mb0052 slm full

Strategic Managementand Business Policy

INSPIRED BY LIFE

®

Manipal

Sikkim Manipal UniversityDirectorate of Distance Education

Subject Code: MB 0052 Book ID: B1699

Edition: Spring 2010

Sikkim Manipal UniversityDirectorate of Distance Education

Department of Management Studies

Board of Studies

Chairman Pankaj KhannaHOD, Department of Management Studies DirectorSMU DDE HR, Fidelity Mutual Fund

Additional Registrar Shankar JagannathanSMU DDE Former Group Treasurers

Wipro TechnologiesDr T.V. Narasimha RaoAdjunct Faculty and Advisor Abraham MathewSMU DDE Chief Financial Officer

Infosys BPOProf. K.V. VaramballyDirector Sadhana DashManipal Institute of Management Senior HR ConsultantManipal

Edition: Spring 2010

Print:Printed at Manipal Technologies LtdPublished on behalf of Sikkim Manipal University, Gangtok, Sikkim byVikas® Publishing House Pvt Ltd

Author: A NagCopyright © Reserved, 2012

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Author’s Profile

Dr. A Nag is currently a strategy consultant and teaches strategic management, strategicmarketing and international business strategy in various institutes. He is a PhD inEconomics from Jadavpur University, Kolkata. He was an Assistant Professor, BITSPilani, and then Associate Professor, XLRI, Jamshedpur. Dr Nag moved to the industryand joined MMTC as Economic Advisor (Metals) and then moved to line functions–firstas GM and later as Chief General Manager, Metals Division. Subsequently, he joinedHindalco Industries as Advisor (Commercial). Later, he became the Director of NihonIspat Pvt. Ltd. He subsequently returned to academics as Senior Professor, StrategyArea, IMM, New Delhi, and later served as Director (Research and Consultancy) in thesame institute. He has also been a visiting faculty at IIFT, IIT (Delhi) and WesternInternational University, USA. A prolific writer, Dr Nag has contributed many papers andarticles in national and international journals and has published a number of books onmanagement, marketing and strategy.

Peer Reviewed by:

Dr. Narendranath Menon has been a Senior Faculty member at the Institute of PublicEnterprise at the postgraduate level. Earlier, he retired as a professor from theDepartment of Business Management, Osmania University. His areas of interest includeStrategic Management, in which he has handled several courses. He has publishedseveral articles in different journals.

In House Content Review Team

Dr. Sudhakar G. P Shubha. PHOD, Department of Management Studies Assistant Professor, DepartmentSMU DDE of Management Studies

SMU DDE

Contents

Unit 1

Understanding Corporate Strategy 1–18

Unit 2

Strategic Management Process 19–46

Unit 3

Business Policy, Strategic Management

and Business Continuity Planning 47–73

Unit 4

Corporate Strategy and Corporate Governance 75–102

Unit 5

Corporate Mission, Objectives and Responsibility 103–131

Unit 6

Internal Competences and Resources 133–162

Unit 7

External Environmental Factors 163–192

Unit 8

Stability Strategies 193–221

Strategic Management and Business Policy Contents

Sikkim Manipal University Page No. (vi)

Unit 9

Strategy for Managing Change 223–248

Unit 10

Expansion Strategies 249–278

Unit 11

Industry and Competition Analysis 279–312

Unit 12

Selection and Activation of Strategy 313–343

Unit 13

Implementation: Structures and Systems 345–374

Unit 14

Implementation: Functional and Operational 375–404

Unit 15

Implementation: Behavioural and Values 405–433

Unit 16

Strategy Evaluation and Control 435–464

MB0052

Strategic Management and Business Policy

Course Description

Any discussion on business and management today is incomplete without

discussing two major forces: one is ‘competition’, and the other is ‘strategy’.

Both these forces coexist or are correlated; in simple words, we can say that it

is competition that drives strategy. For an organization to survive and grow, it is

important to have a strategy. A strategy is a plan, method, or series of maneuvers

or stratagems forobtaining a specific goal or result.

You must have seen or read about the well-known Fortune 500 list, an annual

list compiled and published by Fortune magazine that ranks the top 500 US

companies. Every year, some new names are added and some others are deleted

from this prestigious list. One common reason, which explains both the inclusions

and the deletions, is the ‘strategy’of the respective companies. So, strategy

plays a vital role in organizations. The various units in this book try to explain

‘strategy’ to make the understanding of the concept and its application clearer

and more meaningful.

Sikkim Manipal University Page No. (ix)

Course Objectives

At the completion of this course, the student will be able to explain corporate

strategy, its definition and nature. The student will be able to describe the

corporate strategy in different types of organizations, as well as differentiate

between policy, strategy and tactics, between strategic planning and strategic

management, and corporate strategy and corporate governance. The student

will be able to analyse strategy and its various aspects. Specifically, the student

will learn to:

• discuss corporate strategy, its definition and nature and the strategic

management process

• define ‘corporate mission’ and ‘corporate vision’, as well as corporate

philosophy

• analyse the major factors of environment that impact a business

This book, Strategic Management and Business Policy comprises 16 units that

cover various aspects of strategic management.

Unit 1 - Understanding Corporate Strategy: This unit discusses corporate

strategy, its definition and nature, as well as its levels in an organization.

Unit 2 - Strategic Management Process: This unit gives an overview of the

strategic management process in terms of different approaches, levels in SMP,

planned or intended and realized strategies, the people involved, roles of the

chief executive, board of directors and consultants, among others.

Unit 3 - Business Policy, Strategic Management and Business Continuity

Planning: This unit deals with the difference between policy, strategy and tactics,

between strategic planning and strategic management. It discusses the benefits

and limitations of strategic management, explains the role of business ethics in

strategic management and describes business continuity planning.

Unit 4 - Corporate Strategy and Corporate Governance: This unit explains

the conceptual difference between corporate strategy and corporate governance,

and discusses the growing importance of corporate governance.

Unit 5 - Corporate Mission, Objectives and Responsibility: This unit define

what is business, explains the terms ‘corporate mission’ and ‘corporate vision’,

as well as corporate philosophy. It also discusses the corporate objectives and

goals of a company.

Unit 6 - Internal Competences and Resources: This unit defines the

competence of an organization and the various types of competences.

Unit 7 - External Environmental Factors: This unit analyses the major factors

of environment that impact a business, explains the techniques of environmental

scanning and discusses environment forecasting.

Unit 8 - Stability Strategies: This unit discusses the concept and meaning of

stability strategies, analyses the portfolio model – the BCG, and differentiates

among four generic strategies and modern modifications.

Unit 9 - Strategy for Managing Change: This unit analyses corporate

restructuring as a strategy, diiscusses restructuring in the Indian corporate sector

and the corporate turnaround strategy.

Unit 10 - Expansion Strategies: This unit highlights alternative expansion

strategies, analyses different diversification strategies and focuses on joint

venture and issues involved in it.

Unit 11 - Industry and Competition Analysis: This unit discusses the different

industry types and structures, analyses industry structure and competitive

strategy and shows how to conduct industry analysis.

Unit 12 - Selection and Activation of Strategy: This unit analyses the process

of strategy choice or selection and discusses strategy selection factors or criteria.

Unit 13: Implementation: Structures and Systems

This unit discusses the structure of an organization and various structural types

and the concept and tool of the virtual organization.

Unit 14 - Implementation: Functional and Operational: This unit discusses

the issues related to functional implementation and operational implementation

of strategy.

Unit 15 - Implementation: Behavioural and Values: This unit analyses the

role of leadership in strategy implementation, discusses the role of organizational

culture in implementation of strategy and focuses on the role of business ethics

and values in implementation.

Unit 16 - Strategy Evaluation and Control: This unit discusses the evaluation

and control process in an organization and identifies the evaluation and control

criteria: pre-implementation and post-implementation.

Sikkim Manipal University Page No. (x)

Strategic Management and Business Policy Course Objectives

Strategic Management and Business Policy Unit 1

Sikkim Manipal University Page No. 1

Unit 1 Understanding Corporate Strategy

Structure

1.1 Introduction

1.2 Caselet

Objectives

1.3 What is Strategy?

1.4 Strategic Window

1.5 Corporate Strategy in Different Types of Organizations

1.6 Lack of Strategic Management in Some Companies

1.7 Ten Principles of Strategy

1.8 Case Study

1.9 Summary

1.10 Glossary

1.11 Terminal Questions

1.12 Answers

1.13 References

1.1 Introduction

Any discussion on business and management today is incomplete without

discussing two major forces: one is ‘competition’, and the other is ‘strategy’.

Both these forces coexist or are correlated; in simple words, we can say that it

is competition that drives strategy. For an organization to survive and grow, it is

important to have a strategy. You must have seen or read about the well-known

Fortune 500 list, an annual list compiled and published by Fortune magazine

that ranks the top 500 US companies. Every year, some new names are added

and some others are deleted from this prestigious list. One common reason,

which explains both the inclusions and the deletions, is the ‘strategy’ of the

respective companies. So, strategy plays a vital role in organizations. Let us try

to understand what strategy is.

Strategy is a concept that is used universally but understood differently,

and, therefore, defined differently. In fact, strategy as a concept is better

described and more easily put into practice than defined. Most companies

recognize that strategy is central to business and management. It is also

recognized that it is strategy that makes the difference between success and

failure of many companies and businesses. Yet, there is always a lack of

conceptual clarity about what strategy is. In this unit define and explain ‘strategy’



to make the understanding of the concept and its application clear and

meaningful.

In this unit, we will discuss corporate strategy, its definition and nature, as

well as its levels in an organization. You will be able to understand corporate

strategy in different types of organizations, why some organizations do not

practice strategic management and the principles of strategic management.

1.2 Caselet

Every organization, big or small, follows a certain strategy to achieve its

goals, which are specific to its market. For example, for a long time, the oil

company Shell had focused on selling oil only. Thus, selling oil was its

corporate strategy. For the past few years, the company, like other major

oil producers, has found itself at the heart of the debate over climate change.

The company’s operations alone led to carbon emissions that account for

some 3.6 per cent of global fossil-fuel CO2 emissions in any year—a total

greater than that of the entire United Kingdom. In response to this situation,

Shell took an early position on the issue and started adopting strategies to

address climate change. The company engaged in actions that began to

manage its carbon footprint. These actions have earned the company

credibility and a powerful voice within policy, advocacy and market circles.

Objectives

After studying this unit, you should be able to:

• Explain strategy, its nature and levels of strategy

• Discuss the concept of strategic window

• Describe corporate strategy in different types of organizations

• Explain why some organizations do not undertake strategic management

• List ten principles of strategy

1.3 What is Strategy?

The word ‘strategy’ comes from Greek strategies, which refers to a military

general and combines stratus (the army) and ago (to lead). The concept and

practice of strategy and planning started in the military, and, over time, it entered

business and management. The key or common objective of both business



strategy and military strategy is the same, i.e., to secure competitive advantage

over the rivals or opponents. We will discuss the similarity between business

and military strategies in detail later.

1.3.1 Evolving Definitions of Strategy

Seven definitions of strategy are given below which have evolved over a period

of more than 30 years (1962–96). During this evolutionary process, different

authors have focused on different aspects of the definition of strategy. Let us

see these definitions.

Chandler (1962): 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.

Source: A Chandler, Strategy and Structure: Chapter in the History of the American

Enterprise (MIT Press, 1962).

Andrews (1962): 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 or is to be and the kind of company it is or is to be.

Source: K R Andrews, The Concept of Corporate Strategy (Homewood: Jones Irwin,

1995)

Ansoff (1965): The common thread among the organization’s activities and

product-markets ... that defines the essential nature of business that the

organization was or planned to be in future.

Source: H I Ansoff, Corporate Strategy (New York: McGraw-Hill, 1965).

Glueck (1972): A unified, comprehensive and integrated plan designed to assure

that the basic objectives of the enterprise are achieved.

Source: W F Glueck, Business Policy—Strategy Formation and Management Action

(New York: McGraw-Hill, 1976).

Mintzberg (1987): A pattern in a stream of decisions and action. (Mintzberg

distinguishes between intended strategies and emergent strategies. These are

discussed in Unit 2).

Source: H Mintzberg, ‘Crafting Strategy’, Harvard Business Review (September–October,

1987).

Ansoff (1984): Basically, a strategy is a set of decision-making rules for the

guidance of organizational behaviour.

Source: H I Ansoff, Implementing Strategic Management (London: Prentice Hall

International, 1984).



Porter (1996): Developing and communicating the company’s unique position,

making trade-offs, and, forging fit among activities.

Source: M E Porter, ‘What is Strategy.’ Harvard Business Review (Nov–Dec, 1996),

61–78.

1.3.2 Business Strategy and Military Strategy

As mentioned in the beginning, in many respects, business strategy is similar to

military strategy. Both business and military organizations try to use their

strengths to exploit the weaknesses of their competitors. If the strategy is not

commensurate with the strengths and weaknesses of the organization, efficiency

in operation and implementation may not lead to success. This is true of both

business and military organizations.

Business or military success is not the result of any accidental strategies.

Rather, success is the outcome of continuous attention to internal and external

conditions and formulation and implementation of strategies to suit those

conditions. The element of surprise or unforeseen situations provides a challenge

as well as an opportunity for both military and business strategy; in both the

cases, information and data on opponents’ or competitors’ strategies and

resources are vital inputs for success.

There is, however, a basic difference between military strategy and

business strategy. Business strategy is formulated, implemented and evaluated

with an assumption of competition, but military strategy is based on the

assumption of conflict. Also, military strategies are implemented in the field

(front or border) but, business strategies are implemented in the marketplace.

Nevertheless, military conflict and business competition are so similar that many

strategic management techniques apply equally to both. Superior strategy in

both can overcome an opponent’s superiority in resources and numbers. Both

business and military organizations must adapt to change and constantly improve

or innovate to be successful. Often, companies and military organizations do

not change their strategies when the environment and competitive conditions

warrant a change. This may lead to failure. Here is a good military example of

such a situation:

When Napoleon won, it was because his opponents were committed to

the strategy, tactics and organizations of earlier wars. When he lost—against

Wellington, the Russians and the Spaniards—it was because he, in turn, used

tried-and-true strategies against enemies who thought a fresh, who were

developing the strategies not of the last war but the next.1



1.3.3 Levels of Strategy

Strategies exist at different levels in an organization. Three different levels of

organizational strategy can be clearly distinguished (Figure 1.1).

Figure 1.1 Levels of Strategy

Corporate-level strategies are concerned with overall purpose or objective

of the organization; for example, diversification through joint venture, merger or

acquisition. Business unit-level strategies address themselves to issues of a

particular business unit or product group of an organization—strategies for

product development and/or identification and exploitation of new market

opportunities. Functional strategies (sometimes, called operational strategies)

concentrate on particular functional or operational areas like manufacturing,

marketing, logistics, etc.

For single-business companies, corporate-level strategies and business

unit-level strategies may not be much different. But for multi-business companies

like Unilever (or its subsidiary Hindustan Unilever), business unit-level strategies

would be quite distinct from corporate-level strategies. Functional-level strategies,

however, would be common in both single-business and multiple-business

companies. The three levels of strategy are not isolated: these strategies support,

complement or reinforce each other for the achievement of organizational

objectives. We will be discussing these strategies in more detail in the next unit.

Activity 1

The Indian car market is becoming increasingly competitive with the entry

of foreign players like Hyundai, Ford, General Motors and Honda. Do a

field or online survey/ research on any of the companies and highlight the

steps taken by the company to establish and increase its market share.

Focus on strategic planning and implementation. For information you may

visit the company website and consult the annual reports.



Self-Assessment Questions

1. The key or common objective of both business strategy and military

strategy is to secure competitive advantage over the rivals or the

opponents. (True/False)

2. A unified, comprehensive and integrated plan designed to assure that the

basic objectives of the enterprise are achieved. This definition of strategy

was given by________.

3. Business strategy is formulated, implemented and evaluated with an

assumption of__________, but military strategy is based on the

assumption of_________.

4. For single-business companies, corporate-level strategies and business

unit-level strategies would be quite distinct. (True/False)

1.4 Strategic Window

Companies need to evolve and adapt to changing situations, as is clear from

the example of Shell that you read in the beginning of the unit. They should

always look for opportunities and make the best of them at the right time. Here,

we are referring to strategic windows, the concept which was introduced by

Abell (1978). The basic idea behind the concept of a strategic window is this:

there are only limited periods during which the fit or the match between the key

requirements of a market and the particular competencies of the firm are at the

optimum. Companies should exploit such ‘optimum opportunities’ or windows.

Strategic windows arise as a result of business or market evolution.

Businesses and markets are never static. They are constantly evolving.

Businesses and markets may evolve because of

• Development of new product (new demand);

• Emergence of new competing technologies; and

• Market redefinition or changes.

Due to such evolution, it is recommended that investment in a product

line or market area should be made to coincide with the period(s) during which

a strategic window is open. Companies which do this, optimize returns. For

example, Maruti-Suzuki entered the Indian car market at the right time. The

strategic window was open because of the obsolescence of technology of

Premier Padmini (earlier Fiat), which was the only available passenger car in



the market. (There was also Ambassador, but that was used more as an official

car). Even after Maruti’s entry, the strategic windows for cars remained open,

and other car companies—General Motors, Tata Motors, Ford, Honda, Hyundai—

all entered the Indian car market. Maruti, however, was the first mover and

continues to be the market leader.

Strategic windows are also important for timing the exit from a product or

a market. There are times when it is advisable, and also possible, to divert a

business which a company cannot operate profitably any longer. This means

that the strategic window for exit is open, that is, there are buyers or companies,

who are willing to acquire the business, and, the company should act on it. This

is what Hindustan Unilever did. They hived off their vanaspati (‘Dalda’) business

to the US-based Bunge Ltd, who had plans to relaunch the product. If a company

does not exit in time, the strategic window may get closed; there may not be

any buyer, and the business may have to be closed down at considerable losses.


5. The opportunities that companies should always look for and seize or

exploit at the right time are called _________.

6. Strategic windows arise as a result of _________.

7. Businesses and markets may evolve because of

(a) Development of new product (new demand)

(b) Emergence of new competing technologies

(c) Market redefinition or changes

(d) All of these

8. Strategic windows are not so important for timing the exit from a product

or a market. (True/False)

1.5 Corporate Strategy in Different Types of Organizations

A well-formulated strategy is vital for growth and development of any

organization—whether it is a small business, a big private enterprise, a public

sector company, a multinational corporation or a non-profit organization. But,

the nature and focus of corporate strategy in these different types of organizations

will be different, primarily because of the nature of their operations and

organizational objectives and priorities.



Small businesses, for example, generally operate in a single market or a

limited number of markets with a single product or a limited range of products.

The nature and scope of operations are likely to be less of a strategic issue

than in larger organizations. Not much of strategic planning may also be required

or involved; and, the company may be content with making and selling existing

product(s) and generating some profit. In many cases, the founder or the owner

himself forms the senior/top management and his (her) wisdom gives direction

to the company.

In large businesses or companies—whether in the private sector, public

sector or multinationals—the situation is entirely different. Both the internal and

the external environment and the organizational objectives and priorities are

different. For all large private sector enterprises, there is a clear growth

perspective, because the stakeholders want the companies to grow, increase

market share and generate more revenue and profit. For all such companies,

both strategic planning and strategic management play dominant roles.

Multinationals have a greater focus on growth and development, and also

diversification in terms of both products and markets. This is necessary to remain

internationally competitive and sustain their global presence. For example,

multinational companies like General Motors, Honda and Toyota may have to

decide about the most strategic locations or configurations of plants for

manufacturing the cars. They are already operating multi location (country)

strategies, and, in such companies, roles of strategic planning and management

become more critical in optimizing manufacturing facilities, resource allocation

and control.

In public sector companies, objectives and priorities can be quite different

from those in the private sector. Generation of employment and maximizing

output may be more important objectives than maximizing profit. Stability rather

than growth may be the priority many times. Accountability system is also very

different in public sector from that in private sector. There is also greater focus

on corporate social responsibility. The corporate planning system and

management have to take into account all these factors and evolve more

balancing strategies.

In non-profit organizations, the focus on social responsibilities is even

greater than in the public sector. In these organizations, ideology and underlying

values are of central strategic significance. Many of these organizations have

multiple service objectives, and the beneficiaries of service are not necessarily

the contributors to revenue or resource. All these make strategic planning and



management in these organizations quite different from all other organizations.

The evaluation criteria also become different.

Johnson and Scholes (2005) have given a good and detailed exposition

of strategic management in various types of organizations mentioned above.

Activity 2

The print media, that is, newspapers and magazines, have long served the

information needs of people all over the world. The rise of radio and television

offered some competition. But, with the advent of the Internet and availability

of news and information online, the service offered by the print media is no

longer as valuable as before. Imagine that you are the managing editor of

a leading daily. Suggest some major strategic changes that you feel are

needed at this stage to sustain and grow your company. Visit the websites

of some leading newspapers and see how they are adapting new strategies

to survive and grow.


9. The nature and focus of corporate strategy in different types of

organizations are different primarily because of the nature of their

operations and organizational objectives and priorities. (True/False)

10. As they are operating multi location (country) strategies, roles of strategic

planning and management become more critical in _______ companies

for optimizing manufacturing facilities, resource allocation and control.

1.6 Lack of Strategic Management in Some Companies

Some companies do not undertake strategic planning and management. Some

other companies do strategic planning, but receive no support from managers

and employees. In some other cases, managers and employees do not get

enough support from the top management. A number of such and other reasons

explain why certain companies do not take to strategic planning and

management. David (2003) has mentioned various reasons for poor or no

strategic planning and management by companies. These are discussed below:

1. Poor reward structure: When an organization achieves success, it often

fails to reward its managers or planners. But when failure occurs, the

company may punish the managers concerned. In such a situation, it is



better for individual managers to do nothing than to risk trying to achieve

something, fail and be punished.

2. Content with success: If an organization is generally successful, the top

management or individual managers may feel that there is no need to

plan and strategize because everything is fine. However, they forget that

success today does not guarantee success tomorrow.

3. Overconfidence: As managers gain experience, they may rely less on

formalized planning and more on individual initiative and decisions. But,

this is not appropriate. Overconfidence or overestimating experience leads

to complacency and ultimately can bring downfall. Forethought and

planning are the right virtues and are signs of professionalism.

4. Fire-fighting: An organization may be so deeply engrossed in crisis

management and fire fighting that it may not have time to plan and

strategize. This happens with many companies and is a clear sign of non-

professionalization.

5. Waste of time: Some organizations view planning as a waste of time

because no tangible marketable products are produced through planning.

But they forget that time spent on planning is an investment, and there

would be returns, both tangible and intangible, in due course.

6. Too expensive: Some organizations are culturally opposed to spending

resources on matters like planning which do not produce instant or

immediate results. They feel that spending on planning is a wasteful

expenditure.

7. Previous bad experience: Managers may have had previous bad

experience with planning, that is, cases in which plans have been

cumbersome, impractical or inflexible. There could be experience of

failures also. They would like to avoid recurrence of this.

8. Honest difference of opinion: Some managers may sincerely think that a

plan is not correct. They may see the situation from a different viewpoint,

or, they may have aspirations for themselves or the organization, which

are different from those envisaged in the plan. Different people in different

jobs in the same organization may have different perceptions of the same

situation, and this may lead to difference of opinions among them and

eventually to lack of planning due to lack of consensus.

9. Self-interest: When management has achieved status, privilege or self-

esteem through effectively using an old system, it often sees a new plan

or a new system as unnecessary or a threat.



10. Fear of the unknown: Managers may not be sure of their abilities to learn

new skills or take on new roles or adapt to new system. This is basically

inertia against change or fear for change.

11. Fear of failure: Whenever something new or different is attempted, there

is a chance of success, but, there is also some risk of failure. Many

companies and managers may like to avoid strategic planning and

management for fear of failure.

12. Suspicion: Employees may not trust management, or, the management

may not have enough confidence in the managers. This gives rise to

mutual suspicion.2


11. All companies undertake strategic planning and management. (True/False)

12. Both overconfidence and fear of failure are among the reasons for not

adopting strategic planning and management. (True/False)

1.7 Ten Principles of Strategy

Duro and Standstrom3 have mentioned about 10 principles of strategy, which

are drawn from the military rule or warfare, but are equally applicable to business.

These are given in the following:

1. Set a goal and stick to it.

2. Maintain good morale (good leadership is aprecondition for this).

3. Accumulate forces.

4. Act aggressively.

5. Aim for surprise.

6. Make sure your own forces are secure.

7. Use your forces economically.

8. Coordination (either through chain of command or through cooperation).

9. Try to be adaptable.

10. Simplicity (clear and simple plans and concise orders/instructions).



OveLiljedahl4 has discussed the relevance and applications of the

aforementioned principles to business strategy and has given examples from

the Scandinavian Airline Systems (SAS) as pronounced by their MD.

1. Set a goal and stick to it

SAS: We will be the best airline in Europe.

2. Maintain good morale

SAS: The personality of the leader; motivation courses

3. Accumulate forces

SAS: Concentration on profitable European routes

4. Act aggressively

SAS: ‘Investing’ its way out of the crisis in a stagnating market

5. Aim for surprise

SAS: While competitors pay 100 million kroners for a new DC9a, SAS

repaints and changes interiors of all its 80 planes for 50 million kroners

6. Make sure your own forces are secure

SAS: Delegate responsibility for results; each unit ensures its own security

7. Use your forces economically

SAS: Personnel and fleet tailored to suit the need for resources

8. Coordination

SAS: The aim is known and understood by all employees

9. Try to be adaptable

SAS: Adaptation to new threats from outside; adapting to deteriorating

sales opportunities in the airline industry advising aircraft manufacturers

on how to build modern fleet aircraft.

10. Simplicity

SAS: Single strategy; instead of getting 100 per cent better on one point,

get 1 per cent better on 100 points.

All concerned with strategy—planners and managers at different levels—

would do well to learn and remember the 10 principles. The SAS example shows

how they can be real life business strategies.




13. For strategy building, one should set a goal and stick to it. (True/ False)

14. Good leadership is a precondition for maintaining good morale of a

strategy. (True/ False)

1.8 Case Study

Modi Xerox Defines its Corporate Strategy

Modi Xerox was incorporated in 1983 in technical and financial collaboration

with Rank Xerox, UK, equipped with state-of-the-art manufacturing facility

at Rampur, UP, India. Since 1983, it has come a long way. Modi Xerox, with

a market share of 58 per cent, is the leader in the Indian photocopier market.

The company’s strategic objective is to capture the incremental document

volume and successfully ride the shift in documentation modes. This is

where the strategy comes in. Recognizing the shift in doctrination mix,

Xerox has developed an intelligent digital platform. It is emerging as a

document company, covering document in any form, that is, digital, CD-

ROM, multimedia and paper. Modi Xerox’s strategy closely follows this.

To be a recognized document company, Modi Xerox had launched intensive

advertising. An advertising campaign, worldwide, announced Xerox’s

alignment with digital technology.

Subsequently, new digital models have been launched in India. Modi Xerox’s

Vision 2000 was to develop, manufacture, market and finance a range of

document products and solutions to enhance customer productivity, make

the document persuasive and efficient by making them automated. Following

Vision 2000 was Vision 2002, which targeted a sales turnover of $1 billion

in India. To achieve this, the company had to develop innovative thinking

and plan.

Modi Xerox’s innovative thinking has given birth to the company’s new micro

marketing plan. This involves segmenting the user market vertically on the

standard industrial classification and horizontally by splitting the market

into private organizations, public companies and jobbers. The company

has conducted user census in 48 cities to draw up a micro-marketing plan.

Modi Xerox’s key strategies are based on the marketing plan, and the plan

is based on four corporate objectives:



1. Return on assets

2. Customer satisfaction

3. Employees’ motivation and satisfaction

4. Market share

Costumers are divided into segments and respective accounts are handled

by specialized account managers, global accountant, local accountant and

general and mass market managers. The rest of the customers are handled

by sales promotion agents (dealers and partners).

The company also has telemarketing and telesales programmes.

Telemarketing plays a support role, marketing mostly to small organizations

with around 20 employees. The telesales team is able to access the target

customer in different locations through its computer network.

Modi Xerox is a quality company. Quality is its basic business principle or

philosophy. Quality means providing customers innovative products and

services which fully satisfy their requirements. Quality improvement is the

job of every Modi Xerox employee, whether a staff or a manager.

Leadership through quality is both a strategy (continuous pursuit of quality

improvement) and a process (a fundamental business principle on which

all work processes are based). Leadership through quality is fostered by

the management at all levels and is pursued as a proactive approach rather

than are active approach. This reflects positiveness in the company’s

strategy.



1.9 Summary

Let us recapitulate the important concepts discussed in this unit:

• Strategy or corporate strategy is better described, and more easily put

into practice than defined. However, ‘strategy’, as mostly used or

understood, is an ‘action plan or, a ‘scheme of action’ or ‘design of

execution’ of a plan.

• Business strategy is similar to military strategy. Both business and military

organizations try to use their strengths to exploit the weaknesses of their

competitors or opponents to win or succeed. There is, however, a

significant difference between the two. Business strategy is formulated

based on the assumption of competition, military strategy is based on the

assumption of conflict.

• Like strategy, strategic management has also been defined differently by

different authors and strategy analysts. However, the common elements

in most of the definitions are organizational objectives, the environment,

formulation of strategy, implementation and control.

• In any organization, strategy can exist or operate at three levels—corporate

level, business unit level and functional level. In single business companies,

corporate-level strategies and business unit-level strategies may not be

much different. But, for multi-business companies (like Unilever or ITC),

strategies at two levels would be quite distinct. Functional-level strategies,

however, would be common to both types of companies.

• Companies should always look for opportunities, and seize or exploit

opportunities at the right time. In other words, they should be constantly

aware of strategic windows. This is what Maruti (Suzuki) did. They entered

the Indian car market at the right time, i.e., when the strategic window

was open because of the obsolescence of Premier Padmini (earlier Fiat).

• Some companies do not undertake strategic planning and management.

Some of the common reasons for this are poor reward structure, previous

bad experience, contentment with success, too expensive, overconfidence,

honest difference of opinion, fire fighting, self-interest or self-esteem, waste

of time, fear of the unknown, fear of failure, and suspicion.

• Duro and Standstrom have mentioned 10 principles of strategy, which

are drawn from the military rule or warfare, but are equally applicable to

business. These are: 1. Set a goal and stick to it; 2. Maintain good morale



(good leadership is a precondition for this); 3. Accumulate forces; 4. Act

aggressively; 5. Aim for surprise; 6. Make sure your own forces are secure;

7. Use your forces economically; 8. Coordination (either through chain of

command or through cooperation); 9. Try to be adaptable; 10. Simplicity

(clear and simple plans and concise orders/instructions).

1.10 Glossary

• Competitive advantage: Advantage over competitors gained by offering

consumers greater value, either by means of lower prices or by providing

greater benefits and service that justifies higher prices.

• Fortune 500: A list of top companies around the world compiled annually

by Fortune magazine, which ranks publicly listed corporations according

to their revenues.

• Multilocation: The state of being in more than two places at the same

time

• Strategic window: Short time period between specific events during

which there is an opportunity to capitalize on a market

• Strategy: A plan, method, or series of maneuvers or stratagems for

obtaining a specific goal or result.


1. What is strategy? Mention the different definitions of strategy.

2. What is the relationship between business strategy and military strategy?

What are the similarities and differences between the two types of

strategies?

3. Distinguish between the major levels of a strategy in an organization.

4. What is strategic window? Explain with some examples.

5. Explain the corporate strategy in different types of organizations.

6. Why do some companies not use strategic management? Mention some

common reasons.



1.12 Answers

Answers to Self-Assessment Questions

1. True

2. Glueck (1972)

3. Competition, conflict

4. False

5. Strategic windows

6. Market evolution

7. (d)

8. False

9. True

10. Multinational

11. False

12. True

13. True

14. True

Answers to Terminal Questions

1. The word ‘strategy’ comes from Greek strategos, which refers to a military

general and combines stratus (the army) and ago (to lead). Several

definitions of strategy have evolved over a period of more than 30 years

(1962–1996). Refer to Section 1.3 and 1.3.1 for further details.

2. Business strategy is similar to military strategy in many respects. Both

business and military organizations try to use their strengths to exploit

the weaknesses of the competitors. Refer to Section 1.3.2 for further

details.

3. Strategies exist at different levels in an organization. Three different levels

of organizational strategy can be clearly distinguished -- corporate-level

strategies, business unit-level strategies and functional strategies. Refer

to Section 1.3.3 for further details.



4. Companies should always look for opportunities, and seize or exploit

opportunities at the right time. These opportunities, during which there is

a chance to capitalize on a market, are called strategic windows. Refer to

Section 1.4 for further details.

5. The nature and focus of corporate strategy in different types of

organizations will be different primarily because of the nature of their

operations and organizational objectives and priorities. Refer to Section

1.5 for further details.

6. Some companies do not undertake strategic planning and management.

A number of reasons explain why certain companies do not take to strategic

planning and management. Refer to Section 1.6 for further details.

1.13 References

1. Abell, D F. 1978. ‘Strategic Windows.’ Journal of Marketing 42(2).

2. Alkhafaji, A F. 2003. Strategic Management. New York: Harworth Press.

3. David, F R. 2003. Strategic Management: Concepts and Cases. 9th ed.,

Indian Reprint. New Delhi: Pearson Education.

4. Glueck, W F. 1980. Business Policy and Strategic Management. New

York: McGraw-Hill.

5. Porter, M E. ‘What is Strategy.’ Harvard Business Review 72(6), 1996.

6. Thompson, AA, Jr, and A J Strickland. 2001. Strategic Management:

Concepts and Cases. New Delhi: Tata McGraw-Hill.

E-references

• http://www.shell.com/home/content/aboutshell/our_strategy/

• http://www.source2update.com/Company-History/Modi-Xerox-

MODXER.html

Endnotes

1 F Glueck, ‘Taking the mystique out of planning, ’ Across the Board (July –August, 1985).2 F R David, Strategic Management , 9th ed. (Pearson Education, 2003), 17 –18.3 International Management Institute (IMI), ‘Supplementary Readings in Competitive Analysis

and Marketing Strategy ’, in R-CAMS ,S.No. 9 (New Delhi, 2000).4 International Management Institute (IMl).



Unit 2 Strategic Management Process

Structure

2.1 Introduction

2.2 Caselet

Objectives

2.3 Strategic Management Model

2.4 Approaches to the Strategic Management Process

2.5 Levels in SMP

2.6 Participants in SMP

2.7 Strategic Drift

2.8 Case Study

2.9 Summary

2.10 Glossary


2.12 Answers

2.13 References

2.1 Introduction

In the previous unit, we had defined corporate strategy and strategic

management. In defining strategic management, we had mentioned the

external environment, formulation of strategy and also implementation and

control. Strategic planning and management should actually start with

organizational mission and objectives, consider internal competences and

resources, various strategy alternatives and the competitive situation and,

then proceed with formulation and implementation of the strategy. All these

constitute the strategic management process (SMP). And, this would be the

subject matter of our analysis in the various units starting with Unit 5. In this

unit, we shall give an overview of the strategic management process in terms

of different approaches, levels in SMP, planned or intended and realized

strategies, the people involved, roles of the chief executive, board of directors

and consultants, among others. We shall also discuss concepts like strategic

drift and the learning organization and their relevance and roles in the strategic

management process.



2.2 Caselet

Every organization follows a strategic management model, which depends

on its size, products and other factors. The organizational structure of the

company is built on the basis of this model. Hindustan Unilever (HUL) is a

fast moving consumer goods (FMCG) company that markets about 100

products/brands grouped into different categories. The different categories

of products require different organizational structure. Therefore, the

company has adopted a hybrid organizational structure based on functions

and product divisionalization. Like most organizations, strategies at HUL

also operate at three levels: corporate, SBU and functional. These will be

discussed in more detail in the unit.

Objectives


• Explain the different approaches to the strategic management process

• Illustrate the strategy-making hierarchy in an organization

• Describe the various participants in the strategic management process

• Explain the meaning and nature of strategic drift

2.3 Strategic Management Model

The strategic management process consists of four distinct steps or stages:

(a) Defining organizational mission, objectives or goals

(b) Formulation of strategy/strategic plan

(c) Implementation of strategies

(d) Strategy evaluation and control

For understanding these four stages, a company has to consider a number

of other factors like organizational competence and resources, the environment,

various strategy alternatives available, strategy selection criteria, etc. All these

are internal parts of SMP. The strategic management process may best be

illustrated in the form of a model. We can call this the strategic management

model. Relationships among the major components of the strategic management

process are shown in the model (Figure 2.1).



Companies may or may not follow the strategic management process as

rigidly as shown in the model. Generally, application of SMP is more formal and

model driven in large, well-structured organizations with many divisions, products,

markets, different priorities for investmhent, etc. Smaller businesses or

companies tend to be less formal. In other words, formality in SMP refers to the

extent to which participants in SMP, their responsibilities, authority and roles/

duties are clearly specified. Also, in practice, strategists may not always follow

the strategic management model as rigid steps or chains in the management

process. Situations may not always warrant this. It would also depend on a

company’s approach to SMP.

Figure 2.1 Illustrates the Strategic Management Model.

StabilityStrategies(Ch. 7)

Strategyfor change(Ch. 8)

Expansionstrategies(Ch.9)

Industry &competitionanalysis(Ch.10)

Selection &activationof strategy(Ch.11)

Understandingcorporatestrategy(Ch. 1)

Strategicmanagementprocess(Ch.2)

Corporatestrategy

and corporategovernance(Ch. 3)

Mission. goal,objectives(Ch. 4)

Internalcompetencesresources(Ch. 5)

Externalenvironment(Ch. 6)

Structuralimplementation

(Ch. 2)

Functionalimplementation(Ch. 13)

Behaviouralimplementation(Ch. 14)

Strategyevaluationand control(Ch. 15)

Understandingstrategy

Strategyformulation

Strategyanalysis

Strategyselection

Strategyimplementation

Strategyevaluation control

CORPORATE STRATEGY

Figure 2.1 Strategic Management Model


1. The _____process consists of four distinct steps or stages – Defining

organizational mission, objectives or goals; formulation of strategy/

strategic plan; implementation of strategies; and strategy evaluation and

control.

2. Organizational competence and resources, the environment, various

strategy alternatives available, strategy selection criteria, etc., are _____

parts of SMP.



3. Application of SMP is more formal and model driven in small businesses.

(True/False)

4. In practice, strategists may not always follow the strategic management

model as rigid steps or chains in the management process as, situations

may not always warrant this. (True/False)

2.4 Approaches to the Strategic Management Process

There are different approaches to the strategic management process (some

call these modes of strategy making). These approaches lay varying emphasis

on different elements of the strategic management process, primarily because

of differences in the nature and forms of organizations.

Approaches to strategy making or the strategic management process

have been differently enunciated by different authors and strategy analysts.

Mintzberg (1973) has classified various approaches into three modes. He calls

these the three modes of the strategy-making process.

These are:

• Entrepreneurial mode

• Adaptive mode

• Planning mode

Steiner and others (1982) have classified various approaches into five

forms or categories. These are:

• Formal-structured approach

• Entrepreneurial-opportunistic approach

• Intuitive-anticipatory approach

• Incremental approach

• Adaptive approach

Three modes of Mintzberg and five approaches of Steiner and others

have some commonness or similarities in terms of the content. Therefore, the

two sets of approaches can be regrouped into more coherent forms for the

purpose of analysis. For example, Mintzberg’s planning mode resembles the

formal-structured approach of Steiner and others, incremental and adaptive

approaches have common features (‘adaptive’ is common in both).

Entrepreneurial-opportunistic approach is essentially based on opportunities,



intuition and anticipation. Therefore, entrepreneurial-opportunistic and intuitive-

anticipatory approaches of Steiner and others can be analysed together. So,

the two sets of approaches may be restated in the forms of three basic

approaches:

1. Entrepreneurial-opportunistic

2. Formal-structured and

3. Adaptive

2.4.1 Entrepreneurial-opportunistic Approach

An entrepreneur is a creative thinker—an individual who combines the roles of

an innovator and risk taker. He is tough and pragmatic in decision making and

is constantly driven by an insatiable urge for creation and achievement. He is

characterized by an active search for opportunities in a generally unfriendly or

unfavourable environment. In the entrepreneurial-opportunistic approach, the

focus is on exploiting opportunities against environmental odds rather than

problem solving. In this approach, power rests with one person, the owner and

chief executive, who is capable of taking bold decisions on the basis of personal

power and charisma. Bold decisions are taken many times in situations of

uncertainty. The most dominant goal in this approach is creation and expansion

of assets, markets and market share.

The strategy is to move forward with unusual leaps or ‘discontinuous

growth’ for achieving entrepreneurial success or profits. Many companies have

successfully used this approach.

The entrepreneurial-opportunistic approach is suitable for organizations

in which the key strategists—sometimes a single individual—are visionaries.

Also, they have complete control over formulation and implementation of a

strategy and have very high stake in the outcome of the strategy. They lead the

organization from front and by example. These are the reasons why many such

organizations outperform their more professional counterparts adopting formal-

structured approach.

The advantages of this approach may, however, turn into disadvantages

if the strategists are found lacking in what they do or in righteousness. Since

there are hardly any checks and controls, the entrepreneurs/strategists should

have the right vision backed by the right strategy and resources. Otherwise, the

strategy may easily lead to failure. There are many such cases of failures.



2.4.2 Formal-structured Approach

In the formal-structured approach (also called the planning mode), the strategic

management process depends largely on the planning system. Planning is based

on organizational objectives and priorities, values of the top management, the

company’s strengths and weaknesses, external opportunities and threats

(including risks) and alternative options or strategies available. This implies the

application of scientific techniques and tools of analysis in the planning process.

The roles of planners are, therefore, very important in this approach. Suitability

of the formal-structured approach depends on the size of the organization,

management styles, complexity of environment, etc. Steiner (1969) has identified

six factors which determine the degree of formalization of the strategic

management process. These are organization, management style, environment,

production process, nature of problems and purpose of planning system.

Most of the large companies, including multinationals, follow the formal-

structured approach because it suits their organizational structure and the

decision-making process. Many companies—Unilever, for example, started with

the entrepreneurial-opportunistic approach during the initial years of incorporation

when the company was guided by the vision of the promoter. But, after years of

growth when the company became large and, also global in nature, it switched

over to the formal-structured approach because, at this stage, more planning

and checks and balances are required to sustain growth.

A basic advantage of this approach is that it generates enough information

and, employs scientific tools of analysis which enable planners and decision

makers to find solutions even in complex situations. However, when the planning

and management system becomes too formalized and highly structured, the

decision-making process becomes slow. Such a system also generally

discourages new initiative and unconventional decision making which may be

warranted by emerging competitive situations.

2.4.3 Adaptive Approach

The adaptive approach is essentially a balancing strategy. It is more remedial

and reconciliatory, and, therefore, more reactive than proactive as a decision-

making process. Decisions are made in sequential and incremental steps

necessitated by internal or environmental changes. Different interest groups

and stakeholders put pressure on the decision-making process to protect their

own interests. The basic orientation in this approach, therefore, is to maintain

flexibility to adapt to pressing needs and circumstances. This also means that



the final decision, many times, is a compromised one, which may be at the cost

of organizational effectiveness or success.

The adaptive approach typically suits large public sector companies, where

there is greater focus on accountability than on growth. There are also important

pressure groups in the form of the controlling ministry and other related

government departments and ministries. In such companies, current problem

solving (with necessary adaptation and compromise) always has higher priority

than future planning. All large public sector companies in India like ONGC,

SAIL, BHEL, IOC, MMTC, STC and, also in other parts of the world, follow the

adaptive approach. The degree of adaptability and compromise on strategic

planning and decision making would depend on the progressiveness of the

companies and the concerned controlling ministries.

The adaptive approach also suits follower companies (in the private sector)

rather than leaders in the industry. Followers or imitators are companies that

avoid the risk of innovation and are content with producing and selling products

that have already been established in the market. They only concentrate on

market share.

2.4.4 Combination Approach

Many companies realize that adopting a single approach exclusively may not

be the most judicious course. Stakeholders’ stakes/interests are increasing

(including stock options), the marketplace is ever changing and the business

environment is never fully predictable. Due to these factors, the strategic

management process of a company has to cope with a large number of complex

variables or factors, and a single approach may not be sufficient to secure

competitive advantage. A combination of approaches may be the appropriate

strategy.

A dominant entrepreneurial-opportunistic approach may be combined with

the formal-structured approach for better results. Similarly, a formal-structured

approach may be combined with some elements of entrepreneurial-opportunistic

approach. And, environmental (both internal and external) adaptability should

be a common element in these approaches. As Sumantra Ghoshal puts it: It

may be useful for Reliance (following entrepreneurial approach) to think whether

it should follow a bit of Hindustan Lever’s structured processes, just as much as

it may be productive for Hindustan Lever to consider ways of broadening its

systems and culture to the entrepreneurial approach.1



Hindustan Unilever, like many other companies, has also realized the

need for infusing entrepreneurial approach into their dominant formal-structured

approach for developing more effective business strategies. According to its

former Chairman, Keki Dadiseth, ‘Hindustan Lever has grown in size. While it

has its own obvious benefits, it also has some drawbacks. What we need to

master is the art of creating and preserving the entrepreneurial ability and

connectedness of a small company within a large company.’2

There are different ways in which the three approaches can be combined.

Individual companies have to work out the right combination based on growth

alternatives, investment opportunities or priorities, stakeholders’ pressures and

top management’s style of functioning.

Activity 1

We have mentioned four different entrepreneurial-opportunistic approaches

(Reliance, Dell, Sony, Hero Honda) to the strategic management process.

Make a comparative analysis of these four approaches.


5. ________ has classified various approaches to SMP into three forms,

calling it the three modes of the strategy-making process — entrepreneurial

mode, adaptive mode and planning mode.

6. In the ______ approach, the focus is on exploiting opportunities against

environmental odds rather than problem solving.

7. In the __________ approach, the strategic management process depends

largely on the planning system.

8. Which of these approaches is essentially a balancing strategy – more

remedial and reconciliatory, and, therefore, more reactive than proactive

as a decision-making process?

(a) Entrepreneurial-opportunistic

(b) Formal-structured

(c) Adaptive approach

(d) Combination approach



2.5 Levels in SMP

We had mentioned the three levels of strategy in Unit 1. We shall now elaborate

on these strategies with respect to the strategic management process. To do

this, let us first define a strategic business unit (SBU). A strategic business unit

is a division or a product/product group unit which operates as a separate profit

centre having its own set of market and competitors and its own marketing

strategies. The company or the corporate organization consists of related

businesses and/or products grouped into different SBUs. The SBUs are

homogeneous enough to manage and control most factors which affect their

performance. Resources are allocated to SBUs in relation to their contributions

to the corporate objectives, growth and profitability.

Three levels in the strategic management process, as mentioned in Unit

1, are: the corporate level, the business unit or SBU level and the functional

level. These three levels of strategy distinctly exist only in multiple SBU firms.

For single-business companies, corporate-level strategy and SBU-level strategy

are not really distinguishable because all the organizational level strategies for

resource allocation or growth or market diversification are formulated with respect

to the particular product or business of the company (only in the case of product

diversification, corporate-level strategy and single business unit-level strategy

may/would be different). Relationships among corporate level, business unit-

level and functional-level strategies in single SBU and multiple SBU firms are

shown in Figures 2.2 and 2.3. We can also call these alternative strategic

management structures.

Corporate/businessstrategy

Functional strategy

Operationsstrategies

Marketingstrategies

Financialstrategies

HRstrategies

Middlemanagement

Top/Seniormanagement

Figure 2.2 Corporate/Business Level and Functional Strategiesin Single SBU Company



Operationsstrategies

Marketingstrategies

Financialstrategies

Personnelstrategies

SBU 3strategy

SBU 2strategy

SBU 1strategy

Corporatestrategy

Corporatemanagement

SBU topmanagement

Middlemanagement

Figure 2.3 Corporate/Business Level and Functional Strategiesin Multiple SBU Company

2.5.1 Corporate, SBU and functional level

Corporate-level strategy sets the long-term objectives of an organization and

broad policies and controls within which an SBU operates. The corporate-level

strategies also help an SBU to define its scope of operations and also limit or

enhance SBU’s operations through resources the corporate management allocates

for securing competitive advantage. Functional-level strategies follow from, and

also support, SBU-level strategies. Strategies at the functional level are often

described as tactical. Such strategies are guided and controlled by overall SBU

strategies. Functional strategies are more concerned with implementation of

corporate-and SBU-level strategies rather than formulation of strategies. Strategic

management process at three levels also involves decision making. But, the types

of decision making, their scope and impact are different at different levels. The

characteristics of decision making at three levels may be more clearly understood

in terms of major dimensions of decision making. These are shown in Table 2.1.

Table 2.1 Characteristics of Strategic Decisions at Corporate, SBU and Functional Levels

Level of Strategy

Dimension Corporate SBU Functional

Type of decision Conceptual/policy Policy/operational Operational

Investment implication

High Medium Low/Nil

Risk involved High Medium Low

Time horizon Long term Medium term Short term

Impact Critical Major Minor

Flexibility High Medium Low

Adaptability Low Medium High

A distinction can be made between functional-level or functional-area

strategies and operating strategies. Functional-area strategies involve



approaches, actions and practices to be undertaken for managing particular

functions or business processes or key activities within a business marketing

strategy. Operating strategies in comparison, are relatively narrow strategies

for managing different operating units (plants, distribution centres in different

geographic locations, etc.,) and specific operating activities of strategic

significance (advertising campaigns, management of particular brands, website

sales and operations, etc).3 Operating strategies provide more specific details

about functional-area strategies and render completeness to functional-level

strategies and also to overall corporate strategy.

Hindustan Unilever (HUL) is a multi-SBU fast moving consumer goods

(FMCG) company. It markets about 100 products/brands. It has grouped its big

range of products into three categories: home and personal care, foods and

beverages and, industrial and agricultural. In addition to domestic marketing, it

is also engaged in export which is a separate SBU. The company has adopted

a hybrid organizational structure based on functions and product divisionalization.

Like most organizations, strategies at HUL also operate at three levels: corporate,

SBU and functional. The strategic management process in HUL is shown below

as a model structure (Figure 2.4).

HUL

Corporate level Business level (SBU)

Resource mibilization

Resource deployment

Merger and acquisition

divestment

Appropriation of earnings

Beverages

Personal products

detergents

Ice cream and frozen dessels

Export

Functional level

Technical

Marketing

Finance

Human resources

Research

Corporate affairs

Legal & secretarial

Flow of decision

Flow of support

Figure 2.4 Strategic Management Process at HUL




9. A ________ is a division or a product/product group unit which operates

as a separate profit centre having its own set of market and competitors

and its own marketing strategies.

10. Strategies at the functional level are often described as_____, and such

strategies are guided and controlled by overall SBU strategies.

11. Corporate-level strategy sets the short-term objectives of an organization

and broad policies and controls within which an SBU operates.

(True/False)

12. Operating strategies in comparison are relatively narrow strategies for

managing different operating units. (True/False)

2.6 Participants in SMP

The fact that the strategic management process involves strategy making at

the corporate level, SBU level and functional level also implies that managers

at different levels—top, senior and middle—participate in the strategic planning

and management process. In addition to the managers, the board of directors

also play a definite role. Many times, management consultants also play important

roles in the strategic planning and management of a company. So, there may

be five major participants in the strategic management process of a company

although they may play quite different roles. The five participants are:

1. Board of directors

2. Chief Executive Officer (CEO)

3. Corporate planning staff

4. Other managers

5. Consultants

2.6.1 Role of Board of Directors

In any organizational hierarchy, the board of directors is the apex/highest level

body. The board is the final authority in managing the affairs of a company,

strategic or non-strategic. They perform these functions according to or subject

to the memorandum of association and articles of association of the company.

The role of a board member depends on his (her) degree of involvement in the

strategic process; and the degree of involvement of a member depends partly



on the management philosophy of a company and partly on the interest a

particular board member takes in the affairs of the company. The levels of

involvement and, therefore, the roles of the board members can vary widely.

Wheelan and Hunger4 have analysed the role of board members in terms of a

continuum as shown in Table 2.2.

Table 2.2 Degree of Involvement of Board Members in Strategic Management

Low High

(Passive/ phantom)

Rubber Stamp

Minimal review

Normal participation

Active participation

(Active/ catalyst)

Never knows what to do

Permits executives to make all decisions and approves what they decide

Reviews selected issues brought to him/her

Involved to a limited degree to review management’s performance, decisions or programmes

Questions, reviews and makes final decisions on mission, objectives, strategy, policies; performs fiscal and management audit

Takes the leading role in establishing and modifying mission, objectives, strategy and policies; has very active strategy committee

Source: T L Wheelen, and J D Hunger (1983), 49

Given the progressive management philosophy of a company, professional boards

can play very effective roles in the strategic management process. Boards of

Hindustan Unilever, L&T, ITC, Tata Motors, Tata Steel, for example, are quite

effective and take active part in the strategy-making processes of these companies.

They participate in setting and reviewing corporate objectives, formulation of long-

term strategies, examination and review of proposals for new investment,

appointment of chief executives and other key personnel, etc. According to a

survey conducted by AIMS Research5 on the practice of boards of directors and

their roles in company management, the boards of Hindustan Unilever, Tata Motors,

Bajaj Auto, HDFC and L&T are considered the best in India.

On the other extreme, as shown in Table 2.3, there are boards or board

members who play only passive roles. In such cases, strategic decisions are

taken mostly outside the board. Strategy and decision makers may be a powerful

family group or a powerful CEO or the top management committee, overseas

parent company in the case of subsidiaries of multinationals or bureaucrats or

ministers in the case of public sector companies.

Between the passive boards and the extraordinarily participative ones,

there are boards which are more common in companies. These boards play a

balancing role between the strategy-making process in the companies and the

shareholders. Major strategic functions performed by these boards are:



• Approval of the corporate budget and resource allocation for strategic

investments

• Periodic review of the strategic planning process

• Monitoring the chief executive’s role in the strategic management process

• Triggering discussion on growth possibilities and alternatives

• Guiding the chief executive in formulating organization-level strategies

• Review of strategy implementation with respect to results or profitability

2.6.2 Role of Chief Executive

The chief executive plays the most important role in the strategic management

process of a company. Major management functions of a chief executive,

however, can be broadly divided into two categories; strategic and non-strategic.

Every chief executive should clearly distinguish between his/her strategic

functions and non-strategic or operational functions so that he can appropriately

allocate his time and concentrate more on strategic functions. Strategic and

non-strategic functions of a chief executive in selected basic organizational

areas are given in Table 2.3.

Table 2.3 Strategic and Non-strategic Functional Activities of Chief Executives

Function

Basic organizational area Strategic Non-strategic

• Setting goals and priorities

• Long-term planning

• Short-term planning

• Developing resources

• Allocation of work and major resources

• Committing resources

• Evaluating results / performance appraisal

• Relationship with internal and external stakeholders

Deciding organizational mission and objectives, setting major policies, priorities, etc.

Providing direction and leading the process

Providing directions

Leading organizational resource development team

Allocating major resources to strategic functions and projects

Committing new projects or resources; discommiting projects, resources

Negligible or nil

Mobilizing support

Minimal or nil

Constitute the planning team

Reviewing results

Developing human and physical resources

Designing organizational structure and preparing/approving corporate budget

Developing control criteria

Measurement of performance against plans; measuring organizational and managerial effectiveness

Maintaining good PR for better governance



It may be interesting to see how chief executives prioritize their major

functions or roles. T Thomas, the former CEO of Hindustan Unilever visualizes

three major roles6 of the chief executive:

• Managing relationship with the environment

• Managing the board

• Long-term planning

It is to be noted that Thomas was holding the positions of the chief executive

and also of the chairman of the company. If the two positions are delinked as

happens in many companies, the chief executive’s primary role is to assist the

board rather than manage it. Managing the board would be the chairman’s job.

Some empirical studies have highlighted the relative importance of major

functions (both strategic and non-strategic) performed by a chief executive.

Results of a study7 of 125 Indian CEOs are summarized in Table 2.4.

Table 2.4 Major Functions of a Chief Executive

Function

Degree of importance*

Time spent (per cent)

1. Long-term planning

2. External relationship

3. Review and control of organizational performance

4. Personnel development

5. Short-term planning

6. Performance appraisal

7. Meetings in the organization

8. Review of organizational relations

4.8

4.5

4.0

3.4

3.2

3.0

2.8

2.6

18.0

30.0

20.0

7.0

8.0

5.0

6.0

6.0

100.0

* Degree of importance of a function has been measured on a 5-point scale

Source: R K Shah, Top Managerial Effectiveness (1990).

Effectiveness of the strategic role of the chief executive determines the direction

and pattern of growth of most of the companies. An effective chief executive is

a practical/realistic visionary — ‘a dreamer who also does’. He becomes a catalyst

in the strategic management process and, mobilizes resources, managers and

supports the board to accelerate the growth process. Effective chief executives

are successful leaders; they lead by example and charter a new growth trajectory

for the company. Jack Welch of GE, Lee Iacocca of Chrysler Corporation, Michael

Dell of Dell Computers, Bill Gates of Microsoft, Keki Dadiseth of Hindustan

Unilever, P N Haksar of ITC, Dhirubhai Ambani of Reliance, Aditya Birla of

Hindalco Industries, Azim Premji of Wipro and N R Narayanamurthy of Infosys

have led their companies to unprecedented heights.



2.6.3 Role of Corporate Planning Staff

Every chief executive needs the support of his corporate planning staff. With

increasing volatility of the competitive environment, the strategic planning and

management process is becoming more complex. Also, with the introduction of

new tools, techniques and planning models, the planning system is also

becoming more technical and specialized. Therefore, almost all large companies

and multinationals have created a separate corporate planning division or unit.

This division or unit is equipped with specialized planning staff who forms the

nucleus of strategic planning activities of a company. In many companies, this

division or unit functions directly under the charge of the chief executive.

The corporate planning division performs various functions mostly of a

strategic nature. Major functions of the corporate planning staff may be

summarized as follows:

• Assisting the chief executive in developing and formalizing fundamental

concepts or divisions about organizational growth and diversification.

• Scanning the environment and identifying new business opportunities.

• Analysing cost benefits of alternative investment opportunities and

allocating resources to various activities/projects.

• Integrating SBU plans (and, sometimes, also functional plans) into

corporate plans.

• Monitoring progress of strategic plans at corporate level, SBU level and

functional levels.

• Undertaking mid-term review of plans and strategies and, suggesting

changes, if and when necessary.

• Evaluating plan performance—measuring the degree of success (or

failure) of strategic plans and reporting to the chief executive for any

necessary action.

Vaswani (1990) of Gujarat University conducted a study8 on the strategic

management process in India based on a cross-section of Indian companies.

The study included 12 public sector, 26 FERA9 and 24 private sector companies.

One of the study findings focussed on the role or functions of the corporate

planning staff. These are shown in Table 2.5.



Table 2.5 Functions of Corporate Planning Staff: Relative Importance

Functions Weightage*

1. Getting top management participation in development of plan assumptions

2. Integrating the plans

3. Monitoring plan progress

4. Communicating the plans

5. Issuing planning guidelines

6. Converting physical plans into financial plans

7. Interpreting the plans

8. Monitoring and reviewing strategic plans

9. Negotiating plan targets

10. Verification of plan activities

11. Monitoring performance of operating units

12. Providing continuous staff assistance to chief executive for planning activities

13. Recommending and monitoring allocation of resources to various organizational units

14. Identification of new business opportunities

2.7

2.3

2.3

2.2

2.2

2.1

2.1

2.0

2.0

2.0

1.6

1.6

1.5

1.4

* Weightage is on a four-point scale

Source: P Vaswani, Strategic Management Process in India (1990).

2.6.4 Role of Senior Managers

Not only the corporate planning staff but other managers, particularly the senior

managers, also play an important role in the strategic management process of

a company. The senior managers include SBU heads and also functional heads.

Some of these heads are at the level of directors who are represented on the

board. The senior managers are members of different management committees,

including top management committees which are involved in strategic planning

and management. Some of these committees consider and evaluate proposals

for new investment, restructuring, diversification, etc. In all these committees

some corporate planning staff members are also represented.

ITC has constituted a Corporate Management Committee (CMC) which

consists of five full-time directors and five senior managers, besides company

secretary. MRF has divided its senior managers into five strategic groups dealing

with products and markets, environment, technology, resources and manpower.

Each group, headed by a leader, prepares position papers (which includes

initiation of strategy proposals, feedback and implementation reports) for the

board. Voltas undertakes strategy implementation through a Corporate Executive

Committee (CEC) headed by the President (Chief Executive) and consisting of

Senior VPs and VPs of different functional areas.



2.6.5 Role of Consultants

Management consultants can play very useful roles in the strategic planning

process of a company. Consultants render services in different functional areas

of management including the strategic planning and management process. In

companies with no separate planning division or unit, consultants can fill that

gap. They can undertake planning and strategy exercises as and when the

company management feels the need for such exercises or consultancies. Even

in companies with a corporate planning division/unit, consultants may provide

specialized inputs or insights into identified management or strategy areas. Top

strategic consultants like McKinsey & Company use or develop latest tools,

techniques or models to work out solutions to specific strategic management

problems or issues—be it productivity, cost efficiency, restructuring, long-term

growth or diversification. Consultants bring with them diversified skills (most of

the consulting companies are multidisciplinary) and experience from various

companies which may not be available internally in a single company. This is

the reason why even large multinational companies hire consultants for achieving

their goals or objectives.

There are many international consultants who are in demand in different

countries. There are also national consultants. Leading international consultants,

in addition to McKinsey & Company, are Boston Consulting Group (BCG), Arthur

D Little and Accenture (formerly Anderson Consulting). Prominent Indian

consulting companies are A F Ferguson, Tata Consultancy Services (TCS) and

ABC Consultants.

Consultants, sometimes have a difficult or delicate role to play. In many

companies, a situation develops when the chief executive or the top management

needs to bank upon the support of an external agency like a consultant to push

through a strategic change in the organizational structure or management system

of the company. It may be for growth and development or downsizing. In both

cases, many companies face internal resistance to change. The resistance is

more if it is downsizing even when it is required for turning around a company.

This happens particularly in public sector companies where implementing change

is always difficult. Consultants are engaged to support or substantiate the

company’s point of view (in the form of their recommendations) so that change

is more easily acceptable to the internal stakeholders of the company.

Consultants’ role may become delicate and, sometimes, tricky in such cases,

and they should carefully weigh the ethical implication of their participation.




13. Managers at different levels—top, senior and middle—participate in the

strategic planning and management process. (True/False)

14. The _______ plays the most important role in the strategic management

process of a company.

15. Most large companies and multinationals have created a separate

_____unit, which is equipped with specialized planning staff who form

the nucleus of strategic planning activities of a company.

16. In companies with no separate planning division or unit, ______can fill

that gap.

2.7 Strategic Drift

In the strategic management process of every company, there is a risk of

‘strategic drift’. In simple terms, strategic drift is the widening gap between

demand for change by the environmental forces and actual strategic change in

a company.

If there is a pressure for change, managers usually look for what is familiar.

But, this creates problems when managing strategic change, because the action

required may be outside the present system or paradigm, and organizations

may be required to change significantly their core assumptions and strategies.

The situation may be one of declining performance. To arrest the decline,

company management may first seek to improve implementation of the existing

strategy. This can be through tightening controls and improving the monitoring

system. If this is not effective, a change of strategy may take place, but, a

change which may still be within the existing paradigm. For example, the

management may seek to expand the market but, may assume that it will be

similar to its existing market and, therefore, plan for managing the new project

in much the same way as it has been used to. This is the strategy of incremental

change.

But, this may not be enough. Such processes or strategies may not be

adaptive enough to the environmental changes over time. This may give rise to

strategic drift—a mismatch between the environmental needs and strategic

action—as shown in Figure 2.5.



Phase 2Flux

Strategicchange

3

TimePhase 3/4

Transformationalchange or demise

2

Environmentalchange

1

5

Am

ount of change

Phase 1incremental change

4

Figure 2.5 Strategic Drift in the Management Process

As shown in the Figure 2.6, an organization’s strategy gradually moves

away from or neglects the forces at work in its environment. Sometimes, the

strategic drift is difficult to detect and reverse. This happens because not only

changes are being made in strategy, but also such changes may achieve some

short-term improvement in performance tending to legitimize the action taken.

But, with time, either the drift becomes evident or the environmental change

increases, and the performance is affected. Strategy development is then likely

to go into a state of flux (Phase 2), with no clear direction, further damaging the

performance. Eventually, more transformational change may be required (Phase

3) if the demise of the organization (Phase 4) is to be avoided.10

The above description of strategic drift conforms to a situation of lack of

fit or match with the environment. The lack of fit can happen in another way

also. Those organizations, which tend to stretch their competences to create

new opportunities, may also get into problems. In this case, a transformational

change may be attempted through development of entirely new products or

services not previously in existence. This can succeed and create a shift in the

market in accordance with the intended strategy. However, there is a risk that

such an organization can find itself ‘ahead’ of its environment (Phase 5 in Figure

2.5). The strategy and the environment may eventually realign (as shown in the



figure), but, this may not often happen in reality; and, even if it happens, the

time lag in the realignment process can cause significant problems of

performance in the organizations. Strategic drifts of this nature are, however,

not very common. More common drifts in organizations are the ones where the

strategic process lags behind the environmental forces.

But, all this emphasizes the delicate balance that an organization needs

to maintain in developing its strategy. It has internal pressures—cultural or

managerial—which tend to constrain strategy development, and environmental

forces, including markets and competitors, which it must cope with for a particular

strategic process to succeed. Every organization has to constantly endeavour

to align or realign these two forces to avoid the occurrence of a strategic drift.

2.7.1 The Learning Organization

The risk of strategic drift implies that there is not much justification in pursuing

formalized planning approaches with predetermined objectives, analyses and

strategies. The environment is too complex and changes too rapidly for such

approaches to produce desired results. Such uncertainty in the environment

requires that strategy should be managed in a more unconventional,

‘discontinuous’ way and not through incremental changes. Managers should

not regard their experience as fixed and unalterable; on the other hand, they

should try to develop an organization in which they continually challenge past

experience and practices and strive for new, innovative ways. In other words,

they should develop a learning organization. Senge (1990) gives a good

exposition of the art and practice of the learning organizations.

Managers in a learning organization have a questioning mind. They start

by questioning the past and the present. For this to happen, companies need to

develop organizations which are pluralistic, i.e., organizations in which different

and even conflicting ideas and views are encouraged, and discussions, debates

and experimentations are the norms. In this way, all strategic solutions and

decisions emerge through a critical, but progressive process. The job of the top

management is to create such an organization and build teams which can work

in a pluralistic environment. This can be done in a number of ways; for example,

through development of different types of organizational structure or through

development of organizational culture. Suitability of the organizational type is

important. The learning organization is also an evolving organization.



Activity 2

In every organization, there is a chance of strategic drift. Progressive

organizations try to prevent strategic drift through advance planning and

preventive strategies. Assume that you are the strategic planning manager

of one such company. Give your analysis of preventive planning and

strategies.


17. The widening gap between demand for change by the environmental

forces and actual strategic change in a company is referred to as ______.

18. The risk of strategic drift implies that there is not much justification in

pursuing formalized planning approaches with predetermined objectives,

analyses and strategies. (True/False)

19. Managers in a learning organization have a __________mind.

20. The learning organization is also an evolving organization. (True/False)

2.8 Case Study

Strategic Management Process At Hindustan Unilever (HUL)

Hindustan Unilever (HUL) is a partly owned (majority holding) subsidiary of

Unilever Ltd. For quite some years, Unilever

was on the lookout for expansion

opportunities for its group companies/

businesses in India. When the opportunity

came its way with India’s economic

liberalization in the 1990s, Unilever acted fast,

achieved a big expansion in each of its major

businesses in the country, regrouped and

integrated its companies.

Unilever worked out its corporate strategy for

India in line with its objectives. To achieve its

objectives, HUL formulated a strategy which

had three distinct components:



1. A strategy for expansion of businesses

2. A strategy for regrouping and integrating the group companies

3. A strategy for consolidation of ownership and control by the parent

company in the Indian operations by acquiring majority equity in them.

For expansion of its business, HUL exploited a whole range of strategic

possibilities. It used takeovers/ acquisitions, mergers, strategic alliances

and joint ventures. In some cases, it employed the start-up route as well. It,

however, relied heavily on the takeover route for its expansions. There

were valid reasons for this. By relying on the takeover route for its expansion,

Unilever was in a position to avoid the time lags.

Along with the expansion of its various businesses, Unilever carried out the

regrouping/integration of its existing businesses/companies in the country.

Its idea was to integrate all its companies in India into a single mega firm. It

used mergers for accomplishing the objective and carried it out in stages.

It took two companies at a time—two companies of the group which enjoyed

the closest synergy were merged at a time into a single entity, and the

merged entity in turn was subsequently merged with another company of

the group to form a much larger entity. The process continued till it reached

the stage where Unilever had just a single company in India.

Unilever merged four companies—two of its existing companies, Doom

Dooma India and Tea Estates India, two taken-over companies, Kissan

and Kothari General Food (KGF), into Brooke Bond. The merging of Doom

Dooma and Tea Estates served two purposes. It furthered the objective of

integrating the group companies. It also helped Unilever to acquire majority

equity in Brooke Bond with an incremental new investment. Unilever then

merged Brooke Bond and Lipton into a single entity—Brooke Bond Lipton

India Ltd (BBLIL). Then TOMCO, which had been taken over earlier, was

merged with HLL. Subsequently, the combined entity, Brooke Bond Lipton

India Ltd (BBLIL) was merged with Hindustan Lever. Consolidation of

ownership and control by the parent company was the third part of Unilever’s

strategic process with respect to its Indian operations. Unilever acquired

majority stake and consolidated its position in all its companies in India.

The company acquired 51 per cent or more equity in each of its companies

in India, and it managed this at attractive prices and with minimal new

investment. This was accomplished through a chain of moves involving

mergers of companies and incremental new investments.



2.9 Summary


• There are different approaches to the strategic management process.

These approaches can be regrouped into three basic approaches:

entrepreneurial-opportunistic, formal-structured and adaptive.

• Many companies use a predominantly entrepreneurial-opportunistic

approach and combine this with the formal-structured approach. Similarly,

a formal-structured approach may be combined with some elements of

adopting predominantly a formal-structured approach with elements of

entrepreneurial-opportunistic approach.

• Corporate-level strategies, SBU-level strategies and functional-level

strategies all involve decision making. But, the types of decision making,

their scopes and impacts are different at different levels. For example,

corporate-level strategies are generally long term, SBU-level strategies

are generally medium term and functional level strategies are short term.

• Managers at different levels—top, senior and middle—participate in the

strategic management process. In addition, the board of directors plays

an important role. Consultants also have a role to play. In all, there are

five major participants in SMP: board of directors, chief executives (CEO),

corporate planning staff, other managers and consultants.

• In the strategic management process of every company, there is a risk of

‘strategic drift’. Strategic drift is the gap between demand for change by

the environmental forces and actual strategic change taking place in a

company.

• In learning organizations, managers constantly challenge past experience

and practices and, strive for new innovative ways. In such organizations,

strategy is managed in a more unconventional, ‘discontinuous’ way and,

not through incremental changes.

2.10 Glossary

• Merger: The combining of two or more companies into one, through a

purchase acquisition or a pooling of interests

• Strategic business unit: A division or a product/product group unit which

operates as a separate profit centre having its own set of market and

competitors and its own marketing strategies



• Strategic drift: The widening gap between demand for change by the

environmental forces and actual strategic change in a company

• Strategic management process: An ongoing process that entails

specifying the organization's mission, vision and objectives, developing

policies and plans, often in terms of projects and programs, which are

designed to achieve these objectives, and then allocating resources to

implement the policies and plans, projects and programmes.


1. Explain the strategic management process (SMP). Discuss it in terms of

the strategic management model.

2. Distinguish between the entrepreneurial-opportunistic approach, formal-

structured approach and the adaptive approach in strategic management.

Would you generally recommend each of these approaches in isolation

or in some combination for a company?

3. What are the different levels in SMP? Are there any interrelations among

them? Explain.

4. Who are the major participants in SMP? Do you feel all these participants

play equal roles?

5. Compare the roles of the board of directors and the chief executives in

the strategic management process.

6. What is the role consultants play in the strategic planning and management

process of a company? Is it an essential role?

7. What is strategic drift? Explain graphically.

8. Which is a learning organization? What is the mindset of managers in a

learning organization?

2.12 Answers


1. Strategic management

2. Internal

3. False



4. True

5. Mintzberg (1973)

6. entrepreneurial-opportunistic

7. formal-structured

8. (c)

9. Strategic business unit

10. tactical

11. False

12. True

13. True

14. Chief executive

15. Corporate planning unit

16. Consultants

17. Strategic drift

18. True

19. Questioning

20. True


1. The strategic management process may best be illustrated in the form of

a model. Refer to Section 2.3 for further details.

2. Three modes of Mintzberg and five approaches of Steiner and others

have some commonness or similarities in terms of the content. Refer to


3. Three levels in the strategic management process are the corporate level,

the business unit or SBU level and the functional level. Refer to Section


4. There may be five major participants in the strategic management process

of a company—board of directors, chief executive officer (CEO), corporate

planning staff, other managers and consultants. Refer to Section 2.6 for

further details.



5. The board of directors is the final authority in deciding the affairs and

direction of a company; the chief executive plays the most important role

in the strategic management process of a company. Refer to Section 2.6

for further details.

6. Management consultants can play very useful roles in the strategic

planning process of a company. Refer to Section 2.6.5 for further details.

7. Strategic drift is the widening gap between demand for change by the

environmental forces and actual strategic change in a company. Refer to


8. Due to the fear of strategic drift, every company should be a learning

organization. In learning organizations, managers constantly challenge

past experience and practices and, strive for new innovative ways. Refer


2.13 References

1. Hill, C W L, and G R Jones. 1997. Strategic Management: An Integrated

Approach. 2nd edn. Boston: Houghton Mifflinco.

2. Johnson, G, and K Scholes. 2005. Exploring Corporate Strategy. 6th edn.

London: Pearson Education.

3. Mintzberg, H. 1973. ‘Strategy Making in Three Modes.’ California

Management Review, Winter.

4. Senge, P. 1990. The Fifth Discipline: The Art and Practice of the Learning

Organization. New York: Doubleday Century.

5. Thomas, J. 1981. Managing a Business in India. New Delhi: Allied

Publishers.

6. Wheelen, T L, and J D Hunger. 1983. Strategic Management and Business

Policy. Massachusetts: Addison-Wisley.

7. Wright, P, C Pringle, and M Kroll. 1998. Strategic Management: Text and

Cases. Boston: Allyn and Bacon.

Endnotes

1 Sumantra Ghoshal, ‘Collectors of Great People, ’ Economic Times, Supplement (August20, 1999).

2 Keki Dadiseth, ‘Business Growth Through People Growth: Our Blueprint for the NewMillennium ’, Chairman ’s Speech (Mumbai: Annual General Meeting of the Company,April 20, 2000).



3 A A Thompson Jr, A J Strickland III, and J E Gamble, Crafting and Executing Strategy:

The Quest for Competitive Advantage, 14th ed. (New Delhi: Tata McGraw-Hill, 2005) 34.4 T L W heelen, and J D, Hunger, Strategic Management and Business Policy

(Massachusetts: Edition Wesley, 1983), 49.5 AIMS Research Survey, ‘Best Boards, ’ Business Today (March 7 –21, 1999).6 T Thomas, Managing a Business in India (New Delhi: Allied Publications, 1981), l.7 R K Shah, Top Management Effectiveness, unpublished PhD Dissertation (South Gujarat

University, 1990).8 P Vaswani, ‘Strategic Management Process in India ’, PhD Thesis Surat: South Gujarat

University, 1990.9 Companies covered under the Foreign Exchange Regulation Act (FERA). FERA has now

been replaced with Foreign Exchange Management Act (FEMA).

10 G Johnson, and K Scholes, Exploring Corporate Strategy (1999), 77.



Unit 3 Business Policy, Strategic Management

and Business Continuity Planning

Structure

3.1 Introduction

3.2 Caselet

Objectives

3.3 Policy, Strategy, Tactics

3.4 Strategic Management

3.5 Strategic Planning and Strategic Management

3.6 Benefits of Strategic Management

3.7 Business Ethics and Strategic Management

3.8 Planning for Business Continuity

3.9 Case Study

3.10 Summary

3.11 Glossary


3.13 Answers

3.14 References

3.1 Introduction

A common debate found in strategic management literature is whether policy

comes before strategy or vice versa and what is the interrelation between the

two. The present unit throws light on this by considering the definitions and

features of both. The definitions and role of tactics are also dealt with.

Different definitions of strategic management are also given for clearerunderstanding of the concept and process. The classification of management

functions into strategic and operational categories has been done. Four important

topics – strategic planning, strategic management, limitations of strategic

management and business ethics – have also been discussed.

An extension of strategic planning is business continuity planning. This is

a recent development in policy and strategic management. It essentially deals

with the damages due to a disaster to a business—natural or manmade.

Appropriate planning and strategies are required to handle such damages or

disasters. Implementation issues are also involved. All these have been

discussed in this unit.



3.2 Caselet

Birla Sun Life Insurance is one of the few Indian companies to have a fully

operational business continuity plan (BCP). It consists of a response plan

to restore and recover operations for critical processes within a

predetermined time after a disaster. The plan would ensure minimal impact

to the organization, its people, and most importantly, its customers.

The objective is to have a planned response in the event of any contingency,

ensuring recovery of critical activities within agreed time frames. The plans

would comply with various regulatory requirements and minimize the

potential business impact to the company. Additionally, it helps to create a

system that fosters continuous improvement of business continuity

management.

Highlights of the plan are as follows:

• Crisis Management and incident response

• Data back-up, data and system recovery as documented in the Disaster

recovery plan

• Recovery of all critical business functions and supporting systems

• Alternate recovery sites if primary location is unavailable

• Communication with customers, employees and other stakeholders

• Assurance to customers that they will continue to receive optimum

customer services at all times

Source: http://insurance.birlasunlife.com/Pages/Individual/About-Us/Business-

Continuity-Plan.aspx

Objectives


• Distinguish between policy, strategy and tactics

• Differentiate between strategic planning and strategic management

• Discuss the benefits and limitations of strategic management

• Explain the role of business ethics in strategic management

• Describe business continuity planning in terms of all aspects



3.3 Policy, Strategy, Tactics

We start with five definitions of strategy given by Mintzberg and Quinn (1991).

The five definitions or descriptions are: plan, ploy, pattern, position and

perspective. Strategy as a plan is a consciously intended course of action to

deal with a situation. These action plans may be general or specific. For example,

a strategy to gain competitive advantage in the market through differentiation is

a general strategy, but a strategy to offer low price and higher value for the

customer in a particular market may be considered a specific strategy. As a

ploy, strategy is a specific manoeuvre intended to outwit an opponent or a

competitor. Strategy as a pattern is visible in the consistency of action, intended

or unintended, that a company undertakes from time to time to strengthen its

position in the marketplace. Strategy as a position involves developing a match

between the organization and its external environment by reacting or responding

to change in the market environment. Tata Motors, responding to the emergence

of a Japanese light commercial vehicle (LCV) in the Indian market and introducing

its own LCV to become a market leader, is an example. Finally, strategy as a

perspective involves creating a shared view or perspective of the environment

by the management and other managers at different levels in the organization.

There are many such definitions of strategy in strategic management

literature. If we have to give one single definition of strategy, we would like to

quote the one given by Thompson and Strickland (2001):

A company’s strategy consists of the combination of competitive moves

and business approaches that managers employ to please customers, compete

successfully, and achieve organizational objectives.1

As the above definition suggests, and as mostly used or understood,

strategy is an ‘action plan’ or a ‘scheme of action’ or ‘design of execution’ of a

plan. Porter, one of the greatest exponents of strategy, has a slightly different

approach to the definition. He describes strategy as:

... developing and communicating the company’s unique position, making

trade-offs, and, forging fit among activities.2

For an organization, unique position indicates choice of activities which

are different from those of its competitors or performing similar activities in

different ways to exhibit its uniqueness.

Trade-off is required when some of the activities followed by a company

may not be compatible with each other or with organizational objectives or goals.



Forging or creating fit among different activities is necessary to ensure that

they relate to or reinforce each other.

Policy is different from strategy. ‘Policy’ is derived from the Greek word

‘politeia’, meaning‘ polity’, that is, the state and its citizens, and Latin polotis

meaning ‘polished’, that is, clear.

According to the New Webster Dictionary, ‘policy’ means the art or manner

of governing a nation or the principle on which any measure or course of action

is based. This definition implies that policy is a prescribed guideline for governing

actions of an organization with respect to given objectives. Kotler has given a

clear definition of policy:

Policies define how the company will deal with stakeholders, employees,

customers, suppliers, distributors and other important groups. Policies narrow

the range of individual discretions so that employees act consistently on important

issues.3

3.3.1 Different Features of Policy

On the basis of this definition, certain features of policy can be identified. These

are:

• Policies should follow from organizational objectives and should be

formulated in consistency with such objectives.

• Policies provide guidelines to managers/members in an organization for

deciding a course of action, and these limit their discretion or freedom in

choosing the course of action.

• Policy formulation is generally the function of senior or top management

of a company, and not the job of all managers.

• Policies are commonly expressed in qualitative terms in a general way.

Sometimes, policies can also be stated in a conditional or more specific

way.

• In any organization, a policy will remain in vogue for sometime till it is

reviewed, and a change in the policy is made or the policy is replaced by

a new one4. This means that policies do not change frequently.

To make the concept or meaning of policy clearer, some examples are given

below.

• A company will not consider any cost reduction measures if it means

compromising on the quality of its product(s).



• A company decides to grow only through retained earnings and not resort

to capital issue or market borrowing.

• A company will not consider adding any new products with less than 10

per cent return on investment.

• A company sells on cash terms and also on credit terms.

• A rental company charges a deposit for renting materials.

• A car company charges extra money for delivering the car to the buyer’s

premises.

• A company hires personnel with experience only.

• A company has guidelines on how to collect outstanding amounts from its

customers.

• A company responds to 50 per cent of customer enquiries within three

working days.

• A company does not question the return of goods by customers that were

purchased during last one month.

• A company does not give any discount on price.

• A company gives 10 per cent discount on price if payment is made in

cash.

3.3.2 Policy vs Strategy

The difference between policy and strategy should now be clear. Policy is broader

or more general—more in the form of guidelines or principles. Strategy is more

specific with reference to a particular situation, target or objective. Policy generally

comes first; strategy comes later, and, sometimes, follows from or is subject to

policy. Let us explain this with an example. A company wishes to achieve greater

cost efficiency. This is the objective. The company also has a policy of not

retrenching any of its existing employees. So, a strategy will be worked out,

which is subject to or consistent with this policy. The strategy may relate to

economies of scale or measures for increasing productivity or identifying and

eliminating wasteful expenditure in some area(s) of operation.

Some policy analysts and strategic thinkers do not make much distinction

between policy and strategy. According to them, the relationship between policy

and strategy is an evolutionary phenomenon. Over a period of time, because of

pressure of business and growing competition, business policies of many

companies evolved into specific strategic processes. The paradigm shift between



policy and strategy has been well enunciated by Hofer and others (1984). This

is shown below.

First Phase: Till the mid-1930s: (Ad hoc policy)

Ad hoc policy making necessitated by the expansion of American firms in terms

of product, markets and customers; and, the consequent need for replacing

informal controls by framing functional policies to guide managers.

Second Phase: 1930s and 1940s (Planned policy)

Planned policy formulation instead of ad hoc policy making and shift of emphasis

to integration of function areas caused by environmental changes.

Third Phase: 1960s (Strategy)

Rapid pace of environmental changes and increasing complexity of management

necessitating a critical look at business in relation to environment and the need

for strategic decisions.

Fourth Phase: 1980s and later (Strategic management)

Shift of focus to strategic processes and the responsibility of management in

resolving strategic issues.

The evolutionary aspect gives a good perspective to the difference between

policy and strategy.

3.3.3 Strategy and Tactics

Strategy and tactics are also different although they appear to be the same.

From an overall strategy, a number of sub-strategies follow. These are tactics.

Let us explain this. Suppose an industrial products company wants to increase

its market share. Different strategies can be used for this. The company may

decide to adopt the strategy of increasing customer focus or improving buyer

management (other strategies can relate to quality or price). During the

implementation of the overall customer focus strategy, day-to-day responses to

the market (or customer) constitute tactics. Tactics are used more in individual

cases — for example, giving a quantity discount to a particular customer, offering

a credit package to another customer, a special service to a third customer, etc.

The distinction between strategy and tactics is subtle, like the differentiation

between marketing and selling. Sometimes, the distinction between strategy

and tactics may depend on the level at which it is being used. For example, an

additional discount given to a large or important customer may be a strategic

decision for the salesperson, but for the VP (Marketing), this may be a tactical



decision. The distinction, or rather the relationship, between strategy and tactics

can be made clear in terms of five major factors or characteristics which relate

to both of them. These are given below:

1. Significance: Strategies have more significance or greater consequences

for an organization than tactics because strategies or strategic decisions

generally affect the entire organization or a significant part of the

organization. Tactics may affect only a particular supplier or vendor, a

particular sale or a customer.

2. Level of formulation or conduct: Because of their significance, strategies

are formulated at senior or top management level. Within an overall

strategy, tactics are employed by middle and lower levels of management

including salespersons in the field.

3. Information base: Since strategies are of major consequence to an

organization, these should be carefully worked out based on adequate

information about a company’s resource, operations, environment,

competitors, customers or some or all of these. Information requirements

for tactical decisions would be much less.

4. Objectivity/subjectivity: Strategies are generally worked out by teams

and not by individual managers (except the CEO sometimes.) This, along

with the fact that those are based on carefully analysed information/data,

renders enough objectivity to strategies or strategic decisions. Tactics, by

their nature, are more subjective—sometimes left to the discretion of

individual managers.

5. Periodicity or time horizon: Strategies are not made or changed too

frequently. It takes time for a strategy to fully work itself out and to determine

its effectiveness or success or failure.

Strategies, therefore, have larger periodicity or time frame. Strategies,

which are changed too frequently, are bad strategies. Tactics, on the other hand,

can change quite frequently. If we consider policy, strategy and tactics together,

it becomes clear that policy comes before strategy and strategy comes before

tactics. All the three concepts are closely interrelated and play vital roles in the

business or management process of a company. As a sequence or conceptual

chain in the management process, policy, strategy and tactics can be written

as:

Policy →→→→ Strategy →→→→ Tactics



Activity 1

Today, with increasing awareness about the threat to the environment, many

companies are adopting eco-friendly policies in various ways. Give an

example of a company that has changed its policies or adopted new policies

to make itself eco-friendly. Mention the specific steps taken.


1. The five definitions of _______ given by Mintzberg and Quinn (1991) are

plan, ploy, pattern, position and perspective.

2. When some of the activities followed by a company may not be compatible

with each other or with organizational objectives or goals, ________ is

required.

3. Policy is the same as strategy. (True/False)

4. According to the New Webster Dictionary, ________ means the art or

manner of governing a nation or the principle on which any measure or

course of action is based.

5. Policy generally comes first; strategy comes later, and, sometimes, follows

from or is subject to policy. (True/False)

6. Strategy and tactics are also the same although they appear to be different.

(True/False)

3.4 Strategic Management

Like strategy, strategic management also has been defined differently by different

authors and strategy analysts. We give below three definitions of strategic

management, which together give completeness to the concept of strategic

management.

‘Strategic management is that set of decisions and actions which leads to

the development of an effective strategy or strategies to help achieve corporate

objectives.5’



‘Strategic management is defined as the set of decisions and actions in

formulation and implementation of strategies designed to achieve the objectives

of an organization:’6

‘Strategic management is primarily concerned with relating the organization

to its environment, formulating strategies to adapt to that environment, and,

assuming that implementation of strategies takes place.’7

All the management functions of a company can be broadly classified

into two categories: strategic and operational. Strategic functions are performed

more at the senior and top management level, and operational functions are

discharged more by middle and lower management levels. In other words, it

can be said that, as the level of management moves up, the managers perform

more strategic functions and less operational functions. Also, in any company,

operational functions constitute a higher percentage of total management

functions than strategic functions (Figure 3.1).

Level ofmanagement

Top

Middle

Supervisory

Strategicorientation

Management function Nature of function

Broad and coreative

Somewhat creative

Operationalorientation

Figure 3.1 Nature of Functions at Different Management Levels

Operational functions or operational management, as the name implies,

is concerned with routine matters of day-to-day management like efficient

production of goods, management of a sales team or sales force, monitoring of

financial performance, etc. Strategic management would be concerned with,

say, devising or innovating methods for improving financial performance of the

company. The major differences between strategic management and operational

management are shown in Table 3.1.



Table 3.1 Characteristics of Strategic Management and Operational Management

Strategic management Operational management

Higher level Lower level

Innovative Routinized

Imprecise More precise

Complex Less complex/simple

Organization–wide Operationally specific

Consequential Task driven

Result driven Productivity driven

Long-term implication Short-term/immediate implication

Strategic management consists of three distinct steps or stages. These

are: strategy formulation, strategy implementation and evaluation and control.

In sequential order, these three stages may be shown as

Strategy formulation→→→→Strategy implementation→→→→Evaluation and control

Some call these three the basic elements of strategic management. These

three elements can be considered individually, but, they are closely interrelated

and must be integrated in the total management process.


7. All the management functions of a company can be broadly classified

into two categories __________and _________.

8. Strategic functions are performed more at the senior and top management

level, while operational functions are discharged more by _______

management levels.

9. Strategic management consists of three distinct steps or stages

formulation, strategy implementation, and evaluation and control.

(True/False)

10. Operational functions or operational management, as the name implies,

is concerned with routine matters of day-to-day management. (True/False)



3.5 Strategic Planning and Strategic Management

Plan or planning should precede action. And, strategic planning should precede

strategic management. Strategic planning (also called corporate planning)

provides the framework (some call it a tool) for all major decisions of an

enterprise—decisions on products, markets, investments and organizational

structure. In a successful organization, strategic planning or strategic planning

division acts as the nerve centre of business opportunities and growth. It also

acts as a restraint or defence mechanism that helps an organization foresee

and avoid major mistakes in product, market, or investment decisions.

A strategic plan, also called a corporate plan or perspective plan, is a

blueprint or document which incorporates details regarding different elements

of strategic management. This includes vision/mission, goals, organizational

appraisal, environmental analysis, resource allocation and the manner in which

an organization proposes to put the strategies into action. The concept and role

of strategic planning would be clear if we mention the major areas of strategic

planning in an organization. First, strategic planning is concerned with

environment or rather, the fit between the environment, the internal competencies

and business(es) of a company. Second, it is concerned with the portfolio of

businesses a company should have. More specifically, it is concerned with

changes—additions or deletions—in a company’s product-market postures.

Third, strategic planning is mostly concerned with the future or the long-term

dynamics of an organization rather than its day-to-day tasks or operations.

Fourth, strategic planning is concerned with growth—direction, pattern and timing

of growth. Fifth, strategy is the concern of strategic planning. Growth priorities

and choice of corporate strategy are also its concerns. Finally, strategic planning

is intended to suggest to an organization, measures or capabilities required to

face uncertainties to the extent possible.

All large organizations formulate strategic plans. In 1997, All India

Management Association (AlMA) conducted a study to find out about business

plans, strategies, techniques and tools adopted by various Indian companies.

The study results were published in Business Today. The study showed that 56

per cent of the total number of companies (160) surveyed had published strategy.

In terms of planning horizon, the period covered in the strategic plan was less

than 3 years by 44 per cent of the companies, 3–5 years by 40 per cent of the

companies and more than 5 years by 16 per cent. Analysed in terms of company

size, bigger companies planned for a longer period. For 45 per cent of the large



companies, the planning period was more than 5 years, but for 70 per cent of

the small companies, the period was less than 3 years.

A characteristic feature of the starting plans of many large Indian

companies is that the long-term planning horizons of these companies generally

coincide with the national planning period. This means that many of these

companies follow a five-year planning period which synchronizes with the 5-

year plans of the country. This is particularly true of public sector enterprises in

the core sector.

For example, companies like BHEL, SAIL, NTPC and NHPC have

formulated corporate plans which are linked to the national plans. The 5 year

planning period of these companies, however, is not a generalization. Corporate

plans of some of these companies are linked to the national plans, but, not

necessarily of exactly 5-year duration; the duration can be a multiple of 5 years.

For example, SAIL had prepared an ambitious corporate plan with a planning

horizon of 15 years (1985–2000). Such plans are more appropriately called

perspective plans.

Marico Industries, the maker of Parachute coconut oil, had prepared a

strategic business plan for the period, 1991–96. For the preparation of the plan,

a strategic planning team was formed consisting of six managers from different

functional areas/disciplines. The planning team made some forecasts about

the general macroeconomic environment during 1991–96 and how the Indian

economy would perform during the period in terms of aggregate demand,

technology development and availability of raw materials. In addition to these,

the company had considered other environmental factors also. Based on an

analysis of the major strengths and weaknesses of the company and the

environmental factors (opportunities and threats), a detailed SWOT analysis

(discussed later in Unit 6) of the company was undertaken. The objective of

SWOT analysis was to identify growth and expansion possibilities in existing

and new products/businesses. These were finally translated into projected

volumes, turnover and profitability.

Once a strategic plan is prepared, the same is submitted to the senior

management/top management for their consideration and approval. In Marico

Industries also, the strategic business plan prepared by the planning group was

submitted to the senior management and finally to the top management (CEO).

Deliberations took place at different levels and the business plan was finalized.

This became more like an annual plan which was to be revised and updated

every year during the reference period (1991–96) as per the strategic business



plan. Marico’s target was to increase its turnover to ̀ 300 crore by 1995–96. The

business plan also stipulated that Marico should add a new product to its portfolio

every year and seek technology tie-up for introduction of new products.

Strategic planning and strategic management are intimately related to

each other. Where strategic planning ends, strategic management takes over;

but, both are complementary to each other. They form vital links in an integrated

chain in corporate management. Both are continuous processes. Strategic

management may be more continuous, because it involves implementation and

monitoring also.


11. A ________is a blueprint or document which incorporates details regarding

different elements of strategic management.

12. Strategic planning is concerned with environment or rather, the fit between

the environment, the internal competencies and business(es) of a

company. (True/False)

3.6 Benefits of Strategic Management

An organization can derive many benefits from strategic management. Strategic

management allows an organization to be more proactive than reactive in shaping

its own future. It allows an organization to initiate and influence rather than just

respond to activities or situations; and, this enables the organization to exercise

control over its present activities and give directions to growth and development.

Small business owners, CEOs and managers of many profit and non-profit

organizations have recognized the benefits of strategic management. The

benefits of strategic management can be both financial and non-financial.

Different research studies indicate that organizations using strategic

management are more profitable and successful than those which do not.8

Companies using strategic management techniques show significant

improvement in productivity, sales and profitability compared to the ones without

systematic planning. High-performing companies do more systematic planning

to prepare for future changes in the environment—both internal and external.

Companies with properly organized planning system and strategic management

generally show superior long-term performance relative to the industry average.



High-performing companies usually have more informed decision-making

system with good anticipation of both short-term and long-term consequences.

Companies, which perform poorly, often remain busy in activities that are

shortsighted and do not reflect good forecasting of future conditions. Planners

of low-performing organizations are often preoccupied with resolving internal

problems and conflicts and meeting routine or paper deadlines. They tend to

underestimate their competitors’ strengths and overestimate their own strengths

overlooking the weaknesses. They often attribute their poor financial performance

to uncontrollable factors such as a stagnant economy, poor industrial climate,

technological change and domestic or foreign competition.

Reports indicate that more than 1,00,000 businesses in the US fail annually

resulting in substantial financial losses. These business failures include

bankruptcies, foreclosures and liquidations. Although many factors contribute

to business failure, strategic planning and management can help in the prevention

of failures in many cases by anticipating situations or developments and

recommending or taking appropriate timely actions.

In addition to the financial benefits, companies can derive a number of

non-financial benefits from strategic management such as better awareness of

external threats, clearer understanding of competitors’ strategies, reduced

resistance to change, better analysis of performance-reward relationship, etc.

Strategic management may renew confidence in the current business strategy

or focus on the need for corrective actions. It helps managers to view change

as an opportunity rather than threat.

Greenley (1986) has analysed various non-financial benefits of strategic

management. He has enunciated the benefits of strategic management as given

below:

• It provides for an objective view of management problems.

• It allows for identification, prioritization and exploitation of opportunities.

• It allows for more effective allocation of time and resources to identified

opportunities.

• It provides a framework for improved coordination and control of activities.

• It minimizes the effects of adverse conditions and changes.

• It scans resources and time to be devoted to correcting erroneous or ad

hoc decisions.

• It enables major decisions to support established objectives and priorities

better.



• It provides a framework for improved coordination and control of activities.

• It helps to integrate the behaviour of individuals into a total effect.

• It provides a cooperative and integrated approach to tackling problems

and opportunities.

• It creates a framework for internal communication among managers.

• It encourages forward thinking.

• It imparts a degree of discipline, formality and positiveness to the

management of a business.

• It encourages a favourable attitude towards change.


13. Strategic management allows an organization to be more _____ than

reactive in shaping its own future.

14. The benefits of strategic management are purely financial. (True/False)

3.7 Business Ethics and Strategic Management

Every company or business has moral or ethical responsibility towards its

shareholders. Therefore, strategic management should be ethical and socially

responsible. To be ethical and socially responsible does not mean satisfying

only legal requirements. It also signifies going beyond the law and discharging

responsibilities to the stakeholders and the society as a whole. The strategic

management team should display a high level of integrity and should evolve

right and responsible plans and actions to implement the plan. For example,

the strategists may take the shareholders’ interest into consideration and try to

give them adequate returns on investment. But, at the same time, they should

also take into account the concern of the employees and protect or promote

their interests. This also implies that there should be focus on transparency.

Almost all strategy formulations, implementation and evaluation decisions

have ethical implications. Strategists are responsible for developing,

communicating and also enforcing the code of business conduct or ethics for

their organization. The responsibility for ethical conduct and behaviour, should

not, however, rest only with the strategists. It should be the responsibility of all

managers. Managers, particularly senior managers, hold positions which enable

them to influence and educate many others in the organization. This makes



managers at different levels responsible for developing and practising ethical

decision making and management. In other words, ethical values and standards

should be an integral part of any corporate functioning. For example, Citicorp

has developed a business ethics game, called ‘The Work Ethic’, which is played

by 40,000 employees in 45 countries.9 The objective of the game is to create

and sustain an ethical culture across the organization. The strategists can be

and should be the focal point of this culture.

Explosion of the Internet and its dominance in the workplace has given

rise to many ethical issues in many organizations today. Studies like the E-

Commerce Perspective focus on the business ethics issues related to the

Internet. Millions of computer users are worried about the privacy and security

on the Internet. Given the global nature of Internet and e-commerce, corporate

planners and strategists have to continually strive for ensuring privacy and

security of the Internet as a strategic management tool.

We will discuss more about corporate culture, values and ethics in Unit 4

with respect to corporate governance and, also, in Unit 15 with particular

reference to implementation of corporate strategy.

Activity 2

Give an example of business ethics practised by a company and write a

report on it.


15. Every company or business has _______ responsibility towards its

shareholders.

16. Almost all strategy formulations, implementation and evaluation decisions

have ethical implications. (True/False)

3.8 Planning for Business Continuity

Businesses need to be planned not only for today, but also for tomorrow, that is,

for the future. This implies business continuity and the need for sustainability.

Sustainability requires understanding and analyzing the environment. Besides

business fluctuations or business cycles, business interruptions occur because

of natural disasters like floods, earthquakes, cyclones, etc. To safeguard against

such threats or disasters, planning for business continuity is essential.



3.8.1 What is Business Continuity Planning?

Business continuity planning means proactively working out a means or method

of preventing or mitigating the consequences of a disaster—natural or man-

made (sabotage or terrorism) – and managing it to limit to the level or degree

that a business unit can afford.

3.8.2 Need or Importance of Business Continuity Planning (BCP)

As indicated in the definition, businesses today can be exposed to different

types of threats – natural or man-made. Major threats are:

• Natural disasters such as floods or earthquakes or accidents

• Man-made threats like sabotage or terrorism

• Financial crisis or disaster can be partly man-made and partly due to

environmental factors.

BCP prepares companies to prevent or respond to such situations so that

the damages or losses are minimized and the business or company survives.

Thus, BCP plays a critical role in a business—its survival and sustainability.

3.8.3 Business Impact Analysis

Business impact analysis is the process of identifying major functions in an

organization which have impacts of different degrees on the business of the

organization. The analysis is usually done for each major function to determine

its criticality for the business. This is done through impact questions. Relevant

impact questions are:

• How important is the function in terms of business policy of the company?

• What is the role or criticality of the function in the business strategy of the

company?

• How much the rest of the functions would be affected by absence of the

function – the operational impact?

• How much may be the revenue loss for the company in the absence of

the function —the financial impact?

• How long can the function be in operative without causing any major

impact or losses?

• Whether the absence or in operation of the function affects market or

industry ranking of the company – loss of competitiveness?



• Is the function critical for relationships with customers – loss of customer

confidence or satisfaction?

• Can the absence of the function lead to loss of future sales or revenue –

future growth problem?

The answers to these questions determine the magnitude of impact of a

particular function. In terms of importance or criticality, business functions can

be classified into four categories. These are:

(i) Critical functions: Functions, if interrupted or unavailable for some time,

can put the business in complete disorder, and, may result in heavy losses.

(ii) Essential functions: Functions, whose absence or interruptions, would

badly affect the regular functioning of the organization.

(iii) Necessary functions: Functions without which an organization can

continue functioning, but its operational efficiency would be affected.

(iv) Desirable functions: The absence of these functions does not affect the

operational effectiveness, but the presence of these functions would be

beneficial to the organization.

Impact analysis enables an organization to rank or prioritize business

functions, and determine the order or priority in which those should be developed

or maintained. This also indicate recovery priorities, i.e., the speed or priority

with which a function should be restored or recovered once the function is

disturbed, interrupted or suspended.

3.8.4 Strategies for Business Continuity Planning10

Because of the possibility of different kinds of impacts, and depending on the

nature of damage or disaster, appropriate strategies should be developed and

used to deal with particular situations. Five different strategies should be

developed for five different situations/actions. These are:

1. Prevention

2. Response

3. Resumption

4. Recovery

5. Restoration



1. Prevention

Conventionally, prevention is the best strategy; this means taking steps or actions

to prevent or minimize the chances of occurring of a disaster. Companies can

adopt many preventive control measures as safeguards. Common preventive

control measures are:

(a) Security controls: These involve controls by setting up barriers to protect

the site and prevent unauthorized entry into the premises. This means, in

other words, manned surveillance at the location.

(b) Infrastructure controls: These include appropriate infrastructural facilities

like UPS/back-up power, smoke/fire detectors, fire extinguishers, weather

forecasting systems , etc.

(c) Personnel controls: Skilled/trained personnel are posted to man sensitive

zones where key or critical resources may be located.

(d) Software controls: These involve modern methods of controls through

computerized systems or software. These include authentication,

encryption, firewall, intrusion detection systems, etc.

2. Response

Prevention is a pre-emptive measure; response is a reactive step. If prevention

is not possible, fast response is the next best alternative strategy. After an

interruption or damage has taken place, the BCP team should immediately

inform the management and the Damage Assessment Team. Two other teams

would also be involved: the Technical Team and the Operations Team.

The Damage Assessment Team would assess the nature and magnitude

of the damage. More specifically, the team should investigate into:

• The cause of disruption or damage

• The scope for preventing additional damage

• What can be salvaged

• What repairs, restorations and replacements are required

Based on the report of the Damage Assessment Team, the Technical

Team and Operations Team should get into action. The Technical Team is the

key decision maker for further actions of the BCP and the Operations Team

executes the actual damage control operations of BCP.



3. Resumption

In this, the strategy is for resumption of normal or pre-damage activities of the

organization. Activities now shift to the command centre. The command centre

is different from the location of the normal business activity. Both resumption

and recovery actions are planned and coordinated from the command centre.

The centre should have required communication facilities, systems and

equipments for effective functioning of the BCP/Technical team.

The first decision to be taken by the Technical Team is whether important

or critical business operations can be resumed at the present site or those have

to move to an alternative location. If the present site is badly damaged and, is

not accessible for immediate use, operations may have to move to an alternative

site. Different kinds or types of alternatives may be available based on

infrastructure and facilities and the Technical Team has to choose the most

appropriate site.

4. Recovery

Along with the resumption of critical operations either at the original site or an

alternative location, the recovery process also begins. Recovery essentially

means reinstallation of the operating and control system. Necessary critical

operations are restored. As this happens, information restoration from back-up

tapes or offsite storage also begins. As soon as information/data restoration is

complete, critical business functions can resume.

5. Restoration

Restoration means restoration of the original site for normal functioning. The

restoration process is initiated simultaneously with the recovery work. In fact,

recovery and restoration teams are often common.

The five strategies mentioned above have to be planned and executed

within a time span usually decided by the top management in consultation with

the BCP team. The time span or duration of the process would depend on the

magnitude of the damage or disaster, recovery/restoration goals and the speed

with which different teams " BCP, Technical and Operational " can function.

3.8.5 Developing a Business Continuity Plan and Implementation

Plans and strategies work together. A plan is also essential for implementation

of a strategy or strategies. A separate plan can be made for each of the five

strategies, i.e., prevention, response, resumption, recovery and restoration or

an integrated plan can be prepared incorporating or dealing with all the strategies.



In either case, a plan would have four important aspects or elements.

These are:

(a) Objective: What exactly is to be done or achieved

(b) Assumptions: These indicate availability of back-up services, trained

team to handle operations, vendors, etc.

(c) Team: The BCP team entrusted with the project — their sub-teams roles

and responsibilities should be specified

(d) Scope and limitations: The role of the BCP team should be clearly

defined. Any limitations in their functioning, including resources, are to be

mentioned

3.8.6 Implementation

Implementation of business continuity plans are mostly technology driven.

Implementation involves development and testing of IT system or solution. The

software and/or hardware elements are built into the systems. Implementation

of the mechanical and physical processes of restoration/recovery also take place

simultaneously. In fact, technology and other systems have to be harmonized

for proper implementation of a business continuity plan. During continuity

planning and implementation, care should also be takes to ensure that the

organization’s business process does not come to a complete halt when there

is a disruption of the normal process flow. This is ensured through planning or

building ‘redundancy’, i.e., incorporating back-up service elements which may

be redundant during normal course of business.

An example will make this clear. A bank may be selling fixed deposits to

its account holders or customers through net banking. But, the bank can also

keep phone banking facility ready as a standby so that this can be availed of by

the customers if net services break down. There can also be emergency phone

numbers which customers can use in case of failure of normal communication

services.

3.8.7 Technology versus Business

Business continuity planning and implementation predominantly involve

technology—IT and software systems. But, it must not be forgotten that

technology is used for protection or restoration of business, and, therefore,

focus on business has to be simultaneous.

Also, operational aspects of BCP involves technology, but, technology is

not all or sufficient. Other knowledge areas or activities are equally important.



These include risk management, crisis management, impact analysis, cost-

benefit analysis, storage management, network management, recovery planning,

coordination and communication.11 This implies that business continuity planning

teams should be cross-functional or multi disciplinary so that all required

knowledge inputs or expertise are available. Organizations should develop and

engage such multi disciplinary teams for successful business continuity planning

and its implementation.


17. To safeguard against natural or man-made disasters, ________is

essential.

18. ________is a pre-emptive measure, while _____response is a reactive

step.

3.9 Case Study

Oriental Insurance Company: Growth With Stability*

Oriental Insurance Co. (OIC), a subsidiary of General Insurance Corporation

(GIC), is one of the oldest (established in 1947) insurance companies in

India. OIC conducts all forms of non-life insurance businesses. These

businesses range from small rural insurance covers to big national projects.

OIC’s corporate policy is to contribute to the socioeconomic objectives of

the nation by being a vibrant and viable organization catering to the growing

insurance needs of the community.



Towards this end, the company will strive for effective management of

business operations.

With headquarters based in Delhi, OIC has 21 regional offices, 311 divisional

offices and 635 branch offices in various parts of India—metropolitan cities,

large, medium and small towns and some rural locations. The company

has overseas operations in Nepal, Kuwait and Dubai.

OIC is managed by a team of professionally qualified and experienced

managers. These managers have vast experience in conducting general

insurance business, both nationally and internationally. The company has

a dedicated project cell at headquarters and also major cities of India. A

special R&D team has been dedicated to work out special/innovative

insurance covers like stockbrokers’ policies, special package policies, etc.

OIC specializes in devising special covers for large projects like power

plants, steel plants, chemical plants and petrochemicals. It has a highly

technically qualified team of professionals to render high quality customer

service. The company has special reputation in the reinsurance market.

OIC follows a strategy of growth with stability. The company maintains a

steady growth in its premium income as well as investment income. During

the last 10 years, both premium income and investment income increased

by 8–10 per cent. Even capital and reserve funds grew by about the same

percentage.

OIC generally follows a policy/strategy of concentration in the existing

products and markets, i.e., on its popular policies which are major revenue

earners. The company also adapts its policies/strategies to emerging

environmental and market changes to remain contemporary.

* Based on S Lomash and P K Mishra, Business Policy and Strategic Management

(New Delhi: Vikas Publishing House, 2009), 369–71 (Case IX).

3.10 Summary


• Business policy or policy is different from strategy and strategy is different

from tactics. If we consider policy, strategy and tactics together, policy

comes before strategy and strategy comes before tactics as a sequence

or conceptual chain in the management process: Policy→Strategy→

Tactics. But, all the three concepts are closely interrelated.



• Plan or planning should precede action and strategic planning should

precede strategic management. Strategic planning—also called corporate

planning—provides the framework (some call it a tool) for all major

decisions of an enterprise—decisions on products, markets, investment

and organizational structure.

• Benefits of strategic management are many—both financial and non-

financial. Studies have shown that organizations using strategic

management are more profitable and successful than those which do

not.

• Strategic management has its limitations also—analysing a complex

environment; plans, frameworks and systems mean rigidity; limitation in

implementation; and inadequate appreciation by the management.

• Every company or business has moral or ethical responsibility towards its

shareholders. Therefore, strategic management should be ethical and

socially responsible.

• Business continuity planning means proactively working out a means or

method of preventing or mitigating the consequences of a disaster – natural

or man-made (sabotage or terrorism) – and managing it to limit to the

level or degree that a business unit can afford.

3.11 Glossary

• Business continuity planning: Proactively working out a means or

method of preventing or mitigating the consequences of a disaster – natural

or man-made (sabotage or terrorism) – and managing it to limit to the

level or degree that a business unit can afford.

• Policy: The art or manner of governing a nation or the principle on which

any measure or course of action is based.

• Strategic management: Set of decisions and actions which leads to the

development of a corporate organization.

• Strategic plan (also called a corporate plan or perspective plan): A

blueprint or document

• Strategy: The combination of competitive moves and business

approaches that managers employ to please customers, compete

successfully, and achieve organizational objectives which incorporates

details regarding different elements of strategic management.




1. Explain the difference between policy, strategy and tactics.

2. Explain strategic management. How is it different from operations

management?

3. Specify the interrelationship between strategic planning and strategic

management. Which comes first?

4. Mention the major benefits of strategic management; state in terms of

both financial and non-financial benefits.

5. Does strategic management have any ethical implications? If so, explain

them.

6. What is business continuity planning? Explain in terms of strategies and

implementation.

3.13 Answers


1. Strategy

2. Trade-off

3. False

4. ‘policy’

5. True

6. False

7. Strategic, operational

8. middle and lower

9. True

10. True

11. strategic plan

12. True

13. Proactive

14. False



17. moral or ethical

18. True

19. Business continuity planning

20. Prevention, response


1. Policy is broader or more general—more in the form of guidelines or

principles. Refer to Section 3.3 for further details.

2. All the management functions of a company can be broadly classified

into two categories—strategic and operational. Refer to Section 3.4 for

further details.

3. Plan or planning should precede action. And, strategic planning should

precede strategic management. Refer to Section 3.5 for further details.

4. An organization can derive many benefits from strategic management.

Refer to Section 3.6 for further details.

5. Every company or business has moral or ethical responsibility towards its

shareholders. Therefore, strategic management should be ethical and

socially responsible. Refer to Section 3.7 for further details.

6. Businesses need to be planned not only for today , but also for tomorrow,

that is, for the future. This implies business continuity and the need for

sustainability. Refer to Section 3.8 for further details.

3.14 References

1. Glueck, W F. 1980. Business Policy and Strategic Management. New

York: McGraw-Hill.

2. Hofer, C A, E R Murray, R A Pitts, and Ram Charan. 1984. Strategic

Management—A Casebook in Policy and Planning. 2nd ed. Minnesota:

West Publishing.

3. Mintzburg, H, and J B Quinn. 1991. The Strategy Process: Concepts,

Contests and Cases. New Jersey: Prentice Hall.

4. Ramesh, P, Business Continuity Planning, Technology Review 2002-04,

Tata Consultancy Services, July 2002.



5. Steiner, G A, J B Miner, and E R Gray. 1982, Management Policy and

Strategy. New York: Macmillan.

6. Thompson, A A, Jr, and A J Strickland. 2001. Strategic Management:

Concepts and Cases. New Delhi: Tata McGraw-Hill.

Endnotes

1 A A Thompson Jr, and A J, Strickland, Strategic Management: Concepts and Cases

(New Delhi: Tata McGraw-Hill, 2001) 3.2 M E Porter, ‘What is strategy, ’ Harvard Business Review (November –December,

1996), 61 –78.3 P Kotler, Marketing Management (New Delhi: Prentice Hall of India, 2000), 66.4 A F Alkhafaji, Strategic Management (New York: The Haworth Press, 2003), 8.

5 W F Glueck, Business Policy and Strategic Management (New York: McGraw-Hill, 1980),

6.6 J A Pearce, and R B Robinson, Strategic Management (Singapore: McGraw-Hill, 2000),

6.7 G A Steiner, J B Miner, and E R Gray, Management Policy and Strategy (New York:

Macmillan, 1982), 25.8 C C Miller, and L B Cardinal, ‘Strategic Planning and Firm Performance: A Synthesis of

More than Two Decades of Research, ’ Academy of Management Journal 6, no. 27

(1994); M Peel, and J Bridge, ‘How Planning and Capital Budgeting Improve SME

Performance, ’ Long Range Planning (October, 1998); J Smith, ‘Strategies for Start-

ups,’ Long Range Planning (October, 1998).9 F R David, Strategic Management (2003), 20.

10 This sub-section is based on P Ramesh, Business Continuity Planning , Technology

Review 2002 –04, Tata Consultancy Services, July 2002, pp. 5 –10.11 P Ramesh (2002), p. 37.



Unit 4 Corporate Strategy and

Corporate Governance

Structure

4.1 Introduction

4.2 Caselet

Objectives

4.3 Definitions: Corporate Strategy and Corporate Governance

4.4 Growing Importance of Corporate Governance

4.5 Corporate Strategy and Corporate Governance: Complementarity

and Conflict

4.6 Code of Best Practice

4.7 Strategic Audit

4.8 Board and CEO Relationship

4.9 Managed Corporation

4.10 Governed Corporation

4.11 Corporate Strategy and Corporate Governance:Need for more Integrative Relationship

4.12 Case Study

4.13 Summary

4.14 Glossary


4.16 Answers

4.17 References

4.1 Introduction

Corporate strategy and corporate governance are two important tools that help

in the functioning of any company. They are not the same, but generally

complementary to each other. Corporate governance is more operational, and

no strategy can succeed without operational support. Similarly, no governancecan achieve organizational objectives without a strategy or strategic management

system. A close link or relationship also exists between corporate strategy and

corporate governance through the roles of the board of directors and the CEO.Both the board and the CEO have strategic roles to play. The two also have

important roles to play in the governance of a company.

There is, however, a basic difference between the roles of the board and

the CEO and other managers of a company. The board represents the interest



of the shareholders who are the owners of a company whereas the CEO and

other managers represent the management of the company. The distinction

between ownership and management is very important, because, most of the

issues in the interrelation between corporate strategy and corporate governance

revolve round the relationship, and sometimes, conflict between the two.

Most of the analysis in this unit will be around this theme. In doing so, we

will discuss the definitional aspects of corporate strategy and corporate

governance, growing importance of corporate governance, stakeholders’

expectations, major issues between corporate strategy and corporate

governance, code of corporate governance, empowerment of the board, role of

professional directors, code of best practice, strategic audit, board–CEO

relationship, the managed corporation and the governed corporation.

4.2 Caselet

The year 2001-02 saw the collapse of several high-profile and large

corporations, many of which were involved in accounting fraud. These

corporations included Enron and MCI in the US and One. Tel in Australia.

These events attracted the attention of the respective governments on the

issue of corporate governance. While the US government passed the

Sarbanes-Oxley Act in 2002, the CLERP 9 reforms were passed in Australia.

Today, any discussion of corporate governance makes reference to

principles raised in three documents released since 1990: The Cadbury

Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998

and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002).

Objectives


• Explain the conceptual difference between corporate strategy and

corporate governance

• Discuss the growing importance of corporate governance

• Analyse the complementarities and conflicts between corporate strategy

and corporate governance

• Explain the code of best practice, strategic audit, board and CEO

relationship

• Distinguish between the managed corporation and the governed

corporation



4.3 Definitions: Corporate Strategy and Corporate Governance

We had defined corporate strategy in Unit 1. We will now define corporate

governance. Often, corporate governance is equated with corporate

management, which is not correct. As has been pointed out above, corporate

governance is concerned with serving the interest of the owners (stockholders)

and, is much broader in perspective than corporate management. Corporate

management is a part of or can be a useful partner in corporate governance.

There is some confusion about the concept and meaning of corporate

governance. Two definitions given below may give some clarity to the meaning

and the role of corporate governance.

Corporate governance ensures that long-term strategic objectives and

plans are established and that the proper management structure

(organization, systems and people) is in place to achieve those objectives

while at the same time, making sure that the structure functions to

maintain the corporate’s integrity, reputation and responsibility to its

various constituencies.1

Corporate governance denotes direction and control of the affairs of

the company. The role of corporate governance is to ensure that the

directors of a company are subject to their duties, obligations and

responsibilities to act in the best interest of their company, to give

direction and remain accountable to their shareholders, and other

beneficiaries for their action.2

The Organization for Economic Cooperation and Development (OECD)

describes corporate governance as a system. The complete OECD definition,

which is fairly elaborate, gives some additional perspectives on corporate

governance:

Corporate governance is the system by which business corporations

are directed and controlled. A corporate governance structure specifies

the distribution of rights and responsibilities among different participants

in the corporation such as board members, shareholders and other

stakeholders, and, spells out the rules and procedures for making

decisions on corporate affairs. By doing this, it also provides the structure

through which company objectives are set and means of attaining those

objectives and monitoring performance are spelt out. OECD (1993).3

If we compare the definitions of governance and corporate strategy (given

in Unit 1), some important aspects of commonness and contrasts between the

two emerge.



First, both corporate governance and corporate strategy start with

organizational objectives. In the case of corporate governance, the objectives

have more governance orientation; in the case of corporate strategy, the

objectives have more strategic focus. Second, corporate governance is primarily

guided by the shareholders. Good governance should result in good returns on

investment of shareholders and their happiness. Corporate strategy focuses

more on market share, long-term growth and development. Third, corporate

governance concentrates on organizational structure, rules, procedures and

systems for better governance. Corporate strategy is also concerned with

structures and systems but focuses more on strategic planning and resource

allocations. Fourth, corporate governance attempts to streamline operations

for good governance; corporate strategy depends more on strategic functions

(manufacturing, finance, marketing and HR) and strategic implementation. Fifth,

the guiding force behind corporate governance is the shareholders, i.e., the

owners; but, corporate strategy is dictated by the market, competition and

customers. Finally, effectiveness of corporate governance is judged mostly by

financial results (return on investment or profit) in addition to some social

responsibilities; effectiveness or success of a corporate strategy is assessed in

terms of both financial and non-financial indicators or measures of performance

and, also, in terms of a balanced scorecard—balancing financial performance

with strategic performance (discussed in detail later in Unit 16).


1. The system by which business corporations are directed and controlled

is called________.

2. Corporate governance is primarily guided by the_______.

3. It is correct to equate with corporate management with corporate

governance. (True/False)

4. Both corporate governance and corporate strategy start with organizational

objectives. (True/False)

4.4 Growing Importance of Corporate Governance

The affairs of a company are directed and controlled through the board of

directors who represent the shareholders of the company. The extent to which

the board discharges its trustee responsibilities and its commitment to run a



transparent organization depends on many factors, including the roles played

by the more progressive elements within the corporate sector. A strong demand

for evolving a good corporate governance system is emerging from the corporate

sector itself.

Over the years, organizations have witnessed frequent violations of

organizational and governmental regulations, increase in unethical and corrupt

corporate practices and also scams.

Owing to these and related developments, the need for proper corporate

governance is being increasingly felt.

Shareholders are also becoming more demanding and more conscious

about their rights and privileges. They expect efficient management, good

governance, high profit and large dividends. They look for transparency and

public image to maximize shareholders’ value. In many companies, they are

voicing their concerns in annual shareholders’ meetings. Also, institutional

investors are becoming an important segment of stockholders and are influencing

company management and corporate governance. Since the 1970s, institutional

investors have been increasing their participation, and are presently holding

more than 50 per cent of many corporate stocks. For example, 63 per cent of

Ford Motor Company stock, 81 per cent of Digital Equipment Corporation, 79

per cent of Kmart and 72 per cent of Citicorp are held by institutions. These

investors like to see the value of their stocks increase. Therefore, they have

started playing a more active role in governing the companies in which they

hold stocks. After Exxon’s 1989 oil spill in Alaska, public pension funds persuaded

the company to include an environmentalist on its board.4

If the institutional investors are not happy with corporate performance,

they convey their dissatisfaction to the company management. In 1987, Roger

Smith, chairman, General Motors, had to face a group of institutional investors,

because the group was annoyed that GM had made a $700 million hush mail

payment to H R Perot when he left the GM board. They also reprimanded Smith

for declining profits and market share, weak stock price, low productivity and

big bonuses received by senior executives. Eventually, GM announced a series

of major policy changes including stock buybacks and capital spending cuts.5

4.4.1 Different Models of Corporate Governance

All this suggests the need for an appropriate corporate governance framework

or system for every company. The corporate governance system should clearly

address the three major issues of an organization: what is the purpose—



corporate objective or philosophy or goal of an organization; whom the

organization should be serving; and, how best to serve their interests. There

are different ways to handle (or manage) these issues, and different companies

in different countries have adopted different models of corporate governance to

address various organizational issues. Some selected corporate governance

models with their strengths and weaknesses are shown in Table 4.1.

Table 4.1 Different Corporate Governance Models: Strengths and Weaknesses

Anglo-Saxon Model (US and UK)

Strengths Weaknesses

• Dynamic market orientation

• Fluid capital

• Internationalization possible approach

• Volatility and instability

• Short-term approach

• Inadequate governance structure

European Model (Germany)


• Long-term industrial strategy

• Very stable capital

• Strong governance procedures

• Internationalization difficult

• Vulnerability of companies to global market

Asian Model (Japan)


• Long-term industrial strategy

• Stable capital

• Overseas investments

• Growth of institutional investor activism

• Growth of financial speculation

• Secretive procedures

Source: T Clarke, and E Monkhouse, eds., Re-Thinking the Company, adap. (London:

Financial Times/Pitman Publishing, 1994)


5. The affairs of a company are directed and controlled through the ______

who represent the shareholders of the company.

6. The _____ system should clearly address the three major issues of an

organization—corporate objective; whom the organization should be

serving; and, how best to serve their interests.



4.5 Corporate Strategy and Corporate Governance:

Complementarity and Conflict

We have mentioned earlier that stakeholders’ expectations not only warrant

good corporate governance, but also effective corporate strategies. Simultaneous

focus on both is important, because only good governance and effective

strategies can lead to simultaneous achievement of organizational objectives

like profitability, growth and diversification and stakeholders’ expectations like

high return on their capital, transparency, employee motivation and customer

satisfaction. If we look at the total management activities of modern organizations,

we can clearly see the complementary roles of corporate governance and

strategies in smooth and efficient functioning of organizations. This is shown in

Figure 4.1.

1. Dominantly governance activity 2. Dominantly strategic activity

3. Mix of governance and strategic activities

PROCESSING

Planning: Understand the company and itsenvironmentDetermine goals and objectives of futureorganizational performanceSelect a course of action to achieve objectivesAllocate corporate resources

INPUTS

Resources andCapabilitiesFinancialHumanTechnologicalMaterialsInformation

Organizing (how to accomplish the plan)Find the appropriate arrangement to assign responsibility to people in the organizationCreate supportive culture and leadershipModify or reorganize if plan changes

ControllingMonitor activities and make corrections if neededUse reporting and control measures

Leading (creating shared vision, culture,and values)Empower employees

Use certain techniques to motivate employees to follow

OutcomeDeliver quality products/ services

Achieve goals and objectivesefficiently and effectively

OUTPUTS

2 2

3 1

1

3

Figure 4.1 Management Activities in Modern Organizations: Input-output Chain

Source: A F Alkhafaji, Strategic Management, adap. (2003), 28.



Figure 4.1 shows all the major management activities in a company (input-

output chain) and relationship among them. Activities like input (resources and

capabilities) management and processing have been shown as dominantly of

governance nature; and, activities like organizing (accomplishing the plan) and

output (outcome) have been classified as mix of both strategic and governance

factors. In fact, even in leading an activity of dominantly governance nature,

use of different motivational techniques involves strategies. Similarly, resource

and capability management, perceived primarily as strategic management of

human and financial resources, has major governance implications.

We can also see the interrelationship or interdependence between

governance and strategy through a chain in the ‘reporting system’ in

organizations. We can more appropriately call this governance through report

or documentation system. A typical reporting system is shown in Figure 4.2.

Reports received

Beneficiaries

Trustees

Investmentmanagers

Board

Executivedirectors

Seniorexecutives

Managers

Budgets/otheroperating reports

Budgets/qualitative reporting

Budgets/qualitative reporting

AccountsAnalysts' reports Company briefings

Limited investmentperformance reports

Limited reports

Figure 4.2 Chain of Corporate Governance: Typical ‘Reporting’ System

Source: G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (Pearson

Education, 2005), 196 (Exhibit 5.2).



The reporting system/structure in Figure 4.2 shows the linkage between

ultimate beneficiaries of corporate governance or company performance and

the managers who drive the strategic management process. But, the reporting

structure also shows the distance between the two. It is even possible that

many beneficiaries may either be ignorant or indifferent to the details of

managerial activities or strategies of the company. Individual managers and/or

directors may adopt strategies which may mean effective management but,

may not be in the best interests of the beneficiaries. Also, as we have mentioned

above, all beneficiaries or shareholders do not have the same or common

interests; their interests may often clash. All these may lead to conflicts between

corporate governance and strategic actions. Table 4.2 shows some of these

conflicting situations.

Table 4.3 Some Common Conflicts Between Corporate Strategyand Corporate Governance Corporate

Strategic ←←←← Conflict →→→→ Governance

• Long-term growth • Sacrifice of short-term profitability, cash flow and pay levels/hikes

• Development/diversification to require additional funding (share issue or loans)

• Financial independence may be sacrificed

• Expanding capital base: public ownership of shares

• More openness and accountability from the management

• Cost efficiency through technology or new investment

• Job losses in the organization

• Expanding into mass market; product and price strategy

• Decline in quality standards

• Family businesses to grow; induction of professional manager

• Owners may lose control

Table 4.3 shows some typical conflict situations between strategy and

governance. These include conflicts between growth and profitability; growth

and control/independence, cost efficiency and jobs; volume/mass production

and quality/specialization; and, the problems of sub-optimization, i.e.,

development of one part of an organization at the expense of another.6

Many of these situations also reflect conflicts of stakeholder interests or

expectations. For example, shareholders want cost efficiency, higher productivity

and profit, but, this may lead to job losses and clash with employees’ interests.



Activity 1

Take a company of your choice and design the role of corporate governance

in the company. You may describe the corporate governance in terms of

organizational structure, rules, procedures and systems.


7. Corporate governance and strategies play ________ roles in the smooth

and efficient functioning of organizations.

8. The interrelationship or interdependence between governance and

strategy can be seen through a chain in the ______ in organizations.

9. Activities like input (resources and capabilities) management and

processing have been shown as dominantly of _______nature

10. Activities like organizing (accomplishing the plan) and output (outcome)

have been classified as mix of both _____and _____factors.

4.6 Code of Best Practice

In strategic analysis, we consider benchmarking and best practices mostly with

reference to securing competitive advantage in the market. In governance

analysis, we not only talk of code of corporate governance, but also of code of

best practice for superior performance. For a company, the code of best

governance practice and best strategic practice may actually complement each

other for improving the overall organizational performance.

The Cadbury Committee has prescribed a code of best practice to serve

as a guideline to those companies which want to achieve higher standards of

corporate governance. The objective of the code of best practice is to balance

responsibility, authority and accountability in the governance process. Three

major constituents of the code prescribed by the Cadbury Committee are:

• Separate positions of chairman and CEO: In every company, there should

be a separate CEO and chairman of the board of directors. When the

same person assumes the two roles, it vests too much authority with one

person with very little check on the use of such power. Separate positions

of chairman and CEO help balancing of authority.

• Role clarity of chairman and CEO: Chairman’s function should be to

manage the affairs of the board, including hiring and firing of the CEO of



the company. The CEO, on the other hand, is responsible for day-to-day

management of the organization. The day-to-day management function

of the CEO consists of ‘planning, organizing and implementation’ of

policies, programmes and strategies approved by the board.

• Professional inputs from independent directors: Every company should

have non-executive directors, who bring to the board their professional

experience and expertise. The argument is that these experienced

professional directors, already in senior/top executive positions in other

companies or independent consultants, would supplement the efforts of

the fulltime executive directors on the board. Their involvement would

also provide a validity check and balance the ways in which executive

directors tend to influence governance and strategic decisions at the board

level.7

We will discuss benchmarking and best practices in the strategic

perspective in detail later in Unit 12.


11. The ________has prescribed a code of best practice to serve as a

guideline to those companies which want to achieve higher standards of

corporate governance.

12. One of the constituents of the code prescribed by the Cadbury Committee

are:

(a) Higher pay for directors

(b) Separate positions of chairman and CEO

(c) Greater role of chairman in decision making

(d) Lesser role of chairman in decision making

4.7 Strategic Audit

With increasing pressure on boards from external stakeholders to be more

active, many directors are seeking more practical ways to conduct strategic

overview of company management without getting directly involved in it.

Donaldson (1995) has suggested ‘strategic audit’ as a new tool for systematic

review of strategy by board members without directly involving themselves with

management of companies.



Strategic audit is a formal strategic-review process, which imposes its own

discipline on both the board and the management very much like the financial

audit process8. But, it is different from management audit, which is undertaken

in many companies by the senior/top management on the progress and outcome

of important corporate activities. To understand strategic audit in the correct

perspective, one needs to analyse this in terms of its various elements.

Donaldson has specified five elements of strategic audit. These are:

1. Establishing criteria for performance

2. Database design and maintenance

3. Strategic audit committee

4. Relationship with the CEO

5. Alert to duty (by board members)

The performance criteria should be simple, well-understood and well-

accepted measures of financial performance. A number of measures of financial

performance are available. One common measure, used by many companies,

is return on investment (ROI). The ROI can be analysed like this: profit per unit

of sales (profit margin); sales per unit of capital employed (asset turnover); and,

capital employed per unit of equity invested (leverage). If these three ratios are

multiplied together, the resultant ratio will give profit per unit of equity. This

criterion would fulfil two objectives: first, sustainable rate of return on shareholder

investment, and, second, to decide whether the return is less, or equal to or

more than returns on alternative investments with comparable risk, i.e., whether

the company’s chosen strategy is justifiable or not.

To calculate different performance ratios and monitor performance criteria,

a proper database is essential. This involves both database design and

maintenance. This has to be a regular and an ongoing process. Data on financial

performance can sometimes be sensitive to the managers/ employees of a

company. It is, therefore, suggested that financial and related data design,

maintenance and analyses should be entrusted to the auditors of the company

or outside consultants.

For effective strategic audit, a strategic audit committee should be

constituted. According to Donaldson, outside directors should select three of

their own members to form the committee.

This will impart regularity and more commitment to the strategic audit

process. The committee would decide on the frequency of their meeting,

periodicity of interaction with the CEO or top management of the company and,



also when they should make presentation to or hold discussion with the full

board.

A sensitive issue is the strategic audit committee’s relationship with the

CEO. Any CEO would be generally apprehensive of such a committee. The

strategic audit committee needs to create and maintain an atmosphere of

mutuality. It is true that whenever a question or a discussion on the strategic

direction of a company comes up in a board meeting, it is perceived by many

CEOs as an implicit criticism of the current strategy and leadership of the

company. It is also true that regular strategic process involving the CEO reduces

chances of unpleasant or confronting situations. In fact, ideally, the functioning

of the strategic audit committee should be seen as a low-key operation, positive

in approach, designed to lend support and credibility to company leadership

and management.

The strategic audit committee and also the board should always be alert

and vigilant to ensure that there are no slippages. Business cycles indicate that

period of success may be followed by a period of slump. The strategic audit

committee and the board should be alert enough to get signals so that they can

act in time. This is necessary because complacence develops after success

both in the board and in the management.

If properly conceived, designed and conducted, strategic audit, more than

management audit, can be a powerful tool for monitoring the strategic process

of a company and also strike a good balance between corporate strategy and



13. _________is a new tool for systematic review of strategy by board

members without directly involving themselves with management of

companies.

14. A performance criteria commonly used as a measure by many companies,

is _________.

4.8 Board and CEO Relationship

We have just discussed the sensitivity of the relationship between the board

and the CEO. In fact, this is part of a broader and more significant relationship



between the two. We have given below three observations on the board’s role

and the board–CEO relationship.

• The Board is responsible for the successful perpetuation of the corporation.

• That responsibility cannot be relegated to management9—John G Surale,

non-executive chairman, General Motors (GM).

• The success of the non-executive chairman arrangement is heavily

dependent on the chairman’s relationship with the CEO. If the chemistry

is not good, the relationship isn’t going to work’10 —Sir Denys Henderson,

former chairman and CEO of Imperial Chemical Industries (ICI) and

presently non-executive chairman.

How can outside directors constructively review management’s strategy

if they don’t have a deep knowledge of the business?11—Bernard Marcus,

Chairman, the Home Depot (a retail chain in the US).

Managers and directors in most companies agree that the board should

be an effective ‘watchdog’ without undermining the management’s ability to run

the business. They also feel that boards should determine/decide how to distance

themselves from their CEOs in the course of normal management of business,

but at the same time, maintain a constructive and positive relationship with

them. This means striking a balance between management strategy and

governance of a company. In connection with this, directors and CEOs have

raised many fundamental questions or issues. Some of the major questions or

issues are mentioned below.

• Should the CEO be involved only with management of a company, or

should he (she) be also concerned with governance?

• What role should the board (dominated by outside directors) play in

formulating and reviewing a company’s strategy?

• What are the advantages and disadvantages of splitting chairman’s and

CEO’s job instead of entrusting them to one person?

• Should outside directors obtain information about the company—its

management and governance—on their own bypassing the CEO?

• What should be the right mechanism for boards to evaluate management,

particularly the CEO?

• How does a board ensure that its members have the necessary expertise

to judge management’s performance or evaluate the strategic decision-

making process?



We shall try to give some possible answers to these questions in terms of

thoughts, guidelines and practices in General Motors. The board of General Motors

has developed several guidelines which cover board–CEO relationship and, also

answer some of the issues raised above. These guidelines have evolved out of

GM board’s interactions with the management during the last few years and, not

issued by the board for taking control over the management or the company.

GM guidelines clearly stipulate that the management of the company is

separate from the board. The board does not involve itself in management

decisions. The management team led by Jack Smith has full authority and, of

course, also the responsibilities for day-to-day operations of General Motors.

Activity 2

Choose a company that you are familiar with and design on double (CEO

and chairman) or single (either CEO or chairman) role of the chief executive.

Students should choose any other company and compare with Nestle.


15. The Board is not responsible for the successful perpetuation of the

corporation.

16. The board should be an effective ‘watchdog’ without undermining the

management’s ability to run the business. (True/False)

4.9 Managed Corporation

The debate also implies the managed corporation and the governed corporation.

Pound (1995) analyses both the managed corporation and the governed

corporation, makes a comparison between the two and, suggests the governed

corporation as a model of successful corporate governance. We shall first discuss

the managed corporation and then the governed corporation.

The managed corporation is more like the traditional model of a company

or corporation. This is the model of governance where focus is on power

equations between management and control, board–CEO relationship or strategy

and governance conflict. In the managed corporation, senior managers are

responsible for leadership and decision making. Board function is to hire the

top-level managers, monitor them and fire them if they do not perform.



Shareholders’ role is to throw out the board if the company or the corporation

does not perform.12

Emergence and growth of the managed corporation can be traced in two

factors; first, change in the shareholding pattern—dispersion or distribution of

ownership among many shareholders (including the public) and, second,

emergence of a new class of professionals who were neither major stockholders

nor founders nor owners of companies. Because shareholders were dispersed,

they could not be directly involved in formulating corporate policy and strategy.

Therefore, there was the need for managers and leaders who could formulate

policies and strategies and promote organizational growth. The managed

corporation has dominated the corporate arena for decades. The managed

corporation model can be found in any modern organization; only the actual

form may vary from one organization to another.

In the managed corporation, boards and shareholders are kept away from

strategy formulation and policy making. A significant business proposal or a

major investment project may be discussed at the board level but, the managers

would be given the freedom to formulate and implement business strategies.

Board members are expected to intervene in business policies and strategies if

there is performance failure or the managers are found incompetent or corrupt.

If this happens, that is, if the directors have to get involved in corporate strategies,

may be it is time for the board to look for a new CEO.

If the major cause of corporate failure is management incompetence, the

governance system in the managed corporation may work. But, many

performance failures or crises are not results of incompetence, but are failures

of judgement. Managers tend to be biased towards strategies and decisions

which reflect their individual strengths. Managers also make mistakes. The

managed corporation model permits or ignores mistakes to go uncorrected till

they lead to major crisis or catastrophes. In the US, throughout the 1980s,

boards allowed flawed retail strategy to be followed in spite of clear evidence

that managers lacked retail skills. Some board members later admitted that it

was a mistake to allow company managements to pursue incorrect retail policies

and strategies. But, they did not intervene because they were following the

managed corporation model.



Box 4.1: Nestlé Debate: Double C or Single C

One aspect of the debate on the board–CEO relationship is whether the

positions of both CEO and chairman should be combined in one person.

The Nestlé debate is one of the latest to throw contrasting views on this.

Nestlé shareholders voted Peter Brabeck Letmathe, the CEO, to the

chairmanship of the company as an additional responsibility. The majority

shareholders rejected the arguments of those who opposed a dual role for

Brabeck.

In a statement before the Annual General Meeting (AGM), Nestlé said it

sought the double C-level status for Brabeck in the interest of the investors

as it assured strategic continuity and long-term value. According to the

company, the Austrian-born Brabeck, who had spent his entire working life

with Nestlé, was the best person for the chariman’s job.

But some institutions had an opposite view. The Ethos Foundation, which

represents 83 Swiss pension funds in campaigning for good corporate

governance and the US-based Institutional Shareholder Services had

protested against the plan to combine the double power in one person at

the world’s biggest food group. They and others, who opposed the move,

said that a double mandate was acceptable in special cases, such as

turnaround processes where prompt action was needed but, that was not

the case with Nestlé.

However, unlike Britain, where separation of the two top jobs is the norm,

in Switzerland, a combined top role is not uncommon. For example, heads

of drug companies Novartis and Roche hold dual positions of CEO and

chairman.

Brabeck assumed the dual role after his predecessor, Rainer Gut, retired.

‘I accept this mandate with a bit of disappointment because of the

circumstance in which it has been bestowed on me,’ Now, Brabeck’s main

challenge lies in making the company grow amidst the upheaval and

controversy that has surrounded him. Only time can tell whether the ‘double

C’ is justified in case of Brabeck or not.

Source: Adapted from C D Team, ‘Just Two Much’, Economic Times (Corporate

Dossier), (April 29, 2005).




17. The governed corporation has dominated the corporate arena for decades.

(True/False)

18. Managers tend to be biased towards strategies and decisions which reflect

their individual strengths. (True/False)

4.10 Governed Corporation

The answer to problems of corporate failure in the managed corporation lies in

the governed corporation. In the governed corporation, the focus is not on

power—not monitoring or controlling the managers—but, on improving decision

making. The objective is to minimize chances of mistakes; and, even if they

occur, to mutually work out effective ways to rectify the mistake rather than fire

the management. The result is a positive change in the way companies discuss,

decide and review policy.

Major differences in approach between the managed corporation and the

governed corporation in terms of board’s role, characteristics and policies are

shown in Table 4.3. To create the governed corporation, companies should start

rethinking about the role of directors, and, also, of shareholders. Both the

directors and shareholders should be proactive, and, not reactive in the policy-

making process. Managers will continue to play their roles. This means that

there are three critical constituents of the governed corporation: the board or

directors, the managers and shareholders. Directors should guide managers to

take best possible decisions; major shareholders should be able to communicate

directly with the senior managers/CEO and, also the directors about what they

think of corporate policies and decisions. With shareholders and board/ directors

participating in policy and decision making, and, the managers already involved,

the corporation is governed rather than managed because all the three critical

constituents (managers, directors and shareholders) have a voice in the

governance of the company.13



Table 4.3 The Managed Corporation vs the Governed Corporation: Board’sRole, Characteristics and Policies

The Managed Corporation The Governed Corporation

Board’s Role

• Board’s role is to hire, monitor and, when necessary, change failed management.

Board Characteristics

• Power sufficient to control the CEO and the performance-evaluation process.

• Independence to ensure that the CEO is impartially evaluated and that directors are not compromised or co-opted by management.

• Board methods and procedures to allow outside directors to evaluate managers independently and effectively.

Policies

• Separate the CEO and chairman (or lead outside director).

• Board meeting may take place without CEO being present.

• Committee of independent directors to evaluate the CEO.

• Independent financial and legal advisors available to outside directors.

• Measurable norms or yardsticks for judging CEO’s performance.

Board’s Role

• Board’s role is to foster effective decisions and monitor and reverse failed policies.

Board Characteristics

• Expertise sufficient to allow the board to add value to the decision-making process and performance.

• Incentives to ensure that the board is committed to create organizational value.

• Methods and procedures to foster open debate and keep the board apprised of shareholders’ concerns.

Policies

• Vital areas of expertise must be represented on the board such as core industry and finance.

• Minimum time commitment by the board members (may be two days in a month).

• Designated committee to evaluate new policy proposals.

• Regular meetings shareholders with large shareholders.

• Board members free to ask for information from any employee.

Source: Adapted from J Pound, ‘The Promise of the Governed Corporation’, Harvard

Business Review (March–April, 1995)

Pound has suggested five major changes in the managed corporation for it

to evolve into a governed corporation. First, board members should be ‘experts’,

i.e., well versed with the company—its products, structure, functioning, policies

and practices—the industry and environmental influences and governmental

regulations; second, board meetings should focus on discussions on new policies,

decisions and strategies, and not just on reviews of past performance; third,

directors should have better access to information on products, customers,

competitors, market conditions and critical strategic and organizational issues;

fourth, directors should devote a significant proportion of their professional time



to the company or the corporation to have more meaningful and effective

involvement in decision making; fifth, board members should have proper incentive

to develop and show the right commitment to the company. Directors cannot be

expected to take serious interest in formulation and implementation of company

policies and strategies unless they are sufficiently compensated for it.

The transition from the managed corporation to the governed corporation

may be slow. Such change may take years, particularly in companies which are

governed by individuals (managers, CEOs and directors) who have been

subscribing to the ‘managed philosophy’ for decades. But, changes are taking

place. Many companies are moving in the right direction. Companies like General

Motors, IBM, Compaq Computer and Westinghouse have already taken steps

to become governed corporations.14


19. In the governed corporation, the focus is not on power—not monitoring or

controlling the managers—but, on ___________.

20. _________ has suggested five major changes in the managed corporation

for it to evolve into a governed corporation.

4.11 Corporate Strategy and Corporate Governance:

Need for more Integrative Relationship

The analysis so far has focused on different aspects or characteristics of corporate

strategy and corporate governance, the way they are differentiated and, also,

areas of complementarities and some possible conflicts between the two.

The starting point of both are the same, i.e., achievement of organizational

objectives. But, it is also here that some difference begins between the two and

also is the source of some possible conflict. The most important objective of

corporate governance is to protect the interests of the stockholders whose

primary concern is maximization of return on investment or short-term profitability.

The objective of corporate strategy is more to focus on long-term growth and

profitability, which gives sustenance to the company. This, however, is a common

organizational conflict in many companies, i.e., matching or balancing the short-

term and long-term goals of the organization.

Balancing the stockholder interests and stakeholder expectations is another

issue. This also relates to strategy–governance relationship. Stakeholders include,



in addition to stockholders, a number of other interest groups—both internal and

external. Employees/managers are important internal stakeholders; creditors and

customers are vital external stakeholders, who strongly influence the course or

direction of a company. To serve the interests of all major stakeholders, good

corporate governance is not enough; effective corporate strategy is required in

important functional areas of manufacturing, finance and marketing to deal with

competition, market and business development.

In corporate governance, there is a growing emphasis on ‘inclusiveness’

or ‘inclusive governance’, i.e., focusing on the society, community and

environmental development. The strategic management processes of companies

are also trying to find ways to strike a balance between corporate social

responsibility (CSR) and profitability (discussed in Unit 4), realizing that, ideally,

both should coexist for optimal/proper organizational growth. This is one area

where both corporate strategy and governance are showing a common focus.

Companies like Bajaj Auto, Tata Motors and Nirma are good examples.

This is possible if the board and the CEO work in close unison. In fact,

this implies another vital aspect of strategy–governance balancing, i.e., board–

CEO relationship. The board represents the owners; the CEO represents the

management. Therefore, there can be a conflict or, at least, sensitivity between

the two. But, in many companies, managers (CEO) and directors (board) realize/

agree that the board should only be a ‘watchdog’ without undermining the

management’s ability to run the business. The board should also decide how to

distance itself from the CEO in the course of normal management of business

and, at the same time, maintain a positive and constructive relationship. This

means striking a balance between management, the strategy and the

governance of a company.

This can be illustrated by the board–CEO relationship in General Motors.

This relationship is based on certain guidelines jointly evolved and not issued

by the board. The board’s basic responsibility is to ensure that the company is

managed properly, in order to sustain the business and also serve the interest

of the owners. In other words, it acts as a monitor of management. The CEO

gives annually a management development report to the board. The

management realizes that a strong board (highly experienced professionals/

experts) can be a source of strength to the management and, also helpful in

building and sustaining competitive advantage of the company.

All this implies that, for effectiveness and success, the managed

corporation and the governed corporation should be as closely aligned as

possible. In other words, a company should be as much a ‘managed’ company



as a ‘governed’ company. This is the optimal way to serve both the stockholders

and the interest of the larger group of stakeholders.


21. The starting point of both corporate strategy and governance are the

same, i.e., achievement of organizational objectives. (True/False)

22. In corporate governance, there is a growing emphasis on ‘inclusiveness’

or ‘inclusive governance’, i.e., focusing on the society, community and

environmental development. (True/False)

4.12 Case Study

Gray Line Corporation: Role of Ethics in Governance*

Corporate values and ethics are in a state of flux today, in India as well as

globally, which is illustrated by this case of Gray Line Corporation:

When S. Khopekar, the regional manager, had joined Gray Line Corporation

as the purchase manager, he had gone through the discipline and conduct

guidelines of the company’s purchase department. A clause against

acceptance of gifts by staff of the purchase department had attracted his

attention. The clause read as follows:

‘Purchase department employees shall not accept gifts from vendors. This

is to ensure that no vendor is given any special treatment and employees

work only in the best interest of the firm at all times. Any deviation from the

above will be dealt with severely and can mean dismissal from the firm.’

Khopekar made a note of this.

Months passed by and the New Year, a time for gifts, was approaching. The

rule in Gray Line was that no gift worth more than ̀ 50 should be accepted by

any employee—presumably an old rule that had not been revised.

One day, one of the vendors brought three wall clocks—one for the

Managing Director (MD), one for the Vice-president (VP) procurement, and

one for Khopekar. The vendor, who had a long association with Gray Line,

was aware of the company’s rule. He explained that the cost of the clocks

was `50 each, and therefore, there should be no problem in accepting

them as gifts. Khopekar found it very hard to believe that the clocks would

cost only `50 each. He decided to take the matter to the MD. The MD had



a look at the clock and asked his secretary to hang it on the wall in his

office. He asked Khopekar to distribute the other two as desired by the

vendor. He also mentioned that the clocks could cost ̀ 50 each if bought in

bulk. As per the MD’s instruction, Khopekar sent one to the VP and took

one home and put it up in his living room.

Khopekar later accepted many gifts in Gray Line which were of different

values, but always presented as costing not more than `50. Gradually, he

also stopped feeling uneasy or bad about receiving the gifts. In fact, he was

getting used to it and, also started looking forward to the New Year. He,

however, knew very well that none of the gifts were worth less than `2000.

The next new year, Natarajan, executive secretary to the MD, came to

Khopekar. He wanted to know if gifts had started coming.

Natarajan clarified that it had been the practice with the earlier purchase

managers also to accept gifts from vendors and distribute them among

important officials of the company. He cautioned against discussing the

gifts with the MD, who would be annoyed and take action against him.

Khopekar thought about integrity and ethics, but a bigger test was waiting

for him.

Within few days, a vendor came with six baskets, each with bottles of Scotch

whisky, return air tickets for two to any destination in India and three-night

stay at a five-star hotel. The total value of each of the gift baskets was not

less than `1 lakh. The MD’s secretary told Khopekar that such gifts were

not unusual. Khopekar was faced with a dilemma: to get reconciled to such

practices or look for a change? It is not an easy decision to make for any

manager in today’s volatile business environment.

* Based on U C Mathur, ‘Case study 24’, (Textbook of Strategic Management)

(New Delhi: Macmillan India, 2005), 337. Names have been changed because of

the sensitive nature of the subject.



4.13 Summary


• Corporate strategy and corporate governance are the two important tools

of functioning of any company. Corporate governance has more to do

with ownership of a company; corporate strategy has more to do with

management of a company. They are generally complementary to each

other, but, there can be conflicts between the two.

• In companies, simultaneous focus on good corporate governance and

effective corporate strategies is important, as only this can lead to

simultaneous achievement of organizational objectives like profitability,

growth and diversification and stakeholder expectations like high return

on their capital, transparency, employee motivation and customer

satisfaction.

• To resolve the conflicts between corporate strategy and corporate

governance, empowerment of the board may be a useful tool. The board,

by virtue of its position, is the single entity which can influence both

corporate strategy and corporate governance and try to strike a balance

between their conflicting demands.

• Pound has distinguished between the managed corporation and the

governed corporation. The managed corporation is more like the traditional

model of a company or corporation. This is the model of governance

where the focus is on the power equations between management and

control, board–CEO relationship or strategy and governance conflict.

4.14 Glossary

•••• Best practice: A technique or methodology that, through experience and

research, has been proven to reliably lead to a desired result.

•••• Corporate governance: The framework of rules and practices by which

a board of directors ensures accountability, fairness, and transparency in

a company's relationship with its all stakeholders.

•••• Corporate strategy: The overall scope and direction of a corporation

and the way in which its various business operations work together to

achieve particular goals



•••• Inclusive governance: Governance that focuses on the society,

community and environmental development

•••• Strategic analysis: Considers how an organization attempts to best

combine its own capabilities with the opportunities in the marketplace in

seeking to accomplish its overall objectives.

•••• Strategic audit: A new tool for systematic review of strategy by board

members without directly involving themselves with management of

companies.

•••• Strategic governance: The technique by which companies are directed

and managed. It means carrying the business as per the stakeholders’

desires.


1. What is corporate governance? Explain the difference between corporate

strategy and corporate governance.

2. Discuss the growing importance of corporate governance.

3. Explain the complementarities and conflicts between corporate strategy

and corporate governance.

4. What is strategic audit? Explain its relevance to corporate strategy and


5. What is a managed corporation? Illustrate the main features of a managed

corporation.

6. Define a governed corporation. Distinguish between the managed

corporation and the governed corporation in terms of board’s role, major

characteristics and policies of a company.

4.16 Answers


1. Corporate governance

2. Shareholders

3. False

4. True



5. board of directors

6. corporate governance

7. Complementary

8. ‘reporting system’

9. governance

10. Strategic, governance

11. Cadbury Committee

12. (b)

13. strategic audit

14. return on investment (ROI)

15. False

16. True

17. False

18. True

19. improving decision making

20. Pound

21. True

22. True


1. Corporate governance is concerned with serving the interest of the owners

(stockholders) and, is much broader in perspective than corporate

management. Refer to Section 4.3 for further details.

2. A strong demand for evolving a good corporate governance system is

emerging from the corporate sector itself. Refer to Section 4.4 for further

details.

3. As stakeholders’ expectations not only warrant good corporate

governance, but also effective corporate strategies, simultaneous focus

on both is important. Refer to Section 4.6 for further details.

4. Donaldson (1995) has suggested ‘strategic audit’ as a new tool for

systematic review of strategy by board members without directly involving



themselves with management of companies. Refer to Section 4.7 for

further details.

5. The managed corporation is more like the traditional model of a company

or corporation. Refer to Section 4.9 for further details.

6. There are major differences in approach between the managed corporation

and the governed corporation in terms of board’s role, characteristics

and policies. Refer to Section 4.10 for further details.

4.17 References

1. Donaldson, G. ‘A New Tool for Boards; Strategic Audit.’ Harvard Business

Review, July–August, 1995.

2. Harvard Business Review on Corporate Governance, 2000. Boston:

Harvard Business School Press.

3. Johnson, G and K Scholes. 2005. Exploring Corporate Strategy. 6th edn.

Pearson Education.

4. Kumar, S. 2000. Corporate Governance: A Question of Ethics. New Delhi:

Galgotia Publishing Co.

5. Lorsch, J W. ‘Empowering the Board.’ Harvard Business Review, January–

February, 1995.

6. Mathur, U C. 2005. Corporate Governance and Business Ethics: Text

and Cases. New Delhi: Macmillan India.

7. Pound, J. ‘The Promise of the Governed Corporation,’ Harvard Business

Review, March–April, 1995.

Endnotes

1 Definition given by the Advisory Board of the National Association of Corporate Directors(NACD) New Delhi, reproduced in S Kumar, Corporate Governance (2000), 3

2 Definition given by Chandratre reproduced in S Kumar, Corporate Governance (2000), 4.3 Reproduced in U C Mathur, Corporate Governance and Business Ethics: Text and Cases

(New Delhi: Macmillan India, 2005), 4.4 J H, Dobrzynski, M Schroeder, G L Miles, and J Weber, ‘Taking Charge, ’ Business Week

3113 , (1989): 66.5 A F Alkhafaji, Strategic Management (2003), 27.6 G Johnson, and K Scholes, Exploring Corporate Strategy, 4 th ed. (New Delhi: Prentice

Hall of India, 1999), 195.7 U C Mathur, Corporate Governance and Business Ethics: Text and Cases (2005),

61–63.



8 G Donaldson, ‘A New Tool for Boards: Strategic Audit, ’ Harvard Business Review (July –

August, 1995).9 Harvard Business Review on Corporate Governance (Harvard Business School Press,

2000), 188.10 Ibid .11 Ibid.12 J Pound, ‘The Promise of the Governed Corporation, ’ Harvard Business Review (March

–April, 1995).13 J Pound, ‘The Promise of the Governed Corporation ’, Harvard Business Review (March

–April,1995).14 J Pound, ‘The Promise of the Governed Corporation, ’ Harvard Business Review (March

–April, 1995).



Unit 5 Corporate Mission, Objectives

and Responsibility

Structure

5.1 Introduction

5.2 Caselet

Objectives

5.3 Definition of Business

5.4 Mission Statement

5.5 Corporate Philosophy

5.6 Corporate Objectives and Goals

5.7 Strategic Intent

5.8 Company Responsibility

5.9 Corporate Social Responsibility

5.10 Social Audit

5.11 Case Study

5.12 Summary

5.13 Glossary


5.15 Answers

5.16 References

5.1 Introduction

For formulation of corporate strategy, an organization needs to consider three

major things: first, the corporate mission and objectives; second, its internal

competence; and third, the external environment. We shall discuss corporate

mission and objectives in this unit. Internal competence and resources and the

environmental factors will be analysed in the next two units.

The starting point for the formulation of any strategy is the mission

statement of a company.

The mission statement actually starts with a definition of business of the

company. Related to mission is vision. Also related to mission statement or

development is corporate philosophy. From mission statement and corporate

philosophy follow corporate objectives, goals and also strategic intent. In

developing its mission and objectives, a company has certain responsibility to



its stakeholders and the society. This is expressed in stakeholders’ approach to

company responsibility and corporate social responsibility. Corporate social

responsibility also implies social audit. We will discuss all these in this unit.

5.2 Caselet

No corporation functions without a strategy; and the starting point for the

formulation of any strategy is the mission statement of a company. Microsoft

Corporation, an American multinational corporation, is no exception. The

largest and most well known software corporation in the world, it is best

known for its extremely popular Windows operating system and Microsoft

Office software. The company has a mission statement:

At Microsoft, we work to help people and businesses throughout the

world realize their full potential. This is our mission. Everything we do

reflects this mission and the values that make it possible.

The mission continues to guide Microsoft.

Objectives


• Define what is business

• Explain the terms ‘corporate mission’ and ‘corporate vision’

• Define what is corporate philosophy

• Discuss the corporate objectives and goals of a company

• Explain strategic intent and company responsibility

• Explain the concept of corporate social responsibility

• Discuss social audit as a tool to measure companies’ social performance

5.3 Definition of Business

It may appear very simple or obvious as to what a company’s business is. A

steel mill makes steel; an engineering company makes engineering products;

an electronic manufacturer makes electronic goods; a courier company delivers

letters and parcels; a bank lends money, etc. But, it may not be as simple as

this. In fact, defining the business of a company precisely is a difficult job. Let

us explain this. A textile manufacturer makes textiles goods; but, this may mean

suitings, shirtings, sarees or inner garments; it may be cotton textiles, silk or



synthetics; it may be high-priced or premium product, medium-priced or average

product or low-priced or discount product.

To define a company’s business with precision is the job or responsibility

of the planners and strategists. Precise or correct definition of business of a

company is the foundation for mission statement, objectives, priorities, plans,

strategies and work and resource allocations; and, therefore, along with the top

management, the strategists have an important role to play in this.

Many companies and managers are not clear about the exact nature of

their business, nor are they always aware of the significance of this. Precise

definition of the business of a company should be based on four major factors

or considerations: i. product, ii. technology, iii. customer segment and iv. market

competitiveness (Figure 5.1).

Marketcompetitivenes

Businessdefinition

Technology

Product

Customersegment

Figure 5.1 Business Definition of an Organization

Management thinkers like Peter Drucker feel that business definition

should strongly focus on the customer. According to Drucker, in defining the

business, the following questions about the customer should be asked1:

• Who is the customer?

o Where is the customer located?

o How does the customer buy?

o How can the customer be reached?

• What does the customer buy?

• What does the customer consider value?

In addition to focussing on customer behaviour, answers to these questions

also indicate the nature and quality of the product, production process or



technology and market environment or competitiveness. We can also see how

companies define their businesses. Business definitions of Hindustan Unilever,

Hero Honda, Kodak India and Hero Cycles are given in Table 5.1.

Table 5.1 Business Definitions of Hindustan Unilever, Hero Honda,Kodak India and Hero Cycles

Company Business definition

Hindustan Unilever → To meet everyday needs of Indian people everywhere with branded products

Hero Honda → World class auto products which provide the highest level of customer satisfaction

Kodak India → A high quality photographic system for the customer who desires instant photography

Hero Cycles → Functionally valuable bicycle which common people can afford to buy

The above business definitions show that some generality in definition

remains. To remove the generality or make business definition more meaningful,

this should be read with mission statement and corporate objectives or goals.

These together give definiteness to the business of a company.


1. To define a company’s business with precision is the job or responsibility

of the _________and _________.

2. Management thinkers like Peter Drucker feel that business definition

should strongly focus on the__________.

5.4 Mission Statement

‘A business is not defined by its name, statutes or articles of incorporation.

It is defined by the business mission. Only a clear definition of the mission

and the purpose of the organization makes possible clear and realistic

business objectives.’

— Peter Drucker

But ‘... business mission is so rarely given adequate thought is perhaps the

most important single cause of business frustration.’

— Peter Drucker



This emphasizes the need for organizations to take their mission statement

seriously and formulate it properly. What is a mission statement? Or, what is a

company mission? The mission statement of a company is variously called a

statement of philosophy, a statement of beliefs, a statement of purpose and, a

statement of business principles. A mission statement is many in one. It embodies

the business philosophy of a company’s decision makers, implies the image

the company wishes to project for itself, reflects the company’s self-concept;

indicates the company’s principal product or service areas and, the customer

needs the company seeks to satisfy. In short, it describes the company’s product,

market and technological focus; and it does so in a way that reflects the values

and priorities of the company’s strategic decision makers.2

The mission statement should be as explicit or comprehensive as possible.

Some feel that the mission statement should have seven dimensions or serve

seven different purposes or objectives.

These are:

• To ensure unanimity of purposes within the organization

• To develop a basis or standard for allocating organizational resources

• To provide a basis for motivating the use of the organization’s resources

• To establish a general culture or organizational climate; for example, to

suggest a business-like approach

• To facilitate the translation of objectives and goals into jobs and

responsibilities and assignment of tasks to responsible segments within

the organization

• To serve as a focal point for those who can identify themselves with the

organization’s purpose and business

• To specify organizational purposes and inspire translation of these

purposes into goals in such a way that cost, time and performance

parameters can be assessed and controlled.3

5.4.1 Mission and Vision

Sometimes, ‘mission’ and ‘vision’ of a company are used synonymously or

interchangeably. This is not correct. A clear distinction exists between the two.

Mission is concerned more with the present; the vision more with the future.

The mission statement answers the question: ‘What is our business?’ The vision

statement answers the question: ‘What do we want to become or, which way

should we be going?’ The mission statement focusses on the present strategic



thrust, while the vision statement outlines the strategic path. All visionary

companies have a vision statement. The vision of Microsoft (since 1999) has

been ‘to broadbase its outlook to empower people through great software

anytime, anywhere and on any device including the PC and an incredibly rich

variety of digital devices accessing the power of the Internet’.

Most progressive companies develop both a mission statement and a

vision statement. Indian Oil Corporation (IOC) is a good example. Vision and

mission statements of IOC4 are:

•••• Vision: Indian Oil aims to achieve international standards of excellence

in all aspects of energy and diversified business with focus on customer

delight through quality products and services.

•••• Mission: Maintaining national leadership in oil refining, marketing and

pipeline transportation.

Vision and mission statements can be generally found in the beginning of

annual reports of companies. These statements are also seen in the corporate

or long-term strategic plans of companies. These also appear in many company

reports or documents like customer service agreements, loan requests, labour

relations contracts, etc. Many companies also display them at prominent points

or locations in company premises.

5.4.2 Mission Statements of Some Companies

Mission statements of individual companies vary widely. We give below, as

examples, mission statements of two Indian companies—Tata Steel and Hero

Honda Motors—and, two US companies—Pepsico and Dell computer. All these

companies are in different kinds of business.

Tata Iron and Steel Company (TISCO)

The fundamental mission of TISCO (Tata Iron and Steel Company Limited; now

Tata Steel) is to strengthen India’s industrial base through increased productivity,

effective utilization of manpower and material resources, and continued

application of modern scientific managerial methods as well as through

systematic growth in keeping with the national aspirations. The company

recognizes that while honesty and integrity are the essential ingredients of a

strong and stable enterprise, profitability provides the main spark for economic

activity. It affirms its faith in democratic values and in the importance of success

of individuals, collective and corporate enterprise for the emancipation and

prosperity of the country. Guided by its basic philosophy, the company believes



in discharging its responsibility towards shareholders, employees, customers

and the community.

Hero Honda Motors

It is our mission to strive for synergy between technology, systems and human

resources to produce products and services that meet the quality, performance

and price aspirations of our customers. While doing so, we maintain the highest

standards of ethics and societal responsibilities. This mission is what drives us

to new heights in excellence and helps us to forge a unique and mutually

beneficial relationship with all our stakeholders. We are committed to moving

ahead resolutely on this path.

Pepsico

Pepsico’s mission is to increase the value of our shareholders’ investment. We

do this through sales growth, cost controls and wise investment resources. We

believe our commercial success depends upon offering quality and value to our

consumers and customers; providing products that are safe, wholesome,

economically efficient and environmentally sound and, providing a fair return to

our investors while adhering to the highest standards of integrity.

Dell Computer

Dell Computer’s mission is to be the most successful computer company in the

world at delivering the best customer experience in markets we serve. In doing

so, Dell will meet customer expectations of the highest quality with leading

technology, competitive pricing, individual and company accountability, best-in-

class service and support, flexible customization capability, superior corporate

citizenship and financial stability.

Some companies combine their mission statements with statements of

values and guiding principles of the organization. Ford Motor Company is an

excellent example of this. Ford’s mission statement combined with statements

of values and guiding principles is presented in Box 5.1.

Box 5.1: Ford’s Mission, Values and Guiding Principles

Mission

Ford Motor Company is a worldwide leader in automotive and automotive-

related products and services as well as in newer industries such as

aerospace, communications and financial services. Our mission is to

improve continually our products and services to meet our customers’ needs,



allowing us to prosper as a business and to provide a reasonable return for

our stockholders, the owners of our business.

Values

How we accomplish our mission is as important as the mission itself.

Fundamental to success for the Company are these basic values:

People—Our people are the source of our strength. They provide us

corporate intelligence and determine our reputation and vitality. Involvement

and teamwork are our core human values.

Products—Our products are the end result of our efforts, and they should

be the best in serving customers worldwide. As our products are viewed,

so are we viewed.

Profits—Profits are the ultimate measure of how efficiently we provide

customers with the best products for their needs. Profits are required to

survive and grow.

Guiding Principles

Quality comes first—To achieve customer satisfaction, the quality of our

products and services must be our number one priority.

Customers are the focus of everything we do—Our work must be done

with our customers in mind, providing better products and services than

our competition.

Continuous improvement is essential to our success—We must strive

for excellence in everything we do—in our products, in their safety and

value — and in our services, our human relations, our competitiveness and

our profitability.

Employee involvement is our way of life—We are a team. We must

treat each other with trust and respect.

Dealers and suppliers are our partners—The Company must maintain

mutually beneficial relationships with dealers, suppliers and our other

business associates.

Integrity is never compromised—The conduct of our Company worldwide

must be pursued in a manner that is socially responsible and commands

respect for its integrity and for its positive contributions to society. Our doors

are open to men and women alike without discrimination and without regard

to ethnic origin or personal beliefs.

Source: Ford Motor Company



Activity 1

Conduct a comparitive analysis of the mission and vision statements of

any three companies of your choice.


3. The ________of a company is variously called a statement of philosophy,

a statement of beliefs, a statement of purpose and, a statement of business

principles.

4. Mission is concerned more with the ________; the vision more with

the__________.

5.5 Corporate Philosophy

Corporate or company philosophy is sometimes called company creed, and the

statement of corporate philosophy is called the creed statement. Normally, the

corporate philosophy statement accompanies or appears as part of the mission

statement. It envisages the basic ‘beliefs, values, aspirations and philosophical

priorities of a company which the management or strategic decision makers

are committed to. The mission statement should reflect the corporate philosophy

of an organization as clearly demonstrated in the mission statements of

companies like Ford.

Generally, corporate philosophies should not vary widely from one company

to another. But, in practice, corporate philosophy statements of some companies

may appear quite different or contrasting in terms of the guiding values or principles.

ITC, the Indian multinational and Nissan Motor Manufacturing (UK) are two such

examples. Corporate philosophy of ITC highlights concerns for various

stakeholders whereas Nissan UK’s philosophy focuses on two basic principles:

people principles and key corporate principles. Statements of corporate

philosophies of both the companies are given in Box 5.2.

Box 5.2: Corporate Philosophies of ITC and Nissan Motor (UK)

Corporate Philosophy of ITC

1. Concern for their ultimate customers—millions of customers.

2. Concern for their intermediate customers—the trade.



3. Concern for their suppliers—the source of raw materials and ancillaries.

4. Concern for their employees—their most valued assets.

5. Concern for their competitors whom they wish well—for healthy

competition ultimately benefits the customers.

6. Concern for the national aspiration—India’s future.

Corporate Philosophy of Nissan Motor (UK)

People Principles

(All other objectives can only be achieved by people)

Selection: Hire the highest calibre people; look for technical capabilities

and emphasize attitude.

Responsibility: Maximize the responsibility; staff by devolving decision

making.

Teamwork: Recognize and encourage individual contributions with

everyone working towards the same objectives.

Flexibility: Expand the role of the individual: multiskilled, no job description,

generic job titles.

Kaizen: Continuously seek 100.1 per cent improvements; give ‘ownership

of change.’

Communications: ‘Every day, face to face.’

Training: Establish individual ‘continuous development programmes.’

Supervisors: Regard as ‘the professionals at managing the production

process’; give them much responsibility normally assumed by individual

departments; make them the genuine leaders of their teams.

Single status: Treat everyone as a ‘first class’ citizen; eliminate all illogical

differences.

Trade unionism: Establish single union agreement with AEU emphasizing

the common objective for a successful enterprise.

Key Corporate Principles

Quality: Building profitably the highest quality car sold in Europe.

Customers: Achieve target of No. 1 customer satisfaction in Europe.

Volume: Always achieve required volume.

New Products: Deliver on time, at required quality, within cost.



Suppliers: Establish long-term relationships with single-source suppliers;

aim for zero defects and just-in-time delivery; apply Nissan principles to

suppliers.

Production: Use ‘most appropriate technology’; develop predictable ‘best

method’ of doing job; build in quality.

Engineering: Design ‘quality’ and ‘ease of working’ into the product and

facilities; establish ‘simultaneous engineering’ to reduce development time.

Source: ITC Limited and Business Horizons, January-February, 1995, 51


5. Corporate or company philosophy is sometimes called company creed.

(True/False)

6. Generally, the corporate philosophy statements of most companies appear

quite similar. (True/False)

5.6 Corporate Objectives and Goals

The mission statement of an organization is more generalized; corporate

objectives are more focused and specific and generally have a clear time frame

or period during which objectives should be fulfilled. Mission statements are

qualitative; objectives are usually quantitative. Most of the objectives should be

measurable in terms of results or achievements. But, the link between the mission

statement and objectives should be quite intimate; objectives should follow from

the mission statement or, be fully consistent with it.

Corporate objectives and goals are similar, but, a distinction is generally

made between the two. There is also difference of opinion among strategy

analysts about what should be the correct distinction, or, rather, relationship,

between the two. Ackoff has defined or distinguished the two as follows:

Desired states or outcomes are objectives. Goals are objectives that

are scheduled for attainment during planned period.5

One need not make too much of a distinction between the two, which

may become only a theoretical exercise without much of practical relevance. It

is evident that objectives and goals have overlapping connotations. We will

generally use the two terms synonymously with the only stipulation or rider that

goals may be of longer term than objectives. Objectives can sometimes be

purely short term.



All businesses or companies have at least two common objectives: first,

to make profit and, second, to offer to the owners reasonable rate of return on

their capital. Most of the other objectives of a company either follow from or are

related to these two basic objectives. These objectives may sometimes be

tempered by some social or welfare factors or considerations, which may be

included as additional input(s) in the objective statement.

Details of objectives, however, including even profit objectives, can be

different from one company to another. For example, some companies may

seek short-term profit maximization or maximization of immediate financial

returns; some other companies may decide to sacrifice short-term profit in the

interest of long-term profitability. Some others may choose to have low profit on

a sustained basis for competitive survival.

Various company objectives can be broadly classified into three types or

categories: strategic, tactical or operational. Strategic objectives are generally

long term; tactical objectives are similar to strategic objectives, but, less strategic

in nature; operational strategies are purely short term or operational as the

name indicates. Examples of these three types of objectives are given below.

Strategic Objectives

• Achieving a predetermined overall rate of return on capital employed

• Becoming a market leader in a particular product/market group

• Increasing shareholders’ earnings per share as far as possible

• Reducing company’s dependence on borrowed capital

• Improving employee relations (particular focus on industrial relations)

Tactical Objectives

• Increasing market share in some market segments

• Opening a subsidiary in a particular country within a specific period

• Extending the company’s range of products or brands

• Introducing a new technology or a new manufacturing process

• Revising the organizational structure of one of the company’s divisions or

SBUs

Operational Objectives

• Improving plant utilization

• Undertaking cost-cutting programmes



• Increasing sales during the next quarter

• Managing cash inflows/outflows

• Improving credit control or plant utilization measures6

Another way to distinguish among objectives is in terms of corporate

objectives and unit objectives, because these indicate different ‘levels’ of

objectives with different characteristics. Corporate objectives, more correctly

called corporate-level objectives, relate to the entire organization and are primarily

expressed in financial terms—profitability, rates of growth of sales or turnover,

dividend rates, share valuations, etc. Corporate-level objectives can also be of

non-financial nature such as technology improvement or innovation, product-

market diversifications, objectives relating to stakeholders like customers,

suppliers, employees or the community. But, many of these objectives also

generally have a financial connotation.

Unit objectives or unit-level objectives relate to individual units or SBUs

and, not the entire organization. Unit-level objectives can be financial as well as

non-financial, but, they always pertain to the individual units. Most of the unit-

level objectives generally follow from the corporate-level objectives. For example,

an SBU may have a profit objective, but, this will be a translation of the corporate

profit objective into the business unit-level objective. Many unit-level objectives

are of an operational nature; and, because operations are many, multiple

objectives are more common at the unit level than at the corporate level.

5.6.1 Organizational Life Cycle, Objectives and Strategy

Glueck and Jauch (1984) have mentioned about organizational life cycles and

the linkages between life cycles, objectives and strategic focus of organizations.

They have distinguished seven stages in organizational life cycle: birth, infancy,

youth, youth adult, adult, maturity and old age. At each stage of the life cycle,

there is a thrust on a particular objective, which is most important at that stage

of the life cycle. Depending on the objective at each stage, the strategic focus

of the organization will vary.

Organizational life cycles vary from industry to industry and from company

to company. Generally, high technology industries and companies will have

shorter life cycles than low technology or labour-intensive industries and

companies. Most of the industrial products and consumer durables, particularly

consumer electronics, fall in the first category; consumer non-durables,

particularly FMCGs, fall in the second category.



But, it is a fundamental fact that every organization passes through a life

cycle. And, during different stages of the life cycle, the predominant objectives

will be different and, so also organizational strategies or strategic focus. The

way to prolong the life cycle is to adopt newer technologies or to innovate. This

is what steel and engineering companies do. Tata Steel is a good example.


7. Corporate objectives are more focused and specific compared to

the_____.

8. Birth, infancy, youth, youth adult, adult, maturity and old age are part of

the ______.

5.7 Strategic Intent

From corporate objective, we now move on to strategic intent. If a particular

objective of a company becomes extremely focused and directed towards a

specific target, the company is showing a strategic intent. To be a strategic

intent, the objective has to be both ambitious and aggressive.

The phase ‘strategic intent’ was coined by Hamel and Prahalad (1989).

According to Hamel and Prahalad, strategic intent goes beyond the conventional

model of matching internal competence and resources with company objectives

or targets. Strategic intent indicates a ‘stretch’; it involves setting goals or targets

which demand stretching of the present resource base and capabilities for their

fulfilment.

Strategic intent may often mean challenging or overtaking the market

leader. Some of the examples are: Toyota vs General Motors; British Airways vs

Pan Am; Sony vs RCA; Komatsu vs Caterpillar and Titan vs HMT. Komatsu’s

strategic intent in challenging Caterpillar is analysed in Box 5.3.

Box 5.3: Komatsu’s Strategic Intent to Challenge Caterpillar

Komatsu’s strategic intent to challenge Caterpillar embodies the company’s

changing mission, goal and objective. Today, Komatsu is the second largest

producer of earth-moving equipment in the world next only to its arch-rival

Caterpillar of US. The company has progressed to this position over a long



period of time—a period characterized by clear strategic intent, goal

redefinition and evolving objective.

In the 1950s, Komatsu was producing a limited range of low-quality products

and, with a protected home market, had little or no incentive to improve.

This position changed almost dramatically when Japan opened its market

to foreign competition in the early 1960s. In 1964, Kawai succeeded his

father as the chairman of Komatsu and announced the goal of ‘Maru C’: to

‘encircle Caterpillar’. This statement of strategic intent—to concentrate all

its efforts on surpassing Caterpillar—was to be the driving force behind the

company’s goal for more than two decades.

Komatsu focussed initially on the objective of improving product quality to

stop loss of sales in its home market. The company then signed licensing

agreements with Caterpillar’s competitors to gain access to the latest

American technology. This move enabled the company to expand its product

range which made it more attractive to dealer networks—vital for Komatsu

to build up sales volume. The next step towards its goal was to enter

secondary export markets such as China and eastern Europe which helped

to build the critical mass required to challenge Caterpillar in the main markets

of Europe and the US. By the 1980s, Komatsu was very successful: its

growth from a regional producer of low-quality products to the second largest

producer was impressive, and this was primarily attributed to its goal of

challenging and encircling Caterpillar.

But, the goal and strategy which had served the company so well for over

two decades were beginning to be challenged by the changing business

environment. Komatsu’s sales began to fall as demand for heavy earth-

moving equipment decreased and competition intensified. But, Komatsu

was less focussed on its market needs and continued to concentrate on

outdoing Caterpillar. This strategy was beginning to be questioned, but,

not the strategic intent of the company.

As a response to environmental changes, Katada, Komatsu’s third president,

changed the company’s emphasis from providing construction equipment

to being a ‘total technology enterprise’, and the new goal of ‘Growth, Global,

Groupwide’ was adopted. In three years since the new goal was introduced,

Komatsu has reversed its sales decline and registered a 40 per cent growth

in its non-construction equipment business.

Komatsu’s strategic intent of ‘Maru C’ continues.

Source: Adapted from G Johnson and K Scholes, Exploring Corporate Strategy

(Prentice Hall of India, 1999), 245.



Strategic intent of a company is clear about the end or the target, but, it is

flexible with regard to the means and leaves room for creativity and improvization.

Pursuit of a strategic intent may initially create a misfit between targets or

ambitions and resources. This becomes a challenge to the top management of

a company. The management strives to bridge the gap by relentlessly building

new capabilities or strategic advantages. The essence of the strategy here lies

in creating competitive advantage faster than the target competitor or the leader.


9. The phase ________indicates a ‘stretch’; it involves setting goals or targets

which demand stretching of the present resource base and capabilities

for their fulfilment.

10. The phase ‘strategic intent’ was coined by ________and _________.

11. If a particular objective of a company becomes extremely focused and

directed towards a specific target, the company is showing a strategic

intent. (True/False)

12. Strategic intent does not mean challenging or overtaking the market leader.

(True/False)

5.8 Company Responsibility

In developing mission statements, corporate objectives and goals and, business

strategies, organizations must constantly remind themselves about certain

responsibilities. These responsibilities are towards various stakeholders and

the society at large.

If companies have to balance various stakeholder expectations, many

times, they may have to sacrifice short-term profit. Sometimes, profit objective

may lead to the neglect of corporate governance and responsibilities. Examples

are: Exxon’s oil leak in Alaska ; defective tyres of Firestone; Ford recalling many

of their trucks; Union Carbide gas leak in India (Bhopal gas tragedy), etc.

Companies, therefore, need to carefully examine the economic and social

impacts of their missions, objectives and strategies.

5.8.1 Stakeholder Approach to Company Responsibility

We had defined stakeholders in the previous unit. But, many authors and

practitioners of strategic management define stakeholders in a very broad sense.



In the broadest sense, a stakeholder of a company is anybody or any organization

who/which has something to do with the company. In this sense, stakeholders

will include competitors, the government and the general public in addition to

those mentioned in Unit 4. All these stakeholders have their expectations from

the company and their own notions about company responsibility towards them.

An illustrative statement of stakeholders’ view of company responsibility in terms

of stakeholders’ claims is presented in Table 5.3.

Table 5.3 Stakeholders’ view of Company Responsibility

Stakeholder Expectations/Claims

Stockholders Sharing of profits; additional stock offerings; assets on liquidation; inspection of company books; transfer of stock; election of board of directors; and applicable additional rights.

Creditors Interest payments as due and return of principal amount; security of pledged assets; relative priority in the event of liquidation; management and ownership prerogatives if conditions exist with the company (such as default of interest payments).

Employees Attractive compensation package; job satisfaction; freedom from arbitrary behaviour on the part of company officials; share in fringe benefits; freedom to join union and participate in collective bargaining; satisfactory working conditions.

Customers Competitive price; service provided with the product; suitable warranties; R&D leading to product improvement; facilitation of credit on attractive terms.

Suppliers Continuing business; timely payment and servicing of credit obligations; professional relationship in contracting for purchasing and receiving goods and services.

Governments Taxes (income, excise, sales, etc.); adherence to public policy dealing with the requirement of fair and free competition; discharge of legal obligations of business people (and business organizations); adherence to business law (MRTP, FEMA, etc).

Unions Recognition as the negotiating agent for employees; to be recognized as a participant in the business organization; management’s co-operation in fair wage settlement.

Competitors Observation of the norms for competitive conduct established by the industry and society; ethical business practices; no price war.

Local communities Place for productive and healthy employment; participation of company officials in community affairs; provision of regular employment; fair play; interest in and, support of, local government; support of cultural and charitable projects.

The general public Participation in, and contribution to, society as a whole; assumption of some proportion of the burden of government and society; fair price for products and generating healthy competition.

Source: Adapted from Pearce and Robinson (2000), 50 (Figure 2.3)



As shown in Table 5.3, each interest group of stakeholders has multiple

expectations or claims. For all the stakeholders taken together, the expectations/

claims are too many and varied. Many of them are conflicting. So, if an

organization attempts to incorporate all the interests of various stakeholder

groups in the mission statements or objectives, it becomes almost an impossible

task. Therefore, before attempting such an exercise, companies should do proper

stakeholder analysis. Four steps or tasks are involved in such analysis:

(a) Identification of important internal and external stakeholders

(b) Understanding stakeholders’ specific claims

(c) Reconciliation of stakeholders’ claims and prioritizing them

(d) Matching stakeholder claims with other inputs or elements of the

company mission or objectives.

Every business or company faces different types of stakeholder groups

which vary in ‘number, size, influence and importance.’ Planners and strategy

makers must identify all the important stakeholder groups and assess their

relative weights and claims and their ability to affect company’s performance

and success. This would also involve understanding or analysing stakeholders’

claims carefully. Since claims can be too many, prioritization of claims is

necessary. After prioritization, the problem of reconciliation comes. Reconciliation

is essential to resolve the ‘competiting, conflicting and contradicting’ claims of

stakeholders. Finally, the ‘distilled’ stakeholder claims—prioritized and

reconciled—have to be matched or coordinated with other principal elements of

the mission statement or objectives. These elements relate to the business for

which the organization exists and, the product-market situation. When all these

factors or elements are combined in a harmonized way, the mission statement,

objective and strategies would be internally consistent and are likely to produce

desired results. Methodologically, this is presented in Figure 5.2.

Externalstakeholders

Business/product-market

Internalstakeholders

Companymission

Objectives

Board of directors

Executive officers

Stockholders

Employees

Union*

Customers

Suppliers

Creditors

Government

Union*

Competitors

General public

Figure 5.2 Stakeholders’ Chains, Company Mission and Objectives

*‘Union’ is shown both as internal and external stakeholder because there is a difference

of opinion on this.




13. Corporates have responsibilities towards various stakeholders and the

society at large. (True/False)

14. The competitors, government and the general public are all ______of a

company.

5.9 Corporate Social Responsibility

As mentioned above, external stakeholders of an organization are too many

and varied and many of them represent different sections or social groups. This

implies that organizations should be socially responsible; that is, in addition to

the interests of the shareholders, businesses or companies should also serve

the society. This is corporate social responsibility (CSR). Corporate social

responsibility can be defined as the alignment of business operations with social

values.

The conflict between internal and external stakeholders can go much

further than mentioned so far. Some feel that this is the most problematic issue

in deciding company responsibility. External stakeholders argue that internal

stakeholders’ demand be made secondary to the greater need of the society;

that is, greater good of the external stakeholders. Many of them feel that issues

like pollution, waste disposals, environmental safety and conservation of natural

resources should be the overriding considerations for formulation of policy and

strategic decision making. Internal stakeholders, on the other hand, think that

the competing or social claims of external stakeholders should be balanced in

such a way that it protects the company mission, objectives and profitability.

The debate continues.

Strong exponents of CSR also talk of social policy for companies. They

feel that social responsibilities of companies should be clearly enunciated and

declared as social policy. Social policies may directly affect a company’s products

and services, technology, markets, customers and self-image. According to these

thinkers, an organization’s social policy should be integrated into all management

activities including the mission statement and objectives. Many feel that corporate

social policy should be articulated during strategy formulation, administered

during strategy implementation and reaffirmed or changed during strategy

evaluation.7



5.9.1 CSR Practices in Corporates

Worldwide, companies are trying to integrate corporate social responsibility into

their business operations and strategies. Microsoft, Coca-Cola, McDonald’s,

FedEx, IBM and Johnson & Johnson are some of the leading companies. In

India also, many companies are integrating CSR into their business practices

and making significant contributions to society. Companies like Infosys, Wipro,

Hero Honda, ITC, Dr. Reddy’s, Godrej, Mahindra & Mahindra and Tata Steel

are the foremost among them. Some of these companies have also established

foundations to cater to the needs of society.

Infosys and Wipro are two new-age companies which have integrated

CSR initiatives into their business capabilities and have achieved stronger brand

recognition through it. The Infosys Foundation works for both economic and

social upliftment of the villages it has adopted. The foundation focusses on an

overall development of the village. The developmental activities range from

conducting rehabilitation to construction of orphanages, setting up libraries and

promoting art and culture. Hero Honda has adopted a number of villages in and

around its plant in Dharughera (near Delhi) for integrated rural development.

ITC’s E-choupals have not only helped to meet the information requirements of

rural households, but also immensely contributed to the establishment of better

relations with customers and rural suppliers. This has helped the process of

integrated rural development. Many banks and financial institutions along with

FMCG companies like Hindustan Unilever have recognized the importance of

development of the rural sector.

At the global level, CSR initiatives of companies are observed with interest.

The Wall Street Journal has rated top 15 companies in terms of their social

responsibility.8 These companies are

1. Johnson & Johnson 9. McDonald’s

2. Coca-Cola 10. 3M

3. Wal-Mart 11. UPS

4. Anheuser Bush 12. FedEx

5. Hewlett-Packard 13. Target

6. World Disney 14. Home Depot

7. Microsoft 15. General Electric

8. IBM



It should be noted that there is a difference in focus between CSR initiatives

of Indian companies and the western companies. In India, CSR initiatives are

mostly designed for the upliftment of the economically backward classes or

sections of society with particular emphasis on the rural sector. In companies in

developed countries, the focus is more on adoption of environment-friendly

measures or schemes. A poll carried out by the American Society for Quality

(ASQ) in 2006 for the ISO 26,000 ‘Social Responsibility’ standards shows growing

interest in CSR among organizations. Integration of CSR into business is likely

to receive greater thrust with the creation of ISO 26,000 standards. The ISO

26,000 would provide guidelines on ‘social responsibility’ of corporations and

other organizations. This would help preparation of a road map by companies

wishing to align their business activities with social initiatives.9

5.9.2 Corporate Social Responsibility and Profitability

Milton Friedman said in 1962: Few trends could so thoroughly undermine

the very foundations of our free society as the acceptance by corporate

officials of a social responsibility other than to make as much money for

their stockholders as possible.

— Capitalism and Freedom, 1962

Even after four decades since Friedman said this, corporate social

responsibility has remained a contentious issue. Managers are struggling to

decide to what extent they should adopt CSR in their strategy-building process.

The debate or dichotomy is clear: Should a company behave in a socially

responsible manner and make the profitability policy follow from this; or, should

a company aim at profit maximization and try to be as socially responsible as

possible. Exponents of CSR argue that business ‘depends on, exists to serve

and, cannot be separated’ from the environment; the environment is represented

by external stakeholders like customers, competitors, suppliers, government

agencies, local communities and society in general. Proponents of profit

maximization like Friedman, on the other hand, think that a company has

responsibility only for the financial well-being of its stockholders; and other

objective or policy may threaten the health and prosperity of the company.

The relationship between CSR and profit is complex. Although the two

are not mutually exclusive, neither of them is a prerequisite for the other.

Advocates of corporate pragmatism suggest that CSR and profit need not

necessarily be viewed as two competing concepts. It may be more rational to

include CSR as a factor or component in the strategy-building process of the



business which should determine, along with other objectives, how to increase

or maximize profit.

Several research studies10 have been undertaken to determine the

relationship between corporate social performance and financial performance.

But, none of these studies has been able to establish the precise nature of

relationship between the two. There may be a number of reasons for this. One

reason may be that there is no significant correlation between social and financial

performance. Another reason may be that the benefits of CSR are offset by its

negative effect on profitability with no consequentially visible financial impact

on the company. Other reasons include methodological weaknesses or

drawbacks and/or problems with operational definitions or inadequacy of the

conceptual models used in the studies. A general conclusion from these studies,

however, is that certain relationship between CSR and profitability may exist,

but, the nature of the relationship is not clear.

Activity 2

Choose any five companies that are well known for their CSR practices.

You may choose the companies mentioned in the text above. Write a report

on each of the company’s CSR activities.


15. _________can be defined as the alignment of business operations with

social values.

16. In India, CSR initiatives are mostly designed for the upliftment of the

economically backward classes or sections of society with particular

emphasis on the rural sector. (True/False)

5.10 Social Audit

Exponents of CSR do not just want companies to be socially responsible. They

also want to know how much or how far have they shown their social

responsibility, that is, what is their social performance against stated social

objectives. This can be measured through social audit. ‘Social audit’ and ‘social

accounting’ are sometimes used synonymously. But, there is a distinction

between the two. Social accounting is ‘the process of selecting firm level

performance variables, measures and measurement procedures; systematically



developing information useful for evaluating the firm’s social performance to

concerned social groups, both within and outside the firm.’11 Social audit, on the

other hand, is more specific or focussed; as just mentioned, social audit evaluates

or measures a company’s performance against planned or laid down social

objectives or goals.

A social audit should be like a financial audit or a commercial audit. Some

even feel that social audit should be ‘based on a social balance sheet with a

"credit" side and a "debit" side ("inputs" and "outputs" or "costs" and "benefits").’12

A social audit may be undertaken internally by companies; or, they may engage

outside consultants to conduct the audit. But, as with financial audit, an outside

consultant or agency minimizes organizational biases and brings more credibility

to the evaluation process and the company.

Social audit is important not only because a company wants to ensure

that it has implemented CSR policy as planned or committed, but, also because

it improves its public image and social standing. Also, social audit is conducted

by some companies not only to evaluate their social performance, but, also for

other purposes which are connected with their corporate performance and image

building. Some companies, for example, use social audit to scan the external

environment and determine their vulnerabilities to it; some others conduct social

audit to improve their relations with the government and public bodies. Others

use social audit to institutionalize CSR within their companies.


17. The social performance of companies can be measured against the stated

social objectives through_________.

18. A social audit is always undertaken internally by companies. (True/False)

5.11 Case Study

Corporate Social Responsibility: Tata Group Goes Green*

In India, many companies are integrating corporate social responsibility

(CSR) into their business practices and are making significant contributions

to society. Some of them have also set up foundations to cater to the needs

of the society. Tata Group of companies, along with some others, are

foremost among them. As an extension of CSR practices, Tata Group

companies are going green. From being on the fringe for some time, the



green movement is gaining momentum within the group. The movement

covers all the major companies of the group, namely, Tata Steel, Tata Motors,

Tata Chemicals and Indian Hotels.

Tata Steel is planning to reduce carbon dioxide emissions at its Jamshedpur

plant from the current 1.8 tonne to 1.7 tonne per tonne of liquid steel made

by 2012. The ideal global benchmark though is 1.5. Tata Motors is setting

up an eco-friendly showroom using natural building materials for its flooring

and energy-efficient lights. The project is in its initial stages. The Indian

Hotels Company, which runs the Taj Chain, is in the process of creating

eco rooms, which will have energy-efficient minibars, organic bed linen

and napkins made from recycled paper. There will not be any carpets since

chemicals are used to clean these. And when it comes to illumination, the

rooms will have CFLs or LEDs. About 5 per cent of the total rooms at a Taj

hotel would sport a chic eco-room design.

Another eco-friendly consumer durable product that is in the works is Indica

EV, an electric car that will run on polymer lithium ion batteries. Tata Motors

plans to introduce the Indica EV soon.

The group’s large companies such as Tata Steel, Tata Motors, Tata

Chemicals and Tata Consultancy Services contribute 80 per cent of the

group’s overall emissions and a panel, headed by Tata Sons Director J J

Irani, has been formed to address this issue. Several companies have

already implemented or are in the process of implementing clean

development mechanism (CDM) projects. Tata Steel says it is currently

working on more than 17 CDM projects with Ernst & Young and these

projects are at various stages of approval at United Nations Framework



Convention on Climate Change. Tata Power has said that of the total power,

it would generate in the next 10 years, 25 per cent would be from renewable

energy sources. Tata Motors is collecting environmental and energy data

across its dealer and supply chain to compute their carbon footprint and

indentify opportunities for cutting down on carbon dioxide emission. This

initiative will enable sharing and deployment of ideas throughout the value

chain.

One of the most interesting innovations has come in the form of a biogas-

based power plant at Taj Green Cove in Kovalam, which uses the waste

generated at the hotel to meet its cooking requirements. Indian Hotels

Management has mentioned that all of its domestic and international hotels

would now be certified by Green Globe, an international agency.

Tata Group Chairman Ratan Tata had said during the launch of Swatch, a

low-cost water purifier made form natural ingredients: ‘We have embarked

on a group-wise initiative to create awareness and implement eco-friendly

process wherever it is possible and in fact, look at some of our older

processes to see how we can ensure that they are in compliance with the

stateof- the-art exhibits. This is going to be long and expensive journey and

we are fairly committed to it.’

This summarizes well the Tata Group’s initiatives to promote the green

movement.

* Mostly based on ‘Going green: Tata’s new mantra’, The Times of India (Times

Business), January 4, 2010.

5.12 Summary


• To define a company’s business with precision is the job or responsibility

of the planners and strategists. Precise or correct definition of business

of a company is the foundation for the mission statement, objectives,

plans, strategies and work and resource allocations.

• A mission statement is many in one. It embodies the business philosophy

of a company’s decision makers, implies the image the company wishes

to project, reflects the company’s self-concept, indicates the company’s

principal product or service areas and the customer needs the company

seeks to satisfy.



• Corporate or company philosophy is sometimes called company creed; it

envisages the basic ‘beliefs, values, aspirations and philosophical priorities’

of a company.

• Corporate objectives are more focussed and specific compared to

corporate mission. The mission statement is more general and qualitative;

corporate objectives are usually quantitative—most of the objectives

should be measurable in terms of results or achievements. But, corporate

objectives should be fully consistent with the mission statement for its

performance.

• Glueck and Jauch (1984) have mentioned about organizational life cycles

and the linkages between life cycles, objectives and strategic focus of

organizations. They have distinguished seven stages in organizational

life cycle; birth, infancy, youth, youth adult, adult, maturity and old age.

• Worldwide, companies are trying to integrate corporate social responsibility

into their business operations and strategies. Microsoft, Coca-cola,

McDonald’s, FedEx, IBM and Johnson & Johnson are some of the leading

companies.

5.13 Glossary

• Corporate mission: The business philosophy of a company, declaring

what business the company is in and who its customers are. It provides

focus and direction for the corporate development.

• Corporate philosophy: The beliefs, values, aspirations and philosophical

priorities of a company which the management or strategic decision

makers are committed to.

• Corporate vision: Refers to a company’s specific intentions that are broad,

all-intrusive and forward-thinking.

• Organizational life cycle: A model which proposes that over the course

of time, business firms move through a fairly predictable sequence of

developmental stages.

• Strategic intent: Setting goals or targets which demand stretching of the

present resource base and capabilities for their fulfilment.




1. How would you properly define a business? Explain with a diagram.

2. What is a mission statement? Differentiate between a mission statement

and a vision statement.

3. Specify seven stages of organizational life cycle. Discuss the linkages

between organizational life cycle, corporate objectives and strategy.

4. What is strategic intent? How is strategic intent different from corporate

objective? Explain strategic intent with some examples.

5. What is corporate social responsibility (CSR)? Which are the issues

involved in analysis of CSR? Name three companies with high CSR rating.

6. Explain the concept of social audit. Discuss Tata Steel’s social audit. Would

you recommend social audit for every company?

5.15 Answers


1. Planners, strategists

2. Customer

3. mission statement

4. present, future

5. True

6. False

7. mission statement

8. Organizational life cycle

9. ‘strategic intent’

10. Hamel, Prahalad

11. True

12. False

13. True



14. stakeholders

15. Corporate social responsibility

16. True

17. social audit

18. False


1. To define a company’s business with precision is the job or responsibility

of the planners and strategists. Refer to Section 5.3 for further details.

2. The mission statement of a company is variously called a statement of

philosophy, a statement of beliefs, a statement of purpose and, a statement

of business principles. Refer to Section 5.4 and 5.4.1 for further details.

3. Glueck and Jauch (1984) have distinguished seven stages in

organizational life cycle: birth, infancy, youth, youth adult, adult, maturity

and old age. Refer to Section 5.4 and 5.7 for further details.

4. The phase ‘strategic intent’ was coined by Hamel and Prahalad (1989).


5. Organizations should be socially responsible; that is, in addition to the

interests of the shareholders, businesses or companies should also serve

the society. Refer to Section 5.8 for further details.

6. A company’s social performance against stated social objectives can be

measured through social audit. Refer to Section 5.9 for further details.

5.16 References

1. Aupperle, K E, A B Carroll, J D Hatfield. 1985. ‘An Empirical Examination

of the Relationship between Corporate Social Responsibilities and

Profitability.’ Academy of Management Journal. 28 June.

2. CarrolL, A, and F Hoy. ‘Integrating Corporate Social Policy into Strategic

Management.’ 1984. Journal of Business Strategy 4, Winter.

3. Drucker, P F. 1974. Management: Tasks, Responsibilities and Practices.

New York: Harper & Row.

4. Ghosh, P K. 2003. Strategic Planning and Management. New Delhi: Sultan

Chand & Sons.



6. Hamel, G, and C K Prahalad. 1989. ‘Strategic Intent,’ Harvard Business

Review, May–June.

7. Pearce, J R, and R B Robinson. 2000. Strategic Management. 7th ed.

New Delhi: McGraw Hill.

Endnotes

1 P F Drucker, Management: Tasks, Responsibilities and Practices (New York: Harper &

Row, 1974), 63.2 J R Pearce, and R B Robinson, Strategic Management, 7 th ed. (Mc Graw-Hill, 2000), 27.3 W R King, and D I Cleland, Strategic Planning and Policy (New York: Van Nostrand

Reinhold, 1978), 124.4 An Interview with M A Pathan, Chairman, IOC’, Financial Express, August 30, 1999

5 R Ackoff, A Concept of Corporate Planning (New York: John Wiley, 1970).6 R Bennett, Corporate Strategy , 2nd ed. (Financial Times/Pitman Publishing, 1999),

18–19.7 A Carroll, and F Hoy, ‘Integrating Corporate Social Policy into Strategic Management’,

Journal of Business Strategy, 4, No. 3 (Winter 1984).8 R Alsop, ‘Perils of Corporate Philanthrophy,’ Wall Street Journal (January 16, 2002).

9 Trying to Make a Difference’, Financial Times (New Delhi: Times Publishing House, April

7, 2006).10 Two important studies are: K E Aupperle, A B Carroll, and J D Hatfield, ‘An Empirical

Examination of the Relationship between Corporate Social Responsibility and Profitability,

’ Academy of Management Journal, (1985) 446 –63; W N Davidson, and D L Worrell, ‘A

Comparison and Test of the Use of Accounting and Stock Market Data in Relating Corporate

Social Responsibility and Financial Performance,’ Akron Business and Economic Review,

21 (Fall 1990), 7 –111 K V Ramanathan, ‘Theory of Corporate Social Accounting,’ Accounting Review (July,

1976): 516 –28.12 C C Abt, The Social Audit for Management (New York: AMA, 1977): 44 –45.



Unit 6 Internal Competences and Resources

Structure

6.1 Introduction

6.2 Caselet

Objectives

6.3 Competence Analysis

6.4 Resource Analysis

6.5 Value Chain Analysis

6.6 Cost Analysis

6.7 Financial Competence Analysis

6.8 External Sources of Competence

6.9 Case Study

6.10 Summary

6.11 Glossary


6.13 Answers

6.14 References

6.1 Introduction

For effectiveness, all management strategies should be based on or be

commensurate with the internal competences of a company or its organizational

capabilities. A number of theories or models have been put forward about

internal capabilities or ‘core competences’ which companies must acquire or

use to survive in today’s competitive market. Another way to put this is: the

strategy a company adopts should depend on its competence level in terms

of resources.

Time and again, companies have discovered and/or experienced this,

and they have achieved results. From 1980 to 1988, Canon grew by 264 per

cent and Honda by 200 per cent. Canon’s personal copiers, Honda’s entry into

four-wheeler market, Casio’s small-screen colour LCD television, Yamaha’s

digital piano—all were developed by respective core competencies. In India,

Greaves introduced ‘Garuda’ (the three-wheeler diesel auto) making use of its

competence in diesel engines; IFB-Bosch entered the washing machine segment

making use of its fine blanking technology. Dabur, with its expertise in traditional

Indian medicine, has entered into food products (juice, honey, mint, etc.).



6.2 Caselet

Core competence is the combination of processes and technologies that a

company possesses. It includes the knowledge and experience of

operations, the activities that bring the company high returns and the

qualities that are considered central to the success of the organization.

Core competence gives a company its competitive advantage by enabling

it to deliver value to its customers. Changing core competence requires

key skills and abilities in a new job or field of operations.

Xerox is an example of a company that diversified and adopted new core

competence to enable it to compete in a different market. In the early 20th

century the company came into being with the invention of xerography,

which was the precursor of photocopying technology. Through innovation,

the company invented Ethernet technology, which helped prepare the

foundation for the Internet of today. The shift from hard copy to digital

technology required new core competence. Any core competence

developed by a company stays with it for a long time.

Source: http://smallbusiness.chron.com/examples-changing-core-competencies-

18422.html

Objectives


• Define competence of an organization and the various types of

competences

• Describe resource analysis

• Explain the concept and practice of value chain analysis

• Analyse the financial competence of an organization through cost analysis

• Discuss external sources of competence, including strategic outsourcing

6.3 Competence Analysis

Competence is the ability to perform a task or achieve some objectives.

Competence levels vary across organizations, and, also, within an organization

from time to time. Difference in performance among companies in the same

market and product category is, due to the difference in their competence levels.

This happens because only some companies are able to demonstrate the



competences demanded by particular competitive situations. This applies to a

particular company also. Just for survival, a company needs to possess a

particular level of competence; but, for clear competitive advantage or sustained

growth, a company would require a different level or type of competence. Four

major types or levels of competence may be distinguished:

1. Core competence

2. Distinctive competence

3. Strategic competence

4. Threshold competence

6.3.1 Core Competence

Core competence of a company is one of its special or unique internal

competence. Core competence is not just a single strength or skill or capability

of a company; it is ‘interwoven resources, technology and skill’ or synergy

culminating into a special or core competence. Core competence gives a

company a clear competitive advantage over its competitors. Sony has a core

competence in miniaturization; Xerox’s core competence is in photocopying;

Canon’s core competence lies in optics, imaging and laser control; Honda’s

core competence is in engines (for cars and motorcycles); 3M’s core competence

is in sticky tape technology; JVC’s in video tape technology; ITC’s in tobacco

and cigarettes and Godrej’s in locks and storewels.

Hamel and Prahalad, two of the greatest exponents of core competence,

argue in ‘The Core Competence of the Corporation’ (HBR, 1990) that the central

building block of the corporate strategy is core competence. Hamel and Prahalad

defined core competence as the combination of individual technologies and

production skills that underlie a company’s product lines. According to them,

Sony’s core competence in manufacturing allows the company to make

everything from the Sony walkman to video cameras to notebook computer.

Canon’s core competence in optics, imaging and microprocessor controls have

enabled it to enter markets as seemingly diverse as copiers, laser printers,

cameras and image scanners.

To achieve core competence, a particular competence level of a company

should satisfy three criteria:

(a) It should relate to an activity or process that inherently underlies the value

in the product or service as perceived by the customer. This is important

because managers often take an internal view of value and either miss or

deliberately overlook the customer perspective.



(b) It should lead to a level of performance in a product or process which is

significantly better than those of competitors. Benchmarking is a good

way and is generally recommended for undertaking performance standard

and also for differentiating between good and bad performance. (We will

be discussing benchmarking in Unit 11).

(c) It should be robust, i.e., difficult for competitors to imitate. In a fast changing

world, many advantages gained in different ways (like a superior product

feature, a new marketing campaign or an innovative price policy/strategy)

are not robust and are likely to be short lived. Core competence is not

about such incremental changes or improvements, but, about the whole

process through which continuous change and improvement take place

which lead to or sustain clearly differentiated advantage.1

6.3.2 Distinctive Competence

Core competence may not be enough, because it focuses predominantly on

the product or process and technology, or, as Hamel and Prahalad put it; ‘The

combination of individual technologies and production skills’. There are two

problems with this. First, strong and aggressive competitors may develop, either

through parallel innovations or imitations, similar products or processes which

are highly competitive. This is what Japanese companies have done in the

fields of electronics and automobiles, and now South Korea is doing to Japanese

electronics; IBM’s core computer technology is also facing the same problem.

Second, to secure competitive advantage, only product, process or technology

or technological innovation may not be enough; this has to be amply supported

by special capabilities in the related vital areas like resource or financial

management, cost management, marketing, logistics, etc.

Hamel and Prahalad themselves have said later (1994):

We have to look at the organization as a portfolio of competencies, of

underlying strengths, and, not just a portfolio and business unit .... We

must also identify those core competencies that would allow us to create

new products; and we must ask ourselves what we can leverage as we

move into the future, and what we can do that other companies might

find difficult.2

Distinctive competences may provide an answer to some of these points.

Distinctive competence is based on the assumption that there are different

alternative ways to secure competitive advantage and not only special technical

and production expertise as emphasized by core competence.



Distinctive competence includes core competence as one of the

alternatives. But, there are other alternatives that are also based on

organizational capabilities. So, distinctive competence is more broad based.

Thompson and Strickland (1992) have defined distinctive competence as:

‘Distinctive competence is the unique capability that helps an organization

in capitalizing upon a particular opportunity; the competitive edge it may

give a firm in the marketplace.’3

So, the focus in distinctive competence is on exploiting a market

opportunity. And, depending on the market or competitive situation, one or some

of the alternative competences may work ; for example, product or process

superiority (core competence), product differentiation (situational or adaptability),

cost effectiveness or cost efficiency to support a price strategy, special capability

in marketing or distribution, etc. Under given circumstances, one of these, or a

combination of some of these, will produce a distinctive competence which

would be appropriate or best suited to exploit the opportunity and produce desired

results.

Since resources are limited, identification of distinctive competence may

also help efficient allocation of resources. Reliance Industries, for example, has

developed its distinctive competence in ‘conceiving, implementing and managing

large scale projects’ and mobilizing requisite resources for that. They do not

think in terms of core competence. Mukesh Ambani, Chairman and MD, has

described it like this:

‘We do not believe in core competence; we believe in building

competence around people and processes to create value’.4

6.3.3 Strategic Competence

Strategic competence coexists with, or supports, core competence and distinctive

competence. Strategic competence is the competence level required to

formulate, implement and produce results with a particular strategy, for example,

to outwit competitors. Hindustan Unilever did this. In the mid- and the late 80s,

they used their strategic competence to out manoeuvre Nirma (which was

launched very aggressively) and re-establish their leadership in the detergent

market. Strategic competence may also involve combination or convergence of

different capabilities as in the case of Hindustan Unilever.

6.3.4 Threshold Competence

Threshold competence is the competence level required just for survival in the

market or business. The competence level of a company may be weaker than



many of its competitors. Threshold competence may be adopted by No. 5 or

No. 6 player in the market or those struggling to survive. Companies with

threshold competence can, over time, graduate to a higher level of competence.

But, continued threshold competence can also lead to closure of business.

Multi-product or multi-SBU companies may often possess a portfolio of

competences. In some product or business, they may have core competence,

but, not in all. ITC’s core competence is in tobacco and cigarettes, but, they

have distinctive competence in hospitality business and agri-business. Hindustan

Unilever has distinctive competence and strategic competence in many

businesses. But, they had been surviving with threshold competence in vanaspati

business (Dalda) for some time, and finally, they exited from that business. A

conceptual portfolio of organizational competence consisting of core

competence, distinctive competence, strategic competence and threshold

competence is shown in Figure 6.1.

Figure 6.1 Portfolio of Organizational Competence

Activity 1

Now that you know what is core competence, choose any three companies

and compare their core competence. Write a comparative analyis on the

same.


1. The ability to perform a task or achieve some objectives is called ______.

2. Sony’s competence in miniaturization; Xerox’s competence in photo

copying; Canon’s competence in optics, imaging and laser control are

examples of _______competence.



3. The unique capability that helps an organization in capitalizing upon a

particular opportunity; the competitive edge it may give a firm in the

marketplace is called:

(a) Strategic competence

(b) Core competence

(c) Distinctive competence

(d) None of these

4. The competence level required to formulate, implement and produce

results with a particular strategy, say, to outwit competitors, is known as

strategic competence . (True/False)

6.4 Resource Analysis

Resources create competences. Resources also limit competences because

for developing certain types or levels of competences or capabilities,

commensurate resources may not always be forthcoming. This shows that

competence analysis and resource analysis are intrinsically related. Resources

do not mean only financial resources. In strategic management analysis,

organizational resources can be classified into four major categories:

• Physical resources

• Financial resources

• Human resources

• Intangible resources

Physical resources are buildings (factory or office), machines or production

capacity. The nature and quality of physical resources depend on the age,

condition, location and capability of these resources. Financial resources include

cash, capital, debtors, creditors and suppliers of funds (shareholders, banks,

financial institutions, etc.). Financial resources are the source of all investments

of a company. Human resources are people. Human resources include skills,

knowledge applications and adaptability of people or employees in an

organization. In knowledge-based economies and today’s complicated business

management systems, human resource has become the most valuable asset.

Intangible resources are also called intellectual capital, and, of late, are being

recognized as of strategic importance to companies. Intangible resource includes

knowledge or intellectual capital in the form of patents, brands, business systems,

customer databases and relationships with strategic partners. Intangible resource



or intellectual capital also includes ‘goodwill’ or ‘corporate image’ of an

organization which helps immensely during business transactions. Intellectual

capital forms an important asset of many organizations, and, there are thoughts

to find ways of assessing and accounting for value of intangibles.5

Like competences, resources can also be of different levels of adequacy

or effectiveness. For example, threshold resources, like threshold competences,

are resources required to stay in business or in a market or segment. Threshold

resources may sometimes be the minimum level required for market entry. But

to stay in business, the threshold level has to increase over time because of the

actions of the competitors and/or new entrants. So, the threshold resource level

is always relative to the market position of a particular product. In contrast,

unique resources like core competence or distinctive competence enable an

organization to establish or sustain its product or business better than competitors’

resources. Uniqueness of the resources also makes these difficult to imitate.

Resources may have to be continuously developed and/or adjusted to

competence levels to secure or sustain competitive advantage. Due to the

development of technology and changes in competition levels, some resources

may become redundant at some point of time. Unless organizations are able to

dispose of or abandon redundant resources and develop new resources, they

may not be able to stay in competition. Banking sector is a good example. In

the US and Europe, many traditional banks are still operating with a large number

of branches. However, in the new technology world, many new competitors do

not have any branches and have invested heavily in call centres and Internet

banking. In 2000, average transaction cost with branch operation was £1

compared with 54 p through telephones and only 15 p through the Internet.

Also branch transaction costs are rising as volumes are falling and more

customers are switching to e-banking.6

So, the message is clear. Organizations may have to change their resource

base as competitive situation demands.


5. In strategic management analysis, organizational resources can be

classified into categories:

(a) Physical and non-physical resources

(b) Financial and human resources



(c) Physical, financial and human resources

(d) Physical, financial, human and intangible resources

6. Knowledge or intellectual capital in the form of patents, brands, business

systems, customer databases and relationships with strategic partners is

classified as ________resource.

7. In order to secure or sustain competitive advantage, _________ may

have to be continuously developed and/or adjusted to competence levels.

8. Absence of _____may lead to underutilization or wastage of resources.

6.5 Value Chain Analysis

Various competences and resources of an organization can be integrated into a

chain of activities which an organization performs to meet customer demand.

Since each of these activities is expected to create value when it is performed,

the chain can appropriately be called a value chain. Michael Porter (1985)

introduced the concept of value chain analysis. Now, it has become common

for professional companies to do this analysis.

Value chain analysis helps in understanding how value is created in

organizations through various activities. These activities can be divided into two

broad categories: primary activities and support activities. Primary activities are

directly concerned with the creation or delivery of a product or service or customer

value. Support activities, as the name indicates, support the primary activities,

or, more, correctly, help to improve the ‘effectiveness or efficiency’ of primary

activities.

Primary activities can be divided into five major areas: inbound logistics,

operations, outbound logistics, marketing and sales and service.

Inbound logistics: These are activities concerned with receiving, storing

and distributing raw materials and inputs to the production or service division.

Inbound logistics also include materials handling, stock control, transportation

of inputs, etc.

Operations: These are activities involved in transforming various inputs

into final product or service. Operations also include machinery, packaging,

assembly, testing, etc.

Outbound logistics: These include collecting, storing and distributing or

delivering final products to customers. For tangible products (industrial or



consumer goods), this would include warehousing, materials handling,

transportation, etc. In the case of service, these may be more concerned with

arrangements for bringing customers close to the service location. (e.g., sports

events, entertainment events, etc.).

Marketing and sales: These comprise activities such as advertising, sales

promotion, selling, sales force management, pricing, channel selection, channel

management, etc. Marketing and sales provide the most important link between

the company and the customer.

Service: These include activities which maintain or enhance value of a

product or service such as installation, repair, training, supply of spares and

prompt after-sales service, etc.

Support activities can be divided into four categories: procurement,

technology development, human resource management and organizational

infrastructure.

Procurement: This relates to the processes for acquiring or purchasing

various resource inputs like raw materials, intermediate inputs, equipment,

machinery, etc. Procurement primarily supports inbound logistics and operations.

Technology development: Technology is involved in all value creations.

Key technologies are concerned directly with the product, (e.g., R&D, product

design, quality control, etc.,) or with processes, (e.g.,process development).

Technology development is fundamental to the innovative capacity of an

organization. Technology mainly supports operations.

Human resource management: This provides support to all primary

activities in the value chain. More specifically, HRM is concerned with recruiting,

managing, training and developing people within the organization.

Infrastructure: This is the organizational system including finance, MIS,

general management, strategic planning, etc. Infrastructure also comprises

organizational structures, values and culture. Infrastructure, directly or indirectly,

supports all primary activities.

Figure 6.2 shows the value chain in an organization in terms of primary

activities and support activities and the value or margin these activities are

expected to create. Primary activities and support activities may appear to be

two separate blocks, but, in reality, they are all interconnected activities in a

cohesive value chain.



Figure 6.2 Value Chain in an Organization

Source: M E Porter, Competitive Advantage: Creating and Sustaining Superior

Performance (New York: The Free Press, 1985).

Competences or activities in the value chain can contribute to customer

value in two ways. First is competences in individual activities (for example,

operations or production or marketing). Second is the competence in linking

activities together. This includes the ability to integrate all the separate activities

(both primary and support activities) to deliver some customer value, and, thereby

ensure that they do not contribute to conflicting goals. An organization may

have core competence in manufacturing processes that produce engineering

products of unique specifications very difficult for competitors to match or imitate.

But, the company may not be able to gain competitive advantage from this

unless it is able to take care of its inbound logistics, outbound logistics and

marketing and sales. It is the combined effect of all these activities which creates

or destroys value.

Organizations can effectively use value chain analysis to identify the weak

links (and also the strong links) in the chain for further analysis, review and

necessary action. In using the value chain, an organization should concentrate

on two aspects. First, it should ascertain how different activities, both primary

and support, are being performed so that contribution of each activity to

organizational objectives or goals can be measured. If a particular activity is not

contributing satisfactorily, required changes can be made in that. This is the job

of strategic management. The second aspect is the coordination or integration

of various activities into a cohesive value chain. Many companies perform

individual activities efficiently, but, in the absence of a proper coordination

mechanism, their overall effectiveness is low. The solution to this is integrated

value chain. Many companies are re-engineering their organizational processes

for performing various activities in their value chain in an integrated way.7 Value

chain analysis of Hero Cycles is given as an example in Box. 6.1.



Box 6.1: Value Chain Analysis of Hero Cycles

Hero Cycles is a single product company and concentrates exclusively on

manufacturing bicycles. Hero Cycles has positioned its product as low-

priced, functionally useful and suitable for mass marketing. Its strategy is

based on overall cost leadership and has adopted commensurate strategies

for all activities in the value chain to become the most competitive in the

industry. Value chain analysis of Hero Cycles is given here in terms of

primary activities and support activities.

Primary Activities

The first primary activity in the value chain is inbound logistics. This involves

inward movement of different types of materials. These materials are divided

into three categories: raw materials (mostly steel); components requiring

further machining at the company’s plant; and, components and parts (like

tyres, tubes and other accessories) which can be assembled without any

further processing. The company saves cost in inbound logistics in several

ways. First, except for some critical components, it procures components

from small-scale manufacturers in the neighbourhood which enjoy cost

advantage in terms of lower overhead and also transportation. Second, the

company pays its vendors in cash and enjoys cash discount. Third, the

company has trained many component manufacturers and because

component manufacturing does not involve high technology, they produce

quality components at reasonable cost.

In operations, the company saves cost through higher productivity which is

achieved through motivated and loyal workers. In few cases like rim

manufacturing, automation helps higher productivity.

In outbound logistics, Hero Cycles has adopted just-in-time approach for

finished products in which bicycles are transported within one week of their

manufacturing. The company has appointed stockists in almost all cities of

the country to make outbound logistics more effective.

In marketing and sales, the company has reduced the number of

intermediaries in its distribution channel and goes directly to the stockists

and, through the stocktists, to customers. The company believes that in

the present competitive environment, satisfied customers are the best

source of publicity and promotion. This way, marketing and selling cost of

the company is very low, if not negligible.



In service, the company does not have to do much in terms of managing

the activity because bicycle requires very little after-sales service.

Support Activities

Hero Cycles conducts various support activities in such a way that it either

saves cost on these activities directly or they provide strong support to

primary activities.

Firm infrastructure which includes general management, finance, accounts,

etc., performs efficiently. The company is able to achieve significant cost

saving in finance area. Since it is a cash rich and debt-free company, it

does not have to bear any interest burden in contrast to some others in the

industry.

In human resource management, the company is far superior to its industry

competitors, and its HR policies and practices can even be the envy of

many organizations outside the bicycle industry. The company’s HRM

practices are based on one basic value: employees even at the lowest

level are treated at par with owners and shareholders and top-level

managers. Even the chairman remembers the names of workers and calls

each of them by his/her name. This infuses a feeling of belongingness

among the employees.

In technology development, the company has adopted a policy of

informalization rather than structuring too many processes and systems.

Its R&D activities are always aimed at making bicycles more functionally

useful rather than adding styles and colours which are reserved for cycles

for the export market.

In procurement, there are two centralized systems; one for human resource,

and the other for physical resource. Procurement system for physical

resources gives ample support to inbound logistics.

In conclusion, it can be said that Hero Cycles’ value chain provides high

value to its customers and also to the organization. This differentiates the

company from its competitors.

Activity 2

Having read the value chain analysis of Hero Cycles, choose another

company and compare its value chain with that of Hero Cycles.




9. The chain of activities that an organization performs to meet customer

demand is called _________.

10. The various activities in a value chain can be divided into two broad

categories:

(a) primary and secondary activities

(b) primary and support activities

(c) high-level and low-level activities

(d) priority and non-priority activities

11. Inbound logistics, operations, outbound logistics, marketing and sales

and service are classified under

(a) primary activities

(b) secondary activities

(c) tertiary activities

(d) support activities

12. Activities that help to improve the ‘effectiveness or efficiency’ of primary

activities are known as _______.

6.6 Cost Analysis

Price or market competitiveness of a product or business depends on its cost

competitiveness. Cost competitiveness itself is a competence or capability.

Therefore, cost management becomes a very important strategic function of an

organization.

Cost competitiveness implies two things—cost efficiency and cost

effectiveness. Both may appear same or similar as concepts, but analytically

the difference between the two is quite significant. Efficiency is an input-output

relationship—how much has been produced or achieved per unit of input or

cost. Given an input or cost level, higher the output, more efficient is the

production process. Conversely, cost efficiency may be defined as the level of

resources or cost required to produce a particular output or create a given

value. So, lesser the resources or cost, more efficient is the value creation

process. Effectiveness is more plan-output relationship—how much of the plan

has been fulfilled or realized given a resource level or cost. Effectiveness,



therefore, is the ability to contribute to the defined level of objectives or goals or

to produce results.

Both cost efficiency and cost effectiveness are important dimensions of

cost management. Cost efficiency and cost effectiveness are not exclusive to

each other. So, companies can simultaneously aim at cost efficiency and cost

competitiveness which can lead to cost competence. Cost competence, achieved

through proper cost management, can also contribute to cost efficiency and

cost effectiveness (Figure 6.3).

Figure 6.3 Cost Management, Cost Competences, Cost Efficiencyand Cost Effectiveness

6.6.1 Cost Efficiency

Various factors contribute to cost efficiency in an organization. These may even

include factors which are not directly related to cost or cost management like

general work environment or culture in the organization, motivation levels of

managers, approach of the top management, etc. However, here we shall

consider the factors that are directly related to cost competence or cost efficiency.

Four major factors may be identified: economies of scale, supply cost or cost of

raw materials and inputs, product or process design, and experience or

experience effect (Figure 6.4).

Figure 6.4 Sources of Cost Efficiency

Source: G Johnson, and K Scholes, (2005), 166.



Economies of scale: We know from economics that economies of scale

are the most conventional and, also a very important source of cost efficiency.

In manufacturing organizations, fixed cost (per unit of output), which initially

remains very high, starts going down progressively as output increases. Because

of this, average cost of output decreases as output increases, or the scale of

operations increases. This also means increase in capacity utilization of plant

and machinery. In non-manufacturing organizations or non-manufacturing

activities, economies of scale can be effected through mass advertising, mass

marketing, extensive distribution, etc. Economies of scale can also be achieved

through global partnering and global networks. Many MNEs sustain their

competitiveness in the market through scale advantage.

Supply cost: Costs of raw materials and various inputs constitute supply

cost. Inputs generally include raw material inputs or intermediate inputs and

energy inputs. In an extended sense, these inputs can include factor inputs like

labour also. In highly raw material-intensive industries like steel, cement and

non-ferrous metals, supply costs constitute a very high proportion of total cost

of the product and, therefore, become a very important determinant of the level

of cost efficiency. In these industries, location influences supply cost because

transportation becomes a significant component of total raw material cost. This

is the reason why, in these industries, many plants are located near the raw

material source or mines. This gives cost advantage to companies. In such

industries, ownership of raw material can also give definite cost advantage.

This is why steel manufacturers like Tata Steel and nonferrous metal

manufacturers, like NALCO, BALCO, and HINDALCO, have their own captive

sources of raw materials (ores). In fact, NALCO, primarily because of its captive

sourcing of high quality bauxite, is one of the lowest cost producers of aluminum

in the world. Even in those industries which are not highly raw material-intensive,

supply cost management becomes an important determinant of cost advantage

or cost disadvantage. Inventory (of raw materials, components and spares)

planning and management are also part of this. Companies are becoming

increasingly aware of this. The automobile sector is a good example. All Japanese

automobile manufacturers have established close linkages with their vendors—

suppliers of automobile ancillaries—through different kinds of partnerships and

alliances and implementation of JIT principles. Maruti in India is also a very

good example. Companies are also reducing the number of vendors to make

the raw material supply chain more cohesive and cost efficient.

Product/process design: Product design starts at the R&D stage even if it

is an imitation. Many feel that product design is the first step in efficient cost

management, because the nature of the product determines, to a large extent,



the raw material and other input requirements and supply cost. Cost efficiency

in production processes can be achieved through better process engineering,

increase in productivity (depends partly on the technology level) and better

working capital management. Many companies have achieved cost efficiency

through these methods.

Cost competitiveness through product design need not, however, be

confined to manufacturing or production process alone. Innovative product design

can lead to cost saving through its influence on other parts of the value chain

also like distribution or after-sales service. Canon proved this in its battle with

Xerox. Xerox’s competitive advantage was built on its service and support

network. Canon designed a copier which needed far less servicing8 and, through

this, made one of the strong competence areas of Xerox largely redundant. In

the process, Canon also achieved cost efficiency by spending much less on its

service network.

Experience: Experience in any activity in an organization can be an

important source of cost advantage or cost efficiency—be it manufacturing or

any other functional area. Many studies have been conducted to establish the

relationship between cumulative experience gained in an organization and its

unit cost. The relationship is generally expressed as an inverse relationship

between cumulative output and unit cost—unit cost decreases as cumulative

output increases.

This is shown in the experience curve (Figure 6.5).

Figure 6.5 The Experience Curve

The experience curve is the result of two major factors, namely, the learning

effects and economies of scale. Learning effects refer to cost saving which

comes from learning by doing. Labour, for example, learns through repetitive

processes, how to perform a task more efficiently on the shop floor or in assembly



lines. Due to this, labour productivity increases and this leads to cost reduction

or cost efficiency. Similarly, in a new production process, management learns

over time, how to manage the new operations more efficiently; and, management

efficiency eventually leads to cost efficiency. Same applies to operations like

logistics. Economies of scale as mentioned above contribute to cost reduction

by distributing fixed cost over larger output.

Learning effects, however, may die out after some time. Some feel that

learning effects are really important during the start-up period of a new process.

Even if it is a complex assembly process, workers may almost reach perfection

after a few years, and all effects on the experience curve may cease after two or

three years. Any further downward slope of the curve (that is, cost reduction) may

occur only because of economies of scale which can continue over larger output.

In a cost-conscious organization, all the four major factors, i.e., economies

of scale, supply cost, product/process design and experience may play active

roles for achieving cost efficiency. However, economies of scale and experience

effect can occur only after an organization has been in operation for sometime.

Newly launched companies or products must concentrate on product/ process

design and supply cost and try to reduce the experience cycle through a more

efficient management system.


13. Cost competitiveness implies two things_______and __________.

14. Factors like economies of scale, supply cost or cost of raw materials and

inputs, product or process design, and experience or experience effect

contribute to __________in an organization.

15. The more the resources or cost, more efficient is the value creation

process. (True/False)

16. Companies that achieve cost efficiency and cost competitiveness also

achieve _________.

6.7 Financial Competence Analysis

Financial competence or financial health of an organization can be analysed

with the help of various financial ratios. Financial ratios are computed from a

company’s income statement and balance sheet. Comparison of ratios over

time, and with industry averages, give meaningful statistics which can be used



to identify and analyse or evaluate financial strengths and weaknesses. Various

financial ratios of an organization can be classified into five major categories:

(a) Liquidity ratios

(b) Leverage ratios

(c) Activity ratios

(d) Profitability ratios

(e) Growth ratios

Liquidity ratios relate to current assets and liabilities and indicate an

organization’s short-term obligations. Leverage ratios pertain to debts and show

the extent to which an organization has been financed by debt. Activity ratios

relate turnover to resources and measure how effectively an organization is

using its resources. Profitability ratios pertain to returns and margins and show

different measures of returns/margins on sales and investment. Growth ratios

relate to organizational growth indicators and measure an organization’s growth

in sales, income, etc.

Ten key financial ratios for a company are given below:

1. Current ratio 2. Debt-to-equity ratio

3. Inventory turnover ratio 4. Total assets turnover ratio

5. Gross profit margin 6. Net profit margin

7. Return on total assets (ROA) 8. Return on equity (ROE)

9. Earnings per share 10. Price-earnings ratio

Generally speaking, higher the values (or percentages) of the above ratios

(except debt-equity ratio), better are they as indicators of financial competence

or health of a company. The most desirable ratios for a company would depend

on factors like nature of the company’s business, market or competitive situation

and the industry average. Financial ratio analysis should be carried out by

financial analysts in the company or the strategic planning group or outside

consultants. Such analysis should not be done in isolation; this should be done

in relation to other resources and competences to optimize overall internal

competence of an organization.

Financial ratio analysis, however, is not without limitations. Financial ratios

are based on accounting data, and, companies differ in their treatment of items

like depreciation, inventory valuation, reserves, tax provisions, R&D expenditures,

etc. These factors can affect comparative ratios. Therefore, conformity to industry

ratios does not automatically mean that a company is performing well. Similarly,



deviations from industry averages also do not indicate that a company is doing

badly. For example, a high inventory turnover ratio can indicate efficient inventory

management and, a strong working capital position, but, it can also mean a

serious inventory shortage and a weak working capital position.9


17. Financial ratios are computed from a company’s ________statement and

balance sheet.

18. Financial ratio analysis should be done in relation to other resources and

competences to optimize overall internal competence of an organization.

(True/False)

6.8 External Sources of Competence

Not many companies can hope to possess all the competences required to

survive in today’s highly complex and rapidly changing market. Many

organizations are, therefore, entering into alliances, joint ventures or network

relationships with others within their business system to overcome identified

internal weaknesses.

Studies conducted by the Nordic Business Schools on the performance

of Swedish firms in international markets revealed that many companies faced

a competence inadequacy situation, e.g., not owning appropriate technology or

not having the marketing skills to enter a new market segment. And many of

these companies sought solutions to this problem by entering into network

relationships with other companies (Hakansson, 1989). Studies also showed

that one of the commonest forms of business networking was forming alliances

to achieve faster rates of product and/or process innovation.

Conway (1987) has constructed a framework in an attempt to define

various potential participants (or actors) whom a company might like to bring

together for formation of a network to overcome an identified innovation

competency problem. These include :

(a) Upstream innovators found among the company’s suppliers.

(b) Downstream actors found within the company’s customer base.

(c) Horizontal actors found from companies within the same market

system.



(d) Knowledge participants such as universities and research institutes.

(e) Regulatory actors, e.g., governments or statutory bodies.

(f) Environmental actors, e.g., environmental pressure groups.

The implications of the Conway framework are that the company which

feels that internal innovation competences are not sufficient to adequately support

future business plan, is now able to consider the formation of external alliances

to overcome this problem.

6.8.1 Strategic Outsourcing

‘Capability sourcing’ is becoming the new trend. It is no longer a company’s

ownership of capabilities which matters, but, what matters is its ability to make

the most of available critical capabilities whether they reside inside or outside

the company. Outsourcing is becoming so sophisticated that even core functions

like engineering, R&D, manufacturing and marketing can—and often should—

be moved outside. And, this trend is changing the way companies think about

their organizations, their value chains and, their competitive position.10

Experience of companies like Chrysler, American Express and 7-Eleven

(the US retailer) have shown that strategic outsourcing can significantly improve

a company’s competitive position.

Gottfredson, Puryear and Phillips (2005) have suggested a framework

for capability sourcing or strategic outsourcing. To complete the outsourcing

process, a company has to move progressively in three steps.

The first step is to identify the competences or capabilities of business,

which constitute the core of the core of a company. These are activities which

the company does better and cheaper than its rivals. For 7-Eleven, the core of

the core is in store merchandising and product ordering; for Pfizer, it is developing

and marketing pharmaceutical compounds; for American Express, it is identifying

customer segments and card offering tailored to them. Everything exists in the

company to support the core of the core.

In deciding what to outsource, and what not to, a company should consider

two factors; first, whether a capability is proprietary, that is, possessed only by the

company and, also unique to itself and second, whether it is common enough

and possessed by many in the industry. Based primarily on these two factors, a

company should decide which capabilities have high outsourcing potential and

which should remain under the company’s control. This can be seen more clearly

in a sourcing probability map. This is given in Figure 6.6. The vertical axis of the



map depicts how proprietary a process or function or capability is; the horizontal

axis shows how common a process or function is. The less proprietary and more

common a process or capability is, the stronger a candidate it is for outsourcing.

Figure 6.6 Outsourcing Probability Map

Source: M Gottfredson, R Puryear, and S Phillips, ‘Strategic Sourcing: From Periphery

to the Core’, Harvard Business Review (February, 2005), 138.

Activities or capabilities which appear in the lower left segment of the

map are strong prospects for captive sourcing. Such capabilities may even be

candidates for ‘insourcing’, that is, if a company feels that it is really the best at/

in a given process or capability, it should have an opportunity to perform the

activity for other companies also. A good example of successful insourcing is

FedEx. FedEx plans and manages inbound transportation for more than 1500

product suppliers into 26 General Motors power train facilities. This capability

puts FedEx at the leading edge of the $225 billion logistics outsourcing industry.11

Capabilities, which fall in the upper right segment of the map, are strong

candidates for outsourcing. Capabilities, which fall in the middle of the sourcing



map, generally require more detailed analysis of the company and the industry.

An organization needs to consider such factors as substitute products, standards

and regulations to make out how these capabilities will shape in the future. A

decision for outsourcing should be based on these considerations.

The second step in the capability sourcing process is for a company to

decide how it should outsource the identified capabilities. There is a cost for

capability sourcing: there is a quality angle also. How does a company decide on

these factors? A capability assessment map (Figure 6.7) can be a good guide.

Figure 6.7 A Capability Sourcing Map

Source: M Gottfredson, R Puryear, and S Phillips, ‘Strategic Sourcing: From Periphery

to the Core,’ Harvard Business Review (February, 2005), 138.

The map depicts each capability according to its cost and quality relative

to the top-performing competitors or suppliers (industry median). This map helps

a company decide which key capability gaps it should fill. For example, activities

or capabilities which fall in the upper-left segment (relatively high cost capabilities

whose quality levels exceed requirements) should be outsourced to low-cost

providers—even if it means a reduction in quality.



The third and final step in capability sourcing is a ‘reality check’ or more a

feasibility check in terms of location or physical proximity of the capability to be

outsourced. For example, if it is a tangible product or technology, physical

proximity becomes an important factor because of cost and time implications.

But, for intangibles like R&D, design, engineering, etc., physical proximity may

be much less important. A company, however, has to look into this reality or

feasibility aspect.

According to Gottfredson, Puryear and Phillips, if a company goes through

the proposed three-step process, it will have the right framework for a

‘comprehensive capability sourcing strategy.’


19. One of the commonest forms of business networking is forming ______to

achieve faster rates of product and/or process innovation.

20. In order to improve their competitive position, companies are adopting

______, that is, moving one or more of the functions in the value chain

outside.

6.9 Case Study

Southwest Airlines: Excellence through Integrated Cost Management

According to many, Southwest Airlines is the best airline in the US and one

of the best in the world. Analysts and even competitors attribute this to

Southwest’s low-cost strategy. But, closer analysis reveals that it is integrated

cost management or leadership which gives the company its competitive

position in the global airlines industry and is also the source of its profitable

operations.

Six strategic factors contribute to Southwest’s integrated cost management

leadership. These are: very low ticket prices; limited passenger service (for

example, no meals, no baggage transfers); lean and highly productive

ground and gate crews; frequent, reliable departures; high aircraft utilization;

and short-haul, point-to-point routes between mid-sized cities and secondary

airports.* These factors or activities are linked in a kind of value chain that

leads to highly effective cost management. This also results in high

profitability.



It is often asked, how does Southwest make high profits? The answer is to

be found, in addition to other factors, in price risk management or hedging

of aviation fuel price. Southwest has concluded hedging agreements till

2009 with hedge price not exceeding $35 per barrel for at least 25 per cent

of its annual fuel requirements. It can also exercise ‘option’ for about 25 per

cent of its fuel needs for $26 per barrel. In a highly volatile crude oil/ fuel oil

market, price hedging gives very significant cost advantage to a company.

Due to its successful integrated cost management, Southwest has become

highly competitive in the airline industry. Many ‘full service’ airlines have

tried to adopt Southwest’s cost strategy, but they have remained

unsuccessful, primarily because they have not been able to properly emulate

or integrate various cost management actions/ functions. Kelly, Southwest’s

CEO, said: ‘I feel very good about our competitive position as long as we

continue to improve’. In Southwest Airlines, cost management, competitive

action and growth are closely interlinked.

Integration of, and fit among, critical activities is key to sustainable

competitive advantage of all Companies, including Southwest Airlines. Porter

describes it like this:

Strategic fit among many activities is fundamental not only to competitive

advantage’, but also the sustainability of that advantage. It is harder for

a rival to match an array of interlocked activities than merely to imitate

a particular ... approach.**

* Hitt et al, Management of Strategy (Cengage Learning, India Edition, 2007), 107.

** M E Porter, ‘What is Strategy?’ Harvard Business Review, 74, no. 6 (1996).



6.10 Summary


• For effectiveness, all management strategies should be commensurate

with internal competencies or capabilities of a company. Four major types

or levels of competence are: core competence, distinctive competence,

strategic competence and threshold competence.

• Resources create competences. Resource also limits competences

because of resource crunch. In strategic management analysis,

organizational resources can be classified into four major categories:

physical resources, financial resources, human resources and intangible

resources.

• Various competences and resources of an organization can be integrated

into a chain of activities which performs to meet customer demand. This

chain of activities is a value-creating process and is more appropriately

described as a value chain.

• Activities in the value chain are divided into primary activities—activities

directly concerned with the creation of a product or customer value—and

support activities.

• Price or market competitiveness of a product on business depends on

cost competitiveness, Cost competitiveness itself is a competence or

capability. Cost competitiveness implies two things—cost efficiency and

cost effectiveness.

• Financial competence or financial health of an organization can be

analysed with the help of five categories of financial ratios: liquidity ratios

(relate to current assets and liabilities), leverage ratios (pertain to debts),

activity ratios (relate turnover to resource), profitability ratios (returns/

margins on investment/sales) and growth ratios (growth indicators).

• ‘Capability sourcing’ is becoming the new trend and it can significantly

improve competitive position.

6.11 Glossary

• Competence: The ability to perform a task or achieve some objectives.

• Core competence: The special or unique internal competence of a

company.



• Distinctive competence: The combination of individual technologies and

production skills of a company.

• Economies of scale: Reduction in cost per unit resulting from increased

production, realized through operational efficiencies.

• Liquidity ratios: Ratios that measure a firm's ability to meet its short-

term financial obligations on time, such as the ratio of current assets to

current liabilities.

• Outsourcing: When a company or corporation will either buy products it

intends to resell or hire another company to perform certain functions

that would cost them too much to do themselves

• Strategic competence: The competence level required to formulate,

implement and produce results with a particular strategy, say, to outwit

competitors.

• Threshold competence: The competence level required just for survival

in the market or business.

• Value chain: Various competences and resources of an organization that

can be integrated into a chain of activities which an organization performs

to meet customer demand.


1. Distinguish between core competence, distinctive competence, strategic

competence and threshold competence. Use examples.

2. Distinguish between different kinds of resources. Which are intangible

resources?

3. What is a value chain? Analyse the roles of primary activities and support

activities in a value chain.

4. Explain the concept of cost efficiency of an organization. Analyse the

major determinants of cost efficiency.

5. State five major categories of financial ratios of a company. Explain each

of them.

6. Explain an outsourcing probability map. Use a diagram.

7. What is a capability sourcing map? Illustrate with a diagram.



6.13 Answers


1. Competence

2. Core

3. (c) Distinctive competence

4. True

5. Intangible

6. (d) Physical, financial, human and intangible resources

7. Resources

8. resource analysis or audit

9. value chain

10. (b) primary and support activities

11. (a) primary activities

12. support activities

13. cost efficiency, cost effectiveness

14. cost efficiency

15. False

16. cost competence

17. income

18. True

19. Alliances

20. strategic outsourcing


1. Four major types or levels of competence are: core competence, distinctive

competence, strategic competence and threshold competence. Refer to


2. Organizational resources can be classified into four major categories –

physical, financial, human and intangible resources. Refer to Section 6.4




3. Various activities which an organization performs to meet customer

demand can appropriately be called a value chain. Refer to Section 6.5


4. Various factors contribute to cost efficiency in an organization. Refer to

Section 6.6.1 for further details.

5. The various financial ratios of an organization can be classified into five

major categories: liquidity ratios, leverage ratios, activity ratios, profitability

ratios and growth ratios. Refer to Section 6.7 for further details.

6. To complete the outsourcing process, a company has to move

progressively in three steps. Refer to Section 6.8.1 for further details.

7. A capability assessment map (Figure 6.10) can be a good guide for a

company to decide how should it.outsource the identified capabilities.

Refer to Section 6.8.1 for further details.

6.14 References

1. Aaker, D A. 1995. Strategic Market Management. 4th edn. New York:

John Wiley & Sons.

2. Gottfredson, M, R Puryear, and S Phillips. ‘Strategic Sourcing: From

Periphery to the Core’. Harvard Business Review, February, 2005.

3. Hamel, G, and C K Prahalad. ‘The Core Competence of the Corporation.’

Harvard Business Review, May–June, 1990.

4. Hamel, G, and C K Prahalad. 1994. Competing for the Future. Boston:

Harvard Business School Press.

5. Porter, M E. 1985. Competitive Advantage: Creating and Sustaining

Superior Performance. New York: The Free Press.

6. Thompson, A A, and A J Strickland. 1994. Strategic Management: Concepts

and Cases. Texas: Business Publications.

Endnotes

1 G Johnson, and K Scholes, Exploring Corporate Strategy, 6 th ed. (Pearson Education,2005), 157.

2 G Hamel, and C K Prahalad, Competing for the Future, (Boston: Harvard Business SchoolPress, 1994).

3 A A Thompson, and A J Strickland, Strategic Management: Concepts and Cases, (1994),77.



4 A V Desai, ‘A Rival of Your Size, ’ BusinessWorld (October 9, 2000), 16.5 V Baruch, ‘HR Accounting : The Issue Can No Longer be Ignored, ’ The International

Journal of Applied Human Resource Management 1, no. 1 (2000).6 G Johnson, and K Scholes, Exploring Corporate Strategy, 6 th ed. (Pearson Education,

2005), 154.7 M Hammer, and J Champy, Re-engineering the Corporation (New York: Harper Business,

1993).8 G Johnson, and K Scholes, Exploring Corporate Strategy (2005), 167.9 F R David, Strategic Management: Concepts and Cases (2003), 140.

10 M Gottfredson, R Puryear, and S Phillips, ‘Strategic Sourcing: From Periphery to the

Core, ’ Harvard Business Review (February, 2005), 132.

11 M Gottfredson, R Puryear, and S Phillips, Harvard Business Review (2005), 139.



Unit 7 External Environmental Factors

Structure

7.1 Introduction

7.2 Caselet

Objectives

7.3 Environmental Factors

7.4 Scanning of Environment

7.5 Environment Forecasting

7.6 Environmental Opportunity and Threat Analysis

7.7 SWOT Analysis

7.8 Case Study

7.9 Summary

7.10 Glossary


7.12 Answers

7.13 References

7.1 Introduction

Companies have internal competences or capabilities that enable them to face,

among others, the external environment for formulating and implementing

corporate strategies. The external environment does not refer only to the

macroeconomic environment or broad macro-parameters like socio-economic

factors, government policy and legislations; it also includes technology, competitors,

intermediaries and suppliers; in short, all those factors or forces which together

constitute the market environment within which a company operates.

Analysis of the external environment consists of identification of

opportunities and threats, and exploiting opportunities and meeting threats based

on organizational strengths and weaknesses. Companies that do this effectively

on a regular basis become successful. Companies that ignore the environment

or do not analyse or scan the environment properly, could face disastrous results.

We have many examples of companies that ignored the changing environment

and perished as a result. Hindustan Motors and Premier Automobiles lost their

pre-eminent market position to Maruti Udyog’s Maruti 800. Mahindra and

Mahindra was shaken by Maruti’s Gypsy petrol jeeps. Television giants like

Nelco, Weston, Crown, Bush, etc., lost to companies and brands like Onida



and Videocon and new brands like LG and Samsung. Titan watches shook the

giant HMT. The Surf and Nirma story is well known.

7.2 Caselet

The Nirma success story of how an Indian entrepreneur took on the big

MNCs and rewrote the rules of business:

It was in 1969 that Dr. Karsanbhai Patel started Nirma and went on to

create a whole new segment in the Indian domestic detergent market.During

that time, the domestic detergent market only had the premium segment

and there were very few companies, mainly the MNCs.

Karsanbhai Patel used to make detergent powder in the backyard of his

house in Ahmedabad and then carry out door-to-door selling of his

handmade product. He gave a money back guarantee with every pack that

was sold. Karsanbhai Patel managed to offer his detergent powder for `3

per kg when the cheapest detergent at that time was ̀ 13 per kg and so he

was able to successfully target the middle and lower middle income segment.

Sabki Pasand Nirma…

Karsanbhai Patel had good knowledge of chemicals and he came up with

Nirma detergent which was a result of innovative combination of the

important ingredients. Indigenous method was used, and also the detergent

was more environment friendly.

Consumers now had a quality detergent powder, having an affordable price

tag.

Source: http://toostep.com/insight/success-story-of-nirma

Objectives


• Analyse the major factors of environment that impact a business

• Explain the techniques of environmental scanning

• Discuss environment forecasting

• Distinguish between environmental threat and opportunity (ETOP) analysis

and SWOT analysis

• Conduct organizational SWOT analysis using different approaches



7.3 Environmental Factors

All these and many other such cases point to an important facet of business—

sensitivity of strategy to the external environment. The major environmental

factors a business strategist should reckon with are:

• Political factors

• Economic factors

• Sociological factors

• Government policies/controls

• Technology

• Competition

• Intermediaries

• Suppliers

Competition analysis would be undertaken in detail in Unit 11. Competition

is not just an element or factor of the environment. It has more direct and vital

implications for an organization’s business and strategy. This is the reason why

competition or competitors would be analysed separately in a more

comprehensive way. We shall, however, make references here about competition

as a factor of environment. All other major environmental factors mentioned

above are discussed below.

7.3.1 Political Factors

Political factors or political conditions can have significant impact on industry,

business and the corporates. Political stability improves business environment

and encourages economic and business activities. Political instability produces

the opposite effects. Political factors do not refer to only national political

conditions or relations, but also to international relations. Improved political

relations between the US and China in the mid-70s resulted in trade agreement

between the two countries. The trade agreement provided opportunities to US

electronics manufacturers to commence operations in China. There are many

instances where deteriorating political relations between countries (India and

Pakistan), have affected business conditions.

Rubock (1971) has developed an analytical framework for identifying and

assessing political risks which may affect business conditions. Sources of political

risks can be many. Major risk factors identified by Rubock are: electoral majority



of the party in power; internal dissensions within the ruling party; strengths of

the parliamentary opposition parties; conflicting political ideologies; insurgencies

in border areas, international power alignments and alliances, etc.

Given below are two contrasting Indian examples of the impact of political

environment on business.

The progressive political philosophy of Chandrababu Naidu during his

tenure as the chief minister of Andhra Pradesh led to the creation of ‘Cyberabad’.

IT companies have found Hyderabad, nicknamed by the media as ‘Cyberabad’,

to be the most hospitable location for development of IT, mostly because of

highly supportive political climate. Chandrababu had taken keen personal interest

in IT; and, had encouraged and ensured use of IT in governance by simplifying

rules and procedures, offering concessions and building good supportive

infrastructure.

The Ayodhya-Babri Masjid episode became a political issue and provoked

violence in different parts of the country, and caused serious law and order

problems during December,1992 and January 1993. Apart from the

apprehensions of political instability, the events disrupted transport, slowed down

industrial production and growth of exports, and, also reduced government

revenue.1

7.3.2 Economic Factors

Economic environment is an amalgam; it comprises all aspects or areas of

economic activity—national income (GDP or GNP), the manufacturing sector,

the services sector, capital or financial sector, investment, savings, etc. All these

areas or sectors together influence the structure and trends of the economy

and determine the economic environment.

The major economic factors, which influence any market system, are:

(a) GDP or GNP

(b) Income distribution or income levels

(c) Business cycles or different phases of the cycle like boom, recession,

depression and recovery

(d) Price levels of goods and services, i.e., whether the trend is

inflationary or deflationary

(e) Rate of interest on market borrowing

Each of these and other such macroeconomic factors can be an

opportunity or a threat to a company depending on how it reacts to or exploits



the factor. For example, inflationary trends can generally pose a serious threat

to a company’s competitiveness in terms of input costs and selling prices. But a

smart company with a definite strategy may use this as an opportunity or

challenge to analyse all its cost drivers (activities which affect the cost structure)

to minimize cost and increase competitiveness. Porter (1980) has identified a

number of cost drivers:

• Economies of scale

• Pattern of capacity utilization

• Linkages with suppliers and channels

• Coordination among different activities

• Interrelationships with other business units within a company

• Timing of an activity

• Management of institutional factors like government regulations, tax

holidays/rebates, tariffs, etc.

7.3.3 Sociological Factors

Sociological factors include demographic factors or population profiles, value

system in society and lifestyles of individuals.

Demographic factors or population profiles reflect age and sex composition

of the population, occupational patterns, literacy levels, etc. Demographic

parameters are a very intimate component of the market environment because

they directly affect consumer behaviour. For example, today there is a lot of

focus on the youth and many products and brands are promoted for the young

generation. Apart from Pepsi (which has been specially positioned on the age

factor), mobikes Hero Honda, TVS Suzuki and Kawasaki Bajaj—all are focusing

on this segment. Readymade garment companies are invading the children’s

sector. Many FMCG brands are targeted at women of particular age groups.

Occupational patterns and literacy levels are also influencing consumption

patterns of males and females.

Besides demographic factors, changes in the value system and lifestyles

greatly affect purchasing patterns. Strong family bonding and love for family

have been a big influencing factor in the Indian market. The Vicks Vaporub

theme (the child with cough and cold and the mother’s concern for him) is a

very good example of exploit ing core Indian values for marketing

communications.



The international exposure of Indian consumers is increasing and changing

lifestyles are getting reflected in preferences for international brands of ready-

made garments (Peter England Pizza Hut, Baskin Robbins, etc). These are

important environmental developments for the strategists in the FMCG and

services sector.

7.3.4 Government Policies and Controls

Government policies have a more direct impact on business decision and

marketing strategies than macroeconomic indicators like GDP or GNP.

Government regulations and controls have even more immediate impact than

government policies. Policies and controls can be of three types as shown in

Figure 7.1.

Government Policy

Physicalpolicy controls)

Monetarypolicy

Fiscalpolicy

Bankrates

Creditcontrols

Taxes Subsidies Investmentand

production

Pricesand

distribution

Figure 7.1 Government Policies and Controls

At any point of time, the corporate tax structure, various lending rates of

banks and financial institutions, monetary controls like the bank rate, price

controls, etc., offer a particular economic or business climate. An extension of

the regulatory controls is to be found in economic or business legislation. Two

good examples of this are the Foreign Exchange Regulation Act (FERA) and

Monopolies and Restrictive Trade Practices (MRTP) Act. Given these policies

and controls, the corporate management has to match these through appropriate

strategies for cost control and effectiveness, pricing strategy, marketing

efficiency, etc.

7.3.5 Technology

Technology, as an environmental factor, influences strategic planning and

management in a number of ways.

Technological changes lead to the shortening of product life cycles and

create new sets of consumer expectations. Electronic products are a good

example. This sector is experiencing the most rapid changes today. One can



clearly see the technological revolution in the colour TV market. Sometimes,

advance signals on technological developments are available through research

and development and industry/trade journals and magazines. Companies in

the pharmaceutical industry, for example, are continuously aware of

developments in new formulations and drugs in the world through medical

journals and periodicals. Developments in information technology are greatly

affecting the competitive position of companies.

In a different way, technological developments affect a company’s raw

material, packaging, operations, products and services. For example,

developments in the plastics and packaging industry have brought in new

packaging in the form of tetrapacks, pet bottles, cellophane, etc.

This has made the packing more attractive, carrying of the product more

convenient and has definitely reduced the cost of packaging and the product.

Similarly, containerized movement of cargo, deep freezers and trawlers have

influenced the operations of the companies.

Technological development also provides an opportunity to companies to

develop new products. On the other hand, companies which ignore these

developments face a crisis and eventually may even face extinction. The Indian

automobile industry gives a good illustration.

With the introduction of Maruti 800 which caught the imagination of

consumers, Hindustan Motors (Ambassador) and Premier Automobiles (Padmini)

had to improve their vehicle performances in terms of fuel efficiency, driving

comfort, aesthetic appeal, etc. But what they did was to bring in peripheral

changes only and those were not enough. The result: Padmini is extinct today

with Ambassador following suit (some extension of life has been given to

Ambassador by the government and the public sector).

7.3.6 Intermediaries

The primary role of intermediaries is to link the producers to the end-user market

in those cases where the latter are unable or unwilling to manage the delivery

or the distribution process.

Intermediaries play a really big role in consumer goods2, particularly in

FMCGs. FMCG majors such as Kellogg’s, Heinz and Unilever (Hindustan

Unilever in India) and many other companies utilize the services of large

supermarket chains to distribute their products to households.

The selection of appropriate intermediaries is a matter of marketing choice

and strategy. A company has to take into account a number of factors while



selecting an intermediary or a channel. First, a company should take into account

the purchase behaviour or pattern within the end-user market. For example,

consumers may be prepared to travel up to 50 or 100 km to buy a specific brand

of furniture but may be unwilling to exhibit the same behaviour while purchasing

a packet (or box) of detergent. So, the location of the intermediary is important.

Second is the willingness of the intermediaries to carry their goods. The problem

currently faced by many FMCG companies in the US and Europe is that the

supermarket chains want to expand sales of their own-label products and brands

and, therefore, reduce the number and volume of equivalent branded items of

other companies in their stores. Another problem may be the supermarket chains’

preference or commitment to promote some other company’s brands. The third

factor is the capability of an intermediary to provide appropriate support services

to the market. There are many discount retailers who are not willing to offer

installation or repair services on the electrical goods they sell, and this almost

boils down to negative marketing.

It is important for companies to identify shifts in consumer behaviour and

emerging trends in customer-buying patterns and the intermediaries’ willingness

to service the changing end-user market. An example of consumer behaviour

shift and changing expectations is the field of personal computers (PC). In the

PC market in the US, many large customer organizations now expect distributors

to go beyond just ‘selling boxes’ and give advice on selection, installation and

post-sales operations of sophisticated computer systems. A number of

distributors, known as value added resellers (VARs) are now available who

specialize in supplying certain types of systems and/or serving particular market

segments.

In the late 1980s, IBM’s policy of dealing directly with the industrial

customers might have resulted in their being rather slow in building strong

relationships with leading VARs. Many feel that because of such a decision,

sales were adversely affected particularly in those sectors which preferred to

purchase their systems through VARs instead of dealing directly with computer

manufacturers.

7.3.7 Suppliers

Suppliers to a company can be raw material suppliers, energy suppliers, suppliers

of labour and capital; and the suppliers can affect the competitive position and

business capabilities and therefore, the corporate strategy of a company.

According to Porter, the relationship between suppliers and a company

represents a power equation between them. The equation is based on, or



governed by, the market environment, industry conditions and the extent to

which one is dependent on the other.

The buyer company has better bargaining power under the following

conditions:

• The buyer is a monopolist (single seller) or a monopsonist (single buyer)

and buys large volumes relative to seller’s sales.

• The buyer can easily switch vendors — it has a choice of alternative

sources of supplies.

• The supplier’s product is not very important to buyer’s finished products/

services.

The supplier has stronger bargaining power in the following situations:

• The supplier is a monopolistic or an oligopolistic firm.

• The supplier’s product is a significant input to the buyer’s finished product.

• The buyer is not an important customer of the supplier.

• The supplier’s products are well differentiated and it has built up significant

switching costs.

A company should evaluate the two sets of strengths or bargaining powers

and ascertain where it stands in the power equation with a particular supplier

and then decide on the choice of the supplier depending on the cost effectiveness,

indispensability, etc. This is the general or classical prescription.

But, the trend is changing. Now the slogan is: collaborate with the suppliers.

Companies are taking equity in supplier companies; some are even taking part

in the management of the vendor companies. The Japanese are leading the

way. But, even in such cases, the initial choice of the supplier may depend on

the relative power equation.


1. The national income (GDP or GNP), the manufacturing sector, the services

sector, capital or financial sector, investment, savings, etc., constitute the

________environment.

2. Occupational patterns and literacy levels are also influencing _______

patterns of males and females.

3. Technological changes lead to the shortening of product _______ and

create new sets of consumer expectations.



4. In which condition does the buyer’s company have better bargaining

power

(a) When the buyer is a monopolist (single seller)

(b) The buyer can easily switch vendors

(c) The supplier’s product is not very important to buyer’s finished

products/services.

(d) All the above

7.4 Scanning of Environment

In any business or product category, a company’s task of finding market

opportunities is generally constrained by lack of sufficient information about the

environment—government policies and controls, the customers, the competitors,

channel members, etc. Therefore, understanding the environment and properly

analysing or scanning it are vital for the formulation of any strategy and, more

so, for the success of it. Scanning is a continuous process because it involves

analysing changes and sometimes even forecasting the impact of developments

in the environment. Some call it external audit.3

Various environmental factors or influences are generally expressed in

one or more of four forms — events, trends, issues and expectations. Events

are specific occurrences which take place from time to time like elections,

formation of government, bilateral trade talks or negotiations, etc. Trends are

prevailing tendencies, courses of action or events taking place over time like

movements in national income, inflationary tendencies, growth in industrial

production, etc. Issues are current concerns about events and/or trends like

high/low growth of national income, high rate of inflation, low rate of savings,

stagnant industrial production, etc. Expectations are hopes or demands of

different interest groups like the government expects companies to be constantly

aware of their tax obligations and social responsibilities. So, while planning

environmental scanning, organizations should analyse each important

environmental factor in terms of events, trends, issues and expectations (as

applicable).

The task involved in scanning the environment is to assess the possible

impact of various environmental factors in an interaction matrix or an impact

linkage matrix. Such a matrix is shown in Figure 7.2.



Liberal credit forimportant customers

Price cut/Discount

Increasing dealernetwork

Focus on customersatisfaction

Intensifyingadvertising

New product launch

Customer Choicesand Preferences

TechnologyGovernment

PolicyRate ofInterest

Controls CompetitionEnv.

FactorStrategyFactor

High Impact Linkage Impact Linkage Normal Weak or Minimal Impact Linkage

Figure 7.2 Environmental Impact Linkage Matrix

The matrix in Figure 7.2 has been constructed for six major environmental

factors and six business strategy factors. The matrix can be extended to more

number of factors (by using a computerized model) to make it more

comprehensive. Such matrix should be developed by the strategic planning

group. Establishing the impact linkages correctly is difficult and involves objective

assessment of various factors and working of linkage values as far as possible.

Judgemental factor of the planning team, however, cannot be completely ruled

out. But, once constructed, the matrix builds the right linkages between the

environment and corporate strategies or action plans. On the basis of this, the

possible outcome of a particular strategy can be more easily anticipated or

worked out.

7.4.1 Sources of Information for Environmental Scanning

The first step in scanning the environment is to identify proper sources of

information to be used for scanning. Because environmental factors are too

diverse, even for scanning the relevant or operating environment, an organization

has to tap the right sources of information. Sources of information can be primary

or secondary; internal or external; formal or informal; written or verbal. Even

market gossip can be a good source of information or signal for possible changes

in the environment. Various sources of information for environmental scanning



can be classified into some major types or categories. These are mentioned

below in terms of primary and secondary sources and internal and external

sources.

Secondary or Published Sources

1. Internal: Annual reports, corporate strategic plans, company files and

documents.

2. External: Different types of publications like books, journals, magazines,

newspapers, government publications, industry association reports and

newsletters, annual reports of competitors, etc.

Primary Sources

1. Internal: MIS, special databases, managers/employees

2. External:

• Stakeholders like customers, competitors, marketing intermediaries

or channel members, suppliers; and also industry trade associations,

government agencies, etc.

• Mass media like radio, television and the Internet Special studies

conducted (for the company) by consultants, market research

agencies, educational institutions, etc.

• Surveillance or intelligence by ex-employees of the company,

employees or ex-employees of competitors, industrial espionage

agencies, etc.

Activity 1

Choose a company – an automobile, cell phone or FMCG producer – and

conduct an environmental scanning on its behalf. You will need to express

various environmental factors in terms of events, trends, issues and

expectations in an interaction matrix.


5. ________is a continuous process that involves analysing changes and

sometimes even forecasting the impact of developments in the

environment.

6. Scanning is also called______by some people.



7. Prevailing tendencies, courses of action or events taking place over time

like movements in national income, inflationary tendencies, growth in

industrial production, etc., are known as _______.

8. The first step in scanning the environment is to identify proper sources of

________to be used for scanning.

7.5 Environment Forecasting

To understand the emerging or evolving environment better, some have

suggested environmental forecasting. Any forecasting is a hazardous job; and,

so is environmental forecasting. But, forecasting is a better approximation than

not knowing anything about the future. That is the reason why forecasting has

become inseparable from economic and business analysis.

In environmental forecasting, planners have to start by answering a basic

question: how far ahead should they look, that is, the time horizon for forecasting.

An approach which has been found quite useful is determining the time horizon is

‘Gap Analysis’. Gap analysis should logically be the starting point for environmental

forecasting. The gap analysis projects over time, the gap between the desired

change in strategic parameters like sales, profitability, market share, etc., and

actual change with continuation of present strategy, that is, not responding to

changes in the environment. Gap analysis is shown in Figure 7.3.

A1

A2

Gap

1 2 3 4 5

Time

Str

ate

gic

Pa

ram

ete

r: s

ale

s,

pro

fit, c

apa

city

Figure 7.3 Gap Analysis for Strategic Forecasting



In Figure 7.3, A1 shows the desired change in strategic parameter, say,

growth in sales (as per company objective or target). A2 shows projected growth

in sales with continuation of present strategy. (A1 – A

2) is the gap in achievement

of the target, and the gap starts emerging after the second year. This gap has

been created because of a new product or brand (like Nirma was introduced

and a gap was created in sales of Surf), product/brand or market expansion by

a competitor, slump in the market, etc. In the case of Hindustan Unilever, they

not only did not foresee the entry of Nirma, they had even ignored it for sometime.

That is why the battle was so long for Surf to regain its position. Correct and

timely forecasting of the environment and introduction of necessary changes in

the strategy can help to eliminate or reduce the gap.

Based on gap analysis, an appropriate technique can be chosen for

environmental forecasting. Different authors have suggested different methods

or techniques. Detailed description and analysis of different techniques can be

found in the works of these authors. Two such works or names of authors should

be mentioned here. Lebell and Krasner (1977) have described nine techniques

which range from highly mathematical or statistical techniques to structured

and unstructured opinion methods. Fahey, King and Narayanan (1988) have

mentioned 10 techniques, mostly quantitative, in their survey of environmental

scanning and forecasting. These include scenario writing, simulation and game

theory.

7.5.1 Scenario Building

Forecasting has its limitations. All forecasting is based on certain assumptions

and some database, both of which can be incorrect or imperfect. Therefore,

achieving ‘exactness’ in forecasting is hardly possible. Forecasters also realize

this. That is why, instead of exact forecasting, many have suggested alternative

scenario development which is quite common in forecasting exercises.

A scenario is a detailed and probable view of how the business environment

of an organization may develop in the future based on the analysis of key

environmental influences and factors of change about which there is a high

degree of uncertainty.4 Planners and strategists should develop alternative

scenarios and, should try to indicate the most probable scenario. Or, else,

decision makers may have to decide the right alternative.

Scenario building has to be a systematic process and it should be

completed in stages. Four major steps should be followed:



1. Identify the key environmental factors or forces which should form the

basis for scenario building. For example, three such factors for scenario

building for competitive environment may be market growth rate,

competitive situation in the industry and likely move or behavior of the

market leader. Number of factors would be, in most situations, more than

three, but, this would depend on the environmental situation to be

projected.

2. Formulate or write down the key assumptions for scenario building—

assumptions about the future pattern of environmental forces which have

been identified. In the above example, a relevant assumption can be that

there would be no dramatic change in the structure of the industry. It is

advisable to keep the assumptions low because complexity in scenario

building generally increases as the number of assumptions increases.

3. Understand the historical trend in environmental factors or forces which

have been used in assumptions. Also consider their impact on present

market conditions and likely future impact. This analysis is done to establish

a logic for the assumptions and, also to make inferences based on the

assumptions.

4. Build scenarios which are internally consistent. Build alternative scenarios;

may be, an ‘optimistic’ future, a ‘pessimistic’ future and a mainline or

‘mean’ future. Experts feel that two to four scenarios are generally

appropriate.

Some have suggested a more elaborate, step-by-step, process for

scenario development. One such sequential process is given in Figure 7.4.5

Shell’s long-term scenario building for the oil industry (‘favourable’ and

‘unfavourable’) is given in Box 7.1.

Figure 7.4 Sequential Scenario Development Process


9. The logical starting point for environmental forecasting should be _______.

10. Achieving ‘exactness’ in forecasting is always possible. (True/False)



11. A ______is a detailed and probable view of how the business environment

of an organization may develop in the future.

12. Planners and strategists should develop _______scenarios and, should

try to indicate the most probable scenario.

7.6 Environmental Opportunity and Threat Analysis

The objective of environmental analysis or scanning or even scenario building

is to identify opportunities and threats in the environment and formulate strategies

accordingly. This can be done more directly through environmental appraisal,

that is, assessing the environment for clearly identifying major opportunities

and threats. There are many methods for environmental appraisal. One such

method, suggested by Glueck (1984), is preparation of an environmental threat

and opportunity profile (ETOP) of an organization.

Preparation of ETOP involves dividing the ‘total’ environment into different

factors or sectors, and, analysing the impact of each sector on the organization.

A more detailed ETOP requires dividing each environmental sector further into

subsectors and, then, assessing the impact of each subsector on the

organization. A summary ETOP, however, may only show the major factors. An

example of ETOP is given in Table 7.1 This example is for a sports cycle-

manufacturing company operating both in the domestic market and export

market. The example relates to a hypothetical company but, is realistically based

on the current Indian business environment.6 An actual ETOP of BHEL is given

Table 7.2.

Preparation of ETOP enables planners and strategists to identify specific

sectors or subsectors which have clear impact on the organization either as an

opportunity or a threat. ETOP can also help to analyse the nature and intensity

of impact of different sectors or subsectors—favourable or unfavourable. Based

on ETOP, an organization can formulate appropriate strategies to exploit the

opportunities and counter the threats from the environment.

Conclusion : Sports cycle manufacturing is a recommended business

because the environment provides many opportunities; there is only one threat

(‘international’).



Table 7.1 Environmental Threat and Opportunity Profile (ETOP) for a Sports CycleManufacturer

Environmental Nature of impact Sector position/development

Sector

Market ↑ Industry growth rate for bicycles 7 to 8 per cent per

annum; growth rate for sports cycles 30 per cent;

largely unsaturated demand

Technological ↑ Technological upgradation in the industry in progress;

import of machinery simple

Supplier ↑ Mostly ancillaries and associated companies supply

parts and components; imported raw materials easily

available

Economic ↑ Growing affluence among urban consumers; export

potential promising

Regulatory ↑ Bicycle industry a thrust area for exports

Political → No significant factor

Socio-cultural ↑ Customer preference for sports cycles; durable and

easy to ride

International ↓ Emerging threats from cheap imports from China

‘↑’indicates favourable impact or opportunity ; ‘↓’ indicates unfavourable impact or threat; ‘→’ indicates

neutral impact.

Table 7.2 Environmental Threat and Opportunity Profile (ETOP) for BHEL

BHEL : ETOP

Environmental sector Impact

(+) Opportunity/(–) Threat

Socio-economic (+) Continued emphasis on infrastructural development which

inc ludes power supply for industry, transport and domestic

consumption.

(–) Severe resource constraints.

Technological (+) High growth envisaged in industrial production and technology

upgradation.

Supplier (–) Sources of technology will become scarce due to forma-tion of

technology cartels.

Government (+) Liberalization of technology import policy.

Competition (–) Customers will become more discerning in their requirements

due to an increasing role of power plant consultants.

(–) Public sector will find it increasingly difficult to retain specialists

and highly qualified personnel.

Source: Bharat Heavy Electricals Ltd (BHEL)



Box 7.1: Long-term Scenario Building by Shell for the Oil Industry

Every two or three years, the Central Planning Group of Shell prepares

scenarios about the future of the oil industry on behalf of the Shell Group.

The process generates two scenarios. The objective of scenario generation

is to ‘sensitize decision makers’ in the group to receive signals for possible

changes in the global environment. The logic is that a more timely and

appropriate business response can take place instead of changes coming

as a surprise.

For formulating strategies for 25 years between 1995 and 2020, the Shell

Group has developed two global scenarios projecting the future of the oil

industry in two different ways. These two scenarios can be termed as

‘favourable’ or ‘optimistic’ and ‘unfavourable’ or ‘pessimistic’.

Favourable or Optimistic

In this scenario, economic and political liberalization increases wealth

creation in the countries which adopt them. However, big upheavals are

also experienced as long-standing barriers are dismantled, and economically

weak countries assert themselves claiming a larger role in world economic

activity and growth. High economic growth of 5–6 per cent is sustained in

these developing countries. But, there is slow erosion of wealth of the

developed world which produces its own problems. Big companies find

themselves increasingly challenged as cheaper capital and fewer

international barriers—both tariff and non-tariff—lead to an environment of

relentless competition and innovation. This creates a high level of oil and

energy demand, and substantial new resource development and

improvement in efficiency are required to propel this growth. Growth should

be high enough so that demand does not outstrip supply, and there are no

inflationary trends. Stagflationary tendencies should also be curbed.

Unfavourable or Pessimistic

In this scenario, liberalization is resisted because people fear that they

might lose what they need most—jobs, power, autonomy, cultural identity.

This creates a world of regional, economic and cultural conflict in which

international business cannot operate efficiently. Markets are difficult for

outsiders to enter as reforms are structured to help insiders. Oil prices are

depressed because of instability and, also, uncertainty; oil prices also

suddenly shoot up as trouble flares up in the Middle East. There is increasing

divergence between rich and poor economies as many developing countries



become marginalized mostly because of lack of foreign investment. In the

developed world, due to convergence of or conspiracy by ‘green’ and other

political interests, energy is regarded as something bad and polluting. The

unfavourable investment climate which this produces is reinforced by high

disparities around the world. Widespread poverty and environmental

problems are experienced in poorer countries. The richer countries face

problems of shrinking labour force and ageing population. These become

their major concerns.

Source : Adapted from G Johnson, and K Scholes, Exploring Corporate Strategy,

3rd ed., 4th ed and 6th ed. (Prentice Hall of India and Pearson Education, 1995,

1999 and 2005), 86–87, 105 and 109.


13. The objective of environmental analysis or scanning or even scenario

building is to identify ______ and ________in the environment and

formulate strategies accordingly.

14. The preparation of an environmental threat and opportunity profile (ETOP)

of an organization was suggested by_________.

7.7 SWOT7 Analysis

ETOP and EFEM focus only on the opportunities and threats from the environment.

But, to exploit an opportunity or to consider a threat, a company should have

required strengths or competence. A company also needs to know its weaknesses

in terms of competence, because weaknesses may affect its capability to take

advantage of an opportunity or negotiate a threat. So, simultaneously with

environmental analysis or appraisal, organizations also need to assess their internal

strengths and weaknesses. This is done through SWOT analysis.

Companies have been using SWOT analysis for long, whether for general

business strategy or for marketing strategy. In SWOT, ‘S’ and ‘W’ relate to

internal competence factors, and ‘O’ and ‘T’ pertain to external environment

factors:

S – Strengths Internal competence factor

W – Weaknesses



O – Opportunities External environmental factors

T – Threats

A strength is a resource, skill, capability or any other advantage relative to

competitors and in relation to markets. A weakness is a limitation or deficiency

in resource, skills and capabilities or any other disadvantage relative to

competitors which impedes performance of an organization.

SWOT analysis can be a useful tool to analyse the extent to which strategy

of an organization and its more specific strengths and weaknesses are capable

of dealing with the changes in the business environment. And, this would decide

whether a particular factor in the environment is an opportunity or threat to the

organization with reference to the particular strategy.

For systematic SWOT analysis, major strengths and weaknesses of the

organization for the strategy should be worked out. Then, the important factors

in the environment relevant to this strategy should be identified. Finally, the

strengths and weaknesses should be matched with the environmental factors

through matching analysis or a matrix.

Some potential or likely strengths, weaknesses, opportunities and threats

are shown in Table 7.3, and a hypothetical SWOT analysis for an international

retail chain is presented in Table 7.4.

Table 7.3 Potential/ Likely Strengths, Weaknesses, Opportunities and Threats

Potential Strengths Potential Opportunities

• Abundant financial resources • Rapid market growth

• Well-known brand name • Rival firms are complacent

• # 1 ranking in the industry • Changing customer needs/tastes

• Economies of scale • Opening of foreign markets

• Proprietary technology • Mishap of a rival firm

• Patented processes • New uses for product discovered

• Lower costs (raw materials or processes) • Economic boom

• Respected, company/product/brand image • Government deregulation

• Superior management talent • New technology

• Better marketing skills • Demographic shifts

• Superior product quality • Other firms seek alliances

• Alliances with other firms • High brand switching

• Good distribution skills • Sales decline for a substitute product

• Committed employees • New distribution methods



Potential Weaknesses Potential Threats

• Lack :of strategic direction • Entry of foreign competitors

• Limited financial resources • Introduction of new substitute products

• Weak spending on R&D • Product life cycle in decline

• Very narrow product line • Changing customer needs/tastes

• Limited distribution • Rival firms adopt new strategies

• Higher costs (raw materials or processes) • Increased government regulation

• Out-of-date products or technology • Economic downturn

• Internal operating problems • New technology

• Internal political problems • Demographic shifts

• Weak market image • Foreign trade barriers

• Poor marketing skills • Poor performance of ally firm

• Alliances with weak firms

• Limited management skills

• Undertrained employees

Source: OC Ferrell, M D Hartline, and G H Lucas Jr, Marketing Strategy, 2nd ed. (Thomson South

Western,Vikas Publishing House), 2003, p. 57.

Table 7.4 SWOT Analysis for an International Retail Chain SeekingEntry into the Indian Market

KEY ENVIRONMENTAL FACTORS

New Customer Choices Competition Market International

Strength/Weaknesses Technology & Preferences Growth Exposure

Major Strengths

Capacity to innovate O O O O O

Market research — O O O O

Global base/international brands O O O O O

Major Weakness

New in India/Developing

countries — T T O O

Existing brand suited for — T T O O

US/European markets

High cost products T T T T O

O (Opportunity) 2 3 3 5 6

T (Threats) 1 3 3 1 0

O—T 1 0 0 4 6

‘—’ indicates ‘neither opportunity nor threat’

In SWOT analysis in Table 7.4, opportunities far outweigh threats (O – T

= 11)—shown in the last row. On this basis, it can be said that the environment

is project or strategy friendly and the project is recommended. If threats are

more than opportunities, the environment is to be considered hostile unless

some threats can be converted into opportunities by working on the weaknesses.



If opportunities are equal to threats, the matter should be put to vote of the

senior/top management for decision.

The matrix in Table 7.4 can also be presented in a more clear quantitative

form by assigning numbers in places of ‘O’ and ‘T’. Numbers would indicate

relating significance of opportunities and threats . Opportunities will have positive

signs; threats will have negative signs. On this basis, the matrix and the outcome

of SWOT analysis can be reformulated as shown in Table 7.5.

Table 7.5 SWOT Analysis for an International Retail ChainSeeking Entry into the Indian Market

KEY ENVIRONMENTAL FACTORS

New Customer Choice Competition Market International

Strength/Weaknesses Technology & Preferences Growth Exposure

Major Strengths

Capacity to innovate 3 2 2 2 2

Market research — 3 2 2 2

Global base/International

brands 2 2 2 1 3

Major Weaknesses

New in India/Developing

countries — –3 –2 1 1

Existing brand suited for — –2 –2 1 2

the US/European markets

High cost products –1 –2 –3 –1 1

O (Opportunity) 5 7 6 7 11

T (Threats) –1 –7 –7 – 1 0

O—T 4 0 –1 6 11

‘—’ indicates ‘neither opportunity nor threat’

Pearce and Robinson (2002) have suggested an alternative form of SWOT

analysis more directly in terms of strategy. Based on four different combinations

of strengths and weaknesses and opportunities and threats, four strategic

situations develop. These four strategic situations imply four different strategic

actions: aggressive strategy, diversification strategy, defensive strategy and

turnaround type strategy. These are shown in Figure 7.5. Cell 1 is the most

favourable situation ; there are several environmental opportunities and the

organization has substantial internal strengths to exploit opportunities. Such

condition suggests aggressive growth strategies to take advantage of the

favourable match between strengths and opportunities. IBM’s intensive market

development strategy in the PC market was driven by a favourable match

between its strengths (reputation and resources) and ample opportunity for

market growth. In Cell 2, an organization with key strengths faces an

unfavourable environment.



In such situation, strategists should use current strength to create

opportunities in other products/ markets, that is, to go for diversification. An

organization in Cell 3 has plenty of market opportunities, but, is constrained by

major internal weaknesses. Businesses in this cell are like question marks in

the BCG Matrix. The focus of strategy here should be to remove internal

weaknesses to capitalize on existing opportunities, that is, to follow some kind

of a turnaround strategy. Cell 4 is the least favourable situation with the

environment posing major threats and the organization suffering from major

weaknesses. The most immediate strategy in this situation is to defend or sustain

current position. Organizations in this cell should also work on internal

weaknesses or competences to be able to negotiate environmental threats as

Chrysler Corporation did in the 1980s when analysis revealed that the company

was in Cell 4.

Cell 3: Supportsa turnaround-

oriented strategy

Cell 1: Supportsan aggressive

strategy

Cell 4: Supportsa defensive

strategy

Cell 2: Supportsa diversification

strategy

Substanialinternalstrengths

Criticalinternalweaknesses

Numerousenvironmentalopportunities

Majorenvironmental

threats

Figure 7.5 SWOT Analysis and Recommended Strategies

Source: I A Pearce II, and R B Robinson Jr, Strategic Management, 3rd ed. (Irwin Series

in Management, Reprint India, 2002), 274.

All the four strategies mentioned above, i.e., aggressive or offensive

strategy, defensive strategy, turnaround strategy and diversification strategy

would be discussed in details in the later units.



SWOT analysis, as presented in Tables 7.4 and 7.5 and also Figure 7.5

involves subjectivity.

Judgement of the strategic planning group or SWOT analysis team plays

a very important role.

Therefore, no SWOT analysis should be taken as exact. This should be

understood as a good approximation to matching a company’s strengths and

weaknesses with key environmental factors as opportunities or threats. This

should be always done with respect to a particular business (e.g., entry of an

international retail chain in India as shown above). Such analysis, however, is

an essential starting point for a more detailed and rigorous exercise on strategic

investment decisions in terms of costs and returns and organizational objectives

and priorities.

As mentioned, SWOT analysis gives the initial signals—positive or

negative—for launching of a project or product, market entry, etc. Even if initial

SWOT analysis is not favourable, i.e., threats outweigh opportunities, this does

not mean that the project has to be abandoned. This, in fact, provides basis for

re-examination of the strengths and weaknesses and the possibility of converting

some weaknesses into strengths by investing more resources and improving

skills and capabilities. This would make possible conversion of some of the

threats into opportunities so that matching improves (Figure 7.6) and the project

can still be considered on the basis of investment levels and costs and returns

analysis.

Figure 7.6 SWOT Analysis: a Continuing Process

Source: F R David, Strategic Management: Concepts and Cases (2003), 111.



Activity 2

Choose a company or organization that you are familiar with and conduct a

SWOT analysis for it. Analyse the results.


15. A _______is a resource, skill, capability or any other advantage relative

to competitors and in relation to markets.

16. A _________is a limitation or deficiency in resource, skills and capabilities

or any other disadvantage relative to competitors which impedes

performance of an organization.

7.8 Case Study

General Motors: Slow Response to Environmental Demand

In the 1970s, General Motors (GM) was the largest automobile manufacturer

in the world, with a market share of more than 50 per cent. In 2005, GM’s

market share was just about 25 per cent and it was still declining. GM

remained (in 2005) the largest automobile manufacturer in the world, but,

Toyota (No. 2) was fast catching up because of its competitiveness in terms

of quality and differentiated products. According to one automobile analyst:

‘GM has found itself stuck in second gear for a quarter of a century’. Another

analyst observed: ‘The bedrock principle upon which GM was built—offering

a car to feed every market segment—has degraded into a series of contrived

brands, most with little identity and bland, overlapping product lines’.

GM’s problems are too many. Managerial ego or lethargy (which often leads

to inaction or inefficiency) is one of the more important ones. The company

failed to quickly adapt to earlier demand for compact cars and more recent

trend towards hybrid vehicles. It has negotiated badly with unions incurring

massive costs and creating future liabilities. Due to such commitments and

costs, the company has made compromises in car design and engineering.

The result has been automobiles with outdated designs unable to compete

with more modern and attractive models from competitors like Toyota and

others.*



GM has also become quite bureaucratic in its management approach

implying slow systems and procedures—often non-responsive to situations.

GM’s senior executives have shown a tendency for poor strategic decisions

and inability to capitalize on opportunities in the market. Here is an example.

GM was an early mover into China. It invested more than $1 billion in China

since 1998. But, because of intense competition, it suffered a 35 per cent

decline in sales during 2005 in Shanghai, the largest automarket in China.

In contrast, Hyundai and a local company, Chery, increased their sales

substantially during this period. This means that those competitors have

outweighed GM in designing and manufacturing cars which Chinese buyers

want.**

Because of organizational inertia for response to changing environmental

conditions, GM has landed itself into the present serious situation. An

important development took place for GM in 2009. Billionaire investor Kirk

Kerkorian increased his stake in GM to approximately 9 per cent. To ensure

adequate return on his investment, Kerkorian might urge GM’s Board of

Directors to sell off non-core assets, cut costs or restructure the bloated

auto business faster than current management appears inclined to do.

But, can GM do it? And, if so, how soon? We must remember that we are

in the auto generation of 2010. Speed and adaptability are vital for survival

and success.

* M A Hitt et al., Management of Strategy, Indian Edition (Cengage Learning,

2007), 139.

**M A Hitt et al., (2007), 139.



7.9 Summary


• The external environment consists of a large number of factors which

influence a company’s business. Major environmental factors are: political

factors, economic factors, sociological factors, government policies/

controls, technology, competition intermediaries and suppliers.

• Organizations should be generally concerned with relevant environment

and operating environment. The operating environment, also known as

competitive environment consists of factors in the immediate competitive

situation like customer profile, level of competition, the industry structure,

technology, any specific regulations affecting the company or industry,

etc.

• Since the environment is too diverse, scanning of environment (some call

it external audit) is necessary to elicit information relevant to a particular

organization. Environmental information occurs in one or more of four

forms; events, trends, issues and expectations.

• To understand the emerging or evolving environment better, some have

suggested environmental forecasting. For environment forecasting, ‘Gap

analysis’ is a good starting point.

• Forecasting is a hazardous exercise, and ‘exactness’ in forecasting is

hardly possible. That is why many have suggested alternative scenario

building for the future—say, ‘optimistic’, ‘pessimistic’ and ‘mean’ scenario.

Shell’s long-term scenario building for the oil industry is a good example.

• For identifying opportunities and threats in the environment, organizations

should undertake environmental appraisal, i.e., assessing the environment

for clearly identifying major opportunities and threats. One method for

environment appraisal, suggested by Glueck, is preparation of an

environmental threat and opportunity profile (ETOP).

• Simultaneously with environmental analysis or appraisal (ETOP or EFEM),

organizations also need to assess their internal strengths and weaknesses

to exploit opportunities and negotiate threats. This is done through SWOT

analysis—matching organizational strengths and weaknesses with

environmental opportunities and threats.



7.10 Glossary

•••• Forecasting: Estimate or prediction of future developments in business

such as sales, expenditures, and profits.

•••• Gap analysis: Projections, over time, of the gap between the desired

change in strategic parameters like sales, profitability, market share, etc.,

and actual change with continuation of present strategy, that is, not

responding to changes in the environment.

•••• Scenario: A detailed and probable view of how the business environment

of an organization may develop in the future based on the analysis of key

environmental influences and factors of change about which there is a

high degree of uncertainty.

•••• SWOT analysis: A tool used by organizations to match their internal

strengths and weaknesses with factors of the environment.


1. Enumerate major environmental factors. Which of these, according to

you, are more important and why?

2. What is scanning of environment? Mention the major sources of

information for environmental scanning.

3. What is ‘gap analysis’ ? Explain its relevance to environmental forecasting.

4. What is ETOP? Prepare an ETOP for a sports cycle manufacturing

company.

5. What is SWOT analysis? Explain SWOT analysis in the form of a matrix.

6. Explain Pearce and Robinson’s form of SWOT analysis. Use the relevant

diagram for the analysis.

7.12 Answers


1. Economic

2. Consumption

3. life cycles



4. (d) All the above

5. Scanning

6. external audit

7. Trends

8. Information

9. Gap analysis

10. False

11. Scenario

12. Alternative

13. Opportunities, threats

14. Glueck (1984)

15. Strength

16. Weakness


1. The external environment consists of a large number of factors which

influence a company’s business. Refer to Section 7.3 for further details.

2. Scanning of environment (some call it external audit) is necessary to elicit

information relevant to a particular organization. Refer to Section 7.4 for

further details.

3. Gap analysis refers to the projections, over time, of the gap between the

desired change in strategic parameters like sales, profitability, etc., and

actual change with continuation of present strategy. Refer to Section 7.5


4. Environmental threat and opportunity profile (ETOP) is one of the many

methods for environmental appraisal. It was suggested by Glueck (1984).


5. SWOT analysis is a tool used by organizations to match their internal

strengths and weaknesses with factors of the enviroment. Refer to Section


6. Pearce and Robinson have suggested a form of SWOT analysis more

directly in terms of strategy. Refer to Section 7.7 for further details.



7.13 References

1. David, F R. 2003. Strategic Management: Concepts and Cases, 9th ed.

New Jersey: Pearson Education.

2. Fahey, L, W R King, and V K Narayanan. 1983. ‘Environmental Scanning

and Forecasting in Strategic Planning—the State of the Art.’ In The Truth

about Corporate Planning: International Research into the Practice of

Planning, edited by D Hussey. Oxford: Pergamon Press.

3. Mandell, T S. 1983. ‘Future Scenarios and Their Uses in Corporate

Strategy.’ In The Strategic Management Handbook, edited by K J Abert.

New York: McGraw Hill.

4. Pearce, II, J A, and R B Robinson Jr. 2004. Strategic Management. 7th

ed. McGraw Hill/Irwin, Ch.6.

5. Porter, M.E. 1980.Competitive Strategy: Techniques for Analyzing Industry

and Competition. New York: The Free Press.

Endnotes

1 P K Ghosh, Strategic Planning and Management, 10 th ed. (New Delhi: Sultan Chand &Sons, 2003), 106.

2 In many industrial markets and some consumer goods markets, intermediaries may beabsent because companies decide to deal directly with the end users. Here, we aretalking of personal selling or direct marketing.

3 R David, Strategic Management: Concepts and Cases (Pearson Education, 2003), 80.4 G Johnson, and K Scholes, Exploring Corporate Strategy , 9 th ed. (2005), 1075 T S Mandel, ‘Future Scenarios and Their Uses in Corporate Strategy ’ in The Strategic

Management Handbook , ed. K J Albert (McGraw Hill, 1983), 10 –11.6 A Kazmi, Business Policy and Strategic Management, 2 nd ed . (New Delhi: Tata McGraw

Hill, 2002), 125.7 Some prefer to use ‘C ’ in place of ‘W ’, ‘C ’ standing for ‘Constraints ’ because ‘Weaknesses’

sounds discouraging or negative. So, instead of ‘SWOT ’, it is called ‘SCOT ’ analysis.



Unit 8 Stability Strategies

Structure

8.1 Introduction

8.2 Caselet

Objectives

8.3 What is Stability Strategy?

8.4 BCG Portfolio Model

8.5 Four Generic Strategies

8.6 Mass Customization

8.7 Strategies for Industry Leaders

8.8 Concentration Strategy

8.9 Corporate Parenting

8.10 When Best to Pursue Stability Strategy

8.11 Stability Strategies in Practice

8.12 Case Study

8.13 Summary

8.14 Glossary


8.16 Answers

8.17 References

8.1 Introduction

Definition of corporate mission, objectives or goals, analyses of internal

competences and resources and the external environment lead to the generation

of business strategies or strategic alternatives. In strategic management literature,

various corporate strategies are mentioned and analysed. Some of these strategies

are corporate-level strategies; some are business-level strategies. Some of these

strategies are more appropriate under certain circumstances than in others. Allthese strategies are available to organizations to consider, adopt or pursue. All

such strategies can be broadly classified into three categories: stability strategies,

strategies for managing change and growth or expansion strategies. These are

also called master, grand, generic or basic strategies. These three strategies

along with their major elements or components are shown in Figure 8.1.

We shall discuss stability strategies in this chapter. In this, we shall analyse

portfolio models and other generic strategies, strategies for industry leaders,



strategies for challengers or runner-up companies, strategies for followers,

simulation strategy, concentration strategy, corporate parenting, etc. We shall

discuss strategies for managing change and strategies for growth and

diversification in Units 9 and 10 respectively.

Figure 8.1 Corporate Strategies: Stability Strategy, Strategy forChange and Expansion Strategy

8.2 Caselet

It has been rightly pointed out that if an organization aims for growth, it may

at least achieve stability. Companies have to regularly review their

competence levels, resource base, product portfolios, cost structure or cost

management and, react or respond timely to market developments. Such

an approach has helped Maruti maintains its leadership in the market. The

year 1984 saw the beginning of the biggest success story in the Indian

automobile industry. It all started with the launch of the Maruti 800, a car

that revolutionized the car market in India. The company has not looked

back since then, having sold more than 2.5 million 800s and becoming

India’s best selling car.

Having attained leadership position, a leader’s most strategic concern is to

maintain stability or defend its market position for continuing dominance in



the industry. Maruti, too, has not rested on its laurels –several new brands

have been launched, including the Maruti 1000, India’s first sedan. Examples

of innovative initiatives include the Maruti Driving School, partnership with

State Bank of India to launch an auto finance scheme and insurance services

at low premium schemes. It is these innovations that have helped Maruti

retain its leadership in the industry and continue its success story.

Objectives


• Discuss the concept and meaning of stability strategies

• Analyse the portfolio model – the BCG

• Differentiate among four generic strategies and modern modifications

• Analyse defensive strategies for a leader

• Illustrate the concept of corporate parenting

8.3 What is Stability Strategy?

Stability strategy is most commonly used by organizations. But, the nomenclature,

‘stability strategy’ often creates confusion among managers, planners and

strategists. Stability does not mean ‘static’. Most organizations, which follow

stability strategy, look for growth and do not remain stable or static for a long

period of time. Therefore, some prefer to call it ‘stable growth strategy’. The

basic approach in stability is ‘to maintain present course; steady as it goes’.

Stability strategy can be defined as below:

In an effective stability strategy, companies will concentrate their

resources where the company presently has or can rapidly develop a

meaningful competitive advantage in the narrowest possible product

market scope consistent with the firm’s resources and market

requirements.1

As the definition indicates, stability strategy implies that an organization

will continue in the same or similar business as it currently pursues with the

same or similar objectives and resource base. Three distinctive features of a

stability strategy are:

1. No major change takes place in the product, market, service or functions;

2. Focus is on developing and maintaining competitive advantage consistent

with present resources and market requirements;



3. The strategy thrust is not only on maintenance of the present level of

performance, but also on ensuring that the rate of improvement achieved

in the past is sustained.2

In following stability strategies, companies pursue certain objectives which

are consistent with overall corporate stability. Companies generally have one or

more of the four objectives in view:

1. Incremental growth: Small incremental growth in sales or market share,

sometimes to offset the effects of inflation, is quite consistent with general

corporate stability. This is different from ‘quantum’ or ‘discontinuous’ growth

targeted in expansion strategies.

2. Profitability: The purpose is to sustain profitability if it is tending to drift.

The objective is to achieve stability, if not increase in profit.

3. Sustainability in growth: Past growth in sales or revenue should be

maintained so that the company does not become static.

4. Pause or caution: Stability is a phase of caution or consolidation before

an organization embarks on expansion strategies. This can also be a

period of pause or rest after a ‘blistering’ pace of expansion.

Organizations follow stability strategies because they neither go for any

major internal changes or restructuring nor embark upon any ambitious

expansion strategies. But, stability or sustenance also is neither simple nor to

be taken for granted. It is often said, and correctly too, that if an organization

aims for growth, it may at least achieve stability, but, if it aims at stability, it is

most likely to slip into deceleration. Companies have, therefore, to regularly

review their competence levels, resource base, product portfolios, cost structure

or cost management and, react or respond timely to market developments.

Many models, techniques or strategies pertaining to these are available which

can be important ingredients of stability strategies. We shall now discuss such

techniques or strategies. At the end, we shall make more observations on stability

strategies with reference to these models or techniques and, also as final remarks

on the use of these (stability strategies).


1. The basic approach in _________is ‘to maintain present course; steady

as it goes’.

2. In stability strategy, the focus is on _____and _______competitive

advantage consistent with present resources and market requirements.



3. Organizations that follow stability strategy remain stable or static for a

long period of time. (True/False)

4. Organizations follow stability strategies because they neither go for any


expansion strategies. (True/False)

8.4 BCG Portfolio Model

The Boston Consulting Group (BCG) model is a growth-market share matrix,

depicting a company’s competitiveness (cash flow generation or profitability) in

terms of market growth rate, and, its relative market share. The model is also

known as a portfolio matrix because, on the basis of the BCG matrix, a company

can determine its optimal product portfolio on the basis of cash flow or profitability

analysis of each of its products or product groups in terms of two dimensions,

i.e., market growth and market share. The BCG model is based on the

assumption that relative market share is a good indicator of profitability of a

product or product group.

The BCG model was originally conceived and developed in the early 1970s

for analysis of performance or cash flow generation of strategic business unit

(SBU) of a company. A strategic business unit is a division or a product/product

group unit which operates as a separate profit centre that has its own set of

market and competitors and its own business strategies. The company or the

corporate unit consists of related businesses and/or products grouped into SBUs

which are homogenous enough to manage and control most factors which affect

their performance. Resources are allocated to the SBUs in relation to their

contributions to the corporate objectives, growth and profitability.

The original BCG formulation had used ‘cash use’ for growth rate3 and

‘cash generation’ for market share. Four performance situations of product

groups of SBUs were identified as four quadrants in the matrix, namely, ‘stars’,

‘cash cows’, ‘question marks’ (also called ‘wild cats’ or ‘problem children’) and

‘dogs’. The BCG matrix is shown in the Figure 8.2.

Stars are high market share products or SBUs operating in high-growth

markets. The model predicts that stars will have very strong need to support

their growth. But, because they are in a strong competitive position—they are,

in fact, the highest-share competitors—it is assumed that they will produce high

margin and generate large amounts of cash. Therefore, they will be both users

and generators of large cash flows. On balance, they should generally be self-

supporting with respect to their cash needs.



Figure 8.2 The BCG Matrix: Stars, Cash Cows, Questions Marks, Dogs

Cash cows are high-share products or SBUs operating in a low-growth

market. Because of their market position, their cash generation should be high,

but, because the market is assumed to be mature, their cash investment needs

to be small. And these products or businesses should be a source of substantial

amounts of cash which can be channelled to other areas or businesses.

Question marks/problem children are low-share businesses in high-growth

markets. They are assumed to have cash needs because they need to finance

growth. But, they generate little cash. If a question mark’s/problem child’s market

share cannot be changed, it will continue to absorb cash. If, however, market

share can be adequately improved, a question mark/problem child can be

converted into a star. Usually, such a strategy will require heavy investment in

the short run. Improved position should enable it to generate cash, become a

star and ultimately a cash cow.

Dogs are low-share businesses in low-growth markets. Because of their

low share, it is assumed that their progress is low and, therefore, their profits

will also be low or non-existent. Since growth is low, expansion of share is

assumed to be very costly. Dogs are cash users and probably even ‘cash traps’—

products or businesses that perpetually absorb cash.



Activity 1

Choose a multi-business company and construct a BCG model for this

company.


5. In the BCG model, BCG stands for

(a) Business contact group

(b) Boston Consulting Group

(c) Boston Communication Group

(d) Business Consulting Group

6. The BCG model is also known as _________.

7. The BCG model was originally conceived and developed in the early _____

for analysis of performance or cash flow generation of strategic business

unit.

8. In a BCG model, _______are high-share products or SBUs operating in a

low-growth market, while __________are low-share businesses in low-

growth markets.

8.5 Four Generic Strategies

Porter (1985) evolved the theory that there are four generic strategic options

available to companies. These are:

• Cost leadership

• Focused cost leadership

• Differentiation

• Focused differentiation

Porter’s theory is based on the concepts of niche marketing and mass

marketing and product proposition to be offered by different companies. Two

dimensions of the strategy analysis are market coverage and basis of product

performance. Porter’s theory or the strategy option matrix is shown in Figure 8.3.



Figure 8.3 Porter’s Four Strategy Options Matrix

Cost leadership strategy is based on exploiting some aspects of the

production process, which can be executed at a cost significantly lower than

that of competitors. There can be various sources of this cost advantage:

i. lower input costs, (e.g., the price paid by New Zealand timber mills for the logs

produced by the country’s highly efficient forestry industry or cheap source of

high quality bauxite for National Aluminium Company (NALCO) in India from its

mines); ii. in-plant production costs, (e.g., lower labour costs enjoyed by Japanese

companies locating their video assembly operations in Thailand); iii. lower delivery

cost because of proximity of key markets, (e.g., the practice of major beer

producers in Europe to locate micro-breweries in or around major metropolitan

cities).

Focused cost leadership exploits the same advantages as in cost

leadership strategy, but the company occupies a specific niche or niches serving

only a part of the total market. For example horticulture enterprise, which operates

an onsite farm shop, offers low-priced fresh vegetables to the inhabitants in the

immediate neighborhood area.

Porter has mentioned that cost leadership and focused cost leadership

represent a ‘low scale advantage’ because it is quite likely that eventually a

company’s capabilities will be eroded by rising costs (labour cost in particular)

or its market position will be challenged by an even lower cost producer of

goods, (e.g., Russia’s post-Perestroika entry in the world arms market offering

extremely competitive prices).

Differentiation strategy is based on offering superior performance, and

Porter argues that this is a ‘high scale advantage’ because, first, the producer

can usually command a premium price for its product and, second, competitors

are less of a threat, because to be successful, they must be able to offer an

even higher performance product.

Focused differentiation, which is typically a strategy of smaller and most

specialist companies, is also based on superior performance. The only difference

is that in this strategy, a company specializes in serving the needs of a specific



market or markets. For, e.g., the Cray Corporation supplies ‘super computers’

to the aerospace and defence industries.

8.5.1 Best-cost Strategy

Thompson, Strickland and Gamble (2005) have extended Porter’s four strategic

options framework to include a fifth generic strategy, i.e., best-cost provider

strategy. Best-cost provider strategy is deemed to be a central strategy striking

a middle course between low-cost advantage and differentiation advantage on

the one hand and broad or mass market and narrow or niche market, on the

other (Figure 8.4). Best-cost provider strategy is designed to provide customers

more value for money by incorporating good-to-excellent product features at

lower cost than competitors; the objective is to offer the lowest (best) costs and

prices with same or comparable product attributes as those offered by rivals.

Figure 8.4 Five Generic Competitive Strategies

Source: A A Thompson Jr, A J Strickland III, and J E Gamble, Executing Strategy: The

Quest for Competitive Advantage (New Delhi: Tata McGraw Hill, 2005), 116.

Box 8.1: Toyota’s Best-cost Strategy for Its Lexus Models

Toyota is widely known as a low-cost producer among motor car

manufacturers of the world. Toyota has achieved low-cost leadership,

simultaneously with its product quality, because it has developed

considerable skills in supply chain management and low-cost assembly

capabilities. Its models are also positioned in the low-to-medium end of the

price spectrum where high production volume can lead to low unit cost.



When Toyota decided to launch its new Lexus models to compete in the

luxury car market, it adopted a best-cost provider strategy and, not a low

cost strategy. Toyota took four significant steps for designing and

implementing its Lexus strategy:

1. Designing and incorporating a series of high performing characteristics

and upscale features into the Lexus models. This made these car

comparable in performance and luxury to other high-end models like

Mercedes, BMW, Jaguar, Cadillac and others in the same category.

2. Transferring the company’s capabilities in making high-quality Toyota

models at low cost to making premium quality Lexus models at a cost

lower than those of luxury car manufacturers. Toyota’s supply chain

capabilities and low-cost assembly know-how allowed it to incorporate

high-tech performance features and upscale quality into Lexus models

at substantially less cost than Mercedes and BMW.

3. Establishing a new price point for Lexus by using Toyota’s relatively

lower manufacturing cost and beating Mercedes and BMW on pricing.

Toyota believed that with its cost advantage, it could price Lexus cars

low enough to attract price-conscious buyers away from Mercedes and

BMW and also induce dissatisfied Lincoln and Cadillac users (or

potential buyers) to move up to Lexus.

4. Establishing a new network of Lexus dealers, separate form Toyota

dealers, dedicated to providing personalized customer service

unmatched in the industry. This was a very innovative differentiation.

Lexus models have consistently been ranked among the top 10 models

in J D Power and Associates quality survey. In terms of cost and price

competitiveness, Lexus models are several thousand dollars cheaper

than those of comparable Mercedes and BMW models. This is a clear

indication that Toyota has succeeded in becoming a best cost producer

with its Lexus cars.

Source: Adapted from A A Thompson Jr, A J Strickland III, and J E Gamble (2005),

131 (Illustration Capsule 5.3).


9. In Porter’s theory the four generic strategic options available to companies

include cost leadership, focused cost leadership, differentiation and

______.



10. Porter’s theory is based on the concepts of ______ and mass marketing

and product proposition to be offered by different companies.

11. Differentiation strategy is based on offering superior performance.

(True/False)

12. Best-cost provider strategy is deemed to be a central strategy striking a

middle course between low-cost advantage and differentiation advantage

on the one hand and broad or mass market and narrow or niche market,

on the other. (True/False)

8.6 Mass Customization

Porter’s four strategic options matrix provides a good conceptual framework. It

can be the basis or starting point for formulation of competitive strategies by

companies. But, because of its simple form, the usefulness of the model today,

as a practical tool of analysis, may be rather limited. Also, the model may involve

major risks if the users act on the assumption that the four alternative strategic

propositions are mutually exclusive, which has been presumed in the model. It

is true that in the 1980s, many western companies assumed that one should

strive to be either a low-cost leader or the producer or supplier of differentiated

goods. Thus, German companies concentrated on premium price, superior goods

market segments. In Spain, on the other hand, lower labour cost stimulated the

establishment of manufacturing processes for serving downmarket price-

sensitive sectors.

But, this is in sharp contrast to the situations in the Pacific Rim countries

like Japan and South Korea. In these countries, introduction of flexible

manufacturing processes enabled companies to develop products which offer

both high standards of performance and a low price. Through appropriate cost

performance (technology) mix, these companies succeeded in gaining major

market share in product areas such as cars, televisions, VCRs, video cameras

and watches and, thus gave rise to strategic options not postulated in the

Porterian model. One such option is mass customization. More and more

companies are now adopting flexible manufacturing processes and mass

customization as strategy. Motorola offers more than 29 million different

combinations of pager features to suit specific customer needs. L&T is one of

the engineering companies to adopt flexible manufacturing technologies. Even

McGraw Hill, the book publishing company, customizes specialized textbooks

in quantities or numbers of 100 or more.



On the basis of such developments, it is logical to argue that companies

can increase the nature and number of strategic options available to them by

adding the choices of multi-performance and mass customization to traditional

Porterian strategic options matrix. Such modified matrix may increase the number

of options from four to nine. Chaston (2000) has suggested one such expanded

matrix. This is shown in Figure 8.5.

Figure 8.5 An Expanded Strategic Options Matrix

Source: I Chaston, New Marketing Strategies (New Delhi: Response Books, 2000), 55.


13. Development of products which offer both high standards of performance

and a low price has been made possible through

(a) appropriate technology mix

(b) mass customization

(c) flexible manufacturing processes

(d) All the above

14. The usefulness of Porter’s model today, as a practical tool of analysis,

may be rather limited because of its

(a) simple form

(b) complex form

(c) flexibility

(d) None of the above



8.7 Strategies for Industry Leaders

Industry or market leaders typically employ proven strategies linked either to

low cost or differentiation or best cost or mass customization; these strategies

are, in turn, based on their core competence or distinctive competence or

capabilities. We have many examples of companies which have demonstrated

this: Walmart, Microsoft, McDonald’s, Gillette, Nokia, AT&T, Intel, Dell Computer,

Kodak, Levi Strauss, Sony, Maruti, Hindustan Unilever, Titan and others.

Stability strategies are very relevant for industry leaders. Having attained

leadership position, a leader’s most strategic concern is to maintain stability or

defend its market position for continuing dominance in the industry. Leaders

generally employ one of the four defensive strategies (Figure 8.6).

• Position defence

• Counter offensive

• Retreat

• Pre-emptive defence

Figure 8.6 Four Defensive Strategies

Source: I Chaston, New Marketing Strategies (Response Books, 2000), 80.

We shall discuss each of these strategies below with particular focus on

pre-emptive strategies.

8.7.1 Defensive Strategies

The classic form of retaining existing (civil) territory is to mount a position defence

by constructing strong ramparts to keep out the enemy. In business, position

defence is typically built by developing high levels of customer loyalty. But, the



problem with many organizations is that the defender often becomes complacent

and, does not realize that the enemy is making slow, but steady, inroads into

the customer base. One of the unfortunate examples of this situation is IBM.

The company built a big global business in the computer industry based on

unmatched customer loyalty. But, IBM ignored the threats, may be unknowingly,

posed by the advent of the networked PC and more powerful operating systems.

The company realized, rather late in the 1990s, that customer loyalty had been

completely eroded by competitors who were more strongly committed to fulfilling

the changing needs of customers.

Counter-offensive strategy has a different advantage. It has the advantage

of not having to respond before one measures up the real nature of the

competitive threat. Nevertheless, it is a belated response, and there is always

the risk that by waiting until ‘you see the whites of the enemy’s eyes’, a company

may be forced to spend massive resources to recover lost grounds. Xerox

Corporation is an example. Xerox had been forced to make large investments

in R&D, technology, manufacturing process and organizational structure during

the last few years to regain some of the lost ground in the photocopier market

to competitors such as Canon.

Retreat is sometimes a good defence. After a careful review of

circumstances, if it is evident that the competitor has the potential to overwhelm

the company, then there may be very little logic in defending a position which

will be eventually lost to the enemy. Under these conditions, the defender may

well withdraw to a more protected segment of the market; and in the meantime,

try to determine how the development of new superior product/service packages

might make a recovery of the lost market position possible at a later stage.

Lotus is a good example of this. During the 1980s, Lotus lost its dominant position

in the computer-based spreadsheet market to new software products such as

Microsoft’s excel package. After being acquired by IBM, Lotus is now using its

world beating Lotus Notes as a platform from where it can reposition itself as

the leading provider of Internet-based group ware communication systems.

8.7.2 Pre-emptive Strategies

‘Attack is the best form of defence’ is the basis of pre-emptive defence strategies.

As the name indicates, in pre-emptive defence strategies, companies, after

having identified a possible threat, take action ahead of competitors. An excellent

example of this strategy is Microsoft. Microsoft watches advances made by

competitors in the software industry and quickly moves to introduce another

upgrade to sustain its market leadership position.



Pre-emption is considered by many as one of the smartest strategies.

Pre-emption, as a strategy, requires a close understanding of the planned and

potential moves of competitors for slowing down or blocking those moves. To

develop pre-emptive strategies, companies need to consider five steps.

1. Ascertain where the market or competitors are moving or might move;

2. Identify potential strategies for getting there first or for blocking the

competitor’s moves;

3. Ascertain whether these strategies are consistent with the company’s

current strategic goals;

4. Determine whether these strategies are feasible in terms of resources

and competences;

5. Determine whether and how far they are likely to affect the competitors’

objectives, actions and reactions.

The ability to pre-empt requires companies to be creative or innovative.

In fact, creativity or innovation is often a key resource in pre-emption. It allows

companies to see the unexpected opportunity, threat or competition and design

the strategy in advance.


15. In business, _______is typically built by developing high levels of customer

loyalty.

16. When companies, after having identified a possible threat, take action

ahead of competitors, it is called________.

17. Brainstorming sessions, analogies and war games and simulations are

aids or approaches for generating _____strategies (through creativity).

18. _______involve analysis of analogous situations in other markets,

products, industries and countries.

8.8 Concentration Strategy

We have enumerated above a number of models, techniques and strategies,

which can be used by companies to remain in business or sustain stability, and,

also to secure growth (incremental). Different companies may adopt different

strategies or some combinations of these strategies depending on the particular



product, market and environmental situations. The use of these strategies should

help companies to concentrate better in their present markets.

One of the commonest stability strategies is concentration on the current

business. An organization directs its resources to the profitable growth of a

single product, in a single market and with a single technology4 or a narrowly

defined product and market focusing on a dominant technology.5

The concentration strategy works under certain specific environmental

conditions. First is a market condition in which the demand for the product is

stable and the industry is resistant to major technological change. Paper

manufacturing, for which the basic technology has not changed for almost a

century, is a good example. A second favourable situation for concentration

strategy is when a company’s product markets are ‘sufficiently distinctive’, and,

the company is strong enough to retaliate if a potential competitor plans to

invade its territory. John Deere abandoned its plans for entering into the

construction machinery business when mighty Caterpillar threatened to enter

farm machinery business, Deere’s mainstay, in retaliation. A third favourable

condition for concentration growth exists when a company has stable sourcing

of inputs in terms of price, quantity and timely availability. Maryland-based Giant

Foods is able to concentrate on the grocery business largely because of its

stable long-term arrangements with suppliers of private label goods.

A fourth situation for favourable concentrated growth prevails if market

generalists are effective operators and thrive on general market segments leaving

particular pockets or segments for the specialists. For example, hardware store

chains like, Home Depot, concentrate mostly on routine household repairs and

leave special solutions to the specialists. This also gives the generalists a big

customer base. Finally, concentrated growth becomes successful if the market

is stable and, not subject to seasonal or cyclical fluctuations. Many products

like seeds, pesticides, fertilizers and agricultural equipment have a seasonal

demand and manufacturers of these products may need to diversify into other

products and markets.6

Many companies have been successful by following a concentration strategy.

We have given some examples above. Some other examples are McDonald’s,

Domino’s Pizza, Good year and Apple Computers. Small and medium enterprises

(SMEs ) are generally more successful with concentration strategy because they

have a clearly defined market and are mostly content with it.

Under stable conditions, concentrated growth poses lower risk than any

other strategy, but, in a changing market environment, this may not produce

desired results. Concentrating in a single-product market segment makes a



company vulnerable to changes in that segment. In the fast changing computer

software market, manufacturers of IBM clones faced such a problem when IBM

adopted OS/2 operating system for its PC line. The change made existing clones

out of date. If the strategic management team feels that the combination of

their current product(s) and market(s) will no longer provide the basis for

achieving organizational objectives or goals, they have two options which involve

both cost and risk: market development and product development. These are

discussed later in Unit 10.


19. The _______strategy works under market condition in which the demand

for the product is stable and the industry is resistant to major technological

change.

20. _______enterprises are generally more successful with concentration

strategy.

8.9 Corporate Parenting

In multi-business or multi-SBU organizations, corporate parenting becomes an

important subject for analysis because of its bearing on stability strategies (and

also strategies for change and expansion strategies). Corporate parenting relates

to the manner in which the corporate headquarters or centre manages and

nurtures individual businesses or SBUs. Corporate parent can also be described

as the level(s) of management above business units, and, without direct

interaction with customers and competitors. In corporate parenting, the ‘total

organization’ is viewed in terms of resources and capabilities which can be

used to develop individual business, and, also create synergies among

businesses. The objective of corporate parenting is to focus on value creation

from the relationship between the parent and the SBUs.

For strategic corporate parenting, Campbell and others have suggested

that multi-SBU corporations should address three issues:

(a) Which businesses should the corporation own and why?

(b) What organizational structure, management systems and strategies would

ensure superior performance of the SBUs?

(c) What should be the proper relationship or fit between the parent

corporation and the business units?



On the basis of the answers to these questions, a parenting fit matrix may

be constructed to depict the positive contributions and negative effects of

parenting characteristics and SBU success factors. Such a matrix is shown in

Figure 8.7. SBU performance is presented through critical success factors

(CSFs). Critical success factors, also called key success factors, are those

which are vital for organizational success. Strategists consciously look for or

identify such factors to become successful. For example, one of the CSFs for

Tata Motors for Indica is to capture the tourist vehicle segment.

As can be seen in Figure 8.7, there are five types of business possibilities

or fit (or misfit) situations: Heartland businesses, edge-of-heartland businesses,

ballast businesses, value-trap businesses and alien territory businesses.

Figure 8.7 A Parenting Fit Matrix

Source: Adapted from M Alexander, A Campbell, and M Goold, ‘A New Model for

Reforming the Planning Review’, Planning Review (Jan–Feb 1995), 17.

Heartland businesses are ideal businesses in terms of parenting fit —

businesses where the fit between parenting opportunities and parenting

characteristics is high and the fit between critical success factors and parenting

characteristics is also high. Such businesses should have strong influence on

formulation of corporate strategy because the parent understands their CSFs

well and good opportunities exist for the parent to make improvements.

Expansion strategies are recommended for heartland businesses. Stability

strategies can be used only as a pause.



Edge-of-heartland businesses show some parenting characteristics which

fit the business well but others do not. The parent has to understand and analyse

these businesses further. With additional investment in terms of resources and

capabilities, such businesses may elevate to ‘heartland’ category . In the case

of such businesses, the parent has a special responsibility for value addition.

Ballast businesses fit well with parenting characteristics but, do not provide

enough opportunities to the parent for improvement. These are somewhat like

cash cows. Ballast businesses are those which have been established for long

and contribute well to corporate revenue. Such businesses should generally

adopt stability strategies, but, care should be taken to ensure that these do not

slip to alien territory.

Value trap businesses fit reasonably well with parenting opportunities,

but fit poorly with parent’s understanding of business units’ CSFs. This may

mean two things; either these businesses do not match the core competences

of the corporation or organizational capabilities or the CSFs need re-examination.

If the CSFs cannot be redefined or reworked, these businesses should be milked,

and, eventually divested. Such businesses can adopt stability strategies for

prolonging the period of milking.

Alien territory businesses show very little promise or opportunity because

there is a misfit between parenting characteristics and business units and also,

poor fit between parenting opportunities and characteristics. Such businesses

can often be the results of ‘misguided diversifications’ in the past and, are best

candidates for withdrawal or divestment.

As shown in Figure 8.7 and explained above, if there is lack of fit between

parenting opportunities and characteristics and, also between business units’

CSFs and parenting characteristics, corporate parenting may not add value to

businesses. In fact, a story is told in a major multinational corporation that,

historically, there had never been a business within their portfolio which, having

been divested, had not done better on its own or with someone else.7

This implies that activities of corporate parents may not always be moving

in the right directions. If parenting does not add enough value to businesses,

the parent may become a cost to those businesses, and may reduce or destroy

value created by them instead of adding to it. There is a clear difference of

opinion among strategic management analysts on whether parenting adds value

or destroys it.




21. The manner in which the corporate headquarters or centre manages and

nurtures individual businesses or SBUs is called________.

22. Ideal businesses in terms of parenting fit are_________.

23. _______businesses fit well with parenting characteristics but, do not

provide enough opportunities to the parent for improvement.

24. _________businesses show very little promise or opportunity because

there is a misfit between parenting characteristics and business units.

8.10 When Best to Pursue Stability Strategy

Good parenting can help SBUs to follow any strategy effectively including stability

strategies. In large multi-business organizations, some SBUs may follow stability

strategy; some other SBUs may have to adopt strategy for internal change and

restructuring; other SBUs may pursue expansion strategy. Stability strategies

are followed by organizations as corporate-level strategy also. In fact, most

organizations (single business or multi-business) follow stability strategies for a

period of time; some organizations follow this for a longer period than others. It

has been generally observed that as companies/corporations grow older, they

get more rooted in structures and systems and, are more likely to follow a

stability strategy. L&T is an example. We can also identity some specific situations

when it is best to pursue stability strategy:

(a) Perception of management about performance: If the management is

satisfied with present performance and, is not willing to take market risks,

they may like to adopt stability strategy and continue with it. The

management may consider change of strategy only if results are not

forthcoming.

(b) Slowness to change: Some organizations are slow to change or resistant

to change. This is particularly true of public sector companies. Many such

companies are not organizationally equipped for fast or sudden change

and lack the ability to cope with risk and uncertainty inherent in such

change.

(c) Frequent past changes: If a company had made frequent strategic changes

in the past, it should follow stability strategy for some period for more



efficient management. In fact, it is always recommended that, after a

period of internal change and restructuring or expansions, stability strategy

should be pursued as a pause or rehabilitation. Otherwise, the organization

may show signs of destabilization.

(d) Strategic advantage: If an organization’s strategic advantage lies in the

present business and market, it should pursue stability strategy. If, for

example, an organization has high market share, it can continue in the

same business and defend its position through incremental strategic

changes.

(e) Profit objective/maximization: Every company has some profit objective

which is commensurate with the level of investment, output level, market

structure, willingness to take risk, etc. If the stability strategy helps the

company achieve its profit objective, the company should stick to this.

Sometimes, stability strategy may even help in profit maximization.

(f) Stable environment: Given the organizational resources and capabilities,

the nature of environment determines, to a large extent, the kind of strategy

to be followed by a company.

If the environment is generally stable in terms of macroeconomic situation,

government policy regulations and competition, stability strategy may be the

best. The particular strategy to be followed depends on the precise nature of

the environmental impact. If the environment is hostile or volatile, stability strategy

is not recommended.


25. Sometimes, stability strategy may even help in profit_________.

26. Stability strategy is not recommended if the environment is

_______or_______.

8.11 Stability Strategies in Practice

In practice, many companies in India and various other countries follow stability

strategies. The reasons or situations can be those mentioned above. Such factors

and circumstances relate to conditions in a particular country. In India, in addition

to the situations mentioned above, reasons for pursuit of stability strategy by

companies are of three types:



1. Overcapacity or underutilization of capacity;

2. Regulatory restrictions or controls;

3. Lack or withdrawal of budgetary support for expansion.

The steel industry, cement industry and coal industry in India have

overcapacity. This is one of the most important reasons why companies like

SAIL, Coal India and ACC are adopting the stability strategy. Such companies

cannot go for expansion strategies. Instead, they are concentrating on improving

their operational efficiency. Cigarette and alcoholic beverages industries are

subject to regulatory restrictions and there is strict control over expansion of

these industries. Companies in the cigarette industry, like ITC, are going for

growth and diversification in agri business, hospitality business and export.

Many companies in the public sector are forced to adopt stability strategy

because of government’s policy of privatization or divestment and curtailing or

stopping budgetary support for any expansion programme. Many public sector

companies in India also adopt stability strategies because of their size, slowness

to change, unwillingness to take risk and the accountability system. Examples

are many: BHEL, BPCL, HPCL, IOC, HCL, RCF, STC, MMTC, etc., in addition

to SAIL and Coal India.

Activity 2

Many examples of stability strategies have been given in the unit. Choose

any two companies and compare the nature of their stability strategies.


27. The steel industry, cement industry and coal industry in India pursue

stability strategy because they have _______.

28. Many companies in the public sector are forced to adopt stability strategy

because of government’s policy of __________.

8.12 Case Study

Larsen and Toubro: Growth with Stability

Larsen & Toubro (L&T), founded in 1938, is one of the largest engineering

companies and one of the top five private sector companies in India. Over

the years, L&T has acquired a very high reputation for its capabilities in



executing engineering projects. In 1994, Kulkarni took over as the CEO of

L&T and announced that the company would fulfil its mission of being a

`10,000 crore entity by the end of the century. An independent survey named

L&T to be one of the best managed companies in Asia and another by

Business India mentioned L&T as one of the most transparent companies

and a leader in corporate governance. The company adopts a combination

business strategy—combination of growth strategy and stability strategy

or growth with stability.

L&T has been setting new challenges in defining core capabilities and core

competence. Generally speaking, core competence of the company lies in

its ability to ‘synthesize, integrate and harmonize its diverse world-class

engineering, manufacturing, procurement, construction and fabrication skills

around turnkey projects’ mostly in core sectors. This is backed by a world

class vendor base, high quality technological alliances, excellent IT

infrastructure, sophisticated fabrication facilities and its people. People—

L&T’s dedicated team of managers/employees—stand for one of the

company’s key capabilities.

L&T implements its vision and business philosophy through effective

management approaches. In terms of structure, the company adopts

decentralized decision making and a less hierarchical system. The concept

of SBUs is actively encouraged and implemented. Budget allocations are

made in the beginning of a financial year and SBUs are assigned

responsibilities, along with necessary delegation of powers to achieve the

targets. The CEO directly gets involved only in matters like diversification,

restructuring, business divestment, etc.



The company strongly believes in empowerment, teamwork and continuous

training of employees. According to Kulkarni: ‘Only through empowerment

and decentralized decision making can a highly diversified company like

L&T be managed.’

The TQM movement, initiated in 1993, has taken firm roots in L&T. Training

of a large number of employees has facilitated the launch of many quality

improvement programmes. A large number of managers and staff have

participated in continuous improvement (Kaizen) and small group activities.

Several cross-functional teams regularly operate in the area of design,

manufacturing, marketing and services. The principles of TQM are applied

to customer service also. The TQM Awareness Programmes have also

been extended to the stockists and vendors to bring improvement in

operations and customer service.

L&T is consolidating its business in four major areas—engineering,

construction, cement and equipment manufacture. The company has

identified Engineering Project Construction (EPC) as a thrust business for

the future. In the EPC business, major domestic competitors are BHEL,

Punj & Lloyd and RITES. The core infrastructure sectors such as power,

telecom, and roads are the key focus areas for the country. Most players in

project/construction business have specific competences which cater to

specialized areas. L&T is perhaps the only company which competes in

almost every sector by virtue of its diversified technical competence and

expertise.

L&T’s achievement so far has been highly impressive. It has set a good

example of growth with stability. Its growth has hardly been unbalanced.

However, there are some points of caution or concern. First is global

competition. In international EPC business, the company faces tough

competition from global majors, like Hyundai, Kematsu and Caterpillar. L&T

has partially overcome this through strategic and technological alliances

with major international players. Some of its alliances in certain countries

are even with companies like Caterpillar and Marubeni, which are

competitors in other countries. Another area of concern for L&T is its low

productivity in certain businesses compared to international benchmarks.

Lack of strong/ enough cost competitiveness or cost efficiency is another

relatively weak area. The company needs to take necessary corrective

measures to remain strong in its growth trajectory.



8.13 Summary


• Organizations follow stability strategies because they neither go for any


expansion strategies. In following stability strategies, companies pursue

certain objectives which are consistent with overall corporate

• The BCG model is a growth–market share matrix, a matrix depicting a

company’s competitiveness (cash flow generation or profitability) in terms

of market growth rate and, its relative market share. The model is also

known as a portfolio matrix, a company can determine its optimal product

portfolio in terms of stars, cash cows, question marks and dogs.

• Porter (1985) evolved the theory that there are four generic strategic

options available to companies – cost leadership (mass market), focused

cost leadership (niche market), differentiation (mass market) and focused

differentiation (niche market).

• Thompson, Strickland and Gamble have extended Porter’s framework to

include a fifth generic strategy, i.e., best-cost provider strategy. Best-cost

strategy strikes a middle course between the mass market and niche

market on the one hand and, low-cost advantage and differentiation

advantage, on the other.

• Stability strategies are very relevant for industry leaders. Having attained

leadership position, a leader’s strategic concern is to maintain stability or

defend its market position for continuing dominance in the industry.

Leaders generally employ one of the four defensive strategies: position

defence, counter-offensive, retreat and pre-emptive defence.

• Concentration strategy is one of the commonest stability strategies. In

concentration strategy, an organization directs its resources to the

profitable growth of ‘a single product in a single market and with a single

technology’ or, a narrowly defined product and market focusing on a

dominant technology.

• Corporate parenting relates to the manner in which the corporate

headquarters or centre in amulti-business organization manages and

nurtures individual businesses or SBUs. A corporate parent may be value

adding or value destroying.



8.14 Glossary

• BCG matrix (Boston Consulting Group model): A growth-market share

matrix, depicting a company’s competitiveness (cash flow generation or

profitability) in terms of market growth rate, and, its relative market share.

• Cash cows: High-share products or SBUs operating in a low-growth

market.

• Dogs: Low-share businesses in low-growth markets.

• Pre-emptive defence strategy: A strategy under which a company, after

having identified a possible threat, takes action ahead of competitors.

• Question marks/problem children: Low-share businesses in high-

growth markets.

• Stability strategy: A strategy in which companies will concentrate their

resources where the company presently has or can rapidly develop a

meaningful competitive advantage in the narrowest possible product

market scope consistent with the f irm’s resources and market

requirements.

• Strategic business unit: A product/product group unit which operates

as a separate profit centre that has its own set of market and competitors

and its own business strategies.


1. Define stability strategy. Does ‘stability’ mean ‘being static’? Explain with

reference to the objectives of stability strategy.

2. What is the BCG model? Explain ‘stars’, ‘cash cows’, ‘question marks’,

‘and ‘dogs’ in the context of this model.

3. What are the four generic strategies? What is the best-cost provider

strategy? Explain.

4. What is the general strategy for the industry leader? Explain, with

examples, the four defensive strategies.

5. What is concentration strategy? Is concentration strategy a stability

strategy? Explain with details.

6. Define corporate parenting. Illustrate both the value-adding role and the

value-destroying role of corporate parent.



7. Discuss six situations when it is good/best to pursue stability strategy.

Give some Indian examples.

8.16 Answers


1. Stability

2. Developing, maintaining

3. False

4. True

5. Boston Consulting Group

6. portfolio matrix

7. 1970s

8. Cash cows, dogs

9. Focused differentiation

10. niche marketing

11. True

12. True

13. (d)

14. (a)

15. position defence

16. pre-emptive defence strategies

17. pre-emptive

18. Analogies

19. Concentration

20. Small and medium

21. Corporate parenting

22. Heartland businesses

23. Ballast

24. Alien territory

25. maximization



26. Hostile, volatile

27. Overcapacity

28. privatization or divestment


1. Stability strategy implies that an organization will continue in the same or

similar business as it currently pursues with the same or similar objectives

and resource base. Refer to Section 8.3 for further details.

2. The Boston Consulting Group (BCG) model is a growth-market share

matrix, depicting a company’s competitiveness in terms of market growth

rate, and, its relative market share. Refer to Section 8.4 for further details.

3. Porter (1985) evolved the theory that there are four generic strategic

options available to companies. Refer to Section 8.5 for further details.

4. Industry or market leaders typically employ proven strategies linked either

to low cost or differentiation or best cost or mass customization. Refer to


5. One of the commonest stability strategies is concentration on the current

business. Refer to Section 8.8 for further details.

6. Corporate parenting relates to the manner in which the corporate

headquarters or centre manages and nurtures individual businesses or

SBUs. Refer to Section 8.9 for further details.

7. There are some specific situations when it is best to pursue stability

strategy. Refer to Section 8.10 for further details.

8.17 References

1. Campbell, A, M Goold, and M Alexander. 1994. Corporate Level Strategy:

Creating Value in the Multibusiness Company. New York: John Wiley &

Sons.

2. Hasperlag, P. ‘Portfolio Pricing—Uses and Limits’. Harvard Business

Review, Jan–Feb, 1982.

3. Nag, A. 2008. Strategic Marketing. New Delhi: Macmillan India.



4. Pearce II, J A, and R B Robinson Jr. 2005. Strategic Management:

Formulation, Implementation and Control. 9th edn, New Delhi: Tata

McGraw Hill.

5. Porter, M. 1980. Competitive Strategy: Techniques for Analysing Industries

and Competitors. New York: The Free Press.

6. Thompson, Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and

Executing Strategy: The Quest for Competitive Advantage. New Delhi:

Tata McGraw Hill.

Endnotes

1 R L Katz, Management of Total Enterprise (New Jersey: Prentice Hall, 1970).

2 P K Ghosh, Strategic Planning and Management (New Delhi: Sultan Chand & Sons,

2003), 204 –5.3 More cash would be required to support high growth and less cash would be used to

finance low growth4 J A Pearce II, and R B Robinson Jr, Strategic Management: Strategy Formulation and

Implementation (New Delhi: AITBS Publishers and Distributors, 2002), 251.5 J A Pearce II, R B Robinson Jr, Strategic Management: Strategy Formulation and

Implementation and Control , 9 th ed. (New Delhi: Tata McGraw Hill, 2005), 203.6 J A Pearce, and R B Robinson Jr (2005), 201 –02.7 G Johnson and K Scholes, Exploring Corporate Strategy (2005), 270.



Unit 9 Strategy for Managing Change

Structure

9.1 Introduction

9.2 Caselet

Objectives

9.3 Corporate Restructuring

9.4 Divestment Strategy

9.5 Liquidation Strategy

9.6 Turnaround Strategy

9.7 Managing Radical Change

9.8 Strategic Change in the Public Sector

9.9 Some Strategic Guidelines for Managing Change

9.10 Case Study

9.11 Summary

9.12 Glossary


9.14 Answers

9.15 References

9.1 Introduction

We had distinguished between stability strategies, strategies for managing change

and expansion strategies in Figure 8.1 (in the previous unit). This distinction shouldbe clearly understood, because, change is involved in almost all strategies,

including stability strategies and expansion strategies. However, by change, wehere mean internal organizational change. Many companies, during different

phases of organizational life cycles, reach a stage when organizational changebecomes essential for survival and growth. Analysis of such changes, and various

issues related to these, is the subject matter of this unit.

Organizations have to adopt appropriate strategies for managing the

change. Companies commonly adopt one of the four major strategies: corporaterestructuring, divestment, liquidation and turnaround strategies. Besides these,

organizations use strategies to manage radical change and also during period

of uncertainties. Companies may sometimes adopt a doomsday managementapproach. Some have also suggested change during good times for progressive

companies. Some of these changes are reactive, some are proactive (Figure

9.1) We will discuss all these in this unit.



Managing Change

Reactive Proactive

Corporaterestructuring

Divestment Liquidation Corporateturnaround

Managing radicalchange

Managing uncertainty

Doomsdaymanagement

Changecuring

good times

Figure 9.1 Managing Organizational Change: Reactive and Proactive

9.2 Caselet

Immediately after the announcement of liberalization measures by the

Government of India in July 1991, the Tata Group in 1992 embarked on a

restructuring programme in the form of a strategic plan.

The objective was to create a system of integrated planning, rationalize

companies or businesses, create synergy among overlapping units and

consolidate holdings in the group companies. The strategic plan or the

restructuring programme aimed at reducing the existing 25 businesses and

107 operating companies to 12 businesses and less than 30 operating

units.

In 1996, the group hired McKinsey & Co to prepare a detailed restructuring

plan. As a sequel to the restructuring plan, the group has divested, over the

years, companies/businesses such as Goodlass Nerolac, Tata Oil Mills

(soaps, hair oils and other consumer products), Lakmé and TISCO’s (now

Tata Steel) cement division. Simultaneously, the group has strengthened

businesses like cement and tea through consolidation. Future plans of the

group include investment in new economy businesses like B2B Internet

service and cellular telephony.

Objectives


• Analyse corporate restructuring as a strategy

• Discuss restructuring in the Indian corporate sector



• Discuss corporate turnaround strategy: surgical and non-surgical

• Analyse divestment as a strategy

• Focus on managing radical change

• Discuss strategic guidelines for managing change

9.3 Corporate Restructuring

Corporate restructuring means organizational change to create a more efficient

or profitable enterprise. Similar terms which are used for ‘restructuring’ are

‘revamping’, ‘regrouping’, ‘rationalization’ or ‘consolidation’.

Corporate restructuring has three meanings or connotations: organizational

restructuring, business-level restructuring and financial restructuring.

Organizational restructuring means changes in the structure of the organization—

changing or reducing hierarchies or delayering, down sizing, i.e., reducing the

number of employees, redesigning positions, reallocation of jobs or portfolios

or changing the reporting system. Business-level restructuring (applies to multi-

business organizations) deals with changes in the composition of a company’s

businesses or product portfolios. The changes are done on the basis of

movements in market share or performance of different businesses or products

to improve efficiency or profitability at the corporate level. Financial restructuring

is concerned with changes in financial management in terms of equity pattern

or equity holdings, debt-equity ratio, borrowing pattern, debt servicing schedule,

etc. More common forms of restructuring are organizational restructuring and

business-level restructuring. Sometimes, when major crisis develops,

restructuring may be comprehensive, which may simultaneously involve, rather

combine, business-level restructuring, organizational restructuring and even

financial restructuring. This may happen more during a turnaround situation

(discussed later).

Restructuring is essentially an adaptation strategy. It is about adaptation

to change and is mostly incremental in nature. In contemporary business, most

companies are in the process of constant change. Often older companies require

more restructuring than the newer ones. This may happen for a number of

reasons. First, those companies might have over-diversified including

diversification into unrelated areas; second, the organizational structure might

be very hierarchical not fitting into a dynamic market environment; third, there

might be a conservative financial management system in relation to funds flow

and investments.



A survey by the All India Management Association (AIMA) shows that

corporate restructuring is a continuous process, and, in India, it accelerated

after 1991 with the initiation of the liberalization process. The main objective of

restructuring in the Indian companies was to gain customer focus.1

Another research study on corporate restructuring revealed that most of

the restructuring exercises carried out by the Indian companies after 1991 were

at business portfolio level followed by changes in ownership or shareholding

structure. The instruments of restructuring in these companies were primarily

joint ventures, mergers and acquisitions and diversification into newly opened

sectors like power and telecom. These are actually expansion strategies and

are discussed in detail in the next unit. The conclusion of the study is that large

traditional business houses, medium-sized enterprises of recent origin and public

sector enterprises are the major participants in restructuring, their primary

concern being delivering better shareholder value.2

9.3.1 Restructuring in the Indian Corporate Sector3

We had mentioned above that restructuring processes are more commonly

observed in large diversified companies. Restructuring programmes in some

Indian companies in the private corporate sector, including multinationals and

public sector are mentioned below. The companies are: Hindustan Unilever,

L&T, Tata Industries, SAIL and SBI (The restructuring by the Tata Group has

been discussed in the caselet above).

Hindustan Unilever

Hindustan Unilever’s restructuring plan was christened ‘Project Millennium’. This

was primarily a project on business restructuring. This was a comprehensive

transformation programme to restructure the company from being ‘a large,

diversified conglomerate to becoming a configuration of empowered virtual

companies, each built around a single category of products’. The objective was

to reduce or regroup over 50 existing businesses into 18 businesses grouped

under seven major divisions: detergents, beverages, personal products, frozen

foods, culinary products, agribusiness and oil-fats. The restructuring programme

envisaged a combination of different strategies including acquisition in the

identified core business, dairy products, animal feeds and specialty chemicals.

Larsen and Toubro (L&T)

L&T had developed ‘Vision 2005’ as the basis for its restructuring. The company

had a minor restructuring in 1993 in which it divested non-core businesses like



shipping and shoe manufacturing. The objective of ‘Vision 2005’ was to focus

on its core businesses and deliver better shareholder value. The core businesses

were re-identified as engineering projects, construction and software. As part of

the restructuring programme, the company had planned for entering into joint

ventures for cement, tractors and earth-moving equipment businesses.

Divestments are to continue for minor businesses like glass bottles and crown

caps.

Steel Authority of India (SAIL)

SAIL had made massive investments in modernization programmes undertaken

during 1992–93. The investments later turned out to be untimely, and also the

modernization project suffered from cost overruns and also problems of financial

cost-benefits. This had affected the financial and operations management of

SAIL. Subsequent to this, revival efforts were initiated primarily in terms of

financial restructuring of the company. Restructuring also aimed at business

restructuring focussing on the core business of SAIL, that is, steel, and

intensification of strategies for four steel plants—Durgapur, Bhillai, Bokaro and

Vizag—to improve operational efficiency.

The restructuring programme also involved divestment of non-core

subsidiaries like stainless steel and alloy steel or operating them as joint ventures.

State Bank of India (SBI)

Like many other companies, including L&T and Tata Group, SBI’s restructuring

plan was also induced by the liberalization measures initiated by the government

in 1991. In 1993, SBI had commissioned McKinsey & Company to prepare a

restructuring plan for the bank. Restructuring was aimed at developing an

international perspective for SBI and making it a world class bank.

Corporate restructuring consisted of both organizational restructuring and

business restructuring. The restructuring process was to focus on profitable

areas or operations to improve corporate profitability. To achieve this objective,

SBI was restructured into different banking groups on SBU model. These groups

are: corporate banking, national (retail and other commercial) banking,

international banking, and associate and subsidiary banking.

Restructuring sometimes involves a retrenchment strategy. Retrenchment

strategy means that a company is aiming at contraction of its activities or

operations through significant reduction or elimination of one or more of its

businesses to improve organizational performance or efficiency.



Retrenchment is not just incremental contraction; contraction here is more

significant. Retrenchment actually involves trimming the fat and creating a leaner

and fitter organization devoid of unprofitable or unproductive businesses or

activities. In many cases, retrenchment implies a divestment strategy which is

discussed in the following section.

Activity 1

Carry out a research on corporate restructuring and write a case study of

an organization that undertook corporate restructuring to emerge as a more

efficient or profitable enterprise. You can use reference books or the Internet

for your research.


1. Organizational change to create a more efficient or profitable enterprise

are referred to as _________.

2. Downsizing, redesigning positions, reallocation of jobs or portfolios or

changing the reporting system is known as ________.

3. Often newer companies require more restructuring than the older ones.

(True/False)

4. A company aiming at contraction of its activities or operations through

significant reduction or elimination of one or more of its businesses to

improve organizational performance or efficiency

(a) adopts retrenchment strategy

(b) changes product portfolios

(c) changes the terms of equity pattern

(d) undertakes divestment

9.4 Divestment Strategy

Divestment, also called divestiture, means selling a part of a company—a major

division or an SBU. Divestment is usually a part of corporate restructuring or

rehabilitation programme as indicated above. Divestment can be part of an

overall downsizing or retrenchment strategy of an organization to get rid of

businesses which are unprofitable or which require too much capital or which



do not fit well with the company’s other existing businesses or activities.4

Divestment is many a time used to raise capital for new acquisitions or

investment. Sometimes divestment becomes a forced option when an attempt

has been made to turnaround the business, but, has not been successful.

Divestment can be done in two ways: selling a business outright or spinning

it off as an independent company. Selling a business outright is the more

commonly used form of divestment.

A business becomes a good candidate for spinning off as an independent

company if it possesses sufficient resource strength to compete successfully

on its own. Spinning off business into a separate company may be done because

of some strategic reason; may be, it does not fit well with the core business of

the company. If a company decides to spin off a business, one important decision

the corporate parent has to take is whether to retain partial ownership in the

divested business. Retaining partial control is generally recommended if the

business to be divested has good profit prospects. Spinning off a business, with

or without partial ownership, may be done either by selling shares to the public

through an initial public offering (IPO) or by distributing shares of the new

company to the existing shareholders of the corporate parent.5

Selling a business outright involves finding a suitable buyer. Finding a

suitable buyer may be easy or difficult depending on the nature of the business

to be divested. It also depends on the structure, size and growth of the industry

or market. Many times, businesses are sold not necessarily because they are

unprofitable, but because of strategic or environmental reason, say, emerging

competitive threat. Parle Products sold its profitable soft drinks business to

Coca-Cola because the company did not want to get involved into a marketing

warfare with giants like Coke and Pepsi. Also, while selling a business, the

seller company should look for a buyer who finds the business a good fit with

their existing product mix or product portfolio. For example, for Coca-Cola, buying

the soft drink business of Parle Products was a perfect strategic fit. This way

the seller company also gets a good price, that is, the divestment becomes

profitable.

Divestments are common in corporate functioning of multi-business

organizations including multinational companies. From time to time, large

companies sell or spin off businesses and add or acquire new businesses in

conformity with environmental changes and organizational objectives or goals.

The underlying driving force is competitiveness. Given below are some examples

of recent divestments (Table 9.1).



Table 9.1 Selected Recent Divestments

Parent company Part/business divested Acquiring company

Procter & Gamble

Dell Computer

Citigroup

General Motors

DuPont

Voltas

Tatas

Hindustan Unilever

Voltas

Tatas

Jif peanut butter

Web-hosting division

Citi Capital

Hughes Electronics

Drug Division

Chemicals

TOMCO

Vanaspati (Dalda)

Air conditioners,

Refrigerators

Lakmé

J M Smucker

FON Group

GE Capital Fleet Services

EchoStar Communications

Bristol-Myers-Squibb

Ralechem

Hindustan Unilever

Bunge Ltd

Electrolux

Hindustan Unilever


5. Divestment means

(a) reducing the number of employees

(b) redesigning positions

(c) reallocation of jobs

(d) selling a part of a company

6. Divestment can be done in two ways: _______or spinning it off as an

independent company.

7. Many times, profitable businesses are sold because of ______or

environmental reasons.

8. The underlying driving force behind divestment is ____________.

9.5 Liquidation Strategy

Liquidation means closing down a company and selling its assets. Liquidation

can also be defined as ‘selling of a company’s assets, in parts, for their tangible

worth.’6 This should be the strategy of last resort when no other alternatives like

turnaround, restructuring or divestment are applicable or workable. Liquidation is

actually a recognition of defeat. But, at some stage of the organizational life cycle,

it is advisable to cease operating than continue to operate and accumulate losses.



Liquidation should be planned. Liquidation may be the toughest decision

for a company, but, if it is unavoidable/inevitable, it should be done at the right

time and, in a planned manner. Planned liquidation involves a systematic process

for maximum benefits for the company and its shareholders. If liquidation is

unplanned or haphazard, the company may incur avoidable or unnecessary losses.

In India, liquidation is governed by the Companies Act, 1956. In the

Companies Act, liquidation is officially termed as ‘winding’. The Act defines

winding up of a company as ‘the process whereby its life is ended and its property

administered for the benefit of its creditors and members’. The Act stipulates

appointment of a liquidator who handles the liquidation process. The liquidator

takes control of the company, collects its assets, pays its debts and, finally,

distributes any surplus among the members, according to their rights.7 According

to the Act, liquidation or winding up may be done in three ways:

(a) Voluntary winding up;

(b) Voluntary winding up under supervision of the court;

(c) Compulsory winding up under an order of the court

The Act also provides for dissolution of a company in which case it ceases

to exist as a corporate entity for all practical purposes and, all its operations

remain suspended for a period of two years. During these two years, the company

may be liquidated. Part VII (Sections 425 to 560) of the Act deals comprehensively

with various legal aspects of liquidation including dissolution.

Thousands of small businesses in different countries, developed and

developing, liquidate every year because of unviable operations. Liquidation,

however, is not confined to small business only. General Motors terminated

production of its Chevrolet Camera and Pontiac Firebind in 2002 and closed the

Canadian manufacturing plant when the operation became totally unviable. In

India, Navsari Mills and Swadeshi Mills (both of Tata Group), Binny, Shri Ambica,

Sriram and India United are some of the companies whose products/brands

were quite popular at one time, but, ultimately, had to be closed down. Many

jute mills in eastern India had the same fate. In China and Russia, thousands of

government-owned businesses liquidate as these countries try to privatize and

consolidate industries.

Under certain situations, liquidation is particularly recommended. David

(2003) has suggested three situational guidelines for liquidation to be an effective

strategy:

1. An organization has pursued both a retrenchment strategy and a

divestment strategy, but, neither has been successful;



2. For an organization, only alternative left is bankruptcy; liquidation, in this

case, represents an orderly and planned means of obtaining maximum

possible cash for the organization’s assets. A company can legally declare

bankruptcy and then liquidate various divisions or businesses to raise

funds or capital;

3. The stockholders of a company can minimize their losses by selling the

company’s assets through liquidation.8


9. Closing down a company and selling its assets is known as ________.

10. In India, liquidation is governed by the _________.

11. The Companies Act stipulates appointment of a _______who handles

the liquidation process.

12. The stockholders of a company can minimize their losses by selling the

company’s assets through liquidation. (True/False)

9.6 Turnaround Strategy

Corporate turnaround may be defined as organizational recovery from business

decline or crisis. Business decline for a company means continuous fall in

turnover or revenue, eroding profit, or accrual or accumulation of losses. So,

business or organizational decline, like business performance, is understood in

relative terms, that is, compared with the past. But, some strategy analysts

describe business decline in terms of current comparisons also; for example,

relative to industry rates or averages or even relative to economic growth of the

country. Corporate crisis means deepening or perpetuation of a decline.

Turnaround strategies are usually required for crisis situations. If

organizational decline is not continuous or severe, corporate restructuring can

provide the solutions. That is why turnaround strategy may be said to be an

extension of restructuring strategy. When restructuring is very comprehensive

and leads to corporate recovery, it almost becomes a turnaround strategy as

mentioned above in the case of Voltas.

Corporate or business decline manifests itself in many forms or symptoms,

including profitability. These symptoms are actually different performance criteria

of companies. Major symptoms or criteria or situations which signal towards the

need for a turnaround strategy are:



• Steadily declining market share;

• Continuous negative cash flow;

• Negative profit or accumulating losses;

• Accumulation of debt;

• Falling share price in a steady market;

• Mismanagement and low morale.

With some or all these symptoms becoming clearly visible (these

symptoms are generally interrelated) for a company, a turnaround or recovery

becomes highly imperative. But, the situation should be carefully reviewed to

assess the extent of recovery possible before undertaking any such programmes.

Given a strategy, in some situations, recovery may be more or less successful

than in others. Slatter (1984) contends that there are four recovery situations in

terms of feasibility or success. These situations are:

(a) Realistically non-recoverable situation;

(b) Temporary recovery situation;

(c) Sustained survival situation ;

(d) Sustained recovery situation.

Realistically non-recoverable situation is one in which chances of survival

are very little, because the company is not competitive, the potential for

improvement is low, clear cost disadvantage exists and demand for the

company’s product is in decline stage. In such a situation, divestment or

liquidation may be a better option.

Temporary recovery situation exists when there can be initial successful

recovery, but, sustained turnaround is not possible. This can happen because

repositioning of the product is possible.

Some cost reduction programmes may be successful, and revenue

generation is also possible at least for some time.

Sustained survival situation means that recovery is possible but potential

for future growth does not exist. This may happen primarily because the industry

is in a declining phase (say, black and white TV, audio cassettes, VCR). A

company in such an industry or situation can either go for divestment or

turnaround if it foresees or can create a niche in the industry and if the growth

prospects can be created.

Sustained recovery situation is one in which successful turnaround is

possible for sustained growth. In such cases, business decline might have been



caused by internal organizational factors or external or environmental conditions

which the company is able to deal with effectively. Inherently, the company is

strong in terms of competence.9

Surgical Turnaround and Non-surgical Turnaround

Generally, there are two methods of corporate turnaround: surgical and non-

surgical. The surgical method, more commonly practiced in the West, involves

sweeping changes like firing of staff, managers, wholesale reshuffling of portfolios,

closing down operations, etc. Some call it bloodbath or bloodshed. Non-surgical

turnaround adopts the opposite approach, that is, peaceful means—revamping

or recovery through meetings, discussions, persuasions, consensus, etc.

The operations in surgical turnaround are like this: the first step is to replace

the chief executive of the ailing company by a new ‘iron’ chief. The new chief

promptly gets into action; he asserts his authority. He issues pre-emptory orders,

centralizes functions and spears some convenient scapegoats. Then he goes

about firing employees en masse and auctioning/selling whole plants and divisions

‘until the fat is satisfactorily cut to the bone’. The bloodbath over, the product mix

is revamped, obsolete machinery is replaced, marketing is strengthened, controls

are toughened, accountability for performance is focussed and so on. How ‘bloody’

this sort of turnaround can be may be seen from the examples of companies like

the US video games manufacturer Atari, which, among other actions, cut its labour

force by two-thirds to 3500 to turn itself around. At British Leyland, 84,000

employees (40 per cent) were axed to complete the surgery. At GE, 1,00, 000 of

a workforce of 4,00, 000 lost their jobs; at Imperial Chemical Industries (ICI), the

labour force was reduced from 90,000 to 59, 000; half the staff at Chrysler

Corporation disappeared; at British Steel, half the company’s production capacity

and 80 per cent of workforce were gone.10

Turnaround management of the humane type may involve negotiated

and humane layoffs and divestiture, but, not a bloodbath. This type of turnaround

also is generally brought about by the new helmsman. But, he spends a great

deal of time in trying to understand organizational problems and deliberating on

them. He takes all the stakeholders including unions into confidence; forms

groups within the organization to brainstorm together on what needs to be done

to get over the crisis; tries to create a new work culture; and, generally infuses

a strong sense of participation among the employees and many critical decisions

become participative decisions. There are many examples of successful

turnarounds of the humane type including Enfield, Volkswagen, Lucas, Air India,

SPIC, BHEL and SAIL.



We give here the example of SAIL, the Indian public sector steel giant. Its

losses were about ̀ 100 crore during 1982–83 and ̀ 200 crore in 1983–84. A price

rise during 1984–85 saw SAIL break even in that year. But, rapid increases in

coal prices and freight rates threatened a loss in 1985–86. The steel ministry and

SAIL management then called for another price hike. Krishnamurthy entered the

scene as Chairman, SAIL in mid-1985. He promptly lobbied against price increase

on the ground that efficiency had to be improved. Indian steel was already the

costliest in the world and any further increase in steel price would have ruinous

effects on the economy, contended Krishnamurthy. He spent several months talking

to small groups of executives, officials, staff and workers in SAIL. He estimates

that he talked to over 25,000 employees to identify operating problems, got

perception of how the company was doing and what employees thought should

be done to improve performance and turn around the company. The turnaround

strategy finally emerged from discussions at all levels.


13. Organizational recovery from business decline or crisis is known as

_______.

14. Turnaround strategies are usually required for _________situations.

15. A situation in which recovery is possible but potential for future growth

does not exist is called_________.

16. Generally, there are two methods of corporate turnaround: _______and

_______.

9.7 Managing Radical Change

Turning corporates around is like implementing or managing radical change.

There is, however, one difference. Corporate turnarounds, as we have just

discussed, are prompted by business decline or crisis. But, all radical changes

do not take place because of crisis situations only. Radical change also takes

place when an apparently insignificant new entrant grows radically to take on

an industry giant or the undisputed leader. Radical changes are also implemented

and managed when a small marginal player grows almost dramatically to become

one of the most dominant players in the industry. Ghoshal and others (2002)

deal extensively with the phenomenon of radical change and how visionary

companies manage them. We shall analyse here management of radical change



with reference to three companies in three different industry situations. These

companies are Hastings Jute Mills, Canon and Electrolux.

9.7.1 Hastings Jute Mills

The management of Hastings Jute Mills (Kajaria brothers) made jute business

attractive by defying the conventional rules of jute business through innovation,

entrepreneurship and transforming the employee-management relationship. The

company has been successful in radically improving productivity and creating

innovative products which have found new use in international markets.11

The jute industry in West Bengal has, for long, been characterized by

sick units and closures. The industry represents one of the worst cases of adverse

relations between the owners and the unions which have been destroying the

jute business. Added to this are stagnant or obsolete technology and falling

market prices.

Amidst this highly hostile environment, the Kajaria brothers took over the

management of Hastings Jute Mills in 1994. In the jute industry, wages are

almost 40 per cent of the cost of production; raw material constitutes 35 per

cent; power accounts for 8 per cent; stores 7 per cent; and, other costs are 10

per cent. Kajaria brothers knew that, to be competitive, manufacturing cost had

to be slashed. They also realized that, as they themselves put: ‘... to improve

productivity and reduce the processing costs, we needed the cooperation of

labour, and, for this, we had to build a very different mindset’.

Hastings had 14 trade unions. The first task of the new management was

to convince the trade unions and the individual workers that, unless both the

management and the unions/workers adopted a win-win attitude, the mill might

close down. The unions were initially sceptical because they always have

apprehensions about the management. But, a major breakthrough in trust

building was achieved when the company regularized about 700 ‘ghost’ workers.

The goodwill and confidence created by this gesture yielded some result; the

union leaders came to the negotiating table. Their hostility gradually gave way

to understanding; both sides agreed on enhanced productivity norms and

incentive schemes.

But, the biggest achievement of the management was an innovative

training scheme for young workers. The scheme was born out of necessity. At

Hastings, about 200 workers retired every year and the annual gratuity bill was

about `1 crore. But, the company was not earning enough to spend so much.

Instead, the management promised to employ one member of the family of the

retiring worker. In addition to this, the company would train a young member of



the retiring employee’s family for three years. The management also guaranteed

that the new trained worker would be a regular employee of the company. This

worked well with the unions and the worker community.

The feeling of togetherness and sharing a common destiny by the

management and the workers did not come about easily. It was achieved at a

significant cost. It took four years, two strikes, a lockout and hundreds of

meetings. But, eventually, the results achieved were stupendous. Wage cost

declined from 40 per cent to 33 per cent (from 52 man-days per tonne to 42)

and a saving of `5 lakh per month. In 1998, the Indian jute industry comprised

73 composite mills of which 22 were sick, 25 per cent of installed capacity was

idle and productivity was generally low. But, at Hastings, every mill was busy

and productivity in some section of the mill was 90 per cent against laid down

norms. Turnover accelerated from about ̀ 13 crore during 1994–95 to ̀ 43 crore

in 1995–96 and to about ` 91 crore during 1996–97. Profits also increased

steadily from `0.9 crore during 1994–95 to about `3.50 crore during 1996–97.

Kajarias summarize their changed management success strategy at

Hastings like this: ‘One can buy peace for some time, but, not for always. For

long-term benefits, mindsets have to change and be flexible. We could do this

because we did not inherit the thinking of the old jute dynasties.’

9.7.2 Canon

Canon is the second largest global player in the photocopier business, closely

behind the market leader Xerox. Canon is today the biggest challenger to Xerox.

Since the launching of Canon as a small camera company in Japan, it has

successfully stood up to the challenge of radical change or performance

improvement to come to its present position.

Xerox was enjoying near monopoly and almost 100 per cent market share

in the global photocopier market (in 1995, it was 93 per cent). Xerox technology

was protected by over 500 patents. The company had a massive marketing and

service support organization working directly for Xerox in the US and for its joint

ventures abroad—Rank Xerox in Europe, Fuji Xerox in Japan and Modi Xerox

in India. The company had worldwide manufacturing infrastructure and was

one of the few companies whose brand name became generic for the product.

Photocopying was often referred to as ‘Xeroxing’.

Canon, the small camera company from Japan, entered the photocopying

business in the late 1960s. It was less than one-tenth of the size of Xerox and,

had no sales and support organization to adequately service the photocopier



market. It also did not have a process technology to bypass Xerox’s patent. To

make matters worse, Canon’s entry took place at a time when corporate giants

like IBM, Kodak and 3M were already in the market challenging Xerox. So,

most of the corporate observers were sceptical about Canon’s plans. One

investment analyst sarcastically remarked about Canon that ‘a photocopier is

not a large camera.’12

But, to the amazement of many, Canon rewrote the rules of the photocopier

business during the next three decades. Canon showed, in its own inimitable

way, how photocopiers were to be produced and sold to shake out the market

and progressively snatch market share from the king of photocopying. From

almost insignificant sales, the company amassed an annual turnover of over $6

billion. It even surpassed Xerox in terms of the number of units sold. Clear

evidence of such phenomenal success is visible in ‘Xeroxing by Canon’ signs in

photocopying shops in different parts of the world, including India.

9.7.3 Electrolux

Electrolux is the global market leader in home appliance business. Electrolux is

a unique case of managing aggressive acquisitive growth. The company’s

achievement is spectacular considering the fact that acquisitions and mergers

have a high rate of failure. Transformation of Electrolux has also been very

radical.

Electrolux made almost an insignificant beginning. In the early 1960s, it

was a small and marginal player in home appliances business. The company

had to compete with global rivals like GE in the US, Philips and Siemens in

Europe and Matsushita in Japan. Its product range was very narrow consisting

primarily of vacuum cleaners and absorption type refrigerators—such

refrigerators becoming increasingly uncompetitive against technologically

superior compression type refrigerators manufactured by the global competitors.

With outdated production facilities and no inhouse R&D, the company was

making losses. It was, in fact, fast approaching bankruptcy.13

Around this time, Wallenberg, Sweden’s most influencial business family,

took over the ownership of Electrolux. Changes were made in top management

of the company; and, the leadership of the company was handed over to Hans

Werthen, who became a management legend in Sweden.

During the next two decades, under the leadership of Werthen, Electrolux

started rewriting corporate history. Between 1962 and 1988, the company made

over 200 acquisitions in 40 countries including big names in the US, France,

Italy and Sweden. Most of the acquisitions were strategic successes. In most of



the home appliances businesses, Electrolux established dominant position in

Europe and significant market shares in a number of other markets including

the US, and, had achieved leadership in many technology areas. By late 1980s,

the company had a diversified portfolio of 30 product lines in five business

areas and it became the world’s largest manufacturer of home appliances.


17. Turning corporates around is like implementing or managing radical

change. (True/False)

18. A company whose brand name became generic for the product is

(a) Hastings

(b) Canon

(c) Xerox

(d) Electrolux

9.8 Strategic Change in the Public Sector

Change during good times is not confined to the private sector only. The public

sector is also realizing the advantages of this. This is always less costly in

terms of resources and, more justified in terms of cost-benefits. This is the

reason why big and well-performing public sector companies like ONGC, IOC,

GAIL, BPCL and HPCL are implementing change during good times.

Deregulation, competition and newly discovered global ambitions are

prompting these PSEs to re-invent themselves as organizations which can

compare with the best in the private sector (benchmarking). These PSEs realize

that to move to the next level, they need to develop internal managerial talent

which will embrace change. Most of these companies have undertaken a

competency-based mapping of its people, and, then, devised developmental

programmes based on a gap analysis.14

Several of these PSEs have engaged top-notch management consultants

to guide the change process. ONGC commissioned the services of McKinsey &

Co. to deliver a solution which could help in optimizing manpower and, also

overhauling the existing manning norms and practice.

According to Balyan, Director, HR, ONGC: ‘We felt that though technical

developments had taken place in ONGC, the people development hadn’t kept



pace’. To fill this gap, Project R3—roles, rosters and responsibility—was

undertaken to define each activity and number of people required for that activity,

and the role of each person defined to the smallest detail. Contends Balyan:

‘Now we have benchmarked ourselves with the best of international companies’.

Chairman Raha himself had been leading the change in ONGC.

HPCL realizes that, for a world class future, companies need to adopt the

best practices, and, follow the best thought leaders. To fulfil the dream of a

world class company, HPCL is benchmarking itself against global oil majors like

British Petroleum. BPCL, in collaboration with the Public Enterprises Selection

Board (PSEB), has even come out with a compulsory model for Indian CEOs

based on a study conducted by the Hay Group. For the company, that is the

path to the future.

As these PSEs negotiate change, each one of them is experimenting

with and exploring new possibilities. Some are going through a process of

corporate introspection since a leap to the next level should also involve an

overhaul of old value systems. IOC, for example, is trying to develop a set of

values which embodies the new vibrant organization that it wants to move

towards. The company conducted a workshop for developing an entirely new

value system from the positive stories told by people about their most moving

interactions with one another. Transformation of values means that the urge to

change runs deep in these organizations.

Implementing change in any organization, particularly a public sector

organization, is a tough task because people resist change. But, each of the

PSEs has devised ways to manage the change process. As part of its

organizational transformation project, HPCL has trained 20 ‘coaches’ from

various departments who are preaching change. This has inspired the entire

organization. Everyone in HPCL wants to participate in the programmes now.

ONGC has 60 change agents who are promoting change. Sentiment is similar

in GAIL. According to Banerjee, CMD, GAIL: ‘We pushed the change initiatives

and we have less and less people voicing apprehension and reservations’.

In all these PSEs, change is giving new directions to the companies. The

leaders are also finding changes satisfying and viewing them as a critical

component of future strategy of their companies. ‘The company has gone through

a large transformation and a sea change not only in attitudes and appearances,

but, in every little activity we do,’ says Banerjee. Balyan, Director, HR, ONGC,

concurs with Banerjee : ‘ONGC is changing and changing very fast. We make

comparisons with other companies and, we feel proud. What’s more, people’s



expectations have changed—now they look for excellence and want to compete

with the best’.

A common feature in managing change during good times in different

companies, like a turnaround and doomsday management, is the pivotal role of

the leaders in these companies.

Leaders become the most important change agents: Welch in GE,

Ganguly, Dutta and Dadiseth in HUL, Palmisano in IBM, Raha in ONGC, Banerjee

in GAIL, etc.

Activity 2

We have discussed strategic change in public sector enterprises in India.

Choose any two public sector companies that have undergone such changes

and carry out a comparitive analysis of the strategic changes in these

companies.


19. Public sector companies are not implementing change in their

organizations. (True/ false)

20. PSEs are benchmarking themselves against the best in the private sector.

(True/False)

9.9 Some Strategic Guidelines for Managing Change

So far we have discussed different kinds of change and various strategies

adopted by companies for managing change. We have also analysed different

organizational situations, environmental factors, change agents, leadership, etc.

From all these, we can formulate some general guidelines for managing change

which can be followed by companies. Kanter et al. (1992) have formulated a set

of comprehensive guidelines for managing organizational change. They call

these 10 commandments for executing change. These are analysed below:

1. Analyse the organization and its need for change

(a) Understand an organization’s business and operations;

(b) Analyse how the organization functions in its environment;

(c) Determine what are the organizational strengths and weaknesses; and

(d) Examine how the organization will be affected by proposed changes.



2. Create a shared vision and common direction

One of the first steps in engineering change is the creation of a common vision.

It is like ‘an organizational dream—it stretches the imagination and motivates

people to rethink what is possible.’

3. Deviate from the past (or pattern breaking)

It is difficult for an organization to create or uphold a new vision for the future

until it has isolated the structures, practices and routines which no longer work

and has decided to move beyond them.

4. Create a sense of urgency

It is critical to rally an organization for change. Sense of urgency for change

does not exist in most organizations; it has to be created.

5. Support a strong leader’s role

Leaders, as change drivers, play a pivotal role in creating a company’s vision

and evolving an organizational structure which consistently rewards those who

contribute towards realization of the vision.

6. Line-up support/sponsorship

Leadership alone may not be able to bring about large-scale change. The leader’s

success depends on a broader base of support from individuals or institutions

which first act as followers, then as helpers, and finally, as co-owners of change.

This ‘coalition building’ should include the holders of important organizational

resources.

7. Design an implementation plan

Changing strategy without a proper implementation plan may not succeed.

Implementation involves what to do, when to do and how to do. This change

plan is a ‘road map’ for execution of change.

8. Develop enabling structures

These may range from the symbolic—such as changing the organization’s name,

logo, lay out/interiors, etc.,—to the practical—such as setting up pilot tests,

workshops, training programmes, new reward systems, etc.

9. Communicate and involve people

Open communication and involvement of people (managers and staff) are

effective tools for overcoming resistance and, giving employees a personal stake

in the transformation process and the outcome of it.



10. Reinforce and institutionalize change

Managers and leaders should continually exhibit their commitment to the

transformation process, reward risk taking and incorporate new attitudes and

values. This phase refers to ‘shaping and reinforcing a new culture that fits with

the revitalized organization’.15


21. The ‘10 commandments’ for executing change were given by ________.

22. One of the first steps in engineering change is the creation of a _________.

9.10 Case Study

Restructuring of Samsung

Organizations in general, and multinational companies in particular, revise

or reformulate their business strategies over time in response to changes

in the environment or market. This has also happened in Samsung.

During the Asian financial crisis in the 1990s, many Korean companies

were under severe stress. Samsung was one of them. The company decided

to undertake strategic changes to overcome the problems it was facing.

During the planning for restructuring, Samsung was convinced that the old

model, which had served the company for so long, was not relevant any

more. It was looking for a new model and, therefore, a change in strategic

focus. Accordingly, a change model was formulated. The major elements

of the change model were as follows.

• From chasing market share, the model changed to seeking value

creation and profitability

• The company needed to be innovative for creating products and markets

• The organization was looking for a new thought process, systems and

a new set of skills

• The company had to build on creating brand equity and using R&D for

new product development

• The company needed a new marketing formula in 2000; by 2001, it

should become a truly global brand strategy.

The cornerstone of the change model was exploitation of the digital

technology. To have a global brand strategy, Samsung needed great



products for securing sustainable competitive advantages. The thrust came

from the company’s leadership, since the 1980s, in digital technology. Taking

advantage of the early adopters (young age people) who were open to new

ideas and were changing to digital, brand building was launched with all

earnestness. The company seized the opportunity by concentrating on

wireless phones, digital audio, MP3 and video DVD and digital personal

information management; thus digitalizing homes, mobiles and offices.

The marketing and advertising strategy laid focus on the single brand

Samsung instead of several brands they were promoting earlier when each

country manager/head was following his own advertising. Samsung

established a single brand, a single-brand strategy and one global agency.

In addition to this, it had a single central budget and a uniform brand theme.

The process of change and strategic transformation faced some resistance

from traditional managers who generally suffer from inertia against change.

But, the top management was committed to the change and new strategy,

and it was carried through. The restructuring process was successful in re-

establishing brand Samsung.

9.11 Summary


• Corporate restructuring means organizational change to create a more

efficient or profitable enterprise. It may involve organizational restructuring

or business-level restructuring or financial restructuring, or, some or all of

these simultaneously.

• Divestment, also called divestiture, means selling part of a company—a

major division or an SBU. Divestment is usually a part of corporate



restructuring or rehabilitation programme. It can also be part of an overall

downsizing or retrenchment strategy.

• Liquidation means closing down a company and selling its assets.

Liquidation should be the strategy of last resort when no other alternative

like restructuring, divestment or turnaround are applicable.

• Corporate turnaround may be defined as organizational recovery from

business decline or crisis. Business decline for a company means

continuous fall in turnover or revenue, eroding profit or accrual or

accumulation of loss.

• Turning corporates around is like implementing or managing radical

change. But, all radical changes are not prompted by business decline or

crisis.

• Kanter et al. have formulated a set of 10 guidelines for managing strategic

change. These are: (i) analyse the organization and its need for change ;

(ii) create a shared vision; (iii) deviate from the past; (iv) create a sense of

urgency; (v) support a strong leader; (vi) line-up support/sponsorship;

(vii) design an implementation plan; (viii) develop enabling structures; (ix)

communicate and involve people; and (x) reinforce and institutionalize

change.

9.12 Glossary

• Corporate restructuring: Organizational change to create a more efficient

or profitable enterprise.

• Corporate turnaround: Organizational recovery from business decline

or crisis.

• Divestment: Selling a part of a company—a major division or an SBU.

• Liquidation: Closing down a company and selling its assets.


1. What is corporate restructuring? Analyse corporate restructuring in some

Indian companies.

2. What is divestment or divestiture? Is divestment a part of corporate

restructuring? Explain with examples.



3. Explain liquidation strategy. When would you recommend liquidation of a

company?

4. Define corporate turnaround. Distinguish between surgical and non-

surgical turnaround. Explain with some examples.

5. Analyse, with examples, management of radical change. Explain with

special reference to Hastings Jute Mills.

6. Discuss the strategic guidelines for managing change as suggested by

Kanter, et al.

9.14 Answers


1. Corporate restructuring

2. Organizational restructuring

3. False

4. (a) adopts retrenchment strategy

5. (d) selling a part of a company

6. selling a business outright

7. strategic

8. competitiveness

9. Liquidation

10. Companies Act, 1956

11. liquidator

12. True

13. Corporate turnaround

14. Crisis

15. Sustained survival

16. Surgical, non-surgical

17. True

18. (c) Xerox

19. False



20. True

21. Kanter, et al

22. common vision


1. Corporate restructuring means organizational change to create a more

efficient or profitable enterprise. Refer to Section 9.3 for further details.

2. Divestment means selling part of a company—a major division or an SBU.


3. Liquidation means closing down a company and selling its assets. Refer

to Section 9.5 for further details.

4. Corporate turnaround may be defined as organizational recovery from

business decline or crisis. Refer to Section 9.6 for further details.

5. Turning corporates around is like implementing or managing radical

change. Refer to Section 9.7 and 9.7.1 for further details.

6. Kanter et al. have formulated a set of 10 guidelines for managing strategic

change. Refer to Section 9.9 for further details.

9.15 References

1. Balogun, J, and V H Hailey. 1997. Exploring Strategic Change. London:

Prentice Hall.

2. Dumaine, B. ‘Let the Bad Times Roll.’ Business Today (Reprinted from

Fortune), August, 7–21, 1993.

3. Ghoshal, S, G Piramal, and C A Bartlett. 2002. Managing Radical Change:

What Indian Companies Must Do to Become World Class? New Delhi:

Penguin Books.

4. Hamel, G, and C K Prahalad. 1994. Competing for the Future:

Breakthrough Strategies for Seizing Control of Your Industry and Creating

the Markets of Tomorrow. Boston: Harvard Business School Press.

5. Kanter, R, et al. 1992. The Challenge of Organizational Change. New

York: The Free Press.

6. Slatter, S. 1984. Corporate Recovery: Successful Turnaround, Strategies

and Their Implementation. New York: Penguin.



Endnotes

1 National Management Forum, Corporate Restructuring ( A Survey of India Experiences )

(New Delhi: AIMA, 1995).2 N Venkiteswaran, ‘Restructuring of Corporate India: The Emerging Scenario, ’ Vikalpa

22, no.3 (1997): 7.3 This section is based on ‘Corporate Restructuring by Indian Companies ’ in A Kazmi,

Business Policy and Strategic Management, 2 nd ed. (New Delhi: Tata McGraw-Hill, 2005),

Ch. 6.4 F R David, Strategic Management: Concepts and Cases, 9 th ed. (Pearson Education,

2003), 1735 A A Thompson Jr, A J Strickland III, and J E Gamble, Crafting and Executing Strategy:

The Quest for Competitive Advantage (New Delhi: Tata McGraw Hill, 2005), 272.6 FR David (2003), 173.

7 A Kazmi, Business Policy and Strategic Management , 2nd ed. (New Delhi: Tata McGraw

Hill, 2005), 208.8 F R David (2003), 174.9 S Slatter, Corporate Recovery (Penguin, 1984).

10 P N Khandwala, Innovative Corporate Turnaround (Sage Publications, 1996), 72.11 S Ghoshal, G Piramal, and C A Bartlett, Managing Radical Change (Penguin Books,

2002) 18.12 S Ghoshal, and others (2002), 19.13 S Ghoshal, and others (2002), 118.14 V Mahanta, and D Ganguly, ‘Never Too Old to Rock and Roll ’, The Economic Times

(Corporate Dossier), August 26, 2005.15 R Kanter, et al. The Challenge of Organisational Change (New York: The Free Press,

1992).



Unit 10 Expansion Strategies

Structure

10.1 Introduction

10.2 Caselet

Objectives

10.3 Ansoff Matrix

10.4 Penetration Strategy for Growth in Existing Markets

10.5 Product Development in Existing Markets

10.6 New Product Development

10.7 Market Development for Existing Products

10.8 Expansion through Diversification

10.9 Strategic Alliance

10.10 Joint Venture (JV)

10.11 Takeover or Acquisition

10.12 Merger

10.13 Integration Strategy

10.14 Case study

10.15 Summary

10.16 Glossary


10.18 Answers

10.19 References

10.1 Introduction

Securing competitive advantage, controlling market share and generating profit

are not enough. Companies have to constantly look for growth and expansion

because only this can give long-term sustainability in terms of market leadership

or position. Growth here does not mean incremental growth or change as is

understood in stability strategies; this should be more visible or distinct. Growth

or expansion may be defined as distinct increase in sales or turnover or market

share (and also profit). Different strategies can lead to growth or expansion.

These include penetration into the existing market, product or market

development, integration and diversification. Diversification can be in terms of

strategic alliance, merger, joint venture and takeover or acquisition. Corporate



strategists have to consider all alternative growth strategies which are available

and choose the most appropriate one based on the company’s resource base,

business assets and skills and the competitive environment. We shall discuss

these and related issues here.

Before we proceed with the main analysis, it would be useful to define

market penetration, product development, market development, diversification

and integration. Market penetration takes place when an organization gains

market share. Product development means that an organization supplies

modified or new products to existing markets. Market development occurs when

existing products are offered in new markets. Diversification means entering

into new product or business and/or new markets which may also require new

resources and competence. Integration takes place when a company enters

into an upstream or downstream or parallel activity in the same product line/

flow. These concepts or strategies would be more clear when we discuss their

applications later.

10.2 Caselet

In today’s competitive world, introduction of new products or new product

features has become a main source of competitive advantage. The best

example of this strategy is that of Pepsi Co. For decades, Pepsi Cola and

Coca Cola battled for supremacy in the cola market. In 1996, it seemed

that PepsiCo had lost the cola war, and the proof was everywhere. The

company’s profit trailed that of its rival by 47 per cent. However, losing the

cola war was the best thing that ever happened to Pepsi. It prompted Pepsi’s

leaders to look outside the confines of their battle with Coke. PepsiCo

embraced bottled water and sports drinks much earlier than its rival. Pepsi’s

Aquafina is the No. 1 water brand, with Coke’s Dasani trailing; in sports

drinks, Pepsi’s Gatorade owns 80 per cent of the market while Coke’s

Powerade has 15 per cent.

But Pepsi’s strongest business lies outside drinks altogether. Over the past

ten years, the Frito-Lay division has become a powerhouse, controlling 60

per cent of the US. snack-food market. So strong is Pepsi in this arena, in

fact, that many investors no longer judge it by how it stacks up against

Coke. “Most people think of Pepsi and Coke fighting it out,” observes Eric

Schoenstein, an analyst at Jensen Investment Management, which owns



shares of both. “But we don’t see it that way. Pepsi isn’t really a beverage

company anymore: It’s a food company that also sells beverages.” John

Carey, manager of the Pioneer fund, which has 1.6 million PepsiCo shares,

says he bought the stock because of Frito-Lay: “There’s no Coca-Cola in

that business.”

Source: http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/

8367964/index.htm

Objectives


• Highlight alternative expansion strategies

• Analyse different diversification strategies

• Focus on joint venture and issues involved in it

• Discuss integration strategy: vertical and horizontal

• Analyse takeover or acquisition and post-takeover integration issues

10.3 Ansoff Matrix

We start with Ansoff’s (1987) product-market expansion matrix which has been

the basis for further research and development in growth strategies. The Ansoff

matrix is shown in Figure 10.1.

Figure 10.1 Ansoff’s Product Market Expansion Matrix

As shown above, expansion strategies are always worked out in terms of products

or businesses—existing or new, and markets—existing or new. Johnson and

Scholes (2005) have presented alternative expansion strategies in a more

specified form (Figure 10.2).



Figure 10.2 Alternative Product Market Expansion Matrix

Source: G Johnson, and K Scholes. Exploring Corporate Strategy, 6th ed. (Pearson

Education, 2005), 362, (Exhibit 8.1).


1. Expansion strategies are always worked out in terms of _________or

_________.

2. The ________ matrix has been the basis for further research and

development in growth strategies.

10.4 Penetration Strategy for Growth in Existing Markets

A company has a number of ways for penetrating into the existing markets and

generating growth. The most obvious way to grow is to increase market share.

Companies like Bajaj Auto have successfully penetrated the existing market

and sustained their market share. But, this generally happens in a high growth

market or industry (like two-wheelers). Also, one company’s share gain is another

company’s share loss. Therefore, market share battle increases competitive

pressures, and, market share gain may soon be neutralized, or, in the least,

may be difficult to sustain.

An alternative strategy which may pose lesser threat from competitors

(and which may also ultimately lead to increase in market share) is to increase

the product usage. There are three ways to increase product usage, namely,

the frequency of use, the quantity used and new applications and users. Of the



three ways, the last one, that is, new applications and users, may be the most

effective. Cadbury had shown this. Cadbury Dairy Milk Chocolate (CDM) was

the market leader. But, with a market share of already 70 per cent, winning

away customers from competitors in the slow-moving market was almost

impossible. Cadbury found the solution in new users among parents (elderly

people) who were earlier keeping away from CDM.1

The best way to identify new uses or applications is to conduct market

research or surveys. Such research or survey would include ascertaining details

about applications of competing products and brands, that is, substitutes. Cost

of such research or studies, and, also, subsequent advertising and promotion

should be taken into consideration to determine the cost effectiveness of such

programmes. Investment in research should be justified by returns in terms of

results or findings, and, applicability of the results.

Arm & Hammer conducted more than 150 market research studies to

support its programmes for development of new applications and products.

Hindustan Unilever undertakes such studies for its FMCG products on a regular

basis. And, many companies have achieved results. Arm & Hammer succeeded

in achieving ten-fold growth in its baking soda sales by persuading people to

use the product as a refrigerator deodorizer. Sales of Lipton soup increased

when it included recipes for new uses on packets/boxes and in ads that say:

‘Great meals start with Lipton—recipe soup mix-soup’. A chemical process used

by oil fields to separate water from oil is used by water plants to eliminate

unwanted oil.


3. The most obvious way for a company to grow is to increase__________.

4. An alternative strategy which may pose lesser threat from competitors

(and which may also ultimately lead to increase in market share) is to

increase the _______usage.

5. The best way to identify new uses or applications is to conduct________.

6. Product usage can be increased by

(a) the frequency of use

(b) the quantity used

(c) new applications and users

(d) All the above



10.5 Product Development in Existing Markets

Product development goes a step further than effecting increase in usage of

products. A simple way of product development is to make additions to product

features. Different variants of a particular car model (say Indica, Esteem or

Ford Ikon) clearly show the additional benefits of augmented features which

help market penetration. A company making PCs can have a built-in software

as additional feature. A company making industrial products or inputs may add

a special feature to the product or input to make it more tailor-made for certain

customers leading to increase in sales. In services, special tour packages for

individual customers are good examples.

Another type of product development may be through product line

extensions. This may also include developing new generation products in the

same category which make the existing products obsolete in terms of technology

or usage. This happens in the electronics field almost on a regular basis—be it

computer, CTV or cellular phone. Introduction of disposable contact lenses by

Hindustan Ciba-Geigy almost meant arrival of new generation products in the

visioncare market.

In product development through line extensions (additional features) or

new-generation products, some issues should be considered to make the

strategy workable or effective. First, is the company’s R&D, manufacturing and

marketing functionally integrated to undertake the proposed changes? Second,

is the new product line compatible with the existing product or brand? If it is not,

it may almost be like new product development, and, cost and resource

implications can be quite different. Third, can the existing assets and skills be

applied to the product line extension? If not, there can be asset-skill-product

development mismatch. Philip-Morris underestimated the problems of applying

its existing marketing skills to the 7UP business and, finally gave up because of

lack of success.


7. A simple way of product development is to make additions to product

features. (True/False)

8. Developing new generation products in the same category, making the

existing products obsolete in terms of technology or usage is a common

in the ________industry.



10.6 New Product Development

A new product adds the third or final dimension to product development.

A company may use its core competence or R&D manufacturing-marketing

synergy to develop a new product which is different from the existing product

lines and, generate additional sales and growth. Originally a machine tool

manufacturer, HMT developed watches as a new product line. With its core

competence in heavy commercial vehicles (HCVs) and light commercial vehicles

(LCVs), TELCO successfully added passenger cars to its product basket. Godrej,

traditionally known for its locks, storewels and refrigerators, has expanded into

FMCG products including packaged tea. There are several such examples in

every country.

One good way of new product development is to use the existing brand

image or brand equity and exploit its market strength for extending it to a new

product category. This becomes particularly useful if the company has an

umbrella brand like Ford, Tata, Sony, Maruti, Godrej, etc. Duracell’s Durabeam

flashlights, Arm & Hammer’s oven cleaners, Sears’ kiosks and stores—all thrived

on existing brand names.

Marketers should ensure that the new product does not dilute or damage

the association of the brand through wrong promotions or marketing.

10.6.1 Market Testing

To ensure this, and, also, to ascertain acceptability and commercial viability of a

new product, it is necessary to conduct test marketing before launching the

product. In industrial products, test marketing may be comparatively easy and

simple because of small number of customers. If the prototype development is

successful, the new product can be immediately launched given its cost-benefits

or cost-effectiveness. This may also be largely true of specialized service

products. But, for most of the consumer goods, test marketing is generally

more complex and difficult. In a particular market segment, test marketing should

assess the likely performance of the new product against competitive offerings

(present or expected) in terms of product awareness, trial rate, repeat purchase,

likely market share achievement, etc. In relation to consumer response, there

are four possible outcomes of a test market product as shown in Table 10.1.



Table 10.1 Possible Alternative Test Marketing Outcomes

Situation Trial Rate Repeat Rate Test Outcome

1 High High Successful

2 Low High Review/Improve

3 High Low Terminate

4 Low Low Rework

In situation 1, the new product can be launched almost immediately. In

situation 2 , the high repeat rate means that the product appeal is positive; but

the reason for low trial rate may be inadequate awareness. This can be rectified

through increased consumer campaigns and promotional activity. Situation 3 is

more worrying. This situation indicates that having tried the product, consumers

remain unconvinced about its merit or performance and, hence, the low repeat

rate. The decision in this case may be to terminate the product launch plan

unless the company wants to make necessary changes in the product features

(that is, go back to manufacturing) to make it more acceptable. In situation 4,

the trial rate and repeat rate are both low, and, this should mean that the test

marketing process is incomplete. The company might not have taken it very

seriously or, there is a missing link in the test marketing process. The whole

process may, therefore, have to be reworked to come to clear conclusions about

the result of market testing.


9. Originally a machine tool manufacturer, HMT developed ______as a new

product line.

10. To ascertain acceptability and commercial viability of a new product, it is

necessary to conduct ______before launching the product.

10.7 Market Development For Existing Products

Market development for existing products can take place in two ways; first,

geographic expansion in the existing market segment(s); and second, developing

new market segments.

Geographic expansion in the same market or customer segment would

mean graduating from a local market or, from a regional market to a national

market or, from a national to an international market. Nirma started with the



western regional market but, quickly expanded to the national market achieving

significant growth. Indica has moved from the national to the international market;

so, also, many multinational brands like Ford, Honda, Peter England, Levi

Strauss, Ray-Ban and service brands like KFC, McDonald’s, Domino’s Pizza,

etc.

Expanding into new market segments is another potential avenue for

growth. This can also be more challenging. Cadbury’s (CDM) rejuvenation is a

good example of expanding into new market segment—from predominantly

child market to the market for parents and elders. Johnson & Johnson’s baby

shampoo was steadily losing market share till the company turned towards

adults who use shampoo more frequently. Both the Cadbury and Johnson &

Johnson examples show that the most common way to expand into new market

segments is to bring the present non-users into the fold through appropriate

promotion. Companies, should, however carefully assess market viability in terms

of competing products and brands before making investment in the expansion

programme. Federal Express (FedEx) had an unhappy experience. The company

wanted to expand into the European market. But it lacked first-mover advantage

in that market. DHL and some other courier companies had implemented the

FedEx’s concept much earlier. This seriously affected FedEx’s competitiveness

in the European market.


11. Apart from geographic expansion in the existing market segment(s),

market development for existing products can take place by developing

_______.

12. Cadbury’s rejuvenation of _____ is a good example of expanding into

new market segment.

10.8 Expansion through Diversification

Diversification, as a strategy, may generate growth in a number of ways. Product

development and market development are two different methods to diversify,

and, we had discussed these two methods earlier. Diversification can also take

place through both new products and new markets. And, a diversification strategy,

whether through product development, market development or both or any other

way, may, mean a new business venture of the company, a joint venture, etc.

We shall discuss here the related issues of diversification and their implications.



It is useful to distinguish between ‘related diversification’ and ‘unrelated

diversification’.

Related diversification means that the new business has commonalities

with the core business or core competence of the company; and, these

commonalities provide the basis or strength for generating synergies or

economies of scale or higher returns by exploiting existing resources and skills

in R&D, production process, distribution process, etc. Unrelated diversification,

on the other hand, is less related to the present business and skills and resources

(except financial) and, may mean venturing into an entirely new area. The

company may have to acquire new skills and expertise for this. The main reason

or motivation for unrelated diversification may be high growth potential in terms

of revenue, market share or profitability. There can be a number of other reasons

also.

In strategic management literature, related diversification is more

commonly known as concentric diversification and unrelated diversification, as

conglomerate diversification, although some analysts may like to make some

distinction between the two.

10.8.1 External Expansion or Diversification

Expansion or diversification, related or unrelated (concentric or conglomerate),

into new products or businesses may be ‘internal or external, i.e., it may take

place within the company without involving any other company; or, it may

associate another company as part of the expansion or diversification

programme. External diversification is a common characteristic of corporate

strategy in the developed countries, particularly in the US. In counties like India

also, such diversification is taking place. Expansion or diversification, which

involves another company as part of the expansion/diversification programme,

can be of four major types:

1. Strategic alliance

2. Joint venture (JV)

3. Takeover/acquisition

4. Merger

Activity 1

Carry out a desk research on the diversification strategy of ITC. Mention

the main features of the strategy, focusing on the different products and

markets. You may use the Internet and company literature for your research.




13. Diversification cannot take place through both new products and new

markets. (True/False)

14. The kind of diversification in which new business has commonalities with

the core business or core competence of the company is called_______.

10.9 Strategic Alliance

Strategic alliance may be defined as cooperation between two or more

organizations with a common objective, shared control and contributions (in

terms of resources, skills and capabilities) by the partners for mutual benefit.

This definition can be expanded and made more comprehensive in terms of

essential features or characteristics of strategic alliance. A typical strategic

alliance exhibits five essential features or characteristics:

(a) Two or more organizations join together to pursue a defined objective or

goal during a specified period, but, remain organizationally independent

entities;

(b) The organizations pool their resources and investments and also share

risks for their mutual (and not individual) interest/benefit;

(c) The alliance partners contribute, on a continuing basis, in one or more

strategic areas like technology, process, product, design, etc;

(d) The relationship among the partners is reciprocal with partners sharing

specific individual strengths or capabilities to render power to the alliance;

(e) The partners jointly exercise control over the performance or progress of

the arrangement with regard to the defined goal or objective and share

the benefits or results collectively.

10.9.1 Objectives and Forms of Strategic Alliance

The basic objective behind all strategic alliances is to secure competitive or

strategic advantage in the market. All strategic alliances have long-term objective

or purpose. Many companies realize that they do not possess adequate

resources—financial and managerial—to pursue an innovation, develop a new

product or technology. They look towards other organizations to supplement or

augment their resources or capabilities for the fulfilment of their objective. It can

also be a functional area where they have very little expertise. Different authors



have analysed the objectives or purposes or reasons for strategic alliance. Six

objectives or purposes are more commonly observed:

(a) Development of a new product: In the pharmaceutical industry, new product

development takes place on a continuous basis, and, in this, many strategic

alliances are formed between pharmaceutical companies and research

laboratories and institutions for R&D. We have already given the example

of Boeing and their Japanese partners.

(b) Development of a new technology: Development of technology is a long-

term process, and, also, many times, involves considerable cost.

Collaboration leverages the resources and technical expertise of two or

more companies.

(c) Reducing manufacturing cost: Co-production, common in the

pharmaceutical industry, is a good form of strategic alliance to reduce

manufacturing cost through economies of scale.

(d) Entering new markets: This is often the objective in international business.

Many foreign companies enter into strategic alliances with some local

companies (host country) to enter into and establish themselves in that

country. ‘Piggybacking’ is a common form of strategic alliance. Some of

the Japanese electronic manufacturing companies like Matsushita

Electricals, during their initial years, had entered into strategic alliances

with some US electrical or electronic manufacturers for entering into the

US market.

(e) Marketing and Sales: This is common in both national and international

business. Many manufacturers in India have marketing and sales

arrangements with companies like MMTC and Tata Exports for both

domestic and international marketing.

(f) Distribution: In pharmaceutical and other industries where distribution

represents high fixed cost, potential competitors swap their products for

distribution in the respective markets where they have well-established

distribution systems. Many such alliances exist between the US and

Japanese pharmaceutical companies.

Strategic alliances are non-equity based, i.e., none of the parties invest

any equity capital in such alliances. But, funding is involved and funding can be

by one of the parties or all of them. The nature of funding depends on the type

of strategic alliance, i.e., whether new product development, technology

development or transfer, marketing or sales, etc., and also the parties involved.



For example, if research laboratories or institutions are involved, most of the

funding is done by the corporate concerned.

As mentioned above, many areas of business—from R&D to distribution—

provide scope for strategic alliance. In the semi-conductor industry, many

companies in the US and Japan feel ‘short-handed’ in their R&D, and they swap

licences. In a multiple alliance, which includes both technology and operations,

Samsung Electronics and IBM Korea have entered into an agreement to swap

patents for design and manufacture of semiconductors. IBM and Apple Computer,

have formed an alliance for development of hardware and software technology

for a new generation of desktop computers. Ranbaxy has formed a strategic

alliance with Eli Lilly of the US to fulfil its mission of becoming a research-based

international pharmaceutical company. In the telecommunication sector, a

number of strategic alliances have been formed between Indian and foreign

companies: Crompton Greaves and Millicom; Usha Martin and Telekom Malaysia;

SPIC group and Telstra, etc. A good example of synergistic benefits from a

strategic alliance is that of Taj hotels and British Airways; both create mutual

advantages through complementarity of hotel and airline services. In the field

of agricultural development, Hindustan Unilever and ICICI have entered into a

partnership project for contract farming of wheat and rice in MP and Haryana.


15. Cooperation between two or more organizations with a common objective,

shared control and contributions by the partners for mutual benefit is called

_________.

16. The basic objective behind all strategic alliances is to secure______or

_______advantage in the market.

10.10 Joint Venture (JV)

If a strategic alliance involves equity participation by both (or all) the parties, it

becomes a joint venture. A joint venture may be defined as a business venture

in which two or more independent companies join together, contribute to equity

capital in equal or agreed proportion and establish a new company. JVs are

long-turn ventures formed for an indefinite period. Some JVs can also be

contractual, that is, formed for a fixed period of time and dissolved at a specified

date. Contractual JVs are non-equity based. They are recommended or are

useful under five conditions:



• The new business is uneconomical for a single organization to undertake;

• The risk of the business should be distributed or shared, and, therefore,

there is need for more than one participating company;

• The technology for the new business can be shared only through a joint

venture, or, there exists a need to introduce a new technology quickly;

• Competence or capabilities of two or three companies can be brought

together to produce synergy for better market impact, competitiveness

and success of business;

• A joint venture is the only way to gain entry into a foreign market, particularly

if the foreign government requires that, for entry into that market, a local

partner has to be chosen (OTIS and Mitsubishi elevators in China).

All joint ventures, formed under any of the conditions mentioned above, exhibit

some common or essential characteristics. Five important characteristics are:

• An agreement between the parties for common long-term business

objectives such as production, marketing/sales, research cooperation,

financing, etc. Production joint ventures are more common;

• Pooling of assets and resources, like plant, machinery, equipment, finance,

management know-how, intellectual property rights, etc., by the parties

for achievement of the agreed objectives;

• Characteristics of the pooled assets and resources as contributions by

the respective parties;

• Pursuance of the agreed objective through a new management system

or structure, which is separate from the existing management systems of

the parties;

• Sharing of profits from the joint venture between the parties usually in

proportion to their capital (equity) contributions. The liabilities of the parties

are also normally linked to their capital contributions.2

Joint ventures are commonly formed within the same industry. But, JVs can

take place across industries also. Joint ventures can take place within the same

country or between companies in two countries, or, sometimes, even more than

two countries. Classified this way, five types or forms of joint ventures are

possible:

• Between two (or more) companies in the same industry;

• Between two (or more) companies across different industries;



• Between a local company and a foreign company with technological

capability in the home country (Maruti Udyog -Maruti Suzuki, Hero Honda-

Kinetic Honda)

• Between a local company (home country) and a foreign company in the

foreign country (host country);

• Between a local company (home country) and a foreign company in a

third country.3

10.10.1 JVs in Practice

If we analyse various JVs in operation in different countries, we can classify

them into three major categories:

1. JVs within the same country and within the same industry or related

industries;

2. JVs between the domestic companies and foreign companies in foreign

countries in the same industry or related industries;

3. JVs between the foreign companies and local companies in the domestic

country in the same or related industries.

JVs in the first category are very few. Most of the operating JVs are in

Category 2 or Category 3. In developed countries, majority of the JVs are in

Category 3.

JVs between Indian companies: IPITATA Sponge Iron Ltd—a JV between

TISCO (now Tata Steel) and IPICOL, a wholly owned company of the

Government of Orissa.

Neelanchal Ispat—a JV between MMTC and Orissa Mining Corporation

for manufacturing steel; Metal Junction—a JV between SAIL and TISCO for

online (Internet) trading of steel and steel scrap. There are other examples

also.

JVs between Indian companies and foreign companies in foreign countries:

Aditya Birla Group companies in Malaysia, Indonesia, Thailand and other

countries for textiles, sugar and viscose staple fibre; Tata group companies in

UK, Germany, and other countries in commercial vehicles, cars and hotels;

Kirloskars in Malayasia and other countries for compressors and other

engineering products; Oberoi’s in Australia and other countries for hotels and

others.



JVs between Indian companies and foreign companies in India: Maruti

Udyog—a JV between Government of India and Suzuki of Japan; Hero BMW—

between Hero Motors and BMW, AG, Germany for assembling BMW cars; Hero

Honda—between Hero group and Honda Motors for two wheelers; Thermax-

Fuji—between Thermax Ltd and Fuji Electric Company of Japan for manufacture

of industrial boilers; HCL – HP—between Hindustan Computers (HCL) and

Hewlett-Packard, US for PCs; Tata Information Systems—between IBM World.

Trade Corporation and Tata Industries Ltd—for development of information

technology.

Reliance Industries and Nynex Corporation, A V Birla Group and AT&T,

Tata Industries and Bell Canada, Ashok Leyland and Singapore Telecom for

development of telecommunication; and others.

We have given many examples of JVs which are in operation and have

been working satisfactorily. But, there are many JVs which have not worked

well and have resulted in failure. Several studies have found a failure rate of 30

per cent for joint ventures in developed countries and 45–50 per cent in

developing countries. Most of these JVs are between companies in two different

countries, i.e., a foreign company and a local partner (Category C).

There can be many reasons for the failure of a JV. One of the common

reasons is that foreign companies set up their fully owned subsidiaries and,

either withdraw from the JVs or the subsidiaries run parallel to the JVs affecting

their performance. Japanese automakers like Honda, Toyota and Nissan have

abandoned their European distribution partners and set up their own dealer

network. BMW has done the same in Japan. In India, a number of foreign

multinationals, like Pfizer, Honda Motors and ABB have established fully owned

subsidiaries in addition to being JV partners. In such cases, the subsidiaries

usually get more attention, including latest technology and the JVs suffer. Another

very common reason for failure of JVs is conflicts between foreign and domestic

partners. Conflicts can arise on many issues: sourcing of raw material inputs or

components, operating procedures and controls, domestic sales versus export,

etc. Some of the examples are: Tata Unysis (between Tatas and Unysis); Procter

& Gamble-Godrej India (between P&G and Godrej); TDT Copper (between

Tomen Corporation, Japan, Delton Cables, India and Taihan Corporation, South

Korea).




17. A strategic alliance that involves equity participation by both (or all) the

parties is called a_________.

18. Joint ventures are short-term ventures formed for an definite period.

(True/False)

10.11 Takeover or Acquisition

In takeover or acquisition, one company takes over another organization —its

resources, management and control. Another way to define or describe

acquisition is that an organization develops its resources and competence by

taking over another organization. Takeover or acquisition can be friendly or

hostile. If the takeover is through mutual agreement between the acquiring and

the acquired company, it is friendly acquisition; but, if the takeover/acquisition is

through stock market operations or financial institutions against the wishes of

the company, it becomes a hostile takeover.

Some have suggested that takeover should be a systematic process,

and the company seeking acquisition should follow a prescribed course. A six-

step procedure has been recommended:

• Spell out the objective or reason for takeover

• Work out or specify how the objectives would be fulfilled

• Assess management quality of the prospect

• Check the compatibility of business styles of the two companies

• Anticipate and solve takeover problems promptly so that

complications do not prolong the process

• Treat people with care during the period of takeover.4

In reality, however, many companies do not follow a prescribed or a

systematic course, particularly in cases of hostile takeover. The NEPC takeover

bid for Modiluft is a good example of non-systematic hostile takeover. In this

case, Modiluft management got the news of takeover from leading dailies. The

takeover attempt finally got mired in controversy. Several similar takeovers India

have been controversial. Peaceful or friendly takeovers are normally systematic

and follow a more rational path. Some examples of friendly takeovers are given

in Table 10.2.



Table 10.2 Selected Acquisitions by Indian Companies

Acquiring company Acquired company

Hindustan Unilever TOMCO

Tata Tea Consolidated Coffee

Tata Tea Asian Coffee

TISCO (Tata Steel) Metal Box (Bearing Unit)

Deepak Nitrite Mafatlal (Dyestaff Unit)

ICICI ITC Classic Finance

ICICI Anagram Finance

India Cement Visaka Cement

R.P. Goenka group Ceat Tyres

R.P. Goenka group Calcutta Electric Supply Corporation (CESC)

Some of the more recent acquisitions in Indian are Sahara Airlines by Jet Air

and Air Deccan by Kingfisher Airlines.

Many acquisitions also take place at international level. A select list of

acquisitions among foreign companies and international acquisitions is given in

Table 10.3.

Table 10.3 Selected Foreign and International Acquisitions

Acquiring company Acquired company

Hewlett-Packard Compaq Computer

Pepsico Quaker Oats

Daimler-Benz Chrysler Corporation

BMW Rolls Royce (Car Division)

Ford Volvo (Auto Division)

Procter & Gamble Clairol (Bristol-Myers Squibb)

Japan Airlines Japan Air System

Volvo Renault (Truck Division)

Ford BMW (Rover)

eBay HomesDirect

Tata steel Corus

Mittal Steel Arcelor

10.11.1 Post-takeover Integration

In takeover or acquisition, post-takeover action or management becomes an

important issue. This is primarily the problem of integration—integrating the

acquirer and the acquired company. Integration may take place in two ways:

merging the two companies or keeping the acquired company independent and

integrating it with the organizational culture, structure and functioning of the



present company. Merger after acquisition is appropriate or recommended if it

produces synergy. Majority of the friendly takeovers can lead to mergers except

for strategic reasons. Some of the good examples of acquisitions (shown in

Table 10.3) resulting in mergers are: ICICI–ITC Classic Finance and Anagram

Finance for diversification in retail financing; Tata-Tea–Consolidated Coffee and

Asian Coffee for consolidation of tea and coffee business; Hindustan Unilever

and TOMCO to strengthen consumer goods business.

But, in many acquisitions, such synergy may not exist or may not be

available or the two companies may be kept separate for strategic reasons,

and, those have to be managed as independent entities. In such cases, the

process of integration becomes more difficult. Ghoshal (1999) has suggested

some measures—stepwise process—for integrating the acquired company with

the existing organization.

One of the important issues in post-acquisition integration is cultural fit.

There are three approaches to the post-acquisition cultural fit. First is

assimiliation; the parent’s (acquiring company’s) culture will remain and effort

will be made for assimilating the ‘joiner’ into that culture. Second is to build a

hybrid culture which should combine the features of both the organizations.

This is the most difficult thing to do. Third is to keep the cultures of the two

organizations separate. This is more appropriate when the reason for acquisition

is financial rather than strategic, and integration of cultures and activities may

not be so vital.5

There may be number of other operational problems also in post-

acquisition integration. Many times, benefits of synergy may not be realized

because the process of integrating the new company into the activities and

management style of the existing company may not be very successful because

human values are involved. This actually centres around the problem of cultural

fit. In cases where acquisition is used to acquire new competences, clash of

cultures may be more dominant; and, consequently, the acquirer may not be

able to add sufficient value to the acquisition. This is the issue of corporate

parenting (discussed in Unit 8).

Many acquisitions are intended to produce financial synergy or improve

financial gain or performance. Company experiences show that acquisition is

not an easy or guaranteed strategy for improving financial performance. It may

take considerable time for the acquiring company to secure any significant

financial benefits from acquisition. Research reveals that as as much as 70 per

cent of acquisitions end up with lower returns to shareholders of both the

organizations.6




19. In________ or _______, one company takes over another organization—

its presources, management and control.

20. Takeovers always tend to be unsystematic and hostile. (True/False)

10.12 Merger

A merger is a combination of two or more organizations, in which one acquires

the assets and liabilities of the other in exchange for shares or cash, or the

organizations are dissolved, and a new company is formed, which takes over

the assets and liabilities of the dissolved organizations and new shares are

issued. So, combination or merger takes place, either through acquisition or

amalgamation or consolidation. For the company which acquires another

company, it is acquisition; for the company which is acquired, it is a merger. If

both or more organizations dissolve themselves and form a new organization, it

is amalgamation or consolidation. More common forms of mergers are through

acquisition. There are many reasons why two or more organizations like to

merge. There are reasons for buyer organization; there are reasons for the

seller organization. Glueck and Jauch (1984) have identified several reasons—

both for the buyer and the seller:

Why the buyer wishes to merge:

(a) To increase value of the company’s stock;

(b) To make profitable investment and increase the growth rate;

(c) To balance, complete or diversify product line;

(d) To improve stability of sales and earnings;

(e) To reduce or eliminate competition;

(f) To acquire resources quickly;

(g) To avail tax concessions/benefits;

h. To take advantage of synergy.

Why the seller wishes to merge:

(a) To increase the value of investment and stock

(b) To increase revenue and growth rate

(c) To acquire resources to stabilize operations



(d) To benefit from tax legislation

(e) To deal with top management succession problems

(f) To take advantage of synergy7

10.12.1 Types of Mergers

Mergers can be differentiated on the basis of activities or businesses currently

pursued by the merger partners, and, also, the nature of activity or business to

be added during the process of merger. Based on these, four major types of

mergers may be distinguished:

1. Horizontal merger

2. Vertical merger

3. Concentric merger

4. Conglomerate merger

Horizontal merger takes place when there is a combination of two or more

companies in the same business or product group or product. For example, a

cement company combines with another cement company or a pharmaceutical

company merges with another pharmaceutical company and so on.

Vertical merger takes place when there is a combination of two or more

companies which are not in the same business but in related businesses or

products. The combination or merger takes place to create complementarity of

businesses or products. For example, a refrigerator-manufacturing company

combines with a compressor-manufacturing company.

Concentric merger takes place when there is a combination of two or

more companies related to each other in terms of production process, technology

or market. For example, a leather shoe-manufacturing company combines with

a leather goods company making purses, handbags, jackets, etc.

Conglomerate merger takes place when there is a combination or two or

more companies which are not related to each other in terms of production

process, technology or market. For example, a shoe manufacturing company

merges with a pharmaceutical company or an FMCG company.

As mentioned above, one of the major objectives of merger is to obtain

advantages of synergy.

A study has analysed synergistic benefits in different functional areas

accruing from different types of mergers8 (Table 10.4).



Table 10.4 Synergistic Advantages under Different Types of Merger

Areas of synergy (in percentage)

Type of merger Finance Marketing Technology

Production

Conglomerate

Concentric-technology

Concentric-marketing

Horizontal

All categories

100

100

100

96

100

58

72

100

100

74

20

72

57

41

33

32

57

72

29

36

Source: J Kitching, ‘Why do Mergers Miscarry?’ Harvard Business Review, November-

December, 1967.

We had mentioned earlier that common forms of mergers are through

acquisition. We had given examples of such mergers in Table 10.2 (mergers in

India) and Table 10.3 (mergers in foreign countries including international

mergers). Some more examples of mergers through acquisition are: TVS

Whirlpool Ltd with Whirlpool of India Ltd; Sandoz (India) Ltd with Hindustan

Ciba Geigy Ltd and Polyolifin Industries with NOCIL.

Mergers through amalgamation or consolidation are less common than

through acquisitions.

Some examples are: Nirma Detergents Ltd, Nirma Soaps and Detergenets

Ltd, and Shiva Soaps and Detergents Ltd into Nirma Ltd; Hi Beam Electronics

and other two companies formed Tristar Electronics subsequently named as

Solidaire India Ltd; British Motor Corporation and Leyland Motors into British

Leyland Motors (in UK); likely amalgamation/consolidation: United Airlines and

US Airways; Delta Airlines and Continental Airlines.

As mergers take place, demergers (merger in reverse) also take place,

although they are not very common. Demerger means ‘Spinning of an unrelated

business/division in a diversified company into a stand-alone company along

with a free distribution of its shares to the existing shareholders of that original

company.’9 Some examples of demergers are: Sandoz India from Sandoz

renamed as Clariant India; Ciba Speciality from Ciba India and Aptech from

Apple Industries.


21. A _________ is a combination of two or more organizations, in which one

acquires the assets and liabilities of the other in exchange for shares or

cash, or the organizations are dissolved, and a new company is formed.



22. When there is a combination of two or more companies in the same

business or product group or product, it is called _________.

23. When there is a combination or two or more companies which are not

related to each other in terms of production process, technology or market,

the merger is called__________.

24. Which of these mergers involves a combination of two or more companies

which are not in the same business but in related businesses or products?

(a) Vertical merger

(b) Horizontal merger

(c) Concentric merger

(d) Conglomerate merger

10.13 Integration Strategy

Integration—forward, backward and also horizontal—can be used as a strategy

for growth. Forward integration takes place when a company enters into a

downstream activity with respect to the same product line/flow—for example, a

garment manufacturer starts its own retail chain.

Backward integration means moving upstream—the same garment

manufacturer enters into fabric production. Both backward and forward

integration are vertical integration strategies involving a value chain. Horizontal

integration takes place when a company acquires a competing business or two

or more companies in competing businesses merge (Figure 10.3).

Figure 10.3 Vertical and Horizontal Integrations



A number of factors or considerations govern the decision for diversification

through integration. We can also call them ‘integration benefits’. Some of the

major factors or considerations are:

• Improving supply chain

• Better control over raw material supply

• Strengthening marketing/distribution

• Operating economies

• Diversifying product portfolio

• Direct access to demand or customers

• Cost effectiveness

Decision for integration or adoption of integration strategy can also be analysed

in terms of transaction cost economics. According to transaction cost analysis,

a company should take a ‘make or buy’ decision during procurement of inputs

and ‘sale directly or through others’ for sales of finished products. Relative costs

of these alternatives should be evaluated, and a decision should be taken on

backward or forward integration. If, for example, the cost of making a product

(input) is less than the cost of procuring it from the supplier, the company should

move up the value chain and manufacture the product itself. Similarly, if the

cost of selling the finished product directly is less than the price paid to other

sellers to do the same thing, then, it is profitable for the company to move down

in the value chain and perform the selling operation itself. In both these cases,

the company is adopting an integration strategy—in the former case, it is

backward integration and in the latter case, it is forward integration.

Companies have gained advantages through both backward and forward

integrators. Hewlett- Packard lost vital time in supplying workstations to the

market because a key supplier of chips delayed delivery by six months, whereas

IBM, with integrated sources was on time, and, therefore, enjoyed a clear

competitive advantage. To establish upstream linkages, Japanese automobile

manufacturers like, Honda and Toyota participated in equity capital, and, also in

the management of some of the ancillary units. To gain access to major

customers, American car manufacturers, as an integration move, invested in

car rental companies—Ford invested in Hertz and Budget, General Motors in

Avis and National, and, Chrysler owns Thrify and Snappy. In India, Modern

Suitings went for both backward and forward integration—integrating backward

in the wool processing and integrating forward by diversifying into worsted

suitings.



Experience of companies shows that vertical integration—whether

backward or forward— can be profitable. Buzzell (1983) analysed about 1650

businesses in the PIMS (Profit Impact of Marketing Strategy) database to

ascertain the impact of vertical integration on profitability. In the study, vertical

integration has been defined in terms of value addition as percentage of sales.

The analysis shows that net profit (PAT), as percentage of sales, increases with

vertical integration, but, net profit as percentage of investment or return on

investment (ROI) does not.

Activity 2

Choose a company – either Tata or Godrej – and analyse the integration

process, either forward or backward or both.


25. _________ integration takes place when a company enters into a

downstream activity with respect to the same product line/flow—for

example, a garment manufacturer starts its own retail chain.

26. _______integration means moving upstream—the same garment

manufacturer enters into fabric production.

10.14 Case Study

Tata Steel’s Acquisition of Corus

Tata Steel realized that success in the global market was not possible with

greenfield plants or projects. More recently, Tata Steel showed its renewed

interest in overseas acquisitions, particularly in Europe and in USA. Corus,

the second largest steel producer of Europe and the fifth largest in the

world, gave an inviting signal. Corus expressed its interest in China, Brazil

and India for cheaper steel. This induced Tata Steel to cash in on the

opportunity and decided to make a bid for Corus. Corus was also interested

in setting up a modern steel distribution network in India. Tata Steel decided

to leave no stone unturned to mark its European presence.

Tata Steel’s audacious, but successful bid for Corus at an enterprise value

of £6.7 billion, gives it a capacity of 28 million tonnes, including 8.7 million

tonnes of its own. But, the immediate stock market reaction to Tata Steel

almost running away with Corus in a head-to-head bidding with Brazil’s



CSN was negative. Market participants thought Corus at 608 pence,

representing a premium of 153 pence on the opening offer, was an expensive

buy. Whether the Tatas were paying an inflated price for Corus would remain

a subject of debate for some time. Ratan Tata was emphatic that he was

not paying anything that was beyond prudence. It might not have looked so

at that point, but the acquisition cost for the Tatas would be justified, as the

valuation of steel assets around the world would keep on rising. Tata Steel

finally acquired Corus in 2006, scoring over Brazil’s CSN at $12.15 billion

(around `55,000 crore) in cash and made it the largest acquisition by an

Indian company and the second largest in the industry after Mittal Steel’s

$38.3 billion acquisition of Arcelor.

The acquisition of Corus by Tata Steel is consistent with Tata Steel’s stated

objective of growth and globalization. Tata Steel has identified a number of

specific benefits that it sees from a combination with Corus. Enhanced scale

will position the combined group as the fifth largest steel company in the

world by production, with a meaningful presence in both Europe and Asia.

The powerful combination of lowcost upstream production in India with the

high-end downstream processing facilities of Corus will improve the

competitiveness of the European operations of Corus significantly. The

combination will also allow the crossfertilization of research and development

capabilities in the automotive, packaging and construction sectors, and there

will be a transfer of technology, best practices and expertise of senior Corus

management from Europe to India.

Tata Steel also believes that between the two companies, there exists a high

degree of cultural compatibility which would facilitate an effective integration

of the businesses over time. Tata Steel expects to lead the enlarged group

with a combined management team. The acquisition process shows that

Tata Steel has largely taken care of strategic fit, organizational fit and post-

integration management issues and economics of the acquisition.



10.15 Summary


• Different strategies can lead to growth. These include market penetration,

product or market development, diversification, integration, etc. Marketers

have to decide on the most appropriate one based on resources, business

assets and skills and the environment.

• Diversification, as a strategy, can generate growth in a number of ways—

product development, market development, both product and market

development or any other. Diversification may take the form of either a

new business venture of the company or strategic alliance or joint venture

or acquisition or merger.

• Strategic alliance is cooperation between two or more organizations with

a common objective, shared control and resource contributions by the

partners. Strategic alliances, like all partnerships, are delicate to manage,

and, alliance partners have to share their responsibilities for smooth

operation of the alliance.

• If a strategic alliance involves equity participation by both (or all) the parties,

it becomes a joint venture (JV). The JVs are long-term ventures unlike

strategic alliances which are short-term for a fixed period.

• Takeover or acquisition means that one company takes over another

company—its resources, management and control, it can be friendly or

hostile.

• A merger is a combination of two or more organizations either through

acquisition or amalgamation or consolidation.

• Integration, both forward and backward, can be used as a strategy for

growth.

10.16 Glossary

• Diversification: A growth strategy through new products and new markets.

• Strategic alliance: Cooperation between two or more organizations with

a common objective, shared control and contributions (in terms of

resources, skills and capabilities) by the partners for mutual benefit.

• Joint venture: A strategic alliance involving equity participation by both

(or all) the parties.



• Takeover: (also called acquisition) when one company takes over another

organization —its resources, management and control.


1. What is Ansoff Matrix? Explain with the help of a diagram.

2. Distinguish between related or concentric diversification and unrelated or

conglomerate diversification. Give some examples.

3. Define strategic alliance. Discuss the different forms of strategic alliance.

4. What is a joint venture? Give some examples of joint ventures between

Indian companies and foreign companies in India.

5. Define takeover or acquisition and distinguish between friendly and hostile

takeovers. Discuss the main issues in post-takeover integration.

6. Define merger and distinguish between acquisition and amalgamation.

Discuss the main issues in managing a merger.

7. What is integration strategy? Explain forward integration and backward

integration with examples.

10.18 Answers


1. Products, businesses

2. Ansoff

3. market share

4. product

5. market research or surveys

6. (d) all the above

7. True

8. Electronics

9. watches

10. test marketing

11. new market segments

12. Dairy Milk



13. False

14. Related diversification

15. Strategic alliance

16. Competitive, strategic

17. Joint venture

18. False

19. Takeover, acquisition

20. False

21. Merger

22. Horizontal merger

23. Conglomerate merger

24. (a) Vertical merger

25. Forward

26. Backward


1. Ansoff’s (1987) product-market expansion matrix has been the basis for

further research and development in growth strategies. Refer to Section


2. Related diversification means that the new business has commonalities

with the core business or core competence of the company. Refer to


3. Strategic alliance is cooperation between two or more organizations with

a common objective, shared control and resource contributions by the

partners. Refer to Section 10.9 for further details.

4. If a strategic alliance involves equity participation by both (or all) the parties,

it becomes a joint venture (JV). Refer to Section 10.10 and 10.10.2 for

further details.

5. Takeover or acquisition means that one company takes over another

company—its resources, management and control. Refer to Section 10.11

and 10.11.2 for further details.



6. A merger is a combination of two or more organizations either through

acquisition or amalgamation or consolidation. Refer to Section 10.12 and

10.12.2 for further details.

7. Integration, both forward and backward, can be used as a strategy for

growth. Refer to Section 10.13 for further details.

10.19 References

1. Ansoff, H I. 1987. Corporate Strategy. Harmondsworth: Penguin.

2. Buzzell, R D. ‘Is Vertical Integration Profitable?’ Harvard Business Review,

January–February, 1983.

3. Ghoshal, S. ‘Integrating Acquisitions’. Economic Times (Corporate

Dossier), January 1, 1999.

4. Glueck, W F, and Jauch, L R. 1984. Business Policy and Strategic

Management. 4th ed. New York: McGraw Hill.

5. Johnson, G, and K Scholes. 2002. Exploring Corporate Strategy. 6th ed.

London: Prentice Hall.

6. Porter, M E. 1980.Competitive Strategy. New York: The Free Press.

Endnotes

1 Cadbury’s rejuvenation of its Dairy Milk chocolate (CDM) in the Indian market during1993–94 makes a very interesting story. Refer to A Nag, Strategic Marketing, 2nd ed.(New Delhi: Macmillan India, 2006), Ch. 9.

2 M B Rao, Joint Venture: International Business with Developing Countries (New Delhi:Vikas Publishing House, 1999), 2-3.

3 A Kazmi, Business Policy and Strategic Management, 2nd ed. (New Delhi: Tata McGrawHill Publishing Co., 2002), 189.

4 P Chandra, Financial Management—Theory and Practice (New Delhi: Tata McGraw Hill,1987), 660-61.

5 G Johnson, and K Scholes (2005), 377.6 G Johnson, and K Scholes (2005), 377.7 W F Glueck, and L R Jauch, Business Policy and Strategies Management, 4th ed. (New

York: McGraw Hill, 1984), 224.8 J Kitching, ‘Why do Mergers Miscarry,’ Harvard Business Review (Nov–Dec, 1967).9 N Venkiteswaran, ‘Restructuring of Corporate India: The Emerging Scenario,’ Vikalpa

(22) 3 : 7.



Unit 11 Industry and Competition Analysis

Structure

11.1 Introduction

11.2 Caselet

Objectives

11.3 Definition of Industry

11.4 Industry Types and Structure

11.5 Industry Structure and Competitive Strategy

11.6 How to Conduct Industry Analysis

11.7 Identifying Competitors

11.8 Models of Competition

11.9 Porter’s Competitive Threat Model

11.10 Competitive Advantage Analysis

11.11 Case Study

11.12 Summary

11.13 Glossary


11.15 Answers

11.16 References

11.1 Introduction

Selection of corporate strategy by an organization should be guided by three

sets of factors: organizational mission, objectives or goals (discussed in Unit5), internal competences and resources and the external environment factors.

Given the mission, objectives or goals based on organizational philosophy orpriorities, the choice of strategy should depend, among other things, on company

competences or capabilities (that is, strengths and weaknesses) and theenvironmental factors; or, more correctly, on compatibility or balancing between

the two which is attempted through SWOT analysis. The final selection of

strategy, however, depends on some additional selection criteria including

benchmarking and best practices. These are discussed in the next chapter.

One of the most important components of the environment is competition

or competitors. This would be analysed here. As we talk of competition, we also

imply the ‘industry’ to which the company belongs. Analysis of industry and

competition leads to the determination of competitive advantage or competitive



disadvantage of an organization. So, industry, competition and competitive

advantage (or disadvantage) become three interrelated fields of analysis in an

interactive cycle or circle as shown in Figure 11.1. These analyses will be

undertaken in this unit.

Figure 11.1 Industry, Competition and Competitive Advantage

11.2 Caselet

There are numerous well-documented reasons why the Japanese

automobile firms were able to penetrate the US market successfully,

especially during the 1970s. One important reason, however, is that they

were much better than U.S. firms at doing competitor analysis. David

Halberstam, in his account of the automobile industry, graphically described

the Japanese efforts at competitor analysis in the 1960s. “They came in

groups. . . . They measured, they photographed, they sketched, and they

tape-recorded everything they could. Their questions were precise. They

were surprised how open the Americans were.”

The goal of competition analysis is insight that influences the development

of successful business strategies. The analysis should focus on the

identification of threats, opportunities, or strategic uncertainties created by

emerging or potential competitor moves, weaknesses, or strengths.

Competitor analysis starts with identifying current and potential

competitors.This is an exercise that was successfully done by the Japanese

automobile firrms.

Source: D Halberstam, The Reckoning (New York: William Morrow, 1986), 310.



Objectives


• Discuss the different industry types and structures

• Analyse industry structure and competitive strategy

• Show how to conduct industry analysis

• Identify and analyse competitors — existing and potential

• Conduct competitive advantage analysis

11.3 Definition of Industry

An industry can be broadly defined as ‘the group of firms producing products

that are close substitutes for each other’.1 There is, however, a great deal of

controversy over an appropriate definition of industry. The debate or controversy

mostly centers around ‘how close substitutability needs to be in terms of product,

process or geographic market boundaries’.2 For example, if we take computers,

desktop computers may be an industry; similarly laptop computers may be

another industry. But, because there is a good deal of substitutability between

desktop and laptop computers, an appropriate industry definition may be

‘personal computer’ which includes both.

An important point in the debate or controversy over industry definition is

about overlooking latent sources of competition which may affect a company.

Any definition of an industry is essentially a matter of choice about where to

draw the line between established competitors and substitute products, between

existing companies in the industry and potential entrants and, between existing

manufacturers of the product(s) and suppliers of inputs and buyers. Drawing

these lines may, many times, be a matter of degree, but, it has implications for

choice of strategy by a company.

Definition of an industry should not be thought to be same as definition of

the business in which a company wants to compete. Industry may be broadly

defined or narrowly defined. If industry is broadly defined, it does not follow that

business should also be broadly defined without focus. If we take the example

of personal computer industry again, some companies like Compaq were

focussing their operations more on the desktop computers; companies like HP

(Compaq merged with HP in 2002) and Dell computer focus on both desktop

and laptop computers; others like Toshiba, Sony, IBM, concentrate more on the

laptop segment. Industry in all such cases sets the product boundaries. Business



of a company focusses on a specified product or a product category based on

its technology, resources and capabilities, and accordingly, the company

formulates its competitive strategy.


1. The group of firms producing products that are close substitutes for each

other are known as_________.

2. Definition of an industry should not be thought to be same as definition of

the ________in which a company wants to compete.

11.4 Industry Types and Structure

Industries can be of various types—each major product group constitutes an

industry (subject to the definition above). Industries can also be classified in

terms of size of the constituent units or companies, state or pace of development

of the industry, spread of the market, etc. These are important ways of looking

at the structure of an industry. Based on such factors, various industries can be

broadly classified into five categories according to Porter:

1. Fragmented industry

2. Emerging industry

3. Mature industry

4. Declining industry

5. Global industry

Fragmented industry

As fragmented industry is characterized by the existence of a large number of

small and medium units, and, no single company has any significant market

share, and, none of these units can individually affect the market or industry

outcome. The uniqueness of a fragmented industry is the absence of any market

leader, and, typically, the market share of the largest unit does not exceed 10

per cent.

Fragmented industries are common in certain sectors of the economy

including services, retailing, distribution and agricultural products. Fragmented

industries in some of these sectors are characterized by product differentiation,

whereas undifferentiated products more commonly exist in fragmented industries



in other sectors. For example, computer software, television network/programme

and fast food industries are characterized by products or services which are

differentiated; but, agricultural produce, ATMs, dry cleaning, etc., essentially

involve undifferentiated products. Fragmented industries also vary widely in

technological sophistication ranging from high technology operations like solar

heating to non-technological activities like retailing and distribution.

Emerging industry

An emerging industry is a developing or newly formed industry in which market

for products initially exists in latent form, and, becomes visible later. An emerging

industry may be created by technological innovations, new consumers or

industrial needs for economic or sociological changes which create the

environment or potential market for a new product or service. Emerging industries

are being created all the time; or, to put it in other words, most of the existing

industries today were emerging industries at some point of time or the other.

Examples are word processors, photocopiers, computers, VCR/VCP, CTV, etc.

Different emerging industries may have different structures—structural

details always vary. But, most of the emerging industries exhibit some common

structural characteristics.

Mature industry

A mature industry is one which has passed through transition from period of

fast growth to more modest or stable growth. Maturity is an important or critical

phase in the industry life cycle. During this period, fundamental changes often

take place in the competitive environment, and, companies are usually faced

with difficult strategic decisions for survival and growth because competition

becomes very intense. Industry maturity, in some cases, may be delayed or

postponed because of innovations or other events or developments including

environmental changes. This would mean prolonging the industry growth cycle

or the transition to maturity.

Transition to maturity is associated with important changes in the industry

structure and competitive environment. Industry maturity is characterized by

new trends or tendencies for change. Porter (1980) has identified and analysed

nine such trends or tendencies.

Declining industry

A declining industry is one with negative growth, that is, an industry which has

registered absolute decline in sales over a sustained period of time. Such decline

in sales is not because of business cycles or any other short-term factors like



strike, lockouts or material shortages. Therefore, a declining industry does not

represent a short-term discontinuity, but, a trend expressed in falling industry

output, sales, profitability and dwindling number of competitors. In industry life

cycle, decline follows maturity. Decline sets in generally because of product

obsolescence or emergence of a strong substitute product. For example, demand

for oil-based laundry soaps for cloth washing declined fast because of

introduction of synthetic washing materials.

In-depth study of a wide cross-section of declining industries shows that

industry reactions and the nature of competition during decline vary markedly.

Some industries ‘age’ gracefully; these industries have avoided losses by exiting

either before the decline or in time during the decline. Many other industries in

similar situations have got involved in bitter marketing warfare, prolonged excess

capacity and heavy operating losses.3

Global industry

In global industry, the strategic position of companies in different countries or

national markets are governed by their overall global positions. For example,

IBM’s strategic position in competing for computer sales in France and Germany

has improved significantly because of technology and marketing skills developed

in other countries, and a worldwide manufacturing system which is well

coordinated. To be called a global industry, an industry’s economics and

competitors in different national markets should be considered jointly rather

than individually.4

Distinction should be made between an international industry and a global

industry. An industry in a country may be international if it comprises a number

of multinational companies. But, industries with multinational competitors are

not necessarily global industries. To be a global industry, as explained above

about IBM, an industry should have multi-locational manufacturing facilities,

and, compete worldwide to secure global synergy or competitive advantage.


3. The existence of a large number of small and medium units is found in

(a) Mature industry

(b) Declining industry

(c) fragmented industry

(d) Emerging industry



4. An industry that has passed through transition from period of fast growth

to more modest or stable growth is known as

(a) mature industry

(b) declining industry

(c) Emerging industry

(d) None of the above

11.5 Industry Structure and Competitive Strategy

We have analysed above five types of industries: fragmented, emerging, mature,

declining and global. Each of these industries has its own structure in terms of

companies or competitors and the nature of competition. Let us discuss the

competitive strategy in each type of industry.

11.5.1 Competitive Strategy in Fragmented Industries

Porter has suggested a framework or steps for formulating competitive strategies

in fragmented industries. This is a five-step framework. The steps actually consist

of finding answers to five vital questions relating to strategy formulation in

fragmented industries. Table 11.1 shows the framework or steps for formulating

competitive strategies in fragmented industries.

Table 11.1 Framework or Steps for Formulating Competitive Strategiesin Fragmented Industries

Step 1 ↓ : What is the structure of the industry and position of competitors?

Step 2 ↓ : Why is the industry fragmented?

Step 3 ↓ : Can fragmentation be overcome? How?

Step 4 ↓ : Is overcoming fragmentation profitable? Where should the firm be

positioned to do so?

Step 5 ↓ : If fragmentation is inevitable, what is the best alternative for coping with

it?5

The five steps or the answers to the five questions indicate a logical process

for formulation of competitive strategy in fragmented industry. Step 1 consists

of undertaking a thorough industry and competitor analysis to identify sources

of competitive forces in the industry and positions of important competitors.

Step 2 is to identify cause or sources of fragmentation. Once the causes of



fragmentation are ascertained, it may be possible to find out if fragmentation

can be overcome. This is analysed in Step 3. Step 3 consists of analysing, in

detail, each of the causes of fragmentation, and, finding out if fragmentation

can be overcome through strategic moves. Less fragmented a market is, more

organized it is, and it becomes easier to analyse various competitive forces.

The objective in Step 4 is to ascertain if fragmentation is profitable, and, if so,

when and/or how a particular company should position itself to take advantage

of industry consolidation or restructuring. If chances of overcoming fragmentation

are remote based on analysis in Step 3, a particular company should select and

adopt the best strategy from among the alternatives available to cope with

fragmentation. This should be done in Step 5, and this should be commensurate

with the company’s resources and capabilities.

11.5.2 Competitive Strategy in Emerging Industries

Due to the structural characteristics of uncertainty and associated risk,

formulation of strategy in emerging industries becomes a very difficult task. As

Porter puts it: ‘The rules of the competitive game are largely undefined, the

structure of the industry unsettled and probably changing and competitors hard

to diagnose.’6

But, these also imply the other side of the emerging industries: lot of

freedom, flexibility and leverage exist for companies in these industries for choice

of strategy because the industry is in the formative stage. And, entrepreneurial

and aggressive companies can exploit these leverages to formulate competitive

strategies for improved operations which can lead to more efficient performance

and better results. The entrepreneurial pioneer can, in fact, design the structural

form, build the structure of the industry in terms of product policy, marketing

approach (pricing in particular) and competition strategy in such a way that it

can secure the strongest position in the long run. This is what companies like

Xerox did when it emerged in the photocopier industry.

The pioneering leader, however, will face problems as the industry

develops, competitors emerge and the course of competition becomes

unpredictable. A common problem in emerging industries is that the pioneer

may spend excessive resources in defending high market share as Xerox did.

It may be generally appropriate to respond to competitors aggressively in the

emerging phase, but, a company should concentrate more on building its own

strength and consolidating its position. In practice, as experiences show, it may

not be feasible to defend a monopoly market share for long because competitors

will emerge and some of them may be very strong like Canon in the photocopier



market. In such situations, the pioneer leader should be prepared for shifts in

strategy orientation including redefinition of roles of linkage agents like suppliers

and distributors or distribution channels.

Companies which enter emerging industries during the course of their

development also have a choice to make about which industries to enter. Here,

again, they often have a choice between alternative emerging industries. The

choice in such cases would depend on current returns or profitability and likely

future growth of the industry. The best alternative is one which promises highest

long-term growth and profitability.

11.5.3 Competitive Strategy in Mature Industries

Compared to emerging industries, mature industries pose almost the opposite

problem, i.e., of competitive overcrowding and its impact on formulation of

strategy. During transition to maturity there is volatility in the industry in terms of

emerging participants and competitive levels. But, at maturity, the industry is

already overcrowded and competition is intense. In such an environment,

competitive strategies of companies have to adjust to changing priorities.

Focus has to shift to factors which directly contribute to efficiency and

help securing competitive advantage in a low-margin market. Cost reduction,

‘true’ marketing (as opposed to pure selling) in terms of product-price offerings

and better customer service should receive the highest attention. Redefining or

repositioning old products/brands rather than introducing new products is the

recommended strategy. Less attention to creativity and more attention to

improving the existing value chain is required for edging out competitors. For

achieving this, to any significant extent, organizational change —cultural change

in particular—may also be required. There may be resistance to change, but,

this has to be overcome.

This raises a number of issues which companies in a mature industry

have to cope with. Some of these issues relate to business performance; others

relate to organizational change. Three issues or factors which should be

particularly highlighted are: business growth, financial performance and

profitability, and organizational discipline and recentralization.

11.5.4 Competitive Strategy in Declining Industry

In terms of strategic choice in declining industries, companies are confronted

with the decision about whether to continue in the industry or harvest or divest.

There are implications of both in terms of strategic details and their impacts on

organizations.



Porter has given a perspective on competitive strategies in declining

industries which should be mentioned here. He has suggested four possible

alternative strategies: leadership, niche, harvesting and divesting quickly

(Table 11.2).

Table 11.2 Alternative Strategies in Declining Industries

Leadership Niche Harvest Divest quickly

Seek a leadership Create or defend a Manage a controlled Liquidate the

position in terms of strong position in a disinvestment using business or

market share particular segment strengths investment as early

as possible

Source: M E Porter, Competitive Strategy (1980), 267 (Figure 12.1).

The leadership strategy may work out as below. In a declining industry,

many unprofitable or loss-making units divest and exit. One of the remaining

companies—who are not many in number— may have the potential to achieve

above-average profitability, and leadership position is possible for such a

company. The company strives to be the only one or one of the few competitors

remaining in the industry. Porter suggests a number of strategic steps for

executing the leadership strategy:

• Investment in aggressive competitive actions in marketing (focus

on pricing) and other areas to increase market share;

• Purchasing market share by acquiring competitors or competitors’

business;

• Purchasing and retiring competitors’ production capacity. This also

reduces exit barriers;

• Reducing competitors’ exit barriers in different ways to induce or

force them to exit;

• Demonstrating superior strengths through competitive moves in the

market;

• Demonstrating a strong commitment to continue in the business

through public statements or pronouncements.7

In niche strategy, it may be possible for a company to identify a segment

or a sub-segment in a declining industry which will not only sustain stable demand

but, may also allow high returns or margins. The company then invests to

consolidate its position in this segment or sub-segment. For this, a company

may also adopt some of the leadership strategies mentioned before. The primary



objective of these strategies is to reduce exit barriers or induce exit of competitors.

The company is then secure in the niche for sometime.

Ultimately, however, companies adopting a leadership strategy or a niche

strategy may have to switch over to a harvesting strategy or divesting strategy.

11.5.5 Competitive Strategy in Global Industries

Competition in global industries poses a different kind of challenge because it

cuts across national boundaries and, international or global forces come into

play. These forces create, among others, two distinctive pressures: cost pressure

because of global competition and, pressure for local responsiveness, that is,

adaptation to local needs or values and consumer tastes and preferences. For

some products, cost pressure may be more: for some others, the need for local

adaptation is more. Guided by these two factors and product type or structure,

companies, which wish to compete globally, generally adopt one of the four

strategies:

International strategy, multi-domestic strategy, global strategy, and

transnational strategy (Figure 11.2).

Figure 11.2 Four Basic Global Competitive Strategies

International strategy can be adopted for those products and services

which are not available in some countries and can be transferred from other

countries. These are standard products with little or no differentiation.

International strategies are not very common or popular. Some examples are:

Kellogg’s, Indian software, and Indian handicrafts.

Multidomestic strategy is almost opposite of international strategy.

Multidomestic strategy involves high degree of local responsiveness or local

content. Products are highly customized to suit local requirements or conditions.

Because of high customization, cost pressure is less; cost effectiveness may



be also difficult to achieve because of lack of scale economies. Examples :

Asian Paints (paints in general), Indian garments.

Global strategy suits companies which make highly standardized

sophisticated products, and, are in a position to reap benefits of economies of

scale and experience effects. These also include high technology products which

have universal applicability and hardly require any local adaptation. Examples

are: Intel, Motorola, Microsoft, Texas Instruments. Global retail chains like

Walmart and Marks & Spencer also come under this category.

Transnational strategy is the most difficult strategy to follow because this

is based on a combination of two apparently contradictory factors, i.e., cost

effectiveness and local adaptation. But, this may be a ‘true’ global strategy

because, in global business, there is always a price pressure or cost pressure;

and, also the need to make the product as close to a particular country’s

expectation as possible to maximize value offerings. In fact, many, including

Bartlett and Ghoshal (1989), feel that the transnational strategy is the only viable

competitive strategy in global business. Many companies are adopting this

approach to become successful. Some good examples are : Caterpillar (taking

on Komatsu and Hitachi), McDonald’s, Coca-Cola, Pepsi and Domino’s Pizza.

Many multinational FMCG companies like Unilever and Procter & Gamble follow

transnational strategies through their fully owned subsidiaries in different

countries.


5. In ________ industry, the pioneering leader faces problems as the industry

develops, competitors emerge and the course of competition becomes

unpredictable.

6. In ________ industries, the problem faced is that of competitive

overcrowding and its impact on formulation of strategy.

7. Global strategy suits companies that make highly standardized

sophisticated products. (True/False)

8. Transnational strategy is quite an easy strategy to follow. (True/F alse)

11.6 How to Conduct Industry Analysis

Understanding industry structure and formulating competitive strategies imply

industry analysis. But, conducting a proper industry analysis is a very big task.



To conduct such an analysis, the industry analyst has to find answers to many

important questions:

• What should be the starting point?

• Which types of data one looks for?

• Should one look for only published or secondary data?

• Or, should one also generate primary data from industry observers

(participants)?

• What are the analytical techniques to be used for data processing and

analysis?

Answers to these questions would make possible an appropriate industry

analysis. This is about complete or comprehensive industry analysis. If, however,

one is interested in a particular aspect of an industry, say, only industry growth,

one can also conduct a partial industry analysis with respect to the particular

object. In that case, data requirements would be less, and data processing and

analysis also would be much easier.

Porter (1980) has suggested some detailed guidelines for conducting

industry analysis. These are contained in ‘How to Conduct an Industry Analysis’

(Appendix B) in Competitive Strategy (1980). Porter discusses sources of

published or secondary data, generation or collection of primary data, various

categories of data, scheme of data processing and strategy for industry analysis.

He has also suggested a broad framework for industry analysis in terms of

categories of data and competition. The framework is shown in Box 11.1

Industry analysis should follow a number of logical or strategic steps.

These are shown below:

Step 1 : Determine or specify the objective or objectives so that there

is no lack of focus.

Step 2 : Collect and scan through available published or secondary data.

Step 3 : Identify data or information gaps for generation of primary data.

Step 4 : Generate primary data (through survey, interviews, meetings,

etc.,) to fill the data information gap.

Step 5 : Process/tabulate various data as mentioned in Box 11.1

Step 6 : Prepare a general overview of the industry using the processed/

tabulated data/information.



Step 7 : Prepare specific sectoral analysis—technology, product,

marketing pattern, competition analysis .

Step 8 : Draw inferences or conclusions to complete the analysis.

Box 11.1: A Broad Framework for Industry Analysis

Data Categories Compilation

Product lines By company

Buyers and their behaviour By year

Complementary products By functional area

Substitute products

Growth

Rate

Pattern (seasonal, cyclical)

Determinants

Technology of production and distribution

Cost structure

Economies of scale

Value added

Logistics

Labour

Marketing and Selling

Market segmentation

Marketing practices

Suppliers

Distribution channels (if indirect)

Innovation

Types

Sources

Rate

Economies of scale



Competitors—strategy, goals, strengths and

weaknesses, assumptions

Social, political, legal environment

Macroeconomic environment

Source: M E Porter, Competitive Strategy (1980), 370 (Figure B-1)

The real significance of competition or competitor analysis has been shown

by the Japanese companies. There are many reasons why Japanese automobile

companies were able to penetrate the US market successfully in the 1970s.

But, one of the most important reasons is that they were much better at doing

competitor analysis than US companies. The Japanese conducted a careful

and detailed analysis of the US auto matket (See Caselet). They similarly studied

the European market, particularly the design and engineering of the automobile

manufacturers. In contrast, the Americans were late even at recognizing the

competitive threat from Japan and were never so good in analysing the

competitive environment they were going to face.

Competition analysis can be divided into two main parts: one, identifying

the existing and potential competitors, and two, understanding and evaluating

competitors. To properly structure competitor analysis, one can start with a set

of questions on identifying competitors and understanding and evaluating them.

A series of exploratory questions are posed below. The analysis below would

be generally based on answers to these questions and related issues.

Identifying Competitors

• Who do we usually compete against? Who are our most intense

competitors? Who are less intense, but, still serious competitors? Who

are makers of substitute products?

• Can various competitors be divided into strategic groups on the basis of

their assets, skills or strategies?

• Who are the potential competitors or potential entrants? Is there anything

that can be done to discourage them early?8

Understanding and Evaluating Competitors

• What are competitors’ objectives and strategies? What are their levels of

commitment and seriousness?



• What is competitors’ cost structure? Do they have a cost advantage or

disadvantage or cost neutrality?

• What is their image and positioning strategy?

• Who are the most successful competitors? Who are the unsuccessful

ones? Why?

• What are the strengths and weaknesses of each competitor or competitor

groups?

• What are the leverages competitors have over us (our strategic

weaknesses, customer problems, etc.,) which they can exploit to enter

the market or become stronger competitors?

• What are competitors’ special assets and skills that can be used against

us?

Activity 1

Choose an electronic goods industry (colour TV, cell phone, desktop or

laptop computers) and carry out an industry analysis in terms of the steps

and guidelines given in the text.


9. Competition analysis can be divided into two main parts: (1) identifying

the existing and potential competitors, and (2) __________.

10. Japanese automobile companies were able to penetrate the US market

successfully in the 1970s as they were much better at doing _______

than US companies.

11.7 Identifying Competitors

There are two different ways of identifying existing competitors: customer-based

approach and strategic group approach. The customer-based approach analyses

thoughts (likes, dislikes, preferences, etc.,) of customers who make their choices

among competing suppliers of products. This gives a basis for grouping

competitors to the extent they compete for customer’s choice. The strategic

approach for competitor identification attempts to classify competitors into

strategic groups on the basis of their competitive strategies.



11.7.1 Customer-based Approach

Primary competitors, i.e., competitors in the same product category and, not in

substitute product category, are clearly visible and more easily identifiable. For

example, if one takes the Indian soft drinks market, Coca-Cola and Pepsi are

the most immediate competitors followed by Thums Up, Sprite, Fanta, Limca,

etc. Whenever consumers think of a soft drink, they will first think of one of

these brands. But, secondary competitors, i.e., competitors in substitute product

categories are not so easily visible, and, are more difficult to identify. For example,

lemon soda, canned and packaged fruit drinks (like ‘Frooti’), slush, etc., also

compete with soft drinks. Customers have a choice, and, many times, they ask

for these products/brands in place of soft drinks, and secondary competitors

compete with primary competitors.

The above examples illustrate an important point. In most industries,

competitors can be usefully identified in terms of how intensely they compete

for the business or product which attracts or induces customers. There are

several very direct competitors; others who compete less directly; and, still others

who compete indirectly, but, are still relevant. A knowledge of this pattern can

lead to a proper understanding of the market structure and the competitive

situation.

11.7.2 Strategic Group Approach

Strategic group approach provides an alternative way of identifying competitors

in an industry or market. A strategic group generally exhibits the following

features:

• Possess similar characteristics, (e.g., size, competences, resource base,

etc.)

• Possess similar assets and skills, (e.g., cost efficiency, quality, image,

etc.)

• Pursue similar competitive strategies, (e.g., use of same or similar sales

promotion and advertising methods, aggressive or offensive approach,

etc.)

In many industries or markets, there are a large number of competitors

(like in monopolistic competition) and, it is difficult to analyse each of them

individually. It may be possible to track the leader or one or two large competitors,

but, it may not be very feasible, even cost-wise, to analyse individually, say, 30

or 40 competitors. Reducing such large numbers to small strategic groups makes



the analysis easy and more usable from strategy formulation point of view. Let

us take the Indian detergents market. In this market, Surf (with brand extensions)

and Ariel may be placed in one strategic group; Tide, Rin, Wheel, Sunlight and

Nirma may be classified into a second strategic group; Ghadi and similar regional

brands can be in a third group; and, many local brands can be put together in

the fourth group. Each of these groups will show some distinct features or

characteristics like resource base, ability to compete, marketing skills, etc., and,

such grouping will give a company a clear strategic perspective to analyse

competition.

11.7.3 Potential Competitors

Existing competitors are the most immediate threats to a company. But, there

are also potential competitors who are potential threats. Companies generally

remain busy with formulating strategies or counter-strategies to meet threat

from existing competitors, and, they tend to ignore potential competitors or

entrants. But, this is a very short-term or short-sighted approach, because, in

due course, potential competitors can become stronger than some of the existing

competitors as Titan has shown to HMT.

Aaker (1995) has mentioned six different types of potential competitors

or potential competing situations.

(a) Market expansion: Any company planning market expansion, that

is, planning to enter into a new market, is a potential competitor for

all those already operating in that market. Walmart, for example,

has decided to enter into the Indian market through a JV with Bharti

Enterprise. This is a big potential threat to the entire Indian retailing

industry.

(b) Product expansion: Product expansion, like market expansion, is a

potential competitive threat. ITC diversified into hospitality business

and agri-business, and during the planning stage of diversification,

was a potential competitor for all those in agri-business and hospitality

business.

(c) Backward integration: Present customers can be potential sources

of competition. General Motors bought many component

manufacturers during the initial years of its operation in a backward

integration move. Many can users like Campbell Soup have

integrated backward by making their own containers. Backward

integration is usually more common in business-to-business products.



(d) Forward integration: Suppliers or vendors are also potential

competitors. AST, a major computer manufacturer in the US at one

time, started as a component (add-on-boards) manufacturer for IBM

computers. TVS Motors (earlier Lucas-TVS), traditionally a

manufacturer of electrical accessories for automobiles and

motorcycles/scooters, has integrated forward by entering into

manufacture of motorcycles. Like backward integration, forward

integration also is more typical in business-to-business markets.


11. While identifying competitors, the ________ approach analyses the

preferences of customers who make their choices among competing

suppliers of products.

12. The ________ approach for competitor identification attempts to classify

competitors into strategic groups on the basis of their competitive

strategies.

13. Primary competitors, i.e., competitors in the same product category and,

not in substitute product category, are clearly visible and more easily

identifiable. (True/ false)

14. Existing competitors are the most immediate threats to a company.

(True/False)

11.8 Models of Competition

In addition to analysing various factors which influence competitor actions, one

can also get insight into competitors or competition through different models of

competition. Competition takes various forms and can be of different intensities.

Different models of competition try to analyse this. We shall discuss three

important models of competition:

1. The Economic Model

2. The Life Model

3. The War Model



11.8.1 The Economic Model

Industrial or business economists do not look at business strictly in terms of

market forms. They look at business in different ways. In a competitive

environment, businesses can be classified into four different categories:

specialized businesses, volume businesses, fragmented businesses and

stalemated businesses. Such classification is based on two factors; first, the

potential size of advantage a company can derive from a particular business,

and, second, the number of ways such advantage can be secured. In terms of

these two factors, four business categories are shown in Figure 11.3.9

Figure 11.3 Classification of Business Based on Competitive Environment

As shown in the figure, businesses in which potential size of the advantage

is large and approaches to achieve this are many, may be called specialized

businesses. Most consumer products fall under this category. In such businesses,

few large players dominate the market. The dominant players (national-level

products/brands) control about 80 per cent of market share and the balance is

shared by a number of small players—regional and local. Take the market for

detergents. National brands like Surf, Ariel, Nirma, Rin, Tide and Wheel dominate

the market. But there are also many regional and local detergents (branded

and even non-branded) which exist in the market.

Volume business consists of industrial products. Products like basic

chemicals (e.g., caustic soda) and industrial raw materials which are consumed

in large quantities, fall under such business. In these businesses, bigger the

market share, larger is the profitability. Hence, size gives the greatest competitive

advantage and the competition is mostly cost based — cost efficiency through

economies of scale and other factors.

Businesses which have many small players, with the largest ones having

less than 10 per cent market share, are fragmented businesses. In these

businesses, size does not offer any great advantage. These apply primarily to

service products. Hotels and restaurants (except 5-star hotels), studios



(photographers), dry cleaning, courier services, etc., are good examples.

Competition in these businesses is based on product-price packages.

Stalemated businesses are those which are sort of ‘choked’—potential

size of advantage is small and the number of ways to secure competitive

advantage are also limited. These are businesses which are on the decline

either because of technological obsolescence or changes in consumer tastes

and preferences. Examples of products in the category are radio, music records

(HMV and others) black and white TV, etc.

11.8.2 The Life Model

The life model or the product life cycle (PLC) approach analyses competitive

intensities during different phases of life cycles of a product. Although some

management and marketing academics have raised doubts about the validity

of PLC in real world, it is, nevertheless, a useful tool for analysing competition

and determining appropriate strategies for competitive survival and growth during

different stages of PLC: introduction, growth, maturity and decline.

Figure 11.4 Product Life Cycle (PLC): Sales and Profit

At the introduction stage, that is, when a new product enters the market,

it starts as a monopoly and competition is nil. As the product moves to the

growth stage, competitors start entering the market and competition begins. As

the product matures, competition intensifies and competitive rivalry reaches its

peak. Sales and profit also peak during this period. In the decline phase,

competitive pressure decreases because sales and profit start declining, and

many companies withdraw from the market or close down. Between introduction



and growth, and, in the decline phase, competitive pressures are low, but,

mortality rates of products or businesses are high (Figure 11.4).

The lifespan of a product, and also speed or steepness in growth, maturity

and decline vary according to its nature or category. (This is what explains the

relative flatness (Figure 11.5) and relative steepness [of different PLC curves.)

Most electronic products have a shorter lifespan and also a steep PLC compared

to electrical or mechanical appliances. During the PLC, most markets witness

one market leader, one or a couple of market challengers and a number of

market followers. During the PLC, some niche players also develop in the market

who stay away from mainstream competition. In the toothpaste market, Colgate

is the leader, Pepsodent and Close-Up the challengers and Promise the follower.

Some say Vicco and Neem are niche players, but, there may be difference of

opinion on this.

Different studies have hypothesized different market structures, particularly

during the maturity phase, in terms of market shares of different players. These

studies indicate different types and levels of competition. The first of these studies

is by the Strategic Planning Institute, Cambridge, Massachusatts, popularly

known as PIMS Study. The second study is by Kotler, and, the third by Boston

Consulting Group (BCG). Buzzel (1981) has done consolidation and a

comparative analysis of these studies. The study results for market structures

in mature industries are summarized in Table 11.3.

Table 11.3 Market Structure in Mature Industries: Market Shares

Market Player Market Share (%)

PIMS Kotler BCG

Market leader 52.7 40.0 50.0

Market challengers 28.8 30.0 25.0

Market followers 11.6 20.0 15.0

Market nichers 6.9 10.0 10.0

Source: R D Buzzel, ‘Are there Natural Market Structures?’ Journal of Marketing, 45

(Winter, 1981).

11.8.3 The War Model

The war model of competition is based on close parallel between military

strategies for war and marketing strategies. Many marketing strategists have

found close similarities between the two. Most common forms of war strategies



are defensive warfare, offensive warfare, flanking warfare and guerrilla warfare.

Ries and Trout (1986) are among the greatest exponents of marketing warfare

based on military strategies. Principles of marketing warfare enunciated by them

are given in the following:

Principles of Defensive Warfare

1. Only the market leader should adopt a defensive strategy

2. The best defensive strategy is the courage to attack yourself

3. Strong competitive moves should always be blocked

Principles of Offensive Warfare

1. The strength of the leader is the most important consideration for mounting

an offensive attack

2. Find the leader’s weakness and attack it

3. Launch the attack on as narrow a front as possible

Principles of Flanking Warfare

1. A good flanking move is made into an uncontrolled area of the opposition

2. Tactical surprise should be an important element of the strategy

3. The pursuit is as crucial as the attack itself

Principles of Guerrilla Warfare

1. Find a small segment for intermittent attack; avoid confrontation

2. However successful you may be, never act like the leader

3. Be prepared to quit/exit at very short notice

Offensive and defensive strategies signify different competitive moves

and are of almost universal application in strategic business management today.


15. According to classical economic theory, markets begin as _________,

move towards ______, then to monopolistic competition and ultimately

towards pure or perfect competition.

16. In a competitive environment, businesses can be classified into four

different categories: specialized businesses, volume businesses,

fragmented businesses and _______businesses.



17. The Economic Model, Life Model and War Model are models of

(a) Competition

(b) Production

(c) Marketing

(d) Business strategy

18. Music records (HMV and others) black and white TV are examples of

(a) specialized businesses

(b) stalemated business

(c) volume businesses

(d) fragmented businesses

11.9 Porter’s Competitive Threat Model

A vital task of a strategist is to anticipate and/or recognize the nature of

competition and potential threat from competitors and to develop appropriate

response strategies. The most difficult task in this is to properly assess the

magnitude of existing competition and correctly foresee the threat from new

and emerging competitors. Porter (1980) in his pioneering work on competitive

strategy had identified five major types of competitive threats (Figure 11.5),

which are valid even today. These are:

Figure 11.5 Porter’s Five Forces Model

Source: M E Porter, Competitive Strategy: Techniques for Analysing Industries and

Competitors (New York: The Free Press, 1980).



1. Industry (existing) competitors

2. Threat of substitutes

3. Bargaining power of buyers

4. Bargaining power of suppliers

5. Threat of new entrants

Industry competitors: Various degrees or intensities of competitive rivalry

exist in the market for a product. This is the battle for market share and is the

most immediate concern of a company, particularly if it is a market leader or

challenger. Ongoing battles between Coca-Cola and Pepsi, Surf and Ariel,

Colgate and Pepsodent are good examples. Competitive intensity or rivalry

depends, to a large extent, on the stage of the product life cycle. Competition is

practically non-existent at the introduction stage, then starts growing steadily

and becomes significant till the product enters the decline stage.

Threat of substitutes: Substitute products reduce demand for a particular

product or a category of products because some customers switch over to the

alternatives. Substitution depends on whether an alternative product offers higher

perceived value to the customers. Substitution may take three different forms:

product-for-product substitution, substitution of need and generic substitution,

Product-for-product substitution or substitution for the same use are same; for

example, e-mail substituting for postal service or mobile phones substituting for

landlines. Substitution of need means that a new product or service makes an

existing product or service redundant. For example, IT has provided e-Commerce

as a tool which has generally made secretarial services or printing redundant to a

large extent. Generic substitution takes place when different products or services

compete for a share in the same family income or household income: for example,

air conditioner manufacturers competing with colour televisions or music systems

or home theatres for snatching a share in ‘fixed’ household income.

Bargaining power of buyers: Buyers are generally in a better bargaining

position. But, they can become stronger bargainers or create competition among

suppliers under certain specific conditions. Some of these conditions are: i. the

buyer purchases a very significant proportion of total output of the supplier—

can happen typically in industrial products; ii. the industry consists of a large

number of small operators so that buyers can easily create competition among

them; iii. cost of switching a supplier is low, i.e., substitutes are available or

there is no product differentiation, or, for industrial or service products, there is

no long-term contract; iv. backward integration into supplier’s product—a truck

or car manufacturer beginning to make components or accessories like Tata



Motors or an air conditioner manufacturer also making compressors like Carrier

Aircon or a colour TV manufacturer also making picture tubes like Sony.

Bargaining power of suppliers: Suppliers, or sellers, generally in a weak

bargaining position, can be strong bargainers under certain conditions. Such

market conditions are : i. no close substitutes available for the product offered

by the supplier ; ii. the product(s) sold by the supplier(s) is an important or

critical input in the buyer’s product; for example, ICs and chips in electronic

products which can be bought only from few or selected suppliers; iii. high

switching cost of changing a supplier—may be because the supplier

manufactures a special product or the product is clearly differentiated; iv. forward

integration into buyer’s product; for example, a carbon black producer entering

into tyre manufacturing and competing with tyre manufacturers or TVS (earlier

Lucas-TVS), traditionally a component or accessories maker, enters into

production of motor cycles (TVS-Suzuki).

Threat of new entrants: Many times, new entrants pose a major threat to

the existing market players. Examples of entry of Toyota and Honda in the US

car market (and also in the global market), Maruti Suzuki’s entry into the Indian

car market, Vimal fabrics in the Indian textile market and Titan in the Indian

watch market are well known. In fact, most of the established products and

brands in consumer and industrial markets today were new entrants at some

point of time. Forecasting the emergence of new entrants is very important for

existing competitors and it is also one of the most difficult jobs. But, companies

which fail to foresee the new entrants or ignore them may even face disastrous

results. We have the examples of Padmini (earlier Fiat) cars, HMT watches,

Weston TV, etc.

Activity 2

Choose any FMCG or consumer durable product or brand.and analyse the

competition for this product in terms of Porter’s five forces model.


19. Ongoing battles between Coca-Cola and Pepsi is a good example of

_____ competitors.

20. Air conditioner manufacturers competing with colour televisions or music

systems or home theatres for snatching a share in ‘fixed’ household income

is an example of ________ substitution.



11.10 Competitive Advantage Analysis

Competitive advantage, also called strategic advantage, is essentially a position

of superiority of an organization in relation to its competitors. A more formal

definition of competitive advantage is:

‘Competitive advantage exists when there is a match between the

distinctive competences of a firm and the factors critical for success

within its industry that permits the firms to outperform competitors.’10

The definition shows that superiority of a company over its competitors

exists because the company has developed some unique competence—core

competence or distinctive competence—which matches the environmental

factors or success factors in the industry in a better way than the capabilities of

competitors. South (1981) has given a definition of competitive advantage which

also gives a good perspective:

‘The process of strategic management is coming to be defined, in fact,

as the management of competitive advantage, that is, a process of

identifying, developing and taking advantage of enclaves in which a

tangible and preservable business advantage can be achieved.’11

11.10.1 Developing Competitive Advantage

Competitive advantage can be secured through two primary routes: product

manufacturing and marketing route. The product manufacturing route reflects

core competences, special capabilities, superior product design, etc. The

marketing route reflects marketing mix application, positioning, offering a bundle

of benefits or value to the customer, etc. The product-making route and the

marketing route are obviously not exclusive to each other; they are, in fact,

complementary to or supporting or reinforcing each other (Figure 11.6).

Figure 11.6 Competitive Advantage: Product and Marketing



A corporate strategy can consist of various individual strategies like product

strategy, pricing strategy, promotion strategy, distribution strategy, competition

strategy, etc. Many forms of competition exist. But these strategies or the way

a company competes is not the only key to, or the complete course for success.

There are at least three other strategic factors which are essential for creation

of a competitive advantage which can be sustained over time. These three

factors are: how to compete (basics), i.e., business assets and skills, where to

compete, i.e., product–market selection, and whom to compete against, i.e.,

competitor position (Figure 11.8).

Figure 11.7 Factors Contributing to Competitive Advantage (CA)

For securing competitive advantage, corporate strategy should be based

on appropriate assets, skills and capabilities. Important business assets are

customer base, quality reputation, good management or company image, proper

engineering or skilled staff, etc. For example, a product strategy for an industrial

good without proper design, manufacturing and quality control capabilities will

not deliver the results or any sustainability to the product or quality.

Special assets and skills of a company can also be termed as core

competence or distinctive competence of the company. According to Hamel

and Prahalad (1990), advantages of companies and businesses are based on

core competence of these companies, and therefore, developing and managing

core competence are the keys to strategic success. Core competences, however,

are not the only sources of competitive advantage. We shall see this later.

The next important factor is the choice of the target product-market. A

well-planned strategy duly supported by assets and skills may not succeed

because it does not work in a particular market. Procter and Gamble’s Pringle

potato chips had many assets like consistent quality, long shelf life and national

distribution. But, these assets adversely affected the taste perception which

was considered to be the most important factor in the market.



The third important factor for competitive advantage is competitor position.

The objective or goal here is to employ a strategy to thwart competitors who

may lack strength in relevant assets and skills or is weak in some other strategic

applications. For example, flight safety is important to airline passengers: so, if

an airline is perceived to be strong on safety, then a competitive advantage can

exist in terms of provision of flight safety or better flight security.


21. A position of superiority of an organization in relation to its competitors is

called __________.

22. Various individual strategies like product strategy, pricing strategy,

promotion strategy, distribution strategy, competition strategy make up

the ________. strategy

23. According to Hamel and Prahalad (1990), advantages of companies and

businesses are based on core competence of these companies.

(True/False)

24. While securing competitive advantage, the product-making route and the

marketing route are exclusive to each other. (True/ False)

11.11 Case Study

Coca-Cola and Pepsi: Is Coke falling behind in competitive rivalry?

Coca-Cola and Pepsi are intense rivals in the global beverages market. In

some countries, Coca-Cola is the market leader with Pepsi the challenger

(No. 2); in some other markets, it is the opposite. But, competition continues

with fluctuating fortunes.

For quite sometime, Coca-Cola was the best-known brand in the world.

But, since 1998, the company has undergone a number of unsettling

developments which affected its performance and brand image. These

included management mistakes; and also change in the top management.

After unsuccessful, and also controversial, tenures of a couple of CEOs,

Neville Isdell was called out of retirement to become Coke’s CEO in 2004.

During 2000–05, 13 highest-level executives left their jobs indicating chaos

at the top of the comapny.*

Coca-Cola was going flat**. In the first quarter of 2005, Coke reported a

decline of 11 per cent in profits because of continuing poor sales in the US



and Europe. In contrast, Pepsico registered a 13 per cent increase in profit.

Pepsico attributed the increase to aggressive investments in North American

beverages, international business operations and its plan to increase these

investments in future. This may mean further trouble for Coca-Cola. Both

companies are heavily dependent on their beverages businesses. The

increase in Pepsico’s business in North American and international markets

has, at least partly, been due to Coke’s declining performance, image and

losses.***

Neville Isdell is fully seized with the challenges that his company is facing.

He, however, claims that the ‘system isn’t broken’; but, some analysts may

not agree with him. One analyst pointed out that Coca-Cola has not produced

a successful new soda since 1982. Consultant Tim Pirko has suggested

that the company should invest heavily in developing new brands. He feels

that the company needs to take some new risks, if necessary, to ensure

that the consumers again become excited about Coke products. ****

The company is also aware of it. Coca-Cola has been investing heavily to

rejuvenate the company’s stronger brands, and also in new products/drinks.

During 2005, the company invested in the growing non-calorie soda market

with Coca-Cola Zero; it acquired a stake from Danone in bottled water joint

venture; it bought a majority stake in a milk drink company; it started

distributing the Rockstar energy drink. In response to all this, Pepsi gave a

big push to its new products through Pepsi One, Pepsi Lime and Propel

fitness water.

In this scenario, will Coca-Cola be able to recover lost grounds and fully

rehabilitate itself?* The Coca-Cola company announces changes to senior management and operating

structure,’www.2.coca-cola.com, March 2005.

** D Faust, ‘Gone Flat,’ Business Week, December 20, 2004.

*** B Morris, ‘Coca-Cola: The Real Story,’ Fortune, May 17, 2004.

**** B Morris (2004).



11.12 Summary


• Competition is one of the most important components of business

environment.

• Industries can be of various types—almost each major product group

constitutes an industry. Industries can also be classified in terms of size

of the constituent units or companies, state or pace of development of the

industry, spread of the market, etc.

• Various industries can be classified into five categories – fragmented

industry, emerging industry, mature industry, declining industry and global

industry.

• Competition can be understood better by analysing competitor actions.

More important factors which govern competitive action are objectives or

goals, size and growth, organizational culture, strengths and weaknesses,

cost structure, profitability, image and positioning, and current and past

strategies.

• Various models of competition are mentioned in strategic marketing

literature. Competition takes various forms and can be of different

intensities. Different models of competition try to analyse this. Three

important models of competition are: the economic model, the life model

and the war model.

• Porter’s competitive threat model (Five Forces Model) analyses five major

types of competitive threats a company can face in the marketplace. These

are: industry (existing) competitors, threat of substitutes, bargaining power

of buyers (backward integration), bargaining power of suppliers (forward

integration) and threat of new entrants.

11.13 Glossary

• Competitive advantage: A position of superiority of an organization in

relation to its competitors

• Industry: A group of firms producing products that are close substitutes

for each other

• Monopoly: A condition in which there is single seller with no close

substitute product

• Oligopoly: A condition in which there are few sellers




1. Describe briefly the various types of industries classified by Porter.

2. What is a fragmented industry? Analyse the main features of competitive

strategy in a fragmented industry.

3. Distinguish the major characteristics of emerging industries and mature

industries. Also discuss the contrasts of competitive strategies in these

two types of industries.

4. What is a global industry? Explain with examples, international strategy,

multi-domestic strategy, global strategy and transnational strategy.

5. Distinguish and analyse the economic model, the life model and the war

model of competition. Are there any similarities among the three models?

6. Explain Porter’s competitive threat model (Five Forces Model). Also explain

forward and backward integration.

11.15 Answers


1. Industry

2. Business

3. (c) fragmented industry

4. (d) mature industry

5. Emerging

6. Mature

7. True

8. False

9. understanding and evaluating competitors

10. competitor analysis

11. customer-based

12. strategic



13. True

14. True

15. Monopolies, oligopoly

16. Stalemated

17. (a) Competition

18. (b) stalemated business

19. Industry

20. Generic

21. Competitive advantage

22. Corporate

23. True

24. False


1. Porter broadly classified various industries into five categories. Refer to


2. Porter has suggested a framework or steps for formulating competitive

strategies in fragmented industries. Refer to Section 11.5.1 for further

details.

3. Formulation of strategy in emerging industries is very difficult task due to

structural characteristics of uncertainty and associated risk. In contrast,

mature industries pose almost the opposite problem, i.e., of competitive

overcrowding. Refer to Section 11.5.2 and 11.5.3 for further details.

4. In global industry, the strategic position of companies in different countries

or national markets are governed by their overall global positions. Refer


5. There are three important models of competition – Economic Model, Life

Model and the War Model. Refer to Section 11.8 for further details.

6. Porter identified five major types of competitive threats. Refer to Section




11.16 References

1. Aaker, D A, 1995. Strategic Market Management. 4th ed. New York: John

Wiley & Sons.

2. Day, G S. 1984. Strategic Market Planning: The Pursuit of Competitive

Advantage. St. Paul, Minnesota: West Publishing Co.

3. Day, G S. 1990. Market Driven Strategy. New York: The Free Press.

4. Porter, M E. 1990. Competitive Strategy: Techniques for Analysing

Industries and Competitors. New York: The Free Press.

5. Porter, M E. 1990. The Competitive Advantage of Nations. New York: The

Free Press.

6. Thompson Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and

Executing Strategy: The Quest for Competitive Advantage. New Delhi:

Tata McGraw Hill Publishing Co.

Endnotes

1 M E Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors

(New York: The Free Press 1980). 5.2 M E Porter, Competitive Strategy (1980), 53 M E Porter, Competitive Strategy (1980), 255.4 M E Porter, Competitive Strategy (1980), 275.5 M E Porter, Competitive Strategy (1980), 213.6 M E Porter, Competitive Strategy (1980), 229–307 M E Porter, Competitive Strategy (1980), 2688 A Aaker, Strategic Market Management, 4th ed. (New York: John Wiley & Sons, 1995),

65.9 M J Xavier, Strategic Marketing: A Guide for Developing Sustainable Competitive

Advantage (New Delhi: Response Books, 1999), 213–14.10 P D Bennett, ed., Dictionary of Marketing Terms, (Chicago: American Marketing

Association, 1988), 35.11 S E South, ‘Competitive Advantage: The Art of Strategic Thinking,’ The Journal of Business

Strategy, 4 (Spring 1981).



Unit 12 Selection and Activation of Strategy

Structure

12.1 Introduction

12.2 Caselet

Objectives

12.3 Process of Strategic Choice

12.4 Strategy Selection Factors or Criteria

12.5 Selection of Final Strategy

12.6 The Strategic Plan

12.7 Preparation of Strategic Budget

12.8 Allocating and Managing Resources

12.9 Case Study

12.10 Summary

12.11 Glossary


12.13 Answers

12.14 References

12.1 Introduction

In the last unit, we moved closer to selection of strategy by an organization.

Various industry types and structures were analysed and important aspects of

competitive strategies in these industries were discussed. Most companies belong

to one of these types of industries. Competition analysis was undertaken in detail,

which enables a company to understand clearly competitor signals, moves and

actions which can pose competitive threats to companies. Finally, various factors

which determine or affect competitive advantage or disadvantage of companies

were analysed. All these give vital guidelines to companies for selection of an

appropriate strategy, or a combination of strategies, under given conditions.

The present unit is more like an extension of the previous one. We willdiscuss some additional factors or criteria here. These factors or criteria should

guide a company in selecting a final strategy from among the various alternative

strategies discussed in Unit 7 (stability strategies), Unit 8 (strategies for managingchange) and Unit 9 (expansion strategies) or a combination of some of these

strategies depending on the particular company situation and the competitive

environment. These factors include the process of strategic choice, evaluation

of strategic alternatives, criteria for selection of strategy, benchmarking and

best practices and critical success factors (CSFs). We shall also discuss in this



chapter various factors or issues involved in activating strategies and organizing

for success.

12.2 Caselet

An organization can determine whether its current capabilities represent

strengths or weaknesses in industry competition by analysing industry

structure, industry competitors, cost structure, customer needs, availability

of substitutes, barriers to entry, etc.,.A good example of this is the General

Cinema Corporation, the largest US movie theatre operator for many years.

The company reassessed that its internal capabilities in site analysis, creative

financing, marketing and management of geographically dispersed

operations were key strengths compared to major success factors in the

soft drink bottling industry. This assessment proved correct and timely for

the company. Within 10 years of entering the soft drinks bottling industry,

General Cinema became the largest franchised bottler of soft drinks in the

US. It was handling jobs for Pepsi, 7UP, Dr. Pepper and Sunkist.1

Objectives


• Analyse the process of strategy choice or selection

• Discuss strategy selection factors or criteria

• Highlight different benchmarking practices

• Analyse the process of activation of strategies

• Discuss the process of preparation of strategic budget

• Focus on allocating and managing resources

12.3 Process of Strategic Choice

Choice of a final strategy or strategies from the alternative strategies available

is the most critical and, also the most difficult job in the strategic planning process.

Glueck and Jauch (1984) have defined strategic choice in terms of selecting

the best among the alternatives.

Strategic choice is the decision which selects from among the alternative

grand strategies which will best meet the enterprise’s objectives. The

choice involves consideration of selection factors, evaluation of the

alternatives against these criteria, and, the actual choice.2



Many companies go through the process of strategic choice or decision

making, but not in a very organized or systematic way. They do not guard against

the possible pitfalls, and, as a result, imperfection or mistakes may creep in.

Imperfection may creep in because of four major reasons:

(a) Not analysing carefully the impact of the strategic choice or decision

on organizational objective.

(b) Tendency to ignore problems in the false hope that those would

disappear or resolve themselves.

(c) Incomplete evaluation of strategy alternatives.

(d) Avoidance of risk which may usually be associated with strategic

planning and decision-making process.

In a more positive sense, strategy choice or selection should consist of

four interrelated steps. These steps actually follow from the definition given

above:

1. Focussing on strategy alternatives

2. Evaluating strategy alternatives

3. Considering/using the selection factors or criteria

4. Selecting the final strategy or strategies

Selection of factors or criteria should be generally objective. But, many

times, subjective factors also play dominant roles. Including these factors, the

process of strategic choice may be schematically shown as given in Figure

12.1.

Figure 12.1 Process of Strategic Choice



12.3.1 Focusing on Strategy Alternatives

As discussed in the previous units, strategy alternatives available to a company

are many. Most companies are faced with a dilemma: should they consider all

possible alternative strategies or should they limit themselves to selected

alternatives on the basis of certain given guidelines. Consideration of all possible

alternatives makes the process very broad based, and, it may be theoretically

recommended. But, the practical problems may be many. There is also the

question of time and resources. On the other hand, if only few alternatives are

considered, there is the possibility or risk of omission of some important

strategies.

This clearly indicates the need for a middle course in terms of the number

of alternatives. A ‘reasonable’ number of alternatives should be chosen initially

on the basis of certain company considerations. First, every organization has a

corporate mission or philosophy. This would dictate elimination of some of the

strategy choices. For example, Reliance Industries, as a corporate policy, does

not consider any project with outlay of less than `1000 crore. Similarly, Tata

Group has decided on a policy that group companies will operate only in those

industries in which they can occupy one of the first three positions. Second,

investment requirements may eliminate some choices, i.e., strategy alternatives

with very high investment requirements may not be considered. Third, gap

analysis (discussed in Unit 6) also helps in the initial selection of some probable

alternatives and exclusion of others. The gap analysis essentially shows or

measures the gap between present performance and desired performance based

on organizational goals or priorities. Only those strategies which are relevant

for bridging the performance gap should be considered to begin with. The final

selection of strategy would be made on the basis of other factors or

considerations.


1. Strategic choice is the decision which selects from among the alternative

grand strategies which will best meet the enterprise’s objectives.

(True/ False)

2. Companies must consider all possible alternative strategies before making

a strategic choice. (True/ False)



12.4 Strategy Selection Factors or Criteria

Contingency strategies are exceptional strategies for exceptional situations or

circumstances. Under normal circumstances, the choice of strategy has to

proceed in a logical sequence or step-wise process. After evaluating various

strategic alternatives in terms of company and industry/market characteristics,

the next step is to use appropriate selection factors or criteria. For further

evaluation of the alternatives or narrowing down the choices to more specific

strategies, we shall consider two selection factors or criteria:

1. SPACE technique or approach

2. Benchmarking and best practices

12.4.1 Space Framework or Technique

Strategic Position and Action Evaluation (SPACE) matrix or framework can be

considered an improvement over the portfolio analysis (various models discussed

before) and more comprehensive as a technique for evaluating or selecting

strategies. Compared to the two dimensions of the portfolio matrices/models,

SPACE framework consists of four dimensions— two internal and two external

factors.

Internal External

Financial strength

Competitive advantage

Industry strength

Environmental stability

Each of these factors can be rated on a 5-point scale (0–5) to determine its

relative effectiveness. Based on the relative effectiveness of these factors and

their different combinations, different strategies can be selected (See Figure 12.2).

Four quadrants in the figure represent four different postures: conservative,

aggressive, defensive and competitive. The ideal quadrant is 2 (aggressive)

where both the internal factors are strong and both industry strength and

environmental stability are high. Companies/businesses in this quadrant should

follow expansion strategies like diversification and integration. Actual or final

form of the strategy may be decided based on additional factors or considerations

(discussed later). Companies/businesses in quadrant 4 (competitive) possess

high financial strength but, low competitive advantage; environmental stability

is high but industry strength is low. Such companies/businesses should adopt

merger strategy through amalgamation or consolidation to improve synergy.



They may also undertake corporate restructuring or turnaround strategies to

improve competitive advantage and become more competitive. Similarly,

businesses in quadrant 1 (conservative) should predominantly adopt stability

strategies. Companies/businesses in quadrant 3 are in the worst situation with

both internal and external factors very weak. They should adopt strategies for

divestment and liquidation.

Figure 12.2 SPACE Matrix/Framework

Source: Adapted from H Rowe et al. Strategic Management and Business Policy:

Methodological Approach (Reading, Massachusetts: Addison-Wesley Publishing Co.,

1983), 155.

SPACE matrix/framework considers several individual factors for

determining financial strength, competitive advantage, industry strength and

environmental stability. These are shown in Table 12.1.

Table 12.1 SPACE Factors: Internal and External

Internal Factor External Factor

Financial Strength Industry Strength

• Cash flow • Growth potential

• Working capital • Profit potential

• Liquidity • Financial stability

• Return on investment • Technological know-how



• Leverage • Resource utilization

• Ease of exit • Capital intensity

• Risk in the business • Ease of market entry

• Productivity, capacity utilization

Competitive Advantage Environmental Stability

• Technological know-how • Technological change

• Product quality • Competitive pressure

• Product life cycle • Demand variability

• Market share • Rate of inflation

• Customer loyalty • Price change of competing products

• Competitors’ strengths/weaknesses • Price elasticity of demand

• Control over suppliers and distributors • Entry barriers

Note: Each individual factor is rated to arrive at an average or overall score between 0

and 5 for two internal factors and two external factors.

Source: H Rowe et al., Strategic Management and Business Policy: Methodological

Approach (Massachusetts: Addisson-Wesley Publishing Co., 1982), 155–56.

12.4.2 Benchmarking and Best Practices

An organization’s strategic capability or strategic choice is to be always

understood in relative terms because it involves comparison with competitors

or industry norms. This implies that organizations need to understand and analyse

performance standards, i.e., what constitutes good and bad performance. Since

performance is intrinsically related to strategy formulation and implementation,

the ‘relativity’ factor should be kept in mind during the process of selection of

the strategy itself. A strategy, along with resource base, should be so selected

that it can deliver results of high standards or standards which can compare

with the best in the industry. This necessitates an analysis of benchmarking and

best practices.

Benchmarking is comparison with, and adherence to, prescribed norms,

standards or practices. Benchmarking can also be defined in a more functional

way:

Benchmarking is a process of identifying, understanding, and adopting

outstanding practices from the same organization or from other

businesses to help improve performance.3



Based on the above definitions, five important features or characteristics

can be identified:

(a) Benchmarking enables an organization to analyse where it stands

in comparison to other organizations, where it excels or lags behind.

So, benchmarking is a useful diagnostic tool.

(b) Benchmarking involves identification of two things: first, what is to

be compared, i.e., product, process, performance, etc.; and, second,

whom to compare with, i.e., competitors, organizations in the same

industry, organizations outside the industry, etc.

(c) Benchmarking is applicable to all facets of business products,

processes, services, methods, etc. It goes beyond traditional

competitor analysis and focusses on understanding what are the

best practices and, how the best practices can be emulated, if not

improved upon further.

(d) Benchmarking is not confined to comparison only with direct product

competitors but, all those businesses or organizations which are

recognized as industry leaders or the best.

(e) Benchmarking is a continuous process and not just one-off initiative.

Industry standards and practices constantly change, and an effective

benchmarking initiative has to regularly monitor these changes and

accordingly adapt itself.

Types of Benchmarking

Benchmarking can be broadly divided into two major types or categories: the

first category is primarily based on what is to be benchmarked, and the other

type is dominantly based on whom to benchmark against.

What is to be benchmarked Whom to benchmark against

(Dominant factor) (Dominant factor)

Product benchmarking Internal benchmarking

Process benchmarking Competitive benchmarking

Functional benchmarking Generic benchmarking

Performance benchmarking

Strategic benchmarking

Product benchmarking is a comparison of product(s) with competitors or

industry leader to ascertain what customers value most. Process benchmarking



means emulating best processes, i.e., corporate practices and methods.

Functional benchmarking involves comparison of major functions— production,

marketing, logistics, distribution, etc., with competitors or non-competitors.

Performance benchmarking is overall comparison of organizational performance

including processes, functions, and results with competitors or industry

participants. Strategic benchmarking is the adoption of strategy–building system,

planning process, strategic decision making, etc. Internal benchmarking involves

comparison among units and developments within the same organization to

improve unit level or departmental performance. Competitive benchmarking is

a direct comparison of an organizations’s competitive strengths and weaknesses

with the best of competitors. Generic benchmarking means comparing

organizational methods and practices with the best practices anywhere in any

type of organization within or outside the industry.

More common forms of benchmarking, however, are based on comparison

with competitors and success factors within the same industry. Organizations

which are more progressive and strive for excellence adopt generic

benchmarking. In practice, benchmarking often involves combining different

types (or more than one type) to improve organizational performance and results.

Benchmarking: Comparison with Competitors

A major, and very common, benchmarking practice is to develop an organization’s

resources and competences in comparison with existing and potential

competitors. Different companies in the same industry have different financial

resources, technical know-how, managerial talent, marketing skills, operating

facilities, etc. These resources and competences can become relative strengths

or weaknesses depending on the strategy a company chooses. In selecting a

strategy, the management should compare the organizations’s key capabilities

with those of competitors for securing competitive advantage.

Sears and GE are major competitors in home appliance industry in the

US. Sears’ principal strength is its retail networks. But, for GE, the distribution

system—through independent franchised dealers—has been a relative

weakness. On the other hand, GE’s resource base, particularly financial

resources, to support its modern production system, has enabled the company

to maintain both cost and technological advantage over its competitors,

particularly Sears. This major strength of GE is a relative weakness of Sears.

Maintenance and repair services are important in the appliance business. Sears

always had strength in this area because it maintains fully staffed service

components and distributes the cost of components over various departments

in different retail locations. GE, in contrast, has to depend on regional service



centres and franchised local dealers. The comparison between Sears and GE

shows that benchmarking efforts of the two companies should focus on

distribution network, technological capabilities, operating costs and service

facilities. Management in both companies, in fact, developed successful

strategies based on relative benchmarking. By benchmarking each other, they

have developed ways to build on relative strengths, and at the same time,

avoiding dependence on capabilities in which the other company excels.4

Comparison with key competitors—essentially process benchmarking or

competitive benchmarking—can be very useful in ascertaining whether resources

and capabilities of an organization are competitive strengths or weaknesses.

Identification of differences (strengths and weaknesses) with competitors provide

important inputs for choice and development of strategy. Also, through

competitive benchmarking, a company can concentrate on those strategies which

it can effectively use to its advantage. Box 11.1 illustrates how UPS used

competitor comparison with FedEx to assess its strengths and weaknesses in

the package transportation and delivery industry for selection of its strategy.

Benchmarking against Success Factors in the Industry

Industry analysis (presented in the previous unit) enables a company to identify

factors which account for strategic success in a particular industry. Key

determinants of success in an industry can be used to assess an organization’s

competitive strengths and weaknesses. By analysing industry structure, industry

competitors, cost structure, customer needs, availability of substitutes, barriers

to entry, etc., an organization can determine whether its current capabilities

represent strengths or weaknesses in industry competition. Porter’s 5-forces

model (discussed in the previous unit) of competitive levels/threats in an industry

provide a useful framework for such analysis.

A good example of this is General Cinema Corporation (see Caselet).

Many other companies have successfully benchmarked industry success factors

for development of competitive strategy. Avery Dennison is another example.

Avery Dennison used industry evolution benchmarking against 3M to create a

new successful strategy.

Best-in-class Benchmarking

Comparison with competitors or benchmarking against industry success factors

has a major shortcoming. They only help an organization to succeed or excel

within the industry. But, best methods or practices need not be confined to only

within one’s own industry. These can easily exist in some other business or

industry which may be really exemplary. As mentioned earlier, organizations



which aspire to be comparable to the best among all businesses or strive for

excellence should adopt generic or best-in-class benchmarking.

Best-in-class benchmarking is a comparison of an organization’s methods

and practices or performance against the best in any business or industry and

adoption of the same. Best-in-class benchmarking urges organizations to search

for best practices wherever those may be found. In best-in-class benchmarking,

the potential for change is enhanced, and the forces and direction of change

are facilitated by locating practices or forming partnerships across industries or

sectors. For example, British Airways improved aircraft maintenance, refuelling

and turnaround time by studying the processes used in Formula One Grand

Prix motor racing pit stops.5 A police force wanting to improve the way it responds

to emergency telephone calls studied call centre operations in the banking and

IT sectors for benchmarking the response pattern.6

Best-in-class benchmarking becomes particularly relevant for service

organizations. A characteristic feature of service organizations is that improved

performance in one sector—particularly in factors like speed and reliability—

raises the general level of expectations among customers about the same (speed

and reliability) from all companies in all sectors. So, in the service sector, best-

in-class benchmarking urges organizations to stretch their core competence or

develop newer capabilities to exploit opportunities in different fields or markets.

Benchmarking Practices in Indian Corporates

With the increase in competitive intensities and exposure to globalization, Indian

companies, like many others in different parts of the world, are constantly seeking

to improve their performance. Benchmarking, therefore, is becoming a logical

strategic initiative. Different companies are trying to benchmark themselves in

different ways to suit their performance requirements and benchmarking

objectives.

Benchmarking practices followed by majority of the Indian companies

can be broadly divided into three types: product or quality benchmarking,

customer service benchmarking (an extension of competitive benchmarking)

and comprehensive or combination benchmarking.

Quality benchmarking has been adopted by companies like BHEL, NTPC,

IOC, Tata Motors, JCT Electronics and Johnson & Nicholson. Companies which

have used benchmarking to improve customer service are HDFC, Infosys,

ModiXerox, Titan and Airtel, among others. These companies focus on those

practices which help them to serve their customers better. Companies like

Reliance Industries, Ranbaxy, Maruti Suzuki, Hero Honda and Honda Motors



have resorted to comprehensive or combination benchmarking, i.e., emulating

good or best practices in different areas to improve overall performance.

These companies have not confined themselves to benchmarking only

against Indian organizations. Many of them have gone for global benchmarking.

Some, like Maruti Suzuki have benchmarked their technology suppliers; others

like Hero Honda and ModiXerox have benchmarked their joint venture partners;

and some others like Honda Motors (India) have benchmarked their overseas

parents.

Some of these companies have adopted benchmarking practices as they

exist. Some others have modified or improved upon the existing practices for

better results or competitive advantage; Reliance and Infosys are among such

companies. Reliance has this to say about their global benchmarking: ‘Global

benchmarking has always been a mantra for all of us here at Reliance. We

have now geared ourselves up to raise our levels of productivity and efficiency

for capital, assets, people and the entire organization well beyond comparable

global benchmarks’.

12.4.3 Best Practices at Nike7

Nike can be studied as a good model of how companies grow to excellence in

corporate practices through organizational evolution. Nike evolved from a ‘poster

child for irresponsibility’ to a leader in progressive practices. We analyse here

the content of this evolution or the path to corporate responsibility.

Nike’s business model, like that of many others—to market high-end

consumer goods produced in cost-efficient value chains—was not enough.

During the past decade, the company has been grappling with complex

challenges of responsible business practices trying to strike a balance between

purely organizational and societal dimensions or objectives. Zadek (2004)

explains this in terms of five stages of organizational learning or growth. The

five stages of evolution are:

Stage 1 : ‘Its not our job to fix that’; this is the defensive stage

characterized by outright rejection of allegation or denial of links

between the company’s practices and the alleged negative

outcome.

Stage 2 : ‘We will do just as much as we have to’, this is the compliance

stage—a stage of recognition that a corporate policy must be

evolved and pursued for improving practices. Compliance may

be understood as a cost of doing business.



Stage 3 : ‘It’s the business...’; this is the managerial stage—the company

realizes that it is facing a long-term problem which cannot be

passed off with attempts at simple compliance or a public

relations strategy. The company needs more fundamental

changes in strategy and practices.

Stage 4 : ‘It gives us a competitive edge’; this is the strategic stage—the

company learns how realigning its strategy to conduct

responsible business practices can give it an edge in competition

and contribute to the organization’s long-term success.

Stage 5 : ‘We need to make sure everybody does it’: this is the civil or

implemention stage—the company promotes collective action

to address society’s concerns. Generally, it is linked directly to

organizational strategy.8

Nike’s transition from corporate irresponsibility to excellence in progressive

practices has been made possible through a series of measures and sequential

developments. These have been well summarized by Zadek:

• Nike’s business is based exclusively on global outsourcing. Labour

activists in the early 1990s were exerting tremendous pressure on

premium brand companies to incorporate proper codes of conduct

in their global supply chains (‘appalling’ working conditions in some

of the suppliers’ factories). These groups targeted Nike because of

its high profile brand and not because its business practices were

worse than its competitors.

• Labour activists’ actions were already affecting Nike’s core and highly

profitable youth markets in north America and Europe. To prevent

further damage, Nike went ‘professional’ in 1996 by creating its first

department specifically responsible for managing its supply chain

partners’ compliance with labour standards. And, in 1998, Nike

established a Corporate Responsibility department.

• The CEO assembled a team of senior managers and consultants/

experts to be led by Nike’s VP, Corporate Responsibility. Nike realized

that it had to manage corporate responsibility as an integral or

inseparable part of its business. It was also not difficult to ‘re-engineer’

procurement incentives. The review team proposed that Nike should

grade all factories according to their labour conditions and, then

penalize or reward procurement teams based on the grade of the

supplier they used. But, commercially and culturally, it was not so

simple.



• Nike’s efforts to secure satisfactory labour conditions were serving

its immediate financial objective which was the sole focus of the

majority of the company’s investors. Nike’s challenge was to adjust

its business model to reflect responsible practices—building

tomorrow’s business success without compromising today’s financial

bottom line. And, to do this, it had to offset any first-mover

disadvantage it had by getting both its competitors and its suppliers

involved in the process.

• Nike is a business and is accountable to its shareholders. But, the

company has taken significant steps in evolving a strategy and

practice which transforms itself from being a target of civil activism

to a key participant in civil society initiatives and processes. Nike

has perfectly positioned itself to deal with the challenges of corporate

responsibility. It rightly views the issue as integral to the realities of

globalization and, a vital learning process pertinent to its core

business strategy and organizational practices.

Activity 1

Use the SPACE framework and analyse the strategy selection process of a

company of your choice.


3. A comparison with, and adherence to, prescribed norms, standards or

practices is called __________.

4. An organization’s strategic capability or strategic choice is to be always

understood in _______ terms because it involves comparison with

competitors or industry norms.

5. A comparison of an organization’s methods and practices or performance

against the best in any business or industry and adoption of the same is

called ________ benchmarking.

12.5 Selection of Final Strategy

The final selection of strategy by an organization may depend on judgement,

bargaining or analysis.9 Evaluation of different strategy alternatives through

quantitative techniques and models and application of some selection criteria



eliminate many inappropriate alternatives. This greatly facilitates the process of

strategic choice. But, the final choice of strategy still does not become easy or

automatic because subjective factors (in addition to objective factors) play a very

major role in any organization. Interplay of various organizational forces sometimes

lead to predominance of subjective factors (judgement or bargaining) and, in

some other cases, to dominance of objective or analytical factors (Figure 12.3).

Figure 12.3 Final Choice of Strategy: Interplay of Objective and Subjective Factors

Because final decision is taken by the management or the managers,

strategic choice cannot be governed only by objective considerations. If strategies

were selected only on the basis of objective criteria, a company would have

considered the organization’s mission and goals, internal competences and

resources, environmental opportunities and threats analysis and evaluation of

alternatives and the selection criteria discussed above. But, in actual practice,

personal factors are inevitable in the choice process—perceptions, biases and

preferences. So, the final choice becomes the outcome of interplay of different

and, sometimes, opposing forces. The resultant choice process narrows down

like this:

With individual group, organizational and environmental pressures

restricting strategic choice, a clear implication for the management is

the necessity for strenuous efforts to maintain choice. If 360° can be

conceived of as representing full choice, then previous strategic choice

may have eliminated 200 degrees, environmental conditions another

80 degrees, and, management values 50 degrees leaving a potential

choice range of 30 degrees or less.10

Mintzberg et al., have analysed 25 strategic decisions and arrived at certain

conclusions about strategy choice by judgement, bargaining or analysis.

According to them, choice by judgement is determined by decision makers’

power equations. Choice by bargaining also depends on similar factors, but,

the choice process is more complex; the top management or the decision-making

power in the organization is divided and the issue may be ‘contentious’. Choice



of strategy by analysis is a more logical process. There is agreement among

the top management on organizational goals or objectives. Choice by analysis

is more commonly adopted by larger organizations with better data/information

base and organizational size, and structure tends to support a more objective

approach. But, even in this approach, analysis and evaluation of alternatives

are influenced by managerial attitude towards risk, internal power equations,

organizational culture, etc.11

Between formulation and implementation of strategy, there exists another

major step. This is activation of strategies. Activation of strategy means

institutionalizing the strategy and mobilizing, allocating and managing resources

for execution of strategy. The starting point of activation of strategy is preparation

of a strategic plan. We had mentioned about strategic planning and strategic

plan in Unit 1. The actual use of a strategic plan becomes more contextual at

this stage. Strategy choice or selection, preparation of a strategic plan, activation

of strategy and implementation form interrelated steps or stages:

Strategy selection

↓

Strategic plan

↓

Activation of strategy

↓

Implementation of strategy


6. Strategic choice cannot be governed only by _______ considerations.

7. Institutionalizing the strategy and mobilizing, allocating and managing

resources for execution of strategy is known as _______ of strategy.

12.6 The Strategic Plan

Strategists sometimes differ on whether strategy comes first or plan comes

before strategy. Logically speaking, organizations first decide on a broad strategy

or the strategic direction. It may be a stability strategy (for pause or caution),

growth or diversification strategy or a strategy for change (restructuring,

turnaround, etc.). This broad strategy or strategic direction is decided by the



CEO or the board of directors based on organizational policy or philosophy and

the current company situation. Once the broad strategic move has been decided,

a strategic plan is required to work out or formulate the actual form or elements

of the strategy, the resource implications/allocations, environmental constraints,

etc. For example, a company’s strategic choice may be diversification. It may

be related diversification or unrelated diversification; it may be external

diversification like joint venture, takeover, or acquisition or merger. The strategic

plan examines/evaluates each of these strategic options in terms of costs and

benefits before the strategy in its final form is actually decided. So it can be said

that the strategic plan precedes formulation of final strategy.

A strategic plan is a comprehensive document and, is developed in clear

sequential steps. It should contain the following (as shown in Figure 12.4).

Figure 12.4 Strategic Plan, Activation of Strategy, and Implementation

Implementation of strategy will be discussed in Units 13, 14 and 15. Steps

2 and 3 have already been dealt with in unit 5 and 6. We shall analyse here



issues connected with activating or organizing strategy for competitive advantage

or success. For activating or organizing strategy, three major factors are to be

considered:

1. Preparation of strategic budget

2. Allocating and managing resources

3. Integrating resources and organizing for success


8. The strategic plan ________ formulation of final strategy.

9. Which of the factors are considered for activating or organizing strategy?

(a) Preparation of strategic budget

(b) Allocating and managing resources

(c) Integrating resources and organizing for success

(d) All the above

12.7 Preparation of Strategic Budget

Budget is the instrument for resource allocation. For strategic planning and

executing strategies, an organization needs strategic budgeting. A strategic

budget is different from the conventional accounting budget. In the accounting

budget, emphasis is on various financial entries for expenditure of a company

many of which are of an operational or routine nature; some may be of

developmental nature. A strategic budget, in contrast, is prepared with particular

reference to a strategic plan and its implementation. Certain assumptions are

made; a number of steps and factors are involved; and strategic budget

preparation is often an iterative process. A typical strategic budgeting process

is illustrated in Figure 12.5.

As shown in Figure 12.4 a number of steps or stages are involved in the

strategic budgeting process. The starting point is the preparation of different

position papers—on environment, internal competence/resources and

performance of past strategies. The CEO/top management may also issue some

guidelines for preparation of position papers. These become inputs to the

budgeting process. Based on these inputs and corporate policy or philosophy,

planning objectives are set by the CEO/top management. In the next stage,

strategic plan is prepared by the planning/strategy team. The next step is the



preparation of the strategic budget subject to certain resource availability. The

budget would be submitted to the CEO/top management for approval. They

would also allocate resources. The budgeting process is now complete and the

plan/strategy is ready for implementation. During implementation, there may be

a need for budgetary review which may result in revision of the budget proposals.

Figure 12.5 Strategic Budgeting Process

In large multi-business organizations, strategic budgeting often becomes

an interactive or iterative process between the corporate organization and the

SBUs. The budgetary process is initiated at the corporate level with corporate

goals and objectives. The SBU goals and objectives follow from, or have to be

compatible with or complementary to, corporate or organizational objectives.

But, the SBUs give their own planning and feedback inputs and the budgetary

process starts. Both the corporate organization and the SBUs become equal

partners or participants in the preparation of the final SBU budgets. The

interactive budgetary process is shown in Figure 12.6.

Figure 12.6 Interactive Strategic Budgeting: Corporate and SBU Levels




10. A strategic budget is the same as the conventional accounting budget.

(True/False)

11. In large multi-business organizations, strategic budgeting often becomes

an interactive or iterative process between the corporate organization

and the SBUs. (True/False)

12.8 Allocating and Managing Resources

Allocation and management of resources are major factors in activation and

implementation of strategy. In Figure 12.5, we have shown resource allocation

as a decision of the CEO/top management. In practice, resource allocation

proposals may originate from the planning/strategy team or the SBUs (as shown

in Figure 12.6) based on the strategy and implementation programmes.

Sometimes, the planning/strategy team may seek views of the functional/

operational managers which form important inputs in the resource allocation

process. But, final approval or allocation will be always by the CEO/top

management.

In allocating and managing or organizing resources, three types of

resources have to be considered: financial, human or managerial and technology

or innovation. Some strategic management analysts feel that information

resources should be considered as the fourth resource factor while organizing

and managing organizational resources.12 So, issues relating to allocation and

management of resources are not confined to financial resources only as is

commonly perceived.

We shall, however, start with management of the financial resources or

strategy. All organizations face a basic decision problem as to how their

businesses will be financed. An organization will have a particular financial

requirement if it is planning fast growth of its business through diversification—

product/market development or acquisition. The funding requirement will be

different if a company is trying to consolidate its business, i.e., pursuing a stability

strategy. The funding requirement would also be different during different stages

of development of an SBU. Ward (1993) has analysed funding strategy along

with business risk and financial risk of an SBU. He has conducted the analysis

by using the BCG growth share matrix (discussed in Unit 7). Ward’s analysis is

presented in Figure 12.7.



Figure 12.7 Funding Strategy Analysis: Use of BCG Framework

Source: Adapted from K Ward Corporate Financial Strategy (Butterworth/Heinemann,

1993), Chapter 2.

The essential point emphasized in Figure 12.7 is the relationship between

business risk, financial risk and funding policy or strategy of an organization. In

other words, the analysis focusses on the need for matching financial risk and

financial return (linked to business risk) to investors. The greater the risk to

shareholders or lenders, the higher the return they expect. Debt (borrowing)

has a higher financial risk than equity because of interest and also repayment

obligations. If financing is through internal accruals (reserves/retained earnings)

as may be in the case of cash cows (maturity phase), shareholders may not be

so concerned. Businesses in maturity stage with high market share (cash cows)

usually generate enough surplus which can contribute to retained earnings,

which, in turn, can be reinvested. Financing can also be through a combination

of equity and debt, which through surplus generation, augment retained earnings/

reserves. Debt servicing also becomes easy. If financing is through equity for

growth as may be in the case of stars, the investors look for immediate returns/

profits. If it is equity in the form of venture capital which may be required for

development of new business (question marks) with high business risk, the

investors expect high returns. If a business is in decline, characteristically a

dog, equity funding is difficult because investors may not like to risk their capital

in a declining or sinking business. Financing through debt may be the only

option. Terms of credit is an important factor here.



All this makes mobilization, allocation and management of financial

resources a complex job. Scarcity of investible resources is a common

phenomenon and SBUs make competing demands whether for equity funds or

debt funds. In practice, overstatement of resource requirements by SBUs is

quite common. Also, all businesses of a company do not strictly fall in the BCG

categories of stars, cash cows, question marks and dogs. For many FMCGs

and consumer durables, the market may be in the maturity stage of PLC, but,

all products/brands are not cash cows. There are many examples in soaps,

detergents, refrigerators, etc. These businesses follow stability or incremental

growth strategy. In such cases, the organization may have alternative financing

options available, and, the management may have to carefully weigh the

alternative costs of financing and commensurate returns. There is also a choice

between short-term and long-term financing and the issue of debt servicing. An

organization has to consider all these and related factors in organizing and

managing financial resources.

Next to finance, human resources are the most important factor in

activating strategies. People can make a major difference between success

and failure of a corporate strategy. Knowledge, skill and experience of people

can significantly contribute to strategic success as poor human resource can

hinder adoption or implementation of successful strategies. HR systems play a

vital role in organizing and managing human resources. For various functional/

operational strategies to support a chosen organizational strategy, the right

kind of people should be deployed in right positions or recruited to fill up the

resource gap. For example, if a company’s chosen strategy is diversification,

and, if it involves innovative products and processes, requisite skills or expertise

may not be available in the company. Here the HR department has an important

role to play in hiring the right talent, providing or creating proper work environment

and helping to increase managerial productivity.

Talking about the role of HR, it is also necessary to distinguish between

‘hard’ and ‘soft’ approaches to human resource management. Hard and soft

approaches in HR are like hard and soft Ss in organizations. ‘Hard’ human

resource approach is about how the structure, systems and procedures can be

used to ‘acquire, utilize, develop and retain’ people to secure strategic advantage

for the organization. Organizational needs are the predominant factor here, not

the people. In ‘soft’ human resource management, dominant focus is on the

people, individually and collectively— culture, style, behaviour, etc., and how

these help or hinder organizational strategies. Many organizations concentrate

on the hard approach leaning too much on the structures and systems and



overlooking or showing lack of concern for the soft factors. They tend to forget

the fundamental fact of complementarity between the hard and soft approaches

necessary for strategic success. In practice, HR approaches and strategies in

many companies reflect adhocism because of internal and external pressures.

But, this is a very shortsighted measure/solution and invariably affects activation

and implementation of strategies. A more balanced approach is necessary.

To ensure such an approach and to be effective, HR professionals also

need to orient themselves. They should familiarize themselves with the

organization’s strategic process or a particular strategic initiative and human

resource requirements in terms of competence and commitment. HR activities

or human resource management can help in the pursuit of successful strategies

in many ways. Some of the more important ones are mentioned below:

• HR audit to assess resource requirements and availability in terms

of competence and also to analyse skills and capabilities of individual

managers which can form useful inputs to the future planning and

strategy building process.

• Fostering team-building attitude and rewarding team work approach.

Individual incentives and rewards often undermine teamwork. But,

most strategies require a team approach rather than individual

approach.

• Performance assessment of individuals and teams should have a

clear focus on strategic inputs rather than pure functional or

operational inputs. Some have suggested a 360 degree appraisal

system, i.e., appraisals from multiple perspectives or different parts

or functional areas of the organization so that the full impact of an

employee’s contribution to success or otherwise of a strategy can

be more meaningfully assessed.

• Devising appropriate training and development programmes. Of late,

there has been a shift in focus in terms of reduction of formal training

programmes and increase in coaching and mentoring for self-

development. These become important developmental inputs for

individual managers if the organization’s strategies are changing

more regularly.

• Institutionalization of individual competence. Individual experts or

highly competent people may leave the organization or retire. So,

one of the objectives of HR policies should be to institutionalize such

competence or expertise through proper succession planning.13



Finance and people are two basic resources of an organization. These

two are the prime drivers of operations and strategies. Technology or

technological innovation renders credibility or completeness to these operations

or strategies. So, as organizations have to match and manage financial and

human resources, they also need to acquire, organize and manage technology

to activate strategy, particularly if the strategy pertains to product innovation or

new product development. Technology affects product quality, productivity and

cost efficiency and can significantly contribute to strategic advantage of an

organization. Coping with technological advances is necessary even if a company

pursues a stability strategy, let alone a growth strategy. The relationship between

corporate strategy, technology and innovation is illustrated in Figure 12.8.

Figure 12.8 Relationship between Strategy, Technology, and Innovation

Source: Adapted from G Johnson, and K Scholes (2005), p. 514 (Exhibit 10.10).

12.8.1 Integrating Resources

Owning resources—financial, managerial or technological—and deploying them

in isolated ways are not enough because these do not ensure strategic capability.

Strategic capability, in the real sense, is concerned with how the resources are

deployed, managed and controlled in a harmonious way to produce a synergistic

effect. Financial planning is done primarily by the finance people; human resource

deployment is by HR department; technology development/management is by

R&D/production group. It is, therefore, essential to coordinate or link these



resources and groups at the organizational level. This means integration of

resources for competence building.

The starting point in resource development is to obtain the threshold levels

in individual resources—finance, human and technology. In a highly competitive

environment, the threshold levels are shifting upwards. To maximize the

contribution of resources, i.e., to create a unique strategic capability (core

competence or distinctive competence), resources have to be combined in right

proportion to create the required synergy. Enterprise resource planning (ERP)

is a good method for integrating and optimizing resources. In fact, many

companies are using ERP solutions to optimize resource allocation in an

integrated way. To conclude, we can say that it is not enough to be competent in

different resources. It is the ability of an organization to integrate these resources

effectively which determines the success or failure of a particular strategy or a

set of strategies.

Activity 2

As discussed in the unit, every company prepares a strategic plan. Choose

a company and prepare a strategic plan and analyse the same.


12. In allocating and managing or organizing resources, three types of

resources have to be considered: financial, human or managerial

and __________.

13. In ________ human resource management, dominant focus is on the

people, individually and collectively— culture, style, behaviour, etc., and

how these help or hinder organizational strategies.

14. Many companies are using ______ solutions to optimize resource

allocation in an integrated way.

12.9 Case Study

Crompton Greaves is a pioneer in the field of electric energy. It is India’s

largest private sector enterprise in the business of electrical engineering

operating for more than 50 years. Operations of the company are divided

into four strategic business units (SBUs)



1. Power systems (transformers, switchgears, etc.)

2. Industrial systems (motors, alternators, etc.)

3. Consumer products (lighting, fans, appliances, etc.)

4. Digital (industrial electronices, telecommunication informatics, etc.)

Strategic choice of business of the company emanates from its vision

statement which covers implementation as well as organizational learning.

The vision statement:

To achieve for Crompton Greaves, the status of world class company so as

to ensure—

Customer satisfaction

• Stakeholder satisfaction and pride

• Profitable growth

• Fulfilment of social obligation

• Perpetuity

To achieve through the implementation of the best practices and continuous

improvement of processes focussed on:

• Technology upgradation

• Cost effectiveness

• Total quality

• Speed

• Resource productivity

To create an environment which encourages organizational learning and

team effort where:

• Each individual understands his or her responsibility, makes contribution

and is recognized for the same.

• Each individual gives his or her best to achieve the shared vision.



During 1995–96, business strategy of CGL was reformulated keeping in

view the increasing competition and entry of MNCs who were equipped

with better technology and resources. The company changed its orientation

from a business organization to a technology organization and a new

corporate policy came into being with a thrust on ‘technology organization’.

As a result of this orientation towards technology organization, three new

facilities were established at Mandideep near Bhopal. The most important

aspect of these new facilities is that they belong to that business area of

CGL which the company thinks is its core competence area and wants

dedicated centres to nurture and develop a technology area on which

management can focus for long-term planning.

Other key features of the new corporate strategy focus on the following:

(a) Information technology implementation

(b) Technology innovation and perpetuity

(c) SBU technology cell

(d) Customer satisfaction

(e) Operational efficiency

Right strategic choice and implementation have enabled the company to

maintain robust financial health and sustain steady long-term growth.

* Based on S Lomash and P K Mishra, Business and Strategic Management, New

Delhi: Vikas Publishing House, 2009

12.10 Summary


• Choice of a final strategy or strategies from alternative strategies available

is the most critical and the most difficult job in the strategic planning

process. Many companies go through the process of strategic choice or

decision making but not in a very organized or systematic way.

• After evaluating various strategy alternatives in terms of company and

industry/market characteristics, the next step is to use appropriate selection

factors or criteria for narrowing down the choice to more specific strategies.

Two important selection factors or criteria are: SPACE technique or

approach, and benchmarking and best practices



• An organization’s strategic capability or strategic choice is to be always

understood in relative terms because it involves comparison with

competitors or industry norms. This shows the relevance of benchmarking

and best practices. Benchmarking means comparison with and adherence

to prescribed norms, standards or practices.

• Final selection of strategy by an organization may depend on judgement,

bargaining or analysis.

• Activation of strategy means institutionalizing strategy and mobilizing,

allocating and managing/balancing resources for execution.

12.11 Glossary

• Activation of strategy: Institutionalizing the strategy and mobilizing,

allocating and managing resources for execution of strategy.

• Benchmarking: Comparison with, and adherence to, prescribed norms,

standards or practices.

• Contingency strategies: Exceptional strategies for exceptional situations

or circumstances


1. Explain the process of strategic choice. What are the four steps involved

in the process of strategic choice?

2. What is SPACE technique or framework? Explain by using a diagram.

3. What is benchmarking? What are the different types of benchmarking?

Explain with some examples.

4. Discuss the best practices at Nike.

5. What is strategic budgeting? Explain the steps involved in the process of

strategic budgeting.

6. Explain Ward’s analysis of funding strategy along with business risk and

financial risk of an SBU. Use the BCG framework.



12.13 Answers


1. True

2. False

3. Benchmarking

4. Relative

5. Best-in-class

6. Objective

7. Activation

8. Precedes

9. (d) All the above

10. False

11. True

12. technology or innovation

13. ‘soft’

14. Enterprise resource planning (ERP)


1. Choice of a final strategy or strategies from the alternative strategies

available is the most critical, and, also the most difficult job in the strategic

planning process. Refer to Section 12.3 for further details.

2. Strategic Position and Action Evaluation (SPACE) matrix or framework

can be considered more comprehensive as a technique for evaluating or

selecting strategies. Refer to Section 12.4.1 for further details.

3. Benchmarking is comparison with, and adherence to, prescribed norms,

standards or practices. Refer to Section 12.4.2 for further details.

4. Nike can be studied as a good model of corporate best practice. Refer to




5. For strategic planning and executing strategies, an organization needs

strategic budgeting. Refer to Section 12.7 for further details.

6. Allocation and management of resources are major factors in activation

and implementation of strategy. Refer to Section 12.8 for further details.

12.14 References

1. Cook, S. 1995. Practical Benchmarking: A Manager’s Guide to Creating

Competitive Advantage. London: Kogan Page.

2. Gupta, V, K Gollakota, and R Srinivasan. 2005. Business Policy and

Strategic Management: Concepts and Applications. New Delhi: Prentice

Hall of India.

3. Hofer, C W, and D Schendel. 1978. Strategy Formulation: Analytical

Concepts. St. Paul, Minnesota: West Publishing.

4. Murdoch, A. ‘Lateral Benchmarking or What Formula One Taught an

Airline.’ Management Today, November, 1997.

5. Ward, K. 1993. Corporate Financial Strategy. Oxford: Butterworth-

Heinemann.

6. Zadek, S. ‘The Path to Corporate Responsibility.’ Harvard Business Review

(Best Practice), December, 2004.

Endnotes

1 J A Peace II, and R B Robinson Jr (2005), 173–74. The bottling operations were, however,subsequently sold to Pepsico.

2 F Glueck and L R Jaunch, Business Policy and Strategic Managemet (New York: McGraw-Hill, 1984), 279

3 S Cook, Practical Benchmarking: A Manager’s Guide to Creating Competitive Advantage

(London: Kogan Page, 1995).4 J A Pearce II, and R B Robinson Jr, Strategic Management: Formulation, Implementation,

Control, 9th ed. (New Delhi: Tata McGraw Hill, 2005), 172.5 A Murdoch, ‘Lateral Benchmarking or what Formula One Taught an Airline,’ Management

Today (November, 1997), 64–67.6 G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (Pearson Education,

2005), 174.7 This section is based on S Zadek, ‘The Path to Corporate Responsibility’, Harvard Business

Review (December, 2004).8 S Zadek, ‘The Path to Corporate Responsibility (Best Practice)’, Harvard Business Review

(December, 2004), 126-27.



9 P K Ghosh, Strategic Planning and Management (New Delhi: Sultan Chand & Sons,

2003), 290.10 C Saunders, ‘The Process of Strategic Choice’ in W F Glueck, and L R Jauch, Business

Policy and Strategic Management (McGraw Hill, 1984), 301.11 H Mintzberg, et al., ‘The Structure of Unstructured Decision Process’, Administrative

Science Quarterly, 21 (1976), 246–75.12 G Johnson, and K Scholes, Exploring Corporate Strategy (2005), 490–500.13 G Johnson, and K Scholes, Exploring Corproate Strategy (2005), 480–81.



Unit 13 Implementation:

Structures and Systems

Structure

13.1 Introduction

13.2 Caselet

Objectives

13.3 Structure of an Organization

13.4 Virtual Organization

13.5 Which is the Best Organizational Structure?

13.6 Organizational Systems

13.7 Complementarity of Strategy, Structure and Systems

13.8 Case Study

13.9 Summary

13.10 Glossary


13.12 Answers

13.13 References

13.1 Introduction

In the strategic war between Hindustan Unilever and Nirma in the Indian detergent

market during the mid-1980s, which factor enabled HLL to regain its market

position or supremacy? Was it the brilliant strategic conception of product

expansions in the form of Rin, Wheel and Sunlight or the way they were

marketed? In Parle products’ success with the pioneering Indian mineral water

Bisleri (which was selling at `10 per litre when good quality milk such as DMS

was selling at `7 per litre), which was more important: innovative concept of

bottled water or making the product acceptable to millions of Indians? What

enabled ITC to transform the Indian rural market with the breakthrough innovation

of e-choupal? Was it the brilliant idea or the execution of it?

This brings us to a fundamental question: Is formulation of strategy more

important or its implementation? This is a continuing debate in strategic

management literature. There are exponents on either side. But, one thing is

clear: the real test of a strategy is in its implementation. Only implementation

can determine the success or failure of a strategy. Even the most perfect strategy

or plan may fail if it is not implemented properly. It is said that a technically



imperfect plan implemented well may deliver better results than a perfect plan

which does not get off the paper.1 Many companies spend large amount of

time, energy and resources in developing a strategic plan without giving enough

thought to implementation.

Implementation of a strategy or plan depends on three sets of organizational

factors, namely, the structure of the organization, various functional areas and

operations and behavioural (people) aspects. Strategic analysts, therefore,

distinguish between three types or forms of implementation: structural and systems

implementation, functional and operational implementation and behavioural

implementation. These three forms of implementation are interrelated or

interdependent (Figure 13.1). Strategy implementation, in terms of more detailed

forms or components, is shown in Figure 13.2.

Figure 13.1 Strategy Implementation: Structural, Functional, Behavioural

13.2 Caselet

The e-choupal initiative started by ITC was conceived to overcome some

of the challenges faced by Indian farmers such as fragmented farms, weak

infrastructure and the involvement of numerous intermediaries in the sale

and purchase of produce. The e-choupal initiative directly links the rural

farmers with ITC for the procurement of agriculture and aquaculture

products, such as soybeans, coffee, and prawns. Traditionally, these

commodities were procured by ITC and other companies from mandis (major

agricultural marketing centers in rural areas), and a long chain of

intermediaries (middlemen) was involved in buying the produce from farmers

and moving it to the mandis. Through e-choupals, these farmers can now

directly negotiate the sale of their produce with ITC.



The e-choupal model has been quite effective, not only because of its

innovative concept but also because it has been well executed. Every e-

choupal centre is equipped with a computer and Internet connectivity, which

enables the farmers to obtain information on mandi prices and good farming

practices, and to place orders for agricultural inputs, such as seeds and

fertilizers. This helps farmers in improving the quality of produce and

obtaining better prices. Elected from the village itself, a literate farmer acts

as the interface between the illiterate farmers and the computer. So, although

the primary objective of the project was to bring efficiency to ITC’s

procurement process, an important byproduct is the increased

empowerment of rural farmers where e-choupals have been established.

Source: http://siteresources.worldbank.org/INTEMPOWERMENT/Resources/

14647_E-choupal-web.pdf

Objectives


• Discuss the structure of an organization and various structural types

• Use the concept and tool of the virtual organization

• Analyse different organizational systems

• Discuss the complementarity of strategy, structure and systems

• Identify the root organizational structure

13.3 Structure of an Organization

Structure of an organization defines the levels and roles of management in a

hierarchical way. One can also say that an organizational structure spells out

the way tasks, functions and responsibilities are allocated for implementing a

policy or strategy. These also imply that an organizational structure facilitates

or constrains how processes and relationships work.2 An organizational structure

is presented through the organizational chart. The organizational chart, however,

is only a visual expression of the tasks, functions responsibilities, and the links

and hierarchies among them. The structure goes beyond the visible chart and

signifies the mechanism through which an organization works.

In practice, structural types are many more than depicted by the four

stages of organizational development. In addition to the stage of development,



structural forms or types are determined by corporate philosophy or goals,

organizational concepts of control and centralization/decentralization and the

nature of business or business strategy. More common structural forms are

functional structure, divisional structure, SBU structure and matrix structure as

shown in Figure 13.2. Major structural types or forms are mentioned below:

1. Entrepreneurial Structure

2. Functional Structure

3. Divisional Structure

4. SBU Structure

5. Matrix Structure

6. Project-based Structure

Figure 13.2 Implementation of Strategy: Structural, Functional and Behavioural

13.3.1 Entrepreneurial Structure

This is the most elementary form of structure. The entrepreneurial structure

represents an organization which is owned and managed by a single individual—

the entrepreneur. Some call it a simple structure and contend that this is no

formal structure at all.3 Organizations with such structures are typically single

business product or service companies which cater to local or regional markets.

This is the way most small businesses operate. The owner-entrepreneur

assumes/discharges most of the responsibilities of management with some

manager(s)/staff assisting him/her. The manager(s)/staff hardly exercise any

authority and there is no or very little division of management responsibilities

(Figure 13.3).



Figure 13.3 Entrepreneurial or Simple Structure

Advantages and Disadvantages

The entrepreneurial structure, although very simple in form, has certain

advantages. The most important advantage is that decision making, including

strategic decisions, is fast. This also implies prompt and timely response to

environmental changes. Implementation also would be fast because authority

is vested in one person and is fully centralized. Informality also is an advantage

because the structure is free of procedures which often slow down matters.

The entrepreneurial approach also has its disadvantages. Such a structure

indicates excessive reliance on the owner-entrepreneur. There may be too much

demand on the time of the entrepreneur; this may result in his/her devoting

disproportionately more time to day-to-day operational matters and paying less

attention to important strategic decisions. Such a structure also carries the bias

of a single individual into corporate decisions because there are no checks and

balances in the system.

13.3.2 Functional Structure

As an organization increases in size with expansion of business, the simple

entrepreneurial system outlives its utility as a structural form. Need arises for

functional specialization and also delegation of powers for efficient functioning.

This implies a functional structure. A functional structure is based on

differentiation and allocation of primary functions such as production, marketing,

finance, and HR along with certain delegation of powers. Each of these functions

is headed by a general manager or director usually at board level. Other important

functions or activities like public relations and ‘legal’ may be directly under the

charge of CEO or MD (Figure 13.4). The functional structure is most commonly

used by medium and large organizations with narrow or limited product range.



Figure 13.4 A Typical Functional Structure

Functional Structure: Electrolux Europe4

Functional structure at Electrolux Home Products (EHP) Europe demonstrates

how such a structure can help in bringing uniformity and simplicity into a business

for profitable growth. Electrolux, the Swedish multinational, is a leading

manufacturer of consumer durables—washing machines, refrigerators and

cookers. From a humble beginning, the company has grown through various

acquisitions (Electrolux’s phenomenal growth has been discussed in Unit 8) to

become a dominant player in Europe. But, the market in Europe was becoming

‘fiercely competitive’. To increase competitiveness and its stronghold on the

market, the company needed to reduce costs and improve product and service

standards. For this, the solution or strategy of Electrolux was to introduce a

functional structure for the European operations to replace the geographical

structure which was primarily the result of acquisitions. In 2001, EHP Europe

completely realigned the organization to introduce a functional structure as part

of its competitive strategy in Europe. The new structure is shown in Figure 13.5.

Figure 13.5 Functional Structure at Electrolux Europe

The functional areas/departments shown in Figure 13.5 are explained

below for better understanding of the structure:



• Production and product development: This covers manufacturing and

related activities including R&D. This also includes procurement of raw

material inputs to ensure a ‘seamless flow’ from input supplies to finished

product. This was considered essential to sustain a stream of innovative

and cost-effective products.

• Supply chain management and logistics: This function is necessary for

taking products to the market and provides the link between demand/

sales forecasting and production.

• Marketing, product/brand management: This covers all aspects of

marketing activity. This includes managing products and brands, key

customer accounts, service and spare parts.

• Sales clusters/divisions: These are sales divisions grouped geographically

into seven clusters to maximize revenue generation.

The management of Electrolux explains the rationale for restructuring of

EHP Europe like this: ‘The realignment of EHP Europe is part of a programme

to ensure profitable growth as the organization drives more simplicity into its

business while reducing the organizational hand-offs and creating more focus

on areas where increased effort is required to meet the tougher challenges of

the market place.’5


The functional structure, as the EHP Europe example shows, can lead to

efficiency by focussing on functional specialization. Allocation of work or job

responsibilities also is clear and straightforward. All operational matters can be

delegated to the functional groups so that the top management/CEO can

concentrate more on corporate-level strategies. The functional structure also

signifies that specialists are managing tasks and responsibilities at senior-and-

middle management levels. The CEO is in touch with all functions/operations

through functional heads. This also reduces or simplifies the control mechanism.

If reduction or simplification of the control mechanism is an advantage of

the functional structure, coordination among different functions becomes difficult

in such a structure and this is a disadvantage. This structure can also lead to

functional conflicts, particularly between line and staff functions. Functional

specialization may also lead to narrow specification and compartmentalization,

which may affect organizational efficiency and growth prospects. Because of

functional groupings and allocations, senior managers may often be burdened

with operational or routine matters and may neglect strategic issues.



13.3.3 Divisional Structure

A divisional structure—some call it multidivisional structure—consists of separate

divisions constituted on the basis of products, services or geographical areas.

Need for a divisional structure arises primarily because of inadequacy of a simple

functional structure to deal with the complexities of business as an organization

grows very large. The more common form of divisionalization is on the basis of

product or business. Divisionalization gives focus on different divisions with

separate product/market strategies. The divisional structure, however, does not

do away with the functional structure. Within divisions, the functional allocations

will still continue (Figure 13.6).

Figure 13.6 A Divisional Structure


One distinct advantage of the divisional structure is that it enables concentration

on major business areas of an organization, that is products (product-based

divisions) and/or markets (geographic divisions). Since, the divisional functions

are directly under the control of the divisional head, coordination and management

of intra-divisional operations become easy, and this contributes to functional and

operational efficiency. Such structure enables quick response to environmental

changes in matters affecting the division’s business. The structure also gives

enough time to top management for concentrating on strategic issues.

But, in a divisional structure, there is a possibility of confusion over authority

and responsibility in terms of centralization [top management/CEO and

decentralization (divisions)]. There is the possibility of conflicts among the



divisions because of differences in interest, objectives and priorities. There is

also the issue of intra-divisional trading (and pricing policy) because some division

may be the input supplier to some other division. If a division grows very large,

problems of divisional management may arise. So, if there are too many divisions,

complexity of coordination and, also of cooperation is likely to arise.

13.3.4 SBU Structure

Divisions closely approximate strategic business units (SBUs) in all large multi-

business organizations. The fundamental factor in the SBU structure is to identify

independent product/market segment which requires distinct strategies. Each

of these product/market segments also face a different environment, and,

therefore, more is the need for separate strategies. In many companies,

particularly in the public sector, the earlier divisional structure has been replaced

by an SBU structure to give more focus on individual business and clearly

define the role of corporate parents. A typical SBU structure is shown in Figure

13.7. Some strategic analysts feel that creation of divisions, which closely match

SBUs may be difficult in practice due to size and efficiency factors because

there may have to be too many divisions. So, according to these analysts, the

divisional structure should be much broader with more than one SBU in each

division.6

Figure 13.7 A Typical SBU Structure

GE is an interesting example of how divisions and SBUs are matched. It

had 9 product groups and 48 divisions, which were reorganized into 43 SBUs.

Many of these SBUs cut across product groups, divisions and profit centres.

For example, three separate divisions in food appliances were merged into a

single SBU to serve the houseware market and to give strategic focus.




In terms of strategic focus, the SBU structure is an improvement over the

divisional structure. The structure facilitates strategic management of large and

diverse organizations through SBUs. Because of clear strategic focus, the

structure enables assessment/measurement of performance of individual SBUs.

This also makes possible fixing of responsibility and clear accountability at the

level of business units on the basis of performance and strategic positions of

different businesses. It is also possible or easy to add a new business with high

potential and divest unprofitable ones. All large multi-SBU organizations

commonly do this.

A major disadvantage of the SBU structure is that in very big multi-SBU

organizations like GE with too many business units, effective management of

all the units simultaneously may become a problem for the corporate

organization. Also, there may be problems of defining autonomy of the SBUs

and striking a proper balance between SBU autonomy and corporate parenting.

As in the case of divisions, issues/problems of inter-SBU trading exists including

pricing and profit policies. Also, with diverse SBUs, conflicts of interests among

units are quite likely and the larger the number of SBUs, higher are the chances

of such conflicts.

13.3.5 Matrix Structure

A matrix structure is a need-based or project-based structure which does not

follow the conventional lines of hierarchy or control. We can call it a combination

structure—combination of different divisions or functions—designed to form a

project team for launching a new product, development of a new market or

geographical operations. In the matrix structure, a project manager is appointed

to coordinate and manage project activities. Functional/specialist resources are

drawn from different divisions/functional areas to constitute the project team.

The members of the team have dual responsibility and authority—one is project

responsibility and authority and the other their ‘line’ responsibility and authority

in terms of hierarchy and command. Every matrix structure usually has a defined

duration, that is, the project period. After the completion of the project, the

managers go back to their respective divisions/functional areas. Matrix structures

need not be adopted only by very large complex organizations; these can be

used by many professional organizations, like construction companies,

consultancy organizations, etc. A detailed matrix structure is shown in Figure

13.8. Multinational companies may use matrix structure for international trading

of various products. Here the products are projects. A typical matrix structure

for a multinational company is shown in Figure 13.9.



Figure 13.8 A Matrix Structure

Source: L R Jauch, R Gupta, W F Glueck, Business Policy and Strategic Management,

6th ed. (New Delhi: Frank Bros and Co. 2004), 369.

Figure 13.9 Matrix Structure of a Multinational Company (for Global Operations)




The greatest advantage of the matrix structure is that it fosters an interdisciplinary

approach to organizational business and encourages/promotes teamwork. This

also implies harnessing talents in the organization to optimize outcome. This

means, in other words, maximum utilization of the limited resources of functional

specialists in an organization. The matrix structure also makes possible timely

and efficient response to different environmental situations because of built-in

flexibility (loosely-knit group) and diverse talents in the project group. The

structure also facilitates development of management through increased

participation and involvement in organizational business and decisions. This

should also generally improve the quality of decision making in all group projects/

businesses.

Some disadvantages are inherent in the nature of matrix (cross-functional)

structure itself because it replaces formal lines of authorities, and, this is likely

to result in ambiguity of relationship, responsibility and authority. This implies

lack of clarity in task and job responsibilities. Due to the team approach, decision

making takes longer because consensus has to be reached in all important

matters. The team approach also increases the chances or degrees of conflict

among team members. This happens partly because of dual accountability

system. The dual accountability system also creates confusion and difficulty for

individual team members.

13.3.6 Project-based Structure

Some strategic analysts make a distinction between a matrix structure and a

purely project-based structure. Most matrix structures are also project based,

but, many of these structures have indefinite life like international trading

operations of multinational companies. A project structure is one in which teams

are created for specific purposes or projects, the project team undertakes the

assigned work, and immediately on completion, the team is dissolved. Project-

based structures are more temporary than matrix structures. Such structures

typically represent civil engineering/construction, IT/MIS, consultancy, event

management and management development programmes. The organizational

structure is a constantly changing collection of project teams created, made

functional and knit together loosely by a small corporate team.7 In such a

structure, there may be cross membership of teams.

Project-based structures, as described above, are growing in importance

because of their inherent flexibility and ability to adapt to new situations quickly.



Such a structure particularly suits some activities or operations as mentioned

above. There are, however, some practical issues and difficulties with such

structures. For example, if project teams are short lived or transitory, should

the team members be regular employees or contracted for specific projects

because of considerations of cost and speciality skills? Or, the team members

should be a combination of the two types? Also, if the teams are transitory,

what unites and motivates the members to work as a well-knit group? How do

they develop understanding of, and commitment to organizational strategy?

Activity 1

Analyse the organizational structure of a company of your choice and also

comment on whether you would suggest an alternative structure for the

company.


1. The structure of an organization defines the _________and _______of

management in a hierarchical way.

2. The most elementary form of structure is the _______, which represents

an organization owned and managed by a single individual—the

entrepreneur.

3. A _________is based on differentiation and allocation of primary functions

such as production, marketing, finance, and HR along with certain

delegation of powers.

4. The fundamental factor in the _____is to identify independent product/

market segment which requires distinct strategies.

5. A _______is a need-based or project-based structure which does not

follow the conventional lines of hierarchy or control.

13.4 Virtual Organization

Virtual organization is one of the latest developments in evolution of organizational

structures and designs. It is not an organization which exists in reality, but,

performs like one. This is an organization without a formal structure. A virtual

organization is like an extended network. Business Week has given a formal

definition of a virtual organization/corporation which aptly summarizes its major

characteristics:



Virtual corporation is a temporary network of independent companies—

suppliers, customers, even erstwhile rivals—linked by information technology

to share skills, costs and access to one another’s markets. It will have neither

central office nor organization chart. It will have no hierarchy, no vertical

integration.8

As the above definition shows, in a virtual organization, the in-house or

owned resources and activities are minimized, and, most of those exist outside

the organization and are outsourced. Virtual organizations are not held through

formal structure or physical proximity of managers/staff, but, through partnership,

collaboration and networking.9 The important point here is that such an

organization appears ‘real’ to clients and meets their needs almost as well as

the real organization. In the telecommunication sector in India, several virtual

organizations have been recently created to provide different services.

Business Week has identified and focussed on five basic characteristics

of a virtual organization. These are mentioned below:

(a) Technology: Information networks will link up far-flung companies

for working together through electronic contacts.

(b) Opportunism: Partnerships will be less permanent, less formal and

more opportunistic—companies to bond together for a specific market

opportunity.

(c) Excellence: Each partnering company brings its core competence

and special capabilities, and, it may be possible to create a best-of-

class, virtual organization.

(d) Trust: Virtual organizations are based on relationship and trust. The

partners share a sense of co-destiny.

(e) No Borders: The virtual organization model redefines the traditional

boundaries of a company. Constant cooperation among the partners

makes it difficult to determine where one company ends and another

begins.10

Virtual organizations, like any other organizational form or system, have

their limitations, and, are facing some criticisms. Most virtual organizations

represent extreme forms of outsourcing. This may result in serious strategic

weaknesses in the long-run because an organization becomes devoid of its

core competence and internal capabilities. This is a major concern in industries

like civil engineering, publishing and IT/software solutions which have become

highly dependent on outsourcing. The real concern is that short-term



expediencies or improvements are achieved at the expense of long-term

competence development and innovation.


6. The ________is an organization without a formal structure and is like an

extended network.

7. The in-house resources and activities of a virtual organization are generally

(a) Large

(b) Outsourced

(c) Maximized

(d) Nil

13.5 Which is the Best Organizational Structure?

In all organizations, a logical question is: which is the best or ideal organizational

structure? Or, is there any ideal structure? Stages of development theories

(discussed above) suggest that certain organizational forms are uniquely or

ideally suited to organizations during certain stages of their growth. Should,

then, the organizational structure be linked to the stage of growth of a company?

Studies, in more recent times, however, indicate that the stage of growth, although

very important, is only one of the many critical factors or parameters on which

an ideal organizational structure depends. These factors have complex

interrelationships with each other, and also, with the conditions in the

environment. To design or evolve the best/ideal organizational structure, a

company has to find the best fit between these factors and strategy

implementation.

All organizational structures work in some companies or the other and

would be quite appropriate under certain business conditions. For example, a

functional structure works best under stable market/environmental conditions

with less need for cross-departmental coordination and communication. The

narrower the product line and markets, the more effective is the functional

structure. Divisional structure or SBU structures are most effective under

changing markets/environmental conditions which require more innovations and

faster adaptation. The more diversified the product line and markets, the better

the divisional, particularly the SBU structure, works.



For all products/projects (including international operations) where strong

cross-functional approach is required, the matrix structure (or the project

structure) may be the best.

It must be kept in mind, however, that an organizational structure should

never be static or permanent. In fact, the illustrations given before have indicated

the need for changes. For instance, as business diversifies and markets become

more complex, a functional structure should be replaced by a divisional or SBU

structure. If organizational strategy is for major expansion/diversification through

takeover or merger, the increased size and new organizational composition

may require change of structure. If the strategy is unrelated diversification, (i.e.,

new processes, products and markets), added complexity and diversity may

necessitate change of structure. If the strategy is market penetration through

cost reduction and improvement in service standards, a change of structure

would give better results. We have explained earlier how Electrolux Europe

replaced the geographical structure by a functional structure. Organizational

restructuring may also be required if environmental or business development

creates compulsions for divesting businesses. Tatas divested TOMCO and

Lakmé business, Voltas divested its refrigerator and air conditioner businesses;

the companies restructured themselves accordingly.

In conclusion, we can say that the best or ideal organizational structure is

one which adapts itself perfectly to changing business and market conditions

and consequent strategy requirements.


8. The structure that works best under stable market/environmental

conditions with less need for cross-departmental coordination and

communication is

(a) functional structure

(b) Divisional structure

(c) Matrix structure

(d) SBU structure

9. The structure that is most effective under changing markets/environmental

conditions which require more innovations and faster adaptation is

(a) Functional structure

(b) Divisional structure



(c) Matrix structure

(d) Project structure

13.6 Organizational Systems

An organizational structure provides the mechanism for distribution of authority

and responsibility among various managerial positions in the organization. This

is done through organizational constituents like business units, departments,

divisions, projects or networks. Through these constituents, the organization

performs a set of tasks, activities or functions to achieve its goals or objectives.

To do this effectively, certain organizational inputs are necessary, some linkages

need to be established among the constituents and some controls have to be

enforced. These are done through a series of systems. The structure and the

systems complement each other in the implementation of organizational

strategies. Strategy, structure and systems form the interrelated hard Ss of the

organization (Figure 13.10). Six major systems are important from the strategy

point of view:

(a) Planning system (PS)

(b) Management information system (MIS)

(c) Management development system (MDS)

(d) Motivation system (MS)

(e) Evaluation system (ES)

(f) Management control system (MCS)

See the diagrammatic presentation in Figure 13.11.

Figure 13.10 Interrelated Strategy, Structure, Systems



Figure 13.11 Organizational Structure and Organizational Systems

13.6.1 Planning System

Planning, strategy and implementation have the most direct and intimate

relationship among them. We had discussed about the planning process in an

organization in Unit 1. Planning system represents the planning process in its

entirety—all matters related to planning. The most important factor in the planning

system is the constitution of the corporate planning team and according it an

appropriate position in the organizational chart/structure. In many organizations,

the planning team/system is directly under the control of the CEO. In such

cases, planning system or activity also includes strategy formulation except

pure functional strategies which may be delegated to the functional or

departmental heads. Implementation directives are also given by the centralized

planning system. A good number of organization also follow a decentralized

planning system. In such an organization, planning, strategy formulation and

implementation are decentralized at the division or the SBU level; the parent

organization confines itself to corporate directives or only corporate-level

strategies. The strongest argument in favour of a decentralized planning system

is that if managers are actively associated with the planning process/system,

chances of successful implementation are more.

Different planning systems (centralized and decentralized) suit different

organizational structures. For example, in entrepreneurial structure, and, also

in functional structure, a centralized planning system would be generally more

appropriate with the functional areas/heads given necessary flexibility/authority



for implementation. In a divisional or SBU structure, a decentralized planning

system would be more effective with the active involvement of SBU-level

managers in strategy formulation and implementation. The same applies to

matrix structures and network structures also. In all such decentralized structures

and systems, however, the corporate/parental organization will have its own

planning cell. But, all this also indicates the need for adaptation of the planning

system to organizational structure and strategy requirements.

13.6.2 Management Information System (MIS)

The planning system in any organization depends heavily on the management

information system or MIS. The MIS provides critical inputs to the planning

system regarding all important aspects of organizational functioning and

performance. It also provides connectivity between different constituents of the

organizational structure in terms of information flow and feedback. MIS helps

managers in two important ways; first, it enables them to equip themselves with

all relevant data/information which they may require to perform their tasks better

and, second, to coordinate their activities with other managers/departments

through a central organizational mechanism. Although MIS is more frequently

used by middle and operating management, it also greatly helps the top

management in decision making.

In fact, MIS provides the foundation for design and implementation of a

number of other organizational systems. Therefore, development of MIS in an

organization is a critical management activity because many vital decisions are

based on this. For effectiveness, development of MIS should be guided by the

organizational structure and the style of management. In some organizations,

MIS is part of HR; in some companies, it is part of finance; in some organizations,

MlS is an independent activity reporting directly to the top management; in some

companies, MIS is outsourced. But, for cohesion, MIS should be a part of the

planning system as is the case in many companies. Close connectivity between

the planning system and the information system should increase value addition

by MIS in the organizational process. It should also facilitate strategy

development and implementation.

13.6.3 Management Development System (MDS)

Management development system (MDS) is essentially concerned with the

development of individual managers and preparing them better for organizational

activities including planning, strategy making and implementation. The

Encyclopedia of Professional Management has described MDS as a ‘process



of gradual, systematic improvement in the knowledge, skills, attitudes and

performance of those individuals in an organization who carry management

responsibilities.’11

The objective of MDS is to nurture individual managers and build human

capital. The focus of MDS should be the orientation and development

programmes with particular reference to strategic tasks, planning skills and

implementation capabilities. The nature of strategic tasks change with the change

of organizational strategy or adoption of new strategy. MDS should regularly

modify or update existing programmes or design new development programmes

to prepare managers for changing tasks and responsibilities. Therefore, MDS

has a special role to play in the strategy development and implementation

process.

To effectively play its role, MDS should focus or concentrate on three

important functions:

(a) Training and development of managers through in-house or external

programmes to impart required skills to enable them to perform

strategic tasks.

(b) Career planning of managers to motivate and prepare them to

undertake future strategic tasks and responsibilities and

organizational development through this.

(c) Planned positive intervention to ensure smooth transition from one

strategic phase to another to minimize resistance to change; this is

done through motivational programmes.12

13.6.4 Motivation System

The motivation system can greatly contribute to the management development

system. Many companies work on the basis of a ‘carrot and stick’ policy, i.e.,

reward and punishment system. But, recent trends are more towards ‘carrot’

than ‘stick’; ‘carrot’ here means inducement, encouragement and incentives.

And, these are done through the motivation system. Incentives are the most

important motivational factor. Incentives can be of two types: monetary and

non-monetary. Common monetary incentives are salary increase (increments),

productivity or performance bonus, profit sharing, welfare allowances, etc. Non-

monetary incentives are special rewards, certificates of excellence, nomination

to a prestigious training programme, foreign tours, foreign postings, etc. Both

monetary and non-monetary incentives are used by progressive organizations

to motivate their employees.



Infosys is a good example, a sort of a model, of motivation through

monetary and particularly, non-monetary incentives. Infosys employees receive

high salaries and salary-linked compensations compared to Indian compensation

norms/practices. Infosys is also one of the few Indian companies which offer

employees stock option plans (ESOP). ESOP increases financial stake of the

employees and also gives them a proud feeling of ownership of a company

through shareholding. It is common knowledge that most employees of Infosys

become financially ‘rich’ because of significant market capitalization of company

stocks. But, monetary incentives/compensations are not the only motivating

factors in Infosys. In fact, monetary compensations are not always enough to

completely motivate the employees. As Narayana Murthy, CEO, Infosys, put it:

‘My employees seek challenging opportunities, respect, dignity and the

opportunities to learn new things ... Salary alone is a very dangerous way of

rewarding capability.’13 Infosys has a motivation system which goes much beyond

pure monetary incentives. The company has created an environment and work

culture in which employees are encouraged to communicate with each other

freely and with the higher management. The CEO keeps in regular contact with

the employees by sending them mails every fortnight. There are live chats also.

There is a concept of ‘chairman’s list’, and, based on this list, an annual excellence

award is given to recognize talent.14

13.6.5 Evaluation System

Motivations are required to induce employees/managers to perform. Evaluation

or appraisals are necessary to ascertain whether employees/managers are

actually performing or performing satisfactorily. So, the evaluation system has

a role almost parallel to the motivation system. The evaluation system assesses

managerial performance in terms of organizational objectives, priorities, and

strategies. The purpose of a positive appraisal system is to remind managers

how they are discharging their tasks and responsibilities, particularly in relation

to the strategy implementation. In a progressive organization, this is a continuous

process.

For the development of an effective evaluation system, choice of factors

to be used for appraisal becomes a critical issue. It is generally advisable to use

a number of factors or multiple criteria to make the assessment system more

objective and broad based. This indicates the need for inclusion of a good number

of quantitative factors in addition to the subjective or qualitative factors. Several

appraisal methods are available; some are purely quantitative or objective, some

are totally subjective or qualitative, and, some are mix of the two. Most of the



actual appraisal systems are based on an appropriate mix of the two types of

factors to make the system more acceptable and reliable.

Also, relevance or suitability of the evaluation method to the corporate

strategy adopted by an organization should be considered. For example, if a

stability strategy is followed, the objective of the appraisal system should be to

focus on improving efficiency in current operations. Improvement of efficiency

in current operations, combined with initiative, can also help to achieve short-

term growth. For long-term growth, i.e., growth through expansion or

diversification, focus should be on long-term managerial characteristics of

initiative, aggressiveness, risk taking attitude, etc. The evaluation system should

lay emphasis on these factors and be structured accordingly.

13.6.6 Management Control System (MCS)

The management control system (MCS) runs parallel to the evaluation system,

and, also, to some extent, is complementary to the evaluation system. The

objective of the control system is to ensure that implementation of strategy

takes place according to plan. A properly structured MCS should consist of four

steps:

a. Establishing standards

b. Measuring performance

c. Evaluating performance against standards

d. Taking corrective measures to improve performance

These four steps constitute a cyclical process (see Figure 13.12).

Figure 13.12 Management Control Cycle



Organzational standards are prescribed in terms of targeted or planned

performance. Measurement of performance is done through the evaluation

system discussed above. Performance of employees/managers is evaluated

with respect to the prescribed standards and deviations are noted. On the basis

of deviations or observed drifts in performance, corrective action is initiated so

that performance improves and meets the prescribed organizational standards.

This is the MCS cycle.

The MCS cycle depicts a purely quantitative control system in terms of

formal or measurable indicators of standards and performance. But, in many

organizations, all controls are not enforced only through the formal machinery

or methods; they also use informal methods. In almost every organization, there

is a formal structure, which specifies the official hierarchy and reporting system

in the organization. But, there is also an informal structure which shows the way

systems and relationships actually work bypassing, or parallel to, the formal

structure. Informal controls are apprising the managers about possible problems

or lapses in strategy implementation in advance: guiding them through the

implementation process; cautioning them about mistakes or repeat of mistakes;

adherence to ethical norms, etc. These are done in a more unstructured way.

The informal control system many times complement or reinforces the formal

control system. To make the MCS more positive and successful, a good mix of

formal and informal control systems is generally recommended.


10. The planning system in any organization depends heavily on the ________.

11. The __________ is essentially concerned with the development of

individual managers and preparing them better for organizational activities

including planning, strategy making and implementation.

12. The _________system assesses managerial performance in terms of

organizational objectives, priorities, and strategies.

13. The objective of the ________system is to ensure that implementation of

strategy takes place according to plan.



13.7 Complementarity of Strategy, Structure and Systems

We had mentioned earlier (Figure 13.10) about interrelations between strategy,

structure and systems. Now, this can be seen in more specific forms in terms of

strategy options, structural alternatives and appropriate systems. We can also

introduce environmental factors to make the exercise more contextual.

Environmental factors, strategies, structures and systems can be combined in

the form of a linkage matrix. This is shown in Table 13.1.

Table 13.1 Strategy Implementation, Structure and Systems: A Linkage Matrix

Environmental Characteristics

Strategy/Structure/ Certain, stable, predictable Unstable, volatile, unpredictable

Systems

Strategy Growth/expansion/acquisition/ Stability/controlled growth

divestment

Structure Entrepreneurial/divisional SBU/ Divisional/functional/holding company

matrix

Systems

Planning Participative Directive

MIS Decision-orientation Efficiency-orientation

Management External-focussed; need-based; Internal-focussed; programmed

development contingency

Motivation Monetary/non-monetary Monetary/non-monetary

Evaluation Broad-based; qualitative/subjective Efficiency-based; quantitative/objective

Control Formal/informal; direct/indirect Predominantly formal/direct

Source: Adapted from A Kazmi, Business Policy and Strategic Management (2005),

344 (Exhibit 10.13).

Since the matrix is two-dimensional, it has limitations in terms of options

or alternatives or combinations of environmental characteristics, strategies,

structures and systems which can be shown. So, the combinations of strategies,

structures and systems presented in the matrix are to be taken as more indicative

rather than definitive. For example, for growth and expansion strategy,

appropriate structural form may be divisional/SBU/matrix and the planning

system should be participative. But, for the same strategy, the organizational

structures can also be entrepreneurial; in that case, the planning system should

be directive and not participative. In such cases, more exactness can be obtained

through further analysis. But the matrix is important as a framework of analysis.

This can be made more detailed or sophisticated by adding more dimensions

or variables.



Activity 2

Discuss the complementarity or otherwise of strategy, structure and systems

of any of these companies: L&T, Tata Steel and Crompton Greaves. Write

down your observations in a report.


14. Environmental factors, strategies, structures and systems can be

combined in the form of a _______matrix.

15. The combinations of strategies, structures and systems presented in the

matrix are to be taken as more _______rather than definitive.

13.8 Case Study

SBU Structure at BPCL

Organizational structures evolve in response to company requirements and

changes in environmental conditions. Often old functional or divisional

structures give way to more modern SBU structures. This happened at

BPCL also.

During the 1970s, the government of India nationalized the petroleum

industry and Burmah Oil Refiniries was renamed as Bharat Petroleum

Corporation Ltd (BPCL). Till 1992, the Government of India held 100 per

cent equity in BPCL. During this year, it sold 30 per cent stake to institutional

investors. Since 1995, petroleum companies in India initiated strategic

reorganization/restructuring to face emerging competition because of

dismantling of the Administered Price Mechanism (APM). Government

control on distribution and marketing was also relaxed by 2002 making

way for more competitive marketing.

Organizational restructuring in BPCL was led by Sundararajan, CMD.

Sundararajan initiated the restructuring process through consultation with

the top management, the board and the government. Arthur D Little was

appointed as the consultant for the project. Sundararajan had formed a

‘change team’—a cross-functional team of senior managers—to plan and

implement the restructuring process.

The existing or old structure was functionally organized. There was four

major functional areas—refineries, marketing, finance and personnel—each



headed by an executive director reporting to the CMD. Other support

functional like corporate affairs, legal, audit, vigilance and company secretary

were directly under the CMD.

The change management team, top management and the consultant were

unanimous in their view that the functional structure was not the appropriate

form to create a customer-centric organization. The consensus was to create

strategic business units (SBUs) with clear customer focus. But as happens

in most organizations, particularly in public sector companies, there was

inertia among the managers to change. There were apprehensions about

the new structure among the senior managers. Finally, with the intervention

of the CMD, the new SBU structure was approved and made acceptable.

The new structure identified and separated six distinct SBUs: 1. refinery,

2. industrial/commercial, 3. lubes, 4. LPG, 5. aviation, 6. retail

The refinery, along with two new departments, IT & Supply Chain and R&D,

came under the director (refineries); all the other five customer-centred

SBUs were to report to the director (marketing). The corporate support

functions were to remain under the direct charge of the CMD. Each SBU

was to have its own support function—finance, HR, sales, logistics, etc.

During the process of formation of SBUs, delayering had also taken place—

the number of layers in the organization reduced from seven to four.

Implementation of the new structural design involved redefinition of role

and responsibilities and redeployment of more than 2,000 personnel. New

roles had been created primarily to increase customer interface. Since the

support functions were now located within the SBUs, the new structure

included lateral linkage mechanism for better synergy.



13.9 Summary


• Implementation of a strategy or plan depends on three sets of factors: the

structure (includes systems) of the organization, various functional areas

and operations, and behavioural (people) aspects.

• Structure of an organization defines the levels and roles of management

in a hierachical way. One can also say that an organization structure

spells out the way tasks, functions and responsibilities are allocated for

implementing a policy or strategy.

• Structural forms or types, in practice, are many more than depicted by

the four stages of organizational development. In addition to the stage of

development, structural forms are determined by corporate philosophy or

goals, organizational concepts of business or business strategy.

• Ten probable structural forms are: i. entrepreneurial structure, ii. functional

structure, iii. divisional structure, iv. SBU structure, v. matrix structure, vi.

project-based structure, vii. team-based structure, viii. network structure,

ix. holding company structure, and x. intermediate structure. More common

structural forms are: functional structure, divisional structure, SBU structure

and matrix structure.

• Virtual organization is one of the latest developments in evolution of

organizational structures and designs. This is an organization without a

formal structure. It is a temporary network of independent companies—

suppliers, customers, even erstwhile rivals—linked by information

technology to share skills, costs and access to one another’s markets.

• In the implementation of strategy, organizational structures are supported

by organizational systems. Six major systems are important from the

strategy point of view: planning system, management information system

(MIS), management development system (MDS), motivation system,

evaluation system and management control system (MCS).

13.10 Glossary

• Functional structure: A structure based on differentiation and allocation

of primary functions such as production, marketing, finance, and HR along

with certain delegation of powers.



• Matrix structure: A need-based or project-based structure which does

not follow the conventional lines of hierarchy or control.

• Divisional structure: A structure that consists of separate divisions

constituted on the basis of products, services or geographical areas.

• Entrepreneurial structure: A structure that represents an organization

owned and managed by a single individual—the entrepreneur.

• Virtual organization: A structure of an organization without a formal

structure, which does not exist in reality, but, performs like one.


1. What are the factors that determine the structure of an organization?

Mention six probable structural types or forms.

2. Distinguish between a divisional structure and an SBU structure. Explain

SBU structure with a diagram.

3. What is virtual organization? Explain and also mention its limitations.

4. Is there any ideal or best organizational structure? Discuss in detail.

5. What is the role of organizational systems in strategy implementation?

Distinguish between six major organizational systems.

6. Explain, in detail, the complementarity between strategy, structure and

systems. Analyse with the help of a linkage matrix.

13.12 Answers


1. levels, roles

2. entrepreneurial structure

3. functional structure

4. SBU structure

5. matrix structure

6. Virtual organization

7. (b) Outsourced



8. (a) functional structure

9. (b) Divisional structure

10. management information system (MIS)

11. management development system (MDS)

12. evaluation

13. control

14. linkage

15. indicative


1. The structure of an organization defines the levels and roles of

management in a hierarchical way. Refer to Section 13.3 for further details.

2. A divisional structure consists of separate divisions constituted on the

basis of products, services or geographical areas, while a an SBU

structure, the divisions closely approximate strategic business units

(SBUs). Refer to Section 13.3.3 and 13.3.4 for further details.

3. A vrtual organization is not an organization which exists in reality, but,

performs like one. Refer to Section 13.4 for further details.

4. All organizational structures work in some companies or the other and

would be quite appropriate under certain business conditions. Refer to


5. To achieve its goals or objectives, certain organizational inputs are

necessary, some linkages need to be established among the constituents

and some controls have to be enforced. These are done through a series

of systems. Refer to Section 13.6 for further details.

6. The interrelations between strategy, structure and systems can be seen

in more specific forms in terms of strategy options, structural alternatives

and appropriate systems. Refer to Section 13.7 for further details.

13.13 References

1. Jauch, L R, R Gupta, and W F Glueck. 2004. Business Policy and Strategic

Management. 6th ed. New Delhi: Frank Bros & Co.



2. Macy, B, and Izumi, H. 1993. ‘Organisational Changes, Design and Work

Innovations; A Meta Analysis of 131 North American Field Studies —1961–

1991.’ In Research on Organisational Changes and Development, 7.

3. Salter, M S. 1970. ‘Stages of Corporate Development’. Journal of Business

Society. Spring.

4. Scott, B R. ‘The Industrial State: Old Myths and New Realities’. The

Business Review, March–April, 1973.

5. Thain, D H. 1969. ‘Stages of Corporate Development’. The Business

Quarterly. Winter.

6. Thompson Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and

Executing Strategy: The Quest for Competitive Advantage. 14th ed. New

Delhi: Tata McGraw-Hill.

Endnotes

1 D McKonkey, ‘Planning in a Changing Environment,’ Business Horizons (Sept–Oct), 66.2 G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (2005), 422.3 G Johnson, and K Scholes (2005)4 Based on The Electrolux Executive, December 2000.5 The Electrolux Executive, December 2000.6 G Johnson, and K Scholes (2005), 4257 G Johnson, and K Scholes (2005), 4318 ‘The Virtual Corporation,’ Business Week (February 8, 1993), 98.9 G Johnson, and K Scholes (2005), 452.

10 ‘The Virutal Corporation,’ Business Week (February 8, 1993) 98–100.11 L R Bittel, ed., Encyclopedia of Professional Management (New York: McGraw Hill, (1978).12 A Kazmi, Business Policy and Strategic Management, 2nd ed. (New Delhi: Tata McGraw

Hill, 2005), 342.

13 A Phadnis, ‘What Money Can’t Buy,’ Business Standard (The Strategist), December, 12,

2000.14 A Phadnis, ‘What Money Can’t Buy,’ Business Standard (The Strategist), December, 12,

2000




Functional and Operational

Structure

14.1 Introduction

14.2 Caselet

Objectives

14.3 Production Policies and Plans

14.4 Marketing Policies and Plans

14.5 Financial Policies and Plans

14.6 HR Policies and Functions

14.7 MIS/IT Policies and Plans

14.8 Alternative Business Strategies and Functional

14.9 Processes or Methods

14.10 Productivity and Efficiency

14.11 Pace or Speed of Action

14.12 People Factor

14.13 Case Study

14.14 Summary

14.15 Glossary


14.17 Answers

14.18 References

14.1 Introduction

In the last unit, we had analysed the role of structures and systems in strategy

implementation. In this unit, we shall discuss the roles of functions and operations

in the implementation of strategy. It is necessary for an organization to have the

right structures and systems; but, real implementation of strategy takes place

through major functional areas of manufacturing, marketing, finance, etc. In

each of these functional areas, operational implementation is equally important.

Functional implementation and operational implementation are complementary

to each other. One can even say that operational implementation is an extension

of functional implementation (Figure 14.1).



Figure 14.1 Strategy Implementation: Functional and Operational

We will discuss the issues related to functional implementation and

operational implementation in this unit. These include defining functional strategy;

understanding the role of the functional policies and plans in implementing the

strategy; identifying major factors involved in formulating policies and plans in

different functional areas; integrating various functional policies and plans; and,

analysing all important aspects of operational implementation.

A. Functional Implementation

Functional implementation takes place through functional policies, plans and

strategies. Functional strategy relates to a particular functional area and follows

from business strategy of an organization—either a corporate-level strategy or

a business unit-level strategy (in SBU structure in Figure 12.7, we have shown

different functions).

We had introduced the concepts of policy, plan, strategy and tactics in

Unit 1, and explained the difference between them. The analysis of functional

implementation will be carried out in terms of policies, plans and strategies in

different functional areas. In any organization, five major functional areas are:

production, marketing, finance, HRM and MIS/IT. Some consider R&D also as

an important functional area, but we shall confine ourselves to the four traditional

functional areas: production, marketing, finance, HRM and the emergent area

of MIS/IT. For strategy implementation, these functional areas have to have

proper horizontal fit among themselves, i.e., play interdependent roles

(Figure 14.2).



Figure 14.2 Interdependent Functional Areas

14.2 Caselet

The failure of Big Bite, a much hyped product launched by Parle is an

example of how wrong balancing in a product’s marketing mix can lead to

marketing failure. In 1987–88, Parle Exports (then makers of Thumps Up,

Limca, Gold Spot) made a high profile launch of Big Bite, a kind of burger—

a bun with vegetables, or chicken or mutton filling topped with different

sauces. The launch was preceded by several campaigns in Mumbai with

tantalizing punchlines. Mumbaiites responded overwhelmingly, and, in the

first month of the launch, 90 per cent of the target customers had tried Big

Bite. But, thereafter, the sales declined, and, in less than six months, it was

reduced to 10 per cent. Big Bite was a big failure, and Parle had to withdraw

the product. Follow-up research showed that Big Bite did not live up to

customer expectations. Customers found it dry compared to its nearest

rival ‘Rolls’ and perceived it to be like any other burger. Their expectations

were raised by the Big Bite ads, but, the product failed to rise to those

levels. This was a case of product-promotion mismatch, and the case shows

that wrong balance in the marketing mix can lead to marketing failure.

Source: A Nag, Strategic Marketing, 2nd ed. (New Delhi: Macmillan India, 2008), 171



Objectives


• Analyse functional implementation — functional policies, plans and

strategies

• Identify the linkage between alternative business strategies and functional

policies and plans

• Identify and analyse major issues in operational implementation of strategy

• Discuss the important role of people factor in implementation

14.3 Production Policies and Plans

Production processes typically constitute more than 70 per cent of a company’s

total assets1, and, therefore, have high stakes in terms of roles and activities in

strategy formulation and implementation. Production policies, capabilities and

limitations can significantly affect strategic planning and implementation and

the attainment of organizational objectives. Production, in the core, relates to

manufacturing, i.e., decisions regarding plant size, plant location or layout,

product design, choice of equipment, spares and accessories, technology level/

technological innovation, inventory control, quality control, cost control,

packaging, use of standards, capacity utilization, etc.

But, production as a function, in a broader sense, also includes procurement

of raw materials and inputs, R&D and any other operations (logistics) related to

the production process. Some, therefore, prefer to call this function ‘production/

operations’. Again, production, as a function, is not confined to manufacturing-

related activities/operations only. It also extends to production of services, retailing,

etc. Both manufacturing and service organizations have to formulate policies

regarding capacity, technology, purchasing, etc. Similarly, retailers have to

formulate policies and prepare plans for buying and selling—may be, buy in bulk,

repackage and sell in smaller packs. There have to be policies and plans for

bulking also.

14.3.1 Choice of Production Process

If a company decides to manufacture the product, it has to consider some major

policy issues in relation to the production process. Four major issues to be

considered are:



• Size and location of plants

• Choice of technology

• Process/job specialization

• Mechanization of operations

For all large companies and multinationals, a basic policy decision with respect

to size and location of plants pertains to two alternatives: large size plant with

single centralized location or small size plants in multiple locations. Both the

alternatives have advantages and disadvantages. An obvious advantage of a

large size plant is economies of scale as enjoyed by many companies in steel,

cement, fertilizers, etc.

Choice of technology is a very important factor in the production process.

This assumes special significance today because of increased global

competition, faster communication network and high rate of technological

obsolescence. Like product life cycle, there is also technology life cycle. There

are four phases in the technology life cycle: embryonic, growth, maturity and

decline.

In some industries (products), there is a single or highly standardized

technology, and technological change is very slow. Paper is a very good example.

Others are edible oil, cotton textiles, woollen textiles, etc. But for majority of the

industries or products, regular technological upgradation is necessary, consumer

electronics being one of the best examples. For choice of technology, companies

have three options: first, in-house development

Technology governs, to a large extent, the production process and also

job specialization. In technologically sophisticated processes, i.e., with high focus

on standardization, job specialization or division of labour becomes imperative.

This, in fact, is a distinct characteristic of all large-scale manufacturing activities.

Job specialization also produces the experience effect (discussed in Unit 6)

which helps to increase productivity and efficiency.

Related to process or job specialization is mechanization and automation

of operations. Mechanization and automation are labour saving methods.

Automatic spinning and weaving in textile mills, packaging of products, loading

and unloading of cargo, computerization of banking and insurance operations

are good examples of increased mechanization and automation but, at the same

time, these cause displacement of labour. Technological advances drive

mechanization and automation. Displacement of labour, on the other hand, faces

resistance from worker’s unions and also creates employment problem. Every



big company, therefore, needs to formulate a policy on mechanization which

can balance technology advances and labour relations.

14.3.2 Quality Policy/Management

Quality of a product is closely linked to the production process, operational

efficiency and the quality control system. But, above all, quality depends on the

quality policy of a company. In a highly competitive market, quality of products

and services determine, to a large extent, success and failure of the companies.

This is particularly applicable to industrial products and consumer durables. In

fact, the major developments in quality policy and quality movement pertain to

industrial products (both intermediates and finished products) and consumer

durable categories like automobiles.

The quality movement was initiated in the US. During the post-World War

II period, the concept of total quality control (TQC) was developed in the US by

Armand Feigenbaum. The term, TQC, was defined as ‘a system of integrating

the quality development, maintenance, improvement efforts of various groups

in an organization to enable production, marketing and service at the most

economical level with full customer satisfaction.2

In the early 1960s, Japan introduced Quality Circle (QC) for quality

management. A quality circle, as a tool, aims at ‘defining, analysing and solving

quality related problems’ in a company through a team approach. Seven to ten

workers from interrelated functional or work area form a quality circle. Members

of the team are given necessary training in all quality-related matters so that

they can develop an effective approach to quality management. In India, many

companies, including BEL, BHEL, SKF, Godrej and Mahindra & Mahindra (Jeep

Division) have attempted quality control through QCs. Many other countries

have introduced their own quality controls and standards.

International Organization for Standardization (ISO) has taken the lead in

internationalization of quality. ISO has published a series (ISO 9000 series) of

quality system and standards. ISO standards have now become international

quality benchmarks for all countries. All these have led to the development of

Total Quality Management (TQM) as a tool for integrated quality control. Many

progressive companies are now striving for Six Sigma quality standards

(discussed later in Unit 16) — a benchmark set by GE.

14.3.3 Inventory Policy/Management

For most of the companies, whether in consumer goods or industrial products,

the planning process is:



Planned sales→planned production→planned procurement

Any divergence between the planned and actual sales, and, therefore,

between the planned and actual production is matched by inventory build-up as

shown in the equation:

Sales = Opening stock + Production – Closing stock

Ideal position is: Opening stock = Closing stock = 0 except for some

operating stock.

So coordination or balancing of procurement, production and sales is

leveraged by inventory control and management. But, it is not only inventory

management of finished goods as shown above, but also of raw materials and

inputs. So, a company’s inventory policy should relate to both raw materials and

finished goods. Both have direct implications in terms of carrying cost. Every

company, therefore, has to have an inventory policy for determination of optimum

inventory levels.

One of the latest or more successful approaches or methods is the just-

in-time (JIT) inventory system. First introduced by Toyota Motors in Japan, JIT

model has been adopted by many companies in electronics and automobiles.

In the JIT system, storage of material,. i.e., inventory level is almost zero. Raw

materials/inputs are supplied/procured just-in-time so that the pipeline does not

become dry, production continues and sales do not suffer. To make the JIT

system effective or successful, many vendors have set up production facilities

either in the product manufacturing site or in close proximity. The objective, and

the crux of the JIT system, is to minimize the lead time for supply of raw materials

and inputs.

Activity 1

Choose any two companies – one in the public sector and the other in the

private sector – and make a comparative analysis of the production policies,

plans and strategies.


1. The_________is as a tool introduced in Japan, that aims at ‘defining,

analysing and solving quality related problems’ in a company through a

team approach.

2. During the post-World War II period, the concept of total quality control

(TQC) was developed in the US by ________.



3. In some industries (products), there is a single or highly standardized

technology, and technological change is very slow. Which of these is a

good example of this?

(a) Paper

(b) Electronics

(c) Food processing

(d) Garments

4. In the just-in-time (JIT) inventory system the, storage of material, i.e.,

inventory level is

(a) Very high

(b) Very low

(c) Always changing

(d) almost zero

14.4 Marketing Policies and Plans

Marketing is the most vital function in an organization because it establishes

the link between the company and the market or the customers. It is the function

which generates turnover (through sales) or revenue and earns profit for the

company. So, the marketing function fulfils the most important objective of a

company. In the implementation of most corporate strategies, marketing has a

definite role to play. Marketing policies and plans are, therefore, of great

significance in implementing business plans and strategies of a company.

Marketing policies and plans are expressed though the four Ps: product, price,

promotion and place (distribution). Each of these Ps has a number of elements

associated with it. These are shown in Table 14.1.

Table 14.1 Four Ps of Marketing and their Elements

Product Price Promotion Place

• Quality • List price • Advertising • Customer location

• Brand • MRP • Sales promotion • Outlet location

• Features • Discounts • Personal selling • Channels

• Packaging • Trade margin • Test selling • Warehousing

• Warranties • Commission • Publicity • Stocks

• Services • Instalment • Communications • Delivery

• Credit terms



Marketing policies and plans have to be understood and analysed in terms

of the four Ps and their elements as shown in the table. Many marketing

strategists call this marketing mix analysis. But there is a difference; marketing

mix is not just the four Ps. Marketing mix is the way the four Ps or some of the

Ps (depending on the product category) are combined or blended to optimize

market offerings to increase sales and market share.

In this section, the main issues in marketing policies and plans will be

analysed in terms of

(a) Product and product mix

(b) Pricing decision

(c) Product promotion

(d) Place (distribution)

(e) Marketing mix

14.4.1 Product and Product Mix

Product design, product manufacturing (except services) and product

development are primarily the task or concerns of the production function/

department (along with R&D). But, market or customer analysis is done by the

marketing people; they may know better than production the nature of market

demand, performance or acceptability of different products made by the company.

Market reaction or feedback on a product is conveyed to the production

department by the marketing group. Therefore, in every organization, marketing

and production functions work in tandem in all matters relating to product

planning, product making and product modification or adaptation.

Formulation of product policies and plans by a company should be based

on answers to certain key questions:

• Which products should the company market?

• Which products contribute faster to sales and market share?

• Which products contribute most to profitability?

• Which products make an optimal product mix?

• How do a company’s products compare with those of competitors?

• How frequently should the company change the product?

Let us start with product mix. To have a product mix is a common policy or

strategy of most companies. The basic objective of the product mix is to balance

the product portfolio. This implies or includes two more objectives; first, to



optimize market offerings, (i.e., to cater to as large a cross section of market

segments as possible) and, second, to effectively match competitors’ products

and brands. To achieve optimality of product mix, companies have to continuously

review their existing product lines and market developments. Such review

pursues resource allocation to different products (existing and proposed);

examines whether the rate of new product development is satisfactory; and,

ascertains whether, or, to what extent, each product contributes to sales growth,

market share and profitability. Different products generally contribute differently

to sales, market share and profit. Drucker has mentioned that a typical portfolio

may consist of six different product types:

(a) Tomorrow’s breadwinners, i.e., new products or today’s breadwinners

modified.

(b) Today’s breadwinners, i.e., the innovations of yesterday.

(c) Yesterday’s breadwinners, i.e., products with high volume, but,

fragmented into ‘specials’, small orders and the likes.

(d) Products capable of becoming breadwinners or net contributors if

major changes/improvements are made.

(e) The ‘also rans’—the high hopes of yesterday, which, although did

not perform well, have not become outright failures.

(f) The failures of today.3

14.4.2 Pricing Decisions4

Traditionally, two limits to pricing or price policy are set by an economic or cost

of production factor and the other by the market factor. A company would not

normally sell its product(s) at a price less than the unit (average) cost of

production, and, a customer would not pay a price more than the perceived

value of the product. These two would set the limits to pricing of the product —

unit cost would set the lower limit and customer’s perceived value the upper

limit. The pricing policy of a company is mostly guided by these two limits; and,

in most market situations, the actual price would be settled between the two.

Given these two limits, the pricing policy of a company would depend on

the pricing objectives. The objective of pricing is not always to maximize profit,

although this should be the ideal objective. Many companies have other overriding

objectives dictated by organizational objectives and their positions in the market

vis-a-vis competitors. There can be short-term objectives and long-term objectives,

and there can be a dichotomy between the two. Various pricing objectives followed

by companies, including the more common ones, are given below:



(a) Maximizing growth of sales

(b) Maximizing short-term profitability

(c) Achieving product-quality leadership

(d) Maximizing long-term profitability

(e) Skimming the market

(f) Creating entry barriers for competitors

(g) Dumping the product and

(h) Organizational survival

14.4.3 Product Promotion

There are many ways to promote a product and most companies use a mix of

different promotional tools. Policy-makers and strategists should take into

account the major factors which determine the choice of a particular promotion

mix. These are:

A. Nature of the market, i.e., market size, number of products/brands in the

market, intensity of competition, etc.

B. Product awareness and buyer readiness, i.e., buyers’ awareness of various

products and their readiness to buy particular products/brands.

C. Product life cycle, i.e., introduction stage, maturity stage, etc.—in the

introduction stage, advertising and publicity are more important while in

the maturity stage, sales promotion and personal selling are more effective.

D. Overall marketing strategy, i.e., whether the company likes to ‘push’ the

product (through marketing and distribution network) or create a ‘pull’

(strong consumer demand). In the ‘push’ strategy, focus is on personal

selling and trade promotion; in the ‘pull’ strategy, the emphasis is on

advertising and consumer promotion. For many companies, overall

promotional policy or strategy can be a combination of ‘push’ and ‘pull’.

Given these factors, companies use a variety of promotional tools today.

These include promotion letters, catalogues, point of purchase (retail stores)

displays, customer service programmes, sales demonstrations, contests, free

samples, discounts, coupons, free offers, extras, price-offs, etc.

Point-of-purchase (POP) promotion through displays in retail outlets is

one of the most widely used promotional tools today. Innovative displays have

become a prerequisite for product/brand success. With limited space available

in retail stores, products/brands compete with one another for consumer attention



and shelf space. In today’s high intensity marketing, the retailers are virtually

flooded with POP promotions from various manufactures. More and more

companies are going for innovative displays to give their products/brands more

visibility in shelves. When Nestlé had introduced Maggi noodles in 1983, they

had used a unique dispenser—the wire mesh bag. It had not only helped in

product/brand identification and focus, but, also helped the retailer. The

dispenser, hung from the ceiling helped the retailers save shelf space. Cadbury

too came up with a dispenser. Customized racks are also being used by

companies for display. Companies like Procter and Gamble, Nestlé, Hindustan

Unilever, Lakme and Tips and Toes make yearly bookings for display space in

various stores.

14.4.4 Place (Distribution)

Place or distribution is the process by which goods and services are delivered

to the customers. In industrial products and consumer goods (not for services),

an important matter of policy for a company is to decide whether it should sell

its products directly to consumers or through intermediaries or middlemen, i.e.,

channels. There can be zero channel or there can be multiple channels.

Given the alternative channels, a company has to evaluate these and

determine which channel suits its strategy implementation. Determination of

suitability or unsuitability of a channel is based on three criteria: economic,

control and adaptability. The economic criteria relate to distribution cost. Relative

costs of distribution through different channel alternatives have to be considered

for viability. Since the intermediaries or channel members are independent, a

manufacturer has to take into account the controllability factor of these channels.

A preferred channel is one which offers more controllability. Finally, adaptability

of a channel is important. A channel should provide for flexibility so that changes

can be introduced when situations demand. Inflexibility or rigidity may affect

operational efficiency of a channel.

In all multiple channels, channel management is a major task of a company.

Channel management involves two issues: managing channel conflict and

motivating channel members. Channel conflicts can be vertical (channel

members at one level in conflict with members at higher or lower level), horizontal

(conflicts between members at same channel level) or multichannel (channels

get in conflict with the company). Three different types of conflicts require different

types of channel management approaches. Also, it is not enough for a company

to resolve or reduce channel conflict; it is necessary to keep the channel members

motivated. Motivation can be achieved through both financial (higher margins,



bonuses, extended credit limits, etc., and non-financial (contests, recognition of

better performance, paid holidays, etc.,) methods. Companies like Philips, Bajaj

Electrical and Parle Exports are known to publicly acknowledge and reward

high performance of selected dealers. Reliance, Videocon, etc., sponsor holidays

for their high-performing dealers to foreign destinations.

14.4.5 Marketing Mix

The genesis of the marketing mix is: if one manages to achieve the right product

at a right price with the right promotion and in the right place, the marketing

programme would be effective or successful. Therefore, assembling and

managing the marketing mix (including all the elements shown in Table 14.1) is

a basic marketing task and blending the marketing mix into a winning combination

is a matter of strategy. The inter-connected marketing mix system is shown in

Figure 14.3. Marketing success and failure depend, to a large extent, on the

choice and balance of the marketing mix.

Figure. 14.3 The Inter-connected Marketing Mix System

The case of Big Bite cite in the caselet above is an example of how wrong

balancing in the marketing mix can lead to marketing failure.




5. Marketing policies and plans are expressed though the four Ps: product,

price, promotion and participation. (True/False)

6. The pricing policy of a company is mostly guided by the two limits – unit

cost and customer’s perceived value. (True/False)

7. Which of these is not an element of a promotional mix?

(a) Advertising

(b) Sales promotion

(c) Personal selling

(d) Production

8. Promotion through displays in retail outlets is as a promotional tool is

known as

(a) Point-of-purchase (POP)

(b) Demonstrations

(c) customer service programmes

(d) discounts

14.5 Financial Policies and Plans

Next to production and marketing policies and plans, financial policies and plans

are most vital for strategy implementation of a company. Some may even argue,

and rightly so, that all the three are equally important or vital. Implementation of

every strategy has financial implications in terms of cost or investment. Financial

policies and plans relate to three important factors:

(a) Sourcing of funds

(b) Allocation of funds or investment decisions

(c) Management and control of funds

14.5.1 Sourcing of Funds

Policies and plans related to sourcing of funds deal with financing mix or capital

mix decisions. Policies have to be formulated and decisions taken on major

financing factors or issues: capital structure, capital issues, capital procurement

pattern, working capital borrowings, reserves and surplus or retained earnings



as sources for funding, relationship with lenders, banks, financial institutions,

etc. These policies and decisions are vital because of two reasons: first, these

determine how and how much financial resources will be made available for

implementation of different strategies; and, second, each of the sources or

choices has certain cost associated with it.

Various sources of funds can be broadly divided into two categories: short

term and long term. The other way to classify sources is as internal or external

(Table 14.2).

Table 14.2 Sources of Funds: Internal, External, Short term, Long term

Source Short term Long term

Internal • Nil • Retained earings

External • Short-term loans • Share capital

– Banks – Equity shares

– Financial institutions – Preference shares

• Public deposits • Debentures

• Leased assets • Fixed deposit

• Trade credits • Long–term loans

• Customers’ advances

Given the various sources of funds, a major policy decision for a company

is to secure the optimal financing mix, i.e., the right combination of internal and

external, and short-term and long-term sources of funds. Such combination or

mix is governed by a number of factors. The major factors are mentioned below.

(a) Nature of business

(b) Purpose of financing

(c) Cost of financing

(d) Financial leverage

(e) Control or interference in management

(f) Organizational ability

Because of these various factors, different companies adopt different

policies for financing mix commensurate with their business conditions. Ingersoll

Rand, for example, adopted a policy of blending internal and external sources

for financing its strategies for expansion and growth. Almost 70 per cent of the

company’s post-tax profit was reinvested to reduce its dependence on external

sources (borrowed funds). This enabled the company to keep its interest costs



low. Reliance Industries gives a different kind of example. It has successfully

used its capabilities to source funds at lower cost. To achieve this, it has used a

mix of external long-term sources — fully convertible debentures, partly

convertible debentures, and global depositing receipts (GDRs). The company

has used these sources to finance its expansion plans without putting much

pressure on equity. The company’s debt-equity ratio is maintained around 1:1

which is very favourable for a rapidly growing company as against a general

private sector norm of 2:1.

14.5.2 Allocation of Funds or Investment Decisions

All strategy implementations, except retrenchment strategy, involve allocation

and deployment of funds or investment decisions. As sound corporate practice,

uses or allocation of funds should be kept in view while formulating policies on

sourcing of funds. Policies and plans related to allocation or utilization of funds

essentially relate to asset mix decisions, i.e., regulating investments in fixed

assets and holding of current assets. Fixed assets are long term in nature, have

certain life and depreciate; current assets are short term in nature and are

either held as cash or expected to be converted into cash during the accounting

period.

Fixed investment or investment in fixed assets and investments in current

assets or working capital are meant for different business or corporate purpose;

but, both forms of investment are used simultaneously and, in certain

combinations, with a common objective of strategy or project implementation.

For example, in manufacturing, a company requires both fixed capital and

working capital to fulfil the same objective—to produce or make a product as

per strategy requirements.

Working capital requirements depend on various factors, like production

or sales, raw material/input procurement pattern, inventory norms, seasonal

fluctuations in demand/sales, etc. For formulating its working capital policy, a

company should take into account these and related factors. The fundamental

guiding principle for working capital policy formulation and implementation is

the endeavour to maintain working capital at a level which enables efficient

business operation and, at the same time, minimize the cost of working capital.

This requires three major steps or actions:

(a) Inventory management

(b) Credit/ debit policy

(c) Cash balance




9. All strategy implementations, except retrenchment strategy, involve

allocation and deployment of funds or investment decisions. (True/False)

10. Fixed assets are long term in nature. (True/False)

14.6 HR Policies and Functions

Human resource function in an organization may not appear as significant as

production, marketing and finance, but, its role is becoming increasingly

important. Strategic importance of HR function/activity received widespread

attention in the 1990s, and, its role is encompassing newer dimensions. The job

of the HR manager is changing rapidly as companies are downsizing and

reorganizing or restructuring and his/her strategic responsibilities are assuming

greater significance. Also, HR policies and functions essentially deal with people

who are at the core of all the functions and are considered the most precious

resource of an organization. HR policies are, therefore, very sensitive in terms

of application because these affect employees more directly than other functional

area policies. HR policies and functions should concentrate on four major factors

or areas:

(a) Development of human resource

(b) Retaining personnel

(c) Incentive system

(d) Job mobility/Succession planning

Management of human resource (HRM) and development of human resource

(HRD) are both important. HRM helps in retaining personnel by keeping them

happy and motivated. HRD prepares personnel/managers for performing the

present jobs better and for newer tasks and responsibilities which help in job

mobility and succession planning. HRD, therefore, plays a more vital role. In

practice, however, HRM and HRD play complementary roles. These two together

govern HR policies and plans.

Human resource development is a continuous process. HR development

takes place through counselling, postings, promotions and training. Training is

the most important. In most companies concerned with HR development,

elaborate and systematic training programmes are planned depending on

development requirement of managers at different levels. In planning and



designing training programmes, two factors are important: first, assessment of

training needs, and, second, partly following from the first one, training methods

and intensity of training.

Training needs are usually different for different managers. Therefore,

many tailor-made programmes or modules are necessary. There are two major

methods of training: on-the-job and off-the-job. To determine the methods or

modes of training and frequency, and, because HRD is a continuous process,

many companies have their own training cells and, also centres. Hindustan

Unilever, Larsen & Toubro, RCF, Tata steel, SAIL and BHEL, are among them.


11. There are two major methods of training: _______ and __________.

12. Human resource development is a _______process.

14.7 MIS/IT Policies and Plans

MIS/IT is a ‘new economy’ function which is increasingly playing a significant

role in planning, strategy formulation and implementation. We had briefly

discussed MIS in the previous unit under systems. It provides vital connectivity

between the organization and the environment, and, also among various

functional and operational areas within the organization. Earlier, MIS was

considered a peripheral function—setting up of information system was purely

a matter of option or choice. But, today, it has become an essential requirement.

It has been observed that the strategic management process is more efficient

in companies which have an effective MIS. Many companies are adopting a

new approach to MIS—a system which blends the technical knowledge of IT

experts with thoughts and vision of senior/top management.

An effective management information system should consist of five

interrelated steps or stages to increase its utility and comprehensiveness:

(a) Collection and retention of information

(b) Processing and storage of information

(c) Database management

(d) Synthesis of information, retrieval and usage

(e) Transmission and dissemination of information



Companies are developing MIS policies and plans for its extensive

application to increase productivity in different functional areas, efficiency in

operation and to improve networking for better connectivity. Hindustan Unilever

launched a pilot project to widen its area network by connecting its distributors

and important retailers. The purpose was market research and intelligence to

source information from the market about customers, competitors and various

channel members. The company has also set up a sales force automation

system with wireless connectivity through which salespersons in the field can

collect useful retail data and send the same to the MIS centre for further analysis

and policy formulation. Reliance Fire and General Insurance Company, a

subsidiary of Reliance Industries, is using MIS/IT to improve efficiency in

operation—complete networking of area offices, service centres and insurance

agents for instant service to the customers. Glaxo India, Corporation Bank and

RPG Enterprises have used MIS/IT in different ways.


13. MIS provides vital connectivity between the organization and the

environment, and, also among various functional and operational areas

within the organization. (True/False)

14. MIS is a peripheral function in most companies today. (True/False)

14.8 Alternative Business Strategies and Functional

Policies and Plans

We have analysed various dimensions and developments in major functional

areas of production, marketing, finance, HR and MIS/IT in relation to corporate

strategy. For effective implementation, different business strategies require

different functional policies and plans. So, functional policies and plans should

be flexible, adaptable and strategy-driven. Expansion or diversification strategies

require one set of functional plans; stability strategies need different kind of

functional plans; restructuring or downsizing or retrenchment require still different

plans; combination strategies would generally require a blending of some of

these functional plans. This is illustrated in Table 14.3.



Table 14.3 Alternative Strategies and Functional Plans

Strategy Production Marketing Financial Plan HR Plan Back-up Action

Expansion/ Expand/ Extend and Increase debt- Hire additional Evaluate market

Diversification install plant improve product; equity ratio; production, share and capacity to this is more Review dividend R&D and review financial

support new critical than policy for cash sales position products margin flow needs/ workers/ after

generation managers two years

Stability/ Defer new Push high Strengthen Invest in training Continue for Incremental investments in margin products/ the balance programmes to few years

growth plant and brands sheet and improve mana- unless

equipment maintain steady gement skills market trend

dividends shows high

opportunity for

growth.

Restructuring/ Identify plants Identify products Eliminate or Reduce and/or Sell plants and Retrenchment to be closed on for divestment reduce dividends redeploy reduce

the basis of –those with and manage personnel on personnel in

capacity low sales and/ cash flows the basis of one year; cut

utilization and or margin skills and dividends

obsolescence experience

Source: Adapted from L R Jauch, R Gupta and W F Glueck, Business Policy and

Strategic Management (New Delhi: Frank Bros. & Co., 2004), 387 (Exhibit 10.2).

For each of the major strategies and the functional plans mentioned in

the table, a set of policies has to be laid down relating to a particular area of

business. The policies will ensure that the plans are implemented as intended

and that different functional plans work towards achievement of the same

objectives. The example in Table 14.3 is an illustration of only one group of

strategies, functional plans and required policy support.

Plans and policies have to be developed by companies for all the key

functional decisions pertaining to each particular business strategy.

B. Operational Implementation

We have distinguished between functions and operations earlier in the unit.

Operations are more implementational; they give support to functional policies

and plans. Distribution is a function; transportation involved in distribution is

operation. Operational implementation, therefore, becomes as vital, if not more,

as functional implementation. And, the scope of operational implementation is

very wide because it is part of every function or functional implementation.

Operational implementation, or its effectiveness, depends on four major

interrelated factors. Some call them 4-Ps: processes, productivity, pace and

people (Figure 14.4).



Figure 14.4 4-ps: Processes, Productivity, Pace and People


15. Functional policies and plans should be________, adaptable and strategy-

driven.

16. Operational implementation, or its effectiveness, depends on four major

interrelated factors, which are called the.

14.9 Processes or Methods

Processes are methods or courses of action in sequential steps for carrying out

tasks for achieving certain organizational objectives. All the functional areas of

production, marketing, finance, HR, and MIS/IT operate on the basis of

established processes. Processes, however, evolve and change over time, and

these affect operational implementation of corporate strategies. Many processes

have been developed by strategy analysts, consultants and companies which

have affected strategy implementation in different ways. Major processes which

have influenced strategic management in a significant manner are: value chain

analysis, supply chain management, enterprise resource planning (ERP),

benchmarking, business process re-engineering (BPR) and outsourcing or BPO.

We had discussed value chain analysis, at length, in Unit 6. Value chain

analysis, as a process, links a set of value-creating activities in a company. These

include both primary activities (inbound logistics, production, outbound logistics,

marketing/sales and services) in an organization and, also, support activities (R&D,

HR, MIS, general administration, etc.). Relative effectiveness of individual value-

creating activities, particularly the primary activities, has direct impact on operational

implementation, and, therefore, on overall strategy implementation.



Supply chain management (SCM) is one of the developments, which

emerged from value chain analysis. SCM is a process in business logistics. It

lends logistical support to the activity-based value chain. Supply chain, as a

process, manages the entire movement of raw material/inputs and finished goods

from procurement to the market. Each of the steps or stages in SCM is critical

for the company on the one hand, and stakeholders like vendors, transporters,

channel members and customers on the other. Process improvements in SCM

benefit all the parties concerned and operational implementation of strategies

also improves.

Enterprise resource planning (ERP) provides vital connectivity within an

organization. ERP systems, through appropriate software, seek to integrate the

entire business operations of a company including manufacturing, marketing

finance, HR, logistics, warehousing, etc., to harmonize operations and reduce

cost. Many large organizations use the ERP process to increase operational

efficiency. HPCL, among others, has installed an adapted ERP system to optimize

communication or linkages among various functional departments/activities of

the company.


17. The process called _______ links a set of value-creating activities in a

company.

18. ______systems, through appropriate software, seek to integrate the entire

business operations of a company including manufacturing, marketing

finance, HR, logistics, warehousing, etc.

14.10 Productivity and Efficiency

Productivity and efficiency contribute to the operational effectiveness of various

functions. Productivity measures or innovations to increase productivity have,

however, primarily taken place in the field of manufacturing. Development of

linear and non-linear programming techniques aimed at optimizing production

is subject to certain resource allocations or constraints. Japanese companies

had popularized quality and productivity technique during the 1980s. There was

virtual explosion of such techniques during the 1990s. Many of these were either

initiated by Japanese companies or prompted by their competitive superiority in

manufacturing methods over the US and European companies. Six such major

techniques/methods are: just-in-time manufacturing, cycle time reduction, mass



customization, flexible manufacturing system, optimized production technology

and total productive maintenance.

Just-in-time (JIT) manufacturing is a productivity-cum-efficiency technique

with two primary objectives: cost reduction and inventory minimization. In trying

to achieve these two objectives, JIT, in effect, becomes a more comprehensive

approach including simplification of product designs,

streamlining process flows, meticulous time planning, etc. Cycle time

reduction helps or complements JIT. Cycle time reduction, as the name indicates,

seeks to minimize the time taken for each step or work in the assembly line or

the manufacturing process. Mass customization of products is a development

which has struck a middle course between the two traditional classifications of

mass market and niche market. Mass customization is a landmark evolution in

production and productivity combining the characteristics and benefits of a mass

product and niche product. We had discussed mass customization in Unit 8.

Flexible manufacturing process or system almost follows from the mass

customization approach; or, rather, it is a necessity to ensure mass customization

of products and, at the same time, keep costs under control. Optimized production

technology is a computer-aided system for planning and integrating production,

materials management and resource utilization to maximize output and control

inventory. Total productive maintenance is an improvement over the traditional

reactive maintenance system and focusses on a total system of managing

productivity through organization-wide autonomous maintenance by everybody

concerned rather than a single department.


19. _________manufacturing is a productivity-cum-efficiency technique with

two primary objectives: cost reduction and inventory minimization.

20. ________ seeks to minimize the time taken for each step or work in the

assembly line or the manufacturing process.

14.11 Pace or Speed of Action

Given the processes or methods and productivity, pace or speed of action or

implementation becomes a vital factor in operational effectiveness. Pace or

speed is essentially concerned with timing or time management of

implementation. For example, in value chain analysis, speed can be a

differentiating factor in performing different activities in the chain faster than the



competitors to lead to competitive advantage. The same is true of timing or

speed of action in other processes or methods like supply chain management,

benchmarking, outsourcing, etc. Strategy analysts have suggested a number

of techniques for better planning and management of time to increase efficacy

of operations. Three such techniques are: time study, network analysis and

activity charting and time-based management.

Time study is one of the oldest methods of time management. In time

study, the emphasis is on analysing and sequencing critical stages in production

to identify bottlenecks and wastages, and eliminate or minimize them to build a

more efficient and fast process. Network analysis and activity charts are an

improvement over time study methods. Charting and networking of activities

are done to construct a critical path to optimize time and resource allocation,

and consequently, saving costs. Time-based management approach developed

during the 1980s and 1990s highlights the role of time as a strategic weapon.

For example, first movers in products/markets enjoy a definite competitive

advantage over late-movers or parallel innovators or initiators in launching and

implementation.


21. Time study is one of the latest methods of time management. (True/False)

22. _________and ________of activities are done to construct a critical path

to optimize time and resource allocation, and consequently, saving costs.

14.12 People Factor

Finally, people in an organization become a major factor, or rather, the ultimate

factor, for the success in operational implementation of strategy. Be it process

or method, productivity or time management, people are a common factor.

People signify three categories of human resource who matter most for strategy

implementation: workers on the shop floor, operating staff and managers. Each

of these categories of people makes a difference in operational effectiveness.

Some of the important factors to be considered for optimizing people’s role in

implementation are: strategic selection and recruitment, training and

development and performance management.

Strategic selection and recruitment is the first step in manpower planning

and, should be properly aligned with strategies. As selection of right people for



right positions leads to enhancement of productivity, recruitment of wrong people

can significantly affect performance. After selection and posting, skill levels of

people need to be continually developed and updated through appropriate

training and development methods. Training and development have to be job

based and operation based. The third important factor, which supplements

selection and development, is performance management of the employees.

Productivity comes through performance, and, therefore, many companies use

performance appraisal and monitoring to improve employee efficiency in

operation. The three factors—selection, development and performance

management should be read in conjunction with the four important factors—

development of human resource, retaining personnel, incentive system and job

mobility/succession planning—mentioned before under ‘HR policies and plans’.

In fact, the people factor in operations should be viewed as a role extension of

human resource from HR policies and plans.

We have analysed above many processes, methods, techniques and

practices in different organizational areas for increasing operational effectiveness

of strategy implementation. Managers/management often are not clear about

which are the right methods and techniques, and, in their search for quick results,

sometimes make indiscriminate choices or fall for the latest techniques without

assessing their applicability or appropriateness to particular operational

situations. Companies should guard against such pitfalls. Even carefully chosen

processes and techniques may not always be sufficient to ensure successful

strategy implementation. Porter feels that operational effectiveness is necessary,

but is not a sufficient condition for success of strategy. By operational

effectiveness, he means, performing similar activities better than rivals perform

them. It refers to any number of practices that allows a company to better utilize

its inputs.5

Activity 2

Suppose that you are the strategy head in an organization. How would you

design the operational implementation plan for your company? Discuss in

the form of a project.


23. People signify three categories of human resource who matter most for

strategy implementation: workers on the shop floor, operating staff and

managers. (True/False)



24. Productivity comes through performance, and, therefore, many companies

use performance appraisal and monitoring to improve employee efficiency

in operation. (True/False)

14.13 Case Study

Microsoft: Marketing/Operating Strategy to Sustain Leadership*

Market leaders usually adopt defensive strategies— mostly counter

offensive—to maintain their leadership positions, and challengers (No. 2)

employ offensive strategies—frontal or flank attacks—to challenge or

displace the leader. But, Microsoft, the market leader in computer software,

primarily adopts an offensive or aggressive, or, in the minimum, pre-emptive

strategies to sustain its leadership

Microsoft tried to dissuade IBM and Gateway from promoting or using

Microsoft’s competitors’ products on their PCs. IBM and Gateway resisted

the move. In retaliation, Microsoft forced them to pay higher prices for

installing MS Windows operating system on their PCs than any other PC

makers.

Microsoft urged Intel not to export its newly developed NSP software because

Microsoft felt that NSP becomes an intrusion into its operating system

platform. Microsoft also pressurized PC makers not to install Intel’s NSP

software on their PCs.

Microsoft adopted an aggressive posture against Netscape also. Microsoft

wanted to enter into a special alliance with Netscape. The alliance would

allow Microsoft to incorporate Netscape’s Navigator browser’s functionality

into Windows. When Netscape declined the proposal, Microsoft withheld



information about its Windows 95 code till it released the new operating

system and its own new version of Internet Explorer.

During 1999, US district judge, Jackson, delivered a judgement (in US vs

Microsoft) that Microsoft had repeatedly used high-handed tactics to

‘pressurize customers, crush competitors and throttle competiton.’ Judge

Jackson cited many examples to support his conclusion/judgement.

But, Microsoft continues to use its marketing/operating muscle to sustain

its dominance. During 2001, the company curtailed its support for Java in

its release of the new Windows XP operating system because Java is

favoured by Microsoft’s old rival Sun Microsystems. Microsoft is also

pressurizing PC makers to follow/oblige it in different ways.

* Based on A A Thomson, A J Strickland, and J E Gamble, Crafting and Executing

Strategy (New Delhi: Tata McGraw Hill, 2005), 211 (Illustration capsule 8.2).

14.14 Summary


• In any organization, actual implementation of strategy takes place through

major functional areas of manufacturing, marketing, finance, HR and MIS/

IT. In each of these functional areas, operational implementation is equally

important. Functional implementation and operational implementation are,

in practice, complementary to each other.

• Marketing is the most vital function in an organization because it

establishes the link between the company and the market or the customers.

• In marketing policies and plans, pricing is the most critical element. Pricing

policies and methods are based on the fundamentals of cost, demand

and competition.

• Implementation of every strategy has financial implications in terms of

cost or investment. Financial policies and plans are, therefore, as important

or vital as production and marketing policies.

• HR function in an organization may not appear as significant as production,

marketing and finance, but, its role is becoming increasingly important.

• MIS/IT is a ‘new economy’ function which is playing a very significant role

in planning, strategy formulation and implementation.

• For effective implementation, different business strategies require different

functional policies and plans.



14.15 Glossary

• Current assets: Assets that are short term in nature and are either held

as cash or expected to be converted into cash during the accounting

period

• Fixed assets: Assets that are long term in nature, have certain life and

depreciate

• Functional strategy: Strategy that relates to a particular functional area

and follows from business strategy of an organization

• Marketing mix: The way the four Ps or some of the Ps (depending on

the product category) are combined or blended to optimize market offerings

to increase sales and market share.


1. Discuss functional policies and plans in the area of production including

the major issues involved.

2. Anaylse marketing policies and plans with respect to strategy

implementation in terms of 4-Ps and marketing mix application.

3. What are the major factors which govern financial policies and plans of

an organization? Analyze them.

4. Discuss the role of MIS/IT as a new economy function in planning, strategy

formulation and implementation.

5. What are the major processes, methods or techniques which affect

operational implementation of strategy? Discuss briefly.

6. Discuss the vital role of people factor in implementation. Analyse in terms

of major HR initiatives required to optimize people’s role in strategy

implementation.

14.17 Answers


1. quality circle

2. Armand Feigenbaum



3. (a) Paper

4. (d) almost zero

5. False

6. True

7. (d) Production

8. (a) Point-of-purchase (POP)

9. True

10. False

11. On-the-job, off-the-job

12. continuous

13. True

14. False

15. flexible

16. 4Ps

17. value chain analysis

18. ERP

19. Just-in-time (JIT)

20. Cycle time reduction

21. False

22. Charting, networking

23. True

24. True


1. If a company decides to manufacture the product, it has to consider some

major policy issues in relation to the production process. Refer to Section


2. Marketing is the most vital function in an organization because it

establishes the link between the company and the market or the customers.




3. Next to production and marketing policies and plans, financial policies

and plans are most vital for strategy implementation of a company. Refer


4. MIS/IT is a ‘new economy’ function which is increasingly playing a

significant role in planning, strategy formulation and implementation. Refer


5. Processes are methods or courses of action in sequential steps for carrying

out tasks for achieving certain organizational objectives. Refer to Section

14.9, 14.10, 14.11, 14.12 for further details.

6. People in an organization become a major factor, or rather, the ultimate

factor, for the success in operational implementation of strategy. Refer to


4.18 References

1. David, F R. 2003.Strategic Management: Concepts and Cases. 9th ed.

Pearson Education.

2. Ghosh, P K. 2003. Strategic Planning and Management. 10th ed. New

Delhi: Sultan Chand & Sons.

3. Jauch, L R, R Gupta, and W F Glueck. 2004. Business Policy and Strategic

Management. 6th ed. New Delhi: Frank Bros. & Co.

4. Miller, A. 2002. Strategic Management. New York: McGraw Hill.

5. Nag, A. 2008. Strategic Marketing. 2nd ed. New Delhi: Macmillan India.

6. Pearce II, J A, and R B Robinson Jr. 2005. Strategic Management:

Formulation, Implementation and Control. 9th ed. New Delhi: Tata McGraw-

Hill.

Endnotes

1 F R David, Strategic Management: Concepts and Cases, (Pearson Education, 2003),262 P K Ghosh, Strategic Planning and Management (2003), 416.3 P Drucker, ‘Managing for Business Effectviness,’ Harvard Business Review (May-June,

1963), 59.4 This section is primarily based on A Nag, Marketing Successfully: A Professional

Perspective (New Delhi: Macmillan India, 2001), Chapter 8.5 M Porter, ‘What is strategy?’ Harvard Business Review (November–December, 1996),

62.




Behavioural and Values

Structure

15.1 Introduction

15.2 Caselet

Objectives

15.3 Leadership: Strategic Role

15.4 Leadership Styles

15.5 Is Leadership Style Portable?

15.6 Leadership Role of Top/Senior Management

15.7 Organizational Culture

15.8 Corporate Ethics and Values

15.9 Corporate Politics and Power

15.10 Power, Politics, Strategy and Implementation

15.11 Case Study

15.12 Summary

15.13 Glossary


15.15 Answers

15.16 References

15.1 Introduction

The significance of behavioural factors in strategy implementation in an

organization is clearly understandable. Organizations may plan, formulate and

implement strategies, but, it is the individuals—managers at different levels—

who actually take appropriate actions involved in implementation. So, individual-

related or individual-focussed factors or issues like leadership styles, personal

ethics and values, corporate politics, etc., become very vital. In addition to these,

cultural environment in an organization—work styles, beliefs, shared values,

etc., — is also equally important. Leadership plays a vital role in addition to

organizational culture and values. So, behavioural implementation of strategies

focusses on:



A. Role of leadership

• Strategic role

• Leadership styles

• Role of top management

B. Organizational culture, values, politics

• Organizational culture

• Business ethics and values

• Corporate politics and power

We shall analyse each of these factors below. In analysing these factors,

we shall discuss changing roles and styles of leaders, cultural web, strategy

culture relationship, cultural barriers to strategy implementation, strategy

supporting culture, organizational ethics, personal values of managers, corporate

politics, corporate power equations, etc.

15.2 Caselet

The quality and style of a company’s leader is very important in determining

its growth and sustainability. Wipro was a small insignificant vegetable oil

company in 1947, which grew into a multinational conglomerate in the 21st

century. Wipro Technologies, one of the largest software companies in India,

is headed by Azim Premji (Premji), whose leadership is characterized by

sound values, integrity and professional will. It is these qualities that have

driven Premji to churn Wipro from a $2 million company to a $1.76 billion

one, serving customers across the globe. Premji’s sharp strategic vision

and crisp communication skills led his team to strive for excellence. He has

been known for his modesty, simplicity and non-extravagance.

Source: J. Shalom J and Ravi L (2009), Wipro’s Azim Premji: Level 5 Leadership

Style? Available at http://www.ibscdc.org/Case_Studies/HRM/OB0021.htm

Objectives


• Analyse the role of leadership in strategy implementation

• Discuss whether leadership style is portable

• Analyse the role of organizational culture in implementation of strategy



• Focus on the role of business ethics and values in implementation

• Appreciate the role of corporate politics and power

15.3 Leadership: Strategic Role

We had highlighted the critical role of leadership in turnaround situations in Unit

9. We had also discussed the role of CEO in the strategic management process

in Unit 2. Be it a crisis or turnaround situation, normal times or good times, the

leader plays a pivotal role in the functioning and performance of every

organization. ‘For the manager, leadership is the focus of activity through which

the goals and objectives of the organization are accomplished.’1 Good or great

leaders lead an organization to strategic success, and bad leaders can be

instrumental for the downslide or closure of companies.

A leader performs two strategic roles. First, he is the architect of a

strategy—innovates, conceives, plans and formulates strategy ; second, he is

the implementor of strategy—initiates action and induces/drives the employees

into operations. Successful performance of these two roles presumes many

characteristics or qualities of a leader. King (1990) has enunciated 10 such

characteristics or factors (his original enunciation has nine factors) in relation to

strategy formulation, strategic direction and implementation. Many strategy

analysts agree with him that a leader should

• Be a visionary, willing to take risk and be adaptable to change;

• Develop new capabilities and qualities to perform effectively;

• Exemplify the goals, values and culture of the organization;

• Be clearly aware of the environmental factors affecting the business

of the organization;

• Pay attention to and encourage strategic thinking and intellectual

activities;

• Adopt a collective view of leadership in which leader’s influence is

dispersed across all levels of the organization;

• Lead by empowering employees and put an increasing emphasis

on statesmanship;

• Adopt a strong perspective to build subordinates’ skills and confidence

to make them change agents;



• Facilitate transformation of followers into leaders even at lower levels;

and

• Delegate authority and put emphasis on innovation.2


1. A leader implements the strategy formulated by others. (True/False)

2. A leader should not delegate authority. (True/False)

15.4 Leadership Styles

Leadership style is a way or pattern of behaviour, which a leader adopts in

managing the affairs of the organization — directing and motivating managers

and staff for achievement of organizational objectives. Such definition shows

that leadership styles can be many and varied. A question, therefore, arises as

to which is the most appropriate leadership style. A straightforward answer to

this is always difficult because leadership styles depend on organizational

conditions and business/strategic situations. In fact, most leadership styles are

situational. Contingency theories on leadership support this view. Khandwala

has studied leadership styles in a cross-section of organizations. Based on his

study, Khandwala distinguishes between leadership styles based on five major

characteristics or dimensions. These are presented in Table. 15.1.

Table 15.1 Leadership dimensions and styles

Base/Dimension Style/Characteristics

• Risk taking • Willingness to take high-risk, high-return decisions

• Technocracy • Use of planning techniques and decision making by

technically qualified persons

• Organicity • Flexibi lity and adaptability in organizational

structuring

• Participation • Team management approach involving managers

at different levels

• Coercion • Authoritarian use of fear and domination by top

management

Source: Adapted from P Khandwala, ‘Some Top Management Styles: Their Context

and Performance’, Organization and Administrative Science (Winter, 1977), 21–25.



Leadership styles are influenced by environmental factors as shown in

the table, but, styles must relate to organizational strategy. Leadership roles

and styles are, in fact, designed to formulate and implement strategy. As we

had mentioned in Unit 7, such strategies are formulated taking into account

given environmental conditions. Styles would also depend on the type of strategy

for effective implementation and success. Leadership styles which suit stability

strategies may not be appropriate for growth or diversification strategies or

corporate restructuring or turnaround strategies. Similarly, leadership styles which

may be most suitable for managing internal change (crisis) would not be

applicable for pursuing or implementing growth or diversification strategies. So,

there are three interactive but, different factors: style, strategy and environment.

Strategy-environment combination determines leadership styles.

15.4.1 Leadership Styles in Practice

If we analyse the leadership styles of the global and the Indian CEOs, we would

find that each CEO has a distinctive style of his/her own. These styles are

influenced by environmental conditions and they all relate to organizational

strategies; but, there is a uniqueness to the style of each of these leaders which

make him/her successful and, also exemplary. This is true of great global CEOs

like Lee lacocca, Jack Welch, Bill Gates, Akio Morita, L N Mittal and Indian

CEOs like Dhirubhai Ambani, Ratan Tata; Aditya Birla, Rahul Bajaj, Azim Premji,

N R Narayana Murthy, B L Munjal and many others. The predominant styles of

some of these CEOs are mentioned below.

Jack Welch : Building on strength; entrepreneurial,

participative.

L N Mittal : Highly entrepreneurial, highly aggressive

Dhirubhai Ambani : Highly entrepreneurial and innovative

Aditya Birla : Participative, family approach

Ratan Tata : Democratic temperament, delegates authority

Rahul Bajaj : Friendly and philosophical, believes in level

playing field

Azim Premji : Focus on developing people—creating leaders

N R Narayana Murthy : Constantly aspires for more, blends

professionalism with simplicity

Some studies suggest that, in the Indian context, a purely authoritarian or

a purely participative style may not be effective. Instead a nurturant-task style



can be more relevant and appropriate. Nurturant-task style means a combination

of tasks, responsibilities and concern for people/subordinates (nurturant), and,

is directive as well as paternalistic in approach.3 Maheswari (1980) has studied

the relationship between decision styles and organizational effectiveness in

Indian corporates. He observes that most of the Indian organizations are neither

authoritarian nor highly participative. The predominant style is consultation with

limited participation, rather than joint decision making or company-wide

participation. Organizational effectiveness is positively correlated with

entrepreneurial style and negatively correlated with bureaucratic style of decision

making.4

15.5 Is Leadership Style Portable?

Nohria and others (2006) have researched on a very interesting subject: Is

leadership or leadership style portable? Or, to put it in another way: Will a leader,

successful in one organization, be necessarily successful in another company?

The authors studied job switching of 20 executives of GE (who left the company

between 1989 and 2001) to become chairmen, CEO or CEO-designates of

other companies. These companies include some of the big international names

like 3M, Fiat and Home Depot. GE was chosen because the company is widely

regarded in the US as one of the best talent generators.

The authors conducted their analysis of CEO/leadership portability in terms

of four different types of human capital: strategic human capital, industry human

capital, relationship human capital and company-specific human capital. Strategic

human capital refers to skills or capabilities required to control or manage different

strategic situations—cost control, competitive threat or fierce competition, new

product development, etc. Strategic capability or strategic human capital may

be the most portable. Industry human capital pertains to skills and capabilities

which are successful in one particular industry, but need not be transferable to

another industry. GE top executives who moved to industries which were quite

different from GE businesses were found generally ineffective. Relationship

human capital, which may also be called ‘social capital’, relates to skills,

relationships and understanding an executive develops in course of working

with his/her team or colleagues, and, a manager would be always more

successful in a new job or company if he/she brings along with him/her some of

his/her former colleagues or team members. Lee lacocca did this when he joined

Chrysler. Company-specific human capital refers to skill, knowledge, culture,

systems, procedures, informal processes, etc., which exist in a company and,



are unique to particular organizations and, therefore, are least portable or

transferable.

Based on their study of the selected GE executives in terms of the four

types of human capital, Nohria et al. have come to some interesting findings

and conclusions about leadership portability or transferability. These are

summarized below:

(a) Certain skills—mostly company-specific ones—will not be relevant

to the new job and will have to be unlearned, which takes time.

(b) The more closely the new environment (the company and the

business) matches the old environment, the higher the chances of

success of the portable managers.

(c) The new company should be prepared to make necessary changes

to allow the newcomer to succeed—changes in systems, procedures

business portfolios, hiring a new team, etc.

(d) The efforts of CEOs/leaders to replicate their performances in new

jobs may have only mixed success.

(e) Even the best management talent (CEO/leader) may not be portable

if it does not match the new environment.5


3. Leadership _________ is a way or pattern of behaviour, which a leader

adopts in managing the affairs of the organization.

4. Skills or capabilities required to control or manage different strategic

situations are referred to as _________.

5. Skills or capabilities required to control or manage different strategic

situations are referred to as ________.

6. Skills, relationships and understanding an executive develops in course

of working with his/her team or colleagues are referred to as _______.

15.6 Leadership Role of Top/Senior Management6

The primary responsibility for providing effective strategic leadership is vested

at the top, that is, the CEO. The analysis so far has been directed towards this.

It does not, however, mean that leadership rests only with the CEO. Other



strategic leaders include members of the board of directors, the top management

team and senior managers including general manager (GM), vice-president

(VP), assistant vice-president (AVP), etc. We had discussed the role of managers

at different levels in the strategic management process in Unit 2. The focus

here is on leadership styles or qualities of the top/senior managers and the

important issues related to this.

The top/senior level managers are vested with the responsibility (under

the guidance/supervision of CEO) for formulating and implementing strategies

of the organization. The top/senior level managers take most of the strategic

initiative in the company, and, participate in the process of formulation of strategic

plans. Strategic decisions by top/senior level managers influence, to a large

extent, how far corporate goals will be achieved. Top/senior managers also

help to develop appropriate organizational structures and systems for successful

implementation of strategies. In Unit 12, we had analysed how organizational

structure and reward systems affect implementation of strategies. The top/senior

managers perform their leadership roles individually or, more often, as a team.

15.6.1 Top Management Team

In most companies, the complexity of tasks, issues and challenges and the

need for diversity of knowledge and skills require strategic leadership by a team

of managers. Use of a team to make strategic decisions also helps to avoid

potential problems when these decisions are made by the CEO alone: managerial

hubris.7 Research has shown that when CEOs begin to believe that they are

unlikely to make errors, they are more likely to make poor strategic decisions.8

Some felt that part of Carly Fiorina’s (CEO, HP) problem was that she seemed

to be the only spokesperson for HP, and her refusal to focus more on the

operational details of the business might have been the reflection of her celebrity

status. CEOs and top executives need to have self-confidence but they must

not allow it to become arrogance and develop a false belief in their invincibility.

To guard against CEO overconfidence and poor strategic decisions, companies

often use the top management team to consider strategic opportunities and

problems, and to make strategic decisions. The nature and quality of the strategic

decisions made by a top management team influences, to a large extent, the

company’s ability to innovate and initiate effective strategic management and

change.

The top management team should be, and usually is, heterogeneous in

composition. A heterogeneous team consists of top/senior managers from

manufacturing, marketing, finance, etc., with varied experience and skills. The



more heterogeneous a top management team is, the more varied knowledge

and experience will be at its disposal for effective interaction and decision making.

Different perspectives given by team members during meetings are likely to

increase the quality of the team’s decision, particularly when a consensus or

synthesis emerges from diverse perspectives. Research has shown that greater

heterogeneity among top management team members generates healthy debate

which often leads to better strategic decisions, implementation and organizational

performance.

15.6.2 Top Management Team, CEO and Board

Diversity among team members may, however, lead to differences of views and

also conflicts. In general, the more heterogeneous and large the top management

team is, the more difficult it may be for the team to effectively implement

strategies. Comprehensive and long-term strategic plans can be constrained

because of communication barriers or problems among top executives who

have different backgrounds of education, experience and skills. A group of top

executives with diverse backgrounds may complicate the process of decision

making if it is not properly managed. In such situations, top management teams

may fail to logically examine all the issues, opportunities and threats leading to

a sub-optimal strategic decision. In such cases, the CEO must attempt to seek

behavioural integration among the team members and ensure that the members

function cohesively.

The characteristics of top management teams should be related to

innovation and strategic change. More heterogeneous top management teams

are likely to be associated positively with innovation and strategic change

because of diverse capability inputs. The heterogeneity may force the team or

some of the members to ‘think out of the box’ and thus be more creative in

making decisions. Companies which need to change their strategies are more

likely to succeed if they have top management teams with diverse backgrounds

and expertise. When a new CEO is hired from outside the industry, the probability

of strategic change is greater than if the new CEO is from inside the organization

or inside the industry.9 Hiring a new CEO from outside the company or industry

adds diversity to the team, but, the top management team must be managed

effectively to use the diversity in a positive way.

Board of directors may sometimes find it difficult to direct the strategic

actions of powerful CEOs and top management teams. It often happens that a

powerful CEO appoints to the board a number of sympathetic outside members

and/or inside members who are also in the top management team and report to



the CEO. In either case, the CEO exercises significant control over the board’s

actions. Thus, the amount of discretion a CEO has in making strategic decisions

is related to the board of directors and how it oversees the CEO’s actions and

the top management team. For poor performance of HP during Carly Fiorina’s

leadership, the board of directors had to share part of the blame.

Activity 1

The predominant styles of eight leaders have been mentioned in the text.

Choose any of these leaders and make a detailed analysis of his functioning

style.


7. The primary responsibility for providing effective strategic leadership is

vested at the top, that is, the CEO. (True/False)

8. The leadership of a company rests only with the CEO. (True/False)

9. The more _______a top management team is, the more varied knowledge

and experience will be at its disposal for effective interaction and decision

making

10. Hiring a new CEO from outside the company or industry adds _______ to

the team.

15.7 Organizational Culture

Among the behavioural factors, next only to leadership style, organizational

culture plays the most important role in the strategy implementation process of

a company. Some people say ‘culture’ is an abstraction; but it is the culture

which shapes or moulds the soft Ss in an organization. In McKinsey’s 7-S

framework, culture represents the seventh S—shared values (or superordinate

goals). Culture is not created by declaration; it is mostly unwritten or unstated

assumptions, values, beliefs, etc.

Different authors have attempted different definitions of organizational

culture. One such definition, which is quite representative, is given below:

Organizational culture is the set of assumptions, beliefs, values and

norms that are shared by an organization’s members.10



The most important characteristic of organizational culture is sharing or

common beliefs, values, attitudes, feelings, etc. Sathe (1985) has enunciated

four components of sharing in organizational culture:

• Shared things (e.g., the way people dress)

• Shared saying (e.g., let’s get down to work)

• Shared action (e.g., a service-oriented approach)

• Shared feelings (e.g., hard work is rewarded here)11

J R D Tata, former chairman of Tata Group, has well illustrated corporate

cultural dimensions while describing the house of Tata:

I would call it a group of individually managed companies united by two

factors. First, a feeling that they are part of a large group which carries

the name of Tatas, and, public recognition of honesty and realiability—

trustworthiness. The other reason is more metaphysical. There is an

innate loyalty, a sharing of beliefs. We all feel a certain pride that we are

somewhat different from others.12

15.7.1 Creating Strategy-supportive Culture

In analysing the relationship between culture and strategy, we had mentioned

five alternatives or possibilities. Two of the alternatives involved either adapting

strategy implementation to the existing culture or changing the strategy itself

midway through implementation. But, before changing any strategy, a company

must carefully assess the stakes involved in the strategy and the implication of

its change on corporate objectives, growth and profitability. If the strategy has

very high stake like a major takeover or acquisition or a joint venture or merger

with long-term organizational growth or diversification, the change of strategy

will not be easy or will be at a high cost of organizational sacrifice. Therefore,

change of strategy should be the option or compulsion of last resort. In fact, the

recommended course for most of the situations is: mould the mindset of the

people, remove the resistance to change and prepare the organization for

strategic transformation.

Many methods or techniques are available for changing an organization’s

culture. These methods include effecting changes in organizational design and

structure, job reallocations, role modelling, training, transfer, promotion, etc.

One such method is triangulation. Duncan describes triangulation as an effective,

multimethod technique for analysing and changing a company’s culture.

Triangulation combines obtrusive observations, self-administered questionnaires

and personal interviews to analyse the existing organizational culture. The



process of triangulation identifies the changes required to be made in a

company’s culture to make it contribute to strategy.13

In addition to using methods like triangulation, it is also possible to identify,

through experience and/or research, factors which are useful in positive linking

of culture and strategy. Schein has indicated many elements which can facilitate

creation of a strategy-supportive culture:

(a) Clear statements of organizational philosophy, mission, goals and

objectives;

(b) Organizational design, structure and hierarchy;

(c) Organizational systems and procedures;

(d) Designing of physical spaces, facades and buildings;

(e) Criteria used for selection, recruitment, promotion, leveling off and

retirement of people;

(f) Motivation, compensation and reward systems;

(g) Stories, legends and myths about key people and events;

(h) Role modelling, teaching and coaching by leaders;

(i) What leaders pay attention to, measure and control;

(j) Leader’s reactions to critical incidents and organizational crises.14

15.7.2 Building a Sound Organizational Culture

A sound organizational culture is always conducive to strategy formulation and

implementation. Efforts should, therefore, be made by companies to build a

strong or sound cultural paradigm.

Strategists and consultants can develop an ambitious strategic plan; the

organization may have the necessary resource base; and, the top management/

leadership may be keen on fast and efficient implementation. But, the managers

and staff should be prepared to take on the challenge, i.e., the organization

should be culturally geared up. Sumantra Ghoshal has observed that:

Worldwide, managers are recognizing that while process re-engineering,

financial restructuring and strategic repositioning are important means

to corporate renewal, the bedrock of competitiveness ultimately lies in

the behaviour of people. To stimulate initiative, trust, commitment and

cooperation within the organization and, in its external relationships,

top level managers are increasingly recognizing that the shaping and

embedding of organizational values are perhaps their most important

challenges.15



Building sound organizational culture has been the concern of many

companies. Researches have been conducted on this to evolve ways and

methods to develop an organizational culture which is positive, proactive, and

supports and strengthens strategy formulation and implementation. Collins and

Porras (1994), based on their research, have suggested six guidelines for

developing a sound organizational culture:

(a) Preserve core ideologies and values while allowing change to take

place;

(b) Stimulate growth and development through challenging objectives,

purposeful evolution and continuous self-improvement;

(c) Encourage new ideas, thoughts, experimentation and accept

mistakes as lessons for the future;

(d) Allow diverse thinking and accept paradox while accepting or rejecting

‘either or’ arguments;

(e) Create alignment by translating core values into organizational goals,

strategies and practices; and

(f) Grow new and trained managers internally by promotion from within.16


11. The set of assumptions, beliefs, values and norms that are shared by an

organization’s members is called ________.

12. ________ is a method to change organizational culture that combines

obtrusive observations, self-administered questionnaires and personal

interviews to analyse the existing organizational culture.

13. A sound organizational culture is always conducive to strategy formulation

and implementation. (True/False)

14. A change of strategy should be the first option for a company.

(True/False)

15.8 Corporate Ethics and Values

Corporate culture governs, to a large extent, corporate ethics and values in an

organization. In fact, many feel that ethics and values are embedded in the

cultural paradigm itself. We had mentioned about code of corporate governance



and corporate ethics in Unit 3. But, that was more with reference to corporate

ethics and values in the context of strategy formulation and implementation.

Organizational ethics may be generally understood to be of two kinds: (a)

professional ethics or ethics in terms of observance of rules, procedures,

systems, etc., and, (b) value ethics or ethics in terms of personal integrity of

individual managers. In terms of personal values, three types of managers can

be distinguished: the moral manager, the immoral manager and the amoral

manager. The moral manager is ‘fully committed to high standards of ethical

behaviour both in his individual actions and in his perception of how the

company’s business should be conducted. The immoral manager is openly or

clearly opposed to ethical behaviour in business, and willingly ignores ethical

principles in his management and decision making. The amoral manager believes

that business and ethics need not be mixed. He feels that it is not necessary to

introduce ethical considerations into his business practices and decisions

because business activity lies outside the purview of moral judgement. Corporate

ethics has three aspects or dimensions: development of the manager as a moral

person; influence of the organization as a moral environment; and, evolving

procedures, regulations and actions to ensure a high level of ethical performance

in general management and strategic operations and implementations.

15.8.1 Different Approaches to Business Ethics

In practice, different companies have different approaches to business ethics.

It depends on their prioritization of ethical practices in conducting business.

Some companies accord highest priority to the achievement of organizational

objectives and business targets; ethical practices may have to be compromised.

Some companies give almost equal priorities to both. Some companies give

very high priorities to ethics and values; management and strategic functions

are governed or dictated by this. According to Rossouw and Vuuren (2003),

approaches adopted by various companies to deal with business ethics may

take one of the four forms. These are shown below in terms of increasing order

of ethical concern:

(a) Unconcerned or ethical non-issue approach

↓

(b) Ethical damage control approach

↓

(c) Ethics compliance approach

↓

(d) Ethical culture approach



Unconcerned or ethical non-issue approach: This approach is adopted

by companies whose managers are either immoral or amoral. Such companies

believe that organizational objectives and business targets are the foremost.

Business must grow; profit should be generated and maximized. These

companies plan and adopt strategies which may follow general legal and

business principles, but may be ethically unsound. They are not really concerned

with the ethical issues in the conventional sense. Many feel that Mittal Steel’s

(L N Mittal) international acquisitions fall in this category.

Ethical damage control approach: In companies in this category, managers

are generally amoral, but, they fear adverse publicity or scandal. The objective

in this approach is to protect the company from adverse publicity which may be

made by unhappy stakeholders, external investigation agencies, threats of

litigation, punitive government action, etc. To avoid such a contingent situation,

there is a need for rejecting unethical behaviour and introducing corporate

governance safeguards through ‘window-dressing’ ethics. A company may

generally ignore or condone questionable methods or actions which may help

to achieve business targets or improve its market position so long as it does not

publicly tarnish the image of the company.

Ethics compliance approach: In this approach, companies are conscious

that they should comply with ethical standards and requirements. The managers

are either moral and view strong compliance to prescribed norms or methods

as the best way to enforce ethical practices; or, are unintentionally amoral but

are highly concerned about their ethical reputation. Companies which adopt a

compliance approach adhere to certain practices to demonstrate their

commitment to ethical conduct: make the code of ethics visible and a regular

part of communication with employees, form ethics committees to give guidance

on ethical matters, introduce ethics training programmes, lay down formal

procedures for investigating alleged ethical violations, conduct ethics audit to

measure and monitor compliance and institute ethics awards for employees for

outstanding efforts for creating an ethical environment and improving ethical

performance.

Ethical culture approach: In companies with this approach, ethical business

practices are rooted in the organizational culture itself. The top management/

CEO believes that high ethical principles embedded in the corporate culture

should guide the managers and staff. The ethical principles contained in the

company’s code of ethics and/or corporate values are seen as integral to the

company’s identity and image. The prevalence and success of the ethical culture

approach depends heavily on the personal integrity of the individual managers



who create and nurture the culture. It is clearly understood in such companies

that corporate strategy should be ethical in all respects and ethical behaviour

should also be reflected in strategy implementation.17

15.8.2 Why Unethical Business Behaviour

In today’s volatile business environment, it is an established fact that business

ethics and values are under severe test. Companies are too busy chasing targets

and managers are under enormous pressure to perform. If the targets or results

are achieved, the end justifies the means, i.e., certain amount of dubious or

unethical business behaviour may be permissible if this helps in the achievement

of physical or financial targets. Sometimes, managers themselves may be of

questionable personal integrity and may adopt unethical practices for personal

motives or interests. If we analyse unethical business behaviour perceived in

various companies, this can be attributed to one or more of three major reasons

or factors:

(a) Company culture encourages unethical behaviour

(b) Pressure on company managers to meet or beat targets

(c) Pursuit of personal gain and other selfish interests by managers

15.8.3 Company Culture Encourages Unethical Behaviour

There are companies where corporate values are based on unethical foundation.

The general work culture is immoral or, at best, amoral. The employees have a

company-approved ‘licence’ to ignore or underplay conventional ethical norms

or standards for pursuing operations and strategies which can significantly

contribute to financial gains of the company. Prompted by such corporate

environment, even the otherwise ethical or moral managers may commit ethical

errors and also succumb to opportunities and pressures to resort to unethical

practices.

Almost a classical example of such companies is now infamous Enron.

Enron’s top management/leadership encouraged managers to be innovative

and aggressive in finding out what could be done to increase current revenues

and earnings of the company. The company hired the best and the brightest

people in the industry/market. They were pushed to be creative, exploit

opportunities in the environment and exhibit a sense of urgency in producing

results. Managers were encouraged to be entrepreneurial and, go all out to

contribute to corporate growth and profitability. Norms, procedures and ethics

could be underplayed for this. Employees got the message—pushing the limits



and achieving numbers is the key to survival. Managers had to devise clever

ways to bolster revenue and earnings even if it meant violating existing policies

and norms and doing things without the knowledge of superiors. In fact, for

generating profitable new business, out-of-ethics practices were even

appreciated and sometimes celebrated.

15.8.4 Pressure on Company Managers to Meet or Beat Targets

An organization’s cultural foundation need not be amoral or unethical as in

companies like Enron, but pressures to perform may force managers to look

beyond ethics for the achievement of business targets. Targets can be of various

kinds: quarterly or annual sales targets, profit targets, production or output

targets, inventory management/liquidation targets, dealer networking targets,

etc. Towards the end of the financial year, the pressure builds for meeting

specified targets. Many times, annual compensation packages of managers

are linked to organizational performance and their individual performances in

terms of targets. This puts additional pressure and the fear of loss of financial

gains/incentives prompts the managers to bend the rules, norms and values.

Bristol-Myers Squibb (BMS), one of the world’s largest drug manufacturers,

can be cited as an example. In BMS, the management engaged in different

kinds of manoeuvres to achieve revenue/profit targets. Number games were

said to be common ‘earnings management’ practice at BMS and, according to

one former executive, this ‘sent a huge message across the organization that

you make your numbers at all costs’. Some such cases were:

(a) Offering special discounts at the end of a quarter to distributors and

local pharmacists to build stocks of certain prescription drugs—a

practice known as ‘channel stuffing’;

(b) Giving last-minute price increase signals to prompt/force purchases

and increasing operating margin;

(c) Building excessive reserves in the name of restructuring and then

reversing some of the financing or cost elements to bolster operating

profit.18

15.8.5 Pursuit of Personal Gain and Other Selfish Interests

Immoral managers are characterized by their lack of personal integrity and

disregard of ethical values. Their only objective is to maximize personal gain

and wealth. In many such cases, the organization and the manager/managers

may be working at cross-purposes. The organizational culture may be based



on sound ethical principles and the top management/leadership may not

encourage managers to adopt unethical practices. It is the individual managers

who may be indulging in unethical or corrupt practices in disregard of

organizational norms and values. Sometimes, the top management itself may

be unscrupulous and highly corrupt and try to rip off the company financially.

One such glaring case has been reported by the Securities and Exchange

Commission (SEC) of the US. According to a complaint filed by the SEC, CEO

of Tyco International, a well-known $36 billion manufacturing and services

company, conspired with the company’s chief financial officer (CFO) to ransack

more than $170 million from the company. Tyco’s CEO and CFO were further

charged with conspiracy to manipulate more than $ 430 million through sales of

company shares. They did this by using questionable methods to hide their

actions and indulging in deceptive accounting practices to distort the company’s

financial position during 1995–2002.

On the charges filed by the SEC, the prosecutor told the judiciary: ‘This

case is about lying, cheating, and stealing. These people didn’t win the jackpot—

they stole it.’19

15.8.6 Business Ethics in Indian Companies

In terms of ethical practices, companies in India, as in many other countries,

can be classified as good and bad. We have just given the examples of Infosys,

Amul, ICICI, etc., which are highly ethical. There are also companies which do

not conform to strong ethical norms. We also have regulations like the MRTP

Act and FEMA (earlier FERA) for curbing unethical business practices.

KPMG India conducted a survey of 280 top Indian companies for

ascertaining the level of business ethics in India. Study analysis and findings

are contained in Business Ethics Survey Report: India, 1999. Major findings of

the study are summarized below:

(a) Mission statement: About 85 per cent of the companies surveyed

are reported to have a mission statement. But, most of these

statements focus on customer service and customer satisfaction.

Very few companies emphasize ethical and moral issues such as

organizational values, integrity in business, harassment in the

workplace, etc.

(b) Company policy on ethics: Many companies have a documented

policy on ethics. But, implementation or reinforcement of a formal

ethical system is weak in most of these companies. Some companies



have a grievance cell; some companies conduct periodic workshop

on business ethics, but nothing much beyond that.

(c) Ethical risk in the workplace: Many companies express concern about

lack of ethics in the workplace. Some of the major ethical concerns

expressed by companies are: leakage or misuse of confidential

information (77 per cent); insider trading (48 per cent); receiving

gifts or favours from suppliers (48 per cent); promoting personal

interest (47 per cent).

(d) External factors in corporate ethics: Most Indian companies feel that

ethical problems in business arise because of external or

environmental factors. Two major external factors are government

policies/regulations and political interference.

(e) Training in business ethics: Majority of the companies feel that training

in business ethics should be given high priority. Education in ethics

should be incorporated in the formal management development

programmes of companies.

(f) Strengthening ethical practices: Most Indian companies are of the

opinion that, for strengthening ethical business practices, two factors

are important: first, professionalizing company management; and,

second, minimizing state or governmental control and interference.20

Activity 2

Conduct an analysis of business ethics among Indian companies, with

particular reference to a company of your choice.


15. Organizational ethics may be generally understood to be of two kinds –

_______ and _______ ethics.

16. In the _______ approach, ethical business practices are rooted in the

organizational culture itself.

17. _________ managers are characterized by their lack of personal integrity

and disregard of ethical values.

18. In the ________ approach, companies are generally amoral, but, the

objective is to protect the company from adverse publicity.



15.9 Corporate Politics and Power

All corporate cultures include a political component (corporate politics), and, in

this sense, all organizations are, to a large extent, political in nature. This

permeates to strategy formulation and implementation also. In Unit 11, we have

discussed the role of pressure groups and also about bargaining in final selection

or choice of strategy. These are actually manifestations of organizational politics

and power. Managers come from different social backgrounds with different

views/opinions, professional or individual biases, etc. These managers

continually try to position themselves in the organization so that they can establish

their dominance or prevail over others with their opinions and decisions in all

management matters including strategy. Some tend to call this political view of

strategy development. Political view of strategy development relates to the

proposition that strategies develop as the outcome of process of bargaining

and negotiation among powerful internal or external interest groups (or

stakeholders).21

Power and politics are different, but, they play interrelated roles in corporate

functioning and strategic management. Politics stems from power. Managers

and strategists use different types of power to influence operations, choice of

strategy and its implementation. We can distinguish five types or sources of

power.

(a) Legitimate power: This is derived from positions managers hold in

an organization. Managers can use their official positions to influence

strategy and decision making.

(b) Expert power: This emanates from a manager’s knowledge,

competence and expertise acknowledged by others in the

organization.

(c) Referent power: This arises from personality and charisma of

managers, and their ability to use these to create liking among

subordinates and peers.

(d) Reward power: This is derived from the ability of managers (partly

because of legitimate power) to reward outcomes or results.

(e) Coercive power: This is based on the ability of managers (derived

from their positions) to penalize or punish non-performance or

negative results.22



As mentioned above, politics stems from power, and, it is concerned with

the use of power in different forms in organizational matters. Corporate politics

may be defined/described as ‘the carrying out of activities not prescribed by

policies for the purpose of influencing the distribution of advantage within the

organization.’23 In more clear terms, this means ‘seizing, holding, extracting

and executing of power’. The nature of organizational structure itself creates

conditions for corporate politics. The organizational structure (some call it a

power structure) creates hierarchy, positions and relationships; and, this leads

to ambitions, coalitions and conflicts among managers. This happens because

material benefits, promotions, career growth, prestige, ego, etc., are involved.

We can put it like this:

The ‘who gets what’ (politics) is endemic to every organization regardless

of size, function or character of ownership. Furthermore, it is to be found in

every level of the hierarchy; and, it intensifies as the stakes become more

important and the area of decision possibilities greater.24


19. The ________ view of strategy development relates to the proposition

that strategies develop as the outcome of process of bargaining and

negotiation among powerful internal or external.

20. _______ power emanates from a manager’s knowledge, competence

and expertise acknowledged by others in the organization.

15.10 Power, Politics, Strategy and Implementation

A common thinking is that power and politics have adverse or negative effects

on company operations and strategies, because, power and politics mean

influence, manipulation and domination. But these can be viewed or used in a

positive way also, or, at least, as significant factors in strategy making and

implementation. Mintzberg (1991) observes that corporate politics is neither

inherently good nor bad. Although, more often corporate politics may lead to

divisiveness which is not healthy for an organization, but, there are times when

it can be strategically used to bring about changes. There are times when an

organization is emerging from a stage of complacency or stability or incremental

growth and entering into a phase of fundamental changes or discontinuous

growth. Suggesting the need for creating political tension as well as harmony,



Mintzberg contends that ‘the organization must ... pull apart before it can pull

together again’.25 Quinn (1980) observes that most strategic decisions and

strategic thrusts in large enterprises emerge as part of an evolving continuous

political consensus—building with no precise beginning or end.’26

All this tends to indicate that ‘a manager cannot effectively formulate and

implement strategy without being perceptive about company politics and being

adept at political manoeuvring’.27 What is important or essential is that managers

and strategists should know when to exploit power and politics, and, when to

shun them and promote harmony for achievement of organizational objectives.

Based on an understanding of the power structure, and, the nature of corporate

politics, the strategists should master support for acceptable proposals and

garner similar support for discarding unacceptable or unviable ones.

Some strategic analysts feel that power and politics have a more critical

role to play in strategy implementation than in strategy formulation. There is a

valid reason behind such thinking. Strategies are mostly formulated (planned

and finalized) by the strategic planning group under the direction of the top

management/CEO. Many functional and operational areas may not be

associated with this. But, implementation invariably involves the major functional

and operational areas. Let us take the example of diversification strategy—say

launching of a new product. Three functional areas—manufacturing, finance

and marketing—will play critical roles in implementation of this strategy along

with the respective operational areas. Successful implementation of this strategy

necessitates balancing of interests of all the functional and operational areas

involved and, therefore, requires conflict resolutions (handling inter-functional

and interpersonal clash of interests), consensus building and managing

understanding or coalitions. This can be achieved only through careful and,

sometimes delicate, management of power and politics.

The strategists and managers responsible for implementation should,

therefore, take cognizance of the dominant factors in organizational politics

and power. In other words, managers should make strategic use of power and

politics in implementation. For this, 10 guidelines28 may be followed. The

guidelines recommend that managers should:

(a) Accept the inevitability of power and politics in organizational

functioning.

(b) View power and politics more as positive factors in strategic

management.



(c) Understand how an organization’s power structure works—individuals

and groups whose opinions matter most and those who can be

undermined.

(d) Be sensitive and alert to political signals emanating from different

parts of the organization.

(e) Generally adopt a team approach subject to organizational power

blocks.

(f) Know when to tread softly and rely on coalition management and

consenus building and, when to push through decisions and actions

for results.

(g) Gather support for acceptable ideas and proposals and let the

unacceptable ones die a natural death.

(h) Encourage and reward organizational commitment, and discourage

and penalize negative attitude or actions.

(i) Promote and practice principled politics with openness and honesty

and counter unprincipled and corrupt politics.


21. According to Mintzberg (1991), corporate politics is inherently bad.

(True/ False)

22. Managers should accept the inevitability of power and politics in

organizational functioning. (True/ False)

15.11 Case Study

Hewlett-Packard: What is Right Leadership?

Hewlett-Packard (HP) had two contrasting leaders (CEOs): Carly Fiorina

and Mark Hurd with almost diametrically opposite styles. Fiorina was a

visionary, and her style or strategy was to provide long-term direction to the

company rather than focus on immediate or short-term results. She was

charismatic and a well known leader.

One of the biggest long-term strategic decisions taken by Fiorina was the

acquisition of Compaq. Her decision was based on the directive of the

board of directors to change the course of the company and increase its

long-term competitiveness. The objective was to acquire market power



through integration of the two companies and be able to compete with the

likes of Dell Computer and IBM. This was a ‘high profile’ acquisition and

many such M&As were not successful in the past. Therefore, Fiorina’s

decision involved a high element of risk.

The developments after the acquisition exposed the risk factor. Even after

three years of merger of Compaq with HP, the new HP could not compete

with Dell or IBM. Some analysts think that Fiorina overlooked critical

operating issues which had to be addressed, particularly to compete with

the super-efficient Dell.*

During 2004, HP fell far short of its sale and profit targets. Because of the

company’s poor performance, the stock price fell and investors and other

stakeholders got worried. Many HP managers viewed Fiorina’s style more

as a promotional role than as strategic leadership. Many felt that Fiorina

had a vision, but she was unable to secure necessary internal/organizational

support to fulfil the vision.** After being in HP for almost six years as CEO,

Fiorina was finally fired.

HP hired Mark Hurd as the new CEO. Mark was viewed as quiet, unassuming

and ‘un-Carly’. His approach was traditional. He was a ‘nuts-and-bolts’

operation man with apparently no clear vision. Working on short-term targets

to reduce costs without a long-term vision was not considered a good

strategy of recapturing HP’s lost glory. Hurd’s style has been summarized

as ‘executing’, but without a long-term sense of direction.***

For HP, some have suggested a combination of (styles of) Fiorina and

Hurd. This would blend a thinker with vision and a doer who excels in

execution and operational efficiency. Both styles may be required for

strategic leadership. But, it implies dual CEO. Is it possible in practice?

* B Elgin, ‘The Inside story of Carly’s ouster’, Business Week, (February 10, 2005).

** .Ibid.

*** P Burrows, and P Elgin, ‘The Un-Carly Unveils His Plan’, Business Week, June 16,

2005.



15.12 Summary


• Organizations may plan, formulate and implement strategies, but, it is

the individuals—managers at different levels—who actually take

appropriate actions involved in implementation.

• Individual-related or individual-focussed factors or issues like leadership

styles, personal ethics and values, corporate politics, etc., are very

important. In addition to these, organizational culture—work styles, beliefs,

shared values, etc.,—is equally important or vital.

• In an organization, the leader performs two strategic roles. First, he/she

is the architect of a strategy—innovates, conceives, plans and formulates

strategy; second, he/she is the implementor of strategy—initiates action

and induces/drives the employees into operation.

• Leadership style is way or pattern of behaviour which a leader adopts in

managing the affairs of an organization—directing and motivating

managers and staff for achievement of organizational objectives.

• Next only to leadership style, organizational culture plays the most

important role in the strategy implementation process of a company.

The most important characteristic of organizational culture is sharing or

common beliefs, values, attitudes, feelings, etc.

• Different companies adopt different approaches to business ethics. It

depends on their prioritization of ethical practices in conducting business.

15.13 Glossary

• Business ethics: A form of professional ethics that examines ethical

principles and moral or ethical problems that arise in a business

environment. It applies to all aspects of business conduct and is relevant

to the conduct of individuals and entire organizations.

• Leadership style: A way or pattern of behaviour which a leader adopts

in managing the affairs of the organization.

• Organizational culture: The set of assumptions, beliefs, values and

norms that are shared by an organization’s members.

• Triangulation: A multimethod technique for analysing and changing a

company’s culture that combines obtrusive observations, self-administered

questionnaires and personal interviews to analyse the existing

organizational culture.




1. Discuss the major leadership styles, including the leadershio styles in

practice.

2. Explain how to create a strategy supportive culture. Discuss the various

steps involved in this.

3. What are the different approaches to business ethics adopted by various

companies? Discuss in details.

4. Why does unethical business behaviour exist in many companies? Explain

the major reasons.

5. Discuss the state of business ethics in Indian companies. Analyse in terms

of KPMG business ethics survey.

6. Discuss the roles of power and politics in strategy implementation. Focus

on different thoughts on this.

15.15 Answers


1. False

2. False

3. style

4. strategic human capital

5. Strategic human capital

6. Relationship human capital

7. True

8. False

9. heterogeneous

10. diversity

11. Organizational culture

12. Triangulation

13. True

14. False



15. professional, value

16. Ethical culture approach

17. Immoral

18. Ethical damage control

19. Political

20. Expert

21. False

22. True


1. Leadership styles are influenced by environmental factors. Refer to Section


2. In the relationship between culture and strategy, two of the alternatives

involved are either adapting strategy implementation to the existing culture

or changing the strategy itself midway through implementation. Refer to


3. Different companies have different approaches to business ethics. Refer


4. In today’s volatile business environment, it is an established fact that

business ethics and values are under severe test. Refer to Section 15.8.2


5. In terms of ethical practices, companies in India, as in many other countries,

can be classified as good and bad. Refer to Section 15.8.6 for further

details.

6. All corporate cultures include a political component. Refer to Section 15.9


15.16 References

1. Collins, J C, and J I Porras. 1994. Built to last: Successful Habits of

Visionary Companies. New York: Harper Business.

2. Groysberg, B, A Mclean, and N Nohria. ‘Are Leaders Portable?’ Harvard

Business Review, May, 2006.



3. Khandwala, P. 1977. ‘Some Top Management Styles: Their Context and

Performance’. Organization and Administrative Science, Winter.

4. King, A S. 1990. ‘Evolution of Leadership Theory’. Vikalpa. April-June.

5. Rossouw, G J., and C J Vuuren. 2003. ‘Modes of Managing Morality: A

Descriptive Model of Strategies for Managing Ethics.’ Journal of Business

Ethics, September.

Endnotes

1 A D Szilagyi Jr, and M J Wallace, Jr. Organisational Behaviour and Performance, 2nd

ed., (Glenview, IL: Foreman and Company, 1980), 274.2 King, A S, ‘Evolution of Leadership Theory’, Vikalpa, 1990, 43–54.3 Sinha, J B P, ‘The Nurturant Task Leader: A Model of Effective Executive’, ASCI Journal

of Management (Vol. 8), 1979, 109–194 B L Maheswari, Decision Styles and Organisational Effectiveness, Vikas Publishing House,

1980, ix-x.5 B Groysberg, A N Mclean, and N Nohria, ‘Are Leaders Portable?’ , Harvard Business

Review, (May, 2006).6 This section is largely based on M A Hitt, et al. (2007), 364-69.

7 M A Hitt, et al. (2007), 365.8 M L A Hayward, et al., ‘Believing one’s own Press: The Causes and Consequences of

CEO Celebrity’, Strategic Management Journal, 25, 2004.9 Y Zhang, and N Rajagopalan, ‘Explaining the New CEO Origin: Firm versus Industry

Antecedents’, Academy of Management Journal, 46, 2003.

10 C O’ Reilly, ‘Corporations, Culture and Commitment: Motivation and Social Control in

Organization,’ California Management Review (Summer, 1989), 10.11 V Sathe, Culture and Related Corporate Realities (Homewood, III: Richard D Irwin, 1985),12 R M Lala, The Creation of Wealth (Mumbai: IBH Publishing, 1981), 198.13 For details, refer J Duncan, ‘Organisational Culture: Getting a Fix on an Elusive Concept,’

Academy of Management Executive (August, 1989).14 E H Schein, ‘The Role of the Founder in Creating Organisational Culture,’ Organisational

Dynamics (Summer, 1983), 13-28.15 S Ghoshal, ‘The Value of Values,’ Economic Times (Supplement) (March 5,

1999), 1.16 J C Collins and J I Porras. Built to Last: Successful Habits of Visionary Companies (New

York: Harper Business, 1994).17 G J Rossouw, and L J Vuuren, ‘Modes of Managing Morality: A Descriptive Model of

Strategies for Managing Ethics’, Journal of Business Ethics (September, 2003), 389–

400.18 A A Thompson Jr, A J Strickland III, J E Gamble, and A K Jain, Crafting and Executing

Strategy: The Quest for Competitive Advantage, 14th ed. (New Delhi: Tata McGraw-Hill,

2006), 287.19 Ibid. 286.



20 ‘Picking India Inc’s Conscience: The KPMG Business Ethics Survey,’ Financial Express,

(October, 1999), 5.21 This is discussed in D Buchanan, and D Boddy, The Expertise of the Change Agent:

Public Performance and Backstage Activity (London: Prentice Hall, 1992).22 J R P French, and B Raven, ‘The Bases of Social Power’, in Studies in Social Power, ed.

D Cartwright (Ann Arbor, MI: University of Michigan Press, 1959), 150–67.23 A Sharplin, Strategic Management (New York: McGraw-Hill, 1985), 14124 J M Pfiffner, and F P Sherwood, Administrative Organization (New Delhi: Prentice Hall of

India, 1964), 311.25 H Mintzberg, ‘The Effective Organization: Forces and Forms,’ Sloan Management Review,

32 (Winter, 1991), 54–6726 J R Quinn, Strategies for Change: Logical Incrementalism (Homewood, Illinois: Richard

D Irwin, 1980), 119.

27 A Zaleznik, ‘Power and Politics in Organisational Life,’ Harvard Business Review, (48)3,

47–60.28 The guidelines are generally based on A Kazmi, Business Policy and Strategy Management

(New Delhi: Tata McGraw-Hill, 2005), 363.



Unit 16 Strategy Evaluation and Control

Structure

16.1 Introduction

16.2 Caselet

Objectives

16.3 The Evaluation and Control Process

16.4 Evaluation and Control Criteria: Pre-implementation

16.5 Implementation Process Control

16.6 Evaluation and Control Criteria: Post-implementation

16.7 The Balanced Scorecard Approach

16.8 Organizational Controls

16.9 Six Sigma Approach to Evaluation and Improvement

16.10 Characteristics of an Effective Evaluation System

16.11 Case Study

16.12 Summary

16.13 Glossary


16.15 Answers

16.16 References

16.1 Introduction

For an organization, evaluation and control of strategy is the final stage, and, is

one of the most vital stages in the strategic management process. Through the

evaluation system, the management tries to demonstrate how well the chosen

strategy is implemented and how successful or otherwise the strategy is. If

implementation is not taking place as planned, or, if there are deficiencies in the

strategy in terms of achievement of the objectives or targets which are getting

exposed during implementation, appropriate control mechanisms have to be

put in position for taking necessary corrective actions based on the feedback

process.

In analysing the strategy evaluation and control process, we will be

discussing here all related factors and issues. We shall start with an

understanding of the evaluation and control process. We will discuss pre-

implementation and post-implementation evaluation and control criteria. In terms



of specific details, we will analyse participants in the evaluation process, critical

success factors, strategic control factors, various quantitative performance

criteria and qualitative criteria. Special focus will be given on analysis of the

balanced scorecard approach as an evaluation criterion. We shall also discuss

the Six Sigma approach to evaluation and improvement. Finally, we will mention

certain important factors or characteristics of an effective evaluation system.

16.2 Caselet

Six Sigma has evolved into a highly rigorous tool for analysis and continuous

improvement of corporate performance. Six Sigma at many organizations

simply means a measure of quality that strives for near perfection. To achieve

Six Sigma, a process must not produce more than 3.4 defects per million

opportunities. Six Sigma processes are executed by Six Sigma Green Belts

and Six Sigma Black Belts, and are overseen by Six Sigma Master Black

Belts. According to the Six Sigma Academy, Black Belts save companies

approximately $230,000 per project and can complete 4-6 projects per year.

(Given that the average Black Belt salary is $80,000 in the United States,

that is a fantastic return on investment.) General Electric, one of the most

successful companies implementing Six Sigma, has estimated benefits on

the order of $10 billion during the first five years of implementation. GE first

began Six Sigma in 1995 after Motorola and Allied Signal blazed the Six

Sigma trail. Since then, thousands of companies around the world have

discovered the far reaching benefits of Six Sigma.

Source: http://www.isixsigma.com/new-to-six-sigma/getting-started/what-six-sigma/

Objectives


• Discuss the evaluation and control process in an organization

• Identify the evaluation and control criteria: pre-implementation and post-

implementation

• Analyse the strategy implementation process control

• Use the concept and tool of balanced scorecard analysis

• Apply the Six Sigma approach to corporate evaluation and improvement



16.3 The Evaluation and Control Process

The evaluation and control system is a step-by-step or sequential process. The

process consists of five interrelated steps or stages. These are:

A. Set performance targets, standards and tolerance limits for the strategy,

implementation and achievements.

B. Measure the actual performance position in relation to the targets at a

particular point of time.

C. Identify/diagnose deviations from the prescribed targets.

D. Analyse/measure deviations from targets and given tolerance limits.

E. Incorporate modifications, if and as necessary, to revise targets/objectives,

strategy and the implementation process.

Figure 16.1 illustrates the evaluation and control process.

Figure 16.1 Strategy Evaluation and Control Process

Note: 1, 2, 3, 4 and 5 indicate possible corrective steps/actions

Source: Adapted from L R Jauch, R Gupta, and W F Glueck, Business Policy and

Strategic Management, 6th edn, (New Delhi: Frank Bros & Co, 2004), 438

(Exhitbit 11.3).



As seen in the figure, the evaluation and control system actually operates

through stages C, D and E. The evaluation process may reveal many things.

Targets or standards may not be met because those are too high or low (too

soft). All objectives and targets are based on certain assumptions. Sometimes,

assumptions may be erroneous—too rigid or too general. In some cases, the

assumptions may have been based on pessimistic environmental scenario and

the goals and objectives may be conservative or narrow in scope. The

assumptions might have ignored the new or emerging environmental

opportunities. Under the opposite set of assumptions or scenario, the objectives

may be too ambitious or unrealistic. It is also possible that the objectives have

been achieved because the strategy has not been properly implemented; that

the selection of strategy has not been very appropriate. The strategists/

management have to ascertain which of these factors or cause-and-effect

relationships are at work.

The evaluation and control system generally operates during the process

of implementation of a strategy as shown in Figure 16.1. But, these can be

applied before and after implementation also. So, the evaluation and control

process can be analysed during three stages:

(a) Pre-implementation;

(b) During implementation; and

(c) Post-implementation.


1. The evaluation and control system is a ________ process, with five

interrelated steps or stages.

2. The evaluation and control system generally operates during the process

of _____of a strategy.

16.4 Evaluation and Control Criteria: Pre-implementation

The major participants in the evaluation and control process have to play both

pre-implementation and post-implementation roles. Pre-emptive measures are

always better than reactive or corrective actions. To minimize the problems of

strategy implementation and, possible strategy formulation-implementation

mismatch, it is advisable to use certain evaluation criteria before implementation.



For pre-implementation assessment of strategies, three interrelated evaluation

criteria are generally used (Figure 16.2).

1. Suitability

2. Acceptability

3. Feasibility

Figure 16.2 Evaluation Criteria: Premple-mentation

Suitability is the most important criterion for evaluating a strategy. As shown

in the figure, acceptability and feasibility generally follow assessment of suitability.

Based on these three criteria, a final decision is taken about choice or adoption

of a particular strategy, keeping in mind the implementation factor.

Suitability of a strategy involves assessment in terms of three stages:

first, establishing the rationale or logic of each strategic option available; second,

analysing relative merits of various options when alternative choices are available;

and, third, evaluating the alternatives for final selection of strategy.

Examining the suitability of a strategy in terms of the above factors may

appear to be an elaborate process. But, in practice, the process may not be as

elaborate as it appears. Most of the strategists/managers should be constantly

monitoring product/brand life cycles, positioning and, also the value chain. While

evaluating a particular strategy, the strategy team has to assess the financial

results or profitability and the balancing factor in terms of product/brand portfolios

to arrive at a final decision.

Acceptability of a strategy is concerned with expected performance or

outcome. Factors considered for deciding about the acceptability of a strategy

are return on investment (on strategy formulation/implementation) risk involved

and stakeholders’ expectations from or reaction to possible outcomes.



Feasibility of a strategy involves three aspects. The first is the compatibility

of the strategy with internal competences of the company— resources,

capabilities and skills; second, practicability of the strategy in terms of the

environment— market structure, competitors, government controls, etc.; and,

third, amenability or easiness of implementation—steps or stages are not

ambiguous or mutually conflicting.

16.4.1 Critical Success Factors (CSFs)

Identification of critical success factors helps in analysing suitability of a strategy.

In fact any strategy, to be successful, must start with an identification of the

critical success factors (CSFs) or key success factors (KSFs).1 We had defined

CSF while analysing parenting fit in Unit 7. Critical success factors are those

factors or aspects of strategy in which a company must excel to outperform

competitors, and there are underlying core competences in specific activities of

the company which are concomitant with CSFs. For example, if ‘speed to market’

with new product launch is a CSF, the underlying core competences should be

logistics of physical distribution and retail network. CSF analysis highlights the

important relationship between resources (includes business assets and skills),

competences and choice of strategy which is vital for assessing performance.

A study (Vasconcellos and Hambrick, 1989) of six mature product

industries shows that critical success factors differ from industry to industry—

a capital goods manufacturer will have CSFs different from an input supplying

firm or a consumer goods company. And, those companies which have strengths

matching the CSFs perform significantly better than other companies. Failure

of companies like Procter & Gamble and Philip Morris to penetrate the soft

drinks market because they lack the CSF of ‘access to bottlers’ gives a good

example of the significance of this concept or tool.

An analysis2 of the wine market in the early 1990s identified seven CSFs:

1. Access to quality grape supply (50 per cent of the variable cost),

particularly for those in the premium segment.

2. Access to technology both in the vineyard and in the winery so that

costs can be controlled or minimized.

3. Achievement of adequate scale in production, perhaps with a set of

brands.

4. Expertise in wine making.

5. Financial resources to compete in a capital-intensive business.



6. Name or image recognition—a sense of tradition.

7. Strong relationship with distributors.

It is not enough to identify present CSFs. It is also necessary to project

them into the future, that is, identify emerging CSFs. This gives sustainability to

success. Experience shows that many companies have faltered when CSFs

changed, and resources and competences on which they were based became

less relevant. For example, for industrial products, technology and innovation

are most important during the introduction and growth phase, and systems

capability, marketing and service back-up play more dominant roles as the market

matures. In consumer goods, marketing and distribution skills are critical during

the introduction and growth phases, and manufacturing and operations become

more vital as the product moves into maturity. For services, the CSFs would be

different.


3. Which of these is an evaluation criterion for pre-implementation

assessment of strategies?

(a) Suitability

(b) Acceptability

(c) Feasibility

(d) All the above

4. Factors or aspects of strategy in which a company must excel to outperform

competitors are known as _________.

16.5 Implementation Process Control

In most companies, evaluation and control are exercised during the strategy

implementation process itself. Many call these strategic controls. All strategies

are based on certain assumptions. These assumptions may change or lose

their validity during the period between strategy formulation and its

implementation, and, also, during the period or process of implementation.

Strategic controls take into account required changes in assumptions,

continuously monitor and review the strategic implementation process, and

suggest or undertake changes in the strategy to match the new developments.

Schreyogg and Steinman (1987) have mentioned four types of strategic control:



(a) Premise control

(b) Strategic surveillance

(c) Implementation control

(d) Special alert control3

These controls have a time perspective. See Figure 16.3.

Figure 16.3 Strategy, Implementation and Strategic Control

Source: Adapted from G Schreyogg, and H Steinman, (1987). 86.

16.5.1 Premise Control

This is the first stage of control. As mentioned above, all plans and strategies

are based on certain premises or assumptions. The objective of premise control

is to identify key or critical assumptions, and, during the course of implementation,

either maintain constancy of the assumptions or modify or drop some of them

or reformulate the strategy, if changes of assumptions warrant this. Premise

control is the responsibility of the strategic planning group. The premises or

assumptions may relate to organizational factors and/or industry factors and/or

environmental factors because these are the ones which govern or influence

strategy building.

Organizational factors can relate to resource availability—financial as well

as managerial. Assumptions about organizational factors can also pertain to

different functional areas. For example, it may be about an expected

breakthrough in R&D (may be through strategic alliance) which can directly

affect any strategy on new product development or diversification. The

assumption can also relate to timely installation of a new plant or equipment,



i.e., introduction of a new technology. It may also involve marketing or distribution

collaboration for market penetration strategy of an existing product.

Assumptions are also made about several industry factors—essentially

about industry structure, competitive position and growth. For example, if an

industry is exhibiting a high growth rate like the IT industry, a company’s plan

and strategy may be based on continuance of such growth rate; or, if there is

excess capacity in an industry, creation of any new capacity by a company

would be governed by certain assumptions about the nature and magnitude of

excess capacity. Lafarge of France had planned to set up a greenfield cement

manufacturing project/plant in India. After assessing the overcapacity in the

Indian cement industry, Lafarge changed their strategy to the acquisition route.

Proposal of Michelin of France, the international tyre major, was approved by

FIPB for setting up a radial tyre project in Pune in 2000. The company deferred

project implementation because of a slump in the Indian automobile market.

Important assumptions are required to be made about environmental

factors because these are very critical for determination of strategy. Some of

the vital environmental developments include sudden change in government

policy, regulation and/or control, shift in business or market conditions, an

unanticipated competitor action and capital market boom or depression. VSNL

had planned to raise capital overseas through global depository receipts (GDRs).

The company postponed its GDR issue thrice because of depressed stock market

conditions which prevailed during the period between grant of permission and

actual issue of GDR. Sometimes, it can be a political or social development.

Tata Steel had formulated a strategic plan for establishment of a steel plant in

Orissa. The company had also acquired land for the project. But, they finally

abandoned the project because of sustained protest by the local inhabitants

who were likely to be displaced if the project had come up.

16.5.2 Strategic Surveillance

This is a more generalized strategic control over the entire period spanning

from finalization of strategy to completion of the implementation process. This

is designed to monitor a broad range of events inside and outside the company

that are likely to threaten the course of a firm’s strategy.4 Through strategic

surveillance, a company can keep control over organizational factors, industry

factors and also major environmental factors. Surveillance or monitoring is done

with respect to any of these factors. For example, if there is an unexpected

development in resource availability leading to reallocation of resources, strategy

implementation may have to be slowed down or some change made in the



process. Similarly, strategic surveillance may reveal that a new competitor is

emerging in the industry, and, this may necessitate review of the strategy or its

implementation. In terms of environmental factors, the government may

announce a change in its FDI policy. Strategic surveillance will assess its impact

on the strategy and, accordingly undertake control measures —may be in the

form of reformulation of the strategy either in whole or part, and, also its

implementation.

16.5.3 Implementation Control

Implementation control is focussed on the actual process of implementation.

The implementation process consists of programmes, projects, actions, etc.,

relating to different functional and operational areas. Some of these programmes/

projects/actions are undertaken simultaneously, and, some other incrementally,

in steps or stages, over a period of time. Implementation control evaluates and

monitors these steps/stages. If it is observed that these are not following the

plans, and, the predetermined course, controls are designed for necessary

course corrections.

For effective implementation control, two methods have been suggested;

first, monitoring strategic thrust and, second, milestone review. In the strategic

thrust approach, critical actions, steps or stages are identified as ‘thrusts’ which

need to be constantly monitored to assess the impact of change in any of these

on the implementation process. For launching a new product, the thrusts are

concept development, product development (R&D) and test marketing. On the

basis of implementation position (deficiency or relative success) in the three

stages, the product may be modified or product launch may be deferred; and,

in case of too many abnormalities, the product may even be abandoned.

In the milestone review approach, all critical activities (stages) are identified

as milestones. Each milestone has a cost factor and time factor associated with

it, and it is assessed in terms of these two parameters. Either cost overrun or

time overrun or both in any of the milestones will affect the ‘critical path’ of

implementation. The milestone approach is analogous to the PERT/CPM method

for project evaluation. This approach renders more exactness to the control

process, and, can also be said to be more objective compared to monitoring

strategic thrust approach.

16.5.4 Strategic Alert Control

Strategic surveillance and implementation control may not be sufficient for all

situations. For extraordinary developments or situations, special alert control



may be necessary. Such control is triggered by developments more sudden

and serious than mentioned above. In other words, this refers to contingency or

crisis situations—an industrial disaster, sudden fall of government, natural

catastrophes like floods, earthquakes, etc. Special alert control works through

a contingency plan or strategy which partially or wholly replaces the original

strategy and the plan of implementation. Contingency or crises management

strategy follows certain steps such as signal detection, preparation/prevention,

containment/damage limitation and recovery leading to organizational learning.5

Special alert controls cover such steps to prevent organizational collapse.


5. The objective of _______ control is to identify key or critical assumptions.

6. _______ control is designed to monitor a broad range of events inside

and outside the company that are likely to threaten the course of a firm’s

strategy.

7. The control that is focussed on the actual process of implementation is

called __________.

16.6 Evaluation and Control Criteria: Post-implementation

Post-implementation evaluation shows actual performance of a company vis-à-

vis targets set in the plan. This also becomes an assessment of the strategy —

to what extent it has succeeded or failed. Evaluation of performance is generally

done through various quantitative criteria. But, in a comprehensive evaluation

system, qualitative criteria are also used in addition to the quantitative criteria.

The qualitative criteria usually complement or support the quantitative criteria.

We shall first discuss various quantitative performance criteria, and, then,

qualitative indicators.

16.6.1 Quantitative Evaluation Criteria

Quantitative evaluation criteria or indicators of performance are primarily financial,

but, there are also some important non-financial criteria. These criteria can be

used to measure results or performance in three ways: first, comparing current

performance of the company with its past performance; second, comparing

company’s performance with industry averages, standards or benchmarks; and,

third, comparing company’s performance with that of competitors. Because,

absolute numbers can sometimes be misleading, different evaluation



performance criteria are expressed in relative terms or ratios. Ten major financial

and non-financial criteria may be used:

Financial

1. Return on investment (ROI)

2. Return on equity (ROE)

3. Earnings per share (EPS)

4. Price-earnings ratio

5. Profitability: profit/sales ratio

6. Profitability: relative profit growth

Non-financial

7. Market share: absolute market share

8. Market share: relative market share

9. Sales ratio: actual to target sales

10. Sales ratio: relative sales growth

We had discussed the financial ratios in Unit 6 (Table 6.1). The above

ratios and also the non-financial evaluation criteria are briefly described below.

Return on investment (ROI) is gross or net income on total investment of

a company including both fixed investment and working capital. Return on equity

(ROE) is gross or net income on equity capital. Earnings per share (EPS) is

gross or net income divided by total number of equity shares. Price-earnings

ratio is market price per share to earnings per share. Profit-to-sales ratio is

gross or net profit to total sales (these are also called gross profit margin or net

profit margins). Relative profit growth is the growth of profit of the company

relative to that of the market leader or the nearest competitor.

Absolute market share is a traditional measure or indicator of performance

of a company. But, relative market share is a better indicator of competitive

performance. Relative market share can mean two things. The first is the ratio

of market share of the company to that of the market leader; if the company is

the leader, the ratio of its share to its challenger or No. 2. The second is the ratio

of company’s market share to its nearest rival or rivals (when the company is

ideally in No. 2, No. 3 or No. 4 position). Sales ratio can be either actual sales or

turnover to target sales or relative sales growth, i.e., growth in sales of the

company to that of the leader or nearest rival as explained in the case of market

share.



We can now try to understand the post-implementation evaluation system

more clearly. We shall use a hypothetical example to illustrate this. Hypothetical

data on targets and performance (with and without strategic intervention) have

been used to measure the deviations or variances between the targets and

actuals. These are shown in Table 16.1. For post-implementation evaluation of

strategy of a particular company, the hypothetical data can be replaced by actual

data.

Table 16.1 Post-implementation Performance Evaluation

Evaluation Objective/ Expected Expected Actual Shortfall/

Target Performance Performance Performance Variance

(without stategic (with stategic

intervention) intervention)

1. Return 5% 3% 5% 6% +1%

on investment

2. Return on equity 25% 15% 25% 20% –5%

3. Earnings 20 10 20 15 –5

per share (`)

4. Price/earnings ratio 150% 100% 150% 150% 0%

5. Profit/sales ratio 15% 10% 15% 12% –3%

6. Relative 140% 100% 140% 120% –20%

profit growth

7. Absolute 30% 20% 30% 30% 0%

market share

8. Relative 80% 60% 80% 70% –10%

market share*

9. Ratio of 100% 80% 100% 110% –10%

actual sales to

target sales

10. Relative 150% 100% 150% 130% –20%

sales growth**

*relative to the leader **relative to the nearest competitor/leader/industry average.

As shown in the table, there can be mixed results in terms of targets and

achievements. The ideal situation would be if actual performance in terms of all

major evaluation criteria matches with targets or budgeted estimates given certain



tolerance limits. There can be some cases of over-achievement, i.e., actuals

surpassing the targets. But, more common outcomes are under-achievements

or shortfalls, and, these are matters of serious concern for the strategists/top

management/CEO.

By using the four strategic controls mentioned earlier, the deviations or

shortfalls can be minimized, or, in some cases, eliminated. But, this would depend

on how timely and effectively the controls are exercised.

If the shortfalls are still significant, the strategic group or the top

management has to ascertain the causes of shortfalls or underperformance. A

series of searching questions may help in determining the causes. Some such

pertinent questions are given below.

(a) Is the cause of deviation an organizational or management problem?

(b) Is the causal factor external or environmental?

(c) Is the cause random or could it have been foreseen?

(d) Is the deviation temporary or permanent?

(e) How far are the plans and strategies still valid?

(f) Does the organization have the capacity or preparedness to respond

to the changes required?6

Answers to the above questions will help in identifying the focus areas

where corrective action is required, and, also, the nature and magnitude of

such action. These may mean revision of targets, plan and strategy; this may

sometimes be tantamount to formulation of a new strategy. The lessons learnt

will also provide directions for future planning.

Issues in Measurement

One of the major limitations of the quantitative evaluation criteria, and of the

quantitative indicators, is the problem of measurement. Difficulties are faced in

the choice of unit, gross or net concepts/values, reference period, etc. Information

or database are keys to correct measurement whether it is capital or investment,

return on equity, earnings per share, relative sales growth or profitability.

Incomplete or inadequate database can always create problems of accuracy.

Also different accounting methods may give different results about many

quantitative indicators. There is also a bias in terms of annual targets or objectives

rather than short-term or long-term targets or variables. Finally, the human factor

or subjective element is always associated with choice of, and/or deriving,

quantitative criteria or estimates.



Companies sometimes deliberately manipulate either definitions, units,

or timing points or periodicity to show results which will please the stakeholders

or shareholders. Some companies, particularly in the public sector, resort to

soft targeting, i.e., set targets which are very easily achievable whatever be the

methods of measurement. This is done in the public sector to take care of the

accountability criteria, and, in the private sector, to please or satisfy the

shareholders. But, large professional companies try to maintain as much

neutrality or objectivity as possible in terms of choice of base year, data base,

timing and periodicity for correct strategic evaluation and long-term growth.

16.6.2 Qualitative Evaluation Criteria

Because of the inadequacy of quantitative criteria (and also its limitations as

discussed above), qualitative criteria are also used for evaluation of corporate

strategy. Certain factors, which are critical for strategy and organizational

performance evaluation, are not subject to quantitative measurement. These

are strategic clarity, flexibility, skills and capabilities, organizational attitude

towards risk taking, management motivation/commitment, employee turnover

rates, etc. Qualitative criteria are generally applied before implementation of

strategy, but these can be used as useful controls during the process of

implementation also. A number of criteria have been suggested by strategic

analysts. Tilles has posed six questions which can be useful in evaluating

strategies. These are:

(a) Is the strategy internally consistent?

(b) Is the strategy compatible with the environment?

(c) Is the strategy appropriate considering available resources of the

organization?

(d) Does the strategy involve an acceptable degree of risk?

(e) Does the strategy have an appropriate time frame?

(f) Is the strategy workable or practicable?

David has raised seven additional questions, answers to which can give

significant qualitative directions to strategy:

(a) How good is the company’s balance of investments between high-

risk and low-risk businesses/projects?

(b) How good is the balance of investments between long-term and

short-term businesses/projects?



(c) How good is the balance of investments between slow-growing

markets and fast-growing markets?

(d) How good is the balance of investments among businesses/ SBUs/

divisions?

(e) What are the relationships between the company’s key internal and

external strategic factors?

(f) How are major competitors likely to respond to particular company

strategies?

(g) To what extent are the organization’s strategies socially responsible?7

Glueck and Jauch have suggested three qualitative criteria for strategy

evaluation: consistency, appropriateness and workability. Consistency is

compatibility of the strategy with organizational objectives/targets, internal

conditions and major environmental factors. Appropriateness of the strategy is

assessed with reference to resources, organizational capabilities, risk taking

and time frame. Workability is feasibility or practicability in terms of

implementation.8

Activity 1

We have mentioned financial and non-financial evaluation criteria in the

text (16.6.1). Choose a public limited company and using its balance sheet

and profit and loss account, do a perfromance analysis in terms of the

criteria.


8. Quantitative evaluation criteria or indicators of performance are always

financial. (True/False)

9. Relative market share is a better indicator of competitive performance

than absolute market share. (True/False)

10. The gross or net income on total investment of a company including both

fixed investment and working capital is called __________.

16.7 The Balanced Scorecard Approach

The balanced scorecard approach combines both quantitative and qualitative

criteria/measures of evaluation and incorporates expectations of different



stakeholders in relating performance to strategy. This approach has been

developed by Kaplan and Norton (1992, 1993 and 1996) and elaborated, updated

and improved by others, and is recognized as a modern tool for strategic

evaluation of companies. Based on an analysis of some of the shortcomings of

earlier implementation and control methods, the balanced scorecard approach

has been designed to provide clear guidelines about what companies should

assess/measure to balance the financial aspect in implementation and control

of strategic plans.

The balanced scorecard approach works through four critical perspectives:

financial, internal business process, customer and, learning and growth. These

four perspectives are interlinked, and, they emanate from or are guided by

vision and strategy of the organization. Each of these perspectives is expressed

through its own objectives, targets, initiatives and measures. Together with vision

and strategy, these represent an integrated or balanced scorecard of

performance and growth (Figure 16.4).

Figure 16.4 Balanced Scorecard Approach to Strategy Evaluation

Source: R S Kaplan, and D P Norton, ‘Using the Balanced Scorecard as Strategic Management

System’, Harvard Business Review, (January-February, 1996).



As shown in Figure 16.4, the objectives/targets, initiatives and measures

of the four perspectives are connected through a chain—sort of cause and

effect relationships—which lead to successful implementation of strategy.

Achievement of one perspective’s targets leads to improvements in the next

perspective, and so on till the company’s overall performance improves. A

properly built scorecard is balanced between financial and non-financial

measures; internal and external performance perspectives; and short-term and

long-term success.

The balanced scorecard approach can be regarded as a management

system and, not merely a measurement system, which enables companies to

formulate their strategies, allocate resources, implement strategies and provide

meaningful feedback. The method generates feedback on both internal business

processes and external (stakeholder) outcomes to be able to continuously

evaluate and improve strategic performance and results. When fully developed,

the balanced scorecard is expected to transform strategic planning from a purely

top management function into the ‘system centre’ in the organization guiding

resources, processes and outcomes.

Kaplan and Norton describe the effect of balanced scorecard on

organizational functioning as follows:

The balanced scorecard retains traditional financial measures. But,

financial measures tell the story of past events, an adequate story of

industrial age companies for which investments in long-term capabilities

and customer relationships were not critical for success. These financial

measures are inadequate, however, for guiding and evaluating the

journey that information age companies must make to create future

value through investment in customers, suppliers, employees,

processes, technology and innovation.9

During the last decade, a large number of forward-looking companies

have adopted the balanced scorecard approach. Some of the initial experiences

were not very good. But, those may be either because the approach and

methodology were not understood clearly or not implemented fully. But,

companies soon realized that an overwhelming dependence on conventional

financial performance measures means using only lag indicator (consequences

of past actions). As progressive companies, they should concentrate more on

lead indicators, i.e., drivers of future financial performance — innovations in

business processes, learnings from the past and growth perspectives. Many

US companies including Exxon Mobil, Sears, DuPont and Mobil Corporation

have successfully used this approach in their own ways.



Activity 2

Select a large public limited company and do a balanced scorecard analysis

of the company using the balance sheet, annual report, balance sheet and

profit and loss account.


11. The ______ approach combines both quantitative and qualitative criteria/

measures of evaluation and incorporates expectations of different

stakeholders in relating performance to strategy.

12. A properly built scorecard is balanced between ________ and _____

measures.

16.8 Organizational Controls

We have discussed above different types of strategic controls used by

organizations but, have not mentioned about the financial controls. We have

however, analysed the balanced scorecard approach/framework which

companies use to ensure that they have established both strategic and financial

controls to assess their performance. These are two major components of

organizational control before, during and after strategy implementation.

Companies rely on strategic controls and financial controls as part of their

structures to support implementation of their strategies. Strategic controls are

largely subjective criteria applied to ensure that the company is adopting

appropriate strategies for securing competitive advantage. Thus, strategic

controls are concerned with examining the fit between what the company might

do (to exploit opportunities in its external environment) and what it can do (as

indicated by competitive advantages). Financial controls, in comparison, are

largely objective criteria used to measure the company’s performance against

predetermined quantitative standards—accounting-based or market-based

criteria. The overall organizational control has to enforce complementarity

between the two to make an integrated framework like the balanced scorecard.

Financial control focusses on short-term financial outcomes. In contrast,

strategic control focusses on the content of strategic actions, rather than their

outcomes. Some strategic actions can be correct but may still result in poor



financial outcomes because of external conditions such as a recession in the

economy, unexpected domestic or foreign government actions or natural

disasters. Therefore, an emphasis on financial control often produces more

short-term and risk-averse managerial decisions because financial outcomes

may be caused by events beyond managers’ direct control. Alternatively, strategic

control encourages lower-level managers to take decisions that incorporate

moderate and acceptable levels of risk because outcomes are shared between

the business-level executives making strategic proposals and the corporate-

level executives evaluating them. Strategic controls demand rich communications

between managers responsible for using them to judge the company’s

performance and those with primary responsibility for implementing its strategies

(such as middle-and lower-level managers). These frequent exchanges can be

both formal and informal in nature.10

Strategic controls are also used to evaluate the degree to which the firm

focusses on the requirements to implement its strategies. For a business-level

strategy, for example, the strategic controls are used to study primary and support

activities (discussed under ‘Value Chain Analysis’ in unit 5) to verify that those

critical to successful implementation of the business-level strategy are being

properly emphasized and executed. With related corporate-level strategies,

strategic controls are used to verify the sharing of appropriate strategic factors

such as knowledge, markets and technologies across businesses.

Intel is focussed on improving strategic control of its operations. To

accomplish this, Paul Otellini, Intel’s CEO, has shifted the chip maker’s

organization and control systems to focus

on different product platforms. He has reorganized Intel into five market-

focussed units: corporate computing, the digital home, mobile computing, health

care and, channel products (PCs produced by smaller manufacturers). Each

platform brings together engineers, software developers, and marketers to focus

on creating and selling platform products for particular market-oriented customer

groups. In doing this, he has used ‘two men in a box’ meaning that there are two

executives in charge of each of the largest groups, mobile computing and

corporate computing. This approach has facilitated improved control; the overall

structure has more key executives and affiliated functional teams overseeing

the development of each market platform.11




13. Strategic controls are largely subjective criteria applied to ensure that the

company is adopting appropriate strategies for securing competitive

advantage. (True/False)

14. Financial control focusses on long-term financial outcomes. (True/False)

16.9 Six Sigma Approach to Evaluation and Improvement

Six Sigma12 is conventionally known for minimizing errors or defects in

manufacturing or quality improvement. But, since its first introduction in Motorola

in 1987, Six Sigma has evolved into a highly rigorous tool for analysis and

continuous improvement of corporate performance. Improvement in performance

is combined with profitability. This is brought about by ‘defect reduction, yield

improvement, increase in customer satisfaction and best-in-class performance’

standards. Today, Six Sigma approach in many organizations means

benchmarking or best practices in quality, which seeks to achieve near perfection

in every aspect of business including products, processes, functions, operations

and transaction. Many companies including Honeywell (1994), GE (1995),

Citibank (1997) Polaroid (1998) have adopted the Six Sigma approach as a

major business initiative for success. In some companies, Six Sigma is referred

to as the new ‘TQM’.

Figure 16.5 DMAIC Process of Six Sigma



The Six Sigma approach, like any other effective performance

improvement programme, does not ensure easy or automatic success.

Companies need to work hard for this. Top management commitment is vital for

its success; and employees must be fully trained in Six Sigma methodologies.

Many methodologies—frameworks, models and statistical tools—exist for

implementing the Six Sigma programme. One such method for improving a

system through incremental, but steady corrections in the DMAIC process.

DMAIC is a five-stage process: define, measure, analyse, improve, control.

See Figure 16.5.

The five stages of DMAIC process are elaborated below in terms of specific

analysis, planning and action:13

1. Define

• Project definition

• Project charter preparation

• Ascertaining customer needs (voice of customer)

• Translating customer needs into specific functional and

operational requirements

2. Measure

• Process mapping

• Data attributes/characteristics

• Measurement system analysis/choice

• Measurement process capability

• Calculating process sigma level

• Determining/displaying baseline performance

3. Analyse

• Data tabulation and display (Scatter diagram, Histogram, Pareto

chart)

• Value addition analysis

• Cause and effect analysis

• Identification (verification of root causes)

• Locating opportunity (defects and financial) for improvement

• Project charter review/revision



4. Improve

• Brainstorming sessions

• Quality tool deployment

• Failure modes and effects analysis (FMEA)

• Testing (piloting) the solution

• Implementation planning

• Culture change planning for the organization

5. Control

• Statistical process control

• Developing a process control plan

• Documenting the process

Many Six Sigma programmes are based on an ‘uncompromising’

orientation of all business processes towards the customer. The focus is on

clear understanding of customer expectations so that appropriate methods can

be developed to improve and realign business processes for maximizing

customer satisfaction. Six Sigma implementation at Citibank is one such

example.


15. The _________ approach is conventionally known for minimizing errors

or defects in manufacturing or quality improvement.

16. In some companies, Six Sigma is referred to as the new __________.

16.10 Characteristics of an Effective Evaluation System

We have seen above that strategy evaluation and control is an elaborate, and,

at times, complex, process. It can also be a sensitive process because of the

human factor involved. Too much or too rigorous evaluation and control may be

expensive and, sometimes counterproductive also—authority and flexibility may

be challenged, minimized or even eliminated. Too little or no evaluation may

create the opposite effect—lack of responsibility and accountability. In some

companies, strategy evaluation simply means performance appraisal of the

organization. This is also not correct. The evaluation system should be balanced



and follow some norms and standards. Strategic analysts have laid down certain

basic requirements which evaluation should comply with to be effective.

First, strategy evaluation process or measures should be meaningful.

These should specifically relate to the objectives/targets and the plan. There

should be clear focus and no ambiguity.

Second, strategy evaluation and control process should be economical.

This means that the process should not be made unnecessarily elaborate and

incur too much cost on evaluation itself. Use of too much of information which

may not be necessary increases cost which is avoidable.

Third, the evaluation process should conform to a proper time dimension

for control and information retrieval or dissemination. Time dimension of control

should coincide with the time span of the activity or the implementation phase.

Also, information on developments or feedback should be timely (not delayed

or provided too early) to make evaluation and control more appropriate.

Fourth, strategy evaluation system should give a true picture of what is

actually happening. The objective of evaluation is not fault finding. Sometimes,

performance may be overshadowed by external factors or the environment.

For example, during a severe slump in economic/business activity, productivity

and profitability may decline in spite of best efforts by the managers to implement

strategy. This should be analysed in the correct perspective.

Fifth, strategy evaluation process should not dominate or curb decisions;

it should promote mutual understanding, trust and common cause. All functional

and operational areas should cooperate with each other in evaluating and

controlling strategies. Strategy evaluation process should be simple and not

too complex or restrictive. Complex evaluation systems may confuse managers

and result in lack of accomplishments.14

It is true that there may not be any ideal or the only strategy evaluation

system. All organizations are unique in themselves in terms of vision/mission,

objectives, size, management style, strengths, weaknesses, organizational

culture, etc. All these together determine the exact nature of the evaluation

system, as also the implementation process, which is most suitable for the

organization. Waterman (1987) has made some useful observations about

strategy evaluation system of successful organizations:




17. The evaluation process should conform to a proper ________ for control

and information retrieval or dissemination.

18. The strategy evaluation process should not ________ decisions.

16.11 Case Study

Samsung and LG: Contrasts in Control

Samsung and LG are the leading electronics companies in Korea. During

the 1980s, both the companies were facing environmental changes and

reformulated their strategies in response to the new environment. They

adopted similar strategic methods. Their performance during this period,

however, differed significantly. Samsung clearly outperformed its rival. The

difference in performance was primarily the result of different methods of

control adopted by the two companies.

In the late 1980s, Samsung further strengthened its already strong

environmental scanning system. It did this by appointing monitors of

information in every business activity/group by introducing management

information system for collection and dissemination of information. The

corporate office was strengthened by 200 high-performing managers, and

this enabled the company to increase its supervisory role over the subsidiary

units. The major instrument of control was the annual budget, with

rebudgeting done every six months. In contrast, LG changed its strategy to

give greater autonomy to the subsidiaries. It defined the headquarters’ role

as coordinator and supporter rather than controller. Also, its strategic

planning horizon became three years longer than that of Samsung.



Samsung operates a highly formalized feeback control system. Reporting

is comprehensive and also extremely regular with subsidiary units reporting

15 or 16 times during a month to corporate office. Evaluation is tough and

the reward and punishment system is based on well-established norms or

rules, and it can be harsh for many. For example, the bonus payments are

on zero sum basis—when some employees are paid extra, others are paid

less. By contrast, LG’s reporting system is less formalized and is based, to

some extent, on the strong involvement of members of the founding families.

This makes it difficult to implement the reward and punishment system in

more professional or objective way.

Samsung follows the group’s recruitment system for new managers, except

for some specialists such as R&D staff. So, Samsung’s own recruitment

policy focusses on qualification and skills, but the group’s recruitment

emphasizes the commitment, attitude and personality of applicants. This

shift in recruitment policy focus weakens the socialization of new staff.

Samsung has a well-developed education and training scheme with

company career paths leading to generalists with some special knowledge.

LG, on the other hand, recruits about half of its managers itself with the LG

group recruiting the rest. Its rigorous education and training system is geared

to provide different career paths for general managers, R&D staff and shop-

floor managers. In Samsung, informal communication is not strong and

sub-group formation is totally discouraged. By contrast, in LG, informal

communication and sub-group formation are welcomed.

To sum up, Samsung has been strengthening its strategic planning while

reducing emphasis on its recruitment process as a control mechanism. It

has focussed on two integrating mechanisms—centralization and

formalization—while reducing socialization among employees. In contrast,

LG has strengthened central control of socialization, while decentralizing

strategic planning and budgetary control.

16.12 Summary


• Evaluation and control of strategy is the final stage, and, is one of the

most vital stages, in the strategic management process of an organization.

Through the evaluation system, the management tries to demonstrate

how well the chosen strategy is implemented, and how successful or

otherwise the strategy is.



• Strategy evaluation and control criteria can be both pre-implementation

and post-implementation. Pre-emptive measures are always better than

reactive or corrective actions.

• Evaluation and control are not only pre-implementation or post-

implementation; these are also exercised during the strategy

implementation process itself. Many call these strategic controls.

• Post-implementation evaluation of strategy shows actual performance of

a company vis-a-vis targets—how successful or otherwise a strategy is.

Evaluation of performance is generally done through various quantitative

criteria—primarily financial and, also non-financial.

• The balanced scorecard approach to strategy evaluation combines both

quantitative and qualitative criteria/measures and incorporates

expectations of different stakeholders in relating performance to strategy.

• Six Sigma approach, conventionally known for minimizing errors or defects

in manufacturing or quality improvement, has evolved into a highly rigorous

tool for analysis and continuous improvement of corporate performance.

• Strategy evaluation and control is an elaborate, sometimes complex and,

can also be a sensitive process. It should, therefore, be balanced andfollow

some norms and standards.

16.13 Glossary

• Six Sigma: A quality-control program developed in 1986 by Motorola.

Initially, it emphasized cycle-time improvement and reducing manufacturing

defects to a level of no more than 3.4 per million.

• Strategic control: process of monitoring as to whether to various

strategies adopted by the organization are helping its internal environment

to be matched with the external environment.

• Strategic surveillance: A process by which a company can keep control

over organizational factors, industry factors and also major environmental

factors.


1. Explain the strategy evaluation and control process in terms of different

steps or stages involved.



2. Analyse various quantitative criteria for performance evaluation of

companies. Distinguish between the financial criteria and non-financial

criteria.

3. What role does qualitative evaluation criteria play in the strategy evaluation

process? Analyse.

4. Explain the balanced scorecard approach. Analyse the four perspectives

in the balanced scorecard approach.

5. Analyse Six Sigma as a performance evaluation and improvement method.

Discuss with reference to Citibank’s Six Sigma application for improving

customer satisfaction level.

6. What are the major characteristics of an effective strategy evaluation

system? Analyse these characteristics.

16.15 Answers


1. step-by-step

2. implementation

3. All the above

4. (d) Critical success factors (CSFs)

5. premise

6. strategic

7. Implementation control

8. False

9. True

10. Return on investment

11. balanced scorecard

12. financial, non-financial

13. True

14. False

15. Six Sigma

16. TQM



17. time dimension

18. dominate or curb

Answers Terminal Questions

1. The evaluation and control system is a step-by-step or sequential process.


2. Quantitative evaluation criteria or indicators of performance are primarily

financial, but, there are also some important non-financial criteria. Refer


3. Because of the inadequacy of quantitative criteria (and also its limitations

as discussed above), qualitative criteria are also used for evaluation of

corporate strategy. Refer to Section 16.6.2 for further details.

4. The balanced scorecard approach combines both quantitative and

qualitative criteria/measures of evaluation. Refer to Section 16.7 for further

details.

5. Six Sigma is conventionally known for minimizing errors or defects in

manufacturing or quality improvement. Refer to Section 16.9 for further

details.

6. Strategic analysts have laid down certain basic requirements which

evaluation should comply with to be effective. Refer to Section 16.10 for

further details.

16.16 References

1. Jauch, L R , R Gupta, W F Glueck. 2004. Business Policy and Strategic

Management. 6th ed. New Delhi: Frank Bros & Co.

2. Kaplan, R, and D Norton. ‘The Balanced Scorecard: Measures that Drive

Performance’. Harvard Business Review, January–February, 1992.

3. Kaplan, R, and D Norton. ‘Using the Balanced Scorecard as a Strategic

Management System’. Harvard Business Review, January–February,

1996.

4. Schreyogg, G, and H Steinmann. 1987. ‘Strategic Control: A New

Perspective’. Academy of Management Review, Vol. 12 (1).



5. Tilles, S. ‘How to Evaluate Corporate Strategy’. Harvard Business Review.

July–August, 1963.

Endnotes

1 Johnson and Scholes (1999) and others call these critical success factors (CSFs) and

Aaker ( 1995) and others call these key success factors (KSFs).2 J Dougery, T Fabregas, and others, ‘The California Wine Industry Report’, (Unpuhlished

Paper, 1991).3 G Schreyogg, and H Steinman. ‘Strategic Control: A New Perspective’, Academy of

Management Review, Vol. 12(1), 1987, 91–103.4 J A Pearce II, and R B Robinson, Strategic Management: Strategy Formulation and

Implementation, 3rd ed., (Homewood, Illinois: Richard D Irwin, 1988), 409.5 I I Mitroff, 'Crisis Management: Cutting through the Confusion', Sloan Management Review,

(Winter, 1988), 19.6 S Tilles, ‘How to Evaluate Corporate Strategy’, Harvard Business Review (July–August,

1963).7 F R David, Strategic Management: Concepts and Cases, 9th ed., (Pearson Education,

2003), 308.8 W F Glueck and L R L R Jauch, Business Policy and Strategic Management, 4th edn.,

(New York: McGraw-Hill, 1984), 399–402.

9 R S Kaplan, and D P Norton, ‘Using the Balanced Scorecard as Strategic Management

System’, Harvard Business Review, (January-February, 1996).10 M A Hitt et al. Management of Strategy: Concepts and Cases (South-Western Cengage

Learning, 2007), 329, 382.

11 Hitt et al. (2007), 329.12 For conceptual understanding of Six Sigma and other sigmas, refer any standard textbook

on TQM or quality management.13 These have been abstracted and adapted from J A Pearce II and R B Robinson Jr (2005),

377-7814 David, F R. 2003. Strategic Management: Concepts & Cases (2003), 312.

NOTES


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