UNIT-1

20 Hours
Definition, nature, scope and significance of strategy and strategic management,
strategic decision-making, mintzerbgs 5Ps of strategy, process of strategic
management and levels at which strategy operates, role of strategists
(5 hrs)
Defining Strategic Intent: Vision, mission, business definition, goals and
objectives, stakeholders in business and their roles in strategic management
(5 hrs)
Internal Appraisal: The internal environment, organizational capabilities in
various functional areas and strategic advantage profile, methods and
techniques used for organizational appraisal (value chain analysis, financial and
non financial analysis, historical analysis, industry standards and benchmarking,
balanced scorecard and key factor rating)
(10 hrs)

STRATEGIC MANAGEMENT

Strategic management is defined as the art and science of formulating, implementing, and
evaluating cross-functional decisions that enable the organization to achieve its objectives."
Generally, strategic management is not only related to a single specialization but covers
cross-functional or overall organization.

Strategic management is a comprehensive area that covers almost all the functional
areas of the organization. It is an umbrella concept of management that comprises all
such functional areas as marketing, finance & account, human resource, and
production & operation into a top level management discipline. Therefore, strategic
management has an importance in the organizational success and failure than any
specific functional areas.

Strategic management deals with organizational level and top level issues whereas
functional or operational level management deals with the specific areas of the
business.

Top-level managers such as Chairman, Managing Director, and corporate level

planners involve more in strategic management process.

Strategic management relates to setting vision, mission, objectives, and strategies that
can be the guideline to design functional strategies in other functional areas

Therefore, it is top-level management that paves the way for other functional or
operational management in an organization

Definition:
The determination of the basic long-term goals & objectives of an enterprise
and the adoption of the course of action and the allocation of resources
necessary for carrying out these goals.-Chandler
Strategy
The word strategy is derived from the Greek word stratgos; stratus
(meaning army) and ago (meaning leading/moving).
Strategy is an action that managers take to attain one or more of the
organizations goals. Strategy can also be defined as A general direction set for

the company and its various components to achieve a desired state in the
future. Strategy results from the detailed strategic planning process.
A strategy is all about integrating organizational activities and utilizing and
allocating the scarce resources within the organizational environment so as to
meet the present objectives. While planning a strategy it is essential to consider
that decisions are not taken in a vaccum and that any act taken by a firm is
likely to be met by a reaction from those affected, competitors, customers,
employees or suppliers.
Strategy can also be defined as knowledge of the goals, the uncertainty of
events
and the need to take into consideration the likely or actual behavior of others.
Strategy is the blueprint of decisions in an organization that shows its objectives
and goals, reduces the key policies, and plans for achieving these goals, and
defines the business the company is to carry on, the type of economic and
human organization it wants to be, and the contribution it plans to make to its
shareholders, customers and society at large.
Features of Strategy
1. Strategy is Significant because it is not possible to foresee the future.
Without a perfect foresight, the firms must be ready to deal with the
uncertain events which constitute the business environment.
2. Strategy deals with long term developments rather than routine
operations, i.e. it deals with probability of innovations or new products,
new methods of productions, or new markets to be developed in future.
3. Strategy is created to take into account the probable behavior of
customers and competitors. Strategies dealing with employees will predict
the employee behavior.
Strategy is a well defined roadmap of an organization. It defines the
overall mission, vision and direction of an organization. The objective of a
strategy is to maximize an organizations strengths and to minimize the
strengths of the competitors.
Strategy, in short, bridges the gap between where we are and where we want
to be.

Concept, Meaning, Definition:

Strategy is the determination of the long-term goals and objectives of an
enterprise and the adoption of the courses of action and the allocation of
resources necessary for carrying out these goals. Strategy is managements
game plan for strengthening the organizations position, pleasing customers, and
achieving performance targets.
Types of strategy
Strategy can be formulated on three different levels:

corporate level

business unit level

functional or departmental level.

Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of
businesses in which the company should compete and with the development and
coordination of that portfolio of businesses.
Corporate level strategy is concerned with:

Reach - defining the issues that are corporate responsibilities; these might
include identifying the overall goals of the corporation, the types of
businesses in which the corporation should be involved, and the way in
which businesses will be integrated and managed.

Competitive Contact - defining where in the corporation competition is to

be localized. Take the case of insurance: In the mid-1990's, Aetna as a
corporation was clearly identified with its commercial and property
casualty insurance products. The conglomerate Textron was not. For
Textron, competition in the insurance markets took place specifically at
the business unit level, through its subsidiary, Paul Revere. (Textron
divested itself of The Paul Revere Corporation in 1997.)

Managing Activities and Business Interrelationships - Corporate strategy

seeks to develop synergies by sharing and coordinating staff and other
resources across business units, investing financial resources across
business units, and using business units to complement other corporate
business activities. Igor Ansoff introduced the concept of synergy to
corporate strategy.

Management Practices - Corporations decide how business units are to be

governed:

through

direct

corporate

intervention

(centralization)

or

through more or less autonomous government (decentralization) that

relies on persuasion and rewards.
Corporations are responsible for creating value through their businesses. They
do so by managing their portfolio of businesses, ensuring that the businesses
are successful over the long-term, developing business units, and sometimes
ensuring that each business is compatible with others in the portfolio.

Business Unit Level Strategy

A strategic business unit may be a division, product line, or other profit center
that can be planned independently from the other business units of the firm.
At the business unit level, the strategic issues are less about the coordination of
operating units and more about developing and sustaining a competitive
advantage for the goods and services that are produced. At the business level,
the strategy formulation phase deals with:

positioning the business against rivals

anticipating changes in demand and technologies and adjusting the

strategy to accommodate them

influencing the nature of competition through strategic actions such as

vertical integration and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation,

and focus) that can be implemented at the business unit level to create a
competitive advantage and defend against the adverse effects of the five forces.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions and
departments. The strategic issues at the functional level are related to business
processes and the value chain. Functional level strategies in marketing, finance,
operations,

human

resources,

and

R&D

involve

the

development

and

coordination of resources through which business unit level strategies can be

executed efficiently and effectively.
Functional units of an organization are involved in higher level strategies by
providing input into the business unit level and corporate level strategy, such as
providing information on resources and capabilities on which the higher level
strategies can be based. Once the higher-level strategy is developed, the
functional units translate it into discrete action-plans that each department or
division must accomplish for the strategy to succeed.

The 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.
These all five themes are fundamental to a study of the strategic management field and are
discussed further in this chapter and other part of this thesis.
STRATEGIC MANAGEMENT MODEL / STRATEGIC PLANNING PROCESS
In today's highly competitive business environment, budget-oriented
planning or forecast-based planning methods are insufficient for a large
corporation to survive and prosper. The firm must engage in strategic planning
that clearly defines objectives and assesses both the internal and external

situation to formulate strategy, implement the strategy, evaluate the progress,

and make adjustments as necessary to stay on track.
A simplified view of the strategic planning process is shown by the following
diagram:

a) STRATEGIC INTENT
Strategic intent takes the form of a number of corporate challenges and
opportunities, specified as short term projects. The strategic intent must convey
a significant stretch for the company, a sense of direction, which can
be communicated to all employees. It should not focus so much on today's
problems, but rather on tomorrow's opportunities. Strategic intent should specify
the competitive factors, the factors critical to success in the future.
Strategic intent gives a picture about what an organization must get into
immediately in order to use the opportunity. 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.
b) Environmental Scan
The environmental scan includes the following components:

Analysis of the firm (Internal environment)

Analysis of the firm's industry (micro or task environment)

Analysis of the External macro environment (PEST analysis)

The internal analysis can identify the firm's strengths and weaknesses and the
external analysis reveals opportunities and threats. A profile of the strengths,
weaknesses, opportunities, and threats is generated by means of a SWOT
analysis
An industry analysis can be performed using a framework developed by Michael
Porter known as Porter's five forces. This framework evaluates entry barriers,
suppliers, customers, substitute products, and industry rivalry.
c) Strategy Formulation
Strategy Formulation is the development of long-range plans for the effective
management of environmental opportunities and threats, in light of corporate
strengths & weakness. It includes defining the corporate mission, specifying
achievable objectives, developing strategy & setting policy guidelines.
i)

Mission
Mission is the purpose or reason for the organizations existence. It tells
what

the

company is

providing

to

society, either

housekeeping or a product like automobiles.

ii) Objectives

service

like

Objectives are the end results of planned activity. They state what is to be
accomplished by when and should be quantified, if possible. The
achievement of corporate objectives should result in the fulfillment of a
corporations mission.
iii) Strategies
Strategy is the complex plan for bringing the organization from a given
posture to a desired position in a future period of time.
d) Policies
A policy is a broad guide line for decision-making that links the
formulation of strategy with its implementation. Companies use policies to make
sure that employees throughout the firm make decisions & take actions that
support the corporations mission, objectives & strategy.

d) Strategy Implementation
It is the process by which strategy & policies are put into actions through the
development of programs, budgets & procedures. This process might involve
changes within the overall culture, structure and/or management system of the
entire organization.
i)

Programs:

It is a statement of the activities or steps needed to accomplish a single-use

plan. It makes the strategy action oriented. It may involve restructuring the
corporation, changing the companys internal culture or beginning a new
research effort.
ii) Budgets:
A budget is a statement of a corporations program in terms of dollars. Used
in planning & control, a budget lists the detailed cost of each program. The
budget thus not only serves as a detailed plan of the new strategy in action,
but also specifies through proforma financial statements the expected impact
on the firms financial future
iii) Procedures:
Procedures, sometimes termed Standard Operating Procedures (SOP) are a
system of sequential steps or techniques that describe in detail how a
particular task or job is to be done. They typically detail the various activities
that must be carried out in order to complete
e) Evaluation & Control

After the strategy is implemented it is vital to continually measure and evaluate

progress so that changes can be made if needed to keep the overall plan on
track. This is known as the control phase of the strategic planning process. While
it may be necessary to develop systems to allow for monitoring progress, it is
well worth the effort. This is also where performance standards should be set so
that performance may be measured and leadership can make adjustments as
needed to ensure success.
Evaluation and control consists of the following steps:
i)

Define parameters to be measured

ii)

Define target values for those parameters

iii)

Perform measurements

iv)

Compare measured results to the pre-defined standard

v)

Make necessary changes

Strategic Decision Making

Strategic decisions are the decisions that are concerned with whole environment
in which the firm operates, the entire resources and the people who form the
company and the interface between the two.
Characteristics/Features of Strategic Decisions
a. Strategic decisions have major resource propositions for an organization.
These decisions may be concerned with possessing new resources,
organizing others or reallocating others.
b. Strategic decisions deal with harmonizing organizational resource
capabilities with the threats and opportunities.
c. Strategic decisions deal with the range of organizational activities. It is all
about what they want the organization to be like and to be about.
d. Strategic decisions involve a change of major kind since an organization
operates in ever-changing environment.
e. Strategic decisions are complex in nature.
f. Strategic decisions are at the top most level, are uncertain as they deal
with the future, and involve a lot of risk.
g. Strategic decisions are different from administrative and operational
decisions. Administrative decisions are routine decisions which help or
rather facilitate strategic decisions or operational decisions. Operational
decisions are technical decisions which help execution of strategic
decisions. To reduce cost is a strategic decision which is achieved through

operational decision of reducing the number of employees and how we

carry out these reductions will be administrative decision.
The differences between Strategic, Administrative and Operational decisions can
be summarized as follows-

Strategic Decisions

Administrative Decisions

Operational Decisions

Strategic decisions are longterm decisions.

Administrative decisions
are taken daily.

Operational decisions are

not frequently taken.

These are considered where

The future planning is
concerned.

These are short-term based

Decisions.

These are medium-period

based decisions.

Strategic decisions are taken in

Accordance with
organizational mission and
vision.

These are taken according

to strategic and operational
Decisions.

These are taken in

accordance with strategic
and administrative decision.

These are related to overall

Counter planning of all
Organization.

These are related to

working of employees in an
Organization.

These are related to

production.

These deal with organizational

Growth.

These are in welfare of

employees working in an
organization.

These are related to

production and factory
growth.

Strategist
The final key term to be highlighted here is "strategists". Strategistsare the
individuals who are involved in the strategic management process. Several levels
of management may be involved in strategic decision making. However, the

people responsible for major strategic decisions are the board of director,
president, the chief executive officer, the chief operating officer, and the division
managers.

Share holders
A shareholder or stockholder is an individual or institution (including a
corporation) that legally owns one or more shares of stock in a public or private
corporation. Shareholders own the stock, but not the corporation itself.
Stockholders are granted special privileges depending on the class of stock.
These rights may include:

The right to sell their shares,

The right to vote on the directors nominated by the board,

The right to nominate directors (although this is very difficult in practice

because of minority protections) and propose shareholder resolutions,

The right to dividends if they are declared,

The right to purchase new shares issued by the company, and

Board of Directors

Elected by the shareholders, the board of directors is made up of two types of

representatives. The first type involves individuals chosen from within the
company. This can be a CEO, CFO, manager or any other person who works for
the company on a daily basis. The other type of representative is chosen
externally and is considered to be independent from the company. The role of
the board is to monitor the managers of a corporation, acting as an advocate for
stockholders. In essence, the board of directors tries to make sure that
shareholders' interests are well served.

Board members can be divided into three categories:

Chairman Technically the leader of the corporation, the chairman of the

board is responsible for running the board smoothly and effectively. His or

her duties typically include maintaining strong communication with the

chief

executive

officer

and

high-level

executives,

formulating

the

company's business strategy, representing management and the board to

the general public and shareholders, and maintaining corporate integrity.
A chairman is elected from the board of directors.

Inside Directors These directors are responsible for approving high-level

budgets prepared by upper management, implementing and monitoring
business strategy, and approving core corporate initiatives and projects.
Inside directors are either shareholders or high-level management from
within the company. Inside directors help provide internal perspectives for
other board members. These individuals are also referred to as executive
directors if they are part of company's management team.

Outside Directors While having the same responsibilities as the inside

directors in determining strategic direction and corporate policy, outside
directors are different in that they are not directly part of the
management team. The purpose of having outside directors is to provide
unbiased and impartial perspectives on issues brought to the board.

Management Team
As the other tier of the company, the management team is directly responsible
for the day-to-day operations (and profitability) of the company.

Chief Executive Officer (CEO) As the top manager, the CEO is typically
responsible for the entire operations of the corporation and reports
directly to the chairman and board of directors. It is the CEO's
responsibility to implement board decisions and initiatives and to maintain
the smooth operation of the firm, with the assistance of senior
management. Often, the CEO will also be designated as the company's
president and therefore also be one of the inside directors on the board (if
not the chairman).

Chief Operations Officer (COO) Responsible for the corporation's

operations, the COO looks after issues related to marketing, sales,
production and personnel. More hands-on than the CEO, the COO looks
after day-to-day activities while providing feedback to the CEO. The COO
is often referred to as a senior vice president.

Chief Finance Officer (CFO) Also reporting directly to the CEO, the CFO
is responsible for analyzing and reviewing financial data, reporting
financial performance, preparing budgets and monitoring expenditures
and costs. The CFO is required to present this information to the board of
directors at regular intervals and provide this information to shareholders

and regulatory bodies such as the Securities and Exchange Commission

(SEC). Also usually referred to as a senior vice president, the CFO
routinely checks the corporation's financial health and integrity.

VISION, MISSION AND PURPOSE

VISION STATEMENT
Vision statement provides direction and inspiration for organizational goal
setting.
Vision is where you see your self at the end of the horizon OR milestone
therein. It is a single statement dream OR aspiration. Typically a vision has
the flavors of 'Being Most admired', 'Among the top league', 'Being known for
innovation', 'being largest and greatest' and so on.
Typically 'most profitable', 'Cheapest' etc. dont figure in vision statement. Unlike
goals, vision is not SMART. It does not have mathematics OR timelines
attached to it.
Vision is a symbol, and a cause to which we want to bond the stakeholders,
(mostly employees and sometime share-holders). As they say, the people work
best, when they are working for a cause, than for a goal. Vision provides them
that cause.
Vision is long-term statement and typically generic & grand. Therefore a
vision statement does not change unless the company is getting into a totally
different kind of business.
Vision should never carry the 'how' part . For example ' To be the most
admired brand in Aviation Industry' is a fine vision statement, which can be
spoiled by extending it to' To be the most admired brand in the Aviation Industry
by providing world-class in-flight services'. The reason for not including 'how' is
that 'how' may keep on changing with time.
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:

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.
Mission Statement
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 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.

TOYOTA
Vision
-Toyota

aims

to

achieve

long-term,

stable

growth

economy,

the

local

communities it serves, and its stakeholders.

Mission
-Toyota seeks to create a more prosperous society through automotive
manufacturing.
IBM
Vision
Solutions for a small planet
Mission
At IBM, we strive to lead in the invention, development and manufacture of the
industry's most advanced information technologies, including computer systems,
software, storage systems and microelectronics.

We translate these advanced technologies into value for our customers through
our professional solutions, services and consulting businesses worldwide.

BUSINESS, OBJECTIVES AND GOALS

A business (also known as enterprise or firm) is an organization engaged in the
trade of goods, services, or both to consumers. Businesses are predominant
in capitalist economies, in which most of

them are privately owned and

administered to earn profit to increase the wealth of their owners. Businesses

may also be not-for-profit or state-owned. A business owned by multiple
individuals may be referred to as a company, although that term also has a more
precise meaning.
Goals : It is where the business wants to go in the future, its aim. It is a
statement of purpose, e.g. we want to grow the business into Europe.
Objectives: Objectives give the business a clearly defined target. Plans can then
be made to achieve these targets. This can motivate the employees. It also
enables the business to measure the progress towards to its stated aims.
The Difference between goals and objectives

Goals are broad; objectives are narrow.

Goals are general intentions; objectives are precise.

Goals are intangible; objectives are tangible.

Goals are abstract; objectives are concrete.

Goals can't be validated as is; objectives can be validated.

STAKEHOLDERS IN BUSINESS
A corporate stakeholder is a party that can affect or be affected by the actions of
the business as a whole. Stakeholder groups vary both in terms of their interest
in the business activities and also their power to influence business decisions.
Here is the summary:
The stake holders of a company are as follows

Shareholders

Creditors

Directors and managers

Employees

Suppliers

Customers

Community

Government

Stakeholder
Shareholders

Main Interests
Profit

growth,

Power and influence

Share

price growth, dividends

Interest and principal to

Creditors

be

repaid,

maintain

credit rating
Directors
managers

and Salary

Employees

,share

&

enforce

covenants
withdraw

options, Make

wages,

job

security, job satisfaction

& motivation

Can

loan

and

Can
banking

facilities

job satisfaction, status

Salaries

Election of directors

decisions,

have

detailed information
Staff turnover, industrial
action, service quality

Long
Suppliers

term

contracts,

prompt payment, growth

of purchasing
Reliable quality, value for

Customers

money,

product

availability,

customer

service

Community

Government

Environment, local jobs,

local impact
Operate

legally,

receipts, jobs

Pricing, quality, product

availability

Revenue

repeat

business, Word of mouth

recommendation
Indirect
planning

via

local

and

opinion

leaders
tax Regulation,

subsidies,

taxation, planning

Internal analysis of the environment is the first step of environment scanning.

Organizations should observe the internal organizational environment. This includes
employee interaction with other employees, employee interaction with management, manager
interaction with other managers, and management interaction with shareholders, access to
natural resources, brand awareness, organizational structure, main staff, operational potential,
etc.
Also, discussions, interviews, and surveys can be used to assess the internal environment.
Analysis of internal environment helps in identifying strengths and weaknesses of an
organization.
As business becomes more competitive, and there are rapid changes in the external
environment, information from external environment adds crucial elements to the
effectiveness of long-term plans. As environment is dynamic, it becomes essential to identify
competitors moves and actions. Organizations have also to update the core competencies and
internal environment as per external environment. Environmental factors are infinite, hence,
organization should be agile and vigile to accept and adjust to the environmental changes. For
instance - Monitoring might indicate that an original forecast of the prices of the raw
materials that are involved in the product are no more credible, which could imply the
requirement for more focused scanning, forecasting and analysis to create a more trustworthy
prediction about the input costs. In a similar manner, there can be changes in factors such as
competitors activities, technology, market tastes and preferences.

STRATEGIC ADVANTAGE PROFILE (SAP)

Every firm has strategic advantages and disadvantages. For example, large firms have
financial strength but they tend to move slowly, compared to smaller firms, and often cannot
react to changes quickly. No firm is equally strong in all its functions. In other words, every
firm has strengths as well as weaknesses.
Strategists must be aware of the strategic advantages or strengths of the firm to be able to
choose the best opportunity for the firm. On the other hand they must regularly analyse their
strategic disadvantages or weaknesses in order to face environmental threats effectively
Examples:
The Strategist should look to see if the firm is stronger in these factors than its competitors.
When a firm is strong in the market, it has a strategic advantage in launching new products or
services and increasing market share of present products and services.

Strategic Advantage Profile for a bicycle company

[Link]

Capability
Factor

Nature of Impact

Finance

Down Arrow

Marketing

Horizontal Arrow

Information

Up Arrow

Up Arrow indicates Strength

Down Arrow indicates Weaknesses
Horizontal Arrow indicates Neutral

Competitive

strengths

or

weaknesses
High cost of capital, reserves and
surplus position unsatisfactory
Fierce competition in industry's
Advanced Management information
system

ORGANIZATIONAL CAPABILITY PROFILE (OCP)

The organizational capability profile is drawn in the form of a chart. The

strategists are required to systematically assess the various functional areas and
subjectively assign values to the different functional capability factors and sub
factors along a scale ranging from values of -5 to +5.

Capability

Weakness

Factors

(-5)

Financial

-5

Technical
Human
Resource

Normal (0)

(+5)

0
-5

Marketing
R&D

Strength

5
0

UNIT-2
22 hours
Environmental Appraisal: Concept of environment, components of
environment (economic, legal, social, political and technological),
preparing an environmental threat and opportunity profile (ETOP),
industry analysis, porters five forces model of competition and porter
diamond model, Corporate portfolio analysis, business portfolio analysis,
synergy and dysergy, BCG matrix, GE 9 cell model, Hofers product market
evolution and shell directional policy matrix, concept of stretch, leverage
and fit
(8 hrs)
Generic Competitive Strategies: Low cost, differentiation, focus
(2 hrs)
Grand Strategies: Stability, expansion (diversification strategies,
vertical integration strategies, mergers, acquisition and takeover
strategies,
strategic
alliances
and
collaborative
partnerships),
retrenchment, outsourcing strategies
(6 hrs)
Tailoring Strategy to Fit Specific Industry: Life Cycle analysis,
emerging, growing, mature and declining industries

BUSINESS ENVIRONMENT
A firms environment represents all internal or external forces, factors, or
conditions that exert some degree of impact on the strategies, decisions and
actions taken by the firm. There are two types of environment:
Internal environment pertaining to the forces within the organization (Ex:
Functional areas of management) and
External environment pertaining to the external forces namely macro
environment or general environment and micro environment or competitive
environment (Ex: Macro environment Political environment and Micro
environment Customers).
EXTERNAL ENVIRONMENT
It refers to the environment that has an indirect influence on the business. The
factors are uncontrollable by the business. The two types of external
environment are micro environment and macro environment.
a) MICRO ENVIRONMENTAL FACTORS
These are external factors close to the company that have a direct impact on the
organizations process. These factors include:
i) Shareholders
Any person or company that owns at least one share (a percentage
of ownership) in a company is known as shareholder. A shareholder
may also be referred to as a "stockholder". As organization requires
greater inward investment for growth they face increasing pressure
to move from private ownership to public. However this movement
unleashes the forces of shareholder pressure on the strategy of
organizations.
ii) Suppliers
An individual or an organization involved in the process of making a
product or service available for use or consumption by a consumer
or business user is known as supplier. Increase in raw material
prices will have a knock on affect on the marketing mix strategy of
an organization. Prices may be forced up as a result. A closer
supplier relationship is one way of ensuring competitive and quality
products for an organization.

iii) Distributors
Entity

that

buys

non-competing

products

or

product-lines,

warehouses them, and resells them to retailers or direct to the end

users or customers is known as distributor. Most distributors
provide strong manpower and cash support to the supplier or
manufacturer's promotional efforts. They usually also provide a
range of services (such as product information, estimates, technical
support, after-sales services, credit) to their customers. Often
getting products to the end customers can be a major issue for
firms. The distributors used will determine the final price of the
product and how it is presented to the end customer. When selling
via retailers, for example, the retailer has control over where the
products are displayed, how they are priced and how much they are
promoted in-store. You can also gain a competitive advantage by
using changing distribution channels.
iv) Customers
A person, company, or other entity which buys goods and services
produced by another person, company, or other entity is known as
customer. Organizations survive on the basis of meeting the needs,
wants and providing benefits for their customers. Failure to do so
will result in a failed business strategy.
v) Competitors
A company in the same industry or a similar industry which offers a
similar product or service is known as competitor. The presence of
one or more competitors can reduce the prices of goods and
services as the companies attempt to gain a larger market share.
Competition also requires companies to become more efficient in
order to reduce costs. Fast-food restaurants McDonald's and Burger
King are competitors, as are Coca-Cola and Pepsi, and Wal-Mart
and Target.
vi) Media
Positive or adverse media attention on an organisations product or
service can in some cases make or break an organisation..
Consumer programmes with a wider and more direct audience can
also

have

very

powerful

and

organisations to change their tactics.

positive

impact,

hforcing

b) MACRO ENVIRONMENTAL FACTORS

An organization's macro environment consists of nonspecific aspects in the
organization's surroundings that have the potential to affect the organization's
strategies. When compared to a firm's task environment, the impact of macro
environmental variables is less direct and the organization has a more limited
impact on these elements of the environment. The macro environment consists
of forces that originate outside of an organization and generally cannot be
altered by actions of the organization. In other words, a firm may be influenced
by changes within this element of its environment, but cannot itself influence the
environment.

Macro environment includes political, economic, social and

technological factors. A firm considers these as part of its environmental

scanning to better understand the threats and opportunities created by the
variables and how strategic plans need to be adjusted so the firm can obtain and
retain competitive advantage.
i) Political Factors
Political factors include government regulations and legal issues and
define both formal and informal rules under which the firm must operate.
Some examples include:
tax policy
employment laws
environmental regulations
trade restrictions and tariffs
political stability
ii) Economic Factors
Economic factors affect the purchasing power of potential customers and
the firm's cost of capital. The following are examples of factors in the
macroeconomy:
economic growth
interest rates
exchange rates

 inflation rate
iii) Social Factors
Social factors include the demographic and cultural aspects of the external
macro environment. These factors affect customer needs and the size of
potential markets. Some social factors include:
health consciousness
population growth rate
age distribution
career attitudes
emphasis on safety
iv) Technological Factors
Technological factors can lower barriers to entry, reduce minimum efficient
production levels, and influence outsourcing decisions. Some technological
factors include:
R&D activity
automation
technology incentives
rate of technological change

COMPETITIVE CHANGES DURING INDUSTRY EVOLUTION

Industry lifecycle comprises four stages including fragmentation, growth,
maturity and decline. An understanding of the industry lifecycle can help
competing companies survive during periods of transition. Several variations of
the lifecycle model have been developed to address the development and
transition of products, market and industry. The models are similar but the
number of stages and names of each may differ. Major models include those
developed by Fox (1973), Wasson (1974), Anderson & Zeithaml (1984), and Hill
& Jones (1998).

a) Fragmentation Stage
Fragmentation is the first stage of the new industry. This is the stage when the
new industry develops the business. At this stage, the new industry normally
arises when an entrepreneur overcomes the twin problems of innovation and
invention, and works out how to bring the new products or services into the
market. For example, air travel services of major airlines in Europe were sold
to the target market at a high price. Therefore, the majority of airlines'
customers in Europe were those people with high incomes who could afford
premium prices for faster travel.
In 1985, Ryanair made a huge change in the European airline industry. Ryanair
was the first airline to engage low-cost airlines in Europe. At that time,
Ryanair's services were perceived as the innovation of the European airline
industry. Ryanair tickets are half the price of British Airways. Some of its sales
promotions were very low. This made people think that air travel was not just
made for the rich, but everybody.
Ryanair overcame the twin problems of innovation and invention in the airline
industry by inventing air travel services that could serve passengers with tight
budgets and those who just wanted to reach their destination without breaking
their bank savings. Ryanair achieved this goal by eliminating unnecessary
services offered by traditional airlines. It does not offer free meals, uses paperfree air tickets, gets rid of mile collecting scheme, utilises secondary airports,
and offers frequent flights. These techniques help Ryanair save time and costs
spent in airline business operation.

b) Shake-out
Shake-out is the second stage of the industry lifecycle. It is the stage at which
a new industry emerges. During the shake-out stage, competitors start to
realise business opportunities in the emerging industry. The value of the
industry also quickly rises.
For example, many people die and suffer because of cigarettes every year.
Thus, the UK government decided to launch a campaign to encourage people to
quit smoking. Nicorette, one of the leading companies is producing several
nicotine products to help people quit smoking. Some of its well-known products
include Nicorette patches, Nicolette gums and Nicorette lozenges.
Smokers began to see an easy way to quit smoking. The new industry started
to attract brand recognition and brand awareness among its target market
during the shake-out stage. Nicorette's products began to gain popularity
among those who wanted to quit smoking or those who wanted to reduce their
daily cigarette consumption.
During this period, another company realised the opportunity in this market
and decided to enter it by launching nicotine product ranges, including Nic Lite
gum and patches. It recently went beyond UK boarder after the UK
government introduced non-smoking policy in public places, including pubs and
nightclubs. This business threat created a new business opportunity in the
industry for Nic Lite to launch a new nicotine-related product called Nic Time.
Nic Time is a whole new way for smokers to "get a cigarette" an eight-ounce
bottle contains a lemon-flavoured drink laced with nicotine, the same amount
of nicotine as two cigarettes. Nic Lite was first available at Los Angeles airports
for smokers who got uneasy on flights, but now the nicotine soft drinks are
available in some convenience stores.

c) Maturity
Maturity is the third stage in the industry lifecycle. Maturity is a stage at which
the efficiencies of the dominant business model give these organisations
competitive advantage over competition. The competition in the industry is
rather aggressive because there are many competitors and product substitutes.
Price, competition, and cooperation take on a complex form. Some companies
may shift some of the production overseas in order to gain competitive
advantage.

For example, Toyota is one of the world's leading multinational companies,

selling automobiles to customers worldwide. The export and import taxes mean
that its cars lose competitiveness to the local competitors, especially in the
European automobile industry. As a result, Toyota decided to open a factory in
the UK in order to produce cars and sell them to customers in the European
market.
The haute couture fashion industry is another good example. There are many
western-branded fashion labels that manufacture their products overseas by
cooperating with overseas partners, or they could seek foreign suppliers who
specialise in particular materials or items. For instance, Nike has factories in
China and Thailand as both countries have cheap labour costs and cheap,
quality materials, particularly rubber and fabric. However, their overseas
partners are not allowed to sell shoes produced for Adidas and Nike. The items
have to be shipped back to the US, and then will be exported to countries
worldwide, including China and Thailand.

d) Decline
Decline is the final stage of the industry lifecycle. Decline is a stage during
which a war of slow destruction between businesses may develop and those
with heavy bureaucracies may fail. In addition, the demand in the market may
be fully satisfied or suppliers may be running out.
In the stage of decline, some companies may leave the industry if there is no
demand for the products or services they provide, or they may develop new
products or services that meet the demand in the market. In such cases, this
will create a new industry.
For example, at the beginning of the communication industry, pagers were
used as the main communication method among people working in the same
organisation, such as doctors and nurses. Then, the cutting edge of the
communication industry emerged in the form of the mobile phone. The
communication

process

of

pagers

could

not

be

accomplished

without

telephones. To send a message to another pager, the user had to phone the
call-centre staff who would type and send the message to another pager. On
the other hand, people who use mobile phones can make a phone-call and
send messages to other mobiles without going through call-centre staff.
In recent years, the features of mobile phones have been developing rapidly
and continually. Now people can use mobiles to send multimedia messages,
take pictures, check email, surf the internet, read news and listen to music. As

mobile phone feature development has reached saturation, thus the new
innovation of mobile phone technology has incorporated the use of computers.
The launch of personal digital assistants (PDA) is a good example of the decline
stage of the mobile phone industry as the features of most mobiles are similar.
PDAs are hand-held computers that were originally designed as a personal
organiser but it become much more multi-faceted in recent years. PDAs are
known as pocket computers or palmtop computers. They have many uses for
both mobile phones and computers such as computer games, global positioning
system, video recording, typewriting and wireless wide-area network.

Application of industry life cycle

It is important for companies to understand the use of the industry lifecycle
because it is a survival tool for businesses to compete in the industry
effectively and successfully. The main aspects in terms of strategic issues of
the industry lifecycle are described below:

Competing over emerging industries

The game rules in industry competition can be undetermined and the

resources may be constrained. Thus, it is vital for firms to identify
market segments that will allow them to secure and sustain a strong
position within the industry.

The product in the industry may not be standardised so it is necessary

for companies to obtain resources needed to support new product
development and rapid company expansion.

The entry barriers may be low and the potential competition may be
high, thus companies must adapt to shift the mobility barriers.

Consumers may be uncertain in terms of demand. As a result,

determining the time of entry to the industry can help companies to
take business opportunities before their rivals.

Competing during the transition to industry maturity

When competition in the industry increases, firms can have a

sustainable competitive advantage that will provide a basis for
competing against other companies.

The new products and applications are harder to come by, while buyers
become more sophisticated and difficult to understand in the maturity
stage of the industry lifecycle. Thus, consumer research should be

carried out and this could help companies in building up new product
lines.

Slower industry growth constrains capacity growth and often leads to

reduced

industry

profitability

and

some

consolidation.

Therefore,

companies can focus greater attention on costs through strategic cost

analysis.

The change in the industry is rather dynamic, and an understanding of

the industry lifecycle can help companies to monitor and tackle these
changes effectively. Firms can develop organisational structures and
systems that can facilitate the transition.

Some companies may seek business opportunities overseas when the

industries reach the maturity stage because during this stage, the
demand in the market starts to decline.

Competing in declining industries

The characteristics of declining industries include the following:

Declining demand for products

Pruning of product lines

Shrinking profit margins

Falling research and development advertisement expenditure

Declining number of rivals as many are forced to leave the industry

For companies to survive the dynamic environment, it is necessary for them to:

Measure the intensity of competition

Assess the causes of decline

Single out a viable strategy for decline such as leadership, liquidation

and harvest.

INDUSTRY STRUCTURE
Industry is a collection of firms offering goods or services that are close
substitutes of each other. An Industry consists of firms that directly compete
with each other. Industry structure refers to the number and size distribution of
firms in an industry. The number of firms in an industry may run into hundreds
or thousands. The size distribution of the
Firm is important from both business policy and public policy views. The level of
competition in an industry rises with the number of firms in the industry.
i) Fragmented Industry

If all firms in an industry are small in size when compared with the size of the
whole industry, then it is known as fragmented industry. In a fragmented
industry, no
Firms have large market. Each firm serves only a small piece of total market in
competition with others.
ii) Consolidated Industry
If small number of firms controls a large share of the industry's output or sales,
it is known as a consolidated industry.
CHARACTERISTICS OF INDUSTRY STRUCTURE
A final dimension of industry that is important to the performance of new firms is
industry structure. The structure of the industry refers to the nature of barriers
to entry and competitive dynamics in the industry.
Four characteristics of industry structure are particularly important to the
performance of new firms in the industry:
Capital Intensity
Advertising Intensity
Concentration
Average firm size
Capital Intensity measures the importance of capital as opposed to labor in
the production process. Some industries, such as aerospace, involve a great deal
of capital and relatively little labor. Other industries, such as textiles, involve
relatively little capital and a great deal of labor.
Advertising Intensity Advertising is a mechanism through which companies
develop the reputations that help them sell their products and services. To build
brand name reputation through advertising, two conditions need to be met.
First, the advertising has to be repeated over time. Second, economies of scale
exist in advertising.
Concentration is a measure of the market share that is held by the largest
companies in an industry. For instance, some pharmaceutical industries like
Merck, Pfizer and Eli Lilly account for almost all of the market.
Average firm size - New firms perform better, when the average firm size is
small. New firms tend to begin small as a way to minimize the risk of
Entrepreneurial miscalculation. If the average firm size is large, this may lead to

Inability to purchase in volume, higher average manufacturing and Distribution

cost.

USES OF INDUSTRY STRUCTURE

Business Policy and Strategy: By looking at the structure of an
industry, one can often learn a lot about competition, rivalry, entry
barriers, and other aspects of competitive dynamics in that industry.
Public Policy: Public Policy View is that, reduced competition in an
industry hurts consumers interest and encourages dominant firms to
adopt anti competitive trade practices.
Oligopoly: A key characteristic of an oligopoly (a highly structured
industry) is that competitors are mutually interdependent; a competitive
move by one company will almost certainly affect the fortunes of other
companies in the industry and they will generally respond to the movesooner or later.

GLOBALIZATION
Globalisation is the term to describe the way countries are becoming more
interconnected both economically and culturally. This process is a combination of
economic, technological, socio-cultural and political forces.

ADVANTAGES
Increased free trade between nations
Increased liquidity of capital allowing investors in developed nations to
invest in developing nations
Corporations have greater flexibility to operate across borders
Global mass media ties the world together.
Increased flow of communications allows vital information to be shared
between individuals and corporations around the world
Greater ease and speed of transportation for goods and people.
Reduction of cultural barriers increased the global village effect
Spread of democratic ideals to developed nations.
Greater interdependence of nation states.
Reduction of likelihood of war between developed nations

 Increases in environmental protection in developed nations

DISADVANTAGES
Increased flow of skilled and non-skilled jobs from developed to
developing nations as corporations seek out the cheapest labor.
Spread of a materialistic lifestyle and attitude that sees consumption
as the path to prosperity
International bodies like the world trade organization infringe on
national and individual
Greater risk of diseased being transported unintentionally between
nations.
Greater chance of reactions for globalization being violent in an
attempt to preserve cultural heritage.
Increased likelihood of economic disruptions in one nation effecting all
nations.
Threat that control of world media by a handful of corporations will
limit cultural expression.
Take advantage of weak regulatory rules in developing countries.
Increase in the chances of civil war within developing countries and
open war between developing countries as they vie for resources.
Decrease in environmental integrity as polluting corporations.
Michael Porters 5 forces model
Porters 5 forces model is one of the most recognized framework for the analysis
of business strategy. Porter, the guru of modern day business strategy, used
theoretical frameworks derived from Industrial Organization (IO) economics to
derive five forces which determine the competitive intensity and therefore
attractiveness of a market. This theoretical framework, based on 5 forces,
describes the attributes of an attractive industry and thus suggests when
opportunities will be greater, and threats less, in these of industries.
Attractiveness in this context refers to the overall industry profitability and also
reflects upon the profitability of the firm under analysis. An unattractive
industry is one where the combination of forces acts to drive down overall
profitability. A very unattractive industry would be one approaching pure
competition, from the perspective of pure industrial economics theory.

These forces are defined as follows:

a)

The threat of the entry of new competitors

b)

The intensity of competitive rivalry

c)

The threat of substitute products or services

d)

The bargaining power of customers

e)

The bargaining power of suppliers

The model of the Five Competitive Forces was developed by Michael E. Porter.
Porters model is based on the insight that a corporate strategy should meet the
opportunities and threats in the organizations external environment. Especially,
competitive strategy should base on and understanding of industry structures
and the way they change. Porter has identified five competitive forces that shape
every industry and every market. These forces determine the intensity of
competition and hence the profitability and attractiveness of an industry. The
objective of corporate strategy should be to modify these competitive forces in a
way that improves the position of the organization. Porters model supports
analysis of the driving forces in an industry. Based on the information derived
from the Five Forces Analysis, management can decide how to influence or to
exploit particular characteristics of their industry.

The Five Competitive Forces are typically described as follows:

a)

Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order
to provide goods or services.

Supplier bargaining power is likely to be high when:

The market is dominated by a few large suppliers rather than a

fragmented source of supply

There are no substitutes for the particular input

The suppliers customers are fragmented, so their bargaining power is low

The switching costs from one supplier to another are high

There is the possibility of the supplier integrating forwards in order to

obtain higher prices and margins

This threat is especially high when

The buying industry has a higher profitability than the supplying industry

Forward integration provides economies of scale for the supplier

The buying industry hinders the supplying industry in their development

(e.g. reluctance to accept new releases of products)

The Buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins
from their suppliers. The relationship to powerful suppliers can potentially reduce
strategic options for the organization.

b)

Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much

customers can impose pressure on margins and volumes. Customers
bargaining power is likely to be high when

They buy large volumes; there is a concentration of buyers

The supplying industry comprises a large number of small operators

The supplying industry operates with high fixed costs

The product is undifferentiated and can be replaces by substitutes

Switching to an alternative product is relatively simple and is not

related to high costs

c)

Customers have low margins and are pricesensitive

Customers could produce the product themselves

The product is not of strategical importance for the customer

The customer knows about the production costs of the product

There is the possibility for the customer integrating backwards.

Threat of New Entrants

The competition in an industry will be the higher, the easier it is for other
companies to enter this industry. In such a situation, new entrants could
change major determinants of the market environment (e.g. market
shares, prices, customer loyalty) at any time. There is always a latent
pressure for reaction and adjustment for existing players in this industry.
The threat of new entries will depend on the extent to which there are
barriers to entry.
These are typically

Economies of scale (minimum size requirements for profitable

operations),

High initial investments and fixed costs

Cost advantages of existing players due to experience curve effects

of operation with fully depreciated assets

Brand loyalty of customers

Protected intellectual property like patents, licenses etc,

Scarcity of important resources, e.g. qualified expert staff

Access to raw materials is controlled by existing players,

Distribution channels are controlled by existing players

Existing players have close customer relations, e.g. from long-term

service contracts

d)

High switching costs for customers

Legislation and government action

Threat of Substitutes
A threat from substitutes exists if there are alternative products with
lower prices of better performance parameters for the same purpose.

They could potentially attract a significant proportion of market volume

and hence reduce the potential sales volume for existing players. This
category also relates to complementary products.
Similarly to the threat of new entrants, the treat of substitutes is
determined by factors like

e)

Brand loyalty of customers

Close customer relationships

Switching costs for customers

The relative price for performance of substitutes

Current trends.

Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players
(companies) in an industry. High competitive pressure results in pressure
on prices, margins, and hence, on profitability for every single company in
the industry.
Competition between existing players is likely to be high when

There are many players of about the same size

Players have similar strategies

There is not much differentiation between players and their

products, hence, there is much price competition

Low market growth rates (growth of a particular company is

possible only at the expense of a competitor)

Barriers for exit are high (e.g. expensive and highly specialized
equipment).

ENVIRONMENT THREAT AND OPPORTUNITY PROFILE (ETOP)

Meaning of Environmental Scanning: Environmental scanning can be defined

as the process by which organizations monitor their relevant environment to
identify opportunities and threats affecting their business for the purpose of
taking strategic decisions.
Appraising the Environment: In order to draw a clear picture of what
opportunities and threats are faced by the organization at a given time. It is
necessary to appraise the environment. This is done by being aware of the

factors that affect environmental appraisal identifying the environmental factors

and structuring the results of this environmental appraisal.
Structuring Environmental Appraisal: The identification of environmental
issues is helpful in structuring the environmental appraisal so that the strategists
have a good idea of where the environmental opportunities and threats lie.
There are many techniques to structure the environmental appraisal. One such
technique suggested by Gluek is that preparing an ETOP for an organization. The
preparation of an ETOP involves dividing the environment into different sectors
and then analyzing the impact of each sector on the organization.
Environment threat and opportunity profile (ETOP) for a bicycle
company

[Link]

Environmental sector

Nature of Impact

Economic

Up Arrow

Market

Horizontal Arrow

International

Down Arrow

Up Arrow indicates Favorable Impact

Down Arrow indicates unfavorable Impact
Horizontal Arrow indicates Neutral Impact

The preparation of an ETOP provides a clear picture to the strategists about

which sectors and the different factors in each sector have a favorable impact on
the organization. By the means of an ETOP, the organization knows where it
stands with respect to its environment. Obviously, such an understanding can be
of a great help to an organization in formulating appropriate strategies to take
advantage of the opportunities and counter the threats in its environment.
Advantage of ETOP

It provides a clear of which sector and sub sectors have favorable impact
on the organization. It helps interpret the result of environment analysis.

The organization can assess its competitive position.

Appropriate

strategies

can

be

formulated

to

take

advantage

of

opportunities and counter the threat.

CORPORATE PORTFOLIO ANALYSIS
When the company is in more than one business, it can select more than one
strategic alternative depending upon demand of the situation prevailing in the
different portfolios. It is necessary to analyze the position of different business of
the business house which is done by corporate portfolio analysis.
Portfolio analysis is an analytical tool which views a corporation as a basket or
portfolio of products or business units to be managed for thebest possible
returns.
When an organization has a number of products in its portfolio, it is quite likely
that they will be in different stages of development. Some will be relatively new
and some much older. Many organizations will not wish to risk having all their
products at the same stage of development. It is useful to have some products
with limited growth but producing profits steadily, and some products with real
growth potential but may still be in the introductory stage. Indeed, the products
that are earning steadily may be used to fund the development of those that will
provide the growth and profits in the future.
So the key strategy is to produce a balanced portfolio of products, some with low
risk but dull growth and some with high risk but great potential for growth and
profits. This is what we call as portfolio analysis.
The aim of portfolio analysis is
1) to

analyze

its

current

business

portfolio

and

decide

which

businesses should receive more or less investment

2) to develop growth strategies, for adding new businesses to the
portfolio
3) to decide which business should not longer be retained

Balancing the portfolio

Balancing the portfolio means that the different products or businesses in the
portfolio have to be balanced with respect to four basic aspects

Profitability

Cash flow

Growth

Risk

This analysis can be done by any of the following technologies

A) BCG matix
B) GE nine cell matrix

A) BCG MATRIX the bcg matrix was developed by Boston Consulting group
in 1970s. It is also called as the growth share matrix. This is the most popular
and most simplest matrix to describe the corporations portfolio of businesses or
products.
The BCG matrix helps to determine priorities in a product portfolio. Its basic
purpose is to invest where there is growth from which the firm can benefit, and
divest those businesses that have low market share and low growth prospects.
Each of the products or business units is plotted on a two dimensional matrix
consisting of
a) relative market share is the ratio of the market share of the
concerned product or business unit in the industry divided by the share
of the market leader
b) market growth rate is the percentage of market growth, by which
sales of a particular product or business unit has increased

Analysis of the BCG matrix the matrix reflects the contribution of the products
or business units to its cash flow. Based on this analysis, the products or
business units are classified as
i) Stars
ii) Cash cows
iii) Question marks
iv) Dogs

i) Stars high growth, high market share

Stars are products that enjoy a relatively high market share in a strongly
growing market. They are potentially profitable and may grow further to become
an important product or category for the company. The firm should focus on and
invest in these products or business units. The general features of stars are

High growth rate means they need heavy investment

High market share means they have economies of scale and generate
large amount of cash

But they need more cash than they generate

The high growth rate will mean that they will need heavy investment and will
therefore be cash users. Overall, the general strategy is to take cash from the
cash cows to fund stars. Cash may also be invested selectively in some problem
children (question marks) to turn them into stars. The other problem children
may be milked or even sold to provide funds elsewhere.
Over the time, all growth may slow down and the stars may eventually become
cash cows. If they cannot hold market share, they may even become dogs.

ii) Cash Cows Low growth, high market share

These are the product areas that have high relative market shares but exist in
low-growth markets. The business is mature and it is assumed that lower levels
of investment will be required. On this basis, it is therefore likely that they will
be able to generate both cash and profits. Such profits could then be transferred
to support the stars. The general features of cash cows are

They generate both cash and profits

The business is mature and needs lower levels of investment

Profits are transferred to support stars/question marks

The danger is that cash cows may become under-supported and begin to
lose their market

Although the market is no longer growing, the cash cows may have a relatively
high market share and bring in healthy profits. No efforts or investments are
necessary to maintain the status quo. Cash cows may however ultimately
become dogs if they lose the market share.
iii) Question Marks high growth, low market share
Question marks are also called problem children or wild cats. These are products
with low relative market shares in high growth markets. The high market growth
means that considerable investment may still be required and the low market
share will mean that such products will have difficulty in generating substantial

cash. These businesses are called question marks because the organization must
decide whether to strengthen them or to sell them.
The general features of question marks are

Their cash needs are high

But their cash generation is low

Organization must decide whether to strengthen them or sell them

Although their market share is relatively small, the market for question marks is
growing rapidly. Investments to create growth may yield big results in the
future, though this is far from certain. Further investigation into how and where
to invest is advised.
iv) Dogs Low growth, low market share
These are products that have low market shares in low growth businesses. These
products will need low investment but they are unlikely to be major profit
earners. In practice, they may actually absorb cash required to hold their
position. They are often regarded as unattractive for the long term and
recommended for disposal. The general features of dogs are

They are not profit earners

They absorb cash

They are unattractive and are often recommended for disposal.

Turnaround can be one of the strategies to pursue because many dogs have
bounced back and become viable and profitable after asset and cost reduction.
The suggested strategy is to drop or divest the dogs when they are not
profitable. If profitable, do not invest, but make the best out of its current value.
This may even mean selling the divisions operations.

Advantages

it is easy to use

it is quantifiable

it draws attention to the cash flows

it draws attention to the investment needs

Limitations

it is too simplistic

link between market share and profitability is not strong

growth rate is only one aspect of industry attractiveness

it is not always clear how markets should be defined

market share is considered as the only aspect of overall competitive

position

many products or business units fall right in the middle of the matrix, and
cannot easily be classified.

BCG matrix is thus a snapshot of an organization at a given point of time and

does not reflect businesses growing over time.

B) GE Nine-cell matrix

This matrix was developed in 1970s by the General Electric Company with the
assistance of the consulting firm, McKinsey & Co, USA. This is also called GE
multifactor portfolio matrix.
The GE matrix has been developed to overcome the obvious limitations of BCG
matrix. This matrix consists of nine cells (3X3) based on two key variables:
i)

business strength

ii)

industry attractiveness

The horizontal axis represents business strength and the vertical axis represent
industry attractiveness
The business strength is measured by considering such factors as:

relative market share

profit margins

ability to compete on price and quality

knowledge of customer and market

competitive strengths and weaknesses

technological capacity

caliber of management

Industry attractiveness is measured considering such factors as :

market size and growth rate

industry profit margin

competitive intensity

economies of scale

technology

social, environmental, legal and human aspects

The industry product-lines or business units are plotted as circles. The area of
each circle is proportionate to industry sales. The pie within the circles
represents the market share of the product line or business unit.
The nine cells of the GE matrix represent various degrees of industry
attractiveness (high, medium or low) and business strength (strong, average
and weak). After plotting each product line or business unit on the nine cell
matrix, strategic choices are made depending on their position in the matrix.
Spotlight Strategy
GE matrix is also called Stoplight strategy matrix because the three zones are
like green, yellow and red of traffic lights.
1) Green indicates invest/expand if the product falls in green zone, the
business

strength

is

strong

and

industry

is

at

least

medium

in

attractiveness, the strategic decision should be to expand, to invest and to

grow.
2) Yellow indicates select/earn if the product falls in yellow zone, the
business strength is low but industry attractiveness is high, it needs caution and
managerial discretion for making the strategic choice
3) Red indicates harvest/divest if the product falls in the red zone, the
business strength is average or weak and attractiveness is also low or
medium, the appropriate strategy should be divestment.
Advantages
1) It used 9 cells instead of 4 cells of BCG
2) It considers many variables and does not lead to simplistic conclusions
3) High/medium/low and strong/average/low classification enables a finer
distinction among business portfolio
4) It uses multiple factors to assess industry attractiveness and business
strength, which allow users to select criteria appropriate to their situation
Limitations

1) It can get quite complicated and cumbersome with the increase in

businesses
2) Though industry attractiveness and business strength appear to be
objective, they are in reality subjective judgements that may vary from
one person to another
3) It cannot effectively depict the position of new business units in
developing industry
4) It only provides broad strategic prescriptions rather than specifics of
business policy

Comparision GE versus BCG Thus products or business units in the green zone are almost equivalent to stars
or cashcows, yellow zone are like question marks and red zone are similar to
dogs in the BCG matrix.

Difference between BCG and GE matrices

BCG Matrix

GE Matrix

1. BCG matrix consists of four cells

1. GE matrix consists of nine cells

2. The business unit is rated against

2. The business unit is rated against

relative market share and industry business

strength

and

industry

growth rate

attractiveness

3. The matrix uses single measure to

3. The matrix used multiple measures

assess growth and market share

to

assess

business

strength

and

industry attractiveness
4. The matrix uses two types of

4. The matrix uses three types of

classification i.e high and low

classification i.e high/medium/low and

strong/average/weak

5. Has many limitations

5. Overcomes many limitations of

BCG and is an improvement over it

BALANCED SCORE CARD

Balanced Score Card has been proposed and popularized by Robert. S. Kaplan and David. P.
Norton. It is a performance tool which Provides executives with a comprehensive

framework that translates a companys strategic objectives into a coherent set of performance
measures.
The scorecard consists of 4 different perspectives such as:
Financial
Customer
Internal business
Innovation and Learning
(i) Financial Perspective
Return-on-capital employed
Cash flow
Project profitability
Profit forecast reliability
Sales backlog

(ii) Customer perspective

Pricing index

 Customer ranking survey

Customer satisfaction index
Market share
(iii) Internal Business Perspective
Hours with customers on tender success rate
Rework
Safety incident index
Project performance index
Project closeout cycle
(iv) Innovation & Learning Perspective
% revenue from new services
Rate of improvement index
Staff Attitude survey
Employee suggestions
Revenue per employee.

Distinctive Competitiveness Meaning: Distinctive Competence is a set of

unique capabilities that certain firms possess allowing them to make inroads into
desired markets and to gain advantage over the competition; generally, it is an
activity that a firm performs better than its competition. To define a firms
distinctive competence, management must complete an assessment of both
internal and external corporate environments. When management finds an
internal strength and both meets market needs and gives the firm a comparative
advantage in the market place, that strength is the firms distinctive
competence. Defining and Building Distinctive Competence: To define a
companys distinctive competence, managers often follow a particular process.
1

1. They identify the strengths and weaknesses in the given marketplace.

2. They analyze specific market needs and look for comparative

advantages that they have over the competition.

3
4
5
6
7
8
9

Gap Analysis

Gap analysis is a very useful tool for helping marketing managers to decide upon
marketing strategies and tactics. Again, the simple tools are the most effective.
There's a straightforward structure to follow. The first step is to decide upon how
you are going to judge the gap over time. For example, by market share, by
profit, by sales and so on.
This will help you to write SMART objectives. Then you simply ask two questions
- where are we now? and where do we want to be? The difference between the
two is the GAP - this is how you are going to get there. Take a look at the
diagram below. The lower line is where you'll be if you do nothing. The upper
line is where you want to be.

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:

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:

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:

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:

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:

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
INTERNAL

EXTERNAL

ENVIRONMENTAL FACTORS

Strengths

Weaknesses

Opportunities

S-O strategies

W-O strategies

Threats

S-T strategies

W-T strategies

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.

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a
strong tool, but it involves a great subjective element. It is best when used as a
guide, and not as a prescription. Successful businesses build on their strengths,
correct their weakness and protect against internal weaknesses and external
threats. They also keep a watch on their overall business environment and
recognize and exploit new opportunities faster than its competitors.
SWOT Analysis helps in strategic planning in following mannera. It is a source of information for strategic planning.
b. Builds organizations strengths.
c. Reverse its weaknesses.

d. Maximize its response to opportunities.

e. Overcome organizations threats.
f. It helps in identifying core competencies of the firm.
g. It helps in setting of objectives for strategic planning.
h. It helps in knowing past, present and future so that by using past and
current data, future plans can be chalked out.
SWOT Analysis provide information that helps in synchronizing the firms
resources and capabilities with the competitive environment in which the firm
operates.
SWOT

ANALYSIS

FRAMEWORK

Limitations of SWOT Analysis

SWOT Analysis is not free from its limitations. It may cause organizations to
view circumstances as very simple because of which the organizations might
overlook certain key strategic contact which may occur. Moreover, categorizing
aspects as strengths, weaknesses, opportunities and threats might be very
subjective as there is great degree of uncertainty in market. SWOT Analysis does
stress upon the significance of these four aspects, but it does not tell how an
organization can identify these aspects for itself.
There are certain limitations of SWOT Analysis which are not in control of
management. These includea. Price increase;
b. Inputs/raw materials;
c. Government legislation;
d. Economic environment;

e. Searching a new market for the product which is not having overseas
market due to import restrictions; etc.
Internal limitations may includea. Insufficient research and development facilities;
b. Faulty products due to poor quality control;
c. Poor industrial relations;
d. Lack of skilled and efficient labour; etc
SWOT Analysis of Google
Introduction
Google is probably the worlds best-known company for pioneering the search
engine revolution and providing a means for the internet users of the world to
search and find information at the click of a mouse. Further, Google is also known
for its work in organizing information in a concise and precise manner that has
been a game changer for the internet economy and by extension, the global
economy because corporations, individuals, and consumers can search and
access information about anything anywhere and anytime. Moreover, Google also
goes with the motto of Do not be Evil which means that its business practices
are geared towards enhancing information and actualizing best practices that
would help people find and search information. Though its business practices in
China and elsewhere where the company was accused of being complicit with the
authoritarian regimes in censoring information were questionable, on balance,
the company has done more good than harm in bringing together information
and organizing it.
Strengths

Market Leader in Search Engines

Perhaps the biggest strength of Google is that it is the undisputed leader
in search engines, which means that it has a domineering and lions share
of the internet searches worldwide. Google has more than 65% of the
market share for internet searches and the competitors do not even come
close to anywhere that Google does.

Ability to Generate User Traffic

Google is a household brand in the world, its ability to drive internet user
traffic is legendary, and this has helped it become one of the most
powerful brands in the world. Indeed, Google averages more than 1.2
Billion hits a month in terms of the unique searches that users perform on

the site. This gives it an unrivaled and unparalleled edge over its
competitors in the market.

Revenue from Advertising and Display

Its revenue model wherein it garners humungous profits through
partnerships with third party sites has held the company in good stead as
far as its ability to mop up resources and increase both its top-line as well
as bottom-line is concerned. This is another key strength of the company
that has helped it scale greater heights.

Introduction of Android and Mobile Technologies

The last of the strengths discussed here relates to its adoption of Android
and Mobile technologies, this has resulted in it becoming a direct
competitor of Apple as far as these devices, and operating systems are
concerned.

Weaknesses

Excessive Reliance on Secrecy

Google does not reveal its algorithm for searches or even its basic formula
as far as internet searches are concerned leading to many experts
slamming the company for being opaque and hiding behind the veneer of
secrecy. However, in recent years, Google has taken steps to redress this
by providing a bare bones version of its unique search engine algorithm.

Falling Ad Rates
In recent years and especially in 2013, the company has been faced with
declining revenues from ads and as a result, the profitability of the
company has taken a hit. This is partly due to the ongoing global
economic slowdown and partly because of competitors snapping at its
heels in a more aggressive manner. Indeed, Apple has already taken steps
to garner search engine revenues in its devices and hence, Google must
be cognizant of the challenges that lie ahead.

Overdependence on Advertising
Googles business model relies heavily on advertising and the numbers
reveal that it gets more than 85% of its revenues from ads alone. This
means that any potential dip in revenues would cost the company dearly
(literally as well as metaphorically). The point here is that Google has to
devise a more robust business model that embraces e-commerce and
mobile commerce along with its current business model that is based on
ad revenues alone.

Lack of Compatibility with next generation devices

Another weakness for Google is that it is not compatible with many next
generation computing platforms including mobile and tablet computers
and this remains an area of concern for the company.

Opportunities

Android Operating System

Perhaps the biggest opportunity for Google lies in its pioneering effort in
providing the Android OS (Operating System) which has resulted in its
becoming a direct competitor to Apple and Samsung.

Diversification into non-Ad Business Models

As discussed earlier, the company has to diversify into non-ad revenues if
it has to remain profitable and current indications are that it is adapting
itself to this as can be seen from the push towards commercial
transactions using its numerous sites like Google Books, Google Maps etc.

Google Glasses and Google Play

The introduction of Google Glasses and Google Play promises to be a
game changer for Google and this is a significant opportunity that the
company can exploit. Indeed, this very aspect can make the company
take the next evolutionary leap into the emerging world of nanocomputing.

Cloud Computing
Cloud Computing remains a key opportunity for Google as it is already
experienced in providing storage and cloud solutions. Indeed, if not
anything, it can move into the enterprise market using the cloudcomputing paradigm.

Threats

Competition from Facebook

The advent of Social Media has seriously threatened Googles dominance
in the internet world and the company has to pull an ace to deal with the
increasing features available on Facebook and Twitter.

Mobile Computing

Another threat to Google is from the emerging area of mobile computing

that threatens to pass the company by as newer companies seize the
opportunity to ramp up their mobile computing presence.

Grand Strategies

Strategy can be formulated on three different levels:

CORPORATE LEVEL
BUSINESS UNIT LEVEL
FUNCTIONAL LEVEL

CORPORATE STRATEGY
Corporate strategy tells us primarily about the choice of direction for the firm as
a whole. In a large multi business company, however, corporate strategy is also
about managing various product lines and business units for maximum value.
Even though each product line or business unit has its own competitive or
cooperative strategy that it uses to obtain its own competitive advantage in the
market place, the corporation must coordinate these difference business
strategies so that the corporation as a whole succeeds.
Corporate strategy includes decision regarding the flow of financial and other
resources to and from a companys product line and business units. Through a
series of coordinating devices, a company transfers skills and capabilities
developed in one unit to other units that need such resources.
A corporations l strategy is composed of three general orientations (also called
grand strategies):
A) Growth strategies expand the companys activities.
B) Stability strategies make no change to the companys current activities.
C) Retrenchment strategies reduce the companys level of activities.
D) Combination strategies is the combination of the above three strategies.
Having chosen the general orientation a companys managers can select from
more specific corporate strategies such as concentration within one product
line/industry or diversification into other products/industries. These strategies
are useful both to corporations operating in only one product line and to those
operating in many industries with many product lines.

By far the most widely pursued corporate directional strategies are those
designed to achieve growth in sales, assets, profits or some combination.
Companies that do business in expanding industries must grow to survive.
Continuing growth means increasing sales and a chance to take advantage of the
experience curve to reduce per unit cost of products sold, thereby increasing
profits. This cost reduction becomes extremely important if a corporations
industry is growing quickly and competitors are engaging in price wars in
attempts to increase their shares of the market. Firms that have not reached
critical

mass

(that

is,

gained

the

necessary

economy of

large

scale

productions) will face large losses unless they can find and fill a small, but
profitable, niche where higher prices can be offset by special product or service
features. That is why Motorola Inc., continues to spend large sum on the product
development of cellular phones, pagers, and two-way radios, despite a serious
drop in market share and profits. According to Motorolas Chairman George
Fisher, whats at stake here is leadership. Even though the industry was
changing quickly, the company was working to avoid the erosion of its market
share by jumping into new wireless markets as quickly as possible. Being one of
the market leaders in this industry would almost guarantee Motorola enormous
future returns.
A Corporation can grow internally by expanding its operations both globally and
domestically, or it can grow externally through mergers, acquisition and strategic
alliances. A merger is a transaction involving two or more corporations in which
stock is exchanged, but from which only one corporation survives. Mergers
usually occur between firms of somewhat similar size and are usually friendly.
The resulting firm is likely to have a name derived from its composite firms. One
example in the Pharma Industry is the merging of Glaxo and Smithkline Williams
to form Glaxo Smithkline. An Acquisition is the purchase of a company that is
completely absorbed as an operating subsidiary or division of the acquiring
corporation. Examples are Procter & Gambles acquisition of Richardson-Vicks,
known for its Oil of Olay and Vicks Brands, and Gillette, known for shaving
products.
The Corporate Directional Strategies are:
A) Growth
(i) Concentration
Horizontal growth
Vertical growth
-

Forward integration

Backward integration

(ii) Diversification
Concentric
Conglomerate
B) Stability
(i) Pause/Proceed with Caution
(ii) No Change
(iii) Profit

C) Retrenchment
(i) Turnaround
(ii) Captive Company
(iii) Sell-out / Divestment
(iv) Bankruptcy / Liquidation

A) GROWTH STRATEGY
Acquisition usually occurs between firms of different sizes and can be either
friendly or hostile. Hostile acquisitions are often called takeovers. A Strategic
Alliances is a partnership of two or more corporations or business units to
achieve strategically significant objectives that are mutually beneficial. Growth is
a very attractive strategy for two key reasons.

Growth is based on increasing market demand may mask flaws in a company

(flaws that would be immediately evident in a stable or declining market. A
growing flow of revenue into a highly leveraged corporation can create a
large amount of organization slack. (unused resources) that can be used to
quickly resolve problems and conflicts between departments and divisions.
Growth also provides a big cushion for a turnaround in case a strategic error
is made. Larger firms also have more bargaining power than do small firms
and are more likely to obtain support from key stake holders in case of
difficulty.

A growing firm offers more opportunities for advancement, promotions, and

interesting jobs, growth itself is exciting and ego enhancing for CEOs. The

marketplace and potential investors tend to view a growing corporation as a

winner or on the move. Executive compensation tends to get bigger as an
organization increases in size. Large firms also more difficult to acquire than
are smaller ones; thus an executives job is more secure.

(i) CONCENTRATION STRATEGY: If a companys current product lines

have real growth potential, concentration of resources on those product lines
makes sense as a strategy for growth. The two basic concentration strategies
are vertical growth and horizontal growth. Growing firms in a growing
industry tend to choose these strategies before they try diversifications.

Vertical growth can be achieved by taking over a function previously

provided by a supplier or by a distributor. The company, in effect, grows
by making its own supplies and/or by distributing its own products. This
may be done in order to reduce costs, gain control over a scarce resource,
guarantee quality of key input, or obtain access to potential customers.
Eg: Henry Ford used internal company resources to build his River
Rouge Plant outside Detroit. The manufacturing process was
integrated to the point that iron ore entered one end of the long
plant and finished automobiles rolled out the other end into a huge
parking lot.
Cisco Systems, the maker of Internet Hardware, chose the external
route to vertical growth by purchasing Radiata, Inc., a maker of
chips sets for wireless networks. This acquisition gave Cisco access
to technology permitting wireless communications at speeds,
previously possible only with wired connections.

Vertical growth results in vertical integration, the degree to which a

firms operates vertically in multiple locations on an industrys value
chain from extracting raw materials to manufacturing to retailing.
More specifically, assuming a function previously provided by a
supplier is called backward integration (going backward on an
industrys value chain). The purchase of Pentasia Chemicals by
Asian

Paints

Limited

for

the

chemicals

required

for

manufacturing of paints is an example of backward integration.

the

Assuming a function previously provided by a distributor is labeled

forward integration (going forward an industrys value chain).
Arvind mills, Egample, used forward integration when it expanded
out of its successful fabric manufacturing business to make and
market its own branded shirts and pants.

Horizontal Growth can be achieved by expanding the firms products into

other geographic locations and/or by increasing the range of products and
services offered to current market. In this case, the company expands
sideways at the same location on the industrys value chain.
Eg: Ranbaxy Labs followed a horizontal growth strategy when it
extended its pharmaceuticals business to Europe and to USE
company can grow horizontally through internal development or
externally through acquisitions or strategic alliances with another
firm in the same industry.
Horizontal growth results in horizontal integrations the degree to
which a firm operates in multiple geographic locations at the same
point in an industrys value chain. Horizontal integration for a firm
may range from full to partial ownership to long term contract.

(ii) DIVERSIFCATION STRATEGY:

When an industry consolidates and

becomes mature, most of the surviving firms have reached the limits of growth
using vertical and horizontal growth strategies. Unless the competitors are able
to expand internationally into less mature markets, they may have no choice but
to diversify into different industries if they want to continue growing. The two
basic diversification strategies are concentric and conglomerate.
Concentric Diversification (Related) into a related industry may be a
very appropriate corporate strategy when a firm has a strong competitive
position

but

industry

attractiveness

is

low.

By

focusing

on

the

characteristics that have given the company its distinctive competence,

the company uses those very strengths as its means of diversification. The
firm attempts to secure strategic fit in a new industry where the firms
product knowledge, its manufacturing capabilities, and the marketing
skills it used so effectively in the original industry can be put to good use.
Conglomerate

Diversification

(Unrelated)

takes

place

when

management realizes that the current industry is unattractive and that the

firms lacks outstanding abilities or skills that it could easily transfer to

related products, or services in other industries, the most likely strategy is
conglomerate diversification diversifying into an industry unrelated to its
current one. Rather than maintaining a common threat throughout their
organization, strategic managers who adopt this strategy are primarily
concerned with financials considerations of cash flow or risk reductions.

B) STABILITY STRATEGIES
A corporation may choose stability over growth by continuing its current
activities without any significant change in direction. Although sometimes viewed
as lack of strategy, the stability family of corporate strategies can be appropriate
for a successful corporation operating in a reasonably predictable environment.
(i) Pause/Proceed With Caution Strategy In effect, a time out or an
opportunity to rest before continuing a growth or retrenchment strategy.
It is a very deliberate attempt to make only incremental improvements
until a particular environmental situation changes. It is typically conceived
as a temporary strategy to be used until the environmental becomes more
hospitable or to enable a company to consolidate its resources after
prolonged rapid growth.

(ii) No Change Strategy Is a decision to do nothing new (a choice to

continue current operation and policies for the foreseeable future). Rarely
articulated as a definite strategy, a no change strategys success depends
on a lack of significant change in a corporations situation. The relative
stability created by the firms modest competitive position in an industry
facing little of no growth encourages the company to continue on its
current course. Making only small adjustments for inflation in the sales
and profit objectives, there are no obvious opportunities or threats nor
much in the way of significant strengths of weaknesses. Few aggressive
new competitors are likely to enter such an industry.
(iii) Profit Strategy Is a decision to do nothing new in worsening
situation but instead to act as though the companys problems are only
temporary. The profit strategy is an attempt to artificially support profits
when a companys sales are declining by reducing investment and short
term discretionary expenditures. Rather than announcing the companys
poor position to shareholders and the investment community at large, top

management may be tempted to follow this very seductive strategy.

Blaming the companys problems on a hostile environment (such as antibusiness government policies) management defers investments and / or
buts expenses to stabilize profit during this period.

C) RETRENCHMENT STRATEGIES
A company may pursue retrenchment strategies when it has a weak competitive
position in some or all of its product lines resulting in poor performance-sales
are down and profits are becoming losses. These strategies impose a great deal
of pressure to improve performance.
(i) Turnaround Strategy Emphasizes the improvement of operational
efficiency and is probably most appropriate when a corporations problems are
pervasive but not yet critical. Analogous to a weight reduction diet, the two basic
phases of a turnaround strategy are CONTRACTION and CONSOLIDATION.
Contraction is the initial effort to quickly stop the bleeding with a
general across the board cutback in size and costs.
Consolidation, implements a program to stabilize the now-leaner
corporation. To streamline the company, plans are developed to
reduce unnecessary overhead and to make functional activities cost
justified. This is a crucial time for the organization. If the
consolidation phase is not conducted in a positive manner, many of
the best people leave the organization.
(ii) Captive Strategy Is the giving up of independence in exchange for
security. A company with a weak competitive position may not be able to engage
in a full blown turnaround strategy. The industry may not be sufficiently
attractive to justify such an effort from either the current management or from
investors. Nevertheless a company in this situation faces poor sales and
increasing losses unless it takes some action. Management desperately searches
for an angel by offering to be a captive company to one of its larger customers
in order to guarantee the companys continued existence with a long term
contract. In this way, the corporation may be able to reduce the scope of some
of its functional activities, such as marketing, thus reducing costs significantly.

(iii) Sell Out / Divestment Strategy If a corporation with a weak

competitive position in its industry is unable either to pull itself by its bootstraps
or to find a customer to which it can become a captive company, it may have no

choice to Sell Out. The sell out strategy makes sense if managements can still
obtain a good price for its shareholders and the employees can keep their jobs
by selling the entire company to another firm.
(iv) Bankruptcy/ Liquidation Strategy When a company finds itself in the
worst possible situation with a poor competitive position in an industry with few
prospects, management has only a few alternatives all of them distasteful.
Because no one is interested in buying a weak company in an unattractive
industry, the firm must pursue a bankruptcy or liquidation strategy.
Bankruptcy: It involves giving up management of the firm to the courts in
return

for

some

settlement

of

the

corporations

obligations.

Top

management hopes that once the court decides the claims on the
company, the company will be stronger and better able to compete in a
more attractive industry.
Eg: GTB (Global Trust Bank) was promoted as a private sector bank in
1993, and was running successfully and setting records. In 2004, it
became bankrupt under the pressure of bad loans and merged with a
public sector bank, Oriental Bank of Commerce.
Liquidation: It is the termination of the firm. Because the industry is
unattractive and the company too weak to be sold as a going concern,
management may choose to convert as many saleable assets as possible
to cash, which is then distributed to the shareholders after all obligations
are paid.
Eg: Small businesses and partnership firms liquidate when one or more
partners want to withdraw from the business.
Liquidation may be done in the following ways:

Voluntary winding up.

Compulsory winding up under the supervision of the court.

Voluntary winding up under the supervision of the court.

[Note: The benefit of liquidation over bankruptcy is that the board of directors,
as representatives of the shareholders, together with top management makes
the decisions instead of turning them over to the court, which may choose to
ignore shareholders completely.]
D) COMBINATION STRATEGIES

It is the combination of stability, growth & retrenchment strategies adopted by

an organisation, either at the same time in its different businesses, or at
different times in the same business with the aim of improving its performance.
For example, it is certainly feasible for an organization to follow a retrenchment
strategy for a short period of time due to general economic conditions and then
pursue a growth strategy once the economy strengthens.
The obvious combination strategies include (a) retrench, then stability; (b)
retrench, then growth; (c) stability, then retrench; (d) stability, then growth; (e)
growth then retrench, and (f) growth, then stability.
Reasons for adopting combination strategies are given below
Rapid Environment change
Liquidate one unit, develop another
Involves both divestment & acquisition (take over)
It is commonly followed by organizations with multiple unit diversified product &
National or Global market in which a single strategy does not fit all businesses at
a particular point of time.

BUSINESS STRATEGY
The plans and actions that firms devise to compete in a given product/market
scope or setting and asks the question How do we compete within an industry?
is a business strategy. It focuses on improving the competitive position of a
companys business units products or services within the specific industry or
market segment that the company or business unit serves.
It can be:
A) Competitive battling against all competitors for advantage which includes
Low-cost leadership, Differentiation and Focus strategies; and/or
B) Cooperative working with one or more competitors to gain advantage
against other competitors which is also known as Strategic alliances.

Eg: Wet grinder companies like Shantha and Sowbhagya seeks differentiation in
a targeted market segment.

A) COMPETITIVE BUSINESS STRATEGY (PORTERS GENERIC STRATEGY)

Porter's generic strategies framework constitutes a major contribution to
the development of the strategic management literature. Generic strategies
were first presented in two books by Professor Michael Porter of the Harvard
Business School (Porter, 1980). Porter suggested that some of the most basic
choices faced by companies are essentially the scope of the markets that the
company would serve and how the company would compete in the selected
markets. Competitive strategies focus on ways in which a company can achieve
the most advantageous position that it possibly can in its industry . The profit
of a company is essentially the difference between its revenues and costs.
Therefore high profitability can be achieved through achieving the lowest costs
or the highest prices facing the competition. Porter used the terms cost
leadership' and differentiation', wherein the latter is the way in which
companies can earn a price premium.

Main aspects of Porter's Generic Strategies Analysis

According to Porter, there are three generic strategies that a company can
undertake to attain competitive advantage: cost leadership, differentiation, and
focus.

i) Low-Cost Strategy: It is the ability of a company or a business unit to design,

produce and market a comparable product more efficiently than its competitors.
It is a competitive strategy based on the firms ability to provide products or
services at lower cost than its rivals. It is formulated to acquire a substantial
cost advantage over other competitors that can be passed on to consumers to
gain a large market share. As a result the firm can earn a higher profit margin
that result from selling products at current market prices.
Eg: Whirlpool has successfully used a low-cost leadership strategy to build
competitive advantage.
ii) Differentiation Strategy: It is the ability to provide unique and superior value
to the buyer in terms of product quality, special features or after-sale service. It
is a competitive strategy based on providing buyers with something special or
unique that makes the firms product or service distinctive. The customers are
willing to pay a higher price for a product that is distinct in some special way.
Superior value is created because the product is of higher quality and technically
superior which builds competitive advantage by making customers more loyal
and less-price sensitive to a given firms product or service
Eg: Mercedes and BMW have successfully pursued differentiation strategies.
iii) Focus Strategy: It is designed to help a firm target a specific niche within an
industry. Unlike both low-cost leadership and differentiation strategies that are
designed to target a broader or industry-wide market, focus strategies aim at a
specific and typically small niche. These niches could be a particular buyer
group, a narrow segment of a given product line, a geographic or regional
market, or a niche with distinctive special tastes and preferences.
Eg: Solectron is a highly specialized manufacturer of circuit boards used in PCs
and other electronic devices which has adopted a well-defined focus strategy.

Combination (Stuck in the middle)

According to Porter, a company's failure to make a choice between cost
leadership and differentiation essentially implies that the company is stuck in
the middle. There is no competitive advantage for a company that is stuck in
the middle and the result is often poor financial performance. However, there is
disagreement between scholars on this aspect of the analysis. Kay (1993) and
Miller (1992) have cited empirical examples of successful companies like Toyota
and Benetton, which have adopted more than one generic strategy. Both these
companies used the generic strategies of differentiation and low cost
simultaneously, which led to the success of the companies.

B) COOPERATIVE BUSINESS STRATEGY (STRATEGIC ALLIANCE)

The role of strategic alliances in shaping corporate and business strategy has
grown significantly over the past decade. In almost every industry, alliances are
becoming more common as companies realize that they can no longer afford the
costs of developing new products or entering new markets on their own.
Alliances are especially prevalent in industries or technologies that change
rapidly, such as semi conductors, airlines, automobiles, pharmaceuticals,
telecommunications, consumer electronics and financial services. On a broader
global level, many U.S and Japanese firms in the automobile and electronics
industries have teamed up to develop new technologies, even as they compete
fiercely to sell their existing products and enter each others markets.

A Strategic Alliance is a cooperative agreement between companies who are

competitors from different companies. Strategic alliances are linkages between
companies designed to achieve an objective faster or more efficiently than if
either firm attempted to do so on its own. They serve a vital role in extending
and renewing a firms sources of competitive advantage because they allow
companies to limit certain kinds of risk when entering new terrain.
Ex: In the beverage industry, Nestle works with Coca- Cola to gain access to the
others distribution channels.
In the computer hardware industry, Toshiba and Samsung have formed a
strategic alliance for manufacturing advanced memory chips.

FACTORS PROMOTING THE RISE OF STRATEGIC ALLIANCES (OR)

REASONS
FOR FORMING STRATEGIC ALLIANCES

(i)

To gain access to foreign markets in the pharmaceutical industry,

Pharmacia and Pfizer have formed an alliance for smooth market entry
to accelerate the acceptance of a new drug.

(ii)

To reduce financial risks IBM, Toshiba and Siemens have entered into
an alliance to share the fixed costs of developing new microprocessors.

(iii)

To bring complementary skills Intel formed and alliance with HewlettPackard

(HP)

to

use

HPs

capability

to

develop

Pentium

microprocessors.
(iv)

To reduce political risks Maytag, a U.S company entered into alliance

with Chinese appliance maker RSD to gain access to China.

(v)

To achieve competitive advantage GM and Toyota established joint

venture by name Nummi Corporation.

(vi)

To set technological standards Philips entered into an alliance with

Matsushita to manufacture and market the digital compact cassette.

(vii)

To shape industry evolution Lucent Technologies and Motorola

entered into an alliance to develop a new generation of Digital signal
processing chips that is designed to power next- generation cellular
phones and other consumer electronics.

TYPES OF STRATEGIC ALLIANCES

a) Mutual Service Consortia: A Mutual Service Consortium is a partnership of
similar companies in similar industries who pool their resources to gain a benefit
that is too expensive to develop alone.
Eg: IBM offered Toshiba its expertise in chemical mechanical polishing to
develop a new manufacturing process.

b) Joint Venture: A joint venture is a cooperative business activity, formed by

two or more separate organizations for strategic purposes, that creates an
independent

business

identity

and

allocates

ownership,

operational

responsibilities and financial risks and rewards to each member, while preserving
their separate identity or autonomy.
Eg: IOC and oil tanking GmbH formed a joint venture to build and operate
terminating services for petroleum products.

c) Licensing Arrangement: A licensing agreement is an agreement in which the

licensing firm grants rights to another firm in another country or market to
produce and/ or sell a product.
Eg: P&G licensed the Old Spice trademark and business to a Goa- based
company, Menezes cosmetics (P) Ltd for a period of 10 years to manufacture,
sell, distribute and market in India, Sri Lanka and Bangladesh.

d) Value-Chain Partnership: The value- chain partnership is a strong and close

alliance in which one company or unit forms a long- term arrangement with a
key supplier or distributor for mutual advantage.
Eg: Value- Chain partnership between Cisco Systems and its suppliers.
All forms of strategic alliances are filled with uncertainty. One thorny issue in any
strategic alliance is how to cooperate without giving away the company or
business units core competence. There are many other issues that need to be
dealt with when the alliance is initially formed and others that emerge later.

Strategic alliance success factors

The success factors of strategic alliances are:

Have a clear strategic purpose;

Find

fitting

partner

with

compatible

goals

and

complementary

capabilities;

Identify likely partnering risks and deal with them when the alliance is
formed;

Allocate tasks and responsibilities to each partner;

Create incentives for cooperation to minimize differences in corporate

culture;

Minimize conflicts among partners by clarifying objectives and avoiding

direct competition in market place;

Comprehensive cross- cultural knowledge should be ensured in an

international alliance;

Exchange human resources to maintain communication and trust;

Operate with long- term time horizons;

Develop multiple joint products so that any failures are counterbalanced

by successes;

Share information to build trust and keep projects on target. Monitor

customer responses and service complaints;

Be flexible and willing to renegotiate the relationship of environmental

changes and new opportunities;

Agree upon an exit strategy when the alliance is judged a failure.

 FUNCTIONAL STRATEGY
Functional strategy is the approach, a functional area takes to achieve corporate
and business unit objectives and strategies by maximizing resource productivity.
It is concerned with developing and nurturing a distinctive competence to
provide a company and business firm with a competitive advantage. The
orientation of the functional strategy is dictated by its parent business units
strategy.
Eg: A business unit following a competitive strategy of differentiation through
high quality needs a manufacturing functional strategy that emphasizes
expensive quality assurance process over cheaper, high-volume production.
A HR functional strategy that emphasizes the hiring and training of a highly
skilled but costly workforce and a marketing functional strategy that emphasizes
distribution channel pull using advertising to increase consumer demand over
push using promotional allowances to retailers.
If a business unit were to follow a low cost competitive strategy, however a
different set of functional strategies would be needed to support the business
strategy. Functional Strategies may need to vary from region to region.
Eg: When Maggi Noodles expanded into India, it was marketed as a snack food
and not as a main course meal. Since Indians prefer a heavy breakfast, they
preferred to eat noodles in the evening as a fast to cook and ready to serve
evening meal, especially to children.
Any functional strategy will be successful if it is built around core competence
and distinctive competence. When a firm does not have distinctive competence
in any functional area, it is preferable to opt for outsourcing.

A) OUTSOURCING: is purchasing from someone else a product or service that

had been previously provided internally. It is becoming an increasingly
important part of strategic decision making and an important way to increase
efficiency and often quickly. Firms competing in global industries must in
particular search worldwide for the most appropriate suppliers.
Eg: Daimler Chrysler outsourced its designing of car accessory to Plexion
Technologies

in

Bangalore.

Toyota

has

outsourced

its

transmission

components designing to BFL.

The key to outsourcing is to purchase from outside only those activities that
are not key to the companys distinctive competencies. Otherwise, the

company may give up the very capabilities that made it successful in the first
place thus providing itself on the road to eventual decline. In determining
functional strategy, the strategist must.

Identify the companys or business units core competencies

Ensure that the competencies are continually being strengthened and

Manage the competencies in such a way that best preserves the

competitive advantage they create.

B) MARKETING STRATEGY
Marketing strategy deals with pricing, selling and distributing a product.
Using a market development strategy, a company or business unit can:

Capture a larger share of an existing market for current products

through market saturation and market penetration or

Develop new market for current products.

Eg: P & G, Colgate Palmolive

Using Product development Strategy, a company or business unit can

Develop new products Egisting markets or

Develop new products for new markets.

Eg: GCMMF Amul products (Using a successful brand name to market other
products is called line extension and is a good way to appeal to a companys
current customers).

Using Advertising and promotion strategy, a company or business unit can

use

Push Strategy Spending a large amount of money on trade

promotion inorder to gain or hold shelf space in retail outlets.

Pull Strategy spending a large amount of money on consumer

advertising designed to build awareness so that shoppers will ask for
the products.

Using Distribution strategy, a company or business unit can choose any

method of distribution, namely

Using distributors and dealers to sell the products

Selling directly to the consumers

Using Pricing strategy, a company or business unit can choose,

Skim pricing means high price, when the product is novel and
competitors are few or

Penetration pricing is aimed at gaining high market share with a low

price.

C) FINANCIAL STRATEGY
Financial Strategy examines the financial implications of corporate and
business level strategies options and identifies the best financial course of
action. It attempts usually to maximize the financial strategies adopted by a
company or a business unit. The Financial strategies may be:

Achieving the desired debt to equity ratio and relying on internal long
term financing (via) cash flow, (Equity financing is preferred for related
diversification and debt financing for unrelated diversification)

Leveraged buy out (LBO) a company is acquired in a transaction,

which is namely financed by funds arranged from a third party such as
a bank of financial institutions. This firm declines because of inflated
expectation , utilization of all stock, management burn out and a lack
of strategic management and

Management of dividends to shareholders.

Establishing

tracking

stock

followed

by

large

established

corporations. A tracking stock is a type of common stock tied to one

portion of a corporations business. It is actually an equity interest, in
the parent company. Eg: At & T.

D) RESEARCH & DEVELOPMENT STRATEGY

R& D Strategy deals with product and process innovation and improvement.
It also deals with appropriate mix of different types of R & D (Basic, product,
or process) and with the question of how new technology should be accessed
by internal development, external acquisition or through strategic alliances.
The R & D choices may be:

Technology leadership in which one pioneers an innovation,

Eg: Nike Inc. or

Technological followership in which one imitates the products of

competitors.
Eg: Dean Foods Co.

E) OPERATIONS STRATEGY
Operation Strategy determines how and where a product or service is to be
manufactured, the level of vertical integration in the production process and
the deployment of physical resources. It should also deal with the optimum
level of technology the firm should use in its operation processes. The
strategies are:

Advances

manufacturing

Technology

(AMT)

is

revolutionizing

operations worldwide and should continue to have a major impact as

corporations strive to integrate diverse business activities using
Computer integrated design and manufacturing (CAD / CAM)

Manufacturing strategy of a firm is affected by a products life cycle. A

firm can opt for either production system
(a) Job shop operations through connected line batch flow or
(b) Flexible manufacturing systems and dedicated transfer lines/

Continuous improvement strategy

Mass customization

Modular product designs

F) PURCHASING STRATEGY
Purchasing Strategy deals with obtaining the raw materials, parts and
suppliers needed to perform the operations functions. The basic purchasing
choices are

Multiple Sourcing is superior to other purchasing approaches because

(a) It forces suppliers to compete for the business of an important
buyer, thus reducing purchasing costs and
(b) If one supplier could not deliver, another usually could, thus
guaranteeing that parts and supplied would always be on hand
when needed.

Sole Sourcing relies on only one supplier for a particular part. It is

the only manageable way to obtain high superior quality. It can
simplify the purchasing companys production process by using JIT
rather than keeping inventories. It reduces transaction costs and builds

quality by having purchaser and supplier work together as partners

rather than as adversaries.

Parallel Sourcing Two suppliers are the sole suppliers of two different
parts, but they are also backup suppliers for each others parts. If one
vendor cannot supply all of its part on time, the other vendor would be
able to make up the difference.

G) LOGISTICS STRATEGY
Logistics strategy deals with the flow of products into and out of the
manufacturing process. Three trends are evident, namely:

Centralization Refers to the centralized logistics group usually

contains specialists with expertise in different transportation modes
such as rail or trucking or

Outsourcing of logistics reduces cost and improves delivery time or

Use of internet simplifies logistical system and created an online

system for its retailers and suppliers. Less chance for loose cases to be
lost in delivery and paperwork doesnt have to be done.

H) HRM STRATEGY
HRM Strategy addresses the issue whether a company or business unit
should try to:

Hire a large no. of low skilled employees who receives low pay, perform
repetitive jobs, and most likely quit after a short time (Eg: McDonald)

Hire skilled employees who received relatively high pay and are cross
trained to participate in self management work teams (Eg: MNCs)

Business firms are experimenting with different category of workers

(a) Part time workers
(b) Temporary workers
(c) Leasing of employees

Diverse workforce constitutes a competitive advantage. Companies with a

high degree of racial diversity follow a growth strategy it tends to have higher
productivity than others.

I) INFORMATION SYSTEM STRATEGY

Corporations are turning to IS strategies to provide business units with
competitive advantage. The IS strategies are:

Use of sophisticated intranet for the use of employees where project

team members living in one country can pass their work to team
members in another country in which the work day is just beginning;

IS to form closer relationship with both their customers and suppliers;

and

IS enables workers to have online communication with co-workers in

other countries who use, a different language.

STRATEGIES TO AVOID
Several strategies, which could be considered corporate, business or functional,
are very dangerous. Managers who made a poor analysis or lack creativity may
be trapped into considering some of the following strategies to avoid, namely:

Follow the Leader Imitating a leading competitors strategy might seems

to be a good idea, but it ignores a firms particular strengthens and
weakness and the possibility that the leader may be wrong. Eg: Fujitsu
Ltd, 2nd largest computer maker, was driven sine the 1960s with the
ambition of catching up with IBM. It competed as a mainframe computermaker but failed to notice that the mainframe business had reached
maturity by 1990.

Hit Another Home Run If a company is successful because it pioneered

an extremely successful product, it tends to search for another super
product that will ensure growth and prosperity. Eg: Palaroid spent a lot of
money in developing and instant movie camera, but the public ignored it
in favour f the camcorder.

Arms race Entering into a spirited battle with another firm for increased
market share might increase sales revenue, but that increase will probably
be more then offset by increases in advertising, promotion, R&D, and
manufacturing cost. Eg: Since the deregulation of airlines, price wars and
special rates have contributed to the low profit margins or bankruptcy of
many major airlines such as Eastern and Continental.

Do Everything When faced with several interesting opportunities,

management of a corporation might have enough resources to develop
each idea into a project, but money, time and energy are soon exhausted
as the many projects demand large infusions of resource. Eg: Walt Disney
Companys expertise in the entertainment industry led it to acquire the
ABC Network, as the company progressed, it spent $750 M to build new
theme parks and buy a cruise line. By 2000, even though corporate sales
continued to increase, net income was falling.

Leasing Hands A corporation might have invested so much in a

particular strategy that top management is unwilling to accept its failure.
Believing that it has too much invested to quit, the corporation continues
to throw good money after bad. Eg: PAN American Airlines close to sell
its profitable PAN AM Building and intercontinental Hotels to keep its
money losing airline flying. It continued to suffer losses, until it had sold
off everything and went bankrupt.

BUILDING AND RE-STRUCTURING THE CORPORATION

There are various methods for the firms to enter into a new business and
restructure the existing one. Firms use following methods for building:

Start-up route: In this route, the business is started from the scratch by
building facilities, purchasing equipments, recruiting employees, opening
up distribution outlet and so on.

Acquisition: Acquisition involves purchasing an established company,

complete with all facilities, equipment and personnel.

Joint Venture: Joint venture involves starting a new venture with the
help of a partner.

Merger: Merger involves fusion of two or more companies into one

company. Takeover: A company which is in financial distress can undergo
the process of takeover. A takeover can be voluntary when the company
requests another company to take over the assets and liabilities and save
it from becoming bankrupt.

Re-structuring: Re-structuring involves strategies for reducing the scope of the

firm by exiting from unprofitable business. Restructuring is a popular strategy
during post liberalization era where diversified organizations divested to
concentrate on core business. Re-structuring strategies:

Retrenchment: Retrenchment strategies are adopted when the firms

performance is poor and its competitive position is weak.

Divestment Strategy: Divestment strategy requires dropping of some of

the businesses or part of the business of the firm, which arises from
conscious corporate judgement in order to reverse a negative trend.

Spin-off: Selling of a business unit to independent investors is known as

spin-off. It is the best way to recover the initial investment as much as
possible. The highest bidder gets the divested unit.

Management-buyout: selling off the divested unit to its management is

known as management buyout.

Harvest strategy: A harvest strategy involves halting investment in a

unit in order to maximize short- to- medium term cash flow from that unit
before liquidating it. Liquidation: Liquidation is considered to be an
unattractive strategy because the industry is unattractive and the firm is
in a weak competitive position. It is pursued as a last step because the
employees lose jobs and it is considered to be a sign of failure of the top
management.

COMPETITIVE CHANGES DURING INDUSTRY EVOLUTION

Industry lifecycle comprises four stages including fragmentation, growth,
maturity and decline. An understanding of the industry lifecycle can help
competing companies survive during periods of transition. Several variations of
the lifecycle model have been developed to address the development and
transition of products, market and industry. The models are similar but the
number of stages and names of each may differ. Major models include those
developed by Fox (1973), Wasson (1974), Anderson & Zeithaml (1984), and Hill
& Jones (1998).

a) Fragmentation Stage
Fragmentation is the first stage of the new industry. This is the stage when the
new industry develops the business. At this stage, the new industry normally

arises when an entrepreneur overcomes the twin problems of innovation and

invention, and works out how to bring the new products or services into the
market. For example, air travel services of major airlines in Europe were sold
to the target market at a high price. Therefore, the majority of airlines'
customers in Europe were those people with high incomes who could afford
premium prices for faster travel.
In 1985, Ryanair made a huge change in the European airline industry. Ryanair
was the first airline to engage low-cost airlines in Europe. At that time,
Ryanair's services were perceived as the innovation of the European airline
industry. Ryanair tickets are half the price of British Airways. Some of its sales
promotions were very low. This made people think that air travel was not just
made for the rich, but everybody.
Ryanair overcame the twin problems of innovation and invention in the airline
industry by inventing air travel services that could serve passengers with tight
budgets and those who just wanted to reach their destination without breaking
their bank savings. Ryanair achieved this goal by eliminating unnecessary
services offered by traditional airlines. It does not offer free meals, uses paperfree air tickets, gets rid of mile collecting scheme, utilises secondary airports,
and offers frequent flights. These techniques help Ryanair save time and costs
spent in airline business operation.

b) Shake-out
Shake-out is the second stage of the industry lifecycle. It is the stage at which
a new industry emerges. During the shake-out stage, competitors start to
realise business opportunities in the emerging industry. The value of the
industry also quickly rises.
For example, many people die and suffer because of cigarettes every year.
Thus, the UK government decided to launch a campaign to encourage people to
quit smoking. Nicorette, one of the leading companies is producing several
nicotine products to help people quit smoking. Some of its well-known products
include Nicorette patches, Nicolette gums and Nicorette lozenges.
Smokers began to see an easy way to quit smoking. The new industry started
to attract brand recognition and brand awareness among its target market
during the shake-out stage. Nicorette's products began to gain popularity
among those who wanted to quit smoking or those who wanted to reduce their
daily cigarette consumption.

During this period, another company realised the opportunity in this market
and decided to enter it by launching nicotine product ranges, including Nic Lite
gum and patches. It recently went beyond UK boarder after the UK
government introduced non-smoking policy in public places, including pubs and
nightclubs. This business threat created a new business opportunity in the
industry for Nic Lite to launch a new nicotine-related product called Nic Time.
Nic Time is a whole new way for smokers to "get a cigarette" an eight-ounce
bottle contains a lemon-flavoured drink laced with nicotine, the same amount
of nicotine as two cigarettes. Nic Lite was first available at Los Angeles airports
for smokers who got uneasy on flights, but now the nicotine soft drinks are
available in some convenience stores.

c) Maturity
Maturity is the third stage in the industry lifecycle. Maturity is a stage at which
the efficiencies of the dominant business model give these organisations
competitive advantage over competition. The competition in the industry is
rather aggressive because there are many competitors and product substitutes.
Price, competition, and cooperation take on a complex form. Some companies
may shift some of the production overseas in order to gain competitive
advantage.
For example, Toyota is one of the world's leading multinational companies,
selling automobiles to customers worldwide. The export and import taxes mean
that its cars lose competitiveness to the local competitors, especially in the
European automobile industry. As a result, Toyota decided to open a factory in
the UK in order to produce cars and sell them to customers in the European
market.
The haute couture fashion industry is another good example. There are many
western-branded fashion labels that manufacture their products overseas by
cooperating with overseas partners, or they could seek foreign suppliers who
specialise in particular materials or items. For instance, Nike has factories in
China and Thailand as both countries have cheap labour costs and cheap,
quality materials, particularly rubber and fabric. However, their overseas
partners are not allowed to sell shoes produced for Adidas and Nike. The items
have to be shipped back to the US, and then will be exported to countries
worldwide, including China and Thailand.

d) Decline

Decline is the final stage of the industry lifecycle. Decline is a stage during
which a war of slow destruction between businesses may develop and those
with heavy bureaucracies may fail. In addition, the demand in the market may
be fully satisfied or suppliers may be running out.
In the stage of decline, some companies may leave the industry if there is no
demand for the products or services they provide, or they may develop new
products or services that meet the demand in the market. In such cases, this
will create a new industry.
For example, at the beginning of the communication industry, pagers were
used as the main communication method among people working in the same
organisation, such as doctors and nurses. Then, the cutting edge of the
communication industry emerged in the form of the mobile phone. The
communication

process

of

pagers

could

not

be

accomplished

without

telephones. To send a message to another pager, the user had to phone the
call-centre staff who would type and send the message to another pager. On
the other hand, people who use mobile phones can make a phone-call and
send messages to other mobiles without going through call-centre staff.
In recent years, the features of mobile phones have been developing rapidly
and continually. Now people can use mobiles to send multimedia messages,
take pictures, check email, surf the internet, read news and listen to music. As
mobile phone feature development has reached saturation, thus the new
innovation of mobile phone technology has incorporated the use of computers.
The launch of personal digital assistants (PDA) is a good example of the decline
stage of the mobile phone industry as the features of most mobiles are similar.
PDAs are hand-held computers that were originally designed as a personal
organiser but it become much more multi-faceted in recent years. PDAs are
known as pocket computers or palmtop computers. They have many uses for
both mobile phones and computers such as computer games, global positioning
system, video recording, typewriting and wireless wide-area network.

Application of industry life cycle

It is important for companies to understand the use of the industry lifecycle
because it is a survival tool for businesses to compete in the industry
effectively and successfully. The main aspects in terms of strategic issues of
the industry lifecycle are described below:

Competing over emerging industries

The game rules in industry competition can be undetermined and the

resources may be constrained. Thus, it is vital for firms to identify
market segments that will allow them to secure and sustain a strong
position within the industry.

The product in the industry may not be standardised so it is necessary

for companies to obtain resources needed to support new product
development and rapid company expansion.

The entry barriers may be low and the potential competition may be
high, thus companies must adapt to shift the mobility barriers.

Consumers may be uncertain in terms of demand. As a result,

determining the time of entry to the industry can help companies to
take business opportunities before their rivals.

Competing during the transition to industry maturity

When competition in the industry increases, firms can have a

sustainable competitive advantage that will provide a basis for
competing against other companies.

The new products and applications are harder to come by, while buyers
become more sophisticated and difficult to understand in the maturity
stage of the industry lifecycle. Thus, consumer research should be
carried out and this could help companies in building up new product
lines.

Slower industry growth constrains capacity growth and often leads to

reduced

industry

profitability

and

some

consolidation.

Therefore,

companies can focus greater attention on costs through strategic cost

analysis.

The change in the industry is rather dynamic, and an understanding of

the industry lifecycle can help companies to monitor and tackle these
changes effectively. Firms can develop organisational structures and
systems that can facilitate the transition.

Some companies may seek business opportunities overseas when the

industries reach the maturity stage because during this stage, the
demand in the market starts to decline.

Competing in declining industries

The characteristics of declining industries include the following:

Declining demand for products

Pruning of product lines

Shrinking profit margins

Falling research and development advertisement expenditure

Declining number of rivals as many are forced to leave the industry

For companies to survive the dynamic environment, it is necessary for them to:

Measure the intensity of competition

Assess the causes of decline

Single out a viable strategy for decline such as leadership, liquidation

and harvest.

INDUSTRY STRUCTURE
Industry is a collection of firms offering goods or services that are close
substitutes of each other. An Industry consists of firms that directly compete
with each other. Industry structure refers to the number and size distribution of
firms in an industry. The number of firms in an industry may run into hundreds
or thousands. The size distribution of the
Firm is important from both business policy and public policy views. The level of
competition in an industry rises with the number of firms in the industry.
i) Fragmented Industry
If all firms in an industry are small in size when compared with the size of the
whole industry, then it is known as fragmented industry. In a fragmented
industry, no
Firms have large market. Each firm serves only a small piece of total market in
competition with others.
ii) Consolidated Industry
If small number of firms controls a large share of the industry's output or sales,
it is known as a consolidated industry.
CHARACTERISTICS OF INDUSTRY STRUCTURE
A final dimension of industry that is important to the performance of new firms is
industry structure. The structure of the industry refers to the nature of barriers
to entry and competitive dynamics in the industry.
Four characteristics of industry structure are particularly important to the
performance of new firms in the industry:

 Capital Intensity
Advertising Intensity
Concentration
Average firm size
Capital Intensity measures the importance of capital as opposed to labor in
the production process. Some industries, such as aerospace, involve a great deal
of capital and relatively little labor. Other industries, such as textiles, involve
relatively little capital and a great deal of labor.
Advertising Intensity Advertising is a mechanism through which companies
develop the reputations that help them sell their products and services. To build
brand name reputation through advertising, two conditions need to be met.
First, the advertising has to be repeated over time. Second, economies of scale
exist in advertising.
Concentration is a measure of the market share that is held by the largest
companies in an industry. For instance, some pharmaceutical industries like
Merck, Pfizer and Eli Lilly account for almost all of the market.
Average firm size - New firms perform better, when the average firm size is
small. New firms tend to begin small as a way to minimize the risk of
Entrepreneurial miscalculation. If the average firm size is large, this may lead to
Inability to purchase in volume, higher average manufacturing and Distribution
cost.

USES OF INDUSTRY STRUCTURE

Business Policy and Strategy: By looking at the structure of an
industry, one can often learn a lot about competition, rivalry, entry
barriers, and other aspects of competitive dynamics in that industry.
Public Policy: Public Policy View is that, reduced competition in an
industry hurts consumers interest and encourages dominant firms to
adopt anti competitive trade practices.
Oligopoly: A key characteristic of an oligopoly (a highly structured
industry) is that competitors are mutually interdependent; a competitive
move by one company will almost certainly affect the fortunes of other
companies in the industry and they will generally respond to the movesooner or later.

GLOBALIZATION
Globalisation is the term to describe the way countries are becoming more
interconnected both economically and culturally. This process is a combination of
economic, technological, socio-cultural and political forces.

ADVANTAGES
Increased free trade between nations
Increased liquidity of capital allowing investors in developed nations to
invest in developing nations
Corporations have greater flexibility to operate across borders
Global mass media ties the world together.
Increased flow of communications allows vital information to be shared
between individuals and corporations around the world
Greater ease and speed of transportation for goods and people.
Reduction of cultural barriers increased the global village effect
Spread of democratic ideals to developed nations.
Greater interdependence of nation states.
Reduction of likelihood of war between developed nations
Increases in environmental protection in developed nations

DISADVANTAGES
Increased flow of skilled and non-skilled jobs from developed to
developing nations as corporations seek out the cheapest labor.
Spread of a materialistic lifestyle and attitude that sees consumption
as the path to prosperity
International bodies like the world trade organization infringe on
national and individual
Greater risk of diseased being transported unintentionally between
nations.
Greater chance of reactions for globalization being violent in an
attempt to preserve cultural heritage.
Increased likelihood of economic disruptions in one nation effecting all
nations.
Threat that control of world media by a handful of corporations will
limit cultural expression.

 Take advantage of weak regulatory rules in developing countries.

Increase in the chances of civil war within developing countries and
open war between developing countries as they vie for resources.
Decrease in environmental integrity as polluting corporations.

UNIT-3
22 hours
Strategy
Implementation:
Project
implementation,
procedural
implementation, resource allocation, organization structure, matching
structure and strategy
(10 hrs)
Behavioral Issues in Implementation: Leadership and corporate
culture, values, ethics and social responsibility, Mc Kinseys 7s framework
- concepts of learning organization
(6 hrs)
Functional Issues: Functional plans and policies, financial marketing,
operations, personnel, IT Integration of functional plans, strategic control
and operational control, organizational systems and techniques of
strategic evaluation

STRATEGY IMPLEMENTATION

The implementation of organization strategy involves the application of the

management process to obtain the desired results. Particularly, strategy
implementation

includes designing

the

organization's structure, allocating

resources, developing strategic control systems.

Strategy implementation is "the process of allocating resources to support the

chosen strategies". This process includes the various management activities that
are necessary to put strategy in motion, institute strategic controls that monitor
progress, and ultimately achieve organizational goals.

The

Relation

between

Strategy

Formulation

and

guarantee

successful

Strategy

Implementation

Successful

strategy

implementation.
strategy

formulation

Strategy

formulation.

does

not

implementation

Strategy

is

formulation

fundamentally
and

different

implementation

contrasted in the following ways:

STRATEGY FORMULATION

strategy

STRATEGY IMPLEMENTATION

from

can

be

Strategy formulation is positioning

Strategy

forces before the action.

managing forces during the action.

Strategy

formulation

focuses

on

Strategy

implementation

implementation

is

focuses

effectiveness.

on efficiency.

Strategy formulation is primarily an

Strategy

intellectual process.

primarily an operational process.

Strategy formulation requires good

Strategy implementation requires

intuitive and analytical skills.

special motivation and leadership

implementation

is

skills

Strategy
coordination

formulation
among

individuals

requires
a

Strategy implementation requires

few combination

among

many

individuals.

PLANS, PROGRAMMES, AND PROJECTS

The strategic plan devised by the organization proposes the manner in which the
strategies could be put into action. Strategies, by themselves, do not lead to
action. They are, in a sense, a statement of intent: implementation tasks are
meant to realize the intent. Strategies, therefore, have to be activated through
implementation.

Strategies should lead to plans. For instance, if stability strategies have been
formulated, they may lead to the formulation of various plans. One such plan
could be a modernization plan. Plans result in different kinds of programmes. A
programme is a broad term, which includes goals, policies, procedures, rules,
and steps to be taken in putting a plan into action. Programmes are usually
supported by funds allocated for plan implementation. An example of a
programme is a research and development programme for the development of a
new product.
Programmes lead to the formulation of projects. A project is a highly specific
programme for which the time schedule and costs are predetermined. It requires
allocation of funds based on capital budgeting by organizations. Thus, research
and development programmes may consist of several projects, each of which is
intended to achieve a specific and limited objective, requires separate allocation
of funds, and is to be completed within a set time schedule.
Implementation of strategies is not limited to formulation of plans, programmes,
and projects. Projects would also require resources. After that is provided, it
would be essential to see that a proper organizational structure is designed,
systems are installed, functional policies are devised, and various behavioural
inputs are provided so that plans may work.

Strategic Implementation Process

[Link] and J. Peter proposed a five-stage model of the strategy implementation

process:

a) Determining how much the organization will have to change in order to

implement the strategy under consideration, under consideration.
b) Analyzing the formal and informal structures of the organization.
c) Analyzing the "culture" of the organization.
d) Selecting an appropriate approach to implementing the strategy.
e) Implementing the strategy and evaluating the results.

Galbraith suggests that several major internal aspects of the organization may
need to be synchronized to put a chosen strategy into action. Major factors are
technology, human resources, reward systems, decision process and structure.
This factors tend to be interconnected, so a change in one may necessitate
change in one or more others.
Hambrick

and

Cannella

described

five

steps

for

effective

strategy

implementation:
a) Input from a wide range of sources is required in the strategy formulation
stage (i.e., the mission, environment, resources, and strategic options
component).
b) The obstacles to implementation, both those internal and external to the
organization, should be carefully assessed.
c) Strategists should be use implementation levers or management tasks to
initiate this component of the strategic management process. Such levers
may come from the way resources are committed, the approach used to
structure the organization, the selection of managers, and the method of
rewarding employees.
d) The next step is to sell the implementation. Selling upward entails convincing
boards of directors and seniors management of the merits and viability of the
strategy. Selling downward involves convincing lower level management and
employees of the appropriateness of the strategy. Selling across involves
coordinating implementation across the various units of an organization,
while selling outward entails communicating the strategy to external
stakeholders.
e) The process is on-going and a continuous fine tuning, adjusting, and
responding is needed as circumstance change.

RESOURCE ALLOCATION
The resources may be existing with a company or many be acquired through
capital allocation. Resources include physical ,financial and human resources
essential for implementing plans. Resources are broadly of four categories.

i) Money
ii) Facilities and equipments
iii) Materials, supplies and services
iv) Personnel

Decisions involved in allocation of resources have vital significance in strategy

implementation. In single product firms it may involve assessment of the
resource needs of different functional departments. In the multi divisional
organization it implies assessing the resource needs of different SBUs or product
divisions Redeployment or reallocation of resources becomes necessary when
changes take place. The redeployment of resources is quite critical when there
are major changes and shifts in strategic posture of company. Redeployment of
resources may arise due to strategies of a company to grow in certain areas and
withdraw from the other.
Methods of Resource allocation
(i) Based on percentages:
Usually, companies have been following system of allocation of resources by
percentages. It may not serve much purpose these days. They may be of help
only in making some comparisons. The allocation of resources should not be
based on their availability or scarcity as it may prove to be counterproductive.
The resource allocation should be made with regard to strategies of a company
for its future competitive position and growth. The decisions of resource
allocation are also closely connected with the objectives of a company.

(ii) Based on modern methods

Other methods include -Portfolio models, product life-cycle charts, balance
sheets, profit and loss statements income statements. When retrenchment or
turnaround strategies are implemented zero-based budgeting is used. During
mergers,

acquisitions

and

expansion,

capital

budgeting

techniques

are

suggested. Resource allocation is not purely a rational technique but is based on

several behavioral and political considerations. The other analytical conceptual
models used for strategic choice are growth share matrix, stop light, and
Directional Policy Matrix used in multi divisional firms. A more comprehensive
approach to management decisions on resource allocation is provided by the
budgeting system carefully geared to the chosen strategy.
Problems in resource allocation
There are several difficulties in resource allocation. The following are some of the
identified problems.
i) Scarcity of resources.

Financial, physical, and human resources are hard to find. Firms will usually face
difficulties in procuring finance. Even if fianc is available, the cost of capital is a
constraint. Those firms that enjoy investor confidence and high credit worthiness
possess a competitive advantage as it increases their resource-generation
capability. Physical resources would consist of assets, such as, lard machinery,
and equipment. In a developing country like India, many capital goods have to
be imported. The government may no longer impose many conditions but it does
place a burden on the firms finances and this places a restriction on firms
wishing to procure physical resources. Human resources are seemingly in
abundance in India but the problem arises due to the non-availability of skills
that are specially required. Information technology and computer professionals,
advertising personnel, and telecom, power and insurance experts are scarce in
India. This places severe restrictions on firms wishing to attract and retain
personnel. In sum, the availability resources are a very real problem.
ii) Restrictions on generating resources
In the usual budgeting process these are several restrictions for generating
resources due to the SBU concept especially for new divisions and departments.
iii) Overstatement of needs
Over statement of needs is another frequent problem in a bottom-up approach
to resource allocation.
The budgeting and corporate planning departments may have to face the ire of
those executives who do not get resources according to their expectations. Such
negative reactions may hamper the process of strategic planning itself.
DESIGNING ORGANIZATION STRUCTURE

An organizational structure is the pattern or arrangement of jobs and groups of

jobs within an organization. Organizational Design is the process of creating or
reshaping an organizational structure optimized to support strategic decisions.

The elements of organization structure and design are

a) Division of labor
b) Departmentalization
c) Delegation of authority
d) Span of control

A) DIVISION OF LABOR:
It is the process of dividing work into relatively specialized jobs to achieve
advantages of specialization

Division of Labor Occurs in Three Different Ways:

i) Personal specialties
e.g., accountants, software engineers, graphic designers, scientists,
etc.
ii) Natural sequence of work
e.g., dividing work in a manufacturing plant into fabricating and
assembly (horizontal specialization)
iii) Vertical plane
e.g., hierarchy of authority from lowest-level manager to highest-level
manager
B) DEPARTMENTALIZATION:
Departmentalization

is

the

process

of

grouping

of

work

activities

into

departments, divisions, and other homogenous units. It takes place in various

patterns like departmentalization by functions, products, customers, geographic
location, process, and its combinations.
i) Functional Departmentalization

Functional Departmentalization is the process of grouping activities by functions

performed. Activities can be grouped according to function (work being done) to
pursue economies of scale by placing employees with shared skills and
knowledge into departments for example human resources, finance, production,
and marketing. Functional Departmentalization can be used in all types of
organizations.
Advantages:

Advantage of specialization

Easy control over functions

Pinpointing training needs of manager

It is very simple process of grouping activities.

Disadvantages:

Lack of responsibility for the end result

Overspecialization or lack of general management

It

leads

to

increase

conflicts

departments.

ii) Product Departmentalization

and

coordination

problems

among

Product Departmentalization is the process of grouping activities by

product line. Tasks can also be grouped according to a specific product or
service, thus placing all activities related to the product or the service under one
manager. Each major product area in the corporation is under the authority of a
senior manager who is specialist in, and is responsible for, everything related to
the product line. Dabur India Limited is the Indias largest Ayurvedic medicine
manufacturer is an example of company that uses product Departmentalization.
Its structure is based on its varied product lines which include Home care, Health
care, Personal care and Foods.

Advantages

It ensures better customer service

Unprofitable products may be easily determined

It assists in development of all around managerial talent

Makes control effective

It is flexible and new product line can be added easily.

Disadvantages

It is expensive as duplication of service functions occurs in various product

divisions

Customers and dealers have to deal with different persons for complaint
and information of different products.

iii) Customer Departmentalization

Customer Departmentalization is the process of grouping activities on the

basis of common customers or types of customers. Jobs may be grouped
according to the type of customer served by the organization. The assumption is
that customers in each department have a common set of problems and needs
that can best be met by specialists. UCO is the one of the largest commercial
banks

of

India

is

an

example

of

company

that

uses

customer

Departmentalization. Its structure is based on various services which includes

Home loans, Business loans, Vehicle loans and Educational loans.
Advantages

It focused on customers who are ultimate suppliers of money

Better service to customer having different needs and tastes

Development in general managerial skills

Disadvantages

Sales being the exclusive field of its application, co-ordination may appear
difficult between sales function and other enterprise functions.

Specialized sales staff may become idle with the downward movement of
sales to any specified group of customers.

iv) Geographic Departmentalization

Geographic Departmentalization is the process of grouping activities on

the basis of territory. If an organization's customers are geographically
dispersed, it can group jobs based on geography. For example, the organization
structure of Coca-Cola Ltd has reflected the companys operation in various
geographic areas such as Central North American group, Western North
American group, Eastern North American group and European group
Advantages

Help to cater to the needs of local people more satisfactorily.

It facilitates effective control

Assists in development of all-round managerial skills

Disadvantages

Communication problem between head office and regional office due to

lack of means of communication at some location

Coordination between various divisions may become difficult.

Distance between policy framers and executors

It leads to duplication of activities which may cost higher.

v) Process Departmentalization

Geographic Departmentalization is the process of grouping activities on

the basis of product or service or customer flow. Because each process requires
different skills, process Departmentalization allows homogenous activities to be
categorized. For example, Bowater Thunder Bay, a Canadian company that
harvests trees and processes wood into newsprint and pulp. Bowater has three
divisions namely tree cutting, chemical processing, and finishing (which makes
newsprint).
Advantages
Oriented towards end result.
Professional identification is maintained.
Pinpoints product-profit responsibility.
Disadvantage
Conflict in organization authority exists.
Possibility of disunity of command.
Requires managers effective in human relation
vi) Matrix Departmentalization

In actual practice, no single pattern of grouping activities is applied in the

organization structure with all its levels. Different bases are used in different
segments of the enterprise. Composite or hybrid method forms the common
basis for classifying activities rather than one particular method,. One of the
mixed forms of organization is referred to as matrix or grid organizations
According to the situations, the patterns of Organizing varies from case to case.
The form of structure must reflect the tasks, goals and technology if the
originations the type of people employed and the environmental conditions that
it faces.

It is not unusual to see firms that utilize the function and project

organization combination. The same is true for process and project as well as
other combinations. For instance, a large hospital could have an accounting
department, surgery department, marketing department, and a satellite center
project team that make up its organizational structure.
Advantages

Efficiently manage large, complex tasks

Effectively carry out large, complex tasks

Disadvantages

Requires high levels of coordination

Conflict between bosses

Requires high levels of management skills

C) DELEGATION OF AUTHORITY
Delegation of authority can be defined as subdivision and sub-allocation of
powers to the subordinates in order to achieve effective results.
Centralization and Decentralization are two opposite ways to delegate authority
and to change the organizational structure of organizations accordingly.

i) Centralization:
It is the process of transferring and assigning decision-making authority to
higher levels of an organizational hierarchy. The span of control of top managers
is relatively broad, and there are relatively many tiers in the organization.
Advantages
Provide Power and prestige for manager
Promote uniformity of policies, practices and decisions
Minimal extensive controlling procedures and practices
Minimize duplication of function
Disadvantages
Neglected functions for mid. Level, and less motivated beside personnel.
Nursing supervisor functions as a link officer between nursing director and
first-line management.

ii) Decentralization:
It is the process of transferring and assigning decision-making authority to lower
levels of an organizational hierarchy. The span of control of top managers is
relatively small, and there are relatively few tears in the organization, because
there is more autonomy in the lower ranks.
Advantages
Raise morale and promote interpersonal relationships
Relieve from the daily administration
Bring decision-making close to action
Develop Second-line managers
Promote employees enthusiasm and coordination

 Facilitate actions by lower-level managers

Disadvantages
Top-level administration may feel it would decrease their status
Managers may not permit full and maximum utilization of highly qualified
personnel
Increased costs. It requires more managers and large staff
It may lead to overlapping and duplication of effort
There must be a good balance between centralization and decentralization of
authority and power. Extreme centralization and decentralization must be
avoided.
D) SPAN OF CONTROL
Span of Control means the number of subordinates that can be managed
efficiently and effectively by a superior in an organization. It suggests how the
relations are designed between a superior and a subordinate in an organization.

Factors Affecting Span of Management:

a) Capacity of Superior:
Different

ability

and

capacity

of

leadership,

communication

affect

management of subordinates.
b) Capacity of Subordinates:
Efficient and trained subordinates affects the degree of span

of

management.
c) Nature of Work:
Different types of work require different patterns of management.
d) Degree of Centralization or Decentralization:
Degree

of

centralization

or

decentralization

affects

the

span

of

management by affecting the degree of involvement of the superior in

decision making.
e) Degree of Planning:
Plans which can provide rules, procedures in doing the work higher would
be the degree of span of management.
f) Communication Techniques:
Pattern of communication, its means, and media affect the time
requirement

in

managing

management.
g) Use of Staff Assistance:

subordinates

and

consequently

span

of

Use of Staff assistance in reducing the work load of managers enables

them to manage more number of subordinates.
h) Supervision of others:
If subordinate receives supervision form several other personnel besides
his direct supervisor. In such a case, the work load of direct superior is
reduced and he can supervise more number of persons.

Span of control is of two types:

i) Narrow span of control: Narrow Span of control means a single manager or
supervisor oversees few subordinates. This gives rise to a tall organizational
structure.

Advantages:

Close supervision

Close control of subordinates

Fast communication

Disadvantages:

Too much control

Many levels of management

High costs

Excessive distance between lowest level and highest level

ii) Wide span of control: Wide span of control means a single manager or
supervisor oversees a large number of subordinates. This gives rise to a flat
organizational structure.

Advantages:

More Delegation of Authority

Development of Managers

Clear policies

Disadvantages:

Overloaded supervisors

Danger of superiors loss of control

Requirement of highly trained managerial personnel

Block in decision making

DESIGNING STRATEGIC CONTROL SYSTEMS

Strategic control systems provide managers with required information to find out
whether strategy and structure move in the same direction. It includes target
setting, monitoring, evaluation and feedback system.
The importance of strategic control

Achieving operational efficiency

Maintaining focus on quality

Fostering innovation

Insuring responsiveness to customers

Strategic control process

The basic control process involves mainly these steps as shown in Figure
a) The Establishment of Standards:
Because plans are the standards against which controls must be revised, it
follows logically that the first step in the control process would be to accomplish
plans. Plans can be considered as the criterion or the standards against which
we compare the actual performance in order to figure out the deviations.
Examples for the standards

Profitability standards: In general, these standards indicate how much the

company would like to make as profit over a given time period- that is, its
return on investment.

Market position standards: These standards indicate the share of total

sales in a particular market that the company would like to have relative
to its competitors.

Productivity

standards:

How

much

that

various

segments

organization should produce is the focus of these standards.

of

the

Product leadership standards: These indicate what must be done to attain

such a position.

Employee attitude standards: These standards indicate what types of

attitudes the company managers should strive to indicate in the
companys employees.

Social responsibility standards: Such as making contribution to the

society.

Standards reflecting the relative balance between short and long range
goals.

b) Measurement of Performance:
The measurement of performance against standards should be on a forward
looking basis so that deviations may be detected in advance by appropriate
actions. The degree of difficulty in measuring various types of organizational
performance, of course, is determined primarily by the activity being measured.
For example, it is far more difficult to measure the performance of highway
maintenance worker than to measure the performance of a student enrolled in a
college level management course.
c) Comparing Measured Performance to Stated Standards:
When managers have taken a measure of organizational performance, their next
step in controlling is to compare this measure against some standard. A
standard is the level of activity established to serve as a model for evaluating
organizational

performance.

The

performance

evaluated

can

be

for

the

organization as a whole or for some individuals working within the organization.

In essence, standards are the yardsticks that determine whether organizational
performance is adequate or inadequate.
d) Taking Corrective Actions:
After actual performance has been measured compared with established
performance standards, the next step in the controlling process is to take
corrective action, if necessary. Corrective action is managerial activity aimed at
bringing organizational performance up to the level of performance standards. In
other words, corrective action focuses on correcting organizational mistakes that
hinder organizational performance. Before taking any corrective action, however,
managers should make sure that the standards they are using were properly
established and that their measurements of organizational performance are valid
and reliable. At first glance, it seems a fairly simple proposition that managers

should take corrective action to eliminate problems - the factors within an

organization that are barriers to organizational goal attainment. In practice,
however, it is often difficult to pinpoint the problem causing some undesirable
organizational effect.
Levels of strategic control

The various levels of strategic control are

a) Corporate level control:
The corporate level control is done by the top level management. They set
controls which provide context for the divisional level managers.
b) Divisional level control:
The divisional level control is done by the managers of the division. They
set controls which provide context for the functional managers.
c) Functional level control:
The functional level control is done by the managers of each department.
They set controls which provide context for the first level managers.

d) First level control:

The first level control is done by the first line managers. They set controls
which provide context for the workers.
Types of control systems
The various types of the control systems are
a) Financial Controls
Since one of the primary purposes of every business firm is to earn a
profit, managers need financial controls. Two specific financial controls
include budgets and financial ratio analysis.

i) Budgets act as a planning tool and control tools as well. They

provide managers with quantitative standards against which to
measure and compare resource consumption.

ii) Financial ratios are calculated by taking numbers from the

organization's

primary

financial

statements

the

income

statement and the balance sheet.

b) Operations Controls
Operations control techniques are designed to assess how efficiently and
effectively an organization's transformation processes are working. Many
of these techniques were covered in Chapter 19 as we discussed
operations management. However, two operations control tools deserve
elaboration: TQM control charts and EOQ model.

i) Control charts show results of measurements over a period of

time with

statistically determined upper and lower limits.

They provide a visual means of determining whether a specific

process is staying within predefined limits

ii) The EOQ model helps managers know how much inventory to
order and how often to order. The EOQ model seeks to balance
four costs associated with ordering and carrying inventory.

c) Behavioral Controls
Managers accomplish organizational goals by working with other people.
It's important for managers to ensure that employees are performing as
they're supposed to. We'll be looking at three explicit ways that managers
control employee behavior: direct supervision, performance appraisals,
and discipline.
i) Direct supervision is the daily overseeing of employees' work
performance and correcting problems as they occur. It is also
known as MBWA (management by walking around).

ii) Performance appraisal is the evaluation of an individual's work

performance in order to arrive at objective personnel decisions.
iii) Discipline includes actions taken by a manager to enforce the
organization's standards and regulations. The most common
types of discipline problems involve attendance, on-the-job
behaviors, dishonesty, and outside activities.
IMPLEMENTING STRATEGIC CHANGE
Levels of change
Change occurs at three levels
i) Individual level
ii) Group level and
iii) Organization level
At the individual level change is reflected in such developments as changes in a
job assignment, physical move to a different location, or the change in maturity
of a person which occurs overtime. It is said that changes at the individual level
will seldom have significant implications for the total organization. Most
organizational changes have their major effects at the group level. This is
because most activities in organizations are organized on a group basis. The
groups could be departments, or informal work groups. Changes at the group
level can affect work flows, job design, social organization, influence and status
systems, and communications patterns. Changes at the organization level
involve major programmes that affect both individuals and groups. Decisions
regarding these changes are generally made by senior management and are
seldom implemented by only a single manager. Frequently, they occur over long

periods of time and require considerable planning for implementation. Example

of these changes would be reorganization of the organizational structure and
responsibilities, revamping of employee remuneration system, or major shifts in
an organizations objectives.
Organizations that seek to create and sustain competitive advantage should be
ready to change and implement the proposed changes. The major forces for
change are: technical obsolescence and technical improvements; political,
economic, and social events; globalization; increase in organizational size,
complexity, and specialization; greater strategic awareness and skills of
managers and employees; and competitive dynamics. The level of change could
be at values, culture, or styles of management; objectives, corporate strategy,
or organization structure; competitive strategies, systems, and management
roles; and functional strategies or organization of tasks. It is crucial to clarify the
level

of

change

and

tackle

needs

and

problems

appropriately.

The major types of strategic change are re-engineering, restructuring, and

innovation.

a) Re-engineering: It is also known as Business Process Reengineering. It is

fundamental rethinking and radical redesign of business process to
achieve dramatic improvements in critical, contemporary measures of
performance such as cost, quality, service and speed. The strategist must
completely think how the organization goes about its business. Instead of
focusing on companys functions strategic managers make business
process the focus of attention.

b) Restructuring: It is the second form of change to improve the firms

performance. There are two basic steps to restructuring. First, an
organization reduces reduces its level of differentiation and integration by
eliminating divisions, departments or levels in the hierarchy. Second, an
organization downsizes by reducing the number of its employees to
reduce operating cost.

c) Innovation: It is the process by which organizations use their skills and

resources to create new technologies or goods and services so they can
change and better respond to the needs of their customer. Innovation can
be done with the help of research and development department.

Stages in the Change Process

STAGES IN THE STRATEGIC CHANGE PROCESS

i)

Determine the need for change:

In this step the strategic managers must recognize a gap between actual
performance and desired performance, use a SWOT analysis to define the
companys present state and then determine its desired future state.

ii)

Determine the obstacles to change:

Obstacles may prevent a company from reaching its desired future state.
Conflict is also major setback to change and managers must seek ways to
resolve the conflict to implement strategic change successfully.

iii)

Implement change:
Strategic managers play organizational politics to overcome obstacles to
change, resolve conflicts and bring about strategic change, resolve
conflicts and bring about strategic change. To play politics, managers must
have power.

iv)

Evaluate change:
Strategic managers need to evaluate the results of each change process
and use this analysis to define the organizations present condition so that
they can start the next change process.

MCKINSEYS 7S FRAMEWORK

The framework suggests that there is a multiplicity of factors that influence

an organizations ability to change and its proper mode of change. Because of
the interconnectedness of the variables, it would be difficult to make
significant progress in one area without making progress in the others as
well. There is no starting point or implied hierarchy in the shape of the
diagram, and it is not obvious which of the seven factors would be the driving
force in changing a particular organization at a certain point of time. The
critical variables would be different across organizations and in the same
organizations at different points of time.

The 7 S
a) Superordinate goals are the fundamental ideas around which a business
is built
b) Structure salient features of the unitss organizational chart and inter
connections within the office
c) Systems procedures and routine processes, including how information
moves around the unit
d) Staff personnel categories within the unit and the use to which staff are
put, skill base, etc

e) Style characterization of how key managers behave in order to achieve

the units goals
f) Shared values strategy the significant meanings or guiding concepts that
the unit imbues on its members
g) Skills distinctive capabilities of key personnel and the unit as a whole
The 7 S model can be used in two ways
1. Considering the links between each of the Ss one can identify strengths and
weaknesses of an organization. No S is strength or a weakness in its own
right, it is only its degree of support, or otherwise, for the other Ss which is
relevant. Any Ss that harmonises with all the other Ss can be thought of as
strength and weaknesses
2. The model highlights how a change made in any one of the Ss will have an
impact on all the others. Thus if a planned change is to be effective, then
changes in one S must be accompanied by complementary changes in the
others.