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STRATEGIC MANAGEMENT

M.Com. (Final)

Directorate of Distance Education

Maharshi Dayanand University

ROHTAK 124 001

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Copyright 2004, Maharshi Dayanand University, ROHTAK

All Rights Reserved. No part of this publication may be reproduced or stored in a retrieval system
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Maharshi Dayanand University
ROHTAK 124 001
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Qklhokn

Contents
Chapter 1

Strategic Management An Introduction

Chapter 2

Levels and Approaches to Strategic Decision Making

29

Chapter 3

Process of Strategic Management

42

Chapter 4

Roles of Strategists, Mission and Objectives

47

Chapter 5

Strategic Business Unit

69

Chapter 6

Environment-Concept, Components and Appraisal

74

Chapter 7

Organisational Dynamics and Structuring Organisational Appraisal

120

Chapter 8

SWOT Analysis

159

Chapter 9

Strategy Formulation

175

Chapter 10

Strategy Analysis and Choice

204

Chapter 11

Strategy Implementation Aspects, Structures, Design and Change

231

Chapter 12

Behavioural Implementation Leadership, Culture, Politics, Power, Values and Ethics

284

Chapter 13

Functional Implementation Plans and Policies

338

Chapter 14

Strategic Evaluation and Control

373

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Strategic Management
Paper-7
Note:

Max. Marks.: 100

Time: 3 Hrs
There will be three sections of the question paper. In section A there will be 10 short answer questions of 2
markseach.Allquestionsofthissectionarecompulsory.SectionBwillcompriseof10questionsof5markseach
out of which candidates are required to attempt any seven questions. Section C will be having 5 questions of
15 marks each out of which candidates are required to attempt any three questions. The examiner will set the
questionsinallthethreesectionsbycoveringtheentiresyllabusoftheconcernedsubject.

Course Inputs
Unit-1

Strategic Management Process: Defining Strategy, Levels at which Strategy operates, Approaches to
Strategic Decision making, Process of Strategic Management, Roles of Strategists in Strategic Management;
Mission and purpose, Objectives and goals, Strategic Business Unit.

Unit-2

Environment and Organisational Appraisal: Concept of Environment and its components. Environmental
Scanning and Appraisal; Organisational appraisal-its Dynamics, Considerations, Methods and Techniques.
Structuring Organisational Appraisal, SWOT Analysis.

Unit-3

StrategyFormulation:CorporatelevelStrategies;GrandStrategies,StabilityStrategies,ExpansionStrategies,
Retrenchment Strategies, Combination Strategies, Corporate Restructuring; Business level Strategies
andTactics.
Strategic Analysis and Choice: The Process of Strategic Choice, Corporate Level Strategic Analysis,
Business Level Strategic Analysis, Subjective Factors in Strategic Choice, Contingency Strategy, Strategic
Plan.

Unit-4

Strategy Implementation: Inter relationship between formulation and Implementation. Aspects of Strategic
Implementation, Project Implementation, Procedural Implementation, Resource Allocation.
Strategy and Structures: Structural Considerations, Structures for Strategies; Organisational Design and
Change.
Behavioural Implementation: Leadership Implementation, Corporate Culture, Corporate Politics and
Use of Power, Personal values and Business Ethics.

Unit-5

Functional Implementation: Functional Strategies, Functional Plans and Policies, Marketing Plans and
Policies, Financial Plans and Policies, Personnel Plans and Policies, Operations Plans and Policies.
Strategic Evaluation and Control: An Overview of Strategic Evaluation and Control, Techniques of
Strategic Evaluation and Control.

Strategic Management An Introduction

Chapter 1
Strategic Management
An Introduction
Strategic management is the process by which an organisation formulates its objectives
and manages to achieve them. Strategy is the means to achieve the organisational
ends.
A strategy is a route to the destination viz., the objectives of the firm. Picking a
destination means choosing an objective. Objectives and strategies evolve as problems
and opportunities are identified, resolved and exploited.
The interlocking of objectives and strategies characterise the effective management of
an organisation. The process binds, coordinates and integrates the parts into a whole.
Effective organisations are tied by means-ends chains into a purposeful whole. The
strategies to achieve corporate goals at higher levels often provides strategies for
managers at lower levels.
Managers must have strategic vision to become strategic managers and thereby to
manage the organisation strategically. Strategic vision is a pre -requisite of the strategic
managers. Strategic vision implies a profound scanning ability of the environment in
which the company is in i.e., knowing the objectives and values of the organisation
stakeholders and bringing that knowledge into future projections and plans of the
organisation. The managers strategic vision involves:
l

The ability to solve complex and more complex problems;

The knowledge to be more anticipatory in perspective and approach, and

The willingness to develop options for the future.

Strategic management can be defined as the art and science of formulating, implementing,
and evaluating cross-functional decisions that enable an organisation to achieve its
objectives. As this definition implies, strategic management focuses on integrating
management, marketing, finance/accounting, production/operations, research and
development, and information systems aspects of a business to achieve organisational
success. The term strategic management is used at many colleges and universities as
the title to the capstone course in business administration, business policy, which
integrates material from all business courses.
The strategic-management process consists of three stages: strategy formulation, strategy
evaluation. Strategy formulation includes developing a business mission, identifying an
organisations external opportunities and threats, determining internal strengths and
weaknesses, establishing long-term objectives, generating alternative strategies, and
choosing particular strategies to pursue. Strategy-formulation issues include deciding
what new businesses to enter, what businesses to abandon, how to allocate resources,
whether to expand operations or diversify, whether to enter international markets, whether
to merge or form a joint venture, and how to avoid a hostile takeover.

Strategic Management

Strategy implementation requires a firm to establish annual objectives, devise policies,

motivate employees, and allocate resources so that formulated strategies can he
executed; strategy implementation includes developing a strategy-supportive culture,
creating an effective organisational structure, redirecting marketing efforts, preparing
budgets, developing and utilizing information systems, and motivating individuals to action.
Strategy evaluation monitors the results of formulation and implementation activities
and includes measuring individual and organisational performance and taking corrective
actions when necessary. Although making good strategic decisions is the major
responsibility of an organisations owner or chief executive officer, managers and
employees both must also be involved in strategy formulation, implementation, and
evaluation activities. Participation is a key to gaining commitment for needed changes.
Peter Drucker says the prime task of strategic management is thinking through the
overall mission of a business:
. . . that is, of asking the question What is our Business? This leads to the
setting of objectives, the development of strategies, and the making of todays
decisions for tomorrows results. This clearly must be done by a part of the
organisation that can see the entire business; that can balance objectives and
the needs of today against the needs of tomorrow; and that can allocate
resources of men and money to key results.

The strategic-management process must be a people process to be successful! People,

including all managers and employees, make the difference! The chief executive officer
of Rock Well International explains, We believe that fundamental to effective strategic
management is fully informed employees at all organisational levels. We expect every
business segment to inform every employee about the business objectives, the direction
of the business, progress towards achieving objectives, and customers, competitors and
product plans.
The strategic-management process can be described as an objective, logical, systematic
approach for making major decisions in an organisation. It attempts to organise qualitative
and quantitative information in a way that allows effective decisions to be made under
conditions of uncertainty. Yet, strategic management is not a pure science that lends
itself to a nice, neat, one-two-three approach.
Based on past experiences, judgment, and feelings, intuition is essential to making good
strategic decisions. Intuition is particularly useful for making decisions in situations of
great uncertainty or little precedent, or when highly interrelated variables exist, there is
immense pressure to he right, or it is necessary to choose from several plausible
alternatives. These situations describe the very nature and heart of strategic management.
Some managers and owners of businesses profess to have extraordinary abilities for
using intuition alone in devising brilliant strategies. For example, Will Durant, who organised
General Motors Corporation, was described by Alfred Sloan as a man who would
proceed on a course of action guided solely, as far as I could tell, by some intuitive flash
of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at
times he was astoundingly correct in his judgment. Albert Einstein acknowledged the
importance of intuition when he said, I believe in intuition and inspiration. At times I
feel certain that I am right while not knowing the reason. Imagination is more important
than knowledge, because knowledge is limited, whereas imagination embraces the entire
world.

Strategic Management An Introduction

Although some organisations today may survive and prosper because they have intuitive
geniuses managing them, most are not so fortunate. Most organisations can benefit
from strategic management, which is based upon integrating intuition and analysis in
decision making. Choosing an intuitive or analytical approach to decision making is not
an either-or proposition. Managers at all levels in an organisation should inject their
intuition and judgment into strategic-management analyses. Analytical thinking and
intuitive thinking complement each other.
Operating from the Ive already made up my mind, dont bother me with the facts
mode is not management by intuition; it is management by ignorance. Drucker says, I
believe in intuition only if you discipline it. Hunch artists, who make a diagnosis but
dont check it out with the facts, are the ones in medicine who kill people, and in
management kill businesses. In a sense, the strategic-management process is an attempt
to duplicate what goes on in the mind of a brilliant intuitive person who knows the
business. Successful strategic management hinges upon effective integration of intuition
and analysis, as Henderson notes below:
The accelerating rate of change today is producing a business world in
which customary managerial habits in organisations are increasingly
inadequate. Experience alone was an adequate guide when changes could
be made in small increments. But intuitive and experience-based
management philosophies are grossly inadequate when decisions are
strategic and have major, irreversible consequences.

The strategic-management process is based on the belief that organisations should

continually monitor internal and external events and trends so that timely changes can
be made as needed. The rate and magnitude of changes that affect organisations are
increasing dramatically. Consider, for example, merger/acquisition mania, hostile
takeovers, cellular phones, monoclonal antibodies, fiber optics, the aging population,
taxes on services, computer technology, and the unification of Western Europe in
1992. To survive, all organisations must be capable of astutely identifying and adapting
to change. The strategic-management process is aimed at allowing organisations to
effectively adapt to change over the long run.
In todays business environment, more than any preceding era, the only
constant is change. Successful organisations effectively manage change,
continuously adapting their bureaucracies, strategies, systems, products, and
cultures to survive the shocks and prosper from the forces that decimate the
competition.

Information technology and globalisation are environmental changes that are transforming
business and society today. On a political map, the boundaries between countries are
as clear as ever, but on a competitive map showing the real flows of financial and
industrial activity, the boundaries have largely disappeared. Speedy flow of information
has eaten away at national boundaries so that people worldwide readily see for
themselves how other people live. People are traveling abroad more; ten million Japanese
travel abroad annually. People are emigrating more; East Germans to West Germany
and Mexicans to the United Stares are examples. We are becoming a borderless world
with global citizens, global competitors, global customers, global suppliers, and global
distributors!
The world is changing, and businesses must adapt to these changes or face
extinction. The need to adapt to change leads organisations to key strategic-management

Strategic Management

questions, such as: What kind of business should we become? Are we in the right
fields? Should we reshape our business? What new competitors are entering our
industry? What strategies should we pursue? How are our customers changing? Are
new technologies being developed that could put us out of business?
The history of business and industrial management is one of decision-making
under ever increasing environmental turbulence. At each phase of such turbulence,
management practices have been developed to successfully meet the impacts of the
environment. The evolution of management from budget-based management to strategic
management through corporate planning, long-range planning, strategic long-range
planning, and strategic planning is a continuous picture of this development process.

Environmental Turbulences Management Strategy

Interaction
The discussion of evolution of the planning process from budgetary and financial control
through corporate planning to strategic management can best be initiated by referring
to an article by three members of McKinsey & Company (1) which is diagrammatically
depicted in Exhibit. 1.1.

Effectiveness
of strategic
decision-making

Increasing

* Multi-year budgets
* Gap analysis
* Static allocation of
resourees

Annual budgets
* Functional focus

* Thorough situation
analysis and competitive assessment
* Evaluation of strategic
alternatives
* Dynamic allocation of
resources

* Well-defined strategic
framework
* Strategically focused
organisation
* Widespread strategic
thinking capability
* Coherent reinforcing
management processes
* Negotiation of objectives
* Review of progress
* Incentives
* Supportive value system
and climate

TIME
Phase 1
Financial planning
Value system
* Meet budget

Phase 2
Forecast based
planning
* Predict the future

Phase 3
Externally oriented
Planning
* Think strategically

Phase 4
Strategic Management
* Create the future

Exhibit1.1:PhasesintheEvolutionofStrategicPlanning

The phases shown in the Exhibit. 1.1 can be separated into two parts. In the first phase,
a target, usually a financial one, is set out for the year and limits are placed on what a
divisional manager and his/her people are expected to achieve and to spend in the form
of expenses or in capital expenditure to achieve the desired bottom line. Reviews of
how closely the performance is keeping to the programme are made quarterly or
sometimes even monthly. Such efforts are often tied to corporate targets relating to
annual capital budgets, desired rates of return to shareholders equity or investment.
Likewise, activities such as employment, training, appraisals, and compensation of
management are closely tied to this annual cycle. Operationally this is termed budgeting
or budgetary control, practised during the earlier days of managerial evolution.

Strategic Management An Introduction

The implications of interaction between tempos in environmental change and the intensity
of management control systems would be clear from Exhibit 1.2. Budgeting and financial
control on an annual basis were created during phase 1: the stable environment. Soon,
however, it was found that environmental change was registering an accelerating rates,
and by and large the environment entered the transitional stage. While all segments of
environment go through the same cycle: stable transitional turbulent unstable,
the rates of change for the segments are however different. For instance consumer
behaviour or market may change at a rate quite different than technology, or competition,
or employee attitude.
Man and his creation, society, abhor uncertainty. But change creates uncertainties,
often great uncertainties. Historically, during the post-budget phase, depicted in Exhibit
1.1 by phase 2, while the technological segment continued to be fairly stable, other
segments depicted a fairly unstable environment. Many managers, unable to face this
uncertainty preferred to go back to the old rules of budgeting, even if there was a
feeling that the system was fast becoming obsolete. Others opted for formal schedules
of goal definition, environmental scanning, strategy formulation, in short, for formalised
corporate planning, with the entire strategy of planning being based on forecast with the
assumption of a fairly stable technology base.
Slow

Transitional

Stable

Environmental
Changes

Turbulent

Unstable

Fast
High

Management Control System

Low

Exhibit 1.2 Accelerating Environmental Change

Budgeting
Budgeting is best understood in the context of time of development and use. In its early
manifestation, a budget can be regarded as primarily a plan to reach a goal or objective
and is perhaps best defined as a basic planning and control system.
In its later manifestation, budgeting forms a part of the strategic planning process,
unlike the earlier manifestation when budgeting and budgetary management constituted
a stand alone planning and control system.
Budgeting is, in fact, a tool for running the activities of a firm systematically. It carefully
looks at the resources available or within reach, decides upon the allocation of these

Strategic Management

10

resources (within the constraints of availability) to the various activities in order that the
desired objectives may be fulfilled. In consequence, comparison of the actuals against
the budget also provides a basis of managerial control. Thus, a sales budget will indicate
the volume of sales the company expects to achieve. This clearly leads to the allocation
of resources to production and purchasing and, therefore, budgets for these activities.
Simultaneously, the summation of the resources allocated to various component activities
should indicate whether or not the total resources allocated obey the constraints of
availability. For ease in operation and control, budgets are mainly formulated in financial
terms.
Budgets are basically of two types:
i.

Static budget, based on a single estimate of sales and production, i.e., a single
performance estimate.

ii.

Flexible budgets reflecting different production and sales volumes. The following
sets of information form the building blocks for a flexible budget.
a.

Revenues, expenses and income for a number of levels of sales volumes.

b.

Manufacturing costs for a corresponding number of production volumes.

c.

Manufacturing costs adjusted to what they should have been for a recent
actual production volume.

The major budget concerning all the significant activities of the firm, and usually for a
period of one year, is the master budget. The following is a schematic listing of all the
supplementary budgets.
Operational

Capital

Production budget

Capital expenditure

Inventory budget

Allocation of funds

Direct labour budget

Management of funds

Direct materials budget

Manufacturing overhead budget

Procurement budget

Sales budget (by products and departments)

Selling and distribution expense budget

Administrative expense budget

Other incomes and expenses budget

Simultaneously, cash flow is budgeted through a cash flow budget showing budgeted
receipts, outgoings, and balances on a short-term basis. Similarly, investment decisions
and the expenses they entail tend to be monitored and controlled by a capital expenditure
budget, showing project, yearly expense, and total capital expense budgeted, so that the
actual outlays may be monitored project by project.

Strategic Management An Introduction

The master budget is summarised in two forms:

i.

The budgeted income and expenditure statement: showing total revenues, cost
of goods sold, other costs broken down under major heads, and the budgeted
profits.

ii.

The budgeted balance sheet showing annual assets and liabilities.

Budgetary Control
Since the objective of budgeting is to monitor and control the performance of the firm,
the first step is to determine budget figures. Efficiency standards with regard to all the
activities enumerated above are implicit in the budgetary projections. The estimated
productivity figures are commonly based on standards of performance either derived
from historical observations or computations from the firms internal data, or from
figures obtained based on financial statements of competitors (inter-firm comparisons).
Other approaches are to base these on predetermined performance standards or from
negotiations conducted within the management by objectives (MBO) framework.
For control purposes, it is not enough to evaluate the budget figures carefully. As Ackoff
puts it, control is the evaluation of decisions after they have been implemented. It
involves predicting the outcome of the decisions, comparing of it with the actual outcome,
and taking corrective actions when the match is poor. In a budgetary control system,
the budgets are the predictions of the outcome of the contemplated decisions. The
actuals are plotted against the budget. The differences are the variances, and corrective
actions are taken when the variances are large and significant.

Financial Control
Like budgets and budgetary control, financial control operates using monetary figures.
Initially designed to manage and control cash, it now provides the basis for control of
many other functions. To enable financial control to be better utilised, any economic
entity/corporation is usually subdivided into well-defined segments with clearly defined
scope of activities entrusted to responsible individual managers. These become
responsibility centres, and depending on the nature of the functions, are called costs
centres, expense centres, activity centres, revenue centres, profit centres, investment
centres, and the like.
The financial control system is built around a rather small number of key variables
which, when carefully monitored, allow managers to track over a stipulated period the
performance of the various functional activities and business units of the firm. These
indicators are derived from the basic information compiled for assembling the budget.
A valuable tool in exercising financial control is the use of financial ratios both for
assessment of the companys own financial performance and status, as also to compare
them with similar companies. These ratios are divided into the following major groups:
l

Liquidity ratios

Leverage/capital structure ratios

Profitability ratios

Turnover ratios

11

12

Strategic Management

The major weakness of budget and budgetary control is their short time horizon. In the
scenario in which it was originally initiated, the environment was comparatively less
turbulent, and competition was less intense. It seemed adequate to look after a particular
years business and performance. References to a possible change in direction in future,
capital investment spreading over successive years, easing out of weakening activities
etc. were comparatively less important, if not considered entirely irrelevant in the context
of Budgetary Control. Refixing budgetary figures ab initio each year was also considered
unnecessary. It was enough to build on previous years figures, suitably adjusting and
updating these.
With years, both environmental turbulence and competitive pressures have increased
significantly. Short time-span budgetary control was no longer considered adequate. A
much longer horizon began to be considered necessary not only for a firms well-being,
but even for its survival. As a logical corollary, corporate planning supplanted budget
and budgetary control as a basic tool for planning and monitoring a firms performance.
Budgeting did not, however, lose all its relevance. With corporate planning and strategic
planning as a later development, budgeting and budgetary control became the principal
arm of action plans at the implementation and control stages. A new approach to budgeting
required the use not only of historic data but, for the establishment or emergence of
commitments arising out of the strategic or corporate plan, it also called for negotiations
conducted within the framework of management by objectives (MBO).
Meanwhile, the very process of budget preparation has gone through stages of refinement.
New concepts have been introduced. These include the concept of flexible budgeting
which permits the original standards used to measure performance to be modified with
changes in the actual level of operations. Similarly Zero-Base Budgeting (ZBB)
establishes a set of very comprehensive rules to force managers to justify their budgetary
allocations from base zero, rather than defining the new budget incrementally.
Resort to financial measures and a total preoccupation with budgetary control for a
particular year has left managers overly preoccupied with profitability as the key criterion
for measurement of the firms and hence their own performances. This trend has,
however, continued into the corporate planning phase, when ROI has tended to become
the all important preoccupation of management. The result has been that too many
firms have, in their preoccupation with ROI, inadvertently weakened their asset base
and discouraged necessary investments by compromising the long-term competitive
standing of the firm in exchange for a hefty ROI for the following year. The peculiar
standing of executive management with shareholders in many countries, together with
the behaviour of the share market where immediate profit-taking becomes the all
engrossing consideration as also taxation policies of many governments discouraging
capital gains, has only encouraged this tendency. Indeed, an immediate sure return
versus long-term risk of increased return and growth tended to dichotomize management
attitude and policy, as also the government attitude in many companies and states.
Firms which depend entirely on budgetary and financial control measurements for
planning purposes are exceedingly vulnerable to falling into the near-sighted ROI traps.
Unless these are clear articulations of the businesss competitive spirit and strategy,
properly understood at all organisational levels, a pure budgeting and financial control
system will prove inadequate in warding off undesirable consequences.

Strategic Management An Introduction

13

Corporate Planning
To assist a sharp definition and consideration of the Corporate Planning Process, we
refer to Exhibit 1.3. The explanation of the steps follows.

Objectives
Before discussing the planning process and the objective setting, a few factors perhaps
justify early consideration and emphasis:

Objectives

Internal appraisal

External appraisal

Exhibit 1.3: The Total Corporate Plan Development Process

i.

The process is being undertaken in the context of changing environment, based

on forecast.Momentum
Hence thestrategy
plan is being drawn up in the context of partial ignorance.

ii.

As the planning horizon elongates and extends into the future, the uncertainty
and ignorance
impinging
upon the forecasting process increases, thereby putting
Development
objectives
the reliability and credibility of results of the forecasting process increasingly at
Synergy
structure horizon if the plan is to
risk. This puts an effective upper limit on
the planning
Expansion
plan
function as an effective instrument of control. On the other hand, the weaknesses
of annual planning or budgeting are manifest and have already been discussed,
indeed, the practice is overwhelmingly in support of a five year planning horizon.
Diversification plan
However, the horizon is partially dependent on the investment horizon, a time
= Comparator
period necessary for investment toKey
start yielding
a reasonable revenue. With a
short investment horizon, therefore, a three year planning horizon is also in practice.

iii.

A corporation is a purposive organisation, and it is evident, therefore, that efficient

utilization of the resources at its disposal towards fulfilment of its objective(s)
should be its purpose.

Diversification
objectives

This brings us squarely into the arena of objective setting,. The setting up of objective(s)
is not however, an ad hoc decision, but the culmination of a process. It would perhaps
be useful at this stage to consider this entire process.

Strategic Management

14

The concept of a corporation being a purposive organisation, and the efficient utilisation
of resources as the path to achieving its objectives, invariably brings forward the concept
of strategy.
It is perhaps useful to subdivide objectives into a few basic divisions, e.g.
l

The primary, or profit objective of the business, set in advance of strategy.

The secondary objectives, largely narrative, again set in advance of strategy.

(This would include economic, social, technological, etc. objectives.)
l

Goals that are time-assigned targets derived from the strategy.

Standards of performance (often coterminous with goals) assigned to particular

individuals.
l

Primary or Profit Objectives

When considering profit objective, two aspects require attention:
a.

The philosophy of profitnamely that it is not simply one of short-term gains but
of long-term profit growth allowing for corporate renewal.

b.

The dimensional aspects of profitquantity and efficiency. An efficiency target

may be return-on capital employed with further qualification on the time period
and the trend. The quantity dimension, qualified for similar time period, linked to
efficiency becomes a good dimensional measure of profit. A similar quantitative
measure of profit target would be earning per share.

A number of factors should be borne in mind when setting the profit target.
l

Trends over previous years.

Progress by other firms of similar size or in the same industry.

Performance of leading companies quoted on the stock exchange.

Opportunities for profitable investments elsewhere.

The ambitions of the chief executive.

The strategic need for growth to reach a size that enables the company to at least
maintain its position of influence in its trade.

Rates of inflation.

Once the profit objectives have been set for the company, it should be followed up with
objectives of the divisions and subsidiaries.

Secondary Objectives
Secondary objectives are descriptive and attempt to set out the key elements of the
business of the future. These examine the nature and scope of the business, the
geographical sphere of operation, and some of the key factors about the company.
These include statement of the way the company intends to conduct its relations with
its employees, customers, and society, as also the concept of moral and ethical standards
it proposes to adopt.
Also part of the secondary objective is that the companys attitude to technology, in the
context of the business it is in, is stated unequivocally.

Strategic Management An Introduction

Goals
If we regard objectives as the map reference, goals may be considered to be the
landmarks and milestones that the firm must pass as it progresses along the chosen
route.
In effect, a network of goals provides a model of the companys strategy over the
whole period of the plan. Some possible definitions or measures of goals would be:
l

Percentage market share (by products and/or country).

A ratio, such as return on sales.

An absolute figure for sales.

A minimum figure for customer complaint.

A maximum figure for hours lost in industrial disputes.

A labour productivity ratio.

Total number of employees.

A maximum employee wastage rate.

A standard cost.

A cost reduction target.

A date by which a particular event must take place (e.g. a new product launch).

Quantified values of some of the financial ratios would also constitute measures
and definitions of goals.

Standards of Performance
Standards of performance are essentially derivations from goals. While a goal is a
corporate, divisional or departmental target, a standard of performance is something
which is individually assigned to a named person. Some times the personal standard
may be something which is coterminous with the corporate goal. For instance, a market
share goal may be assigned to the product manager responsible. Sometimes the standard
may be something derived from the goal: splitting up the corporate target and making
individuals responsible for each segment (for instance the personal sales target assigned
to a representative). Frequently, these are time-assigned tasks. The overall concept
may be visualised as a network of targets, all interlinked in some way to the companys
primary and secondary objectives.
The importance of personal standards is that they provide a tool for ensuring that plans
are converted into tasks people can perform. A direct link is thus established between
the task of the individual persons and the total corporate strategy.
It is also important to realise the relation between the system of personal standards, as
briefly described above, and the technique of management by objectives (MBO)
developed by Humble Personal standards as a system is essentially a simple variant of
MBO, although its aims are narrower.

The Appraisal Process

It has already been briefly mentioned how the comparatively stable technology base
accompanied by an unstable, indeed turbulent, environment in the corporate segments

15

Strategic Management

16

gave rise to the felt need for formalized or informal environmental scanning. Also, the
plan is a projection of the companys performance and expectations into the future
based on the planned strategy. Essentially, therefore, the appraisal process consists of
the following major elements:
l

External appraisal

Together comprising

Internal appraisal

environmental analysis

SWOT analysis

Gap analysis

Forecasting

Environment monitoring and analysis can perhaps be depicted in a concentric diagram

(Exhibit 1.4). In Exhibit 1.4, everything except the internal environment is a constituent
of the external environment.

Exhibit 1.4: Environments to be Monitored

External appraisal is carried out to evaluate and judge the external environment both in
regard to existing activities and also new opportunities for new products and activities.
It thus provides the basis for evaluating the scope, opportunities, threats, etc.

Internal Appraisal
It is basically to evaluate the firms own capacities and to meet the requirements of
existing activities efficiently and effectively; and also to meet the challenges or threats
indicated on the basis of external appraisal. It further identifies the strengths, weaknesses,
and resources of the company keeping the objectives, the external environment, and
the forecast in view; the strengths to be utilised, the weaknesses to be corrected.
It is important to realise that although there is interrelationship between internal appraisal
and environment analysis, the two are really different and isolated from each other. In
effect, internal appraisal is best done against the background of environment analysis.
A number of basic concepts should be borne in mind as the appraisal progresses, and
performance rated against then.
l

It should always be assumed that there might be a better way of doing something
until the contrary is proved.

Strategic Management An Introduction

l

It is usually a relatively small amount of effort that produces most of the returns.
Usually, around 80 percent of the profit comes from, say, 20 per cent of effort,
the remaining 20 percent requiring the balance 80 percent effort. Any action that
reduces the amount of less profitable action should lead to corporate improvement.
This, in effect, is an illustration of the Pareto Principle.

Often knowledge of what is being done is not as perfect as managers within a

company believe. One of the tasks of corporate appraisal should be to ascertain
the facts.

When what is being done has been established, the question why should be asked.

The future is more important than the present where the trends and effects on
the aspects studied can be foreseen.

The appraisal should cover all aspects of the company.

The following factors should be considered as part of the internal appraisal:

1.

Trends of results: For example, trends in profits, sales, capital employed, and
the various commonly used ratios. This will show whether the company is improving
or worsening in its performance.

2.

Sources of profit: This analysis should be mostly marketing oriented.

3.

Risk: Arising from such factors as the bulk of profit coming from a single product,
over-dependence on a single market, too few customers for a product, raw
materials difficulty varying from difficulty of supply, duty, shortage, to overdependence on one supplier, other market risks, technological risks not only in
product obsolescence but in production processes, etc.

4.

Manufacturing activity: The purpose being production cost reduction,

consideration of the process should include, apart from the manufacturing process,
plant and equipment appropriateness and efficiency, correct labour deployment
and efficiency, also the raw materials, the standards set for their purchase and
the efficiency of the company as buyer (skills, technology absorption creation).

5.

Rationalisation of resources: This involves rationalisation relocations of facilities,

plants and building, distribution depots, supply and demand patterns, etc.

6.

Organisation and management structure: This involves studying the basic

organisational structure, assessment of managerial capabilities, the companys
labour relations, companys relation with its trade unions, morale of employees,
corporate motivation, etc.

7.

Financial resources: Study of the companys liquid resources and expected

future cash-flow position.

8.

Corporate capability: This is brought out in the analysis of the companys synergy
structure.

9.

Systems: This would involve assessment of the formal and informal systems and
communications, authorities and participation within the company.

10.

Use of resources: This essentially involves a study of allocation of resources

between the products and a comparison of this with their real profit contribution.
Resources here mean not only money, building, and plant, but also what are

17

Strategic Management

18

probably the scarce resources of management talent, capability, and technical

skills.
11.

Skills and technology: This refers to the availability of the required technology
in the organisation, as also the specialised skills for the technology absorption,
adaptation, and creation.
Internal appraisal should also include the following:
a.

The organisation climate and culture: Whether this is compatible with

the environment at large. This is an area in particular where a shift in
either the organisational climate or of the environment surrounding it and
the consequent incompatibility may prove disastrous or near disastrous.

b.

A shift in organisational leadership: Such a shift within an unchanged

organisational culture may again produce wasting conflicts, often leading
to a decrease in efficiency which, once identified, requires considerable
effort and internal readjustment tO correct.

External Appraisal
a.
Customer environment: The scanning should include the following:
l

Tracking customer complaints and compliments.

Monitoring return rates.

Listening to customer needs and concerns.

Extent of quality improvement/maintenance/deterioration as reflected in

customer reactions.
l

Extent of competitive pressures from possible substitutes, as reflected in

customer reaction.
l

b.
Competitive environment: Surveillance of competitive environment should include
consideration of:

c.

Competitor profile.

Market segment pattern.

Trend in market shares.

Research and development trends.

Emergence of new competitors.

Threat through possible emergence of new substitutes.

Industry environment: Industry environment monitoring should include the

following:
l

Structure of the industry.

How is the industry financed.

Changes in the degree of government regulations.

Changes in the typical products offered by the industry.

Changes in typical industry marketing strategies and techniques.

Strategic Management An Introduction

l

d.

Trends in the total market for the industry.

Macro environment: Macro environment surveillance should include the

following:
l

Social factors, e.g. demographic changes.

Technological factors.

Economic factors, e.g. prime interest rates; consumer price index, etc.

Political factors, e.g. increases or decreases in government regulations and

control, taxation laws, etc.

Social factors, e.g. awareness about environment, etc.

Forecasting
As corporate planning extends to a firms activities into the quite distant future, perhaps
five years or so, it will be realised that there is need for forecasting of sales into these
years. These forecasts of the product or industry sales and the deductions from these
of the companys expected sales or planned sales would determine the planning of
resources.
These forecasts may be of products already on sale production by the company; products
on the same or similar lines which the company may take up, products currently in the
research and development stage, or products the company may take up for
diversification. Depending on the status of the product vis-a-vis the companys actions,
plans or intentions, the forecasts would extend to or extend over varying time periods
into the future. Also, an exact knowledge of the product attribute will vary accordingly.
All forecasts project into the future and hence are subject to uncertainty. The degree of
uncertainty depends considerably on how far into the future the forecast extends and
the status of knowledge of the product attributes.
Before discussing forecasting methods, however, it is important to emphasise the
difference between forecast and market share. Forecast is directly a projection of
anticipated sales. It is thus independent of how the market itself grows or changes.
Market share is a derivative of the combined effects of sales forecast and change in
the volume of total market. Market share is an important driver for the process of
strategy formulations.
All products usually go through a life cycle with a general shape such as that shown in
Exhibit 1.5.
It is easy to realise that for any sales forecast of any existing product it is important to
find out the phase of the product life cycle that the product is in. There are, however,
three difficulties, namely
a.

Determining the phase the product is in.

b.

Determining the duration of the various time phases which are dependent on
many external factors.

c.

Actions which can be taken by the company to extend and modify the life cycle.

19

Strategic Management

20
Increasing sales:
profit starts growing

Take off

Sales

Maturity: fairly static

sales; constant or
slightly declining
profits

Sales still grow

but slowly:
lower profit growth

Introduction :
low sales;
low or no profit

Decline:
decline in sales and
profit, perhaps justifying
the withdrawal of
the product from the
market.

Time

Exhibit1.5:TheProductLifeCycle

Forecasting Methods
1. Statistical Projections
This methodology is based on past data and can assume increasing sophistication as
follows:
Trend Analysis
i.
Simple growth pattern
This is quite useful for short-term forecasts, say for instance, for a few months,
particularly to gain a perspective of the future prospects.
This method is based on the average annual growth rate, calculated over a
period, worked out simply by expressing the latest year as an index of the earliest
and correcting out for the erratic factor.
ii.

Moving averages
In it the seasonal or cyclical pattern is eliminated by obtaining a smooth underlying
trend for twelve months. Then, for each advancing month or quarter, etc. the
data for the same period is added and the data for the corresponding period at the
tail end is eliminated and a fresh trend line is worked out.

iii.

Exponential smoothing
This method is in concept the same as moving averages, except that the average
is exponentially weighted so that the more recent data is given a greater weightage,
and the past forecasting error is taken into account in each successive period.

iv.

Mathematical trends
Mathematical trends are methods in which a mathematical fit is used to express
the past data. Some of the methods of using mathematics with increasing
complexity are as follows:
l

Simple regression model

Strategic Management An Introduction

In this, model, a dependent variable (sale) is expressed as a mathematical

function of a second variable (say year, or GNP), This function may take
any form, e.g.
* linear,

Y = a+bx;

* exponential, Y = ea+bx ; or for computational ease,

logeY = (a+bx)(logee) = a+bx;
* quadratic,

Y = a+bx2;

* cubic,

Y = a+bx+cx2+dx3, etc.

Multiple Regression Model

A multiple regression model is applicable when the dependent variable
(sale) is a function of two or more independent variables (GNP, sale of
steel, etc.).
Thus, for two independent variables, the functional form would be, Y = a
+ b1 x1 + b2 x2
This functional form may also be non-linear, but in most instances,
particularly for computational purposes, these can be transformed into linear
forms.
The advantage of mathematical regressions (both simple and multiple) is
that their fit may be statistically tested.

Auto-regressive Schemes:
An auto-regressive scheme is a method of regression where the dependent
variable is a function of past values of the same variable with increasing
time lags. Thus the general form is,
Yt = a1+ b1 Yt1 + b2 Yt2 .... + bk Ytk+...+ Ut.

2. Econometric Models
In this method, the dependent variable is expressed through a system of equations
involving several independent variables, themselves dependent on one another.
Thus for example, the interdependencies of the dependent and independent variable
may take the following form:
Sales

= f (GNP, Price, Advertising)

Production cost
cost)

= f (Number of units produced, inventories, labour costs, material

Selling expenses

= f (Advertising, other expenses)

Advertising

= f (Sales )

Price

= f (Production cost, selling expenses, administrative overhead,

profit)

In econometric models, we are faced with many tasks similar to those in multiple
regression analysis. These tasks include:

21

Strategic Management

22

1.

Determining which variables to include in each equation.

2.

Determining the functional form (e.g., linear, exponential, logarithmic, etc.) of

each of the equations.

3.

Checking the validity of the assumptions involved.

4.

Estimating simultaneously the parameters of the equations.

5.

Testing the statistical significance of the results.

Input-output method
The input-output model is a special type of econometric model, in which a number of
inputs are chosen, and for each relationship the quantities of a number of different
inputs are related to quantities of a number of different outputs through linear
relationships. The inputs being independent variables, the outputs would be the forecasted
dependent variables.
End-use method
In end-use method, the product for which demand is to be forecast is related to the
various end uses to which it is put and the quantitative relationship between units of the
product and corresponding units of the end-use product is established. This relationship
is known as the bridging factor. The projected demand of the end-use product over the
forecasting period is now obtained and worked backwards to obtain the demand forecast
of the product.
An example will make the procedure clear. Suppose it is desired to project the demand
forecast for forging steel over a forecasting interval. It is easy to list the different end
products in which forged steel is used, e.g. automobiles (classified into trucks, LCVs,
passenger cars, etc.), railway engines, 3 wheelers, motorcycles and cycles. It is also
possible to establish the number of kilogrammes of forged steel required per unit of
these end products, giving the bridging factor.
Once bridging factors have been established, demand projection of the different end
products will enable demand forecast of forged steel to be determined.
It will be seen that there is considerable similarity between input-output analysis and
the end-use method. A major obvious difference is that whereas in input-output analysis,
the inputs are the independent variables, in the end-use method, the position is reversed.
Also, in the input-output method, multiple inputs and outputs are considered
simultaneously, any output having one or more inputs, just as any input may be related
to one or more outputs. As against that, in the end use method a single product is
considered and is related to all the end products which have significant requirement of
the product. The forecast derivation of the end-use method is thus more direct and data
requirement is often less.
Both the methods, it may be mentioned, are extremely important and significant, having
extensive use in forecasting.

3. Marketing and Market Research Methods

The forecasting methods discussed till now are all based on projections based on past
data, either of the product itself, or of the industry together with models of their relationship
with one or more independent variables, established statistically or through causal analysis

Strategic Management An Introduction

based on economic logic and tested statistically.

Another source of possible forecast for future sales can, however, be through direct
contact with the existing or prospective market through variations of market analysis
and market research. Some of these are briefly described below:
i.

Analysis of estimates submitted by field salesmen

For an existing product, in a fairly known marketing environment, the estimates
of future sales submitted by field salesmen, properly filtered and analysed, provide
a fairly satisfactory basis for short-term forecasting.

ii.

Comparative studies
A useful forecasting method is to examine the performance of something similar
to the item being forecast. Thus a company launching, say, a new cough mixture,
would find it useful to study the price, promotion, and progress of other cough
mixtures, or similar products introduced during the past five years.

iii.

Leading indicator
The leading indicator is indeed very akin to an econometric method except that it
tends to be qualitative and largely subjective. A leading indicator is an event
which always precedes an event of another type, thus giving prior warning of
change. Thus the fast pace of rural electrification and the creation of a succession
of low and medium capacity TV relay stations, providing extensive rural coverage
for television in India, would be a sure indication of surge in demand for television
sets; particularly black and white TV sets.

iv.

Experimental market research

Under this heading would be included all systematically conducted market research
experiments, based on sample survey and designed to obtain the quantitative
forecast desired. Conducted properly, they usually provide valuable forecast for
the period, within reason considered valid.
The disadvantage of such tests is that while a true experiment eliminates all
variables except those being measured, this is not always possible for such
experiments. Also the source of inaccuracy creeping in through sampling error is
ever present.

v.

Intention-to-buy surveys
These may be used for both consumer and industrial goods. There are two major
uses:
a.

To obtain information about proposed new products, both to assess their

potential as also to verify or obtain information on product attribute
suitability, need for change, product placement, etc.

b.

To obtain an index about their market acceptance vis-a-vis competitive

products which can be related to actual performance and guide both the
forecast and marketing strategy.

A pitfall is that an interviewees reactions during interview may be widely divergent

from his/her behaviour at the time of actual purchase.

23

Strategic Management

24

vi.

Marketing judgements
There are many occasions where little or no data exist on which to base a forecast
of a product or environmental event, but where the knowledge of the companys
employees can be called upon, or when common sense can be used to forecast
bands of possible results based on some other data. Indeed, this can be further
refined to quantify judgement by building a subjective demand curve. Its accuracy
may be questioned, but its usefulness, in the absence of any constructive alternatives
is underiable.

4. Technological Forecasting
This is useful for forecasts for the comparatively distant future. Indeed, the term
technological forecasting is rather loosely formulated, since it may be used to forecast
not only a technology but also matters of nontechnical interest.
Since it is a forecast of a comparatively distant future, the uncertainty surrounding it is
consequently greater. A technological forecast should therefore not usually be a prediction
of what will happen, but of what is possible and what can be made to happen. It is thus
a guide to catalyse strategic leadership vision rather than an operating methodology.
When technical, it often provides a guide to action on what can be made to happen and
serves as an invaluable aid to a visionary strategic leader and decision-maker in times
of discontinuity.

Defining Strategy and Other Key Terms

The word strategy is derived from the Greek word Strategtia, which was used first
around 400 B.C. This connotes the art and science of directing military forces. The
strategy, according to a survey conducted in 1974 which asked corporate planners to
define what they meant by strategy, includes the determination and evaluation of
alternative paths to an already established mission or objective and eventually, choice
of the alternative to be adopted. Simply put, a strategy outlines how management
plans to achieve its objectives. Strategy is the product of the strategic management
process. Genenrally, when we talk of organisational strategy, it refers to organisations
top level strategy. However, strategies exist at other levels also.
Chandler made a comprehensive analysis of interrelationships among environment,
strategy, and organisational structure. He analysed the history of organisational change
in 70 manufacturing firms in the US. While doing so, Chandler defined strategy as:
The determination of the basic 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. Chandler refers to three aspects:
l

Determination of basic long-term goals and objectives.

adoption of courses of action to achieve these objectives, and

allocation of resources necessary for adopting the courses of action.

Professor Ansoff is a well-known authority in the field of strategic management and

has been a prolific writer for the last four decades. In one of his earlier books, Corporate
Strategy (1965), he explained the concept of strategy as: The common thread among

Strategic Management An Introduction

the organisations activities and product-markets . . . that defines the essential nature
of business that the organisation was or planned to be in future.
Ansoff has stressed on the commonality of approach that exists in diverse organisational
activities including the products and markets that define the current and planned nature
of business.
Andrews belongs to the group of professors at Harvard Business School who were
responsible for developing the subject of business policy and its dissemination through
the case study method. Andrew defines strategy as: The pattern of objectives, purpose,
goals and the major policies and plans for achieving these goals stated in such a way so
as to define what business the company is in or is to be and the kind of company it is or
is to be. This definition refers to the business definition, which is a way of stating the
current and desired future position of company, and the objectives, purposes, goals,
major policies and plans required to take the company from where it is to where it
wants to be.
Another well-known author in the area of strategic management was Glueck, who was
a Distinguished Professor of Management at the University of Georgia till his death in
1980. He defined strategy precisely as: A unified, comprehensive and integrated plan
designed to assure that the basic objectives of the enterprise are achieved. The three
adjectives which Glueck has used to define a plan make the definition quite adequate.
Unified means that the plan joins all the parts of an enterprise together, comprehensive
means it covers all the major aspects of the enterprise, and integrated means that all
parts of the plan are compatible with each other. Michael Porter of the Harvard Business
School has made invaluable contributions to the development of the concept of strategy.
His ideas on competitive advantage, the five-forces model, generic strategies, and value
chain are quite popular. He opines that the core of general management is strategy,
which he elaborates as: ... developing and communicating the companys unique
position, making trade-offs, and forging fit among activities.
Strategic position is based on customers needs, customers accessibility, or the variety
of a companys products and services. A companys unique position relates to choosing
activities that are different from those of the rivals, or to performing similar activities in
different-ways. However, a sustainable strategic position requires a trade-off when
the activities that a firm performs are incompatible. Creation of fit among the different
activities is done to ensure that they relate to each other.
It must be noted that the different approaches referred to above to define strategy
cover nearly a quarter of a century. This is an indication of what a complex concept
strategy is and how various authors have attempted to define it. To put it in another
way, there are as many definitions as there are experts. The same authors may change
the approach they had earlier adopted. Witness what Ansoff said 19 years later in 1984
(his earlier definition is of 1965): Basically, a strategy is a set of decision making rules
for the guidance of organisational behaviour.
We have tried to give you an assortment of definitions out of the many available.
Rather than an assortment, it may be more appropriate to call this section a bouquet of
definitions and explanations of strategy. Each flower (definition) is resplendent by itself
yet contributes synergistically to the overall beauty of the bouquet. The field of strategy
is indeed fascinating, prompting an author to give the title What is Strategy and

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Strategic Management

26

does it matter?to his thought-provoking book, Druckcr goes to the extent of terming
the strategy of an organisation as its theory of the business.
By means of the deeper insight that the authors have developed through years of
experience and thinking, they have attempted to define the concept of strategy with
greater clarity and precision. This comment is valid for most of the concepts in strategic
management since this discipline is in the process of evolution and a uniform terminology
is still evolving.
By combining the above definitions we do not attempt to define strategy in a novel way
but we shall try to analyse all the elements that we have come across. Strategy may be
summarised as follows:

a plan or course of action or a set of decision rules forming pattern or creating a

common thread,

the pattern or common thread related to the organisations activities which are
derived from its policies, objectives and goals,

related to pursuing those activities which move an organisation from its current
position to a desired future state,

concerned with the resources necessary for implementing a plan or following a

course of action, and

connected to the strategic positioning of a firm, making trade-offs between its

different activities, and creating a fit among these activities.

Strategists are individuals who are most responsible for the success or failure of an
organisation. Strategists have various job titles, such as chief executive officer, president,
chairman of the board, executive director, chancellor, dean or entrepreneur. Strategists
differ as much as organisations themselves, and these differences must considered in
the formulation, implementation, and evaluation of strategies. Strategists differ in their
attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern
for profitability, concern for short-run versus long-run aims, and management style.
Some strategists will not consider some types of strategies due to their personal
philosophy.

Mission Statements
Mission statements are enduring statements of purpose that distinguish one business
from other similar firms. A mission statement identifies the scope of a firms operations
in product and market terms. It addresses the basic question that faces all strategists:
What is our Business? A clear mission statement describes the values and priorities
of an organisation. Developing a business mission compels strategists to think about the
nature and scope of present operations and to assess the potential attractiveness of
future markets and activities. A mission statement broadly charts the future direction
of an organisation.
External Opportunities and Threats
Other key terms in our study of strategic management are external opportunities and
external threats. These terms refer to economic, social, political, technological, and
competitive trends and events that could significantly benefit or harm an organisation in

Strategic Management An Introduction

the future. Opportunities and threats are largely beyond the control of a single organisation,
thus the term external. The computer revolution, biotechnology, population shifts,
changing work values and attitudes, space exploration, and increased competition from
foreign companies are examples of opportunities or threats for companies. These types
of changes are creating a different type of consumer and consequently a need for
different types of products, services, and strategies. Other opportunities and threats
may include the passage of a new law, the introduction of a new product by a competitor,
a national catastrophe, or the declining value of the dollar. A competitors strength
could be a threat. Unrest in Latin America, rising interest rates, or the war against
drugs could represent an opportunity or a threat.
A basic tenet of strategic management is that firms need to formulate strategies to take
advantage of external opportunities and to avoid or reduce the impact of external threats.
For this reason, identifying, monitoring, and evaluating external opportunities and threats
is essential for success.

Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are controllable activities within an
organisation that are performed especially well or poorly. Management, marketing,
finance/ accounting, production/operations, research and development, and information
systems activities of a business are areas where internal strengths or weaknesses
arise. The process of identifying and evaluating organisational strengths and weaknesses
in the functional areas of a business is an essential strategic-management activity.
Organisations strive to pursue strategies that capitalise on internal strengths and improve
on internal weaknesses.
Strengths and weaknesses are determined relative to competitors. Relative deficiency
or superiority is important information. Also, strengths and weaknesses can be
determined by elements of being rather than performance. For example, a strength
may involve ownership of natural resources or a historic reputation for quality. Strengths
and weaknesses may be determined relative to a firms own objectives. For example,
high levels of inventory turnover may not be a strength to a firm that seeks never to
stock-out.

Long-term Objectives
Objectives can be defined as specific results that an organisation seeks to achieve in
pursuing its basic mission. Long-term means more than one year. Objectives are essential
for organisational success because they provide direction, aid in evaluation, create
synergy, reveal priorities, allow coordination, and provide a basis for effective planning,
organising, motivating, and controlling activities. Objectives should be challenging,
measurable, consistent, reasonable, and clear. In a multidivisional firm, objectives should
be established for the overall company and for each division.
Annual Objectives
Annual objectives are short-term milestones that organisations must achieve to reach
long-term objectives. Like long-term objectives, annual objectives should be measurable,
quantitative, challenging, realistic, consistent, and prioritised. They should be established
at the corporate, divisional, and functional level in a large organisation. Annual objectives

27

28

Strategic Management

should be stated in terms of management, marketing, finance/accounting, production/

operations, research and development, and information systems accomplishments. A
set of annual objectives is needed for each long-term objective. Annual objectives are
especially important in strategy implementation, whereas long -term objectives are
particularly important in strategy formulation. Annual objectives represent the basis for
allocating resources.

Policies
The final key term to be highlighted here is policiesthe means by which annual
objectives will be achieved. Policies include guidelines, rules, and procedures established
to support efforts to achieve stated objectives. Policies are guides to decision making
and address repetitive or recurring situations.
Policies are most often stated in terms of management, marketing, finance/accounting,
production/operations, research and development, and information systems activities.
Policies can be established at the corporate level and apply to an entire organisation, at
the divisional level and apply to a single division, or at the functional level and apply to
particular operational activities or departments. Policies, like annual objectifies, are
especially important in strategy implementation because they outline an organisations
expectations of its employees and managers. Policies allow consistency and coordination
within and between organisational departments.

Levels and Approaches to Strategic Decision Making

Chapter 2
Levels and Approaches to Strategic
Decision Making
The definitions of strategy, varied in nature, depth and coverage, offer us a glimpse of
the complexity involved in understanding this daunting, yet interesting and challenging,
concept. In this section, we shall learn about the different levels at which strategy can
be formulated.

Levels of Strategies
The strategic planning process culminates into formulation of strategies for the
organisation. A business strategy must contain well-coordinated action programs aimed
at securing a long-term competitive edge and which should be sustained by the company
(Refer Exhibit 2.1)

Exhibit2.1:LevelsofStrategies

Corporate Level
In an organisation, there are basically three levels. The top level of the organisation
consists of chief executive officer of the company, the board of directors, and
administrative officers. The responsibility of the top management is to keep the
organisation healthy. This implies that their responsibility is to achieve the planned financial
performance of the company in addition to meeting the nonfinancial goals viz. social
responsibility and the organisational image. The issues pertaining to business ethics,

29

Strategic Management

30

integrity, and social commitment are dealt with, at this level of strategic decisions. The
corporate level strategies translates the orientation of the stakeholders and the society
into the forms of strategies for functional or business levels (Refer Exhibit 2.2).

Corporate Level
of Strategies

Marketing
Strategies

System
Strategies

Reward
System
Strategies

Financial
Strategies

R&D
Strategies

Exhibit2.2:CorporateLevelStrategies

By using portfolio approach, a set of natural and generic strategies are generated that
must be considered by each business group, depending on their position in the industry
attractiveness and competitive strength dimensions. This is the level where vision
statement of the companies emerges. Exhibit 2.3 shows typical levels of strategy-making
in an organisation.
Corporate Level

Sub Business Unit-1

Level

Sub Business Unit-2

Level

Sub Business Unit-3

Level

Operational Level

Exhibit2.3:LevelsofStrategy-Making

Business Level
This level consists of primarily the business managers or managers of Strategic Business
units. Here strategies are about how to meet the competitions in a particular product
market and strategies have to be related to a unit within an organisation. The managers
at this level translate the general statements of direction and intent churned out at

Levels and Approaches to Strategic Decision Making

31

corporate level. They identify the most profitable market segment, where they can
excel, keeping in focus the vision of the company. The corporate values, managerial
capabilities, organisational responsibilities, and administrative systems that link strategic
and operational decision-making level at all the levels of hierarchy, encompassing all
business and functional lines of authority in a company are dealt with at this level of
strategy formulation. The managerial style, beliefs, values, ethics, and accepted forms
of behaviour must be congruent with the organisational culture and at this level, these
aspects are diligently taken care of by strategic managers.

Operational Level
Planning alone cannot create massive mobilisation of resources and people and can
never generate high quality of strategic thinking required in complex organisational
context. For this to happen, the planning should be carefully dovetailed and integrated
with significant administrative systems viz. management control, communication,
information management, motivation, rewards etc. It is also vital that all these systems
are supported by organisational structure that define various authority and responsibility
relationships, among various members of the company and specifically at operational
level. The culture of the organisation should be accounted for, and these systems should
find adaptability with the culture of the organisation.

Strategies at
Operational
Level
Strategies at
Operational
Level

Strategies at
Operational
Level
Strategies at
Operational
Level

Strategies at
Operational
Level

Strategies at
Operational
Level

Exhibit2.4: InteractionofVariousFunctions

The managers at this level of product, geographic, and functional areas develop annual
objective and short-term strategies. The strategies are designed in each area of research
and development, finance and accounting, marketing and human relations etc. The
responsibilities also include integrating among administrative systems and organisational
structure and strategic and operational modes and seek for congruency between
managerial infrastructure and the corporate culture. Exhibit 2.4 shows the interaction
of various functions for deciding strategies at the operational level.

Characteristics of Strategic Decisions

The three levels of strategic decision have varying characteristics due to the varying
responsibility and authority at different levels of management functioning (Refer Exhibit
2.5).

Strategic Management

32
Characteristic

Corporate Level

Business Unit Level

Nature

Conceptual

Conceptual but
business unit

related

Functional Level
to

Totally operational

Measurability

Non-measurable

Measurable to some extent

Quantifiable

Frequency

Large spans 5-10 years

Periodic

Annually

Adaptability

Poor

Average

High

Character

Innovative and Creative

Action-oriented

Totally action oriented

Risk

High

Moderate

Low

Profit

Large

Moderate

Low

Flexibility

High

Moderate

Low

Time

Long range

Medium range

Short range

Costs Involved

High

Medium

Low

Cooperation needed

High

Medium

Low

Exhibit2.5:CharacteristicsofCorporate,BusinessandFunctionalLevelStrategies

The nature of decisions taken at corporate level give a vision to the organisation. The
decisions taken are visionary in nature and hence are highly subjective. The vision of a
company evolves after a lot of deliberations among the directors who decide that how
their company would be known after a long period of time, say after ten to fifteen
years. The decisions at this level are therefore vital for selecting the directions of growth
of a company. Since it is very difficult to foresee what would happen to a company
after a long period of time, the decision essentially should have built-in flexibility as
these would have far-reaching consequences on the operations of the company. The
decisions at this level also involve greater risks, costs, potential profits etc. The
characteristic strategies at this level may include the following in a typical organisation.
l

Business scope and an expression of competitive leadership.

Identification of product market segments.

Corporate strategic thrusts and planning challenges relevant to the business unit.

Internal security at the business level that includes identification and evaluation
of critical success factors and assessment of competitive position.

Environmental scan at business level and identification of product markets and

industry attractiveness.

Formulation of business strategy is a set of multi-year broad action programmes.

At the functional level, the decisions involve action-oriented operational issues. Essentially
these are short-term type and hence periodically made. They reflect some or all part of
the strategy at corporate level. These decisions are also comparatively of low risk and
involve lower costs as the resources to be used by them are from the organisation
itself. The company as a whole is rarely involved in these decisions. They are more
concrete, clear, simple to implement and do not disturb the ongoing processes of the
company. The decisions at this level are more critically examined, in spite of being less
profitable.

Approaches to Strategic Decision Making

Strategic planning tools have developed enormously over the past 20 years. Such
techniques as the growth/share matrix and the experience curve are in widespread
use, and other planning techniques allow the manager to evaluate the impact of alternative
strategies on the stock price of the corporation. Management consulting firms offer

Levels and Approaches to Strategic Decision Making

strategic planning on a commodity basis, and any new M.B.A. comes equipped with at
least one method for developing such plans.
Unfortunately, the tools for implementing strategies have not developed as quickly as
the tools we use for planning. The result of this discrepancyfailed plans and abandoned
planning effortsis all too visible:
A major diversified manufacturer concluded that a steady stream of new products was
the most important factor in improving the stock price, yet the performance measures
and management reports imposed on the division heads stress quarterly profit. As a
result, division managers dont make the long-term investment required for successful
new product development.
A leading consumer goods company committed itself to strategic planning and built a
staff of over 30 planners, many with M.B.A.s, and experience in consulting firms.
Unfortunately, the expected benefits of planning failed to materialise; in less than two
years, the department was disbanded and planning responsibility returned to the operating
units.
Recently, business writers have begun to pay more attention to the problems of strategy
implementation. Corporate culture is now widely acknowledged as an important force
in the success or failure of business ventures; studies of Japanese management practices
point out the effectiveness of participative methods in securing wholehearted
commitment to new strategies at all levels of the organisation.
Despite this interest, three critical questions remain unanswered:
l

How can executives be more effective in putting chosen strategies into action?

How can the planning process be managed so that the strategies which emerge
are realistic/ not only in terms of the market place, but also in terms of the
politics, culture, and competence of the organisation?

Research shows that managers do not analyse opportunities exhaustively before

taking action; rather, they shape strategy through a continuing stream of individual
decisions and actions. How can we reconcile the static academic dogma, First
formulate strategy, then implement it, with the dynamic reality of managerial
work?

To shed some light on these questions, we studied management practice at a number of

companies. We have found that their approaches to strategy implementation can be
categorised into one of five basic descriptions. In each one, the chief executive officer
plays a somewhat different role and uses distinctive methods for developing and
implementing strategies. The approaches differ in a number of other dimensions as
well (see Exhibit 2.6). We have given each description a title to distinguish its main
characteristics.
The first two descriptions represent traditional approaches to implementation.
Here the CEO formulates strategy first, and then thinks about implementation later.
1.

The commander approachThe CEO concentrates on formulating the strategy,

applying rigorous logic and analysis. He either develops the strategy himself or
supervises a team of planners. Once hes satisfied that he has the best strategy,
he passes it along to those who are instructed to make it happen.

33

Strategic Management

34

2.

The organisational change approachOnce a strategy has been developed,

the executive puts it into effect by taking such steps as reorganising the company
structure, changing incentive compensation schemes, or hiring personnel.
The next two approaches involve more recent attempts to enhance implementation
by broadening the bases of participation in the planning process:

3.

The collaborative approachRather than develop the strategy in a vacuum,

the CEO enlists the help of his senior managers during the planning process in
order to assure that all the key players will back the final plan.

Fa

Exhibit 2.6: Comparison of Five Approaches

4.

The cultural approachThis is an extension of the collaborative model to involve

people at middle and sometimes lower levels of the organisation. It seeks to
implement strategy through the development of a corporate culture throughout
the organisation.
The final approach begins to answer some of the questions posed above by taking
advantage of managers natural inclination to develop opportunities as they are
encountered. While it has not been widely recognised or studied up to now, we
think it may represent the next major advancement in the art of strategic
management.

5.

The crescive approachIn this approach, the CEO addresses strategy planning
and implementation simultaneously. He is not interested in strategising alone, or
even in leading others through a protracted planning processs. Rather, he tries,
through his statements and actions, to guide his managers into coming forward as

W
or

H
pl
ap

Levels and Approaches to Strategic Decision Making

champions of sound strategies. (Since this involves growing strategies from

within the firm, the label comes from the Latin crescere, to grow.)
In these five approaches we see a trend toward the CEO playing an increasingly
indirect and more subtle role in strategy development. We question the recentralisation
of strategy making at headquarters, a trend documented (and encouraged) by some
recent writers. We think, at least for some firms, that this might be a mistake.
Various theories have been suggested about how decisions are made. Let us examine,
these first. Most writers focus on three approaches: rational-analytical, intuitiveemotional, and behavioral-political.

Rational-Analytical Decision Maker

In this model, the decision maker is a unique actor whose behavior is intelligent and
rational. The decision is the choice this actor makes, in full awareness of all available
feasible alternatives, to maximise advantages. The decision maker there to considers
all the alternatives as well as the consequences of all the possible choices, orders these
consequences in the light of a fixed scale of preferences, and chooses the alternative
that procures the maximum gain.
This is the oldest decision theory. It prescribes a rational, conscious, systematic, and
analytical approach. It has been criticised because
1.

The decision maker is often not a unique actor but part of a multiparty decision
situation.

2.

Decision makers are not rational enough or informed enough to consider all
alternatives or know all the consequences. And information is costly.

3.

Decision makers make decisions with more than a maximisation of objectives in

mind. They tend to satisfice, that is, make a decision expected to yield a
satisfactory, as opposed to an optimal, outcome. Besides, the objectives may
change.

So descriptions of actual decision making question the validity of rational

processes.

Intuitive-Emotional Decision Maker

The opposite of the rational decision maker is the intuitive decision maker. This decision
maker prefers habit or experience, gut feeling, reflective thinking, and in-stinct, using
the unconscious mental processes. Intuitive decision makers consider a number of
alternatives and options, simultaneously jumping from one step in analysis or search to
another and back again.
Some who prescribe intuition or judgment as the preferred approach point out that in
many, cases, judgment may lead to better decisions than optimizing tech-niques.
For example, consider sensitivity analysis on a tool such as the economic order quantity
(EOQ). EOQ models suggest that there is an optimal order quantity considering tradeoffs of ordering and holding costs. Yet you can stray far from optimal in most cases
without a very significant impact on total cost differentials. Here, then, judgment
concerning other factors in the decision situation could lead to a better overall decision
about order quantities, rather than holding fast to deciding what the rational model

35

Strategic Management

36

prescribes. In fact, the timing of when to implement a decision based on the analysis
may require an intuitive feel for what the data are telling you. In many cases, judgment
such as this might be preferable to relying on the analysis. Recognize, then, that analytical
models are tools to help the decision maker refine judgment.
Those opposed to this approach argue that
1.

It does not effectively use all the tools available to modern decision makers.

2.

The rational approach ensures that adequate attention is given to consequences

of decisions before big mistakes are made.

Political-Behavioral Decision Making

A third point of view suggests that real decision makers must consider a variety of
pressures from other people affected by their decisions. An organisation interacts with
a variety of stakeholders in a series of interdependent exchange relationships. Unions
exchange labor for decent wages and job security. Customers exchange money for
products and services. Owners exchange capital for expected returns on invest-ment.
Suppliers exchange inputs for money and continued business. Government exchanges
protection and economic security for taxes. Even competitors exchange information
with one another through trade associations or other contacts. The list of, agents and
expectations goes on. A stakeholder is any group or individual who can affect or is
affected by the achievement of an organisations purpose.
Each stakeholder gives the organisation something and expects something in return.
To the extent an organisation has a favorable exchange relationship (gets a bit mod
than given) compared with other organisations and stakeholders, it has more power.
More powerful stakeholders have more influence over decisions because the
organisation is more dependent on these stakeholders. A majority stockholder can
have a greater influence on decisions about reinvestment versus dividend payout
than if stock is widely held by many small owners. If the firm is labor-intensive,
more attention may be paid to union leaders demands for better wages than to the
desires of stock-holders for more profit, because the union might shut the firm
down.
Given these realities, decision makers do a juggling act to meet the demands of the
various stakeholders. Through political compromise, they attempt to merge competing
demands so that a coalition of interests emerges that will support the decision.
This mode of decision making is a descriptive theory suggesting that the organisation in
which the decision maker works limits the choices available. Decisions are made when
the several people involved in the process agree that they have found a solution. They
do this by mutual adjustment and negotiation following the rules of the gamethe way
decisions have been made in the organisation in the past. The decision maker must
consider whether the decision outcome can be implemented politically.

A Synthesis on Decision Making

The human being is a mix of the rational and the emotional. The environment is a
mixture of the analysable and of chaotic change and pressures. Strategic
management decisions therefore are made in a typically human way: using the

Levels and Approaches to Strategic Decision Making

rational, conscious analysis and intuitive, unconscious gut, in light of political

realities.
As stated earlier, some prescribe that one component or another should be larger.
However, because of individual differences and differences in the stability of the
environment, the amount of the rational versus the intuitive versus the political varies
by the decision maker and the decision situation. In some cases the analytical component
is very large; in others, the emotional set may dominate. For example, Bil Ziff, the
magnate behind the billion dollar Ziff-Davis Publishing Company, sold of much of his
empire because he became more and more bored. He put TV station up for sale
because, he says, they were not a turn on. But as Exhibit. 1.12 suggest the interaction
of the three approaches (shaded area) defines where we think much decision making
probably occurs. We would prefer that the analytical component be larger than the
others. In fact, we prescribe an analytical-rational approach, tempered by realities in
the situation. Thus when you set about to make decisions, you should apply the tools
you learn. But truly rational analysis will also incorporate analysis of the politicalbehavioral and intuitive dimensions in the decision situation. Indeed various techniques
such as dialectic inquiry, devils advocacy, hierarchical analysis, and influence diagrams
have evolved to help managers with these complex and messy problems. These systems
allow managers to recognise and rationally structure the judgmental and political factors
which will undoubtedly influence them.

Analyticalrational

Politicalbehavioral

Intuitiveemotional

Exhibit 2.7: Components of Strategic Decision Processes

Thus a blending of these prescriptive and descriptive approaches helps to better

understand how decision makers operate. And as you assess cases or business problems,
attempt to diagnose the political or emotional realities of the situation in addition to using
the analytical tools at your disposal. The recommendations you make are likely to be
much more meaningful if you do this.
As strategic decision-making is a complex process, it is difficult to perform. It is
incomprehensible; it cannot be analysed and explained easily. Decision-makers are
unable to describe the exact manner in which strategic decisions are made. Like the
working of the human mind, strategic decision-making is fathomless. And rightly so, for
it is based on complex mental processes which are not exposed to the view. While
commenting on the nature of strategic decision-making Henry Mintzberg says that the
key managerial processes are enormously complex and mysterious, drawing on the
vaguest of information and using the least articulated of mental processes. These

37

Strategic Management

38

processes seem to be more relational and holistic than ordered and sequential, and
more intuitive than intellectual....
For these reasons, no theoretical model, however painstakingly formulated, can adequately
represent the different dimensions of the process of strategic decision-making. Despite
these limitations, we can still attempt to understand strategic decision-making by
considering some important issues related to it. Six such issues are:
1.

Criteria for decision-making. The process of decision-making requires objectivesetting. These objectives serve as yardsticks to measure the efficiency and
effectiveness of the decision-making process. In this way, objectives serve as
the criteria for decision-making. There are three major viewpoints regarding setting
criteria for decision-making.
(a)

The first is the concept of maximisation. It is based on the thinking of

economists who consider objectives as those attributes which are set at
the highest point. The behaviour of the firm is oriented towards achieving
these objectives and, in the process, maximising its returns.

(b)

The second view is based on the concept of satisficing. This envisages

setting objectives in such a manner that the firm can achieve them realistically
through a process of optimisation.

(c)

The third viewpoint is that of the concept of incrementalism. According to

this view, the behaviour of a firm is complex and the process of decisionmaking, which includes objective-setting, is essentially a continually-evolving
political consensus-building. Through such an approach, the firm moves
towards its objectives in small, logical and incremental steps.

2.

Rationality in decision-making. In the context of strategic decision-making,

rationality means exercising a choice from among various alternative courses of
action in such a way that it may lead to the achievement of the objectives in the
best possible manner. Those economists who support the maximizing criterion
consider a decision to be rational if it leads to profit maximisation. Behaviourists,
who are proponents of the satisfying concept, believe that ratio-nality takes into
account the constraints under which a decision-maker oper-ates. Incrementalists
are of the opinion that the achievement of objectives depends on the bargaining
process between different interested coalition groups existing in an organisation,
and therefore a rational decision-making process should take all these interests
into consideration.

3.

Creativity in decision-making. To be creative, a decision must be original and

different. A creative strategic decision-making process may considerably affect
the search for alternatives where novel and untried means may be looked for and
adopted to achieve objectives in an exceptional manner. Creativity as a trait is
normally associated with individuals and is sought to be developed through
techniques such as brainstorming. One of the attitudinal objectives of a business
policy course it to develop the ability to go beyond and think, which, in other
words, is using creativity in strategic decision-making.

4.

Variability in decision-making. It is a common observation that given an identical

set of conditions two decision-makers may reach totally different conclusions.

Levels and Approaches to Strategic Decision Making

This often happens during case discussions too. A case may be analysed differently
by individuals in a group of learners, and, depending on the differing perceptions
of the problem and its solutions, they may arrive at different conclusions. This
happens due to variability in decision-making. It also suggests that every situation
is unique and there are no set formulas that can be applied in strategic decisionmaking.
5.

Person-related factors in decision-making. There are a host of person-related

factors that play a role in decision-making. Some of these are age, education,
intelligence, personal values, cognitive styles, risk-taking ability, and creativity.
Attributes like age, knowledge, intelligence, risk-taking ability, and creativity are
generally supposed to play a positive role in strategic decision-making. A cognitive
style which enables a person to assimilate a lot of information, interrelate complex
variables, and develop an integrated view of the situation is specially helpful in
strategic decision-making. Values, as enduring prescriptive beliefs, are culturespecific and important in matters of social responsibility and business ethics
issues that are important to strategic management.

6.

Individual versus group decision-making. Owing to person-related factors,

there are individual differences among decision-makers. These differences matter
in strategic decision-making. An organisation, as it possesses special
characteristics, operates in a unique environment. Decision-makers who understand an organisation s characteristics and its environment are in advantage
position to undertake strategic decision-making. Individuals such as chief executives
or entrepreneurs play the most important role as strategic decision-makers. But
as organisations become bigger and more complex, and face an increasingly
turbulent environment, individuals come together in groups for the purpose of
strategic decision-making.

Schools of Thought on Strategy Formation

The subject of strategic management is in the midst of an evolutionary process. In the
course of its development, several strands of thinking are emerging which are gradually
leading to a convergence of views. This is a subtle indication of the maturing of this
subject. We now have a wealth of insight into the complexities of strategic behaviour
the observable characteristics of the manner in which, an organisation performs decisionmaking and planning functions with regard to the issues that are of strategic importance
to its survival, growth and profitability. Strategic decision-making is the core of managerial
activity, strategic behaviour is its manifestation, while the outcome is the formation of
strategy.
Here, in this section, we dwell upon the compendium of various perspectives to strategy
formation that have evolved over a period of time. Several persons, among whom are
the doyens in the field of strategy, have contributed to the formulation of these
perspectives. These offer the reader, a meaningful insight into the development of the
concept of strategy. Indeed, Mintzberg and his associates, from whose writings these
perspectives have been adopted here, call them the 10 schools of thought on strategy
formation.
The schools of thought can be classified under three groups as below.

39

Strategic Management

40

The Prescriptive Schools

1.
Design school where strategy formation is a process of conception
2.

Planning school where strategy formation is a formal process

3.

Positioning school where strategy formation is an analytical process

The Descriptive Schools

4.
Entrepreneurial school where strategy formation is a visionary process
5.

Cognitive school where strategy formation is a mental process

6.

Learning school where strategy formation is an emergent process

7.

Power school where strategy formation is a negotiation process

8.

Cultural school where strategy formation is a collective process

9.

Environmental school where strategy formation is a reactive process

10.

Configuration school where strategy formation is a process of transformation.

The Integrative School

Given below is a description and explanation of each school of thought.
1.

The design school, which perceives strategy formation as a process of conception

developed mainly in the late 1950s and 60s. Under this school, strategy is seen as
something unique which is in the form of a planned perspective. The CEO as the
main architect guides the process of strategy formation. The process of strategy
formation is simple and informal and based on judgement and thinking. The major
contributors to the design school are Selznick (1957) and Andrews (1965).

2.

The planning school, which perceives strategy formation as a formal process

developed mainly in the 1960s. Under this school, strategy is seen as a plan
divided into substrategies and programmes. The planners play the lead role in
strategy formation. The process of strategy formation is formal and deliberate.
The major contributor to the planning school is Ansoff (1965).

3.

The positioning school, which perceives strategy formation as an analytical

process developed mainly in the 1970s and 80s. Under this school, strategy is
seen as a set of planned generic positions chosen by a firm on the basis of an
analysis of the competition and the industry in which they operate. The lead role
in strategy formation is played by the analysts. The process of strategy formation
is analytical, systematic and deliberate. The major contributors to the positioning
school are Schendel and Hatten (1970s), and Porter (1980s).

4.

The entrepreneurial school, which perceives strategy formation as a visionary

process developed mainly in the 1950s. Under this school, strategy is seen as the
outcome of a personal and unique perspective often aimed at the creation of a
niche. The lead role in strategy formation is played by the entrepreneur/ leader.
The process of strategy formation is intuitive, visionary, and largely deliberate.
The major contributors to the entrepreneurial school are Schumpeter (1950s),
Cole(1959) and several others, most of whom are economists.

Levels and Approaches to Strategic Decision Making

5.

The cognitive school, which perceives strategy formation as a mental process,

developed mainly in the 1940s and 50s. Under this school, strategy is seen as an
individual concept that is the outcome of a mental perspective. The lead role in
strategy formation is played by the thinker-philosopher. The process of strategy
formation is mental and emergent. The major contributors to the cog-nitive school
are Simon (1947 and 1957), and March and Simon (1958).

6.

The learning school which perceives strategy formation as an emergent process

has had a legacy from the 1950s through the 1990s. Under this school, strategy
is seen as a pattern that is unique. The lead role is played by the learner within
the organisation whoever that might he. The process of strategy formation is
emergent, informal and messy. The major contributors to the learning school are
Lindblom (1959, 1960), Cyert and March (1963), Weick (1969), Quinn (1980),
Senge (1990), and Prahalad and Hamel (early 1990s).

7.

The power school, which perceives strategy formation as a negotiation process,

developed mainly during the 1970s and 80s. Under this school, strategy is seen
as a political and cooperative process or pattern. The lead role in strategy formation
is played by any person in power (at the micro level) and the whole organisation
(at the macro level). The process of strategy formation is messy. consisting of
conflict, aggression and cooperation. At the micro level the process of strategy
formation is emergent while at the macro level it is deliberate. The major
contributors to the power school are Allison (1971), Pfeffer and Salancik (1978),
and Astley (1984).

8.

The cultural school, which perceives strategy formation as a collective process

developed Mainly in the 1960s. Under this school, strategy is seen as a unique
and collective perspective. The lead role in strategy formation is played by the
collectivity displayed within the organisation. The process of strategy formation
is ideological, constrained, collective and deliberate. The major contributors to
the cultural school are Rhenman and Normann (late 1960s).

9.

The environmental .school, which perceives strategy formation as a reactive

process, developed mainly in the late 1960s and 70s. Under this school, strategy
is seen as something generic occupying a specific position or niche in relation to
the environment. The lead role in strategy formation is played by the environment
as an entity. The process of strategy formation is passive and imposed, and
hence, emergent. The major contributions to the environmental school are Hannan
and Freeman (1977) and contingency theorists like Pugh el. al. (late 1970s).

10.

The configuration school, which perceives strategy formation as a

transformation process developed during the 1960s and 70s. Under this school,
strategy is viewed in relation to a specific context and thus could be in a form
that corresponds to any process visualised under any of the other nine schools.
The lead role may be played by any actor identified in the other nine schools. The
process of strategy formation is inlegrative, episodic and sequential. In addition,
the process could incorporate the elements pointed out under the other nine schools
of thought. The major contributors to the configuration school are Chandler (1962),
Mintzbcrg and Miller (late 1970s), and Miles and Snow (1978).

41

Strategic Management

42

Chapter 3
Process of Strategic Management
Business policy is a term traditionally associated with the course in business schools
devoted to integrating the educational program of these schools and under-standing
what today is called strategic management. In most businesses in earlier times (and in
many smaller firms today), the focus of the managers job was on todays decisions for
todays world in todays business. That may have been satisfactory then instead of
focusing all their time on today, managers began to see the value of trying to anticipate
the future and to prepare for it. They did this in several ways.
l

They prepared systems and procedures manuals for decisions that must be made
repeatedly. This allowed time for more important decisions and ensured more or
less consistent decisions.

They prepared budgets. They tried to anticipate future sales and flows of funds.
In sum, they created a planning and control system.

Budgeting and control systems helped, but they tended to be based on the status quo
the present business and conditionsand did not by themselves deal well with change.
These systems did provide better financial controls and are still in use. Later variations
included capital budgeting and management-by-objectives systems.
Because of the lack of emphasis on the future in budgeting, long-range planning appeared.
This movement focused on forecasting the future by using economic and technological
tools. Long-range planning tended to be performed primarily by corporate staff groups,
whose reports were forwarded to top management. Sometimes their reports and advice
were heeded (when they were understood and were credible); otherwise, they were
ignored. Since the corporate planners were not the decision makers, long-range planning
had some impact, but not as much as would be expected if top management were
involved. Then, too, they were producing first-generation plans.
First-generation planning means that the firm chooses the most probable appraisal
and diagnosis of the future environment and of its own strengths and weak-nesses.
From this, it evolves the best strategy for a match of the environment and the firma
single plan for the most likely future.
Todays approach is called strategic planning or, more frequently, strategic
management. The board of directors and corporate planners have parts to play in
strategic management. But the starring roles are for the general managers of the
corporation and its major operating divisions. Strategic management focuses on secondgeneration planning, that is, analysis of the business and the preparation of several
scenarios for the future. Contingency strategies are then prepared for each of these
likely future scenarios.
Strategy formulation is the process of establishing a business mission, conducting research
to determine critical external and internal factors, establishing long-term objectives, and
choosing among alternative strategies. Sometimes the strategy formula stage of strategic

Process of Strategic Management

43

management is called strategic planning. The difference between strategic planning

and strategic management is that the latter includes strategy implementation and strategy
evaluation.
As illustrated below three basic strategy-formulation activities are conducting research,
integrating intuition with analysis, and making decisions. Conducting research involves
gathering and assimilating information about a given Arms industry and markets. This
process is sometimes called environmental scanning. Internally, research is conducted
to identify key strengths and weaknesses in the functional areas of business. Internal
factors can be determined in a number of ways that include computing ratios, measuring
performance, and comparing to past periods and industry averages. Various types of
surveys can also be developed and administered to examine internal factors such as
employee morale, production efficiency, advertising effectiveness, and customer loyalty.
There are numerous strategic-management techniques that allow strategists to integrate
intuition with analysis in generating and choosing among feasible alternative strategies
Some of these tools are the External Factor Evaluation (EFE) Matrix, the Internal
Factor Evaluation (IFE) Matrix, the Strategic Position and Action Evaluation (SPACE)
Matrix, the Boston Consulting Group (BCG) Matrix, and the Quantitative Strategic
Planning Matrix (QSPM).
Since no organisation has unlimited resources, strategists must make decisions regarding
which alternative strategies will benefit the firm most. Strategy-formulation decisions
commit an organisation to specific products, markets, resources, and technologies over
an extended period of time. Strategies determine long-term competitive advantages.
For better or worse, strategic decisions have enduring effects on an organisation and
major multifunctional consequences. Strategists have the best perspective to fully
understand the ramifications of formulation decisions; they have the authority to commit
the resources necessary for implementation.

STAGES

ACTIVITIES

Strategy
formulation

Conduct
research

Integrate
intuition
with analysis

Make
decisions

Strategy
Implementation

Estabish
annual
objectives

Devise
policies

Allocate
resources

Strategy
evaluation

Review internal and

external factors

Measure
performance

Take
corrective
actions

Exhibit 3.1: Stages and Activities in the Strategic-Management Process

Strategic Management

44

Strategy Implementation
Strategy implementation is often called the action stage of strategic management.
Implementing means mobilising employees and managers to put formulated strategies
into action. Three basic strategy-implementation activities are establishing annual
objectives, devising policies, and allocating resources. Often considered to be the most
difficult stage in strategic management, strategy implementation requires personal
discipline, commitment, and sacrifice. Successful strategy implementation hinges upon
managers ability to motivate employees, which is more an art than a science. Strategies
formulated but not implemented serve no useful purpose.
Interpersonal skills are especially critical for successful strategy implementation.
Strategy implementation includes developing strategysupportive budgets, programs,
and cultures, and linking motivation and reward systems to both long-term and annual
objectives. Strategy-implementation activities affect all employees and managers in an
organisation. Every division and department must decide on answers to questions such
as What must we do to implement our part of the organizations strategy? and How
best can we get the job done? The challenge of implementation is to stimulate managers
and employees throughout an organisation to work with pride and enthusiasm toward
achieving stated objectives.

Strategy Evaluation
The final stage in strategic management is strategy evaluation. All strategies are subject
to future modification because external and internal factors are constantly changing.
Three fundamental strategy-evaluation activities are (I) reviewing external and internal
factors that are the bases for current strategies, (2) measuring performance, and (3)
taking corrective actions. Strategy evaluation is needed because success today is no
guarantee of success tomorrow! Success always creates new and different problems;
complacent organisations experience demise.
Strategy formulation, implementation, and evaluation activities occur at three hierarchical
levels in a large diversified organisation: corporate, divisional or strategic business unit,
and functional. By fostering communication and interaction among managers
and employees across hierarchical levels, strategic management helps a firm function
as a competitive team. Most small businesses and some large businesses do not have
divisions or strategic business units, so these organisations have only two hierarchical
levels.
The strategic-management process can best be studied and applied using a model.
Every model represents some kind of process. The framework illustrated below is a
widely accepted, comprehensive model of the strategic-management process. This
model does not guarantee success, but it does represent a clear and practical approach
for formulating, implementing, and evaluating strategies. Relationships among major
components of the strategic-management process are shown in the model. (Exhibit
3.2)

Process of Strategic Management

45

"

"$ $ % &
'( ! )* $( +

"$ $ % &
! * ! +$ $( +

"$ $ % &
, *) $( +

Exhibit 3.2: A Comprehensive Strategic Management Model

Identifying an organisations existing mission, objectives, and strategies is the logical

starting point for strategic management because a firms present situation and
condition may preclude certain strategies and may even dictate a particular course
of action? Every organisation has a mission, objectives, and strategy, even if
these elements are not consciously designed, written, or communicated. The answer to
where an organisation is going can be determined largely by where an organisation has
been.
The strategic-management process is dynamic and continuous. A change in any one of
the major components in the model can necessitate a change in any or all of the other
components. For instance, a shift in the economy could represent a major opportunity
and require a change in long-term objectives and strategies; or a failure to obtain annual
objectives could require a change in policies; or a major competitor could announce a
change in strategy that requires a change in the firms mission. Therefore,strategy
formulation, implementation, and evaluation activities should be performed on a continual
basis, not just at the end of the year. The strategic-management process never really
ends.

Strategic Management

46

Toward
more
formality
and
more
details

Organisation

Toward
less
Fermality
Formality
y and
Fewer
details

Small one-plant compaines

Large compaines
Management styles
Policy maker
Democratic-permissive
Authoratic
Day-to-day operational thinker
Intuitive thinker
Experienced in planning
Inexperienced in planning
Complexity of environment
Stable environment
Turbulent environment
Little competition
Many markets and customers
Single market and customer
Competition severe
Complexity of production processes
Long production lead times
Short production lead times
Capital intensive
Labor intensive
Integrated manufacturing processes
Simple manufacturing processes
High technology
Low technology
Market reaction time for new
Production is short
Market reaction time is long
Nature of problems
Facing new complex, tough problems
having long-range aspects
Facing tough short-range problems
Purpose of planning system
Coordinate division activities
Train managers

Exhibit 3.3: Forces Influencing Design of Strategic Management Systems

The strategic-management process is not as cleanly divided and neatly performed in

practice as the strategic-management model suggests. Strategists do not go through
the process in lockstep fashion. Generally, there is give-and-take among hierarchical
levels of an organisation. Many organisations conduct formal meetings semiannually to
discuss and update the firms mission, opportunities/threats, strengths/weaknesses,
strategies, objectives, policies, and performance. These meetings are commonly held
off-premises and called retreats. The rationale for periodically conducting strategicmanagement meetings away from the work site is to encourage more creativity and
candor among participants. Multidirectional arrows in Exhibit 3.3 illustrate the importance
of good communication and feedback throughout the strategic-management process.
As shown in Exhibit 3.3 a number of different forces affect the formality of strategic
management in organisations. Size of organisation is a key factor: smaller firms are
less formal in performing strategic-management tasks. Other variables that affect
formality are management styles, complexity of environment, complexity of production
processes, nature of problems, and purpose of planning system.

Roles of Strategists, Mission and Objectives

Chapter 4
Roles of Strategists, Mission and
Objectives
Strategists are individuals or groups who are primarily involved in the formulation
implementation, and evaluation of strategy. In a limited sense, all managers are strategists.
There are persons outside the organisation who are also involved in various aspects of
strategic management. They too are referred to as strategists.
The top management function is usually performed by the Chief Executive Officer
(CEO) of the organisation, by whatever name called, in coordination with the Chief
Operating Officer (COO) or President, Vice-Presidents, and divisional and departmental
heads. The top managers are also known as general manager.
Top management especially the CEO is responsible to the board of directors for overall
management of the organisation. The job of the top management is multi-dimensional
and oriented towards the welfare of the total organisation. Though the specific top
management functions may vary from organisation to organisation, one could have a
good idea about it from an analysis of an organisations mission, objectives, strategies
and key activities.
The Chief Executive in most of the companies is called the Managing Director
(Chairman-cum-Managing Director) or President. Where the executive head of the
organisation is the Managing Director or Chairman-cum-Managing Director, the
President is usually in the position of the Chief Operating Officer (COO). The Executive
leader, of a major segment of the organisation such as a division, department or unit is
typically called a general manager.
The Chief Executive Officer (CEO) is a strategist, organisational builder and leader.
The CEO is the principal strategist of his organisation. Although the BODs and other
members of the top management play an important role, the CEO cannot really delegate
all his strategic responsibilities to anyone else. He is in fact a strategic thinker. He is the
person who links the internal world of the corporation with the external world. This role
can be described as the gate keeping role of the CEO; it is both flag flying and
transmitting to and receiving signals from the external environment. It is he who has
both the corporate understanding and the vantage joint perspective which is required to
translate the signals from the outside world. These signals may often be subtle, and not
very perceptible. He has to sow seeds for new thoughts within the organisation and has
to nurture and sustain those which come from outside.
Many CEOs are so involved in the day-to-day operations that they hardly have any
time left for strategic matters, it has been rightly said that routine drives out creativity.
The CEO has to see to it that he is left with sufficient time for strategic responsibilities.
An American Survey indicated that the executives who reached to the top allocated the
largest part of their time to long range planning and policy setting. They even wished
that they had more time for long range planning and human resource management.

47

48

Strategic Management

While operating within the environment and the resources at hand, the CEO has to build
the organisation. Organisation building is a continuous process involving organisational
change. Some of organisational building responsibility can certainly be delegated but
the CEO, being at the helm of the affairs, has to remain the initiator for experimenting
with new ideas, approaches and systems. He is the key person in the organisation. The
organisational changes should be made gradually and regularly, and not suddenly or
sporadically. It is a human tendency to resist change for a variety of reasons, the main
being uncertainty. It is therefore important to recognise resistance to change prior to
attempting to make organisational changes.
The common reasons for people resisting change are: vested interests, differing
perceptions, misunderstanding and lack of trust, and low tolerance for change. Some
useful ways to deal with resistance are: education and communication, participation
and involvement, and facilitation and support. All these ultimately lead to the creation of
a climate of better confidence.
The CEO is the first among leaders of his organisation. He must have the will to manage.
To manage well a person has to want to manage; he has to really love it. How a Chief
Executive can turn around a company is amply revealed in a case history. An expatriate
was called to India to boost the performance of an Indian subsidiary in the processingmarketing, industry. The company had tremendous goodwill in the market but its
performance was wholly out of alignment with its image. In spite of good products, the
company was not able to do well because of traditional management which was
characterised by lethargy and lack of articulation. The new CEO, who was gentle in his
speech, sensitive to human relations and had charming social manners, was often
perceived by company executives as an academic who had somehow strayed into the
world of business. However, soon after joining his new position, the new CEO started
questioning the current assumptions relating to product strategies, marketing and
distribution. He started the system of target setting and performance appraisal.
It soon became clear that the velvet glove concealed an iron fist. He left nobody in
doubt about his conviction that if the company had to move forward it had to be sensitive
to the environment and regulatory policies, and pull itself up by the organisational boot
straps. He redefined product-market posture and reconstituted product groups into
divisions with profit responsibility, after taking into consideration the technological,
marketing and managerial dimensions which have an impact on performance. He selected
the heads of the new divisions carefully. Planning systems were st:eamlined, targets
regarding sales, cost, profit, product development etc. were developed on the basis of
open discussion and information sharing. Considerable autonomy was devolved upon
the divisional heads with regard to staffing, resource allocation, and marketing strategies.
Many eyebrows were raised about his style of tough-minded behaviour, quite unknown
in the history of the organisation. Within a period of less than two years the organisation
turned the corner and was found attempting for market leadership in the industry.
Mentoring and helping others along the road to success is an important activity of
managers and more so of CEO. The higher a manager gets in an organisation, the more
responsibility he has for such helping activities. It is a characteristic of a really genuine
leader at any level to lift others up, even beyond his own level at every legitimate
opportunity.

Roles of Strategists, Mission and Objectives

Thus, a CEO is simultaneously a strategic thinker, an organisational builder, and a leader.

He is also a spokesman, an innovator, a father figure and a prime decision maker, as
will be borne out in our later discussion.
Top management comprises a team of people, including the CEO, who perform certain
vital tasks. Although there may be differences among writers as to whether people
holding certain positions in a body corporate can be regarded as members of top
management or not, yet there is a good deal of agreement on tasks performed by them.
The tasks performed by the team or group of people who can be regarded as constituting
top management are:
l

Providing direction

Setting vision

Setting standards.

Direction
Top management, undoubtedly, is expected to give direction to the organisation. Should
the organisation continue to produce goods and services provided hitherto?
Should there be a change in products supplied? What are the areas, from which the
organisation should withdraw? What are the new areas into which it should enter?
In a reasonably stable environment these questions are not that relevant. But in a
changing environment there is a need to keep a close watch. Some products/ businesses
which were doing well in recent years may not continue to do so. What should the
organisation do? Disinvest, but what are the new areas into which it could go? Most big
industrial houses have gradually withdrawn from textiles or are in the process of doing
so. These include Birlas, Tatas, Shri Ram Group, Modis. They have entered into new
areas such as chemicals, automobiles, tyres, electronics, reprographics. Who decided
about these? Of course the top management or more specifically top management
team.

Vision Setting
Having given the direction to the organisation, top management team is expected to set
standards for the short run and the long run. What is to be achieved, say 5 to 10 years
from now? What are the targets for the given years?
Can you guess which task is more importantsetting standards for the short run or the
long run? Of course, both are equally important and are interconnected. An overemphasis on the achievement in the short run may mean that the organisation is not
able to initiate action in time for moving into more promising areas in the long run.
Similarly, an overly concern for achievements in the long run may put the organisation,
in difficulty for meeting the short term requirements of cash and other facilities. Evolving
a balanced perspective of the short term and long term interests has been emphasised
in the literature. It is argued that the top management needs to have bifocal glasses
which help it in managing the short term as well as long term interests of the organisation
simultaneously.

49

Strategic Management

50

Standard Setting
Top management not only sets standards but evaluates the performance of various
units or groups of businesses. Setting standards has no meaning without some system
of control. Developing a system of control is one of the tasks of top management. The
frequency of such exercise on evaluation differs from situation to situation. However,
the evaluation should provide scope for initiating corrective action.
One of the formal ways of having a system of evaluation is provided by Management
by Objectives. In this approach an attempt is made to arrive at an agreement on what
is to be achieved. These targets, then constitute the basis on which evaluation is attempted.
The dimension relating to the managerially derived expectations of the Board of
Directors role seems to be of relatively recent origin. In the last two decades or so,
industrial development has been marked by far-reaching technological changes, leading
to equally fundamental competitive reorientation at the global level. As a result, many
erstwhile great names in industry have been humbled. With such rapidly mounting
changes and uncertainties, the role of BODs has begun to be viewed from much wider
and long-term perspectivebeyond the minimum requirements of law. Probably, upto
the 1970s, the duty of BODs to superintend, control and direct had gone by default.
Stable environment had helped this key role to remain dormant. What arc then the
renewed ramifications of this role at present? These are meant to ensure that:
l

the enterprise continues to remain effective on the standpoint of technology

parameters.

the enterprise continues to achieve healthy market growth in competitive

conditions,

divestment and diversification take place on sound lines.

long-term productivity and quality are never sacrificed at the altar of short-term
profitability.

judicious earnings retention policy is adopted for financing growth, modernisation

etc.

serious and sustained attention is devoted towards building a sound system of

human values and exalted corporate culture.

It is a common observation that BODs function rather passively. Often the members
are selected not because of their knowledge of the specific functioning of the company
which they are supposed to oversee but because of their compatibility, prestige or
esteem in the community. Traditionally, as it happens, the board members arc expected
(or requested) to approve the proposals put forward to them by top management.
Usually, the Chief Executive Officer (CEO) or the group of promoters have a free
reign in choosing the directors and in having them elected by the shareholders. The
CEO or the promoter group may select board members who in their opinion, will not
disturb the companys policies and functioning . The directors so selected often feel
that they should go along with any proposals made by the CEO and his group. Thus, a
strange or somewhat paradoxical situation arises. The board members find themselves
accountable to the very management they are expected to oversee.

Roles of Strategists, Mission and Objectives

Even today, the boards in India, especially in family owned or closely held companies,
are mere figureheads. Over the recent past, however, lending institutions, financial
media and corporate analysts have seriously questioned the role of BODs. The investors
and government in general arc now better aware of the role of BODs. In general, it is
felt that there is a critical lack of responsibility on the part of BODs. Though the
Companies Act throws some light on the powers of BODs and the restrictions placed
on those powers, it does not specify to whom they are responsible and what for. However,
there is a broad agreement that BODs appointed or elected by the shareholders are
expected to:
l

oversee the management of the companys assets

establish or approve the companys mission, objectives, strategy and policies

review management actions and financial performance of the company

hire and fire the principal executive and operating officers of the company.

An important issue in this context is : should BODs merely direct or may they manage
also? Many experts and practicing top managers say that BODs should only oversee
and direct, and never get involved with detailed management. There are others who
feel that, for direction to be realistic and sensible, some in-depth involvement with
details is necessary. The majority view, however, is in favour of directors directing the
affairs of the company and not managing them.
Probably, in the majority of cases in India, the real problem is one of non-involvement
of board membersalmost to the extent of callousnessin enterprise affairs. Especially
in those enterprises which are sick, or are near to this state, it should be clearly decided
whether their BODs will merely direct and feel satisfied, for such enterprises often
lack competent managers at all levels. So, whom would BODs direct? Is there a need,
therefore, for the BODs here to spend more time and manage such enterprises too
for a stipulated period of time?
The board is expected to act with due care. That is they must act with that degree
of diligence, care, and skill which ordinarily prudent men would exercise under similar
circumstances in like positions. If a director or the Board as a whole fails to act with
due care and, as a result,, the company in some way is, harmed, the careless director or
directors may be held personally liable for the harm done.
Further, they may be held personally responsible not only for their own actions but also
for the actions of the company as a whole.
In addition, directors must make certain that the company is managed in accordance
with the laws and regulations of the land. They must also be aware of the needs and
demands of the constituent groups so that they can bring about a judicious balance
between the interests of these diverse groups, while ensuring at the same time that the
company continues to function.
According to Bacon and Brown, a BODs, in terms of strategic management, has three
basic tasks.
l

To initiate and determine: A board can delineate an organisations mission and

specify strategic options to its management.

51

Strategic Management

52
l

To evaluate and influence: A board can examine management proposals,

decisions and actions; agree or disagree with them; give advice and offer
suggestions; develop alternatives.

To monitor: By acting through its committees, a board can keep abreast of

developments, both inside and outside the organisation. It can thus bring new
developments to the attention of the management which it might have overlooked.

The members of the board may be having varying commitments to the organisation
in terms of their involvement with the above strategic tasks. The degree of involvement
of the board in the organisations strategic affairs can be viewed as a continuum, ranging
from phantom boards, with no real involvement, to catalyst boards, with a very high
degree of involvement. Expectedly, highly involved boards tend to be very active. They
take their task of initiating, evaluating and influencing, and monitoring seriously and
provide advice to management whenever it is felt necessary and keep them alert . As
depicted in Exhibit 4.1, a catalyst board may be deeply involved in the strategic
management process. The BODs of some public enterprises (e.g., BHEL and HMT)
and some private sector companies with multinational links (e.g., Hindustan Lever and
L&T) have a reputation for their active involvement in strategic affairs. You will see
that the degree of involvement lessens as we move further to the left of the continuum.
The three types of boards towards the left of the continuum can be described as passive
boards. Such boards in general do not initiate or determine strategy. The Board members
interest may be aroused only when a crisis overtakes the company. Very few companies
are fortunate to have catalyst boards or even boards with active participation, The
boards of most of the companies in the private sector will fall in any one of the four
categories on the left side of the continuum.
DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT
Low

HIGH

(passive)

(Active)

Phantom

Rubber Stamp

Minimal Review

Never knows what

to do, if anything,
no degree of
involvement.

Permits officers to
make all decisions.
It votes as the
officers
recommend on
action issues.

Formally reviews
selected issues
that officers bring
to its attention

Nominal
Participation
Involved to a
limited degree in
the performance or
review of selected
key decisions,
indicators, or
programs of
management

Active
Participation
Approves,
questions, and
makes final
decisions on
mission, strategy,
policies, and
objectives. Has an
active board
committees.
Performs fiscal and
management
audits.

Catalyst
Takes the leading
role in establishing
and modifying the
mission,
Objectives,
Strategy, and
policies. It may
have a very active
strategy
committee.

Exhibit 4.1: Board of Directors Continum

A great responsibility lies on the chairman of the BODs. It is he who can ensure that
the board functions effectively. The influential shareholders, financial institutions,
managements of holding companies can also play an important role in this regard.
While a BODs is not expected to involve itself in day-to-day operating decisions, they
are nonetheless expected to consider and give their views on all such matters that have
long-term connotations. In fact, such matters by convention are referred to the board.
These relate to issues such as introduction of a new product, new technology,
collaboration agreements, senior management appointments and major decisions
regarding industrial relations.

Roles of Strategists, Mission and Objectives

The directing function of the board has internal and external components. Internal
component relates to various actions taken by the executives and their implications for
the organisation, including R&D, capital budgeting, new projects, new competitive thrusts,
relationships with financial institutions and banks, foreign collaborators, major customers
and suppliers. External component -relates to identifying broad emerging opportunities
and threats in the environment and feeding them to the management so that strategic
mismatches do not occur. The hoard should see that the organisation always remains
in alignment with the social, economic and political milieu.
It is quite likely that many Chief Executive Officers (CEOs) and some board members
may not want the board to be involved in strategic mailers at more than a superficial
level. The reasons are not far to seek. Many companies may not have an explicit or
well articulated strategy. The management of such companies take strategic decisions
intuitively rather than through a rigorous process of search and analysis. Further, the
managements of some companies do not like outside directors to know enough about
the new strategic decisions or postures. They may perceive the involvement of board
members in strategic decision making as a threat to their power.

Role of Entrepreneurs
According to Drucker, the entrepreneur always searches for change, responds to it
and exploits it as an opportunity. The entrepreneur has been usually considered as the
person who starts a new business, is a venture capitalist, has a high level of achievementmotivation, and is naturally endowed with the qualities of enthusiasm, idealism, sense of
purpose, and independence of thought and action. However, not all of these qualities
are present in all entrepreneurs nor are these found uniformly. An entrepreneur may
also demonstrate these qualities in different measures at different stages of life. Contrary
to the generally accepted view of entrepreneurship, entrepreneurs are not to be found
only in small businesses or new ventures. They are also present in established and
large businesses, in service institutions, and also in the bureaucracy and government.
By their very nature, entrepreneurs play a proactive role in strategic management. As
initiators, they provide a sense of direction to the organisation, and set objectives and
formulate strategies to achieve them. They are major implementers and evaluators of
strategies. The strategic management process adopted by entrepreneurs is generally
not based on a formal system, and usually they play all strategic roles simultaneously.
Strategic decision-making is quick and the entrepreneurs generate a sense of purpose
among their subordinates.

Role of SBU-level Executives

The rationale for organising the structure according to SBUs is to be able to manage a
diversified company as a portfolio of businesses, each business having a clearly defined
product-market segment and a unique strategy. The role that the SBU-level executives
play is, therefore, important in strategic management. SBU-level executives, also known
as either profit-center heads or divisional heads, are considered the chief executives of
a defined business unit for the purpose of strategic management. In practice, however,
the concept of an SBU is adapted to suit traditions, shared facilities and distribution
channels, and manpower constraints. Therefore, an SBU-level executive wields

53

Strategic Management

54

considerable authority within the SBU while maintaining co-ordination with the other
SBUs in the organisation.
With regard to strategic management, SBU-level strategy formulation and
implementation are the primary responsibilities of the SBU-level executives. Many
public and private sector companies have adopted the SBU concept in some form or
the other. There are several family-managed groups today who boast of their professfsionally-managed organisation structure. Each of their companies has a chief executive
who... has total responsibility.. and authority over the profit center. There are even
separate management boards to review the performance of each profit center. At
Shriram Fibres, the strategic planning system covered the different businesses ranging
from nylon yarn manufacture to the provision of financial services. Strategic plans
were formulated at the level of each SBU as well as at the corporate level. The corporate
planning department at the bead office coordinated the strategic planning exercise at
the SBU level. Each SBU had its own strategic planning cell.

Role of Consultants
Many organisations which do not have a corporate planning department owing to reasons
like small size, infrequent requirements, financial constraints, and so on, take the help of
external consultants in strategic management. These consultants may be individuals,
academicians or consultancy companies specialising in strategic management activities.
According to the Management Consultants Association of India, management
consultancy is a professional service performed by specially trained and experienced
persons to advise and assist managers and administrators to improve their performance
and effectiveness and that of their organisations. Among the many functions that
management consultants perform, corporate strategy and planning is one of the important
services rendered. The main advantages of hiring consultants are: getting an unbiased
and objective opinion from a knowledgeable outsider, cost-effectiveness,
and the availability of specialists skills. According to a senior consultant of a
large consultancy firm, the trend is that family-owned companies and the public sector
are relying more heavily on consultancy services than the multinationals. There are
many consultancy organisations, large and small, that offer consultancy services in the
area of strategic management in India. Instances of companies seeking the help of
consultants in various strategic exercises such as diversification, restructuring, and so
on, are legion.
It should be noted that consultants do not perform strategic management, they only
assist the organisations and their managers in strategic management by working of
specific time-bound consultancy assignments.

Role of Corporate Planning Staff

David Hussey has enlisted the many and varied principal responsibilities of corporate
planers. Essentially, the corporate-planning staff plays a supporting role in strategic
management. It assists the management in all aspects of strategy formulation,
implementation and evaluation. Besides this, they are responsible for the preparation and
communication of strategic plans, and for conducting special studies and research pertaining
to strategic management. It is important to note that the corporate planning department is

Roles of Strategists, Mission and Objectives

not responsible for strategic management and usually does not initiate the process on its
own. By providing administrative support, it fulfills its functions of assisting the introduction,
working, and maintenance of the strategic management system

Role of Middle-level Managers

The major functions of middle-level managers relate to operational matters and, therefore,
they rarely play an active role in strategic management. They may, at best, be involved
as sounding boards for departmental plans, as implementers of the decisions taken
above, followers of policy guidelines, and passive receivers of communication
about functional strategic plans. As they are basically involved in the implementation
of functional strategies, the middle-level managers are rarely employed for any
other purpose in strategic management This does not, however, preclude the possibility
of using their expertise. Many of the examples that we have provided in the previous
sub-sections show that managers and assistant managers can also contribute to the
generation of ideas, the development of strategic alternatives, the refinement of business,
functional and development plans, target-setting at departmental levels, and for
various other purposes. The importance of the middle management cadres lies in the
fact that they form the catchments areas for developing future strategists for the
organisation.

Role of Executive Assistant

The emergence of executive assistants in the managerial hierarchy is a relatively
recent phenomenon. An executive assistant is a person who assists the chief executive
in the performance of his duties in various ways. These could be: to assist the chief
executive in data collection and analysis, suggesting alternatives where decisions
are required, preparing briefs of various proposals, projects and reports, helping in
public relations and liaison functions, coordinating activities with the internal staff
and outsiders, and acting as a filter for the information coming from different sources.
Among these the most important and what one manager labels the bread and butter
role of EA (executive assistant) could be that of corporate planner. The reason
being that the increasing complexity of business and strategic decision-making has
led to a situation where it is the function of the executive assistant to monitor the
changing context and evolve strutcgics in tundcin with senior management. But in
companies where a corporate planning department exists, this function not assigned
to the executive assistants. Since executive assistants assist the chief executive they
help to optimise their time utilisation. In terms of skills and attitudes, the requirements
for an executive assistant include a generalists orientation, a few years line
experience, exposure to different functional areas, excellent written and oral
communication ability, and a pleasing personality. Generally the qualification required
is an MBA or a CA. The position of an executive assistant offers a unique advantage
to young managers as nowhere else can he or she gain a comprehensive view of the
organisation, which can help in career planning and development, and rapid
advancement to the senior levels of management. We end this chapter on this
encouraging note.

55

Strategic Management

56

Mission and Objectives

The two most basic questions faced by corporate-level strategists are, (1) What business
are we in? and (2) Why are we in business?
An answer to the first question requires a consideration of the mission definition, or the
scope of the business activities the firm pursues. The second question involves
establishing objectives to be accomplished. Both questions help define the nature of the
business and provide a framework for analysis, choice, implementation, and evaluation
processes.

Mission and Business

For long-term survival (often viewed as the ultimate objective), most organisations
must legitimise themselves. This is normally done by performing some function which
is valued by society. Of course, some functions are valued more highly than others, and
priorities can change over time. In the United States, professional sports teams are
valued for their entertainment function, and they have become big business.
Organisations which make a net contribution to society are likely to be called Legitimate.
These organisations are likely to be allowed to survive over the long term. Challenges
to legitimacy are not frequent, but once made they can damage survival potential or
limit the scope of action and increase the cost of doing business. For example, over a
dozen of the largest U.S. defense contractors were under investigation in 1985 for cost
and labor mischarges, bribery and kickbacks, defective pricing, and so on. Congress
acted to stop payments on some contracts and made it harder to acquire the more
lucrative contracts because the legitimacy of the action of these firms was called into
question.
Many organisations define the basic reason for their existence in terms of a mission
statement. Such a definition can provide the basic philosophy of what the firm is all
about. It usually emanates from the entrepreneur who founded the firm or from major
strategists in the firms development over time. The mission can be seen as a link
between performing some social function and more specific targets or objectives of the
organization. Thus the mission can be used to legitimize the organisation.
When the mission of a business is carefully defined, it provides a statement to insiders
and outsiders of what the company stands forits purpose, image, and character.
Mission definitions can be so broad as to be meaningless, or they can merely be public
pronouncements of ideals, which few could ever reach. The specificity and breadth of
goal or mission statements are important considerations for strategists. But a good
mission statement focuses around customer needs and utilities. For example, AT&T is
in communications, not telephones; Tenneco is in energy, not just oil and gas; MGM
provides entertainment, not just movies. The customer needs for communication, energy,
or entertainment are not product-specificnor are mission statements. Avon defines
itself as being in the beauty business. The mission of most public universities is to
provide teaching, research, and public service-but many also provide entertainment
(sports teams).
The mission must be clear enough so that it leads to action. Organisations must at some
point establish specific targets to shoot for which will be used as guides for evaluating

Roles of Strategists, Mission and Objectives

progress. NASAs mission in the 1960s was to begin space exploration and land a man
on the moon. Without establishing specific goals to get to along the way, we might be
still waiting for that first small step. So firms also must express their mission and
philosophy by establishing statements about the grand design, quality orientation,
atmosphere of the enterprise, and the firms role in society.
After Roger Smith took over as chairman of General Motors, he moved quickly to
solve some problems at GM and altered its strategy. As part of the process, he distributed
culture cards to be carried in the pockets of executives to remind them of their new
mission. The card reads
The fundamental purpose of General Motors is to provide products and services of
such quality that our customers will receive superior value, our employees and business
partners will share in our success, and our stockholders will receive a sustained, superior
return on their investment.
Other firms consciously (or subconsciously) develop core principles, or norms, which
guide decision making or behavior. These principles serve as mechanisms for selfcontrol to guide managers at all levels of the organisation. Hence, if quick decisions are
needed at lower levels of an organisation, such core principles serve as guides to making
decisions or taking action consistent with the overriding mission and strategy of the
business. These are different from policies in that they are frequently part of the culture,
or ways of doing things, that emerge in the informal organisation.
In practical, everyday decision making, most organisations are not immediately concerned
with questions of continued existence. Survival for most is relatively assured within the
time frame of thinking of those in charge. And the mission tends to become an ideological
position statement which is only occasionally referred to in support of legitimisation. So
what tends to occupy the minds of the molders of organisation purpose are various
objectives to improve performance. However, prescriptively, a mission statement and
core principles ought to serve as guidelines for strategic decisions rather than as a set
of platitudes. Otherwise, short-term thinking can get in the way of the long-term best
interests of the organisation in society.

Business
Part of the mission statement is the definition of the business itself. By this we mean a
description of the products, activities, or functions and markets that the firm presently
pursues. Products (or services) are the outputs of value created by the system to be
sold to customers. Markets can refer to classes or types of customers or geographic
regions where the product and/or service is sold. When we refer to functions, we mean
the technologies or processes used to create and add value. For example, in agriculture
one might plant and grow seeds, harvest crops, mill grain, process grain into various
food products, and distribute or retail the finished product. Each stage adds value and
represents a separate function. Some firms do all the functions while others do a limited
number or only one. Consider a full-service airline versus a no-frills carrier. One operates
full-service ticket counters in airports and downtown locations; the other may ticket on
the plane, offer no interline ticketing, offer few fare options, and so on. The no-frills
airline may use first come-first-serve seating versus ticketing at gates. On board, the
no-frills carrier may not serve food or drink or charge extra for the service. The full-

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line carrier may provide free baggage checking while the no-frill firm charges or provides
no interline baggage connection. Each of these options represents a service or function
configuration. Functions of ticketing, gate operations, on-board service, and baggage
handling can provide options for adding value to services provided.
A good business definition will include a statement of products, markets, and functions.
For example, a business definition for Apple might state the following: We design,
develop, produce, market, and service microprocessor-based personal computers
in United States and foreign countries. In contrast, Tandy might be defined as a
U.S. manufacturer and retailer of consumer electronic equipment. Note that Tandy
performs fewer functions than Apple and is a bit more restricted geographically, but it
has a wider product definition. Westinghouse manufactures, sells, and services
equipment and components which generate, transmit, distribute, utilize, and control
electricity. Note that this definition includes a very broad line: it specifies a locus around
which the products are related but ignores market issues (except for the notion that its
markets involve electricity). In its 1985 Annual Report, Schulumberger asks, What are
our businesses? The answer:
First, we are an oilfield services company, bringing technology to the oil industry anywhere,
anytime. [We are] also an electronics company. We are ready to expand in the
international markets through leadership in electricity, . . electronic payments, . . .
instruments, bringing technology to the utilities, to the aerospace industry, to the banking
community . . .
A good statement of the business definition of the firm should meet certain criteria: it
should be as precise as possible and indicate major components of strategy (products,
markets, and functions). Some go a bit further than this by also indicating how the
mission is to be accomplished.
Defining the mission and business definition is the starting point of strategy analysis. It
answers the question, What business are we in? When performing the initial gap analysis
we find that such a statement indicates where the firms current strategy has been
going up to this point is time and what results might be expected if it continues. From
there, once objectives have been specified and other analyses have been performed,
determinations can be made about whether such a definition can continue successfully,
or must be altered to close gaps. In other words, the strategic management process
starts with the current business definition but proceeds with other questions: What
business should we be in? Who are our customers? How do we serve them? That is,
some conditions might call for a strategic change in products, markets, or functions, or
changes in the way in which that business definition is going to be accomplished
(competitive strategy and policies). For example, long after cars, interstate highways,
and airplanes sent many railroad companies into bankruptcy court, some railroad
companies are reemerging with new corporate identities. The Reading Company, a major
regional railroad established in 1833, now owns only 16 miles of track. Like many former
railroad firms, Reading is now a major real estate operator (even though the Monopoly
game board earns it immortality as a railroad).
A problem many firms find themselves with is that through acquiring a series of
businesses unrelated to their mission or business definition, they become conglomerates,
with little to tie them together other than financial objectives. Many firms have found a
need to return to basic business definitions because they cannot effectively manage the

Roles of Strategists, Mission and Objectives

diversity. It took General Mills longer than most, but after 17 years of trying they finally
sold off their toy division and nonfood lines to get back to the kitchen, which they
knew best about.
Changing the business definition is one of the basic strategy alternatives. But before
strategy determination is made, the other major aspect of strategic gap analysis is a
determination of whether desired objectives will be attained. Analysts must determine
if continuation with the mission and adherence to the business definition will lead to
expected outcomes close to those desired.

What Objectives and Goals Are Pursued?

Objectives are the ends which the organisation seeks to achieve through its existence
and operations. A variety of different objectives are pursued by business organisations.
Some examples include continuity of profits; efficiency (for example, lowes costs);
employee satisfaction and development; quality products or services for customers or
clients; good corporate citizenship and social responsibility; market leadership (for
example, to be first to market with innovations); maximization of dividends or share
prices for stockholders; control over assets; adaptability and flexibility; service to society.
It is important that several points be made about objectives so that you understand their
nature fully. These are as follows:
l

The list just given contains 10 objectives, which is not to suggest that most
organisations pursue 10 objectives or these exact 10. But research clearly
demonstrates that firms have many objectives. All but the simplest organisations
pursue multiple objectives.

Many organisations pursue some objectives in the short run and others in long
run. For example, with respect to the list of 10 objectives, many firms would
view efficiency and employee satisfaction as short-run objectives. They would
probably view profit continuity, service to society, and good corporate citizenship
as long-run objectives. Some other objectives such as adaptability or asset control
may be medium-range objectives. In sum, the objectives pursued are given a
time weighting by strategists.
One of the major dilemmas of corporate-level strategists is the short-term-longterm trade-off decision. With the logic of net present value and the importance of
return on investment, combined with pressures from Wall Street and corporate
rained for good quick profits and cash flows, modern managers have been
pressured town short-term thinking. This kind of thinking also fillers down to the
business level where a desire for quick returns may influence SBU managers.
There appears to be less patience to invest in the future in the United States than
there is in other countries (such as Japan). This lack of patience can have a
severe impact on strategic decision making; and the timing of goal accomplishment
needs careful analysis in this regard

Since there are multiple objectives in the short run at any one time, normally
some of the objectives are weighted more highly than others. The strategists are
responsible for establishing the priorities of the objectives. Priorities are crucial
when resources and time are limited. At such times, trade-offs between profitability
and market share, etc., must be known so that the major objective of the particular

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time is achieved. Thus strategists should establish priorities for each objective
among all the objectives at corporate and SBU levels.
l

There are many ways to measure and define the achievement of each objective.
For example, some objectives can be measured through the use of an efficiency
criterion; others may be measured in terms of effectiveness. Efficiency is the
ratio of inputs to outputs. Effectiveness refers to the degree of achievement of a
goal in relation to some ideal. At times, trade-offs between efficiency and
effectiveness are required. For example, installing pollution-control equipment
may be effective in achieving clean-air goals, but these goals may be achieved at
the expense of a goal of efficient plant operation. At other times, trade-offs of
efficiency goals within units of an organisation are required. This is a basic factor
in suboptimisation. As each subsystem seeks efficiency, the entire system may
lose effectiveness. For example, a credit manager is charged with establishing a
policy to minimise credit losses; a sales manager is asked to maximise sales. If
they both maximise in their own way, conflict is likely. Sales to some classes of
customers will increase credit risk. Trade-offs in the goals of each unit may be
called for. Here, goal priorities of the whole organisation need to take precedence.
In each part of the organisation such goal conflicts are likely and require
resolution. The guidance should come from mission definitions. The
implementation phase of strategic management involves clarifying the
measurement of achievement, of objectives.
There is a difference between official objectives and operative objectives.
Cooperative objectives are ends actually sought by the organisation. They can
be determined by analysing the behavior of the executives in allocating resources.
Official objectives are ends which firms say they seek on official occasions
such as public statements to general audiences. The objectives that count are
those the strategists put their money and time behind. For instance, executives
official goals may focus on providing employees with a quality work environment;
whether operative goals are the same depends on how much money is spent to
improve actual working conditions.
An official goal may be to contribute to social responsibility; yet a firm may fail to
spend money on pollution-control equipment or even fight regulations designed to
prevent acid rain because of the costs involved. Or a firm may state that it
wishes to integrate activities of SBUs to achieve synergy while its organisation
structure grants decentralised autonomy to divisions which prevent this from
happening. Anderson, Clayton & Co. has searched for an acquisition in the food
business for a decade; but analysis suggest its refusal to take on a debt to clinch
a big acquisition really suggests that its operative goal is to not discourage potential
buyers of the firm itself. According to one former officer, they are managing
the company to be sold.

There may be limits to the attainment of some goals. Some firms may try to
maximise shareholder wealth but find that they are constrained by the need for
funds to achieve lower-cost operations to meet competition. Excessive increases
in market share might come at the cost of unpleasant antitrust consequences,
which, in effect, could be counterproductive from a survival perspective. Again,
there are trade-offs among goals which managers must make.

Roles of Strategists, Mission and Objectives

l

Finally, objectives are not strategies. Strategies are means to an end. Note that
expansion was not among the objectives listed. Expansion is one type of strategy
but not an end in itself. In itself, expansion of sales or assets may not improve
performance. But cutting back (retrenchment) in certain areas of the operation
could also be a way to increase efficiency and improve performance. So expansion
and retrenchment are ways in which goals can be achieved, and both can lead to
performance increases (e.g., growth in returns). Not all managers agree with
this distinction, but we believe it is an important one. (This is a problem with
strategic management terminology in general.)

One other issue regarding objectives which has become important to strategists is the
priority attached to objectives relating to social responsibility. Social responsibility is an
ill-defined term, but the basic idea is that the economic functions provided by business
ought to be performed in such a way that other social functions are, at worst, unharmed
and, at best, promoted. Thus businesses are urged to be as concerned with human
rights, environmental protection, equality of opportunity, and the like, as they are with
providing outcomes such as economic efficiency.
Several dilemmas arise. A major problem is how to define socially responsive behavior.
Value systems are so diverse that achieving consensus on this issue is difficult. Equally
problematic is the fact that economic organisations automatically take resources from
organisations in other sectors and often detract from performing other societal functions.
Businesses werent designed to promote public health, safety and welfare (though some
use charitable giving as a marketing ploy). A common example is detrimental health
effects from pollution created by the production of goods. Do we stop producing goods?
Do we increase costs to the extent that other societal goals are adversely affected? For
instance, a completely safe automobile might be so expensive that possible cost increases
to protect human safety become detrimental to economic well-being. Cost-benefit tradeoffs are extremely difficult to make.
In some cases, external threats can be so severe as to call into question the legitimacy
of the mission of the organisation, as in the case of utilities which generate power with
nuclear plants. Policies to deal with these concerns include ignoring the issue, using
public relations campaigns to try to mitigate unfavorable publicity, and altering goal
priorities and changing strategies. Some creative strategists try to turn these kinds of
threats into opportunities. For instance, some coal companies have increased the value
of land originally used for strip-mining by converting the strip mines into recreation
complexes. But these options are not always available. In any case, decision makers
are being urged to increase the priority given to these concerns by some.
On the other hand, businesses are also criticised if they stray too far from their economic
function. For instance, business firms are chastised for creating political action
committees as a means to influence their environment.
While research evidence is mixed, the predominant view is that social responsibility
bears little (positive or negative) relationship to financial performance objectives Clearly,
then, establishing goal priorities and resource allocation requires a consideration of
issues beyond simple economic efficiencies.

Objectives
Why do firms have objectives, and why are they important to strategic management?
There are four reasons.

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Objectives help define the organisation in its environment. Most organisations

need to justify their existence, to legitimise themselves in the eyes of the
government, customers, and society at large. And by stating objectives, they also
attract people who identify with the objectives to work for them. Thus objectives
define the enterprise.

Objectives help in coordinating decisions and decision makers. Stated

objectives direct the attention of employees to desirable standards of behavior. It
may reduce conflict in decision making if all employees know what the objectives
are. Objectives become constraints on decisions.

Objectives provide standards for assessing organisational performance.

Objectives provide the ultimate standard by which the organisation judges itself.
Without objectives, the organisation has no clear basis for evaluating its success.

Objectives are more tangible targets than mission statements. The products
of an organisation or the services it performs (outputs) are probably the most
familiar terms in which people tend to think of objectives or goals. (Its easier to
see Hallmark as a producer of cards and gifts than to imagine the company as
being in the social-expression business.) Output goals may also be thought of
in terms of quality, variety, and the types of customers or clients who are the
intended target. Nonetheless, it may be deceptively easy to link output goals with
mission definitions. For instance, Henry Fords original mission of providing
transportation for the common man was easily seen through the production of
the Model A. But the private hospital offering a large range of services with the
best doctors and equipment may be available to only a few rich clients; it may be
profitable with these services and judged effective by some, but others will argue
that it fails to satisfy a larger mission of equal health care treatment (note the
social responsibility clement here).

Mission and objectives ought to be considered at each stage of the strategic management
process. In the assessment of environmental conditions, expected changes may force
rethinking about goal priorities (e.g., changing government tax regulations may suggest
a different treatment of dividend payout or retained earnings). In an analysis of internal
conditions, a goal of employee welfare might alter perceptions about unionisation. In
choosing alternative strategies, a change in business definition could lead to decisions
to get out of some businesses in favor of others. If a goal of flexibility is desired, the
implementation of a strategy could lead to a new form of organisation structure. So at
each stage of the process, mission, business definition, and objectives should guide
decision-making.
To carry this a bit further and illustrate how objectives relate to the process as a whole,
we consider the gap analysis as outlined in Exhibit 4.2. Point A is the current level of
attainment an enterprise has reached at this time (t1). Point B is the ideal point at which
management would like to see itself at some point in the future (t2). If, as a result of
following the strategic management process, the firm sees itself pursuing the same
strategy with a given set of assumptions about its environment management may believe
it will arrive at point C at t2. The gap of interest which could trigger either strategic
change or goal change is that between B and C. Note that the gap between the
existing state and the desired state is not as important as the gap between the expected
state and the desired state.

Roles of Strategists, Mission and Objectives

Exhibit4.2:GapAnalysisforObjectives

The perception of this gap is important in terms of significance, importance, and

reducibility. With these conditions in mind, note that several basic choices are available,
if the gap is significant, important, and reducib an attempt could be made to alter strategy
so that the expected state (point C) will come closer to the desired state (B). If the gap
is significant and important but no reducible, point B might be altered (e.g., expectations
might be lowered). If the gaps is significant and reducible but not important, once again
point B can be altered. The goal that is sought becomes less critical when compared
with other goals. If the gaps is neither significant, important, nor reducible, no change
will occura stability strategy (continuing past approaches in similar ways) is likely to
be followed.
This is a prescriptive way to examine the analysis of objectives as a component the
strategic management process. But other factors influence the nature of the Perceptions
of these gaps as objectives are formulated.

How Are Mission and Objectives Formulated?

We believe that missions and objectives are formulated by the corporate-level strategists.
But these executives do not make choices in a vacuum. Their choices are affected by
several factors: the realities of the external environment and external power relationships,
the realities of the enterprises resources and internal power relationships, the value
systems and goals of the top executives, and past strategy and development of the
enterprise.
The first factor affecting the formulation of mission and objectives is forces in the
environment. The stakeholders with whom the organisation has an exchange relationship
will present demands or claims (expectations). These can be thought of as constraints
on objectives. The stakeholders may vary, the nature of their constraints (expectations
or claims) can change, and their power vis-a-vis the organization and one another may
change. Taken together, they represent one set of forces within which managerial
objectives must be established. The claims of the most powerful stakeholders will be
met, so long as the entire set of objectives falls within the constraints imposed by the
set of stakeholders.
Suppose that managers want to choose maximisation of sales as an objective. They
may have to modify this objective because of governmental regulations regarding excess
profits, antitrust legislation, consumer labeling, and so on. Trade unions may require
higher-than-market wage rates or fringe benefits which lead to higher costs (possibly

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reducing sales). Competitors may sell other products or services at unrealistically low
prices and spend excessive amounts on advertising. Suppliers may become monopolised
and charge outrageous prices. If the organisation is more dependent on suppliers than
on any other stakeholders, the operative objective may very well be limited by the
availibility and cost of supplies.
So the prudent strategist will ask a variety of questions when establishing mission,
objectives, and strategy: Who are the critical stakeholders? What are our critical
assumptions about each stakeholder? How do stakeholders affect each division,
business, or function at various points in time. And what changes can be expected
among the stakeholder groups in the future?
The second factor affecting the formulation of mission and objectives is the realities of
the enterprises resources and internal power relationships. Larger and more
profitable firms have more resources with which to respond to forces in the environment
than do smaller or poorer firms.
In addition to this, the internal political relationships affect mission and objectives. First,
how much support does management have relative to others in the organisation? Does
the management have the full support of the stockholders? For example, Paul Smucker
has the support of the Smucker family stockholders to emphasize quality as an objective
for his jam and preserves firm. If the management has developed the support of
employees and key employee groups like the professional employees lower and middle
management, then it can set higher objectives that employees will help achieve.
Mission and objectives are also influenced by the power relationships among the
strategists either as individuals or as representatives of units within the organisation.
Thus if there is a difference of opinion on which objectives to seek or the trade-offs
among them, power relationships may help settle the difference.
A final internal factor is the potential power of lower-level participants to withhold
information and ideas. To the extent that this occurs, the evaluation of past goal
attainment and expectations about the future can be affected. For instance, consider
the sales manager who tries to hide the fact that a competitors new product is
starting to hurt sales. This might be an attempt to protect the unit, but it could mislead
top managers regarding future goals and strategies. Or lower-level managers might
decide whether or not to forward a proposal which could lead to goal changes on the
basis of what they think top management is (or is not) ready to accept. Thus the
exercise of this type of informal power can play a role in the selection of objectives.
Mintzberg has advanced a theory about formulation of objectives that combines the
stakeholder forces described earlier with the internal power relationships. He believes
that power plays result from interactions of internal and external coalitions.
External coalition

Internal Coalition

Power Configuration

Dominated

Bureaucratic

The Instrument

Passive

Bureaucratic

The Closed System

Passive

Personalised

The Autocracy

Passive

Ideological

The Missionary

Passive

Professional

The Meritocracy

Divided

Politicised

The Political Arena

Exhibit 4.3: Six Pure Power Configuration Affecting Objectives Formulation

Roles of Strategists, Mission and Objectives

l

The external coalition includes owners, suppliers, unions, and the public. These
groups influence the firm through social norms, specific constraints, pressure
campaigns, direct controls, and membership on the board of directors. Mintzberg
specifies three types of external coalitions, noted in Exhibit 4.3.

The internal coalition includes top management, middle-line managers, operators,

analysts, and support staff. These groups influence the firm through the personnel
control system, the bureaucratic control system, the political system, and the
system of ideology. Mintzberg specifies 5 types of internal coalitions, shown in
Exhibit 4.3.

Mintzberg says that there are six basic power configurations, as shown in Exhibit 4.3 In
the instrument power configuration, one external influence with clear objectives, typically
the owner, is able to strongly influence objectives through the top manager. In a closedsystem power configuration, power to set objectives rests with the top manager, who
sets the objectives. This is also true in the autocracy power configuration. In the missionary
power configuration, objectives are strongly influenced by past ideology and a charismatic
leader. Ideology tends to dictate the objectives. In the meritocracy power configuration,
the objectives are set by a consensus of the members, most of whom are professionals.
Thus the formulation of mission and objectives can be a simple process: the top manager
sets them subject to the environment. Or, more frequently, they are set by a complex
interplay of past and present, internal and external role players.

1
2
3
4
5
6

The third factor affecting the formulation of mission and objectives is the value system
of the top executives. Enterprises with strong value systems or ideologies will attract
Very combative
passive
and retain managersVery
whose
values are similar. These values are essentially set of
Very innovative
innovative
attitudes about what isNogood
or bud, desirable or undesirable. These in turn will influence
Risk-oriented
the perception of theRisk-aversive
advantages and disadvantages of strategic action an the choice of
Qualityobjectives. Exhibit 4.4
Quantity
lists the extremes of six selected values. Lets look at each of
Autocratic
Participative
these to see how they might affect objectives.
Personal goals

Shareholder goals

Exhibit 4.4: Values Toward Various Groups In The Strategic Situation

The following list corresponds to the continuum in Exhibit 4.4. Each dimension is explained
below:
1.

Some executives believe that to be successful a firm must attack in the marketplace. Others believe that you go along to get along.

2.

Some executives believe that to succeed a firm must innovate. Others prefer to
let others make the mistakes first.

3.

Some executives know that to win big, you must take big risks. Others comment,
Risk runs both ways.

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66

4.

Some executives believe that one becomes successful by producing quality. Others
go for volume.

5.

Some executives believe that one should treat employees in a manner that makes
them know who the boss is. Others believe that cooperation comes from a
participative style.

6.

Some executives believe that they should be primary beneficiaries of corporate

success while others think the business is operated for the benefit of stockholders.

You can see that one set of executives with the set of values on the left would be
inclined to emphasize a different set or different level of objectives than those who
accept the set of values on the right in Exhibit 4.4. For instance, risk-oriented innovators
might see significantly larger gaps between where they want to be and where they
expect to be than risk averters. Managers on the left on number 6 will avoid hostile
takeovers to protect their jobs, even if it comes at the expense of shareholder loss.
Corporate raiders often recognize this, and receive greenmail for their effort.
Prescriptively, from a maximizing decision perspective, these and other kinds of values
ought not be considered when goals are being established. Yet some believe that it is
better to recognize the inevitability of their influence on decision makers. That is, even
if they are not explicitly stated, value assumptions will be implicit in decision premises
and the types and forms of data collected. Consequently, stating these values in the
form of assumptions is one technique recommended to force these values explicitly
into the open, if they are included, the bases upon which decisions are made can be
considered more, rational than if decision makers pretended that these factors dont
exist.
The fourth factor affecting the formulation of mission and objectives is the awareness
by management of the past development of the firm. Management does not begin
from scratch each year. It begins with the most recent mission and objectives. These
may have been set by strong leaders in the past. The leaders consider incremental
changes from the present, given the current environment and current demands of the
conflicting groups. The managers have developed aspiration levels of what the objectives
ought to be in a future period. But by muddling through, they set the current set of
objectives to satisfy as many of the demands and their wishes as they can. The
momentum of the large organisation and its strategies and policies are all current designed
to accomplish the existing mission and objectives. Just us it takes time the turn a large
ship around, it usually takes time to make major corporate changes.
Lets summarise what has been said so far on how mission and objectives an established.
The factors are shown in Exhibit 4.5. Mission and objectives are no the result of
managerial power alone. These result from the managers trying to satisfy the needs of
all groups involved with the enterprise. These coalitions of interest (stockholders,
employees, suppliers, customers, and others) sometimes have conflicting interests. As
the strongest coalition group, managers try to reconcile the conflicts Management cannot
settle them once and for all. Management bargains with the various groups and tries
to produce a set of objectives and a mission which can satisfy the groups at that time.
The goals of these groups are considered in relation to pa goals. This is a very complicated,
largely consensus-building process with no precise beginning or end. And at any given

Roles of Strategists, Mission and Objectives

time, only a few specific goals can be graspe and comprehended by any single executive.
Thus there appears to be a need for son grander vision as expressed by a mission
definition.

Note: Each of these factors represents a set of constraints on the establishment of the priorities
among future objectives. The set of mission and objectives considered at any one time is also limited.

Exhibit 4.5: Factors Influencing the Formulation of Objectives and Mission

Mission and objectives will become a meaningful part of the strategic management
process only if corporate strategists formulate them well and communicate them and
reinforce them throughout the enterprise. The strategic management process will be
successful to the extent that general managers participate in formulating the
mission and objectives and to the extent that these reflect the values of management
and the realities of the organisations situation. These factors also play a role in
strategic choice.

Why Do Mission and Objectives Change?

Although organisations tend toward stability, mission and objectives change over time.
As discussed before, objectives could change on the basis of a rational analysis of a
gap between expected and desired states. That is a normative approach. But what
might lead to the determination of the states themselves? Are there some factors which
would lead to different perceptions regarding the gaps between goals and how the
future goal states might be arrived at?
On the basis of the foregoing discussion of how mission and objectives are formulated,
we can present some descriptive reasons why mission or objectives might change.
l

The aspiration levels of managers could alter goal orientations. They may begin
to extrapolate past achievements and say that the enterprise can do more. Or
they may look at what relevant competitors or other enterprises have achieved
and decide to match or exceed these levels. The arrival of a new CEO from
outside the organisation is the most prevalent condition under which mission and
goals are reconsidered. New managers from the outside who are not tied or
committed to past strategy and ideology are more likely to alter the mission,
objectives, and strategies of an organisation than are new CEOs from the inside.

The mission can change in a crisis. When a firms market disappears, for
example, or its reason for being ceases, a crisis exists. Some firms supplying

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equipment to the oil industry discovered this in 1974 and again in 1982 and 1986.
Faced with an uncertain future, their objectives have begun to focus on flexibility.
When the cure for polio was found, the mission of the National Foundation for
Infantile Paralysis changed. So the attainment of objectives can also lead to a
crisis or new opportunities can create an identity crisis if a firm seeks to take
advantage of them.
l

Demands from coalition groups that make up the enterprise can change.
This often occurs as the membership or leadership of groups changes or as
internal power groups change. For instance, new government or labor leaders or
new competitors can alter the way a business sets its goal-priorities. Similarly, if
the comptroller becomes more powerful internally, the firm might begin to stress
shorter-term financial goals.

Normal life-cycle changes may occur which alter goal orientations. Though the
analogy with humans can be taken too far, there may be changes in objectives or
strategies which naturally occur in the aging process. Of course, organisations
may have more control over the sequencing and timing of these stages than
humans. Yet it is often difficult for an organisation to know what stage it is in.
And were not sure what might precipitate organisational aging or movement.
We do know that commitment to the past may hinder change, and new agents in
coalition groups are likely to hasten it.

These four classes of factorsaspirations, crisis, demands, and developmentcan be

used to predict the likelihood that mission and objectives will remain similar to those of
the past or be subject to redefinition. Thus in considering how mission and objectives
are formulated, we must examine various pressures for stability or change before a
gap analysis can be effectively done.

Strategic Business Unit

69

Chapter 5
Strategic Business Unit
A strategic business unit (SBU) is an operating division of firm which
serves a distinct product-market segment or a well-defined set of
customers or a geographic area. The SBU is given the authority to
make its own strategic decisions within corporate guidelines as long as
it meets corporate objectives.
Generally, SBUs are involved in a single line of business. A complementary cept to the
SBU, valid for the external environment of a company, is a strategic business area
(SBA). It is defined as a distinctive segment of the environment in which the firm does
(or may want to do) business.
A number of SBUs, relevant for different SBAs form a cluster of units under a corporate
umbrella. Each one of the SBUs has its own functional departments, or a few major
functional departments, while common functions arc grouped under the corporate level.
These different levels are illustrated in Exhibit 5.1. Two types of levels are depicted in
this exhibit. One relates to the organisational levels and the other to the strategic levels.
The organisational levels are those of the corporate. SBU and functions! levels. The
strategic levels are those of the corporate. SBU and functional level strategies.
Corporate level strategy is an overarching plan of action covering the various functions
performed by different SBUs. The plan deals with the objectives of the company,
allocation of resources and coordination of the SBUs for optimal perform-ance.
SBU level (or business) strategy is a comprehensive plan providing objectives for SBUs,
allocation of resources among functional areas, and coordination between them for
making an optimal contribution to the achievement of corporate level objectives.
Functional strategy deals with a relatively restricted plan providing objectives for a
specific function, allocation of resources among different operations within that functional
area, and coordination between them for optimal contribution to the achievement of
SBU and corporate-level objectives.

Exhibit5.1:DifferentLevelsofSBUs

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Strategic Management

Apart from the three levels at which strategic plans are made, occasionally companies
plan at some other levels too. Firms often set strategies at a level higher than the
corporate level. These are called the societal strategies. Based on a mission statement,
a societal strategy is a generalised view of how the corporation relates itself to society
in terms of a particular need or a set of needs that it strives to fulfill. Corporate-level
strategies could then be based on the societal strategy. Suppose a corporation decides
to provide alternative sources of energy for society at an optimum price and based on
the latest available technology. On the basis of its societal strategy, the corporation has
a number of alternatives with regard to the businesses it can take up. It can either be a
manufacturer of nuclear power reactors, a maker of equipments used for tapping solar
energy, or a builder of windmills, among other alternatives. The choice is wide and
being in one of these diverse fields would still keep the corporation within the limits set
by its societal strategy. Corporate- and business-level strategies derive their rationale
from the societal strategy.
Some strategies are also required to be set at lower levels. One step down the functional
level, a company could set its operations-level strategies. Each functional area could
have a number of operational strategies. These would deal with a highly specific and
narrowly-defined area. For instance, a functional strategy at the marketing level could
be subdivided into sales, distribution, pricing, product and advertising strategies. Activities
in each of the operational areas of marketing, whether sales or advertising, could be
performed in such a way that they contribute to the funclional objectives of the marketing
department. The functional strategy of marketing is interlinked with those of the finance,
production and personnel departments. All these functional strategies operate under
the SBU-level. Different SBU-level strategies are put into action under the corporatelevel strategy which, in turn, is derived from the societal-level strategy of a corporation.
Ideally, a perfect match is envisaged among all strategies at different levels so that a
corporation, its constituent companies, their different SBUs, the functions in each SBU,
and various operational areas in every functional area are synchronised. Perceived in
this manner, an organisation moves ahead towards its objectives and mission like a
well-oiled piece of machinery. Such an ideal, though extremely difficultif not impossible
of attainmentis the intent of strategic management.
Societal strategies are manifest in the form of vision and mission statements, while
functional and operational strategies take the shape of functional and operational
implementation, respectively.

Strategic Management in Multiple-SBU Businesses

In small businesses or in businesses which focus on one product or service line, the
corporate-level strategy serves the whole business. This strategy is implemented at
the next lower level by functional plans and policies. This relationship is illustrated in
Exhibit 5.2.
In conglomerates and multiple-industry firms, the business often inserts a level of
management between the corporate and functional levels. In some firms, these units
are called operating divisions or, more commonly, strategic business units (SBUs). In
these firms, the strategies of these units are guided by the corporate strategies, but they
may differ from one another. This situation operates as shown in Exhibit 5.3.

Strategic Business Unit

Each SBU sets its own business strategies to make the best use of its resources (its
strategic advantages) given the environment it faces. The overall corporate strategy
sets the long-term objectives of the firm and the broad constraints and resources within
which the SBU operates. The corporate level will help the SBU define its scope of
operations. It also limits or enhances the SBUs operations by means of the resources
it assigns to the SBU. Thus at the corporate level in multiple-SBU firms, the strategy
focuses on the portfolio of SBUs the firm wishes to put together to accomplish its
objectives.
For example, Mobil Corporation hired a new chief executive with the charge of revitalising
Montgomery Ward, one of its poor-performing SBUs. The SBU is being pared down
and turned into a specialty retailer since it has not been able to compete well as a
general merchandiser. Corporate-level management set goals and has its own strategy
(that of divesting Ward if it doesnt perform); but the SBU has determined its own
strategy for how to redefine its business and compete effectively.

Exhibit 5.2: Relationship of Corporate Strategy and Functional Plans and Policies
atSingle-SBUFirms

Exhibit 5.3: Relationship Among Strategies and Policies and Plans in Firms with
MultipleSBUs.

Some writers make distinctions between corporate strategy, business strategy, and
functional-level strategy, maintaining that corporate strategy focuses on the mission of
the firm, the businesses that it enters or exits, and the mix of SBUs and resource
allocations. Business strategy, then, focuses on how to compete in an industry or strategic
subgroup, and how to achieve competitive advantage. At the functional level, plans and

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policies to be carried out (by marketing, manufacturing, personnel, and so on) are
designed to implement corporate and business strategy to make the firm competitive.
Roger Smith, chairman of GM, has stated, Unless we want to play a perpetual game
of catch-up, we ... have to do more than just meet our competition on a day-to-day
basis. We have to beat them in long-term strategy. Choices about how to compete
should be considered in the decision about whether to exit or enter a business, as our
earlier example about Montgomery Ward illustrated. And the implementation of a
strategy will determine how effectively the choice will be carried out. Hence, we believe
that the process described here can assist in the readers thinking about business and
competitive strategy.
As mentioned before, the model in Exhibit 5.2 is for a single-SBU firm. For a multipleSBU firm the model is adjusted so that the process is conducted at corporate and SBU
levels. The results of these processes feed into one another. However, at both levels,
the process involves appraisal, choice, implementation, and evaluation.
Strategic decision making in multiple-SBU firms involves interrelationships between
corporate-level and business-level planning. As can be seen in Exhibit.54 the corporatelevel executives first determine the overall corporate strategy. They do this after
examining the level of achievement of objectives relative to their SBUs and other
businesses they could enter. Next they assess how the SBUs are doing relative to each
other and potential SBUs. Then they allocate funds to the SBUs and establish policies
and objectives with them.

Exhibit 5.4: A Model of the Strategic Management Process for a Firm with Multiple
SBUs using First-Generation Planning

At this point the SBUs analyse, within the guidelines set by the corporate level, how
they can create the most effective strategy to achieve their objectives.
This model is, of course, a simplified representation. Depending on various organisation
designs, the interrelationships among units and planning processes can be quite complex

Strategic Business Unit

in a series of iterative interactions across levels and subunits. Moreover, conflicts

between the corporate level and the SBU level can create problems for both. SBU
managers usually seek greater resource allocations in an attempt to expand their units.
Corporate level, however, may wish to stabilize a unit or use cash flows from one unit
to support another SBU. For example, while the head of the tobacco unit at Philip
Morris in the early 1980s wanted growth in cigarette volume and new-product
development, funds were being used to promote sales of the Miller Brewing acquisition. Discussions between SBUs and corporate level must consider overall goals and
resource needs.

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74

Chapter 6
Environment - Concept, Components and
Appraisal
Understanding the environmental context of a company is of immense significance.
Successful strategies are the where the company adapts to its environment.
Companies that fail to adapt to their environment are unlikely to survive in the long run,
and tend, like dinosaurs, to disappear.
An example of this type of failure is provided by the near demise of the UK motorcycle
industry, which failed because it did not mount an effective strategic reaction to a major
environmental changenamely the emergence of its Japanese counterpart. Japanese
producers planned and managed their motorcycle industry on an international basis. i.e.
they built factories that were designed to serve the world market rather than just their
domestic market, thus having the advantage of economies of scale. Such a development
was a major competitive innovation to which the UK companies, with their much less
automated production and smaller sales targets, were unable to respond effectively.
Environment would be classfied as follows :
l

Macro environment

Industry environment

Competitive environment

Internal environment

We further classified these individual classes or segments. Thus, for instance, the macro
environment was further classified into:
l

Social factors, e.g. demographic changes

Technological factors

Economic factors, e.g. prime interest rates, consumer price index, etc.

Political factors

The process of environmental analysis presents the strategic planner with a dilemma: if
all those environmental elements that could have some influence on a company are
included, then the analysis becomes extremely complex and unwieldy. Alternatively, if.
in the interest of reducing the level of complexity, certain environmental elements are
omitted, then certain crucial environmental forces may be left out of the analysis. In
practice, deciding upon the appropriate balance between the width of environmental
analysis and its depth is frequently a function of the nature of the industry, and requires
knowledge, experience, and judgement on the part of the strategic planner.
In the discussion to follow, we would adopt a three stage approach to analysing the
environment:
Stage I:

Segmenting the environment

Environment - Concept, Components and Appraisal

Stage II:

Analysing the segments

Slaue III:

Attributing weights to each segment.

Above, we have already segmented the environment. In what follows, we provide

some elaboration of each segment and thereafter analyse it, ending with a discussion of
the method of attributing weight to each segment.

Segmenting Environment and Analysing Environmental

Segments
Macro Environment
Social Factors
Demographic Changes
The decade of the eighties has seen the impact of the post War baby boom generation
throughout The world. The age of the prime workforce and prime consumer population
belonged to this generation, and their tastes and habits influenced the habits and purchasing
choices in the market, on the one hand, and motivated the manufacturing sector, on the
other. Some features of this impact are worth listing.
l

A general increase in the educational level.

A distinct shift in the value system, resulting in discernable cultural dissatisfaction

at the workplace, which in turn affected productivity.

Increase in productivity, even if at a less than expected pace, augmented by

automation.

Simultaneously, changes in the value system and education have brought in their wake
increased employee participation and involvement in decision-making activities. The
growth of the service industry has only height-ened the process. Such changes require
changed operating procedures, shared information services, and shared authority.
A Model of Ethics: Perhaps some of these changes in the social environment may be
systematically viewed somewhat differently, we may approach it through a model of
ethics, as shown in Exhibit 6.1. From the figure, it can be seen that ethics consists
principally of two relationships, indicated by arrows in the figure. A person or organisation
is ethical if these relationships are strong.

Exhibit6.1:ModelofEthics

There are a number of sources that could be used to determine what is right or wrong,
good or bad, moral or immoral behaviour. These include, for instance, the holy books,

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the still small voice that many refer to as conscience. Indeed millions believe that
conscience is a strong guiding force. Others simply see conscience as a developed
response based on the intemalization of social mores. Other sources of ethical guidance
are what psychologists call significant othersour parents, friends, role models,
members of our clubs, associations, codes of ethics for organisations, etc.
Whatever the source, there is general agreement that persons have a responsibility to
avail themselves of the sources of ethical guidance, and individuals should care about
right and wrong rather than just be concerned about what is expedient. The strength of
the relationship between what an individual or an organisation believes to be
moral or correct and what available sources of guidance suggest is morally correct
is Type I ethics.
Type II ethics is the strength of the relationship between what an individual believes
in and the way he behaves. Generally, a person is not considered ethical unless
possessed of both types of ethics.

Social Responsibility
Organisational strategists have great influence over what is right or wrong because
they normally establish policies, develop, the companys mission statement, and so forth.
When a corporation behaves as if it had a conscience, it is said to be socially responsible. Social responsibility is the implied, enforced, or felt obligation of managers,
act-ing in their official capacities, to serve or protect the interests of stakeholder
groups other than themselves.
Business ethics is the application of ethical principles to business relationships
and activities.
Changing values towards social responsibility To understand the social responsibility of
a corporation, it is useful to begin by understanding an organisational constituency.
An organisational constituency is an identifiable group towards which
organizational managers either have or acknowledge a responsibility.
Clearly, every business organisation has a large number of stakeholders, some of whom
are recognised as constituencies and some of whom are not. An organisational
stakeholder is an individual or a group whose interests are affected by
organisational activities. Exhibit 6.2 depicts a typical illustration of organizational
stake-holders, those marked with asterisks being likely to be considered constituencies.
Even though no manager can reasonably consider all stakeholder interests at a time,
some strategists claim to try. The great questions a strategist has to face would go like
this, During an economic downtrend, should employees be afforded continuous
employment even when this is not in the long-term best interest of the owners of the
corporation and does not accord with their preferences? Should managers be concerned
about whether suppliers receive a reasonable profit on items purchased from them or
should management simply buy the best inputs at the lowest price possible? Many
corporate strategists cop out on such questions by simply assuming that the long-term
best interest of the common stakeholders should reign supreme. What happens, however,
when stakeholders have interests that are in conflict? That is when the ethical
considerations

Environment - Concept, Components and Appraisal

77

Exhibit 6.2: The Company Stakeholders

of the strategist become the important deciding factor. Before proceeding any further,
we list some accepted ethical principles and stake-holders in Exhibit 6.3 and 6.4.
Wrong, Unethical, Immoral
Murder
Rape
Lying under oath
Theft
Incest
Severely hurting
someone economically,
psychologically
physically
Violating a trust
Anarchy
Violating laws
Sacrificing the future for today

Right, Ethical, Moral

Giving to the poor or
disadvantaged
Working hard
Gathering knowledge
and wisdom
Repaying obligations
Being truthful
Caring for offspring or
Caring for forebears
Considering the long-term
outcomes of behaviour

Exhibit6.3:AcceptedEthicalPrinciples

An open system is an organisation or an assemblage of things that affects and is

affected by external events, it is now more or less universally recognised that a
corporate organisation is an open system. Indeed, most corporate strategists
recognise the existence of the grapevine or the informal communication system
within and outside an organization.
The open system view involves recognising the relationships between organisations
and their environments, and evaluating those relationships in an intelligent, not necessarily
moral, way. It is not an ethical concept. It is,

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78

Common shareholders
Preferred shareholders
Trade creditors
Holders of secured debt securities
Past employees
Retirees
Competitors
Neighbours
The immediate community
The national society
The world society

Intermediate (Business)
Customers
Final (consumer) customers
Suppliers
Employees
Corporate management
The organizational strategists themselves
The chief executives
The Board of Directors
Government
Special interest groups
Local government agencies

Exhibit6.4:Stakeholders(PotentialConstituents)

however, clear that the organisation has obligations to other elements of society, some
of which are not spelt out in law or in any other formal way. This is termed social
contract.

The Social Contract

In a sense, organisations and society enter into a contract. This social contract is the
set of written or unwritten rules and assumptions about behaviour patterns among
various elements of society.
Thinking of the social contract from the standpoint of the business or non-business
organisation, organisational strategists should contemplate expected or prescribed relationships with individuals, with government, with other organisations and with society at
large. This is illustrated in Exhibit 6.5.

Society

Government

The
Organisation

Other
organisations

Groups

Individuals

Exhibit.6.5TheSocialContract

Environment - Concept, Components and Appraisal

Obligations to Individuals
It is through joining organisations that individuals find healthy outlets for their energies.
From the church they expect guidance, ministerial services, and fellowship, and they
devote time and money for its sustenance. From their employers they expect a fair
days pay for a fair days workand perhaps much more. Many expect to be given
time off, usually with pay, to vote, perform jury service, and so forth. Clubs and
associations provide opportunities for fellowship and for community service. To the
extent that these expectations are acknowledged as responsibilities by the organisations
involved, they become part of the social contract.

Obligations to Other Organisations

Organisational strategists must be concerned with relationships involving organisations
of similar kindssuch as competitorsand vastly differing organisations. Commercial
businesses are expected to compete wiih one another on an honourable basis, without
subterfuges or reckless lack of concern for their mutual rights. Charities expect support
from businesses, customer organisations expect to be treated as Customers.
Obligations to Government
Government is the most important party to the social contract. Under the auspices of
the government, companies have licence to do business. They have written patent
rights, trade marks, and so forth. Churches are often incorporated under state laws and
given non-profit status. Many quasi-governmental agencies, such as the Federal
Depository Insurance Corporation, Regional Planning Commission, Levy Boards, have
been allocated special missions by the government. In addition, organisations are expected
to recognise the need for order rather than anarchy and to accept some degree of
government intervention in organisational affairs. The inspection rights of Occupational
Safety and Health Administration function-aries are cases in point.
Obligations to Society in General
Businesses are expected to creatively abide by iaws that are passed for the good of
society. That is, as responsible corporate citisens, businesses should follow the spirit as
well as the letter of the law. This has emerged abundantly sharply in recent cases
where defence against charges of dumping of dangerous waste has tended to lake the
line of its being within legal limits. It is now clear that society considers such pleas
simply unacceptable.
Indeed, views now appear to be veering towards the concept that protecting the public
is simply a matter of managerial self-interest. It is the clear consensus among developed
economies today that corporate strategists must protect other stakeholders, even when
doing so coullicts with managerial self-interest or even the interest of stockholders.
Up to now, we have basically considered the organisations obligations to its stakeholders,
government, and society, arising out of moral and ethical considerations. It is also
important to consider the influence government and society may have on the strategic
posture of the company.

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80

Government and Its Role

It is convenient to divide the role of government into two categories: government acting
as an aid to business and government acting as impediment to business; although the
government may simultaneously be performing both acts.
Government as Aid to Business
Government as Buyer
Government is frequently a major purchaser of goods and services, and is generally
regarded by business as an excellent customer because it will not default on payment and
also because government purchases, as well as being a mark of approval, are also frequently
relatively large.

Government as Sustainer of R&D

In many industries today the cost of engaging in the R&D necessary for successful
development of new products and processes is frequently beyond the financial capacities
of individual companies. In such circumstances, the government may frequently help
out by providing subsidies or even partially bearing the cost of R&D by directly
participating in joint research. MITI of Japan, particularly in the early days, would be a
case in point.
Government as Provider of Protection
This is usually in the form of provision of subsidies to the threatened industry, through
erection of tariff barriers against foreign products; through imposition of quotas against
foreign goods; and through exercise of preferential procurement practices.
Government as Aid to Controlling Wage Cost
This takes the form of government policies introducing income norms that ease the
difficulties of businesses in meeting wage demands they believe to be excessive.
Government Assistance in Training
Independent of trade and industry, many governments have sponsored training
programmes aimed at raising the skill levels of existing and potential workers.
Occasionally there are also tax reliefs and grants given to companies running their own
training schemes.
Government Assistance in Start-up Business
In many regions of high unemployment, government provides special concessions and
assistance to start up new businesses. A similar situation arises m backward or noindustry areas in developing countries, where special facilities or concessions are given
for setting up new industries.
Government as Provider of New Business Opportunities
Since the eighties, in many Western countries and in some developing countries there
has been a general trend favouring privatization of new industries. This automatically
creates new business opportunity for prospective investors.

Environment - Concept, Components and Appraisal

Government as Impediment to Business

The development of the web of regulations: Frequently government increases its
intervention in society through legislations and regulations. Often these work to the
detriment of industries, increasing not only costs, but procedural impediments; examples
would be regulations controlling inter-state or inter-country movement of goods and
levy of excise duties on goods produced.
Government as controller of prices: Income policies are also frequently complemented
by price policies, which is generally regarded by industry with some hostility. The major
argument is that this conflicts directly with the influence of market forces on prices.
Government as protector of the environment: Nations around the world are increasingly
becoming aware of the long-term eost of industrial pollution. This has resulted in a
spate of legislations curbing activities believed to be causing pollution. Many industries
resent this as being undue intervention.
Government as guarantor of health and safety at work: This concern for health
and safety of workers manifests itself through various acts of legislation, invariably
resulting in increased cost to the company, and is often resented as undue penalty.
Government as guarantor of equal opportunity: Legislation conforming to equal
opportunity, i.e. equal rights to employment and promotion without regard to sex. age.
race, or religion, has been enacted in most countries in the Western world. This is again
often resented by companies as undue interference and cost-enhancing measures.
Government as defender of competition against monopoly: Governments in many
countries seek to restrict monopoly by legislation in the interest of maintaining competition,
from the social point of view and as protection for small firms. This is often considered
by large companies as a negative step, particularly in the context of globalization when
national monopoly (and hence larger size) is often considered as a prerequisite for
global success. (It may be mentioned that contrary cases abound around the world.)
Government as defender of the rights of consumers: Many Western governments
have enacted legislation to protect the consumer against unscrupulous business practices.
It may involve insistence on honest labelling of goods, contents of advertising,
standardisation of contents in pharmaceutical and food products, and price regulation in
the case of utility companies. The more extensive these laws are, the more hostile
business tends to become towards these.
In view of this ambivalence in government attitude to industries (sometimes beneficial,
sometimes creating impediments), instead of generalizing, it would be useful to see the
role of government in terms of changing participation in strategic decisions. In this, a
distinction must be drawn between political influence and strategic leadership. The key
difference is that the former calls primarily for exercise of political skills on behalf of a
constituency, while the latter, in addition to political skills, requires a clear perception of
the common purposes of an organisation, and of ways of attaining them. It is common
to refer to such perceptions as the vision of the organisations future.
Exhibit 6.6 summarises Ansoffs conception of changing participation in strategic
decisions by different management levels in different types of industries.

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Effects of Society and Culture

Like the environmental effect of government, the social/ cultural effects on products
and services should also be considered somewhat more specifically. This is now done
under a few important heads.

Exhibit6.6:ChangingParticipationinStrategicDecisions

Education: The level, availability and participation rate in education can have major
implications for many products and services. Indeed, the impact of education is being
increasingly felt in most industries.
Health and fitness: Peoples concern for health and fitness has become extremely
important in recent times. This social/cultural change has implications not just for sportsrelated business, but also for how other products and services are promoted, and how
potentially unhealthy products overcome their poor image; for example, the tobacco
industry is a major sponsor of sporting events.
Family size: Family size has been decreasing almost all around the world. This has
implications not just for suppliers of childrens goodsbaby food, prams, clothes, etc.
but also for seemingly unrelated products, such as houses and cars, where design and
size is frequently a function of family need.

Environment - Concept, Components and Appraisal

Family units: Family units have generally become less stable; there has been an
increase in the level of divorce and increasing tendency of young people to leave home
and live apart form their parents. This has implications for promotion, packaging, etc.
Religion: There has been a decrease in the power of churches and their appeal, especially
to young people. This has had a major influence on such issues as how people spend
their leisure, the types of moral attitudes that are socially acceptable, retail opening
hours.
Geographical mobility: The advent of cheap international travel has greatly increased
scope for international travel both for business and pleasure. It has also greatly increased
peoples knowledge of foreign environments and tended to make goods and services more
cosmopolitan.
Domestic mobility: The development of mass motoring has meant a major social change
not just in recreation but also in retailing. This has been helped by a rise in freezer
ownership. Thus many retailers have moved from down-town sites to out-of-town
shopping centres with good parking facilities. Similar increased ownership of freezers
has tended to change daily necessity shopping to the weekly shopping trip.
The role of women in society: With the great increase in proportion of women working
outside the home and the development of equal opportunity legislation, there has also
been a change both in societys attitude to the role of women as also womens personal
attitude about themselves. Thus there has been a diminution in the domestic role of
women and an increase in their broader role in society. This has found reflection in
their purchasing habits and product choices.
Attitude to work: is evident that there has been a distinct change in workers attitude
to work and the consequent need for strategic change to accommodate it.

Economic Environment
The significant indicators of the economic environment would include:
l

Growth rate in productivity

Rate of inflation

Individual savings rate

R&D expenditure as a percentage of GNP

The key domestic social and economic goals would include:

l

Revitalisation of cities

Cleaner environment

Quality education

Old age security

The key economic environmental problems of recent and current times appear to be:
l

Controlling inflation

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84
l

Modernising industry

Taking care of energy shortages

Growing international interdependence

National economic factors.

These are now slightly elaborated.

Controlling Inflation
A major long-term political issue in combating inflation is whether high employment
and non-inflationary economic growth can be achieved simultaneously. The continuation
of economic restraint and unemployment to suppress inflation can only lead to further
development of a welfare state and the trend appears to be exactly the opposite the
world over. The inflationary impact of demand expansion policies, however, will require
greater wage-price flexibility, productivity and advance capital investment to ensure
supply availability. Such growth policies would, therefore, require changes in
environmental and other regulatory provisions.
Modernising Industry
To be internationally competitive, industry must seek economies of scale to sustain
comparative advantages in efficiency and productivity. This requires continued capital
investments and the application of technological innovations from research and
development to reduce unit cost and to lead to the introduction of new and more efficient
products and processes.
Living with Energy Shortages
The world economies at large will be living in a world of gradually depleting oil, gas and,
ultimately, coal reserves. This demands special action and incentives for the development
of renewable energy sources such as solar and fusion energy. Until such alternatives
are able to meet future needs , special attention will be necessary to deal with the
interim supply and demand problems, including national energy policies for the
conservation and development of alternative supplies. The problem has been further
complicated by the changed social value system and newly awakened awareness about
pollution and environmental degradation through extensive use of fossil fuel, on the one
hand, and damage to the ecosystem through large dam- or barrage- based hydroelectric
projects, on the other.
Better Labour-management Relationships
The growing complexity and interrelatedness of todays economic problems are likely
to increase pressure for joint labour-management problem solving. A common concern
is developing for increased productivity that may lead to productivity bargaining.
Growing International Interdependence
The rapid increase in movement of goods, people, money, ideas, and problems across
national boundaries is complicating the ability of nations to manage their own economic
affairs without reference to other nations and national interests. Thus the economic

Environment - Concept, Components and Appraisal

export policies of Japan, for example, have significantly influenced US and Western
steel, auto, radio, and electronics industries. The transfer of Eurodollars to high interest
paying countries can significantly affect exchange rates and corresponding corporate
currency adjustments (often forcing significant accounting losses or gains). The growth
in world trade also causes inflation to spread rapidly from one economy to another.
Less developed countries that control scarce resources such as oil have increased the
abundance of capital at their disposal. Important exporting nations such as Brazil, Korea,
Taiwan, and now the South East Asian countries like Indonesia, Malaysia, Thailand,
and Singapore are becoming industrialised and thus prospective members of the
developed world. Simultaneously a host of less developed countries mostly in Africa
are near bankruptcy. Intervention by international financial Institutions like the
International Monetary Fund or the World Bank are hardly assisting in countering the
trend. Countries with balance-of-payments surpluses are becoming significant world
bankers. Those with balance-of-payments difficulties are being forced into severe
financial difficulties and basic problems of survival.
In sum, because of the influence of global economic events, it is usually inadequate to
consider national economic policies without taking cognizance of the broader global
economic context in which all national economies must exist. This broader economic
context must include an assessment of such fundamental indices as:
l

Performance of the major industrial countries in their

-

Rates of inflation

Real growth rate of GNP

Current account balances

Levels of employment

Interest rates

Such an appraisal should enable a judgement to be made about the general state of
world economy and its stage in the business cycle.
l

Information on and analysis of other global issues such as

-

The economic development and performance of nations

Global efforts at monetary reforms

The behaviour of currency markets

Commodities

Trade talks

Activities of the International Monetary Fund

Activities of the World Bank

Third World indebtedness

The State of the National Economy

The analysis of the global economy can form the eco-nomic context within which the
national economy can be appraised.

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This can be done on a hierarchical basis, as discussed below:

l

The top economic goals of the government are assessed. Information for this
can be obtained from party manifestos, government statements, budget statements,
etc.

The specific policies advocated and implemented to achieve these goals are
studied. The policies fall under the following principal headings:

Fiscal policies: What is the level of government spending and what are its policies on
taxation? For example, is government, through public expenditure, attempting to raise
the level of demand and hence reduce unemployment? Is the governments tax strategy
designed to increase investment or increase public spending power?
Monetary policies: How tightly are monetary measures such as the money supply and
PSBR being constrained?
Inflation policies: What is the governments attitude towards inflation and what does
it believe are its causes? What steps is it taking to influence the level of inflation?
Foreign exchange and balance-of-payments policies: What is the governments
attitude towards stability in the value of the national currency? How do changes in the
value of national currency affect the economy in general and the organization under
analysis in particular?
Unemployment policies: How committed is the govern-ment to full employment, and
what policies does it use to achieve employment goals?
Privatisation policies: How strongly committed to privatisation of nationalized industries
is the government? What is the objective of privatisation: to increase competitiveness,
to raise revenues for the government, or to underpin an ideological theory?
Regional policies: How committed is the government to strong regional policies to
prevent the concentration of industry and commerce in favored locations?
The operation of most of the above indicators can be quantitatively assessed. Once the
impact of the economic segment has been assessed, it can be weighted.
The rate of inflation that prevails can be a significant environmental influence. It is,
however, not enough only to know the rate of inflation; it is also necessary to understand
and appreciate its impact on the workings of a particular company. This is because
inflation tends to act as a tax on current assets and as a subsidy on fixed assets.
Thus, for example, a banker, a financial company, the assets of which are skewed
towards money and other similar products, must earn a return on equity at least as
large as the rate of inflation, otherwise their net worth would be eroded by inflation. In
contrast, a property company, for instance, would find its fixed assets constantly
understated in its balance sheet during inflation, as the realisation on sale would be that
much higher.
Proposals are often heard of for the use of a world currency to replace all national
currencies. Indeed, this appears to be becoming a reality for EEC countries. This may
seem far-fetched, but it is reflective of the fact that the economic facet of the environment
is influenced by worldwide forces. The US and European auto and electronic industries
have been severely impacted by foreign competition, mostly Japanese. Recently, when
it appeared that the oil producers and exporters cartel (OPEC) was about to fall apart,

Environment - Concept, Components and Appraisal

there was fear that this would result in a number of developing countries defaulting on
their debts to major US banks, with consequent increase in US interest rates. The
recession which began in 1979 was a worldwide phenomenon, and this was also the
case with the recovery which began in 1983. International travel is more feasible than
it has ever been in the past, and more and more companies engage in international
business. Every organisation is affected by worldwide forces.
In short, the economic facet of the environment is a rapidly changing one, but the more
it changes, the more it remains the same. Organisational strategists must still compete
on an economic basis. As long as prices for goods and services are set in free markets,
it will be on the basis of economic variables that an organisation sets its goals and
measures its performance.

Political Environment
In democratic countries, business excesses generated disenchantment and a growing
demand for more humanist goals to equalise income distribution and end poverty and
suffering. Such pressures had caused the trend towards the welfare states in which
the state (a) diverts resources into various welfare projects, (b) establishes compulsory
insurance schemes, e.g na-tional health care, and (c) affects worker motivations to
contribute. Thus, in the USA, rent subsidy, negative income tax, welfare payments, and
a food stamps programme were established to raise the living standard of the poor.
Continued pressure for welfare states will in all probability grow and affect many
nations, organisations and individuals in the following ways:
i.

Total taxes and government spending will increase drastically,

ii.

Worker penalties for welfare recipients will create dysfunctional worker

motivation,

iii.

Any government administration will find it well nigh impossible to reverse the
trend towards greater welfare benefits,

iv.

Resource allocation decisions will increasingly be made on philosophical or political

grounds rather than on economic criteria,

v.

Increased worker taxation on incremental income will encourage worker

absenteeism.

vi.

Government dependence will decrease worker motivation through lack of care

or worry.

This trend may, however, result in business sales stagnation leading to economic and
industrial decline and depression. In short, carried too far and without compatibility
with economic considerations, the welfare state trend would in all probability conflict
with economic progress and viability. Indeed, in more recent times it has already happened
in many countries and the trend towards the welfare state has been reversed.
Perhaps the political environment needs to be looked at from certain other viewpoints
as well. Corporations today spend hundreds of millions of dollars on political contributions
and lobbying. These contributions are some-times designed to support principles that
corporate executives believe are worthwhile for society. More often, however, they
tend to be self-serving. This is evident from the fact that few political contributions are

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made anonymously. The political facet of environment is also con-cerned with the
organisations relationships with government officials and other individuals and groups
who hold political power.
In recent times there has been fear that political action committees (PACs) are likely to
subvert governmental processes by causing elected officials to serve the interests of
those groups that make contributions. Political action committees are tax-favoured
organisations formed by special interest groups to accept contributions and influence
governmental actions. The growth of PACs has afforded an avenue for corporations to
contribute hundreds of millions of dollars to political candidates. The returns received in
the form of subsidies and price support to various industries are also enormous.
While the general public is justifiably concerned about the influence of PACs and other
private organisations on government, most managers express greater concern for the
pervasive involvement of government in business activities. One prominent law school
dean. Thomas Erlieh of Stanford University, complained that the increasing legal
pollution in America unduly constrains business. Not only have laws become more
numerous, but the propensity of citizens to litigate has become greater. Business and
non-business organizations find themselves in a sea of political forces. The organisational
strategist must take account, if not advantage, of these forces.
The decade of the sixties up to the mid-seventies has seen vast expansion in the scope
and detail of government regulation of business decisions, beyond those of the New
Deal era, beyond regulating public utility industry, and beyond temporary periods of
wage and price controls. This regulation has undoubtedly cost US business heavily.
Indeed, the problem is much more severe in the USA than in European countries.
It is now acknowledged by more balanced people in government that the government
appears to be an opponent rather than friend or even neutral force vis-a-vis business
and industry. The government view is of course different; namely that it has to protect
public interest. Indeed, it is suggested that businessmen can serve their political interests
better by looking beyond the very narrow interests of the individual company and offering
some connection between what businessmen want and the broader public interest.
Certainly, the business-government interface is often an abrasive one. The very recent
trend, however, is towards lessening regulation and reducing government interfer-ence
in business and private activities. Incidentally, it is noteworthy the deregulated industries
themselves tend to be the most vehement opponents of deregulation, it is likely that this
opposition arises from a fear of rapid and unmanageable change.

Technological Environment
Technological change results when new ideas are applied to existing problems for the
purpose of economic and social development. As with all economic and social changes,
the acceptance of technological innovations takes a significant period of time, and it is
also a reflection of rapidly increasing environmental turbulence that this time span is
constantly decreasing.
Recent times have seen the development of new products and processes with increasing
frequency. The uncertainties and slow pace of development of technological innovations
make investments on them high risk. The potential pay-off for winning innovations can,

Environment - Concept, Components and Appraisal

however, be significant and continues to encourage investment in research and

development.
Looking carefully, the competitive advantage of Japan in many industrial and business
areas would be largely attributable to their emphatic and consistent policy on research
and development. Some of the attributable factors would be:
i.

There is a national policy for setting up research and development facilities for
new technologies,

ii.

There are tax and interest incentives for investors in designated technologies.

ii.

Capital is made available for designated technological investments at preferred

interest rales,

iv.

Investment in new technology is readily accepted by employees.

v.

Growth in new technologies has become part of the culture and economic system.

Future developments have a wide range of technologies to draw upon. Predicting new
developments and innovations will be increasingly important. Consider the problem of
depleting oil resources and their increasing costs. Consider the simultaneous awareness
about issues related to pollution control and environmental protection. We are beginning
to see a new emphasis on energy-related technologies that have yet to become
commercial. Consider the following classes of technology:
i.

Nuclear fission (breeder reactors)

ii.

Nuclear fusion

iii.

Synthetic hydrocarbon fuels

iv.

Solar energy

v.

Wind energy.

vi.

Geothermal energy

vii

Hydrostatic, tidal, and ocean current energy

viii.

Temperature gradient energy

ix.

Advanced energy storage and distribution

Today deciding, which of these technologies research and development funds should
be invested in, is a real gamble.
Let us look at the impact of technology on business and industry a little more closely.
With todays modern computers it is possible to obtain strategic information on a realtime basis for the first time in history. Most major merchandises now have point-ofsale electronic accounting systems. When a customer order is checked out at the cash
register, the inventory is immediately updated. An order for a replacement item is
entered if necessary, and the impact on sales, profitability, and other strategic variables
immediately calculated. In this final analysis, as unsettling as many of the advances is
that most of these result in the production of goods and services at lower cost
both in terms of time and materials. If economic endeavour has a single goal, this has to
be it.

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Organisational strategists who ignore technological changes do so at their peril.

Manufacturers of mechanical adding machines, large propeller driven aircraft, or plasticreinforced automobile safety glass will find almost no market today.
Three possible effects, of technological change are easily discernible:
l

It can change relative competitive positions within a given business.

It can create new markets and new business segments.

It can collapse or merge previously independent businesses by reducing or

eliminating their segment cost barriers.

In any event, when technology advances, all participants in the respective business
segments are affected. To survive today companies must continually innovate. This is
not because of some external force which has imposed upon the world a new and
fearsome order of things, but because technological improvement is possible. When
improvement is possible in a free economy, someone will attempt it. The company or
person who does, and succeeds in producing a better product at the same cost or a
cheaper version of the same product, will be able to dominate the market place.
Companies that do not, will be driven from the economic scene. Even when competitors
make appropriate but delayed technological response, lost market shares may not be
regained.
Although it is difficult to measure, except with hind-sight, the importance of technological
change to an industry, two measures that may give reasonable indication are
suggested:
l

The amount the industry spends on R&D. This could either be an absolute
amount or it could be a relative measure such as R&D expenditure as a
proportion of sales. The latter basis is increasingly becoming the more standard
practice.

The PIMS measure of innovation. This measure defines the level of innovation
as the proportion of revenues that accrue from products that have been introduced
during the past three years. This measure is good indication of the relative
importance to the industry of new products.

When the analysis of the technological environment has been completed, the threats
and opportunities that prevail should be weighed.

Industry Environment
To analyse industrial environment we should begin by understanding its purpuse. The
purpose of studying industrial environment or analysing industry structure is to gain an
understanding of the competitive relationships among groups of firms that compete for
a specific market. The first step is a broad analysis of industry environment. This is
illustrated in Exhibit 6.7.

Environment - Concept, Components and Appraisal

91

Industry trends

Market size/age

Industry
attractiveness

Competition
number/size/
power

Rules of the game

Intensity/strategy/profits

Exhibit6.7:IndustryStructure

A slight elaboration of the factors may be helpful.

Market size/age: Is the market relatively small or large, and can it be broadly
characterised by its stage of development (start-up, emerging, growth, maturing,
declining)?
Number of competitors: What is the level of competition for the market? Are there
many small rivals or a few large, dominant ones? Also, how easy is it for new players
to enter the industry? Some industries are easy to enter, others difficult.
The rules of the game: How do firms compete in this market? Do they compete on
price, quality, technology, service, etc? What is the average level of profitability? Is it a
profitable market or is it a high volume, low margin field? As an industry matures there
is usually a movement towards the cost advantage of economies of scale. When there
is a major change in the cost or profit structure, competition will tend to intensify, as, for
instance, if price cutting strategies are used.
Industry trends/driving forces: What are the industry trends and how rapidly do they
change? Is the industry growing and innovative or stable and slow to change? The rate
of market growth is a critical factor because it influences the equilibrium between
demand and supply. In a slow-growth industry, competition tends to increase because
any growth must be taken from a rivals share.
Industry attractiveness: The overall attractiveness of an industry is determined by
the interaction of these key structural forces. The higher the rate of growth and the
weaker the competition, the more attractive the industry.

Techniques of Industry Structure Analysis

The initial analysis of industry structure provides a map of the competitive environment.
The strategist also needs to anticipate future trends: new developments that may change
the existing structure.
There are several techniques that may be employed to identify the underlying competitive
alignment and the major players. Below, We briefly discuss two such.

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Structural Mapping
One method that may be used to examine industry structure is termed structural group
mapping. The map is developed by plotting competing firms on two industry dimensions;
for example, product quality versus distribution channels. To give an added dimension
of strategic input, the area of each circle representing a company may be made
proportional to its market share. When these two-dimensional plottings are stretched
together, the dominant strategy of each competitor and its effectiveness shows up quite
distinctly.
Competitive Arena Mapping
A second industry analysis technique is termed competitive arena mapping. The total
market segment is diagrammed around customer needs and product offerings. This
map of the information-communication arena allows the strategist to examine all the
likely moves by key players and to anticipate possible changes in competitive forces.
By highlighting the largest markets, it is possible to visually portray the strategy and
direction of key competitors, such mapping of the information-communication arena is
shown in Exhibit 6.8. It will be seen from this illustration that competitors from all
directions are converging on the growing microcomputers and office-automation
markets.
What is more important is the sure indication of increased competition in the future
from giants converging on the attractive markets, and therefore this advance information
enables a choice to be made of the suitable strategic response.

Strategic Group Analysis

The problem that the strategic analyst will face is conceiving of the nature of competition
that the organisation faces. In particular, who are the most direct competitors and on
what basis is competition likely. Given this understanding it is then possible to gauge the
extent to which strategy is appropriate in the competitive circumstances. One problem
here is that the idea of the industry is not particularly helpful. The boundaries of an
industry can be very unclear and may not provide any precise delineation of competition.
In a given industry there may be many companies each with different interests and
competing on different bases. There is a need for some intermediate mapping of the
basis of competition between the individual firm and the industrial level.
Strategic group analysis is one means of providing this intermediate level of analysis.
The idea is to identify more finely defined groupings of organisations so that each
grouping represents those with similar strategic characteristics, following similar strategies
or competing on similar bases. Porter argues that such groups can usually be identified
using two, or perhaps three, sets of key characteristics as a basis of competition. It is
useful to consider the extent to which organisations differ in terms of such characteristics
and also show similarities. Some examples of such characteristics would be:
l

extent of product (or service) diversity;

extent of geographic coverage;

number of market segments served;

distribution channels used;

Environment - Concept, Components and Appraisal

l

extent (number) of branding;

marketing effort (e.g. advertising spread, size of sales force, etc.);

extent of vertical integration;

product or service quality;

technological leadership (a leader or follower);

Exhibit 6.8: Competitive Arena Map

l

R&D capability (extent of innovation in product or process);

cost position (e.g. extent of investment in cost reduction)

utilisation of capacity;

pricing policy;

level of gearing;

ownership structure (separate company or relationship with parent);

relationship to interest groups (e.g. government, the city);

size of organisation.

This sort of analysis is useful for all organizations that seek to understand competition.
What the analyst is looking for is to establish which characteristics most differentiate
firms or groupings of firms from one another. Moreover, it is likely to yield a better
understanding of the competitive characteristics of competitors. It also allows the analyst
to ask how likely or possible it is for the organization to move from one strategic group
to another. Mobility between groups is of course a matter of considering the extent to
which there are real barriers to entry between one group and another in terms of how
they compete.

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We discuss here two models for strategy formulation in which industry and industrial
environment analysis plays a key role.

The BCG Growth/Share Matrix

One of the most widely used portfolio approaches to corporate strategic analysis has
been the growth/share matrix pioneered by the Boston Consulting Group and illustrated
in Exhibit 6.9.
Question
mark

Low
High

Market growth rate

Stars

Net users
of resources

Net suppliers
of resources

Cash Cows
High

Harvested
or
liquidated

Dogs
Low

Relative competitive position

Exhibit 6.9: BCG Growth/Share Matrix

The BCG matrix facilitates strategic analysis of likely generators and optimum users
of corporate resources. Market growth rate is the projected rate of sales growth for
the market to be served by a particular business. Market growth rate provides an
indicator of the relative attractiveness of the market served by each of the businesses
in the corporations portfolio. The relative competitive position is usually expressed as
the ratio of a business market share divided by the market share of the largest competitor
in the market. Each business unit can also be represented as a circle in the matrix. The
size of the circle represents the proportion of corporate revenue generated by that
business unit. This provides visualisation of the current importance of each business as
a revenue generator.
Market growth rate is frequently separated into high and Mow areas by an arbitrary
10 percent growth line. The relative competitive position is usually divided as a relative
market share between 1.0 and 1.5 so that a high position signifies market leadership.
Once plotted, business units will be in one of the four cells with differing implications
for their role in an overall corporate-level strategy.

The GE-Mckinsey Nine-cell Planning Grid (Directional

Policy Matrix)
General Electric, assisted by McKinsey, developed a strategic planning grid which
attempted to correct some of the limitations of the BCG matrix approach. The grid is
illustrated in Exhibit 6.10.
First the GE grid uses multiple factors to assess industry attractiveness and business
strength, rather than the single measures (market share and market growth, respectively)
employed by the BCG matrix. Second, GE expanded the matrix from four cells to nine,

Environment - Concept, Components and Appraisal

95

replacing the high/low axis with a high/medium/low one to draw finer distinctions
between business portfolio positions.
To determine which axis a business unit falls under, the companys business unit is
rated on multiple sets of strategic factors within each axis of the grid.

Competitive Environment
The best method for carrying out a study of the competitive environment is through a
structural analysis. Exhibit 6.11 provides a model.

Competitive Advantage Analysis

The choice of competitive strategy is determined first by the long-term profitability of
an industry, an essential ingredient in predicting the profitability of the firm, and second,
its relative competitive position within an industry. Hoffer and Schendel have suggested
four steps for analysis of these factors.

Exhibit6.10:GeneralElectric/McKinseyNine-CellPlanningGrid
Potential Entrants
Threat of
entrants
Suppliers
Bargaining
Power

Buyers
Competitive
Rivalry

Bargaining
Power

Threat of
substitutes
Substitutes

Exhibit 6.11: A Model for Structural Analysis of the Competitive Environment

Strategic Management

96

i.

Develop an internal analysis profile of the organisations principal resources and

skills in several broad areas such as financial, marketing, organisational, production,
human resources, and technologi-cal.

ii.

Determine the key success requirements of the product/market segments in

which the organisation competes.

iii.

Compare the internal profile to the key success requirements to determine the
major strengths on which an effective strategy can be based, and the major
weaknesses to be overcome.

iv.

Compare the organisations strengths and weaknesses with those of its major
competitors to identify which key policies are sufficient to yield a competitive
advantage in the market place.

Perhaps the idea of competitive advantage requires some elucidation. A competitive

advantage is a position that offers an opportunity for higher profits in relation to
competitors by:
l

Differentiating products from competition.

Concentrating on specific market segments.

Focusing on production or distribution channels.

Using selective price/cost structures.

Whatever the method used, the objective is to establish a distinct, favourable

differentiation from rival firms.
This, however, raises a basic strategic issue: how can we strengthen our competitive
position in relation to competitors?
Four basic managerial issues have been suggested:
i.

The ability to understand competitive interaction as a complete dynamic

system, including competitors, customers, money, people, and resources. In other
words, how does the firm compete in each of its basic businesses or product
groups?

ii.

The ability to use this understanding to predict the consequences of a given

intervention in that system. In effect, how does the firm respond to changing
conditions? How will it take advantage of new opportunities, reduce competitive
threats, and strengthen the firms own competitiveness?

iii.

The availability of uncommitted resources that can be dedicated to different

uses and purposes in the current circumstances.

iv.

The willingness to deliberately act to make the commitment. Integrating the

activities of various divisions, products, and functions into a committed corporate
culture and strategy.

The purpose of strategy is to maintain or gain a position of advantage in relation to

competitors. An advantage is gained by seizing opportunities in the environment so that
the organisation can capitalise upon its areas of strength. The ability of firms to identify
and capitalise on the underlying industry structure varies tremendously. Most industries
are characterized by one or more profitable leader, a group of smaller, more focused

Environment - Concept, Components and Appraisal

competitors, and a large number of firms holding in the mid-ranges with lower
performances. This pattern emerges clearly when comparing sales volume with
profitability. Large firms tend to dominate industry by achieving economies of scale,
with resulting cost advantages. Smaller firms main-tain a high profit with lower volume
by focusing on a specialized market segment.
Mid-range firms remain at the bottom, being unable to realize competitive advantage.
Being unable to take advantage of economies of scale and not having adopted the
focusing strategy, they are stuck in the middle.
Competitive analysis provides the framework for diagnosing strategic forces in the
environment. It can help prioritize strengths and weaknesses, and locate possible
vulnerabilities of rivals: a strategic window of opportu-nities that the strategist may be
able to exploit. Competitive analysis should be an ongoing process if strategy formulation
is to be effective. The strategy maker must identify the key success requirements for
each industry situation.
The strategic window concept refers to the timing of marketing opportunities. It is
easier to enter when the window opens and difficult to do so after it closes. Thus IBM
missed the laptop PC market window, the opportunity being taken by Zeniths Z-181.
By the time the IBM laptop PC came to the market, the window was closed.
The important and related aspects of timing and when require reference at this
point. While discussing the concept of strategic windows, we referred to the failure of
the IBM laptop PC as against Zeniths Z 181. It is not as if IBM lacked the resources
or key success requirements, nor was there any error in choosing the field of
diversification. What was missing, however, was an adequate strategic concept about
the timing of the move. In all strategic decisions, it is not enough only to look at
opportunities and strengths. The third and critical element of successful crafting of
strategy is choosing the time element correctly.

The Marketing Segment

The marketing segment falls somewhere between the industry and competitive segments.
Because of its significance and importance, it is being considered under a separate
heading.
The following environmental indicators are usually considered to be the fundamental
determinants of the demand for goods and services:
l

The size and affluence of the market: A primary determinant of demand is the
absolute size and affluence of the market for the product. The size and the
affluence of the market have led to globalisation, and most global companies
seeking roles in the US market. The factor of size has also been instrumental in
the development of a single European market.

The trends in the market: Within all markets there are other indicators and
trends that are of great significance when considering the potential of the market.
Among the more important are the following:

Total population trends: growing, static, or declining?

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l

Trends in segments of the population: products largely tend not to be targeted

at the whole population but rather at particular segments. It is, therefore,
important to know how the different target segments are changing.

Income trends: e.g. is the level of income in the population increasing, decreasing
or static, and how is the distribution of income among the various segments
chang-ing?

Stage in industry/product life cycle: from the perspective of environmental

assessment it. is important for managers to be informed about the stage at which
their industry is in its life cycle.

Market Identification
At this stage the company attempts to identify in its environment market opportunities
that it may be able to successfully exploit. This is when marketing research is undertaken
in order to ascertain the extent and nature of opportunities, and to assess the companys
internal ability to exploit them. At this stage there is general lack of detail in the proposed
actions; it is essentially exploratory and is really concerned with seeing if there is a
possible match between the market and the companys capabilities, in-cluding its existing
(and potential) range of products or services.
Market Segmentation
Frequently used bases of segmentation for consumer goods include:
l

Demography: age, sex, family size, income, occupa-tion, religion, race, etc.

Geography: country, region, city, town, climate, etc.

Social basis: class, education, occupation, etc.

Product function: use sought, benefit sought, rate of usage, etc.

Buyer behaviour: of actual and potential consumers.

It should be noted that market segmentation is often more straightforward for consumer
goods than for industrial goods because of the great range of uses to which many
industrial goods can be put and also because there is much greater customer
heterogeneity.
The criteria for deciding which segments are most attractive will vary from industry to
industry, but in general the following tend to be considered important influences:
l

Current and future growth rate of the segment in terms of volume and value.

The degree and nature of existing competition: threats of new entrants, threats
of substitutes, power of buyers, level of rivalry among existing competition, levels
of profitability.

Product Positioning
Once a company has decided upon the target markets, the next stage is to determine
how it ought to position its products in these in relation to competitors offerings. This
involves assessing how competitors products meet customers needs and then
developing marketing strategies to meet these needs belter. Product positioning is a

Environment - Concept, Components and Appraisal

vital part of the process, because it is here that managers must see to the heart of the
reason for competitors success and more importantly, decide upon how they will position
their own products or services so that consumers are induced to buy these. It is suggested
that this can be accomplished in three steps:
i.

Decide upon the criteria that distinguish the various products currently available
in the target market.

ii.

Draw up a series of product pricing maps for competitors. This graphically shows
how products compete, using two key customer criteria as axes. The products
are represented by circles whose areas are proportional to their annual sales.
Exhibit 6.12 illustrates such a map.

iii.

Decide upon possible positions for the companys product on the product positioning
map and define the qualities associated with the position chosen.

Exhibit 6.12: The Product Positioning Map

Marketing Mix Strategy

In order to position a product in a desired location in its target market segment, a
company has at its disposal a great number of instruments. These include:
l

the quality of the product in terms of features such as style and image;

the distribution, i.e. by wholesaler, agent, etc.;

the promotion of the product in terms of advertising, methods of selling;

the price of the product.

These various instruments, which are used to influence consumers have been grouped
together by McCarthy under four headings: product, place, promotion, and price,
and these broader sets of strategy instruments have become known as marketing mix.
The most commonly used elements of the marketing mix are shown in Exhibit 6.13.
At this stage, the task is to blend various elements from the marketing mix into
a combination that enables the company to position its products in markets by an
appropriate mix of the products, place, promotion, and price variables, so that it achieves
its goals.

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Product Strategy
Product activities are concerned with developing products (and their associated
services) or services that satisfy customer needs effectively. Among the more important
features that distinguish products are the following:
Quality: What is the relative quality of the product and its associated services, in
relation to the competing products that are available?
Features: What particular features does the product have that distinguish it from
competing products?
Options: Are there options that are not available on competing products?
Product

Place

Promotion

Price

Quality
Features and options
Style
Brand name
Packaging
Product line
Warranty
Service level
Other services

Distribution channel
Distribution coverage
Outlet location
Sales territories
Inventory, levels

Advertising
Personal selling
Sales promotion
Publicity

Level
Discount and
allowances
Payment terms

Transportation
carriers

and location

Exhibit 6.13: The Marketing Mix

Style: How well is the product styled in relation to immediate and other non-immediate
competing products?
Brand Name: Does the product have a brand name with connotations?
Packaging: What is the quality of packaging of the product in relation to that offered
by competitors?
Product line: Is the product just a single offering or is it part of a wider and more
comprehensive product line or basket?
Warranty: What is the warranty period and the quality of warranty in comparison with
warranties offered on competing products?
Service Level: Is the level of service that accompanies the product inferior or superior
to that of comparable products?

Place Strategy
Place activities are concerned with deciding upon where the product will be sold, the
method of distribution, and associated discussions such as inventory levels.
The distribution strategy and practices adopted by a company should flow from its
corporate marketing strategies. It is important that the relationship has this direction,
because discussions about distribution have such far-reaching strategic implications.
The more important of these include:
l

Responsiveness to customers needs and wishes: The nature, level, and quality
of customer service will be strongly influenced by the chosen method of
distribution.

Profitability: The method of distribution chosen: in most cases there is a choice

of method, usually calling for a trade-off between the costs and benefits of
alternatives.

Environment - Concept, Components and Appraisal

l

Costs: Distribution costs are significant in most industries. Fifteen percent of the
turnover is perhaps a representative figure.

Product: The characteristics of the product will be influenced by the method of

distribution chosen.

Pricing: The pricing policy adopted will be influenced not just by manufacturing
and actual distribution costs but also by the nature of the distribution adopted.
Thus a decision by an organisation to have broad, intensive, natural distribution
will tend to demand a lower level of unit distribution costs and hence lower
pricing than a decision to have limited distribution with a small number of exclusive
quality outlets.

Promotion: The promotional requirements of a product or service are also a

function of the distribution methods employed. Thus the promotional requirements
of intensive national distribution are very different from those required for smaller
regional sales.

Relationship with other firms: The degree to which an organization subcontracts

its distribution will have major long-term implications for its relationship with
other firms and its flexibility towards strategic change. Thus an organization that
contracts out its distribution may have to enter long-term legal contracts that
cannot easily be changed.

Control: The greater the use a company makes of intermediaries to carry out its
distribution the less control will it have over the marketing of its products.

Because of these and other strategically important aspects of distribution it is important

that distribution policies reflect corporate policies rather than constrain or set them.

Promotion Strategy
The third element in the marketing mix is promotion. This could be considered the
process through which a company communicates with and influences its target market
segments, with the goal of helping to position its products and services in their desired
locations and generating the desired responses from them.
Promotion, apart from having the goal of generating maximum sales at minimum cost,
also has the following generic goals:

Awareness
Companies frequently wish to develop in their target audience just an awareness of
their products, their brands, their services, and even their existence. This may be used
to,
i.

Develop potential customers memories of the existence of a new product or

service, particularly at the time when it is first offered.

ii.

Refreshing existing customers memories of the existence of a company, a brand,

a product or a service, through reminders of its existence. This is often the goal
behind the promotion of products that are at a mature stage in their product life
cycle.

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Attitude
The generic goal attitude is somewhat similar to the awareness goal, in that when a
promotion has such a goal, its aim is to leave primarily the targeted sector with a
desired attitude of mind towards a product, a service or, indeed, an issue, and the
desired attitude may not result in action. Thus, for instance in a campaign about AIDS
(acquired immuno-deficiency syndrome,), the goal could conceivably be to develop
twofold attitudes: to prevent the spread of AIDS and to allay peoples fears and
misconceptions about its transmission.
Competitive Signals
In general, the primary goal of any promotion strategy should be to help the company
achieve its marketing goals. More specifically, it will often be the case that the promotion
goals will be to ensure that blend of promo-tional devices which will achieve the maximum
degree of influence in targeted market segments at minimum cost. Thus any promotion
strategy should contribute to the marketing process by:
l

being appropriate to the product and to the market segment that has been identified
and is being targeted;

helping position the product in the desired local ion in the segment;

being appropriate to the means of distribution chosen;

being appropriate to the resources which the company has.

Companies may, however, use promotion to signal to their competition, and other
interested parties, selected information about themselves. The information could include
strategic intentions, future goals, or internal health.

Price Strategy
Traditional economic theory claims that price is the primary basis of competition and
the primary determinant of demand. Empirical evidence and casual observation suggests
that this is often not true. Indeed, price is just one element of the marketing mix that
may be employed to achieve the companys marketing objectives. A quotation from
Porter would be relevant in this connection.
Some forms of competition, notably price competition, are highly unstable and quite
likely to leave the entire industry worse off from the standpoint of profitability. Price
cuts are quickly and easily matched by rivals, and once matched they lower the revenues
for all firms unless industry price elasticity of demand is high enough. Advertising
battles, on the other hand, may well expand demand or enhance level of product
differentiation in the industry for the benefit of all firms.
This is primarily why a more satisfactory approach is to use price in conjunction with
other complementary elementsproduct, place and promotionin the market-ing mix.
A companys pricing strategy should:
l

help the company achieve its corporate goals in such areas as profitability, market
share, growth, range of products, etc;

help the company achieve its more specific marketing goals such as market
share, market growth rate, etc;

Environment - Concept, Components and Appraisal

l

materially contribute to the marketing process through:

being appropriate for the market segment that has been identified and is
being targeted;

helping position the product in the desired location in the segment;

being appropriate to the means of distribution chosen;

being consistent with the means of promotion chosen for the product.

In most companies, pricing strategy and practices tend to be determined by one or

more of the following major sets of influences:
l

Demand influences

Competitive influences

Cost influences

Demand Influences
This is the area where the concept of elasticity most comes into play. The demand for
a product is a fundamental influence on pricing strategy, just as price of a product is a
fundamental influence on the demand for it. The two are mutually dependent. Generally,
the higher the price charged for a product, the less will be the volume of demand and
vice-versa. Consequently, when planning price strategies for products that have high
price elasticity of demand (such as international air travel), particular attention must be
paid to the consequences of price changes. When such a view of pricing prevails,
companies should endeavour to develop accurate sales forecasts or simulation of the
demand consequences that different pricing strategies are likely to have.
Competitive Influence
Most products and services are not unique: they must compete with rivals or substitutes.
Consequently, pricing strategies will normally require response to the nature of
competition. This type of pricing strategy is one where the price charged for a product
or service is strongly influenced by prices charged by competitors. There may, however,
be two exceptions:
l

Prices charged by the market leader, who sets the tone for prices charged by
competitors and hence decides his own price based on other strategic
considerations.

Markets of differentiated products, in which case the impact of competitive prices

is less significant. The price fixed in such cases is strongly influenced by demand
considerations, superimposed by the fact that a higher price tends to signal superior
quality.

Cost Influences
The cost of manufacturing a product or providing a service will be a fundamental
influence in pricing strategy. A price below cost will ultimately lead to extinction while
a price too high in relation to cost will encourage new entrants and stimulate customers
to use substitutes. The principal types of cost-based strategies are:
l

Cost plus pricing

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l

Target pricing

Marginal cost pricing

Cost Plus Pricing

A cost plus pricing strategy determines the total cost per unit produced and then arrives
at a price by adding to that cost a fixed percentage for profit margin.The total cost per
unit is normally composed of the variable costs of production and marketing plus an
allocation of overheads to cover fixed costs.
Target Pricing
The kernel of this strategy is that the price to be charged for a product should be set by
meeting the predetermined return on capital employed to produce and market it.
Target pricing has an underlying assumption that the company setting the target price
has the power to see that it is indeed followed in the industry and that its sales volume
and market share remain unimpaired. Consequently, this type of pricing strategy tends
to be adopted successfully only by companies that have this degree of power.

Marginal Cost Pricing

In marginal cost pricing, all the variable costs of produc-tion and marketing are covered,
but fixed costs may be partly covered or not covered at all. There are a number of
situations in which this type of pricing strategy may be particularly appropriatealthough
a generalised application of this strategy is potentially dangerous.
Pricing New Products or Services
A unique new product does not have the benchmarks of demand and competition; the
only element known with certainty is the cost. In such an eventuality, the following
approach may be adopted:
l

Assume that the price of the product will at least cover marginal costs.

Through market researchsay test marketinganalysis of substitute products

and the estimation of competitive reactions of the producers of substitutes
make estimates of the likely demand for the new product at different price levels,
with different means of distribution and with alternative methods of promotion.

Choose a pricing structure, method of distribution, and method of promotion that

promise to generate maximum profitability based on the market research and
cost analysis embodied in steps 1 and 2 above.

In general any pricing strategy should be integrated with all the elements of the marketing
mix, and the price structure itself should be regarded as a variable that dynamically
responds to its changing internal and external circumstances, particularly the following:
Internal: The resources the organisation has available to pursue its chosen price strategy;
and the relationship between pricing strategy and the cost of production and marketing.
External: The products stage in life cycle, the level and nature of competition, and the
price elasticity of demand for the product.

Environment - Concept, Components and Appraisal

105

Attributing Weights to Each Segment

At this stage of environmental analysis, the segments of the environment that have
been selected and analysed are given weights that summarize the impact each segment
is expected to have on the company under analysis, as depicted in Exhibit 6.14.
Segment

Importance

Strength

Overall score
(Importance
Strength)

Competitive

+4

+4

Marketing

+3

+3

Economic

-2

-10

Legal/Govt

-3

-6

Technological

-4

-12

Exhibit 6.14: Assigning Weights to Environmental Segments

l

The importance to the company under analysis of each segment of the

environment that has been analysed is ranked on an ordinal scale ranging from 0
to 5. Thus a segment considered to be of crucial importance is ranked 5; one of
average importance scored 3, and one of no importance is scored 0.

Once the importance of each segment has been determined, the strength of
each factor in the period under analysis is then ranked on an ordinal scale from
5 to +5. The lower limit indicates that this factor is likely to have as strong a
negative influence on the company as possible. A score of +5 indicates that the
segment under consideration is likely to have as strong a positive influence on the
company as possible. Finally, a score of 0 indicates that the factor does not have
any influence whatsoever.

When the importance and strength of each factor have been determined, these
two numbers arc multiplied and the ordinal score for each relevant segment in
the environment is obtained. However, these scores cannot be summed up. Rather,
they show individually the likely relative impact of each segment on the company.
This can also be graphically depicted on the environment assessment diagram
Exhibit 6.15 for a more live demonstration.

Exhibit 6.15: Environment Assessment Diagram

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Environmental Analysis; Taking the Stakeholders into Account

The competitive analysis touched upon earlier in the study may be somewhat broadened
as stakeholder analysis. Listing the generic stakeholders, the broad classification would
be:
l Shareholders

l Suppliers

l Lenders

l Employees

l Competitors

l Society

l Government

l Customers

l Industry

Stakeholders can be classified into one of two orientation categories, depending on

whether they are in favour of the organisation meeting its own objectives or not. The
organizations strategy has also to be oriented accordingly. Where management has
the option of an alternative course of action, stakeholders do not possess the power to
dictate their terms. This means that stakeholders, in an attempt to achieve their aims,
often attempt to limit the choices open to management. For instance, unions attempt to
dictate managements alternatives by using picket lines and threats of violence to prevent
non-union replacements from entering the firms premises.

Stakeholders and Environmental Scanning

Changes in stakeholder needs should be tracked in the same way as environmental
scanning because they could alter the perspective of the stakeholder vis-a-vis the
corporation. Failure on the part of the corporation to keep up with the changing needs
of stakeholders may give rise to stakeholder dissatisfaction. In turn, a dissatisfied stakeholder may attempt to change the manner in which the company relates to him/her by,
for instance, altering its business terms. In order to anticipate impending changes, it is
necessary to analyse the basis on which stakeholders derive their power and hence the
issues causing the changes. Thus, for example, emerging technology resulting in the
availability of substitute raw materials would reduce the power base of suppliers of
existing materials.
The influence of shareholders is obvious. They actively or passively influence the
determination of goals, objectives and missions of the organisation. They also influence
the choice and tenure of the CEO and senior management, and consequently the
strategies chosen by management must significantly satisfy the objectives of
shareholders.

Predicting Environmental Change

As we move towards greater interdependences and growing concern for the individual,
we may find it more difficult to control our economic destiny. Poor economic
performance will also lead to capital shortages and to further restrictions on investments
in technology. Interac-tions between the social, political, technical, and eco-nomic
environments of todays organisation will place greater pressure on strategists to monitor
and forecast the organisations future business environment. It is important to understand
that most national legislationthat action which may affect us most directlyrequires
six to ten years to move from a social concern to legislative action. Ten years are likely
to elapse before confrontation causes enough momentum and pressure to force
government to take action. International issues involve even longer time spans for

Environment - Concept, Components and Appraisal

action to be taken unless a national crisis occurs.

Graham Molitar in his 1977 article suggests that public policy issues can be anticipated
and forecasted through proper tracking of issues. By understanding the development
process for public policy, organisations should be able to foresee public policy changes
and accommodate them with minimal disruption. The Molitar Model includes:
a.

Tracking events or time that begin to attract leading authorities or advocates. The
frequency of such events as thalidomide poisoning eventually reaches a critical
level, and it is then that the take-off point for potitical action is reached and
becomes virtually irreversible, Exhibit 6.16 shows the sequence of events.

b.

Leading authorities and advocates eventually recog-nize an events significance

and begin interpreting the implications of the event. Victims, though less capable
of articulating the problem, are able to generate emotional support for the cause.
Politicians are rela-tively late to join in comparison with other groups and institutions
Exhibit 6.17.

c.

Written documentation and publication of events serve to fully explore the issues
involved and eventually reach the mass media for public exposure and con-sumption.
Early Warnings about emerging problems can thus bo obtained from u careful
review of the literature. Once scientific, technical, or professional publications
confirm the details, public exposure and take-off are not far behind, as is shown in
Exhibit 6.18.

d.

Institutional support for action generally forces public policy officials to consider
the issue seriously. Such support generally begins at the local level, and moves to
broader state and national coverage. Exhibit 6.19 shows that once these
organisations, people, and resources support the action the point of no return
has been reached and the implementation of change is not far behind.

e.

Along with growth in institutional support over larger geographic areas comes
increased concern by local, state, national, and international governments. Local
legislation will be diffused to other domestic or international governments. Countries
such as Sweden have become early adopters of social legislation. The US has
been rather slow to implement some two thousand consumer issues, some of
which were implemented twenty years earlier in Sweden, as suggested in Exhibit
6.20.

Exhibit6.16:LeadingEventsBuildtoTake-off

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Exhibit 6.17: Leading Authorities and Advocates for Change

Exhibit 6.21 summarises the effect that public issues can have on political action. By
overlaying the five dimensions of political actions, the point at which a, critical mass of
support comes together can be identified as the take off point for action. From that
point on, momentum can be expected to increase and create intense
Diffuse Institutional
response
ideas

Publish
ideas

Mass
Mass
media consumption

Historical
review

Number
of
Articles
[Take off]

Exhibit 6.18: Leading Literature Support for Change

Informal

Formal Organisation

Individuals & groups

Local State Regional National International

Number
of
supporters

Exhibit 6.19: Organisational Support for Change

Early
innovators

Early
adopters

Florida/New York

Mass/III/
California

Sweeden / Denmark

Germany

Early
majority

Late
majority

Leggards

Number of
laws

Domestic
International

Deep south
Rural areas
US/Canda

Bulk of
countries

Less dev. Countries

Exhibit 6.20: Political Leaders in Implanting Change

Environment - Concept, Components and Appraisal

109
Literature
Events
Advocates/experts

Pressure for
legislation

Institutional

Institutional
involvement

Govermment
Response

Public Concern
Public understanding
Opinion leaders
Calm

Issue Emerges

Interaction of
concerned

Media coverage
and local
legislation

Institutional
advertising

Proposed
legislation

Lobbying and
passage of law

Exhibit6.2l:ForecastingPoliticalActions

pressure for action. From this point onwards, there is little possibility of changing the
direction of action. By tracking the social pressure for political action, organisations
have ample time to either (a) attempt to impact the direction of change, (b) plan
alternatives, or (c) reallocate resources to deal with expected change.
The importance of tracking social issues should be apparent. Without recognising the
currents of change, managers are quite likely to be caught off guard, surprised at the
implementation of new policies, and unable to adapt effectively. This approach, therefore,
simply outlines a methodology for environmental scanning in a complex, rapidly changing
environment.

Tracking Environment Issues

The growing interdependence and speed of economic changes will require greater
adjustments and more efficient means of adjusting to change. Some of the changes
that will impact economic decisions include:
i.

changing trade and investment patterns,

ii.

changing the economic importance of various regions and nations,

iii.

changing the impact of productivity and technology on employment and locations,

and

iv.

changing government intervention into pricing and production decisions.

Such changes will impose hardships on affected individuals, firms,
industries, com-numities, and nations that cannot adjust effectively to the new
conditions.

Given the variety of changes taking place in the general business environment, it will be
difficult for management to set priorities and decide what strategies are required to
cope with complex environmental problems. It will be necessary, therefore, for managers
to develop a methodology for tracking environmental issues and determining priorities
for action. One method for managers to prioritise those issues they will track more
specially is shown in Exhibit 6.22. For a given organisation, environmental issues can
be placed in one of the nine cells of the matrix. Those issues that will have high impact
on the business and have a probability of political action are critical to management
and need formal attention and specific strategies developed to cope with imminent
change. Issues in the moderate impact cells need high priority attention in order to

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possibly influence political outcomes. Low priority issues still need watching in case
they develop in combination with other issues which may change their importance.
We are, however interested in environmental analysis from the point of view of strategic
implementation and consequent strategy formulation. For that we have to look at,
i.

environmental evolution,

ii.

the process of environmental analysis and, finally,

iii.

integrate environmental analysis into strategic analysis.

We briefly elaborate these three stages.

i.

Environmental Evolution

Three constructs are useful to describe changes in the environmental segments:

l

Types of changes,

forces driving change, and

types of future evolution.

Changes in the macro-environmental segments may be systematic or

discontinuous. Gradual, continuous, and potentially predictable changes are termed
systematic. While random, unpredictable, sudden changes are termed discontinuous.
For analytical purposes, it is important to go beyond description of change to assess the
Ibices driving it.

Exhibit6.22:IdentifyingHighPriorityEnvironmentalIssues.

Sometimes, forces driving change in one segment, lie in changes in other segments.
Thus shifts in social segments (for example migration of the population) may affect the
political segment (for example distribution of regional power). Usually, however, each
segment evolves quasi-autonomously. That is why the existence of inducements and
autonomous evolution resulting in changes in segments should be analysed independently
as well as in conjunction with identifying the underlying forces.
Often, driving forces interact with one another. Such interaction may be
reinforcing, conflicting or disjointed. When the forces support one another in terms
of their effect on changes in a third segment, the effect may be reinforcing. When they
dampen one another, they are conflicting, and when they do not affect one another,
they are disjointed. In addition, the effects of changes in one segment may have primary
or secondary consequences for other segments. When the effects are direct, they are

Environment - Concept, Components and Appraisal

111

termed primary consequences. In some cases, changes may not have a direct impact
on other segments; however, consequences may ensue as a result of direct effect on a
third segment. These are termed secondary consequences. Finally, in charting the
evolution of change in the future, it is important to characterise whether such evolution
is completely predictable from the present trends or whether it is contingent upon actions
of the firm or other entities in the environment. This refers to closed and open versions
of the future, respectively. This distinction is often critical: in contrast to the closed
version, the open version should alert organisations to potential action domains that
needs further analysis, or where firm-level responses may enable it to shape the future
evolution of the change.

Process of Environmental Analysis

Conceptually, the process of environmental analysis can be divided into four analytical
stages:
l

scanning the environment to detect warning signals,

monitoring specific environmental trends,

forecasting the direction of future environmental changes, and

assessing current and future environmental changes for their organisational

implications.
l

A conceptual overview of these four activities and their interactions is shown in

Exhibit 6.23.

Scanning
In its prospective mode scanning focuses on identifying precursors or indicators of
potential environmental changes and issues. Environmental scanning is thus aimed at
alerting the organisation to potentially significant external impingement before it has
fully formed or crystallised. Successful environmental scanning draws attention to
possible changes and events well before occurrence, allowing time for suitable strategic
actions.

Monitoring
Conception of
environment
Medium term

'Outside in'

Scanning

Forecasting
Surprises

'Inside out'

Long term

Organizational
context

Exhibit6.23:EnvironmentalAnalysisActivities

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In the prospective mode, scanning is part of an analytical activity and becomes useful
when environmental changes take time to unfold, as is indeed often the case. For
example, social value shifts do not occur in just days or even months, technological
changes often take years, as may the developement of large-scale social movements.
Scanning in the current and retrospective sense identifies surprises or strategic issues
requiring immediate action on the part of an organisation. In this case, the out-puts may
feed directly into assessment and influence the current and imminent strategic decisions
of an organisation. Scanning frequently detects environmental change that is already in
an advanced stage; a change that has already evolved to a point where it is actual or
imminent rather than potential at some, as yet unspecified date. Thus a scan of
demographic data might pick up population movement or changes in household formation.
Scanning frequently unearths actual or imminent environmental change because it
explicitly focuses an organisations antennae on areas that may previously have been
neglected, or it challenges the organisation to rethink areas to which it had earlier paid
attention.
It is important to recognise that scanning is the most ill-structured and ambiguous
environmental analysis activity. The data sources are many and varied. Moreover, a
common feature of scanning is that early signals often show up in unexpected places.
Thus the purview of search must be broad.
Partly in consequence, the noise level of scanning is likely to be high. In consequence,
the fundamental chal-lenge for the analyst in scanning is to make sense of vague,
ambiguous, and unconnected data, and to infuse meaning into it.
Three critical decisions during scanning need high-lighting.
First, the scope and breadth of data and data sources inevitably influence the analysts
perceptions. Second, the data do not speak by themselves: the analyst has to breathe
life into them. Third, critical acts of judgement are required of the analyst in his or her
choice of events and/ or precursors to consider for monitoring, forecasting, and/ or
assessment. All these entail skill and expertise on the part of the analyst.

Monitoring
Monitoring entails tracking the evolution of environmental trends, the sequences of
events, or streams of activity. It frequently involves following the signals or indicators
unearthed during environmental scanning, and in this sense is a follow up process.
The purpose of monitoring is to assemble sufficient data to discern whether certain
patterns are emerging. Two comments are relevant in this regard.
First, they are likely to be a complex of discrete trends. For example, an emergent lifestyle pattern may include changes in entertainment, education, consumption, work habits
and domicilelocation preferences. In the initial stages of monitoring, the patterns are
likely to be hazy because they are the outputs of scanning: the analyst has only a vague
notion of what to look for. Second, highly formalised and quantified databases usually
found in archives of organisations represent a characterisation bused on a previously
identified pattern and may be of only limited utility in tracking emergent patterns.
In monitoring, the data search is focused and much more systematic than in scanning.
By focused, it is meant that the analyst is guided by a priori hunches. Systematic refers

Environment - Concept, Components and Appraisal

to the notion that the analyst has the general sense of the pattern/ (s) he is looking for
and collects data regarding the evolution of the pattern.
As monitoring progresses, the data frequently move from the imprecise and unbounded
to reasonably specific and focused. Thus, for example, in tracking the emergence of
social issues, the first indicators are feelings of discontent or loosely distributed concerns
expressed by a few individuals. These sentiments gather support and gradually what is
often referred to as a social movement begins to evolve. Environmentalist movements
at national levels are a case in point.
A number of data interpretations or judgements are unavoidable in monitoring. These
judgements are often complex, further confounded when individuals within the same
organization make different and often conflicting judgements.
The outputs of monitoring are threefold:
i.

a specific description of environmental patterns to be forecast,

ii.

identification of trends for further monitoring, and

iii.

identification of patterns requiring further scanning.

Forecasting
Scanning and monitoring provide a picture of what has already taken place and what is
currently happening. However, strategic decision-making requires a further orientation;
it needs a picture of what is likely to happen. Thus forecasting is an essential element
in environment analysis.
Forecasting is concerned with the development of plausible projections of directions,
scope, speed, and intensity of environmental change, to lay out the evolutionary path of
anticipatory change. There are two conceptually separable, though integrally related,
activity elements in forecasting. The first concerns projections based on trends that are
evident and can be expected, with some margin of error, to continue unabated in a
given period of time into, the future. Demographic trends would be suitable examples.
The second relates to alternative futures that may come about not only on the basis of
current trends but judgements regarding events that may take place or that may be
made to happen by an organisation or entities outside it. Forecasting, based on projections,
involves a closed perspective whereas forecasting based on alternate futures corresponds
to a version of open perspective.
There are a number of key analytic tasks and outputs involved in forecasting. The first
concerns untangling of forces that drive the evolution of a trend. This is a necessary
prerequisite to charting out the trends evolutionary path. The second concerns
understanding the nature of the evolutionary path: that is whether the change is a
fad or of some duration, or cyclical or systematic in character. The third concerns more
or less clearly delin-eating the evolutionary path or paths leading to projections and
alternative futures. The critical outputs of forecasting are specific understanding of
future implications of current and anticipated environmental changes and decisionrelevant assumptions, projections, and information.
Since the focus, scope, and goals of forecasting are more specific than in scanning and
monitoring, forecasting is usually a much more deductive and rigorous activity. A wide

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variety of forecasting techniques are available, ranging from simple extrapolation to

methodologies involving multiple participants making forecasts in a number of iterations
such as Delphi or scenario development.

Assessment
Scanning, monitoring, and forecasting are not ends in themselves, unless their outputs
are assessed for their implications for the organisations current and potential strategies.
Scanning, monitoring, and forecasting merely provide nice-to-know information.
Assessment involves identifying and evaluating how and why current and projected
environmental changes will affect strategic management of an organisation. In
assessment, the frame of reference moves from understanding the environment the
focus of scanning, monitoring and forecastingto identifying what that understanding
of environment means for the organisation. Assessment thus endeavours to answer
the question: what are the implications of our analysis of the environment for our
organisation?
From the perspective of linking environmental analysis and strategic management, the
critical question is: what is likely to be the positive or negative impact of environmental
patterns on the firms strategies? This question compels linking of environmental patterns
and the organisations context. Those patterns judged to have already had an impact on
the organisations strategy or to possess the potential to do so are deemed to be issues
for the organisation.
Criteria against which specific patterns should be judged include the following:
l

How might the pattern have an impact on the organisation?

What is the probability that the pattern will develop and become clearly
recognisable?
l

How great will be the eventual impact on the organisation?

When is the issue likely to peaknear term, medium teem, long term?

The intention of the first criterion is to determine whether the pattern has or will have
an impact on the organisation. The other criteria follow in the analysis in logical sequence.
Issues can then be conveniently arrayed on a probability-impact matrix, as shown in
Exhibit 6. 24, with a separate matrix being prepared for each of the three planning
periods: short, medium, and long term. The merits of the matrix display are that it
provides a comprehensive, at-a-glance array of issues, orders them in a way that
facilitates discussion and planning, and places them in time-frames appropriate to the
allocation of resources and management attention.

Two Approaches to Environmental Analysis

It is possible to conceptualise and execute two distinct though related approaches to
environmental analysisan outside-in or macro approach and an inside-out or
micro approach. The outside-in approach adopts a broad view of the environment,
focused on longer term trends, develops alternative views or scenarios of the future
environment, and then derives implications for the industry surrounding the firm, and.
of course for the firm itself. The inside-out view adopts a narrow view of the

Environment - Concept, Components and Appraisal

environment, develops a picture of what is currently happening through ongoing

monitoring as a basis for forecasting the immediate future environment and then derives
implications for the industry and the firms within it. A characterisation of these two
approaches is clear from the discussion above. A little introspection will, show the
integral relationship between the two approaches.

Exhibit6.24:ProbabilityImpactMatrix

Temporal Cycles
Exhibit 6.23 portrays the multiple time-bound cycles in environmental analysis. Surprises
or discrete issues encountered during early scanning activities may require immediate
action on the part of the organisation, implying the short time cycle. Similarly, monitoring
activities may engender short and medium-term actions. What is important to emphasise
is that they have to be considered in entirety and their implications considered separately.
Differences among Environmental Segments
Exhibit 6.24 makes it clear that there are different environmental segments and activities
within them assume different characteristics. They have their primary impact on different
parts of the organisation requiring different strategic responses. These are now briefly
touched upon.
Integrating Environmental Analysis into Strategic-Analysis
The integration is primarily inside-out in character and three points need to be borne in
mind regarding it. First, environmental analysis, although often intrinsically interesting,
is useful only to the extent that it results in strategy-related insights and action. Second,
integration does not just happen, it is made to happen. The specific linkages to various
kinds of actions need to be thought through and not left to evolve in an unplanned
manner. Third, integration needs to take place in short-, medium- and long-run horizons.
The implications of environmental issues need to be assessed for strategic planning at
three levels:
i.

corporate strategy where product-market decisions are usually the focus;

ii.

business strategy, where the focus is on how to compete within an industry and,

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116

iii.

functional-level strategy where operational decisions are the concern.

Corporate Strategy
At the level of corporate strategy, environmental impact on three key issues needs to
be considered:
i.

patterns of diversification,

ii.

portfolio planning, and

iii.

risk-return trade-offs.

Patterns of Diversification
There are at least three modes by which the environment influences patterns of
diversification. First, firms differ in terms of the synergies they seek to exploit across
their businesses. These synergies could be upset or enhanced by macro-environmental
change. Second, different pat-terns of diversification manifest different vulnerabilities.
Macro-environmental changes may amplify these vulner-abilities. Third, macroenvironmental trends may open up or close out existing patterns of diversification.
Deregulation of industries is one such change.
Portfolio Planning
Macro-environmental trends have important implications for the bases of portfolio
planning. Typical portfolio approaches focus on a business competitive advantages
within an existing industry, constrained by the financial resources of the firm. Ansoff
notes that macro-environmental trends may necessitate portfolio planning based on
such bases as resources or technology.
Environmental analyses are also particularly important for planning the potential future
portfolio. Product portfolio approaches arc useful for portfolio planning within the existing
set of businesses, or at best pointing out the direction of search for additional businesses.
The specific businesses to be targeted need to be considered in the light of
macroenvironmental forecasts and predictions.

Risk-Return Trade-offs
Political, economic, technological, and demographic shifts have an impact on the returns
and risks of existing and planned portfolios. It is important to consider environmental
impacts on each of these characteristics of corporate-level strategy.
Business Strategy
Industry structure changes in the macro-environment may affect
l

the boundaries of the industry,

the forces shaping industry structure, such as suppliers, customers, rivalry and
product substitution, entry barriers,

strategic groups,

the key success factors, and

Environment - Concept, Components and Appraisal

l

the general expectations within the industry.

It is elaborated briefly below:

i.

Perhaps of greatest importance is the impact of environmental change on the

survival of an industry or specific industry segments. For instance, technology
advances underlying frozen foods and personal com-puters have irrevocably
altered our conceptions of the food and computer industries.

ii.

Environmental trends directly influence the forces shaping industry structure:

suppliers, consumers, new entrants and substitutes. Environmental changes can
affect:
a.

the number, types, and location of suppliers, their products and supply costs,
and the competitive dynamics of suppliers;

b.

the size, characteristics and behaviour of a firms customers;

c.

the rate and trend of product substitution, and

d.

change in entry barriers.

iii.

Environmental changes have a differential impact on various strategic groups

within the industry. Changes, to the extent that they affect customer preferences,
supplier capabilities, substitute products, and so forth could potentially enlarge or
decimate product market arenas in which different strategic groups operate. For
example, deregulation of the airline industry in the USA in the late 1970s had an
adverse impact on longer-haul firms in relation to those with shorter hauls.

iv.

Environmental change can potentially affect the key success factors in almost
any industry or industry segment. It can affect relative cost positions, reputation,
and resource requirements for major product market segments.

v.

Environmental changes potentially affect general expectations about an

industry. For instance, since the deregulation of the telecommunication industry
in the USA, many telephone companies are discovering that their assessment of
competitors responses, shaped by their past behaviour, are no longer valid.

Impact on Business unit Strategy

Such impact becomes manifest in (a) business definition, (b) assumption, and (c) general
strategic thrust. These assessments are likely to be medium- or short-term oriented.
Business definitions are in terms of what customers are served, the customer needs
that are satisfied, and the technology employed for the purpose.
The assumptions are in terms of the anticipated actions of suppliers, customers,
competitors, or new entrants to the industry.
Examples of a general strategic thrust would be building, maintaining, etc. of market
share.

Functional Level Strategy

Macro-environmental changes have implications for the functional level strategies of
an organization, over and beyond business strategies.

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Strategic Management

118

Consider the following examples:

a.

Changes in demographics, life-styles, values with birth of a totally new set of

customers.

b.

Changes in general expectations regarding working hours resulting in the birth of

flextime, alternative work schedules, increase in the proportion of working women
resulting in creation of childcare centers.

Mega Trends
Finally, certain broad trends in the external environment having consequent impacts on
a firms working need to be noted and accounted for. Ten such trends or influences are
a movement from:
i.

an industrial to information society;

ii.

forced technology to a matching of each new technology with a compensatory

human response (hi-techhigh touch);

iii.

a national to world economy;

iv.

short-term to long-term considerations, with emphasis on strategic planning;

v.

a period of centralisation to decentralisation of power;

vi.

reliance on institutional help to greater self-reliance;

vii.

representative democracy to more participative democracy, in politics as well as

at the workplace;

viii.

our dependence on traditional hierarchical structures to an informal network of

contracts;

ix.

the north and west to the south and east geographically and economically;

x.

a society with a limited number of personal choices to a multiple-option society.

The final product of environmental analysis is its contribution to strategic thinking and
its input for the development of a strategic plan for the business. Merely interesting
studies will not suffice. More relevant and specific contributions include the development
of planning as-sumptions, the framing of issues for strategy development, and the pursuit
of studies of strategic environmental issues. A possible matrix approach to issue
identification is presented in Exhibit 6.25.
When a set of coherent and comprehensive environmental assumptions is
developed, it becomes the first and most obvious input in the strategic plan. This is one
leg of the three-legged stool on which strategy development rests (the other two being
resource analysis and strategy concept), so it is important that it should be sturdy. The
environment analysis chapter of the strategic plan should, at the very minimum:
l

identify the key forces operating in the business environment (past, present, and
future);

make explicit the assumptions about their future course;

analyse the strategic significance of these factorsthe threats, opportunities,

and issues that they pose;

Environment - Concept, Components and Appraisal

119

highlight the major contingencies (and their trigger points) for which contingency
plans should be developed.

Issues should be framed in an orderly and disciplined way, so that constructive strategies
can be developed to respond to these. A suggested framework for this framing is the
following eight-step sequence which organizes the necessary information to focus on
the necessary strategic responses:
Definition of the issue: a succinet (one-sentence) statement of the issue, from
the point of view of business strategy.
l

issue.

Strategic significance: identification of the threats and opportunities posed by the

Driving forces: the key environmental lorces that converge (now and in the future)
to make this an issue.
l

Prospects: the potential outcomes and developments of the issue under alternative
scenarios.
l

Micro-environment

Trends, Events, Developments in the Macro-environment

Social

Economic

Political

Technological

Markets
Customers
Employees
Competitors
Technology
Materials & supplies
Production
Finances
Shareholders
Public
government
relations

&

Exhibit6.25:AMatrixApproachtoIssueIdentification
l

Planning challenges: a set of need to.... statements listing out the overall actions
required of the business to maximise the opportunities and minimise the threats.

Strategic responses: a set of specific strategy alternatives to be considered as

ways of implementing the need to.... statements.

Finally, environmental analysis should be the source of those in-depth studies of critical
external trends and factorsinflation energy prospects, global competition, new
technologywhich may require detailed and specific analysis because of their special
significance for business strategy.

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120

Chapter 7
Organisational Dynamics and Structuring
Organisational Appraisal
The appraisal of the external environment of a firm helps it to think of what it might
choose to do. The appraisal of the internal environment, on the other hand, enables a
firm to decide about what it can do.
This chapter deals with the internal environment of an organisation. We shall build a
foundation for understanding the internal environment through an explana-tion of its
dynamics. This has been done by refering to the resource-based view of strategy.
The resources, behaviour, strengths and weaknesses, synergy, and compe-tencies
constitute the internal environment, and we shall deal briefly with each of these aspects
initially. All these together determine the organisational capability that leads to strategic
advantage.
Organisational capability could be understood in terms of the strengths and weak-nesses
existing in the different functional areas of an organisation. We shall consider six such
areas: finance, marketing, operations, personnel, information management and general
management. For each of these, we shall mention the important factors
influencing them and clarify the nature of the various functional capability factors through
illustrations.
We deal with the factors that affect appraisal, the approaches adopted for appraisal,
and the sources of information used to perform organisational appraisal. With regard to
the methods and techniques used for organisational appraisal, we consider a range of
factors grouped under the three headings of internal analysis, comparative analysis, and
comprehensive analysis. The application of these methods results in highlighting the
strengths and weaknesses that exist in different functional areas.
We attempt to understand the internal environment of an organisation in terms of the
organisational resources and behaviour, strengths and weaknesses, synergistic effects,
and competencies.
An organisation uses different types of resources and exhibits a certain type of behaviour.
The interplay of these different resources along with the prevalent behav-iour produces
synergy or dysergy within an organisation, which leads to the develop-ment of strengths
or weaknesses over a period of time. Some of these strengths make an organisation
specially competent in a particular area of its activity causing it to develop competencies.
Organisational capability rests on an organisations capacity and ability to use its
competencies to excel in a particular field.

Organisational Dynamics and Structuring Organisational Appraisal

Strategic advantage

Organisational capability

Competencies

Synergistic effects

Strengths and weaknesses

Organisational resources + Oraganisational behaviour

Exhibit 7.1: Framework for the Development of Strategic

Advantage by an Organisation.

The resources, behaviour, strengths and weaknesses, synergistic effects and

competencies of an organisation determine the nature of its internal environment. Exhibit
7.1 depicts a diagram showing the framework that we have adopted for the explanation
of the process of development of strategic advantage by an organisation. It is (expected
that the readers of this book are aware of these terms in general. However, explain
each of these terms here to place them in the specific context of strategic management.

Organisational Resources
The dynamics of the internal environment of an organisation can be best understood in
the context of the resource-based view of strategy, According & Barney (1991), who
is credited with developing this view of strategy as a theory, a firm is a bundle of
resourcestangible and intangiblethat include all assets, capabilities, organisational
processes, information, knowledge, and so on. These resources could be classified as
physical, human, and organisational resources. The physical resources are the technology,
plant and equipment, geographic location, access to raw materials, among others. The
human resources are training, experience, judgement, intelligence, relationships, and so
on, present in an organisation. The organisational resources are the formal systems and
structures as well as informal relations among groups. Elsewhere, Barney has said that
the resources of an organisation can ultimately lead to a strategic advantage for it if
they possess four characteristics, that is, if these resources are valuable, rare, costly to
imitate, and non-substitutable.
Like individuals, very few organisations are born with a silver spoon in the mouth; most
organisations have to acquire resources the hard way. The cost and availability of
resources are the most important factors on which the sucess of an organisation depends.
If an organisation is favourably placed with respect to the cost and availability of a
particular type of resource, it possesses an enduring strength which may be used as a
strategic weapon by it against its competitors. Conversely, the high cost and scarce
availability of a resource are handicaps which cause a persistent strategic weakness in
an organisation.

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122

But the mere possession of resources does not make an organisation capable. Much
depends on their usage within an organisation.

Organisational Behaviour
Organisational behaviour is the manifestation of the various forces and influences
operating in the internal environment of an organisation that create the ability for, or
place constraints in the usage of resources. Organisational behaviour is unique in the
sense that it leads to the development of a special identity and character of an
organisation. Some of the important forces and influences that affect organisational
behaviour are: the quality of leadership, management philosophy, shared values and
culture, quality of work environment and organisational climate, organisational politics,
use of power, among others.
The perceptive reader would note that what we are proposing here is a marriage of the
.hard side of an organisationits resource configurationwith the soft side of behaviour.
The resources and behaviour are thus the yin and yang of organisations. What they
collectively produce are the strengths and weaknesses.

Strengths and Weaknesses

Organisational resources and behaviour do not exist in isolation. They combine in a
complex fashion to create strengths and weaknesses within the internal environment of
an organisation. A strength is an inherent capability which an organisation can use to
gain strategic advantage. A weakness, on the other hand, is an inherent limitation or
constraint which creates a strategic disadvantage for an organisation. Financial strength,
for example, is a result of the availability of sources of finance, low cost of capital,
efficient use of funds, and so on. Another example is of a weakness in the operations
area which results due to inappropriate plant location and layout, obsolete plants and
machinery, uneconomical operations, and so on. In the following sections, we will take
up a detailed discussion of the strengths and weaknesses in different functional areas
within an organisation.
Strengths and weaknesses do not exist in isolation but combine within a functional area,
and also across different functional areas, to create synergistic effects.

Synergistic Effects
It is the inherent nature of organisations that strengths and weaknesses, like resources
and behaviour, do not exist individually but combine in a variety of ways. For instance,
two strong points in a particular functional area add up to something more than double
the strength. Likewise, two weaknesses acting in tandem result in more than double
the damage. In effect, what we have is a situation where attributes do not add
mathematically but combine to produce an enhanced or a reduced impact. Such a
phenomenon is known as the synergistic effect. Synergy is the idea that the whole is
greater or lesser than the sum of its parts. It is also expressed as the two-plus-two-isequal-to-five-or-three effect.
Within an organisation, synergistic effects occur in a number of ways. For example,
within a functional area, say of marketing, the synergistic effect may occur when the

Organisational Dynamics and Structuring Organisational Appraisal

product, pricing, distribution, and promotion aspects support each other, resulting in a
high level of marketing synergy. At a higher level, the marketing and production areas
may support each other leading to operating synergy. On the other hand, marketing
inefficiency reduces production efficiency, the overall impact being negative, in which
case dysergy (or negative synergy) occurs. In this manner, synergistic effects are an
important determinant of the quality and type of the internal environment existing within
an organisation and may lead to the development of competencies.

Competencies
On the basis of its resources and behaviour, an organisation develops certain strengths
and weaknesses which when combined lead to synergistic effects. Such effects manifest
themselves in terms of organisational competencies. Competencies are special qualities
possessed by an organisation that make them withstand pressures of competition in the
marketplace. In other words, the net results of the strategic advantages and
disadvantages that exist for an organisation determine its ability to compete with its
rivals. Other terms frequently used as being synonymous to competencies are unique
resources, core capabilities, invisible assets, embedded knowledge, and so on.
When an organisation develops its competencies over a period of time and hones them
into a fine art of competing with its rivals it tends to use these competencies exceedingly
well. The capability to use the competencies exceedingly well turns them into core
competencies.
When a specific ability is possessed by a particular organisation exclusively, or in a
relatively large measure, it is called a distinctive competence. Many organisations achieve
strategic success by building distinctive competencies around the CSFs. CSFs are those
factors which are crucial for organisational success. A few examples of distinctive
competencies are given below.
l

Superior product quality in a particular attribute, say, a two-wheeler, which

is more fuel-efficient than its competitor products.

Creation of a market niche by supplying highly-specialised products to a

particular market segment.

Differential advantages, based on the superior R&D skills of an organisation

not possessed by its competitors.

An organisations access to a low-cost financial source like equity

shareholders, not available to its competitors.

A distinctive competence is any advantage a company has over its competitors because
it can do something which they cannot or it can do something better than they can. It
is not necessary, of course, for all organisations to possess a distinctive competence.
Neither do all the organisations, which possess certain distinctive competencies, use
them for strategic purposes. Nevertheless, the concept of distinctive competence is
useful for the purpose of strategy formulation. The importance of distinctive competence
in strategy formulation rests with the unique capability it gives an organisation in
capitalising upon a particular opportunity; the competitive edge it may give a firm in the
market place; and the potential for building a distinctive competence and making it the
cornerstone of strategy.

123

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Strategic Management

To some of you, we may seem to be making a hairline distinction here between the
three terms: competencies, core competencies, and distinctive competencies. The
difference, as you must have noted, lies in the degree of uniqueness associated with the
net synergistic effects occurring within an organisation. You could think of them as
being synonymous so long as you are able to make a distinction among them when
necessary. Among the three, it is the term core competence that has gained greater
currency and popularity. The term core competence has been popularised by Prahalad
and Hamel as an idea around which strategies could be formulated by an organisation.
Several Indian companies have taken to the idea of core competence in right earnest.
Examples abound of companies shedding businesses that are not in line with their
perceived core competencies and focussing upon those that are. Kumar Mangalam
Birla, of the A V Birla group, sees the groups core competencies in a wide array of
skills related to process industries, project management, operations, raw material
sourcing, distribution and logistics, setting up dealer networks commodity branding, and
raising finance at a competitive cost. S Kumar sees its core competence in textile
processing, Nandas of Escorts in light engineering, and Reli-ance Industries in skillful
project management and execution.
The idea of Core Competence seems to be a brilliant way to focus upon the latent
strength of an organisation. Yet there are pitfalls of which an organisation has to be
aware. Core competencies can be developed but also lost. They cannot be taken for
granted. The ability of a core competence to provide strategic advantage can diminish
over time as they do not exist perpetually. A dilemma associated with all core
competencies is that they have the potential of turning into core rigidities The external
environment is responsible for this sad turn of events. New competitors may figure out
a way to serve customers or new technologies may emerge causing the existing company
to lose its strategic advantage. Over-reliance on core competencies to the extent of
becoming prisoners of ones own excellence may result in strategic myopia.
That core competence acts as a double-edged sword is demonstrated by the concept
of strategic commitment enunciated by Pankaj Ghemawat. This means an organisations
commitment to a particular way of doing business, that is, developing a particular set of
resources and capabilities. Ghemawats contention is that once a company has made a
strategic commitment it finds it difficult to respond to new competition if doing so
requires a break with its commitment.
Core or distinctive competencies serve a useful purpose if they are used to develop
sustained strategic advantages through building up organisational capability

Organisational Capability
Organisational capability is the inherent capacity or potential of an organisation to use
its strengths and overcome its weaknesses in order to exploit opportunities and face
threats in its external environment. It is also viewed as a skill for coordinating resources
and putting them to productive use. Without capability, resources, even though valuable
and unique, may be worthless. Since organisational capability is the capacity or potential
of an organisation, it means that it is a measurable attribute. And since it can be measured,
it follows that organisational capability can be compared. Yet it is very difficult to
measure organisational capability as it is, in the ultimate analysis, a subjective attribute.
As an attribute, it is the sum total of resources and behaviour, strengths and weaknesses,

Organisational Dynamics and Structuring Organisational Appraisal

synergistic effects occurring in and the competencies of any organisation.

Several thinkers in the field of strategy favour the line that capabilities are the outcome
of an organisations knowledge base, that is, the skills and knowledge of its employees.
There is a growing body of opinion that considers organisations as reservoirs of knowledge
in which case they are all learning organisations. In fact, the concept of organisational
learning has spawned a whole school of strategy thought.
It is to be noted that while the concept of a learning organisation is applicable to strategic
management in a wider sense at several places, here we are referring to it in the
specific context of capability that is seen as an outcome of organisatinal learning.
Strategists are primarily interested in organisational capability because of two reasons.
Firstly, they wish to know what capacity exists within the organisation to exploit
opportunities or face threats in its environment. Secondly, they are interested in knowing
what potentials should be developed within the organisation so that opportunities could
be exploited and threats should be faced in future.
Organisational capability is measured and compared through the process of organisational appraisal which is the subject matter of this chapter. A feasible approach
to appraising the organisation is to start with the factors and influences operating within
the organisation. These could be called the organisational capability factors.

Strategic Advantage
Strategic advantages are the outcome of organisational capabilities. They are the result
of organisational activities leading to rewards in terms of financial parameters, such as,
profit or shareholder value, and/or non-financial parameters, such as, market share or
reputation. In contrast, strategic disadvantages are penalties in the form of financial
loss or damage to market share. Clearly, such advantages or disadvantages are the
outcome of the presence or absence of organisational capabilities. Strategic advantages
are measurable in absolute terms using the parameters in which they are expressed.
So, profitability could be used to measure strategic advantagethe higher the profitability
the better the strategic advantage. They are comparable in terms of the historical
performance of an organisation or its current performance with respect to its
competitors.
Competitive advantage is a special case of strategic advantage where there are one or
more identified rivals against whom rewards or penalties could be measured. So,
outperforming rivals in profitability or market standing could be a competitive advantage
for an organisation. Competitive advantage is relative rather than absolute, and it is to
be measured and compared with respect to other rivals in an industry.
With rising competitiveness in the industry, mainly owing to liberalisation and the reform
process, the usage of the term competitive advantage has become more pronounced.
The term competitive advantage is more popular since it has been used as an important
concept by the proponents of the positioning school of thought in strategy.

Structuring Organisational Appraisal

Just as environmental appraisal is structured through an environmental threat and
opportunity profile organisational appraisal can also be structured through various

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Strategic Management

126

techniques. For instance, Glueck proposes a preparation of the strategic advantage

profile (SAP) where the results of organisational appraisal are presented in a summarised
form. Another approach, suggested by Rowe et al., is to prepare a company capability
profile as a means for assessing a companys strengths arid weakness in dealing with
the opportunities and threats in the external environment. Here we propose a similar
approach of making an organisational capability profile which can be summarised in
the form of a SAP. The SAP is then matched with the environmental threats and
opportunity profile, which may have been prepared while structuring the environmental
appraisal, in order to look for strategic alternatives and exercise a strategic choice.

Preparing the Organisational Capability Profile

The organisational capability profile (OCP) is drawn in the form of a chart as depicted
in Exhibit 7.2 which shows a summarised OCP. 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 the
values of -5 to +5. A detailed OCP may run into several pages where each of the sub
factors constituting the different functional capability factors can be assessed. In this
manner, a summarised OCP, as shown Exhibit 7.2, may be prepared.
Capability factors
Weakness
-5

Normal
0

Strength
+5

1. Financial capability factors

(a) Sources of funds
(b) Usage of funds
(c) Management of funds
2. Marketing capability factors
(a) Product-related
(b) Price-related
(c) Promotion-related
(d) Integrative and systematic
3. Operations capability factors
(a) Production system
(b) Operations and control system
(c) R&D system
4. Personnel capability factors
(a) Personnel system
(b) Organisational and employee characteristics
(c) Industrial relations
5. Information management capability factors
(a) Acquisition and retention of information
(b) Processing and synthesis of information
(c) Retrieval and usage of information
(d) Transmission and dissemination of information
(e) Integrative, systemic, and supportive
6. General management capability factors
(a) General management system
(b) External relations
(c) Organisational climate

Exhibit 7.2: Summarised Form of Organisational Capability Profile

After the completion of the chart, the strategists are in a position to assess the relative
strengths and weaknesses of an organisation in each of the six functional areas and

Organisational Dynamics and Structuring Organisational Appraisal

identify the gaps that need to be filled or the opportunities that could be used. The
preparation of an OCP provides a convenient method to determine the relative priorities
of an organisation vis-a-vis its competitors, its vulnerability to outside influences, the
factors that support or pose a threat to its existence, and its over all capability to compete
in a given industry.

Preparing the Strategic Advantages Profile

Based on the detailed information presented in the OCP, it is possible to prepare a
concise chart of a strategic advantage profile. An SAP can also be prepared directly
when students analyse cases during classroom learning without making a detailed OCP.
A SAP provides a picture of the more critical areas, which can have a relationship to
the strategic posture of the firm in the future.
In Exhibit 7.3, we provide an illustration of an SAP drawn for a hypothetical company
in the bicycle industry. The main business of the company is in the sports cycle
manufacturing for domestic and exports markets. This example relates to a hypothetical
company but the illustration is realistic.
Capability factor

Competitive strengths or weaknesses

1. Finance

High cost of capital; reserves and surplus position

unsatisfactory

2. Marketing

Fierce competition in industry; companys position

secure at present

3. Operations

Plant and machinery in excellent condition; captive

sources for parts and components available

4. Personnel

Quality of managers and workers comparable with that

in competitor companies

5. Information

Computerised management information system in the

process of development; traditional functions such as
payroll and accounting computerized

6. General management

High quality and experienced top management;

generally adopts a proactive stance with regard to
decision-making

Exhibit 7.3: Strategic Advantage Profile (SAP) for a Bicycle Company

Note: Up arrow indicates strength, down arrow indicates weakness, while horizontal arrow indicates
a neutral position.

The SAP presented in Exhibit 7.3 clearly shows the strengths and weaknesses in different
functional areas. For instance, the company has to use its strengths in the area of
operations and in general management areas. A gap is also indicated in the finance
area which has to be overcome if the company has to survive and prosper in a competitive
industry like bicycle manufacturing. In marketing, though the competitive position is
secure at present, it cannot be said that it will remain so in the future. The SAP indicates
that strategists can initiate action to cover the gaps and use the companys strengths in
the light of environmental threats and opportunities.
The probable line of action to be adopted for covering the gaps and using the companys
strengths in the light of environmental threats and opportunities is found through
considering strategic alternatives at the corporate-level and the business level and
exercising a strategic choice.

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128

Organisational Appraisal
l
The analysis of internal resources has five objectives.
l

To outline the role that a companys resources and capabilities play in the
formulation of its strategy and to pinpoint their crucial importance in establishing
competitive advantage.

To show how the firm can identify, classify, and explore the characteristics of its
base of resources and capabilities.

To develop a set of criteria to analyse the potential of the firms resources and
capabilities to yield long-term profits/returns.

To identify weaknesses in resources in the context of the external environment

and strategy formulated, and to show how strategy is concerned not only with
deploying the firms resources to yield returns over the long term but also with
augmenting and strengthening the firms resources and capabilities.

To develop a framework for resource analysis that integrates the above themes
into a practical guide for the formulation of strategies that build competitive
advantage.

The Role of Resource Analysis in Strategy Formulation

It is interesting that during the past two decades, most of the developments in strategy
analysis have concentrated upon the industry environment of the firm and its competitive
position in relation to rivals. The analysis of industry and competition has been based
primarily on concepts and theories of microeconomics and has been closely associated
with the works of Michael Porter, the Boston Consulting Group, McKinsey & Co., and
the Strategic Planning Institutes linking of market share, quality, and other positional
variables to profitability through the PIMS project.
In contrast, strategic analysis of the firms internal environment is surprisingly
underdeveloped. Analysis of the internal environment has, for the most part, been
concerned with issues of strategy implementation (partly associated with objective
four listed in the introduction above). Internal characteristics of firms such as
organisational structure, systems of control and incentives, and top management skill
and style, have been viewed primarily as consequences of the strategy adopted and to
some extent as constraints upon the range of strategies that can be adopted. Interestingly
again, this comparative neglect of internal resources by business strategists contrasts
sharply with the approach of military strategy which has always given primacy to
resource analysis and followed one underlying principle of war: concentration on strength
against weakness;
The case for making the resources and capabilities of the firm the foundation of its
long-term strategy rests upon two premises:
l

The first concerns the role of resources in defining the identity of the firm.
Conventionally, the definition of the business has been in terms of the market
served by the firm: who are our customers? and which of their needs are we
seeking to serve? But when the external environment is in a state of flux, the
market itself is liable to change and the firm itself, defined in terms of its resources

Organisational Dynamics and Structuring Organisational Appraisal

and capabilities, may be a much more stable basis on which to define its
identity.
Thus the basis of a resource-based approach to strategy is a definition of the firm,
not in terms of the needs it is seeking to satisfy, but in terms of its capabilities. The
primary issue for strategy is determining what the firm can do. The second is
deciding in which industries and through which types of competitive strategy the
firm can best exploit those capabilities.
Evidently this approach is in contrast to that, proposed by Theodore Levitt1 in his
classic article Marketing Myopia in which he has proposed broadening the concept
of the market served as the key to successful adjustment. Experience shows, however,
that companies basing their strategies on the development and application of specific
capabilities have usually shown a remarkable capacity to adjust to external changes.
Companies like Honda or 3M are cases in point.
l

The second reason for focusing upon resources as the foundation for an enterprises
strategy is that profits are ultimately a return to the resources owned and controlled
by the firm. Profits are usually derived from two sources: the attractiveness of
the industry in which the firm is located, and the achievement of competitive
advantage over other firms wiihin the industry. If, however, we probe deeper into
both competitive advantage and industry attractiveness, we can trace the origins
of both sources of profit back to the firms resources.

Let us, therefore, consider competitive advantage. The ability to establish a cost
advantage over competition rests upon the possession of scale-efficient plant, superior
process technology, ownership of low cost sources of raw materials, or locational
advantages in relation to low wage labour or proximity to markets. Differentiation
advantage is similarly based upon ownership or control over certain resources, brand
names, patents, or a wide distribution and service network. llence the superior profits
that a firm gains as a result of competitive advantage over rivals are really returns
generated by these resources. Once these resources depreciate, become obsolete, or
are replicated by other firms, returns also disappear.
Superior profits associated with attractive industry environments are typically thought
of as accruing to the industry rather than to individual firms. Profitability above the
competitive level is typically the result of market power. But what is the source of
market power? Contemporary industrial economists regard barriers to entry as its
fundamental prerequisite. Barriers to entry have one major basis in economies of scale,
in capital equipment, patents, experience, brand loyalty, or some other resource that
incumbent firms possess but which entrants can acquire only slowly or at disproportionate
expense. In Exhibit 7.4 graphically detail, resources as the basis of superior profitability.
Thus the case for resource analysis rests not only upon the observation that contemporary
developments in strategy have overemphasised external analysis to the near exclusion
of internal analysis, but also that resources are the fount from which a firms profits
flow. We provide below the outlines of a resource-based approach to strategy
formulations. This comprises three key elements:

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130

Exhibit7.4:ResourcesastheBasisofSuperiorProfitability
l

Selecting a strategy that exploits a companys principal resources and

competencies. Successful examples are: IBM and Marks & Spencer (who
concentrated on their core competencies of manufacture and software
development in the first case and marketing in the second). Failures (the strategies
going beyond close linkage with their resource base) are Chrysier which overextended itself and ITT whose concentration on conglomerate development
depended solely on the capability of its CEO (who created no successor) during
the seventies.

Ensuring that the firms resources are fully employed and its profit potential is
exploited to the utmost. Walt Disneys remarkable turnaround between 1984 and
1987 (after four successive years of declining net income and other declining
financial indicators) involved very little change in basic strategies.

Building the companys resource base: Resource analysis is not just about
deploying assets, it is crucially concerned with filling current resource gaps and
building the companys future resource base. The continuing dominance of
IBM&Proctor and Gamble in their respective fields of business owes much to
these companies commitment to nurturing talent, augmenting technologies, and
adjusting capabilities to fit emerging market trends. This is also evident in the
deliberate build up of core competencies in successful companies like NEC,
Canon, Honda, 3M.

Taking Stock of the Firms Resources and Capabilities

Resource analysis takes place at two levels of integration. The basic units of analysis
are the individual resources of the firm: items of capital equipment, skills of individual
employees, patents, brand names, etc., but to examine how the firm can create
competitive advantage, we must look at how groups of resources work together to
create capabilities. Exhibit 7.5 shows the relationship between resources, capabilities,
and competitive advantage.

Organisational Dynamics and Structuring Organisational Appraisal

131

Tangible Resources
Tangible resources are the easiest to identify and to evaluate: financial resources and
physical assets are identified in the firms financial statement. At the same time, company
financial statements are renowned for their propensity to obscure strategically relevant
information and to mis-value assets.
A strategic assessment of tangible resources is directed towards answering two key
questions:
l

What opportunities exist for economy in the use of finance, inventions, and fixed
assets?

What are the possibilities of employing existing assets more profitably?

The first may involve using fewer tangible resources to support the same level of
business, or using existing resources to support a larger volume of business. The success
of companies that have pursued growth through acquisitions within mature industries
has been due to managements ability to vigorously prune the cash and assets needed
to support the turnover of acquired businesses.
The returns to a companys tangible resources can be increased in many ways.
Resources can be utilised more productively, they can be transferred to more profitable
uses within the company, and finally, can be sold to other companies. The opportunities
for breaking up asset-rich, low-profit companies encouraged many company acquisitions
during the eighties.
Competitive advantage

Capabilities
(Organisational routines)

Resources
Tangible
Physical Financial
assets
assets

Human
Skills

Intangible
Technology

Reputation

Exhibit 7.5: The Two Levels of Resource Analysis: Resources and Capabilities

Intangible Resources
Over time, working capital, fixed capital, and other tangible assets are becoming less
important to the firm, both in value and as a basis for competitive advantage. At the
same time, inversely, the value of intangible resources is increasing. However, intangible
resources remain invisible to accountants and auditors. Hence, accounting evaluation
of net worth increasingly bears little or no relationship to the true value of a firms
resources. To illustrate, the most valuable assets owned by consumer goods firms are
likely to be their brand names; yet these either receive no valuation in a companys
balance sheet or are valued only when they are acquired. It is perhaps not surprising
that when Nestle acquired the British chocolate manufacturer Rowntree in 1988, the
bid price exceeded the book value of Rowntrees assets by over 500 per cent. This is

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Strategic Management

but an indication of the value of Rowntrees brand names such as Kitkat and Quality
Street.
To identify and appraise intangible resources, it is useful to distinguish between human
and non-human intangibles. While people are clearly tangible, the resources that they
offer to the firm are their skills, knowledge, reasoning, and decision-making capabilities
which are clearK intangibles. In economists terminology, the productive capability of
human beings is refened to as human capital. Identifying and appraising the slock of
human capital within a firm is complex and difficult. Individual skills and capabilities
can be assessed from their job performance, from their experience, and from their
qualifications. These are, however, only an indication of an individuals potential, and in
a firm people work together in a way that makes it difficult to directly observe the
contribution of the individual to overall corporate performance. Yet, if a company is to
develop, to adjust to changing environmental conditions, and to exploit new opportunities,
it must have knowledge not only of how its employees perform in their present and past
jobs, but of their repertoire of skills and abilities. Dave Ulrich of the University of
Michigan points to the role of a human resource information system as a valuable tool
for sustaining a companys competitive advantage.
While intangible resources receive scant recognition from accountants, their value is
being increasingly recognised by the stock market, as evident from the significantly
high ratio of stock prices to book values of successful companies. Indeed, any evaluation
of this ratio in the stock market will show that two types of companies dominate such
a list: those with valuable technical resources (notably pharmaceutical companies, an
industry where patents are particularly effective), and companies with very strong
brand names (especially in nondurable goods).
Hofer has identified five types of resources: financial, physical, human, technological,
and organisational. Exhibit 7.6 illustrates and slightly modifies his classification of resource
types, and points to their principal characteristics and key indicators.

Resource Audit
The strategic capability of the organisation is built largely around those activities that
add value to a product. Other activities are also useful and necessary but they are not
the ones through which the organisation sustains its distinctive production/service values.
In this context, the relative roles of primary and support activities of the organization
need to be appreciated. It will be obvious that resources contributing to the value system
of the organization will be dispersed amongst various primary activities. The role of
support activities would be to marshal them and use them effectively and efficiently.
The checklist in Exhibit 7.7 would provide broad coverage of the resources to be audited.
It will be noticed that within an activity different types of resources are identified:
Physical resources: Physical resource assessment should go way beyond mere listing.
It should indicate the nature of these resources, their age, condition, capability, location,
and, where relevant, specialty.
Human resources: An analysis of human resources must examine a number of relevant
questions. An assessment of the number and types of different skills within the
organization is undoubtedly important. Equally important, however, are questions such
as adaptability (to different external circumstances). There is also the question of

Organisational Dynamics and Structuring Organisational Appraisal

133

retrenchment, retraining, and relocation under conditions of economic distress and

flexibility, as also of location, often for skilled operatives in high wage countries in
multinational companies.
Thus consider the case of Japanese multinationals. In the context of the continuously
rising value of the yen, it would soon become unavoidable for many such Japanese
companies to move their manufacturing facilities to lower wage countries to maintain
competitiveness. Some of their skilled operators would also have to go along, particularly
in the initial stages. The ready acceptance by employees of such relocation is an important
consideration in human relations.

Principal Characteristics

Resource (s)
Financial

Physical

Human

Technological

Reputation

The firms borrowing capacity and its internal

fund generation determine its investment
capacity and its cyclical resilience.

Key Indicators
Debt-equity ratio.
Ratio of net cash to capital expenditure. Credit
rating

The size, location, technical sophistication, and Educational, technical, and professional
flexibility of plant and equipment, location and qualifications of employees Pay rates in
alternative uses for land and buildings; relation to industry average. Record of labour
resources of raw materials constrain the firms disputes. Rate of employee turnover.
set of production possibilities and determine its
potential forE
cost
quality
advantage.
xhiand
bit
7.6:
Classifying and Appraising the Firms Resources
The (raining and expertise of employees Resale values of fixed
determine the skills available to the firm. The Primary
capital
equipment. Scale
Activities
adaptability of employees determines the uses of fixed assets.
Support
Inbound
logistics
Operations
Outbound
strategic flexibility of the firm. The commitment
activities
logistics
and loyally of employees determine the firms
Procurement
Transport
Warehousing
Machines Consumables Transport
ability to maintain
competitive
advantage.
Capital

Warehousing

assets, vintage of
of plants Alternative
Marketing and sales

Service

Product/Service
Patents/Licenses

Franchise Credit
facilities

Stock of technology, including proprietary Number and significance of

patents. Revenue
Brand names Market
technology (patents, copyrights, trade secrets), from patent licenses. research
R&D staff as a
and expertise in its application of know-how. percentage of total employment.
Technology
Design researchProcess
development
Shipments
Networks of contacts
Resources Know-how.
for innovation,
facilities,
development
Technology. Transfer (in)
Information systems
technical and scientific employees.
Human
resource
development

Recruitment Supplier
Team spirit Job
Vetting Shareholders
satisfaction
Creditors relation Image
Subcontractors
Reputation in city
with customers, through the Brand

Subcontractors

Agents Sales force

Distributors.
Merchandisers
Price
premium user
goodwill

recognition.
ownership of brands, established relationship competing brands. Percentage of repeat
Management
Purchasing
systems
Order processing
with customers,
the association
of Production
the firmsPlanning
purchases.Delivery
Objective measures
of product
systems
Vehicle Scheduling
Quality control Cash
scheduling
Debtor control
products with quality, reliability etc. The performance, level and consistency of
Material handling
management Stock
reputation of the company with the suppliers
of company
control Facilities
layout performance
components, finance, labour resources, and
oilier inputs.

Fault diagnosis
Maintenance staff

Customer service
systems

Exhibit7.7:AChecklistforResourceAuditing

Financial resources: This would include the sources and uses of money within the
value chain, such as obtaining capital, managing cash, the control of debtors and creditors,
and management of relationships with suppliers of money (shareholders, bankers,
concepts of convertibility, creditworthiness, etc.).

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Strategic Management

In resource analysis, the importance of intangibles should never be overlooked. In

some businesses, particularly services such as solicitors, retail shops, and the catering
industry, goodwill could represent the major asset of the company and may stem from
brand names, good contacts, company image, and many other sources. Even in others,
where it may not constitute a major asset, it is still significant. Thus where a company
adopts the strategy of differentiation to gain competitive advantage, a considerable
portion of the value associated with differentiation is perceived difference, such
perception being largely subjective and somewhat intangible in nature. Similarly, where
quality is a major plank of the strategy adopted, one of its major components is perceived
quality, once again based on intangibles.

Resource Utilisation
It is evident that an organisations resources have practically no value unless organised
into systems, to ensure that they are utilised to produce goods, products, or services
that are valued by the final consumer/user. There are various ways of measuring resource
utilisation; some are mentioned below.
Capacity Fill
It is often a prime measure of efficiency of organisations whose major costs are
overheads. This is particularly important for those industries where the additional or
marginal cost of additional occupancy of unoccupied capacity is extremely small.
Examples would be transport industries and hotels. It may also be noted that
capacity fill often becomes the major criterion for cost competitiveness of such
organisations.
Working Capital Utilisation
Working capital utilisation is a good indicator of the way in which the financial resources of
the company are used strategically. It is readily realized that operating at a low level of
working capital involves considerable risk; on the other hand, having too much capital is
patently inefficient. It is therefore important to achieve a balance between these extremes.
An assessment of how well this balance has been achieved will be a measure of the
efficiency of working capital utilisation. This balance is sometimes changed by factoring
certain aspects such as debtors in return for cash. This, in effect, means redefining the
boundaries of the organisations value chain to maintain efficiency.
Production Systems
An essential precondition of the ability to assess the efficiency of the production system
of a company is to have a thorough and clear understanding of the various aspects of a
companys production system, such as job design, layout, and materials flow. It may be
found, for example, that excessive costs have been incurred through unnecessary
handling and transportation of materials during manufacture, or that the company can
take advantage of new operational methods. In other words, job simplification, job
elimination, methods improvement are distinct possibilities. Instances of the application
of these industrial engineering concepts and consequent improvement in efficiency
with corresponding enhancement of cost-competitiveness are too numerous to require
any specific illustration.

Organisational Dynamics and Structuring Organisational Appraisal

Efectiveness
A complete understanding of a companys use of resources also requires an analysis of
the effectiveness with which these resources have been used. The effectiveness of an
organisation can be critically influenced by the ability to get all parts of the value chain
working in harmonyincluding those key activities that are within the value chains of
suppliers, channels, or customers. This is a key task of management and is largely
concerned with development and sustenance of common attitudes and values amongst
all those in the value chain so that people see the purpose of the products/services in
similar ways and have a common view on which activities are critical to success. It is
really the differences in attitudes and perceptions on these issues which are often the
root causes of misunderstandings. Some of them are now discussed.

Use of People
There are many situations where people may be used ineffectively. For instance, an
engineering design team may be designing for the lowest cost whilst the organisation is
competing on uniqueness of product. Taking the example to a degree of refinement,
there may be misunderstanding on the concept of uniqueness itself. Thus the design
staff may be designing for durability, whereas the organisations perception of the market
choice is reliability.
Use of Capital
An analysis of a companys long-term funding (capital structure) may provide useful
insights. A company may be foregoing the opportunity of additional long-term funds
(loans or share issues) and, in consequence, facing difficulty in carrying out its necessary
investment programmes. Sometimes the opposite is true, when a company may be too
highly geared for the realities of the markets in which it is operating. Many companies
have found that when general levels of profitability are low and interest rates high, the
conventional wisdom of gearing to improve profitability is impossible to achieve.
Organisations that have grown by a series of mergers and takeovers are particularly
astute at putting together packages of finance (money and share options) that are
regarded as attractive by shareholders of the organisations being taken over.
Use of Marketing and Distribution Resources
The effectiveness with which a sales force is being used might be judged by assessing
the volume of sales that each salesperson produces. However, expenditure on other
items like advertising or distribution may be more difficult to assess. Companies often
use rules of thumb like percentage of turnover spent on advertising, or might sometimes
attempt more rigorous and expensive analysis such as advertising effectiveness research.
A crucial judgement when analysing the value chain is whether the marketing effort
could have been delivered more effectively in a different wayfor example would
appointing sales agents have been better than having an in-house sales force?
Use of Research Knowledge
An assessment of how effectively research knowledge is used is equally problematic.
Tangible measures are available, such as the number of product and process changes
developed internally or the competitive advantage that has been gained from technical

135

Strategic Management

136

improvements resulting in better quality or lower cost. Companies are increasingly

trying to cope with their worries about underutilisation of the R&D resource by providing
better links with the commercial function and improving monitoring and control
arrangements. There is often a tendency towards technology transfers rather than
in-house R&D development. This has some obvious advantages, such as time saved
and non-commitment of internal resources. The disadvantages should not be lost sight
of either; the obvious one being that technology transfer is a static process and which
it may include the minutest details, it would still be missing the essential element. Further,
the R&D department would be ill-equipped to carry out any improvement, since it
would not know the process and would not be in a position to comment on it.

Use of Production Systems

Poor utilisation of resources may result from the choice of an inappropriate system of
production. This, in effect, means that the production system should be designed as one
appropriate for the volume it is expected to handle, and the correctness of that estimated
value is of critical concern.
A production system needs to be geared to the basis on which the organisation
competes. Where cost competitiveness is crucial, highly integrated production
systems may be essential. However, a more flexible system will be required if the
quality of service (e.g. delivery time) is the principal competitive weapon.

Exploitation of Intangible Assets

In case of intangible assets such as image, brand name, and market information, their
exploitation is a measure of effectiveness.
Exhibit 7.8 gives the measure of efficiency and effectiveness for different resources.

Control of Resources
It is not enough to look at resource audit and utilisation; it is necessary to ensure that
resources are controlled properly according to the strategic intent. Otherwise, there
would be situations where good quality resources have been deployed the right way
and used efficiently, but still performance is poor as resources are poorly controlled.
Exhibit 7.9 lists some aspects of resource control.
The ways in which linkages within the value chain and with the value chains of supplies,
channels, or customers are controlled can also be important. Often financial control
systems of an organization tend to discourage such linkages because they do not fit the
compartmentalised concept of resource control. Some important aspects of resource
control are discussed below.

Control of Key Personnel

Often key creative and professional people, while essential for the efficient
functioning of organisations, are a bad fit in the organisational structure and culture
because their personal concepts of their jobs are somewhat different from those of
the company. In such situations, it may be preferable to have these people outside
the organisation (as advisors or consultants) whilst continuing to be key resources
within the value chain.

Organisational Dynamics and Structuring Organisational Appraisal

Resource

Efficiency

Effectiveness

Physical resources

Capacity fill

Match between production/marketing resources and nature of

work.

Buildings

Capacity fill, unit costs.

Plant & machinery

Job design, layout, materials flow

Financial

Profitability, use of working capital

Capital structure

Materials

Yield

Suitability of materials.

Products

Damage (e.g. in transit)

Match between product and market needs

Marketing and
distribution

Sales per area

Choice of channels.

Sales per outlet

Choice of advertising method.

Human resources

Labour productivity

Allocation of jobs to people.

Relative size of departments

Duplication of efforts.
Exploitation of image, brand name market information, research
knowledge, etc. Consumer complaints level.

Intangibles

Exhibit 7.8: Some Measures of Resource Utilisation

Resource Area
Physical resources
Buildings
Plant & machinery
Financial
Materials
Products
Human resources

Intangibles

Typical Control to Investigate

Security, maintenance.
Production control; maintenance system
Costing systems, Budgets, Investment appraisal
Supplier Control (quantity, quality, and cost) Control of stock
Stock control, quality control, losses (e.g. thefts)
Control of key personnel
Leadership
Working agreements
Control of outlets (e.g. distribution)
Control of image (e.g. public relations)
Industrial relations celiac
Control of vital information

Exhibit 7.9: Aspects of Resource Control

Costing
This is an area of particular importance and significance for small, fast-growing
organisations and yet this is where they often fail. The management knows what
resources are needed to establish the company in the market and how to deploy these
to good effect. It is, however, unaware of how its method of operation will influence
costs and revenue, and hence the profitability of the company. It is important to emphasize
that costing is a means of resource control, not obstructing resource utilisation. Often,
in organisations, there is confusion between cost effectiveness and cost minimisation.
Whereas cost effectiveness is invariably desirable, cost minimisation may lead to blind
cost pruning, frequently resulting in a downward spiral, leading to a product/service
that is valued less by consumers/buyers/users, creating a fall in demand, a worsening
cost structure, and so on. This is where a proper appreciation of costing as a resource
control measure comes of age.
Quality of Materials
In most industries, the quality of the finished product is highly dependent on the quality
of certain key materials and components that are bought in. Establishing strict quality
control measures on these materials (and components) is there fore essential to ensure
the quality of the final product. In the context of the value chain there are different
ways in which this might be achieved; for instance by establishing rigid quality
specifications; and subsequent inspection of incoming materials, by inspecting the
suppliersquality control systems or by inspection of incoming materials. The relative

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Strategic Management

cost and effectiveness of the alternatives is an important consideration. In many cases,

it becomes necessary to roll-back the control of quality to the supplier. One can
conceive the supplier-company value chain linkage through joint or combined research
for developing suitable quality material and the consequent quality control procedures.

Marketing Outlets
Many manufacturers fail to exert sufficient control over the way in which their outlets
present and sell their products. Retail outlets often sell 5000 to 10,000 different products,
including many that directly compete with one another. Monitoring and controlling the
marketing efforts of outlets is important, but often difficult. Again, different approaches
are possible ranging from the ownership of outlets (i.e. bringing distribution into the
organisations own value chain), the Bata shoe store chain in India is an example;
appointment of approved dealers; the provision of customer training; and the use of
merchandising teams.
Stock and Production Control
There may be occasions when a companys poor performance can be due to poor
control of stock or the system of production. Poor stock control means tied up capital
and accrued interest on this with consequent interest burden. A good stock control
system, by controlling inventory levels, can substantially reduce working capital
requirements resulting in substantial benefits.
Even if the raw materials or finished goods inventory control procedure may be
satisfactory, poor production control systems may result in poor delivery record and
high buffer stock between the various steps of production. This is equally harmful
and demands installation of proper production control system.

Control of Leakage
Most companies face this problem. Retailers are particularly vulnerable. Organisations
face a real dilemma since the introduction of more stringent controls and checks could
be counterproductive in reducing the value of the service in the eyes of consumers.
Control of Intangibles
The companys ability to control its image through its public relations activities is one
example. The industrial relations record can indicate how well team spirit or
organisational culture are controlled. In some cases, the control of vital information
that may be of commercial benefit to competitors would be particularly important to
monitor.
Financial Analysis
Financial analysis is useful at all stages of resource analysis, and not only as part of
value analysis. For example, the forecasting of the cash requirements of different
activities is an important measure of how well an organizations resources are balanced
(portfolio analysis). Equally, financial measures such as profitability, gearing, or liquidity
are used to compare the performance of a company with its competitors as a means of
analysing that companys resource position.

Organisational Dynamics and Structuring Organisational Appraisal

139

The key value activities change over time. Key financial measures to monitor
will change accordingly. Thus, as a new product launch goes through introduction,
growth, and decline, the key measures shift through sales volume, profit/unit, and
cash flow. Exhibit 7.10 provides some financial ratios in relation to a companys
strategic resources and capabilities.
Financial Ratio

Used to Assess

Return on capital

Overall measure of
Performance

Cost structure
Sales profitability
Gross margin
Sales expenses
Overheads
Labour
Materials

Dividends
Interest
Asset turnover
Fixed assets
Stock

Debtors

Creditors
Liquidity
Capital structure
(gearing)

Sales performance.
Direct costs.
1. Indirect cost
2. Value of expenditure
1. Labour productivity
2. Relation to value
1. Purchasing policies
2. Quality of materials
3. Relation to value
Power of shareholders
Capital structure
Capital intensity
1. Cash tied up
2. Delivery performance
3. Risk of write-offs
1. Cash tied up
2. Use of credit
3. Risk of bad debts
Choice of suppliers
Short-term risk
1. Long-term risk
2. Using available resources

Exhibit 7.10: Financial Ratio and Resource Analysis

Comparative Analysis
To adequately comprehend the strategic capability of an organisation, it is useful to
carry out a comparative analysis, with (i) itself in the past to see how the resource basis
has shifted over time, (ii) other competitive organisations, and (tit) industry norms.
Historical Analysis
Historical analysis looks at the deployment of the resources of a business in comparison
with previous years in order to identify any significant changes in the overall levels of
resources.Typically, measures like sales-capital ratio, sales-employees ratio are used,
as well as identification of any significant variations in the proportions of resources
devoted to different activities. Such analysis appears straightforward, but in a tabulated
form often discloses drifts normally not visible. Thus a company, basically in
manufacturing and retailing its own products, finding the retail market relatively
favourable may gradually emphasise on retailing to such a degree as to drift away from
the traditional base of manufacturing. It is only when resource utilisation is compared
across the years that the drift becomes apparent. It is now for the company to reassess

Strategic Management

140

where its major thrust of business should lie in the future. In other words, the company
has gradually redefined the boundaries of its value chain over time.

Comparison with Industry Norms

The historical analysis discussed above is upgraded considerably by additional comparison
with the industry as a whole. It helps to put the companys resources and performance
in perspective and provides the company with a broad idea about its competitive position
in relation to the industry.
The dangers of such comparison with the industry as a whole are, however, several.
i.

It may overlook the fact that the industry as a whole is doing badly and is losing
out competitively to other industries and other countries with belter resources
and with the capability to satisfy customer needs better.

ii.

The industry norms, averaging out companies with different strategies, often
average out different things and in the process hide more than they reveal. Thus,
for instance, comparing labour costs; for companies with cost competitiveness
as the critical strategy, labour cost should necessarily be low, whereas for
companies with differentiation as the critical strategy, labour cost, is no longer
critical and can easily be somewhat higher, so long as it is more than compensated
by the added value gained by differentiation, duly reflected in higher price.

What is more important, therefore, is to compare similar value activities between

organisations if the strategic context is not forgotten. This would, however, mean keeping
detailed profiles of competitors resources, and may prove very difficult and expensive.
We now discuss certain concepts related to the analysis of internal resources.

The Experience Curve

The concept of the experience curve was propounded by the Boston Consulting Group,
as the end result of studies of company performances showing a direct and consistent
relationship between aggregate growth in volume of production and declining cost of
production. This relationship resembles that shown in Exhibit 7.11.

Exhibit 7.11: The Experience Curve

In analysing the reasons contributing to the shape of the curve, the major reasons
identified by the BCG are the following:
The learning function: Anyone doing a job learns to do it better over time and given
increased experience. Labour cost should, in fact, decline by about 10 to 15 per cent
every time cumulative experience doubles.

Organisational Dynamics and Structuring Organisational Appraisal

Specialisation: As scale of production increases, so it becomes possible to split jobs

into more and more specialist ones. Doing half as much but twice as often equals the
same amount of effort but twice the experience with the task.
Scale: The capital costs required to finance additional capacity diminish as that capacity
grows.
Cost is thus, in general, a function of experience. It is also a function of volume and
particularly of market share, specially when the product is competing in a definable
relevant market segment.
There are, however, some significant reservations expressed about the value of
experience curve ideas. Some of the conventional reasons are the following:
i.

Some of the key variables such as market growth and share are not always easy
to be precise about.

ii.

There is risk that managers interpret the conclusions too simplistically, e.g. by
failing to recognise the opportunities afforded by market segmentation and/or
product differentiation.

A more profound and up-to-date objection would, however, be that the ever increasing
trend of technological innovation would tend to establish rapid obsolescence of
yesterdays technology. In consequence, a company, whose products may claim reduced
labour cost achieved through the impact of the experience curve, may find itself in
competition with another company just commencing production. Whereas, as the normal
consequences of the experience curve, the old company should-enjoy a cost advantage,
this would be totally negated through faster and better machines.

Assessing the Balance of Resources

While value chain analysis is undoubtedly important, there is an additional resource
issue that is of equal and complementary importance: namely the extent to which the
organisations resources are balanced overall. Three important aspects of such analysis
are:
l

The extent to which the various activities and resources of an organisation

complement one another. Portfolio analysis is particularly useful here.

The degree of balance of the people within the organisation both in terms of
individual skills and personality types.

Whether the degree of flexibility in the organisations resources is appropriate

for the level of uncertainty in the environment and the degree of risk the company
is prepared to take.

Portfolio Analysis
Let us consider the market share, market growth rate BCG matrix together with the
concept of the experience curve discussed above. The experience curve underlines
the importance of the relationship between market dominance and profitability. It will
be evident that there is not much sense in market dominance unless the market is in a
growth stage. Evidently, all competitors would be trying to gain in market shares,

141

Strategic Management

142

competition would be fierce, the investment and resource deployment requirement higher,
and profitability would be low. Cash generation would perhaps even be negative. And
yet, in expectation of a future high profit (and perhaps cash generation), resource
deployment and investment would have to be made. Evidently, that cash would have to
be generated by some other product/market segment. This is how the BCG matrix
suggests the model for product portfolio or the growth share matrix as a tool by which
to consider product strategy.
Portfolio analysis is particularly useful inasmuch as it raises some important questions
about resources. For example:
l

Whether the mix of products, services or businesses is balanced across the

organisation. The idea of a portfolio of interests emphasises the importance of
having areas of activity that provide security of funds (cash cows) and others
that provide for the future of the business, (star and question mark).

Drucker has long emphasised the importance of reviewing activities to ensure

that the appropriate amount of management and physical and financial resources
are being allocated to the activities, that management is not providing excessive
resources to dogs while starving question marks and thus reducing the chances
of turning them into stars.

Whether the balance of a companys products/markets matches the resources

available to the company. If a company is particularly good at development and
design this may not match the analysis of product/market position which indicates
a predominance of mature products in a static market. This may suggest the
need to move funds from the development area into a greater emphasis on
promotion or market development.

Skills Analysis
Organisations must possess the necessary balance of skills needed to run a
business successfully. Companies need the capability to manage their production and
marketing systems as well as control the financial and personnel aspects properly.
There is another aspect to the balance of human resources, namely the extent to which
nbteams contain an adequate balance of personality types to operate effectively. Some
of the common personality types needed within an effective team are identified in
Exhibit 7.12.

Flexibility Analysis
Another important aspect of organisational resources is the extent to which they are
flexible and adaptable. It is also important to assess how far this flexibility is balanced
with the uncertainty faced by the organisation. Since this uncertainty is wholly concerned
with the external environment and disturbances in it, flexibility has no meaning without
an understanding of the uncertainty involved or apprehended. Thus flexibility
involves resources and their utilisation in the uncertainty of the external environment
in the content of the managment strategy specifically adopted with an end object in
view.

Organisational Dynamics and Structuring Organisational Appraisal

Chairman/team leader
Stable, dominant, extrovert. Concentrates on objectives. Does
not originate ideas. Focuses people on what they do best.

143

Company worker
Stable, controlled. Practical organizer.
Can be inflexible but likely to adapt to established systems. Not
an innovator.

Plant Manager

Monitor evaluator

Dominant, high IQ, introvert. A scattered of seeds; originates,

ideas.

High IQ, stable, introvert. Measured analyses not innovation.

Misses out on details. Trustful but easily offended.

Unambitious and lacking enthusiasm. Solid, dependable.

Resource investigator

Team worker

Stable, dominant, extrovert, Sociable. Contacts with outside

world. Salesperson/diplomat/liaison officer. Not an original
thinker.

Stable, extrovert, low dominance.

Concerned with individuals needs
Builds on others ideas. Cools things down.

Shaper

Finisher

Anxious, dominant, extrovert, emotional, impulsive. Quick to

challenge and respond to challenge. Unites ideas, objectives
and possibilities. Competitive, Intolerant of woolliness and
vagueness.

Anxious, introvert. Worries over what will go wrong. Permanent

sense of urgency. Preoccupied with order. Concerned with
following through.

Exhibit7.12:PersonalityTypesforanEffectiveTeam

Flexibility analysis is usually not a sophisticated exer-cise. Often it is a simple listing of

the major areas of uncertainty and the extent to which the companys resources are
geared to cope with each of these. An example is shown in Exhibit 7.13.

Value Chain Analysis

The concept of value relates to how the ultimate consumer/user views the organisations
products/source in relation to competitive offerings. An analysis of resources must be
undertaken in a way that establishes how such competitive differences are achieved
throughout the value chain. Many of the value activities will be performed outside the
organisation (e.g. by suppliers, channels or customers). It is essential that the
organisations own value chain is seen in this wider context.
The linkages and relationships between various activities are often the basis on
which competitive advantage is achieved. This also applies to linkages of the value
chain of an organisation with those of its suppliers, channels, and customers.
Major areas of Uncertainty

Flexibility Required

Actual (at present)

Comments

Demand for Product A.

Capacity (possibility +20 per

cent) or stocks

Overtime could cover.

Low

Probably OK

New supplies.
New materials.

None known at present.

Production cannot cope.

Problem area Seek

information on new suppliers.

Long-term loan may not be

renewed next year.

Other sources of Capital.

Good image on stock market.

New share issue looks

favourable.

Major customer may go

bankrupt.

Replacement customer

No leads

Sound out potential customer.

Chief design engineer may

retire.

Design capability for products

presently in development.

Deputy not suitable Chief may

agree to part time
consultancy arrangements.

Tracing and/ or recruitment

needs urgent attention.

Price of raw materials from

present supplier.

Exhibit7.13:FlexibilityAnalysis

Exhibit 7.14 and 7.15 show the value system and an illustration of an organisations
value chain. Exhibit 7.15 a schematic representation of the value chain showing its
constituent parts. The primary activities of the organisation are grouped into five
principal areas: inbound logis-tics, operations, outbound logistics, marketing and sales,
and lastly service.

Strategic Management

144

Inbound logistics: arc the activities concerned with receiving, storing, and distributing
inputs to the product/ service. This includes materials handling, stock control, transport,
etc.
Operations: transform these various inputs into the final product or service. For example,
this would include machining, packaging, assembly, and testing.
Outbound logistics: collect, store, and distribute the product to customers. For tangible
products this could be warehousing, materials handling, and transport. In case of services,
it may be more concerned with arrangements for bringing customers to the service if it
is a fixed location (e.g. sports events).
Marketing and sales: provide the menus whereby customers/users are made aware
of the product/service, etc., and on completion of sales take in hand the requirements
concerned with collection of dues, data registration, etc. In utility services, the
communication networks which help users access a particular service are often
important.
Service: all the activities that enhance or maintain the value of a product/service such
as installation, repair, training, spares, etc.
Each of these groups of primary activities is linked to support activities. These can be
divided into four areas.
Procurement: refers to the process of acquisition of various resource inputs that go
into primary activities (not to resources themselves). As such, it occurs in many parts
of the organisation.
Technology development: all value activities have a technology even if it is simply
know-how. The key technologies may be concerned with the product (e.g. R&D,
product design), or with process (e.g. process development), or with a particular resource
(e.g. raw materials improvement).
Human resource management: high quality training and development, recruitment of
the right people, and appropriate reward systems that motivate people.
Firms infrastructure: support from senior executives in customer relations, investment
in suitable physical facilities to improve working conditions, and investment in carefully
designed information technology systems.

Exhibit 7.14: The Value System

Su

Organisational Dynamics and Structuring Organisational Appraisal

Exhibit 7.15: The Value Chain

It would seem evident that in searching for the most appropriate means, of differentiating
for competitive advantage it is important to look at which activities are the most essential
as far as consumers and customers are concerned, and to isolate the key success
factors, It is a search for opportunities to be different from competitors in ways that
matter, and through this the creation of a superior competitive position. It is perhaps
best illustrated by the case of YKK, the Japanese Zip manufacturer, the world market
leader. Their value chain is shown in Exhibit 7.16. The idea behind their use of a value
chain for the creation of both cost leadership and substantial differentiation might be
illustrated as in Exhibit 7.17. The essential components of the strategy illustrated in
Exhibit 7.16 are,
l

heavily automated plants;

production of coils in Japan for world supply;

little dependence on supplies;

competitive pricing of finished products;

vertical information design and manufacture of own machinery;

wide range of colours and sizes.

The broken lines (----------) illustrate linkages.

Exhibit 7.16: YKKs Competitive Advantage and the Value Chain

145

Strategic Management

146

Exhibit 7.17: Use of Value Chain

it is only al this stage that a sensible assessment can be made of the major, strengths
and weaknesses of an organisation and an indication of their strategic importance derived.
It is then that resource analysis begins to be useful as a basis against which to judge
future courses of action. Strengths and weaknesses can be identified under readily
identifiable heads. An illustrative list would be:
Strengths
l
l
l
l
l
l
l
l
l

Company/brand name
Market share
Advertising effectiveness circles.
Financial management.
New products launched
New product under development, etc.
Technology
Saleability of divisions for ready
cash generation
Industrial relations, etc.

Weaknesses
l
l
l
l
l

Status of market
Territorial performances.
Credibility in business
Plant location
Functional capabilities, etc.

Each of the strengths could in a particular case be a weakness or vice versa.

There are several analyses or assessments that can be made. In this context, SWOT
analysis has already been referred to earlier. This can be a very useful way of
summarizing many of the previous analyses and combining them with key issues from
environmental analysis. One of the benefits of using value chain analysis is that it
should help avoid some of the common pitfalls of SWOT analysis. In particular, the
analysis must be clear on
a.

the reasons why particular activities or resources are identified as strengths or

weaknesses;

b.

that the value activities are more important than resources per se, i.e. it is the use
to which resources are being put that is critical:

c.

that the linkages between various value activities are likely to be key strengths
(or weaknesses) of the organization. This would include linkages with value chains
of suppliers, channels, and customers.

A strength and weakness analysis can be particularly valuable if it incorporates a

comparison with competitors. This can be done by using the concept of distinctive
competence. Distinctive competence is concerned with identification of those particular
strengths that give the company an edge over its competitors and those areas of particular
weakness that are to be avoided. This may require a parallel analysis of the competitors
resources.

Organisational Dynamics and Structuring Organisational Appraisal

147

A Functional Approach
Strategic internal factors are a firms basic capabilities, limitations, and characteristics.
Thus Exhibit 7.18 lists typical factors, broken along functional lines, some of which
would be the focus of internal analysis in most business firms. To develop or revise a
strategy, managers would identify the few factors on which success will most likely
depend. These factors are the key strategic factors.
Strategists examine past performance to isolate key internal contributors to favourable
(or unfavourable) results. The same examination and questions can be applied to a
firms current situation, with particular emphasis on changes in the importance of key
dimensions over time. Analysis of past trends of sales, costs and profitability is also of
major importance in identifying strategic internal factors. Identification of strategic
factors also requires an external focus. When a strategist isolates key internal factors
through analysis of past and present performance. industry conditions/trends and
comparison with competitors also provide insights. Changing industry conditions can
lead to the need to re-examine internal strengths and weaknesses in the light of newly
emerging determinants of success in the industry. Furthermore, strategic internal factors
are offer chosen for in-depth evaluation because firms are contemplating expansion of
products or markets, diversification, and so forth. Clearly scrutinizing the industry under
consideration and current competitors is a key means of identifying strategic factors if
a firm is evaluating a move into unfamiliar markets.
Key Internal Factors
Marketing
Firms products/services: breadth of product line.
Conceniration of sales in a few products or to a few customers.
Ability to gather needed information about markets.
Market share or sub-market shares.
Product/service mix and expansion potential: life cycle of key products
Services: profit/sales balance in product/service.
Channels of distribution: number, coverage and control.
Effective sales organisation: knowledge of customer needs.
Product/service image, reputation, and quality.
Pricing strategy and pricing flexibility.
Procedures for digesting market feedback and developing new products, services, or markets.
After sales service and follow-up.
Goodwill/brand loyalty.
Finance and Accounting
Ability to raise short-term capital.
Ability to raise long-term capital: debt/equity.
Corporate level resources (multi-business firm).
Cost of capital in relation to industry and competitors.
Tax considerations.
Relations with owners, investors, and stockholders.
Leverage position: capacity to utilize alternative financial straiegies such as lease, or sale and
lease back.
Cost of entry and barriers to entry.
Price-earnings ratio.
Working capital: flexibility of capital structure.
Effective cost control: ability to reduce cost.
Financial size.
Efficient and effective accounting system for cost, budget and profit planning.
Production/Operation/Technical
Raw material cost and availability; supplier relationship.
Inventory control systems; inventory turnover.
Contd...

148

Strategic Management
Location of facilities; layout and utilization of facilities.
Economies of scale.
Technical efficiency of facilities and utilization of capacity.
Effective use of subcontracting.
Degree of vertical integration; value added and profit margin.
Efficiency and cost-benefit of equipment.
Effective operation control procedures: design, scheduling, purchasing, quality control, and
efficiency.
Costs and technological competencies in relation to industry and competitors.
Research and development/technology/innovation.
Patents, trademarks, and similar legal protection.
Personnel
Management personnel.
Employees skill and morale.
Labour relations costs in comparison to industry and competition.
Efficient and effective personnel policies.
Effective use of incentives to motivate performance.
Ability to level peaks and valleys of employment.
Employee turnover and absenteeism.
Specialized skills.
Experience.
Organisation of general management
Organisational structure.
Firms image and prestige.
Firms record of achieving objectives.
Organisation of communication system.
Overall organisationall control system (effectiveness and utilization).
Organisational climate: culture.
Use of systematic procedures and techniques in decision-making.
Top management skills, capabilities, and interest.
Strategic planning system
Inter-organisational synergy (multi-business firm).

Exhibit 7.18: Internal Factors: Potential Strengths and Weaknesses.

Historical Analysis Revisited, Stages in Product/ Market Evolution

The requirements for success in product/market segments evolve and change over
time. In consequence, strategists can use these changing patterns associated with
different stages in product/market evolution as a framework for identification and
evaluation of the firms strengths and weaknesses.
Exhibit 7.19 depicts four general stages of product/market evolution and the typical
changes in functional capabilities often associated with business success at each stage.
The early development of a product/market, for example, entails minimal growth in
sales, major R&D emphasis, rapid technological change in the product, operating losses,
and a need for sufficient resources or slack to support a temporarily unprofitable
operation. Success at this stage may be associated with technical skill, with being first
in new markets, or with having a marketing advantage that creates widespread
awareness.
The strengths necessary for success change in the growth stage. Rapid growth
brings new competitors in the market. Such factors as brand recognition, product/
market differentiation, and the financial resources to support both heavy marketing
expenses and the effect of price competition on cash flow can be key strengths at this
stage.
As the product/market moves through a shake-out phase and into the maturity phase,
market growth continues but at a decreasing rate. The number of market segments

Organisational Dynamics and Structuring Organisational Appraisal

149

begins to expand, while technological change in product design slows down considerably.
The result is usually more intense competition and promotional or pricing advantages or
differentiation become key internal strengths. Technological changes in process design
become intense as the many competitors seek to provide the product in the most efficient
manner. Where R&D was critical in the development stage, efficient production has
now become crucial to a business continued success in the broad market segments.
When product/markets move towards a saturation/ decline stage, strengths and
weaknesses centre on cost advantages, superior supplier or customer relationships,
and financial control. Competitive advantage can exist at this stage, at least temporarily,
if a firm serves gradually shrinking markets that competitors are choosing to leave.
Exhibit 7.19 is rather a simple model of the stages of product/market evolution. These
stages can and do vary. It is, however, important to realize that the relative importance
of various determinants of success differs across the stages of product/market evolution,
and there-fore these must be considered in internal analysis. Exhibit 7.19 suggests
different dimensions that are particularly deserving of in-depth consideration while
developing a company profile. Exhibit 7.20 suggests steps in the development of a
company profile.

Functional Area

Maturity

Decline

Resources/skills to
create widespread
awareness and find
acceptance with
customers;
advantageous access
to distribution.

Ability to establish
brand recognition; find
niche; re duce price;
solidify strong
distribution relations
and develop new
channels.

Skill in aggressively
promoting product in
new markets and
holding existing
markets; pricing
flexibility, skills in
differentiating products
and holding customer
loyalty.

Cost effective means of

efficient access to
selected channels and
market; strong
customer loyalty or
dependence; strong
company image.

Production operations

Ability to expand
capacity effectively;
limit number of designs;
develop standards.

Ability to add product

variants; centralize
production or otherwise
lower costs; improve
product quality,
seasonal
subcontracting
capacity.

Improve products and

re duce costs, ability to
share or reduce
capacity; advantageous
supplier relation ships;
subcontracting.

Ability to prune product

line cost advantage in
production, location, or
distribution; simplified
inventory control;
subcontracting or long
production runs.

Finance

Resources to support
high net cash overflow
and initial losses; ability
to use leverage
effectively.

Ability to finance rapid

expansion, still have
net cash outflow but
increasing profits;
resources to sup port
product improvements

Ability to generate and

redistribute not cash
inflows; effective castle
control systems.

Ability to rescue or
liquidate unneeded
equipment; advantage
in cost of liabilities,
control system
accuracy; streamlined
management control.

Personnel

Flexibility in staffing
and training new
management;
existence of employees
with key skills in new
products or markets.

Existence and ability to

add skilled personnel;
motivated and loyal
workforce.

Ability to cost
effectively reduce
workforce; increase
efficiency.

Capacity to reduce and

reallocate personnel;
cost advantage.

Engineering and
research and
development

Ability to make
engineering changes,
have technical bugs in
products and process
resolved.

Skill in quality and new

feature development
state; developing
successor product.

Reduce costs; develop

variants in
differentiated products.

Support to other group

areas or apply to
unique customer
needs.

Key functional areas

and strategy focus

Engineering; market
penetration.

Sales; consumer
loyalty; market share.

Production efficiency;
successor products.

Finance: maximum
investment recovery.

Marketing

Introduction

Growth

Exhibit 7.19: Sources of Distinctive Competence at Different Stages of Product/

Market Evolution

150

Strategic Management

Organisational Routines: The Basis of a Companys

Capabilities
Strategic capabilities or distinctive competencies are activities that the firm can perform
better than competitors, but what is their basis and their nature? We have observed that
capability is the consequence of different resources working together in a complementary
team. But what is the nature of the interrelationships and interactions that these resources
have? What determines the ability of resources to work together to perform complex
activities within the organisations? And how does a firm go about creating capability in a
particular activity?
Richard Nelson and Sidney Winter of Yale University have developed the concept of
organisational routines in this connection. Organisations routines are regular and
predictable patterns of activity made up of a sequence of coordinated actions by individuals.
The behaviour of the organisation may be viewed as huge networks of routines. This is
true of manufacturing, sales, ordering, distribution, customer service, top management
activities such as monitoring of business unit performance, capital budgeting, employee
appraisal and promotion. Even the strategy of a corporation may be viewed as a routine:
as a set of guidelines that precondition the firms responses to events.

Ehibit 7.20: Steps in the Development of a Company Profile

Organisational Dynamics and Structuring Organisational Appraisal

Routines also fulfill other functions within the firm. They represent the truce between
conflicting interests of different members of the organisation and provide a means
through which management can control the activi-ties of the organisation. In particular,
they establish standards for the smooth functioning of the organization, notwithstanding
the fact that resources (especially people) are so heterogeneous.
The concept of organizational routines offers illuminating insights into the relationships
between resources, capabilities, and comparative advantage.

The Relationship Between Resources and Capabilities

An important implication of organisational routines is the appreciation that the firms
competencies are not simply the consequences of a collection of industrial resources
that the firm controls. The types, amounts, and qualities of resources available to the
firm have an important bearing on what the firm can do. They place constraints upon
the range of organizational routines that can be performed and the standard to which
they are performed. Resources do not, however, exclusively determine what the firm
can do and how well it can do it. A key ingredient in the relationship between resources
and capabilities is the managements ability to achieve cooperation and coordination
between resources required for the development of organizational routines. The ability
of the firm to motivate and socialize its members in order to win their cooperation and
commitment depends upon the organizations style, culture, leadership, systems of control,
reward, and communication.
The Trade-off between Efficiency and Flexibility Routines are to the organization what
skills are to the individual. Just as the individuals skills are carried out semi-automatically,
without conscious coordination, so organisational routines involve a large component of
tacit knowledge, implying limits on the extent to which the organisations capabilities
can be articulated. Just as individual skills become rusty when not exercised, so it is
difficult for organizations to retain coordinated responses to contingencies that only
rarely arise. Hence there may be a trade-off between efficiency and flexibility. A
limited repertoire of routines can be performed highly efficiently with near perfect
coordinationall in the absence of significant intervention by top management. The
same organisation may find it extremely difficult to respond to novel situations.

Economics of Experience
Just as individual skills are acquired through practice over time, so an organisations
capabilities are-developed and sustained only through experience. The advantage of an
established firm over a newcomer is primarily with regard to the routines that it has
been perfecting over time.The Boston Consulting Groups experience curve is a naive
and mechanistic representation of this relationship of experience to performance. A
much more insightful and predictably valid understanding is possible through investigating
the characteristics and evolution of underlying routines. This would also explain, for
instance in industries where technological change is rapid, why new firms may possess
an advantage over established firms. They have a potential for faster learning of new
routines because they are less committed to old ones.

151

Strategic Management

152

The Complexity of Capabilities

Some capabilities derive directly from individual resources. Thus the reputation of HarleyDavidson is primarily in consequence of its status as a sole surviving remnant of the US
motorcycle industry. In other cases, a capability may require complex interaction between
heterogenous resources, or may perhaps involve an integrated set of routines. Each
routine typically requires a number of resources such as operating skills, customer
service skills, communication skills, transportation equipment, and communication and
data processing equipments. In addition, it requires commitment, coordination, and
responsiveness within its department, and a close, complex link between manufacturing,
product design and development, marketing, service functions, effective employee
training programmes, management information systems, and a deeply entrenched
set of values that have been nurtured over time. The complexity of capabilities in
terms of the interrelationships between resources and routines is critical to firms
ability to sustain a competitive advantage and to reap profits from such a competitive
advantage.

Appraising The Profit-earning Capacity of Resources and

Capabilities
By identifying the firms resources and capabilities, and establishing areas of strength
in relation to competitors, the firm can adjust its strategy to ensure that its strengths are
fully utilized and weaknesses protected.
In appraising the capacity of the firms resources and capability to yield profits over the
long term, we need to evaluate these; first in relation to the firms ability to appropriate
returns from its resources; and second in relation to the sustainability of the competitive
advantage. Exhibit 7.21 summarises the relationships to be discussed according to four
criteria.

Apropriability
In drawing up an inventory of the firms resources, an immediate problem is determination
of the boundaries of the firms resource base. As we have indicated earlier, a
firms balance sheet is a very poor and unreliable source of information in this
connection.
Once we go beyond financial and physical assets, ownership becomes less clear. The
firm can establish property rights in certain intangible assets: patents, copy-rights, and
brand names for example. Typically, however, only a fraction of the firms reputation
and knowledge is protected by legally enforceable ownership. The primary basis of a
companys capabilities is the skills of its employees. The consequences for the firm arc
twofold: first, the employee is mobile between firms so the firm cannot reliably base a
strategy upon the specific skills of individuals; secondly, the employee is in a good
position to ensure that his or her full contribution to the prosperity of the enterprise is
reflected in the salary and benefits received.

Organisational Dynamics and Structuring Organisational Appraisal

The Four Key Criteria

Exhibit 7.21: Appraising the Profit Earning Capacity of Resources and Capabilities

But the capabilities of firms are located within groups of individuals and supported by
other sources such as reputation, corporate management systems, and the systems of
values that mesh together the employees of departments and companies. From the
point of view of the firm, the key issue is the degree of control which the firm can
exercise and the extent to which the capability can be maintained when individual
employees leave. A firms dependence upon skills possessed by key highly trained and
highly mobile emptoyees is particularly important in the case of professional service
companies. An advertising company would be an apt example.
Such issues would also arise in relation to high technology start-up companies that have
been such a conspicuous feature in the evolution of the US electronic industry. Typically,
these companies are founded by technologists and managers who leave large, established
electronic companies in order to develop and exploit ideas and products that they
conceived of when they were with their former employers. The tendency of large, US
technology-based companies to spin off numerous entrepreneurial start-ups (for instance
the Silicon Valley) rather than being a tribute to the dynamism of American business
enterprise, represents a failure of leading US micro-electronic companies to maintain
ownership and control over technologies that they develop internally.
Faced with ambiguity over property rights in key resources, an important strategic
issue for the firm is the means by which it can secure control over such resources and
ensure that it obtains an adequate share of the return from these assets. The issue of
the firms control over its resources is clearly critical to the firms ability to use its
resources as a secure base for formulation and implemention of strategy. But ambiguity
over ownership and control is also important from another perspective: the firms ability

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to appropriate returns to its resources. An implication of a resource-based concept of

the firm is that profits from it are a return to resources owned by the firm. A critical
consequence of ambiguity over ownership and control of resources is indeterminacy
over the allocation of returns to the resources. For instance, when individuals at 3M
pioneer the development of commercially successful products such as reflective traffic
signs and Post-it notes, to what extent does 3M profit?
The division of returns between the firm and its employees depends upon relative
bargaining power. If the individual employees contribution to productivity is clearly
identifiable, if the employee is mobile, and if s/he could offer similar productivity to
other firms, then s/he is in a strong bargaining position to expropriate a substantial
proportion of the contribution in salary, bonus, or commission.
Conversely, the less easy it is to identify the individuals contribution and the more firmspecific are the skills being applied, the greater is the proportion of returns that accrue
to the firm. A recent trend among investment banking firms has been to reduce the
image and reputation of individual stars and gurus and increase the identity and reputation
of the firm and the team. Conflicts with senior employees at City Bank, Merill Lynch,
First Boston, etc. have been a consequence. It is also to be noted that the tendency of
professional service linns is to be organised as partnerships rather than corporations,
partly to reflect the superiority of a partnership in avoiding bargaining conflict between
owners and employees in enterprises where the capital stock is primarily human skills.

Durability
Some resources are more durable than others and, hence, are a securer basis for
competitive advantage.
Intangible assets vary substantially in durability. Thus while the value of patents is
increasingly being curtailed by technological leapfrogging, consumer brand names show
remarkable durability (brands like Kelloggs and Coca Cola are examples). Corporate
reputation is similarly long enduring (General Electric, Du Pont, IBM are examples).
The reputation of being a well-managed, socially responsible, financially sound company,
producing reliable products and taking good care of its employees and customers, gives
a company credibility and attention in every field of business it enters.

Transferability
The firms ability to sustain its competitive advantage over time depends upon the
speed with which rivals can acquire the resources and capabilities needed to imitate
the success of the initiating firm. The primary means of doing so is the hire and purchase
of required inputs. The ability to do so depends upon the transferability of resources
and capabilities. Some resources such as raw materials, components, machines
performing standard operations, and certain types of human resources are easily
transferable and can be purchased readily. Some other resources such as special types
of machinery and costly equipment are not easily transferable. Yet other resources
such as technical knowledge and brand names may be firm-specific in the sense that
their value declines on transfer to another firm. Other resources such as the reputation
of the firm, may he completely firm-specific and although valuable to the firm itself,
may have doubtful value for an intending purchaser.

Organisational Dynamics and Structuring Organisational Appraisal

Transfer of capabilities is particularly difficult where a firms capability is the consequence

of resources working together as a team. This would mean transfer of the whole team,
which is possible but very improbable.
If resources and capabilities are highly differentiated and are firm-specific, other
consequences for strategy follow. In such cases, these resources play an important
role both in limiting the flexibility of the firm in changing its strategy and in providing an
important incentive to diversify in order to more fully exploit any underutilised resources
and skills.

Replicability
The firm-specificity of a resource or routine limits the ability of a firm to acquire it
simply by purchase in the market. The second route by which a firm can acquire a
resource or capability is by creating it itself through investment. Some capabilities can
be easily initiated through replication. If legal barriers exist to replication, as in the case
of patented products, then replication can be more difficult. Probably the least replicable
capabilities are those that are based upon the exercise of highly complex organizational
routines. The complex nature of these routines and the fact that they are based upon
tacit rather than codified knowledge means that diagnosing and recreating them is
exceedingly difficult. Even when codified, it may still be very difficult to imitate a
competitors superior performance. Thus McDonalds success is based upon a highly
sophisticated and detailed operating system that regulates the operations of every
McDonald outlet, from employee behaviour and dress to cleaning procedures to the
placing of pickles on the burger. Yet the system is only one aspect; equally important is
ensuring its implementation through management information, incentives, and controls.
Similar difficulties of imitation have applied to Western firms adoption of successful
Japanese industrial practices. Two of the simplest and best known Japanese
manufacturing practices are just-in-time inventory systems and quality circles. Both
are simple ideas that require neither sophisticated knowledge nor complex operating
systems. Indeed, the concept and design originally came from the US. Yet the successful
operation of both requires a degree of cooperation and set of attitudes that hew American
or European firms have been successful in introducing with the same degree of success
as their Japanese counterparts.
Thus 3M Corporations approach to the development of new products is distinctive
competences that arc located not in a particular department or unit, but permeate the
whole corporation and are built into the fabric and culture of the organisation. Moreover,
because these routines are broadly based and not particular to any one product or
production technology, they are not as constraining and/or subject to obsolescence as
more specific routines.

Identifying the Resource Gaps and Developing the Resource Base

A resource-based approach to strategy must be concerned not only with deploying
existing resources but with investing in resources that secure a long-term future for the
firm. Such investment is concerned not just with maintenance but augmentation of the
firms resources so that positions of competitive advantage can be strengthened and
the firms strategic opportunity set broadened. Therefore a key feature of resource

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analysis is that once a strategy has been formulated based upon a matching of the
firms capabilities with opportunities available in the external environment. The firm
must reconsider the implications of the strategy for the firms resource needs. In other
words, what resource gaps need to be filled?
Thus General Motors strategy for regeneration, automation, and quality enhancement
has placed great emphasis on identifying and filling the resource deficiencies that its
strategy caused. GMs needs for electronic technology was the principal stimulus for
Us acquisition of Electronic Data Systems. Likewise, its quest for improved quality
encouraged its strategic alliance with Toyota. These are aspects of core competency,
a concept that will be elaborated below.
The implications of the firms strategy for its resources are not only in terms of the
emergence of resource gaps. The pursuit of a particular strategy not only utilises a
firms resources, but also augments resources through the creation of skills and
knowledge that are the products of experience. In the words of Hiroyaki Itami who
introduced the concept of dynamic resources fit: Effective strategy in the present
builds invisible assets, and the expanded stock enables the firm to plan its future strategy
to be carried out. And the future strategy must make effective use of the resources
that have been amassed. Matsushitas multinational expansions have closely followed
this principle of parallel and sequential development of strategy and resources. Arataroh
Takahashi explained the strategy:
In every country batteries are a necessity, so they sell well. As long as we bring a few
advanced automated pieces of equipment for the process vital to final product quality,
even unskilled labour can produce good products. As they work on this rather simple
product, the workers get trained, and this increased skill level then permits us to gradually
expand production to items with increasingly higher technology level, first rmlio. then
television.
This dynamic resource fit may also provide a strong basis for a firms diversification.
Sequential additions as expertise and knowledge are acquired are prominent features
of Hondas strategies in extending its product range from motorcycles to cars, to lawn
mowers, and boat engines, as also 3Ms in expanding from abrasive, to adhesive, to
computer disks, video and audio tape, and a broad range of consumer and producer
goods.

Core Competence
Prahlad and Hamel, in impressing the importance of invisible resources in global
competition, have introduced the impressive concept of Core Competency. Core
competencies are the collective learning in organisations, especially on how to coordinate
diverse production skills and integrate multiple streams of technologies. The philosophy
behind the concept is simple and can be likened to a tree. The diversified corporation is
a large tree. The trunk and major limbs are core products, the smaller branches are
business units; the leaves, flowers, and fruit are end products. The root system that
provides nourishment, sustenance and stability is the core competency.
It thus involves not only harmonizing streams of technology but is also about the
organization of work and delivery of value. The force of core competency is felt as
decisively in services as in manufacturing. It is also communication, involvement, and a

Organisational Dynamics and Structuring Organisational Appraisal

deep commitment to working across organizational boundaries. The skills that together
constitute core competency must coalesce around individuals whose efforts are not so
narrowly focused that they cannot recognize the opportunities for blending their functional
expertise with that of others in new and interesting ways.
Two fallouts from core competencies are important.
l

core products;

strategic architecture.

Core Products
The tangible link between identified core competencies and end products is what is
called core products: the physical embodiments of one or more core competences.
Core products are the components or sub-assemblies that actually contribute to the
value of end products. If a company maintains world manufacturing dominance in core
products it reserves the power to shape the evolution of end products.
Thus Canon is reputed to have an 84 per cent world manufacturing share in desktop
laser printer engines even though its brand share in the laser printer business is miniscule.
Similarly, Matsushita has a world manufacturing share of about 45 per cent in key
VCR components, far in excess of its brand share of 20 per cent, and a commanding
core product share in compressors worldwide, estimated at 40 per cent, even though its
brand share in both the air-conditioning and refrigerator businesses is quite small.
To sustain leadership in their chosen core competence areas, these companies seek to
/maximize their world manufacturing share in core products. The manufacture of
core products for, a wide variety of external (and internal) customers yields the revenues
and market feed-back that, at least partially, determine the pace at which core
competences can be enhanced and extended.

Strategic Architecture
The fragmentation of core competencies becomes inevitable when a diversified
companys information system, patterns of communication, career paths, managerial
rewards, and process of strategy development do not transcend SBU lines.
By providing an impetus for learning from alliance and a focus for internal development
efforts, strategic architecture like NECs C&C can dramatically reduce the investment
necessary to secure future market leadership. The answers to the following questions
will help us visualize what strategic architecture looks like. How long could we preserve
our competitiveness in the business if we did not control a particular core competency?
How central is this core competence to perceived customer benefits? What future
opportunities would be foreclosed if we were to lose this particular competence?
This strategic architecture provides a logic for product and market diversification. It
should make resource allocation priorities transparent to the entire organisation. It
provides a template for allocation decision by top management. It helps lower level
managers understand the logic of allocation priorities and disciplines senior management
to maintain consistency. In short, it yields a definition of the company and the market it
serves.

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SBU and Core Competency

The implications of two alternate concepts of the corporation are summarised in SBU
or core competence.
As an SBU evolves, it often develops unique competences. Typically, the people who
embody this competence are seen as the sole properly of the business in which they
grew up. They are usually not available for the benefit of the company as a whole.
When competences become thus imprisoned, the people who carry the competences
do not get assigned to the most exciting opportunities and their skills begin to atrophy.
When the organisation is conceived of as a multiplicity of SBUs, no single business
may feel responsible for maintaining a viable portion in core products nor be able to
justify the investment required to build world leadership in some core competency.
There is thus need for a more comprehensive view imposed by corporate management to be superimposed on the SBU concept and a suitable organizational form to
allow this.
SBU

Core Competence

Basis for competition

Competitiveness of
todays products

Inter-firm competition to
build competencies.

Corporate structure

Portfolio of businesses related

in product market terms

Portfolio of competencies,
core products, and businesses.

Status of the
business unit

Autonomy is sacrosanct: the SBU

owns all resources other than cash

SBU is a potential reservoir

of core competencies.

Resource allocation

Discrete businesses are the unit of

analysis; capital is allocated
business by business

Business and competencies are the

units of analysis; top management
allocates capital and talent

Value added of top

management

Optimizing corporate returns

throug hcapital allocation
trade-offs among businesses

Enunciating strategic architecture

and building competencies to
secure the future.

Exhibit 7.22: Two Concepts of the Corporation SBU and Core Competence

SWOT Analysis

Chapter 8
SWOT Analysis
In looking at various aspects of the external and internal environment, we have to look
at the strengths and weaknesses of the company and as also, to an extent, opportunities
and threats. We nevertheless, again reemphasize their importance in the corporate
planning process to make the concept much more self contained.
There are several ways to undertake such analysis. One approach is to look at the
corporate identity and view the strengths, weaknesses, opportunities and threats from
there. The second way is to scrutinize all aspects of the companys activities and
resources, and look at the strengths and shortfalls.
i.

When looking at the corporate identity, it is relatively simple to see that the allocation
of resources, and the orientation of activities in the market place must maintain a
close identification and alignment with the companys missions, and consequent
statement of objectives. Any contradiction in this anywhere would be a symptom
of weakness.

ii.

When looking at the various aspects of the company, it is possible to identify and
analyse these strengths and weaknesses systematically. We provide here a brief
description.

Strengths
A strength is a resource, skill, or other advantage in relation to the competition and the
needs of markets a firm serves or anticipates serving. A strength is a distinctive
competence that affords the firm a comparative advantage in the market place. Financial
resources, image, market leadership and buyer-supplier relations are examples.

Weaknesses
A weakness is a limitation or deficiency in resources, skills, and capabilities that seriously
impedes effective performance. Facilities, financial resources, management capabilities,
marketing skills, and brand image could be sources of weakness.
Strengths and weaknesses can be identified by careful analysis of the firms activities.
A few examples follow:

a.

Source of profit

i.

If the bulk of the profit comes from a single product, that in itself is a symptom of
weakness deserving further analysis:
What is its status in the life cycle? What is the status of competition ? What is the
status of industry sale? Product quality? Is the market share currently enjoyed
commensurate with quality, competition, price status? Is there scope for further
growth in sales through product development?

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ii.

What is the scope for development of other profit-yielding products?

iii.

Is the technology continuing to be up-to-date or is there a risk, of better technology

appearing in the market place in the near future? What is the danger of
substitution?.

iv.

Is the product itself in any danger of becoming obsolete or out of style in the near
future?

b.

Risks

The analysis of the source of profits invariably exposes the risks looming ahead. These
may be:
i.

For the product, the dangers of obsolescence;

ii.

the danger of being priced out because of quality, cost, and backdated technology;

iii.

the danger of substitution.

iv.

For the market, the style and desirability changing; the danger of new competition
coming in; the market itself reaching maturity or its decaying stale, etc.

Opportunities
An opportunity is a major favourable situation in the firms environment. Key trends
represent one source of opportunity. The identification of a previously overlooked market
segment, changes in competitive or regulatory circumstances, technological changes,
and improved buyer and/or supplier relationships could represent opportunities for the
firm.
Threats
A threat is a major unfavourable situation in the firms environment. It is a key impediment
to the firms current and/or desired future position. The entrance of a new competitor,
slow market growth, increased bargaining power of key buyers or suppliers, major
technological change, and changing regulations could represent major threats to the
firms future success.
Opportunity for one firm could be a strategic threat to another. Thus regulation in India
reserving some product ranges for the small-scale sector would represent an opportunity
for the small-scale industries in that sector and a threat to large industries in it also, the
same factor can be seen as both a potential opportunity and a potential threat. Thus the
entry of Caterpillar through a joint venture with Mitsubishi in the Japanese market was
a threat to Komatsu whose products were then distinctly inferior in quality by comparison.
It was also an opportunity for Komatsu to employ its R&D efforts to match Caterpillar
quality and thus not only confidently face Caterpillar in the domestic market, but also
expand to become a competitor to Caterpillar internationally. This is a classic example
of a threat being converted into an opportunity.
Understanding the key opportunities and threats lacing a firm helps managers identify
realistic options from which to choose an appropriate strategy. Such understanding
clarifies the identification of the most effective niche of the firm.

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161

SWOT analysis can be used in at least three ways in strategic choice decisions.
i.

The commonest application provides a logical framework guiding systematic

discussions of the business situation, alternative strategies, and, ultimately choice
of strategy. What one manager sees as an opportunity, another may see as a
potential threat. Likewise, a strength to one manager may be a weakness from
another perspective. Different assessments may rellect underlying power
consideration within the organization, as well as differing factual perspectives.
The key point is that systematic SWOT analysis ranges across all aspects of a
firms situation, providing thereby a dynamic and useful framework for choosing
a strategy.