MB 401 STRATEGIC MANAGEMENT
______________________________________________________________________
__
INSTRUCTIONS FOR PAPER-SETTER
The question paper will consist of Two parts, A and B. Part A will have 15 short answer
questions (40-60 words) of 2 marks each. Part B will have 12 long answer questions of 5
marks each.
The syllabus of the subject is divided into 3 sections I, II and III. The question paper will
cover
the entire syllabus uniformly. Part A will carry 5 questions from each section and Part B
will
carry 4 questions from each section.
INSTRUCTION FOR CANDIDATES
Candidates are required to attempt all questions from Part A and 9 questions of Part B
out of
12.
______________________________________________________________________
__
Section I
MBA Syllabus (August 2005) Page 19 of 45
Definition, nature, scope, and importance of strategy; and strategic management
(Business
policy). Strategic decision-making. Process of strategic management and levels at which
strategy operates. Role of strategists.
Defining strategic intent: Vision, Mission, Business definition, Goals and Objectives.
Internal Appraisal – The internal environment, organisational capabilities in various
functional
areas and Strategic Advantage Profile. Methods and techniques used for organisational
appraisal (Value chain analysis, Financial and non financial analysis, historical analysis,
Industry standards and benchmarking, Balanced scorecard and key factor rating).
Identification of Critical Success Factors (CSF).
Section II
Environmental Appraisal—Concept of environment, components of environment
(Economic,
legal, social, political and technological). Environmental scanning techniques- ETOP,
QUEST
and SWOT (TOWS).
Corporate level strategies-- Stability, Expansion, Retrenchment and Combination
strategies.
Corporate restructuring. Concept of Synergy.
Business level strategies—Porter’s framework of competitive strategies; Conditions,
risks and
benefits of Cost leadership, Differentiation and Focus strategies. Location and timing
tactics.
Concept, Importance, Building and use of Core Competence.
Section III
Strategic Analysis and choice—Corporate level analysis (BCG, GE Nine-cell, Hofer’s
product
market evolution and Shell Directional policy Matrix). Industry level analysis ; Porters’s
five
forces model. Qualitative factors in strategic choice.
Strategy implementation: Resource allocation, Projects and Procedural issues.
Organistion
structure and systems in strategy implementation. Leadership and corporate culture,
Values,
Ethics and Social responsibility. Operational and derived functional plans to implement
strategy. Integration of functional plans.
Strategic control and operational Control. Organistional systems andTechniques of
strategic
evaluation.
MB 401 STRATEGIC MANAGEMENT
______________________________________________________________________
__
INSTRUCTIONS FOR PAPER-SETTER
The question paper will consist of Two parts, A and B. Part A will have 15 short answer
questions (40-60 words) of 2 marks each. Part B will have 12 long answer questions of 5
marks each.
The syllabus of the subject is divided into 3 sections I, II and III. The question paper will
cover
the entire syllabus uniformly. Part A will carry 5 questions from each section and Part B
will
carry 4 questions from each section.
INSTRUCTION FOR CANDIDATES
Candidates are required to attempt all questions from Part A and 9 questions of Part B
out of
12.
______________________________________________________________________
__
Section I
MBA Syllabus (August 2005) Page 19 of 45
Definition, nature, scope, and importance of strategy; and strategic management
(Business
policy). Strategic decision-making. Process of strategic management and levels at which
strategy operates. Role of strategists.
Defining strategic intent: Vision, Mission, Business definition, Goals and Objectives.
Internal Appraisal – The internal environment, organisational capabilities in various
functional
areas and Strategic Advantage Profile. Methods and techniques used for organisational
appraisal (Value chain analysis, Financial and non financial analysis, historical analysis,
Industry standards and benchmarking, Balanced scorecard and key factor rating).
Identification of Critical Success Factors (CSF).
Section II
Environmental Appraisal—Concept of environment, components of environment
(Economic,
legal, social, political and technological). Environmental scanning techniques- ETOP,
QUEST
and SWOT (TOWS).
Corporate level strategies-- Stability, Expansion, Retrenchment and Combination
strategies.
Corporate restructuring. Concept of Synergy.
Business level strategies—Porter’s framework of competitive strategies; Conditions,
risks and
benefits of Cost leadership, Differentiation and Focus strategies. Location and timing
tactics.
Concept, Importance, Building and use of Core Competence.
Section III
Strategic Analysis and choice—Corporate level analysis (BCG, GE Nine-cell, Hofer’s
product
market evolution and Shell Directional policy Matrix). Industry level analysis ; Porters’s
five
forces model. Qualitative factors in strategic choice.
Strategy implementation: Resource allocation, Projects and Procedural issues.
Organistion
structure and systems in strategy implementation. Leadership and corporate culture,
Values,
Ethics and Social responsibility. Operational and derived functional plans to implement
strategy. Integration of functional plans.
Strategic control and operational Control. Organistional systems andTechniques of
strategic
evaluation.
MBA 401 Strategic Management Distance Education Course Material
February 2006
MBA 401
Strategic Management
Table of Contents
Section
Unit
I
Title
Page
Introduction, Definition, Meaning
I
1
Definition, Nature, Scope of Strategic Management
I
2
Defining Strategic Intent
I
3
Internal Appraisal Methods and Techniques
II
Environmental Assessment and Corporate Strategy
II
4
Environmental Appraisal
II
5
Corporate Level Strategies
II
6
Business Level Strategies
III
Strategic Choice and Implementation
III
7
Strategic Analysis and Choice
III
8
Strategy Implementation
III
9
Strategic Control and Operational Control
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
Section I: Introduction, Definition, Meaning
Unit: 1
Definition, Nature, Scope of Strategic Management
1.1 Introduction
This is the first and introductory unit to this Distance Education Course “MBA 401
Strategic Management”. In this Unit, we will outline basic and simple concepts
pertaining to the definition and meaning of Strategic Management. At the end of this
Unit, you should be a little bit more familiar with what Strategic Management is, and
what it can do for you.
1.2 Objectives
The basic purpose and objective of this Unit is to introduce basic concepts of Strategic
Management, define some common terms which you will come across later on in this
Text Book, and to explain the meanings of these basic and simple concepts.
1.3 Content Exposition
1.3.1
What is strategy?
The word “strategy” is derived from the Greek word “strategtia”, which was first used
around 400 BC. This word connotes the art and science of directing military forces. The
Webster’s Third New International Dictionary defines strategic as of “great or vital
importance within an organizational whole” (Webster, 1995). This suggests that strategic
matters may extend far down into an organization, although they are probably
concentrated at the top senior management level (Bower, 1982; Shirley, 1982). We shall
spend considerable time in defining and understanding the terms strategic, strategy, and
management later on, but for now, to introduce the topic of this book and of this chapter,
let us say the a strategy is “a plan or course of action which is of vital, pervasive, or
continuing importance to an organization as a whole”.
It is widely accepted that the rise of strategy as a major component of management can be
attributed to the increased scale and pace of change both within and outside
organizations. The environment of a business is now far less predictable than it was in the
past, especially due to the widespread proliferation of the Internet. Technological change
is happening more quickly, and technology is being applied more effectively within
organizations. Customers are more demanding, and are no longer as loyal to one supplier
as they used to be. Thanks to the globalization of national and trans-national economies,
the economies of the world are no longer as insulated from each other as they were
previously. Today, the competition for an organization need no longer arise from within
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
the same industry, or from within the same country. To add to these external changes and
challenges, management is now faced with an additional complication brought about due
to the organizations themselves being in a state of constant flux. Some organizations
have grown so large and so complex that it is beyond the scope of traditional theory to
manage them effectively. Should they be centralized? Or should they be broken up into
decentralized divisions? Many organizations now have an international dimension, as
mentioned above, that further adds to complexity. Employees are less compliant than
they used to be. They are now demanding “real” jobs and career paths, and want to have
a say in the overall direction and purpose of an organization.
A strategy is the means used to achieve the ends (objectives). A strategy, however, is not
just any plan. A strategy is a plan that is unified: it ties all parts of the enterprise together.
A strategy is comprehensive: it covers all major aspects of the enterprise. A strategy is
integrated: all the parts of the plan are compatible with each other and fit together well.
1.3.2 Definition
A strategy is a unified, comprehensive, and integrated plan that relates the strategic
advantages of the firm to the challenges of the environment, and one that is designed
to ensure that the basic objectives of the enterprise are achieved through proper
execution by the organization (Glueck and Jauch, 1984).
A strategy begins with a concept of how to use the resources of a firm most effectively in
a changing environment. It is similar to the concept of a “game plan” in sports. Before a
team goes onto the field, an effective coach examines a competitor’s past plans, and its
strengths and weaknesses. Then he examines his own team’s strengths and weaknesses.
The objective is to win the game with a minimum of risks and injuries to the players.
A game plan is not exactly a strategy, however. A game plan is oriented towards one
game. A strategy for a firm is a “long – run game plan”. A game plan is oriented against
one competitor only. A firm deals with a number of competitors simultaneously, and with
the government, suppliers, owners, labor unions, and others. A strategy is oriented toward
basic issues such as these:
•
•
•
•
•
•
What is our business?
What should it be?
What are our products and markets?
What can our firm do to accomplish objectives?
How do we leverage the advantages offered by the environmental parameters?
How do we stay clear of the threats posed by the environment?
Not only do the above issues have to be addressed as a part of a strategic plan, but these
decisions must also be implemented effectively. The coach may have an excellent game
plan, but the game is played on the field. For successful performance, then, the unified,
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
comprehensive, integrated plan must also include operational concerns. Table 1.1
highlights the differences between operational management and strategic management.
Table 1.1 Strategic Management and Operational Management
•
•
•
•
•
•
•
•
Strategic Management
Operational Management
Ambiguity
Complexity
Non-routine
Organization-wide
Fundamental
Significant change
Environment or
Expectations driven
* Routinized
* Operationally specific
* Small-scale change
* Resource driven
Many of these issues will be discussed in greater detail later on in this book, but, for now,
you will appreciate that the probability of success is enhanced with the combination of
good strategic planning and good strategic implementation. Good strategy with poor
implementation, or poor strategy with good implementation, is likely to lead to problems.
1.3.3
Central Concepts in Strategic Management
Strategic management is the responsibility of all the managers in an organization.
Although it would be considered the core function of senior manager, strategy concept
must also be a part of decision-making process of operating line and staff managers.
Every manager must understand how their activities add value to the overall operations of
the organization. This means that strategic management is just as important in the public
sector as it is in the private sector, and in large conglomerate organizations as it is in
single product/service organizations or autonomous divisions of organizations. As long as
there is a need for a manager to consider his or her operation within the context of a
changing external environment in order to achieve some stated organizational goal,
strategic management is necessary.
The unit outline and this prescribed text for this course describe strategic management as
“The process of identifying, choosing and implementing activities that will enhance the
long term performance of an organization by setting direction and by creating ongoing
compatibility between the internal skills and resources of an organization and the
changing external environment within which it operates”.
This definition clearly demonstrates the interface between the external environment and
the external characteristics of an organization which characterizes the nature of strategic
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
management. It also hints at the broad activities and process, which constitute strategic
management.
In order to reinforce the fundamental of strategic management, it is useful to briefly
describe the character of typical strategic decisions taken within organizations.
1.3.4 Collecting Information on an External Environment
Due to fact that strategy is largely concerned with adapting an organization to the
requirements of an ever changing environment, gathering reliable information on that
environment is an important strategic decision. It requires deciding on source and cost of
information concerning economic variables, social/cultural variables, technological
changes, competitor activities, the influence of lobby groups, alternative sources of
supply and so on.
1.3.5 Deciding the Scope of an Organisation
These decision are usually related to the information gathered on the external
environment and concern such issues as: ’what business are we in?’, ‘ what business
should we in?’ and ‘how can be get from where we are now to where we want to be?’.
These decisions cannot be taken on the basis on the ignorance and, therefore, substantial
environmental scanning needs to occur before the addressing such issues.
1.3.6 Acquiring Organizational Resources and the Skills to Match External
Opportunities and Threats
Unless an organizations has the capabilities to create the kind value that is necessary to
allow it to pursue ‘its business’ effectively, there is no point in analyzing the external
environment for opportunities and threats. This aspect of strategic decision making
usually involves a number of separate decision; for example, a decision to launch a new
or revised product in response to strong customer demand may involve the acquisition of
plant and equipment , the training of technical, clerical and the sales staff, new financing
arrangements, the location of new suppliers, and so on. In this respect, strategic decisions
have a ripple effect throughout the organization and set off a sequence of subsequent
operational decisions.
1.3.8 Deciding Major Investment Patterns for the Future
Strategic decisions are usually complex in nature. This is because they tend to be multidimensional (i.e. involve a large number of variables), they are based on partial ignorance
(no organization can be absolutely sure of likely trends and development in its external
internal environment) and they are important (they commit large amount of resources for
a substantial time period). Furthermore, there are seldom right or wrong answers to
strategy problems. Most strategic decision are based on managerial judgment using some
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
general guidelines. It is often difficult to tell whether an organization has made a ‘good’
or ‘bad’ strategic decision. If the organization is performing poorly, perhaps this is the
best it could achieve given the uncertainties and difficulties facing it in it’s internal and
external environments.
It has been found to be useful to consider the role of strategic management in
organizations. This is particularly true in light of growth in recent decade in multiindustry and multinational corporations, especially conglomerate enterprises such as
United Technologies, Allied corporation, and Textron. To facilitate the management of
such complex organization they are usually divided into strategic business units (SBU’s).
A strategic business unit is any part of business organization which is treated
separately for strategic management purposes. In general, an SBU engages in a single
line of business. Less frequently, several related operation are combined to form as SBU.
Many company set up their SBU’s as separate profile centers, sometimes giving them
virtual autonomy. Other companies exercise extensive control over their SBU’s,
enforcing corporate policies and standards down to very low levels in the organization.
Corporate-level strategic management is the management of activities which define the
overall character and mission of the organization, the product service segment it will
enter and leave, and the allocation of resources and management of synergies among its
SBUs. Corporate-level strategic management seeks to answer such questions as the
following: what are the purposes of organization? What image should be organization
project? What are the ideals and philosophies the organization desires its member to
process? What is the organization’s business or businesses? How can the organization’s
resources best be used to fulfill corporate purposes? Corporate-level strategic
management is primarily the responsibility of the organization’s top executives. The
primary focus of corporate-level strategic management is upon formulating and
implementing strategies to accomplish the organization’s mission.
Organizational
mission is the organization’s continuing purpose with regard to certain categories of
person- in short what is to be accomplished for whom.
SBU-level strategic management is the management of an SBU’s effort to compete
effectively in a particular line of business and to contribute to overall organizational
purposes. At the SBU level, strategic question include the following: what specific
products or services does the SBU produce? Who are the SBU’s customers or clients?
How can the SBU best compete in its particular product/services segment? How can SBU
best conform to the total organization’s ideals and philosophies and support
organizational purposes?
In general, SBU-level strategic management is the
responsibility of the second tier of executives, vice president or division head, in large
organizations. In single-SBU organizations, senior executive have both corporate and
SBU level responsibilities.
Within each SBU, practically every impotent organization is divided into two functional
subdivisions. Most business have separate department for production (or operation),
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
marketing, finance, and personal (or human resources management). Military
installations have supply, police, and maintenance department, among others. Churches
have preaching, education, and music ministries. Each of these functional subdivision is
typically vital to the success of the respective SBU and, therefore, to the total
organization. Functional-level strategic management is the management of relatively
narrow area of activity which is of vital, pervasive, or continuing importance to the total
organization. Strategic management of the finance function involves establishing
budgeting, accounting, and investment policies and the allocation of SBU cash flows. In
the personnel areas, policies for compensation, hiring and firing, training, and personnel
planning are of strategic concern. Strategic management at the functional level does not
include the supervision of day- to-day activities but mainly general direction and
oversight through setting and enforcing policies.
Although not a “level” per se, the concept of enterprise strategy is an important one.
Enterprise strategies answer the question: what do we stand for? Enterprise strategy is
the organization’s plan for establishing the desired relationship with other social
institution and stakeholder groups and maintaining the overall character of organization.
In this text, enterprise strategy will be treated as an aspect of mission determination. This,
in turn, is a function of corporate-level strategic management.
1.4 Revision Points
•
•
•
•
•
•
•
•
•
•
•
The word “strategy” is derived from the Greek word “strategtia”, which was first
used around 400 BC. This word connotes the art and science of directing military
forces. The Webster’s Third New International Dictionary defines strategic as of
“great or vital importance within an organizational whole” (1).
A strategy is oriented toward basic issues such as these:
What is our business?
What should it be?
What are our products and markets?
What can our firm do to accomplish objectives?
How do we leverage the advantages offered by the environmental parameters?
How do we stay clear of the threats posed by the environment?
Strategic management is the responsibility of all the managers in an organization.
Although it would be considered the core function of senior manager, strategy
concept must also be a part of decision-making process of operating line and staff
managers.
Due to fact that strategy is largely concerned with adapting an organization to the
requirements of an ever changing environment, gathering reliable information on
that environment is an important strategic decision.
Unless an organizations has the capabilities to create the kind value that is
necessary to allow it to pursue it’s business effectively, there is no point in
analyzing the external environment for opportunities and threats. This aspect of
strategic decision making usually involves a number of separate decision; for
example, a decision to launch a new or revised product in response to strong
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
•
•
•
•
•
February 2006
customer demand may involve the acquisition of plant and equipment , the
training of technical, clerical and the sales staff, new financing arrangements, etc.
As a result of decision concerning the scope of the organization and internal skills
and resources required to achieve the scope, strategic decision will have to be
taken to influence major investment patterns.
Corporate-level strategic management is the management of activities which
define the overall character and mission of the organization, the product service
segment it will enter and leave, and the allocation of resources and management
of synergies among its SBUs.
Organizational mission is the organization’s continuing purpose with regard to
certain categories of person- in short what is to be accomplished for whom.
SBU-level strategic management is the management of a SBUs effort to compete
effectively in a particular line of business and to contribute to overall
organizational purposes.
Organizational strategists are generally considered to be those persons, who
spend a large portion of their time on matters of vital or for-ranging importance to
the organization as a whole.
1.5 Summary
The word “strategy” is derived from the Greek word “strategtia”, which was first used
around 400 BC. This word connotes the art and science of directing military forces. The
Webster’s Third New International Dictionary defines strategic as of “great or vital
importance within an organizational whole” (1).
A strategy is oriented toward basic issues such as these:
•
What is our business?
•
What should it be?
•
What are our products and markets?
•
What can our firm do to accomplish objectives?
•
How do we leverage the advantages offered by the environmental parameters?
•
How do we stay clear of the threats posed by the environment?
•
Strategic management is the responsibility of all the managers in an organization.
Although it would be considered the core function of senior manager, strategy concept
must also be a part of decision-making process of operating line and staff managers.
Due to fact that strategy is largely concerned with adapting an organization to the
requirements of an ever changing environment, gathering reliable information on that
environment is an important strategic decision.
As a result of decision concerning the scope of the organization and internal skills and
resources required to achieve the scope, strategic decision will have to be taken to
influence major investment patterns. Corporate-level strategic management is the
management of activities which define the overall character and mission of the
organization, the product service segment it will enter and leave, and the allocation of
resources and management of synergies among its SBUs. Organizational mission is the
organization’s continuing purpose with regard to certain categories of person- in short
what is to be accomplished for whom. SBU-level strategic management is the
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
management of a SBUs effort to compete effectively in a particular line of business and
to contribute to overall organizational purposes. Organizational strategists are generally
considered to be those persons, who spend a large portion of their time on matters of vital
or for-ranging importance to the organization as a whole.
1.6 Check Your Progress
Revision Questions:
1. Describe your understanding of the terms “strategy” and “strategic management” in
your own words.
2. Give two formal definitions of strategic management, as outlined in this text book.
3. What are the various processes involve in the central theme of strategic management?
4. Outline the various levels at which strategic management can be practiced?
1.7 References
1. Webster, 1995. Third International Dictionary.
2. Bower, J. 1982. Business Policy in the 80’s. Academy of Management Review,
7:4, pp. 630 – 638.
3. Shirley, R.C. 1982. Limiting the Scope of Strategy: A Decision Based Approach.
Academy of Management Review, 7:2, pp. 262 – 268.
4. Glueck, W.F and Jausch, J.R. 1984. Buiseness Policy and Strategic Management,
Fourth Edition. McGraw Hill, International Student Edition, New Delhi.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
Unit 2 Defining Strategic Intent
2.1 Introduction
This Unit will highlight the importance of clearly identifying and defining the strategic
intent for any business. This would imply defining the business’ mission, vision, and
strategic objectives in clear and unambiguous terms.
2.2 Objectives
The overall objective of this Unit is to define the meaning and importance of an
organization’s mission, vision, and strategic objectives. After going through this Unit and
its related themes, you should be able to formulate the mission, vision, and objectives of
any organization that has a strategic purpose and intent.
2.3 Content Exposition
2.3.1 The Nature and Role of Mission and Vision Statements
Mission statements are now relatively commonplace. They are frequently found in
annual reports and financial statements, or hanging in board rooms and reception areas,
or even summarized in the form of a motto and printed on company documents and
invoices. A good mission statement is a strategic management tool rather than a piece of
organizational finery. The existence and use of mission statements can be closely linked
to the desire for participation, by employees, in the management of organizations. This
results in the need to imbue people with a common sense of purpose and method, hence
these become the central features of most mission statements.
The construction of a mission statement, however, is not an end in itself. The mission
statement should simply be the articulation of the sense of mission which already exists
within the organization. In this sense, mission statements are a useful means of
summarizing and reinforcing the central purpose and characteristics of an organization,
they cannot create those features. The creation of a sense of sense of mission is the
function of the entire strategic management process.
According to Peter Drucker, “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 purpose of the organization makes possible clear and realistic business objectives.”
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
2.3.2
February 2006
What is a Mission Statement?
A mission statement can be defined as ‘the unique character and purpose of the
organization which identifies the scope of its activities and which distinguishes it from
other of its type’. It summarises the character, identity and reason for existence of an
organization.
The impetus for the development of a mission statement usually comes from one to more
of the following sources:
•
•
•
•
•
Strategy consultants working in an organization normally require to see the
mission of that organization at the outset of their assignment. If the mission does
not exist, or has never been articulated formally, the consultants would
recommend this as an urgent requirement in their report.
Often one of the stakeholder groups in an organization created pressure for the
development of a mission statement by developing a public statement to this
effect. This, then, acts as an incentive for the company to broaden the statement
to include all other stakeholders, employees, customers, and so on) and to bind
these together with some formal statement of purpose.
Often the appointment of a new CEO results in the development of a mission
statement as that person grapples with the central features of the organization he
or she now controls.
Sometimes there is a ground swell of opinion from within the organization itself
(usually line managers) to clarify the direction of the organization. This results in
a series of management meetings and, ultimately, the development of a mission
statement.
Sometimes, the board of directors of an organization, or its senior management
team, decides during an extended planning session to formally articulate the
mission of the organization.
The mission statements arising as a result of these activities usually contain two central
characteristics. First, they contain a statement of the business of the organization (a
matter which is not as simple as it may sound—as we well see later in this topic). Second,
they contain a statement or series of statements designed to reinforce the culture of the
organization. Sometimes, a mission statement may contain only one of these two
characteristics, but this is unlikely to persist in the long-term as the organization develops
a better sense of what it is and how it goes about achieving its central purpose.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
2.3.3 What is the Vision for the Organization?
It is especially important for managers and executives in any organization to agree on the
basic long-term vision of the firm. The basic question attempted to be answered by a
vision statement is, “What do we want to become?” A clear vision provides the
foundation for generating a comprehensive mission statement. Many organizations have
both a vision and a mission statement, but the vision statement should be established first
and foremost. The vision statement should be brief, preferably one sentence, and must be
jointly developed using the inputs from as many managers as possible.
Hints on Creating a ‘Sense of Vision’
It is highly unlikely that any organization will be able to imbue all of its employees with
a cohesive sense of vision. Whilst some employees will be both emotionally and
rationally supportive of the organizational vision and its approach, others will be unable
to make the emotional bond. Many will simply be working for their own private motives
and will remain unconvinced about either rational or emotive reasons for developing a
sense of vision. This is entirely normal. However, the advantages of a sense of mission
are so great that even if an organization has only the support of its key managers and
small pockets of employees spread throughout the company, the benefits can be
substantial.
Although there are no hard and fast rules that will guarantee the success of developing a
sense of vision, the following provide some guidelines:
•
•
•
•
Do not expect short-term results. Creating a sense of mission in an organization
can take many years. Organizations in crisis (e.g. where a drastic turnaround
strategy is required) often create a sense of mission in a shorter time period out of
necessity.
Create and portray consensus within top management. Unless the senior managers
in an organization hold the same sense of vision and mission and unless they are
consistent in carrying this to the rest of the organization, a sense of mission may
never be fully achieved.
Actions speak louder than words. Employees in an organization are very quick to
identify double standards. It is important that managers act out the values
enunciated in their speeches. This is illustrated by the adage ‘what you say I can’t
hear, what you do is so loud!’
Top managers must move around the organization carrying the message.
Employees find it very difficult to identify with a message contained on a piece of
paper. Face-to-face communication by senior managers with groups of employees
is far more effective than a stream of memos. It also helps if the same managers
are seen for a continued period of time—the senior management team should
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
remain largely unchanged if possible (in the case of turnaround strategy this
means after the offending managers have been removed or negated).
•
Keep the message simple. It is important that senior managers identify the core
issues around which they wish to build a sense of mission. Over a period of time,
elaboration on these issues can become the focus of attention but, until such time,
a simple and clear focus is necessary.
From the preceding analysis it is clear that an organization’s mission is best articulated
after the organization has already achieved something in terms of a sense of vision. If a
mission statement is formulated in isolation from any sense of vision, employees will
adopt a very critical and cynical view of the process and purpose of the statement. In line
with this view is the belief that the mission statement should avoid making totally
unrealistic claims. For example, one Indian organization discovered that many of its
employees simply did not believe the claim in its mission statement that its aim was to be
‘the best in the world’ at its particular activity. These types of claims are also
unnecessary in view of the fact that most successful missions are built on processes (i.e.,
the way things are done) rather than goals (what we hope to achieve). Most organizations
find that if the processes used are appropriate, effective and efficient, the goals they hope
to achieve follow as a natural consequence without forming the center point of the
mission statement.
2.3.4 Importance of Vision and Mission Statements
The importance of vision and mission statements is fairly well documented in the
management literature (Rarick, 1995; Bart, 1998; King, 1979; Pearce, 1982; Carroll,
1984). However, the actual research results are not very flattering. Rarick (1995) found
that firms with a formal mission statement have twice the average return on shareholders
equity than those without a formal mission statement. Bart and Baetz (1998) found a
positive relationship between mission statements and organizational performance. A
recent edition of Business Week (2002) reports that firms which have mission statements,
have a 30 per cent higher return on certain financial measures, than those without such
statements. The extent of manager and employee involvement in developing vision and
mission statements can make a difference in business success. This Chapter provides a set
of guidelines for developing vision and mission statements in different types of
organizations. In actual practice, there are wide variations in the nature, composition, and
use of both vision and mission statements. King (1979) recommends that an organization
should carefully develop a written mission statement for the following reasons:
1. To ensure unanimity of purpose within the organization;
2. To provide a basis, or standard, for allocating organizational resources;
3. To establish a general tone, or organizational climate;
4. To serve as a focal point for individuals to identify with the organization’s
purpose and direction;
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5. To facilitate the translation of objectives into a work structure involving the
assignment of tasks to responsible elements within the organization; and
6. To specify organizational purposes and the translation of these purposes into
objectives in such a way that cost, time, and performance parameters can be
assessed and controlled.
Reuben Mark, the former CEO of Colgate Palmolive, maintains that a clear mission
statement must also be relevant in an international sense. “When it comes to rallying
everyone to the corporate banner, it is essential to push one vision globally rather than to
drive home different messages in different cultures. The trick is to keep the vision simple
but elevated: “We make the world’s fastest computers” or “Telephone services for
everyone.” You are never going to get anyone to charge the machine guns only for
financial objectives. It has got to be something that makes them feel better, feel a part of
something.”
Developing a comprehensive mission statement is important because divergent views
amongst managers can be revealed and resolved through the process. When we ask the
question, “What is our business?”, there is a high probability of raising a controversy.
Raising this question often reveals differences amongst the strategists in an organization.
Individuals who have worked together for a long time, and who think they know each
other, may suddenly realize that they are in fundamental disagreement. Negotiation,
compromise, and eventual agreement on important issues are needed before focusing on
more specific strategy formation activities.
2.3.5 Characteristics and Components of a Mission Statement
A Declaration of Attitude
A mission statement is a declaration of attitude and outlook more than a statement of
specific details. It is usually broad in scope for at least two major reasons. First, a good
mission statement allows for the generation and consideration of a range of feasible
alternative objectives and strategies without unduly stifling management creativity.
Excessive specificity would limit the potential of creative growth for the organization. On
the other hand, an overly general statement that does not exclude any strategy alternatives
could be dysfunctional.
Secondly, a mission statement needs to be broad to be able to effectively reconcile
differences, and to appeal to an organization’s stakeholders. Stakeholders include:
employees, managers, stockholders, board of directors, customers, suppliers, distributors,
creditors, governments (local, state, federal, etc.), unions, competitors, NGO’s, and the
general public. Stakeholders affect, and are affected by, the organization’s strategies; yet,
the concerns and claims of diverse constituencies vary, and often conflict with each other.
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A Customer Orientation
A good mission statement describes an organization’s purpose, customers, products or
services, markets, philosophy, and basic technology. Vern McGinnis (1981) has
suggested the following characteristics of a mission statement. It should:
1. Define what the organization is, and what the organization aspires to be;
2. Be limited enough to exclude some ventures, and broad enough to allow for
creative growth;
3. Distinguish a given organization from all others;
4. Serve as a framework for evaluating current and prospective activities; and
5. Be stated in sufficiently clear terms as to be widely understood throughout the
organization.
A good mission statement reflects the anticipation of customers. Rather than developing a
product and then trying to find customers, the tactical philosophy of an organization
should be to identify the needs of customer(s), and then try to provide a product or
service to meet those needs. Good mission statements identify the utility value of the
product(s) or service(s) of a firm to its customers.
A Declaration of Social Policy
The term “social policy” embraces the managerial philosophy and thinking at the highest
levels of an organization. For this reason, social policy affects the development of the
mission statement for a business. Social issues mandate that the firm considers not only
what it owes to its major stakeholders, but also what its responsibilities are to its
consumers, the environmentalists, minorities, other communities and groups.
The issue of social responsibility arises when a firm establishes its business mission. The
impact of society on business, and that of business on society, is becoming increasingly
more pronounced. Social policies directly affect a firm’s customers, products and
services, markets, technology, profitability, and public image. An organization’s social
policy should be integrated into all strategic management activities, including the
development of a mission statement.
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February 2006
2.3.6 The Components of a Mission Statement
A mission statement can contain any one or more of the following components—and a
good mission statement will contain them all:
•
•
•
•
•
•
A statement of organizational purpose
A description of generic strategy, i.e., the way in which the organization attempts
to achieve its purpose
Stakeholder promises
A statement of organizational values and beliefs
A statement of public image
A summary of standards and behaviors expected within the organization.
Organizational Purpose
The statement of organizational purpose usually describes in terms of products, markets
and technology, the business of the organization—its reason for existence. Given that
this element of the mission statement will have a strong influence on all the other
elements, it should form the core of the statement and should be very clearly articulated.
Generic Strategy
In order to achieve its fundamental purpose an organization needs to specify the means
for doing so. This part of the statement should be made in such a way that the
organization can differentiate itself from its competitors in the industry. For example, it
may focus on selected market niches, or it may be the cost leader in the industry, and so
on.
Stakeholder promises
Stakeholder promises specify the commitment of the organization to all persons or groups
who have an interest in that organization. They are important because different parts of
the organization deal directly with different stakeholders. The responsibility of each of
these should be specified for all to see, question, justify and (ultimately) abide by.
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Organizational Values and Beliefs
Organizational values and beliefs provide guidelines on how things are to be
accomplished in the organization, i.e., the principles which underlie the organization’s
operations.
Public Image
This element of the mission statement specifies how the organization wishes to be seen
by external constituents. Given the tremendous amount of damage which can be done by
bad publicity (sometimes unjustifiably) it is important that organizations specify the
behaviors and approaches to be used when dealing with external constituencies.
Standards and Behaviors
This section of the mission statement briefly identifies the major policies and procedures
which are to be used in implementing the strategy and which will reinforce the values and
beliefs of the organization. Note how the Qantas mission statement enunciates the way
that responsibility will be delegated, people will be held accountable, and participation in
decision-making will occur.
2.4 Revision Points
A good mission statement is a strategic management tool rather than a piece of
organizational finery. The existence and use of mission statements can be closely linked
to the desire for participation, by employees, in the management of organizations. These
result in the need to imbue people with a common sense of purpose and method, hence
these become the central features of most mission statements.
According to Peter Drucker, “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 purpose of the organization makes possible clear and realistic business objectives.”
A mission statement can be defined as ‘the unique character and purpose of the
organization which identifies the scope of its activities and which distinguishes it from
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
other of its type’. It summarizes the character, identity and reason for existence of an
organization.
The mission statements arising as a result of these activities usually contain two central
characteristics. First, they contain a statement of the business of the organization.
Second, they contain a statement or series of statements designed to reinforce the culture
of the organization.
It is especially important for managers and executives in any organization to agree on the
basic long-term vision of the firm. The basic question attempted to be answered by a
vision statement is, “What do we want to become?” A clear vision provides the
foundation for generating a comprehensive mission statement. Many organizations have
both a vision and a mission statement, but the vision statement should be established first
and foremost. The vision statement should be brief, preferably one sentence, and must be
jointly developed using the inputs from as many managers as possible.
From the preceding analysis it is clear that an organization’s mission is best articulated
after the organization has already achieved something in terms of a sense of vision. If a
mission statement is formulated in isolation from any sense of vision, employees will
adopt a very critical and cynical view of the process and purpose of the statement. In line
with this view is the belief that the mission statement should avoid making totally
unrealistic claims.
2.5 Summary
A good mission statement is a strategic management tool rather than a piece of
organizational finery. The existence and use of mission statements can be closely linked
to the desire for participation, by employees, in the management of organizations.
According to Peter Drucker, “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 purpose of the organization makes possible clear and realistic business objectives.”
A mission statement can be defined as ‘the unique character and purpose of the
organization which identifies the scope of its activities and which distinguishes it from
other of its type’. It summarizes the character, identity and reason for existence of an
organization. From the preceding analysis it is clear that an organization’s mission is best
articulated after the organization has already achieved something in terms of a sense of
vision. If a mission statement is formulated in isolation from any sense of vision,
employees will adopt a very critical and cynical view of the process and purpose of the
statement. In line with this view is the belief that the mission statement should avoid
making totally unrealistic claims.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
2.6 Check Your Progress
Revision Questions:
1. You may wish to perform the ‘organizational purpose’ exercise amongst your
own colleagues or management team by asking individuals (separately) ‘What is
the most important thing this organization must do in the next 3-5 years to make it
as successful as it could possibly be?’. How uniform/disparate are the answers?
What does this tell you about the need (or lack of need) for improved strategic
management in your organization?
2. What are the broad needs of your customers? Can you think of any ways in which
you are not currently helping them satisfy their needs? What further action do you
need to take?
3. Identify your current customer groups. Are there any further customer groups
which you have the capability to serve? What are they? What skills and resources
will you need to develop within the organization in order to satisfy these groups?
4. Can you isolate any distinctive characteristic, which differentiates your
organization from others of its type? (Note: whether this differentiation is on the
basis of customer groups, customer needs or technology, whether it is some
function which supports these aspects of organizational purpose.)
2.7 References
1. Rarick, C. and Vitton, J. 1995. Mission Statements make Cents. Journal of
Business Strategy, 16, pp. 11.
2. Bart, C. and Baetz, M. 1998. The Relationship Between Mission Statements and
Firm Performance: An Exploratory Study. Journal of Management Studies, 35,
pp. 823.
3. King, W.R. and Cleland, D.I. 1979. Strategic Planning and Policy. Van Norstrand
Reinhold, New York.
4. Pearce, J. 1982. The Company Mission as a Strategic Tool. Sloan Management
Review, 23, No. 3, pp. 74.
5. Carroll, A. and Hoy, F. 1984. Integrating Corporate Social Policy into Strategic
Management. Journal of Business Strategy, 4, No. 3, pp. 57.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
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Unit 3 Internal Appraisal Methods and Techniques
3.1 Introduction
Having seen the importance of strategic planning and decision making, and having
understood the importance of vision and mission statements, we will now, in this Unit,
turn our attention to the methods and techniques of internal appraisal of an organization.
The idea here is to provide you with the capabilities for assessing the strengths and
weaknesses of the organization. This will help you subsequently to formulate and
implement appropriate strategies for the specific organization.
3.2 Objectives
The basic objective in learning the contents of this Unit is to enable you to conduct an
internal appraisal of an organization. Specifically, we will teach you, in this Unit, the
various methods and techniques to conduct an internal organizational appraisal. These
techniques can be used by you to find out the strengths and weaknesses of the particular
organization.
3.3 Content Exposition
3.3.1 The Internal Assessment
Objectives:
•
•
•
•
•
•
•
•
Describe how to perform an internal strategic-management audit.
Discuss key interrelationships among the functional areas of business.
Compare and contrast culture in America versus other countries.
Identify the basic functions or activities that make up management, marketing,
finance/accounting, production/operations, research and development, and
computer information systems.
Explain how to determine and prioritize a firm's internal strengths and
weaknesses.
Explain the importance of financial ratio analysis.
Discuss the nature and role of computer information systems in strategic
management.
Develop an Internal Factor Evaluation (IFE) Matrix
Notable Quotes:
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MBA 401 Strategic Management Distance Education Course Material
February 2006
“An organization should approach all tasks with the idea that they can be
accomplished in a superior fashion”.
THOMAS WATSON, JR.
“By 2010, managers will have to handle greater cultural diversity. Managers will have
to understand that employees don't think alike about such basics as "handling
confrontation" or even what it means "to do a good day's work."
JEFFREY SONNENFELD
This Unit focuses on identifying and evaluating a firm's strengths and weaknesses in
the functional areas of business, including management, marketing, finance/accounting
production/operations, .research and development, and computer information system
Relationships among these areas of business are examined. Strategic implications
important functional area concepts are examined. The process of performing an internal
audit is described.
3.3.1.1 The Nature of an Internal Audit
All organizations have strengths and weaknesses in the functional areas of business. No
enterprise is equally strong or weak in all areas. Maytag, for example, is known for
excellent production and product design, whereas Procter & Gamble is known for superb
marketing. Internal strengths/weaknesses, coupled with external opportunities/threats
and a clear statement of mission, provide the basis for establishing objectives and
strategies. Objectives and strategies are established with the intention of capitalizing up
internal strengths and overcoming weaknesses! The internal-audit part of the strategy
management process is illustrated in Figure 3.1.
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3.3.1.2 Key Internal Forces
It is not possible a business policy text to review in depth all the material presented in
courses such as marketing, finance, accounting, management, computer information
systems and production/operations; there are many sub areas within these functions, such
as customer services ,warranties, advertising, packaging, and pricing under marketing
A firm’s strengths that cannot be easily matched or imitated by competitors are
called distinctive competencies. Building competitive advantages involves taking
advantage of distinctive competencies. For example, 3M exploits its distinctive
competence in research and development by producing a wide range of innovative
products. Strategies are designed in part to improve on a firm's weaknesses, turning them
into strengths, and may be even into distinctive competencies.
3.3.1.3 The Process of Performing an Internal Audit
The process of performing an internal audit closely parallels the process of performing
an external audit. Representative managers and employees from throughout the firm need
to be involved in determining a firm's strengths and weaknesses. The internal audit
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
Requires gathering and assimilating information about the firm's management, marketing,
finance/accounting, production/operations, research and development (R&D), and
computer information systems operations.
Compared to the external audit, the process of performing an internal audit provides
more opportunity for participants to understand how their jobs, departments, and
divisions fit into the whole organization. This is a great benefit because managers and
employees perform better when they understand how their work affects other areas and
activities in the firm.
Performing an internal audit requires gathering, assimilating, and evaluating
information about the firm's operations. Critical success factors, consisting of both
strengths and weaknesses can be identified and prioritized in the manner discussed.
The development of conclusions on the 10 to 20 most important organizational
strengths and weaknesses can be, as any experienced manager knows, a difficult
task, when it involves managers representing various organizational interests and
points of view. Developing a 20-page list of strengths and weaknesses could be
accomplished relatively easily, but a list of the 10 to 15 most important ones
involves significant analysis and negotiation. This is true because of the judgments
that are required and the impact which such a list will inevitably have as
it is used in the formulation, implementation, and evaluation of strategies.
A failure to recognize and understand relationships among the functional areas of
business can be detrimental to strategic management, and the number of those
relationships that must be managed increases dramatically with a firm's size, diversity,
geographic dispersion, and the number of products or services offered. Governmental and
nonprofit enterprises traditionally have not placed sufficient emphasis on relationships
among the business functions. For example, some state governments, utilities,
universities, and hospitals only recently have begun to establish marketing objectives and
policies that are consistent with their financial capabilities and limitations. Some firms
place too great an emphasis on one function at the expense of others.
During the first fifty years, successful firms focused their energies on optimizing
the performance of one of the principal functions: production/operations,
R&D, or marketing. Today, due to the growing complexity and dynamism of
the environment, success increasingly depends on a judicious combination of
several functional influences. This transition from a single function focus co a
multifunction focus is essential for successful strategic management.
Financial ratio analysis exemplifies the complexity of relationships among the functional
areas of business. A declining return on investment or profit margin ratio could
the result of ineffective marketing, poor management policies, research and development.
errors or a weak computer information system. The effectiveness of strategy formation,
implementation, and evaluation activities hinges upon a clear understanding
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MBA 401 Strategic Management Distance Education Course Material
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how major business functions affect one another. For strategies to succeed, a coordinated
effort among all the functional areas of business is needed.
3.3.2 Finance/Accounting
3.3.2.1 Financial Accounting Functions
According to James Van Horne, the functions of finance/accounting comprise three
decisions:
• the investment decision,
• the financing decision, and
• the dividend decision.
Financial ratio analysis is the most widely used method for determining an organization's
strengths and weaknesses in the investment, financing, and dividend areas. Because the
functional areas of business are so closely related, financial ratios can signal strengths or
weaknesses in management, marketing, production, research and development, and
computer information systems activities.
The investment decision, also called capital budgeting, is the allocation and reallocation
of capital resources to projects, products, assets, and divisions of an organization.
Once strategies are formulated, capital budgeting decisions are required to implement
strategies successfully. The financing decision concerns determining the best capital
structure for the firm and includes examining various methods by which the firm can
raise capital for example, by issuing stock, increasing debt, selling assets, or using a
combination of these approaches). The financing decision must consider both short-term
and long-term needs for working capital. Two key financial ratios that indicate whether
a firm's financing decisions have been effective are the debt-to-equity ratio and the debt
to-total-assets ratio.
Dividend decisions concern issues such as the percentage of earnings paid to stock
holders, the stability of dividends paid over time, and the repurchase or issuance of stock
Dividend decisions determine the amount of funds that are retained in a firm compared
to the amount paid out to stockholders. Three financial ratios that are helpful in
evaluating a firm's dividend decisions are the earnings-per-share ratio, the dividends-pershare ratio, and the price-earnings ratio. The benefits of paying dividends to investors
must be balanced against the benefits of retaining funds internally, and there is no set
formula on how to balance this trade-off. For the reasons listed here, dividends are
sometimes paid out even when funds could be better reinvested in the business or when
the firm has to obtain outside sources of capital:
1. Paying cash dividends is customary. Failure to do so could be thought of as a
stigma. A dividend change is considered a signal about the future.
2. Dividends represent a sales point for investment bankers. Some institutional
investors can buy only dividend-paying stocks.
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MBA 401 Strategic Management Distance Education Course Material
February 2006
3. Shareholders often demand dividends, even in companies with great opportunities
for reinvesting all available funds.
4. A myth exists that paying dividends will result in a higher stock price.
3.3.2.2 Basic Types of Financial Ratios
Financial ratios are computed from an organization's income statement and balance
sheet. Computing financial ratios is like taking a picture because the results reflect a
situation at just one point in time. Comparing ratios over time and to industry averages is
more likely to result in meaningful statistics that can be used to identify and evaluate
strengths and weaknesses.
Table 3.1 provides a summary of key financial ratios showing how each ratio is
calculated and what each ratio measures. However, all the ratios are not significant for all
industries and companies. For example, accounts receivable turnover and average
collection period are not very meaningful to a company that does cash receipts business.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
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MBA 401 Strategic Management Distance Education Course Material
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MBA 401 Strategic Management Distance Education Course Material
February 2006
Profitability ratios measure the firm’s ability to raise revenue larger than expenses of
production, i.e. the excess returns on the capital invested. They include:
• Return on stockholders' equity (ROE)
• Earnings per share
• Price-earnings ratio
Growth ratios measure the firm's ability to maintain its economic position in the
growth of the economy and industry. These include:
• Sales
• Net income
• Earnings per share
• Dividends per share
3.4 The Internal Factor Evaluation (IEF) Matrix
A summary step in conducting an internal strategic-management audit is to construct an
Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and
evaluates the major strengths and weaknesses in the functional areas of a business, and it
Also provides a basis for identifying and evaluating relationships among those areas.
Intuitive judgments are required in developing an IFE Matrix, so the appearance of a
scientific approach should not be interpreted to mean this is an all-powerful technique. A
thorough understanding of the factors included is more important than the actual
numbers.
3.4.1 IFE Matrix can be developed in five steps:
1. List key internal factors as identified in the internal-audit process. Use a total of
from ten to twenty internal factors, including both strengths and weaknesses. List
strengths first and then weaknesses. Be as specific as possible, using percentages,
ratios, and comparative numbers.
2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to
each factor. The weight assigned to a given factor indicates the relative importance of
the factor to being successful in the firm's industry. Regardless of
whether a key factor is an internal strength or weakness, factors considered to have
the greatest effect on organizational performance should be assigned the
highest weights. The sum of all weights must equal 1.0.
3. Assign a 1-to-4 rating to each factor to indicate whether that factor represents a
major weakness (rating = 1), a minor weakness (rating = 2), a minor strength
(rating = 3), or a major strength (rating = 4). Note that strengths must receive
a 4 or 3 rating and weaknesses must receive a 1 or 2 rating. Ratings are thus
company-based, whereas the weights in Step 2 are industry-based.
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MBA 401 Strategic Management Distance Education Course Material
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4. Multiply each factor's weight by its rating to determine a weighted score for each
variable. Sum the weighted scores for each variable to determine the total
weighted score for the organization.
Regardless of how many factors are included in an IFE Matrix, the total weighted
score from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total
weighted scores well below 2.5 characterize organizations that are weak internally,
whereas scores significantly above 2.5 indicate a strong internal position. Like the EFE
Matrix, an IFE Matrix should include from 10 to 20 key factors. The number of factors
has no effect upon the range of total weighted scores because the weights always sum to
1.0.
When a key internal factor is a both strength and a weakness, the factor should be
included twice in the IFE Matrix, and a weight and rating should be assigned to each
inclusion of the factor.
An example of an IFE Matrix for Circus Enterprises is provided in Table 3.2.
Note that the firm's major strengths are its size, occupancy rates, property, and long-range
Planning as indicated by the rating of 4. The major weaknesses are locations and recent
joint venture. The total weighted score of2.75 indicates that the firm is above average in
overall internal strength.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
3.4 Revision Points
The basic objective in learning the contents of this Unit is to enable you to conduct an
internal appraisal of an organization. Specifically, we have taught you, in this Unit, the
various methods and techniques to conduct an internal organizational appraisal. These
techniques can be used by you to find out the strengths and weaknesses of the particular
organization.
This Unit focuses on identifying and evaluating a firm's strengths and weaknesses in
the functional areas of business, including management, marketing, finance/accounting
production/operations, .research and development, and computer information system
Relationships among these areas of business are examined. Strategic implications
important functional area concepts are examined. The process of performing an internal
audit has been described.
All organizations have strengths and weaknesses in the functional areas of business. No
enterprise is equally strong or weak in all areas. Maytag, for example, is known for
excellent production and product design, whereas Procter & Gamble is known for superb
marketing. Internal strengths/weaknesses, coupled with external opportunities/threats
and a clear statement of mission, provide the basis for establishing objectives and
strategies. Objectives and strategies are established with the intention of capitalizing up
internal strengths and overcoming weaknesses!
It is not possible a business policy text to review in depth all the material presented in
courses such as marketing, finance, accounting, management, computer information
systems and production/operations; there are many sub areas within these functions, such
as customer services ,warranties, advertising, packaging, and pricing under marketing
A firm’s strengths that cannot be easily matched or imitated by competitors are
called distinctive competencies. Building competitive advantages involves taking
advantage of distinctive competencies. For example, 3M exploits its distinctive
competence in research and development by producing a wide range of innovative
products. Strategies are designed in part to improve on a firm's weaknesses, turning them
into strengths, and may be even into distinctive competencies.
The process of performing an internal audit closely parallels the process of performing
an external audit. Representative managers and employees from throughout the firm need
to be involved in determining a firm's strengths and weaknesses. The internal audit
Requires gathering and assimilating information about the firm's management, marketing,
finance/accounting, production/operations, research and development (R&D), and
computer information systems operations.
Compared to the external audit, the process of performing an internal audit provides
more opportunity for participants to understand how their jobs, departments, and
divisions fit into the whole organization. This is a great benefit because managers and
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
employees perform better when they understand how their work affects other areas and
activities in the firm.
Performing an internal audit requires gathering, assimilating, and evaluating
information about the firm's operations. Critical success factors, consisting of both
strengths and weaknesses can be identified and prioritized in the manner discussed.
The development of conclusions on the 10 to 20 most important organizational
strengths and weaknesses can be, as any experienced manager knows, a difficult
task, when it involves managers representing various organizational interests and
points of view. Developing a 20-page list of strengths and weaknesses could be
accomplished relatively easily, but a list of the 10 to 15 most important ones
involves significant analysis and negotiation. This is true because of the judgments
that are required and the impact which such a list will inevitably have as
it is used in the formulation, implementation, and evaluation of strategies.
3.5 Summary
All organizations have strengths and weaknesses in the functional areas of business. No
enterprise is equally strong or weak in all areas. Maytag, for example, is known for
excellent production and product design, whereas Procter & Gamble is known for superb
marketing. Internal strengths/weaknesses, coupled with external opportunities/threats
and a clear statement of mission, provide the basis for establishing objectives and
strategies. Objectives and strategies are established with the intention of capitalizing up
internal strengths and overcoming weaknesses!
A firm’s strengths that cannot be easily matched or imitated by competitors are
called distinctive competencies. Building competitive advantages involves taking
advantage of distinctive competencies. For example, 3M exploits its distinctive
competence in research and development by producing a wide range of innovative
products. Strategies are designed in part to improve on a firm's weaknesses, turning them
into strengths, and may be even into distinctive competencies.
3.6 Check Your Progress
Revision Questions
1. Give two examples of staffing strengths, and two examples of staffing
weaknesses, of an organization with which you are familiar.
2. Explain the difference between data and information in terms of each being useful
to strategists.
3. Explain why prioritizing the relative importance of strengths and weaknesses to
include in an IFE Matrix is an important strategic management activity.
4. How can delegation of authority contribute to effective strategic management.
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5. Conduct an informal and qualitative internal assessment of an organization that
you are familiar with.
6. Now conduct a formal and quantitative internal assessment of the same
organization as at 5 above, using the IFE Matrix.
3.7 References
1. Sharplin, A. 1985. Strategic Management. McGraw Hill Book Company, New
York
2. Johnson, G. and Scholes, K. 1995. Exploring Corporate Strategy: Text and Cases.
Prentice Hall of India, New Delhi.
3. Chi, P.S.K. 1999. Financial Performance and Survival of Multinational
Corporations in China. Strategic Management Journal, 20, No. 4, pp. 359 – 374.
4. Dass, P. and Parker, B. 1999. Strategies for Managing Human Resource
Diversity: From Resistance to Learning. The Academy of Management Executive,
13, No. 2, pp. 68 – 80.
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Section II: Environmental Assessment and Corporate Strategy
Unit 4
Environmental Appraisal
4.1 Introduction
In this Unit, we will look at the appraisal of the environment. Along with the Internal
Assessment of the capabilities of an organization, the Environmental Appraisal is the
most important activity to help in formulating strategies. Environmental Assessment is
the process of scanning and appraising the various opportunities and threats from the
external environment.
4.2 Objectives
The overall objective of this Unit is to expose you to the various nuances of conducting
an Environmental Appraisal. We will take you through the various mechanisms and
means of assessing opportunities and threats in the external environment. At the end of
studying and comprehending this Unit, you should be in a position to conduct an
Environmental Appraisal for your organization.
4.3 Content Exposition
4.3.1 The Nature of the Environment and the Economic Variables
We have, in the previous Units of this Text Book, stressed that the central feature of
strategic management is the ability of an organization to adapt to a changing external
environment and to do so with a strong sense of mission. This implies the need to have a
good understanding of what is happening both within and outside the organization.
However, this knowledge about the guiding philosophy of strategic management does not
assist in the practice of strategic management. In other words, how do we actually go
about:
• identifying external opportunities and threats;
• analyzing our organizational skills and resources;
• deciding what strategy to pursue on the basis of the preceding analysis;
• implementing a preferred strategy; and
• controlling our strategic performance?
An important step in this strategic planning process is the analysis of the external
environment. Without a full understanding of the trends occurring in each facet of the
external environment, an organization will have little idea of the opportunities and threats
confronting it. Managers, faced with the need to understand the effects of the
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environment, are dealing with a difficult problem. The formulation of strategy is, as we
just pointed out, concerned with matching the capabilities of an organization to its
environment. But there are two major problems. First, the notion of the environment
encapsulates very many different influences.. The difficulty is in understanding this
diversity in a way which can contribute to strategic decision making. The danger is a
“listing” approach to this problem – setting down all conceivable environmental
influences in an attempt to see what the organization has going for and against it. Long
lists can be generated for most organizations, but no useful, overall picture emerges. A
further danger is that attempts will be made to deal with environmental influences in a
“piecemeal” way, rather than identifying more fundamental and “holistic” approaches.
A second difficulty is that of uncertainty. Understanding the history of external
influences on an organization is problematic; understanding likely future influences is
significantly more difficult and unclear.
It should be recognized that the external environment is where the future of the
organization is made or lost. By creating strategic distinctiveness, which in the case of
private sector companies can be translated into sustainable competitive advantage,
organizations can add value for their customers and stakeholders. Accordingly, the
analysis of the external environment should perform three functions (Sharplin, 1985):
1. Align the activities of the company with the issues and trends, which have been
identified in the external environment;
2. Prevent other organizations from aligning their activities with these issues and
trends more effectively; and
3. Identify ways to predict future issues and trends more reliably.
4.3.2
Barriers to, and Components of, the Environmental Appraisal
Experience tells us that there are three major causes of neglect of, and barriers to,
external environmental analysis (Viljoen, 1994):
1. Organizational success: Many successful organizations lose their ability to
perform since they become infatuated with their own success. Nothing leads to
failure like success. This is usually caused by the belief that the organization is
such a runaway success in its industry that it need no longer concentrate on how
to improve itself. As a result, managers become inward looking, and focus on
internal issues only. They inevitably become less well aligned with the external
environment. Failure is inevitable.
2. Planning without business purpose: In many organizations, planning occurs as a
matter of routine, rather than as a result of a sense of business urgency. Thus,
though an analysis of the external environment may take place, management will
lack the focus on critical elements of the environment, simply because they are
not thinking strategically. A bland, routine document will be created, which will
have little impact on the nature and scope of business activities; and
3. Complex internal environments: As organizations grow, they become permeated
by complex systems, interrelationships, resource issues, and information
requirements. It is often a challenging enough task for managers to handle these
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issues, without being burdened by the additional complexities of external
environmental analysis. For this reason, the past decade has seen a concerted
effort by many large companies to break themselves into smaller operating units,
thereby simplifying their internal operations, and allowing their executives to
focus more on the external environment.
4.3.3
The Macro Environment
The macro environment is usually analyzed in terms of the physical/ geographical
environment within which an organization chooses (or is compelled) to operate. The
macro includes the regulatory environment, the economic environment, the socio-cultural
environment, and the technological environment. We will, in subsequent Sections of this
Unit, discuss these parameters in greater details. The elements of the macro environment
tend to change relatively seldom, compared to other elements of the external
environment, but when change occurs in these elements, it tends to be very significant for
the organization. The example of the impact of digital technology on the recording music
and video industry is a case in point.
4.3.3.1 Industry Analysis
The analysis of any given industry normally takes the form of analyzing suppliers, human
and physical resources, size and growth characteristics, structure, distribution channels,
costs, trends, and key success factors. For different organizations, some of these factors
will be more important than others. It is necessary that strategy managers identify the key
drivers of competitive advantage within their industry, and focus the analysis on these
drivers.
4.3.3.2 Customer Analysis
Customers can be analyzed from many perspectives. It is usual to include an analysis of
customers by market segment, and also to consider the specific circumstances which
surround the purchase decision of the customer. When an organization supplies to
industrial and trade customers (rather than the consumer), it is important to understand
the impact of the customer on the company. Customers should be evaluated in terms of
current sales and future potential sales, costs of doing business with that customer, and
the gross or net margin on the product or service provided. It is also important for an
organization to understand the impact it has on its customers’ business. This requires an
understanding of the strategic environment of the customer, and how the provision of our
goods and services enables the customer to fit successfully into that environment.
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4.3.3.3 Competitor Analysis
Analysis of competitors can take many forms. Of course, for some companies and
organizations such as those in the public sector, there may be no competitors at all.
Managers need to recognize that there is a growing trend for increased privatization and
free market competition, even in public sector companies. We will go into greater details
of the Porter’s “five forces model of competitive strategy” later on in this Text Book. But
managers must understand that they can influence the degree of competition they face
within their respective industries by formulating strategies which account for the impact
of the five forces.
4.3.3.4 Stakeholder Analysis
The preceding analyses of the macro environment, industry sector, customers, and
competitors will normally identify most of the stakeholders relevant to the operation of a
given organization. However, for some organizations, stakeholders outside of this set
exist, and need to be analyzed and evaluated carefully. These include shareholders,
employees, the community, unions, and government bodies.
4.3.4 An Integrated and Analytical Understanding of the Environment
Mangers typically cope with making sense of environmental influences by evolving, over
time, accepted wisdom about their industry, its environment, and what are sensible
responses to different situations. However, without discounting the value of such
accepted wisdom, we shall, in this Section, look at models which permit a more
integrated and analytical understanding of the environment. This can be done by a series
of steps, briefly introduced here, and summarized in Figure 4.1 below:
1. It is useful to take an initial view of the nature of the organization’s environment
in terms of how uncertain it is. Is it relatively static, or does it show signs of
change, and in what ways; and is it simple or complex to comprehend? This
determines the focus for the rest of the analysis. Given a fairly simple/ static
environment, a detailed and systematic historical analysis may be quite useful. If
the environment is in a dynamic state, a future-oriented perspective is more
sensible.
2. A second step might involve an auditing of environmental influences. Here the
aim is to identify those environmental influences that have affected the
organization’s development or performance in the past. It may also be helpful to
construct pictures, or scenarios, of possible futures, to consider the extent to
which strategies might need to change.
3. The third step moves the focus more towards an explicit consideration of
individual environmental influences. The general analysis already begun can be
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MBA 401 Strategic Management Distance Education Course Material
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enhanced by a structural analysis, which aims to identify the key forces at work
in the immediate competitive environment, and why they are significant.
4. The fourth step is to analyze the organization’s strategic position: that is , how it
stands in relation to those other organizations competing for the same resources,
or customers, as itself. The aim of such analysis is to develop an understanding of
opportunities, which can be built upon, and threats, which have to be overcome or
circumvented.
Assessing the nature of the environment
Audit environmental influences
Identify key competitive forces through structural analysis
Identify strategic position
Identify key opportunities and threats
Strategic Position
Figure 4.1 Steps in Environmental Analysis
4.3.5 Understanding the Environment and Economic Conditions
Since one of the main problems of strategic management is coping with uncertainty, it is
useful to begin an analysis of the environment by asking:
(a) How uncertain is the environment?
(b) What are the reasons for that uncertainty? and
(c) How should the uncertainty be dealt with?
As the environmental conditions become more dynamic and complex, environmental
uncertainty increases. Dynamism is to do with the rate and frequency of change. The idea
of complexity perhaps needs a little more explanation, because it may exist for a number
of different reasons, including the following:
• The diversity of environmental influences faced by an organization. For a multinational
company operating in different countries, uncertainty is increased due to the sheer
number of influences it has to cope with.
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• The amount of knowledge required to handle environmental influences. An example,
and one which will be presented as a Case Study later in this book, is the Indian Space
Research Organization (ISRO).
• Different environmental influences being inter-connected. If influences such as raw
material supplies, exchange rates, political changes, and consumer spending are not
independent of each other, but are related, it is more difficult to understand influence
patterns.
In simple/ static conditions, an organization faces an environment which is both relatively
straight forward to understand, and is not going to change significantly. Raw material
suppliers and some mass manufacturing companies are, perhaps good examples of such
conditions. The technical processes are fairly simple, there may be few competitors, and
the markets are relatively fixed over time. Another relevant category of examples is the
public sector “services” companies, which are in the business of “rationing” scarce
resources. These organizations are also protected from competitive influences. In such
circumstances, if change does occur, it is likely to be predictable; so it makes sense to
analyze the environment on a historical basis.
In situations of relatively low complexity, it may also be possible to identify some
predictors of environmental influences. For example, in public services, demographic
data, such as birth rates, may be used as lead indicators to determine the required
provision of schooling, health care, or social services.
In dynamic conditions, managers sensibly address themselves to considering the
environment of the future, not just that of the past. They may do this by intuitive means,
or they may employ more structured ways of making sense of the environment of the
future. With the growth and application of more sophisticated technology, there is an
increasing move to this condition of great uncertainty. The IT, computer, electronics, and
airlines industries are all in, or moving into, this dynamic/ complex situation. Complexity
as a result of diversity may be dealt with by ensuring that different parts of the
organization responsible for different aspects of diversity are separate, and given the
resources and authority to handle their own part of the environment.
An information processing approach to dealing with the complexity might entail an
attempt to model the effects of different environmental conditions on the organization,
especially its finances. In its extreme form, there may be an attempt to model the
environment itself; as for example, in the 1980’s, the Planning Commission of the
Government of India drew on a model of the Indian economy to draw a blueprint for the
liberalization, privatization, and globalization of the Indian economy. However, for most
organizations facing complexity, organizational responses are probably more useful than
extensive model building. Indeed, it can be argued that since the environment in which
the organizations operate, cannot be predicted other than for the short term, what really
matters is that managers are, essentially, sensitive to signals in their environment, and
flexible and intuitive in their responses.
4.3.6
Auditing Environmental Influences
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Table 4.1 shows some of the environmental influences important to organizations. It is
not intended to provide an exhaustive list, but it does give examples of ways in which
strategies of organizations are affected by such influences, and also indicates some of the
ways in which organizations seek to handle aspects of their environment (Narayanan,
1986).
Table 4.1
Examples of Environmental Influences
Economic forecasting:
Financial policy:
Economic factors and
restructuring
Capital markets
Environmental
sensing:
R&D policy:
Demographics
Technology
Socio-cultural
Labor policy and
industrial relations:
Demographic
forecasting:
Environmental
sensing:
Ecology
Marketing policy:
Purchasing policy:
Competition
Supplies
Lobbying:
Other environmental
factors …
Labor market
Other environmental
factors…
Government
Over time, different environmental influences will be more, or less, important to an
organization. For example, the economies of most western countries moved from
recession in the late 1970’s and early 1980’s, into recovery in the mid-1980’s, and back
into recession by 1990 So also the case with the Indian economy, which had a boon
period in the mid-1980’s, and another period of growth in the early 1990’s.
It might also be the case that the key environmental issues for one organization may not
be the same as that for another. A multinational corporation (MNC) might be primarily
concerned with government relations, since it may be operating plants or subsidiaries
within several different countries, with a variety of governments and policies. On the
other hand, for an export-led firm, exchange rates may be particularly important. For a
retailer, consumer tastes and behavior will be particularly important. A computer
manufacturer is likely to be concerned with the technical environment, which leads to
innovation, and perhaps the obsolescence of equipment. Public sector managers and civil
servants are likely to be especially concerned with public policy issues, public funding
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levels, and perhaps demographic changes. The point is that there is unlikely to be any
definitive set of environmental issues, which are equally important for all organizations,
and they will shift over time.
4.3.7
PEST Analysis
It is useful to consider, as a starting point, what environmental influences have been
particularly important in the past. One can also look at the extent to which there are
changes occurring, which may make any of these more or less significant in the future,
for the organization and its competitors.
Table 4.2 summarizes the questions to be asked, to ascertain the likely key forces at work
in the wider environment. The Political, Economic, Social, and Technological (PEST)
Analysis is a useful framework that can contribute to strategic analysis in the following
ways:
1. The headings in Table 4.2 can be used as a checklist when considering and
analyzing the different influences. However, though a great deal of information
can be generated in this way, it will be of limited value, if it remains a listing of
influences. It is more important to use a more quantitative approach, as will be
outlined in the next Section.
2. It may, however, be possible to identify a small number of key environmental
influences. For example, the hospital services in metropolitan cities face shortterm pressures in terms of patient care. Their ability to provide such care in the
long term is, however, critically dependent on how management reconcile
themselves to the convergence of at least three crucial factors. The first is
demographic, and concerns in particular the ageing population and, therefore, the
increasing demands on health care. The second is the rapid development of
technology, at one and the same time, prolonging life, improving the prospects of
health care, and yet demanding huge amounts of funding. The third factor is the
uncertain economic conditions under which the hospitals operate, when linked to
government policy on public funding. The point is that the strategy for health care
services must address these key influences. The danger is that managers, faced
with pressing day-to-day problems, as in the health services, fail to address them;
and strategy becomes short-term response rather than long-term development.
3. PEST analysis may also be used in identifying long-term drivers of change. For
example, given the increasing globalization of some markets, it is important to
identify the forces leading to this development. These include rapid change in
technology, leading to shorter life spans of such technology, and therefore to the
need for greater scales economies in its production and use. The world-wide
convergence of production systems and consumer tastes in markets such as radios,
television, and entertainment leads to the possibility of major economies being
gained through global manufacturing and marketing. The growth of the
multinational customer and competitor has also increased the shift towards global
markets, as has the overall pressure on business for cost reduction and, therefore,
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the search for scale economies. A further force for global development is the
worldwide search for raw materials, energy, and, often, skills to service global
business networks (Prahalad, 1990).
4. PEST analysis may also help to examine the differential impact of external
influences on organizations, either historically, or in terms of likely future impact.
This approach builds on the identification of key trends, or influences, and ask to
what extent such external influences will affect different organizations, perhaps
competitors, differently. Table 4.2 shows a simplified example of such an
analysis, which builds on the trends towards globalization of markets discussed
above. In this instance, the three key external influences have been identified as:
shorter technological life span, convergence of customer requirements, and
access to supplies and skills internationally. The three competitors, A, B, and C
have been assessed in terms of their differential ability to cope with these three
forces. The analysis shows that firm A is best placed to deal with technological
change, given its track record, investment in R&D, and its high market (readily
allowing for the cost of R&D to be offset). Like C, it is also well placed, given the
centralized product planning, to cope with the development of more convergent
customer requirements. However, both A and C are not as well placed as B, when
it comes to accessing supplies, particularly, technical skills worldwide. A and C
are much more centralized in procurement, and C, in particular, has a tradition of
recruiting and promoting from within its own national boundaries.
Table 4.2 A PEST Analysis of Environmental Influences
1. What environmental factors are
affecting the organization?
Political/ legal:
•
•
•
•
•
•
•
•
•
•
•
•
•
Monopolies legislation
Environmental protection laws
Taxation policy
Foreign trade regulations
Employment law
Government stability
Socio-cultural:
Population demographics
Income distribution
Social mobility
Lifestyle changes
Attitudes to work and leisure
Consumerism
Levels of education
2. Which of these are the most
important at the present time?
Economic:
•
•
•
•
•
•
•
•
•
•
•
•
•
Business cycles
GNP trends
Interest rates
Money supply
Inflation
Unemployment
Disposable income
Energy availability and cost
Technological:
Government spending on
research
Government and industry focus
of technological efforts
New discoveries/ development
Speed of technology transfer
Rates of obsolescence
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4.3.8 The Process of Performing an External Audit
The process of performing an external audit must involve as many managers and
employees as possible. As emphasized in earlier Units, involvement in the strategic
management process can lead to understanding and commitment from organizational
members. Individuals appreciate having the opportunity to contribute ideas and to gain a
better understanding of their firm's industry, competitors, and markets.
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To perform an external audit, a company first must gather competitive intelligence
and information about social, cultural, demographic, environmental, economic, political,
legal, governmental, and technological trends. Individuals can be asked to monitor
various sources of information such as key magazines, trade journals, and newspapers.
These persons can submit periodic scanning reports to a committee of managers charged.
with performing the external audit. This approach provides a continuous stream a
timely strategic information and involves many individuals in the external-audit process
The Internet provides another source for gathering strategic information, as do corporate,
university, and public libraries. Suppliers, distributors, salespersons, customers, and
competitors represent other sources of vital information.
Once information is gathered, it should be assimilated and evaluated. A meeting
or series of meetings of managers is needed to collectively identify the most important
opportunities and threats facing the firm. These key external factors should be listed on
flip charts or a blackboard. A prioritized list of these factors could be obtained by
requesting all managers to rank the factors identified, from 1 for the most important
opportunity /threat to 20 for the least important opportunity/threat. These key external.
factors can vary over time and by industry.
4.3.8.1 Economic Forces:
Economic factors have a direct impact on the potential attractiveness of various
strategies. (For example, as interest rates rise, then funds needed for capital expansion
become more costly or unavailable. Also, as interest rates rise, discretionary income
declines, and the demand for discretionary goods falls. As stock prices increase, the
desirability
of equity as a source of capital for market development increases. Also, as the market
rises, consumer and business wealth expands) A summary of economic variables that
often represent opportunities and threats for organizations are provided in Table 3-1.
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4.3.8.2 Social, Cultural, Demographic, and Environmental Forces:
Social, cultural, demographic, and environmental changes have a major impact upon
virtually all products, services, markets, and customers. Small, large, for-profit and
nonprofit
organizations in all industries are being staggered and challenged by the opportunities
and threats arising from changes in social, cultural, demographic, and environmental
variables.
4.3.8.3 Political, Governmental and Legal forces:
Federal, state, local, and foreign governments are major regulators, deregulators,
subsidizers, employers, and customers of organizations. Political, governmental, and
legal factors therefore can represent key opportunities or threats for both small and large
organizations. For industries and firms that depend heavily on government contracts or
subsidies, political forecasts can be the most important part of an external audit. Changes
in patent laws, antitrust legislation, tax rates, and lobbying activities can affect firms
significantly.
Some of the best Web sites for finding legal help on the Internet are listed below
www.findlaw.com
www.lawguru.com
www.freeadvice.com
www.nolo.com
www.lecdaw.com
www.abanet.org
Increasing global competition accents the need for accurate political, governmental
and legal forecasts. Many strategists will have to become familiar with political systems
in Europe and Asia and with trading currency futures. East Asian countries already
have become world leaders in labor-intensive industries. A world market has emerge
from what previously was a multitude of distinct national markets, and the climate for?
international business today would be much more favorable than yesterday. Mass
communication and high technology are creating similar patterns of consumption in
diverse
cultures worldwide! This means that many companies may find it difficult to survive by
relying solely on domestic markets.
It is no exaggeration that in an industry that is, or is rapidly becoming, global,
the riskiest possible posture is to remain a domestic competitor. The domestic
competitor will watch as more aggressive companies use this growth to capture
economies of scale and learning. The domestic competitor will then be faced
with an attack on domestic markets using different (and possibly superior)
technology, product design, manufacturing, marketing approaches, and
economies of scale. A few examples suggest how extensive the phenomenon of
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world markets have already become. Hewlett-Packard's manufacturing chain
reaches halfway around the globe, from well-paid, skilled engineers in
California to low-wage assembly workers in Malaysia. General Electric has survived
as a manufacturer of inexpensive audio products by centralizing its world
production in Singapore.
4.3.8.4 Technological Forces:
Revolutionary technological changes and discoveries such as superconductivity,
computer engineering, thinking computers, robotics, un staffed factories, miracle drugs
space communications, space manufacturing, lasers, cloning, satellite networks, fiber
optics, biometrics, and electronic funds transfer are having a dramatic impact on
organizations. Superconductivity advancements alone, which increase the power of
electric products by lowering resistance to current, are revolutionizing business
operations, especially in the transportation, Utility, health care, electrical, and computer
industries.
The Internet is acting as a national and even global economic engine that
spurring productivity, a critical factor in a country's ability to improve living standard,
The Internet is saving companies billions of dollars in distribution and transaction costs
from direct sales to self-service systems. For example, the familiar Hypertext Mark4
Language (HTML) is being replaced by Extensible Markup Language (XML).XML is a
programming language based on "tags" whereby a number represents a price, an invoice
a date, a zip code, or whatever. XML is forcing companies to make a major strategic
decision in terms of whether to open their information to the world in the form of
catalogs, inventories, prices and specifications, or attempt to hold their data closely to
preserve some perceived advantage. XML is reshaping industries, reducing prices,
accelerating global trade, and revolutionizing all commerce. Microsoft has reoriented
most of its software development around XML, replacing HTML.
The Internet is changing the very nature of opportunities and threats by altering,
the life cycles of products, increasing the speed of distribution, creating new products
and services, erasing limitations of traditional geographic markets, and changing the
historical trade-off between production standardization and flexibility. The Internet is
altering economies of scale, changing entry barriers, and redefining the relationship
between industries and various suppliers, creditors, customers, and competitors.
To effectively capitalize on information technology, a number of organizations art
establishing two new positions in their firms: chief information officer (CIO) and chief
technology officer (CTO). This trend reflects the growing importance of information
technology in strategic management. A CIO and CTO work together to ensure that
information needed to formulate, implement, and evaluate strategies is available where
and when it is needed.
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Organizations that traditionally have limited technology expenditures to what
they can fund after meeting marketing and financial requirements urgently need a
reversal in thinking. The pace of technological change is increasing and literally wiping
out business every day. An emerging consensus holds that technology management is one
of the key responsibilities of strategists. Firms should pursue strategies that take
advantage of technological opportunities to achieve sustainable, competitive advantages
in the market place.
Technology-based issues will underlie nearly every important decision that
strategists make. Crucial to those decisions will be the ability to approach technology
planning analytically and strategically. . . . technology can be planned
and managed using formal techniques similar to those used in business and
capital investment planning. An effective technology strategy is built on a penetrating
analysis of technology opportunities and threats, and an assessment of
the relative importance of these factors to overall corporate strategy.
4.3.8.5 Competitive Forces:
The top five U.S. competitors in four different industries are identified in Table 3-5. .
important part of an external audit is identifying rival firms and determining their
strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies.
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TABLE 4.3
February 2006
Key Questions About Competitors
1. What are the major competitors' strengths?
2. What are the major competitors' weaknesses?
3. What are the major competitors' objectives and strategies?
4. How will the major competitors most likely respond to current economic, social?
cultural, demographic, environmental, political, governmental, legal, technological,
and competitive trends affecting our industry?
5. How vulnerable are the major competitors to our alternative company strategies?
6. How vulnerable are our alternative strategies to successful counter attack by our major
competitors?
7. How are our products or services positioned relative to major competitors?
8. To what extent are new firms entering and old firms leaving this industry?
9. What key factors have resulted in our present competitive position in this industry?
10. How have the sales and profit rankings of major competitors in the industry changed
over recent years? Why have these rankings changed that way?
11. What is the nature of supplier and distributor relationships in this industry?
12. To what extent could substitute products or services be a threat to competitors in this?
industry?
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4.3.9
February 2006
Competitive Analysis: Porter’s Five Forces Model:
As illustrated in Figure 4.1, Porter's Five Forces Model of competitive analysis is a
widely used approach for developing strategies in many industries. The intensity of
competition among firms varies widely across industries. Intensity of competition is
highest in lower-return industries. According to Porter, the nature of competitiveness in
given industry can be viewed as a composite of five forces:
•
•
•
•
•
Rivalry among competitive firms
Potential entry of new competitors
Potential development of substitute products
Bargaining power of suppliers
Bargaining power of consumers
4.3.9.1 Rivalry among Competing Firms:
Rivalry among competing firms is usually the most powerful of the five competitive
forces. The strategies pursued by one firm can be successful only to the extent that they
provide competitive advantage over the strategies pursued by rival firms. Changes in
strategy by one firm may be met with retaliatory countermoves, such as lowering prices,
enhancing quality, adding features, providing services, extending warranties, and
increasing advertising. For example, Pepsi recently filed a complaint against Coca-cola or
"illegally trying to force competitors out of the European market." The complaint to the
European Union resulted in government raids at Coca-Cola offices in four European
countries seizing documents relating to the issue. Coca-Cola denied any wrong doing.
In the Internet world, competitiveness is fierce. Amazon.com watches in dismay as
customers use their site's easy-to-use format, in-depth reviews, expert recommendations,
and then bypass the cash register as they click their way over to deep-discounted sites
such as Buy.com to make their purchase. Buy.com CEO says, "The Internet is going to
shrink retailers’ margins to the point where they will not survive.
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The intensity of rivalry among competing firms tends to increase as the number of
Competition increases, as competitors become more equal in size and capability, as
demand for the industry's products declines, and as price cutting becomes common.
Rivalry also increases when consumers can switch brands easily; when barriers to leaving
the market are high; when fixed costs are high; when the product is perishable; when
rival firms are diverse in strategies, origins, and culture; and when mergers and
acquisitions are common in the industry. As rivalry among competing firms intensifies,
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industry profits decline, in some cases to the point where an industry becomes inherently
unattractive.
.
4.3.9.2 Potential Entry of New Competitors
Whenever new firms can easily enter a particular industry, the intensity of
competitiveness among firms increases. Barriers to entry, however, can include the need
to gain economies of scale quickly, the need to gain technology and specialized knowhow, the lack of experience, strong customer loyalty, strong brand preferences, large
capital requirements, lack of adequate distribution channels, government regulatory
policies, tariffs, lack of access to raw materials, possession of patents, undesirable
locations, counterattacks by entrenched firms, and potential saturation of the market.
Despite numerous barriers to entry, new firms sometimes enter industries with higherquality products, lower prices, and substantial marketing resources. The strategist job,
therefore, is to identify potential new firms entering the market, to monitor the new rival
firms' strategies, to counterattack as needed, and to capitalize on existing strengths and
opportunities.
4.3.9.2 Potential Development of Substitute Products
In many industries, firms are in close competition with producers of substitute products in
other industries. Examples are plastic container producers competing with glass,
paperboard and aluminum can producers, and acetaminophen manufacturers competing
with other manufacturers of pain and headache remedies. The presence of substitute
products put a ceiling on the price that can be charged before the consumers will switch
to the substitute product.
Competitive pressures arising from substitute products increase as the relative price
of substitute products declines and as consumers' switching costs decrease. The
competitive strength of substitute products is best measured by the inroads into market
share those products obtain, as well as those firms' plans for increased capacity and
market penetration.
4.3.9.3 Bargaining Power of Suppliers
The bargaining power of suppliers affects the intensity of competition in an industry,
especially when there is a large number of suppliers, when there are only a few good
substitute raw materials, or when the cost of switching raw materials is especially costly.
It often is in the best interest of both suppliers and producers to assist each other with
reasonable prices, improved quality, and development of new services, just-in-time
deliveries, and reduced inventory costs, thus enhancing long-term profitability for all
concerned.
Firms may pursue a backward integration strategy to gain control or ownership of
suppliers. This strategy is especially effective when suppliers are unreliable, too costly, or
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not capable of meeting a firm's needs on a consistent basis. Firms generally can negotiate
more favorable terms with suppliers when backward integration is a commonly used
strategy among rival firms in an industry.
4.3.9.4 Bargaining Power of Consumers
When customers are concentrated or large, or buy in volume, their bargaining power
represents a major force affecting intensity of competition in an industry. Rival firms may
offer extended warranties or special services to gain customer loyalty whenever the
bargaining power of consumers is substantial. Bargaining power of consumers also is
higher when the products being purchased are standard or undifferentiated. When this is
the case, consumers often can negotiate selling price, warranty coverage, and accessory
packages to a greater extent. Wal-Mart is the offline retailing champ. However, Wal-Mart
today is scrambling to improve its wal-mart.com Web site which looks prehistoric
compared to many new competitors hungry to seize retailing market share through online
entry into the industry. Even for a huge company such as Wal-Mart, the drastic increase
in bargaining power of consumers caused by Internet usage is a major external threat.
4.3.10 Forecasting Tools and Techniques:
Forecasting tools can be broadly categorized into two groups: quantitative techniques and
qualitative techniques. Quantitative forecasts are most appropriate when historical data
are available and when the relationships among key variables are expected to remain the
same in the future. The three basic types of quantitative forecasting techniques are
• Econometric models,
• Regression
• Trend extrapolation.
Econometric models are based simultaneous systems of regression equations that forecast
variables such as interest rates and money supply. With the advent of sophisticated
computer software, econometric models have become the most widely used approach for
forecasting economic variables.
All quantitative forecasts, regardless of statistical sophistication and complexity are based
on historical relationships among key variables. Linear regression, for example, are based
on the assumption that the future will be just like the past-which, of course, never is. As
historical relationships become less stable, quantitative forecasts becomes less accurate.
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The six basic qualitative approaches to forecasting are
(1)
(2)
(3)
(4)
(5)
(6)
Sales force estimates
Juries of executive opinion
Anticipatory surveys or market research
Scenario forecasts
Delphi forecasts
Brain storming.
Qualitative or judgmental forecasts are particularly useful when historical data are not
available or when constituent variables are expected to change significantly in the future.
Due to advancements in computer technology, quantitative forecasting techniques are
usually cheaper and faster than qualitative methods. Quantitative techniques, such as
multiple regression, can generate measures of error that allow a manager to estimate the
degree of confidence associated with a given forecast. Forecasting tools must be used
carefully or the results can be more misleading than helpful, but qualitative techniques
require more intuitive judgment than do quantitative ones. Managers sometimes
erroneously forecast what they would like to occur.
No forecast is perfect, and some forecasts are even wildly inaccurate. This fact accents
the need for strategists to devote sufficient time and effort to study the underlying bases
for published forecasts and to develop internal forecasts of their own. Key external
opportunities and threats can be effectively identified only through good forecasts
Accurate forecasts can provide major competitive advantages for organizations. Forecasts
are vital to the strategic-management process and to the success of organizations.
4.3.11 An External Factor Evaluation (EFE) Matrix
This allows strategists to summarize and evaluate economic, social, cultural,
demographic, environmental, political, governmental, legal, technological, and
competitive information. Illustrated in Table 4.5, the EFE Matrix can be developed in
five steps:
1 .List key external factors as identified in the external-audit process. Include a total of
from ten to twenty factors, including both opportunities and threats affecting the firm and
its industry. List the opportunities first and then the threats. Be as specific as possible,
using percentages, ratios, and comparative numbers whenever possible.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very
important). The weight indicates the relative importance of that factor to being successful
in the firm's industry. Opportunities often receive higher weights than
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threats, but threats too can receive high weights if they are especially severe 0:
threatening. Appropriate weights can be determined by comparing successful with
unsuccessful competitors or by discussing the factor and reaching a group consensus. The
sum of all weights assigned to the factors must equal 1.0.
3. Assign a l-to-4 rating to each key external factor to indicate how effectively the firm's
current strategies respond to the factor, where 4 = the response is superior 3 = the
response is above average, 2 = the response is average, and 1 = the response is poor.
Ratings are based on effectiveness of the firm's strategies. Ratings are thus companybased, whereas the weights in Step 2 are industry-based. It is important to note that both
threats and opportunities can receive a, 2, 3, or 4.
4. Multiply each factor's weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted SCORE for
the organization.
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4.3.12 The Competitive Profile Matrix (CPM)
The Competitive Profile Matrix (CPM) identifies a firm's major competitors and their
particular strengths and weaknesses in relation to a sample firm's strategic position. The
weights and total weighted scores in both a CPM and EFE have the same meaning.
However, the factors in a CPM include both internal and external issues; therefore, the
ratings refer co strengths and weaknesses, where 4 = major strength, 3 = minor strength,
2 = minor weakness, and 1 = major weakness. There are some important differences
between the EFE and CPM. First of all, the critical success factors in a CPM are broader;
they do not include specific or factual data and even may focus on internal issues. The
critical success factors in a CPM also are not grouped into opportunities and threats such
as they are in an EFE. In a CPM the ratings and total weighted scores for rival firms can
be compared to the sample firm. This comparative analysis provides important internal
strategic information.
A sample Competitive Profile Matrix is provided in Table 4.6. In this example,
advertising and global expansion are the most important critical success factors, as
indicated by a weight of 0.20. Avon's and L'Oreal's product quality are superior, as
evidenced by a rating of 4; L'Oreal's "financial position" is good, as indicated by a rating
of 3; Procter & Gamble is the weakest firm overall, as indicated by a total weighted score
of 2.80.
Other than the critical success factors listed in the example CPM, other factors often
included in this analysis include breadth of product line, effectiveness of sales
distribution, proprietary or patent advantages, location of facilities, production capacity
and efficiency, experience, union relations, technological advantages, and e-commerce
expertise.
A word on interpretation: Just because one firm receives a 3.2 rating and another receives
a 2.8 rating in a Competitive Profile Matrix, it does not follow that the first firm. is 20
percent better than the second? Numbers reveal the relative strength of firms, but their
implied precision is an illusion. Numbers are not magic. The aim is not to arrive at single
number, but rather to assimilate and evaluate information in a meaningful way that aids
in decision making.
Revision Points
An important step in this strategic planning process is the analysis of the external
environment. Without a full understanding of the trends occurring in each facet of the
external environment, an organization will have little idea of the opportunities and threats
confronting it. Managers, faced with the need to understand the effects of the
environment, are dealing with a difficult problem. The formulation of strategy is, as we
just pointed out, concerned with matching the capabilities of an organization to its
environment. But there are two major problems. First, the notion of the environment
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encapsulates very many different influences.. The difficulty is in understanding this
diversity in a way which can contribute to strategic decision making. The danger is a
“listing” approach to this problem – setting down all conceivable environmental
influences in an attempt to see what the organization has going for and against it.
It should be recognized that the external environment is where the future of the
organization is made or lost. By creating strategic distinctiveness, which in the case of
private sector companies can be translated into sustainable competitive advantage,
organizations can add value for their customers and stakeholders. Accordingly, the
analysis of the external environment should perform three functions (Sharplin, 1985):
1. Align the activities of the company with the issues and trends, which have been
identified in the external environment;
2. Prevent other organizations from aligning their activities with these issues and
trends more effectively; and
3. Identify ways to predict future issues and trends more reliably.
The macro environment is usually analyzed in terms of the physical/ geographical
environment within which an organization chooses (or is compelled) to operate. The
macro includes the regulatory environment, the economic environment, the socio-cultural
environment, and the technological environment.
The analysis of any given industry normally takes the form of analyzing suppliers, human
and physical resources, size and growth characteristics, structure, distribution channels,
costs, trends, and key success factors. For different organizations, some of these factors
will be more important than others. It is necessary that strategy managers identify the key
drivers of competitive advantage within their industry, and focus the analysis on these
drivers.
Customers can be analyzed from many perspectives. It is usual to include an analysis of
customers by market segment, and also to consider the specific circumstances which
surround the purchase decision of the customer. When an organization supplies to
industrial and trade customers (rather than the consumer), it is important to understand
the impact of the customer on the company. Customers should be evaluated in terms of
current sales and future potential sales, costs of doing business with that customer, and
the gross or net margin on the product or service provided.
Analysis of competitors can take many forms. Of course, for some companies and
organizations such as those in the public sector, there may be no competitors at all.
Managers need to recognize that there is a growing trend for increased privatization and
free market competition, even in public sector companies.
The preceding analyses of the macro environment, industry sector, customers, and
competitors will normally identify most of the stakeholders relevant to the operation of a
given organization. However, for some organizations, stakeholders outside of this set
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MBA 401 Strategic Management Distance Education Course Material
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exist, and need to be analyzed and evaluated carefully. These include shareholders,
employees, the community, unions, and government bodies.
Since one of the main problems of strategic management is coping with uncertainty, it is
useful to begin an analysis of the environment by asking:
(d) How uncertain is the environment?
(e) What are the reasons for that uncertainty? and
(f) How should the uncertainty be dealt with?
As the environmental conditions become more dynamic and complex, environmental
uncertainty increases. Dynamism is to do with the rate and frequency of change.
Summary
An important step in this strategic planning process is the analysis of the external
environment. Without a full understanding of the trends occurring in each facet of the
external environment, an organization will have little idea of the opportunities and threats
confronting it. It should be recognized that the external environment is where the future
of the organization is made or lost. By creating strategic distinctiveness, which in the case
of private sector companies can be translated into sustainable competitive advantage,
organizations can add value for their customers and stakeholders.
The macro environment is usually analyzed in terms of the physical/ geographical
environment within which an organization chooses (or is compelled) to operate. The
macro includes the regulatory environment, the economic environment, the socio-cultural
environment, and the technological environment. The analysis of any given industry
normally takes the form of analyzing suppliers, human and physical resources, size and
growth characteristics, structure, distribution channels, costs, trends, and key success
factors. Customers can be analyzed from many perspectives. It is usual to include an
analysis of customers by market segment, and also to consider the specific circumstances
which surround the purchase decision of the customer.
Analysis of competitors can take many forms. Of course, for some companies and
organizations such as those in the public sector, there may be no competitors at all.
Managers need to recognize that there is a growing trend for increased privatization and
free market competition, even in public sector companies.The preceding analyses of the
macro environment, industry sector, customers, and competitors will normally identify
most of the stakeholders relevant to the operation of a given organization. However, for
some organizations, stakeholders outside of this set exist, and need to be analyzed and
evaluated carefully. These include shareholders, employees, the community, unions, and
government bodies.
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Check Your Progress
Review Questions
1. Explain how to conduct an external strategic management audit.
2. Identify a recent economic, social, political, or technological Trend in India that
significantly affects financial institutions.
3. “Major opportunities and threats usually result from an interaction among key
environmental trends, rather than from a single external event or factor”. Discuss
this statement, with suitable examples from recent events in India.
4. Identify two industries experiencing rapid technological changes, and three
industries experiencing slow or little technological change. Compare and contrast
the environmental factors in these industries.
5. Use Porter’s five-forces model in evaluate competitiveness in the following
Indian industries: (a) Information Technology; (b) Biotechnology;
(c) Pharmaceuticals; (d) Banking; (e) Insurance and financial services;
(f) Airlines; (g) Power generation, transmission, and distribution
References
1. Viljoen, S. 1994. Strategic Management: Planning and Implementing Successful
Corporate Strategies. Longman Business and Professional Publishers, London
2. Sharplin, A. 1985. Strategic Management. McGraw Hill Book Company, New
York
3. David, F.R 1995. Strategic Management. Fifth Edition. Prentice Hall, New
Jersey.
4. Porter, M.E. 1980. Competitive Strategy: Techniques for Analyzing Industries and
Competitors. Free Press, London
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MBA 401 Strategic Management Distance Education Course Material
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Unit 5 Corporate Level Strategies
5.1 Introduction
We have, in the previous Units of this Text Book, studied the meaning, intent, and scope
of Strategic Management, and then looked at aspects of Internal Appraisal and External
Assessment. We shall from now on, devote our attention towards actual formulation and
implementation of strategies, in different scenario, industries, and enterprises. Let us start
by looking at Corporate Level Strategies.
5.2 Objectives
The overall objective of this Unit is to describe and explain the central concepts of
Corporate Level Strategies in an organization. The specific objectives are to go into
details of the formulation, implementation, and relevance of Corporate Level Strategies.
5.3 Content Exposition
5.3.1 What are Corporate Level Strategies?
It has been found to be useful to consider the strategic management in organization. This
is particularly true in light of growth in recent decade in multi-industry and multinational
corporations, especially conglomerate enterprises such as United Technologies, Allied
corporation, and Textron. To facilitate the management of such complex organization
they are usually divided into strategic business units (SBUs). A strategic business unit is
any part of business organization which is treated separately for strategic management
purposes. In general, an SBU engages in a single line of business. Less frequently,
several related operation are combined to form as SBU. Many company set up their
SBUs as separate profile centers, sometimes giving them virtual autonomy. Other
companies exercise extensive control over their SBUs, enforcing corporate policies and
standards down to very low levels in the organization. Figure 1.1 illustrates the
organizational level of a typical multibusiness corporation, with the corresponding levels
of strategic management.
Corporate-level strategic management is the management of activities which define the
overall character and mission of the organization, the product service segment it will
enter and leave, and the allocation of resources and management of synergies among its
SBUs. Corporate-level strategic management seeks to answer such questions as the
following: what are the purposes of organization? What image should be organization
project? What are the ideals and philosophies the organization desires its member to
process? What is the organization’s business or businesses? How can the organization’s
resources best to used to fulfill corporate purposes? As indicated in the Figure 1.1,
corporate-level strategic management is primarily the responsibility of the organization’s
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top executives. The primary focus of corporate-level strategic management is upon
formulating and implementing strategies to accomplish the organization’s mission.
Organizational mission is the organization’s continuing purpose with regard to certain
categories of person- in short what is to be accomplished for whom.
SBU-level strategic management is the management of a SBUs effort to compete
effectively in a particular line of business and to contribute to overall organizational
purposes. At the SBU level, strategic question include the following: what specific
products or services does the SBU produce? Who are the SBUs customer or clients? How
can the SBU best compete in its particular product/services segment? How can SBU best
conform to the total organization’s ideals and philosophies and support organizational
purposes? In general, SBU-level strategic management is the responsibility of the
second tier of executives, vice president or division head, in large organizations. In
single-SBU organizations, senior executive have both corporate and SBU level
responsibilities.
Within each SBU, practically every impotent organization is divided into two functional
subdivisions. Most business have separate department for production (or operation),
marketing, finance, and personal (or human resources management). Military
installations have supply, police, and maintenance department, among others. Churches
have preaching, education, and music ministries. Each of these functional subdivision is
typically vital to the success of the respective SBU and, therefore, to the total
organization. Functional-level strategic management is the management of relatively
narrow area of activity which is of vital, pervasive, or continuing importance to the total
organization. Strategic management of the finance function involves establishing
budgeting, accounting, and investment policies and the allocation of SBU cash flows. In
the personnel areas, policies for compensation, hiring and firing, training. And personnel
planning are of strategic concern. Strategic management at the functional level does not
include the supervision of day- to-day activities but mainly general direction and
oversight through setting and enforcing policies.
Although not a “level” per se, the concept of enterprise strategy is an important one.
Enterprise strategies answer the question: what do we stand for? Enterprise strategy is
the organization’s plan for establishing the desired relationship with other social
institution and stakeholder groups and maintaining the overall character of organization.
In the text, enterprise strategy will be treated as an aspect of mission determination. This,
in turn, is a function of corporate-level strategic management.
For most organization, it is difficult to say exactly who the organizational strategists are.
In ancient Greece, perhaps, strategy was determined by the general. For many companies
today, strategy clearly emanates from the top. Lee Iacocca, chairman of Chrysler
Corporation, Robert Goizueta, president and chief executive officer (CEO) of coca cola,
and Frank Borman, president and chairman of Eastern Airlines, seems to the shots, at
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MBA 401 Strategic Management Distance Education Course Material
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least from a strategic management standpoint. Many companies employ in-house staff
strategic management specialists, specialists who serve in a staff capacity to assist and
advise manager in strategic planning. Remember that strategic management involves
planning and doing, that is, formulation and implementation. Staff strategic management
specialists, where employed, are especially involved the planning, or formulation, phase.
At general Electric (GE), the corporate planning staff includes over 100 persons.
Many organizations retain consultant to assist in designing and implementing strategy.
Consultants are particularly useful for performing marketing and other research to
provide an informational base for strategic decision. Robinson (1982) believes that
consultant can play and effective part in strategic planning, even for small firms. In fact,
most small firms can no afford full time staff strategic management specialists. So,
employing consultants may be the most economical approach to strategic planning.
At least to a limited extent, every manager is an organizational strategist (Polyczynski
and Leniski, 1982). Each manager is responsible for activities related to continuing and
vital corporate objectives. It should be recognized that what is considered an
overwhelming matter by personnel director-for example; the size of annual personnel
department budget-might be relatively incidental from the standpoint of the total
organization. It is not a question of whether a matter is important to any one individual
that determines whether it is a strategic matter or not. It is the question of its important to
the organization as a whole and the degree to which it has continuing significance. So
Organizational strategist are generally considered to the those persons who spend a
large portion of their time on matters of vital or for-ranging importance to the
organization as a whole. In general, this includes the top two levels of management, inhouse staff specialists in strategic management, and retained consultants in the area.
5.3.2
Levels of Strategy
Strategies will exist at a number of levels in an organization. Individual may say they
have a strategy – to do with their career, for example. This may be relevant when
considering influences on strategies adopted by organizations, but it is not what is meant
by corporate strategy. Taking IKEA as an example, it is possible to distinguish at least
three levels of strategy. First, there is the corporate level: for IKEA has a many corporate
headquarters, the main issue seem to be about overall scope of the organization; how it is
to be run in structural and financial terms; and how resources are to be allocated to the
different IKEA operation across the world. As has been seen, all of these likely to be
influence by the overall mission of the organization. This was so in IKEA: the mission
was provide to good-value home furnishing around the world at such a price that the
majority of people were able to afford them. This is based on ideas of egalitarianism and
Swedish social value as much as on good business through the creation of large market.
IKEA truly believed it had something of value to offer the world. These are factor
common in other large organizations, although they might also be compressed concerned
at the corporate level with financial markets and issues of diversification and acquisition.
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The second level can be thought of in terms of competitive or business strategy. Here
strategy is about how to compete in a market: the concern are therefore about which
products or services should be developed and offered to which markets; and the extent to
which these meet customer need in such a way as to achieve the objective of organization
– perhaps long term profitability, market growth or measure of efficiency. So, whereas
corporate strategy involves decisions about the organization as a whole, business strategy
is more likely to be related to a unit within the whole.
For IKEA, issues of business strategy will, then, be concern with the sorts of store
product and service they should offer within the particular markets in which they
compete. This is good illustration of the way in which corporate level strategy interact
with business-level strategy. At the business level, IKEA strategy needs to take account
of the markets within which it is operating. However, at the corporate level IKEA
whishes to ensure that its image, ranges and style of operation are consistent throughout
the world. This matching of competitive- level strategy with corporate-level strategy is an
issue which exists for most multinational corporation. For IKEA, it is resolved by the
overall corporate mission and strategy guiding the choice of markets in which it operates,
and the sorts of product and service it provides. Other organization might choose to
compete differently in different markets, in which case the corporate influence may be
much less.
The third level of strategy is at the operating end of the organization. Here there are
operational strategies which are concerned with how the different functions of
enterprises – marketing, finance, manufacturing and so on – contribute to the other levels
of strategy. Such contributions will certainly be important in terms of how an
organization seeks to competitive. For example, in IKEA it was the crucial importance
that design, store operation and sourcing operations dovetailed into higher-level decisions
about product range and market entry. Indeed, in most businesses, successful business
strategies depend to a large extent on decision which are taken, or activity which occur, at
the operational level. The integration of operations and strategy is therefore of great
importance.
The ideas discussed in this Text Book are relevance to all three level of strategy but are
most significantly concerned with the areas of corporate and business strategy – what
businesses (or areas of operation) should an organization be in, and how should it
compete in each of these?
5.3.3
Guidelines for Effective Corporate Level Strategies
Failing to follow certain guidelines in conducting strategic management can foster
criticisms of the process and create problems for the organization. An integral part of
strategy evaluation must be to evaluate the quality of the strategic-management process.
Issues such as "Is strategic management in our firm a people process or paper process?"
should be addressed.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
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R. T. Lenz offered some important guidelines for effective strategic management:
Keep the strategic-management process as simple and no routine as possible.
Eliminate jargon and arcane planning language. Remember, strategic
management is a process for fostering learning and action, not merely a formal
system for control. To avoid routinized behavior, vary assignments, team
membership, meeting formats, and the planning calendar. The process should not
be totally predictable, and settings must be changed to stimulate creativity.
Emphasize word-oriented plans with numbers as back-up material. If managers
cannot express their strategy in a paragraph or so, they either do not have one or
do not understand it. Stimulate thinking and action that challenge the assumptions
underlying current corporate strategy. Welcome bad news. If strategy is not
working, managers desperately need to know it. Further, no pertinent information
should be classified as inadmissible merely because it cannot be quantified.
Build a corporate culture in which the role of strategic management and its
essential purposes are understood. Do not permit "technicians" to co-opt the
process. It is ultimately a process for learning and action. Speak of it in these
terms. Attend to psychological, social, and political dimensions, as well as the
information infrastructure and administrative procedures supporting it.
Comparing Business and Military Strategy
A strong military heritage underlies the study of strategic management. Terms
such as objectives, mission, strengths, and weaknesses first were formulated to
address problems on the battlefield. According to Webster's New World
Dictionary, strategy is "the science of planning and directing large-scale military
operations, of maneuvering forces into the most advantageous position prior to
actual engagement with the enemy." The word "strategy" comes from the Greek
strategos, referring to a military general and combining stratos (the army) and ago
(to lead). The history of strategic planning began in the military. A key aim of
both business and military strategy is "to gain competitive advantage." In many
respects, business strategy is like military strategy, and military strategists have
learned much over the centuries that can benefit business strategists today. Both
business and military organizations try to use their own strengths to exploit
competitors' weaknesses. If an organization's overall strategy is wrong
(ineffective), then all the efficiency in the world may not be enough to allow
success. Business or military success is generally not the happy result of
accidental strategies. Rather, success is the product of continuous attention to
changing external and internal conditions and the formulation and implementation
of insightful adaptations to those conditions. The element of surprise provides
great competitive advantages in both military and business strategy; information
systems that provide data on opponents' or competitors' strategies and resources
are also vitally important.
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Of course, a fundamental difference between military and business strategy is that
business strategy is formulated, implemented, and evaluated with an assumption
of competition, whereas military strategy is based on an assumption of conflict.
Nonetheless, military conflict and business competition are so similar that many
strategic-management techniques apply equally to both. Business strategists have
access to valuable insights that military thinkers have refined over time. Superior
strategy formulation and implementation can overcome an opponent's superiority
in numbers and resources.
5.3.4
Corporate Level Strategies in Action
Objectives should be quantitative, measurable, realistic, understandable, challenging,
hierarchical, obtainable, and congruent among organizational units. Each objective
should also be associated with a time line. Objectives are commonly stated in terms such
as growth in assets, growth in sales, profitability, market share, degree and nature of
diversification, degree and nature of vertical integration, earnings per share, and social
responsibility.
Long-term objectives are needed at the corporate, divisional, and functional levels in an
organization. They are an important measure of managerial performance. Many
practitioners and academicians attribute a significant part of U.S. industry's competitive
decline to the short-term, rather than long-term, strategy orientation of managers in the
United States. Arthur D. Little argues that bonuses or merit pay for managers today must
be based to a greater extent on long-term objectives and strategies.
Not Managing by Objectives
An unknown educator once said, "If you think education is expensive, try ignorance."
The idea behind this saying also applies to establishing objectives. Strategists should
avoid the following alternative ways to "not managing by objectives."
• Managing by Extrapolation-adheres to the principle "If it isn’t broke, don't fix
The idea is to keep on doing about the same things in the same ways because
things are going well.
• Managing by Crisis-based on the belief that the true measure of a really good
strategist is the ability to solve problems.
• Managing by Subjective-built on the idea that there is no general plan for which
Way to go and what to do; just do the best you can to accomplish what you think
should be done.
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5.3.4.1 Types of Strategies
Defined and exemplified in Table 5-2, alternative strategies that an enterprise
could pursue can be categorized into thirteen actions-forward integration, backward
integration, horizontal integration, market penetration, market development,
product development, concentric diversification, conglomerate diversification, horizontal
diversification, joint venture, retrenchment, divestiture, and liquidation-and a
combination strategy. Each alternative strategy has countless variations. For example,
market penetration can include adding salespersons, increasing advertising expenditures,
couponing and using similar actions to increase market share in a given geographic are
5.3.4.2 Integration Strategies
Forward integration, backward integration, and horizontal integration are sometimes
collectively referred to as vertical integration strategies. Vertical integration strategies
allow a firm to gain control over distributors, suppliers, and/or competitors.
Forward Integration
Forward integration involves gaining ownership or increased control over distributors or
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MBA 401 Strategic Management Distance Education Course Material
February 2006
retailers. Increasing numbers of manufacturers (suppliers) today are pursuing a forward
integration strategy by establishing Web sites to sell products directly to consumers.
This strategy is causing turmoil in some industries.
Six guidelines when forward integration may be an especially effective strategy are:
1. .When an organization's present distributors are especially expensive, or
unreliable, or incapable of meeting the firm's distribution needs.
2. When the availability of quality distributors is so limited as to offer a competitive
advantage to those firms that integrate forward.
3. When an organization competes in an industry that is growing and is expected to
continue to grow markedly; this is a factor because forward integration reduces an
organization's ability to diversify if its basic industry falters.
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4. When an organization has both the capital and human resources needed to manage
the new business of distributing its own products.
5. When the advantages of stable production are particularly high; this is a
consideration because an organization can increase the predictability of the
demand for its output through forward integration.
6. When present distributors or retailers have high profit margins; this situation
suggests gests that a company profitably could distribute its own products and
price them more competitively by integrating forward
Backward Integration
Both manufacturers and retailers purchase needed materials from suppliers. Backward
integration is a strategy of seeking ownership or increased control of a firm's suppliers.
This strategy can be especially appropriate when a firm's current suppliers are unreliable
too costly, or cannot meet the firm's need.
Global competition also is spurring firms to reduce their number of suppliers and
To demand higher levels of service and quality from those they keep. Although
traditionally relying on many suppliers to ensure uninterrupted supplies and low prices,
American firms now are following the lead of Japanese firms, which have far fewer
Suppliers and closer, long-term relationships with those few. "Keeping track of so many
suppliers onerous," says Mark Shimelonis of Xerox.
Seven guidelines when backward integration may be an especially effective strategy are:
•
When an organization's present suppliers are especially expensive, or unreliable.
incapable of meeting the firm's needs for parts, components, assemblies, or raw
materials
•
When the number of suppliers is small and the number of competitors is large.
•
When an organization competes in an industry that is growing rapidly; this
factor because integrative-type strategies (forward, backward, and horizontal)
reduce an organization's ability to diversify in a declining industry.
•
When an organization has both capital and human resources to manage the new
business of supplying its own raw materials.
•
When the advantages of stable prices are particularly important; this is a factor
because an organization can stabilize the cost of its raw materials and the
associated price of its product through backward integration.
•
When present supplies have high profit margins, which suggests that the business
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MBA 401 Strategic Management Distance Education Course Material
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of supplying products or services in the given industry is a worthwhile venture.
•
When an organization needs to acquire a needed resource quickly
Horizontal Integration
Horizontal integration refers to a strategy of seeking ownership of or increased control
over a firm's competitors. One of the most significant trends in strategic management
today is the increased use of horizontal integration as a growth strategy. Mergers,
acquisition and takeovers among competitors allow for increased economies of scale and
enhanced transfer of resources and competencies. Kenneth Davidson makes the following
observation about horizontal integration:
The trend towards horizontal integration seems to reflect strategists' misgivings
about their ability to operate many unrelated businesses. Mergers between
direct competitors are more likely to create efficiencies than mergers between
unrelated businesses, both because there is a greater potential for eliminating
duplicate facilities and because the management of the acquiring firm is more
likely to understand the business of the target.
Five guidelines when horizontal integration may be an especially effective strategy are:
•
When an organization can gain monopolistic characteristics in a particular area or
region without being challenged by the federal government for "tending
substantially" to reduce competition.
•
When an organization competes in a growing industry.
•
When increased economies of scale provide major competitive advantages.
•
When an organization has both the capital and human talent needed to
successfully manage an expanded organization
•
When competitors are faltering due to a lack of managerial expertise or a need for
particular resources that an organization possesses; note that horizontal
integration would not be appropriate if competitors are doing poorly because
overall industry sales are declining
5.3.4.3 Intensive Strategies
Market penetration, market development, and product development are sometimes
referred to as intensive strategies because they require intensive efforts to improve a
firm's competitive position with existing products.
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Market Penetration
A market penetration strategy seeks to increase market share for present products or
services present markets through greater marketing efforts. This strategy is widely used
alone and in combination with other strategies. Market penetration includes increasing
the number of salespersons, increasing advertising expenditures, offering extensive sales
promotion items or increasing publicity efforts.
Five guidelines when market penetration may be an especially effective strategy are:
1. when current markets are not saturated with a particular product or service
2. when the usage rate of present customers could be increased significantly
3. when the market shares of major competitors have been declining while total
industry sales have been increasing
4. when the correlation between dollar sales and dollar marketing expenditures
historically has been high
5. when increased economies of scale provide major competitive advantages
Market Development
Market development involves introducing present products or services into new
geographic areas. The climate for international market development is becoming more
favorable. In many industries, such as airlines, it is going to be hard to maintain a
competitive edge by staying close to home.
Six guidelines when market development may be an especially effective strategy
are:
•
When new channels of distribution are available that are reliable, inexpensive and
of good quality.
•
When an organization is very successful at what it does.
•
When new untapped or unsaturated markets exist.
•
When an organization has the needed capital and human resources to manage
expanded operations
•
When an organization has excess production capacity.
•
When an organization's basic industry rapidly is becoming global in scope
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Product Development.
Product development is a strategy that seeks increased sales by improving or modifying
present products or services. Product development usually entails large research and
development expenditures. The U.S. Postal Service now offers stamps and postage
the Internet, which represents a product development strategy. Called PC postage,
stamps can now be obtained online from various Web sites such as www.stamps.com
and then printed on an ordinary laser or inkjet printer.
Five guidelines when product development may be an especially effective strategy
to pursue are:
.
When an organization has successful products that are in the maturity stage of the
product life cycle; the idea here is to attract satisfied customers to try new
(improved) products as a result of their positive experience with the organization’s
present products or services.
•
When an organization competes in an industry that is characterized by rapid
technological developments.
•
When major competitors offer better-quality products at comparable prices.
•
When an organization competes in a high-growth industry.
•
When an organization has especially strong research and development capabilities
5.3.4.4 Diversification Strategies
There are three general types of diversification strategies: concentric, horizontal, and
conglomerate. Overall, diversification strategies are becoming less popular as
organizations are finding it more difficult to manage diverse business activities.
The 1980’s saw Michel Porter of the Harvard Business School says, "Management found
they couldn't manage the beast." Hence, businesses are selling, or closing, less profitable
divisions in order to focus on core businesses.
Concentric Diversification
Adding new, but related, products or services is widely called concentric diversification.
An example of this strategy is AT&T recently spending $120 billion acquiring cable
television companies in order to wire America with fast Internet service over cable rather
than telephone lines. AT&T's concentric diversification strategy has led the firm into
talks with American Online (AOL) about a possible joint venture or merger to provide
AOL customers cable access to the Internet.
Six guidelines when concentric diversification may be an effective strategy are provided
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MBA 401 Strategic Management Distance Education Course Material
February 2006
below:
•
When an organization competes in a no-growth or a slow-growth industry.
•
When adding new, but related, products significantly would enhance the sales
current products.
•
When new, but related, products could be offered at highly competitive prices.
•
When new, but related, products have seasonal sales levels that counterbalance an
organization's existing peaks and valleys.
•
When an organization's products are currently in the decline stage of the prod~
life cycle.
•
When an organization has a strong management team
Horizontal Diversification
Horizontal diversification refers to the process of adding new, unrelated products or
services for present customers.
This strategy is not as risky as conglomerate diversification because a firm already
should be familiar with its present customers.
Four guidelines when horizontal diversification may be an especially effective
strategy is:
•
when revenues derived from an organization's current products or services would
increase significantly by adding the new, unrelated products
•
when an organization competes in a highly competitive and/or a no-growth
industry, as indicated by low industry profit margins and returns
•
when an organization's present channels of distribution can be used to market the
new products to current customers
•
when the new products have countercyclical sales patterns compared to an
organization’s present products
Conglomerate Diversification
Conglomerate diversification is the process of adding new, unrelated products or
services. Some firms pursue conglomerate diversification based in part on an expectation
of profits from break up acquired firms and selling divisions piecemeal.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
Six guidelines when conglomerate diversification may be an especially effective
Strategy to pursue is listed below:
•
when an organization's basic industry is experiencing declining annual sales and
profits
•
when an organization has the capital and managerial talent needed to compete
successfully in new industry
when an organization has the opportunity to purchase an unrelated business that
an attractive investment opportunity
•
•
when there exists financial synergy between the acquired and acquiring firm;
note that a key difference between concentric and conglomerate diversification is
that the former should be based on some commonality in markets, products, or
technology, whereas the latter should be based more on profit considerations
•
when existing markets for an organization's present products are saturated
•
when antitrust action could be charged against an organization that historically
has concentrated on a single industry.
5.3.4.5 Defensive Strategies
In addition to integrative, intensive, and diversification strategies, organizations also
could pursue retrenchment, divestiture, or liquidation.
Retrenchment
Retrenchment occurs when an organization regroups through cost and asset reduction
reverse declining sales and profits. Sometimes called a turnaround or reorganization
strategy, retrenchment is designed to fortify an organization's basic distinctive
competence. During retrenchment, strategists work with limited resources and face
pressure from shareholders, employees, and the media. Retrenchment can entail selling
off land and buildings to raise needed cash, pruning product lines, closing marginal
businesses closing obsolete factories, automating processes, reducing the number of
employees, and instituting expense control systems.
Five guidelines when retrenchment may be an especially effective strategy to pursue
follows:
•
when an organization has a clearly distinctive competence, but has failed to meet
its objectives and goals consistently over time
•
when an organization is one of the weaker competitors in a given industry
•
when an organization is plagued by inefficiency, low profitability, poor employee
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MBA 401 Strategic Management Distance Education Course Material
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morale and pressure from stockholders to improve performance
•
when an organization has failed to capitalize on external opportunities, minimize
external threats, take advantage of internal strengths, and overcome internal
weaknesses
over time; that is, when the organization's strategic managers have failed
(and possibly will be replaced by more competent individuals)
•
when an organization has grown so large so quickly that major internal
reorganization is needed
Divestiture
Selling a division or part of an organization is called divestiture. Divestiture often is used
to raise capital for further strategic acquisitions or investments. Divestiture can be part of
an overall retrenchment strategy to rid an organization of businesses that are unprofitable
That require too much capital, or that do not fit well with the firm's other activities.
Six guidelines when divestiture may be an especially effective strategy to pursue
are listed below:
.
• When an organization has pursued a retrenchment strategy and it failed to
accomplish needed improvements.
•
When a division needs more resources to be competitive than the company can
provide.
•
When a division is responsible for an organization's overall poor performance.
•
When a division is a misfit with the rest of an organization; this can result from
radically different markets, customers, managers, employees, values, or needs
•
when a large amount of cash is needed quickly and cannot be obtained
reasonably from other sources
•
when government antitrust action threatens an organization
Liquidation
Selling all of a company's assets, in parts, for their tangible worth is called liquidation.
Liquidation is recognition of defeat and consequently can be an emotionally difficult
strategy. However, it may be better to cease operating than to continue losing large sums
of money.
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MBA 401 Strategic Management Distance Education Course Material
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Three guidelines when liquidation may be an especially effective strategy to pursue are as
follows:
1. When an organization has pursued both a retrenchment strategy and a divestiture
strategy, and neither has been successful;
2. When an organization's only alternative is bankruptcy; liquidation represents an
orderly and planned means of obtaining the greatest possible cash for an
organization's assets.
3. A company can legally declare bankruptcy first and then liquidate various
divisions to raise needed capital when the stockholders of a firm can minimize
their losses by selling the organization's assets
Revision Points
•
•
•
•
•
•
The overall objective of this Unit is to describe and explain the central concepts of
Corporate Level Strategies in an organization. The specific objectives are to go
into details of the formulation, implementation, and relevance of Corporate Level
Strategies.
Corporate-level strategic management is the management of activities which
define the overall character and mission of the organization, the product service
segment it will enter and leave, and the allocation of resources and management
of synergies among its SBUs.
Strategies will exist at a number of levels in an organization. Individual may say
they have a strategy – to do with their career, for example. This may be relevant
when considering influences on strategies adopted by organizations, but it is not
what is meant by corporate strategy.
Failing to follow certain guidelines in conducting strategic management can foster
criticisms of the process and create problems for the organization. An integral part
of strategy evaluation must be to evaluate the quality of the strategic-management
process. Issues such as "Is strategic management in our firm a people process or
paper process?" should be addressed.
Objectives should be quantitative, measurable, realistic, understandable,
challenging, hierarchical, obtainable, and congruent among organizational units.
Each objective should also be associated with a time line. Objectives are
commonly stated in terms such as growth in assets, growth in sales, profitability,
market share, degree and nature of diversification, degree and nature of vertical
integration, earnings per share, and social responsibility.
Alternative strategies that an enterprise could pursue can be categorized into
thirteen actions, namely: forward integration, backward integration, horizontal
integration, market penetration, market development, product development,
concentric diversification, conglomerate diversification, horizontal diversification,
joint venture, retrenchment, divestiture, and liquidation-and a combination
strategy.
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MBA 401 Strategic Management Distance Education Course Material
•
•
•
•
•
•
•
•
•
•
•
•
•
•
February 2006
Forward integration, backward integration, and horizontal integration are
sometimes collectively referred to as vertical integration strategies. Vertical
integration strategies allow a firm to gain control over distributors, suppliers,
and/or competitors.
Forward integration involves gaining ownership or increased control over
distributors or retailers. Increasing numbers of manufacturers (suppliers) today are
pursuing a forward integration strategy by establishing Web sites to sell products
directly to consumers.
Backward integration is a strategy of seeking ownership or increased control of a
firm's suppliers. This strategy can be especially appropriate when a firm's current
suppliers are unreliable too costly, or cannot meet the firm's need.
Horizontal integration refers to a strategy of seeking ownership of or increased
control over a firm's competitors. One of the most significant trends in strategic
management today is the increased use of horizontal integration as a growth
strategy.
Market penetration, market development, and product development are sometimes
referred to as intensive strategies because they require intensive efforts to
improve a firm's competitive position with existing products.
A market penetration strategy seeks to increase market share for present products
or services present markets through greater marketing efforts. This strategy is
widely used alone and in combination with other strategies.
Market development involves introducing present products or services into new
geographic areas. The climate for international market development is becoming
more favorable.
Product development is a strategy that seeks increased sales by improving or
modifying present products or services. Product development usually entails large
research and development expenditures.
There are three general types of diversification strategies: concentric, horizontal,
and conglomerate. Overall, diversification strategies are becoming less popular as
organizations are finding it more difficult to manage diverse business activities.
Adding new, but related, products or services is widely called concentric
diversification.
Adding new, unrelated products or services for present customers is referred to as
horizontal diversification. This strategy is not as risky as conglomerate
diversification because a firm already should be familiar with its present
customers.
Conglomerate diversification is the process of adding new, unrelated products or
services. Some firms pursue conglomerate diversification based in part on an
expectation of profits from break up acquired firms and selling divisions
piecemeal.
In addition to integrative, intensive, and diversification strategies, organizations
also could pursue retrenchment, divestiture, or liquidation.
Retrenchment occurs when an organization regroups through cost and asset
reduction to reverse declining sales and profits. Sometimes called a turnaround or
reorganization strategy, retrenchment is designed to fortify an organization's basic
distinctive competence.
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MBA 401 Strategic Management Distance Education Course Material
•
•
February 2006
Selling a division or part of an organization is called divestiture. Divestiture often
is used to raise capital for further strategic acquisitions or investments. Divestiture
can be part of an overall retrenchment strategy to rid an organization of
businesses that are unprofitable
Selling all of a company's assets, in parts, for their tangible worth is called
liquidation. Liquidation is recognition of defeat and consequently can be an
emotionally difficult strategy. However, it may be better to cease operating than
to continue losing large sums of money.
5.5 Summary
•
•
•
•
The overall objective of this Unit is to describe and explain the central concepts of
Corporate Level Strategies in an organization. The specific objectives are to go
into details of the formulation, implementation, and relevance of Corporate Level
Strategies.
Corporate-level strategic management is the management of activities which
define the overall character and mission of the organization, the product service
segment it will enter and leave, and the allocation of resources and management
of synergies among its SBUs.. An integral part of strategy evaluation must be to
evaluate the quality of the strategic-management process. Issues such as "Is
strategic management in our firm a people process or paper process?" should be
addressed. Objectives should be quantitative, measurable, realistic,
understandable, challenging, hierarchical, obtainable, and congruent among
organizational units. Each objective should also be associated with a time line.
Objectives are commonly stated in terms such as growth in assets, growth in
sales, profitability, market share, degree and nature of diversification, degree and
nature of vertical integration, earnings per share, and social responsibility.
Alternative strategies that an enterprise could pursue can be categorized into
thirteen actions, namely: forward integration, backward integration, horizontal
integration, market penetration, market development, product development,
concentric diversification, conglomerate diversification, horizontal diversification,
joint venture, retrenchment, divestiture, and liquidation-and a combination
strategy.
Forward integration, backward integration, and horizontal integration are
sometimes collectively referred to as vertical integration strategies. Vertical
integration strategies allow a firm to gain control over distributors, suppliers,
and/or competitors. Forward integration involves gaining ownership or increased
control over distributors or retailers. Backward integration is a strategy of seeking
ownership or increased control of a firm's suppliers. This strategy can be
especially appropriate when a firm's current suppliers are unreliable too costly, or
cannot meet the firm's need. Horizontal integration refers to a strategy of seeking
ownership of or increased control over a firm's competitors.
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
•
•
February 2006
Market penetration, market development, and product development are
sometimes referred to as intensive strategies because they require intensive efforts
to improve a firm's competitive position with existing products. A market
penetration strategy seeks to increase market share for present products or
services present markets through greater marketing efforts. This strategy is widely
used alone and in combination with other strategies. Market development involves
introducing present products or services into new geographic areas. The climate
for international market development is becoming more favorable. Product
development is a strategy that seeks increased sales by improving or modifying
present products or services. Product development usually entails large research
and development expenditures.
There are three general types of diversification strategies: concentric, horizontal,
and conglomerate. Adding new, but related, products or services is widely called
concentric diversification. Adding new, unrelated products or services for present
customers is referred to as horizontal diversification. Conglomerate
diversification is the process of adding new, unrelated products or services. In
addition to integrative, intensive, and diversification strategies, organizations also
could pursue retrenchment, divestiture, or liquidation. Retrenchment occurs when
an organization regroups through cost and asset reduction to reverse declining
sales and profits. Sometimes called a turnaround or reorganization strategy,
retrenchment is designed to fortify an organization's basic distinctive competence.
Selling a division or part of an organization is called divestiture. Divestiture often
is used to raise capital for further strategic acquisitions or investments. Divestiture
can be part of an overall retrenchment strategy to rid an organization of
businesses that are unprofitable. Selling all of a company's assets, in parts, for
their tangible worth is called liquidation. Liquidation is recognition of defeat and
consequently can be an emotionally difficult strategy. However, it may be better
to cease operating than to continue losing large sums of money.
1.6 Check Your Progress
Review Questions:
1. How does strategy formulation differ for a large organization versus a small
organization? For a profit versus a non-profit organization?
2. Give recent examples of market penetration, market development, and product
development.
3. Give recent examples of concentric diversification, horizontal diversification, and
conglomerate diversification.
4. Why is it not advisable for a corporate to pursue too many strategies at once?
5. Give recent examples of joint venture, retrenchment, divestiture, and liquidation.
6. Do you think that hostile takeovers are unethical? Why or why not?
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MBA 401 Strategic Management Distance Education Course Material
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Unit 6: Business Level Strategies
6.1 Introduction
In this Unit, we will look at the topic of Business Level Strategies. We will distinguish
between the topic of Corporate Level Strategies that we studied in the previous Unit, and
Business Level Strategies. At the end of this Unit, you will get an overall better
appreciation of the various facets of Strategic Management, in the business context.
6. 2 Objectives
The overall objective of this Unit is to explain the Topic of Business Level Strategies. We
will expect you to understand the general meaning of Business Level Strategies, and its
various applications. Specifically, this Unit will expose you to the intricacies and details
of the various aspects of Business Level Strategies.
6.3 Content Exposition
6.3.1 The Nature and Role of Business Level Strategies
Business Level Strategies are now relatively commonplace. They are frequently found in
annual reports and financial statements, or hanging in board rooms and reception areas,
or even summarized in the form of a motto and printed on company documents and
invoices. A good business level strategy is a strategic management tool rather than a
piece of organizational finery. The existence and use of business level strategies can be
closely linked to the desire for participation, by employees, in the management of
organizations. This results in the need to imbue people with a common sense of purpose
and method, hence these become the central features of most mission statements.
The construction of a business level mission statement, however, is not an end in itself.
The mission statement should simply be the articulation of the sense of mission which
already exists within the organization. In this sense, mission statements are a useful
means of summarizing and reinforcing the central purpose and characteristics of an
organization, they cannot create those features. The creation of a sense of sense of
mission is the function of the entire business level strategic management process.
According to Peter Drucker, “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 purpose of the organization makes possible clear and realistic business objectives.”
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What is a Business Level Strategy Statement?
A Business Level Strategic mission statement can be defined as ‘the unique character and
purpose of the business which identifies the scope of its activities and which
distinguishes it from others of its type’. It summarizes the character, identity and reason
for existence of a business.
The impetus for the development of a business level strategy usually comes from one to
more of the following sources:
•
•
•
•
•
Strategy consultants working in a business normally require to see the mission of
that business at the outset of their assignment. If the mission does not exist, or has
never been articulated formally, the consultants would recommend this as an
urgent requirement in their report.
Often one of the stakeholder groups in a business created pressure for the
development of a mission statement for the business by developing a public
statement to this effect. This, then, acts as an incentive for the business to
broaden the statement to include all other stakeholders, employees, customers,
and so on) and to bind these together with some formal statement of purpose.
Often the appointment of a new CEO results in the development of a business
mission statement as that person grapples with the central features of the
organization he or she now controls.
Sometimes there is a ground swell of opinion from within the business itself
(usually line managers) to clarify the direction of the organization. This results in
a series of management meetings and, ultimately, the development of a business
level mission statement.
Sometimes, the board of directors of the business, or its senior management team,
decide during an extended planning session to formally articulate the mission of
the business.
The business level strategic mission statements arising as a result of these activities
usually contain two central characteristics. First, they contain a statement of the business
of the organization (a matter which is not as simple as it may sound—as we well see later
in this Unit). Second, they contain a statement or series of statements designed to
reinforce the culture of the business. Sometimes, a mission statement may contain only
one of these two characteristics, but this is unlikely to persist in the long-term as the
business develops a better sense of what it is and how it goes about achieving its central
purpose.
6.3.3 What is the Vision for the Business?
It is especially important for managers and executives in any business to agree on the
basic long-term vision of the business. The basic question attempted to be answered by a
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vision statement is, “What do we want to become?” A clear vision provides the
foundation for generating a comprehensive mission statement. Many businesses have
both a vision and a mission statement, but the vision statement should be established first
and foremost. The vision statement should be brief, preferably one sentence, and must be
jointly developed using the inputs from as many managers as possible.
Hints on Creating a ‘Sense of Vision’
It is highly unlikely that any business will be able to imbue all of its employees with a
cohesive sense of vision. Whilst some employees will be both emotionally and rationally
supportive of the organizational vision and its approach, others will be unable to make
the emotional bond. Many will simply be working for their own private motives and will
remain unconvinced about either rational or emotive reasons for developing a sense of
vision. This is entirely normal. However, the advantages of a sense of mission are so
great that even if an business has only the support of its key managers and small pockets
of employees spread throughout the company, the benefits can be substantial.
Although there are no hard and fast rules that will guarantee the success of developing a
sense of vision, the following provide some guidelines:
•
•
•
•
•
Do not expect short-term results. Creating a sense of mission in a business can
take many years. Businesses in crisis (e.g. where a drastic turnaround strategy is
required) often create a sense of mission in a shorter time period out of necessity.
Create and portray consensus within top management. Unless the senior managers
in an business hold the same sense of vision and mission and unless they are
consistent in carrying this to the rest of the business, a sense of mission may never
be fully achieved.
Actions speak louder than words. Employees in an business are very quick to
identify double standards. It is important that managers act out the values
enunciate in their speeches. This is illustrated by the adage ‘what you say I can’t
hear, what you do is so loud!’
Top managers must move around the business carrying the message. Employees
find it very difficult to identify with a message contained on a piece of paper.
Face-to-face communication by senior managers with groups of employees is far
more effective than a stream of memos. It also helps if the same managers are
seen for a continued period of time—the senior management team should remain
largely unchanged if possible (in the case of turnaround strategy this means after
the offending managers have been removed or negated).
Keep the message simple. It is important that senior managers identify the core
issues around which they wish to build a sense of mission. Over a period of time,
elaboration on these issues can become the focus of attention but, until such time,
a simple and clear focus is necessary.
From the preceding analysis it is clear that a business’s mission is best articulated after
the business has already achieved something in terms of a sense of vision. If a mission
statement is formulated in isolation from any sense of vision, employees will adopt a very
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critical and cynical view of the process and purpose of the statement. In line with this
view is the belief that the mission statement should avoid making totally unrealistic
claims. For example, one Indian business discovered that many of its employees simply
did not believe the claim in its mission statement that its aim was to be ‘the best in the
world’ at its particular activity. These types of claims are also unnecessary in view of the
fact that most successful missions are built on processes (i.e., the way things are done)
rather than goals (what we hope to achieve). Most businesses find that if the processes
used are appropriate, effective and efficient, the goals they hope to achieve follow as a
natural consequence without forming the center point of the mission statement.
6.3.4 Importance of Business Level Strategy Statements
The importance of Business Level Strategy statements is fairly well documented in the
management literature (Rarick, 1991; Bart, 1996; King, 1979; Perace, 1982; Carroll,
1984). However, the actual research results are not very flattering. Rarick (1991) found
that businesses with a formal mission statement have twice the average return on
shareholders equity than those without a formal mission statement. Bart and Baetz (1996)
found a positive relationship between mission statements and business performance. A
recent edition of Business Week (2002) reports that businesses which have mission
statements, have a 30 per cent higher return on certain financial measures, than those
without such statements. The extent of manager and employee involvement in developing
vision and mission statements can make a difference in business success. This Chapter
provides a set of guidelines for developing strategic mission and vision statements in
different types of businesses. In actual practice, there are wide variations in the nature,
composition, and use of both vision and mission statements. King (1979) recommends
that a business should carefully develop a written mission statement for the following
reasons:
1. To ensure unanimity of purpose within the business;
2. To provide a basis, or standard, for allocating business resources;
3. To establish a general tone, or a business climate;
4. To serve as a focal point for individuals to identify with the business’s purpose
and direction;
5. To facilitate the translation of objectives into a work structure involving the
assignment of tasks to responsible elements within the business; and
6. To specify organizational purposes and the translation of these purposes into
objectives in such a way that cost, time, and performance parameters can be
assessed and controlled.
Reuben Mark, the former CEO of Colgate Palmolive, maintains that a clear business
strategy statement must also be relevant in an international sense. “When it comes to
rallying everyone to the corporate banner, it is essential to push one vision globally rather
than to drive home different messages in different cultures. The trick is to keep the vision
simple but elevated: “We make the world’s fastest computers” or “Telephone services for
everyone.” You are never going to get anyone to charge the machine guns only for
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financial objectives. It has got to be something that makes them feel better, feel a part of
something.”
Developing a comprehensive mission statement is important because divergent views
amongst managers can be revealed and resolved through the process. When we ask the
question, “What is our business?”, there is a high probability of raising a controversy.
Raising this question often reveals differences amongst the strategists in a business.
Individuals who have worked together for a long time, and who think they know each
other, may suddenly realize that they are in fundamental disagreement. Negotiation,
compromise, and eventual agreement on important issues are needed before focusing on
more specific strategy formation activities.
6.3.5 Characteristics and Components of a Business Level Strategic Mission
Statement
A Declaration of Attitude
A mission statement is a declaration of attitude and outlook more than a statement of
specific details. It is usually broad in scope for at least two major reasons. First, a good
mission statement allows for the generation and consideration of a range of feasible
alternative objectives and strategies without unduly stifling management creativity.
Excessive specificity would limit the potential of creative growth for the business. On the
other hand, an overly general statement that does not exclude any strategy alternatives
could be dysfunctional.
Secondly, a mission statement needs to be broad to be able to effectively reconcile
differences, and to appeal to an business’s stakeholders. Stakeholders include:
employees, managers, stockholders, board of directors, customers, suppliers, distributors,
creditors, governments (local, state, federal, etc.), unions, competitors, NGO’s, and the
general public. Stakeholders affect, and are affected by, the organization’s strategies; yet,
the concerns and claims of diverse constituencies vary, and often conflict with each other.
A Customer Orientation
A good mission statement describes an business’s purpose, customers, products or
services, markets, philosophy, and basic technology. Vern McGinnis (1981) has
suggested the following characteristics of a mission statement. It should:
1. Define what the business is, and what the business aspires to be;
2. Be limited enough to exclude some ventures, and broad enough to allow for
creative growth;
3. Distinguish a given business from all others;
4. Serve as a framework for evaluating current and prospective activities; and
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5. Be stated in sufficiently clear terms as to be widely understood throughout the
business.
A good mission statement reflects the anticipation of customers. Rather than developing a
product and then trying to find customers, the tactical philosophy of a business should be
to identify the needs of customer(s), and then try to provide a product or service to meet
those needs. Good mission statements identify the utility value of the product(s) or
service(s) of a firm to its customers.
A Declaration of Social Policy
The term “social policy” embraces the managerial philosophy and thinking at the highest
levels of a business. For this reason, social policy affects the development of the mission
statement for a business. Social issues mandate that the firm considers not only what it
owes to its major stakeholders, but also what its responsibilities are to its consumers, the
environmentalists, minorities, other communities and groups.
The issue of social responsibility arises when a firm establishes its business mission. The
impact of society on business, and that of business on society, is becoming increasingly
more pronounced. Social policies directly affect a firm’s customers, products and
services, markets, technology, profitability, and public image. An business’s social policy
should be integrated into all strategic management activities, including the development
of a mission statement.
6.3.6 The Components of a Business Mission Statement
A mission statement can contain any one or more of the following components—and a
good mission statement will contain them all:
•
•
•
•
•
•
A statement of the business’s purpose
A description of generic strategy, i.e., the way in which the organization attempts
to achieve its purpose
Stakeholder promises
A statement of the business values and beliefs
A statement of public image
A summary of standards and behaviors expected within the business.
Business Purpose
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The statement of business purpose usually describes in terms of products, markets and
technology, the business of the business—its reason for existence. Given that this
element of the mission statement will have a strong influence on all the other elements, it
should form the core of the statement and should be very clearly articulated.
Generic Strategy
In order to achieve its fundamental purpose, a business needs to specify the means for
doing so. This part of the statement should be made in such a way that the business can
differentiate itself from its competitors in the industry. For example, it may focus on
selected market niches, or it may be the cost leader in the industry, and so on.
Stakeholder promises
Stakeholder promises specify the commitment of the business to all persons or groups
who have an interest in that business. They are important because different parts of the
business deal directly with different stakeholders. The responsibility of each of these
should be specified for all to see, question, justify and (ultimately) abide by.
Business Values and Beliefs
Business values and beliefs provide guidelines on how things are to be accomplished in
the business, i.e., the principles which underlie the business’s operations.
Public Image
This element of the mission statement specifies how the business wishes to be seen by
external constituents. Given the tremendous amount of damage which can be done by bad
publicity (sometimes unjustifiably) it is important that businesses specify the behaviors
and approaches to be used when dealing with external constituencies.
Standards and Behaviors
This section of the mission statement briefly identifies the major policies and procedures
which are to be used in implementing the strategy and which will reinforce the values and
beliefs of the business. Note how a business mission statement enunciates the way that
responsibility will be delegated, people will be held accountable, and participation in
decision-making will occur.
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6.3.7 Understanding Business Level Strategies
What do we want to become?
It is especially important for managers and executives in any organization to agree upon
the basic vision which the business strives to achieve in the long term. A vision statement
should answer the basic question, What do we want to become? A clear vision provides
the foundation for developing a comprehensive mission statement. Many organizations
have both a vision and mission statement, but the vision statement should be established
first and foremost. The vision statement should be short, preferably one sentence, and as
many managers as possible should have input into developing the statement.
Several example vision statements are provided below and in Table 6-1.
The Vision of the National Pawnbrokers Association is to have complete and
vibrant membership that enjoys a positive public and political image and is the
focal organization of all pawn associations.-National Pawnbrokers Association
(http://npa. ploygon.net)
Our Vision as an independent community financial institution is to achieve
superior long-term shareholder value, exercise exemplary corporate citizenship,
and create an environment which promotes and rewards employee development
and the consistent delivery of quality service to our customers.-First Reliance
Bank of Florence, South Carolina
At CIGNA, we intend to be the best at helping our customers enhance and
extend their lives and protect their financial security. Satisfying customers is
the key to meeting employee needs and shareholder expectations, and will
enable CIGNA to build on our reputation as a financially strong and highly
respected company (www.cigna.com).
TABLE 6-1 Vision and Mission Statement Examples
THE BELLEVUE HOSPITAL
Vision Statement
The Bellevue Hospital is the LEADER in providing resources necessary to realize
the community's highest level of HEALTH throughout life.
Mission Statement
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The Bellevue Hospital, with respect, compassion, integrity and courage honors
the individuality and confidentiality of our patients, employees and community,
and is progressive in anticipating and providing future health care services.
US POULTRY & EGG ASSOCIATION
Vision Statement
A national organization which represents its members in all aspects of poultry and
eggs on both a national and an international level.
Mission Statement:
1. We will partner with our affiliated state organizations to attack common
problems.
2. We are committed to the advancement of all areas of research and education in
poultry technology.
3. The International Poultry Exposition must continue to grow and be beneficial to
both exhibitors and attendees.
4. We must always be responsive and effective to the changing needs of our
industry.
5. Our imperatives must be such that we do not duplicate the efforts of our sister
organizations.
6. We will strive to constantly improve the quality and safety of poultry products.
7. We will continue to increase the availability of poultry products.
JOHN DEERE, INC.
Vision Statement
John Deere is committed to providing Genuine Value to the company's stakeholders,
including our customers, dealers, shareholders, employees and communities. In support
of that commitment, Deere aspires to:
• Grow and pursue leadership positions in each of our businesses. .
• Extend our preeminent leadership position in the agricultural equipment market
worldwide.
• Create new opportunities to leverage the John Deere brand globally. .
Mission Statement
John Deere has grown and prospered through a long-standing partnership with the
world's most productive farmers. Today,
John Deere is a global company with several equipment operations and complementary
service businesses. These businesses are closely interrelated, providing the company with
significant growth opportunities and other synergistic benefits.
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MANLEY BAPTIST CHURCH
The Vision of Manley Baptist Church is to be the people of God, on mission with God,
motivated by a love for God, and a love for others.
The mission of Manley Baptist Church is to help people in the Lake way area become
fully developing followers of Jesus Christ
.
US GEOLOGICAL SURVEY (USGS)
The Vision of USGS is to be a world leader in the natural sciences through our scientific
excellence and responsiveness to society's needs.
The mission of USGS is to serve the Nation by providing reliable scientific information
to
1. describe and understand the Earth
2. minimize loss of life and property from natural disasters;
3. manage water, biological, energy, and mineral resources; and enhance and protect
our quality of life.
6.3.8 Formulating a Business Mission Statement:
Mission statements can and do vary in length, content, format, and specificity. Most
practitioners and academicians of strategic management consider an effective statement
to exhibit nine characteristics or components. Because a mission statement is often the
most visible and public part of the strategic-management process, it is important that
includes all of these essential components. Components and corresponding questions.
that a mission statement should answer are given here.
1. Customers: Who are the firm's customers?
2. Products or services: What are the firm's major products or services?
3. Markets: Geographically, where does the firm compete?
4. Technology: Is the firm technologically current?
5. Concern for survival, growth, and profitability: Is the firm committed to growth
and financial soundness?
6. Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities?
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of the firm?
7. Self-concept: What is the firm's distinctive competence or major?
competitive advantage?
8. Concern for public image: Is the firm responsive to social, community, and
environmental concerns?
9. Concern for employees: Are employees a valuable asset of the firm?
TABLE 6-2 Examples of the Nine Essential Components of a Business Mission
Statement
1. CUSTOMERS
We believe our first responsibility is to the doctors, nurses, and patients, to mothers and
all others who use our products and services. (Johnson &Johnson)
2. PRODUCTS OR SERVICES
Amax’s principal products ace molybdenum, coal, iron ore, copper, lead, zinc, petroleum
and natural gas, potash, phosphates, nickel, tungsten, silver, gold, and magnesium.
(AMAX)
Standard Oil Company (Indiana) is in business to find and produce crude oil, natural gas
and natural gas liquids; to manufacture high-quality products useful to society from these
raw materials; and to distribute and market those products and to provide dependable
related services to the consuming public at reasonable prices. (Standard Oil Company)
3. MARKETS
We are dedicated to the total success of Corning Glass Works as a worldwide competitor.
(Corning Glass Works)
Our emphasis is on North American markets, although global opportunities will be
explored. (Blockway)
4. TECHNOLOGY
Control Data is in the business of applying micro-electronics and computer technology in
two general areas: computer related hardware; and computing-enhancing services, which
include computation, information, education, and finance.
(Control Data)
The common technology in these areas is discrete particle coatings. (Nashua)
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5. CONCERN FOR SURVIVAL, GROWTH, AND PROFITABILITY
In this respect, the company will conduct its operations prudently, and will provide the
profits and growth which will assure Hoover's ultimate success. (Hoover Universal)
To serve the worldwide need for knowledge at a fair profit by adhering, evaluating,
producing, and distributing valuable information in a way that benefits our customers,
employees, other investors, and our society. (McGraw-Hill)
6. PHILOSOPHY
We believe human development to be the worthiest of the goals of civilization and
independence co is the superior condition for nurturing growth in the capabilities of
people. (Sun Company)
It's all part of the Mary Kay philosophy-a philosophy based on the golden rule. “A spirit
of sharing and caring where people give cheerfully of their time, knowledge, and
experience”. (Mary Kay Cosmetics)
7. SELF-CONCEPT
Crown Zellerbach is committed co leapfrogging ongoing competition within 1,000 days
by unleashing the constructive and creative abilities and energies of each of its
employees. (Crown Zellerbach)
8. CONCERN FOR PUBLIC IMAGE
To share the world's obligation for the protection of the environment. (Dow Chemical)
To contribute to the economic strength of society and function as a good corporate citizen
on a local, state, and national basis in all countries in which we do business. (Pfizer)
9. CONCERN FOR EMPLOYEES
To recruit, develop, motivate, reward, and retain personnel of exceptional ability,
character, and dedication by providing good working conditions, superior leadership,
compensation on the basis of performance, an attractive benefit program, opportunity for
growth, and a high degree of employment security. (The Wachovia Corporation)
To compensate its employees with remuneration and fringe benefits competitive with
other employment opportunities in its geographical area and commensurate with their
contributions coward efficient corporate operations. (Public Service
Electric and Gas Company)
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TABLE 6-3 Mission Statements - of Seven Organizations
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.
Ben &Jerry's mission is to make, distribute and sell the finest quality all-natural ice cream
and related products in a wide variety of innovative flavors made from Vermont dairy
products. To operate the Company on a sound financial basis of profitable growth,
increasing value for our shareholders, and creating career opportunities and financial
rewards for our employees. To operate the Company in a way that actively recognizes the
central role that business plays in the structure of society by initiating innovative ways to
improve the quality of life of a broad community-local, national, and international.
The Mission of the Institute of Management Accountants (IMA) is to provide to members
personal and professional development opportunities through education, association with
business professionals and certification in management accounting and financial
management skills. The IMA is globally recognized by the financial community as a
respected institution influencing the concepts and ethical practices of management
accounting and financial management.
The Mission of Pressure Systems International (PSI) is to provide automatic tire inflation
systems to our customers along with customer-valued services and tire maintenance
related solutions that best meet the needs and exceed the expectations of our customers
while meeting the growth and financial objectives of our investors/owners.
The Mission of Genetec Inc. is to be the leading biotechnology company, using human
genetic information to develop, manufacture and market pharmaceuticals that address
significant unmet medical needs. We commit ourselves to high standards of integrity in
contributing to the best interests of patients, the medical profession, and our employees,
and to seeking significant returns to our stockholders based on the continued pursuit of
excellent science.
The Mission of the California Department of Fish and Game is to manage California's
diverse fish, wildlife, and plant resources, and the habitats upon which they depend, for
[heir ecological values and for their use and enjoyment by the public.
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The Mission of Barrett Memorial Hospital is to operate a high-quality health care facility
providing an appropriate mix of services to the residents of Beaverhead County and
surrounding areas. Service is given with ultimate concern for patients, medical staff,
hospital staff, and the community. Barrett Memorial Hospital assumes a strong leadership
role in the coordination and development of health-related resources within the
community.
6.3.9 Competitive Analysis: Porter’s Five Forces Model:
As illustrated in Figure 6.1, Porter's Five Forces Model of competitive analysis is a
widely used approach for developing strategies in many industries. The intensity of
competition among firms varies widely across industries. Intensity of competition is
highest in lower-return industries. According to Porter, the nature of competitiveness in
given industry can be viewed as a composite of five forces:
•
•
•
•
•
Rivalry among competitive firms
Potential entry of new competitors
Potential development of substitute products
Bargaining power of suppliers
Bargaining power of consumers
6.3.9.1 Rivalry among Competing Firms:
Rivalry among competing firms is usually the most powerful of the five competitive
forces. The strategies pursued by one firm can be successful only to the extent that they
provide competitive advantage over the strategies pursued by rival firms. Changes in
strategy by one firm may be met with retaliatory countermoves, such as lowering prices,
enhancing quality, adding features, providing services, extending warranties, and
increasing advertising. For example, Pepsi recently filed a complaint against Coca-cola or
"illegally trying to force competitors out of the European market." The complaint to the
European Union resulted in government raids at Coca-Cola offices in four European
countries seizing documents relating to the issue. Coca-Cola denied any wrong doing.
In the Internet world, competitiveness is fierce. Amazon.com watches in dismay as
customers use their site's easy-to-use format, in-depth reviews, expert recommendations,
and then bypass the cash register as they click their way over to deep-discounted sites
such as Buy.com to make their purchase. Buy.com CEO says, "The Internet is going to
shrink retailers’ margins to the point where they will not survive.
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The intensity of rivalry among competing firms tends to increase as the number of
Competition increases, as competitors become more equal in size and capability, as
demand for the industry's products declines, and as price cutting becomes common.
Rivalry also increases when consumers can switch brands easily; when barriers to leaving
the market are high; when fixed costs are high; when the product is perishable; when
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rival firms are diverse in strategies, origins, and culture; and when mergers and
acquisitions are common in the industry. As rivalry among competing firms intensifies,
industry profits decline, in some cases to the point where an industry becomes inherently
unattractive.
.
6.3.9.2 Potential Entry of New Competitors
Whenever new firms can easily enter a particular industry, the intensity of
competitiveness among firms increases. Barriers to entry, however, can include the need
to gain economies of scale quickly, the need to gain technology and specialized knowhow, the lack of experience, strong customer loyalty, strong brand preferences, large
capital requirements, lack of adequate distribution channels, government regulatory
policies, tariffs, lack of access to raw materials, possession of patents, undesirable
locations, counterattacks by entrenched firms, and potential saturation of the market.
Despite numerous barriers to entry, new firms sometimes enter industries with higherquality products, lower prices, and substantial marketing resources. The strategist job,
therefore, is to identify potential new firms entering the market, to monitor the new rival
firms' strategies, to counterattack as needed, and to capitalize on existing strengths and
opportunities.
6.3.9.3 Potential Development of Substitute Products
In many industries, firms are in close competition with producers of substitute products in
other industries. Examples are plastic container producers competing with glass,
paperboard and aluminum can producers, and acetaminophen manufacturers competing
with other manufacturers of pain and headache remedies. The presence of substitute
products put a ceiling on the price that can be charged before the consumers will switch
to the substitute product.
Competitive pressures arising from substitute products increase as the relative price
of substitute products declines and as consumers' switching costs decrease. The
competitive strength of substitute products is best measured by the inroads into market
share those products obtain, as well as those firms' plans for increased capacity and
market penetration.
6.3.9.4 Bargaining Power of Suppliers
The bargaining power of suppliers affects the intensity of competition in an industry,
especially when there is a large number of suppliers, when there are only a few good
substitute raw materials, or when the cost of switching raw materials is especially costly.
It often is in the best interest of both suppliers and producers to assist each other with
reasonable prices, improved quality, and development of new services, just-in-time
deliveries, and reduced inventory costs, thus enhancing long-term profitability for all
concerned.
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Firms may pursue a backward integration strategy to gain control or ownership of
suppliers. This strategy is especially effective when suppliers are unreliable, too costly, or
not capable of meeting a firm's needs on a consistent basis. Firms generally can negotiate
more favorable terms with suppliers when backward integration is a commonly used
strategy among rival firms in an industry.
6.3.9.5 Bargaining Power of Consumers
When customers are concentrated or large, or buy in volume, their bargaining power
represents a major force affecting intensity of competition in an industry. Rival firms may
offer extended warranties or special services to gain customer loyalty whenever the
bargaining power of consumers is substantial. Bargaining power of consumers also is
higher when the products being purchased are standard or undifferentiated. When this is
the case, consumers often can negotiate selling price, warranty coverage, and accessory
packages to a greater extent. Wal-Mart is the offline retailing champ. However, Wal-Mart
today is scrambling to improve its wal-mart.com Web site which looks prehistoric
compared to many new competitors hungry to seize retailing market share through online
entry into the industry. Even for a huge company such as Wal-Mart, the drastic increase
in bargaining power of consumers caused by Internet usage is a major external threat.
6.3.10 Assessing Core Competencies by Performing an Internal Audit
The process of performing an internal audit closely parallels the process of performing
an external audit. Representative managers and employees from throughout the firm need
to be involved in determining a firm's strengths and weaknesses. The internal audit
requires gathering and assimilating information about the firm's management, marketing,
finance/accounting, production/operations, research and development (R&D), and
computer information systems operations.
Compared to the external audit, the process of performing an internal audit provides more
opportunity for participants to understand how their jobs, departments, and divisions fit
into the whole organization. This is a great benefit because managers and employees
perform better when they understand how their work affects other areas and activities in
the firm.
Performing an internal audit requires gathering, assimilating, and evaluating information
about the firm's operations. Critical success factors, consisting of both strengths and
weaknesses can be identified and prioritized in the manner discussed.
The development of conclusions on the 10 to 20 most important organizational strengths
and weaknesses can be, as any experienced manager knows, a difficult task, when it
involves managers representing various organizational interests and points of view.
Developing a 20-page list of strengths and weaknesses could be
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accomplished relatively easily, but a list of the 10 to 15 most important ones involves
significant analysis and negotiation. This is true because of the judgments that are
required and the impact which such a list will inevitably have as it is used in the
formulation, implementation, and evaluation of strategies.
A failure to recognize and understand relationships among the functional areas of
business can be detrimental to strategic management, and the number of those
relationships that must be managed increases dramatically with a firm's size, diversity,
geographic dispersion, and the number of products or services offered. Governmental and
nonprofit enterprises traditionally have not placed sufficient emphasis on relationships
among the business functions. For example, some state governments, utilities,
universities, and hospitals only recently have begun to establish marketing objectives and
policies that are consistent with their financial capabilities and limitations. Some firms
place too great an emphasis on one function at the expense of others.
Ansoff explained:
During the first fifty years, successful firms focused their energies on optimizing the
performance of one of the principal functions: production/operations, R&D, or
marketing. Today, due to the growing complexity and dynamism of the environment,
success increasingly depends on a judicious combination of several functional influences.
This transition from a single function focus co a multifunction focus is essential for
successful strategic management.
Financial ratio analysis exemplifies the complexity of relationships among the functional
areas of business. A declining return on investment or profit margin ratio could the result
of ineffective marketing, poor management policies, research and development. errors or
a weak computer information system. The effectiveness of strategy formation,
implementation, and evaluation activities hinges upon a clear understanding how major
business functions affect one another. For strategies to succeed, a coordinated effort
among all the functional areas of business is needed.
Finance/Accounting
Financial accounting Functions
According to James Van Horne, the functions of finance/accounting comprise three
decisions:
• the investment decision,
• the financing decision, and
• the dividend decision.
Financial ratio analysis is the most widely used method for determining an organization's
Strengths and weaknesses can lie in the investment, financing, and dividend areas.
Because the functional areas of business are so closely related, financial ratios can signal
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strengths or weaknesses in management, marketing, production, research and
development, and computer information systems activities
The investment decision, also called capital budgeting, is the allocation and reallocation
of capital resources to projects, products, assets, and divisions of an organization.
Once strategies are formulated, capital budgeting decisions are required to implement
strategies successfully. The financing decision concerns determining the best capital
structure for the firm and includes examining various methods by which the firm can
raise capital for example, by issuing stock, increasing debt, selling assets, or using a
combination of these approaches). The financing decision must consider both short-term
and long-term needs for working capital. Two key financial ratios that indicate whether a
firm's financing decisions have been effective are the debt-to-equity ratio and the debt tototal-assets ratio.
Dividend decisions concern issues such as the percentage of earnings paid to stock
holders, the stability of dividends paid over time, and the repurchase or issuance of stock
Dividend decisions determine the amount of funds that are retained in a firm compared to
the amount paid out to stockholders. Three financial ratios that are helpful in evaluating a
firm's dividend decisions are the earnings-per-share ratio, the dividends-per-share ratio,
and the price-earnings ratio. The benefits of paying dividends to investors must be
balanced against the benefits of retaining funds internally, and there is no set formula on
how to balance this trade-off. For the reasons listed here, dividends are sometimes paid
out even when funds could be better reinvested in the business or when the firm has to
obtain outside sources of capital:
1. Paying cash dividends is customary. Failure to do so could be thought of as a stigma. A
dividend change is considered a signal about the future.
2. Dividends represent a sales point for investment bankers. Some institutional investors
can buy only dividend-paying stocks.
3. Shareholders often demand dividends, even in companies with great opportunities for
reinvesting all available funds.
4. A myth exists that paying dividends will result in a higher stock price.
Basic Types of Financial Ratios
Financial ratios are computed from an organization's income statement and balance sheet.
Computing financial ratios is like taking a picture because the results reflect a situation at
just one point in time. Comparing ratios over time and to industry averages is more likely
to result in meaningful statistics that can be used to identify and evaluate strengths and
weaknesses.
Table 6 – 4 provides a summary of key financial ratios showing how each ratio is
calculated and what each ratio measures. However, all the ratios are not significant for all
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industries and companies. For example, accounts receivable turnover and average
collection period are not very meaningful to a company that does cash receipts business.
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Return on stockholders' equity (ROE)
Earnings per share
Price-earnings ratio
Growth ratios measure the firm's ability to maintain its economic position in the growth
of the economy and industry.
• Sales
• Net income
• Earnings per share
• Dividends per share
Revision Points
•
•
•
•
•
•
1.
2.
3.
4.
Business Level Strategies are now relatively commonplace. They are frequently
found in annual reports and financial statements, or hanging in board rooms and
reception areas, or even summarized in the form of a motto and printed on
company documents and invoices. A good business level strategy is a strategic
management tool rather than a piece of organizational finery.
The construction of a business level mission statement, however, is not an end in
itself. The mission statement should simply be the articulation of the sense of
mission which already exists within the organization. In this sense, mission
statements are a useful means of summarizing and reinforcing the central purpose
and characteristics of an organization, they cannot create those features. The
creation of a sense of sense of mission is the function of the entire business level
strategic management process.
According to Peter Drucker, “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 purpose of the organization makes possible clear and
realistic business objectives.”
The business level strategic mission statements arising as a result of these
activities usually contain two central characteristics. First, they contain a
statement of the business of the organization. Second, they contain a statement or
series of statements designed to reinforce the culture of the business.
It is especially important for managers and executives in any business to agree on
the basic long-term vision of the business. The basic question attempted to be
answered by a vision statement is, “What do we want to become?” A clear vision
provides the foundation for generating a comprehensive mission statement. Many
businesses have both a vision and a mission statement, but the vision statement
should be established first and foremost.
A business should carefully develop a written mission statement for the following
reasons:
To ensure unanimity of purpose within the business;
To provide a basis, or standard, for allocating business resources;
To establish a general tone, or a business climate;
To serve as a focal point for individuals to identify with the business’s purpose
and direction;
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5. To facilitate the translation of objectives into a work structure involving the
assignment of tasks to responsible elements within the business; and
6. To specify organizational purposes and the translation of these purposes into
objectives in such a way that cost, time, and performance parameters can be
assessed and controlled.
• Characteristics and Components of a Business Level Strategic Mission Statement
include: a Declaration of Attitude, a Customer Orientation, and a Declaration of
Social Policy.
• A mission statement can contain any one or more of the following components—
and a good mission statement will contain them all:
•
•
•
•
•
•
A statement of the business’s purpose
A description of generic strategy, i.e., the way in which the organization attempts
to achieve its purpose
Stakeholder promises
A statement of the business values and beliefs
A statement of public image
A summary of standards and behaviors expected within the business.
Summary
Business Level Strategies are now relatively commonplace. They are frequently
found in annual reports and financial statements, or hanging in board rooms and
reception areas, or even summarized in the form of a motto and printed on company
documents and invoices. A good business level strategy is a strategic management
tool rather than a piece of organizational finery. The construction of a business level
mission statement, however, is not an end in itself. The mission statement should
simply be the articulation of the sense of mission which already exists within the
organization. In this sense, mission statements are a useful means of summarizing
and reinforcing the central purpose and characteristics of an organization, they cannot
create those features. The creation of a sense of sense of mission is the function of the
entire business level strategic management process. According to Peter Drucker, “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 purpose of the
organization makes possible clear and realistic business objectives.” The business
level strategic mission statements arising as a result of these activities usually contain
two central characteristics. First, they contain a statement of the business of the
organization. Second, they contain a statement or series of statements designed to
reinforce the culture of the business. It is especially important for managers and
executives in any business to agree on the basic long-term vision of the business. The
basic question attempted to be answered by a vision statement is, “What do we want
to become?” A clear vision provides the foundation for generating a comprehensive
mission statement. Many businesses have both a vision and a mission statement, but
the vision statement should be established first and foremost.
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MBA 401 Strategic Management Distance Education Course Material
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A business should carefully develop a written mission statement for the following
reasons:
1. To ensure unanimity of purpose within the business;
2. To provide a basis, or standard, for allocating business resources;
3. To establish a general tone, or a business climate;
4. To serve as a focal point for individuals to identify with the business’s purpose
and direction;
5. To facilitate the translation of objectives into a work structure involving the
assignment of tasks to responsible elements within the business; and
6. To specify organizational purposes and the translation of these purposes into
objectives in such a way that cost, time, and performance parameters can be
assessed and controlled.
Characteristics and Components of a Business Level Strategic Mission Statement
include: a Declaration of Attitude, a Customer Orientation, and a Declaration of
Social Policy. A mission statement can contain any one or more of the following
components—and a good mission statement will contain them all:
• A statement of the business’s purpose
• A description of generic strategy, i.e., the way in which the organization attempts
to achieve its purpose
• Stakeholder promises
• A statement of the business values and beliefs
• A statement of public image
• A summary of standards and behaviors expected within the business.
Check Your Progress
Review Questions:
1. Explain the importance of business level strategies.
2. Describe the process of constructing a business level mission statement. Do this
for 3 businesses that you are familiar with.
3. How is a business defined, according to Peter Drucker?
4. How will you define the long term vision of a business? Do this for 3 businesses
that you are familiar with.
5. Can the long term objectives of a business be translated into a work structure,
involving the assignments of tasks to responsible elements within the business?
How? Give 3 recent examples from businesses that you are familiar with.
6. How do we identify all the stakeholders in a business? Do this for 3 businesses
that you are familiar with.
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Section III: Strategic Choice and Implementation
Unit 7: Strategic Analysis and Choice
7.1 Introduction
We are now getting into the final stages of our Strategic Management exercise. In this
third and concluding Section, we will examine the various methods and processes of
formulating, selecting, implementing, and controlling strategies. In this Unit, we will
study the various means available to formulate strategies, as well the rational ways of
selecting feasible, if not optimal, strategies.
7.2 Objectives
The overall objective of this Unit is to make you familiar with, and able to utilize, the
different methods of analyzing and formulating strategies in a corporate environment.
The specific objectives of this Unit are to delve into techniques such as SWOT Matrix,
SPACE Matrix, BCG Matrix, Input – Output Matrix, and Grand Strategy Matrix.
7.3 Content Exposition
7.3.1 The Nature of Strategy Analysis and Choice:
The firm's present strategies, objectives, and mission coupled with the external and
internal audit information, provide a basis for generating and evaluating feasible
alternative strategies. Unless a desperate situation faces the firm, alternative strategies
will likely represent incremental steps to move the firm from its present position to a
desired future position. Alternative strategies do not come out of the wild blue yonder;
they are derived from mission, objectives, external audit, and internal audit; they ate
consistent with or build upon, past strategies that have worked well!
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7.3.2 The Process of Generating and Selecting Strategies
Strategists never consider all feasible alternatives that could benefit the firm, because
There are an infinite number of possible actions and an infinite number of ways to
implement those actions, Therefore, a manageable set of the most attractive alternative
strategies must be developed. The advantages, disadvantages, trade-offs, costs, and
benefits of these strategies should be determined. This section discusses the process that
many firms used to determine an appropriate set of alternative strategies.
All participants in the strategy analysis and choice activity should have the firm's external
and internal audit information by their sides. This information, coupled with the firm’s
mission statement will help participants crystallize in their own minds particular
strategies that they believe could benefit the firm most. Creativity should be encouraged
in this thought process.
A COMPREHENSIVE STRATEGY FORMULATION
FRAMEWORK
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Important strategy-formulation techniques can be integrated into a three-stage decisionmaking framework, as shown in Figure 6-2. The tools presented in this framework are
Applicable to all sizes and types of organizations and can help strategists identify,
evaluate and select strategies.
Stage 1 of the formulation framework consists of the EFE Matrix, the IFE Matrix, and
the competitive Profile Matrix. Called the input Stage 1 summarizes the basic input
formation needed to formulate strategies.
Stage 2, called matching stage focuses upon generating feasible alternative strategies by
aligning key external and internal factors. Stage 2 techniques include the Threatsopportunities- Weaknesses-Strengths (TOWS) matrix, the Strategic Position and Action
Evaluation (SPACE) Matrix, the Boston consulting group (BCG) Matrix, the InternalExternal (IE) Matrix, and the Grand Strategy matrix.
Stage 3, called the Decision Stage, and involves a single technique, the QuantitativeStrategic planning Matrix (QSPM). A QSPM uses input information from Stage 1
To objectively evaluate feasible alternative strategies identified in Stage 2. A QSPM
relative attractiveness of alternative strategies and thus provides an objective basis for
selecting specific strategies.
All the nine techniques included in the strategy-formulation framework require
integration and analysis. Autonomous divisions in an organization commonly use
strategy-formulation techniques to develop strategies and objectives. Divisional analyses
provide a basis for identifying, evaluating, and selecting among alternative corporate
level strategies.
Strategists themselves, not analytic tools, are always responsible and account for strategic
decisions. Lenz emphasized that the shift from a words-oriented to a numbers oriented
planning process can give rise to a false sense of certainty; it can reduce dialogue,
discussion, and argument as a means to explore understandings, test assumptions and
foster organizational learning. 1 Strategists therefore must be wary of this possibility and
use analytical tools to facilitate, rather than diminish, communication. Without objective
information and analysis, personal biases, politics, emotions, personalities and halo error
(the tendency to put too much weight on a single factor) unfortunately play a dominant
role in the strategy-formulation process.
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THEINPUT STAGE
Procedures for developing an EFE matrix, an IFE Matrix, and a Competitive Profile
Matrix was presented in the previous two chapters. The information derived from these
three matrices provide basic input information for the matching and decision stage
matrices described later in this chapter.
The input tools require strategists to quantify subjectivity during early stages of The
strategy-formulation process. Making small decisions in the input matrices regarding it
relative importance of external and internal factors allows strategists to generate and
evaluate alternative strategies more effectively. Good intuitive judgment is always
needed in determining appropriate weights and ratings.
The Matching Stage
Synergy is sometimes defined as the match an organization makes between its internal
resources and skills and the opportunities and risks created by its external factors.2 The
matching stage of the strategy-formulation framework consists of five techniques that can
be used in any sequence: the TOWS Matrix, the SPACE Matrix, the BCG Matrix, and the
IE matrix and the Grand Strategy Matrix. These tools rely upon information derived from
the input stage to match external opportunities and threats with internal strengths and
weaknesses. Matching external and internal critical success factors is the key to
effectively generating feasible alternative strategies! For example, a firm with excess
working capital (internal strength) could take advantage of the cablevision industry's 20
percent annual growth rate (an external opportunity) by acquiring a firm in the
cablevision industry. This example portrays simple one-to-one matching. In most
situations, external and internal relationships are more complex, and the matching
requires multiple alignments for each strategy generated. The basic concept of matching
is illustrated in Table 6-1.
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Any organization, whether military, product-oriented, service-oriented, governmental, or
even athletic, must develop and execute good strategies to win. A good offense without a
good defense, or vice versa, usually leads to defeat. Developing strategies that use
strengths to capitalize on opportunities could be considered an offer whereas strategies
designed to improve upon weaknesses while avoiding threats could termed defensive.
Every organization has some external opportunities and threats and internal strengths and
weaknesses that can be aligned to formulate feasible alternative strategies. As indicated
in the E-Commerce Perspective, the Internet itself creates significant opportunities and
threats for firms.
7.3.3 The Threats-Opportunities- Weaknesses-Strengths (TOWS) Matrix
The Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix is an important
matching tool that helps managers develop four types of strategies: SO Strategies, WO
Strategies, ST Strategies, and WT Strategies.3 Matching key external and internal factors
is the most difficult part of developing a TOWS Matrix and requires good judgment, and
there is no one best set of matches. Note in Table 6-1 that the first, second, third and
fourth strategies are SO, WO, ST, and WT Strategies, respectively.
SO Strategies use a firm's internal strengths to take advantage of external opportunities.
All managers would like their organizations to be in a position where internal strengths
can be used to take advantage of external trends and events. Organizations generally will
pursue WO, ST, or WT Strategies in order to get into a situation where they can apply SO
Strategies. When a firm has major weaknesses, it will strive to overcome them and make
them strengths. When an organization faces major threats, it will seek to avoid them in
order to concentrate on opportunities.
WO Strategies aim at improving internal weaknesses by taking advantage of external
opportunities. Sometimes key external opportunities exist, but a firm has internal
weaknesses that prevent it from exploiting those opportunities. For example, there may
be a high demand for electronic devices to control the amount and timing of fuel injection
in automobile engines (opportunity), but a certain auto parts manufacturer may the
technology required for producing these devices (weakness). One possible WO
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Strategy would be to acquire this technology by forming a joint venture with a firm
having competency in this area. An alternative WO Strategy would be to hire and train
people with the required technical capabilities.
ST Strategies use a firm's strengths to avoid or reduce the impact of external threats
This does not mean that a strong organization should always meet threats in the external
environment head-on. A recent example of ST Strategy occurred when Texas Instruments
used an excellent legal department strength) to collect nearly $700 million in dam. and
royalties from nine Japanese and Korean firms that infringed on patents for semi
conductor memory chips (threat). Rival firms that copy ideas, innovations, and patented
products area major threat in many industries. This is a major problem for U.S. firms
selling products in China.
WT Strategies are defensive tactics directed at reducing internal weaknesses and
avoiding environmental threats. An organization faced with numerous external threats
and internal weaknesses may indeed be in a precarious position. In fact, such a firm may
have to fight for its survival, merge, retrench, declare bankruptcy, or choose liquidation.
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A schematic representation of the TOWS Matrix is provided in Figure 6-3. Note that a
TOWS Matrix is composed of nine cells. As shown, there are four key factor cells,
Four strategy cells and one cell that are always left blank (the upper-left cell). The four
strategy cells, labeled SO, WO, ST, and WT, are developed after completing four key
factor cells, labeled
W, W, O, and T There are eight steps involved in constructing a TOWS Matrix:
1.
2.
3.
4.
5.
List the firm's key external opportunities.
List the firm's key external threats.
List the firm's key internal strengths.
List the firm's key internal weaknesses.
Match internal strengths with external opportunities and record the resultant
SO Strategies in the appropriate cell.
-
6. Match internal weaknesses with external opportunities and record the resultant WO
Strategies.
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7. Match internal strengths with external threats and record the resultant ST Strategies.
8. Match internal weaknesses with external threats and record the resultant WT
Strategies.
The purpose of each Stage 2 matching tool is to generate feasible alternative strategies,
not to select or determine which strategies are best! Not all of the strategies developed
in the TOWS Matrix, therefore, will be selected for implementation. A sample TOWS
Matrix for Cineplex Odeon, the large cinema company, is provided in Figure 6-4
The strategy-formulation guidelines provided in Chapter 5 can enhance the process of
matching key external and internal factors. For example, when an organization
has both the capital and human resources needed to distribute its own products (internal
strength) and distributors are unreliable, costly, or incapable of meeting the firm's needs
(external), then forward integration can be an attractive ST Strategy. When a firm
production capacity (internal weakness) and its basic industry is experiencing declining
annual sales and profits (external threat), then concentric diversification can be an
effective WT Strategy. It is important to use specific, rather than general, strategy terms
when developing a TOWS Matrix. In addition, it is important to include the
“S1, O2”-type notation after each strategy in the TOWS Matrix. This notation reveals the
rationale for each alternative strategy.
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7.3.4 The Strategic Position and Action Evaluation (SPACE) Matrix
The Strategic Position and Action Evaluation (SPACE) Matrix, another important Stag-2
matching cool, is illustrated in Figure 6-5. Its four-quadrant framework indicates whether
aggressive, conservative, defensive, or competitive strategies are most appropriate for a
given organization. The axes of the SPACE Matrix represent two inter dimensions
(financial strength [FSJ and competitive advantage [CAJ) and two external dimensions
(environmental stability [ESJ] and industry strength [lSJ]. These four factors are the most
important determinants of an organization's overall strategic position.
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Depending upon the type of organization, numerous variables could make up each of the
dimensions represented on the axes of the SPACE Matrix. Factors earlier included. in the
firm's EFE and IFE matrices should be considered in developing a SPACE Matrix
Other variables commonly included are given in Table 6-2. For example, return on
investment, leverage, liquidity, working capital, and cash flow commonly are considered
determining factors of an organization's financial strength. Like the TOWS Matrix
SPACE Matrix should be tailored to the particular organization being studied and based
on factual information as much as possible.
The steps required to develop a SPACE Matrix are as follows:
1. Select a set of variables to define financial strength (FS), competitive advantage (CA),
environmental stability (ES), and industry strength (IS).
2. Assign a numerical value ranging from + 1 (worst) to +6 (best) to each of the variables
that make up the FS and IS dimensions. Assign a numerical value ranging from -1 (best)
to -6 (worst) to each of the variables that make up the ES and CA dimensions.
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3. Compute an average score for FS, CA, IS, and ES by summing the values given to the
variables of each dimension and dividing by the number of variables included in the
respective dimension.
4. Plot the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE
Matrix.
5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores
on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point.
6. Draw a directional vector from the origin of the SPACE Matrix through the new
intersection point. This vector reveals the type of strategies recommended for the
organization: aggressive, competitive, defensive, or conservative.
Some examples of strategy profiles that can emerge from a SPACE analysis are shown in
Figure 6-6. The directional vector associated with each profile suggests the type
strategies to pursue: aggressive, conservative, defensive, or competitive. When a firm's
directional vector is located in the aggressive quadrant (upper-right quadrant) of the
SPACE Matrix, an organization is in an excellent position to use its internal strengths to
(1) take advantage of external opportunities, (2) overcome internal weaknesses, and (3)
avoid external threats. Therefore, market penetration, market development, product
development, backward integration, forward integration, horizontal integration,
conglomerate, diversification, concentric diversification, horizontal diversification, or a
combination strategy, all can be feasible, depending on the specific circumstances that
face the firm.
The directional vector may appear in the conservative quadrant (upper-left quadrant)
Of the SPACE Matrix, which implies staying close to the firm's basic competencies and
Not taking excessive risks. Conservative strategies most often include market penetration
market development, product development, and concentric diversification. The
directional vector may be located in the lower-left or defensive quadrant of the SPACE
Matrix which suggests that the firm should focus on rectifying internal weaknesses and
avoiding external threats. Defensive strategies include retrenchment, divestiture,
liquidation and concentric diversification. Finally, the directional vector may be located
in the lower-right or competitive quadrant of the SPACE Matrix, indicating competitive
strategies. Competitive strategies include backward, forward, and horizontal integration;
.penetration; market development; product development; and joint venture.
SPACE Matrix analysis for a bank is provided in Table 6-3. Note that the competitive
strategies are recommended.
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7.3.5 The Boston Consulting Group (BCG) Matrix
Autonomous divisions (or profit centers) of an organization make up what is called a
business portfolio. When a firm's divisions compete in different industries, a separate
strategy often must be developed for each business. The Boston Consulting Group (BCG)
Matrix and the Internal-External (IE) Matrix are designed specifically to enhance a
multidivisional firm's efforts to formulate strategies.
The BCG Matrix graphically portrays differences among divisions in terms relative
market share position and industry growth rate. The BCG Matrix allows a multi
divisional organization to manage its portfolio of businesses by examining the relative
market share position and the industry growth rate of each division relative to all other
divisions in the organization. Relative market share position is defined as the ratio of a
divisions own market share in a particular industry to the market share held by the largest
rival firm in that industry. For example, in Table 6-4, the relative market share of Ocean
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Spray premium noncarbonated beverage is 14.7/40.5 = 0.36 and Sony's market share in
the music industry is 16/27 = 0.59, and the new Hilton-Promos hotel company's market
share is 290,000/528,896 = 0.55.
Relative market share position is given on the x-axis of the BCG Matrix. The mid-point
on the x-axis usually is set at .50, corresponding to a division that has half the market
share of the leading firm in the industry. The y-axis represents the industry growth -sales,
measured in percentage terms. The growth rate percentages on the y-axis ranges from -20
to +20 percent, with 0.0 being the midpoint. These numerical un the x- and y- axes often
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are used, but other numerical values could be established deemed appropriate for
particular organizations.
An example of a BCG Matrix appears in Figure 6-7. Each circle represents a separate
division. The size of the circle corresponds to the proportion of corporate revenue
generated by that business unit and the pie slice indicate the proportion of corporate
profits generated by that division. Divisions located in Quadrant I of the BCG Matrix are
called question Marks, those located in Quadrant II are called Stars, those located in
quadrant III are called Cash Cows, and those divisions located in Quadrant IV are called
Dogs. As indicated in the Global Perspective, European firms are becoming Stars through
consolidation, this represents a threat to many American firms.
Question Marks-Divisions in Quadrant I have a low relative market share position yet
compete in a high-growth industry. Generally these firms' cash needs are high and their
cash generation are low. These businesses are called Question Marks because the
organization must decide whether to strengthen them by pursuing an intensive strategy
(market penetration, market development, or product development) or to sell them.
Stars-Quadrant II businesses (often called Stars) represent the organization's best longrun opportunities for growth and profitability. Divisions with a high relative market share
and a high industry growth rate should receive substantial investment to maintain or
strengthen their dominant positions. Forward, backward, and horizontal integration;
market penetration; market development; product development; and joint ventures are
appropriate strategies for these divisions to consider.
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Cash Cows-Divisions positioned in Quadrant III have a high relative market share
position but compete in a low-growth industry. Called Cash Cows because they generate
cash in excess of their needs, they often are milked. Many of today's Cash Cows were
yesterday's Stars. Cash Cow divisions should be managed to maintain their strong
position for as long as possible. Product development or concentric diversification may
be attractive strategies for strong Cash Cows. However, as a Cash Cow division becomes
weak, retrenchment or divestiture can become more appropriate.
Dogs-Quadrant IV divisions of the organization have a low relative market share position
and compete in a slow- or no-market-growth industry; they are Dogs in the firm's
portfolio. Because of their weak internal and external position, These businesses often are
liquidated, divested, or trimmed down through retrenchment
When a division first becomes a Dog, retrenchment can be the best strategy to pursue
because many Dogs have bounced back, after strenuous asset and cost reduction, to
become viable, profitable divisions.
The major benefit of the BCG Matrix is that it draws attention to the cash flow
investment characteristics and needs of an organization's various divisions. The divisions
of many firms evolve over time: Dogs become Question Marks, Question Marks become
Stars, Stars become Cash Cows, and Cash Cows become Dogs in an ongoing counter
clockwise motion. Less frequently, Stars become Question Marks, Question marks
become Dogs, Dogs become Cash Cows, and Cash Cows become Stars (in a clockwise
motion)
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In some organizations, no cyclical motion is apparent. Over time, organizations should
strive to achieve a portfolio of divisions that are Stars.
One example of a BCG Matrix is provided in Figure 6-8, which illustrates an
organization, composed of five divisions with annual sales ranging from $5,000 to
$60,000. Division I has the greatest sales volume, so the circle representing that division
is the largest one in the matrix. The circle corresponding to Division 5 is the smallest
because its sales volume ($5,000) is least among all the divisions. The pie slices within
the circles -the percent of corporate profits contributed by each division. As shown,
Division I contributes the highest profit percentage, 39 percent. Notice in the diagram
that Division I is considered a Star, Division 2 is a Question Mark, Division 3 also is a
Question Mark, Division 4 is a Cash Cow, and Division 5 is a Dog.
The BCG Matrix, like all analytical techniques, has some limitations. For example,
viewing every business as a Star, Cash Cow, Dog, or Question Mark is an
oversimplification; many businesses fall right in the middle of the BCG Matrix and thus
are not classified. Furthermore, the BCG Matrix does not reflect whether or not various
divisions or their industries are growing over time; that is, the matrix has no temporal
qualities, but rather is a snapshot of an organization at a given point in time. Finally,
other variables besides relative market share position and industry growth rate in sales,
such as size of the market and competitive advantages, are important in making strategic
decisions about various divisions.
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7.3.6 The Internal-External (IE) Matrix
The Internal-External (IE) Matrix positions an organization's various divisions in a nine
cell display illustrated in Figure 6-9. The IE Matrix is similar to the BCG Matrix in that
Both tools involve plotting organization divisions in a schematic diagram; this is why
they are both called portfolio matrices. Also, the size of each circle represents the
percentage sales contribution of each division, and pie slices reveal the percentage profit
contribution of each division in both the BCG and IE Matrix.
But there are some important differences between the BCG Matrix and IE Matrix.
First, the axes are different. Also, the IE Matrix requires more information about the
divisions than the BCG Matrix. Further, the strategic implications of each matrix are
different. For these reasons, strategists in multidivisional firms often develop both the B
Matrix and the IE Matrix in formulating alternative strategies. A common practice is to
develop a BCG Matrix and an IE Matrix for the present and then develop projected
matrices to reflect expectations of the future. This before-and-after analysis forecasts the
expected effect of strategic decisions on an organization's portfolio of divisions.
The IE Matrix is based on two key dimensions: the IFE total weighted scores on the xaxis and the EFE total weighted scores on the y-axis. Recall that each division of an
organization should construct an IFE Matrix and an EFE Matrix for its part of the
organization. The total weighted scores derived from the divisions allow construction of
the corporate level IE Matrix. On the x-axis of the IE Matrix, an IFE total weighted score
of 1.0 to 1.99 represents a weak internal position; a score of 2.0 to 2.99 is considered
average; and as of 3.0 to 4.0 is strong. Similarly, on the y-axis, an EFE total weighted
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score of 1.0 to 1.99 is considered low; a score of 2.0 to 2.99 is medium; and a score of 3.0
to 4.0 is high.
The IE Matrix can be divided into three major regions that have different strategy
implications. First, the prescription for divisions that fall into cells I, II, or IV can be
described as grow and build. Intensive (market penetration, market development, product
development) or integrative (backward integration, forward integration, and horizontal
integration) strategies can be most appropriate for these divisions. Second divisions that
fall into cells III, V, or VII can be managed best with hold and maintain strategies;
market penetration and product development are two commonly employed strategies for
these types of divisions.
Third, a common prescription for divisions that fall into cells VI, VIII, or IX is harvest or
divest. Successful organizations are able to achieve a portfolio of businesses positioned in
or around cell I in the IE Matrix.
An example of a completed IE Matrix is given in Figure 6-10, which depicts an
organization composed of four divisions. As indicated by the positioning of the circles,
grow and build strategies are appropriate for Division 1, Division 2, and Division 3.
Division 4 is a candidate for harvest or divest. Division 2 contributes the greatest
percentage of company sales and thus is represented by the largest circle. Division 1
contributes the greatest proportion of total profits; it has the largest-percentage pie slice.
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7.3.7 Grand Strategy Matrix
In addition co the TOWS Matrix, SPACE Matrix, BCG Matrix, and IE Matrix, the
Grand Strategy Matrix has become a popular cool for formulating alternative strategies.
All organizations can be positioned in one of the Grand Strategy Matrix's four strategy
quadrants. A firm's divisions likewise could be positioned. As illustrated in Figure 6-11,
the Grand Strategy Matrix is based on two evaluative dimensions: competitive position
and market growth. Appropriate strategies for an organization to consider are listed in
sequential order of attractiveness in each quadrant of the matrix.
Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic
position. For these firms, continued concentration on current markets (market penetration
and market development) and produces (product development) are appropriate strategies.
It is unwise for a Quadrant I firm to shift notably from its established competitive
advantages. When a Quadrant I organization has excessive resources, then
backward, forward, or horizontal integration may be effective strategies. When a
Quadrant I firm is too heavily committed to a single product, and then concentric
diversification may reduce the risks associated with a narrow product line. Quadrant I
firms afford to take advantage of external opportunities in several areas: they can take
risks aggressively when necessary.
Firms positioned in Quadrant II need to evaluate their present approach to the
marketplace seriously. Although their industry is growing, they are unable to compete
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effectively, and they need to determine why the firm's current approach is ineffectual and
how the company can best change to improve its competitiveness. Because Quadrant II
firms are in a rapid-market-growth industry, an intensive strategy (as opposed to the
integrative or diversification) is usually the first option that should be considered.
However if the firm is lacking a distinctive competence or competitive advantage, then
horizontal integration is often a desirable alternative. As a last result, divestiture or
liquidation should be considered. Divestiture can provide funds needed to acquire other
business or buy back shares of stock.
Quadrant III organizations compete in slow-growth industries and have weak competitive
positions. These firms must make some drastic changes quickly to avoid further demise
and possible liquidation. Extensive cost and asset reduction (retrenchment) should be
pursued first. An alternative strategy is to shift resources away from the current business
into different areas. If all else fails, the final options for Quadrant III businesses are
divestiture or liquidation.
Finally, Quadrant IV businesses have a strong competitive position but are in a slow
growth industry. These firms have the strength to launch diversified programs into more
promising growth areas. Quadrant IV firms have characteristically high cash flow levels
and limited internal growth needs and often can pursue concentric, horizontal, or
conglomerate diversification successfully. Quadrant IV firms also may pursue joint
ventures.
7.3.8 The Decision Stage
Analysis and intuition provide a basis for making strategy-formulation decisions. The
matching techniques just discussed reveal feasible alternative strategies. Many of these
strategies will likely have been proposed by managers and employees participating in the
strategy analysis and choice activity. Any additional strategies resulting from the
matching analyses could be discussed and added to the list of feasible alternative options.
As indicated earlier in this chapter, participants could rate these strategies on a 1 to 4
scale so that a prioritized list of the best strategies could be achieved.
7.3.9 The Quantitative Strategic Planning Matrix (QSPM)
Other than ranking strategies to achieve the prioritized list, there is only one analytical
technique in the literature designed to determine the relative attractiveness of feasible
alternative actions. This technique is the Quantitative Strategic Planning Matrix (QSPM),
which comprises Stage 3 of the strategy-formulation analytical framework.5This
technique objectively, indicates which alternative strategies are best. The QSPM uses
input from stage 1 analyses and matching results from Stage 2 analyses to decide
objectively among alternative strategies. That is, the EFE Matrix, IFE Matrix, and
Competitive Profile Matrix that makes up Stage 1, coupled with the TOWS Matrix,
SPACE Analysis, BCG Matrix, IE Matrix, and Grand Strategy Matrix that make up Stage
2, provide the Needed information for setting up the QSPM (Stage 3). The QSPM is a
tool that allows strategists to evaluate alternative strategies objectively, based on
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previously identified external and internal critical success factors. Like other strategyformulation analytical tools, the QSPM requires good intuitive judgment.
The basic format of the QSPM is illustrated in Table 6-5. Note that the left column of a
QSPM consists of key external and internal factors (from Stage 1), and the top
row consists of feasible alternative strategies (from Stage 2). Specifically, the left column
of a QSPM consists of information obtained directly from the EFE Matrix and IFE
Matrix. In a column adjacent to the critical success factors, the respective weights
received by each factor in the EFE Matrix and the IFE Matrix are recorded.
The top row of a QSPM consists of alternative strategies derived from the TOWS Matrix,
SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix. These matching
tools usually generate similar feasible alternatives. However, not every strategy suggested
by the matching techniques has to be evaluated in a QSPM. Strategists should use good
intuitive judgment in selecting strategies to include in a QSPM.
Conceptually, the QSPM determines the relative attractiveness of various strategies based
on the extent to which key external and internal critical success factors are capitalized
upon or improved. The relative attractiveness of each strategy within a set of alternatives
is computed by determining the cumulative impact of each external and internal critical
success factor. Any number of sets of alternative strategies can be included in the QSPM,
and any number of strategies can make up a given set, but only strategies within a given
set are evaluated relative to each other. For example, one set of strategies include
concentric, horizontal, and conglomerate diversification, whereas another set may include
issuing stock and selling a division to raise needed capital. These two sets of strategies
are totally different, and the QSPM evaluates strategies only within sets. Note in Table 66 that three strategies are included and they make up just one set.
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A QSPM for a food company is provided in Table 6-6. This example illustrates all the
components of the QSPM: Key Factors, Strategic Alternatives, Weights,
Attractiveness Scores, Total Attractiveness Scores, and the Sum Total Attractiveness
Score. The three new terms just introduced-(l) Attractiveness Scores, (2), Total
Attractiveness Scores, and (3) the Sum Total Attractiveness Score are defined and
explained below as the six steps required to develop a QSPM are discussed.
Step I
Make a list of the firm's key external opportunities/threats and internal
strengths/weaknesses in the left column of the QSPM. This information should be taken
directly from the EFE Matrix and IFE Matrix. A minimum of
10 external critical success factors and 10 internal critical success factors should be
included in the QSPM.
Step2
Assign weights to each key external and internal factor. These weights are identical to
those in the EFE Matrix and the IFE Matrix. The weights are presented in a straight
column just to the right of the external and internal critical success factors.
Step3
Examine the Stage 2 (matching) matrices and identify alternative Strategies that the
organization should consider implementing. Record these strategies in the top row of the
QSPM. Group the strategies into mutually exclusive sets if possible.
Step4
Determine the Attractiveness Scores (AS), defined as numerical values that indicate the
relative attractiveness of each strategy in a given set of alternatives.
Attractiveness Scores are determined by examining each key external or internal factor,
one at a time, and asking the question, "Does this factor affect the choice strategies being
made?" If the answer to this question is yes, then the strategy should be compared relative
to that key factor. Specifically, Attractiveness
Scores should be assigned to each strategy to indicate the relative attractiveness of one
strategy over others, considering the particular factor. The range for
Attractiveness Scores is I = not attractive, 2 = somewhat attractive, 3 = reasonably
attractive, and 4 = highly attractive. If the answer to the above question is no, indicating
that the respective key factor has no effect upon the specific choice being made, then do
not assign Attractiveness Scores to the strategies in that
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set. Use a dash to indicate that the key factor does not affect the choice being made.
Note: If you assign an AS score to one strategy, then assign AS score(s) to the other. In
other words, if one strategy receives a dash, then all others must receive a dash in a given
row.
Step 5
Compute the Total Attractiveness Scores. Total Attractiveness Scores are defined as the
product of multiplying the weights (Step 2) by the Attractiveness Scores (Step 4) in each
row. The Total Attractiveness Scores indicate
the relative attractiveness of each alternative strategy, considering only the impact of the
adjacent external or internal critical success factor. The higher the
Total Attractiveness Score, the more attractive the strategic alternative (considering only
the adjacent critical success factor).
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Step 6
Compute the Sum Total Attractiveness Score. Add Total Attractiveness Scores in each
strategy column of the QSPM. The Sum Total Attractiveness Scores reveal which strategy
is most attractive in each set of alternatives. Higher scores indicate more attractive
strategies, considering all the relevant external and internal factors that could affect the
strategic decisions. The magnitude of the difference between the Sum Total
Attractiveness Scores in a given set of strategic alternatives indicate the relative
desirability of one strategy over another.
In Table 6-6, two alternative strategies-establishing a joint venture in Europe and
establishing a joint venture in Asia-are being considered by Campbell Soup.
Note that NAFTA has no impact on the choice being made between the two strategies, so
a dash (-) appears several times across that row. Several other factors also have no effect
on the choice being made, so dashes are recorded in those rows as well. If a particular
factor affects one strategy but not the other, it affects the choice being made, so
attractiveness scores should be recorded. The sum total attractiveness score of 5.30 in
Table 6-6 indicates that the joint venture in Europe is a more attractive strategy when
compared to the joint venture in Asia.
You should have a rationale for each AS score assigned. In Table 6-6, the rationale for
the AS scores in the first row is that the unification of Western Europe creates more
stable business conditions in Europe than in Asia. The AS score of 4 for the joint venture
in Europe and 2 for the joint venture in Asia indicates that the European venture is most
acceptable and the Asian venture is possibly acceptable, considering only the first critical,
success factor. AS scores, therefore, are not mere guesses; they should be rational,
defensible, and reasonable. Avoid giving each strategy the same AS score. Note in Table
6-6 that dashes are inserted all the way across the row when used. Also note that never
are double 4's, or double 3's, or double 2's, or double l's in a given row. These are
important guidelines to follow in constructing a QSPM.
7.3.9 Positive Features and Limitations of the QSPM
A positive feature of the QSPM is that sets of strategies can be examined sequentially or
simultaneously. For example, corporate-level strategies could be evaluated first, followed
division-level strategies, and then function-level strategies. There is no limit to the
number of strategies that can be evaluated or the number of sets of strategies that can be
examined at once using the QSPM.
Another positive feature of the QSPM is that it requires strategists to integrate pertinent
external and internal factors into the decision process. Developing a QSPM makes it less
likely that key factors will be overlooked or weighted inappropriately
QSPM draws attention to important relationships that affect strategy decisions.
Although developing a QSPM requires a number of subjective decisions, making small
decisions along the way enhances the probability that the final strategic decisions will be
best for the organization. A QSPM can be adapted for use by small and large for-profit
and nonprofit organizations and can be applied to virtually any type of organization.
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A QSPM especially can enhance strategic choice in multinational firms because many
factors and strategies can be considered at once. It also has been applied successfully by a
number of small businesses.
The QSPM is not without some limitations. First, it always requires intuitive judgments
and educated assumptions. The ratings and attractiveness scores require judgmental
decisions, even though they should be based on objective information.
Discussion among strategists, managers, and employees throughout the strategyformulation process, including development of a QSPM, is constructive and improves
strategic decisions. Constructive discussion during strategy analysis and choice may arise
because of genuine differences of interpretation of information and varying opinions.
Another limitation of the QSPM is that it can be only as good as the prerequisite
information and matching analyses upon which it is based.
7.4 Revision Points
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The firm's present strategies, objectives, and mission coupled with the external
and internal audit information, provide a basis for generating and evaluating
feasible alternative strategies.
All participants in the strategy analysis and choice activity should have the firm's
external and internal audit information by their sides. This information, coupled
with the firm’s mission statement will help participants crystallize in their own
minds particular strategies that they believe could benefit the firm most.
Creativity should be encouraged in this thought process.
Important strategy-formulation techniques can be integrated into a three-stage
decision-making framework. The tools presented in this framework are
applicable to all sizes and types of organizations and can help strategists identify
evaluate and select strategies.
All the nine techniques included in the strategy-formulation framework require
integration and analysis. Autonomous divisions in an organization commonly use
strategy-formulation techniques to develop strategies and objectives. Divisional
analyses provide a basis for identifying, evaluating, and selecting among
alternative corporate level strategies.
Procedures for developing an EFE matrix, an IFE Matrix, and a Competitive
Profile Matrix were presented in Units 3 and 4. The information derived from
these three matrices provide basic input information for the matching and decision
stage matrices described later in this chapter.
The matching stage of the strategy-formulation framework consists of five
techniques that can be used in any sequence: the TOWS Matrix, the SPACE
Matrix, the BCG Matrix, and the IE matrix and the Grand Strategy Matrix. These
tools rely upon information derived from the input stage to match external
opportunities and threats with internal strengths and weaknesses.
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•
•
•
•
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February 2006
The Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix is an important
matching tool that helps managers develop four types of strategies: SO Strategies,
WO Strategies, ST Strategies, and WT Strategies.
The Strategic Position and Action Evaluation (SPACE) Matrix has a fourquadrant framework which indicates whether aggressive, conservative, defensive,
or competitive strategies are most appropriate for a given organization. The axes
of the SPACE Matrix represent two inter dimensions financial strength [FS] and
competitive advantage [CA] and two external dimensions environmental stability
[ES] and industry strength [IS]. These four factors are the most important
determinants of an organization's overall strategic position.
The BCG Matrix graphically portrays differences among divisions in terms
relative market share position and industry growth rate. The BCG Matrix allows a
multi divisional organization to manage its portfolio of businesses by examining
the relative market share position and the industry growth rate of each division
relative to all other divisions in the organization.
The Internal-External (IE) Matrix positions an organization's various divisions in
a nine cell display. . The IE Matrix is similar to the BCG Matrix in that both tools
involve plotting organization divisions in a schematic diagram.
In addition to the TOWS Matrix, SPACE Matrix, BCG Matrix, and IE Matrix, the
Grand Strategy Matrix has become a popular tool for formulating alternative
strategies. All organizations can be positioned in one of the Grand Strategy
Matrix's four strategy quadrants.
Other than ranking strategies to achieve the prioritized list, there is only one
analytical technique in the literature designed to determine the relative
attractiveness of feasible alternative actions. This technique is the Quantitative
Strategic Planning Matrix (QSPM), which comprises Stage 3 of the strategyformulation analytical framework.5This technique objectively, indicates which
alternative strategies are best. The QSPM uses input from stage 1 analyses and
matching results from Stage 2 analyses to decide objectively among alternative
strategies.
7.5 Summary
The essence of strategy formulation is an assessment of whether an organization is doing
the right things and how it can be more effective in what it does. Every organization
should be wary of becoming a prisoner of its own strategy, because even the best
strategies become obsolete sooner or later. Regular reappraisal of strategy helps
management avoid complacency. Objectives and strategies should be consciously
developed and coordinated and should not merely evolve out of day-to-day operating
decisions.
An organization with no sense of direction and no coherent strategy precipitates its own
demise. When an organization does not know where it wants to go, it usually ends up
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some place it does not want to be! Every organization needs to consciously establish and
communicate clear objectives and strategies.
Modern strategy-formulation tools and concepts are described in this Unit and are
integrated into a practical three-stage framework. Tools such as the TOWS Matrix,
SPACE Matrix, BCG Matrix, IE Matrix, and QSPM can enhance significantly the quality
of strategic decisions, but they should never be used to dictate the choice of strategies.
Behavioral, cultural, and political aspects of strategy generation and selections are always
important to consider and manage. Because of increased legal pressure fromoutside
groups, boards of directors are assuming a more active role in strategy analysis and
choice. This is a positive trend for organizations.
7.6 Check Your Progress
Review Questions:
1. How would you develop a set of objectives for your school of business?
2. How would you develop a set of objectives for the neighborhood provision store?
3. How would the application of a strategy formulation framework differ from a
small to a large organization?
4. What do you think is the appropriate role of a board of directors in strategic
management? Why?
5. Discuss the limitations of various strategy formulation analytical techniques.
6. Explain why cultural factors should be an important consideration in analyzing
and choosing among alternative strategies.
7. How are the following methods similar to each other? How are they different?
(a) TOWS Matrix and SPACE Matrix?
(b) TOWS Matrix and BCG Matrix?
© TOWS Matrix and IE Matrix?
(d) TOWS Matrix and Grand Strategy Matrix?
(e) SPACE Matrix and BCG Matrix?
(f) SPACE Matrix and IE Matrix?
(g) SPACE Matrix and Grand Strategy Matrix?
(h) BCG Matrix and IE Matrix?
(i) BCG Matrix and Grand Strategy Matrix?
(j) IE Matrix and Grand Strategy Matrix?
8. How would profit and non-profit organizations differ in their applications of the
strategy formulation framework?
9. What types of strategies would you recommend for an organization that achieves
a total weighted score of 3.6 on the IFE, and of 1.2 on the EFE Mtarix?
10. Given the following information, develop a SPACE Matrix for the Bharath
Corporation: DS=+2; ES=-6; CA=-2; IS=+4.
11. Explain the steps involved in developing a QSPM.
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MBA 401 Strategic Management Distance Education Course Material
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Unit 8: Strategy Implementation
8.1 Introduction
This Unit will introduce you to the features and characteristics of Strategy
Implementation. Most organizations assume that once a good strategy has been evolved,
its implementation is automatically an easy task. But, as we shall see in this Unit, there
are several issues involved in Strategy Implementation.
8.2 Objectives
The overall objective of this Unit is to explain the various issues involved in Strategy
Implementation. Specifically, we shall look at the organizational, finance, and marketing
perspectives. In this process, we shall make you aware and prepared to tackle any
problems which might arise during the Strategy Implementation process in your
organization.
8.3 Content Exposition
8.3.1 The Nature of Strategy Implementation
The strategy-implementation stage of strategic management is revealed in Figure 8.1.
Successful strategy formulation does not guarantee successful strategy implementation.
It is always more difficult to do something (strategy implementation) than to say you are
going to do it (strategy formulation)! Although inextricably linked, strategy
implementation is fundamentally different from strategy formulation. Strategy
formulation implementation can be contrasted in the following ways:
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•
•
•
•
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Strategy formulation is positioning forces before the action. .
Strategy implementation is managing forces during the action.
Strategy formulation focuses on effectiveness.
Strategy implementation focuses on efficiency.
Strategy formulation is primarily an intellectual process.
Strategy implementation is primarily an operational process.
Strategy formulation requires good intuitive and analytical skills.
Strategy implementation requires special motivation and leadership skills.
Strategy formulation requires coordination among a few individuals.
Strategy implementation requires coordination among many persons.
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Management Perspectives
Management issues central to strategy implementation include establishing annual
Objectives devising policies, allocating resources, altering an existing organizational
structure restructuring and reengineering, revising reward and incentive plans,
minimizing resistance to change, matching managers with strategy, developing a
strategy-supportive culture adapting production/operations processes, developing an
effective human resource function and, if necessary, downsizing. Management changes
are necessarily more extensive when strategies to be implemented move a firm in a major
new direction.
Managers and employees throughout an organization should participate early and
Directly in strategy-implementation decisions. Their role in strategy implementation
Should build upon prior involvement in strategy-formulation activities. Strategists'
genuine personal commitment to implementation is a necessary and powerful
motivational force for managers and employees. Too often, strategists are too busy to
actively support strategy-implementation efforts, and their lack of interest can be
detrimental to organizational success. The rationale for objectives and strategies should
be understood and clearly communicated throughout an organization.
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8.3.2 Annual Objectives
Establishing annual objectives is a decentralized activity that directly involves all
management in an organization. Active participation in establishing annual objectives can
lead to acceptance and commitment. Annual objectives are essential for strategy
implementation because
(1) they represent the basis for allocating resources;
(2) they are a primary mechanism for evaluating managers;
(3) they are the major instrument for monitoring progress toward achieving long-term
objectives;
(4) they establish organizational, divisional, and department priorities.
The purpose of annual objectives can be summarized as follows:
Annual objectives serve as guidelines for action, directing and channeling
efforts and activities of organization members. They provide a source of
legitimacy in an enterprise by justifying activities to stakeholders. They serve as
standards of performance. They serve as an important source of employee
motivation and identification. They give incentives for managers and employees
to perform. They provide a basis for organizational design.
Figure 8-2 also reflects how a hierarchy of annual objectives can be established
based on an organization's structure. Objectives should be consistent across hierarchical
levels and form a network of supportive aims. Horizontal consistency of objectives is as
important as vertical consistency. For instance, it would not be effective for
manufacturing to achieve more than its annual objective of units produced if marketing
could not sell additional units.
Annual objectives should be measurable, consistent, reasonable, challenging, clear,
communicated throughout the organization, characterized by an appropriate time
dimension and accompanied by commensurate rewards and sanctions. Too often,
objectives are stated in generalities, with little operational usefulness. Annual objectives
such as "to improve communication" or "to improve performance" are not clear, specific,
or measurable.
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8.3.3 Policies
Changes in a firm's strategic direction do not occur automatically. On a day-to-day basis
policies are needed to make a strategy work. Policies facilitate solving recurring
problems and guide the implementation of strategy. Broadly defined, policy refers to
specific guidelines, methods, procedures, rules, forms, and administrative practices
established to support and encourage work toward stated goals. Policies are instruments
for strategy implementation. Policies set boundaries, constraints, and limits on the kinds
of administrative actions that can be taken to reward and sanction behavior; they clarify
what can and cannot be done in pursuit of an organization's objectives.
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Policies let both employees and managers know what is expected of them, thereby
increasing the likelihood that strategies will be implemented successfully. They provide
a basis for management control, allow coordination across organizational units and
reduce the amount of time managers spend making decisions. Policies also clarify
work is to be done by whom. They promote delegation of decision making to appropriate
managerial levels where various problems usually arise. Many organizations have a
policy manual that serves to guide and direct behavior.
Policies can apply to all divisions and departments (for example, "We are an equal
opportunity employer"). Some policies apply to a single department ("Employees in this
department must take at least one training and development course each year)
8.3.3.1 A Hierarchy of Policies
Company strategy: Acquires chain of retail stores to meet our sales growth and
profitability objectives.
Supporting policies:
All stores swill be open from 8 A.M .to 8 P.M. Monday through Saturday."(This policy
could increase retail sales if stores currently are open only 40 hours a week.)
All stores must submit a Monthly Control Data Report." (This policy could reduce
expense-to-sales ratios.)
All stores must support company advertising by contributing 5 percent of their total
monthly revenues for this purpose. (This policy could allow the company to establish a
national reputation.)
All stores must adhere to the uniform pricing guidelines set forth in the Company
Handbook." (This policy could help assure customers that the company offers a
consistent product in terms of price and quality in all its stores.)
Divisional Objective: Increase the division's revenues from $10 million in 2000 to $15
million in 2002.
Supporting policies:
Beginning in January 2001, this division's salespersons must file a weekly activity report
that includes the number of calls made , the number of miles traveled, the number of units
sold, the dollar volume sold, and the number of new accounts opened." (This policy could
ensure that salespersons do not place too great an emphasis in certain areas.)
Beginning in January 2001, this division will return to its employees 5 percent of its gross
revenues in the form of a Christmas bonus." (This policy could increase employee
productivity.)
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Beginning in January 2001, inventory levels carried in warehouses will be decreased by
30 percent in accordance with a Just-in-Time manufacturing approach." (This policy
could reduce production expenses and thus free funds for
Increasing marketing efforts.)
Production Department Objective: Increase production from 20,000 units in 2000 to
30,000 units in 2002.
Supporting policies:
Beginning in January 2001, employees will have the option of working up to 20 hours of
overtime per week." (This Policy could minimize the need to hire additional employees.)
Beginning in January 2001, perfect attendance awards in the amount of $100 will be
given to all employees who do Not miss a workday in a given year." (This policy could
decrease absenteeism and increase productivity.)
Beginning in January 2001, new equipment must be leased rather than purchased." (This
policy could reduce tax liabilities and thus allow more funds to be invested in
modernizing production processes.)
''The example issues that may require a management policy are as follows
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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To offer extensive or limited management development workshops and seminars
To centralize or decentralize employee-training activities
To recruit through employment agencies, college campuses, and/or newspapers
To promote from within or hire from the outside
To promote on the basis of merit or on the basis of seniority
To tie executive compensation to long-term and/or annual objectives
To offer numerous or few employee benefits
To negotiate directly or indirectly with labor unions
To delegate authority for large expenditures or to retain this authority centrally
To allow much, some, or no overtime work
To establish a high- or low-safety stock of inventory
To use one or more suppliers
To buy, lease, or rent new production equipment
To stress quality control greatly or not
To establish many or only a few production standards .To operate one, two, or
three shifts
To discourage using insider information for personal gain .To discourage sexual
harassment .To discourage smoking at work .To discourage insider trading .To
discourage moonlighting
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8.3.4 Resource Allocation
Resource allocation is a central management activity that allows for strategy execution in
organizations that do not use a strategic-management approach to decision making,
resource allocation is often based on political or personal factors; Strategic management
enables resources to be allocated according to priorities established by annual objectives.
Nothing could be more detrimental to strategic management and to organizational
success than for resources to be allocated in ways not consistent with priorities indicated
by approved annual objectives,
All organizations have at least four types of resources that can be used to achieve
desired objectives: financial resources, physical resources, human resources, and
technological resources. Allocating resources to particular divisions and departments
does not mean that strategies will be successfully implemented. A number of factors
commonly prohibit effective resource allocation, including an overprotection of
resources, too great an emphasis on short-run financial criteria, organizational politics,
vague strategy, targets, a reluctance to take risks, and a lack of sufficient knowledge.
Below the corporate level, there often exists an absence of systematic thinking
about resources allocated and strategies of the firm. Yavitz and Newman explained why:
Managers normally have many more tasks than they can do. Managers must
allocate time and resources among these tasks. Pressure builds up. Expenses are
too high. The CEO wants a good financial report for the third quarter. Strategy
formulation and implementation activities often get deferred. Today's problems
soak up available energies and resources. Scrambled accounts and budgets fail to
reveal the shift in allocation away from strategic needs to currently squeaking
wheels.
The real value of any resource allocation program lies in the resulting accomplishment
of an organization's objectives. Effective resource allocation does not guarantee
successful strategy implementation because programs, personnel, controls, and
commitment must breathe life into the resources provided. Strategic management itself is
sometimes referred to as a "resource allocation process."
8.3.5 Managing Conflict
Interdependency of objectives and competition for limited resources often leads to
conflict. Conflict can be defined as a disagreement between two or more parties on one or
more issues. Establishing annual objectives can lead to conflict because individuals
different expectations and perceptions, schedules create pressure, personalities are
incompatible and misunderstandings between line and staff occur. For example, a
collection management’s objective of reducing bad debts by 50 percent in a given year
may conflict with a divisional objective to increase sales by 20 percent.
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Establishing objectives can lead to conflict because managers and strategists must Make
trade-offs, such as whether to emphasize short-term profits or long-term growth, profit
margin or market share, market penetration or market development, growth or stability,
high risk or low risk, and social responsiveness or profit maximization. Conflict
is unavoidable in organizations, so it is important that conflict be managed and resolved
before dysfunctional consequences affect organizational performance. Conflict is not
always bad. An absence of conflict can signal indifference and apathy. Conflict can serve
to energize opposing groups into action and may help managers identify problems.
Various approaches for managing and resolving conflict can be classified into three
categories: avoidance, defusion, and confrontation. Avoidance includes such actions
as ignoring the problem in hopes that the conflict will resolve itself or physically
separating the conflicting individuals (or groups). Defusion can include playing down
differences between conflicting parties while accentuating similarities and common
interests, compromising so that there is neither a clear winner nor loser, resorting to
majority rule, appealing to a higher authority, or redesigning present positions.
Confrontation is exemplified by exchanging members of conflicting parties so that each
can gain an appreciation of the other's point of view, or holding a meeting at which
conflicting parties present their views and work through their differences.
8.3.6 Matching Structure with Strategy
Changes in strategy often require changes in the way an organization is structured for
two major reasons. First, structure largely dictates how objectives and policies will be
established. For example, objectives and policies established under a geographic
organizational structure are couched in geographic terms. Objectives and policies are
stated largely in terms of products in an organization whose structure is based on product
The structural format for developing objectives and policies can significantly
impact all other strategy-implementation activities.
The second major reason why changes in strategy often require changes in structure is
that structure dictates how resources will be allocated. If an organization is structure
based on customer groups, then resources will be allocated in that manner.
Similarly, if an organization's structure is set up along functional business lines, then
resources are allocated by functional areas. Unless new or revised strategies place
emphasis in the same areas as old strategies, structural reorientation commonly becomes
a part of strategy implementation.
Changes in strategy lead to changes in organizational structure. Structure should
be designed to facilitate the strategic pursuit of a firm and, therefore, follows strategy.
Without a strategy or reasons for being (mission), designing an effective structure is
difficult. Chandler found a particular structure sequence to be often repeated as
organizations grow and change strategy over time; this sequence is depicted in Figure8-3.
There is no one optimal organizational design or structure for a given strategy or
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type of organization. What is appropriate for one organization may not be appropriate for
a similar firm, although successful firms in a given industry do tend to organize themselves in a similar way. For example, consumer goods companies tend to emulate the
divisional structure-by-product form of organization. Small firms tend to be functionally
tructured (centralized). Medium-size firms tend to be divisionally structured
(decentralized). Large firms tend to use an SBU (strategic business unit) or matrix
structure.
As organizations grow, their structures generally change from simple to complex as a
result of concatenation, or the linking together of several basic strategies.
Numerous external and internal forces affect an organization; no firm could change
its structure in response co every one of these forces, because co do so would lead to
chaos. However, when a firm changes its strategy, the existing organizational structure
become ineffective. Symptoms of an ineffective organizational structure include too
many levels of management, too many meetings attended by coo many people, too much
attention being directed coward solving interdepartmental conflicts, too large a span of
control, and coo many unachieved objectives. Changes in structure can facilitate strategyimplementation efforts, but changes in structure should not be expected co make a bad
strategy good, co make bad managers good, or co makes bad products sell.
Structure undeniably can and does influence strategy. Strategies formulated must be
workable, so if a certain new strategy required massive structural changes it would not be
an attractive choice. In this way, structure can shape the choice of strategies. But a more
important concern is determining what types of structural changes is need. implement
new strategies and how these changes can best be accomplished. We examine this issue
by focusing on seven basic types of organizational structure: functional, divisional by
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geographic area, divisional by product, divisional by customer, divisional by process,
strategic business unit (SBD), and matrix.
8.3.7 Restructuring, Re-engineering, and E-Engineering
Restructuring and reengineering are becoming commonplace on the corporate landscape
across the United States and Europe. Restructuring-also called downsizing; rightsizing, or
delayering - involves reducing the size of the firm in terms of number of employees,
number of divisions or units, and number of hierarchical levels in the firm's
organizational structure. This reduction in size is intended to improve both efficiency and
effectiveness. Restructuring is concerned primarily with shareholder well-being rather
than employee’s well-being.
The Internet is ushering in a new wave of business transformation. No longer is it enough
for companies to put up simple Web sites for customers and employees. To take full
advantage of the Internet, companies need to change the way they distribute goods, deals
with suppliers, attract customers, and serve customers. The Internet eliminates the
geographic protection/monopoly of local businesses. Basically companies need to
reinvent the way they do business to take full advantage of the Internet. This whole
process is being called Re-engineering. Dow Corning Corporation and many others have
recently appointed an e-commerce top executive.
.
In contrast, reengineering is concerned more with employee and customer well being
than shareholder well-being. Reengineering-also called process management process
innovation, or process redesign-involves reconfiguring or redesigning work jobs, and
processes for the purpose of improving cost, quality, service, and speed.
Reengineering does not usually affect the organizational structure or chart, nor does it
imply job loss or employee layoffs. Whereas restructuring is concerned with eliminating
or establishing, shrinking, and moving organizational departments and divisions, the
focus of reengineering is changing the way work is actually carried out.
Reengineering is characterized by many tactical (short-term, business function specific)
decisions, whereas restructuring is characterized by strategic (long-term, affecting all
business functions) decisions.
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Restructuring:
Firms often employ restructuring when various ratios appear out of line with competitors
as determined through benchmarking exercises. Benchmarking simply involves
comparing a firm against the best firms in the industry on a wide variety of performancerelated criteria. Some benchmarking ratios commonly used in rationalizing the need for
restructuring are headcount-to-sales-volume, or corporate-staff-to-operating-employees,
or span-of-control figures.
The primary benefit sought from restructuring is cost reduction. For some highly
bureaucratic firms, restructuring can actually rescue the firm from global competition and
demise. But the downside of restructuring can be reduced employee commitment,
creative and innovation that accompanies the uncertainty and trauma associated with
pending and actual employee layoffs.
Another downside of restructuring is that many people today do not aspire to become
managers, and many present-day managers are trying to get off the management
Sentiment against joining management ranks is higher today than ever. About 80 percent
of employees say they want nothing to do with management, a major shift from just a
decade ago when 60 to 70 percent hoped to become managers. Managing others
historically led to enhanced career mobility, financial rewards, and executive perks; but
in today’s global, more competitive, restructured arena, managerial jobs demand more
hours and headaches with fewer financial rewards. Managers today manage more people
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spread over different locations, travel more, manage diverse functions, and are change
agents even when they have nothing to do with the creation of the plan or even disagree
with its approach. Employers today are looking for people who can do things, not for
people who make other people do things. Restructuring in many firms has made a
manager’s job, an invisible, thankless role. More workers today are self-managed,
entrepreneurs intrepreneurs, or team-managed. Managers today need to be counselors,
motivators, financial advisors, and psychologists. They also run the risk of becoming
technologically behind in their areas of expertise. "Dilbert" cartoons commonly portray
mangers as enemies or as morons.
Reengineering
The argument for a firm engaging in reengineering usually goes as follows: Many
companies historically have been organized vertically by business function. This
arrangement has led over time to managers' and employees' mind-sets being defined by
their particular functions rather than by overall customer service, product quality, or
corporate performance. The logic is that all firms tend to bureaucratize over time. As
routines become entrenched, turf becomes delineated and defended, and politics takes
precedence over performance. Walls that exist in the physical workplace can be
reflections of "mental" walls.
In reengineering, a firm uses information technology to break down functional barriers
and create a work system based on business processes, products, or outputs rather than on
functions or inputs. Cornerstones of reengineering are decentralization, reciprocal
interdependence, and information sharing. A firm that exemplifies complete information
sharing is Springfield Remanufacturing Corporation, which provides to all employees a
weekly income statement of the firm, as well as extensive information other companies'
performances.
8.3.9 Managing Resistance to Change
No organization or individual can escape change. But the thought of change raises
anxieties because people fear economic loss, inconvenience, uncertainty, and a break in
normal social patterns. Almost any change in structure, technology, people, or strategies
has the potential to disrupt comfortable interaction patterns. For this reason, people resist
change. The strategic-management process itself can impose major changes on
individuals and processes. Reorienting an organization to get people to think and act
strategically is not an easy task.
Resistance to change can be considered the single greatest threat to successful strategy
implementation. Resistance in the form of sabotaging production machines, absenteeism,
filing unfounded grievances, and an unwillingness to cooperate regularly occurs in
organizations. People often resist strategy implementation because they do not
understand what is happening or why changes are taking place. In that case, employees
may simply need accurate information. Successful strategy implementation hinges upon
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manger’s ability to develop an organizational climate conducive to change. Change must
be viewed as an opportunity rather than as a threat by managers and employees.
Resistance to change can emerge at any stage or level of the strategy-implementation
process. Although there are various approaches for implementing changes, three
commonly used strategies are a force change strategy, an educative change strategy, and
a rational or self-interest change strategy. A force change strategy involves giving orders
and enforcing those orders; this strategy has the advantage of being fast, but it is plagued
by low commitment and high resistance. The educative change strategy is one that
presents information to convince people of the need for change; the disadvantage of an
educative change strategy is that implementation becomes slow and difficult. However,
this type of strategy evokes greater commitment and less resistance than does the force
strategy. Finally, a rational or self-interest change strategy is one that attempts to
convince individuals that the change is to their personal advantage. When this appeal is
successful, strategy implementation can be relatively easy. However, implementation
changes are seldom to everyone's advantage
Ignor Ansoff summarized the need for strategists to manage resistance to change as
follows:
Observation of the historical transitions from one orientation to another show
that if left unmanaged, the process becomes conflict-laden, prolonged, and
costly in both human and financial terms. Management of resistance involves
anticipating the focus of resistance and its intensity. Second, it involves
eliminating unnecessary resistance caused by misperceptions and insecurities.
Third, it involves mustering the power base necessary to assure support for the
change. Fourth, it involves planning the process of change. Finally, it involves
monitoring and controlling resistance during the process of change.
8.3.10 Crafting Strategy Supporting Culture
Strategists should strive to preserve, emphasize, and build upon aspects of an existing
culture that support proposed new strategies. Aspects of an existing culture that are
antagonistic to a proposed strategy should be identified and changed. Substantial research
indicates that new strategies are often market-driven and dictated by competitive forces.
For this reason, changing a firm's culture to fit a new strategy is usually more effective
than changing a strategy to fit an existing culture. Numerous techniques are available to
alter an organization's culture, including recruitment, training, transfer, and promotion,
restructure of an organization's design, role modeling, and positive reinforcement.
Jack Duncan described triangulation as an effective, multi-method technique for studying
and altering a firm's culture.15 Triangulation includes the combined use of obtrusive
observation, self-administered questionnaires, and personal interviews to determine the
nature of a firm's culture. The process of triangulation reveals needed changes in a firm's
culture that could benefit strategy.
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Schein indicated that the following elements are most useful in linking culture to
strategy:
1. Formal statements of organizational philosophy, charters, creeds, materials used
for recruitment and selection, and socialization
2. Designing of physical spaces, facades, buildings
3. Deliberate role modeling, teaching, and coaching by leaders
4. Explicit reward and status system, promotion criteria
5. Stories, legends, myths, and parables about key people and events
6. What leaders pay attention to, measure, and control?
7. Leader reactions to critical incidents and organizational crises
8. How the organization is designed and structured
9. Organizational systems and procedures
10. Criteria used for recruitment, selection, promotion, leveling off, retirement "excommunication" of people.
In the personal and religious side of life, the impact of loss and change is easy to see.
Memories of loss and change often haunt individuals and organizations for years.
Ibsen wrote, "Rob the average man of his life illusion and you rob him of his happiness at
the same stroke. When attachments to a culture are severed in an organization’s attempt
to change direction, employees and managers often experience deep feelings of grief.
This phenomenon commonly occurs when external conditions dictate the need for a new
strategy. Managers and employees often struggle to find meaning in a situation changed
many years before. Some people find comfort in memories; others find solace in the
present. Weak linkages between strategic management and organizational culture can
jeopardize performance and success. Deal and Kennedy emphasized making strategic
changes in an organization always threatens a culture:
“People form strong attachments to heroes, legends, the rituals of daily life, the hoopla
of extravaganza and ceremonies, and all the symbols of the workplace.
Change strips relationships and leaves employees confused, insecure, and often angry.
Unless something can be done to provide support for transitions from old to new, the
force of a culture can neutralize and emasculate strategy changes”.
8.3.11 Production/Operation Concerns When Implementing Strategies
Production/operation capabilities, limitations and policies can significantly enhance or
inhibit attainment of objectives. Production processes typically constitute more than 70
percent of a firm's total assets. A major part of the strategy-implementation process takes
place at the production site. Production-related decisions on plant size, plant location
design, choice of equipment, kind of tooling, size of inventory, inventory control quality
control, cost control, use of standards, job specialization, employee training, equipment
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and resource utilization, shipping and packaging, and technological innovation can have a
dramatic impact on the success or failure of strategy-implementation efforts.
Examples of adjustments in production systems that could be required to implement
various strategies are provided in Table 7-3 for both for-profit and nonprofit
organizations. For instance, note that when a bank formulates and selects a strategy to
add ten new branches, a production-related implementation concern is site location. The
largest bicycle company in the United States, Huffy, recently ended its own production of
bikes and now contracts out those services to Asian and Mexican manufacturers. Huffy
focuses instead on design, marketing, and distribution of bikes, but no longer produces
bikes itself. The Dayton, Ohio, company closed its plants in Ohio, Missouri, and
Mississippi
Just in Time UIT) production approaches have withstood the test of time.JIT significantly
reduces the costs of implementing strategies. With JIT, parts and materials are
delivered to a production site just as they are needed, rather than being stockpiled as a
hedge against later deliveries. Harley-Davidson reports that at one plant alone, JIT freed
$22 million previously tied up in inventory and greatly reduced reorder lead time.
Factors that should be studied before locating production facilities include the availability
of major resources, the prevailing wage rates in the area, transportation costs related to
shipping and receiving, the location of major markets, political risks in the area or
country, and the availability of trainable employees.
For high-technology companies, production costs may not be as important as production
flexibility because major product changes can be needed often. Industries such as
biogenetics and plastics rely on production systems that must be flexible enough to
allow frequent changes and rapid introduction of new products. An article in Harvard
Business Review explained why some organizations get into trouble:
They too slowly realize that a change in product strategy alters the tasks of a production
system. These tasks, which can be stated in terms of requirements for cost, product
flexibility, volume flexibility, product performance, and product consistency, determine
which manufacturing policies are appropriate. As
strategies shift over time, so must production policies covering the location and scale of
manufacturing facilities, the choice of manufacturing process, the degree of vertical
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integration of each manufacturing facility, the use of R&D units, the control of the
production system, and the licensing of technology.
A common management practice, cross-training of employees, can facilitate strategy
implementation and can yield many benefits. Employees gain a better understanding of
the whole business and can contribute better ideas in planning sessions. Production/
operations managers need to realize, however, that cross-training employees can create
problems related to the following issues:
1. It can thrust managers into roles that emphasize counseling and coaching over
directing and enforcing.
2. It can necessitate substantial investments in training and incentives.
3. It can be very time-consuming.
4. Skilled workers may resent unskilled workers who learn their jobs.
5. Older employees may not want to learn new skills.
8.3.12 Human Resources Concerns when Implementing Strategies
The job of human resource manager is changing rapidly as companies downsize and
reorganize the 1990s. Strategic responsibilities of the human resource manager include
accessing the staffing needs and costs for alternative strategies proposed during strategy
formulation and developing a staffing plan for effectively implementing strategies. This
plan must consider how best to manage spiraling health insurance costs. Employers'
health coverage expenses consume an average 26 percent of firms' net profits, even
though most companies now require employees to pay part of their health insurance
premiums. The plan must also include how to motivate employees and managers during a
time when layoffs are common and workloads are high.
The human resource department must develop performance incentives that clearly
Link performance and pay to strategies. The process of empowering managers and
Employees through involvement in strategic-management activities yields the greatest
Benefits when all organizational members understand clearly how they will benefit
personally if the firm does well. Linking company and personal benefits is a major new
strategic responsibility of human resource managers. Other new responsibilities for
human resource managers may include establishing and administering an employee stock
ownership plan (ESOP). instituting an effective child care policy, and providing
leadership for managers and employees to balance work and family.
A well-designed strategic-management system can fail if insufficient attention is given to
the human resource dimension. Human resource problems that arise when businesses
implement strategies can usually be traced to one of three causes: (1) disruption of social
and political structures, (2) failure to match individuals' aptitudes with implementation
tasks, and (3) inadequate top management support for implementation activities.
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Strategy implementation poses a threat to many managers and employees in an
organization. New power and status relationships are anticipated and realized. New
formal and informal groups' values, beliefs, and priorities may be largely unknown
Managers and employees may become engaged in resistance behavior as their roles.
prerogatives and power in the firm change. Disruption of social and political structures
that accompany strategy execution must be anticipated and considered during strategy
formulation and managed during strategy implementation.
A concern in matching managers with strategy is that jobs have specific and relatively
static responsibilities, although people are dynamic in their personal development.
Commonly used methods that match managers with strategies to be implemented include
transferring managers, developing leadership workshops, offering career development
activities, promotions, job enlargement, and job enrichment.
8.4 Revision Points
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It is always more difficult to do something (strategy implementation) than to say
you aregoing to do it (strategy formulation)! Although inextricably linked,
strategy implementation is fundamentally different from strategy formulation.
Management issues central to strategy implementation include establishing
annualobjectives devising policies, allocating resources, altering an existing
organizational structure restructuring and reengineering, revising reward and
incentive plans, minimizing resistance to change, matching managers with
strategy, developing a strategy-supportive culture adapting production/operations
processes, developing an effective human resource function and, if necessary,
downsizing.
Managers and employees throughout an organization should participate early and
directly in strategy-implementation decisions. Their role in strategy
implementationshould build upon prior involvement in strategy-formulation
activities. Strategists'genuine personal commitment to implementation is a
necessary and powerful motivational force for managers and employees. Too
often, strategists are too busy to actively support strategy-implementation efforts,
and their lack of interest can be detrimental to organizational success.
Establishing annual objectives is a decentralized activity that directly involves all
management in an organization. Active participation in establishing annual
objectives can lead to acceptance and commitment
Changes in a firm's strategic direction do not occur automatically. On a day-today basispolicies are needed to make a strategy work. Policies facilitate solving
recurring problems and guide the implementation of strategy.
Resource allocation is a central management activity that allows for strategy
execution in organizations that do not use a strategic-management approach to
decision making,resource allocation is often based on political or personal factors;
Strategic management enables resources to be allocated according to priorities
established by annual objectives.
Interdependency of objectives and competition for limited resources often leads
toconflict. Conflict can be defined as a disagreement between two or more parties
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on one ormore issues. Establishing annual objectives can lead to conflict because
individualsdifferent expectations and perceptions, schedules create pressure,
personalities are incompatible and misunderstandings between line and staff
occur.
Changes in strategy often require changes in the way an organization is structured
fortwo major reasons. First, structure largely dictates how objectives and policies
will beestablished.
Restructuring and reengineering are becoming commonplace on the corporate
landscapeacross the United States and Europe. Restructuring-also called
downsizing; rightsizing, or delayering - involves reducing the size of the firm in
terms of number of employees,number of divisions or units, and number of
hierarchical levels in the firm's organizational structure;
No organization or individual can escape change. But the thought of change raises
anxieties because people fear economic loss, inconvenience, uncertainty, and a
break in normal social patterns. Almost any change in structure, technology,
people, or strategieshas the potential to disrupt comfortable interaction patterns.
Strategists should strive to preserve, emphasize, and build upon aspects of an
existingculture that support proposed new strategies. Aspects of an existing
culture that are antagonistic to a proposed strategy should be identified and
changed.
Production/operation capabilities, limitations and policies can significantly
enhance or inhibit attainment of objectives. Production processes typically
constitute more than 70percent of a firm's total assets. A major part of the
strategy-implementation process takesplace at the production site.
The job of human resource manager is changing rapidly as companies downsize
and reorganize the 1990s. Strategic responsibilities of the human resource
manager includeaccessing the staffing needs and costs for alternative strategies
proposed during strategyformulation and developing a staffing plan for effectively
implementing strategies.
8.5 Summary
Successful strategy formulation does not at all guarantee successful strategy
implementation. Although inextricably interdependent, strategy formulation and strategy
implementations are characteristically different. In a single word, strategy
implementation means change. It is widely agreed that "the real work begins after
strategies are formulated." Successful strategy implementation requires support,
discipline, motivation., and hard work from all managers and employees. It is sometimes
frightening to think that a. single individual can sabotage strategy-implementation efforts
irreparably.
Formulating the right strategies is not enough, because managers and employees
must be motivated to implement those strategies. Management issues considered central
to strategy implementation include matching organizational structure with strategy,
linking performance and pay to strategies, creating an organizational climate
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conducive to change, managing political relationships, creating a strategy-supportive
culture, adapting production/operations processes, and managing human resources
Establishing annual objectives, devising policies, and allocating resources are central
strategy-implementation activities common to all organizations. Depending on the size
and type of organization, other management issues could be equally important to
successful strategy implementation.
8.6 Check Your Progress
Revision Questions:
1. Allocating resources can be apolitical and an ad hoc activity in firms
that do not use strategic management. Why is this true? Does using
strategic management ensure easy resource allocation? Why?
2. Compare strategy formulation with strategy implementation, in terms
of each being a science or an art.
3. Describe the relationship between annual objectives and policies.
4. Identify a long-term objective and two supporting annual objectives
for any organization that you are familiar with.
5. Identify and discuss three policies that would apply to (a) a local
government unit; (b) an educational institution; and (c) a sports club.
6. Explain the following statement: Horizontal consistency of goals is as
important as vertical consistency.
7. Describe several reasons why conflicts may occur during objective
setting exercises.
8. Describe the organizational culture of your college or university.
9. Explain organizational culture is so important in strategy
implementation.
10. In your opinion, how many separate divisions could an organization
reasonably have, without using an SBU-type organizational structure?
Why?
11. Consider a college organization that you are familiar with. How did
management issues affect strategy implementation in that
organization?
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Unit 9: Strategic Control and Operational Control
9.1 Introduction
In this Unit, which is the last and concluding Unit of this Text Book, we shall
present the final aspects of Strategic Management, namely, the issues of Strategic
Control and Operational Control. The major aspects of control are related to
operational and derived functional plans to implement strategy, integration of
functional plans, organizational systems and techniques of strategic evaluation.
9.2 Objectives
The overall objective of this Unit, which is the final capstone Unit of this Text
Book, is to explain the intricacies of Strategic Control and Operational Control.
The specific objectives are to give you comprehension and competence in
methods of operational and functional plans to implement strategy, and devise
systems and techniques of strategic evaluation.
9.3 Content Exposition
9.3.1 Evaluation of Strategy Implementation
Strategy implementation directly affects the lives of plant managers, division
managers, department managers, sales managers, product managers, project
managers personnel managers, staff managers, supervisors, and all employees. In
some situations individuals may not have participated in the strategy-formulation
process at all and may not appreciate, understand, or even accept the work and
thought that went into strategy formulation. There may even be foot dragging or
resistance on their part.
Managers and employees who do not understand the business and are not
committed to the business may attempt to sabotage strategy-implementation
efforts in hopes that the organization will return to its old ways. The strategyimplementation stage of the strategic-management process is emphasized in
Figure 9-1.
9.3.2 Evaluating Marketing Issues in Strategy Implementation
Countless marketing variables affect the success or failure of strategy
implementation, and the scope of this text does not allow addressing all those
issues. Some examples of marketing decisions that may require policies are as
follows:
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1. To use exclusive dealerships or multiple channels of distribution
2. To use heavy, light, or no TV advertising
3. To limit (or not) the share of business done with a single customer
4. To be a price leader or a price follower
5. To offer a complete or limited warranty
6. To reward salespeople based on straight salary, straight commission, or a
combination salary/commission
7. To advertise online or not.
A marketing issue of increasing concern to consumers today is the extent to which
companies track individual’s movements on the Internet, and even are able to
identify the individual by name and email address. Individuals' wanderings on the
Internet are no longer anonymous as many persons believe. Marketing companies
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such as Double-click, Flycast , AdForce, and Real Media have sophisticated
methods to identify who you are and your particular interests. 1 If you are
especially concerned about being tracked, visit the www.networkadvertising.org
Web site that gives details about how marketers today are identifying you and
your buying habits.
Market segmentation is an important variable in strategy implementation for at
least three major reasons. First, strategies such as market development, product
development, market penetration, and diversification require increased sales
through new markets and products. To implement these strategies successfully,
new or improved market segmentation approaches are required. Second, market
segmentation allows a firm to operate with limited resources because mass
production, and mass- distribution, and mass advertising are not required. Market
segmentation can enable a small firm to compete successfully with a large firm by
maximizing 'per-unit profits and per-segment-sales. Finally, market segmentation
decisions directly affect marketing mix variables: product, place, promotion, and
price, as indicated in Table 9-1. For example, Snack Wells. A pioneer in reducedfat snacks has shifted its advertising emphasis from low-far to great taste as part
of its new market-segmentation strategy.
Evaluating potential market segments requires strategists to determine the
characteristics and needs of consumers analyze consumer similarities and
differences and develop consumer group profiles. Segmenting consumer market is
generally much simpler and easier than segmenting industrial markets, because
industrial products, such as electronic circuits and forklifts, have multiple
applications and appeal to diverse customer groups.
A market segment of increasing importance today is online purchasers. Of the 22
million users ages five to eighteen, 67 percent make purchases on the Internet.
Children aged thirteen to eighteen spent $274 million on line in 2000, up from
$125 million in 1999. However, there is increasing evidence that Internet
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shoppers are being short- changed according to recent studies reporting that 10
percent of items purchased never arrive, 50 percent of orders arrive without
receipts, and the wait for refunds often is months.
Identifying target customers upon whom to focus marketing efforts sets the stage
for deciding how to meet the needs and wants of particular consumer groups.
Product positioning is widely used for this purpose. Positioning entails developing
schematic representations that reflect how your products or services compare to
competitors' on dimensions most important to success in the industry. The
following steps are required in product positioning:
1. Select key criteria that effectively differentiate products or services in the
industry.
2. Diagram a two-dimensional product-positioning map with specified criteria on
each axis.
3. Plot major competitors' products or services in the resultant four-quadrant
matrix.
4. Identify areas in the positioning map where the company's products or services
could be most competitive in the given target market. Look for vacant areas
(niches)
5. Develop a marketing plan to position the company's products or services
appropriately.
Because just two criteria can be examined on a single product-positioning map,
multiple maps are often developed to assess various approaches to strategy
implementation. Multidimensional scaling could be used to examine three or
more criteria simultaneously, but this technique requires computer assistance and
is beyond the scope of this text. Some examples of product-positioning maps are
illustrated in Fig 9-3.
Some rules of thumb for using product positioning as a strategy-implementation
tool are the following:
1. Look for the whole or vacant niche. The best strategic opportunity might be an
un-served segment.
2. Don't squat between segments. Any advantage from squatting (such as larger
target market) is offset by a failure to satisfy one segment. In decision-theory
terms, the intent here is to avoid sub-optimization by trying to serve more than
one objective function.
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3. Don't serve two segments with the same strategy. Usually, a strategy successful
with one segment cannot be directly transferred to another segment.
4. Don't position yourself in the middle of the map. The middle usually means a
strategy that is not clearly perceived to have any distinguishing characteristics.
This rule can vary with the number of competitors. For example, when there are
only two competitors, as in U.S. presidential elections, the middle becomes the
preferred strategic position.
An effective product-positioning strategy meets two criteria:
(1)It uniquely distinguishes a company from the competition.
(2)It leads customers to expect slightly less service than a company can deliver.
Firms should not create expectations that exceed the service the firm can or will
deliver. Network Equipment Technology is an example of company that keeps
customer expectations slightly below perceived performance. This is a constant
challenge for marketers. Firms need to inform customers about expect and then
exceed the promise. Under promise and then over-deliver!
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Evaluating Finance and Accounting Issues in Strategy
Implementation
In this section, we examine several finance/accounting concepts considered to be
central to strategy implementation: acquiring needed capital, developing pro
forma financial statements, preparing financial budgets, and evaluating the worth
of a business. Some examples of decisions that may require finance/accounting
policies are:
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9.3.3.1 Acquiring Capital to Implement Strategies
Successful strategy implementation often requires additional capital. Besides net
profit from operations and the sale of assets, two basic sources of capital for an
organization are debt and equity. Determining an appropriate mix of debt and
equity in a firm’s capital structure can be vital to successful strategy
implementation. An Earning’s Per Share/Earnings Before Interest and Taxes
(EPS/EBIT) analysis is the most widely used technique for determining whether
debt, stock, or a combination of debt and stock is the best alternative for raising
capital to implement strategies. This technique involves an examination of the
impact that debt versus stock financing has on earnings per share under various
assumptions as to EBIT.
Theoretically, an enterprise should have enough debt in its capital structure to
boost its return on investment by applying debt to products and projects earning
more than the cost of the debt. In low earning periods, too much debt in the
capital structure an organization can endanger stockholders' return and jeopardize
company survival. Fixed debt obligations generally must be met, regardless of
circumstances. This does not mean that stock issuances are always better than
debt for raising capital. Some special concerns with stock issuances are dilution of
ownership, effect on stock price and the need to share future earnings with all new
shareholders.
9.3.3.2 Financial Budgets
A financial budget is a document that details how funds will be obtained and spent
for a specified period of time. Annual budgets are most common, although the
period of time for a budget can range from one day co more than ten years.
Fundamentally, financial budgeting is a method for specifying what must be done
to complete strategy implementation successfully. Financial budgeting should not
be thought of as a cool for limiting-expenditures but rather as a method for
obtaining the most productive and profitable use of an organization's resources.
Financial budgets can be viewed as the planned allocation of firm's resources
based on forecasts of the future.
There are almost as many different types of financial budgets as there are types of
organizations. Some common types of budgets include cash budgets, operating
budgets, sales budgets, profit budgets, factory budgets, capital budgets, expense
budgets divisional budgets, variable budgets, flexible budgets, and fixed budgets.
When an organization is experiencing financial difficulties, budgets are especially
important in guiding strategy implementation.
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9.3.3.3 Evaluating the Worth of a Business
Evaluating the worth of a business is central to strategy implementation because
integrative, intensive, and diversification strategies are often implemented by
acquiring firms. Other strategies, such as retrenchment and divestiture, may result
in the sale of a division of an organization or of the firm itself. Approximately
twenty thousand transactions occur each year in which businesses are bought or
sold in the United States. In all these cases, it is necessary to establish the
financial worth or cash value of a business to successfully implement strategies.
All the various methods for determining a business's worth can be grouped into
Three main approaches: what a firm owns, what a firm earns, or what a firm will
bring into the market. But it is important to realize that valuation is not an exact
science. The valuation of a firm’s worth is based on financial facts, but common
sense and intuitive judgment must enter into the process. It is difficult to assign a
monetary value to factors such as a loyal customer base, a history of growth, legal
suits pending, dedicated employees, a favorable lease, a bad credit rating, or good
patents-that may not be reflected in a firm's financial statements. Also, different
valuation methods will yield different totals for a firm’s worth and no prescribed
approach are best for a certain situation. Evaluating the worth of a business truly
requires both qualitative and quantitative skills.
The first approach in evaluating the worth of a business is determining its net
worth of stockholders' equity. Net worth represents the sum of common stock,
additional paid-in capital, and retained earnings. After calculating net worth, add
or subtract appropriate amount for goodwill (such as high customer loyalty) and
overvalued used or undervalued assets. This total provides a reasonable estimate
of a firm's monetary value. If a firm has goodwill, it will be listed on the balance
sheet, perhaps as intangibles.
The second approach to measuring the value of a firm grows out of the belief that
worth of any business should be based largely on the future benefits its owners
may derive through net profits. A conservative rule of thumb is to establish a
business's worth as five times the firm's current annual profit. A five-year average
profit level could also be used. When using this approach, remember that firms
normally suppress earnings in their financial statements to minimize taxes.
The third approach, letting the market determine a business's worth, involves
three methods. First, base the firm's worth on the selling price of a similar
company. A potential problem, however, is that sometimes comparable figures
are not easy to locate, even though substantial information on firms that buy or
sell to other firms is available in major libraries. The second approach is called
the price-earnings ratio method. To use this method divide the market price of the
firm's common stock by the annual earnings per share and multiply this number
by the firm's average net income for the past five years. The third approach can be
called the outstanding shares method. To use this method, simply multiply the
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number of shares outstanding by the market price per share and add a premium.
The premium is simply a per share dollar amount that a person or firm is willing
to pay to control (acquire) the other company. As indicated in the global
perspective. European firms aggressively are acquiring American firms, using
these and perhaps other methods for evaluating the worth of their target
companies.
9.3.4
Evaluating Research and Development Issues in Evaluating Strategy
Implementation
Research and development (R&D) personnel can play an integral part in strategy
implementation. These individuals are generally charged with developing new
products and improving old products in a way that will allow effective strategy
implementation. R&D employees and managers perform tasks that include
transferring complex technology, adjusting processes to local raw materials,
adapting processes to local markets, and altering products to particular tastes and
specifications. Strategies such as product development market penetration and
concentric diversification require that new products be successfully developed
and that old products be significantly improved. But the level of management
support for R&D is often constrained by resource availability:
If Indian business is to maintain its position in the global business environment,
then R&D support will have to become a major business commitment. Business
managers cannot continue to ignore it or rake funds away from it for short-term
profits and still have long-term strategic options. If one runs away from more
aggressive product and process strategies, one should not be surprised by the fact
that competitive advantages are lost to foreign competitors.
Technological improvements that affect consumer and industrial products and
services shorten product life cycles. Companies in virtually every industry are
relying on the development of new products and services to fuel profitability and
growth.
Surveys suggest that the most successful organizations use an R&D strategy that
ties external opportunities to internal strength and is linked with objectives. Wellformulated R&D policies match market opportunities with internal capabilities
and provide an initial screen to all ideas generated. R&D policies can enhance
strategy implementation efforts to:
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Emphasize product or process improvements
Stress basic or applied research
.Be leaders or followers in R&D.
Develop robotics or manual-type processes.
Spend a high, average, or low amount of money on R&D.
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Perform R&D within the firm or to contract R&D to outside firms.
Use university researchers or private sector researchers.
There may be effective interactions between R&D departments and other
functional departments in implementing different types of generic business
strategies Conflicts between marketing, finance/accounting, R&D, and
information systems departments can be minimized with clear policies and
objectives. Table 9-6 gives some examples of R&D activities that could be
required for successful implementation of various strategies. Many American
utility, energy, and automotive companies are employing their research and
development departments to determine how the firm can effectively reduce its
greenhouse gas emissions.
Many firms wrestle with the decision to acquire R&D expertise from external
firms or to develop R&D expertise internally. The following guidelines can be
used to help make this decision:
1. If the rate of technical progress is slow, the rate of market growth is moderate
and there are significant barriers to possible new entrants, and then in-house R&D
is the preferred solution. The reason is that R&D, if successful, will result in a.
temporary product or process monopoly that the company can exploit.
2. If technology is changing rapidly and the market is growing slowly then a
major effort in R&D may be very risky, because it may lead to development of an
ultimately obsolete technology or one for which there is no market.
3. If technology is changing slowly but the market is growing fast, there generally
is not enough time for in-house development? The prescribed approach is to
obtain R&D expertise on an exclusive or nonexclusive basis from an outside firm.
4. If both technical progress and market growth are fast, R&D expertise should be
obtained through acquisition of a well-established firm in the industry.
There are at least three major R&D approaches for implementing strategies. The
first strategy is to be the first firm to market new technological products. This is a
glamorous and exciting strategy but also a dangerous one. Firms suchas3M,
Polaroid and General Electric have been successful with this approach, but many
other pioneering firms have fallen, with rival firms seizing the initiative.
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A second R&D approach is to be an innovative imitator of successful products,
thus minimizing the risks and costs of start-up. This approach entails allowing a
pioneer firm to develop the first version of the new product and to demonstrate
that a market exists. Then laggard firms develop a similar product. This strategy
requires excellent R&D personnel and an excellent marketing department.
A third R&D strategy is to be a low-cost producer by mass-producing products
similar to but less expensive than products recently introduced. Far Eastern
countries used this approach effectively during the 1980s to crush the $8 billion
U.S. consumer electronics industry. As a new product is accepted by customers,
price becomes increasingly important in the buying decision. Also, mass
marketing replaces personal selling as the dominant selling strategy. This R&D
strategy requires substantial investment in plant and equipment, but less
expenditure in R&D than the two approaches described earlier.
9.3.5
Evaluating the Importance of Information Systems in Implementing
Strategy
Although no firm would use the same marketing or management approach for
twenty years, many companies have twenty-year-old computer information
systems that threaten their very existence. Developing new user applications often
takes a backseat to keeping an old system running. Countless firms still do not use
the Internet. This unfortunate situation is happening at a time when the quantity
and quality of information available to firms and their competitors is increasing
exponentially.
Firms that gather, assimilate, and evaluate external and internal information most
Effectively are gaining competitive advantages over other firms. Recognizing the
importance of having an effective computer information system will not be an
option in the future; it will be a requirement. Information is the basis for
understanding in a firm.
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Robert Kavner, president of AT&T Data Systems Group, says, "Modern
corporations are organizing around information flow. With the growth of
communications networks such as the Internet, the barriers of time and place have
been breached. By mirroring people’s work needs and habits, networked
computing systems have made new modes of work possible.
It is estimated that the quantity of human knowledge is doubling every decade. In
many industries, information is becoming the most important factor
differentiating successful and unsuccessful firms. The process of strategic
management is facilitated immensely in firms that have an effective information
system. Many companies are establishing a new approach to information systems,
one that blends the technical knowledge of the computer experts with the vision
of senior management.
Information collection, retrieval, and storage can be used to create competitive
advantages in ways such as cross-selling to customers, monitoring suppliers,
keeping managers and employees informed, coordinating activities among
divisions, and managing funds. Like inventory and human resources, information
is becoming recognized as a valuable organizational asset that can be controlled
and managed. Firms that implement strategies using the best information will reap
competitive advantages in the twenty first century. John Young, president and
CEO of Hewlett-Packard, says, "There really isn't any right amount to spend on
information systems. Many management teams spend too much time thinking
about how to beat down the information system's cost, cost instead of thinking
about how to get more value out of the information they could have available and
how to link that to strategic goals of the company."
A good information system can allow a firm to reduce costs. For example, online
orders from salespersons to production facilities can shorten materials ordering
time and reduce inventory costs. Direct communications between suppliers,
manufacturers, marketers and customers can link elements of the value chain
together as though they were one organization. Improved quality and service often
result from an improved information system.
Firms must increasingly be concerned about computer hackers and take specific
measures to secure and safeguard corporate communications, files, orders, and
business conducted over the Internet.
9.3.6
Evaluating the Value of Strategic Management for Non-Profit and
Government Organizations
The strategic-management process is being used effectively by countless
nonprofit and governmental organizations, such as the Girl Scouts and Boy
Scouts, the Red Cross, chambers of commerce, educational institutions, medical
institutions, public utilities, libraries, government agencies, and churches.
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Compared to for-profit firms, nonprofit and governmental organizations often
functions as a monopoly, produce a product or service that offers little or no
measurability of performance, and are totally dependent on outside financing.
Especially for these organizations, strategic management provides an excellent
vehicle for developing justifying requests for needed financial support.
9.3.6.1 Educational Institutions
Educational institutions are using strategic-management techniques and concepts
more frequently. Richard Cyert, president of Carnegie-Mellon University, says, "I
believe we do a far better job of strategic management than any company I
know." Population shifts nationally from the Northeast and Midwest to the
Southeast and West are but one factor causing trauma for educational institutions
that have not planned for changing enrollments. Ivy League schools in the
Northeast are recruiting more heavily in the Southeast and West. This trend
represents a significant change in the competitive climate for attracting the best
high school graduates each year.
For a list of college strategic plans, click on strategic-planning links found a.
www.strategyclub.com Web site and scroll down through the academic sites.
9.3.6.2 Medical Organizations
The $200 billion American hospital industry is experiencing declining margins,
excess capacity, bureaucratic overburdening, poorly planned and executed
diversification strategies, soaring health care costs, reduced federal support, and
high administrator turnover. The seriousness of this problem is accented by a 20
percent annual decline inpatient use nationwide. Declining occupancy rates
deregulation, and accelerating growth of health maintenance organizations,
preferred provider organizations, urgent care centers, outpatient surgery centers,
diagnostic centers, specialized clinics, and group practices are other major threats
facing hospitals today.
Hospitals-originally intended to be warehouses for people dying of tuberculosis,
Small pox, cancer, pneumonia, and infectious diseases-are creating new strategies
today as advances in the diagnosis and treatment of chronic diseases are
undercutting that earlier mission. Hospitals are beginning to bring services to the
patient as much as bringing the patient to the hospital; in twenty years, health care
will be concentrated in the home and in the residential community, not on the
hospital campus.
Current strategies being pursued by many hospitals include creating home health
services, establishing nursing homes, and forming rehabilitation centers.
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Backward integration strategies that some hospitals are pursuing include
acquiring ambulance services, waste disposal services, and diagnostic services.
9.3.6.3 Governmental Agencies and Departments
Federal, state, county, and municipal agencies and departments, such as police
departments, chambers of commerce, forestry associations, and health
departments, are responsible for formulating, implementing, and evaluating
strategies that use taxpayers' dollars In the most cost-effective way to provide
services and programs. Strategic-management concepts increasingly are being
used to enable governmental organizations to be more effective and efficient. But
strategists in governmental organizations operate with less strategic autonomy
than their counterparts in private firms. Public enterprises generally cannot
diversify into unrelated businesses or merge with other firms. Governmental
strategists usually enjoy little freedom in altering the organizations' missions or
redirecting objectives. Legislators and politicians often have direct or indirect
control over - major decisions and resources. Strategic issues get discussed and
debated in the media and legislatures. Issues become politicized, resulting in
fewer strategic choice alternatives. There is more predictability in the
management of public sector enterprises.
9.3.6.4 Strategic Management in Small Firms
Strategic management is vital for large firms' success, but what about small firms?
The strategic management process is just as vital for small companies. From their
inception, all organizations have a strategy, even if the strategy just evolves from
day-to-day operations. Even if conducted informally or by a single
owner/entrepreneur, the strategic management process significantly can enhance
small firms' growth and prosperity.
A major conclusion of these articles is that a lack of strategic-management
knowledge is a serious obstacle for many small business owners. Other problems
often encountered in applying strategic-management concepts to small businesses
are a lack of both sufficient capital to exploit external opportunities and a day-today cognitive frame of reference. Research also indicates that strategic
management in small firms is more informal than in large firms, but small firms
that engage in strategic management outperform those that do not. The Check
MATE strategic planning software at www.checkmateplan.com offers a version
especially for small businesses.
9.3.7
Ethics and Social Responsibility
9.3.7.1 What is "Business Ethics"? The concept has come to mean various
things to various people, but generally it's coming to know what it right or wrong
in the workplace and doing what's right -- this is in regard to effects of
products/services and in relationships with stakeholders. Wallace and Pekel
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MBA 401 Strategic Management Distance Education Course Material
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explain that attention to business ethics is critical during times of fundamental
change -- times much like those faced now by businesses, both nonprofit or forprofit. In times of fundamental change, values that were previously taken for
granted are now strongly questioned. Many of these values are no longer
followed. Consequently, there is no clear moral compass to guide leaders through
complex dilemmas about what is right or wrong. Attention to ethics in the
workplace sensitizes leaders and staff to how they should act. Perhaps most
important, attention to ethics in the workplaces helps ensure that when leaders and
managers are struggling in times of crises and confusion, they retain a strong
moral compass. However, attention to business ethics provides numerous other
benefits, as well (these benefits are listed later in this document).
Note that many people react that business ethics, with its continuing attention to
"doing the right thing," only asserts the obvious ("be good," "don't lie," etc.), and
so these people don't take business ethics seriously. For many of us, these
principles of the obvious can go right out the door during times of stress.
Consequently, business ethics can be strong preventative medicine. Anyway,
there are many other benefits of managing ethics in the workplace. These benefits
are explained later in this document.
9.3.7.2 Two Broad Areas of Business Ethics
1. Managerial mischief. Madsen and Shafritz, in their book "Essentials of
Business Ethics" (Penguin Books, 1990) further explain that "managerial
mischief" includes "illegal, unethical, or questionable practices of individual
managers or organizations, as well as the causes of such behaviors and remedies
to eradicate them." There has been a great deal written about managerial mischief,
leading many to believe that business ethics is merely a matter of preaching the
basics of what is right and wrong. More often, though, business ethics is a matter
of dealing with dilemmas that have no clear indication of what is right or wrong.
2. Moral mazes. The other broad area of business ethics is "moral mazes of
management" and includes the numerous ethical problems that managers must
deal with on a daily basis, such as potential conflicts of interest, wrongful use of
resources, mismanagement of contracts and agreements, etc.
Business ethics is now a management discipline. Business ethics has come to be
considered a management discipline, especially since the birth of the social
responsibility movement in the 1960s. In that decade, social awareness
movements raised expectations of businesses to use their massive financial and
social influence to address social problems such as poverty, crime, environmental
protection, equal rights, public health and improving education. An increasing
number of people asserted that because businesses were making a profit from
using our country's resources, these businesses owed it to our country to work to
improve society. Many researchers, business schools and managers have
recognized this broader constituency, and in their planning and operations have
replaced the word "stockholder" with "stakeholder," meaning to include
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
employees, customers, suppliers and the wider community.
The emergence of business ethics is similar to other management disciplines. For
example, organizations realized that they needed to manage a more positive image
to the public and so the recent discipline of public relations was born.
Organizations realized they needed to better manage their human resources and so
the recent discipline of human resources was born. As commerce became more
complicated and dynamic, organizations realized they needed more guidance to
ensure their dealings supported the common good and did not harm others -- and
so business ethics was born.
Note that 90% of business schools now provide some form of training in business
ethics. Today, ethics in the workplace can be managed through use of codes of
ethics, codes of conduct, roles of ethicists and ethics committees, policies and
procedures, procedures to resolve ethical dilemmas, ethics training, etc.
9.3.7.3 Myths About Business Ethics
Business ethics in the workplace is about prioritizing moral values for the
workplace and ensuring behaviors are aligned with those values -- it's values
management. Yet, myths abound about business ethics. Some of these myths arise
from general confusion about the notion of ethics. Other myths arise from narrow
or simplistic views of ethical dilemmas.
1. Myth: Business ethics is more a matter of religion than management. Diane
Kirrane, in "Managing Values: A Systematic Approach to Business Ethics,"
(Training and Development Journal, November 1990), asserts that "altering
people's values or souls isn't the aim of an organizational ethics program -managing values and conflict among them is ..."
2. Myth: Our employees are ethical so we don't need attention to business
ethics. Most of the ethical dilemmas faced by managers in the workplace are
highly complex. Wallace explains that one knows when they have a significant
ethical conflict when there is presence of a) significant value conflicts among
differing interests, b) real alternatives that are equality justifiable, and c)
significant consequences on "stakeholders" in the situation. Kirrane mentions that
when the topic of business ethics comes up, people are quick to speak of the
Golden Rule, honesty and courtesy. But when presented with complex ethical
dilemmas, most people realize there's a wide "gray area" when trying to apply
ethical principles.
3. Myth: Business ethics is a discipline best led by philosophers, academics and
theologians. Lack of involvement of leaders and managers in business ethics
literature and discussions has led many to believe that business ethics is a fad or
movement, having little to do with the day-to-day realities of running an
organization. They believe business ethics is primarily a complex philosophical
debate or a religion. However, business ethics is a management discipline with a
programmatic approach that includes several practical tools. Ethics management
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
programs have practical applications in other areas of management areas, as well.
(These applications are listed later on in this document.)
4. Myth: Business ethics is superfluous -- it only asserts the obvious: "do
good!" Many people react that codes of ethics, or lists of ethical values to which
the organization aspires, are rather superfluous because they represent values to
which everyone should naturally aspire. However, the value of a codes of ethics
to an organization is its priority and focus regarding certain ethical values in that
workplace. For example, it’s obvious that all people should be honest. However,
if an organization is struggling around continuing occasions of deceit in the
workplace, a priority on honesty is very timely -- and honesty should be listed in
that organization’s code of ethics. Note that a code of ethics is an organic
instrument that changes with the needs of society and the organization.
5. Myth: Business ethics is a matter of the good guys preaching to the bad guys.
Some writers do seem to claim a moral high ground while lamenting the poor
condition of business and its leaders. However, those people well versed in
managing organizations realize that good people can take bad actions, particularly
when stressed or confused. (Stress or confusion are not excuses for unethical
actions -- they are reasons.) Managing ethics in the workplace includes all of us
working together to help each other remain ethical and to work through confusing
and stressful ethical dilemmas.
6. Myth: Business ethics in the new policeperson on the block. Many believe
business ethics is a recent phenomenon because of increased attention to the topic
in popular and management literature. However, business ethics was written about
even 2,000 years ago -- at least since Cicero wrote about the topic in his On
Duties. Business ethics has gotten more attention recently because of the social
responsibility movement that started in the 1960s.
7. Myth: Ethics can't be managed. Actually, ethics is always "managed" -- but,
too often, indirectly. For example, the behavior of the organization's founder or
current leader is a strong moral influence, or directive if you will, on behavior or
employees in the workplace. Strategic priorities (profit maximization, expanding
marketshare, cutting costs, etc.) can be very strong influences on morality. Laws,
regulations and rules directly influence behaviors to be more ethical, usually in a
manner that improves the general good and/or minimizes harm to the community.
Some are still skeptical about business ethics, believing you can't manage values
in an organization. Donaldson and Davis (Management Decision, V28, N6) note
that management, after all, is a value system. Skeptics might consider the
tremendous influence of several "codes of ethics," such as the "10
Commandments" in Christian religions or the U.S. Constitution. Codes can be
very powerful in smaller "organizations" as well.
8. Myth: Business ethics and social responsibility are the same thing. The social
responsibility movement is one aspect of the overall discipline of business ethics.
Madsen and Shafritz refine the definition of business ethics to be: 1) an
application of ethics to the corporate community, 2) a way to determine
responsibility in business dealings, 3) the identification of important business and
social issues, and 4) a critique of business. Items 3 and 4 are often matters of
social responsibility. (There has been a great deal of public discussion and writing
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
about items 3 and 4. However, there needs to be more written about items 1 and 2,
about how business ethics can be managed.) Writings about social responsibility
often do not address practical matters of managing ethics in the workplace, e.g.,
developing codes, updating polices and procedures, approaches to resolving
ethical dilemmas, etc.
9. Myth: Our organization is not in trouble with the law, so we're ethical. One
can often be unethical, yet operate within the limits of the law, e.g., withhold
information from superiors, fudge on budgets, constantly complain about others,
etc. However, breaking the law often starts with unethical behavior that has gone
unnoticed. The "boil the frog" phenomena is a useful parable here: If you put a
frog in hot water, it immediately jumps out. If you put a frog in cool water and
slowly heat up the water, you can eventually boil the frog. The frog doesn't seem
to notice the adverse change in its environment.
10. Myth: Managing ethics in the workplace has little practical relevance.
Managing ethics in the workplace involves identifying and prioritizing values to
guide behaviors in the organization, and establishing associated policies and
procedures to ensure those behaviors are conducted. One might call this "values
management." Values management is also highly important in other management
practices, e.g., managing diversity, Total Quality Management and strategic
planning.
9.3.7.4
Benefits of Managing Ethics in the Workplace
Many people are used to reading or hearing of the moral benefits of attention to
business ethics. However, there are other types of benefits, as well. The following
list describes various types of benefits from managing ethics in the workplace.
1. Attention to business ethics has substantially improved society. A matter of
decades ago, children in our country worked 16-hour days. Workers’ limbs were
torn off and disabled workers were condemned to poverty and often to starvation.
Trusts controlled some markets to the extent that prices were fixed and small
businesses choked out. Price fixing crippled normal market forces. Employees
were terminated based on personalities. Influence was applied through
intimidation and harassment. Then society reacted and demanded that businesses
place high value on fairness and equal rights. Anti-trust laws were instituted.
Government agencies were established. Unions were organized. Laws and
regulations were established.
2. Ethics programs help maintain a moral course in turbulent times. As noted
earlier in this document, Wallace and Pekel explain that attention to business
ethics is critical during times of fundamental change -- times much like those
faced now by businesses, both nonprofit or for-profit. During times of change,
there is often no clear moral compass to guide leaders through complex conflicts
about what is right or wrong. Continuing attention to ethics in the workplace
sensitizes leaders and staff to how they want to act -- consistently.
3. Ethics programs cultivate strong teamwork and productivity. Ethics programs
align employee behaviors with those top priority ethical values preferred by
leaders of the organization. Usually, an organization finds surprising disparity
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
between its preferred values and the values actually reflected by behaviors in the
workplace. Ongoing attention and dialogue regarding values in the workplace
builds openness, integrity and community -- critical ingredients of strong teams in
the workplace. Employees feel strong alignment between their values and those of
the organization. They react with strong motivation and performance.
4. Ethics programs support employee growth and meaning. Attention to ethics in
the workplace helps employees face reality, both good and bad -- in the
organization and themselves. Employees feel full confidence they can admit and
deal with whatever comes their way. Bennett, in his article "Unethical Behavior,
Stress Appear Linked" (Wall Street Journal, April 11, 1991, p. B1), explained that
a consulting company tested a range of executives and managers. Their most
striking finding: the more emotionally healthy executives, as measured on a
battery of tests, the more likely they were to score high on ethics tests.
5. Ethics programs are an insurance policy -- they help ensure that policies are
legal. There is an increasing number of lawsuits in regard to personnel matters
and to effects of an organization’s services or products on stakeholders. As
mentioned earlier in this document, ethical principles are often state-of-the-art
legal matters. These principles are often applied to current, major ethical issues to
become legislation. Attention to ethics ensures highly ethical policies and
procedures in the workplace. It’s far better to incur the cost of mechanisms to
ensure ethical practices now than to incur costs of litigation later. A major intent
of well-designed personnel policies is to ensure ethical treatment of employees,
e.g., in matters of hiring, evaluating, disciplining, firing, etc. Drake and Drake
(California Management Review, V16, pp. 107-123) note that “an employer can
be subject to suit for breach of contract for failure to comply with any promise it
made, so the gap between stated corporate culture and actual practice has
significant legal, as well as ethical implications.”
6. Ethics programs help avoid criminal acts “of omission” and can lower fines.
Ethics programs tend to detect ethical issues and violations early on so they can
be reported or addressed. In some cases, when an organization is aware of an
actual or potential violation and does not report it to the appropriate authorities,
this can be considered a criminal act, e.g., in business dealings with certain
government agencies, such as the Defense Department. The recent Federal
Sentencing Guidelines specify major penalties for various types of major ethics
violations. However, the guidelines potentially lowers fines if an organization has
clearly made an effort to operate ethically.
7. Ethics programs help manage values associated with quality management,
strategic planning and diversity management -- this benefit needs far more
attention. Ethics programs identify preferred values and ensuring organizational
behaviors are aligned with those values. This effort includes recording the values,
developing policies and procedures to align behaviors with preferred values, and
then training all personnel about the policies and procedures. This overall effort is
very useful for several other programs in the workplace that require behaviors to
be aligned with values, including quality management, strategic planning and
diversity management. Total Quality Management includes high priority on
certain operating values, e.g., trust among stakeholders, performance, reliability,
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
measurement, and feedback. Eastman and Polaroid use ethics tools in their quality
programs to ensure integrity in their relationships with stakeholders. Ethics
management techniques are highly useful for managing strategic values, e.g.,
expand marketshare, reduce costs, etc. McDonnell Douglas integrates their ethics
programs into their strategic planning process. Ethics management programs are
also useful in managing diversity. Diversity is much more than the color of
people’s skin -- it’s acknowledging different values and perspectives. Diversity
programs require recognizing and applying diverse values and perspectives -these activities are the basis of a sound ethics management program.
8. Ethics programs promote a strong public image. Attention to ethics is also
strong public relations -- admittedly, managing ethics should not be done
primarily for reasons of public relations. But, frankly, the fact that an organization
regularly gives attention to its ethics can portray a strong positive to the public.
People see those organizations as valuing people more than profit, as striving to
operate with the utmost of integrity and honor. Aligning behavior with values is
critical to effective marketing and public relations programs. Consider how
Johnson and Johnson handled the Tylenol crisis versus how Exxon handled the oil
spill in Alaska. Bob Dunn, President and CEO of San Francisco-based Business
for Social Responsibility, puts it best: “Ethical values, consistently applied, are
the cornerstones in building a commercially successful and socially responsible
business.”
9. Overall benefits of ethics programs: Donaldson and Davis, in “Business
Ethics? Yes, But What Can it Do for the Bottom Line?” (Management Decision,
V28, N6, 1990) explain that managing ethical values in the workplace legitimizes
managerial actions, strengthens the coherence and balance of the organization’s
culture, improves trust in relationships between individuals and groups, supports
greater consistency in standards and qualities of products, and cultivates greater
sensitivity to the impact of the enterprise’s values and messages.
10. Last - and most -- formal attention to ethics in the workplace is the right
thing to do.
9.4
Check Your Progress
Revision Points
•
•
Strategy implementation directly affects the lives of plant managers, division
managers, department managers, sales managers, product managers, project
managers personnel managers, staff managers, supervisors, and all employees
Market segmentation is an important variable in strategy implementation for at
least three major reasons. First, strategies such as market development, product
development, market penetration, and diversification require increased sales
through new markets and products. To implement these strategies successfully,
new or improved market segmentation approaches are required. Second, market
segmentation allows a firm to operate with limited resources because mass
production, and mass- distribution, and mass advertising are not required. Market
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
•
•
•
February 2006
segmentation can enable a small firm to compete. successfully with a large firm
by maximizing 'per-unit profits and per-segment-sales. Finally, market
segmentation decisions directly affect marketing mix variables.
Successful strategy implementation often requires additional capital. Besides net
profit from operations and the sale of assets, two basic sources of capital for an
organization are debt and equity.
A financial budget is a document that details how funds will be obtained and spent
for specified period of time. Annual budgets are most common, although the
period of time for a budget can range from one day co more than ten years.
Evaluating the worth of a business is central to strategy implementation because
integrative, intensive, and diversification strategies are often implemented by
acquiring firms. Other strategies, such as retrenchment and divestiture, may result
in the sale of a division of an organization or of the firm itself.
•
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
STRATEGIC MANAGEMENT
PREFACE
For a very long time, there has been a real and a significant need for a good text book in
Strategic Management. As a matter of fact, even in the United States, the American
Assembly of Collegiate Schools of Business (AACSB) established the requirement for a
study, “integrating analysis and policy determination at the overall management level.”
(Source: AACSB Report, 1969)
In India, we have long felt the need for a good reference text book which provides
students of strategy with an understanding of:
• What corporate strategy is?
• Why strategic decisions are important? and
• Approaches to formulating and implementing strategy.
This text book on Strategic Management is primarily intended for students of strategy in
undergraduate, graduate, and diploma courses in universities and colleges; students in
courses with titles such as Corporate Strategy, Business Policy, Strategic Management,
Organizational Policy, Corporate Policy, and so on. However, we know that many such
students are already managers anyway, who are undertaking part-time and distance
education programs of study. Hence this book is written with the manager and the
potential manager in mind.
When we look at the general scenario of Continuing Education in our country, we see
that there is a tremendous potential and opportunity for providing flexible forms of
learning, that complement the professional practices of managers and executives. For
instance, when the learning has to be implanted by stand-alone resources (such as this
text book), one has to device innovative means of imparting knowledge and skills. We
have attempted to do precisely this: each Section of this textbook is broken up into
convenient modules of Units; and in each Unit, we have attempted to present the learning
materials through a Content Exposition approach. In this approach, we begin with an
Introduction of the topic of the Unit; then, we outline the learning Objectives of the Unit;
and then we present the details of the contents in simple and easy-to-learn manner. At the
end of each Unit, we highlight the Revision Points of the matter presented in the Unit; as
well as a Summary for quick recollection. Finally, we have carefully posed Review
Questions to Check Your Progress as you complete each Unit of learning.
Strategic Management is a responsibility of all managers. It is also a responsibility that
is becoming more and more important. It is not sufficient for managers to think of
management in some operational or functional context, or simply to know their piece of
the jigsaw well, and trust that others know theirs equally as well. Modern organizations
exist in a complex environment with an increasing demand for fast and effective strategic
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
responses. The very least that managers require is to understand how their piece of the
jigsaw fits into the rest of the puzzle. Additionally, one has to always keep in focus the
strategic problems and direction of the organization.
In preparing this textbook on Strategic Management, we have attempted to keep in mind
the needs of the manager in understanding strategic problems in many different
organizations. In doing so, we have developed the themes around the Introduction,
Definition, and Meaning of Strategy; Strategic Choice and Implementation; and
Environmental Assessment and Corporate Strategy. Obviously, how well a job we have
done will be determined by you, the reader, as you go through the materials herein. We
would be most grateful for critical comments and constructive suggestions, to continually
improve and refine the learning resources and educational value of this textbook.
It is always a great pleasure to acknowledge the help and assistance provided by
colleagues and professionals of the Indian Institute of Science, Bangalore, which as been
my karma bhoomi for the past two decades. In particular, I must thank Professors NJ
Rao, P Venkataram, and KR Yogendra Simha, for their encouragement and assistance.
Special thanks and appreciation to all my industry participants of the PROFICIENCE
Courses in Strategic Management, who have been excellent critics and guinea pigs, in
this joint learning and exploration of the subject.
No words of appreciation or gratitude are enough to express my deep sense of
indebtedness to my parents. They have taught me the value of learning, and have
empowered me to pursue life-long learning. Finally, I have great pleasure and pride in
acknowledging the total support, encouragement, and freedom provided by my family,
that has enabled me to keep pursuing this project of life-long learning. The complete
understanding and moral cheer-leading provided by my wife, Lalitha, and by my
daughters, Priya and Preethi, are the foundations on which I have built the structure of
this learning enterprise.
In concluding this introductory Preface, I wish to reiterate that though the credits for
assistance go out to many people, as mentioned above; the responsibility for the
correctness and relevance of the study materials in this textbook are entirely mine. I will
be forever grateful to you, readers, for your comments and criticisms to continually
improve the quality of this textbook.
Parameshwar P. Iyer
20 March, 2006
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India
MBA 401 Strategic Management Distance Education Course Material
February 2006
To
My Parents
For
Teaching me how to learn
And
To
Lalitha, Priya, and Preethi
For
Supporting and sharing the thrills of learning
© Parameshwar P. Iyer 2006. Indian Institute of Science Bangalore – 560 012. India