Chapter

2 Understanding
Strategies
Introduction
Management control systems are tools to implement strategies. Strategies differ
between organizations and controls should be tailored to the requirements of
specific strategies. Different strategies require different task priorities, different
key success factors and different skills, perspectives and behaviours.
Objectives of the Company
The fixing of objectives is closely linked to the company's organisation structure.
At the first level of responsibility, the overall objective is usually, earning the
required return of the funds invested in the business, consistent with maintaining
the sound financial position of the business. At the second level of responsibility,
typical functional objectives that may be fixed are related to the following
functions:
1. Marketing
2. Production
3. Research and Development
4. Personnel
5. Finance
Developing a Strategic Vision: The First Direction-
setting Task
Effective strategy making begins with a vision of where the organization needs to
head. Charting a company's course begins with senior management looking at
the road ahead and addressing the following questions: "Where do we go from
here?" and "What difference will these changes make to the company's
present business?"

A strategic vision is a road map showing the route a company intends to

take in developing and strengthening its business. It paints a picture of a
company's destination and provides a rationale for going there.

Cont….
The Three Elements of Strategic Vision

1. Coming up with mission statement that defines what business the company
is presently in and conveys the essence of "who we are, what we do, and
where we are now".

2. Using the mission statement as a basis for deciding on a long-term course,

making choices about "where we are going" and charting a strategic path for
the company to pursue.

3. Communicating the strategic vision in clear, exciting terms that arouse

organization-wide commitment.
Vision & mission of ESSAR Steel
Vision
We will be a respected global entrepreneur, through the power of Positive Action.

Mission
We are committed to innovative growth through our personal passion, reinforced by a
professional mindset, creating value for all those we touch.

Core Values
Maintain integrity at all times
Satisfy internal and external customers
Facilitate all-round excellence
Promote quality
Continuously innovate and create
Explore growth opportunities in new technologies
Constantly focus on cost reduction
 ITC

Sustain ITC's position as one of

India's most valuable corporations
THE ITC VISION » through world class performance,
creating growing value for the Indian
economy and the Company's
stakeholders

To enhance the wealth generating

capability of the enterprise in a
THE ITC MISSION » globalising environment, delivering
superior and sustainable stakeholder
value
Establishing Objectives: The Second Direction-setting
Task
Objectives represent a managerial commitment to achieving specific
performance targets within a specific time – they are a call for results that
connect directly to the company's strategic vision and core values. They function
as yardsticks for tracking an organization's performance and progress.
Ideally, managers ought to use the objective-setting exercise as a tool for truly
stretching an organization to reach its full potential. They are also referred to as
goals.

Cont….
Financial Objectives
*An x percent increase in annual revenues
* Annual increase in after tax profits of x
percent
* Annual increase in earnings per share of x
percent.
* Annual dividend increase of x percent
* Profit margins of x per cent.
* An x percent return on capital employed
(ROCE) or shareholders’ equity (ROE).
* Increased shareholder value -in the form of
an upward -trending stock price and annual
dividend increases.
* Strong bond and credit ratings
* Sufficient internal cash flows to fund new
capital investment.
* Stable earnings during the periods of
recession.
Strategic Objectives
* Winning an x percent market share.
* Achieving lower overall costs than rivals.
*Overtaking key competitors on product
performance or quality or customer service.
* Deriving x percent of revenues from the sale
of new products introduced within the past five
years.
*Achieving technological leadership.
* Having better product selection than rivals.
*Strengthening the company’s brand name
appeal.
* Having stronger nation al or global sales and
distribution capabilities than rivals.
* Consistently getting new or improved
products to market, ahead of rivals.
Crafting a Strategy: Phase 3 of the Strategy-Making-
Strategy-Executing Process
An enterprise's CEO, as the captain of a ship, carries the mantles of chief
direction--setter, chief objective-setter, chief strategy-maker, and chief strategy
implementer for the total enterprise. In most companies, the heads of business
divisions and major product lines, the chief financial officer, and vice-presidents
for production, marketing, human resources and other functional departments
have influential strategy-making roles of their respective functions as well as
strategy implementing roles.
Strategies Strategies formulation

Definition: Environmental analysis

Internal Analysis
Strategies describe Competitor Technological know -how
Customer Manufacturing know -how
the general Supplier Marketing know -how
direction in which Regulatory Distribution know -how
Social/ Political Logistics k now-how
an organization
plans to move to
attain its goals.
Opportunities and threats Strengths and weaknesses
Every well-
managed Identify opportunities Identify core competencies

organization has
one or more Fix internal competencies with
strategies, although external opportunities

they may not be

stated explicitly. Firm’s strategies
Two levels of strategies
Level 1 - Corporate strategy - It is about being in the right mix of business:

1. In which business industries or sub industries - should the firm be

2. The deployment of resources among those businesses

A strategic analysis of the corporate scenario results in decisions involving

businesses to add, businesses to retain, businesses to emphasize, businesses
to de-emphasize and businesses to divest.

Level 2 - Business until strategy

1. For each chosen business, what should be its mission (what are its overall
objectives)?

2. Its competitive advantage i.e., how should the business unit compete in its
industry to accomplish its mission.

Cont….
Corporate-level Strategy: Definitions
Corporate-level strategy
• Definition: Specific actions a firm takes to gain an
advantage by selecting and managing a group of different
businesses
• Primary form of corporate-level strategy is product
diversification
– Diversification involves using expertise and knowledge gained in one business to
diversify into a business where it can be used in a related way

– 2 main concerns with corporate-level strategy:

1) What businesses the firm should be in
2) How the firm should manage the different business units
Corporate-level Strategy

Companies can be classified into one of these categories:

1. A single industry firm operates in one line of business. Exxon Mobil, which is
in the petroleum industry, is an example.

2. Related diversified firms - Here, the firm participates in a number of

industries but its businesses are connected to each other by common
customers, common distribution channel, common technology or some
other common factor. Here, the emphasis is on ability to share common
resources. Example: Proctor & Gamble.

3. Unrelated diversified firms

Cont….
Types of corporate Single Industry Related diversified Unrelated
strategy firm firm diversified firm
Corporate
Pictorial
representation of
strategy is a
strategy continuum with
single industry
strategy at one
end of the
spectrum and
unrelated
diversification at
the other hand
(related
diversification is
Identifying features Competes in only Sharing of core Totally autonomous in the middle of
one industry competencies businesses in very
across boundaries different markets the spectrum). A
Examples McDonalds Proctor & Gamble General Electric firm's location on
Corporation Johnson & Johnson L&T this continuum
Wrigley Du Point HLL depends on the
Ford Motor Gillette Rockwell extent and type
Nucor Texas Instruments
of its
AT&T
diversification.
Corporate-Level Strategies – Summary of Three Generic Strategies
Cont….
Corporate-level Strategy: Examples
• Ex. 1: Proctor & Gamble’s Diversification Strategy
– Pre-2005: Product mix focused on women and baby care
– 2005: Acquired Gillette, which focused on consumer health
care products geared toward men
– Synergy created by combining Gillette’s toothbrush (Oral-B)
and P&G’s toothpaste (Crest) businesses to create Pro-
Health oral care product line
• Good for retailers (shelf space)
• Strategy had potential but was more difficult to create
operational relatedness between the products
– Comingle employees requiring actual physical re-location/talent exit
– Different ways to make business decisions
– Conflicting organizational cultures
• In 2007, Pro-Health overtook Colgate in market share

• Ex. 2: Disney
 3 Levels of Diversification
1. Low level of diversification
– Single-business strategy
– Dominant-business strategy
2. Moderate-to-high levels of diversification
– Related constrained diversification strategy
– Related linked diversification strategy
3. Very high levels of diversification
– Unrelated diversification
Performance Diversification and Firm Performance

Dominant Related Unrelated

Business Constrained Business
Level of Diversification
 Low-level Diversification
• Single-business strategy A
– Firm generates 95% or more of its sales revenue from its
core business area
– Example (pre-2008): Wm. Wrigley Jr. Company—the
world’s largest producer of chewing and bubble gums
• Post-2008  Acquired by Mars Inc.
A
• Dominant-business strategy B
– Firm generates 70-95% of total sales revenue within a
single business area
– Example: UPS generated 74% of revenue from U.S.
package delivery business; 17% from international
package business; 9% from non-package business
 Moderate-to-High Diversification
• Related constrained diversification A
strategy B C

– < 70% of revenue comes from the dominant business

– There are direct links between the firm's businesses (e.g.,
share products, technology; marketing; and distribution
linkages)
– Example: Campbell’s
 Moderate-to-High Diversification
• Related linked diversification strategy A D
– < 70% of revenue comes from the dominant business
B C
– Mix between related and unrelated diversification
• Linked firms share fewer resources and assets among their
businesses
• Interested in constantly adjusting the mix in their portfolio
of businesses and how to manage the businesses
• Example: Rachel Ray
 Moderate-to-High Diversification
• Related linked diversification strategy example A D
2
B C
Mars, Inc.

2%
Petcare
42% 49% Food
Snack Food
7% Drinks
 Very High Diversification
A
• Unrelated diversification strategy
B C
– Less than 70% of revenue comes from
dominant business
– No relationships between businesses
– Often called conglomerates
– Example: Jarden Corporation
Performance Diversification and Firm Performance

Dominant Related Unrelated

Business Constrained Business
Level of Diversification
 3 Reasons Firms Diversify
1. Value-creating reasons 3.
 Economies of scope
 Market power
 Vertical Integration
 Financial economies
Value-reducing reasons
 Diversifying managerial
employment risk
 Increasing managerial
compensation

2. Value-neutral reasons
 Tax laws
 Low performance
 Uncertain future cash
flows
 Risk reduction for firm
 Tangible resources
 Intangible resources
 ITC’s corporate strategies are :

 Create multiple drivers of growth by developing a portfolio of world class

businesses that best matches organisational capability with opportunities in
domestic and export markets.

 Continue to focus on the chosen portfolio of FMCG, Hotels, Paper, Paperboards &
Packaging, Agri Business and Information Technology.

 Benchmark the health of each business comprehensively across the criteria of

Market Standing, Profitability and Internal Vitality.

 Ensure that each of its businesses is world class and internationally competitive.
 Enhance the competitive power of the portfolio through synergies derived by
blending the diverse skills and capabilities residing in ITC’s various businesses.

 Create distributed leadership within the organisation by nurturing talented and

focused top management teams for each of the businesses.

 Continuously strengthen and refine Corporate Governance processes and

systems to catalyse the entrepreneurial energies of management by striking the
golden balance between executive freedom and the need for effective control and
accountability.
business unit strategy - mission and competitive advantage
The strategy of a business unit depends upon two inter-related aspects:
1. Mission
i. Two broad set of factors: Factors external to the firm and factors
internal to the firm - determine respectively, the attractiveness of the
market opportunities available to individual business units and their
competitive ability to exploit these opportunities.
ii. Within the firm, competitive ability is likely to vary from one business
unit to another.
iii. The relevant industry's attractiveness is also likely to vary from one
business unit to another.
iv. Thus, the mission (in terms of growth and profitability) varies from one
business to another.
v. Collectively, the missions assigned to the different business units
should help the firm achieve its overall goals.
vi. Resource allocation among business units should be based on their
respective missions.

Cont….
 Business unit mission-BCG Portfolio model

High Cash Source Low

High
“Star” “ Question Mark” High
Hold Build
Industry
Growth Cash use
Rate “Cash cow “Dog”

Harvest Divest

Low

High Relative market share Low

Cont….
BCG MATRIX FOR ITC
2. Business unit competitive advantage

Three inter-related questions have to be considered in developing business

unit's competitive advantage –

(i) What is the structure of the industry in which the business units operate?

(ii) How should the business unit exploit the industry's structure?

(iii) What will be the basis of the business unit's competitive advantage?

In answering the first two questions, Mr. Michael E Porter (Competitive

Advantage, New York, Free Press 1985) states that the structure of an
industry should be analyzed in terms of the collective strength of five
competitive forces as given in Figure

Cont….
 Threats of new
entry

Powers of
Power of Industry buyers
Suppliers competitions

Direct rivalry Direct rivalry

Business Unit Competitive Advantage: Analysing the structure of industries

Cont….
Generic Competitive Advantage

Through five forces, the firm is able to identify the opportunities and threats in
the external environment. With this understanding, the business unit has five
generic ways it can respond to the opportunities in the external environment and
develop a sustainable competitive advantage:

1. Low cost provider strategy

2. A broad differentiation

3. A best-cost provider strategy

4. A focused (or market niche) strategy based on lower cost

5. A focused (or market niche) strategy based on differentiation

Cont….
 TYPE OF COMPETITIVE ADVANTAGE
BEING PURSUED

Lower Cost Differentiation

M
A
R Overall Broad
K A Broad Cross - Low -Cost Differentiation
E Section of Buyers Leadership Strategy
T Strategy

T
A Best Cost
R Provider
G Strategy
E
T
A Narrow Buyer Focused Focused
Segment Low -Cost Differentiation
(or Market Niche) Strategy Strategy

Cont….
Value Chain Analysis

Product Marketing Service/

Development Manufacturing and Sales Logistic

Support activities: Finance, Human Resources, Information Technology

Value Chain Analysis for a Business

Value chain analysis seeks to determine, within the company's operations - from
design to distribution - customer value can be enhanced or costs lowered.
For each value added activity, the key questions are:
1. Can we reduce costs in this activity, holding revenue value constant?
2. Can we increase revenue in this activity, keeping the costs constant?
3. Can we reduce assets in this activity keeping costs and revenues constant?
4. Most importantly, can we do (a), (b) and (c) simultaneously?
Corporate Strategy and Control System
The logic for linking controls to strategy is based on the following lines of
thinking:

1. Different organizations generally operate in different strategic contexts.

2. For effective execution, different strategies require different task priorities;

different key success factors; and different skills, perspectives and
behaviours.

3. Control systems are measurement systems that influence the behaviours of

those people whose activities are being measured.

4. Thus, a continuing concern in the design of control system should be

whether the behaviour induced by the system is the one that is consistent
with the strategy.

Cont….
 The organizational structure implications of different corporate strategies
are given in the table below.

Single Business Related Diversified Unrelated Diversified

Organizational Functional Business Units Holding Company

structure

Industry familiarity of High Low

corporate
management

Functional Relevant operating Mainly finance

background of experience (mfg.
corporate Mktg. R&D)
management

Decision –making More centralized More Decentralized

authority

Size of corporate staff High Low

Reliance on internal High Low

promotions

Use of lateral High Low

transfers Cont….

Corporate culture Strong Weak

 Single Business Related Unrelated
Diversified Diversified

Programming Vertical–cum–Horizontal Vertical only

Budgeting High
Specific tendencies in the
Relative control of Low design of control systems
business unit manager
over budget formulation corresponding to variations
Importance attached to High in corporate strategies are
Meeting the budget Low

Transfer pricing: Low

given in the table below.
Importance of transfer High
pricing

Sourcing flexibility Constrained Arm’s–length

market pricing

Incentive compensation: Different Corporate

Bonus criteria Financial and non – Primarily financial Strategies:
financial criteria criteria Management Control
Bonus determination Primarily formula Implications
approach Primarily subjective based

Bonus basis Based both on business Based primarily on

unit and corporate business unit
performance performance
 Build Hold Harvest

Importance of programming Relatively high Relatively low

Formalization of capital Less formal DCF More formal DCF

Expenditure decisions analysis; analysis, shorter

Longer payback payback

Capital expenditure More emphasis on non - More emphasis on

Evaluation criteri a financial data (market financial data (cost
share, efficient use of efficiency, straight cash
R&D dollars etc.) on cash incremental
return)

Hurdle rates Relatively low Relatively high

Capital investment analysi s More subjective and More quantitative and

qualitative financial

Project approval limits at Relatively high Relatively low

the business unit level

Cont….
Different Strategic Implications for Programming Process
 Different Strategic Implications for Budgeting

Build Hold Harvest

Percent compensation as Relatively high Relatively low

bonus

Bonus criteria More emphasis on non- More emphasis on

financial criteria financial criteria

Bonus determination More subjective More formula -

approach based

Frequency of bonus Less frequent More frequent

payment
Competitive Advantage
A business unit can choose to compete either as a differentiated player or as a
low-cost player. The choice of a differentiation approach, rather than a low-cost
approach, increases uncertainty in a business unit's task environment for three
reasons.
First, product innovation is likely to be more critical for differentiation business
units than for low-cost business units. This is partly because a low-cost business
unit, with its primary emphasis on cost reduction, typically prefers to keep its
product offerings stable over time; whereas a differentiation business unit, with
its primary focus on uniqueness and exclusivity, is likely to engage in greater
product innovation.
Second, low-cost business units typically tend to have narrow product lines to
minimize inventory carry costs as well as to benefit from scale economies.
Differentiation business units, on the other hand, tend to have broader set of
products to create uniqueness.
Third, low-cost business units typically produce no-frill commodity products, and
these products succeed primarily because they have lower prices than
competing products.
Cont….
Objectives in Functional Areas

The organization has goals and senior management has decided on a set of
strategies to accomplish these goals. The organisation as a whole and the
responsibility center, in turn, are required to do their part in implementing these
strategies. They exist to accomplish one or more purposes, these purposes are
its objectives. Because the organisation is the sum of all the responsibility
centres within it, if the strategies are sound and if each responsibility centre
meets its objectives, the whole organisation will achieve its goals.

Every responsibility centre has outputs, that is, it does something. Effectiveness
is the relationship between a responsibility centre's outputs and its objectives.

Cont….
 Goals and objectives
Objectives Responsibility Report
Standards of centre actual v/s
performance operation plan
Strategic plan

Corrective
action

Feedback
communication

The relationship of goals and strategies, strategic plans and objectives to management
control process
Cont….