontal Assault: going head-to-head with the competitor, matching each other in every way. To be successful, the attacker must have superior resources and be willing to continue longer than the company attacked. * Flanking Maneuver: attacking a part of the market where the competitor is weak. To be successful, the attacker must be patient and willing to carefully expand out of the relatively undefended market niche or else face retaliation by an established competitor. * Encirclement: usually evolving from the previous two, encirclement involves encircling and pushing over the competitor's position in terms of greater product variety and/or serving more markets. This requires a wide variety of abilities and resources necessary to attack multiple market segments. * Bypass Attack: attempting to cut the market out from under the established defender by offering a new, superior type of produce that makes the competitor's product unnecessary or undesirable. * Guerrilla Warfare: using a "hit and run" attack on a competitor, with small, intermittent assaults on different market segments. This offers the possibility for even a small firm to make some gains without seriously threatening a large, established competitor and evoking some form of retaliation.

Some Defensive Tactics are: * Raise Structural Barriers: block avenues challengers can take in mounting an offensive * Increase Expected Retaliation: signal challengers that there is threat of strong retaliation if they attack * Reduce Inducement for Attacks: e.g., lower profits to make things less attractive (including use of accounting techniques to obscure true profitability). Keeping prices very low gives a new entrant little profit incentive to enter. The general experience is that any competitive advantage currently held will eventually be eroded by the actions of competent, resourceful competitors. Therefore, to sustain its initial advantage, a firm must use both defensive and offensive strategies, in elaborating on its basic competitive strategy. Cooperative Strategies Another group of "competitive" tactics involve cooperation among companies. These could be grouped under the heading of various types of strategic alliances, which have been discussed to some extent under Corporate Level growth strategies. These involve an agreement or alliance between two or more businesses formed to achieve strategically significant objectives that are mutually beneficial. Some are very short-term; others are longer-term and may be the first stage of an eventual merger between the companies. Some of the reasons for strategic alliances are to: obtain/share technology, share manufacturing capabilities and facilities, share access to specific markets, reduce financial/political/market risks, and achieve other competitive advantages not otherwise available. There could be considered a continuum of types of strategic alliances, ranging from: (a) mutual service consortiums (e.g., similar companies in similar industries pool their resources to develop something that is too expensive alone), (b) licensing arrangements, (c) joint ventures (an independent business entity formed by two or more companies to accomplish certain things, with allocated ownership, operational responsibilities, and financial risks and rewards), (d) value-chain partnerships (e.g., just-in-time supplier relationships, and out-sourcing of major value-chain functions). FUNCTIONAL STRATEGIES Functional strategies are relatively short-term activities that each functional area within a company will carry out to implement the broader, longer-term corporate level and business level strategies. Each functional area has a number of strategy choices, that interact with and must be consistent with the overall company strategies.


Page 30

Three basic characteristics distinguish functional strategies from corporate level and business level strategies: Shorter time horizon, greater specificity, and primary involvement of operating managers. A few examples follow of functional strategy topics for the major functional areas of marketing, finance, production/operations, research and development, and human resources management. Each area needs to deal with sourcing strategy, i.e., what should be done in-house and what should be outsourced? Marketing strategy deals with product/service choices and features, pricing strategy, markets to be targeted, distribution, and promotion considerations. Financial strategies include decisions about capital acquisition, capital allocation, dividend policy, and investment and working capital management. The production or operations functional strategies address choices about how and where the products or services will be manufactured or delivered, technology to be used, management of resources, plus purchasing and relationships with suppliers. For firms in hightech industries, R&D strategy may be so central that many of the decisions will be made at the business or even corporate level, for example the role of technology in the company's competitive strategy, including choices between being a technology leader or follower. However, there will remain more specific decisions that are part of R&D functional strategy, such as the relative emphasis between product and process R&D, how new technology will be obtained (internal development vs. external through purchasing, acquisition, licensing, alliances, etc.), and degree of centralization for R&D activities. Human resources functional strategy includes many topics, typically recommended by the human resources department, but many requiring top management approval. Examples are job categories and descriptions; pay and benefits; recruiting, selection, and orientation; career development and training; evaluation and incentive systems; policies and discipline; and management/executive selection processes. CHOOSING THE BEST STRATEGY ALTERNATIVES Decision making is a complex subject, worthy of a chapter or book of its own. This section can only offer a few suggestions. Among the many sources for additional information, I recommend Harrison (1999), McCall & Kaplan (1990), and Williams (2002). Here are some factors to consider when choosing among alternative strategies: * It is important to get as clear as possible about objectives and decision criteria (what makes a decision a "good" one?) * The primary answer to the previous question, and therefore a vital criterion, is that the chosen strategies must be effective in addressing the "critical issues" the company faces at this time * They must be consistent with the mission and other strategies of the organization


Page 31

* They need to be consistent with external environment factors, including realistic assessments of the competitive environment and trends * They fit the company's product life cycle position and market attractiveness/competitive strength situation * They must be capable of being implemented effectively and efficiently, including being realistic with respect to the company's resources * The risks must be acceptable and in line with the potential rewards * It is important to match strategy to the other aspects of the situation, including: (a) size, stage, and growth rate of industry; (b) industry characteristics, including fragmentation, importance of technology, commodity product orientation, international features; and (c) company position (dominant leader, leader, aggressive challenger, follower, weak, "stuck in the middle") * Consider stakeholder analysis and other people-related factors (e.g., internal and external pressures, risk propensity, and needs and desires of important decision-makers) * Sometimes it is helpful to do scenario construction, e.g., cases with optimistic, most likely, and pessimistic assumptions. SOME TROUBLESOME STRATEGIES TO AVOID OR USE WITH CAUTION Follow the Leader: when the market has no more room for copycat products and look-alike competitors. Sometimes such a strategy can work fine, but not without careful consideration of the company's particular strengths and weaknesses. (e.g., Fujitsu Ltd. was driven since the 1960s to catch up to IBM in mainframes and continued this quest even into the 1990s after mainframes were in steep decline; or the decision by Standard Oil of Ohio to follow Exxon and Mobil Oil into conglomerate diversification) Count On Hitting Another Home Run: e.g., Polaroid tried to follow its early success with instant photography by developing "Polavision" during the mid-1970s. Unfortunately, this very expensive, instant developing, 8mm, black and white, silent motion picture camera and film was displayed at a stockholders' meeting about the time that the first beta-format video recorder was released by Sony. Polaroid reportedly wrote off at least $500 million on this venture without selling a single camera. Try to Do Everything: establishing many weak market positions instead of a few strong ones Arms Race: Attacking the market leaders head-on without having either a good competitive advantage or adequate financial strength; making such aggressive attempts to take market share that rivals are provoked into strong retaliation and a costly "arms race." Such battles seldom

produce a substantial change in market shares; usual outcome is higher costs and profitless sales growth Put More Money On a Losing Hand: one version of this is allocating R&D efforts to weak products instead of strong products (e.g., Polavision again, Pan Am's attempt to continue global routes in 1987) Over-optimistic Expansion: Using high debt to finance investments in new facilities and equipment, then getting trapped with high fixed costs when demand turns down, excess capacity appears, and cash flows are tight Unrealistic Status-Climbing: Going after the high end of the market without having the reputation to attract buyers looking for name-brand, prestige goods (e.g., Sears' attempts to introduce designer women's clothing) Selling the Sizzle Without the Steak: Spending more money on marketing and sales promotions to try to get around problems with product quality and performance. Depending on cosmetic product improvements to serve as a substitute for real innovation and extra customer value.

Steps in Strategy Formulation Process

Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision. The process of strategy formulation basically involves six main steps. Though these steps do not follow a rigid chronological order, however they are very rational and can be easily followed in this order. 1. Setting Organizations objectives - The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives. Thus, strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives. While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. Once the objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions.


Page 33

2. Evaluating the Organizational Environment - The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors strengths and weaknesses. After identifying its strengths and weaknesses, an organization must keep a track of competitors moves and actions so as to discover probable opportunities of threats to its market or supply sources. 3. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments.

4. Aiming in context with the divisional plans - In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.

5. Performance Analysis - Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist.

6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.


Page 34

10 steps in strategy formulation:

There are several ways a strategy can be designed for a company. However some methods are better than the others. Here are 10 steps which guide you in deciding the strategy of your company. Steps 1 to 5 mainly involve internal or external research as well as very long term strategy making (Strategies made in the first 5 steps affect the whole life cycle of the company) 1) Write a Vision Statement A vision statement (crisp and to the point) is a must for developing a strategy. Exploring and deciding on the vision of the company gives you clarity on the main objectives of the company. 2) Mission Statement - Decide a Mission statement for the company. This mission statement would actually determine the methodology of the company in reaching its vision, its purposes and its philosophy behind its goals. 3) Define the company profile - The company profile needs to be comprehensive which further clears the goals of the organization. What would be the strengths of the company, capabilities, management. In essence mention everything you can about the company. This helps in transparency while deciding the strategy. 4) Study the External environment No strategy can be complete without taking into consideration the effect that external environment has on businesses. Thus an in depth study on external environment is necessary and the same should be mentioned in the strategy report. 5) The 5th step involves matching all three Mission statement, Company profile and the external environment such that they are in sync to achieve the vision of the company. From here on, Step 6 to 10 involve decision making based on the research as well as the decisions taken for the company in the previous steps. The last steps are more inclined towards implementation. 6) Deciding the actions for accomplishing the mission of the organization 7) Selecting long term strategies which will be most effective 8) Deciding on short term strategies arising from the long term ones such that these short term strategies too are in sync with the mission and vision statement

9) Deciding the budget and resource allocation according to the short term strategy 10) Implementation of the strategies along with pre decided review system along with measures to maintain control and a fallback short term plan.

STRATEGIC VISION AND MISSION Though sounding cliched, Vision & Mission statement can do a lot to alignment. It is important that the same is worded and articulated in a way the people can relate to them and also find it linked to their job.

Strategic Vision
A strategic vision is a view of an organizations future direction and business makeup. It is a guiding concept for what the organization is trying to do and to become. Whereas the focus of the companys mission tends to be on the present, the focus of a strategic vision is on a companys future. If the statement of mission speaks as much to the future path the organization intends to follow as to the present organizational purpose, then the mission statement incorporates the strategic vision and theres no separate need for a vision.) (Thompson Strickland p.24) A vision statement answers the questions What will our business look like in 5 to 10 years from now? A strategic vision is a roadmap of a companys future the direction it is headed, the customer focus it should have, the market position it should try to occupy, the business activities to be pursued, and the capabilities it plans to develop. Forming a strategic vision of what the companys future business makeup will be and where the organization is headed is needed so as to provide long-term direction, delineate what kind of enterprise the company is trying to become, and infuse the organization with a sense of purposeful action. Strategic vision charts the course for the organization to pursue and creates organizational purpose and identity. Strategic vision spells out a direction and describes the destination. (Thomas Strickland, p.3, 27) A vision statement is a powerful picture of what the companys business can and should be a decade from now. When a strategic vision conveys the market position it intends to stake out and what course the company is going to follow, then the vision is truly capable in 1. guiding managerial decision making 2. shaping the companys strategy 3. impacting how the company is run.(Thomas Strickland, p.28) A well-worded strategic vision statement has real value: (Thomas Strickland,, p.36) 1. It crystallizes senior executives own views about firm long-term direction and future. 2. It guides managerial decision making. 3. It conveys an organizational purpose that arouses employee buy-in and commitment. 4. It provides a beacon lower-level managers can use to form departmental missions, set departmental objectives, and craft strategies. 5. It helps an organization prepare for the future.

Developing a Strategic Vision Statement


The entrepreneurial challenge in developing a strategic vision is to think creatively about how to prepare a company for the future. It requires rational analysis of what the company should be doing to get ready for the changes coming in its present business and to capitalize on newly developing market opportunities.

Challenges related to Vision Statement: Putting-up a vision is not a challenge. The problem is to make employees engaged with it. Many a time, terms like vision, mission and strategy become more a subject of scorn than being looked up-to. This is primarily because leaders may not be able to make a connect between the vision/mission and peoples every day work. Too often, employees see a gap between the vision, mission and their goals & priorities. Even if there is a valid/tactical reason for this mis-match, it is not explained. Horizon of Vision: Vision should be the horizon of 5-10 years. If it is less than that, it becomes tactical. If it is of a horizon of 20+ years (say), it becomes difficult for the strategy to relate to the vision. Features of a good vision statement:
y y y y y y y

Easy to read and understand. Compact and Crisp to leave something to peoples imagination. Gives the destination and not the road-map. Is meaningful and not too open ended and far-fetched. Excite people and make them get goose-bumps. Provides a motivating force, even in hard times. Is perceived as achievable and at the same time is challenging and compelling, stretching us beyond what is comfortable.

Vision is a dream/aspiration, fine-tuned to reality: The Entire process starting from Vision down to the business objectives, is highly iterative. The question is from where should we start. We strongly recommend that vision and mission statement should be made first without being colored by constraints, capabilities and environment. This can said akin to the vision of armed forces, thats 'Safe and Secure country from external threats'. This vision is a non-negotiable and it drives the organization to find ways and means to achieve their vision, by overcoming constraints on capabilities and resources. Vision should be a stake in the ground, a position, a dream, which should be prudent, but should be non-negotiable barring few rare circumstances.
Vision Statements for New and Small Firms Vision statements and mission statements are very different. A vision statement for a new or

small firm spells out goals at a high level and should coincide with the founder's goals for the business. Simply put, the vision should state what the founder ultimately envisions the business to be, in terms of growth, values, employees, contributions to society, and the like; therefore, self-reflection by the founder is a vital activity if a meaningful vision is to be developed. As a founder, once you have defined your vision, you can begin to develop strategies for moving the organization toward that vision. Part of this includes the development of a company mission.

Realistic: A vision must be based in reality to be meaningful for an organization. For example, if you're developing a vision for a computer software company that has carved out a small niche in the market developing instructional software and has a 1.5 percent share of the computer software market, a vision to overtake Microsoft and dominate the software market is not realistic! Credible: A vision must be believable to be relevant. To whom must a vision be credible? Most importantly, to the employees or members of the organization. If the members of the organization do not find the vision credible, it will not be meaningful or serve a useful purpose. One of the purposes of a vision is to inspire those in the organization to achieve a level of excellence, and to provide purpose and direction for the work of those employees. A vision which is not credible will accomplish neither of these ends. Attractive: If a vision is going to inspire and motivate those in the organization, it must be attractive. People must want to be part of this future that's envisioned for the organization. Future: A vision is not in the present, it is in the future. In this respect, the image of the leader gazing off into the distance to formulate a vision may not be a bad one. A vision is not where you are now, it's where you want to be in the future. (If you reach or attain a vision, and it's no longer in the future, but in the present, is it still a vision?)

Nanus goes on to say that the right vision for an organization, one that is a realistic, credible, attractive future for that organization, can accomplish a number of things for the organization:

It attracts commitment and energizes people. This is one of the primary reasons for having a vision for an organization: its motivational effect. When people can see that the organization is committed to a vision-and that entails more than just having a vision statement-it generates enthusiasm about the course the organization intends to follow, and increases the commitment of people to work toward achieving that vision. It creates meaning in workers' lives. A vision allows people to feel like they are part of a greater whole, and hence provides meaning for their work. The right vision will mean something to everyone in the organization if they can see how what they do contributes to that vision. Consider the difference between the hotel service worker who can only say, "I make beds and clean bathrooms," to the one who can also say, "I'm part of a team committed to becoming the worldwide leader in providing quality service to our hotel guests." The work is the same, but the context and meaning of the work is different. It establishes a standard of excellence. A vision serves a very important function in
Page 38


establishing a standard of excellence. In fact, a good vision is all about excellence. Tom Peters, the author of In Search of Excellence, talks about going into an organization where a number of problems existed. When he attempted to get the organization's leadership to address the problems, he got the defensive response, "But we're no worse than anyone else!" Peters cites this sarcastically as a great vision for an organization: "Acme Widgets: We're No Worse Than Anyone Else!" A vision so characterized by lack of a striving for excellence would not motivate or excite anyone about that organization. The standard of excellence also can serve as a continuing goal and stimulate quality improvement programs, as well as providing a measure of the worth of the organization. It bridges the present and the future. The right vision takes the organization out of the present, and focuses it on the future. It's easy to get caught up in the crises of the day, and to lose sight of where you were heading. A good vision can orient you on the future, and provide positive direction. The vision alone isn't enough to move you from the present to the future, however. That's where a strategic plan, discussed later in the chapter, comes in. A vision is the desired future state for the organization; the strategic plan is how to get from where you are now to where you want to be in the future.

Mission Statement What is a mission: Mission of an organization is the purpose for which the organization is. Mission is again a single statement, and carries the statement in verb. Mission in one way is the road to achieve the vision. For example, for a luxury products company, the vision could be 'To be among most admired luxury brands in the world' and mission could be 'To add style to the lives' A good mission statement will be :

Clear and Crisp: While there are different views, We strongly recommend that mission should only provide what, and not 'how and when'. We would prefer the mission of 'Making People meet their career' to 'Making people meet their career through effective career counseling and education'. A mission statement without 'how & when' element leaves a creative space with the organization to enable them take-up wider strategic choices. Have to have a very visible linkage to the business goals and strategy: For example you cannot have a mission (for a home furnishing company) of 'Bringing Style to Peoples lives' while your strategy asks for mass product and selling. Its better that either you start selling high-end products to high value customers, OR change your mission statement to 'Help people build homes'. Should not be same as the mission of a competing organization. It should touch upon how its purpose it unique.

Mission Statements for New and Small Firms The mission statement should be a concise statement of business strategy and developed from the customer's perspective and it should fit with the vision for the business. The

mission should answer three questions: 1. What do we do? 2. How do we do it? 3. For whom do we do it? What do we do? This question should not be answered in terms of what is physically delivered to customers, but by the real and/or psychological needs that are fulfilled when customers buy your products or services. Customers make purchase decisions for many reasons, including economical, logistical, and emotional factors. An excellent illustration of this is a business in the Twin Cities that imports hand-made jewelry from east Africa. When asked what her business does, the owner replied, "We import and market east African jewelry." But when asked why customers buy her jewelry, she explained that, "They're buying a story in where the jewelry came from." This is an important distinction and answering this question from the need-fulfilled perspective will help you answer the other two questions effectively. How do we do it? This question captures the more technical elements of the business. Your answer should encompass the physical product or service and how it is sold and delivered to customers, and it should fit with the need that the customer fulfills with its purchase. In the example above, the business owner had originally defined her business as selling east African jewelry and was attempting to sell it on shelves of boutique retail stores with little success. After modifying the answer to the first question, she realized that she needed to deliver the story to her customers along with the product. She began organizing wine parties that included a slide show of east Africa, stories of personal experiences there, and pictures and descriptions of the villagers who make the jewelry. This method of delivery has been very successful for her business. For whom do we do it? The answer to this question is also vital, as it will help you focus your marketing efforts. Though many small business owners would like to believe otherwise, not everyone is a potential customer, as customers will almost always have both demographic and geographic limitations. When starting out, it is generally a good idea to define the demographic characteristics (age, income, etc.) of customers who are likely to buy and then define a geographic area in which your business can gain a presence. As you grow, you can add new customer groups and expand your geographic focus.

Mission follows the Vision: The Entire process starting from Vision down to the business objectives, is highly iterative. The question is from where should be start. I strongly recommend that mission should follow the

vision. This is because the purpose of the organization could change to achieve their vision. For example to achieve the vision of an Insurance company 'To be the most trusted Insurance Company', the mission could be first 'making people financially secure' as their emphasis is on Traditional Insurance product. At a later stage the company can make its mission as 'Making money work for the people' when they also include the non-traditional unit linked investment products.

Clearly stated strategic objectives, the third step of strategy formulation, outline the position in the marketplace that the firm seeks. Performance targets state the measurable milestones that the firm needs to reach or obtain to achieve its strategic objectives. Some strategic objectives relate to the positioning of goods and services in the competitive marketplace while others concern the structure of the company itself and how it plans to produce goods or manage its operations. Typical strategic objectives involve profitability, market share, return on investment, technological achievement, customer service level, revenue size, and diversification. In order to make strategic planning work, the goals, missions, objectives, performance targets, or other hopes of top management must somehow be made real by others in more distant locations down the organizational chart. Merely communicating to each member of the business the vision that top management has for the firm is not sufficient. Strategic objectives and performance targets should penetrate every corner of the organizational chart. There should be a hierarchy of strategic formulation starting with the highest levels of the firm, from which it is consistently translated from level to level so that each department knows what its contribution to the overall mission of the firm is to be. This process should end with each individual in the firm having strategic objectives and performance targets tailored to their specific role in the firm. Setting objectives for the organization is one of the most important and challenging task. The failure and success of the firm depends upon the setting of strategic objectives. Strategic objectives are formulated for a longer period and are set for three to five years.

Strategic objectives are divided into targets for business units, departments; functional areas, teams, and individuals. These objectives are a blend of financial and nonfinancial measures. This enables the organization to align itself to achieve the strategic objectives. Organizations follow the following poits while setting the strategic objectives. y y y y y y y y y y To see the organizations competencies and competitive advantages To see the current and projected influences on the industry and the competitive environment To see the current and future constraints on resources and operations To see the current possibilities, probabilities, and capabilities in the organization. To analyze the previously pursued opportunities that didnt work. To see how opportunities will work? To analyze what things are needed in the organization? To clarify what things should be changed or shed? The most important factor what is the current financial position (debt, equity, cash), etc.? To analyze the current relationships with revenue, gross margin and profit margin, etc.

The above mentioned points explain that in order to create appropriate strategic objectives, organizations work to understand their internal capabilities as well as the environment in which they operate. Further, they also seek to clarify their purpose or mission. The organization focuses on these issues allowing it to create a fit between its resources and the demands of the competitive situation. Role of Setting Objectives in Strategic Planning: The role of objective setting in strategic planning is very clear. Without objective strategic plans cannot work. Objective setting gives the firm a guideline and direction from where to start and where the organization is going. Objectives provide a target to aim and to achieve that aim all the efforts are focused on it. Another role the objective play is that it motivates the managers and team members for getting the reward upon achievement. The objectives setting supports to evaluate the success of any project in the strategic planning..

Setting objectives:
Introduction Objectives set out what the business is trying to achieve. Objectives can be set at two levels: (1) Corporate level


Page 42

These are objectives that concern the business or organisation as a whole Examples of corporate objectives might include: We aim for a return on investment of at least 15% We aim to achieve an operating profit of over 10 million on sales of at least 100 million We aim to increase earnings per share by at least 10% every year for the foreseeable future (2) Functional level e.g. specific objectives for marketing activities Examples of functional marketing objectives might include: We aim to build customer database of at least 250,000 households within the next 12 months We aim to achieve a market share of 10% We aim to achieve 75% customer awareness of our brand in our target markets Both corporate and functional objectives need to conform to the commonly used SMART criteria. The SMART criteria (an important concept which you should try to remember and apply in exams) are summarised below: Specific - the objective should state exactly what is to be achieved. Measurable - an objective should be capable of measurement so that it is possible to determine whether (or how far) it has been achieved Achievable - the objective should be realistic given the circumstances in which it is set and the resources available to the business. Relevant - objectives should be relevant to the people responsible for achieving them Time Bound - objectives should be set with a time-frame in mind. These deadlines also need to be realistic.

Financial Objectives:
The business plan financial objectives involve measuring financial performance to reflect the total operational performance. The aim in managing this performance should be to maximize net profit and net cash surpluses of the operation. The two main measures, therefore, are net profit and net cash flow. Each indicator for any given period is calculated as follows: Total income (revenue) less direct costs (or C.O.G.S.) equals gross profit (contribution margin) and gross profit less operating costs (cost of running the business) is equal to net profit. Total receipts (inflows) less total payments (outflows) is equal to net cash flow surplus.


Page 43

Net profit is calculated as the excess of income (revenue) over expenses of the operation for a given period. Income (revenue) is the earnings of the business and expenses are it's running costs. Net cash flow surplus is calculated as the excess of receipts (inflows) over payments for a given period. Receipts are the cash inflows of the business, payments are it's cash outflows or outgoings. See also performance metrics

Financial Plan Outline

1) Break even analysis One of the main financial objectives is to perform a break even analysis. This should be done before preparing the final financial plans for your operation. You should know the sales break-even point, that is, the level of sales necessary to meet the total business running costs. You can also use break-even analysis to determine the level of sales to achieve a desired profit target. See also sales break even point 2) Categorise costs as fixed or variable Fixed costs are constant. They do not change when sales levels change provided the business does not change its operating capacity. Variable costs change proportionally to changes in business activity. When sale levels change, these costs also change (up or down). Examples of variable costs are stock purchases, raw material purchases, and direct costs (job material purchases). 3) Calculate the contribution margin This is a key area of the financial objectives. The sales income of the business must be enough to cover it's variable costs and it's fixed cost's as well as the required profit. The contribution margin is the excess of sales income over the variable costs of the business for the period (sales less direct costs). The contribution margin measures how much sales contribute towards meeting fixed costs and the desired net profit of the business. This is the one of the key financial objectives, as without sufficient contribution margin you cannot meet your operating costs and you will be in negative net profit territory. See also performance metrics 4) Calculate the break-even point With a knowledge of the contribution margin (% to sales), you can find the business's break-even point, the level at which income equals expenses (direct costs and overheads or expenses), so that neither a profit or a loss is made (in the net profit line of your profit and loss report). See also sales break even point. 5) Financial Forecasts sales Sales forecasts should be the first forecasts made when planning profit and overall financial objectives. The sales forecast is of prime importance because it influences many of the cost forecasts for your business. 6) Forecast profit statements Prepare a forecast profit statement showing the annual net profit target for the business for each year. See also performance metrics


Page 44

7) Forecast capital expenditure requirements Prepare an annual capital expenditure forecast for each year. This shows details of your proposed capital expenditure for the period in the business plan. 8) Forecast cash flow After you have prepared the forecast profit and capital expenditure statements, you can now prepare cash flow statements for each year of the business plan. Potential lenders will critically analyse your cash flow forecasts to determine your ability to meet loan repayments. A cash flow statement shows the intended cash receipts and payments of the business over the period of the business plan, which then allows the cash flow to be calculated. A forecast cash flow statement shows the cash receipts (inflows) and payments (outflows) of the operation, which enables future cash positions to be predicted. This is one of the key financial objectives of your business, and dictates any required level of funding over the coming trading period (budget year). 9) Financial Ratios The calculation of financial ratios provides a useful summary of the acceptability of forecasts. They can be used to identify strengths and weaknesses in planned operating activities. Ratios are compared with standard benchmarks such as industry averages for acceptability. Ratios should also be improving over time. The identification of any unacceptable ratios should cause you to review and adjust relevant sections of the operational plan to produce satisfactory forecasts and results. For a comprehensive understanding of financial ratios see our eBook relationships that show the health of your business. 10) Financial records You will need to design a comprehensive record system that records the financial transactions of the business. Financial records are necessary for the financial control of the operation. Records of financial transactions enable accurate reports to be prepared for monitoring the financial results of the operation. Financial results are compared with corresponding targets to identify any unsatisfactory performance so that follow up action can be taken. 11) Business insurance Plan what types of insurance will be required for the business now and for the period of the plan, the types of insurance might include public liability (usually the minimum) and professional indemnity. Comprehensive insurance cover should be arranged and maintained for your business operation to minimise exposure to daily risks which can cause financial losses. 12) Financial controls The final area of financial objectives is to establish the financial controls for your business. After you have designed your financial record keeping system, you should then decide what financial controls to adopt for your business operation.


Page 45

Financial controls are the methods or techniques you will use to monitor and evaluate the financial results of your operation. Key financial results are 'profit', 'cash flow' and 'financial position'. See also performance metrics Understanding the financial objectives for your business operation is essential if your business is to be successful. Many business fail because they do not take time out to first establish these, and then to monitor them. These are your "stakes in the ground" which ultimately support the structure of your business!

The Balanced Scorecard

Traditional financial reporting systems provide an indication of how a firm has performed in the past, but offer little information about how it might perform in the future. For example, a firm might reduce its level of customer service in order to boost current earnings, but then future earnings might be negatively impacted due to reduced customer satisfaction. To deal with this problem, Robert Kaplan and David Norton developed the Balanced Scorecard, a performance measurement system that considers not only financial measures, but also customer, business process, and learning measures. The Balanced Scorecard framework is depicted in the following diagram: The balanced scorecard translates the organization's strategy into four perspectives, with a balance between the following:
y y y

between internal and external measures between objective measures and subjective measures between performance results and the drivers of future results

Beyond the Financial Perspective

In the industrial age, most of the assets of a firm were in property, plant, and equipment, and the financial accounting system performed an adequate job of valuing those assets. In the information age, much of the value of the firm is embedded in innovative processes, customer relationships, and human resources. The financial accounting system is not so good at valuing such assets.


Page 46

Diagram of the Balanced Scorecard




Business Processes

Learning & Growth

The Balanced Scorecard goes beyond standard financial measures to include the following additional perspectives: the customer perspective, the internal process perspective, and the learning and growth perspective.
y y y

Financial perspective - includes measures such as operating income, return on capital employed, and economic value added. Customer perspective - includes measures such as customer satisfaction, customer retention, and market share in target segments. Business process perspective - includes measures such as cost, throughput, and quality. These are for business processes such as procurement, production, and order fulfillment. Learning & growth perspective - includes measures such as employee satisfaction, employee retention, skill sets, etc.

These four realms are not simply a collection of independent perspectives. Rather, there is a logical connection between them - learning and growth lead to better business processes, which in turn lead to increased value to the customer, which finally leads to improved financial performance.


Page 47

Objectives, Measures, Targets, and Initiatives

Each perspective of the Balanced Scorecard includes objectives, measures of those objectives, target values of those measures, and initiatives, defined as follows:
y y

y y

Objectives - major objectives to be achieved, for example, profitable growth. Measures - the observable parameters that will be used to measure progress toward reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin. Targets - the specific target values for the measures, for example, +2% growth in net margin. Initiatives - action programs to be initiated in order to meet the objective.

These can be organized for each perspective in a table as shown below.

Objectives Measures Targets Initiatives Financial Customer Process Learning

Balanced Scorecard as a Strategic Management System:

The Balanced Scorecard originally was conceived as an improved performance measurement system. However, it soon became evident that it could be used as a management system to implement strategy at all levels of the organization by facilitating the following functions: 1. Clarifying strategy - the translation of strategic objectives into quantifiable measures clarifies the management team's understanding of the strategy and helps to develop a coherent consensus. 2. Communicating strategic objectives - the Balanced Scorecard can serve to translate high level objectives into operational objectives and communicate the strategy effectively throughout the organization. 3. Planning, setting targets, and aligning strategic initiatives - ambitious but achievable targets are set for each perspective and initiatives are developed to align efforts to reach the targets.

4. Strategic feedback and learning - executives receive feedback on whether the strategy implementation is proceeding according to plan and on whether the strategy itself is successful ("double-loop learning"). These functions have made the Balanced Scorecard an effective management system for the implementation of strategy. The Balanced Scorecard has been applied successfully to private sector companies, non-profit organizations, and government agencies.

The Balanced Scorecard was introduced as one of the newest management tools. The purpose was to allow organizations to be better able to use their intangible assets. The balanced scorecard is to be used as a supplement to traditional financial measures. It measures performance from three additional perspectives; customers, internal business processes, and learning and growth. The scorecard can help top-level management link the long-term strategy with the short-term actions. Managers using a balanced scorecard do not only have to rely on the short-term financial results as indicators of the companys progress. It brings in other indicators that provide information about how the short-term results have affected the long-term strategy. The scorecard allows managers to introduce four new processes; 1. translating the vision, 2. communicating and linking, 3. business planning, and 4. feedback and learning. Translating the vision is a means of expressing the mission/vision statements with an integrated set of objectives and measures. This forces the top management to develop operational measures, which requires them to discuss, and eventually agree on, a means of achieving the goals of the company. Communicating and linking is a process that facilitates the communication of strategies throughout the entire organization. Departmental and individual objectives must be aligned with the strategy through evaluation procedures and incentives. To have goal congruence between the individual employees and the company, scorecard users engage in three activities: communicating and educating, setting goals, and linking rewards to performance measures which are in turn linked to the overall strategy. Communicating and educating is achieved by maintaining policies that ensure all employees are aware of the strategies of the organization. Also, it is important for the lower level employees to be able to communicate upwards about whether or not the strategies are realistic from the competitive or operational perspective.

Setting goals alone is not sufficient to change employees mind-set. One technique to ensure the objectives related to the goals are achieved is the use of a personal scorecard. It is simply a card that has information that describes corporate objectives, measures, and targets. Employees would carry it with them. This allows employees to better translate these objectives into meaningful tasks that will help reach these goals. Linking rewards to performance is an important incentive to help an organization achieve its purpose. What the balanced scorecard adds to the traditional means of linking rewards to financial performance is that it takes a more holistic look at the organization. It ensures that the correct criteria are used as a measure of performance before rewards are given. The idea is that, if you are not using the correct indicators to evaluate performance, there is a high risk in rewarding this behavior. Business planning is the third process used by managers with the balanced scorecard. By using the scorecard, businesses will integrate their strategic planning and budgeting processes. This makes sure that the budgets support the strategies of the company. The users of the scorecard pick measures that represent each of the four perspectives, and then set targets for each. Then they will decide which specific actions will help them in reaching those targets. Using short-term milestones to evaluate the progress toward the strategic goal is what results from using the balanced scorecard. The fourth, and final, process is feedback and learning. With the balanced scorecard in place managers can monitor feedback and relate this to the strategy. The first three processes are very important, but they demand a constant objective. Any deviation from the plan is considered a defect. By adding the feedback and learning process, the scorecard becomes balanced by providing real time information to enhance strategic learning. The balanced scorecard supplies three essential items to strategic learning. First, it articulates the vision. The holistic vision is communicated to the entire organization, and the individual efforts are linked to business unit objectives. Second, the scorecard supplies a strategic feedback system.This system views the strategies as hypotheses, and should be able to test, validate, and modify these hypotheses. Third, the balanced scorecard facilitates strategy review. Instead of using periodic meetings to evaluate past performances as the traditional financial review process does,

scorecard users review the feedback in a way to gain a better understanding of if the strategy is being reached, how is it being reached, and should the strategy be modified based on new information. This gives the organization a forward focus. The balanced scorecard facilitates an organization's plan to align management processes and focuses with the long-term strategy of the company. Without the scorecard it would be nearly impossible to maintain a consistency of vision and action while attempting to introduce new strategies and processes. The balanced scorecard provides a framework for managing the implementation of a strategy, while also allowing the strategy to evolve in response to changes in the companys competitive, market, and technological environments. The Strategic Planning Process
In the 1970's, many large firms adopted a formalized top-down strategic planning model. Under this model, strategic planning became a deliberate process in which top executives periodically would formulate the firm's strategy, then communicate it down the organization for implementation. The following is a flowchart model of this process: This process is most applicable to strategic management at the business unit level of the organization. For large corporations, strategy at the corporate level is more concerned with managing a portfolio of businesses. For example, corporate level strategy involves decisions about which business units to grow, resource allocation among the business units, taking advantage of synergies among the business units, and mergers and acquisitions. In the process outlined here, "company" or "firm" will be used to denote a single-business firm or a single business unit of a diversified firm. Mission A company's mission is its reason for being. The mission often is expressed in the form of a mission statement, which conveys a sense of purpose to employees and projects a company image to customers. In the strategy formulation process, the mission statement sets the mood of where the company should go. Objectives Objectives are concrete goals that the organization seeks to reach, for example, an earnings growth target. The objectives should be challenging but achievable. They also should be measurable so that the company can monitor its progress and make corrections as needed.


Page 51

The Strategic Planning Process

Mission | V Objectives | V Situation Analysis | V Strategy Formulation | V Implementation | V Control

Situation Analysis Once the firm has specified its objectives, it begins with its current situation to devise a strategic plan to reach those objectives. Changes in the external environment often present new opportunities and new ways to reach the objectives. An environmental scan is performed to identify the available opportunities. The firm also must know its own capabilities and limitations in order to select the opportunities that it can pursue with a higher probability of success. The situation analysis therefore involves an analysis of both the external and internal environment.

The external environment has two aspects: the macro-environment that affects all firms and a micro-environment that affects only the firms in a particular industry. The macro-environmental analysis includes political, economic, social, and technological factors and sometimes is referred to as a PEST analysis. An important aspect of the micro-environmental analysis is the industry in which the firm operates or is considering operating. Michael Porter devised a five forces framework that is useful for industry analysis. Porter's 5 forces include barriers to entry, customers, suppliers, substitute products, and rivalry among competing firms. The internal analysis considers the situation within the firm itself, such as:
y y y y y y y y y y y y y

Company culture Company image Organizational structure Key staff Access to natural resources Position on the experience curve Operational efficiency Operational capacity Brand awareness Market share Financial resources Exclusive contracts Patents and trade secrets

A situation analysis can generate a large amount of information, much of which is not particularly relevant to strategy formulation. To make the information more manageable, it sometimes is useful to categorize the internal factors of the firm as strengths and weaknesses, and the external environmental factors as opportunities and threats. Such an analysis often is referred to as a SWOT analysis. Strategy Formulation Once a clear picture of the firm and its environment is in hand, specific strategic alternatives can be developed. While different firms have different alternatives depending on their situation, there also exist generic strategies that can be applied across a wide range of firms. Michael Porter identified cost leadership, differentiation, and focus as three generic strategies that may be considered when defining strategic alternatives. Porter advised against implementing a combination of these strategies for a given product; rather, he argued that only one of the generic strategy alternatives should be pursued. Implementation The strategy likely will be expressed in high-level conceptual terms and priorities. For effective implementation, it needs to be translated into more detailed policies that can be understood at the

functional level of the organization. The expression of the strategy in terms of functional policies also serves to highlight any practical issues that might not have been visible at a higher level. The strategy should be translated into specific policies for functional areas such as:
y y y y y y

Marketing Research and development Procurement Production Human resources Information systems

In addition to developing functional policies, the implementation phase involves identifying the required resources and putting into place the necessary organizational changes. Control Once implemented, the results of the strategy need to be measured and evaluated, with changes made as required to keep the plan on track. Control systems should be developed and implemented to facilitate this monitoring. Standards of performance are set, the actual performance measured, and appropriate action taken to ensure success. Dynamic and Continuous Process The strategic management process is dynamic and continuous. A change in one component can necessitate a change in the entire strategy. As such, the process must be repeated frequently in order to adapt the strategy to environmental changes. Throughout the process the firm may need to cycle back to a previous stage and make adjustments. Drawbacks of this Process The strategic planning process outlined above is only one approach to strategic management. It is best suited for stable environments. A drawback of this top-down approach is that it may not be responsive enough for rapidly changing competitive environments. In times of change, some of the more successful strategies emerge informally from lower levels of the organization, where managers are closer to customers on a day-to-day basis. Another drawback is that this strategic planning model assumes fairly accurate forecasting and does not take into account unexpected events. In an uncertain world, long-term forecasts cannot be relied upon with a high level of confidence. In this respect, many firms have turned to scenario planning as a tool for dealing with multiple contingencies.


Page 54

The hierarchy of Strategic intent:

Strategic Intent Defined Strategic intent is a high-level statement of the means by which your organization will achieve its vision. It is a statement of design for creating a desirable future (stated in present terms). Simply put, a strategic intent is your company's vision of what it wants to achieve in the long term. In complexity science's terms, strategic intent is decomposition of exploration rules into the next level of detail, the linkages to the exploration rules and the transition rules that define how it will migrate from its current design and ecosystem to a future business design and ecosystem.1 Purpose of Strategic Intent The logic, uniqueness and discovery that make your strategic intent come to life are vitally important for employees. They have to understand, believe and live according to it. Strategy should be a stretch exercise, not a fit exercise. Expression of strategic intent is to help individuals and organizations share the common intention to survive and continue or extend themselves through time and space. Strategies are involved in the formulation, implementation and evaluation of strategy. The hierarchy of strategic intent lays the foundation for strategic management process. The process of establishing the hierarchy of strategic intent is very complex. In this hierarchy, the vision, mission, business definition and objectives are established. Formulation of strategies is possible only when strategic intent is clearly set up. This step is mostly philosophical in nature. It will have long term impact on the organization. Vision is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to become. Mission is the essential purpose of the organization, concerning particularly why it is in existence, the nature of the business it is in, and the customers it seeks to serve and satisfy." The mission statements stage the role that organization plays in society. Business definition explains the business of an organization in terms of customer needs, customer groups and alternative technologies. Objectives refer to the ultimate end results which are to be accomplished by the overall plan over a specified period of time. The vision, mission and business definition determine the business philosophy to be adopted in the long run. The goals and objectives are set to achieve them


Page 55

Analyzing a companys external environment:
A business does not function in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as external factors or influences. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies. Main Factors The main factor that affects most business is the degree of competition how fiercely other businesses compete with the products that another business makes. The other factors that can affect the business are:

y y

y y y

Social how consumers, households and communities behave and their beliefs. For instance, changes in attitude towards health, or a greater number of pensioners in a population. Legal the way in which legislation in society affects the business. E.g. changes in employment laws on working hours. Economic how the economy affects a business in terms of taxation, government spending, general demand, interest rates, exchange rates and European and global economic factors. Political how changes in government policy might affect the business e.g. a decision to subsidise building new houses in an area could be good for a local brick works. Technological how the rapid pace of change in production processes and product innovation affect a business. Ethical what is regarded as morally right or wrong for a business to do. For instance should it trade with countries which have a poor record on human rights.

Changing External Environment Markets are changing all the time. It does depend on the type of product the business produces, however a business needs to react or lose customers. Some of the main reasons why markets change rapidly:
y y y y y

Customers develop new needs and wants. New competitors enter a market. New technologies mean that new products can be made. A world or countrywide event happens e.g. Gulf War or foot and mouth disease. Government introduces new legislation e.g. increases minimum wage.


Page 56

Business and Competition Though a business does not want competition from other businesses, inevitably most will face a degree of competition. The amount and type of competition depends on the market the business operates in:
y y y

Many small rival businesses e.g. a shopping mall or city centre arcade close rivalry. A few large rival firms e.g. washing powder or Coke and Pepsi. A rapidly changing market e.g. where the technology is being developed very quickly the mobile phone market.

A business could react to an increase in competition (e.g. a launch of rival product) in the following ways:
y y y y

Cut prices (but can reduce profits) Improve quality (but increases costs) Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs money) Cut costs, e.g. use cheaper materials, make some workers redundant

Social Environment and Responsibility Social change is when the people in the community adjust their attitudes to way they live. Businesses will need to adjust their products to meet these changes, e.g. taking sugar out of childrens drinks, because parents feel their children are having too much sugar in their diets. The business also needs to be aware of their social responsibilities. These are the way they act towards the different parts of society that they come into contact with. Legislation covers a number of the areas of responsibility that a business has with its customers, employees and other businesses. It is also important to consider the effects a business can have on the local community. These are known as the social benefits and social costs. A social benefit is where a business action leads to benefits above and beyond the direct benefits to the business and/or customer. For example, the building of an attractive new factory provides employment opportunities to the local community. A social cost is where the action has the reverse effect there are costs imposed on the rest of society, for instance pollution. These extra benefits and costs are distinguished from the private benefits and costs directly attributable to the business. These extra cost and benefits are known as externalities external costs and benefits.

Governments encourage social benefits through the use of subsidies and grants (e.g. regional assistance for undeveloped areas). They also discourage social costs with fines, taxes and legislation. Pressure groups will also discourage social costs. Analyze the companys external environment and identify opportunities and threats it faces. List the opportunities and threats the company faces in two columns just as you listed strengths and weaknesses in two columns. Once weve studied the industry life-cycle model and the Porter 5-forces model in Chapter 3, try using them to analyze the situation your company faces. If you think of additional strengths and weaknesses as you are listing opportunities and threats, add them to the lists you created in Step 2. Here is a list of opportunities and threats developed from the Sun Microsystems case. Note that this list, based on the case published in 2001, shows more threats than opportunities. The threats shown here played a significant role in the serious problems that Sun experienced in 2001 and 2002. Opportunities Sales of networking equipment for web, other large-scale applications are growing Digital contents creation business is growing Threats Many competitors can make Unix servers Microsoft Windows NT can in theory do everything Solaris does and offer much wider compatibility Linux offers strong competition for Solaris and is more open

Industry analysis:
Definition: A market assessment tool designed to provide a business with an idea of the complexity of a particular industry. Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants.


Page 58

Industry Analysis The course is based on the ability of students to define their business, conduct an effective industry analysis, and identify the "key success factory" for firms competing in the industry. Such industry analysis is based on:
THE BUSINESS. The boundary for industry analysis is A. DEFINE the markets and products that describe the domain of the industry. Once you understand the business segment that is to be analyzed, identify the capabilities required to participate in that industry, and those competitors that are able to effectively target the same business segments. These four elements set the parameters for understanding and analyzing the industry. As industries like printers, copiers, scanners, and facsimile machines converge, business definitions become more difficult. In industries like computers, consumers are becoming more demanding for customized products and services. B. DESCRIBE THE INDUSTRY STRUCTURE. For each product-market segment, an industry analysis will describe the "five-forces" of competition. 1. A primary force comes customer segments that make up the markets. The size and importance of customers provide the power to negotiate prices and deals that reduce the profitability of the industry. The size and growth of segments determine their potential influence on product development and level of competition. 2. A second force comes from the competitors and their strategies for gaining market share. Each competitor offers a set of products and services that attempts to provide higher value to the product-market segments they address. Strategies can be to provide some combination of higher performance, more fashion and features, higher quality, or lower price. Increased rivalry often leads to price or service competition that can reduce the profitability of the business. 3. A third force comes from the industry suppliers. Industry suppliers often control critical inputs that can affect a firms ability to compete. Access to critical equipment, materials, or components can determine what firms will lead the industry. For this reason, increased outsourcing often leads to lower entry barriers for new competition. 4. The fourth force represents the barriers to change in industry structure, either from new competitors entering the industry or current competitors existing the industry. Barriers to entry often include heavy investment in capital, equipment, and market development. Barriers to exit often include outstanding warranty or service contracts that must be honored, and alternative use or potential sale of equipment and facilities. Once specialized facilities are established, they are seldom shut down, but are often sold to another industry participant. 5. The fifth force represents the potential for change in product-market structure of the industry through the substitution of products or services with alternative approaches to satisfying the customer's needs. This requires the identification of potential substitutes and the characteristics that would cause rapid substitution. Price often becomes a driver for substitutes, such as plastics for metals in cars and plumbing supplies. Today, the Internet is becoming a substitute for mail service and, eventually, telephone service.


Page 59

C. IDENTIFY KEY SUCCESS FACTORS. The primary purpose of industry analysis is to identify the requirements and trends that determine the key success factors for the business. These factors encompass (1) customer requirements, (2) competitive factors that must be met, (3) regulations/industry standards in the business, (4) the resource requirements to implement competitive strategy, and other (5) technical requirements to build a competitive position. 1. Customers are looking for products that provide some level of value for the price they pay. Each buyer segment has different requirements that affect its key success factors. Requirements can include high performance, durability, special features or fashion, ease of use, or rapid availability. 2. Competing firms often use similar product-market strategies. Competition is often based on price, quality, and delivery. Depending on their strategic focus, each firm must develop a set of skills (strategic weapons) that allow it to perform better than their competitors on each competitive dimension. 3. Industry regulations or standards are often minimum requirements for participation in a competitive arena. Goverment regulations often affect safety issues for the environment or end users. Industry standards often determine technical compatibility, process performance, and interface issues for network or system products. Industry standards can be set by a special body, like the Industry Standards Organization (ISO), or become ad hoc standards set by leading competitiors, like Intel and Microsoft. 4. Resource requirements are be coming increasingly critical as markets become global and economies of scale become critical for research and development, manufacturing, and marketing. Investments now excede $1 billion for facilities in semiconductors, paper making, and steel production. In high technology areas, like information technology, shortages of qualified personnel are forcing firms to outsource much of their capabilities. 5. Technical requirements are also key to today's competitive environment. Without access to, or internal technology, firms are not able to participate in many industries. This is especially important for suppliers, such as component suppliers for electronics or automobiles. As firms reduce their number of suppliers, suppliers must increasingly add research and development capabilities to stay in the game. Business Strategies Analysis Competitive product-market strategies are critical to business success. Business strategy analysis requires the following: A. IDENTIFY STRATEGIC GOALS. A firm's strategic goals drive business strategy and address the key success factors of the industry. Strategic goals often include the vision or mission statement for the business. They should also set the direction and standard for financial and market results against which actual performance can be measured. The two most common stategic goals are: 1. Competitive and market goals that define market share or market growth and penetration for the firm's products or services. 2. Financial performance in terms of key ratios, like return on investment and sales, and growth in revenues and/or profitability.

B. DEFINE BUSINESS STRATEGY. The definition of business strategy includes six areas of analysis. The product-market focus is the first step. The underlying capabilities in implementing a product-market strategy include the technologies, processes and market access that a firm has. These address the business and its key success factors. Businesss strategy includes customer targeting, product lines and positions, technical capabilities, strategic processes, and market access. 1. Describe the customer targeting strategy and its requirements. Without targeting a specific customer segment, it is impossible to develop effective products or services that meet specific customer needs and requirements. Each segment, by definition, has a different set of requirements. While differences may be minor at time, they affect the decision of the customer to purchase the product or service. 2. Describe the product line and product positioning strategies for the market segment. The business unit must decide what it will offer and how those offerings will be positioned within the competitive environment. A firm can have one product or a product line that covers a range of prices with a variety of features. The price-qualityperformance position is a relative determination compared with competitors' prices, quality levels and features when comparing your products with alternative products in the marketplace. 3. Identify the technologies required to implement the product-market strategy. Technologies provide the basic capabilities needed to develop products or services, as well as the associated processes used in developing or delivering them to the marketplace. Technology determines the range of products and speed with which they can be developed and delivered to the marketplace. 4. Identify the strategic process(es) required to implement the product-market strategy. The core capabilities of a firm are embedded in the business processes and functions. Strategic processes can either improve the product or marketing capabilities of a firm. These processes and functions are the basis of a firms competitive strengths and weaknesses, and make up the core competencies of the firm. These skills and capabilites are described in section C below. 5. Identify the market access strategy. The final element of strategy requires that a firm have access to its market or customers. Today, the Internet is considered the new channel for accessing markets. In the 1960s, 1-800 numbers were the new method of access. At the same time, discount superstores grew their market share in retail walk-in sales markets. C. IDENTIFY INTERNAL CAPABILITIES AND SKILLS. The ability of a firm to implement its strategy is dependent upon both the functions and business processes that supports its strategy. Depending on the nature of the organization, its functions and business process capabilities and skills are central to strategy implementation. These capabilities can be classified into product or service creation functions and processes, and product or service delivery and satisfaction functions and processes. Product-related functions and processes are dependent manufacturing/purchasing capabilities. upon a firm's R&D and


Page 61

1. The R&D function generates proprietary technologies that can be applied to the development and production of new products. In the electronics industry, access to basic components, like hard disk drives and floppy disk drives and high precision production equipment are fundamental to making smaller, lighter, higher quality products. Each generation of smaller products, like palm corders, stimulates market growth for the company that is first to the market. Each generation of smaller products also reduce packaging and shipping costs, reduce power consumption, extend battery life, and are more convenient to carry. 2. The time-to-market process is required to integrate new technology into a firm's products and services. Today, competitive advantage is often related to the speed with which a firm can introduce the next generation of technologies into the market through new product and process developments. Once the product is developed, production capacity often becomes the limiting factor of market growth. 3. The manufacturing function transforms a set of purchased components and software into a firm's products. Having acceptable products available in a timely manner for customers is central to making sales. The ability to provide the highest quality products in the most efficient allows companies to gain market share by offering competitive prices and ready availability. Experience curve effects from high volumes can lead to lower costs. 4. The integrated-supply-chain process coordinates purchasing of components for assembly, product outsourcing, otherwise making sure products are available to meet customer order requirements. Outsourcing and alliances increase a firm's ability to offer a wider range of products or to introduce new products more rapidly. Increased flexibility provides competitive advantage in responding to rapid market changes. Market-related functions and processes are directed at serving the customer in the most effective manner possible. Distribution and marketing activities, including sales and service, are central to fulfilling customer demands and ensuring customer satisfaction. 1. The distribution function is essential for a firm in gaining market access. The company that dominates the sales channels for a given market often controls the market. Market share is related to product availability, i.e. the number and type of locations that make the products and services available to your customer target. The Internet is providing the next generation of distribution and marketing system. 2. The market-to-collection process is used to obtain customers and deliver products. The Internet is changing the role of sales from face-to-face communication to phone or computer communications. It is expected that many intermediary roles (such as distributors and agents) will change to that of infomediary. As product quality and durability improve, service becomes less important, and new channels can be developed. 3. The marketing function provides the customer with information and education about a firm's products and services. Product information and education is often needed to let customers know about product capabilities. Advertising is the part of marketing that helps pull the customer into the market-to-colletion process by creating recognition and image for the brand's products and services. It helps pull the customer into the store and create brand image. Coca Cola, with the largest advertising budget, spends less money


Page 62

per bottle of soft drink sales than any other competitor. That gives them competitive advantage. 4. The customer-service and satisfaction process is critical to sustain a company's brand loyalty. It is much less expensive to keep an existing customer than to acquire a new customer. Once a customer relationship is established, it is important that appropriate customer service activities are established to maintain the relationship, and solve problems that might hurt the relationship. When after sales service is required, customers need a company contact. 1-800 numbers and the Internet are rapidly providing direct purchase opportunities and technical support capabilities. Dell Computers, for example, guarantees 48 hour repairs of their products (often next day service). Xerox provides 7day, 24-hour repair service to their large system customers. D. STRATEGIC PERFORMANCE. Performance is an outcome of strategy. The success with which a firm's business strategy effectively addresses its industry's key success factors will determine its strategic performance. Strategic performance is measured in terms of both financial and market success. 1. Financial performance is essential for continued business operations. Financial capabilities are critical in supporting functional strategies and making required infrastructure investments. For example, a company with adequate funding can expand or invest, or can provide customer financing. 2. Market share demonstrates a firm's ability to create and hold customers, which determines the long term success of a firm. The freshness of product lines and market positioning affect a firm's ability to attract customers ahead of their competition.

Porter s dominant economic features:



Industrys Dominant Economic Features

Identification of industrys dominant economic features is very important for analyzing a companys industrys and competitive environment. It also provides an overview of the over all landscape of industry. So basically it helps the organization to know the different kind of strategic moves that industry members are likely to employ. Some of the important industrys dominant economic features are given below. Market size and growth rate Market size refers to the total number of firms operating in the industry. It is also important to know whether the industry is growing, static or declining. It depends upon the position of industry in the business life cycle i.e. earlydevelopment, rapid growth, early maturity, maturity, stagnation, decline.


Page 63

Number of rivals Organizations should also know whether the industry contains too many small rivals or is it dominated by a few large firms. Similarly they should also know about the various development in the industry such as mergers andacquisitions etc. Scope of competitive rivalry Scope of competitive rivalry is an important factor for the organizations to know about the level of competition. Industry members must know about the nature of future competition. For example if a company realizes that its future success depends upon diversification, product development and market expansion, then it must start planning from the very first day. Buyer needs and requirements Industry members must take into consideration the need and taste of final buyers as well as the middlemen. So, basically organizations have to do a lot of periodic research in order to know the major shifts in buyers needs and requirements. They should also know the about the various factors factors affecting consumer behavior. Degree of product differentiation Product differentiation is another important factor for analyzing the overall industry situation. If all the products of industry are not fully differentiated then it will increase competition among the members of industry. In such case prices of the products will be low and the new entrants will find it difficult to compete with the existing firms. Product innovation Product innovation can be used as a measure to know the dominant industry features. If the industry is characterized by rapid product innovation and short product life cycle then the research and development is very important for the success of an organization. In such cases, members of the industry must come up with new products to compete effectively. Pace of technological change If the industry is characterized by rapid pace of technological change then the art of the state technology is imperative for the success of organizations. For example Industry of mobile phones requires rapid changes in the technology in order to meet the changing consumer demands.


Page 64

Vertical integration It is important to know whether the competitors in the industry are partially or fully integrated. Similarly the competitive advantages and disadvantages of fully, partially and non integrated firms should be taken into consideration. Vertical integration can cause potential cost of production differences. Economies of scale Organizations must also know about the different economies of scale in purchasing, manufacturing, and other activities. They should analyze whether the companies with high scale operations has any cost advantage or not. Any reduction in the cost of production leads to higher competitiveness which ultimately results higher profits.

Competitive Environment Analysis

Competitive Environment Analysis explains the structure, participants and forces that affect the competitive intensity and profitability of an industry or market. It is a useful tool to complement a SWOT analysis and to assess the attractiveness of a potential business diversification. Five Forces Model The best-known model for analysing a competitive environment is Michael Porter's Five Forces model. Porter classifies the five forces or "rules of competition" as: 1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products or services 5. Rivalry among existing competitors.

The analyst has to measure the individual and overall strength of the five forces; then answer the questions: how attractive is the industry/market? How can we compete?


Page 65

A Competitive Environment Analysis can be very useful provided accurate information is used and the analysis is objective. A thorough analysis may require more research analyst resource than the Competitive Intelligence team can spare. We Can Analyse Your Competitive Environment Intelligentsia is expert in Competitive Environment Analysis. We work closely with clients' competitive strategy teams, to either refresh existing analyses as competitive forces change or to create the analysis to begin the process. The Benefits of Outsourcing Outsourcing a competitive environment analysis is cost-effective. You receive a well researched piece of analysis and can, if you wish, deploy the analysis on other priorities in the business.

Analysis of competition
The third element of Strategic analysis is to look at the competitive environment - what your competitors are doing, where the next technological developments are coming from and the general directions the market is moving. Competitive and environmental analysis A competitive and environmental analysis of your markets should include all the key influencing factors that affect the way in which you can compete. A competitive review is important for two reason. Firstly, even if you know what the customers want and have the resources to meet the customers' demands, it may be that the competitive environment means that it is not worth pursuing particular parts of the market for a whole range of strategic reasons, such as the threat a price war, channel conflict, or legal or ethical considerations. Secondly, you need to know if your competitors are doing things better than you are, or more dangerously, whether they are looking to change the basis of competition in the market, for instance by moving to a direct sales model, or by introducing some revolutionary new product or technology. The main types of competitive analysis from a strategic point of view are:
y y

"The Five Forces" Benchmarking and competitive evaluation ESHWARI.S---LORAA BUSINESS ACADEMY Page 66

Market Intelligence is the primary mechanism for gathering information about competitors (although some may come from talking to customers in your own market surveys). Notanant is our on-line market knowledge system for collecting, sharing and managing customer and competitor knowledge provided by Gegen CIS. Five forces The five forces come from Porter's famous framework and are: y Power of Buyers y Power of Suppliers y Threat of substitutes y Barriers to entry y Competitors The idea is that change in your market is likely to come as the basis of one of these five areas. For instance, buyers may distort the market by forcing prices down, or by deciding to take build products in-house. In considering how these "forces" act on your markets, you get a picture of issues such as channel conflict, threats from vertical integration, the impact of regulatory change or the advent of new technology. You can also take a view as to how you are or can affect the competitive situation for your own benefit, rather than statically accepting the status quo. Consequently it becomes possible to play around with different future competitive scenarios and to use these to test different propositions to try and guess how the market will change. Your strategy can then include contingencies and responses to changes that might affect you, or changes that you might make to the market. Benchmarking Benchmarking is used to ascertain how well you are doing against the competition. Are there areas that you can learn from the competition? Are there ideas in markets outside your own that would be worth bringing into your market to give you a competitive advantage? Your competitors can also be a source for information about the general market. Their advertising and marketing is telling you something about the messages and approaches that they think are applicable to your market. If they have done their research, you can learn from their approaches. One common issue that comes from looking at the competition is what do you do about it? The options are:


Page 67

y Ignore y Fight y Adopt In practice, if there is merit in something new and you ignore it, it is likely to bite you later. If you fight against it, you add to your costs potentially just to save market share, rather than to win market share. Consequently often adoption of the competition's good ideas is the best way forward (although perhaps after a little fighting to test whether the ideas are sound). Microsoft's Embrace and Extend and Intel's "Only the Paranoid Survive" are good examples of companies that use the competition to keep their products at the cutting edge. Often there can internal cultural issues that mean this can be difficult to accept. But learning from the competition, doesn't mean following the competition. This approach, known as an "invest in your threats"strategy, can be an extremely effective way of keeping up with and ahead of the market.

Porter's 5 Forces Analysis:

The model originated from Michael E. Porter's 1980 book "Competitive Strategy: Techniques for Analyzing Industries and Competitors." Since then, it has become a frequently used tool for analyzing a company's industry structure and its corporate strategy. In his book, Porter identified five competitive forces that shape every single industry and market. These forces help us to analyze everything from the intensity of competition to the profitability and attractiveness of an industry. Figure 1 shows the relationship between the different competitive forces.


Page 68

1. Threat of New Entrants - The easier it is for new companies to enter the industry, the more cutthroat competition there will be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:
y y y y y y

Existing loyalty to major brands Incentives for using a particular buyer (such as frequent shopper programs) High fixed costs Scarcity of resources High costs of switching companies Government restrictions or legislation

Power of Suppliers - This is how much pressure suppliers can place on a business. If one supplier has a large enough impact to affect a company's margins and volumes, then it holds substantial power. Here are a few reasons that suppliers might have power:
y y y y y

There are very few suppliers of a particular product There are no substitutes Switching to another (competitive) product is very costly The product is extremely important to buyers - can't do without it The supplying industry has a higher profitability than the buying industry

Power of Buyers - This is how much pressure customers can place on a business. If one customer has a large enough impact to affect a company's margins and volumes, then the customer hold substantial power. Here are a few reasons that customers might have power:
y y y y y

Small number of buyers Purchases large volumes Switching to another (competitive) product is simple The product is not extremely important to buyers; they can do without the product for a period of time Customers are price sensitive
SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry


Page 69

Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry THREAT OF NEW ENTRANTS Barriers to Entry Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes


Page 70

Availability of Substitutes - What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses a serious threat. Here are a few factors that can affect the threat of substitutes:

The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially, a coffee drinker may switch over to a beverage like tea. If substitutes are similar, it can be viewed in the same light as a new entrant.

Competitive Rivalry - This describes the intensity of competition between existing firms in an industry. Highly competitive industries generally earn low returns because the cost of competition is high. A highly competitive market might result from:
y y y

Many players of about the same size; there is no dominant firm Little differentiation between competitors products and services A mature industry with very little growth; companies can only grow by stealing customers away from competitors

Industry Driving Forces:

Organizations of all types are continually striving to enhance their business information systems. Four major driving forces affect the strategies that CIOs and other IT leaders pursue relative to their legacy systems. These drivers include:
y y y

Customer needs The capability and quality of such systems to fulfill the needs of customers often differentiate an organization from its competitors. Regulatory changes and emerging standards Concurrently, organizations are continually under pressure to respond to changes in laws, regulations and policies that govern their operations. Similarly, emerging industry standards may require changes in system functionality. Evolving technologies New functionality in new versions of products or entirely new products provide opportunities to enhance systems. Sometimes, as technology evolves, vendors discontinue support for a component of a system, which in some cases puts missioncritical legacy systems at risk. Budget and time constraints Leaders responsible for legacy systems must endeavor to balance all driving forces with the cost of systems development and operations. In fact, organizations typically face the need to provide more and better functionality in shorter time frames and reduced budgets.

y y

y y


Page 71

key success factors and implementation: no

analyzing company's resource competitive position:

analysis of companys present strategies: 1. 2. 3. 4. 5. How well is the companys present strategy working? What are the companys strengths, weaknesses, opportunities, and threats? Are the companys prices and costs competitive? How strong is the companys competitive position? What strategic issues does the company face?

Strategy and Competitive Advantage

The Five Generic Competitive Strengths

When one strips away the details to get at the real substance the biggest and most important differences among competitive strategies boil down to (1) whether a company s market target is broad or narrow and (2) whether it is pursuing a competitive advantage linked to low costs or product differentiation. Five distinct approaches stand out: 1. A low-cost leadership strategy Appealing to a broad spectrum of customers based on being the overall low cost provider of a product or service. 2. A broad differentiation strategy Seeking to differentiate the company s product offering from rivals in ways that will appeal to a broad spectrum of buyers. 3. A best-cost provider strategy Giving customers more value for the money by combining an emphasis on low cost with an emphasis on upscale differentiation; the target is to have the best (lowest) costs and prices relative to producers of products with comparable quality and features. 4. A focused or market niche strategy based on lower cost Concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals. 5. A focused or market niche strategy based on differentiation Concentrating on a narrow buyer segment and outcompeting rivals by offering niche members a customized product or service that meets their tastes and requirements better than rivals offering.


Page 72

T y p e o f C o m p e titiv e A d v a n ta g e B e in g P u rs u e d S e c tio n o f Low er C ost B u y e rs D iffe re n tia tio n A B ro a d

M a rk e t T a rg e t

C ro s s -

A N a rro w

SWOT Analysis
SWOT analysis is a tool for auditing an organization and it environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors.

Segm ent

O v e ra ll L o w -C o s t B ro a d L e a d e rs h ip D iffe re n tia tio n S tra te g y S tra te g y B e s t-C o s t P ro v id e r S tra te g y Focused Focused Low D iffe re n tia tio n C o s t S tra te g y S tra te g y

B uyer

SWOT Analysis
A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan: SWOT Analysis Framework

Environmental Scan / \ Internal Analysis External Analysis /\ /\ Strengths Weaknesses Opportunities Threats | SWOT Matrix


Page 73

Strengths A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:
y y y y y y

patents strong brand names good reputation among customers cost advantages from proprietary know-how exclusive access to high grade natural resources favorable access to distribution networks

Weaknesses The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses:
y y y y y y

lack of patent protection a weak brand name poor reputation among customers high cost structure lack of access to the best natural resources lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment. Opportunities The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:
y y y y

an unfulfilled customer need arrival of new technologies loosening of regulations removal of international trade barriers

Threats Changes in the external environmental also may present threats to the firm. Some examples of such threats include:


Page 74

y y y y

shifts in consumer tastes away from the firm's products emergence of substitute products new regulations increased trade barriers

The SWOT Matrix A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity. To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below: SWOT / TOWS Matrix Strengths Weaknesses

Opportunities S-O strategies W-O strategies


S-T strategies W-T strategies

y y y y

S-O strategies pursue opportunities that are a good fit to the company's strengths. W-O strategies overcome weaknesses to pursue opportunities. S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats. W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.

value chain analysis Introduction

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings: (1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and


Page 75

(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced"). Linking Value Chain Analysis to Competitive Advantage What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used. Primary Activities Primary value chain activities include: Primary Activity Inbound logistics Operations Description

All those activities concerned with receiving and storing externally sourced materials The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products) Outbound All those activities associated with getting finished goods and services to logistics buyers Marketing and Essentially an information activity - informing buyers and consumers about sales products and services (benefits, use, price etc.) Service All those activities associated with maintaining product performance after the product has been sold

Support Activities Support activities include: Secondary Activity Procurement Human Resource Management Technology Development Description This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers) Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business Activities concerned with managing information processing and the development and protection of "knowledge" in a business


Page 76

Infrastructure Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

Steps in Value Chain Analysis Value chain analysis can be broken down into a three sequential steps: (1) Break down a market/organisation into its key activities under each of the major headings in the model; (2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage; (3) Determine strategies built around focusing on activities where competitive advantage can be sustained

The Value Chain analysis:

To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of value-generating activities referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram: The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. The primary value chain activities are:
y y y y y

Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required. Operations: the processes of transforming inputs into finished products and services. Outbound Logistics: the warehousing and distribution of finished goods. Marketing & Sales: the identification of customer needs and the generation of sales. Service: the support of customers after the products and services are sold to them.

Porter's Generic Value Chain ESHWARI.S---LORAA BUSINESS ACADEMY Page 77

Inbound Logistics

> Operations >

Outbound Logistics


Marketing & Sales

> Service >


Firm Infrastructure HR Management Technology Development Procurement

These primary activities are supported by:

y y y y

The infrastructure of the firm: organizational structure, control systems, company culture, etc. Human resource management: employee recruiting, hiring, training, development, and compensation. Technology development: technologies to support value-creating activities. Procurement: purchasing inputs such as materials, supplies, and equipment.

The firm's margin or profit then depends on its effectiveness in performing these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It is in these activities that a firm has the opportunity to generate superior value. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows:
y y

Cost advantage: by better understanding costs and squeezing them out of the value-adding activities. Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors.

Cost Advantage and the Value Chain A firm may create a cost advantage either by reducing the cost of individual value ESHWARI.S---LORAA BUSINESS ACADEMY Page 78

chain activities or by reconfiguring the value chain. Once the value chain is defined, a cost analysis can be performed by assigning costs to the value chain activities. The costs obtained from the accounting report may need to be modified in order to allocate them properly to the value creating activities. Porter identified 10 cost drivers related to value chain activities:
y y y y y y y y y y

Economies of scale Learning Capacity utilization Linkages among activities Interrelationships among business units Degree of vertical integration Timing of market entry Firm's policy of cost or differentiation Geographic location Institutional factors (regulation, union activity, taxes, etc.)

A firm develops a cost advantage by controlling these drivers better than do the competitors. A cost advantage also can be pursued by reconfiguring the value chain. Reconfiguration means structural changes such a new production process, new distribution channels, or a different sales approach. For example, FedEx structurally redefined express freight service by acquiring its own planes and implementing a hub and spoke system. Differentiation and the Value Chain A differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation, as can distribution channels that offer high service levels. Differentiation stems from uniqueness. A differentiation advantage may be achieved either by changing individual value chain activities to increase uniqueness in the final product or by reconfiguring the value chain. Porter identified several drivers of uniqueness:
y y y y y

Policies and decisions Linkages among activities Timing Location Interrelationships Page 79


y y y y

Learning Integration Scale (e.g. better service as a result of large scale) Institutional factors

Many of these also serve as cost drivers. Differentiation often results in greater costs, resulting in tradeoffs between cost and differentiation. There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration that increases product differentiation. Technology and the Value Chain Because technology is employed to some degree in every value creating activity, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations of the value chain. Various technologies are used in both primary value activities and support activities:

Inbound Logistics Technologies o Transportation o Material handling o Material storage o Communications o Testing o Information systems Operations Technologies o Process o Materials o Machine tools o Material handling o Packaging o Maintenance o Testing o Building design & operation o Information systems Outbound Logistics Technologies o Transportation o Material handling Page 80


o o o y

Packaging Communications Information systems

Marketing & Sales Technologies o Media o Audio/video o Communications o Information systems Service Technologies o Testing o Communications o Information systems

Note that many of these technologies are used across the value chain. For example, information systems are seen in every activity. Similar technologies are used in support activities. In addition, technologies related to training, computeraided design, and software development frequently are employed in support activities. To the extent that these technologies affect cost drivers or uniqueness, they can lead to a competitive advantage. Linkages Between Value Chain Activities Value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities. Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose that inadvertantly the new product design results in increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase. Sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage. Analyzing Business Unit Interrelationships Interrelationships among business units form the basis for a horizontal strategy. Such business unit interrelationships can be identified by a value chain analysis. Tangible interrelationships offer direct opportunities to create a synergy among ESHWARI.S---LORAA BUSINESS ACADEMY Page 81

business units. For example, if multiple business units require a particular raw material, the procurement of that material can be shared among the business units. This sharing of the procurement activity can result in cost reduction. Such interrelationships may exist simultaneously in multiple value chain activities. Unfortunately, attempts to achieve synergy from the interrelationships among different business units often fall short of expectations due to unanticipated drawbacks. The cost of coordination, the cost of reduced flexibility, and organizational practicalities should be analyzed when devising a strategy to reap the benefits of the synergies. Outsourcing Value Chain Activities A firm may specialize in one or more value chain activities and outsource the rest. The extent to which a firm performs upstream and downstream activities is described by its degree of vertical integration. A thorough value chain analysis can illuminate the business system to facilitate outsourcing decisions. To decide which activities to outsource, managers must understand the firm's strengths and weaknesses in each activity, both in terms of cost and ability to differentiate. Managers may consider the following when selecting activities to outsource:
y y y

Whether the activity can be performed cheaper or better by suppliers. Whether the activity is one of the firm's core competencies from which stems a cost advantage or product differentiation. The risk of performing the activity in-house. If the activity relies on fastchanging technology or the product is sold in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets. Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, higher flexibility, reduced inventory, etc.

The Value Chain System A firm's value chain is part of a larger system that includes the value chains of upstream suppliers and downstream channels and customers. Porter calls this series of value chains the value system, shown conceptually below: The Value System ...

> Value Chain > Value Chain > Value Chain > Value Chain





Linkages exist not only in a firm's value chain, but also between value chains. ESHWARI.S---LORAA BUSINESS ACADEMY Page 82

While a firm exhibiting a high degree of vertical integration is poised to better coordinate upstream and downstream activities, a firm having a lesser degree of vertical integration nonetheless can forge agreements with suppliers and channel partners to achieve better coordination. For example, an auto manufacturer may have its suppliers set up facilities in close proximity in order to minimize transport costs and reduce parts inventories. Clearly, a firm's success in developing and sustaining a competitive advantage depends not only on its own value chain, but on its ability to manage the value system of which it is a part.

Definition Benchmarking is the process of identifying "best practice" in relation to both products (including) and the processes by which those products are created and delivered. The search for "best practice" can taker place both inside a particular industry, and also in other industries (for example - are there lessons to be learned from other industries?). The objective of benchmarking is to understand and evaluate the current position of a business or organisation in relation to "best practice" and to identify areas and means of performance improvement. The Benchmarking Process Benchmarking involves looking outward (outside a particular business, organisation, industry, region or country) to examine how others achieve their performance levels and to understand the processes they use. In this way benchmarking helps explain the processes behind excellent performance. When the lessons learnt from a benchmarking exercise are applied appropriately, they facilitate improved performance in critical functions within an organisation or in key areas of the business environment. Application of benchmarking involves four key steps: (1) Understand in detail existing business processes (2) Analyse the business processes of others (3) Compare own business performance with that of others analysed (4) Implement the steps necessary to close the performance gap Benchmarking should not be considered a one-off exercise. To be effective, it must become an ongoing, integral part of an ongoing improvement process with the goal of keeping abreast of ever-improving best practice.


Page 83

Types of Benchmarking There are a number of different types of benchmarking, as summarised below: Type Strategic Benchmarking Description Where businesses need to improve overall performance by examining the long-term strategies and general approaches that have enabled high-performers to succeed. It involves considering high level aspects such as core competencies, developing new products and services and improving capabilities for dealing with changes in the external environment. Changes resulting from this type of benchmarking may be difficult to implement and take a long time to materialise Businesses consider their position in relation to performance characteristics of key products and services. Benchmarking partners are drawn from the same sector. This type of analysis is often undertaken through trade associations or third parties to protect confidentiality. Most Appropriate for the Following Purposes - Re-aligning business strategies that have become inappropriate

Performance or Competitive Benchmarking

_ Assessing relative level of performance in key areas or activities in comparison with others in the same sector and finding ways of closing gaps in performance - Achieving improvements in key processes to obtain quick benefits

Process Benchmarking

Functional Benchmarking

InternalBench marking

Focuses on improving specific critical processes and operations. Benchmarking partners are sought from best practice organisations that perform similar work or deliver similar services. Process benchmarking invariably involves producing process maps to facilitate comparison and analysis. This type of benchmarking often results in short term benefits. Businesses look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar functions or work processes. This sort of benchmarking can lead to innovation and dramatic improvements. involves benchmarking businesses or operations from within the same organisation (e.g. business units in different countries). The main advantages of internal benchmarking are that access to sensitive data and information is

- Improving activities or services for which counterparts do not exist.

- Several business units within the same organisation exemplify good practice and management want to
Page 84


External Benchmarking

International Benchmarking

easier; standardised data is often readily available; and, usually less time and resources are needed. There may be fewer barriers to implementation as practices may be relatively easy to transfer across the same organisation. However, real innovation may be lacking and best in class performance is more likely to be found through external benchmarking. involves analysing outside organisations that are known to be best in class. External benchmarking provides opportunities of learning from those who are at the "leading edge". This type of benchmarking can take up significant time and resource to ensure the comparability of data and information, the credibility of the findings and the development of sound recommendations. Best practitioners are identified and analysed elsewhere in the world, perhaps because there are too few benchmarking partners within the same country to produce valid results. Globalisation and advances in information technology are increasing opportunities for international projects. However, these can take more time and resources to set up and implement and the results may need careful analysis due to national differences

spread this expertise quickly, throughout the organisation

- Where examples of good practices can be found in other organisations and there is a lack of good practices within internal business units

- Where the aim is to achieve world class status or simply because there are insufficient"national" businesses against which to benchmark.

The benchmarking process consists of five phases:

1. Planning. The essential steps are those of any plan development: what, who and how.

What is to be benchmarked? Every function of an organization has or delivers a product or output. Benchmarking is appropriate for any output of a process or function, whether its a physical good, an order, a shipment, an invoice, a service or a report. To whom or what will we compare? Business-to-business, direct competitors are certainly prime candidates to benchmark. But they are not the only targets. Benchmarking must be conducted against the best companies and business functions regardless of where they exist.

y y

How will the data be collected? Theres no one way to conduct benchmarking investigations. Theres an infinite variety of ways to obtain required data and most of
Page 85


the data youll need are readily and publicly available. Recognize that benchmarking is a process not only of deriving quantifiable goals and targets, but more importantly, its the process of investigating and documenting the best industry practices, which can help you achieve goals and targets. 2. Analysis. The analysis phase must involve a careful understanding of your current process and practices, as well as those of the organizations being benchmarked. What is desired is an understanding of internal performance on which to assess strengths and weaknesses. Ask:
y y y y y

Is this other organization better than we are? Why are they better? By how much? What best practices are being used now or can be anticipated? How can their practices be incorporated or adapted for use in our organization?

Answers to these questions will define the dimensions of any performance gap: negative, positive or parity. The gap provides an objective basis on which to actto close the gap or capitalize on any advantage your organization has. 3. Integration. Integration is the process of using benchmark findings to set operational targets for change. It involves careful planning to incorporate new practices in the operation and to ensure benchmark findings are incorporated in all formal planning processes. Steps include:
y y y

Gain operational and management acceptance of benchmark findings. Clearly and convincingly demonstrate findings as correct and based on substantive data. Develop action plans. Communicate findings to all organizational levels to obtain support, commitment and ownership.

4. Action. Convert benchmark findings, and operational principles based on them, to specific actions to be taken. Put in place a periodic measurement and assessment of achievement. Use the creative talents of the people who actually perform work tasks to determine how the findings can be incorporated into the work processes. Any plan for change also should contain milestones for updating the benchmark findings, and an ongoing reporting mechanism. Progress toward benchmark findings must be reported to all employees. 5. Maturity. Maturity will be reached when best industry practices are incorporated in all business processes, thus ensuring superiority. Tests for superiority:

y y

If the now-changed process were to be made available to others, would a knowledgeable businessperson prefer it? Do other organizations benchmark your internal operations?

Maturity also is achieved when benchmarking becomes an ongoing, essential and self-initiated facet of the management process. Benchmarking becomes institutionalized and is done at all appropriate levels of the organization, not by specialists. Figure 1 Benchmarking process steps


Page 87

Generic Competitive Strategies

M.E. Porter, Competitive Advantage, New York, 1985. This diagram has been recreated by LMC. LMC explains Generic Competitive Strategies The generic competitive strategies form a business tool which helps strategists understand how the position of a company within its industry can be directly related to the strategy it employs. The strategy employed can then be analysed to understand where a company's competitive advantage lies, with a view to maintaining it. Porter (1985) identified the two main types of competitive advantage as cost advantage and differentiation. In developing and maintaining their competitive advantage, companies have the option to adopt one of the three generic strategies: cost leadership, differentiation or focus. The horizontal axis across the top of the graph shows the type of competitive advantage the company has, whilst the vertical axis relates to the scope of the competition, either broad and company-wide or narrow and limited to a market segment.

Cost Leadership This is a strategy where a company aims to out-price its competitors by reducing overheads or the fixed costs associated with manufacture and distribution. It requires a focus on the efficiency of production lines and economies of scale. This strategy is employed where customers have the ability to change supplier easily and the products or services are standardised and well understood by the consumer. A good example of cost leadership strategy is employed by supermarket chains on everyday necessity goods. By using this strategy, marketing the product becomes less important. Benefits include raising barriers for competitors to enter the market and easing the effect of fixed-cost rises across the industry. Differentiation This strategy is employed where a unique attribute of a product or service is highlighted relative to similar alternatives presented by the competition. It allows a higher price to be charged or a greater ability to command customer loyalty. Differentiation strategy is used where the company sees its key product competencies as a more profitable advantage than simple cost leadership. Examples include Coca-Cola, which differentiates by building a solid brand, or Sony, which differentiates on quality or reliability of products. Customers react to this strategy by paying more for a perceived greater reliability or quality or by returning to a trusted brand. It relies heavily on marketing or advertising to maintain the brand identity and raises the barrier to competitors entering the market. Focus This strategy is aimed at a specific target consumer group, for example cultural, economic, political, geographical or age-related groups. The strategy employs either cost focus (3A) or differentiation focus (3B) within its target audience, and in this sense it is a narrower application of one of the aforementioned strategies. Saga holidays, for example, focus on a specific group of consumers - the over 50's. Benefits include the increase in brand loyalty developed as customers perceive the company to be a specialist. Porter identified that one combination of the strategies is possible: combining market segmentation with differentiation. However, in general, other combinations are not possible due to a conflict between cost reduction and value-added differentiation. Therefore, a company should retain one overall main strategy to maintain its long term competitive advantage.

Porter's Generic Competitive Strategies (ways of competing)

A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership,


Page 89

differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.

1. Cost Leadership In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average. 2. Differentiation In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price. 3. Focus The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. The focus strategy has two variants. (a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on

differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in certain segments.


Porter's Generic Strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:

Target Scope

Advantage Low Cost Cost Leadership Strategy Product Uniqueness Differentiation Strategy

Broad (Industry Wide)

Narrow (Market Segment)

Focus Strategy (low cost)

Focus Strategy (differentiation)

Cost Leadership Strategy This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than

that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market. Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership. Firms that succeed in cost leadership often have the following internal strengths:
y y y y

Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome. Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process. High level of expertise in manufacturing process engineering. Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share. Differentiation Strategy A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily. Firms that succeed in a differentiation strategy often have the following internal strengths:
y y

Access to leading scientific research. Highly skilled and creative product development team.
Page 92


y y

Strong sales team with the ability to successfully communicate the perceived strengths of the product. Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. Focus Strategy The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly. Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiationfocused strategy may be able to pass higher costs on to customers since close substitute products do not exist. Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well. Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other focusers may be able to carve out sub-segments that they can serve even better. A Combination of Generic Strategies - Stuck in the Middle? These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage. Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy. By separating the strategies into different units having

different policies and even different cultures, a corporation is less likely to become "stuck in the middle." However, there exists a viewpoint that a single generic strategy is not always best because within the same product customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price. There have been cases in which high quality producers faithfully followed a single strategy and then suffered greatly when another firm entered the market with a lower-quality product that better met the overall needs of the customers. Generic Strategies and Industry Forces These generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces.

Generic Strategies and Industry Forces

Industry Force Entry Barriers

Generic Strategies Cost Leadership Ability to cut price in retaliation deters potential entrants. Ability to offer lower price to powerful buyers. Differentiation Focus

Customer loyalty can Focusing develops core competencies discourage potential entrants. that can act as an entry barrier. Large buyers have less power Large buyers have less power to to negotiate because of few negotiate because of few alternatives. close alternatives. Suppliers have power because of low volumes, but a differentiationfocused firm is better able to pass on supplier price increases.

Buyer Power

Supplier Power

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Can use low price to Customer's become attached Specialized products & core Threat of defend against to differentiating attributes, competency protect against Substitutes substitutes. reducing threat of substitutes. substitutes. Rivalry Better able to compete on price. Brand loyalty to keep customers from rivals. Rivals cannot meet differentiationfocused customer needs.


Page 94

Strategic alliances:
Agreement for cooperation among two or more independent firms to work together towards common objectives. Unlike in a joint venture, firms in a strategic alliance do not form a new entity to further their aims but collaborate while remaining apart and distinct

Types of Strategic Alliances

Collaborative agreements between businesses can take a number of forms and are becoming increasingly common as businesses aim to get the upper hand over their competitors. The main types of strategic alliances are listed below: Joint Ventures A joint venture is an agreement by two or more parties to form a single entity to undertake a certain project. Each of the businesses has an equity stake in the individual business and share revenues, expenses and profits. "Joint Ventures are agreements between parties or firms for a particular purpose or venture. Their formation may be very informal, such as a handshake and an agreement for two firms to share a booth at a trade show. Other arrangements can be extremely complex, such as the consortium of major U.S. electronics firms to develop new microchips," says Charles P. Lickson in A Legal Guide for Small Business. Joint ventures between small firms are very rare, primarily because of the required commitment and costs involved. Outsourcing The 1980s was the decade where outsourcing really rose to prominence, and this trend continued throughout the 1990s to today, although to a slightly lesser extent. The early forecasts, such as the one from American Journalist Larry Elder, have been shown to not always be true:

Outsourcing and globalization of manufacturing allows companies to reduce costs, benefits consumers with lower cost goods and services, causes economic expansion that reduces unemployment, and increases productivity and job creation. Affiliate Marketing Affiliate marketing has exploded over recent years, with the most successful online retailers using it to great effect. The nature of the internet means that referrals can be accurately tracked right through the order process. Amazon was the pioneer of affiliate marketing, and now has tens of thousands of websites promoting its products on a performance-based basis. Technology Licensing This is a contractual arrangement whereby trade marks, intellectual property and trade secrets are licensed to an external firm. Its used mainly as a low cost way to enter foreign markets. The main downside of licensing is the loss of control over the technology as soon as it enters other hands the possibility of exploitation arises. Product Licensing This is similar to technology licensing except that the license provided is only to manufacture and sell a certain product. Usually each licensee will be given an exclusive geographic area to which they can sell to. Its a lower-risk way of expanding the reach of your product compared to building your manufacturing base and distribution reach. Franchising Franchising is an excellent way of quickly rolling out a successful concept nationwide. Franchisees pay a set-up fee and agree to ongoing payments so the process is financially risk-free for the company. However, downsides do exist, particularly with the loss of control over how franchisees run their franchise. R&D Strategic alliances based around R&D tend to fall into the joint venture category, where two or more businesses decide to embark on a research venture through forming a new entity.


Page 96

Distributors If you have a product one of the best ways to market it is to recruit distributors, where each one has its own geographical area or type of product. This ensures that each distributors success can be easily measured against other distributors. Distribution Relationships This is perhaps the most common form of alliance. Strategic alliances are usually formed because the businesses involved want more customers. The result is that cross-promotion agreements are established. Consider the case of a bank. They send out bank statements every month. A home insurance company may approach the bank and offer to make an exclusive available to their customers if they can include it along with the next bank statement that is sent out. Its a win-win agreement the bank gains through offering a great deal to their customers, the insurance company benefits through increased customer numbers, and customers gain through receiving an exclusive offer.

Strategic Alliances - an Underused Marketing Tactic:

Strategic alliances are formal partnerships between businesses which help the businesses achieve a set of goals. There are many types of strategic alliances, including joint ventures, affiliates and distribution agreements. They are particularly common in industries that are experiencing rapid change, the internet being one example, and are often the quickest way of rapidly expanding a business. Fortune Magazine called the 1990s the decade of the strategic alliance and it has become one of the key tools in rapidly expanding and winning market share. Benefits of Strategic Alliances Many startups decide that the best way to rapidly expand their business is to enter into strategic alliances with established companies which serve a different but similar market. The many benefits of strategic alliances are listed below:

Access to distribution channels Access to technology, expertise or intellectual property

Page 97



As a means to raise capital New products for your customers Lower R&D costs Economies of scale Raise brand awareness

For a new business looking to develop brand awareness there are few more cost-effective ways of raising widespread awareness than partnering with an established business within the same industry. Theres also no reason to stop there you can continue to partner with other noncompeting firms and benefit from multiple distribution channels. When approaching a company to propose a strategic allianceremember that you must have something to offer them in exchange.

Disadvantages of Strategic Alliances

The problem with strategic alliances is that there are a number of problems which must be overcome for them to be a success, including:

Incoherent goals, with one business not benefiting greatly from the agreement Insufficient trust, with each partner company trying to get the better deal Conflicts over how the partnership works Potential to reduce future opportunities through being unable to enter into agreements with your partners competitors Lack of commitment to the partnership Risk of sharing too much knowledge and the partner company becoming a competitor


The main problem with strategic alliances is being able to develop a partnership which is beneficial to both parties. Often a partnership is beneficial to the smaller business, perhaps due to the wide-scale distribution channels that are gained, but the benefits for the established business arent quite so clear. Even when this problem has been overcome the problem of trust arises. Without a degree of trust partnerships become beset with administrative problems and suspicions.

The best way to overcome this is to be transparent and reassess the alliance at regular intervals to ensure that both parties are gaining from the agreement. If they arent then perhaps the terms of the agreement need to be changed. Finally, be careful that a partnership doesnt end up being more of a hindrance than a benefit. Partnering with a company within a certain field will make it harder, if not impossible, to partner or win contracts from other competing companies within the same industry. Sometimes the risk can be even closer to home, where the partnering company gains sufficient knowledge for them to become a competitor rather than a partner.

Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:

Strategy Development: Strategy development involves studying the alliances feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.

Partner Assessment: Partner assessment involves analyzing a potential partners strengths and weaknesses, creating strategies for accommodating all partners management styles, preparing appropriate partner selection criteria, understanding a partners motives for joining the alliance and addressing resource capability gaps that may exist for a partner.

Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partners contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.

Alliance Operation: Alliance operations involves addressing senior managements commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance.

Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocates resources elsewhere.


Page 99

The advantages of strategic alliance include: 1. Allowing each partner to concentrate on activities that best match their capabilities. 2. Learning from partners & developing competences that may be more widely exploited elsewhere. 3. Adequate suitability of the resources & competencies of an organization for it to survive.

Collaborative partnerships:
The Collaborative Approach This approach extends strategic decision-making to the organization's top management team in answer to the question "How can I get my top management team to help develop and commit to a good set of golas and strategies?" The strategic leader and his senior manager (divisional heads, business unit general managers or senior functional managers) meet for lengthy discussion with a view to formulating proposed strategic changes. In this approach, the leader employs group dynamics and "brainstorming" techniques to get managers with differing points of view to contribute to the strategic planning process. The Collaborative Approach overcomes two key limitations inherent in the previous two. By capturing information contributed by managers closer to operations, and by offering a forum for the expression of managers closer to operations, and by offering a forum for the expression of many viewpoints, it can increase the quality and timeliness of the information incorporated in the strategy. And to the degree than participation enhances commitment to the strategy, it improves the chances of efficient implementation. However, the Collaborative Approach may gain more commitment that the foregoing approaches, it may also result in a poorer strategy. The negotiated aspect of the process brings with several risks -that the strategy will be more conservative and less visionary than one developed by a single person or staff team. And the negotiation process can take so much time that an organization misses opportunities and fails to react enough to changing environments. A more fundamental criticism of the Collaborative Approach is that it is not really collective decisions making from an organizational viewpoint because upper-level managers often retain centralized control. In effect, this approach preserves the artificial distinction between thinkers and doers and fails to draw on the full human potential throughout the organization.

Collaborative Strategies: The route to maximising future operational savings:

Traditional approaches to partnering and outsourcing have improved performance, though examples tend to be found in mature contracts which are now largely exhausted. The current

need is to go beyond this traditional approach and focus on overall performance improvement, optimising the cost and revenue position. Traditional partnering contracts tend to feature a single supplier delivering bundled services and long term value through various forms of incentives. A collaborative strategy is a step change from the traditional client / supplier relationship, developing a joint approach from all the suppliers who act together to deliver greater value as a single entity. These are not complex collaborations, however, if there is not a strong cultural and professional contract leading to mutual economic gain, they can fail. The core to successful collaboration is not found in traditional services (although providing these at the very best level is important), it is the manner in which these services are combined to deliver a more valuable outcome. Creating solutions A collaborative partnership is commonly defined as a link between companies to jointly pursue a common goal. These partnerships are very different from traditional relationships between companies and it is these differences that need to be managed to achieve exceptional performance. By successfully linking with another firm, one or both parties may enjoy the benefits otherwise unavailable to them. The collaborative partnership is characterised by the following four attributes: Shared risk and reward: The responsibility for managing the collaboration is shared by the organisations in the partnership. This is in contrast to a traditional arrangement where leadership is vested in one organisation designated as the prime supplier. Collaborative benefits come from leveraging greater economies in supply chain management and a shared service technology platform which reaches beyond the scale of a single organisation. One of the benefits of this approach is the emergence of innovative solutions that deliver higher value. Typically, traditional outsourcing would deliver 15-20% reduction in property costs. However, further reductions can be derived from scope or service integration facilitated by the collaboration. The basis of reward is for the collective group, which can be directly related to the value delivered and has the potential to deliver a further 5-10% reduction in property assets. Accessing wider capabilities In traditional partnering models there would not normally be incentives to encourage further innovation outside the scope of the contract. By allowing members of the collaboration to maintain their individual identities, wider capabilities are still developed outside the contract and related intellectual property of each organisation can still be leveraged. The commercial model is fundamentally based on shared rewards and therefore all intellectual input that delivers savings can be distributed between all parties.


Page 101

Transfer of skills During the process of collaboration the partners provide inputs (funding, skills and personnel) on an ongoing basis. There is a continual supply of resources and communication from parent organisations, which drives ongoing benefits. This leads to up-skilling the team in order to meet the needs of the client organisation, contributing more widely to the collaboration outside the constraints of a traditional contract. This results in greater geographic spread and new areas of operation, thereby sustaining benefits over a greater area of the business. Significant advantages when dealing with complex problems The collaboration model explicitly considers both the task and organisational complexity of the challenge, leading to insights into performance issues and opportunities that can be achieved. This is achieved through vertical integration, linking the complementary contributions of the partners in a value chain. The combined efforts of all partners must add up to a value chain which will produce a more competitive end result. Delivering value To make collaborative partnerships successful there needs to be a degree of trust between partners. Without this, focus will not be on the joint decisions and consultations required to drive the value. The key attribute is an alignment of behaviours and contractual agreements focused on mutual economic gains. These are easier to achieve within one organisation rather than multiple organisations. Achieving this is valuable not only in driving the transformational agenda within the organisations Corporate Real Estate function, but in delivering a greater overall return for the client and suppliers. By sharing a common vision and goal around clear rewards, the outcome will exceed traditional arrangements and will enhance business performance. Key benefits Risk reduction- the collaboration is directly linked to mutual economic gain, driving a right first time approach with clear accountabilities. Product portfolio diversification- through collaboration the client has access to a much broader range of products and services, combined to deliver maximum value. This can also combine to offer insight into performance challenges and opportunities. Reduction of fixed costs- the nature of the collaboration often involving the client organisation themselves naturally leads to efficiencies. Optimisation of personnel and process are a consequence.


Page 102

Lower total capital investment- a collaborative model allows more realistic solving of complex problems, reducing the amount of direct investment the client needs to make in resolving these situations. Faster payback- the mutual economic gain will drive faster outcomes as the rewards are directly linked to the partners. This requires alignment with the client organisation. Technology synergy- a lot of Corporate Real Estate costs are linked to an effective enterprise level property performance system. Through collaboration the partners can make effective investment decisions and combine technology to drive value.

Mergers and acquisition: Implementing Strategies through

Mergers, Acquisitions:
Mergers and acquisitions are two frequently used methods for implementing diversifications strategies. A merger takes place when two companies combine their operations, creating in effect, a third company. An acquisition is a situation in which one company buys, and controls another company. y y Horizontal mergers or acquisitions are the combining of two or more organizations that are direct competitors. Concentric merges or acquisitions are the combining of two or more organizations that have similar products or services in terms of technology, product line, distribution channels, or customer base. Vertical merges or acquisitions are the combining of two or more organizations to extend an organization into either supplying products or services required in producing its present products or services or into distributing or selling its own product and services. Conglomerate mergers or acquisitions involve the combining of two or more organizations that are producing products or services that are significantly different from each other.

Organizations seek mergers and acquisitions for many reasons. The primary reason for large mergers and acquisitions is the potential benefit that can accrue to the stockholders of both companies. Synergy is often cited as a rationale for mergers. Synergy occurs as the result of a merger, when two operating units can be run more efficiently (i.e.: with lower costs) and / or more effectively (i.e.: with appropriate allocation of scarce resources given environmental constrains) together than apart. Other reason for merging with or acquiring another company include improving or maintaining competitive position in a particular business in order to enter new markets or acquire new products rapidly, to improve financial position, or to avoid a takeover. Mergers and acquisitions can be carried out in either a friendly or a hostile environment. Friendly mergers and acquisitions are accomplished when the stockholders and management of both organizations agree that the combination will benefits both firms and the work together to ensure its success.


Page 103

Hostile (or, as they are frequently called, takeover) mergers and acquisitions result when the organizations to be acquired (also sometimes called the target company) resist the attempt. Several methods are available for carrying out mergers and acquisitions:
y y y y

One is, the tender offer, is well - publicized bid made by a corporation to all or a prescribed amount of the stock of another organizations. Another option for one company is to purchase stock of the target organization in the open market. The acquiring company can also purchase the assets of the target company. Finally, the two firms may agree to an exchange of stock.

Because so many terms are used in described activities involved in mergers and acquisitions, there is summary of the definitions of many of these terms. Several factors need to be avoided to ensure a successful merger or acquisition. These factors include: 1. 2. 3. 4. 5. 6. 7. Paying to much Straying too far a field Marrying disparate corporate cultures Counting on key managers staying Assuming that a boom market will not crash Leaping before looking Swallowing too large company

Numerous organizations have been able to integrate sufficiently so that the merger or acquisition becomes a successful strategy of diversification

Mergers & Acquisition Planning:

Companies employ mergers and acquisitions strategies (M&A) in order to grow their business and bolster their competitive advantages. For example, one company might be great at product development, whereas another has marketing channels built into which the products could be sold. To be successful, a company's M&A strategy must be carefully planned. The strategic objectives set during the planning process determine the type of companies that will be acquired. 1. Objectives The company may want to expand geographically by acquiring a company with a strong presence in another market. Cost savings also can be achieved when staff functions such as accounting or human resources are shared. Instead of having two departments performing a

function, they can be consolidated into one, and the total number of staff members can be reduced. A company may lack a key capability, such as technical innovation, that it needs to compete. Acquiring a company strong in this regard fills the gap. Acquisition Criteria: Setting objectives results in the creation of a set of acquisition criteria. These are the elements that describe the ideal acquisition for the company. They include the size of company that will be acquired -- in terms of revenue and pretax income -- where it is located, and the industry or market niches the company serves. Deal Sources: Implementing an M&A program requires what is termed "deal flow" -- being presented with a steady stream of high-quality acquisition candidates. Executives with responsibility for making acquisitions usually network with professionals such as attorneys, accounts and investment bankers that work with other businesses. The company makes it known it is seeking to make acquisitions and these professionals refer companies that are a good fit for the acquisition criteria the company has selected. Acquisition Team Built: Selecting companies to acquire and completing the negotiations up to closing of a transaction require a specific set of skills and experience. These include an understanding of the legal aspects of making an acquisition, such as the documentation required and compliance with applicable securities laws. Knowledge of business valuation techniques is also important to ensure the deal terms are fair to both parties and the company does not overpay for the acquisition. Strategic planning skill also is needed -- the ability to see how the two companies could fit together strategically going forward and take advantage of each other's strengths. If the management team does not have all of these skills, outside consultants can be hired to assist or management personnel will be added to the team. Funding Sources in Place: A company seeking to make an acquisition may not have all the cash required to complete the transaction. In that case, funding sources must be lined up. These could be equity partners or lenders that specialize in acquisition financing. The company should have the financing sources available prior to beginning negotiations with the company to be acquired. Post-Acquisition Plan: The decision whether to go ahead with an acquisition depends on how favorable a price can be negotiated but also on the benefits the company will receive after the transaction is closed. These benefits are quantified through creating a post-acquisition business plan that projects the revenues and profit for the combined entities, and presents strategies for building the combined company's revenues and market strength. The post-acquisition plan is presented to the equity partners or lenders that will be asked to provide financing.

Difference between Mergers and Acquisitions

Though the two words mergers and acquisitions are often spoken in the same breath and are also used in such a way as if they are synonymous, however, there are certain differences between mergers and acquisitions.

Merger The case when two companies (often of same size) decide to move forward as a single new company instead of operating business separately. The stocks of both the companies are surrendered, while new stocks are issued afresh. For example, Glaxo Wellcome and SmithKline Beehcam ceased to exist and merged to become a new company, known as Glaxo SmithKline.

Acquisition The case when one company takes over another and establishes itself as the new owner of the business. The buyer company swallows the business of the target company, which ceases to exist. Dr. Reddy's Labs acquired Betapharm through an agreement amounting $597 million.

A buyout agreement can also be known as a merger when both owners mutually decide to combine their business in the best interest of their firms. But when the agreement is hostile, or when the target firm is unwilling to be bought, it is considered as an acquisition.

Mergers & Acquisition Risks

An acquisition occurs when one company buys another. When two companies agree to combine into one company, they merge. Reasons for these corporate actions include a strategic plan to eliminate competition by acquiring it, a desire to expand into another geographical area or product line or a need to sell or merge the company because of owner retirement or corporate financial difficulties. Both companies face substantial risks. It is not unusual for one company seeking to acquire another to end up being acquired itself, and acquisition plans sometimes become mergers.


Reckless Enthusiasm: Mergers and acquisitions, also known as M&A, begin in strategic planning sessions, when company management decides to acquire another company, to be acquired or to merge. The next step is hiring an investment banker or attorney specializing in M&A work. The entire process is long, time-consuming and stressful. Most M&A specialists say the most dangerous part is project fatigue, which causes company management to decide on a candidate just to get the task over with. Reckless enthusiasm born of project fatigue is one of the main reasons for failures of mergers or acquisitions. Return on Investment: The wrong acquisition can severely harm a company's profitability. When AT&T acquired NCR, after five years of steadily accumulating losses totaling $2 billion, AT&T finally admitted the failure and sold its stake in NCR. Time Warner's purchase of AOL also ended in years of losses and an eventual spin-off of AOL. Much debate in the M&A industry centers around whether to perform exhaustive due diligence and negotiations or to just jump in and buy or merge with the first company that looks good, worrying about the consequences later. Deloitte & Touche LLP counsels a broad-based approach


Page 106

involving examination of all parts of a candidate company, with planned risk management at multiple levels. Corporate Integration: The second main risk in M&A projects is poor integration of the companies. An example of this is when a company acquires another for a specific technology it developed and then in the confusion of integrating the two companies mistakenly closes the department that created the targeted technology asset. Other examples of poor integration are company culture clashes, as in the Daimler Benz-Chrysler merger where German efficiency met head-on with American union work rules. A third example of common integration failure is the loss of important customers who liked doing business with the old company, not the new one. The solution is detailed planning and testing of decisions, with a centralized integration management team that monitors every element of the project. Legal Surprises: No matter how careful the due diligence effort, nearly every merger and acquisition experiences legal surprises. These are often in the form of lawsuits that the plaintiffs suddenly decide to file because the combination of companies has presented greater assets to attach. You can expect everything from expiring patents, canceled licenses, unreported fraud, infringement on another company's patent and shareholder class action suits. Risk management, in this case, involves the best deal contracts that can be created, which is why good M&A attorneys are so necessary and expensive.

Merger and Acquisition Strategies

Merger and acquisition are the corporate strategies that deal with buying, selling or combining different companies with a goal to achieve rapid growth. However, the decisions on mergers and acquisitions are taken after considering a few facts like the current business status of the companies, the present market scenario, and the threats and opportunities etc. In fact, the success of mergers and acquisitions largely depend upon the merger and acquisition strategies adopted by the organizations. Merger and acquisition strategies are the roadmap for the corporate development efforts of an organization. The strategies on merger and acquisition are devised to transform the strategic business plan of the organization to a list of target acquisition prospects. The merger and acquisition strategies offer a framework, which evaluates acquisition candidates and helps the organization to identify the suitable ones. Many big companies continuously look out for potential companies, preferably smaller ones, for mergers and acquisitions. Some companies may have their core cells, which concentrate on mergers and acquisitions. Merger and acquisition strategies are devised in accordance with the policy of the organization. Some may prefer to diversify or to expand in a specific field of business, while some others may wish to strengthen their research facilities etc.

Merger and Acquisition Strategy Process


The merger and acquisition strategies may differ from company to company and also depend a lot on the policy of the respective organization. However, merger and acquisition strategies have got some distinct process, based on which, the strategies are devised.
Determine Business Plan Drivers: Merger and acquisition strategies are deduced from the

strategic business plan of the organization. So, in merger and acquisition strategies, you firstly need to find out the way to accelerate your strategic business plan through the M&A. You need to transform the strategic business plan of your organization into a set of drivers, which your merger and acquisition strategies would address. While chalking out strategies, you need to consider the points like the markets of your intended business, the market share that you are eyeing for in each market, the products and technologies that you would require, the geographic locations where you would operate your business in, the skills and resources that you would require, the financial targets, and the risk amount etc. Determine Acquisition Financing Constraints: Now, you need to find out if there are any financial constraints for supporting the acquisition. Funds for acquisitions may come through various ways like cash, debt, public and private equities, PIPEs, minority investments, earn outs etc. You need to consider a few facts like the availability of untapped credit facilities, surplus cash, or untapped equity, the amount of new equity and new debt that your organization can raise etc. You also need to calculate the amount of returns that you must achieve. Develop Acquisition Candidate List: Now you have to identify the specific companies (private and public) that you are eyeing for acquisition. You can identify those by market research, public stock research, referrals from board members, investment bankers, investors and attorneys, and even recommendations from your employees. You also need to develop summary profile for every company. Build Preliminary Valuation Models: This stage is to calculate the initial estimated acquisition cost, the estimated returns etc. Many organizations have their own formats for presenting preliminary valuation. Rate/Rank Acquisition Candidates: Rate or rank the acquisition candidates according to their impact on business and feasibility of closing the deal. This process will help you in understanding the relative impacts of the acquisitions. Review and Approve the Strategy: This is the time to review and approve your merger and acquisition strategies. You need to find out whether all the critical stakeholders like board members, investors etc. agree with it or not. If everyone gives their nods on the strategies, you can go ahead with the merger or acquisition.


Page 108

Merger and Acquisition Process

Mergers and acquisitions are parts of corporate strategies that deal with buying / selling or combining of business entities, which in turn, help a company to grow quickly. However, merger and acquisition process is quite a complex process that consists of a few steps. Before going for any merger and acquisition, both the companies need to consider a few points and also need to go through some distinct steps. The merger and acquisition process is also a big point of concern for the companies involved in the deal, as the process could be full of risk and uncertainty. However, prior effective planning and research could make the process easy and simple. Steps of Mergers and Acquisition Process The process of merger and acquisition has the following steps: Market Valuation Before you go for any merger and acquisition, it is of utmost important that you must know the present market value of the organization as well as its estimated future financial performance. The information about organization, its history, products/services, facilities and ownerships are reviewed. Sales organization and marketing approaches are also taken into consideration. Exit Planning: The decision to sell business largely depends upon the future plan of the organization what does it target to achieve and how is it going to handle the wealth etc. Various issues like estate planning, continuing business involvement, debt resolution etc. as well as tax issues and business issues are considered before making exit planning. The structure of the deal largely depends upon the available options. The form of compensation (such as cash, secured notes, stock, convertible bonds, royalties, future earnings share, consulting agreements, or buy back opportunities etc.) also plays a major role here in determining the exit planning. Structured Marketing Process This is merger and acquisition process involves marketing of the business entity. While doing the marketing, selling price is never divulged to the potential buyers. Serious buyers are also identified and then encouraged during the process. Following are the features of this phase.
y y y y

Seller agrees on the disseminated materials in advance. Buyer also needs to sign a NonDisclosure agreement. Seller also presents Memorandum and Profiles, which factually showcases the business. Database of prospective buyers are searched. Assessment and screening of buyers are done.
Page 109


y y

Special focuses are given on he personal needs of the seller during structuring of deals. Final letter of intent is developed after a phase of negotiation.

Letter of Intent Both, buyer and seller take the letter of intent to their respective attorneys to find out whether there is any scope of further negotiation left or not. Issues like price and terms, deciding on due diligence period, deal structure, purchase price adjustments, earn out provisions liability obligations, ISRA and ERISA issues, Non-solicitation agreement, Breakup fees and no shop provisions, pre closing tax liabilities, product liability issues, post closing insurance policies, representations and warranties, and indemnification issues etc. are negotiated in the Letter of Intent. After reviewing, a Definitive Purchase Agreement is prepared. Buyer Due Diligence This is the phase in the merger and acquisition process where seller makes its business process open for the buyer, so that it can make an in-depth investigation on the business as well as its attorneys, bankers, accountants, tad advisors etc. Definitive Purchase Agreement: Finally Definitive Purchase Agreement are made, which states the transaction details including regulatory approvals, financing sources and other conditions of sale.

Outsourcing - A Strategic Decision?

Does strategic outsourcing actually benefit an organization? Or will it backfire in the long run? Here's how outsourcing has impacted organizations in India, and how it can benefit you. by Soutiman Das Gupta What do companies like Hero Honda Motors, Bharti Tele-Ventures Limited, the National Stock Exchange (NSE), HDFC Bank, Sony Entertainment Television, Hyatt Services India Pvt. Ltd, and HPCL have in common? The common thread running through these large organizations is that all of them have chosen outsourcing as a strategic business decision to garner tangible and intangible benefits in the near and long run. Indeed, it's difficult to find a successful and growing organization in India, irrespective of size, that does not outsource a certain amount of its IT infrastructure services or management.

Focus on the core:


Page 110

Given the pressures of a competitive market, organizations tend to focus on their core activities activities that link-up directly with the revenues and hence the profitability. In such a scenario, companies tend to outsource their non-core tasks to focus on business decision-making. And IT infrastructure easily lends itself to outsourcing. Hero Honda Motors is a good example of an organization that uses strategic outsourcing to focus on core competency. We wanted to outsource all routine (IT maintenance) tasks so that we could concentrate on the main business issues. With the headache of dealing with routine complaints taken away, our staff focuses on user requirements and is able to deliver services to users on time, explains SR Balasubramanian, Vice President - Information Systems, Hero Honda Motors Limited.

Competitive business strategy:

Outsourcing is best adopted after a careful look at business needs and available options. It is essential that the outsourcing relationship provides strategic business benefits in the future. Outsourcing provides a competitive strategy benefit in a number of ways to an organization. It allows ease of management, reduction in cost, lesser manpower, and frees up internal resources, says Pankaj. Outsourcing can, and frequently does, provide both long- and short-term benefits to companies that outsource, provided they have a strategic objective for outsourcing. Medium and long-term gains are best realised by selecting a vendor who brings value to your core business, rather than one who can provide you with the lowest prices, explains Sharad Sanghi, Managing Director & CEO, Netmagic Solution Pvt. Ltd.

It's important to understand that outsourcing is a business-related decision and not simply an IT need. The ultimate goal of outsourcing is to bring benefits to the business and subsequently the customer. Hero Honda's Balasubramanian says, We believe an outsourcing service provider could better handle our day-to-day management needs than our own team. We've not added numbers to our staffing in spite of increased business activity. Since the outsourcing agency manages the data centre round the clock, our staff has been relieved from working in shifts. For customers, it brings innovative and streamlined products and services like billing, CRM and data warehousing. For employees, it brings enhanced performance-critical applications like intranet, e-mail and online collaboration. And at an overall level, the strategic alliance provides

predictable IT spends, and additional revenue streams to further enhance shareholder value, he adds.

The changing landscape:

In the past, Indian companies were not very keen to outsource their IT needs, primarily because their enterprise IT environments were relatively less complex, easier to manage, and inexpensive to maintain. Besides, few outsourcing service providers offered a number of outsourcing options under one roof. But now, IT environments in companies have become more complex. There has been growth in terms of volume of business, range of services, number of employees, number of competitors, nationwide locations, and enterprise applications. This calls for more attention to IT as a service to provide strategic business benefits. To help organizations get optimum value out IT and use it as a strategic tool to further the cause of business, many CIOs think it worth their while to outsource IT infrastructure management.

Innovative options:
Indian enterprises today have a variety of outsourcing options from which they can choose the right fit. Outsourcing solution providers offer services that include desktop client management, server management, cable management, firewall management, patch management, software license management, IT audits, backbone and connectivity, website hosting, and IT infrastructure management. Thus the available services are innovative, significantly more customised, and better aligned with individual customer requirements. An enterprise can pick-and-chose specific services and build a reliable mode of service delivery. A company can outsource basic desktop management needs, or the management of the entire nationwide IT infrastructure if needed. To introduce more flexibility, many service providers offer clients hire-purchase schemes, infrastructure on-demand, and pay-as-you-use options.

Before you outsource:

All things said, outsourcing is a strategic business decision that should be made only if a company sees true business benefits accruing from it. Badly-planned outsourcing could result in erosion of service value and cost escalation, but a well-planned outsourcing decision can help you sleep better at night, knowing that the responsibility of deliverables is in safe hands.


Page 112

Michele Caminos of Gartner highlights a few steps that can lead you to take a proper decision in this context.
y y y y y y

What type of a service is it? Identify characteristics of service and the respective type. What perspective is driving the effort? Identify decision rights (service owner) and input rights (other stakeholders). How are other perspectives affected? Identify conflicts and work them out. Check 'killer' factor. Improve solution. Check compliance with principles and fit with architecture. Who should carry it out? Evaluate different staffing possibilities. Select best from combination. Who should participate in the decision? Submit service proposal to specific decision process. Follow it up.

The Top 10 Things You Need to Know About Outsourcing Strategies

1. One advantage is that by outsourcing, companies are able to focus more on their core activities. When companies grow and expand, they begin to use more resources such as human and financial. This may take away from what the company was built around. Outsourcing these resources will allow for refocusing on those core strategies. 2. Outsourcing allows for cost and efficiency savings. Several of the jobs in a corporation can be tedious and costly. By outsourcing these jobs, such as customer service, labor found elsewhere can be cheaper and the company can focus on the areas that need the most attention in order to earn profits. 3. Reducing overhead costs is another advantage of outsourcing. This relates again to the customer service impact on a company. These positions, as well as being costly, also require a large amount of office space depending on the size of the business. Sometimes the employers having to make these calls to customers are responsible for other areas and can lose focus on their main objectives. Outsourcing again cuts costs by being able to find cheaper labor overseas as well as minimizing the required office space. 4. Companies that have existed for a while may tend to lose operational control. For example, a department may succumb to poor management over time due to lack of qualified resources to fill the positions. By outsourcing, a company can look outside of the U.S. for a manager that has specific knowledge and best fits the position they are looking to fill. 5. Another advantage of outsourcing is that it can help develop a more skilled internal staff. A company may have staff that lacks the knowledge needed to complete a certain task. By outsourcing, the company can bring in the skilled people that can work alongside and train the existing staff. Once the training is done, the employers

have gained the knowledge on the subject and in the future will be better prepared for it. 6. A disadvantage to outsourcing is that there can be a loss of managerial control. When a company outsources an area of their business, management no longer has direct control over how that area is operating. The control belongs to that which was outsourced to, therefore leading to the possibility of decreased standards or standards that fit another company, but not yours. 7. There is also the possibility of hidden costs. After signing a contract with an outsourcing company, they may tack on additional fees that were not stated in the initial contract. For example, they may add in legal fees for filing the contract. They do this because this is how they earn their profits and they have probably done it before, thereby putting your company at a disadvantage up front for future negotiations. 8. When a company chooses to outsource, there is also the threat to security and confidentiality. There are a lot of companies that exist willing to take on the role of the outsourced. However, by choosing the wrong one, a company bears the risk of losing its trade secrets to the highest bidder. To prevent any incidence of this nature, the company should make sure the outsourcing company is reliable and that the contract includes a penalty clause for any wrong doing. 9. Another disadvantage of outsourcing could be that there is a problem in the quality of work done. Contracts are set as fixed prices when a company outsources and the outsourcing company is in the business of making profit. The only way for them to maximize their profits is to reduce their expenses. This could mean that they dont spend as much time in inspection or they simply choose to use cheap parts where good parts are necessary. 10. As you would imagine from seeing just the few disadvantages above, when a company chooses to outsource, they bear the risk of having bad publicity or ill-will attached to their name. So many employees have lost their jobs over the past few years that the term outsourcing is generally not a good thing for a company to be associated with. Not only does it lower the morale of the community, but

Joint venture:
Three basic strategies have been proposed for use in joint ventures: the spiderls web, go together-split and successive integration. The spiderls web strategy is employed in an industry with few large organizations and several smaller ones. One strategy for smaller organizations would be to enter a joint venture with one large organization and then, in order to avoid being absorbed, enter a new joint venture as quickly as possible with one or more of the remaining organizations.


Page 114

Go together-split is a strategy in which two or more organizations cooperate for an extended time and then separate. It is particularly appropriate projects that have ad definite life span, such as construction projects. Successive integration starts with a weak joint venture relationship between organizations, becomes stronger, and ultimately may result in a merger - either friendly or hostile. Three major considerations seem to be particularly important in forming a joint venture:
y y y

The first is choosing partner. A second consideration is the question of control over the joint venture. final consideration involves the management of the joint venture.


Benefits of International Strategies:

Increased market size. Greater returns on major capital investments or new products or processes. Greater economies of scale, scope or learning. A competitive advantage through location.

International Strategies:
International Business Level Strategies International Corporate Level Strategies Multi-domestic Strategy
Page 115


Global Strategy Transnational Strategy

Determinants of National Advantage:

Factors of Production Inputs Labour, land, natural resources, capital & infrastructure Demand Conditions The nature and size of he buyers needs in the home market of goods & services Related & Supporting Industries Industries in which the target country is considered the leader eg. Italy - shoes with a supporting leather industry, Japan - cameras & photocopiers, Denmark - diary & an industry focused on food enzymes.

Firm Strategy, Structure & Rivalry make up Germany focused on methodical product & process improvements, Italys national pride of designers helped spawn fashion apparel, furniture & sports car industries.
Page 116


International Corporate-Level Strategy:

Multi-domestic Strategy Strategic & operating decisions are decentralized to the strategic business unit in each country to tailor products to the local market. Global Strategy Assumes more standardization of products across country markets Transnational Strategy The firm seeks to achieve both global efficiency and local responsiveness

Choice of International Entry Mode: Exporting:

Common way to enter new international markets():
      No need to establish operations in other nations. Establish distribution channels through contractual relationships. May have high transportation costs. May encounter high import tariffs. May have less control on marketing and distribution. Difficult to customize product.

Licensing: Firm authorizes another firm to manufacture & sell its products Licensing firm is paid a royalty on each unit produced and sold. Licensee takes risks in manufacturing investments. Least risky way to enter a foreign market. Licensing firm loses control over product quality & distribution. Relatively low profit potential.

Strategic Alliances: Enable firms to shares risks and resources to expand into international ventures.


Page 117

Most joint ventures (JVs) involve a foreign corp. with a new product or technology & a host company with access to distribution or knowledge of local customs, norms or politics. May experience difficulties in merging disparate cultures. May not understand the strategic intent of partners or experience divergent goals.

Acquisitions: Enable firms to make most rapid international expansion.

Can be very costly. Legal and regulatory requirements may present barriers to foreign ownership. Usually require complex and costly negotiations. Potentially disparate corporate culture.

Major Risks of International Diversification:

Political Risk:
National government instability may create potential problems for internationally diversified firms. Potential changes in attitudes or regulations regarding foreign ownership. Legal authority obtained from previous administration may become invalid. Potential for nationalization of firms assets.

Economic Risk:
Econ. risks are interdependent with political risks. Differences and fluctuations in international currencies may affect value of assets & liabilities. This affects prices & thus ability to compete. Differences in inflation rates may affect inter-nationally diversified firms ability to compete. Enforcing intellectual property rights on CDs, software, etc.

International Corporate & Business Level Strategies:


A basic international business strategy is the import and export of goods or resources. Companies often acquire economic resources from international countries to take advantage of favorable currency exchange rates and cheaper business input costs. Companies may also use written contracts to secure economic resources at fixed prices for future use. Exporting goods allows companies to ship economic resources or finished products to international markets for business and consumer use. Exporting goods to international markets often requires companies to have efficient operations for shipping goods to other countries with specific international guidelines.

An increasingly popular international business strategy is the outsourcing of specific business functions or services. Information technology allows companies to outsource call centers, technical support and other administrative services to international countries. Outsourcing nonessential business services allows companies to save money on payroll costs and benefits for employees. Setting up international business locations may also be cheaper, depending on the political and business environment of international countries. Outsourcing business functions allows companies to gain the full advantage of cheaper business costs without usually making direct investments in the foreign economic market. Companies may create business partnerships with outsourcing functions to ensure products or services meet the company's standards.

Joint Ventures
Joint ventures are business relationships in which two companies collaborate to complete business services or produce consumer goods. Joint ventures may be used in international business strategies to allow an already established international company produce specific goods or services relating to another company. This allows domestic businesses the opportunity to develop a presence in international economic markets by licensing an international company to produce goods or services for the international market.

Direct Investment
The most intensive international business strategy companies often make is a direct investment into an international market. This strategy usually requires companies to purchase facilities and equipment for producing goods or services in each international market in which they operate. Companies must also hire employees and follow business guidelines for each international country. While this strategy is often the most high risk and expensive international business strategy, it may offer companies the best option for creating a competitive advantage and saturate the international business market.


Page 119

Formulating Long Term Objectives and Grand Strategies
Long Term Objectives There are seven areas in which long term objectives have to be established

1. Profitability The ability of any firm to operate in the long term depends on attaining an acceptable level of profits. Strategically managed firms have a long term objective, usually expressed in earnings per share or return on equity. 2. Productivity Commonly used productivity objectives are the number of items produced or the number of services rendered per unit of input. They are also, sometimes, defined in terms of desired cost decrease. 3. Competitive position This is in terms of relative dominance in the marketplace. Companies often use total sales or market share as a measure of competitive position. 4. Employee Development Employee development in terms of training which increases productivity and decreases employee turnover. 5. Employee relations Proactive steps in anticipating the employee needs and expectations are characteristics of good strategic management. This builds employee loyalty leading to increase in productivity. Such programs include safety training, employee stock option and worker representation on management committees.

6. Technological leadership Firms have to adopt different strategies depending on its intention of being a leader or a follower of technology leadership. e.g., Companies like Intel and Microsoft have an advantage of being known as technological leaders in their domains. e-commerce technology will lead to emergence of new leaders who are better positioned to take advantage of internet technology to improve productivity and innovation. 7. Public responsibility Corporates ensure that their responsibility go beyond providing good products and services to include corporate social responsibility. They donate to educational projects, nonprofit organizations, charities and other socially relevant activities. e.g. MindTree is involved with Spastics Society of Karnataka, Tata Steel in credited with development of Jamshedpur

Qualities of long-term objectives 1. Acceptable

The long term objectives should be consistent with the preferences of the employees. They may ignore or even obstruct an objective that offend them or that they believe to be inappropriate and unfair. The long term objectives should also be designed to be acceptable to groups external to the firm. e.g. development of hybrid cars

2. Flexible
Objectives should be adaptable to unforeseen or extraordinary changes in the firm's competitive or environmental forecasts. Such flexibility is at the expense of specificity. One way of providing flexibility while minimizing its negative effects is to allow for adjustments in the level, rather than in the nature, of objectives. e.g. there may be some flexibility in the growth rate in terms of revenues in times of recession

3. Measurable

The objectives must clearly state what will be achieved and by when it will be achieved. e.g. Adobe wants to increase its revenues from India to 5% of their total revenue in the next five years

4. Motivating
The objectives have to be set to a motivating level which is high enough to challenge, but not so high enough as to frustrate, and also it should not be so low as to be easily attained.

Since different group of people have different levels of motivation, different long term objectives should be set to motivate the groups. 5. Suitable
Long term objective must be suited to the broad aims of the firm, which are expressed in its mission statement. Each of the objectives should help the firm to move closer to achieving its mission. e.g. companies with mission of global reputation cannot do anything which is unethical

6. Understandable
All the people involved in the execution of the objectives must be able to clearly understand the objectives. They should also understand the major criteria by which their performance would be evaluated. The objectives must be clear, meaningful and unambiguous.

7. Achievable
Objectives must be possible to achieve.

The objectives have be set to be achievable under normal conditions, when

extreme changes in the external and internal environments are not expected.

Grand Strategies
Grand strategies provide basic direction for strategic actions. They are the basis for coordinated and sustained efforts directed towards achieving longterm business objectives.
Page 122


They indicate a time period over which long-term objectives are to be achieved. Firms involved with multiple industries, businesses, product lines or customer groups usually combine several grand strategies.

The fifteen grand principles are:

1. Concentrated growth e.g. e-bay in online auction 2. Market development e.g. J&J catering to the adults, using sachets for market penetration 3. Product development e.g. personal care products from HUL, newer version of books, 4. Innovation 5. Horizontal integration 6. Vertical integration 7. Concentric diversification 8. Conglomerate diversification 9. Turnaround 10. Divestiture e.g. Sale of TOMCO by Tata, selling of cement division by L&T 11. Liquidation 12. Bankruptcy 13. Joint ventures 14. Strategic alliances 15. Consortia e.g. Mitsubishi, LG

Innovation is needed since both consumer and industrial markets expect periodic changes and improvements in the products offered. Firms seeking to making innovation as their grand strategy seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product. As the products enters the maturity stage these companies start looking for a new innovation. The underlining rationale is to create a new product life cycle and thereby make similar existing products obsolete. This strategy is different from the product development strategy in which the product life cycle of an existing product is extended. e.g. Polaroid which heavily promotes each of its new cameras until competitors are able to match its technological innovation; by this time Polaroid normally is prepared to introduce a dramatically new or improved product. Intel, 3M

Horizontal integration

It is a strategy in which a firms long term strategy is based on growth through acquisition of one or more similar firms operating at the same stage of the production-marketing chain. E.g. Acquisition of Arcrol by Mitta Steels Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets. The acquiring firm is able to greatly expand its operations, thereby achieving greater market share, improving economics of scale, and increasing the efficiency of capital use. e.g. acquisition of Arcerol by Mittal steels, acquisition of VoiceStream Wireless by Deutsche Telekom The risk associated with horizontal integration is the increased commitment to one type of business.

Vertical integration
It is a process in which a firm's grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products). The acquiring of suppliers is called backward integration. The main reason for backward integration is the desire to increase the dependability of the supply or quality of the raw materials used in the production inputs. This need is particularly great when the number of suppliers are less and the number of competitors is large. In these conditions a vertically integrated firm can better control its costs and, thereby, improve the profit margin. e.g. acquiring of textile producer by a shirt manufacturer The acquiring of customers is called forward integration. e.g. acquiring of clothing store by a shirt manufacturer Forward integration is preferred if great advantages accrue to stable production. It also helps in greater predictability of demand for its outputs. Vertical integration has a risk which results from the firm's expansion into areas requiring strategic manager to broaden the base of their competences and to assume additional responsibilities.

Concentric diversification
It involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products. The selected new business must possess a very high degree of compatibility with the firm's existing business.


Page 124

The ideal concentric diversification occurs when the combined company profits increase the strengths and opportunities and decreases the weaknesses and exposure to risk. Thus, the acquiring firm searches for new businesses whose products, markets, distribution channels, technologies and resource requirements are similar to but not identical with its own, whose acquisition results in synergies but not complete interdependence. e.g. acquiring of Spice Telecom by Idea

Conglomerate Diversification
It is a grand strategy in which a very large firm plans to acquire a business because it represents the most promising investment opportunity available. The principal concern, and often the sole concern, of the acquiring firm is the profit pattern of the venture. It gives little concern to creating product-market synergy with existing business. They may seek a balance in their portfolio between current businesses with cyclical sales and acquired businesses with countercyclical sales, between high-cash/low-opportunity and low-cash/high-opportunity businesses or between debt-free and high leveraged businesses. e.g. acquisition of Adlabs by Anil Dirubhai Ambani Group

Sometimes the profit of a company decline due to various reasons like economic recession, production inefficiencies and innovative breakthrough by competitors. In many cases the management believes that such a firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences. This is known as turnaround strategy.

Turnaround typically is begun with one or both of the following forms of retrenchment being employed either singly or in combination. 1. Cost reduction It is done by decreasing the workforce through employee attrition, leasing rather than purchasing equipment, extending the life of machinery, eliminating promotional activities, laying off employees, dropping items from a production line and discontinuing low-margin customers.

2. Asset reduction

This includes sale of land, buildings and equipment not essential to the basic activity of the firm. Research has showed that turnaround almost always was associated with changes in top management. New managers are believed to introduce new perspectives, raise employee morale and facilitate drastic actions like deep budgetary cuts in established programs.

Turnaround situation
The model begins with the depiction of external and internal factors as causes of a firm's performance downturn. When these factors continue to detrimentally impact the firm, its financial health is threatened. Unchecked decline places the firm in a turnaround situation. A turnaround situation represents absolute and relative to the industry declining performance of a sufficient magnitude to warrant explicit turnaround actions. Turnaround situations may be a result of years of gradual slowdown or months of sharp decline. For a declining firm, stabilizing operations and restoring profitability almost always entail strict cost reduction followed by shrinking back to those segments of the business that have been the best prospects of attractive profit margins.

Situation severity


Page 126

The urgency of the resulting threat to company survival posed by the turnaround situation is known as situation severity. Severity is the governing factor in estimating the speed with which the retrenchment response will be formulated and activated. When severity is low stability can be achieved through cost reduction alone. When severity is high cost reduction must be supplemented with more drastic asset reduction measures. Assets targeted for divestiture are those determined to be underproductive. More productive resources are protected and will become the core business in the future plan of the company. E.g . strategy adopted by Citibank

Turnaround response
Turnaround response among successful firms typically include two strategic activities: Retrenchment phase Recovery phase Retrenchment phase It consists of cost-cutting and asset-reducing activities. The primary objective of this process is to stabilize the firm's financial condition. Firms in danger of bankruptcy or failure attempt to halt decline through cost and asset reductions. It is very important to control the retrenchment process in a effective and efficient manner for any turnaround to be successful. After the stability has been attained through retrenchment, the next step of recovery phase begins. Recovery phase The primary causes of the turnaround situation will be associated with the recovery phase. For firms that declined as a result of external problems, turnaround most often has been achieved through creative new entrepreneurial strategies. For firms that declined as a result of internal problem, turnaround has been mostly achieved through efficiency strategies. Recovery is achieved when economic measures indicate that the firm has regained its predownturn levels of performance.

Tailoring strategy to fit specific industry and company situations


Strategies based on industry situation Strategies for emerging industries Strategies for competing in turbulent, high-velocity markets Strategies for competing in maturing industries Strategies for firms in stagnant or declining industries Strategies for competing in fragmented industries

Strategies based on company situation Strategies for sustaining rapid company growth Strategy for industry leaders Strategies for runner-up firms Strategies for weak and crisis-ridden businesses

Strategies for emerging industries An emerging industry is one which is in its formative stage. The two critical strategic issues confronting firms in an emerging industry are:

1. How to finance initial operations until sales and revenues take off 2. What market segments and competitive advantages to go after in trying to secure a frontrunner position.

Challenges when competing in emerging industries

1. Because the market is new and unproven, there is speculation about how it will function, how fast it will grow and how big it will get. It is difficult to make sales and profit projections. There will be guess work about how rapidly customers would be attracted and how much they would be willing to pay. 2. Much of the technological know-how for the products of emerging industries is proprietary and closely guarded. Patents and unique technical expertise are key factors in securing competitive advantage. 3. Often, there is no consensus regarding which of the several competing technologies will win or which product attributes will prove decisive in winning buyer favor. e.g. The mobile service providers are using both GSM and CDMA technologies and they are not sure which technology will be the winner. 4. . Entry barriers tend to be low, even for entrepreneurial start-up companies.

Large companies with ample resources will enter the market if they find the promise for explosive growth or if its emergence their existing business. e.g. entry of large number of players to the mobile services market

5. Strong learning and experience curve effects may be present, allowing significant price reductions as volume builds and costs fall. 6. The marketing task is to induce initial purchases and to overcome customer concerns about product features, performance reliability and conflicting claims of rival firms. 7. Potential buyers expect first-generation products to be rapidly improved, so they delay purchase till second or third generation products are released. 8. It will take time for companies to secure ample raw materials and components. Till suppliers gear up to meet the industry's needs. 9. A lot of mergers and acquisitions happen as many small companies not able to fund R&D will be willing to be acquired. Strategic avenues for competing in an emerging market 1. Try and win early race for industry leadership with risk-taking entrepreneurship and a bold creative strategy. Broad or focused differentiation strategies with emphasis on technology or product superiority offers the best chance for early competitive advantage. 2. Push to perfect the technology, improve product quality and develop additional attractive performance features. 3. As technological uncertainty clears and a dominant technology emerges, adopt it quickly. 4. Form strategic alliances with key suppliers to gain access to specialized skills, technological capabilities and critical materials or components. 5. Acquire of form alliances with companies that have related or complementary technological expertise as a means of helping outcompete rivals on the basis of technological superiority. 6. Try to capture any first-mover advantage associated with early commitments to promising technologies. 7. Pursue new customer groups, new user applications and entry into new geographical areas. 8. Make it easy and cheap for first-time buyers to try the industry's first generation product. Then, as the product becomes familiar to a large section of the market, shift advertisement emphasis to increasing frequency of use and building brand loyalty. 9. Use price cuts to attract the next layer of price-sensitive buyers into the market. Strategies for competing in turbulent, high-velocity markets

The characteristics of the turbulent, high-velocity markets is the occurrence of all the following things at once: rapid technological change short product life cycles entry of new rivals into the marketplace frequent launches of new competitive moves by rivals fast evolving customer requirements e.g. mobile services, cell phones,

Strategies for coping with rapid changes The central strategy-making challenge in a turbulent market environment is managing change. A company can assume any of the three strategic postures in dealing with high-velocity change. Ideally a company's approach should incorporate all three postures, in different proportions. The best-performing companies in high-velocity markets consistently seek to lead change with proactive strategies, at the same time anticipating and preparing for the future and reacting quickly to unpredictable and uncontrollable new developments.

1. It can react to change The company can respond to a rival's new product with a better product. It can counter unexpected shift in buyer tastes and buyer demand by redesigning or repacking its product.

Disadvantages Reacting is a defensive strategy. It is unlikely to create fresh opportunity.

2. It can anticipate change, make plans for dealing with the expected change and follow its plans as changes occur (fine-tuning them as may be needed) It entails looking ahead to analyze what is likely to occur and then preparing and positioning for that future. It entails studying buyer behavior, buyer needs, and buyer expectations to get insight into how the market will evolve, then preparing for the necessary production and distribution capabilities ahead of time.


Page 130

Advantages It can open new opportunities and thus is a better way to manage change than just pure reaction.

Disadvantages Anticipating change is fundamentally a defensive strategy. 3. It can lead change It entails initiating the market and competitive forces that others must respond to. It means being the first to market with an important new product or service. It means being technological leader. It means having products whose features and attributes shape customer preferences and expectations It means proactively seeking to shape the rules of the game. Advantage It is a offensive strategy aimed at putting a company in the driver's seat.

Strategic moves for fast-changing markets The strategic moves depends on the company's ability to Improvise Experiment Adapt Reinvent regenerate It has to constantly reshape its strategy and its basis for competitive advantage. Cutting-edge know-how and first-to-market capabilities are very valuable competitive assets. A company has to have quick reaction time and should have flexible and adaptable resources. Organizational agility would be a competitive asset. When a company's strategy are not doing well, it has to quickly regroup probing, experimenting, improvising and trying again and again, until it finds something that is acceptable by customers.

The following five strategic moves provide the best payoff between altering offensive and defensive strategies and fast-obsolescing strategy.


Invest aggressively in R&D to stay on the leading edge of technological know-how If technology is the primary driver of change, it is important to translate technological advances into innovative new products and remaining close to whatever advancements and features are pioneered by rivals. It is desirable to focus the R&D effort on a few critical areas to: - avoid stretching the company's resources too thin - deepen the firm's expertise - master the technology - fully capture learning curve effects - become a dominant player in a particular technology area or product category. Develop quick-response capability Since it will not be possible to anticipate all the changes that can happen, having an organizational capability to react quickly becomes very crucial. This means: - shifting resources internally - adapting existing competencies and capabilities - creating new competencies and capabilities - not falling far behind rivals


3. Rely on strategic partnerships with outside suppliers and with companies making tie-in products As discussed earlier specialization and focus are desirable, even though technology in high-velocity market creates new paths and product categories continuously. It helps to Partner with suppliers making state-of-the-art parts and components and collaborating closely with developers of related technologies and makers of tie-in products. e.g. PC manufacturers rely heavily on suppliers of components and software for innovative advances. Suppliers stay on the cutting edge of their specialization and can achieve economics of scale. The managerial challenge is to strike a good balance between building a rich internal resource base that keeps the firm from being at the mercy of the suppliers and allies and at the same time maintain organizational agility by relying on resources and expertise of outsiders.

4. Initiate fresh actions every few months, not just when a competitive response is needed


Page 132

A company can be proactive by making proactive time-paced moves - introducing a new or improved product every few months rather than when the market declines or when rivals introduce new models. It can enter a new market every few months rather wait for opportunity to present itself. It can refresh existing brands often rather wait for its popularity to wane. The key to successfully using time pacing strategy is the right interval. e.g. 3M had pursued a objective of having 25 percent of its revenues come from products less than four years old. The target has been revised to 30 percent to have more focus on innovation.

5. Keep the company's products and services fresh and exiting enough to stand out in the midst of all the change that is taking place. The marketing challenges for companies in fast changing markets is to keep the firm's products and services in limelight. The products should be innovative and well matched to the changes that are occurring in the marketplace

Strategies for competing in maturing industries What are the characters of an maturing industry? It is moving from a rapid growth to a significantly slower growth. Nearly all its potential buyers are already users of the industry's products. Demand consists mainly of replacement sales to existing users, the growth is restricted to the industry's ability to attract the remaining few new buyers and in convincing existing buyers to up the usage. Consumer goods industries that are mature typically have a growth rate roughly equal to the growth of the consumer base or economy as a whole.

. What are the changes we can see in an industry as it enters the mature stage? 1. Slowing growth in buyer demand generates more competition for market share Firms looking for higher growth will try to take customers away from competitors. Price cutting, increased advertising and other aggressive tactics are seen as markets mature. 2. Buyers become more sophisticated, often driving a harder bargain on repeat purchases Since buyers have already experienced the product and are familiar with competing brands, they evaluate different brands and can negotiate for a better deal with seller

3. Competition often produces a greater emphasis on cost and service As sellers add all features in a product, the sellers focus shifts to combination of price and service. 4. Firms are not ready to add new facilities 5. Product innovation and new end-use applications are harder to come by 6. International competition increases Firms start looking for foreign markets for growth. E.g. Vodafone Production activity will be shifted to countries where products can be produced at best cost. E.g. Automobile companies starting operations in India Product standardization and diffusion of technical know-how lowers barrier and encourages foreign companies to enter the market. The focus for most global players will be to capture the large geographic markets. E.g. P&G entering India

7. Industry profitability falls temporarily or permanently 8. Stiffening competition induces a number of mergers and acquisitions among competitors, weaker firms are driven out and consolidation is seen. E.g. Vodafone acquired Hutch What strategic moves can be adopted for maturing industries? 1. Pruning marginal products and models e.g. HUL reducing its number of brands A wide variety of products is suitable for growth stage, when consumer tastes are still evolving. E.g. cellphone handset market A variety of products in a mature industry means additional costs in terms of maintaining more inventory, not able to reach economics of scale, and distribution costs. Pruning marginal products helps the firms to cut cost, concentrate on a few items with highest margins and where firms have competitive advantage. e.g. HUL pruning its many brands to concentrate on only a few power brands 2. More emphasis on value chain innovation e.g. Maruti Suzuki asking its vendors to invest in R&D, Vendors involved in Nano, setting up company owned retail shops by companies like Reliance (Vimal) Value chain innovation can lead to: lower costs better product and service quality greater ability to produce customized products shorter design-to-market time

Innovation in production technology by using better technology, labor efficiency, flexible manufacturing, redesign of assembly lines can lead to saving and customization. E.g. using robots in automobile manufacturing Better collaboration with suppliers and distributors can increase quality of service. 3. Trimming costs e.g. reduction in employees through automation 4. Increasing sales to present customers e.g. Credit card companies offering multiple cards to same customers This is a more easier option as compared to converting customers loyal to rival companies. This may include finding new applications for the products and sales promotions. E.g. Johnson making soaps for mothers also 5. Acquiring rival firms at bargain prices e.g. Acquisition of Modern Breads by HUL, acquisition of Kissan jams by HUL, acquisition of Merrill Lynch by Bank of America Rival firms which are not doing well can be targets for acquisition at bargain prices. Acquisitions helps in: increasing the customer base by adding acquired customers reaching economics of scale, if possible using new technologies from acquired firms The acquisition must be done carefully to ensure the overall competitive strength of the firm increases. 6. Expanding internationally e.g. Vodafone acquisition of Hutch Firms should look for markets which have attractive growth potential and competitive pressures are less. It is more suitable when the firm's skills, reputation and products can be readily transferable to foreign markets. 7. Building new or more flexible capabilities e.g. Toyota building multiple model of cars from a single platform Firms need to strengthen their competitive capabilities making them harder to imitate. New competencies and capabilities can be added.


Page 135

Existing competencies can be made more adaptable to changing customer requirements. E.g. ITC using its expertise in running five star hotels to customize food products like atta What can be the strategic pitfalls in an maturing industry? 1. A company should not choose a middle path between low cost, differentiation and focusing. 2. Slow to mounting a defense against stiffening competitive pressures. E.g. HTM watches against Titan 3. Concentrating more on short-term profitability rather than building long-term competitive position. E.g. Unilever losing market share to local brands like Babool in toothpaste 4. Waiting for too long to respond to price cutting by rivals. E.g. Ambassador not responding to introduction of smaller cars 5. Over expanding in the face of slowing growth. 6. Over spending on advertising and sales promotion efforts in a losing effort to combat the growth slowdown. 7. Failing to pursue cost reduction at the earliest and aggressively. Strategies for firms in stagnant or declining industries Characteristics: Demand is growing slower than economy-wide average. Harvesting the business to obtain cash flow e.g. selling of Gillette to P&G, selling out Preparing for closedown is a strategy for uncommitted firms. E.g. government selling Modern Breads to HUL Closing operations is always the last resort. The performance targets should be consistent with available market opportunities. E.g. Khadi garments Cash flow and return-on-investment criteria are more appropriate than growth-oriented performance measures. Acquisition or exit of weaker firms creates opportunities for the remaining companies to capture greater market share.

Strategies that can be followed 1. Pursue a focused strategy aimed at the fastest growing segment within the industry Focusing on the segment within the industry which is growing will help companies to escape stagnating sales and profits and even gain competitive advantage. E.g. Polyester Khadi

2. Stress differentiation based on quality improvement and product innovation. Innovation can create important new growth segments. Differentiating based on innovation helps in being different and making it difficult for rivals to imitate. 3. Strive to drive costs down and become the industry's low-cost leader Potential cost-saving actions include: cutting marginally beneficial activities out of the value chain outsourcing functions and activities that can be performed more cheaply by outsiders redesigning internal business processes to exploit cost-cutting consolidating underutilized production facilities adding more distribution channels to ensure the unit volume needed for low-cost production closing low-volume, high-cost retail outlets pruning marginal products from the firm's offerings

The most common strategic mistakes 1. Getting trapped in a profitless war of attrition 2. Diverting too much cash out of the business too quickly 3. Being over optimistic about the industry's future and spending too much on improvements in anticipation that things will improve. Strategies for competing in fragmented industries Characteristics: Hundreds of small and medium sized companies, many privately held and none with a substantial share of total industry sale. Absence of market leaders with large market share or widespread buyer recognition. e.g. restaurants, computer hardware assemblers, hospitals

Reasons for supply-side fragmentation 1. Market demand is so extensive and so diverse that very large number of firms can easily coexist trying to accommodate the range and variety of buyer preferences and requirements and to cover all the needed geographic locations. E.g. hotels and eateries catering to various tastes and budgets of customers 2. Low entry barriers allow small firms to enter quickly and cheaply. E.g. starting a real estate business just needs a contact number and a small office

3. An absence of scale economics permits small companies to compete on an equal footing with larger firms. 4. Buyers require relatively small quantities of customized products. 5. The market for the industry's product or service is becoming more global, putting companies in more and more countries in the same competitive market arena. e.g. interest shown by automobile manufacturers the world over to launch of Nano 6. The technologies embodied in the industry's value chain are exploding into so many new areas and along so many different paths that specialization is essential just to keep abreast in any one area of expertise. E.g restaurants specializing in a particular variety 7. The industry is young and crowded with aspiring contenders, with no firm having yet developed the resource base, competitive capabilities and market recognition to command a significant market share. Strategic options for a fragmented industry 1. Constructing and operating "formula" facilities This approach is frequently employed in restaurant and retailing businesses operating at multiple locations. It involves constructing standardized outlets in favorable locations at minimum cost and then operating them cost effectively. e.g. Pizza Hut, Cafe Coffee Day, Adiga's, MTR 2. Becoming a low-cost operator Companies can stress no-frills operations featuring low overhead, highproductivity, low-cost labor, lean capital budgets. E.g. low cost eateries like Darshinis Successful low-cost producers can use price-discounting and still earn profit above industry average. 3. Specializing by product type Focus on one product or service. e.g. Dosa Corners, auto-repair shops specializing in only one brand of vehicles 4. Specializing by customer type Cater to customers interested in low cost or unique product attributes or customized features. e.g. Only outdoor caterers 5. Focusing on limited geographic area Concentrating company efforts on a limited geographical area can produce greater operating efficiency, speed of delivery and customer service and promote strong brand e.g. Supermarkets

Strategies based on company position in the industry Strategies for sustaining rapid company growth e.g. Airtel Companies that are focused on growing their revenues and earnings at a rapid or aboveaverage pace year after year generally have to draft a portfolio of strategic initiatives covering three horizons.

Horizon 1 "Short-jump" strategic initiatives to fortify and extend the company's position in existing businesses e.g. price cutting by Airtel Short jump initiatives typically include adding new items to the company's present product line, expanding into new geographic areas where the company does not yet have a market presence, and launching offensives to take market share away from rivals. E.g. prepaid cards and low price strategies of Airtel The objective is to capitalize fully on whatever growth potential exists in the company's present business arenas. Horizon 2 "Medium-jump" strategic initiatives to leverage existing resources and capabilities by entering new businesses with promising growth potential e.g. entering into 3G segment and the DTH segment by Airtel These initiatives become more important as the present businesses enter maturity stage with the growth rate slowing down.

Horizon 3 "Long-jump" strategic initiatives to plant the seeds for ventures in businesses that do not yet exist e.g. failed attempt by Airtel to acquire MTN, foray into Sri Lanka by Airtel It includes putting funds in R&D projects, investing in promising start-up companies creating industries of the future, looking for new products. e.g. Intel invests multibillion dollar in start-up companies. Shell encourages its employees to come up with new ideas Tatas entering defense production The tendency of many firms is to focus on Horizon 1 strategies and devote only sporadic and uneven attention to Horizon 2 and 3 strategies.


Page 139

A study by McKinsey & Company shows that a relatively balanced portfolio of strategic initiatives covering all the three horizons are critical to maintain above the industry growth. E.g. initiatives by GE to look for potential business in 2025 A portfolio of initiatives also provides some protection against unexpected adversity in present or newly entered businesses.

The risks of pursuing multiple strategy horizons 1. A company cannot pursue all the opportunities that are available in the environment because of resource constraints. 2. Medium-jump and long-jump initiatives can cause a company to stray far from its core competence and may end up trying to compete in businesses for which it may be illsuited. E.g. L&T entering cement manufacturing business 3. It is difficult to achieve competitive advantage in medium and long jump businesses, if those businesses do not mesh with the present businesses and resource strengths. E.g. L&T entering cement manufacturing business 4. The payoff's of long-jump initiatives often prove elusive; not all the initiatives are successful, only a few may evolve into significant contributors to the company's revenue and profit growth. 5. The losses from unsuccessful long-jump initiatives may be substantial to erode gains from successful initiatives. Strategies for industry leaders Characteristics The competitive positions of industry leaders range from "stronger than average" to "powerful e.g. Google and Microsoft are powerful, Airtel is stronger than average Leaders have proven strategies. E.g. acquiring and turning capabilities of Arcerol Mittal The main concern for a leader revolves around how to defend and strengthen its leadership position. The pursuit of industry leadership and large market share is primarily important because of the competitive advantage and profitability that accrue to being the industry's biggest company. E.g . it helps in reaching economics of scale, being a technology leader

Some of the strategies that can be followed are: 1. Stay-on-the-offensive strategy The central goal of this strategy is to be a first-mover and a proactive market leader. E.g. Microsoft, Google


Page 140

It rests on the principle that staying a step ahead and forcing rivals to follow is the surest path to industry prominence and potential market dominance. E.g. Intel Being the industry standard setter entails relentless pursuit of continuous improvements and innovation. E.g. Google Innovation involves technical improvements, new and better products, more attractive features, quality enhancements, improved customer service and cutting costs. Initiatives to expand overall industry demand - spurring creation of new families of products, making products more customer friendly, discovering new use for the product and attracting new users. E.g. Nokia in mobile handset 2. Fortify-and-defend strategy The essence of this strategy is to make it harder for challengers to gain ground and for new firms to enter. E.g. Microsoft in operating system The goals of a strong defense are: To hold on to the present market share Strengthen the current market position Protect the competitive advantage Some of the defense actions can be: Attempting to raise the competition for challengers and new entrants through increased spending for advertising, higher levels of customer service and bigger R&D spending. Introducing more product versions or brands to match the product attributes that challengers brands have or to fill vacant niches. E.g. Nokia Adding personalized services and other extras that boost customer loyalty and make it harder or more costly for customers to switch to rival products. E.g. earning points system by credit cards Keeping prices reasonable and quality attractive Building new capacity ahead of market demand to discourage smaller competitors from adding capacity of their own. E.g. Nokia starting manufacturing unit in India Investing enough to remain cost-competitive and technologically progressive. Patenting the feasible alternative technologies Signing exclusive contracts with the best suppliers and dealer distributors.

When is this suitable?


Page 141

This strategy is best suited for companies that have already achieved industry dominance and don't wish to risk antitrust action. E.g. Microsoft, Google It is also suitable for conditions where a firm wishes to use its position for profits and cash flow because the industry's prospects for growth are low and further gains in market share do not appear profitable enough to go after.

3. Muscle-flexing strategy Here the dominant player plays tough when smaller rivals challenge with price cuts or mount new market offensives that directly threaten its position. E.g. Microsofts reaction to Netscape browser Specific response can include: Quickly matching and exceeding challengers price cuts. E.g. 1 paise per second offers by Aircel in response to Tata Docomo offer Using larger promotional campaign and offering better deals to their major customers. E.g. bundling of free browser by Microsoft The leaders may also dissuade distributors from carrying rivals products. Provide salespersons with documented information about the weaknesses of competing firms Try to fill any vacant position in their own firms by making attractive offers to the better executives of rival firms. Use various arm-twisting tactics to put pressure on present customers not to use the products of rivals. like: agreeing for exclusive arrangements in return for better prices e.g. types sold to automobile manufacturers charging them higher price if they use competitor's products e.g. chargers levied by BSNL for calls originating from a competitor to their customer landline give special discounts to certain customers e.g. corporate discounts offered by five star hotels preferred treatment if they do not use any products of rivals e.g. no checkins for frequent flyers offered by major airlines Risks Running afoul of the antitrust laws. Alienating customers with bullying tactics Arousing adverse public opinion.
Page 142


Strategies for runner-up firms Characteristics Runner-up or "second-tier" firms have smaller market share than market leaders. E.g. Microsoft and Yahoo in online search Some of the runner-up firms can be market challengers by employing offensive strategies to gain market share and build a stronger market position. E.g. Microsoft in online search Other runner-up competitors are focusers, seeking to improve their lot by concentrating their attention on serving a limited portion of their market. E.g. Cavincare in hair care segment Some runner-up firms may be termed perennial runner-up, because they lack the resources and competitive strengths to do more than continue in trailing positions. E.g. Nirma in detergents

Obstacles for firms with small market shares 1. Less access to economics of scale in manufacturing, distributing, or marketing and sales promotion 2. Difficulty in gaining customer recognition 3. Weaker ability to use mass media advertising 4. Difficulty in funding capital requirements Strategic approaches for runner-up companies 1. Offensive strategies to build market share e.g. Microsoft in online search A cardinal rule in offensive strategy is to avoid attacking a leader head-on with an imitative strategy regardless of the resources and staying power of the runner-up firm. Some of the offensives can be: Pioneering a leapfrog technological breakthrough e.g. K6 processor from AMD Getting new or better products into the market consistently ahead of rivals and building a reputation for product leadership e.g. Tata Motors in passenger car segment Being more agile and innovative in adapting to evolving market conditions and customer expectations. E.g. Cavincare adopted sachets before HUL Forging attractive strategic alliances with key distributors and dealers. E.g. Acquiring of graphics chip design company by AMD


Page 143

Finding innovative ways to dramatically drive down costs and then using the attraction of lower prices to win customers. E.g. ITC in foods in distribution Crafting an attractive differentiation strategy based on premium quality, technological superiority, outstanding customer service, rapid product innovation or online shopping. E.g. Hyundai in cars

2. Growth via acquisition strategy e.g. Wipro consumer care acquiring Chandrika brand 2. Vacant niche strategy e.g. successful strategy of Paramount airlines o This strategy focuses on some niches in customer requirements which have been overlooked by the market leader. o The niche should be:  of sufficient size  Profitable  has growth potential  well suited to the firms ability  is hard for the leading firm to serve 3. Specialist strategy e.g. SAP o A specialist firm will focus on one technology, product or product family, end use or market share. o The aim is to use company's resource strengths and capabilities on building competitive edge through leadership in a specific area. 5. Superior product strategy e.g. Mercedes Benz in passenger car Here the firm uses differentiation based focused strategy with emphasis on superior product quality or unique attributes. Sales and marketing efforts are aimed directly at quality conscious and performance oriented buyers. 6. Distinctive image strategy Some of the ways to create a distinct image are: creating a reputation for charging the lowest prices e.g. Big Bazaar providing best quality at good price e.g. Toyota with Lexus going all out to give superior customer service e.g. Oberoi Hotels designing unique product attributes e.g. Apple being a leader in new product introduction e.g. Apple 7. Content follower strategy e.g. HMT in watches
Page 144


The firm deliberately refrain from initiating trendsetting strategic moves and aggressive attempts to take customers from leaders. They do not want to compete with the leader directly. They prefer defense to offense. They would rather react than be proactive.

GE nine cell planning grid

General Electric with the assistance of McKinsey and Company developed this matrix. This martix includes 9 cells based on long-term industry attractiveness(on Y-axis) and business strength/competitive position (on X-axis). The industry attractiveness includes Market size, Market growth rate, Market profitability, Pricing trends, Competitive intensity / rivalry, Overall risk of returns in the industry, Entry barriers, Opportunity to differentiate products and services, Demand variability, Segmentation, Distribution structure, Technology development Business strength and competitive position includes Strength of assets and competencies, Relative brand strength (marketing), Market share, Market share growth, Customer loyalty, Relative cost position (cost structure compared with competitors), Relative profit margins (compared to competitors), Distribution strength and production capacity, Record of technological or other innovation, Quality, Access to financial and other investment resources, Management strength

Plotting the Information: 1. Select factors to rate the industry for each product line or business unit. Determine the value of each factor on a scale of 1 (very unattractive) to 5 (very attractive), and multiplying that value by a weighting factor.

Industry attractiveness + .+

= factor value1 x factor weighting1

factor value2 x factor weighting2 factor valueN x factor weightingN

2. Select the key factors needed for success in each of the product line or business unit. Determine the value of each key factor in the criteria on a scale of 1 (very unattractive) to 5 (very attractive), and multiplying that value by a weighting factor. Business strengths/competitive position = key factor value1 x factor weighting1 + key factor value2 x factor weighting2 . + key factor valueN x factor weightingN 3. Plot each product line's or business unit's current position on a matrix. 4. The individual product lines or business units is identified by a letter and plotted as circles on the GE Business Screen. 5. The area of each circle is in proportion to the size of the industry in terms of sales. The pie slice within the circles depict the market share of each product line or business unit. 6. Plot the firm's future portfolio assuming that present corporate and business strategies remain unchanged. This is shown as an arrow which starts from the circle representing the current position and the tip of the arrow will be the tentative center of the future circle.

Strategic Implications
Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix as follows:

1. Grow strong business units in: attractive industries average business units in attractive industries strong business units in average industries. 2. Hold average business units in: average industries strong businesses in weak industries weak business in attractive industies. 3. Harvest weak business units in:

unattractive industries average business units in unattractive industries weak business units in average industries. There are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry. GE business screen represents an improvement over the more simple BCG growth-share matrix.

Limitations It presents a somewhat limited view by not considering interactions among the business units It neglects to address the core competencies leading to value creation Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units.


Page 147

 Invest/ Expand: In this Zone there is opportunity to Grow through further Investment & Expansion. This zone is characterized by high business strength & high industry attractiveness which is a Ideal situation for growth. How ever this situation does not remain for a long time.  Example: Initially IT industry most attractive but later on it was facing competition from all sorts of place.  Select/Earn : This zone presents a mix situation in which growth possibility is low. However its presents a opportunities for selective earning.

 Harvest/Dives: In the case of red-cell organization has to stop. In this case Harvesting or
Divesting strategies suitable. Harvesting means withdraw from a business but withdrawal is not immediate. Initially focus is on cost-cutting i.e In R&D and advertising, the objective is to earn short term profit.

Market Attractiveness:
 Annual market growth rate  Overall market size  Historical profit margin


Current size of market Market structure Market rivalry Demand variability Global opportunities

Business Strength:        Current market share Brand image Production capacity Corporate image Profit margins relative to competitors R & D performance Promotional effectiveness

The BCG Growth-Share Matrix:

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. It is based on the observation that a company's business units can be classified into four categories based on combinations of market growth and market share relative to the largest competitor, hence the name "growth-share". Market growth serves as a proxy for industry attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share matrix thus maps the business unit positions within these two important determinants of profitability. BCG Growth-Share Matrix


Page 149

This framework assumes that an increase in relative market share will result in an increase in the generation of cash. This assumption often is true because of theexperience curve; increased relative market share implies that the firm is moving forward on the experience curve relative to its competitors, thus developing a cost advantage. A second assumption is that a growing market requires investment in assets to increase capacity and therefore results in the consumption of cash. Thus the position of a business on the growth-share matrix provides an indication of its cash generation and its cash consumption. Henderson reasoned that the cash required by rapidly growing business units could be obtained from the firm's other business units that were at a more mature stage and generating significant cash. By investing to become the market share leader in a rapidly growing market, the business unit could move along the experience curve and develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix was born. The four categories are:

Dogs - Dogs have low market share and a low growth rate and thus neither generate nor consume a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture. Question marks - Question marks are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash comsumption. A question mark (also known as a "problem child") has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share. Stars - Stars generate large amounts of cash because of their strong relative market share, but also consume large amounts of cash because of their high growth rate; therefore the cash in each direction approximately nets out. If a star can maintain its large market share, it will become a cash cow when the market growth rate declines. The portfolio of a diversified company always should have stars that will become the next cash cows and ensure future cash generation. Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate, and thus generate more cash than they consume. Such business units should be "milked", extracting the profits and investing as little cash as possible. Cash cows provide the cash required to turn question marks into market leaders, to cover the administrative costs of the company, to fund research and development, to service the corporate debt, and to pay dividends to shareholders. Because the cash cow generates a relatively stable cash flow, its value can be


Page 150

determined with reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow analysis. Under the growth-share matrix model, as an industry matures and its growth rate declines, a business unit will become either a cash cow or a dog, determined soley by whether it had become the market leader during the period of high growth. While originally developed as a model for resource allocation among the various business units in a corporation, the growth-share matrix also can be used for resource allocation among products within a single business unit. Its simplicity is its strength - the relative positions of the firm's entire business portfolio can be displayed in a single diagram. Limitations The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed. Some of its weaknesses are:

Market growth rate is only one factor in industry attractiveness, and relative market share is only one factor in competitive advantage. The growth-share matrix overlooks many other factors in these two important determinants of profitability. The framework assumes that each business unit is independent of the others. In some cases, a business unit that is a "dog" may be helping other business units gain a competitive advantage. The matrix depends heavily upon the breadth of the definition of the market. A business unit may dominate its small niche, but have very low market share in the overall industry. In such a case, the definition of the market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing a corporation's business portfolio at a glance, and may serve as a starting point for discussing resource allocation among strategic business units.

Retrenchment Strategy
Retrenchment is a corporate-level strategy that seeks to reduce the size or diversity of an organization's operations. Retrenchment is also a reduction of expenditures in order to become financially stable. Retrenchment is a pullback or a withdrawal from offering some current products or serving some markets. In a military situation a retrenchment provides a second line of defense. Retrenchment is often a strategy employed prior to or as part of a Turnaround strategy.

Retrenchment strategy


Page 151

A retrenchment grand strategy is followed when an organization aims at a contraction of its activities through substantial reduction or the elimination of the scope of one or more of its businesses in terms of their respective customer groups, customer functions, or alternative technologies either singly or jointly in order to improve its overall performance. E.g: A corporate hospital decides to focus only on special treatment and realize higher revenues by reducing its commitment to general case which is less profitable. The growth of industries and markets are threatened by various external and internal developments (External developments government policies, demand saturation, emergence of substitute products, or changing customer needs. Internal Developments poor management, wrong strategies, poor quality of functional management and so on.) In these situations the industries and markets and consequently the companies face the danger of decline and will go for adopting retrenchment strategies. E.g: fountain pens, manual type writers, tele printers, steam engines, jute and jute products, slide rules, calculators and wooden toys are some products that have either disappeared or face decline. There are three types of retrenchment strategies Turnaround Strategies, Divestment Strategies and Liquidation strategies. 1. Turnaround Strategies Turn around strategies derives their name from the action involved that is reversing a negative trend. There are certain conditions or indicators which point out that a turnaround is needed for an organization to survive. They are:
y y y y y y y

Persistent Negative cash flows Negative Profits Declining market share Deterioration in Physical facilities Over manning, high turnover of employees, and low morale Uncompetitive products or services Mis management

An organization which faces one or more of these issues is referred to as a sick company. There are three ways in which turnarounds can be managed

The existing chief executive and management team handles the entire turnaround strategy with the advisory support of a external consultant. In another case the existing team withdraws temporarily and an executive consultant or turnaround specialist is employed to do the job.


Page 152

The last method involves the replacement of the existing team specially the chief executive, or merging the sick organization with a healthy one.

Before a turn around can be formulated for an Indian company, it has to be first declared as a sick company. The declaration is done on the basis of the Sick Industrial Companies Act (SICA), 1985, which provides for a quasi judicial body called the Board of Industrial and Financial Reconstruction (BIFR) which acts as the corporate doctor whenever companies fall sick. 2. Divestment Strategies A divestment strategy involves the sale or liquidation of a portion of business, or a major division. Profit centre or SBU. Divestment is usually a part of rehabilitation or restructuring plan and is adopted when a turnaround has been attempted but has proved to be unsuccessful. Harvesting strategies a variant of the divestment strategies, involve a process of gradually letting a company business wither away in a carefully controlled manner Reasons for Divestment

y y

The business that has been acquired proves to be a mismatch and cannot be integrated within the company. Similarly a project that proves to be in viable in the long term is divested Persistent negative cash flows from a particular business create financial problems for the whole company, creating a need for the divestment of that business. Severity of competition and the inability of a firm to cope with it may cause it to divest. Technological up gradation is required if the business is to survive but where it is not possible for the firm to invest in it. A preferable option would be to divest Divestment may be done because by selling off a part of a business the company may be in a position to survive A better alternative may be available for investment, causing a firm to divest a part of its unprofitable business. Divestment by one firm may be a part of merger plan executed with another firm, where mutual exchange of unprofitable divisions may take place. Lastly a firm may divest in order to attract the provisions of the MRTP Act or owing to oversize and the resultant inability to manage a large business.

E.g: TATA group is a highly diversified entity with a range of businesses under its fold. They identified their non core businesses for divestment. TOMCO was divested and sold to Hindustan Levers as soaps and a detergent was not considered a core business for the Tatas. Similarly, the pharmaceuticals companies of the Tatas- Merind and Tata pharma were divested to Wockhardt. The cosmetics company Lakme was divested and sold to Hindustan Levers, as

besides being a non core business, it was found to be a non- competitive and would have required substantial investment to be sustained. 3. Liquidation Strategies A retrenchment strategy which is considered the most extreme and unattractive is the liquidation strategy, which involves closing down a firm and selling its assets. It is considered as the last resort because it leads to serious consequences such as loss of employment for workers and other employees, termination of opportunities where a firm could pursue any future activities and the stigma of failure The psychological implications
y y

The prospects of liquidation create a bad impact on the companys reputation. For many executives who are closely associated firms, liquidation may be a traumatic experience.

Legal aspects of liquidation: Under the Companies Act 1956, liquidation is termed as winding up. The Act defines winding up of a company as the process whereby its life is ended and its property administered for the benefit of its creditors and members. The Act provides for a liquidator who takes control of the company, collect its assets, pay it debts, and finally distributes any surplus among the members according to their rights. The stability grand strategy is adopted by an organization when it attempts at an incremental improvement of its functional performance by marginally changing one or more of its businesses in terms of their respective customer groups, customer functions, and alternative technologies either singly or collectively E.g: A copier machine company provides better after sales service to its existing customer to improve its company product image, and increase the sale of accessories and consumables This strategy may be relevant for a firm operating in a reasonably certain and predictable environment. Stability strategy can be of three types No Change Strategy, Profit Strategy, Pause/ Proceed with caution Strategy. 1. No-Change Strategy It is a conscious decision to do nothing new. The firm will continue with its present business definition. When a firm has a stable internal and external environment the firm will continue with its present strategy. The firm has no new strengths and weaknesses within the organization and there is no opportunities or threats in the external environment. Taking into account this situation the firm decides to maintain its strategy.


Page 154

Several small and medium sized firm operating in a familiar market- more often a niche market that is limited in scope and offering products or services through a time tested technology rely on the No Change Strategy. 2. Profit Strategy No firm can continue with the No Change Strategy. Sometimes things do change and the firm is faced with the situation where it has to do something. A firm may assess the situation and assume that its problem are short lived and will go away with time. Till then a firm tries to sustain its profitability by adopting a profit strategy For instance in a situation when the profit is becoming lower firm takes measures to reduce investments, cut costs, raise prices, increase productivity and adopt other measures to solve the temporary difficulties. The problem arises due to unfavorable situation like economic recession, government attitude, and industry down turn, competitive pressures and like. During this kind of situation that the firm assumes to be temporary it would adopt profit strategies Some firms to overcome these difficulties would sell off assets such as prime land in a commercial area and move to suburbs. Others have removed some of its non-core business to raise money, while others have decided to provide outsourcing service to other organizations. 3. Pause/ Proceed with Caution Strategy It is employed by the firm that wish to test the ground before moving ahead with a full fledged grand strategy, or by firms that have an intense pace of expansion and wish to rest for a while before moving ahead. The purpose is to allow all the people in the organization to adapt to the changes. It is a deliberate and conscious attempt to postpone strategic changes to a more opportune time. E.g: In the India shoe market dominated by Bata and Liberty, Hindustan Levers better known for soaps and detergents, produces substantial quantity of shoes and shoe uppers for the export market. In late 2000, it started selling a few thousand pairs in the cities to find out the market reaction. This is a pause proceed with caution strategy before it goes full steam into another FMCG sector that has a lot of potential Growth strategy Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when an organization aims at higher growth by broadening its one or more of its business in terms of their respective customer groups, customers functions, and alternative technologies singly or jointly in order to improve its overall performance. There are five types of expansion (Growth) strategies

1. 2. 3. 4.

Expansion through concentration Expansion through integration Expansion through diversification Expansion through cooperation

1. Expansion through concentration It involves converging resources in one or more of firms businesses in terms of their respective customer needs, customer functions, or alternative technologies either singly or jointly, in such a manner that it results in expansions. A firm that is familiar with an industry would naturally like to invest more in known business rather than unknown business. Concentration can be done through

Market Penetration: It involves selling more products to the same market by focusing intensely on existing markets with its present products, increasing usage by existing customers and increasing market share and restructures a mature market by driving out competitors E.g.: Low pricing strategies Market Development: It involves selling the same products to new markets by attracting new users to its existing products. Market development can be geographic wise and demographic wise. E.g.: XEROX Company educated small business entrepreneurs to create new markets. Product Development: It involves selling new products to the same markets by introducing newer products in existing markets. E.g.: the tourism industry in India has not been able to attract new customers in significant numbers. New products such as selling India as a golfing or ayuerveda-based medical treatment destination are some of the product development efforts in the tourism industry to attract more tourists.

Advantages of concentration strategies

y y y y y

Involves minimal organizational changes and is less threatening. Enables the firm to specialize by gaining the in-depth knowledge of the businesses. Enables the firm to develop competitive advantage. Decision-making can be made easily as there is a high level of productivity. Systems and processes within the firm become familiar to the people in the organization.

Disadvantages of concentration strategies


It is dependent on one industry if there is any worse condition in the industry the firm will be affected.
Page 156


y y

Factors such as product obsolescence, fickleness of market, emergence of newer technologies are threat to concentrated firm Mangers may not be able to sustain interest and find the work less challenging. It may lead to cash flow problems.

2. Expansion through Integration It is done where the company attempts to widen the scope of its business definition in such a manner that it results in serving the same set of customers. The alternative technology of the business undergoes a change. It is combing activities related to the present activity of a firm. Such a combination may be done through value chain. A value chain is a set of interrelated activity performed by an organization right from the procurement of basic raw materials down to the marketing of finished products to the ultimate customers. E.g.: Several process based industry such as petro chemicals, steel, textiles of hydrocarbons have integrate firm A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers. The cost of making the items used in the manufacture of ones owns products are to be evaluated against the cost of procuring them from suppliers. If the cost of making is less that the cost of procurement then the firm moves up the value chain to make the item itself. Like wise if the cost of selling the finished products is lesser than the price paid to the sellers to do the same thing then the firm would go for direct selling. Among the integration strategies are of two types vertical and horizontal integration.

Vertical Integration: when an organization starts making new products that serve its own needs vertical integration takes place. Vertical integration could be of two types Back ward and forward integration. Backward integration means moving back to the source of raw materials while forward integration moves the organization nearer to the ultimate customer. Generally when firms vertically integrate they do so in a complete manner that is they move backward or forward decisively resulting in a full integration but when a firm does not commit it fully it is possible to have partial vertical integration strategies too. Two such partial vertical integration strategies are taper integration and quasi integration. Taper integration requires firms to make a part of their own requirements and to buy the rest from outsiders. Through quasi integration strategies firm purchase most of their requirements from other firms in which they have an ownership stake. Ancillary industrial units and outsourcing through sub contracting are adapted forms of quasi integration. Horizontal Integration: when an organization takes up the same type of products at the same level of production or marketing process, it is said to follow a strategy of horizontal integration. When a luggage company takes over its rival luggage company, it is
Page 157


horizontal integration. Horizontal integration strategy may be frequently adopted with a view to expand geographically by buying a competitors business, to increase the market share or to benefit from economics of scale. 3. Expansion through Diversification Diversification is a much used and much talked about set of strategies. It involves a substantial change in the business definition singly or jointly- in terms of customer groups or alternative technologies of one or more of a firms businesses. . There are two categories, concentric and conglomerate diversification. Concentric Diversification: when an organization takes up an activity in such a manner that is related to the existing business definition of one or more of firms businesses, either in terms of customer groups, customers functions or alternative technologies, it is called concentric diversification. Concentric diversification may be of three types: 1. Marketing related concentric diversification: when a similar type of product is offered with a help of unrelated technology for e.g., a company in the sewing machine business diversifies in to kitchen ware and household appliances, which are sold to house wives through a chain of retails stores. 2. Technology- related concentric diversification: when a new type of product or service is provided with the help of related technology, for e.g., a leasing firm offering hirepurchase services to institutional customers also starts consumer financing for the purchase of durable sot individual customers. 3. Marketing- technology related concentric diversification: when a similar type of product is provided with the help of related technology, for e.g., a rain coat manufacturer makes other rubber based items, such as water proof shoes and rubber gloves sold through the same retail outlets Conglomerate Diversification: when an organization adopts a strategy which requires taking of those activities which are unrelated to the existing businesses definition of one or more of its businesses either in terms of their respective customer groups, customer functions or alternative technologies. Example of Indian company which have adopted apart of growth and expansion through conglomerate diversification the classic examples is of ITC, a cigarette company diversifying into the hotel industry 4. Expansion through Cooperation The term cooperation expresses the idea of simultaneous competition and cooperation among rival firms for mutual benefits. Cooperative strategies could be of the following types:


Page 158

1. 2. 3. 4.

Mergers Takeovers Joint ventures Strategic alliances

Mergers Strategies: A merger is a combination of two or more organizations in which one acquires the assets and liabilities of the other in exchange for shares or cash or both the organization are dissolved and the assets and liabilities are combined and new stock is issued. For the organization, which acquires another, it is an acquisition. For the organization, which is acquired, it is a merger. If both the organization dissolves their identity to create a new organization, it is consolidation. There are different types of mergers they are horizontal merger, vertical merger, concentric merger and conglomerate merger.

Horizontal Mergers: it takes place when there is a combination of two or more organizations in the same business. E.g: A company making footwear combines with another footwear company, or a retailer of pharmaceutical combines with another retailer in the same businesses. Vertical Mergers: It takes place when there is a combination of two or more organizations, not necessarily in the same business, which create complementarities either in terms of supply of raw materials (input) or marketing of goods and services (outputs). E.g: A footwear company combines with a leather tannery or with a chain shoe retail stores Concentric Mergers: It takes place when there is a combination of two or more organizations related to each other either in terms of customer functions, customer groups, or the alternative technologies used. E.g: A footwear company combining with a hosiery firm making socks or another specialty footwear company, or with a leather goods company making purse, hand bags and so on Conglomerate Mergers: It takes place when there is a combination of two or more organizations unrelated to each other, either in terms of customer functions, customer groups, or alternative technologies used. E.g: A footwear company combining with a pharmaceutical firm.

Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by Indian companies. Acquisitions usually are based on the strong motivation of the buyer firm to acquire. Takeovers are frequently classified as hostile takeovers (which are against the wishes of the acquired firm) and friendly takeovers (by mutual consent)


Page 159

Friendly takeovers are where a takeover is not resisted or opposed, by the existing management or professionals. E.g: Tata Teas takeover of Consolidated Coffee (a grower of coffee beans) and Asian Coffee (a processor) is an example of a friendly takeover. Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the existing management or professionals.

Joint Venture Strategies: Joint ventures are a special case of consolidation where two or more companies from a temporary form a temporary partnership (also called a consortium) for a specified purpose. They occur when an independent firm is created by at least two other firms. Joint ventures may be useful to gain access to a new business mainly under these conditions
y y y y

When an activity is uneconomical for an organization to do alone. When the risk of business has to be shared. When the distinctive competence of two or more organization can be brought together. When the organization has to overcome the hurdles, such as import quotas, tariffs, nationalistic political interests, and cultural roadblocks.

Strategic alliances: They are partnership between firms whereby their resources, capabilities and core competencies are combined to pursue mutual interest to develop, manufacture, or distribute goods or services. There are various advantages:

Two or more firms unite to pursue a set of agreed upon goals but remain independent subsequent to the formation of the alliances. A pooling of resources, investment and risks occurs for mutual gain The partner firms contribute on a continuing basis in one or more key strategic areas, for example, technology, product and so forth. Strategic alliances offer a growth route in which merging ones entity, acquiring or being acquired, or creating a joint venture may not be required Global partners can help local firms by developing global quality consciousness, creating adherence to international quality standards, providing access to state of the art technology, gaining entry to world wide mass markets, and making funds available for expansions.

Restructuring strategy:
Organizational Restructuring hovers around the changes in organizational design. It brings about changes in decision making, information flow and management style. Though this restructuring, just like all other restructurings, is initiated by the CEO, it requires the participation of all hierarchies of an organization, especially the employees. Organizational restructuring, ESHWARI.S---LORAA BUSINESS ACADEMY Page 160

combined with portfolio restructuring and financial restructuring makes meaningful changes materialize and touches upon the following aspects: 1) Centralization/decentralization of the organization: Functions or units of the organization may be centralized or decentralized to create new linkages to better implement the strategy. Nature of Decision making in the organization may be changed due to the changes in reporting levels and hierarchy. 2) Organizational Culture: The essential fabric of the firm i.e. its culture is affected as a consequence of changes in reporting levels and hierarchical levels. 3) Training and Redeployment: Imparting training to the workforce enables the organization to cope better with the changing environment. At the same time some employees need to be redeployed. However, training and redeployment may be inadequate at times and therefore inducting educated and skilled professionals at different levels becomes necessary. 4) Changes in HR Policies: The current HR policies of the organization need to be changed in accordance with the changing scenario. The HR department needs enable change management. 5) Rationalization of Pay Structure: The present pay structure should be modified and reevaluated to maintain the internal and external equity among the employees. Symptoms indicating the need for organizational restructuring
y y y y y y y y y

Parts of the organization are significantly over or under staffed. Organizational communications are inconsistent, fragmented, and inefficient. Technology and/or innovation are creating changes in workflow and production processes. Significant staffing increases or decreases are contemplated. New skills and capabilities are needed to meet current or expected operational requirements. Accountability for results are not clearly communicated and measurable resulting in subjective and biased performance appraisals. Personnel retention and turnover is a significant problem. Workforce productivity is stagnant or deteriorating. Morale is deteriorating

Benefits of Organizational Restructuring i. Lower cost ii. Better formulation and implementation of strategies Issues in Organizational Restructuring i. Culture. ii. Downsizing iii. Loss of Employee Morale.


Page 161

The approaches that various companies, large and small, public and private, adopted in their efforts to restructure in terms of DOWNSIZING differed in terms of how they viewed their employees.
y y

One group viewed employees as costs to be cut. These are the "downsizers". The other group viewed employees as assets to be developed. These are the "responsible restructurers."

The 7 principles of a successful restructure

Even as the economic outlook appears to brighten, the fact remains that many organisations can no longer operate as they had been. A key feature of this changing landscape is the need for organisations to restructure. Here are seven broad restructuring principles to help make any restructure a successful one. 1. Align structure to strategy All restructures must align to strategy. This may seem self-evident, yet a significant number of organisations fail to do so. For example, if local conditions are a predominant factor, then stress local sales and marketing functions rather than a centralised behemoth that then tries to matrix with local elements. 2. Reduce complexity Simply put, complexity costs. Whether it is a complex organisational structure, a complex product offering or complex transactional processes, the added cost of complexity can be a drag on performance. To mitigate complexity, there are three considerations that help with organisational design:

Design structure for strategy before you design for specific personnel. Organisational redesigns which are a compromise between strategic intent and line management preferences inevitably add complexity. So, while internal political intrigue is unavoidable, at least start with a clean and clear design that matches to strategy.

Avoid making leadership roles too complex (see principle #5).

Page 162


Minimise the use of matrices. They introduce measurement overhead and a lack of clear direction to the staff.

3. Focus on core activity Remove noise (inefficiency in processes) and enhance core before restructuring roles. This means that you will need to know what people are doing today by obtaining a detailed understanding of tasks by role. This ensures that no value-added activities are thrown out when removing a role. Similarly, duplication and redundant activity can be removed at the time of the restructure. 4. Create feasible roles Dont overload roles restructures generally leave an organisation with fewer people to do the same amount of work. When restructuring to reduce headcount, make sure you understand the current workload of employees. This will help to ensure you design roles that are neither too heavily laden nor indeed too light. Furthermore, role design must take into account realistic groupings of skills. Packing a role with too many distinct skill-sets reduces the pool of durable candidates. 5. Balance own work and supervisory load of managers The case of leadership or management loading can be particularly troublesome in restructures. Often, the inability of managers to focus on leadership tasks due to increased output requirements can create significant problems for an organisation. For example, time spent mentoring and coaching staff drops off, staff become disengaged, more issues arise due to staff errors and managers end up spending more time resolving them. To ensure management are appropriately loaded, its critical to balance three elements:

1. The number of staff directly managed or supervised. 2. Staff ability to perform work without supervision. 3. The amount of own work managers have to do on top of their leadership activity.

6. Implement with clarity Often there is confusion in the first weeks and months after an initial restructure. After all, who is supposed to be responsible for what? The answer is to clarify roles and responsibilities from the beginning, identify all functions (activities, tasks and decisions) that have to be accomplished for effective operation, clarify who should be involved and be specific about accountability. 7. Maintain flexibility Finally, it is important not to cut your resources too fine. If the organisational change is material, you will need resource flexibility in the first few months. So even as you strive to operate more efficiently, be sure to give yourself some wriggle room in your staffing. Flexibility applies not only to staff members, but to staff capability. Leave yourself and your leadership team some room to respond to capability gaps in the new structure. Common ways to do this include: a staged transition so there are fewer capability gaps to manage at a point in time, and a temporary use of contract resources until in-house staff become familiar with their roles.



Page 164

Organizations successful at strategy implementation effectively manage six key supporting factors: 1. 2. 3. 4. 5. 6. Action Planning Organization Structure Human Resources The Annual Business Plan Monitoring and Control Linkage.

Action Planning First, organizations successful at implementing strategy develop detailed action plans... chronological lists of action steps (tactics) which add the necessary detail to their strategies. And assign responsibility to a specific individual for accomplishing each of those action steps. Also, they set a due date and estimate the resources required to accomplish each of their action steps. Thus they translate their broad strategy statement into a number of specific work assignments. Organizational Structure Next, those successful at implementing strategy give thought to their organizational structure. They ask if their intended strategy fits their current structure. And they ask a deeper question as well... "Is the organization's current structure appropriate to the intended strategy?" We're reminded here of a client we worked with some years ago. The company was experiencing problems implementing its strategy calling for the development of two new products. The reason the firm had been unable to develop those products was simple... they had never organized to do so. Lacking the necessary commitment for new product development, management didn't establish an R&D group. Rather, it assigned its manufacturing engineering group the job of new product development... and hired two junior engineers for the task. Since the primary function of the manufacturing engineering group was to keep the factory humming, those engineers kept getting pulled off their "new product" projects and into the role of the manufacturing support. Result no new products.


Page 165

Human Resource Factors Organizations successful at strategy implementation consider the human resource factor in making strategies happen. Further, they realize that the human resource issue is really a two part story. First, consideration of human resources requires that management think about the organization's communication needs. That they articulate the strategies so that those charged with developing the corresponding action steps (tactics) fully understand the strategy they're to implement. Second, managers successful at implementation are aware of the effects each new strategy will have on their human resource needs. They ask themselves the questions... "How much change does this strategy call for?" And, "How quickly must we provide for that change?" And, "What are the human resource implications of our answers to those two questions?" In answering these questions, they'll decide whether to allow time for employees to grow through experience, to introduce training, or to hire new employees. The Annual Business Plan Organizations successful at implementation are aware of their need to fund their intended strategies. And they begin to think about that necessary financial commitment early in the planning process. First, they "ballpark" the financial requirements when they first develop their strategy. Later when developing their action plans, they "firm up" that commitment. As a client of ours explains, they "dollarize" their strategy. That way, they link their strategic plan to their annual business plan (and their budget). And they eliminate the "surprises" they might otherwise receive at budgeting time. Monitoring & Control Monitoring and controlling the plan includes a periodic look to see if you're on course. It also includes consideration of options to get a strategy once derailed back on track. Those options (listed in order of increasing seriousness) include changing the schedule, changing the action steps (tactics), changing the strategy or (as a last resort) changing the objective. (For more on this point, see "Monitoring Implementation of Your Strategic Plan.") Linkage - The Foundation for Everything Else Many organizations successfully establish the above five supporting factors. They develop action plans, consider organizational structure, take a close look at their human

resource needs, fund their strategies through their annual business plan, and develop a plan to monitor and control their strategies and tactics. And yet they still fail to successfully implement those strategies and tactics. The reason, most often, is they lack linkage. Linkage is simply the tying together of all the activities of the make sure that all of the organizational resources are "rowing in the same direction." It isn't enough to manage one, two or a few strategy supporting factors. To successfully implement your strategies, you've go to manage them all. And make sure you link them together. Strategies require "linkage" both vertically and horizontally. Vertical linkages establish coordination and support between corporate, divisional and departmental plans. For example, a divisional strategy calling for development of a new product should be driven by a corporate objective calling for growth, perhaps - and on a knowledge of available resources - capital resources available from corporate as well as human and technological resources in the R&D department. Linkages which are horizontal - across departments, across regional offices, across manufacturing plants or divisions require coordination and cooperation to get the organizational units "all playing in harmony." For example, a strategy calling for introduction of a new product requires the combined efforts of and thus coordination and cooperation among the R&D, the marketing, and the manufacturing departments. For more on the subject of linkage, please see Linkage: The Foundation for Everything Else.

Relation Between Strategy Formulation And Strategy Implementation:

In order to achieve its objectives, an organization must not only formulate but also implement its strategies effectively. The Figure represents the importance of both tasks in matrix form and suggests the probable outcomes of the four possible combinations of these variables: - Success is the most likely outcome when strategy is appropriate and implementation good. Roulette involves situation wherein a poor strategy is implemented well. - Trouble is characterized by situations wherein an appropriate strategy is poorly implemented. - Failure involves situations wherein a poor strategy is poorly implemented.


Page 167

Diagnosing why a strategy failed in the roulette, trouble, and failure cells in order to find a remedy requires the analysis of both formulation and implementation. S.Certo and J. Peter proposed a five-stage model of the strategy implementation process: 1. determining how much the organization will have to change in order to implement the strategy under consideration, under consideration; 2. analyzing the formal and informal structures of the organization; 3. analyzing the "culture" of the organization; 4. selecting an appropriate approach to implementing the strategy; 5. implementing the strategy and evaluating the results. Implementation is successfully initiated in three interrelated stages: 1. Identification of measurable, mutually determined annual objectives. 2. Development of specific functional strategies. 3. Development and communication of concise policies to guide decisions.

A General Framework For Strategy Implementation:

The first step in implementation is identifying the activities, decisions, and relationships critical to accomplishing the activities. There are six principal administrative tasks that shape a manager's action agenda for implementing strategy. In general, every unit of an organization has to ask, "What is required for us to implement our part of the overall strategic plan and how can we bets get it done?". The specific components of each of the six strategy-implementation tasks: 1. Building an organization capable of executing the strategy. The organization must have the structure necessary to turn the strategy into reality. Furthermore, the firm's personnel must possess the skill needed to execute the strategy successfully. Related to this is the need to assign the responsibility for accomplish key implementation tasks to the right individuals or groups. 2. Establishing a strategy-supportive budget. If the firm is to accomplish strategic objectives, top management must provide the people, equipment, facilities, and other resources to carry out its part of the strategic plan. Further, once the strategy has been decided on, the key tasks to performed and kinds of decision required must be identified, formal plans must also be developed. The tasks should be arranged in a sequence comprising a plan of action within targets to be achieved at specific dates. ESHWARI.S---LORAA BUSINESS ACADEMY Page 168

3. Installing internal administrative support systems. Internal systems are policies and procedures to establish desired types of behavior, information systems to provide strategy-critical information on a timely basis, and whatever inventory, materials management, customer service, cost accounting, and other administrative systems are needed to give the organization important strategy-executing capability. These internal systems must support the management process, the way the managers in an organization work together, as well as monitor strategic progress. 4. Devising rewards and incentives that are tightly linked to objectives and strategy. People and departments of the firm must be influenced, through incentives, constraints, control, standards, and rewards, to accomplish the strategy. 5. Shaping the corporate culture to fit the strategy. A strategy-supportive corporate culture causes the organization to work hard (and intelligently) toward the accomplishment of the strategy. 6. Exercising strategic leadership. Strategic leadership consists of obtaining commitment to the strategy and its accomplishment. It also involves the constructive use of power and politics, and politics in building a consensus to support the strategy.

The 7-s's Framework

McKinsey and Company have developed a model know as, "the seven elements of strategic fit," or the "7-S's." 7-S's include: 1. 2. 3. 4. 5. 6. 7. strategy (the coherent set of actions selected as a course of action); structure (the division of tasks as shown on the organization chart); systems (the processes and flows that show how an organization gets things done); style (how management behaves); staff (the people in the organization); shared-values (values shared by all in the organization); and skills (capabilities possessed by the organization).

The underlying concept of the model is that all seven of these variables must "fit" with one another in order for strategy to be successfully implemented.

Operationalizing Strategy
Introduction The whole concept of strategy and strategic thinking is typically advanced with an almost mystical aura as a topic that is deeply intellectual and complex. The subject is indeed critical to business theory, and there has been significant thought and much respected brainpower applied

to defining it, analyzing it and advising about it. However at the end of the day it is important to remember that firm isnt judged by its strategy but by its success as a business. Business success comes from implementation. Businesses need a strategy. But they need strategic thinking even more. They dont need over complicated or over nuanced concepts. They dont need anyone to tell them what their strategy should be (at any price). Most firms though could use a disciplined approach to help surface and organize what they already know as owners and operators about their business. Applying this knowledge is the gist of Operationalizing strategy.

Strategy Defined
Lets start with what strategy is not. It is not: Planning Financial management Innovation Management system A dirty word Just the province of big companies. Strategy is simply the process of defining decisions or choices required to meet specific business objectives. Note the emphasis on process. The output of the process is the choices the firm has made about how they will accomplish something. An organization has to separate the means of achievement from the ends or the objectives they have defined. Success is defined solely by the firm and its stakeholders. In order to develop a vision you first have to understand where you are in order to set the context for that vision. The vision guides your examination of the fundamental tenets for any business. In the context of your vision you ask and answer many questions, define goals, set objectives and develop specific operating plans.

Strategy and strategic thinking often become confused. You may have a complex and detailed strategy or you may just have a set of ideas. Your strategy could be a boat anchor disguised as an important looking binder with hundreds of pages, or it could be a number of to-do lists. The process by which you developed any or all of these is accurately labeled strategic thinking.

Operationalizing The format of the output is nowhere near as critical as your ability to be guided by it to business success. That ability is often called operational effectivity. At Arketype we call it operationalizing a strategy but it must be the goal of any strategic process. The discipline and skill needed to implement or deploy a strategy is every bit as rare as the expertise and dedication required to craft strategy. The two must be seen as different sides of the same coin. impacts, it is
usually the negative ones that concern us in the context of implementing strategy. The mere act of defining metrics for managing progress against objectives should force discussion and analysis of possible risks and uncertainties.

Annual objectives: Establishing Annual Objectives in Strategy Implementation Process:

Establishing annual objectives is a decentralized activity that directly involves all managers in an organization. Active participation in establishing annual objectives can lead to acceptance and commitment. Annual objectives are essential for strategy implementation because they ( 1 ) represent the basis for allocating resources; ( 2 ) are a primary mechanism for evaluating managers' ( 3 ) are the major instrument for monitoring progress toward achieving long-term objectives; and ( 4 ) establish organizational, divisional, and departmental priorities. Considerable time and effort should be devoted to ensuring that annual objectives are well conceived, consistent with long-term objectives, and supportive of strategies to be implemented. Approving, revising, or rejecting annual objectives in much more than a rubber-stamp activity. The purpose of annual objectives can be summarized a s follows. Clearly stated and communicated objective are critical to success in all types and sizes of firms. Annual objectives, stated in terms of profitability, growth, and maker share by business segment, geographic area, customer groups, and product, are common in organization.

Annual objectives should

be measurable, consistent, reasonable, challenging, clear,

communicated throughout the organization, characterized by an appropriate time dimension, and accompanied by commensurate rewards and sanctions. Too often, objectives are stated in generalities, with little operational usefulness. Annual objectives, such as "to improve communication" or "to improve performance," are not clear, specific, or measurable. Objectives should state quantity, quality, cost, and time-and also be verifiable. Terms and phrases such as maximize, minimize, as soon as possible, and adequate should be avoided.

Annual objectives should be compatible with employees'' and managers'' values and should be supported by clearly stated policies. More of something is not always better. Improved quality or reduced cost may, for example, e more important than quantity. It is important to tie rewards and sanctions to annual objectives so that employees and mangers understand that achieving objectives is critical to successful strategy implementation. Clear annual objectives do not guarantee successful strategy implementation, but they do increase the likelihood that personal and organizational aims can be accomplished. Overemphasis on achieving objectives can result in undesirable conduct, such as faking the numbers, distorting the records, and letting objectives become ends in themselves. Managers must be alert to these potential problems.

Functional Strategies
The success of your business-unit strategy depends not only on how well your firm positions itself and competes in the given market segment, but also on how well you coordinate the various functions required to design, manufacture, deliver, and support the product or service. Therefore, functional strategies are vitally important. They can be a major determinant of the competitive advantage of your business, since they are based on competencies emanating from your firm's internal processes. These internal processes add value (the value chain of the business) and give the firm the ability to implement certain business-unit strategies. Value chain and functional strategies are supported by tools such as total quality management, reengineering, and time-based competition. These techniques, however, are not strategy tools in

themselves, because they only supportnot determinewhat your company's unique and sustainable competitive advantage will be. There are several types of functional strategies, many of which are addressed in other courses in the typical business curriculum. Module 14 of your text focuses on new product development/innovation and research and development (R&D)/technology strategies. Maidique and Patch suggest four major technology-related strategies your firm may choose. Each has different requirements for R&D, manufacturing, marketing, finance, organization and timing. The technology strategy adopted by your company may be the propulsive force behind other actions you take. A first-to-market strategy means getting the product to the market before the competition does. This strategy requires extensive research and development and emphasizes medium-scale manufacturing. It will be important to stress stimulation of primary demand and flexibility. Your firm should also encourage risk-taking, since in the first-to-market strategy you may need access to risk capital. Finally, your company will want to enter the market as early as possible in the product's life cycle. In the second-to-market technology strategy, you will want to enter the market when the product is just beginning its growth stage. This strategy requires advanced, flexible, and responsive research and development, since it is very important for you to be able to differentiate your product from the original and to stimulate secondary demand. Your firm should also be able to swing quickly into medium-scale manufacturing, an activity that may require access on short notice to medium to large quantities of capital. Flexibility and efficiency are the buzz words if you choose this "fast follower" strategy. In the cost minimization or "late-to-market" strategy, you attempt (after noting your competition's tactics and results) to avoid making their mistakes. In this strategy, your product enters the market during the late-


Page 173

growth or early-maturing stages in its life cycle. For this strategy to be successful, your company must minimize selling and distribution costs, have access to large amounts of capital, and have the capabilities for efficient, large-scale production. When using this strategy, you should focus your R&D on developing skills in cost-effective production. Your company organization should stress hierarchical control, efficiency, and enforcement of procedures. In a market segmentation strategy, you will generally enter the market during the growth stage of the product life cycle, although you may enter at almost any stage. This strategy is often used by smaller producers who have identified and reached certain segments of the market. A favorable relationship has usually been achieved by offering a particular feature or special service as part of the product. Flexibility is vital in both the manufacturing and organization departments of your company in practicing market segmentation. You will need financial backing in medium to large amounts, and your R&D department must key its operations toward custom engineering and advanced product-design.

Why is Concise Communication Important for Developing Effective Strategic Leadership?

Concise communication is essential for the success of any organization and is especially important to develop effective strategic leadership. The focus of strategic leadership is to build and maintain a sustainable competitive advantage for the organization, according to Ralph Stacy, author of "Learning as an Activity of Interdependent People." Concise communication is significant in developing effective strategic leadership, as it is typically the responsibility of leaders to translate the desires of those at the upper echelons of the organization to those at the bottom.

1. Strategic Management

The strategic planning process is a common method used to develop and maintain a sustainable competitive advantage for an organization. In the strategic planning process, organizational leaders develop a mission statement for the organization, explaining its reason for existence. Managers and leaders must then develop strategies to meet this purpose. The development of effective strategic leadership is vital to the success of the

strategic planning process, and concise communication is an essential element of this development.


Strategic leadership typically involves the alignment of the day-to-day work activities with the organization's mission statement using strategic leadership. Concise communication is essential to the success of any strategic management plan. For operational activities to align with the mission statement, strategic leaders must ensure that workers maintain a clear understanding of that mission statement. Senior managers must encourage the clarification of expectations so workers' understanding of what is expected of them measures up to strategic leadership metrics.

Sender/Receiver Communication Model


One of the most essential tasks of the strategic leader is to communicate organizational strategies to those who will implement them. Concise communication is a vital element in this process. The sender/receiver communication model is a useful tool for developing these core competencies within strategic leaders. Every communication involves a sender and a receiver. For strategic leaders to be truly effective, they must understand the importance of concise communications to ensure the messages they send to workers are received in the manner intended.

Leaders vs. Managers


While not all leaders are necessarily managers, it is essential that all managers be properly developed to provide effective strategic leadership for the organization. Warren Bennis, author of "On Becoming a Leader," describes several differences between leaders and managers. For example, managers are administrators, while leaders are innovators. Managers focus on completing tasks, while leaders focus on people. Concise communication is an essential tool of the effective leader.

Institutionalizing the strategic structure:

Institutionalization of Strategy: The first basic action that is required for putting a strategy into operation is its institutionalization. Since strategy does not become either acceptable or effective by virtue of being well designed and clearly announced, the successful implementation of strategy requires that the strategy framer acts as its promoter and defender. Often strategy choice becomes a personal choice of the strategist because his personality variables become an influential factor in strategy formulation. Thus, it becomes a personal strategy of the strategist. Therefore, there is an urgent need for the institutionalization of strategy because without it, the strategy is subject to being

undermined. Therefore, it is the role of the strategist to present the strategy to the members of the organization in a way that appeals to them and brings their support. This will put organizational people to feel that it is their own strategy rather than the strategy imposed on them. Such a feeling creates commitment so essential for making strategy successful.

Recall from Chapter 4 that functional strategy provides an action plan for strategy implementation at the level of the work group and individual. It puts corporate and business strategy into operation by defining the activities needed for implementation. Depending on the specific strategy to be implemented, functional strategy nay need to be formulated by a variety of work groups within the organization Consider, for example, the functional strategies that would be necessary if Coca-Cola decided to develop a new line of fruit juices. The research and development department would have to develop a formula; the marketing department would have to conduct taste tests, develop promotional campaigns, and identify the appropriate distribution channels; and the production department would have to purchase new equipment and perhaps build new facilities to produce the fruit juice line. Table 5.4 outlines just a few of the functional strategies necessary to introduce a new line of fruit juices. The most significant challenge lies in coordinating the activities of the various work groups that must work together to implement the strategy. The strategies must be consistent both within each functional area of the business (such as the marketing department) and between functional areas (such as the marketing department and the production department).48 For example, if Coca-Cola's new fruit juice line is to be priced at a premium level, it must be promoted to buyers who desire a premium product and distributed through channels that reach those buyers. These marketing decisions must be consistent. Further, the production department must purchase highquality raw materials and produce a product that is worthy of a premium price. Without consistency within and between the work groups of the organization, the implementation process is sure to fail.


Page 176

y y y y





Page 177

DIVERSIFICATION STRATEGY (Develop new products for new markets)

MARKETING MIX ISSUES Product Strategy Specifying the exact product or service to be offered Promotion Strategy How the product or service is to be communicated to customers Channel or Place Strategy Selecting the method for distributing the product or service Price Strategy Establishing a price for the product or service Skim pricing (high) when you are a pioneer Penetration pricing (low) builds market shares Dynamic pricing (prices vary frequently) based on demand/availability Distribute through dealer networks or through mass merchandisers? Sell directly to consumers through own stores or through internet? Push - spend $$$ on promotions and discounts to push products Pull - spend $ to build brand awareness so consumers will ask for it by name New or existing product? for new or existing customers?


CAPITAL ACQUISITIONS Debt Leverage, Stock Sales, & Gains from Operations Equity financing is preferred for related diversification
Page 178


Debt financing is preferred for unrelated diversification Leveraged buyouts (LBOs) make the acquired firm pay off the debt

CAN WE GROW BY RELYING ON ONLY INTERNAL CASH FLOWS? DO STOCK SALES DILUTE OWNERSHIP CONTROL? DOES A LARGE DEBT RATIO CRIPPLE FUTURE GROWTH? DOES STRONG LEVERAGE BOOST EARNINGS PER SHARE? DOES HIGH DEBT DETER TAKEOVER ATTEMPTS? DO MOST LBOs UNDERPERFORM 3-4 YEARS AFTER THE BUYOUT? RESOURCE ALLOCATIONS Dividends, Stock Price, & Reinvestment Reinvest earnings in fast-growing companies Keeping the stockholders contented with consistent dividends Use of stock splits ( or reverses) to maintain high stock prices Tracking stock keeps interest in company, but doesnt allow takeover


LEVEL OF INNOVATION Pioneer (Leader) v. Copy Cat (Follower) Technological leadership fits well with differentiation A follower strategy makes sense with cost-leader strategies Are we better at finding applications and customer adaptations than actually inventing something really new? Different types of R & D (basic, product, process) Where is the firms historic expertise / advantage? How competent are the R & D Personnel? ACQUISITION OF TECHNOLOGY Internally developed v. acquired from outside Technology Scouts Strategic Technology Alliances Acquire minority stake in promising high-tech ventures



Page 179

MANUFACTURING LOCATION Internal Production v. Outsourcing Domestic Plants v. International Locations SYSTEM LAYOUT Product v. Process Layouts Job Shops v. Mass Production Job shop/small batch production fits well with a differentiation strategy Continuous production / dedicated transfer lines helps achieve cost leadership Use of robots and CAD/CAM v. Labor intense manufacturing Modular Manufacturing and just-in-time delivery of subassemblies Continuous improvement systems lower costs and increase quality PURCHASING STRATEGIES: SOURCING COMPONENTS AND SUPPLIES WHERE CAN THE HIGHEST QUALITY COMPONENTS BE FOUND? Outsourcing (our firm buys everything) Buying on the Open Market (Spot) (prices fluctuate) Long-Term Contracts with Multiple Suppliers (low bid) Sole Sourcing (only one supplier) improves quality Parallel Sourcing (two suppliers) provides protection Backward Integration (our firm has an ownership stake in the suppliers we use) Quasi-integration (minority ownership position in a supplier) Tapered (produce some of what we need, but not all) Full (produce all of our own needs) Use of Component Inventories v. Just-in-time supply delivery LOGISTICS STRATEGIES: DO WE HAVE GOODS THAT MUST BE TRANSPORTED OR DELIVERED? TYPE OF MATERIALS TRANSPORTED (Bulky or Compact?) Raw Materials, Supplies, & Components

Finished Goods BEST MODE OF TRANSPORTATION AIR RAIL TRUCK BARGE DO WE WANT DEPENDABILITY, LOW COST, OR HIGH QUALITY SERVICE? OUTSOURCE TRANSPORTATION OR DO IT YOURSELF? CONTRACT WITH OTHERS Use Multiple Shippers v. Just One (UPS)? Consider batch deliveries v. Just-in-time arrangements? OWNERSHIP IN DISTRIBUTION CHAIN Quasi Tapered Full HUMAN RESOURCES STRATEGIES: TALENT ACQUISITION Recruit from Outside v. Internal Development Require experienced, highly-skilled workers v. we will train you Offer top dollar wages & benefits v. mentoring and a career WORK ARRANGEMENTS Individual Jobs v. Team Positions Narrowly-defined jobs v. Positions with discretion and autonomy On-premises Work v. Telecommuting Options MOTIVATION & APPRAISAL Extrinsic v. Intrinsic Reward Systems Assessment for development v. assessment for rewards Incentives for ideas & originality v. incentives for conformity? INFORMATION SYSTEMS STRATEGIES: WORKER PRODUCTIVITY & CONNECTIVITY Employees can be networked together across the globe Instant translation software for global firms Follow the Sun Managementpass projects on to the next team

SALES & INVENTORY MANAGEMENT Internet sales and development of customer databases Instant sales reports allow immediate inventory reorders SHIPPING & TRACKING GOODS FEDEX PowerShip softwarestores addresses, prints labels, etc. Tracking the progress of package shipmentFEDEX & UPS


GLOBAL OUTSOURCING INCREASES EFFICIENCY & QUALITY Averages 9% reduction in costs and 15% increase in capacity and quality Up to 70% of Boeing planes are outsourced..built in just 4 mos v. 1 year AMA SURVEY -- 94% OUTSOURCE AT LEAST ONE ACTIVITY 78% General & Administrative activities 77% Human Resources 66% Transportation & Distribution 63% Information Systems 56% Manufacturing 51% Marketing 18% Finance & Accounting 25% were disappointed in their outsourcing results 51% brought the outsourced activity back in-house MOST LIKELY ACTIVITIES TO OUTSOURCE Customer Service Bookkeeping/Financial/Clerical Sales/Telemarketing Software Programming Mailroom



Page 182

THE FIRM DOESNT LEARN NEW SKILLS & DEVELOP CORE COMPETENCIES A SURVEY OF 129 OUTSOURCING FIRMS Half of the projects undertaken failed to achieve the anticipated savings Software produced in India had 10% more bugs than comparable US projects SEVEN MAJOR OUTSOURCING ERRORS Outsourcing activities that shouldnt be outsourced Failed to keep core activities in-house Selecting the wrong vendor Picked a vendor that wasnt trustworthy, or who lacks state-of-the art processes Writing a poor contract Balance of power favors the vendorlocked in over a long period of time Overlooking personnel issuesmy area of expertise was outsourced! Losing Control over the Outsourced ActivityWere at their mercy! Overlooking the hidden costs of outsourcingTransaction fees? Failing to plan an exit strategyHow can we reverse out of this deal? SUCCESSFUL OUTSOURCING:


Page 183


Produce Some Internally

Produce All Internally

--------------------------------------------OUTSOURCE COMPLETELY Buy on Open Market LOW OUTSOURCE COMPLETELY Use Long-Term Contracts



STRATEGIES TO AVOID: DUMB STRATEGIES FOLLOW THE LEADER We can do that toobut maybe its not worth copying HIT ANOTHER HOME RUN A pioneer company looking to get lucky again ARMS RACE Battles which increase costs and decrease revenues DO EVERYTHING Offering something for everyonetrying to please everyone LOSING HAND Pouring $$ down the knotholeinvestment because of prior commitments NONE OF THESE STRATEGIES WILL CREATE A SUSTAINABLE COMPETITIVE ADVANTAGE FOR THE FIRM INSTITUTIONALIZING STRATEGY

While functional strategies are essential to the strategy implementation process, it is also important that the strategy be institutionalized within the organization. Institutionalizing a strategy means that every member, work group, department, and division of the organization subscribes to and supports the organization's strategy with its plans and actions. Theory suggests that a fit must exist between the strategy of the organization and its structure, culture, and leadership if the strategy is to be institutionalized. Each of these topics will be examined in much greater detail in a subsequent chapter (organizational structure in Chapter 9, culture in Chapter 11, and leadership in Chapter 13), but here we will briefly discuss their relationship to strategy.

Organizational Structure
Organizational structure, most commonly associated with the organizational chart, defines the primary reporting relationships that exist within an organization.49 The structure of an organization establishes its chain of command and its hierarchy of responsibility, authority, and accountability.50 Departmentalization of organizational activities is the focus of the structuring process. Organizing work responsibilities into departments requires grouping individuals on the basis of the tasks they perform. If, for example, work units are structured so that all production tasks are grouped together, all marketing tasks are grouped together, and all finance tasks are grouped together, then the departments are organized on the basis of function. Similarly, if work units are structured so that all tasks related to serving the U.S. market are grouped together, all tasks for the European market are grouped together, and all tasks for the Asian market are grouped together, then organizational members are grouped according to the geographic market served. Alfred Chandler, one of the earliest researchers in the area of strategy, originally advanced the idea that "structure follows strategy."51 In essence, Chandler's findings indicate that an organization's strategy should influence its choice of organizational structure. For example, organizations that pursue growth through product development may benefit from a structure that is departmentalized by products. In contrast, those that pursue a geographic market development strategy may find an area-based structure to be most suitable, Furthermore, when an organization fails to change its structure in response to changes in its strategy, it will most likely experience operational problems that will eventually result in declining performance.52 Since Chandler's classic research, a significant body of research has developed that suggests that organizations should develop structures that are

appropriate for and supportive of their strategies. In fact, several studies have successfully linked a strategy-structure fit to superior financial performance.53 In Chapter 9, a number of organizational structures will be identified and discussed. In addition, we will examine the advantages and disadvantages of the different structures as well as their suitability for varying strategic conditions.

Organizational Culture
The second organizational component that should be in alignment with an organization's strategy is organizational culture. Organizational culture refers to the system of shared beliefs and values that develops within an organization. It guides the behavior of and gives meaning to the members of the organization.54 Peters and Waterman's classic survey of America's best-managed companies has drawn attention to the contribution of organizational culture to strategic success. Peters and Waterman attributed the success of such firms as Procter & Gamble, General Electric, and 3M, in large part, to an organizational culture that supports their strategic Initiatives.55 Many organizations that wished to emulate the success of these companies began to look to changes in organizational culture as a means of doing so. In an organization with an effective culture, employees are convinced that top management is committed to the implementation of its strategy. Further, employees believe that they will receive the support necessary to implement the plans of the organization. For example, 3M, which maintains a culture that values innovation, supports its "champions" of new product designs by removing bureaucratic impediments, giving them access to whatever resources they need, and providing executive support for their efforts. Individuals who champion new product concepts are confident that they will get the support necessary to bring their ideas to fruition.56 Reward systems are also a critical component of the organization's culture. Employees must know not only that they will be supported, but that they will be rewarded for taking the actions necessary to implement the organization's strategy. While financial rewards will always be important to some degree, other types of rewards can be useful as well. For example, a manager of one of IBM's sales offices rented Meadowlands Stadium, home of the New York Giants, to stage a special tribute to the salespeople in his office. He invited family, friends, and colleagues of his sales personnel to attend the ceremony and had each salesperson run through the players' tunnel to be recognized for his or her outstanding sales achievements.


Page 186

Developing a strong, pervasive organizational culture has become more challenging as the work force in the United States has become more culturally diverse. As we mentioned in Chapter 1, people with different backgrounds, from different nations, or with different cultural frames of references often have very diverse views about organizations and how they should function. Reaching agreement can be more difficult in such groupsboth in establishing common goals and in determining methods for achieving those goals. Managers must be prepared to work harder and more creatively to ensure that a strong organizational culture exists within culturally diverse organizations.

Organizational Leadership
Leadership is the third organizational component that should he in alignment with the strategy of the organization. If an organization is to implement its strategy effectively, it must have the appropriate leadership.57 Without effective leadership, it is unlikely that the organization will realize the benefits of its selected strategy. This is particularly true when a quality orientation is a key aspect of its strategy.58 At the top of organization must be the visionary leader. Such leaders can envision the future, communicate their vision to those around them, empower the people of the organization to make the vision happen, and reward them when it becomes a reality. 59 Bill Gates of Microsoft has often been described as a visionary leader. Gates saw an opportunity to redefine the market for personal computing operating systems and made that vision a reality with the introduction of Microsoft Windows. The effective implementation of that strategy has made Microsoft one of the most successful organizations in the United States. Equally important to strategy implementation is effective leadership in the ranks of managers. In today's organizations, they may be team leaders, coaches, or champions rather than traditional middle managers, but the idea is the same. These individuals must do whatever is necessary to ensure that their work groups are making a contribution toward fulfilling the mission of the organization, achieving its goals, and implementing its strategy. Canon, the $19 billion maker of cameras, copiers, printers,

and fax machines, attributes its success to strong leadership throughout the organization. Leadership is discussed in Chapter 13, where we examine the relationship between leadership and strategy in greater detail. It is essential for an organization to develop the systems necessary to support its strategy. Structure, culture, and leadership are among the aspects of an organization's system that are particularly relevant for effective strategy implementation. When a strategy is being implemented, it is also very important to monitor both the success of the implementation process and the effectiveness of the strategy. Strategic control provides the mechanism for doing just that.
ROLE OF EFFECTIVE LEADERSHIP IN STRATEGY IMPLEMENTATION 1. INTRODUCTION Effective leadership is required to lead and to guide the subordinates to perform organizational tasks efficiently and effectively. 2. LEADERSHIP ROLE IN IMPLEMNTATION Strategic leadership plays an important role in strategy implementation. The role of EFFECTIVE LEADERSHIP in strategy implementation can be explained as follows: 1. Introducing Change: Change is a must for organizational growth and development. Without changes, an organisation would lead to doom. Therefore, introducing changes in the organisation is one of the prime responsibilities of the leadership. Organisational changes takes place as a result of changes in technology, consumers tastes, likes and dislikes, changes in competitors strategy, political changes, etc. Organisations have to respond and adjust to the changes in the environment. Failure to do so would result in poor performance of the organisation and ultimately closure. Changes affect the existing equilibrium in the organisation, and therefore, leadership should ensure that changes do not generate resistance on the part of the people in the organisation. For this purpose, the leadership should consider the following aspects: y While introducing a change, there should be concern for the people as well as for the objectives of the organisation. y Employees should be encouraged to participate in the process of change right from the initiation stage.

y y y

Change should be introduced with objective explanation. Leadership should create a psychological climate suitable for change. Change should be introduced on impersonal requirements rather than on personal grounds.

2. Integrating Conflicting Interests: Organisation consists of various people, groups, departments or sub-units. Every person on group may have certain interests, which may clash with those of others in the organisation. For instance, there can be conflict of interest between the superior and subordinates, top level and the lower level, between the production department and marketing department, and so on. Therefore, an important role of leadership at various levels is to integrate the conflicting interests of people and groups in the organisation. It is to be noted that some amount of conflicts are desirable in the organisation. This is because; some conflicts facilitate change in the organisation. Conflicts may arise due to problems in the functioning in the organisation. Conflicts bring to surface dormant or latent problems and help the organisation in solving it. The solution to the problem often requires changes in the organisation. It is also true that conflicts can create problems in the organisation. Among other things, conflicts affect inter-personal relations. This is because; each person or group tries to find faults with others rather than trying to sort out the conflict. People involved in conflict may spread false information. There is loss of trust and faith in each other. In general, conflicts can adversely affect the performance of the organisation. Therefore, effective leadership is required in sorting out conflicts in the organisation. 3. Developing Leadership Ability of Managers: - Managers need to be effective leaders. This is because; managers need to influence and inspire the subordinates in order to accomplish the organisational goals. For this purpose, there is a need to develop leadership abilities in the managers. There are several measures, which can be used for developing leadership ability of the managers: y Leadership training in which training programmes can be undertaken to expose managers to various leadership problems and situations. y Internal exposure where managers can be exposed to various situations in the organisation such as solving of conflicts.


Page 189

Challenging tasks can be set by top management to be achieved by managers within a certain time frame.

Autonomy and accountability where managers can be provided with enough autonomy to handle certain situations and they should be held accountable for their actions.

4. Developing Appropriate Organisational Climate:- Effective leadership is required for developing appropriate organisational climate in the organisation. Organisational climate refers to a set of values, beliefs and norms that are shared by an organisations members. The organisational climate gives a distinct identity to an organisation. It influences the morale, motivation and performance of its members. Some of the important features of organisational climate are: y It is a combination of social, cultural, physical, psychological, and other conditions within an organisation. y y It evolves over a fairly long period of time. It can be relatively stable over a period of time. However, there may be changes in organisational climate, with a change in top management, or managements philosophy. y It gives a separate identity to the organisation as compared to other organisations, as each organisation has its own set of values, beliefs, practices, emotions, etc. To adopt appropriate organisational climate, the leadership, especially at the top management level must adopt certain policies and practices: y y y y y y High standards of excellence in every area of operations and evaluation. High standards of moral character, especially at the top management level. Encouragement for innovation with consequent freedom to act upon the ideas. Proper delegation of authority throughout the organisation. Matching rewards with performance rather than on subjective grounds. Situational leadership style with high concern both for people, and objectives of the organisation. 5. Developing Motivational System:- One of the important roles of leadership is to motivate, people in the organisation. Motivation is vital for better performance on the part of the people.


Page 190

The leadership must be a dynamic force in motivating people involved in strategy implementation. The leadership must understand the process of motivation, which involves: y Presence of needs: - Every person has certain amount of needs, which can range from physiological needs to self-actualisation needs. y Efforts: - An individual puts in his efforts in order to satisfy such needs. The more the needs, the more are the efforts. y y Performance: - The efforts of a person lead him into certain work performance. Rewards: - Good performance is rewarded with monetary and/or non-monetary incentives.

The leadership should note that motivation is a continuous process. This is because; human needs and desires are never ending. When one need is satisfied, another need emerges that needs to be satisfied. Therefore, leadership must identify the emerging needs of the people and strive to satisfy such needs at regular intervals through a proper mix of monetary and non-monetary incentives. 6. Clarity in Goals: - The leader must set clear and well defined goals and objectives. Before setting goals, the leader must analyse the internal and external environment. The leader may consult his subordinates before finalizing the goals. A leader can be effective when there is clarity in goals and roles to be performed to achieve those goals. In the absence of clear goals, the leader may not be able to get the support and commitment from the subordinates in the performance of the activities. 7. Relations: - The leader must maintain excellent relations with his subordinates, and also with the other departmental heads. The leader on his own may develop good relations with his subordinates, but he also needs excellent support from the organisation to develop and maintain good relations with the subordinates. Good relations facilitate inter-personal relations between the leader and his subordinates. Therefore, the leader should have substantial hold over the resources and authority required to manage the subordinates and to get the work done from them. 8. Leadership Styles: - A leader would be effective, if he adopts the right leadership style depending upon the situation. He can be autocratic, especially, when the situation is quite demanding and there is little time to consult subordinates. He may adopt consultative leadership style, especially when subordinates views and suggestions are important in decision-making. He

may also follow participative leadership style, especially, when the participation of the subordinates is vital in decision-making. 3. LEADERSHIP STYLES Every manager develops a style in managing the activities. Such styles vary from leader to leader, from situation to situation, and from organisation to organisation.

The main types of leadership styles are as follows:

1. Autocratic style: An autocrat is the one who takes all decisions by himself and expects to be obeyed by his subordinates. The subordinates have no scope to question the superior. Certain points to be noted in this respect: y y y y The superior makes the decision. The superior does not consult the subordinates in decision making. The superior is responsible for the decision. The relations between superior and subordinates are formal.

This style is suitable when:

y y y Quick decisions are to be made. Subordinates are inexperienced and it does not make any sense to consult them. Subordinates are not affected by the decisions.

2. Bureaucratic style: This type of leadership style is more followed in government departments. The bureaucrats often follow rules and regulations in totality. They do not use their discretion, even to do away with more formalities. They strictly follow the scalar chain principle, even in the case of urgency. The following points to be noted: y The bureaucrat takes the decisions by strictly following the formalities, or rules and regulations. y y y The subordinates are often not consulted. The bureaucrat may avoid responsibility. The relations between superior and subordinates are formal.
Page 192


This style results in delay and red tapism, and unwanted paper work.

3. Consultative Style: In this type, the leader consults his subordinates before taking a decision. The leader feels that it is always advisable to consult the subordinates. This type of leader is open minded and would welcome suggestions from the subordinates before making a decision. The following points to be noted: y y The superior consults the subordinates before making a decision. The subordinates may give their suggestions or comments, which the superior may or may not accept. y y y The superior makes the decision. The superior is responsible for the decision. The relations between the superior and subordinates are informal.

This type style is suitable when: y y y There is no urgency of the decision, which allows the leader to consult subordinates. The suggestions and the comments of the subordinates are vital in making a decision. The subordinates are experienced and matured and can provide suggestion and comments.

4. Participative style: The leader not only consults the subordinates, but allows them to take part in decision making. The following points are to be noted: y y y y The superior consults his subordinates before making his decision. The leader along with the group takes part in decision making. Both the leader and the group share the responsibility for making the decision. The relations are informal.

This type style is suitable when: y y y Group decision making is required. There is an immediate possibility of opposition from a group of followers. There are experienced and matured followers.


Page 193

5. Laissez-faire style: This style aims at creating a family atmosphere within the organisation. The leader is respected and treated as a father figure by the subordinates. The following points to be noted: y y y y y This style is mostly followed in Japanese organisations. The leader considers himself as a parent figure. The leader may consult his subordinates. Mostly the leader takes the decision. The relations are very homely.

This type of style is more suitable in small organisations, where there are handfuls of employees, and just one leader or boss. The leader advises, guides, and helps the subordinates even during their personal hardships.

6. Sociocratic Style: Sociocratic attempt to run their organisations like a social club. They believe that good fellowship or friendship is more important than productivity. They keep people happy even at the cost of the organisation. They believe in a warm and pleasant atmosphere. For them, the interest of the subordinates comes first, and than that of the organisation. The following points are to be noted: y The superior take the decision by keeping the interest of the subordinates. The interest of the organisation may be secondary. y The superior consults the subordinates for decision making.

7. Neurocratic Style: A Neurocratic leader is highly task oriented and wants to get the things done at any cost. He is highly sensitive and gets quickly upset at failures. The following points are to be noted: y y y The leader may be eccentric and emotional. The leader may not consult the subordinates in decision making. The leader is responsible for decision making, but he may shift the responsibility on to his subordinates.


Page 194

8. Situational Style: Now-a-days, in most well managed organisations, the managers follow situational leadership style. This means, the leadership style varies depending upon the situation. In other words, the leader may be autocratic at times, consultative at times, and participative at times, depending upon the decision and the situation.

Leadership for strategy implementation and change management

Auteur Functie Organisatie Don Tapscott Strategy theorist and CEO of New Paradigm New Paradigm

Leadership is about more than leadership behaviour and leadership style, or telling people what to do. Increasing complexity and the role of knowledge work means that people now plan their own work and make their own decisions.

Effective leadership involves a lot of management managing the people processes in the organisation so that people can align themselves to the strategy. Henry Mintzberg makes the case that too many problems in organisations are caused by separating the leadership and management roles (Community-ship is the answer Financial Times).

Leaders are responsible for formulating and communicating the strategy - but responsibility doesnt stop there. They must also manage the alignment of people for strategy implementation. They need to ensure that the people in the organisation understand the strategy, buy into it, and align their decisions and actions accordingly. And this alignment needs to be measured and monitored.

Aligning your people to implement the strategy


Page 195

In the most basic terms, a strategy is nothing more than a definition of what you will sell, to whom you will sell it, how you will sell it and where you will sell it. Taken together, these also define your customer value proposition.

Have a clear strategy and understand its implications throughout your company The four dominant types of strategies Price, Product, Product+ (premium/high end) and Customer Specific Solutions should all be based on a clear customer value proposition. Different strategies require different organisational behaviours - and therefore different leadership skills.

Communicate the strategy and get buy-in Effective leadership means communicating the strategy in a language that the people in an organisation understand. Effective leaders check to ensure people know what the strategy means for them and their job, that they buy in to the strategy, and then support it.

Align the organisation to implement the strategy The attitudes and behaviours of the people in any organisation are driven by six dimensions of people processes: customer proposition, strategy commitment, processes & structure, behaviour of leaders, performance metrics and culture. Leaders lead and manage strategy implementation by aligning people using these levers. Measure and monitor the alignment of people to the strategy Effective leaders check their assumptions by ensuring people alignment is measured and monitored. Effective measurements are in line with the strategic objectives, and actions taken in one or more areas must be supported by actions in the other areas to get the right result. The way to achieve strategy implementation is not just by telling people what to do. Its by communicating the strategy in a way that everyone can understand and buy into, and see how they can contribute.

Then you put the people processes in place to enable and encourage strategy implementation. Management Centre Europe can help you to do this - at MCE, we do not believe that effective

leadership is only a matter of behaviour and style. Effective leadership is also about formulating the strategy and strategy implementation.

By the end of this decade we may look back on the history of the corporation and see that the survivors found within themselves the leadership, not just to forge smart strategies, but also to execute them.

Corporate culture and strategy implementation Folktales at FedEx abound about a delivery person who was given the wrong key to a FedEx drop box. So ingrained was the culture of next-day delivery guarantee that the delivery person unbolted the box from its base and took it back to the office where it was pried open. The contents were delivered the next day. It is not important whether this folktale is true or not. What is important is that this story illustrates Fedexs corporate culture: every employee helps in the achievement of FedExs reputation of reliable overnight delivery. All organizations have their own folktale. Whats yours? This is the way we do things around here. Do you not tell this to every employee who joins your organization? Your organization has its own work environment, its own way of doing things, its own processes and its own politics. How your organization approaches problems, what it believes in and its thought process defines its personality. This is what is corporate culture. It is born out of your organizations beliefs and philosophies about why it does things the way it does. It is born out of how you with your stakeholders. Consistently doing the things you do results in your corporate culture. Culture is formed by screening and selecting new employees who share the same values as your organization. However, culture evolves, it is not static. Both internal (hiring, staff turnover, etc) and external (technology, competition, etc.) factors shape your culture. Your beliefs, vision, objectives and business practices may be compatible with culture. If this is the case, your culture becomes a valuable ally in strategy implementation. On the other hand, if there is conflict then you do not have a strategy-culture fit and you need to do something about it quickly.

Strong cultures promote successful strategy implementation while weak cultures do not. By strong culture, I mean there is a shared belief in practices, norms and other practices within the organization that helps energize everyone to do their jobs to promote successful strategy implementation. For example, if your culture is built around listening to customers and empowering employees (both authority and responsibility), it promotes the execution of a strategy that supports superior customer service. In weak cultures, employees have no pride in ownership of work, work is sloppy, there are very few values and people form political groups within the organization. Such cultures provide little or no assistance to implement strategy. Some time ago, I was working with a small business that in the software industry. They had been in business for a number of years before I was brought in. One of the things I noticed initially was that there was constant re-work; i.e. bulk of the developers time was spent in fixing bugs instead of new development work. Deliverables were always late. Customers who did receive the product found the software buggy. The organizations reputation suffered as a result. To combat this we initiated a number of measures; from letting unprofitable customers go to introducing time tracking, etc. But we forgot the most fundamental aspect; to initiate a change in the culture. Developers looked at our initiatives with skepticism. I was told statements like This will never work or Wait for a few days and we will revert back to the old way of doing things. We did eventually figure it out and started to implement a change in culture. Changing a culture is the toughest of all management tasks. It takes time to change unhealthy culture and you may have to weed out obstacles to a healthy culture. This experience was a valuable lesson for me. In weak cultures, people do not take risks that is needed to succeed. They believe in moving cautiously, preferring to follow than lead. In todays dynamic business world, strategies are dynamic. Hence, it is but logical that your organizational culture has to be dynamic too. It needs to adapt to the demands of business. In such cultures, all employees have confidence in the teams ability to meet any challenge. In my professional career, I have always taken the approach of doing whatever is necessary to ensure organizational success within the bounds of organizational core values and beliefs. As a CEO


Page 198

you need to encourage this culture. In fact, you should consciously seek, recruit, train and promote individuals who exhibit such entrepreneurship capabilities

Ethical and social responsibility: no Strategic audit and control:

The strategic audit
In our introduction to business strategy, we emphasised the role of the "business environment" in shaping strategic thinking and decision-making. The external environment in which a business operates can create opportunities which a business can exploit, as well as threats which could damage a business. However, to be in a position to exploit opportunities or respond to threats, a business needs to have the right resources and capabilities in place. An important part of business strategy is concerned with ensuring that these resources and competencies are understood and evaluated - a process that is often known as a "Strategic Audit". The process of conducting a strategic audit can be summarised into the following stages: (1) Resource Audit: The resource audit identifies the resources available to a business. Some of these can be owned (e.g. plant and machinery, trademarks, retail outlets) whereas other resources can be obtained through partnerships, joint ventures or simply supplier arrangements with other businesses. You can read more about resources here. (2) Value Chain Analysis:


Page 199

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings: (1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("outsourced"). You can read more about Value Chain Analysis here. (3) Core Competence Analysis: Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analysing core competencies is recognising that competition between businesses is as much a race for competence mastery as it is for market position and market power. Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage. You can read more about the concept of Core Competencies here. (4) Performance Analysis The resource audit, value chain analysis and core competence analysis help to define the strategic capabilities of a business. After completing such analysis, questions that can be asked that evaluate the overall performance of the business. These questions include: - How have the resources deployed in the business changed over time; this is "historical analysis" - How do the resources and capabilities of the business compare with others in the industry "industry norm analysis" - How do the resources and capabilities of the business compare with "best-in-class" - wherever that is to be found- "benchmarking"


Page 200

- How has the financial performance of the business changed over time and how does it compare with key competitors and the industry as a whole? - "ratio analysis" (5) Portfolio Analysis: Portfolio Analysis analyses the overall balance of the strategic business units of a business. Most large businesses have operations in more than one market segment, and often in different geographical markets. Larger, diversified groups often have several divisions (each containing many business units) operating in quite distinct industries. An important objective of a strategic audit is to ensure that the business portfolio is strong and that business units requiring investment and management attention are highlighted. This is important - a business should always consider which markets are most attractive and which business units have the potential to achieve advantage in the most attractive markets. Traditionally, two analytical models have been widely used to undertake portfolio analysis: - The Boston Consulting Group Portfolio Matrix (the "Boston Box"); - The McKinsey/General Electric Growth Share Matrix (6) SWOT Analysis: SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. Read more about it here.
In order to better understand what strategic control performance measures are and how a manager can take such measurements, we need to introduce two important topics: (1) strategic audits and (2)strategic audit measurement methods.

Strategic Audits


Page 201

A strategic audit is an examination and evaluation of areas affected by the operation of a strategic management process within an organization. A strategy audit may be needed under the following conditions:
y y y y

Performance indicators show that a strategy is not working or is producing negative side effects. High-priority items in the strategic plan are not being accomplished. A shift or change occurs in the external environment. Management wishes: (1) to fine-tune a successful strategy and (2) to ensure that a strategy that has worked in the past continues to be in tune with subtle internal or external changes that may have occurred.

Assessing The Firm's Operational And Strategic Health

To aid in control, firms will occasionally perform audits to ensure that certain aspects of their operations are in order. Such audit may includeoperational audits (assessing the firm's operating health) and strategic audits (assessing the firm's strategic health).

Measures Of Organizational Health

Measures or indicators of a firm's current operating and strategic health are shown in Table 6-5 and 6-6. As the tables show, to assess a firm's current operating health, shortterm financial, market, technological, and production position are used, while current strategic health is based on strategic market position, technological position, production capabilities, and financial health.

Strategic Audit Measurement Methods

There are several generally accepted methods for measuring organizational performance. One way for categorizing these methods divides into the distinct types: qualitative and quantitative. However, a few methods do not fall neatly into one or other of these categories but rather are a combination of both types.

Qualitative Organizational Measurements

There is no universally endorsed list of critical questions designed to reflect important facets of organizational operations. However, several that might be useful to the practicing managers are presented below. Sample Questions to be asked for Qualitative Organizational Measurement
y y

Are the financial policies with respect to investment dividends and financing consistent with opportunities likely to be available? Has the company defined the market segments in which it intends to operate sufficiently specifically with respect to both product lines and market segments? Has it clearly defined the key capabilities needed for success?
Page 202


y y

Does the company have a viable plan for developing a significant and defensible superiority over competition with respect to these capabilities? Will the business segments in which the company operates provide adequate opportunities for achieving corporate objectives? Do they appear as attractive as to make it likely that an excessive amount of investment will be drawn to the market from other companies? Is adequate provision being made to develop attractive new investment opportunities? Are the management, financial, technical and other resources of the company really adequate to justify an expectation of maintaining superiority over competition in the key areas of capability? Does the company have operations in which it is not reasonable to expect to be more capable than competition? If so, can the board expect them to generate adequate returns on invested capital? Is there any justification for investing further in such operations, even just to maintain them? Has the company selected business that can reinforce each other by contributing jointly to the development of key capabilities? Or are there competitors that have combinations of operations which provide them with an opportunity to gain superiority in the key resource areas? Can the company's scope of operations be revised so as to improve its position vis--vis competition? To the extent that operations are diversified, has the company recognized and provided for the special management and control systems required?

Qualitative Organizational Measurements

There is no universally endorsed list of critical questions designed to reflect important facets of organizational operations. However, several that might be useful to the practicing managers are presented below. Sample Questions to be asked for Qualitative Organizational Measurement
y y

y y

Are the financial policies with respect to investment dividends and financing consistent with opportunities likely to be available? Has the company defined the market segments in which it intends to operate sufficiently specifically with respect to both product lines and market segments? Has it clearly defined the key capabilities needed for success? Does the company have a viable plan for developing a significant and defensible superiority over competition with respect to these capabilities? Will the business segments in which the company operates provide adequate opportunities for achieving corporate objectives? Do they appear as attractive as to make it likely that an excessive amount of investment will be drawn to the market from other companies? Is adequate provision being made to develop attractive new investment opportunities?


Page 203

Are the management, financial, technical and other resources of the company really adequate to justify an expectation of maintaining superiority over competition in the key areas of capability? Does the company have operations in which it is not reasonable to expect to be more capable than competition? If so, can the board expect them to generate adequate returns on invested capital? Is there any justification for investing further in such operations, even just to maintain them? Has the company selected business that can reinforce each other by contributing jointly to the development of key capabilities? Or are there competitors that have combinations of operations which provide them with an opportunity to gain superiority in the key resource areas? Can the company's scope of operations be revised so as to improve its position vis--vis competition? To the extent that operations are diversified, has the company recognized and provided for the special management and control systems required?

The Evaluation Of Corporate Strategy

Each organization has its own approach to evaluation. There are not absolute answers as to the proper evaluation standards. However, there are three basic questions to ask in strategy evaluation: 1. Is the existing strategy any good? 2. Will the existing strategy be good in the future? 3. Is there a need to change a strategy? The first question may need additional detailing to indicate whether the current strategy is useful and beneficial to the organization. Seymour Tilles has written a classic article on the qualitative assessment of organizational performance. This article serves several particular questions to be asked for evaluation. These questions are: 1. Is the strategy internally consistent? Internal consistency refers to the cumulative impact of various strategies on the organizations. According to Tilles, a strategy must be judged not only in relationships to other strategies. 2. Is organizations strategy consistent with its environment? An important test of strategy is whether the chosen strategy in consistent with environment (constituent demands, competition, economy, product / industry life cycle, suppliers, customers) - whether the really make sense with respect to what is going on outside. 3. Is the strategy appropriate in view of available resources? Resources are those things that company is or has and that help it to achieve its corporate objectives. Included are money, competence, facilities and other. Without appropriate resources, organization simply cannot make strategic work.


Page 204

4. Does the strategy involve an acceptable degree of risk? Strategy and resources, taken together, determine the degree of risk which the company is undertaken. Each company must determine the amount of risk it wishes to incur. This is a critical managerial choice. In attempting to assess the degree of risk associated with a particular strategy, management must assess such issues as the total amount of resources a strategy requires, the proportion of the organization's resources that a strategy will consume, and the amount of time that must be committed. 5. Does the strategy have an appropriate time horizon? A significant part of every strategy is the time horizon on which it is based. For example, a new product developed, a plant put on stream, a degree of market penetration, become significant strategic objectives only if accomplished by a certain time. Management must ensure that the time necessary to implement the strategy is consistent. Inconsistency between these two variables can make it impossible to reach goals in a satisfactory way. 6. Is the strategy workable?

Quantitative Organizational Measurements

Quantitative measurements provide information and insight as to how well an organization is accomplishing its goods and objectives. In attempting to evaluate the effectiveness of corporate strategy quantitatively, we can see how the firm has done compared wit its own history, or compared with its competitors. Many quantitative measures may be developed to determine performance results. These standards expressed in quantitative terms include: 1. 2. 3. 4. 5. 6. 7. 8. Sales (growth of sales) Net profit Dividend returns Return on equity Return on investment Return on capital Marker share Earnings per share

The list is long and many other factors could be included. The objective of all of these endeavors is financial control. But financial control is only part of the total strategic management control process. Much of the activity affects financial performance in non financial nature. This include consideration of labor efficiency and productivity; production quantity turnover, and tardiness; on a very limited basis, human resources accounting and personnel satisfaction measures; more commonly, management by objectives systems; social analysis; operational audits of any functional, divisional, or staff component, distribution cost and efficiency; management audits modeling; and so forth. The list is almost endless and there is no time to discuss each item here.


Page 205

Which factors should be used? Establishing the standards and tolerance limit is not as easy as we might expect. Managers need to first define the critical success factors - the factors which are most important to the strategy and being successful in the business. Most of these measures are internal. But objective assessments can also be made by comparing the firm's results of similar firms (see sectionBenchmarking) Below we present a set of worthwhile guidelines that managers might follow in designing and implementing more comprehensive strategic audits. A strategic audit is conducted in three phases: diagnosis to identify how, where, and in what priority in-depth analyses need to be made; focused analysis; and generation and testing recommendation. Objectivity and the ability to ask critical, probing questions are key requirements for conducting a strategic audit. Phase one: Diagnosis The diagnostic phase includes the flowing tasks: 1. Review key document such as: o Strategic plan o Business or operational plans o Organizational arrangements o Major policies governing matters such as resource allocation and performance measurement. 2. Review financial, market, and operational performance against benchmarks and industry norms to identify jet variances and emerging trends. 3. Gain an understanding of: o Principal roles, responsibilities, and reporting relationships. o Decision - making processes and major decisions made. o Resources, including physical facilities, capital, management, technology. o Interrelationships between functional staffs and business or operating units. 4. Identify strategic implications of strategy for organization structure, behavior patterns, systems, and processes. o Define interrelationships and linkages to strategy. 5. Determine internal and external perspectives. o Survey the attitudes and perceptions of senior and middle managers and other key employees to assess the extent to which these are consistent with the strategic direction of the firm. One way to accomplish this task is through carefully focused interviews and / or questionnaires, wherein employees are asked to identify and make trade-offs among the objectives and variables they consider most important. o Interview a carefully selected sample of customers and prospective customers and other key external sources to gain understanding of how the company is viewed. 6. Identify aspects of the strategy that are working well. Formulate hypotheses regarding problems and opportunities for improvement based on the findings above. Define how and in what order each should be pursued. Phase two: Focused analysis

1. Test the hypotheses concerning problems and opportunities for improvement through analysis of specific issues. o Identify interrelationships and dependencies among components of the strategic system. 2. Formulate conclusions as to weaknesses in strategy formulation, implementation deficiencies, or interactions between the two. Phase three: Recommendations 1. Develop alternative solutions to problems and ways of capitalizing on opportunities. o Test [these alternatives] in light of their resource requirements, risk, rewards, priorities, and other applicable measures. 2. Develop specific recommendations. o Develop an integrated, measurable, and time - phased action plan to improve strategic results.

strategic review: no strategic control guiding and evaluating the strategy:

Nature of Strategic Evaluation:
Evaluate effectiveness of organisational strategy in achieving organisational objectives Perform the task of keeping organisation on track

Importance of Strategic Evaluation:

The need for feedback Appraisal and reward Check on the validity of strategic choice Congruence between decisions and intended strategy


Page 207

Successful culmination of the strategic management process Creating inputs for new strategic planning Ability to coordinate the tasks performed

Barriers in Evaluation:
Limits of Controls Difficulties in measurement Resistance to evaluation Short-termism Relying on efficiency versus effectiveness

Requirements of Effective Evaluation:

Control should involve only the minimum amount of information Control should monitor only managerial activities and results Control should be timely Long term and short term control should be used Control should aim at pinpointing exceptions Rewards for meeting or exceeding standards should be emphasized

Strategic Control : Four Types of Strategic Controls:


Premise Control Implementation Control Strategic Surveillance Special alert control

Premise Control:
Premises control is necessary to identify the key assumptions and its implementation. Premises control serves the purpose of continually testing the assumptions to find out whether they are still valid or not. This enables the strategists to take corrective action at the right time rather than continuing with a strategy which is based on erroneous assumptions.

Implementation Control: Implementation control is aimed at evaluating whether the plans, programmes, and projects are actually guiding the organization towards its predetermined objectives or not. Strategic Surveillance: Strategic surveillance aimed at a more generalized and overarching control designed to monitor a broad range of events inside and outside the company that are likely to threaten the course of a firms strategy. Special Alert Control:


Page 209

Special alert control, which is based on a trigger mechanism for rapid response and immediate reassessment of strategy in the light of sudden and unexpected events

Operational Control:
Aimed at the allocation and use of organisational resources Concerned with action or performance

How do Strategic Control and Operational Control Differ:

Attribute Strategic Control Operational Control 1. Basic question Are we moving in the right direction? How are we performing? 2. Aim Proactive, continuous questioning of the basic direction of strategy Allocation and use of organisation al resources 3. Main Concern Steering the organizations future direction 4. Focus External environment Action control Internal organization 5. Time Horizon Long- term Short- term

6. Main Techniques

Environmental scanning, information gathering, questioning and review

Budgets, schedules,
Page 210


and MBO

Process of Evaluation:
Setting standards of performance Measurement of performance Analyzing variances Taking corrective action

Setting of Standards:
Quantitative Criteria   It has performed as compared to its past achievements Its performance with the industry average or that of major competitors Qualitative Criteria There has to be a special set of qualitative criteria for a subjective assessment of the factors like capabilities, core competencies, risk- bearing capacity, strategic clarity, flexibility, and workability

Measurement of Performance:
The evaluation process operates at the performance level as action takes place. Standards of performance act as the benchmark against which the actual performance is to be compared. It is important, however, to understand how the measurement of performance can take place.


Page 211

Analyzing Variances:
The measurement of actual performance and its comparison with standard or budgeted performance leads to an analysis of variances. Broadly, the following three situations may arise: The actual performance matches the budgeted performance The actual performance deviates positively over the budget performance The actual performance deviates negatively from the budgeted

Taking Corrective Actions:

There are three courses for corrective action: checking of performance, checking of standards, and reformulating strategies, plans, and objectives.

Techniques of Strategic Evaluation and Control:

Evaluation Techniques for Strategic Control Evaluation Techniques for Operational Control

Evaluation Techniques for Strategic Control:

Techniques for strategic control could be classified into two groups on the basis of the type of environment faced by the organisation. The organisation that operate in a relative stable environment may use strategic momentum control, while those which face a relatively turbulent environment may find strategic leap control more appropriate.

Evaluation Techniques for Operational Control:


Page 212

Operational control is aimed at the allocation and use of organisational resources The evaluation techniques are classified into three parts: Internal analysis Comparative analysis Comprehensive analysis.

Establishing strategic control:

Strategic Control: A New Perspective

Most commentators would agree with the definition of strategic control offered by Schendel and Hofer: "Strategic control focuses on the dual questions of whether: (1) the strategy is being implemented as planned; and (2) the results produced by the strategy are those intended." This definition refers to the traditional review and feedback stages which constitutes the last step in the strategic management process. Normative models of the strategic management process have depicted it as including there primary stages: strategy formulation, strategy implementation, and strategy evaluation (control). Strategy evaluations concerned primarily with traditional controls processes which involves the review and feedback of performance to determine if plans, strategies, and objectives are being achieved, with the resulting information being used to solve problems or take corrective actions. Recent conceptual contributors to the strategic control literature have argued for anticipatory feedforward controls, that recognize a rapidly changing and uncertain external environment. Schreyogg and Steinmann (1987) have made a preliminary effort, in developing new system to operate on a continuous basis, checking and critically evaluating assumptions, strategies and


Page 213

results. They refer to strategic control as "the critical evaluation of plans, activities, and results, thereby providing information for the future action". Schreyogg and Steinmann based on the shortcomings of feedback-control. Two central characteristics if this feedback control is highly questionable for control purposes in strategic management: (a)feedback control is post-action control and (b) standards are taken for granted. Schreyogg and Steinmann proposed an alternative to the classical feedback model of control: a 3-step model of strategic control which includes premise control, implementation control, and strategic surveillance. Pearce and Robinson extended this model and added a component "special alert control" to deal specifically with low probability, high impact threatening events. The nature of these four strategic controls is summarized in Figure 6-4. Time (t ) marks the point where strategy formulation starts. Premise control is established at the point in time of initial premising (t ). From here on promise control accompanies all further selective steps of premising in planning and implementing the strategy. The strategic surveillance of emerging events parallels the strategic management process and runs continuously from time (t ) through (t ). When strategy implementation begins (t ), the third control device, implementation control is put into action and run through the end of the planning cycle (t ). Special alert controls are conducted over the entire planning cycle.

Promise Control:
Planning premises/assumptions are established early on in the strategic planning process and act as a basis for formulating strategies. "Premise control has been designed to check systematically and continuously whether or not the premises set during the planning and implementation process are still valid.


Page 214

It involves the checking of environmental conditions. Premises are primarily concerned with two types of factors:

Environmental factors (for example, inflation, technology, interest rates, regulation, and demographic/social changes). Industry factors (for example, competitors, suppliers, substitutes, and barriers to entry).

All premises may not require the same amount of control. Therefore, managers must select those premises and variables that (a)are likely to change and (b) would a major impact on the company and its strategy if the did.

Implementation Control
Strategic implantation control provides an additional source of feedforward information. "Implementation control is designed to assess whether the overall strategy should be changed in light of unfolding events and results associated with incremental steps and actions that implement the overall strategy." Strategic implementation control does not replace operational control. Unlike operations control, strategic implementation control continuously questions the basic direction of the strategy. The two basis types of implementation control are: 1. Monitoring strategic thrusts (new or key strategic programs). Two approaches are useful in enacting implementation controls focused on monitoring strategic thrusts: (1) one way is to agree early in the planning process on which thrusts are critical factors in the success of the strategy or of that thrust; (2) the second approach is to use stop/go assessments linked to a series of meaningful thresholds (time, costs, research and development, success, etc.) associated with particular thrusts. 2. Milestone Reviews. Milestones are significant points in the development of a programme, such as points where large commitments of resources must be made. A milestone review usually involves a full-scale reassessment of the strategy and


Page 215

the advisability of continuing or refocusing the direction of the company. In order to control the current strategy, must be provided in strategic plans.

Strategic Surveillance
Compared to premise control and implementation control, strategic surveillance is designed to be a relatively unfocused, open, and broad search activity. "... strategic surveillance is designed to monitor a broad range of events inside and outside the company that are likely to threaten the course of the firm's strategy." The basic idea behind strategic surveillance is that some form of general monitoring of multiple information sources should be encouraged, with the specific intent being the opportunity to uncover important yet unanticipated information. Strategic surveillance appears to be similar in some way to "environmental scanning." The rationale, however, is different. Environmental, scanning usually is seen as part of the chronological planning cycle devoted to generating information for the new plan. By way of contrast, strategic surveillance is designed to safeguard theestablished strategy on a continuous basis.

Special Alert Control

Another type of strategic control is a special alert control. "A special alert control is the need to thoroughly, and often rapidly, reconsider the firm's basis strategy based on a sudden, unexpected event." The analysts of recent corporate history are full of such potentially high impact surprises (i.e., natural disasters, chemical spills, plane crashes, product defects, hostile takeovers etc.). While Pearce and Robinson suggest that special alert control be performed only during strategy implementation, Preble recommends that because special alert controls are


Page 216

really a subset of strategic surveillance that they be conducted throughout the entire strategic management process. The characteristics of each control component are detailed in Table 6-4, including the component's purpose, mechanism used to implement it, the procedure to be followed, degree of focusing, information sources, and organizational/personnel to be utilized.

Strategic Control Process

Although control systems must be tailored to specific situations, such systems generally follow the same basic process. Regardless of the type or levels of control systems an organization needs, control may be depicted as a six-step feedback model): 1. Determine what to control. What are the objectives the organization hopes to accomplish? 2. Set control standards. What are the targets and tolerances? 3. Measure performance. What are the actual standards? 4. Compare the performance the performance to the standards.How well does the actual match the plan? 5. Determine the reasons for the deviations. Are the deviations due to internal shortcomings or due to external changes beyond the control of the organization? 6. Take corrective action. Are corrections needed in internal activities to correct organizational shortcomings, or are changes needed in objectives due to external events? Feedback from evaluating the effectiveness of the strategy may influence many of other phases on the strategic management process. A well-designed control system will usually include feedback of control information to the individual or group performing the controlled activity. Simple feedback systems measure outputs of a process and feed into the system or the inputs of a system corrective actions to obtain desired outputs. The consequence of utilizing the feedback control systems is that the unsatisfactory performance continues

until the malfunction is discovered. One technique for reducing the problems associated with feedback control systems is feedforward control. Feedforward systems monitor inputs into a process to ascertain whether the inputs are as planned; if they are not, the inputs, or perhaps the process, are changed in order to obtain desired results.

Determine What To Control

The first step in the control process is determining the major areas to control. Managers usually base their major controls on the organizational mission, goals and objectives developed during the planning process. Managers must make choices because it is expensive and virtually impossible to control every aspect of the organization's activities. In deciding what to control, the organization must communicate through the actions of its executives that strategic control is a needed activity. Without top management's commitment to controlling activities, the control system could be useless.

Set Control Standards

The second step in the control process is establishing standards. Acontrol standards is a target against which subsequent performance will be compared. Standards are the criteria that enable managers to evaluate future, current, or past actions. They are measured in a variety of ways, including physical, quantitative, and qualitative terms. Five aspects of the performance can be managed and controlled: quantity, quality, time cost, and behavior. Each aspect of control may need additional categorizing. An organization must identify the targets, determine the tolerances those targets, and specify the timing of consistent with the organization's goals defined in the first step of determining what to control. For example, standards might indicate how well a product is made or how effectively a service is to be delivered. Standards may also reflect specific activities or behaviors that are necessary to achieve organizational goals. Goals are translated into performance standards by making them measurable. An organizational goal to increase market share, for example, may be translated into a top-management performance standard to increase market share by 10


Page 218

percent within a twelve-month period. Helpful measures of strategic performance include: sales (total, and by division, product category, and region), sales growth, net profits, return on sales, assets, equity, and investment cost of sales, cash flow, market share, product quality, valued added, and employees productivity. Quantification of the objective standard is sometimes difficult. For example, consider the goal of product leadership. An organization compares its product with those of competitors and determines the extent to which it pioneers in the introduction of basis product and product improvements. Such standards may exist even though they are not formally and explicitly stated. Setting the timing associated with the standards is also a problem for many organizations. It is not unusual for short-term objectives to be met at the expense of long-term objectives. Management must develop standards in all performance areas touched on by established organizational goals. The various forms standards are depend on what is being measured and on the managerial level responsible for taking corrective action. Commonly uses as an example, the following eight types of standards have been set by General Electric :

Profitability standards : These standards indicate how much profit General Electric would like to make in a given time period. Market position standards : These standards indicate the percentage of total product market that company would like to win from competitors. Productivity standards : These production-oriented standards indicate various acceptable rates which final products should be generated within the organization. Product leadership standards : Product leadership standards indicate what levels of product innovation would make people view General Electric products as leaders in the market. Personnel development standards : Personnel development standards list acceptable of progress in this area. Employee attitude standards : These standards indicate attitudes that General Electric employees should adopt.


Page 219

Public responsibility standards : All organizations have certain obligations to society. General Electric's standards in this area indicate acceptable levels of activity within the organization directed toward living up to social responsibilities. Standards reflecting balance between short-range and long-range goals . Standards in this area indicate what the acceptable long- and short - range goals are and the relationship among them.

Critical Control Points and Standards. The principle of critical point control, one of the more important control principles, states: "Effective control requires attention against plans". There are, however, no specific catalog of controls available to all managers because of the peculiarities of various enterprises and departments, the variety of products and services to be measured, and the innumerable planning programs to be followed.

Measure Performance
Once standards are determined, the next step is measuring performance. The actual performance must be compared to the standards. In some work places, this phase may require only visual observation. In other situations, more precise determinations are needed. Many types of measurements taken for control purposes are based on some form of historical standard. These standards can be based on data derived from the PIMS (profit impact of market strategy) program, published information that is publicly available, ratings of product / service quality, innovation rates, and relative market shares standings. PIMS was developed by Professor Sidney Shoeffler of Harvard University in the 1960s. Strategic control standards are based on the practice of competitive benchmarking - the process of measuring a firm's performance against that of the top performance in its industry. (see last part of this Chapter) The proliferation of computers tied into networks has made it possible for managers to obtain up-to-minute status reports on a variety of quantitative performance measures. Managers should be careful to observe and measure in accurately before taking corrective action.

Compare Performance To Standards

The comparing step determines the degree of variation between actual performance and standard. If the first two phases have been done well, the third phase of the controlling process - comparing performance with standards - should be straightforward. However, sometimes it is difficult to make the required comparisons (e.g., behavioral standards).

Some deviations from the standard may be justified because of changes in environmental conditions, or other reasons.

Determine The Reasons For The Deviations

The fight step of the control process involves finding out: "why performance has deviated from the standards?" Causes of deviation can range from selected achieve organizational objectives. Particularly, the organization needs to ask if the deviations are due to internal shortcomings or external changes beyond the control of the organization. A general checklist such as following can be helpful:
y y y y

Are the standards appropriate for the stated objective and strategies? Are the objectives and corresponding still appropriate in light of the current environmental situation? Are the strategies for achieving the objectives still appropriate in light of the current environmental situation? Are the firm's organizational structure, systems (e.g., information), and resource support adequate for successfully implementing the strategies and therefore achieving the objectives? Are the activities being executed appropriate for achieving standard?

The locus of the cause, either internal or external, has different implications for the kinds of corrective action.

Monitoring performance and evaluating deviations:

Great Value from Monitoring and Evaluation
As stated several times throughout this library topics (and in materials linked from it), too many strategic plans end up collecting dust on a shelf. Monitoring and evaluating the planning activities and status of implementation of the plan is -- for many organizations -- as important as identifying strategic issues and goals. One advantage of monitoring and evaluation is to ensure that the organization is following the direction established during strategic planning. The above advantage is obvious. Adults tend to learn best when they're actually doing something with new information and materials and then they're continuing to reflect on their experiences. You can learn a great deal about your organization and how to manage it by continuing to monitor the implementation of strategic plans.


Page 221

Note that plans are guidelines. They aren't rules. It's OK to deviate from a plan. But planners should understand the reason for the deviations and update the plan to reflect the new direction.

Responsibilities for Monitoring and Evaluation

The strategic plan document should specify who is responsible for the overall implementation of the plan, and also who is responsible for achieving each goal and objective. The document should also specify who is responsible to monitor the implementation of the plan and made decisions based on the results. For example, the board might expect the chief executive to regularly report to the full board about the status of implementation, including progress toward each of the overall strategic goals. In turn, the chief executive might expect regular status reports from middle managers regarding the status toward their achieving the goals and objectives assigned to them.

Key Questions While Monitoring and Evaluating Status of Implementation of the Plan
1. Are goals and objectives being achieved or not? If they are, then acknowledge, reward and communicate the progress. If not, then consider the following questions. 2. Will the goals be achieved according to the timelines specified in the plan? If not, then why? 3. Should the deadlines for completion be changed (be careful about making these changes -- know why efforts are behind schedule before times are changed)? 4. Do personnel have adequate resources (money, equipment, facilities, training, etc.) to achieve the goals? 5. Are the goals and objectives still realistic? 6. Should priorities be changed to put more focus on achieving the goals? 7. Should the goals be changed (be careful about making these changes -know why efforts are not achieving the goals before changing the goals)?

8. What can be learned from our monitoring and evaluation in order to improve future planning activities and also to improve future monitoring and evaluation efforts?

Frequency of Monitoring and Evaluation

The frequency of reviews depends on the nature of the organization and the environment in which it's operating. Organizations experiencing rapid change from inside and/or outside the organization may want to monitor implementation of the plan at least on a monthly basis. Boards of directors should see status of implementation at least on a quarterly basis. Chief executives should see status at least on a monthly basis.

Reporting Results of Monitoring and Evaluation

Always write down the status reports. In the reports, describe: 1. Answers to the above key questions while monitoring implementation. 2. Trends regarding the progress (or lack thereof) toward goals, including which goals and objectives 3. Recommendations about the status 4. Any actions needed by management

Deviating from Plan

Its OK do deviate from the plan. The plan is only a guideline, not a strict roadmap which must be followed. Usually the organization ends up changing its direction somewhat as it proceeds through the coming years. Changes in the plan usually result from changes in the organizations external environment and/or client needs result in different organizational goals, changes in the availability of resources to carry out the original plan, etc.


Page 223

The most important aspect of deviating from the plan is knowing why youre deviating from the plan, i.e., having a solid understanding of whats going on and why.

Changing the Plan

Be sure some mechanism is identified for changing the plan, if necessary. For example, regarding changes, write down: 1. What is causing changes to be made. 2. Why the changes should be made (the "why" is often different than "what is causing" the changes). 3. The changes to made, including to goals, objectives, responsibilities and timelines. Manage the various versions of the plan (including by putting a new date on each new version of the plan). Always keep old copies of the plan. Always discuss and write down what can be learned from recent planning activity to make the next strategic planning activity more efficient.


A. Importance of Strategy Evaluation 1. The strategic-management process results in decisions that can have significant, long-lasting consequences. Erroneous strategic decisions can inflict severe penalties and can be exceedingly difficult, if not impossible, to reverse. 2. Most strategists agree, therefore, that strategy evaluation is vital to an organizations well-being; timely evaluations can alert management to problems or potential problems before a situation becomes critical. 3. Strategy evaluation includes three basic activities: a. Examining the underlying bases of a firms strategy.

b. Comparing expected results with actual results. c. Taking corrective actions to ensure that performance conforms to plans. 4. The strategy-evaluation stage of the strategic-management process. 5. Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis on evaluating strategies may be expensive and counterproductive. Yet, too little or no evaluation can create even worse problems. Strategy evaluation is essential to ensure that stated objectives are being achieved. 6. It is impossible to demonstrate conclusively that a particular strategy is optimal, but it can be evaluated for critical flaws. Here are four criteria to use in evaluating a strategy: a. b. c. d. consistency consonance feasibility advantage

7. These trends make strategy evaluation difficult: a. b. c. d. e. f. dramatic increase in environmental complexity difficult in predicting future increasing number of variables rapid rate of obsolescence increase in the number of world events affecting organization decreasing time spans for planning

B. The Process of Evaluating Strategies 1. Strategy evaluation is necessary for all sizes and kinds of organizations. a. Strategy evaluation should initiate managerial questioning of expectations and assumptions, trigger a review of objectives and values, and stimulate creativity in generating alternatives and formulating criteria of evaluation.

2. Evaluating strategies on a continuous rather than a periodic basis allows benchmarks of progress to be established and more effectively monitored. 3. Managers and employees of the firm should continually be aware of progress being made toward achieving the firms objectives. As critical success factors change, organizational members should be involved in determining appropriate corrective actions. A STRATEGY-EVALUATION FRAMEWORK The strategy-evaluation activities in terms of key questions that should be addressed, alternative answers to those questions, and appropriate actions for an organization to take. A. Reviewing Bases of Strategy 1. By developing a revised EFE Matrix and IFE Matrix, the underlying bases of an organizations strategy can be approached and reviewed. a. A revised IFE Matrix should focus on changes in the organizations management, marketing, finance/accounting, production/operations, R&D, and MIS strengths and weaknesses. b. A revised EFE Matrix should indicate how effectively a firms strategies have been in response to key opportunities and threats. B. Measuring Organizational Performance 1. Another important strategy-evaluation activity is measuring organizational performance. This activity includes comparing expected results to actual results, investigating deviations from plans, evaluating individual performance, and examining progress being made toward meeting stated objectives. Both long-term and annual objectives are commonly used in this process. 2. Failure to make satisfactory progress toward accomplishing long-term or annual objectives signals a need for corrective action.



Page 226

3. Quantitative criteria commonly used to evaluate strategies are financial ratios, which strategists use to make three critical comparisons: a. comparing the firms performance over different time periods, b. comparing the firms performance to competitors, and c. comparing the firms performance to industry averages. 4. Key financial ratios for measuring organizational performance: a. return on investment b. return on equity c. profit margin d. market share e. debt to equity f. earnings per share g. sales growth h. asset growth C. Taking Corrective Action 1. The final strategy-evaluation activity, taking corrective action, requires making changes to reposition a firm competitively for the future. 2. Examples of changes that may be needed are altering an organizations structure, replacing one or more key individuals, selling a division, or revising a business mission. 3. Taking corrective action raises employees and managers anxieties. Research suggests that participation in strategy-evaluation activities is one of the best ways to overcome individuals resistance to change. III. PUBLISHED SOURCES OF STRATEGY-EVALUATION INFORMATION A. Examples of Helpful Publications 1. A number of publications are helpful in evaluating a firms strategies. For example, Fortune annually identifies and evaluates the Fortune 1,000 (the largest manufacturers) and the Fortune 50 (the largest retailers, transportation companies, utilities, banks, insurance companies, and diversified financial corporations in the United States).

2. Another excellent evaluation of corporations in America, The Annual Report on American Industry, is published annually in the January issue of Forbes. Business Week, Industry Week, and Duns Business Month also periodically publish detailed evaluations of American businesses and industries. IV. CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM A. Strategy evaluation must meet several basic requirements to be effective. 1. Strategy-evaluation activities must be economical; too much information can be just as bad as too little information. 2. Strategy-evaluation activities should also be meaningful; they should specifically relate to a firms objectives. 3. Strategy-evaluation activities should provide timely information; on occasion and in some areas, managers may need information daily. 4. Strategy evaluation should be designed to provide a true picture of what is happening. B. There is more than one ideal strategy-evaluation system. The unique characteristics of an organization, including its size, management style, purpose, problems, and strengths can determine a strategy-evaluation and control systems final design. V. CONTINGENCY PLANNING A. Essence of Contingency Planning 1. A basic premise of good strategic management is that firms plan ways to deal with unfavorable and favorable events before they occur. 2. Contingency plans can be defined as alternative plans that can be put into effect if certain key events do not occur as expected. B. Effective Contingency Planning Involves These Steps: 1. Identify both beneficial and unfavorable events that could possibly derail the strategy or strategies. 2. Specify trigger points. Estimate when contingent events are likely to occur.

3. Assess the impact of each contingent event. Estimate the potential benefit or harm of each contingent event. 4. Develop contingency plans. Be sure that the contingency plans are compatible with current strategy and financially feasible. 5. Assess the counterimpact of each contingency plan. That is, estimate how much each contingency plan will capitalize on or cancel out its associated contingent event. 6. Determine early warning signals for key contingent events. Monitor the early warning signals. 7. Develop advanced action plans to take advantage of the available lead time. VI. AUDITING A. Auditing is defined by the American Accounting Association (AAA) as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria, and communicating the results to interested users. 1. People who perform audits can be divided into three groups: independent auditors, government auditors, and internal auditors. 2. Two government agencies, the General Accounting Office (GAO) and the Internal Revenue Service (IRS), employ government auditors responsible for making sure that organizations comply with federal laws, statutes, and policies. B. The Environmental Audit 1. For an increasing number of firms, overseeing environmental affairs is no longer a technical function performed by specialists; rather, it has become an important strategic-management concern. It should be as rigorous as a financial audit. 2. It should include training workshops in which staff help design and implement the policy. It should be budgeted and have funds allocated to ensure its viability. 3. A Statement of Environmental Policy should be published periodically.


Page 229


USING COMPUTERS TO EVALUATE STRATEGIES When properly designed, installed, and operated, a computer network can efficiently acquire information promptly and accurately. Networks can allow diverse strategy-evaluation reports to be generated for, and responded by different levels and types of managers.

----------------------------------------END OF STRATEGIC NOTES---------------------


Page 230