MBA BUSINESS STRATEGY™

DEGREE
TRAINING BOOK
SECOND EDITION
BY INTERNATIONAL MBA INSTITUTE™
[Link]

© COPYRIGHT INTERNATIONAL MBA INSTITUTE™




Dedication
To all of the International MBA Institute™ students, thank you for inspiring us, keeping us
focused, and making sure we do our best to help you grow in your career with your skills
and knowhow. Without you, your engagement and your loyal support, International MBA
Institute™ could not come where it is today.
TABLE OF CONTENTS CLICKABLE
WELCOME .........................................................................................................................................................5
ABOUT INTERNATIONAL MBA INSTITUTE™ ........................................................................................................6
Introduction ..................................................................................................................................................7
The Evolution of the Concept of Strategy ...............................................................................................9
Competing on Capabilities and the Resource-Based View ....................................................................15
The Concept of Core Competence .............................................................................................................18
The Concept of Strategic Intent ..............................................................................................................23
Intended and Realized Strategies ...........................................................................................................28
The Three Levels of Strategy ...................................................................................................................31
Developing a Strategic Perspective ........................................................................................................34
Introduction to Strategic Management .................................................................................................36
Components of Strategy Formulation ....................................................................................................44
Strategic Decision-Making ........................................................................................................................48
Thank you .....................................................................................................................................................52
WELCOME

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ABOUT INTERNATIONAL MBA INSTITUTE™

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6
Introduction environment, it is not good enough if the senior
management’s principal aim is to build an enduring
In this chapter, you will: organization.
• Understand the importance of Business
Strategy

It is easy for you to be successful once, but it is

difficult to stay successful perpetually. Corporate
history is replete with examples of organizations
which were successful at one point of time, but
which could not continue to survive in the
marketplace. One of the reasons for corporate
mortality is excessive focus on the present and
ignoring or paying little attention to the future and its
challenges. In the intensely competitive global
environment of today, your organization/firm should
have strategies that provide the framework for long-
term success. It is the goal of strategic management
to create an enduring organization. Competing For The Future

Gary Hamel, a leading authority on strategic

management and co-author of the book ‘Competing The dynamic nature of the environment often
for the Future', estimated that American senior renders the strategy being pursued by a firm
managers generally spend about 3 percent of their redundant and there is a need for it to be replaced
time thinking and planning for the future. While 3 with new strategies. For example, till the mid-1980s,
percent may be sufficient if you want to achieve the Indian passenger car sector had three players,
short-term objectives in a stable business namely, Standard Motors, Premier Automobiles Ltd.

7
(PAL), and Hindustan Motors Ltd. Maruti Udyog Ltd. success of a particular strategy is dependent on the
entered the industry in the mid-1980s and went on intensity of competition in the marketplace. In
to become the market leader in a short span of time. strategic management, you deal with the issues of
Its cars outperformed those of the existing players staying perpetually successful. You deal with how a
and PAL had to shut shop as it was not able to cope firm utilizes its resources and capabilities to counter
with the competitive pressures. or pre-empt competitive moves and succeed in the
dynamic marketplace.
The early 1990s witnessed the opening up of the
Indian car industry; global players like Hyundai, Ford, Summary:
General Motors, Fiat, Mitsubishi, and Toyota among 1 The goal of strategic management is to create
others entered the Indian car market. Tata Motors an enduring organization.
and Mahindra & Mahindra too entered the 2 The dynamic nature of the environment often
passenger car market. Maruti Udyog Ltd. had to face renders the strategy being pursued by a firm
intense competition from the new players. Its ability redundant.
to launch new cars and models along with a strong Tenure of success of a particular strategy is
distribution and service network helped it to retain dependent on the intensity of competition in the
its leadership position. In order to survive, Hindustan marketplace.
Motors tied up with Mitsubishi Motors.

In 2009, Tata Motors launched the world’s lowest

priced car Nano. This disruptive innovation forced
some of its competitors to take a relook at their
product portfolio and strategic direction for the
future.

Different firms pursue a variety of strategies to stay

successful over a period of time as the tenure of

8
The Evolution of the Concept of For example, the following strategic principles
continue to be relevant across changes in time and
Strategy context.

In this chapter, you will: 1 Attack Strength: Attack the enemy in his
• Learn Ansoff’s Strategic Success Paradigm stronghold. The Japanese attack on Pearl
• Learn Mintzberg: Strategy as Craft Harbour is an example of this principle.
• Learn Peter Drucker’s Contribution to the Similarly, in the 1990s, Lexus (Toyota)
concept of Strategy successfully fought Cadillac (GM) and Lincoln
• Learn about Michael Porter: Strategy and (Ford) in the US luxury car market.
Sustainable Competitive Advantage 2 Attack Weakness: The American attack
against Germany in Morocco during the
The word Strategy comes from the Greek word Second World War is an example of this
Strategia, which means a General or Military strategy. The Nazis ignored the impending US
Commander. War and strategy are inseparable. attack on Morocco, thinking that Morocco was
Wherever there has been war, there has been a hardly worth defending. The successful
strategy to wage it. War and strategy are not new American attack on Morocco opened up the
concepts; what is new is the increased emphasis on way for the ultimate defeat of Hitler in the
strategy in the business context. Every business Second World War. Sam Walton, the founder of
strategy that is hammered out in the boardrooms of Wal-Mart, executed this strategy in the early
an American, Asian, or European company can be 1960s by opening retail stores in small towns
traced back to a battlefield of a past war as shown ignored by the then giant — Sears.
below. 3 Concentrate Your Forces: This strategy is
most relevant in today’s business scenario.
Impact of War on Business Strategies Organizations should coordinate their
Today’s successful business strategies can be traced resources and concentrate on the areas where
back to military strategies that have been used the competition is most intense. Using this
effectively from ancient Greece to the 21st century.

9
 strategy, in ancient times, generals like Caesar
and Genghis Khan overwhelmed rivals with
much bigger armies. Companies like Nike and
FedEx excel because of their concentration
strategy.
4 Forge a Strategic Alliance: The alliance
among the US, the UK, and the USSR overcame
Nazi Germany in the Second World War.
Similarly, in today’s highly competitive business
environment, organizations are increasingly
entering into alliances and forming business
networks to take advantage of various
synergies.
5 Sometimes, Containments Good Enough:
The Cold War between the US and the
erstwhile USSR during the second half of the
20th century is an example of Containment
s t ra t e g y. I n b u s i n e s s , w h e n t h e re i s
competition between two organizations of
equal size, if one organization tries to eliminate
the other, then both firms will end up with
shattered profit margins and mountains of
debt, and, in the end, bankruptcy. So,
Todays Success Strategies
containment is often preferred.

10
Igor Ansoff pioneered the concept of strategy. Later, Ansoff‘s strategic success paradigm identifies the
Henry Mintzberg, Michael E. Porter, and others conditions that optimize profitability. The key
enriched the concept of strategic management with elements of this paradigm are as follows:
their original insights. 1 There is formula for all firms.
2 The level of turbulence in the environment
determines the strategy required for the
success of your firm.
3 The aggressiveness of the strategy should be
aligned with the turbulence in the environment
to optimize your firm’s success.
4 The management’s capabilities should be
aligned with the environment to optimize your
firm’s success.
5 Internal capability variables, that is, cognitive,
psychological, political, anthropological, and
Strategic Management Gurus
sociological variables, all jointly determine your
firm’s success.
After 11 years of testing his strategic success
Ansoff’s Strategic Success Paradigm
paradigm empirically, Ansoff translated it into a
The systematic study of strategy was pioneered by
diagnostic instrument called ‘Strategic Readiness
Igor Ansoff conducted extensive research on
Diagnosis’. His book ‘Corporate Strategy’ (1965)
acquisitions by American companies between 1948
played a key role in the development of the concept
and 1968. He found that acquisitions based on a
o f s t ra t e g i c p l a n n i n g . H e i n t ro d u c e d ‘g a p
rational strategy fared far better than those that
analysis’ (the gap between where the company is
were based on opportunistic decisions.
today in terms of growth and aspirations and where
it wants to be) and the concept of synergy to a wide
audience for the first time. He also proposed the

11
Ansoff Product/Market Grid, also known as the may craft a new strategy, different from the one he/
Ansoff Matrix, to depict four growth strategies — she started with.
market penetration, market development, product
development, and diversification. Mintzberg saw strategy formulation as a deliberate,
delicate, and dangerous process, and advocated that
Mintzberg: Strategy as Craft strategies are both plans for the future and patterns
The next great influential thinker in the field of from the past.
strategic management after Ansoff was Henry
Mintzberg. Mintzberg added a new dimension to In 2005, Kodak was ranked number 1 in digital
strategic management by bringing the personal side camera sales in the United States. Its digital camera
of the manager into the picture. He proposed an sales had touched US$ 5.7 billion. It was product
intuitive view of strategic management, and attacked innovation which enabled Kodak to achieve this
the rationalism of his contemporaries with regard to status. However, by 2007, Antonio M. Perez, Kodak’s
the subject. In his first book, The Nature of Chief Executive Officer, was disillusioned with the low
Managerial Work (1973), he advocated a more profitability of the digital camera business. This was
humane approach to strategy formulation and because, though the fast paced growth of camera
implementation, and coined the term ‘crafting sales had countered the fast-fading film revenues, it
strategy’. He drew a parallel between a craftsman, was not in a position to replace the rich profits of its
potter, and a manager who is crafting strategy. He film business. The best mass market cameras yielded
proposed that the manager is aware of the corporate slim profit margins. Accordingly, though Kodak’s
capabilities and the future market opportunities digital camera business was a roaring sales success,
which are taken advantage of by him/her, using his/ it was a major profit disappointment. Perez began
her knowledge. Accordingly, a manager while crafting crafting yet another strategy for Kodak, its third in
strategy may start with a pre-planned deliberate less than a decade. Kodak started working on a
strategy but while implementing it, may use his/her range of new digital photo services for consumers
capabilities to sense changes required in the strategy that were expected to yield higher returns and
due to the dynamic nature of the environment and included everything from online photo sharing to a

12
rapid-fire scanning system, called Scan the World, of management; it is a philosophy of managing. MBO
that converts old pictures into digital images transformed the basic assumptions of managing
organized by the date originally printed. from exercising control to self-control.

Peter Drucker’s Contribution Michael Porter: Strategy and Sustainable

After World War II, the use of formal strategic Competitive Advantage
thinking to guide management decisions was Michael Porter (Porter) is a leading authority on
encouraged. Peter F. Drucker argued that competitive strategy, and on the competitiveness
“management is not just passive, adaptive behavior; and economic development of nations, states, and
it means taking action to make the desired results regions. In his book ‘Competitive Strategy’ (1980),
come to pass.” Porter addressed the issue of how your firm analyzes
industries and competitors and develops its
Drucker expected managers to influence and control strategies accordingly. He proposed that competitive
market forces. He said, “It (managing) implies strategy is about being different. Being different here
responsibility for attempting to shape the economic refers to the manner in which customers perceive
environment, for planning, initiating, and carrying your firm to be distinct from your competitors.
through changes in that economic environment, for Hence, strategy is about positioning your firm in the
constantly pushing back the limitations of economic customer’s perspective. In his book ‘Competitive
circumstances on the enterprise’s freedom of action.” Advantage’ (1985), he addressed the issue of firms
create and sustain superior performance, that is,
Drucker ’s biggest contribution to strategic build a sustainable competitive advantage.
management was the introduction of the concept of
management by objectives (MBO). When Drucker Porter ’s important contributions to strategic
introduced the concept in 1954, most managers management include the ‘Five Forces model’, the
were concerned with processes rather than goals. ‘value chain’ concept and the concept of ‘generic
With MBO, the focus shifted from processes to goals. strategies’. According to the ‘Five Forces’ model’, the
According to Drucker, MBO is more than a technique nature and degree of competition in an industry

13
depends on five forces: the threat of new entrants, implementation, and coined the term ‘crafting
the bargaining power of customers, the bargaining strategy’.
power of suppliers, the threat of substitute products, 3 Peter F. Drucker argued that “management is
and the rivalry between existing players. To not just passive, adaptive behavior; it means
determine a strategic plan for growth in your taking action to make the desired results come
business environment, an organization must to pass.”
understand how these forces operate in the industry
and affect the company-specific situation. Porter Porter ’s important contributions to strategic
proposed assessing every activity of your company in management include the ‘Five Forces model’, the
terms of its overall competitiveness. Further, he ‘value chain’ concept and the concept of ‘generic
proposed the use of value chain analysis of your strategies’.
o rg a n i z a t i o n’s i n t e r n a l p ro c e s s e s , a n d t h e
interactions between different functions, to
determine how and where value could be added for
the customer by your company. He also advocated
three generic strategies: overall cost leadership,
differentiation, and focus, which help your
organization to compete effectively in the
marketplace. These strategies determine the basis of
competition.

Summary:
1 Ansoff found that acquisitions based on a
rational strategy fared far better than those
that were based on opportunistic decisions.
2 Mintzberg advocated a more humane
approach to strategy formulation and

14
Competing on Capabilities and the “The building blocks of corporate strategy are not
products and markets but business processes.
Resource-Based View Competitive success depends on transforming a
company’s key processes into strategic capabilities
In this chapter, you will: that consistently provide superior value to the
• Understand the ability for your firm to be customer. Companies create these capabilities by
successful making strategic investments in a support
infrastructure that links together and transcends
The ability of your firm to succeed today depends on traditional Strategic Business Units (SBUs) and
its capability to move quickly in and out of products, functions. Because capabilities necessarily cross
markets, and at times from entire business areas. functions, the champion of a capabilities-based
Success depends on anticipation of market trends strategy is the CEO.”
and responding quickly to the changing customer
needs. This is enabled when your firm builds its In a capabilities-driven firm, senior management
strategic capabilities around key business processes does not tell managers what to do. Rather, they
and not functional areas. For a capability to be create an environment where they can learn from
considered strategic, it should be focused on the the market and from each other. An environment is
customer. built in which the capabilities are rooted as the
primary object of strategy.
A firm which strategizes on the basis of the
capabilities it possesses will enjoy clear advantages One such firm is Dell, which created capabilities
in terms of speed, agility, acuity, consistency, and (competitive advantages) by utilizing the Internet and
innovativeness. breaking the functional barriers. At a time, when
personal computers (PC) were being sold by
According to George Stalk, Philip Evans, and intermediaries, Dell used the internet to enable
Lawrence E. Shulman, the four-basic principles of customers to design their own PC on the internet
capabilities-based competition are: and place orders online. This eliminated the need for

15
intermediaries like dealers and resulted in cost
savings for the firm. It further used electronic links to
integrate with its vendors like Sony to dispatch
shipments of computer monitors directly to the
customers instead of shipping them to a warehouse
and re-routing to the customers, which resulted in
further cost savings for Dell. These capabilities gave
Dell a competitive advantage over its competitors in
many countries.

These capabilities, along with valuable assets –

tangible and/or intangible – that can provide a
competitive advantage, are together referred to as
‘resources’ in strategy literature. For a resource to be
valuable and provide a competitive advantage to the
firm, the market demand for the resource should be
high, market availability should be low, and your firm Porter's Five Forces
should have the bargaining power to capture the
value that is created by the resource. Further, such
resources should be durable, superior to similar Summary:
resources possessed by competitors, and difficult to 1 Success depends on anticipation of market
imitate/copy or substitute. Resources form the trends and responding quickly to the changing
foundation of the resource-based view (RBV) of your customer needs.
firm which visualizes strategy as a choice that 2 In a capabilities-driven firm, senior
matches what your firm can do (given its resources management does not tell managers what to
and capabilities) with the competitive environment do. Rather, they create an environment where
(in terms of Porter’s Five Forces).

16
 they can learn from the market and from each
other.
3 For a resource to be valuable and provide a
competitive advantage to the firm, the market
demand for the resource should be high,
market availability should be low, and your
firm should have the bargaining power to
capture the value that is created by the
resource.

17
The Concept of Core Competence 3.8 billion. However, in 1988, NEC outperformed GTE.
In 1988, NEC’s sales were US$ 21.89 billion, much
In this chapter, you will: higher than GTE’s US$ 16.46 billion. According to
• Identify the factors of core competence Prahalad and Hamel, the difference in the way NEC
• U n d e r s t a n d t h e a p p l i c a b i l i t y o f c o re and GTE conceived of themselves — the former as a
competence in Emerging markets portfolio of competencies (especially in
semiconductors) and the latter as a portfolio of
In 1990, C. K. Prahalad and Gary Hamel, in their businesses — could also be observed in many other
celebrated article, ‘The Core Competence of the industries.
Corporation”, introduced the concept of core
competence. They defined core competencies as the Prahalad and Hamel are of the opinion that while in
“collective learning in the organization, especially the short run, your company’s competitiveness
how to coordinate diverse production skills and depends on the price/performance attributes of its
integrate multiple streams of technologies.” Core products, in the long-run, competitiveness depends
competence is also about the organization of work on the ability to build core competencies faster than
and the delivery of value. Miniaturization, one of competitors and at a lower cost. Your company’s
Sony’s core competencies, was brought to its competitive advantage depends on the
p ro d u c t s by e n s u r i n g t h a t t h e c o m p a n y ’s management’s ability to consolidate technologies
technologists, engineers, and marketers had a and production skills into competencies. The
shared understanding of customer needs and competencies would empower individual businesses
technological possibilities. to adapt quickly to opportunities.

Prahalad and Hamel studied GTE and NEC to put Core competence involves communication,
forward their views on core competence. In the early involvement, and a deep commitment to working
1980s, GTE was well placed in the evolving across organizational boundaries. It involves people
information technology industry. In 1980, GTE’s sales at all levels and all functions. Unlike physical assets,
were US$ 9.98 billion, much higher than NEC’s US$

18
core competence does not reduce with use. In fact, it Developing a core competence
grows when applied and shared. To develop core competence, your company need
not spend more on R&D than its competitors. In
1983, when Canon beat Xerox in the copier business,
its R&D spend on reprographics was much less than
that of Xerox. NEC also spent less on R&D as a
percentage of sales than most of its American and
The Process Of Core Competencies
European competitors. According to Prahalad and
Hamel, core competence also does not mean sharing
costs, such as two or more SBUs using a common
Identifying a core competence
facility, e.g., plant, service facility, sales force, or
A core competence in a company can be identified
common component. Sharing of costs is an effort to
by applying three tests. A core competence must:
rationalize production across existing businesses,
1 have the potential to provide access to a
and not part of a predetermined effort to build
variety of markets;
competencies.
2 m a ke a c o n t r i b u t i o n t o p re c o n c e i v e d
consumer benefits of the end product;
When NEC aimed at making semiconductors the
3 be difficult for a competitor to copy.
most important “core product” of the company, it
For example, if your company’s core competence is
entered into strategic alliances to build competences
said to be the manufacture of display systems, it
at low cost. Most collaborative arrangements aimed
should be able to participate in diverse businesses
at gaining access to the required technology. NEC’s
such as calculators, miniature TV sets, and monitors
managers seemed to understand the rationale for
for laptop computers. Though a competitor may be
such alliances and the goal of internalizing partner
able to copy some technologies that comprise a core
skills.
competence, it should find it difficult to copy the
comprehensive pattern of internal learning and
coordination.

19
Redefining core competence outstanding returns (as in the case of Berkshire
According to a McKinsey Quarterly article, “Is Your Hathaway).
Core Competence a Mirage?”, while most examples
in Prahalad and Hamel’s article referred to A frontline execution competence refers to the
knowledge of one or more technologies, executives unique ability to deliver products and services whose
have extended the idea of core competence to quality is equal to the best that could have been
include many types of skills and functions like produced under ideal circumstances. Examples of
process engineering, production, new product idea frontline competences can be seen at Nordstrom,
generation, and even corporate identity. In the the retailing giant. Its ability to satisfy customers is
article, the authors defined core competence as “a an example of frontline competence. Nordstrom
combination of complementary skills and knowledge stores achieve high levels of service because of the
bases embedded in a group or team that results in actions and decisions of hundreds of members of
the ability to execute one or more critical processes the sales force.
to world-class standard.”
It is possible for insight/foresight and frontline
According to the authors of this article, core competences to co-exist in the same company. But
competences can be grouped into two categories: each would require its own managerial focus. For
insight/foresight competences and frontline example, McDonald’s uses its frontline execution
execution competences. Insight/foresight competence to improve its food delivery system at
competences enable your company to learn facts individual restaurants and uses its insight/foresight
that create first-mover advantages. Insights can be competence to identify sites for its outlets.
derived from technical or scientific knowledge such
as optics knowledge and miniaturization ability, (e.g., Applicability to emerging markets
Canon), proprietary data, flair for inventing The application of the concept of core competence to
successful products (such as displayed by 3M), and strategy suggests that your company should ‘focus’
superior analysis and inference which may result in on serving its markets based on a portfolio of core
competencies. Tarun Khanna and Krishna Palepu in

20
their article, “Why Focused Strategies May Be Wrong counterparts in developed countries. Conglomerates,
for Emerging Markets”, argued that focus or which are reputed for their products and services,
emphasis on core businesses may not be the right can enter new businesses even if those businesses
strategy in emerging markets. They argued that focus are not related to their current product lines.
is good for western countries where there are Conglomerates have an advantage when they try to
institutions that support their business activities. But build brands because they can spread the cost of
many such institutions are absent in emerging maintaining brands across multiple lines of business.
markets. Companies must adapt their strategies to
fit a country’s product, capital, labor markets, and Conglomerates can also provide the flexibility
regulatory system. needed for labor markets. In emerging markets, rigid
labor laws prevent companies from laying off
According to Khanna and Palepu, diversified employees. Labor unions also insist on job security.
business groups are better suited to developing Conglomerates are in a better position to deal with
countries. The chaebols of Korea, the business rigid labor laws and union demands. Khanna and
houses of India, and the grupos of Latin America add Palepu are of the opinion that conglomerates can
value by carrying out the functions of several develop their own internal labor markets. If one
institutions that are prevalent in developed company in the group faces declining prospects, its
countries. employees can be transferred to other companies in
the group.
In product markets, there is dearth of information
due to three reasons: poor communication Conglomerates can also make better use of talent.
infrastructure in emerging markets; absence of a They can allocate talent where it is most required
mechanism to corroborate the claims made by and thus get a head start in beginning new activities.
sellers; and no mechanism for redressal if the For example, in India, the Wipro Group moved
product does not deliver on its promise. As there is beyond computers into financial services by
lack of information in emerging markets, companies transferring skilled engineers first to computer
incur higher costs for building brands than their

21
leasing services to make use of their technical skills
and then to a broad array of financial services.

Summary:
1 Core competence involves communication,
involvement, and a deep commitment to
working across organizational boundaries.
2 Core competence needs to be first identified
by your firm.
3 To develop core competence, your company
need not spend more on R&D than its
competitors.
4 A frontline execution competence refers to the
unique ability to deliver products and services
whose quality is equal to the best that could
have been produced under ideal
circumstances.
5 The application of the concept of core
competence to strategy suggests that your
company should ‘focus’ on serving its markets
based on a portfolio of core competencies.
6 Conglomerates have an advantage when they
try to build brands because they can spread
the cost of maintaining brands across multiple
lines of business

22
The Concept of Strategic Intent ‘Encircle Caterpillar’”, “Canon sought to ‘Beat Xerox”’
and “Honda strove to ‘become a second Ford - an
In this chapter, you will: automotive pioneer’”.
• Understand the concept of strategic intent
• Understand how corporate strategy can be The time horizon of strategic intent is long term.
used as leverage Strategic intent can be understood as your firm’s
• Learn the five-ways of realizing resource obsession to win, which is sustained over a long
leverage period of time, say, 10 to 20 years. However, strategic
intent is not a simple ambition: it involves enthusing
The term strategic intent refers to the purpose(s) the human resources, environmental scanning, and
your organization strives to achieve. Traditionally, a appropriate resource allocations guided by the
strategy was described in terms of matching the strategic intent.
resources your firm had at its disposal and the
opportunities being thrown up by the environment. Strategic intent envisages your company’s position in
However, Gary Hamel and C K Prahalad brought to the long term and furthers a unique point of view
light the concept of strategic intent. Strategic intent is about the future. Employees will be excited about
defined as the ability of your firm to think beyond its the feeling of exploring something new. It brings a
resources at a given point of time and define its sense of discovery. Strategic intent also possesses an
purpose in terms such as challenging the market or emotional edge. Employees feel that the pursuit of
industry leader. Hamel and Prahalad describe the the company’s goals is a worthwhile experience. In
success stories of Komatsu vis-à-vis Caterpillar, this way, it gives rise to a sense of shared destiny.
Honda vis-à-vis Chrysler, and Canon vis-à-vis Xerox to
explain that the ability of your firm to grow is not Competitive Strategy as Leverage
dependent on the resources at its disposal at a given Leveraging comes into the picture only when a
point of time; rather, it is the strategic intent which is resource-scarce firm is facing a wealthy rival. Wealth
reflected in terms beyond its resources at a given here refers to market share, financial resources, and
point of time. They wrote “Komatsu set out to revenue. The challenger has a small market share,

23
scarce resources, and little or no revenues. A ratios rather than from reducing the
challenger (a smaller firm) will exploit opportunities denominator.
to change the rules of the game rather than follow 5 The resource allocation task of management
the same rules that others in the game do. It will look has received too much attention as compared
for gaps in the bigger firm’s defenses rather than to the task of resource leverage.
fight the competitor in well-guarded market 6 The capacity for resource leverage is the
segments. It will focus its investments on relatively ultimate selection mechanism, separating the
fewer competencies where it sees a chance of being victorious from the victims in prolonged battles
a leader. It will also look for ways to reduce its for industry leadership.
manufacturing costs by following lean manufacturing
methods that make it possible to do more with less. Case Study: Resource Leverage Example:
Resource Leverage in the North Vietnam War
In their book ‘Competing for the Future’, Hamel and The experience of North Vietnam in its conflict with
Prahalad proposed that leveraging is based on an the US is an example of resource leverage. Necessity
understanding of the following premises: leads to invention; similarly, stretch leads to leverage.
1 Your firm is a portfolio of resources, as well as Facing the military might of the US, the North
a portfolio of products or market-focused Vietnamese had no other way except to resort to
business units. guerrilla warfare. They hoped to exploit the
2 Resource constraints are not necessarily an orthodoxies and complacency of the larger US army.
important impediment to the achievement of The Vietnamese tried to outmanoeuvre rather than
global leadership. overpower the US army.
3 Great differences do exist between different
firms in the market in terms of the competitive For example, the North Vietnamese could move their
impact they can generate with a given amount men and material freely across rivers, despite the
of resources. attempts of the US military to locate and destroy
4 Leverage-based efficiency gains come primarily bridges used for transfer of these resources. The
from raising the numerator in productivity Vietnamese built their bridges just below the water

24
line so that they couldn't be seen by the airborne Leverage Method: Efficiently accumulating
reconnaissance, and could be used by men and resources
machines. In this case, resource scarcity led to Techniques to be Adopted:
tactical creativity. • Mining: Every firm has access to information
that is collected from various sources. But
firms differ in their capacity to extract useful
information from the available stockpiles of
information.
• Borrowing: Resource leverage can also be
achieved by taking ideas from other firms. For
Realizing Resource Leverage example, Sony commercialised the transistor
and the charge-coupled device technologies
pioneered by AT&T’s Bell Laboratories.
Leverage Method: Concentrating resources on key
strategic goals Leverage Method: Complementing resources of one
Techniques to be Adopted: type with those of another to create more value
• Converging: Your firm can streamline the Techniques to be Adopted:
efforts of individuals, functional departments, • Blending: Different types of resources can be
and entire businesses by pursuing a single blended together in different ways to multiply
strategic intent over a long period. the value of each. Blending needs technology
• Focusing: Focusing protects your firm against generalization, systems thinking, and the
the dilution of resources at a particular point in capacity to optimize complex technological
time. trade-offs. For example, Honda was competent
• Targeting: Targeting ensures that the focus as an organization at blending engine-related
remains fixed on set priorities. technologies such as combustion engineering,
electronic controls, and lean burn.

25
 • Balancing: A balanced firm possesses a strong accept the market structure as defined by the
product-development capability, capacity to industry leader.
produce its products or deliver its services at
world-class levels of cost and quality, and a Leverage Method: Recovering, that is, by minimizing
sufficiently widespread distribution, marketing, the time between expenditure and payback
and service infrastructure. Techniques to be Adopted:
• Expediting success: The time between
Leverage Method: Conserving the resources expending resources and recovering resources
Techniques to be Adopted: should be minimized. A firm that completes
• Recycling: Resources must be as reused as far any activity in half the time, with similar
as possible. The more the resources are re s o u rc e s , h o l d s a t w o - f o l d l ev e ra g e
reused, the greater the resource leverage. For advantage. For example, the Japanese firms
example, companies such as Unilever and that were able to shorten their product-
P&G, recycle their product brands by using development times gained a competitive
unknown brands with well-known brands till advantage over their US and European
the new brands become popular. competitors.
• Co-opting: A potential competitor may be co-
opted to fight against a common enemy, to Summary:
work collectively to establish a new standard or 1 Strategic intent is defined as the ability of your
develop a new technology, or to build a lobby firm to think beyond its resources at a given
to influence a particular legislative issue. point of time and define its purpose in terms
• Protecting: Intelligent generals rarely attack such as challenging the market or industry
well-fortified positions. The objective in a war is leader.
to maximize enemy losses without facing much 2 The time horizon of strategic intent is long
risk. Similarly, a shrewd firm never attacks a term.
competitor in its local market. It does not try to
overpower a larger competitor, nor does it

26
3 Strategic intent envisages your company’s
position in the long term and furthers a unique
point of view about the future.
4 Leveraging comes into the picture only when a
resource-scarce firm is facing a wealthy rival.
5 The five ways of realizing resource leverage
are:
◦ Concentrating resources on key strategic
goals
◦ Efficiently accumulating resources
◦ Complementing resources of one type
with those of another to create more
value
◦ Conserving the resources
◦ Recovering, that is, by minimizing the
time between expenditure and payback

27
Intended and Realized Strategies For example, Bill Hewlett and Dave Packard decided
to first start a company and then decide what they
In this chapter, you will: would make. They had four products, a bowling foul
• Understand the difference between intended line indicator, automatic urinal flushers, fat reduction
and realized strategies of an organization shock machines, and audio oscilloscopes. None of
• Understand the various schools of thought on these products worked for the company which is
Strategy Formation today known as Hewlett Packard, one of the world’s
largest IT companies. The strategic ends pursued by
When we speak of strategy as plans for the future, a typical business could be either generic, like the
we refer to an intended strategy. When we speak of vision and mission of the organization, or more
strategy as actions taken, we refer to a realized focused, like the goals and objectives of the firm.
strategy. In both cases, we are considering the efforts
directed toward fulfilling your organization’s Every organization needs to be careful about aligning
purposes. In fact, strategy comprises the most the broad and narrow scenarios. Otherwise, money
fundamental ends and means of an organization. may be invested, time spent, energy dissipated, and
resources utilized to fulfill a narrow set of objectives
The realized strategy may be very different from the that do not move in the direction of the broader
intended strategy, and if so, it is termed as an vision of your firm. The focus of the set of narrow
emergent strategy. The emergent strategy is a intentions should be consistent with the broader
product of the interplays between your firm’s ones.
environment and the intended strategy. When the
environment renders the intended strategies Case Study: Schools of Thought on Strategy
redundant, new unplanned strategies emerge to Formation
counter the environment and these are known as The various points of view available in literature on
emergent strategies. strategy formation can be classified into ten schools.
The first three schools ‘prescribe’ some ideal
approaches to how strategies should be actively

28
 formulated; the next six schools ‘describe’ how
strategy is actually formed in practice. The tenth
school integrates both perspectives.

Prescriptive approach:
The Design School: Strategy formulation is a process
of conception
The Planning School: Strategy formulation is a formal
process
The Positioning School: Strategy formulation is an
analytical process

Descriptive approach:
The Entrepreneurial School: Strategy formation is a
visionary process
The Cognitive School: Strategy formation is a mental
process
The Learning School: Strategy formation is an
emergent process
The Power School: Strategy formation is a process of
negotiation
The Cultural School: Strategy formation is a collective
process
The Environmental School: Strategy formation is a
reactive process

Guide through Strategic Management

29
Integrative approach:
The Configuration School: Strategy formulation/
formation as a process of transformation.

Summary:
1 When we speak of strategy as plans for the
future, we refer to an intended strategy.
2 When we speak of strategy as actions taken,
we refer to a realized strategy.
3 When the environment renders the intended
s t ra t e g i e s re d u n d a n t , n ew u n p l a n n e d
strategies emerge to counter the environment
and these are known as emergent strategies.
4 Strategy can be formed using:
◦ Prescriptive approach
◦ Descriptive approach
◦ Integrative approach

30
The Three Levels of Strategy management, whereas in a multi business scenario,
there are three fully operative levels.
In this chapter, you will:
• Understand the three levels of strategy for an
organization

Strategy can be formulated at three levels, namely,

the corporate level, the business level, and the
functional level. At the corporate level, strategy is
formulated for your organization as a whole.
Corporate strategy deals with decisions related to
various business areas in which the firm operates
and competes. At the business unit level, strategy is
formulated to convert the corporate vision into
reality. At the functional level, strategy is formulated
to realize the business unit level goals and objectives
using the strengths and capabilities of your
organization. There is a clear hierarchy in levels of
strategy, with corporate level strategy at the top,
business level strategy being derived from the
corporate level, and the functional level strategy
being formulated out of the business level strategy.

In a single business scenario, the corporate and Levels of Strategy

business level responsibilities are clubbed together
and undertaken by a single group, that is, the top

31
Corporate Level may choose overall cost leadership as a strategy to
Corporate level strategy defines the business areas be pursued in its steel business, differentiation in its
in which your firm will operate. It deals with aligning tea business, and focus in its automobile business.
the resource deployments across a diverse set of The business level strategies are decided upon by the
business areas, related or unrelated. Strategy heads of strategic business units and their teams in
formulation at this level involves integrating and light of the specific nature of the industry in which
managing the diverse businesses and realizing they operate.
synergy at the corporate level. The top management
team is responsible for formulating the corporate Functional Level
strategy. The corporate strategy reflects the path Functional level strategies relate to the different
toward attaining the vision of your organization. For functional areas which a strategic business unit has,
example, your firm may have four distinct lines of such as marketing, production and operations,
business operations, namely, automobiles, steel, tea, finance, and human resources. These strategies are
and telecom. The corporate level strategy will outline formulated by the functional heads along with their
whether the organization should compete in or teams and are aligned with the business level
withdraw from each of these lines of businesses, and strategies. The strategies at the functional level
in which business unit, investments should be involve setting up short-term functional objectives,
increased, in line with the vision of your firm. the attainment of which will lead to the realization of
the business level strategy.
Business Level
Business level strategies are formulated for specific For example, the marketing strategy for a tea
strategic business units and relate to a distinct business which is following the differentiation
product-market area. It involves defining the strategy may translate into launching and selling a
competitive position of a strategic business unit. The wide variety of tea variants through company-owned
business level strategy formulation is based upon retail outlets. This may result in the distribution
the generic strategies of overall cost leadership, objective of opening 25 retail outlets in a city; and
differentiation, and focus. For example, your firm producing 15 varieties of tea may be the objective for

32
the production department. The realization of the
functional strategies in the form of quantifiable and
measurable objectives will result in the achievement
of business level strategies as well.

Summary:
1 Corporate Level Strategy:
◦ Defines the business areas in which your
firm will operate.
◦ Involves integrating and managing the
diverse businesses and realizing synergy
at the corporate level.
◦ Top management team is responsible.
2 Business Level Strategy:
◦ Involves defining the competitive
position of a strategic business unit.
◦ Decided upon by the heads of strategic
business units and their teams.
3 Functional Level Strategy:
◦ Formulated by the functional heads
along with their teams.
◦ Involve setting up short-term functional
objectives.

33
Developing a Strategic business environment. They reject or ignore or
reinterpret the unpleasant information that
Perspective does not tally with their own preferred views of
the operating environment.
In this chapter, you will: 3 Vested interests of the managers also play
• Understand how to develop a right strategic havoc with strategic planning. Managers prefer
perspective for your organization to maintain their existing position and power.
This personal interest results in continuation of
Developing the r ight stra tegic per spective the same strategies even in a changed
contributes to effective implementation of strategy. business environment.
However, organizations often fail to develop sound 4 Excessive involvement of senior managers in
strategic management perspectives for a variety of everyday operational problems also leads to
reasons. Some of these reasons are: inefficient strategic plans. This over-emphasis
1 Lack of awareness within the top management on regular activities leaves no time to study
team about your organization’s real operating emerging trends and to think about future
situation. This happens when information plans.
systems fail to provide the information the top 5 The top management in many organizations
management needs to determine your gets complacent after some initial successes.
organization’s position relative to competitors, This blinds the managers to the difficult
consumption trends, relative costs, etc. situations the company faces. This is another
2 “Kidding themselves” syndrome. This happens reason why managements often continue with
when senior managers are collectively tried and trusted strategies that may be
deluding themselves about the organization’s inappropriate in the present and future
condition. Usually this occurs when the senior scenarios.
management team acts as a tightly-knit group. 6 A change in direction is often misinterpreted as
As there is no flow of either fresh information an admission that what was done in the past
or new perspectives, the top managers tend to was a mistake. This makes managers who were
hold the same stereotyped views of your

34
 closely associated with decisions taken in the and the organization’s structure which determine the
past, reluctant to see the organization move in survival of your organization in the short and long
a new direction. term.
7 Inability on the part of the top management to
locate its competitive edge may also lead to its Summary:
ignoring strategy planning altogether. 1 Organizations fail to develop sound strategic
perspective because:
In general, organizations, like individuals, often ◦ Lack of awareness about the
abhor change and staunchly resist it. A crisis is organization’s real operating situation.
necessary to make the top management pay more ◦ “Kidding themselves” syndrome.
than lip service to strategic management. Perhaps ◦ Vested interests of the managers.
the biggest hindrance to strategy formulation is the ◦ E xc e s s i v e i n v o l v e m e n t o f s e n i o r
manager’s involvement in day-to-day business. managers.
Everyday events drive away the best strategic ◦ Complacency of the top management.
intentions. The solution is to make strategy ◦ Reluctance to see the organization move
development process a formal activity. in a new direction.
◦ Inability to locate its competitive edge.
Strategic management can be defined, as a rational
and intuitive process through which your firm
streamlines and leverages its resources on a
continuous basis to position itself distinctly from its
competitors. It involves evaluating and building upon
your firm’s strengths, and minimizing or eliminating
its weakness while taking advantage of the
opportunities emerging in the environment and
countering the threats effectively. It involves taking
decisions about business units, products, location,

35
Introduction to Strategic changes in the environment are essential in strategic
management.
Management Strategic management is a comprehensive
In this chapter, you will: procedure and starts with a strategic diagnosis. It
• Understand what is strategic management continues with a series of additional steps,
• Understand the process of strategic culminating in new products, markets, technologies,
management and capabilities. The strategic task of the leadership
• Learn tools that can be used for strategic team is to challenge the prevailing set-up with a
management process single question: “Why?”, and to ask the same
• Learn Strategy formulation, Strategy execution, question as many times as necessary to make the
evaluation and control future as clear as the present for managers at all
levels. For example, the strategist at a leading
Strategic management involves defining the vision luggage company in America would be asking
and the mission of your firm which clearly define questions like why should we not enter the European
what the firm aspires to become and the reason for market in the next financial year? Or why cannot we
its existence. Once the vision and mission are surpass our competitor’s market share in the next
defined, an internal and external environment two years? The answers to these questions will
analysis is carried out to identify opportunities and create avenues for growth which would not have
threats emerging in your firm’s environment and emerged had these questions not been asked.
your firm’s strengths and weaknesses.
Strategic management enables your firm to survive
The strengths of your firm are leveraged upon to in the long run. It maps your firm’s strengths and
build competitive advantages and core competencies weaknesses against the competitor’s strengths and
and capabilities to outperform competition. Strategic weaknesses and enables it to leverage on its
management is a continuous process and not a resources to achieve its goals. It is through strategic
point-in-time exercise. Periodic reviews of strategies management that the long-term vision for your firm
and the incorporation of new elements in line with

36
is set which provides your firm with an indication of Environmental Scanning
its growth direction. Strategic thinking involves Environmental scanning involves monitoring the
answering three basic questions: environment, and evaluating and disseminating
• Where are we now? information obtained from the internal and external
• Where do we want to go in the future? environments.
• How will we get there?
Following table lists out the external and internal
The Process of Strategic Management sources of information used for environmental
There are four basic elements in the process of scanning. The aim of environmental scanning is to
strategic management: identify the strategic factors that may determine the
• Environmental scanning future of your firm. An organization can derive
• Strategy formulation several benefits from environmental scanning
• Strategy execution (implementation) including the development of a common perception,
• Evaluation and control identification of strengths and weaknesses an
understanding of trends and conditions, and the
optimum utilization of internal and external
information. Techniques such as secondary research,
surveys, and questionnaires focus groups, and open
forums can be employed in environmental scanning.

SWOT analysis is often used along with

environmental scanning. SWOT is an acronym for the
strengths, weaknesses, opportunities, and threats
faced by your firm. Strengths and weaknesses are
within the control of the top management in the long
run. Opportunities and threats are external factors
The Process of Strategic Management
that are outside the control of the organization.

37
Following table depicts the SWOT analysis for a Strengths Weaknesses
hypothetical tire company. In the automotive
• S t r o n g m a r k e t • Deteriorating liquidity
segment, the company supplies tires to major
original equipment manufacturers and has an position • Lower inventory
• Diversified operations turnover ratios
equally strong position in the replacement market.
• Strong focus on • L o w employee
Research & productivity
Development
External Sources of I n t e r n a l S o u rc e s o f
Information Information Opportunities Threats
• Expansion of global • I n c r e a s i n g r a w
• Personal contacts • Personal contacts
• Journals/magazines, • Internal reports and airline fleet material costs
• Opportunities in India • Sluggish heavy and
books, newspapers conference papers
• Annual reports • Internal memoranda and China medium truck tire
• Positive outlook for sales
• Prof. conferences and • Committees / Meetings
meetings • Sales staff, employees specialty tires • Intense competition

• Radio, television, and and managers

the Internet • Internal databases
• Prof. Network • Internal audits and the A careful analysis of the SWOT here will clearly
• Customers Board highlight the areas on which the firm needs to focus.
• Commercial DBs • Directors For instance, immediate attention needs to be given
to improving employee productivity and improving
the inventory turnover ratio.

Case Study: Sears Reinvents Itself

In the 1980s, Sears, which was one of the largest
retailers in the United States, entered other

38
businesses such as banking, investment, and real some stores, and launched an advertising campaign
estate services, in addition to selling appliances, to effect a turnaround at Sears. Through extensive
hardware, clothes, and other goods. In those days, customer research, Sears found that its hardware
the ‘Big Book’ catalog of Sears was considered the lines enjoyed a very high level of brand loyalty.
primary (and sometimes the only) source for items Moreover, research suggested that customers
ranging from wrenches to bathtubs. preferred convenience to breadth of category in its
hardware stores.
When Sears diversified its activities from its main
business of retail sales, the company steadily lost After its hardware store idea was successfully tested,
ground in retailing, falling from the Number 1 the company drew up a plan to set up 1,000
position to Number 3 behind Wal-Mart Stores, Inc. freestanding, 20,000-square-foot hardware stores by
and Kmart Corporation. Sears could not keep up with 2006 at a cost of $1.25 million per outlet.
discounters such as Wal-Mart and Kmart, and with
specialty retailers such as Toys R Us, Home Depot, Strategy Formulation
Inc., and Circuit City Stores, Inc. that focused on a Strategy formulation refers to the development of
wide selection of low-price merchandise in a single long-term actionable plans for managing
category. Neither could Sears compete with trend- o p p o r t u n i t i e s a n d t h re a t s i n t h e ex t e r n a l
setting department stores. In the 1990s, Sears came environment, and for utilizing the strengths and
to a stage where it was neither sure of its customers overcoming the weaknesses within your
nor its competitive basis. This was a lacuna in the organization. The strategy team takes into
company’s strategy. consideration components of strategic management
such as mission, internal profile, external
Arthur C. Martinez, the then CEO of Sears, went in for environment, strategic analysis and choice, long-
a major strategic overhaul. Under the new strategy, term objectives, annual objectives, and grand
the company decided to concentrate on its core strategy while formulating a strategy. Above case
businesses. It disposed of its non-retail assets, study describes environmental scanning and strategy
upgraded the section on women’s apparel, renovated formulation in a firm.

39
Strategy formulation helps an organization to: incentives to ensure superior efficiency, quality,
• Capitalize on available opportunities. innovation, or customer responsiveness.
• A d d re s s t h e c h a l l e n g e s f a c e d by t h e
organization. Budgets are used for planning and control. The
• Provide leadership that understands and budget details the investments to be made and the
masters change. returns expected from the investments. The budget
• Incorporate an in-depth planning model. is also a proforma financial statement.

Strategy Execution Case Study: Strategic Objective of Ford Motor

The process by which strategies are put into action is Company
called strategy execution or strategy implementation. “To satisfy our customers by providing quality cars
Programs, budgets, and procedures are developed and trucks, developing new products, reducing the
for this purpose. This process may call for changes in time it takes to bring new vehicles to market,
overall culture, organizational structure, and/or the improving the efficiency of all our plants and
management system. Strategy execution is typically processes, and building on our teamwork with
handled by middle and lower level managers, except employees, unions, dealers, and suppliers.”
when drastic organization-wide changes are needed.
However, the progress of the implementation is Case Study: Financial Objective of 3M Corporation
reviewed by the top management from time to time. “To achieve annual growth in earnings per share of
10 percent or better, on average; a return on
Your firm’s structure plays a vital role in achieving its stockholders’ equity of 20-25 percent; a return on
objectives. A proper structure is essential for strategy capital employed of 27 percent or better; and have at
to be operational. Structure serves as a vehicle for least 30 percent of sales come from products
managers to exploit the skills and capabilities of their introduced in the past four years.”
subordinates. They can further use the structure in
motivating their subordinates through providing

40
Evaluation and Control execute the strategies. Unbiased information is
The ultimate test of the strategy is its ability to essential as this information is used for corrective
achieve the ends — in terms of vision, mission, and action and to minimize the mistakes the organization
long-term objectives. The firm is successful only to might commit in the future.
the extent that the strategy used achieves the ends.
Strategy formulation is largely subjective, and the Feedback is a very important part of the evaluation
first test of reality for a strategy is in its process as it provides an opportunity to revise or
implementation. When a strategy is implemented, it correct decisions made in the earlier stages. Poor
should be monitored to determine the extent of performance indicates that something has gone
success, that is, the number of objectives achieved. wrong with either strategy formulation or
Strategic managers should employ timely monitoring implementation. It could also mean that a variable
and control methods, to ensure successful execution was ignored in the environmental analysis.
of the strategy. Periodic review and evaluation is also
helpful for making modifications to the plan. The feedback from execution, evaluation, and control
will loop back into the early stages of planning.
Evaluation and control refer to the processes in Feedback is defined as the post-implementation
which corporate activities and performance results results, collected as inputs for future decision-
are compared with the desired performance. This making. Plans for the future should reflect changes
information is used to take corrective action and brought about by previous strategic actions.
resolve problems. It also pinpoints the weaknesses
of strategic plans implemented earlier. Thus, this Refer to following Case Study for details of Wal-
exercise provides a valuable opportunity for Mart’s failure in strategic management/execution in
organizational learning. its German operations.

For effective evaluation and control, your firm’s Case Study: Wal-Mart’s Misadventure in Germany
management must obtain clear, prompt, and For the world’s largest retailing company — Wal-Mart
unbiased information from the people who actually Inc. (Wal-Mart) — the German market was proving to

41
be a tough nut to crack. By 2003, even five years in the German market. However, as Wertkauf
after entering Germany, Wal-Mart was continuing to covered only southwestern Germany, it failed to
make losses. Though Wal-Mart did not reveal these provide the required market penetration to Wal-Mart
figures, analysts estimated its losses at around US$ in Germany. In 1998, Wal-Mart acquired Interspar’s
200-300 million per annum in Germany, over the 74 hypermarket stores to raise the total number of
five-year period. Wal-Mart stores in Germany to 95.

According to analysts, the main reason for Wal-Mart’s With the acquisition of Interspar’s stores, Wal-Mart
losses was its failure to understand the German became the fourth largest hypermarket retailer in
culture and the shopping habits of the Germans. Germany. However, neither the Wertkauf nor the
Though Wal-Mart was famous the world over for its Interspar stores were popular with German
Every Day Low Pricing (EDLP), which had turned it consumers. A major challenge for Wal-Mart was to
into the world’s number 1 retailer, it failed to make change customer perceptions about the stores. Wal-
an impact on Europe’s most price-sensitive market — Mart was criticized for acquiring Interspar’s stores as
Germany. Wal-Mart also ran into a series of they had made heavy losses and had a poor brand
problems with German regulatory authorities for its image in the public mind. However, while
pricing strategies and faced considerable opposition acquisitions may not have been the ideal route for
from German suppliers to its centralized distribution Wal-Mart to take in Germany, the company, in fact,
system. It had problems with its German workers had little choice. The German government was
too. refusing new licenses for food and grocery retailing,
so if it wanted to enter the German market, Wal-Mart
Wal-Mart expanded its presence into Germany had to go in for acquisitions. Soon after acquiring the
through acquisitions. It acquired the 21-hypermarket stores, Wal-Mart hurried through with their
stores of Wertkauf in 1997. The Wertkauf stores renovation and put its brand name on them to make
offered both food and general merchandise to sure its EDLP message went across. But it was unable
customers. Wal-Mart sources said that Wertkauf to cash in on its EDLP selling point, chiefly because of
stores would provide it with the necessary foothold the strong competition from German retailers.

42
W h e n ev e r Wa l - M a r t l ow e re d i t s p r i c e s o n Summary:
commodities, German retailers such as Aldi, Lidl, 1 Strategic management involves defining the
Rewe, and Edeka too lowered their prices to retain vision and the mission of a firm which clearly
their customers. Wal-Mart therefore found it difficult define what the firm aspires to become and
to get a foothold. the reason for its existence.
2 Strategic management is a comprehensive
The lack of strong vendor relations also affected Wal- procedure and starts with a strategic diagnosis.
Mart’s operations in Germany. Unlike in the US, 3 Strategic management enables your firm to
where the company and its suppliers were survive in the long run.
accustomed to centralized distribution, in Germany, 4 Basic elements of strategic management are:
suppliers were not comfortable with the system that ◦ Environmental scanning
Wal-Mart adopted. ◦ Strategy formulation
◦ Strategy execution (implementation)
Another operational problem that Wal-Mart faced ◦ Evaluation and control
was employee unrest. It was accused of paying low
wages and of not providing good working conditions.
Wal-Mart did not understand the German work
culture. It ran into trouble with the German unions
when it announced employee lay-offs and store
closures in 2002 in order to reduce its personnel
costs. In addition, it also refused to accept the
centralized wage-bargaining process in the German
retail industry. Because of this, the trade unions
organized a walk-out from Wal-Mart stores, which led
to bad publicity for the company.

43
Components of Strategy The mission identifies the purpose of your company;
defines the scope of your company’s operations;
Formulation describes your company’s product, market, and
technological areas of thrust; and reflects the values
In this chapter, you will: and priorities of its strategic decision-makers. It sets
Understand the various components required to apart one company from other companies in the
formulate the strategy of your organization. same area of business. The mission of a business
• Understand the implications of the strategy on looks to an endless future as if your firm were
managers. immortal.

Strategy formulation involves the interplay of External Environment

interrelated components which enable your firm to The external environment of your company
compete effectively and survive in the dynamic comprises forces and conditions over which your
business world. The components are: vision and firm has little or no control, and they exert an
mission, external environment, internal profile, long- influence on your company’s strategic options as well
term objectives and annual objectives, grand as on its competitive position. The external
strategy, generic strategy and functional/operational environment is of two types, the operating
strategies. environment and the remote environment. The
operating environment has a direct bearing on your
Vision and Mission firm’s performance and includes variables like
Your company’s vision is a description of what the competitors, consumers, and vendors. The remote
organization is trying to do and to become. It gives a environment, on the other hand, includes political,
view of your organization’s future direction course of social, economic, and demographic variables.
business activity. Above all, the vision is a powerful
motivator and keeps your organization moving Internal Profile
forward in the intended direction. An internal analysis of your firm’s resources helps in
determining your company’s capabilities and

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developing an internal profile. The profile reflects the instance, if your firm’s long-term objective is to
strengths and weaknesses of your firm and also increase market share from 8% to 16% over the next
evaluates the past performance of your firm in the 4 years, then the annual objective might be to
context of current capabilities. This is done to increase the market share by 2 percentage points
identify the capabilities required by your firm in the every year. Achieving the short-term objectives will
future. lead to achievement of the long-term objectives.

Long-term Objectives and Annual Objectives Grand, Generic, and Functional/Operational

Objectives are outlined in order to translate your Strategies
organization’s vision and mission into clearly defined A grand strategy is a statement of means that
performance targets. In terms of time horizon, indicates the methods to be used to achieve your
strategic management uses two types of objectives firm’s objectives. This strategy is a unique package of
— long-term objectives and annual objectives. long-term strategies. The grand strategy provides the
framework for the entire business of your firm.
Long-term objectives refer to those results that your Grand strategies include the following strategies:
organization seeks to achieve over a number of market penetration, market development, product
years. Such objectives are typically set in terms of development, horizontal integration, vertical
m a r ke t s h a re , re t u r n o n a s s e t s d e p l oy e d , integration, concentric diversification, conglomerate
profitability, technological leadership, employee diversification, turnarounds, divestiture, and
relations, social responsibility, and employee liquidation.
development.
For competing in each of its businesses, your firm
Annual objectives are the objectives that your firm can choose a generic competitive strategy — cost
seeks to achieve in one year. Annual or short-term leadership, differentiation, or focus.
objectives flow from the long-term objectives. The
short-term objectives are more specific and are to be The grand strategy is split into strategies for each
achieved within a time span of one year. For function. These strategies are referred to as

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functional strategies. They are specific to the needs relevant environmental variables, and vice
of each functional area and prescribe an integrated versa.
action plan for every function. Operational strategies • The process of strategic management should
provide the means for achieving annual objectives. be kept flexible. If the strategic plan has to be
Your company budget is coordinated with the needs re-evaluated because of factors like the entry
of operating strategies to ensure specificity, of new competitors or appointment of a new
practicality, and accountability in the plans. CEO for your firm, then the process should
start once again with environmental analysis.
Strategic analysis is taken up to identify attractive However, equal attention need not be given to
investment opportunities which are compatible with all the components of the process; instead,
your firm’s vision and mission. Such opportunities attention paid to different components should
are called desired opportunities. Strategic choice is be based on need. The mission statement may
made after comparing the desired opportunities. The remain the same for a long time, whereas
goal of strategic analysis and choice is to ensure that objectives and strategies may have to be
your firm’s grand strategies are aligned with the updated annually in tune with the
objectives of your firm in order to optimally achieve achievements of the firm.
the vision and mission of the firm. • Strategic management would fail if it is based
on a wrong set of assumptions or on arbitrary
Implications for Managers and inflexible goals. It will also fail if a system
Looking at strategic management as a process helps of controls is not implemented to achieve a
to highlight certain aspects of the model: b a l a n c e a m o n g c u l t u re , rew a rd s , a n d
• Strategic management is done keeping in view boundaries.
the environment and your organization’s • Pursuing a uni-dimensional strategy which
capabilities. A change in any component of the focuses on a short-term competitive advantage
strategy formulation model will have an instead of creating a long-term, sustainable
influence on several other components. For competitive advantage is bound to result in the
instance, the mission has an effect on the failure of strategic management.

46
 • Strategic management is bound to fail if the
communication in your organization is stifled.
• Strategic management is a continuous process
and not an event to be executed at a point of
time. The dynamic nature of the environment
makes it a continuous process. Failure to
recognize the environmental flux also results in
a failure to achieve coordination and
integration of core processes and key functions
across organizational boundaries.

Summary:
1 Components of Strategy formulation include:
◦ Vision and Mission
◦ External Environment
◦ Internal Profile
◦ Long-term Objectives and Annual
Objectives
◦ G ra n d , G e n e r i c , a n d F u n c t i o n a l /
Operational Strategies

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Strategic Decision-Making
In this chapter, you will:
• Understand the process of strategic decision-
making.
• Understand the various modes of strategic
decision-making.

Strategic management places a heavy emphasis on

strategic decision-making. As organizations grow
larger and environments become more uncertain,
decisions become increasingly more complex and
difficult to make. For a decision to be called strategic,
it should have the following characteristics:
• It deals with the long-run future of the entire
organization.
• It commits substantial resources and demands
a great deal of commitment from people at all Modes of Strategic Decision Making
levels.
• It acts as a directive. It sets a precedent for
lower level decisions and future actions, and Henry Mintzberg has classified strategic decision-
has implications for the entire organization. making into three different modes:
• Entrepreneurial mode
• Adaptive mode
• Planning mode

48
There is a fourth approach — logical incrementalism Planning mode
— which has some characteristics of each of these In this mode, appropriate information for situational
three approaches. analysis is gathered systematically. A few feasible
alternative strategies are developed and the most
Entrepreneurial mode appropriate strategy is selected. The planning mode
In this mode, strategies are framed by one powerful e n c o m p a s s e s b o t h a p ro a c t i v e s e a rc h f o r
individual. The entrepreneurial mode focuses solely opportunities and a reactive solution to existing
on your organizations opportunities. Problems problems. The planning mode helps your firm to be
associated with strategy are given secondary better prepared for environmental uncertainties.
importance. Strategy is formulated based on the
founder’s own vision of direction and is exemplified Though every mode of strategic decision-making can
by bold decisions. The dominant goal is the growth be used in one situation or the other, the planning
of the organization. Apple Computer, Inc. (now mode, which includes the basic elements of the
Apple, Inc.), under the leadership of Steve Jobs, strategic management process, is a more rational
provides an example of this mode of strategic and better method of strategic decision- making than
decision-making. The disadvantage of this mode is the others. It is more appropriate for dealing with
that it does not consider problems that may arise complex and changing environments.
during strategy implementation. The advantage is
the speed with which a strategy can be formulated Logical incrementalism
and implemented. There is a fourth approach that might be followed by
your firm — logical incrementalism. It is a synthesis
Adaptive mode of the three approaches just mentioned. When
This mode is characterized by reactive solutions to developing strategies, organizations choose an
existing problems. This mode of decision making interactive process for probing the future,
results in a fragmented strategy with incremental experimenting, and learning from a series of
improvement. incremental commitments. This approach is useful
when the environment is changing rapidly and it is

49
important to build a consensus before committing Strategic management is concerned with both
the entire company to a specific strategy. efficiency and effectiveness
Strategic management lays emphasis on both
Characteristics of Strategic Decisions efficiency and effectiveness. It deals with the
The characteristics of strategic decisions flow from environment over which your firm has little or no
the nature of strategic management. There are control. Accordingly, efficiency, that is, doing things
several important differences between strategic right might lose validity and relevance if the
management and various management functions environment conditions undergo a change. It is
like operations, human resources, marketing, effectiveness which will align the activities and
accounting, finance, and research and development. strategies to the dynamic environment. Effectiveness
The distinguishing features of strategic management when coupled with efficiency will enable your firm to
are listed here. achieve its mission and hence strategic management
places a balanced importance on both.
Strategic management entails multiple time
horizons Strategic management integrates various
Strategic management involves strategy formulation functions
at three levels, namely, the corporate level, the Strategic management adopts an integrative
business level and the functional level. The three perspective of the various functional areas in your
levels have different orientations of time, though organization. This enables organization to build on
they are synchronized in their objectives. The its strengths and minimize its weaknesses across
corporate manager deals with the vision of your functional areas and also provides synergistic effects
organization, which has a long-term perspective. The for your organization.
strategic business unit level managers deal with,
translating the vision into the mission and objectives
for your firm and they have a medium-term
perspective. The functional managers tend to have a
short-term perspective.

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Strategic management considers a broad range
of stakeholders
Strategic management deals with both the external
environment (operating and remote) and the internal
environment effectively, and meets the expectations
of the various stakeholders. The hierarchical level of
strategy formulation helps in meeting the
expectations of a wide variety of stakeholders.

Summary:
1 Modes of Strategic Decision-Making include:
◦ Entrepreneurial mode
◦ Adaptive mode
◦ Planning mode
◦ Logical incrementalism


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