Strategic Management Essentials

ESHWARI.
S---LORAA BUSINESS ACADEMY Page 1
Unit-1
Definition:
The term strategic management is used to refer to the entire scope of

strategic-decision making activity in an organization.
The following statements serve as a number of workable definitions of strategic
management:
Strategic management is the process of managing the detection of organizational mission while
managing the relationship of the organization to its environment (James M. Higgins).
Strategic management is defined as the set of decisions and actions resulting in the
formulation and implementation of strategies designed to achieve the objectives of the
organization.
What is strategy?
Overall Definition:
"Strategy is the direction and scope of an organization over the long-term:
Strategy, a word of military origin, refers to a plan of action designed to achieve a
particular goal. In military usage strategy is distinct from tactics, which are concerned with the
conduct of an engagement, while strategy is concerned with how different engagements are
linked.
Strategy at Different Levels of a Business
Strategies exist at several levels in any organization - ranging from the overall business (or group
of businesses) through to individuals working in it.
Corporate Strategy - is concerned with the overall purpose and scope of the business to meet
stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the
business and acts to guide strategic decision-making throughout the business. Corporate strategy
is often stated clearly in a "mission statement".
Business Unit Strategy - is concerned more with how a business competes successfully in a
particular market. It concerns strategic decisions about choice of products, meeting needs of
customers, gaining advantage over competitors, exploiting or creating new opportunities etc.
ESHWARI.S---LORAA BUSINESS ACADEMY Page 2
Operational Strategy - is concerned with how each part of the business is organised to deliver
the corporate and business-unit level strategic direction. Operational strategy therefore focuses
on issues of resources, processes, people etc.
How Strategy is Managed - Strategic Management
In its broadest sense, strategic management is about taking "strategic decisions" - decisions that
answer the questions above.
In practice, a thorough strategic management process has three main components, shown in the
figure below:
Strategic Analysis
This is all about the analysing the strength of businesses' position and understanding the
important external factors that may influence that position. The process of Strategic Analysis can
be assisted by a number of tools, including:
PEST Analysis - a technique for understanding the "environment" in which a business operates
Scenario Planning - a technique that builds various believable views of possible futures for a
business
Five Forces Analysis - a technique for identifying the forces which affect the level of
competition in an industry
Market Segmentation - a technique which seeks to identify similarities and differences between
groups of customers or users
Directional Policy Matrix - a technique which summarises the competitive strength of a
businesss operations in specific markets
Competitor Analysis - a wide range of techniques and analysis that seeks to summarise a
businesses' overall competitive position
Critical Success Factor Analysis - a technique to identify those areas in which a business must
outperform the competition in order to succeed
SWOT Analysis - a useful summary technique for summarising the key issues arising from an
assessment of a businesses "internal" position and "external" environmental influences.
Strategic Choice
This process involves understanding the nature of stakeholder expectations (the "ground rules"),
identifying strategic options, and then evaluating and selecting strategic options.
Strategy Implementation
Often the hardest part. When a strategy has been analysed and selected, the task is then to
translate it into organisational action.
The Nature of Strategic Management:

Defined: Art & science of formulating, implementing, and
evaluating, cross-functional decisions that enable an organization
to achieve its objectives.
Achieving Sustained Competitive

Ad v a n t a g e :
1. Adapting to change in external trends, internal
capabilities and resources
2 . E ff e c t i v e l y f o r m u l a t i n g , i m p l e m e n t i n g & e v a l u a t i n g
strategies
Adapting to Change Key Strategic Management
Questions:
What kind of business should we become?
A r e w e i n t h e r i g h t fi e l d s
Are there new competitors
What strategies should we pursue?
How are our customers changing?
K e y Te r m s :
Vision Statement
What do we want to become?
Mission Statement
What is our business?
Opportunities & Threats (External)
A n a l y s i s o f Tr e n d s :
Economic
Social
Cultural
Demographic/Environmental
Polit ic al, Le ga l, Gove rn me nt al
Te c h n o l o g i c a l
Competitors
S t r e n g t h s & We a k n e s s e s ( I n t e r n a l ) :
Ty p i c a l l y l o c a t e d i n f u n c t i o n a l a r e a s o f t h e fi r m
Management
Marketing
Fi n a n c e / A c c o u n t i n g
Production/Operations
Re s e a rc h & D e v e l o p m e n t
Computer Information Systems
Comprehensive strategic management

model:
Vision
&
Mission
Chapter 2
B e n e fi t s o f S t r a t e g i c M a n a g e m e n t :
F i n a n c i a l B e n e fi t s :
Improvement in sales
I m p r o v e m e n t i n p r o fi t a b i l i t y
Productivity improvement
N o n - F i n a n c i a l B e n e fi t s :
Improved understanding of competitors strategies
Enhanced awareness of threats
Re d u c e d re s i s t a n c e t o c h a n g e
Enhanced problem-prevention capabilities
Advantages of International Operations:
Absorb excess capacity

Reduce unit costs
Spread risk over wider markets
Low-cost production facilities
Disadvantages of International Operations

D i ffi c u l t c o m m u n i c a t i o n s
Underestimate foreign competition
C u l t u r a l b a r r i e r s t o e ff e c t i v e m a n a g e m e n t
C o m p l i c a t i o n s a r i s i n g f r o m c u r r e n c y d i ff e r e n c e s
Scope of strategic management:

j. Constable has defined the area addressed by strategic management as "the management
processes and decisions which determine the long-term structure and activities of the
organization".
This definition incorporates five key themes:
* Management process. Management process as relate to how strategies are created and
changed.
* Management decisions. The decisions must relate clearly to a solution of perceived problems
(how to avoid a threat; how to capitalize on an opportunity).
* Time scales. The strategic time horizon is long. However, it for company in real trouble can be
very short.
* Structure of the organization. An organization is managed by people within a structure. The
decisions which result from the way that managers work together within the structure can result
in strategic change.
* Activities of the organization. This is a potentially limitless area of study and we normally
shall centre upon all activities which affect the organization.
Components of a Strategy Statement

The strategy statement of a firm sets the firms long-term strategic direction and broad policy
directions. It gives the firm a clear sense of direction and a blueprint for the firms activities for
the upcoming years.
The main constituents of a strategic statement are as follows:
1. Strategic Intent
An organizations strategic intent is the purpose that it exists and why it will continue to
exist, providing it maintains a competitive advantage. Strategic intent gives a picture
about what an organization must get into immediately in order to achieve the companys
vision. It motivates the people. It clarifies the vision of the company. Strategic intent
helps management to emphasize and concentrate on the priorities. Strategic intent is,
nothing but, the influencing of an organizations resource potential and core
competencies to achieve what at first may seem to be unachievable goals in the
competitive environment. A well expressed strategic intent should guide/steer the
development of strategic intent or the setting of goals and objectives that require that all
of organizations competencies be controlled to maximum value. Strategic intent includes
directing organizations attention on the need of winning; inspiring people by telling them
that the targets are valuable; encouraging individual and team participation as well as
contribution; and utilizing intent to direct allocation of resources. Strategic intent differs
from strategic fit in a way that while strategic fit deals with harmonizing available
resources and potentials to the external environment, strategic intent emphasizes on
building new resources and potentials so as to create and exploit future opportunities.
2. Mission Statement
Mission statement is the statement of the role by which an organization intends to serve
its stakeholders. It describes why an organization is operating and thus provides a
framework within which strategies are formulated. It describes what the organization
does (i.e., present capabilities), who all it serves (i.e., stakeholders) and what makes an
organization unique (i.e., reason for existence). A mission statement differentiates an
organization from others by explaining its broad scope of activities, its products, and
technologies it uses to achieve its goals and objectives. It talks about an organizations
present (i.e., about where we are).For instance, Microsofts mission is to help people
and businesses throughout the world to realize their full potential. Wal-Marts mission is
To give ordinary folk the chance to buy the same thing as rich people. Mission
statements always exist at top level of an organization, but may also be made for various
organizational levels. Chief executive plays a significant role in formulation of mission
statement. Once the mission statement is formulated, it serves the organization in long
run, but it may become ambiguous with organizational growth and innovations. In
todays dynamic and competitive environment, mission may need to be redefined.
However, care must be taken that the redefined mission statement should have original
fundamentals/components. Mission statement has three main components-a statement of
mission or vision of the company, a statement of the core values that shape the acts and
behaviour of the employees, and a statement of the goals and objectives.
Features of a Mission
a. Mission must be feasible and attainable. It should be possible to achieve it.
b. Mission should be clear enough so that any action can be taken.
c. It should be inspiring for the management, staff and society at large.
d. It should be precise enough, i.e., it should be neither too broad nor too narrow.
e. It should be unique and distinctive to leave an impact in everyones mind.
f. It should be analytical,i.e., it should analyze the key components of the strategy.
g. It should be credible, i.e., all stakeholders should be able to believe it.
2. Vision
A vision statement identifies where the organization wants or intends to be in future or
where it should be to best meet the needs of the stakeholders. It describes dreams and
aspirations for future. For instance, Microsofts vision is to empower people through
great software, any time, any place, or any device. Wal-Marts vision is to become
worldwide leader in retailing. A vision is the potential to view things ahead of
themselves. It answers the question where we want to be. It gives us a reminder about
what we attempt to develop. A vision statement is for the organization and its members,
unlike the mission statement which is for the customers/clients. It contributes in effective
decision making as well as effective business planning. It incorporates a shared
understanding about the nature and aim of the organization and utilizes this
understanding to direct and guide the organization towards a better purpose. It describes
that on achieving the mission, how the organizational future would appear to be.
An effective vision statement must have following featuresa. It must be unambiguous.

b. It must be clear.
c. It must harmonize with organizations culture and values.
d. The dreams and aspirations must be rational/realistic.
e. Vision statements should be shorter so that they are easier to memorize.
In order to realize the vision, it must be deeply instilled in the organization, being owned
and shared by everyone involved in the organization.
3. Goals and objectives
A goal is a desired future state or objective that an organization tries to achieve. Goals
specify in particular what must be done if an organization is to attain mission or vision.
Goals make mission more prominent and concrete. They co-ordinate and integrate
various functional and departmental areas in an organization. Well made goals have
following featuresa. These are precise and measurable.
b. These look after critical and significant issues.
c. These are realistic and challenging.
d. These must be achieved within a specific time frame.
e. These include both financial as well as non-financial components.
Objectives are defined as goals that organization wants to achieve over a period of time.
These are the foundation of planning. Policies are developed in an organization so as to
achieve these objectives. Formulation of objectives is the task of top level management.
Effective objectives have following featuresf. These are not single for an organization, but multiple.
g. Objectives should be both short-term as well as long-term.
h. Objectives must respond and react to changes in environment, i.e., they must
be flexible.
i. These must be feasible, realistic and operational.
Dimensions of Strategic Management
Strategic management process involves the entire range of decisions. Typically, strategic issues
have six identifiable dimensions:
* Strategic issues require top-management decisions
* Strategic issues involve the allocation of large amounts of company resources
* Strategic issues are likely to have significant impact on the long-term success of the firm
* Strategic issues are future oriented
* Strategic issues usually have major multifunctional or multibusiness consequences
* Strategic issues necessitate considering factors in the firm's external environment.
Importance of strategic management:

Strategic management used to play a different role in more predictable times
after the Second Word War. Strategic plans of the past usually range 3 to 5
years. Some companies could even have plans for 10 good years. That's not
possible today given rapid evolution of our society.
What still matters in strategic management lies in the value of planning
ahead. There's an old saying that if you fail to plan, you are planning to fail.
By acting on this, strategic management actually gives the organization
direction, a sense of identity and unity towards what the business goal.
Therein lays the continued importance of strategic management towards
business success.
Every business has a vision and a mission. Strategic management takes into
consideration both of these. Strategic management helps in achieving the
organizational goals in an effective and efficient manner.
Improved strategic management processes may also facilitate the
development of the more complex management structural that are needed
as firms grow. It also helps firms to articulate, communicate and monitor the
implementation of strategy using a system interlinked with the long-term
vision of the corporations.
Why Strategic Management is so important?

Today management is needed in all types of organizations regardless of their size, at all
organizations levels and in all work areas. Because management is universally needed,
improving the way an organization is managed is one of the keys to success, and the importance
of strategic management to achieve this goal is recognised around the world.
Gives everyone a role
Makes a difference in performance levels
Provides systematic approach to uncertainties
Coordinates and focuses employees

Importance:
Like mentioned before, strategic management can and will influence the organizations
performance. Thats why you can have organizations that face the same environmental
conditions, but with different performance levels and considering recent studies, there is a wide
belief that organizations that use strategic planning usually have better performance that the
ones that dont.
Another reason that supports the importance of strategic management has to do with the
continually changing situation that organizations face these days, because it helps managers to
examine relevant factors before deciding their course of action, thus helping them to better cope
with uncertain environments.
Finally, strategic management is important most organizations are composed by diverse divisions
and departments that need to be coordinated, else there would be no focus on achieving the
organization's goals.
Strategic Management Process
Much can be said about this process, but here i'll only present the general steps to give you an
idea of what is this all about. The strategic management consists of six steps:
1.
2.
3.
4.
5.
6.
Mission, goals and strategies: If you Google one of the well know companies, and
search their website, you'll always find a section dedicated to their mission. That's because
every organization needs a mission. Why? Because it defines the organization's purpose,
their reason for being in business. It is also important to identify goals, because they are the
foundation of planning and give managers a way to measure the performance their success.
Finally, a manager needs to know the organizations strategies, to evaluate them and make
the necessary changes.
External Analysis: Pretty straightforward. A manager needs to know what the
competition is doing, to know how the current legislation affects the organization's
activities...and so on. An external analysis is needed to examine the changes occurring in the
environment, in order to adapt to those changes.
Internal Analysis: Now we move to inside of the organization, instead of the outside.
basically in this step a manager has to analyse the organization's resources, capabilities, and
spot the strengths and weaknesses in order to improve his decisions (this is also know as
SWOT analysis).
Formulate Strategies: Considering the realities described above, managers formulate
corporate, business and functional strategies.
Implement Strategies: Sounds logical doesn't it? After strategies are formulated they must
be implemented, and like in other aspects of life, a strategy is only as good as its
implementation.
Evaluate the Results: And now the final step where we evaluate the results. A manager
should ask himself if the implemented strategies helped the organization to reach their
goals.
Strategic Management Process - Meaning, Steps and Components

The strategic management process means defining the organizations strategy. It is also defined
as the process by which managers make a choice of a set of strategies for the organization that
will enable it to achieve better performance. Strategic management is a continuous process that
appraises the business and industries in which the organization is involved; appraises its
competitors; and fixes goals to meet all the present and future competitors and then reassesses
each strategy.
Strategic management process has following four steps:
1. Environmental Scanning- Environmental scanning refers to a process of collecting,
scrutinizing and providing information for strategic purposes. It helps in analyzing the
internal and external factors influencing an organization. After executing the environmental
analysis process, management should evaluate it on a continuous basis and strive to improve
it.
2. Strategy Formulation- Strategy formulation is the process of deciding best course of
action for accomplishing organizational objectives and hence achieving organizational
purpose. After conducting environment scanning, managers formulate corporate, business
and functional strategies.
3.Strategy Implementation- Strategy implementation implies making the strategy work as
intended or putting the organizations chosen strategy into action. Strategy implementation
includes designing the organizations structure, distributing resources, developing decision
making process, and managing human resources.
4. Strategy Evaluation- Strategy evaluation is the final step of strategy management
process. The key strategy evaluation activities are: appraising internal and external factors
that are the root of present strategies, measuring performance, and taking remedial /
corrective actions. Evaluation makes sure that the organizational strategy as well as its
implementation meets the organizational objectives.
These components are steps that are carried, in chronological order, when creating a new
strategic management plan. Present businesses that have already created a strategic management
plan will revert to these steps as per the situations requirement, so as to make essential changes.
Components of Strategic Management Process

Strategic management is an ongoing process. Therefore, it must be realized that each component
interacts with the other components and that this interaction often happens in chorus.
Characteristics of Strategic Management:

1.
Strategy often makes the difference between success and failure of a firm.
Strategic management is a branch of management that studies how to organize the structure of a
firm, what products the firm should sell, how it should position itself in the marketplace, where it
should get its supplies and whether it needs to differentiate or compete on costs. Strategic
management also deals with other issues, such as human resources policies, employee
compensation plans, competitiveness and productivity. A course in strategic management is a part of
many MBA programs.
2.
o
Long-Term Issues
Strategic management deals primarily with long-term issues that may or may not have an
immediate effect. For example, investing in the education of the company's work force may yield no
immediate effect in terms of higher productivity. Still, in the long run, their education will result in
higher productivity, and therefore enhanced profits.
Competitive Advantage
o
Strategic management helps managers find new sources of sustainable competitive

advantage. Executives that apply the principles of strategic management in their work continuously
try to deliver products or services cheaper, produce greater customer satisfaction and make
employees more satisfied with their jobs.
Effect on Operations
o
Good strategic management always has a sizable effect on operational issues. For
example, a decision to link pay to performance will result in operational decisions being more
effective as employees try harder at their jobs. Operational decisions include decisions that deal with
questions such as how to sell to certain customers or whether to open a credit line to them.
Operational decisions are made in the lower echelons of the organizational hierarchy.
Shareholders
o
Managing the organization in a strategic fashion requires that the interests of

shareholders be put at the heart of all issues. Whether the question at hand is expansion into a new
market or negotiating mergers and acquisitions, shareholder value should be at the core at all times.
Companys strategy and its business model:

People will always stress that having a well researched business plan is key before you start
your business. Although creating a business plan is often an important step in the evolution
of a business, particularly if you need financing or you are not experienced at running a
business, it is not necessarily the essential first step. There are two key elements that
should be completed prior to the business plan:
The business model
The strategy
What is a Business Model?

While the word model often stirs up images of mathematical formulas, a business model is
in fact a story of how a business works. In general terms, a business model is the method of
doing business by which a company can generate revenue. Both start-up ventures and
established companies take new products and services to the market through a venture
shaped by a specific business model. In their paper, The Role of the Business Model in
Capturing Value from Innovation,
Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a
business model:
1. Articulate the value proposition the value created to users by using the product
2. Identify the market segment to whom and for what purpose is the product
useful; specify how revenue is generated by the firm.
3. Define the value chain the sequence of activities and information required to
allow a company to design, produce, market, deliver and support its product or
service.
4. Estimate the cost structure and profit potential using the value chain and
value proposition identified.
5. Describe the position of the firm with the value network link suppliers,
customers, complementors and competitors.
6. Formulate the competitive strategy how will you gain and hold your
competitive advantage over competitors or potential new entrants.
Joan Magretta in her article Why Business Models Matter took the concept of the business
model a little further. Magretta suggests every business model needs to pass two critical
tests, the narrative test and the numbers test. The narrative test must tell a good story and
explain how the business works, who is the customer, what do they value and how a
company can deliver value to the customer. The numbers test means your profit and loss
assumptions must add up. At the most basic level, if your model doesnt work, then your
model has failed one of the two tests.
To begin the modeling process you need to articulate a value proposition on the product or
service being provided. The model must then describe the target market. The customer will
then value the product on its ability to reduce costs, solve a problem or create new
solutions. A market focus is needed to identify what product attributes need to be targeted
and how to resolve product trade-offs such as quality versus cost. You also need to identify
how much to charge and how the customer will pay.
Think of business modeling as the managerial equivalent of the scientific method - you start
with a hypothesis, which you then test in action and revise when necessary. The business
model also plays a part of a planning tool by focusing managements on how all the
elements and activities of the business work together as a whole. At the end of the day, the
business model should be condensed onto one page consisting of: a diagram outlining how
the business generates revenue, how cash flows through the business and how the product
flows through the business and; a narrative describing the product/ service components,
financial projections or other important elements not captured in the diagram.
Business Models and Strategy
It is important to note that completing a business model does not constitute strategic
planning. Strategic planning factors in the one thing a business model doesnt; competition.
What is strategy?
According to the Collins English Dictionary, strategy is a particular long-term plan for
success". For our purposes, we will consider the essence of strategy as a formula for coping
with the competition. Competitive strategy is about being different and the goal for a
corporate strategy is to find a position in the industry where the company is unique and can
defend itself against market forces. To do this the company must choose a set of activities
that can deliver a unique mix of value.
Market Forces and Strategy
The determination of a strategy is rooted in determining how a company stacks up against
basic market forces, how it can defend itself against these forces and how it can influence
these forces. Fortunately, Michael E. Porter in his article How Competitive Forces Shape
Strategy defined these market forces for us. Known as Porters 5 forces they consist of:
1. The industry this is the jockeying for position among current competitors, this
can consists of price competition, new product introduction or advertising slugfests.
2. The threat of new entrants - the seriousness of the threat of entry depends on
the barriers to entry and reaction from existing companies. There are 6 major
barriers to entry: 1) economies of scale 2) product differentiation 3) capital
requirements 4) cost disadvantages independent of size 5) access to distribution
channels 6) government policy. A new company will generally have second thoughts
about entering an industry if the incumbent has substantial resources to fight back,
the incumbent seems likely to cut prices or industry growth is slow.
3. The threat of substitute products/services - substitutes can place a ceiling on
prices that are charged and limit the potential of an industry.
4. The bargaining power of suppliers - suppliers can squeeze profitability by
increasing prices or lowering the quality of the goods.
5. The bargaining power of buyers (customers) - customers can force down
prices, demand better quality, more service or play competitors off on each other.
Once you assess how the market forces are affecting competition in your industry and their
underlying causes, you can identify the underlying strength and weaknesses of your
company, determine where it stands against each force and then determine a plan of action.
Plans of action may include:
Positioning the company match your strengths and weaknesses to the

companys industry, build defenses against competitive forces or find a position in the
industry where forces are the weakest. You need to know your companys capabilities
and the causes of the competitive forces
Influencing the balance take the offensive, for example innovative marketing
can raise brand identification or differentiate the product.
Exploiting industry change an evolution of an industry can bring changes in

competition. For example, in an industry life-cycle growth rates change and/or
product differentiation declines; anticipate shifts in the factors underlying these
forces and respond to them.
The framework for analyzing the industry and developing a strategy provides the road map
for answering the question what is the potential of this business?"
Reconciling the Business Model and Strategy
I will use a short example to illustrate the difference between a business model and
strategy. Although you may think that Wal-Mart pioneered a new business model on its road
to success, the reality is that the model was really no different than the one Kmart was
using at the time. But it was what Sam Walton chose to do differently than Kmart, such as
focusing on small towns as opposed to large cities and everyday low prices, that was the
real reason for his success. Although Sam Waltons model was the same as Kmart's, his
unique strategy made him a success.
Strategy Formulation:
INTRODUCTION
It is useful to consider strategy formulation as part of a strategic management process that
comprises three phases:
1. Diagnosis,
2. formulation, and
3. Implementation.
Strategic management is an ongoing process to develop and revise future-oriented strategies that
allow an organization to achieve its objectives, considering its capabilities, constraints, and the
environment in which it operates.
Formulation, the second phase in the strategic management process, produces a clear
set of recommendations, with supporting justification, that revise as necessary the mission and
objectives of the organization, and supply the strategies for accomplishing them. In formulation,
we are trying to modify the current objectives and strategies in ways to make the organization
more successful. This includes trying to create "sustainable" competitive advantages -- although
most competitive advantages are eroded steadily by the efforts of competitors.
The remainder of this chapter focuses on strategy formulation, and is organized into six
sections:
Three Aspects of Strategy Formulation,
Corporate-Level Strategy, Competitive Strategy, Functional Strategy, Choosing Strategies, and

Troublesome Strategies.
THREE ASPECTS OF STRATEGY FORMULATION:
The following three aspects or levels of strategy formulation, each with a different focus, need to
be dealt with in the formulation phase of strategic management. The three sets of
recommendations must be internally consistent and fit together in a mutually supportive manner
that forms an integrated hierarchy of strategy, in the order given.
Corporate Level Strategy: In this aspect of strategy, we are concerned with broad decisions
about the total organization's scope and direction. Basically, we consider what changes should
be made in our growth objective and strategy for achieving it, the lines of business we are in, and
how these lines of business fit together.
It is useful to think of three components of corporate level strategy:
(a) Growth or directional strategy (what should be our growth objective, ranging from
retrenchment through stability to varying degrees of growth - and how do we accomplish
this)
(b) Portfolio strategy (what should be our portfolio of lines of business, which
implicitly requires reconsidering how much concentration or diversification we should
have), and
(c) Parenting strategy (how we allocate resources and manage capabilities and
activities across the portfolio -- where do we put special emphasis, and how much do we
integrate our various lines of business).
Competitive Strategy (often called Business Level Strategy): This involves deciding how the
company will compete within each line of business (LOB) or strategic business unit (SBU).
Functional Strategy: These more localized and shorter-horizon strategies deal with how each
functional area and unit will carry out its functional activities to be effective and maximize
resource productivity.
CORPORATE LEVEL STRATEGY
This comprises the overall strategy elements for the corporation as a whole, the grand strategy, if
you please. Corporate strategy involves four kinds of initiatives:
* Making the necessary moves to establish positions in different businesses and achieve
an appropriate amount and kind of diversification. A key part of corporate strategy is
making decisions on how many, what types, and which specific lines of business the
company should be in. This may involve deciding to increase or decrease the amount
and breadth of diversification. It may involve closing out some LOB's (lines of
business), adding others, and/or changing emphasis among LOB's.
* Initiating actions to boost the combined performance of the businesses the company has
diversified into: This may involve vigorously pursuing rapid-growth strategies in the
most promising LOB's, keeping the other core businesses healthy, initiating turnaround
efforts in weak-performing LOB's with promise, and dropping LOB's that are no longer
attractive or don't fit into the corporation's overall plans. It also may involve supplying
financial, managerial, and other resources, or acquiring and/or merging other companies
with an existing LOB.
* Pursuing ways to capture valuable cross-business strategic fits and turn them into
competitive advantages -- especially transferring and sharing related technology,
procurement leverage, operating facilities, distribution channels, and/or customers.
* Establishing investment priorities and moving more corporate resources into the most
attractive LOB's.
It is useful to organize the corporate level strategy considerations and initiatives into a
framework with
The following three main strategy components: growth, portfolio, and parenting. These
are discussed in the next three sections.
What Should be Our Growth Objective and Strategies?
Growth objectives can range from drastic retrenchment through aggressive growth.
Organizational leaders need to revisit and make decisions about the growth objectives and
the fundamental strategies the organization will use to achieve them. There are forces that tend
to push top decision-makers toward a growth stance even when a company is in trouble and
should not be trying to grow, for example bonuses, stock options, fame, ego. Leaders need to
resist such temptations and select a growth strategy stance that is appropriate for the organization
and its situation. Stability and retrenchment strategies are underutilized.
Some of the major strategic alternatives for each of the primary growth stances
(retrenchment, stability, and growth) are summarized in the following three sub-sections.
Growth Strategies
All growth strategies can be classified into one of two fundamental categories: concentration
within existing industries or diversification into other lines of business or industries. When a
company's current industries are attractive, have good growth potential, and do not face serious
threats, concentrating resources in the existing industries makes good sense. Diversification
tends to have greater risks, but is an appropriate option when a company's current industries have
little growth potential or are unattractive in other ways. When an industry consolidates and
becomes mature, unless there are other markets to seek (for example other international
markets), a company may have no choice for growth but diversification.
There are two basic concentration strategies, vertical integration and horizontal growth.
Diversification strategies can be divided into related (or concentric) and unrelated
(conglomerate) diversification. Each of the resulting four core categories of strategy alternatives
can be achieved internally through investment and development, or externally through mergers,
acquisitions, and/or strategic alliances -- thus producing eight major growth strategy categories.
Comments about each of the four core categories are outlined below, followed by some
key points about mergers, acquisitions, and strategic alliances.
1. Vertical Integration: This type of strategy can be a good one if the company has a strong
competitive position in a growing, attractive industry. A company can grow by taking over
functions earlier in the value chain that were previously provided by suppliers or other
organizations ("backward integration"). This strategy can have advantages, e.g., in cost,
stability and quality of components, and making operations more difficult for competitors.
However, it also reduces flexibility, raises exit barriers for the company to leave that industry,
and prevents the company from seeking the best and latest components from suppliers competing
for their business.
A company also can grow by taking over functions forward in the value chain previously
provided by final manufacturers, distributors, or retailers ("forward integration"). This strategy
provides more control over such things as final products/services and distribution, but may
involve new critical success factors that the parent company may not be able to master and
deliver. For example, being a world-class manufacturer does not make a company an effective
retailer.
Some writers claim that backward integration is usually more profitable than forward
integration, although this does not have general support. In any case, many companies have
moved toward less vertical integration (especially backward, but also forward) during the last
decade or so, replacing significant amounts of previous vertical integration with outsourcing and
various forms of strategic alliances.
2. Horizontal Growth: This strategy alternative category involves expanding the company's
existing products into other locations and/or market segments, or increasing the range of
products/services offered to current markets, or a combination of both. It amounts to expanding
sideways at the point(s) in the value chain that the company is currently engaged in. One of the
primary advantages of this alternative is being able to choose from a fairly continuous range of
choices, from modest extensions of present products/markets to major expansions -- each with
corresponding amounts of cost and risk.
3. Related Diversification (aka Concentric Diversification): In this alternative, a company

expands into a related industry, one having synergy with the company's existing lines of
business, creating a situation in which the existing and new lines of business share and gain
special advantages from commonalities such as technology, customers, distribution, location,
product or manufacturing similarities, and government access. This is often an appropriate
corporate strategy when a company has a strong competitive position and distinctive
competencies, but its existing industry is not very attractive.
4. Unrelated Diversification (aka Conglomerate Diversification): This fourth major category
of corporate strategy alternatives for growth involves diversifying into a line of business
unrelated to the current ones. The reasons to consider this alternative are primarily seeking more
attractive opportunities for growth in which to invest available funds (in contrast to rather
unattractive opportunities in existing industries), risk reduction, and/or preparing to exit an
existing line of business (for example, one in the decline stage of the product life cycle). Further,
this may be an appropriate strategy when, not only the present industry is unattractive, but the
company lacks outstanding competencies that it could transfer to related products or industries.
However, because it is difficult to manage and excel in unrelated business units, it can be
difficult to realize the hoped-for value added.
Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy categories
just discussed can be carried out internally or externally, through mergers, acquisitions, and/or
strategic alliances. Of course, there also can be a mixture of internal and external actions.
Various forms of strategic alliances, mergers, and acquisitions have emerged and are used
extensively in many industries today. They are used particularly to bridge resource and
technology gaps, and to obtain expertise and market positions more quickly than could be done
through internal development. They are particularly necessary and potentially useful when a
company wishes to enter a new industry, new markets, and/or new parts of the world.
Despite their extensive use, a large share of alliances, mergers, and acquisitions fall far
short of expected benefits or are outright failures. For example, one study published in Business
Week in 1999 found that 61 percent of alliances were either outright failures or "limping along."
Research on mergers and acquisitions includes a Mercer Management Consulting study of all
mergers from 1990 to 1996 which found that nearly half "destroyed" shareholder value; an A. T.
Kearney study of 115 multibillion-dollar, global mergers between 1993 and 1996 where 58
percent failed to create "substantial returns for shareholders" in the form of dividends and stock
price appreciation; and a Price-Waterhouse-Coopers study of 97 acquisitions over $500 million
from 1994 to 1997 in which two-thirds of the buyer's stocks dropped on announcement of the
transaction and a third of these were still lagging a year later.
Many reasons for the problematic record have been cited, including paying too much,
unrealistic expectations, inadequate due diligence, and conflicting corporate cultures; however,
the most powerful contributor to success or failure is inadequate attention to the merger
integration process. Although the lawyers and investment bankers may consider a deal done
when the papers are signed and they receive their fees, this should be merely an incident in a
multi-year process of integration that began before the signing and continues far beyond.
Stability Strategies
There are a number of circumstances in which the most appropriate growth stance for a company
is stability, rather than growth. Often, this may be used for a relatively short period, after which
further growth is planned. Such circumstances usually involve a reasonable successful company,
combined with circumstances that either permit a period of comfortable coasting or suggest a
pause or caution. Three alternatives are outlined below, in which the actual strategy actions are
similar, but differing primarily in the circumstances motivating the choice of a stability strategy
and in the intentions for future strategic actions.
1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout) may be
appropriate in either of two situations: (a) the need for an opportunity to rest, digest, and
consolidate after growth or some turbulent events - before continuing a growth strategy, or (b) an
uncertain or hostile environment in which it is prudent to stay in a "holding pattern" until there is
change in or more clarity about the future in the environment.
2. No Change: This alternative could be a cop-out, representing indecision or timidity in
making a choice for change. Alternatively, it may be a comfortable, even long-term strategy in a
mature, rather stable environment, e.g., a small business in a small town with few competitors.
3. Grab Profits While You Can: This is a non-recommended strategy to try to mask a
deteriorating situation by artificially supporting profits or their appearance, or otherwise trying to
act as though the problems will go away. It is an unstable, temporary strategy in a worsening
situation, usually chosen either to try to delay letting stakeholders know how bad things are or to
extract personal gain before things collapse. Recent terrible examples in the USA are Enron and
WorldCom.
Retrenchment Strategies
Turnaround: This strategy, dealing with a company in serious trouble, attempts to resuscitate or
revive the company through a combination of contraction (general, major cutbacks in size and
costs) and consolidation (creating and stabilizing a smaller, leaner company). Although difficult,
when done very effectively it can succeed in both retaining enough key employees and
revitalizing the company.
Captive Company Strategy: This strategy involves giving up independence in exchange for
some security by becoming another company's sole supplier, distributor, or a dependent
subsidiary.
Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or
captive company strategy, it has few choices other than to try to find a buyer and sell itself (or
divest, if part of a diversified corporation).
Liquidation: When a company has been unsuccessful in or has none of the previous three
strategic alternatives available, the only remaining alternative is liquidation, often involving a
bankruptcy. There is a modest advantage of a voluntary liquidation over bankruptcy in that the
board and top management make the decisions rather than turning them over to a court, which
often ignores stockholders' interests.
What Should Be Our Portfolio Strategy?
This second component of corporate level strategy is concerned with making decisions about the
portfolio of lines of business (LOB's) or strategic business units (SBU's), not the company's
portfolio of individual products. Portfolio matrix models can be useful in reexamining a
company's present portfolio. The purpose of all portfolio matrix models is to help a company
understand and consider changes in its portfolio of businesses, and also to think about allocation
of resources among the different business elements. The two primary models are the BCG
Growth-Share Matrix and the GE Business Screen (Porter, 1980, has a good summary of these).
These models consider and display on a two-dimensional graph each major SBU in terms of
some measure of its industry attractiveness and its relative competitive strength
The BCG Growth-Share Matrix model considers two relatively simple variables: growth
rate of the industry as an indication of industry attractiveness, and relative market share as an
indication of its relative competitive strength. The GE Business Screen, also associated with
McKinsey, considers two composite variables, which can be customized by the user, for (a)
industry attractiveness (e.g, one could include industry size and growth rate, profitability, pricing
practices, favored treatment in government dealings, etc.) and (b) competitive strength (e.g.,
market share, technological position, profitability, size, etc.)
The best test of the business portfolio's overall attractiveness is whether the combined
growth and profitability of the businesses in the portfolio will allow the company to attain its
performance objectives. Related to this overall criterion are such questions as:
* Does the portfolio contain enough businesses in attractive industries?
* Does it contain too many marginal businesses or question marks?
* Is the proportion of mature/declining businesses so great that growth will be sluggish?
* Are there some businesses that are not really needed or should be divested?
* Does the company have its share of industry leaders, or is it burdened with too many
businesses in modest competitive positions?
* Is the portfolio of SBU's and its relative risk/growth potential consistent with the
strategic goals?
* Do the core businesses generate dependable profits and/or cash flow?
* Are there enough cash-producing businesses to finance those needing cash
* Is the portfolio overly vulnerable to seasonal or recessionary influences?
* Does the portfolio put the corporation in good position for the future?
It is important to consider diversification vs. concentration while working on portfolio
strategy, i.e., how broad or narrow should be the scope of the company. It is not always desirable
to have a broad scope. Single-business strategies can be very successful (e.g., early strategies of
McDonald's, Coca-Cola, and BIC Pen). Some of the advantages of a narrow scope of business
are: (a) less ambiguity about who we are and what we do; (b) concentrates the efforts of the total
organization, rather than stretching them across many lines of business; (c) through extensive
hands-on experience, the company is more likely to develop distinctive competence; and (d)
focuses on long-term profits. However, having a single business puts "all the eggs in one
basket," which is dangerous when the industry and/or technology may change. Diversification
becomes more important when market growth rate slows. Building stable shareholder value is
the ultimate justification for diversifying -- or any strategy.
What Should Be Our Parenting Strategy?
This third component of corporate level strategy, relevant for a multi-business company (it is
moot for a single-business company), is concerned with how to allocate resources and manage
capabilities and activities across the portfolio of businesses. It includes evaluating and making
decisions on the following:
* Priorities in allocating resources (which business units will be stressed)
* What are critical success factors in each business unit, and how can the company do
well on them
* Coordination of activities (e.g., horizontal strategies) and transfer of capabilities among
business units
* How much integration of business units is desirable.
COMPETITIVE (BUSINESS LEVEL) STRATEGY
In this second aspect of a company's strategy, the focus is on how to compete successfully in
each of the lines of business the company has chosen to engage in. The central thrust is how to
build and improve the company's competitive position for each of its lines of business. A
company has competitive advantage whenever it can attract customers and defend against
competitive forces better than its rivals. Companies want to develop competitive advantages that
have some sustainability (although the typical term "sustainable competitive advantage" is
usually only true dynamically, as a firm works to continue it). Successful competitive strategies
usually involve building uniquely strong or distinctive competencies in one or several areas
crucial to success and using them to maintain a competitive edge over rivals. Some examples of
distinctive competencies are superior technology and/or product features, better manufacturing
technology and skills, superior sales and distribution capabilities, and better customer service and
convenience.
Competitive strategy is about being different. It means deliberately choosing to perform
activities differently or to perform different activities than rivals to deliver a unique mix of
value. (Michael E. Porter) The essence of strategy lies in creating tomorrow's competitive
advantages faster than competitors mimic the ones you possess today. (Gary Hamel & C. K.
Prahalad)
We will consider competitive strategy by using Porter's four generic strategies (Porter 1980,
1985) as the fundamental choices, and then adding various competitive tactics.
Porter's Four Generic Competitive Strategies
He argues that a business needs to make two fundamental decisions in establishing its
competitive advantage: (a) whether to compete primarily on price (he says "cost," which is
necessary to sustain competitive prices, but price is what the customer responds to) or to compete
through providing some distinctive points of differentiation that justify higher prices, and (b)
how broad a market target it will aim at (its competitive scope). These two choices define the
following four generic competitive strategies. which he argues cover the fundamental range of
choices. A fifth strategy alternative (best-cost provider) is added by some sources, although not
by Porter, and is included below:
1. Overall Price (Cost) Leadership: appealing to a broad cross-section of the market by
providing products or services at the lowest price. This requires being the overall low-cost
provider of the products or services (e.g., Costco, among retail stores, and Hyundai, among
automobile manufacturers). Implementing this strategy successfully requires continual,
exceptional efforts to reduce costs -- without excluding product features and services that buyers
consider essential. It also requires achieving cost advantages in ways that are hard for
competitors to copy or match. Some conditions that tend to make this strategy an attractive
choice are:
* The industry's product is much the same from seller to seller
* The marketplace is dominated by price competition, with highly price-sensitive buyers
* There are few ways to achieve product differentiation that have much value to buyers
* Most buyers use product in same ways -- common user requirements
* Switching costs for buyers are low
* Buyers are large and have significant bargaining power
2. Differentiation: appealing to a broad cross-section of the market through offering
differentiating features that make customers willing to pay premium prices, e.g., superior
technology, quality, prestige, special features, service, convenience (examples are Nordstrom and
Lexus). Success with this type of strategy requires differentiation features that are hard or
expensive for competitors to duplicate. Sustainable differentiation usually comes from
advantages in core competencies, unique company resources or capabilities, and superior
management of value chain activities. Some conditions that tend to favor differentiation
strategies are:
* There are multiple ways to differentiate the product/service that buyers think have
substantial value
* Buyers have different needs or uses of the product/service
* Product innovations and technological change are rapid and competition emphasizes the
latest product features
* Not many rivals are following a similar differentiation strategy
3. Price (Cost) Focus: a market niche strategy, concentrating on a narrow customer segment
and competing with lowest prices, which, again, requires having lower cost structure than
competitors (e.g., a single, small shop on a side-street in a town, in which they will order
electronic equipment at low prices, or the cheapest automobile made in the former Bulgaria).
Some conditions that tend to favor focus (either price or differentiation focus) are:
* The business is new and/or has modest resources
* The company lacks the capability to go after a wider part of the total market
* Buyers' needs or uses of the item are diverse; there are many different niches and
segments in the industry
* Buyer segments differ widely in size, growth rate, profitability, and intensity in the five
competitive forces, making some segments more attractive than others
* Industry leaders don't see the niche as crucial to their own success
* Few or no other rivals are attempting to specialize in the same target segment
4. Differentiation Focus: a second market niche strategy, concentrating on a narrow customer

segment and competing through differentiating features (e.g., a high-fashion women's clothing
boutique in Paris, or Ferrari).
Best-Cost Provider Strategy: (although not one of Porter's basic four strategies, this strategy is
mentioned by a number of other writers.) This is a strategy of trying to give customers the best
cost/value combination, by incorporating key good-or-better product characteristics at a lower
cost than competitors. This strategy is a mixture or hybrid of low-price and differentiation, and
targets a segment of value-conscious buyers that is usually larger than a market niche, but
smaller than a broad market. Successful implementation of this strategy requires the company to
have the resources, skills, capabilities (and possibly luck) to incorporate up-scale features at
lower cost than competitors.
This strategy could be attractive in markets that have both variety in buyer needs that make
differentiation common and where large numbers of buyers are sensitive to both price and value.
Porter might argue that this strategy is often temporary, and that a business should choose and
achieve one of the four generic competitive strategies above. Otherwise, the business is stuck in
the middle of the competitive marketplace and will be out-performed by competitors who choose
and excel in one of the fundamental strategies. His argument is analogous to the threats to a
tennis player who is standing at the service line, rather than near the baseline or getting to the
net. However, others present examples of companies (e.g., Honda and Toyota) who seem to be
able to pursue successfully a best-cost provider strategy, with stability.
Competitive Tactics
Although a choice of one of the generic competitive strategies discussed in the previous section
provides the foundation for a business strategy, there are many variations and elaborations.
Among these are various tactics that may be useful (in general, tactics are shorter in time horizon
and narrower in scope than strategies). This section deals with competitive tactics, while the
following section discusses cooperative tactics.
Two categories of competitive tactics are those dealing with timing (when to enter a
market) and market location (where and how to enter and/or defend).
Timing Tactics: When to make a strategic move is often as important as what move to
make. We often speak of first-movers (i.e., the first to provide a product or service), secondmovers or rapid followers, and late movers (wait-and-see). Each tactic can have advantages and
disadvantages.
Being a first-mover can have major strategic advantages when: (a) doing so builds an
important image and reputation with buyers; (b) early adoption of new technologies, different
components, exclusive distribution channels, etc. can produce cost and/or other advantages over
rivals; (c) first-time customers remain strongly loyal in making repeat purchases; and (d) moving
first makes entry and imitation by competitors hard or unlikely.
However, being a second- or late-mover isn't necessarily a disadvantage. There are cases
in which the first-mover's skills, technology, and strategies are easily copied or even surpassed
by later-movers, allowing them to catch or pass the first-mover in a relatively short period, while
having the advantage of minimizing risks by waiting until a new market is established.
Sometimes, there are advantages to being a skillful follower rather than a first-mover, e.g., when:
(a) being a first-mover is more costly than imitating and only modest experience curve benefits
accrue to the leader (followers can end up with lower costs than the first-mover under some
conditions); (b) the products of an innovator are somewhat primitive and do not live up to buyer
expectations, thus allowing a clever follower to win buyers away from the leader with better
performing products; (c) technology is advancing rapidly, giving fast followers the opening to
leapfrog a first-mover's products with more attractive and full-featured second- and thirdgeneration products; and (d) the first-mover ignores market segments that can be picked up
easily.
Market Location Tactics: These fall conveniently into offensive and defensive tactics.
Offensive tactics are designed to take market share from a competitor, while defensive tactics
attempt to keep a competitor from taking away some of our present market share, under the
onslaught of offensive tactics by the competitor. Some offensive tactics are:
* Frontal Assault: going head-to-head with the competitor, matching each other in every
way. To be successful, the attacker must have superior resources and be willing to
continue longer than the company attacked.
* Flanking Maneuver: attacking a part of the market where the competitor is weak. To
be successful, the attacker must be patient and willing to carefully expand out of the
relatively undefended market niche or else face retaliation by an established competitor.
* Encirclement: usually evolving from the previous two, encirclement involves
encircling and pushing over the competitor's position in terms of greater product variety
and/or serving more markets. This requires a wide variety of abilities and resources
necessary to attack multiple market segments.
* Bypass Attack: attempting to cut the market out from under the established defender by
offering a new, superior type of produce that makes the competitor's product
unnecessary or undesirable.
* Guerrilla Warfare: using a "hit and run" attack on a competitor, with small, intermittent
assaults on different market segments. This offers the possibility for even a small firm
to make some gains without seriously threatening a large, established competitor and
evoking some form of retaliation.
Some Defensive Tactics are:

* Raise Structural Barriers: block avenues challengers can take in mounting an
offensive
* Increase Expected Retaliation: signal challengers that there is threat of strong
retaliation if they attack
* Reduce Inducement for Attacks: e.g., lower profits to make things less attractive
(including use of accounting techniques to obscure true profitability). Keeping prices
very low gives a new entrant little profit incentive to enter.
The general experience is that any competitive advantage currently held will eventually be
eroded by the actions of competent, resourceful competitors. Therefore, to sustain its initial
advantage, a firm must use both defensive and offensive strategies, in elaborating on its basic
competitive strategy.
Cooperative Strategies
Another group of "competitive" tactics involve cooperation among companies. These
could be grouped under the heading of various types of strategic alliances, which have been
discussed to some extent under Corporate Level growth strategies. These involve an agreement
or alliance between two or more businesses formed to achieve strategically significant objectives
that are mutually beneficial. Some are very short-term; others are longer-term and may be the
first stage of an eventual merger between the companies.
Some of the reasons for strategic alliances are to: obtain/share technology, share
manufacturing capabilities and facilities, share access to specific markets, reduce
financial/political/market risks, and achieve other competitive advantages not otherwise
available. There could be considered a continuum of types of strategic alliances, ranging from:
(a) mutual service consortiums (e.g., similar companies in similar industries pool their resources
to develop something that is too expensive alone), (b) licensing arrangements, (c) joint ventures
(an independent business entity formed by two or more companies to accomplish certain things,
with allocated ownership, operational responsibilities, and financial risks and rewards), (d)
value-chain partnerships (e.g., just-in-time supplier relationships, and out-sourcing of major
value-chain functions).
FUNCTIONAL STRATEGIES
Functional strategies are relatively short-term activities that each functional area within a
company will carry out to implement the broader, longer-term corporate level and business level
strategies. Each functional area has a number of strategy choices, that interact with and must be
consistent with the overall company strategies.
Three basic characteristics distinguish functional strategies from corporate level and
business level strategies:
Shorter time horizon, greater specificity, and primary involvement of operating managers.
A few examples follow of functional strategy topics for the major functional areas of marketing,
finance, production/operations, research and development, and human resources management.
Each area needs to deal with sourcing strategy, i.e., what should be done in-house and what
should be outsourced?
Marketing strategy deals with product/service choices and features, pricing strategy, markets to
be targeted, distribution, and promotion considerations. Financial strategies include decisions
about capital acquisition, capital allocation, dividend policy, and investment and working capital
management. The production or operations functional strategies address choices about how and
where the products or services will be manufactured or delivered, technology to be used,
management of resources, plus purchasing and relationships with suppliers. For firms in hightech industries, R&D strategy may be so central that many of the decisions will be made at the
business or even corporate level, for example the role of technology in the company's
competitive strategy, including choices between being a technology leader or follower.
However, there will remain more specific decisions that are part of R&D functional strategy,
such as the relative emphasis between product and process R&D, how new technology will be
obtained (internal development vs. external through purchasing, acquisition, licensing, alliances,
etc.), and degree of centralization for R&D activities. Human resources functional strategy
includes many topics, typically recommended by the human resources department, but many
requiring top management approval. Examples are job categories and descriptions; pay and
benefits; recruiting, selection, and orientation; career development and training; evaluation and
incentive systems; policies and discipline; and management/executive selection processes.
CHOOSING THE BEST STRATEGY ALTERNATIVES
Decision making is a complex subject, worthy of a chapter or book of its own. This section can
only offer a few suggestions. Among the many sources for additional information, I recommend
Harrison (1999), McCall & Kaplan (1990), and Williams (2002). Here are some factors to
consider when choosing among alternative strategies:
* It is important to get as clear as possible about objectives and decision criteria (what
makes a decision a "good" one?)
* The primary answer to the previous question, and therefore a vital criterion, is that the
chosen strategies must be effective in addressing the "critical issues" the company faces
at this time
* They must be consistent with the mission and other strategies of the organization
* They need to be consistent with external environment factors, including realistic

assessments of the competitive environment and trends
* They fit the company's product life cycle position and market attractiveness/competitive
strength situation
* They must be capable of being implemented effectively and efficiently, including being
realistic with respect to the company's resources
* The risks must be acceptable and in line with the potential rewards
* It is important to match strategy to the other aspects of the situation, including: (a) size,
stage, and growth rate of industry; (b) industry characteristics, including fragmentation,
importance of technology, commodity product orientation, international features; and
(c) company position (dominant leader, leader, aggressive challenger, follower, weak,
"stuck in the middle")
* Consider stakeholder analysis and other people-related factors (e.g., internal and
external pressures, risk propensity, and needs and desires of important decision-makers)
* Sometimes it is helpful to do scenario construction, e.g., cases with optimistic, most
likely, and pessimistic assumptions.
SOME TROUBLESOME STRATEGIES TO AVOID OR USE WITH CAUTION
Follow the Leader: when the market has no more room for copycat products and look-alike
competitors. Sometimes such a strategy can work fine, but not without careful consideration of
the company's particular strengths and weaknesses. (e.g., Fujitsu Ltd. was driven since the 1960s
to catch up to IBM in mainframes and continued this quest even into the 1990s after mainframes
were in steep decline; or the decision by Standard Oil of Ohio to follow Exxon and Mobil Oil
into conglomerate diversification)
Count On Hitting Another Home Run: e.g., Polaroid tried to follow its early success with
instant photography by developing "Polavision" during the mid-1970s. Unfortunately, this very
expensive, instant developing, 8mm, black and white, silent motion picture camera and film was
displayed at a stockholders' meeting about the time that the first beta-format video recorder was
released by Sony. Polaroid reportedly wrote off at least $500 million on this venture without
selling a single camera.
Try to Do Everything: establishing many weak market positions instead of a few strong ones
Arms Race: Attacking the market leaders head-on without having either a good competitive
advantage or adequate financial strength; making such aggressive attempts to take market share
that rivals are provoked into strong retaliation and a costly "arms race." Such battles seldom
produce a substantial change in market shares; usual outcome is higher costs and profitless sales
growth
Put More Money On a Losing Hand: one version of this is allocating R&D efforts to weak
products instead of strong products (e.g., Polavision again, Pan Am's attempt to continue global
routes in 1987)
Over-optimistic Expansion: Using high debt to finance investments in new facilities and
equipment, then getting trapped with high fixed costs when demand turns down, excess capacity
appears, and cash flows are tight
Unrealistic Status-Climbing: Going after the high end of the market without having the
reputation to attract buyers looking for name-brand, prestige goods (e.g., Sears' attempts to
introduce designer women's clothing)
Selling the Sizzle Without the Steak: Spending more money on marketing and sales
promotions to try to get around problems with product quality and performance. Depending on
cosmetic product improvements to serve as a substitute for real innovation and extra customer
value.
Steps in Strategy Formulation Process

Strategy formulation refers to the process of choosing the most appropriate course of action for
the realization of organizational goals and objectives and thereby achieving the organizational
vision. The process of strategy formulation basically involves six main steps. Though these
steps do not follow a rigid chronological order, however they are very rational and can be easily
followed in this order.
1. Setting Organizations objectives - The key component of any strategy statement is to
set the long-term objectives of the organization. It is known that strategy is generally a
medium for realization of organizational objectives. Objectives stress the state of being
there whereas Strategy stresses upon the process of reaching there. Strategy includes both
the fixation of objectives as well the medium to be used to realize those objectives. Thus,
strategy is a wider term which believes in the manner of deployment of resources so as to
achieve the objectives.
While fixing the organizational objectives, it is essential that the factors which influence
the selection of objectives must be analyzed before the selection of objectives. Once the
objectives and the factors influencing strategic decisions have been determined, it is easy
to take strategic decisions.
2. Evaluating the Organizational Environment - The next step is to evaluate the general
economic and industrial environment in which the organization operates. This includes a
review of the organizations competitive position. It is essential to conduct a qualitative
and quantitative review of an organizations existing product line.
The purpose of such a review is to make sure that the factors important for competitive
success in the market can be discovered so that the management can identify their own
strengths and weaknesses as well as their competitors strengths and weaknesses.
After identifying its strengths and weaknesses, an organization must keep a track of
competitors moves and actions so as to discover probable opportunities of threats to its
market or supply sources.
3. Setting Quantitative Targets - In this step, an organization must practically fix the
quantitative target values for some of the organizational objectives. The idea behind this
is to compare with long term customers, so as to evaluate the contribution that might be
made by various product zones or operating departments.
4. Aiming in context with the divisional plans - In this step, the contributions made by
each department or division or product category within the organization is identified and
accordingly strategic planning is done for each sub-unit. This requires a careful analysis
of macroeconomic trends.
5. Performance Analysis - Performance analysis includes discovering and analyzing the

gap between the planned or desired performance. A critical evaluation of the
organizations past performance, present condition and the desired future conditions must
be done by the organization. This critical evaluation identifies the degree of gap that
persists between the actual reality and the long-term aspirations of the organization. An
attempt is made by the organization to estimate its probable future condition if the current
trends persist.
6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of
action is actually chosen after considering organizational goals, organizational strengths,
potential
and
limitations
as
well
as
the
external
opportunities.
http://www.managementstudyguide.com/strategic-management.htm
10 steps in strategy formulation:

There are several ways a strategy can be designed for a company. However
some methods are better than the others. Here are 10 steps which guide you in
deciding the strategy of your company.
Steps 1 to 5 mainly involve internal or external research as well as very long

term strategy making (Strategies made in the first 5 steps affect the whole life
cycle of the company)
1) Write a Vision Statement A vision statement (crisp and to the point) is a
must for developing a strategy. Exploring and deciding on the vision of the
company gives you clarity on the main objectives of the company.
2) Mission Statement - Decide a Mission statement for the company. This

mission statement would actually determine the methodology of the company in
reaching its vision, its purposes and its philosophy behind its goals.
3) Define the company profile - The company profile needs to be

comprehensive which further clears the goals of the organization. What would
be the strengths of the company, capabilities, management. In essence mention
everything you can about the company. This helps in transparency while
deciding the strategy.
4) Study the External environment No strategy can be complete without

taking into consideration the effect that external environment has on
businesses. Thus an in depth study on external environment is necessary and
the same should be mentioned in the strategy report.
5) The 5th step involves matching all three Mission statement, Company
profile and the external environment such that they are in sync to achieve the
vision of the company.
From here on, Step 6 to 10 involve decision making based on the research as
well as the decisions taken for the company in the previous steps. The last steps
are more inclined towards implementation.
6) Deciding the actions for accomplishing the mission of the organization
7) Selecting long term strategies which will be most effective
8) Deciding on short term strategies arising from the long term ones such
that these short term strategies too are in sync with the mission and vision
statement
9) Deciding the budget and resource allocation according to the short term
strategy
10) Implementation of the strategies along with pre decided review

system along with measures to maintain control and a fallback short term plan.
STRATEGIC VISION AND MISSION
Though sounding cliched, Vision & Mission statement can do a lot to alignment. It is
important that the same is worded and articulated in a way the people can relate to them
and also find it linked to their job.
Strategic Vision
A strategic vision is a view of an organizations future direction and business makeup. It is a guiding
concept for what the organization is trying to do and to become. Whereas the focus of the
companys mission tends to be on the present, the focus of a strategic vision is on a companys
future. If the statement of mission speaks as much to the future path the organization intends to
follow as to the present organizational purpose, then the mission statement incorporates the
strategic vision and theres no separate need for a vision.) (Thompson Strickland p.24)
A vision statement answers the questions What will our business look like in 5 to 10 years from
now? A strategic vision is a roadmap of a companys future the direction it is headed, the
customer focus it should have, the market position it should try to occupy, the business activities to
be pursued, and the capabilities it plans to develop. Forming a strategic vision of what the
companys future business makeup will be and where the organization is headed is needed so as to
provide long-term direction, delineate what kind of enterprise the company is trying to become, and
infuse the organization with a sense of purposeful action. Strategic vision charts the course for the
organization to pursue and creates organizational purpose and identity. Strategic vision spells out a
direction and describes the destination. (Thomas Strickland, p.3, 27)
A vision statement is a powerful picture of what the companys business can and should be a
decade from now. When a strategic vision conveys the market position it intends to stake out and
what course the company is going to follow, then the vision is truly capable in
1. guiding managerial decision making
2. shaping the companys strategy
3. impacting how the company is run.(Thomas Strickland, p.28)
A well-worded strategic vision statement has real value: (Thomas Strickland,, p.36)
1. It crystallizes senior executives own views about firm long-term direction and future.
2. It guides managerial decision making.
3. It conveys an organizational purpose that arouses employee buy-in and commitment.
4. It provides a beacon lower-level managers can use to form departmental missions, set
departmental objectives, and craft strategies.
5. It helps an organization prepare for the future.
Developing a Strategic Vision Statement

The entrepreneurial challenge in developing a strategic vision is to think creatively about how to
prepare a company for the future. It requires rational analysis of what the company should be doing
to get ready for the changes coming in its present business and to capitalize on newly developing
market opportunities.
Challenges related to Vision Statement:

Putting-up a vision is not a challenge. The problem is to make employees engaged with it. Many
a time, terms like vision, mission and strategy become more a subject of scorn than being looked
up-to. This is primarily because leaders may not be able to make a connect between the
vision/mission and peoples every day work. Too often, employees see a gap between the vision,
mission and their goals & priorities. Even if there is a valid/tactical reason for this mis-match, it
is not explained.
Horizon of Vision:
Vision should be the horizon of 5-10 years. If it is less than that, it becomes tactical. If it is of a
horizon of 20+ years (say), it becomes difficult for the strategy to relate to the vision.
Features of a good vision statement:
Easy to read and understand.
Compact and Crisp to leave something to peoples imagination.
Gives the destination and not the road-map.
Is meaningful and not too open ended and far-fetched.
Excite people and make them get goose-bumps.
Provides a motivating force, even in hard times.
Is perceived as achievable and at the same time is challenging and compelling, stretching
us beyond what is comfortable.
Vision is a dream/aspiration, fine-tuned to reality:

The Entire process starting from Vision down to the business objectives, is highly iterative. The
question is from where should we start. We strongly recommend that vision and mission
statement should be made first without being colored by constraints, capabilities and
environment. This can said akin to the vision of armed forces, thats 'Safe and Secure country
from external threats'. This vision is a non-negotiable and it drives the organization to find ways
and means to achieve their vision, by overcoming constraints on capabilities and resources.
Vision should be a stake in the ground, a position, a dream, which should be prudent, but should
be non-negotiable barring few rare circumstances.
Vision Statements for New and Small Firms
Vision statements and mission statements are very different. A vision statement for a new
or small firm spells out goals at a high level and should coincide with the founder's goals for
the business. Simply put, the vision should state what the founder ultimately envisions the
business to be, in terms of growth, values, employees, contributions to society, and the like;
therefore, self-reflection by the founder is a vital activity if a meaningful vision is to be

developed. As a founder, once you have defined your vision, you can begin to develop
strategies for moving the organization toward that vision. Part of this includes the
development of a company mission.
Realistic: A vision must be based in reality to be meaningful for an organization. For

example, if you're developing a vision for a computer software company that has carved
out a small niche in the market developing instructional software and has a 1.5 percent
share of the computer software market, a vision to overtake Microsoft and dominate the
software market is not realistic!
Credible: A vision must be believable to be relevant. To whom must a vision be

credible? Most importantly, to the employees or members of the organization. If the
members of the organization do not find the vision credible, it will not be meaningful or
serve a useful purpose. One of the purposes of a vision is to inspire those in the
organization to achieve a level of excellence, and to provide purpose and direction for the
work of those employees. A vision which is not credible will accomplish neither of these
ends.
Attractive: If a vision is going to inspire and motivate those in the organization, it must
be attractive. People must want to be part of this future that's envisioned for the
organization.
Future: A vision is not in the present, it is in the future. In this respect, the image of the
leader gazing off into the distance to formulate a vision may not be a bad one. A vision is
not where you are now, it's where you want to be in the future. (If you reach or attain a
vision, and it's no longer in the future, but in the present, is it still a vision?)
Nanus goes on to say that the right vision for an organization, one that is a realistic,
credible, attractive future for that organization, can accomplish a number of things for the
organization:
It attracts commitment and energizes people. This is one of the primary reasons for
having a vision for an organization: its motivational effect. When people can see that the
organization is committed to a vision-and that entails more than just having a vision
statement-it generates enthusiasm about the course the organization intends to follow,
and increases the commitment of people to work toward achieving that vision.
It creates meaning in workers' lives. A vision allows people to feel like they are part of
a greater whole, and hence provides meaning for their work. The right vision will mean
something to everyone in the organization if they can see how what they do contributes
to that vision. Consider the difference between the hotel service worker who can only
say, "I make beds and clean bathrooms," to the one who can also say, "I'm part of a team
committed to becoming the worldwide leader in providing quality service to our hotel
guests." The work is the same, but the context and meaning of the work is different.
It establishes a standard of excellence. A vision serves a very important function in

establishing a standard of excellence. In fact, a good vision is all about excellence. Tom
Peters, the author of In Search of Excellence, talks about going into an organization
where a number of problems existed. When he attempted to get the organization's
leadership to address the problems, he got the defensive response, "But we're no worse
than anyone else!" Peters cites this sarcastically as a great vision for an organization:
"Acme Widgets: We're No Worse Than Anyone Else!" A vision so characterized by lack
of a striving for excellence would not motivate or excite anyone about that organization.
The standard of excellence also can serve as a continuing goal and stimulate quality
improvement programs, as well as providing a measure of the worth of the organization.
It bridges the present and the future. The right vision takes the organization out of the
present, and focuses it on the future. It's easy to get caught up in the crises of the day, and
to lose sight of where you were heading. A good vision can orient you on the future, and
provide positive direction. The vision alone isn't enough to move you from the present to
the future, however. That's where a strategic plan, discussed later in the chapter, comes
in. A vision is the desired future state for the organization; the strategic plan is how to get
from where you are now to where you want to be in the future.
Mission Statement
What is a mission:
Mission of an organization is the purpose for which the organization is. Mission is again a single
statement, and carries the statement in verb. Mission in one way is the road to achieve the vision.
For example, for a luxury products company, the vision could be 'To be among most admired
luxury brands in the world' and mission could be 'To add style to the lives'
A good mission statement will be :
Clear and Crisp: While there are different views, We strongly recommend that mission
should only provide what, and not 'how and when'. We would prefer the mission of
'Making People meet their career' to 'Making people meet their career through effective
career counseling and education'. A mission statement without 'how & when' element
leaves a creative space with the organization to enable them take-up wider strategic
choices.
Have to have a very visible linkage to the business goals and strategy: For example you
cannot have a mission (for a home furnishing company) of 'Bringing Style to Peoples
lives' while your strategy asks for mass product and selling. Its better that either you start
selling high-end products to high value customers, OR change your mission statement to
'Help people build homes'.
Should not be same as the mission of a competing organization. It should touch upon
how its purpose it unique.
Mission Statements for New and Small Firms

The mission statement should be a concise statement of business strategy and developed
from the customer's perspective and it should fit with the vision for the business. The
mission should answer three questions:
1. What do we do?
2. How do we do it?
3. For whom do we do it?
What do we do? This question should not be answered in terms of what is physically
delivered to customers, but by the real and/or psychological needs that are fulfilled when
customers buy your products or services. Customers make purchase decisions for many
reasons, including economical, logistical, and emotional factors. An excellent illustration of
this is a business in the Twin Cities that imports hand-made jewelry from east Africa. When
asked what her business does, the owner replied, "We import and market east African
jewelry." But when asked why customers buy her jewelry, she explained that, "They're
buying a story in where the jewelry came from." This is an important distinction and
answering this question from the need-fulfilled perspective will help you answer the other
two questions effectively.
How do we do it? This question captures the more technical elements of the business.
Your answer should encompass the physical product or service and how it is sold and
delivered to customers, and it should fit with the need that the customer fulfills with its
purchase. In the example above, the business owner had originally defined her business as
selling east African jewelry and was attempting to sell it on shelves of boutique retail stores
with little success. After modifying the answer to the first question, she realized that she
needed to deliver the story to her customers along with the product. She began organizing
wine parties that included a slide show of east Africa, stories of personal experiences there,
and pictures and descriptions of the villagers who make the jewelry. This method of delivery
has been very successful for her business.
For whom do we do it? The answer to this question is also vital, as it will help you focus
your marketing efforts. Though many small business owners would like to believe
otherwise, not everyone is a potential customer, as customers will almost always have both
demographic and geographic limitations. When starting out, it is generally a good idea to
define the demographic characteristics (age, income, etc.) of customers who are likely to
buy and then define a geographic area in which your business can gain a presence. As you
grow, you can add new customer groups and expand your geographic focus.
Mission follows the Vision:

The Entire process starting from Vision down to the business objectives, is highly iterative. The
question is from where should be start. I strongly recommend that mission should follow the
vision. This is because the purpose of the organization could change to achieve their vision.
For example to achieve the vision of an Insurance company 'To be the most trusted Insurance
Company', the mission could be first 'making people financially secure' as their emphasis is on
Traditional Insurance product. At a later stage the company can make its mission as 'Making
money work for the people' when they also include the non-traditional unit linked investment
products.
STRATEGIC OBJECTIVES:
Clearly stated strategic objectives, the third step of strategy formulation, outline the position in
the marketplace that the firm seeks. Performance targets state the measurable milestones that the
firm needs to reach or obtain to achieve its strategic objectives.
Some strategic objectives relate to the positioning of goods and services in the competitive
marketplace while others concern the structure of the company itself and how it plans to produce
goods or manage its operations. Typical strategic objectives involve profitability, market share,
return on investment, technological achievement, customer service level, revenue size, and
diversification.
In order to make strategic planning work, the goals, missions, objectives, performance targets, or
other hopes of top management must somehow be made real by others in more distant locations
down the organizational chart. Merely communicating to each member of the business the vision
that top management has for the firm is not sufficient. Strategic objectives and performance
targets should penetrate every corner of the organizational chart. There should be a hierarchy of
strategic formulation starting with the highest levels of the firm, from which it is consistently
translated from level to level so that each department knows what its contribution to the overall
mission of the firm is to be. This process should end with each individual in the firm having
strategic objectives and performance targets tailored to their specific role in the firm.
http://www.referenceforbusiness.com/encyclopedia/Str-The/Strategy-Formulation.html
Setting objectives for the organization is one of the most important and challenging task. The
failure and success of the firm depends upon the setting of strategic objectives. Strategic
objectives are formulated for a longer period and are set for three to five years.
Strategic objectives are divided into targets for business units, departments; functional areas,
teams, and individuals. These objectives are a blend of financial and nonfinancial measures. This
enables the organization to align itself to achieve the strategic objectives. Organizations follow
the following poits while setting the strategic objectives.
To see the organizations competencies and competitive advantages
To see the current and projected influences on the industry and the competitive
environment
To see the current and future constraints on resources and operations
To see the current possibilities, probabilities, and capabilities in the organization.
To analyze the previously pursued opportunities that didnt work.
To see how opportunities will work?
To analyze what things are needed in the organization?
To clarify what things should be changed or shed?
The most important factor what is the current financial position (debt, equity, cash), etc.?
To analyze the current relationships with revenue, gross margin and profit margin, etc.
The above mentioned points explain that in order to create appropriate strategic objectives,
organizations work to understand their internal capabilities as well as the environment in which
they operate. Further, they also seek to clarify their purpose or mission. The organization focuses
on these issues allowing it to create a fit between its resources and the demands of the
competitive situation.
Role of Setting Objectives in Strategic Planning:
The role of objective setting in strategic planning is very clear. Without objective strategic plans
cannot work. Objective setting gives the firm a guideline and direction from where to start and
where the organization is going. Objectives provide a target to aim and to achieve that aim all the
efforts are focused on it. Another role the objective play is that it motivates the managers and
team members for getting the reward upon achievement. The objectives setting supports to
evaluate the success of any project in the strategic planning..
Setting objectives:
Introduction
Objectives set out what the business is trying to achieve.
Objectives can be set at two levels:
(1) Corporate level
These are objectives that concern the business or organisation as a whole
Examples of corporate objectives might include:
We aim for a return on investment of at least 15%
We aim to achieve an operating profit of over 10 million on sales of at least 100 million
We aim to increase earnings per share by at least 10% every year for the foreseeable future
(2) Functional level
e.g. specific objectives for marketing activities
Examples of functional marketing objectives might include:
We aim to build customer database of at least 250,000 households within the next 12 months
We aim to achieve a market share of 10%
We aim to achieve 75% customer awareness of our brand in our target markets
Both corporate and functional objectives need to conform to the commonly used SMART criteria.
The SMART criteria (an important concept which you should try to remember and apply in exams)
are summarised below:
Specific - the objective should state exactly what is to be achieved.
Measurable - an objective should be capable of measurement so that it is possible to determine
whether (or how far) it has been achieved
Achievable - the objective should be realistic given the circumstances in which it is set and the
resources available to the business.
Relevant - objectives should be relevant to the people responsible for achieving them
Time Bound - objectives should be set with a time-frame in mind. These deadlines also need to be
realistic.
Financial Objectives:
The business plan financial objectives involve measuring financial performance to reflect the
total operational performance. The aim in managing this performance should be to
maximize net profit and net cash surpluses of the operation. The two main measures,
therefore, are net profit and net cash flow.
Each indicator for any given period is calculated as follows:
Total income (revenue) less direct costs (or C.O.G.S.) equals gross profit (contribution
margin) and gross profit less operating costs (cost of running the business) is equal to net
profit.
Total receipts (inflows) less total payments (outflows) is equal to net cash flow surplus.
Net profit is calculated as the excess of income (revenue) over expenses of the operation for
a given period. Income (revenue) is the earnings of the business and expenses are it's
running costs.
Net cash flow surplus is calculated as the excess of receipts (inflows) over payments for a
given period. Receipts are the cash inflows of the business, payments are it's cash outflows
or outgoings. See also performance metrics
Financial Plan Outline

1) Break even analysis
One of the main financial objectives is to perform a break even analysis. This should be
done before preparing the final financial plans for your operation. You should know the sales
break-even point, that is, the level of sales necessary to meet the total business running
costs. You can also use break-even analysis to determine the level of sales to achieve a
desired profit target. See also sales break even point
2) Categorise costs as fixed or variable
Fixed costs are constant. They do not change when sales levels change provided the
business does not change its operating capacity.
Variable costs change proportionally to changes in business activity. When sale levels
change, these costs also change (up or down). Examples of variable costs are stock
purchases, raw material purchases, and direct costs (job material purchases).
3) Calculate the contribution margin

This is a key area of the financial objectives. The sales income of the business must be
enough to cover it's variable costs and it's fixed cost's as well as the required profit. The
contribution margin is the excess of sales income over the variable costs of the business for
the period (sales less direct costs). The contribution margin measures how much sales
contribute towards meeting fixed costs and the desired net profit of the business.
This is the one of the key financial objectives, as without sufficient contribution margin you
cannot meet your operating costs and you will be in negative net profit territory. See also
performance metrics
4) Calculate the break-even point
With a knowledge of the contribution margin (% to sales), you can find the business's
break-even point, the level at which income equals expenses (direct costs and overheads or
expenses), so that neither a profit or a loss is made (in the net profit line of your profit and
loss report). See also sales break even point.
5) Financial Forecasts sales
Sales forecasts should be the first forecasts made when planning profit and overall financial
objectives. The sales forecast is of prime importance because it influences many of the cost
forecasts for your business.
6) Forecast profit statements
Prepare a forecast profit statement showing the annual net profit target for the business for
each year. See also performance metrics
7) Forecast capital expenditure requirements
Prepare an annual capital expenditure forecast for each year. This shows details of your
proposed capital expenditure for the period in the business plan.
8) Forecast cash flow
After you have prepared the forecast profit and capital expenditure statements, you can
now prepare cash flow statements for each year of the business plan. Potential lenders will
critically analyse your cash flow forecasts to determine your ability to meet loan
repayments.
A cash flow statement shows the intended cash receipts and payments of the business over
the period of the business plan, which then allows the cash flow to be calculated. A forecast
cash flow statement shows the cash receipts (inflows) and payments (outflows) of the
operation, which enables future cash positions to be predicted.
This is one of the key financial objectives of your business, and dictates any required level
of funding over the coming trading period (budget year).
9) Financial Ratios
The calculation of financial ratios provides a useful summary of the acceptability of
forecasts. They can be used to identify strengths and weaknesses in planned operating
activities.
Ratios are compared with standard benchmarks such as industry averages for acceptability.
Ratios should also be improving over time. The identification of any unacceptable ratios
should cause you to review and adjust relevant sections of the operational plan to produce
satisfactory forecasts and results.
For a comprehensive understanding of financial ratios see our eBook relationships that show
the health of your business.
10) Financial records
You will need to design a comprehensive record system that records the financial
transactions of the business. Financial records are necessary for the financial control of the
operation. Records of financial transactions enable accurate reports to be prepared for
monitoring the financial results of the operation. Financial results are compared with
corresponding targets to identify any unsatisfactory performance so that follow up action
can be taken.
11) Business insurance
Plan what types of insurance will be required for the business now and for the period of the
plan, the types of insurance might include public liability (usually the minimum) and
professional indemnity. Comprehensive insurance cover should be arranged and maintained
for your business operation to minimise exposure to daily risks which can cause financial
losses.
12) Financial controls
The final area of financial objectives is to establish the financial controls for your business.
After you have designed your financial record keeping system, you should then decide what
financial controls to adopt for your business operation.
Financial controls are the methods or techniques you will use to monitor and evaluate the
financial results of your operation. Key financial results are 'profit', 'cash flow' and 'financial
position'. See also performance metrics
Understanding the financial objectives for your business operation is essential if your
business is to be successful.
Many business fail because they do not take time out to first establish these, and then to
monitor them. These are your "stakes in the ground" which ultimately support the structure
of your business!
The Balanced Scorecard

Traditional financial reporting systems provide an indication of how a firm has performed in the
past, but offer little information about how it might perform in the future. For example, a firm
might reduce its level of customer service in order to boost current earnings, but then future
earnings might be negatively impacted due to reduced customer satisfaction. To deal with this
problem, Robert Kaplan and David Norton developed the Balanced Scorecard, a performance
measurement system that considers not only financial measures, but also customer, business
process, and learning measures. The Balanced Scorecard framework is depicted in the following
diagram:
The balanced scorecard translates the organization's strategy into four perspectives,
with a balance between the following:
between internal and external measures
between objective measures and subjective measures
between performance results and the drivers of future results
Beyond the Financial Perspective
In the industrial age, most of the assets of a firm were in property, plant, and equipment,
and the financial accounting system performed an adequate job of valuing those assets.
In the information age, much of the value of the firm is embedded in innovative
processes, customer relationships, and human resources. The financial accounting
system is not so good at valuing such assets.
Diagram of the Balanced Scorecard

Financi
al
Custom
er
Strate
gy
Busines
s
Process
es
Learnin
g
&
Growth
The Balanced Scorecard goes beyond standard financial measures to include the
following additional perspectives: the customer perspective, the internal process
perspective, and the learning and growth perspective.
Financial perspective - includes measures such as operating income, return on

capital employed, and economic value added.
Customer perspective - includes measures such as customer satisfaction,

customer retention, and market share in target segments.
Business process perspective - includes measures such as cost, throughput,

and quality. These are for business processes such as procurement, production,
and order fulfillment.
Learning & growth perspective - includes measures such as employee

satisfaction, employee retention, skill sets, etc.
These four realms are not simply a collection of independent perspectives. Rather, there
is a logical connection between them - learning and growth lead to better business
processes, which in turn lead to increased value to the customer, which finally leads to
improved financial performance.
Objectives, Measures, Targets, and Initiatives
Each perspective of the Balanced Scorecard includes objectives, measures of those

objectives, target values of those measures, and initiatives, defined as follows:
Objectives - major objectives to be achieved, for example, profitable growth.
Measures - the observable parameters that will be used to measure progress

toward reaching the objective. For example, the objective of profitable growth
might be measured by growth in net margin.
Targets - the specific target values for the measures, for example, +2% growth in
net margin.
Initiatives - action programs to be initiated in order to meet the objective.
These can be organized for each perspective in a table as shown below.
Objectives
Measures
Targets
Initiatives
Financial
Customer
Process
Learning
Balanced Scorecard as a Strategic Management

System:
The Balanced Scorecard originally was conceived as an improved performance
measurement system. However, it soon became evident that it could be used as a
management system to implement strategy at all levels of the organization by facilitating
the following functions:
1. Clarifying strategy - the translation of strategic objectives into quantifiable
measures clarifies the management team's understanding of the strategy and
helps to develop a coherent consensus.
2. Communicating strategic objectives - the Balanced Scorecard can serve to
translate high level objectives into operational objectives and communicate the
strategy effectively throughout the organization.
3. Planning, setting targets, and aligning strategic initiatives - ambitious but
achievable targets are set for each perspective and initiatives are developed to
align efforts to reach the targets.
4. Strategic feedback and learning - executives receive feedback on whether the
strategy implementation is proceeding according to plan and on whether the
strategy itself is successful ("double-loop learning").
These functions have made the Balanced Scorecard an effective management system
for the implementation of strategy. The Balanced Scorecard has been applied
successfully to private sector companies, non-profit organizations, and government
agencies.
The Balanced Scorecard was introduced as one of the newest management tools. The
purpose was to allow organizations to be better able to use their intangible assets. The
balanced scorecard is to be used as a supplement to traditional financial measures. It
measures performance from three additional perspectives; customers, internal
business processes, and learning and growth. The scorecard can help top-level
management link the long-term strategy with the short-term actions. Managers using a
balanced scorecard do not only have to rely on the short-term financial results as
indicators of the companys progress. It brings in other indicators that provide
information about how the short-term results have affected the long-term strategy.
The scorecard allows managers to introduce four new processes;
1. translating the vision,
2. communicating and linking,
3. business planning, and
4. feedback and learning.
Translating the vision is a means of expressing the mission/vision statements with an
integrated set of objectives and measures. This forces the top management to develop
operational measures, which requires them to discuss, and eventually agree on, a
means of achieving the goals of the company.
Communicating and linking is a process that facilitates the communication of
strategies throughout the entire organization. Departmental and individual objectives
must be aligned with the strategy through evaluation procedures and incentives. To
have goal congruence between the individual employees and the company, scorecard
users engage in three activities: communicating and educating, setting goals, and
linking rewards to performance measures which are in turn linked to the overall
strategy.
Communicating and educating is achieved by maintaining policies that ensure all
employees are aware of the strategies of the organization. Also, it is important for the
lower level employees to be able to communicate upwards about whether or not the
strategies are realistic from the competitive or operational perspective.
Setting goals alone is not sufficient to change employees mind-set. One technique
to ensure the objectives related to the goals are achieved is the use of a personal
scorecard. It is simply a card that has information that describes corporate objectives,
measures, and targets. Employees would carry it with them. This allows employees
to better translate these objectives into meaningful tasks that will help reach these
goals.
Linking rewards to performance is an important incentive to help an organization
achieve its purpose. What the balanced scorecard adds to the traditional means of
linking rewards to financial performance is that it takes a more holistic look at the
organization. It ensures that the correct criteria are used as a measure of performance
before rewards are given. The idea is that, if you are not using the correct indicators to
evaluate performance, there is a high risk in rewarding this behavior.
Business planning is the third process used by managers with the balanced
scorecard. By using the scorecard, businesses will integrate their strategic planning
and budgeting processes. This makes sure that the budgets support the strategies of the
company. The users of the scorecard pick measures that represent each of the four
perspectives, and then set targets for each. Then they will decide which specific
actions will help them in reaching those targets. Using short-term milestones to
evaluate the progress toward the strategic goal is what results from using the balanced
scorecard.
The fourth, and final, process is feedback and learning. With the balanced scorecard
in place managers can monitor feedback and relate this to the strategy. The first three
processes are very important, but they demand a constant objective. Any deviation
from the plan is considered a defect. By adding the feedback and learning process, the
scorecard becomes balanced by providing real time information to enhance strategic
learning.
The balanced scorecard supplies three essential items to strategic learning.
First, it articulates the vision. The holistic vision is communicated to the entire
organization, and the individual efforts are linked to business unit objectives.
Second, the scorecard supplies a strategic feedback system.This system views the
strategies as hypotheses, and should be able to test, validate, and modify these
hypotheses.
Third, the balanced scorecard facilitates strategy review. Instead of using periodic
meetings to evaluate past performances as the traditional financial review process
does,
scorecard users review the feedback in a way to gain a better understanding of if
the strategy
is being reached, how is it being reached, and should the strategy be modified
based on new
information. This gives the organization a forward focus.
The balanced scorecard facilitates an organization's plan to align management
processes and focuses with the long-term strategy of the company. Without the
scorecard it would be nearly impossible to maintain a consistency of vision and action
while attempting to introduce new strategies and processes. The balanced scorecard
provides a framework for managing the implementation of a strategy, while also
allowing the strategy to evolve in response to changes in the companys competitive,
market, and technological environments.
The Strategic Planning Process
In the 1970's, many large firms adopted a formalized top-down strategic planning model. Under
this model, strategic planning became a deliberate process in which top executives periodically
would formulate the firm's strategy, then communicate it down the organization for
implementation. The following is a flowchart model of this process:
This process is most applicable to strategic management at the business unit level of the
organization. For large corporations, strategy at the corporate level is more concerned with
managing a portfolio of businesses.
For example, corporate level strategy involves decisions about which business units to grow,
resource allocation among the business units, taking advantage of synergies among the business
units, and mergers and acquisitions. In the process outlined here, "company" or "firm" will be
used to denote a single-business firm or a single business unit of a diversified firm.
Mission
A company's mission is its reason for being. The mission often is expressed in the form of a
mission statement, which conveys a sense of purpose to employees and projects a company
image to customers. In the strategy formulation process, the mission statement sets the mood of
where the company should go.
Objectives
Objectives are concrete goals that the organization seeks to reach, for example, an earnings
growth target. The objectives should be challenging but achievable. They also should be
measurable so that the company can monitor its progress and make corrections as needed.
The Strategic Planning Process
Mission
|
V
Objectives
|
V
Situation Analysis
|
V
Strategy Formulation
|
V
Implementation
|
V
Control
Situation Analysis
Once the firm has specified its objectives, it begins with its current situation to devise a strategic
plan to reach those objectives. Changes in the external environment often present new
opportunities and new ways to reach the objectives. An environmental scan is performed to
identify the available opportunities. The firm also must know its own capabilities and limitations
in order to select the opportunities that it can pursue with a higher probability of success. The
situation analysis therefore involves an analysis of both the external and internal environment.
The external environment has two aspects: the macro-environment that affects all firms and a
micro-environment that affects only the firms in a particular industry. The macro-environmental
analysis includes political, economic, social, and technological factors and sometimes is referred
to as a PEST analysis.
An important aspect of the micro-environmental analysis is the industry in which the firm
operates or is considering operating. Michael Porter devised a five forces framework that is
useful for industry analysis. Porter's 5 forces include barriers to entry, customers, suppliers,
substitute products, and rivalry among competing firms.
The internal analysis considers the situation within the firm itself, such as:
Company culture
Company image
Organizational structure
Key staff
Access to natural resources
Position on the experience curve
Operational efficiency
Operational capacity
Brand awareness
Market share
Financial resources
Exclusive contracts
Patents and trade secrets
A situation analysis can generate a large amount of information, much of which is not
particularly relevant to strategy formulation. To make the information more manageable, it
sometimes is useful to categorize the internal factors of the firm as strengths and weaknesses,
and the external environmental factors as opportunities and threats. Such an analysis often is
referred to as a SWOT analysis.
Strategy Formulation
Once a clear picture of the firm and its environment is in hand, specific strategic alternatives can
be developed. While different firms have different alternatives depending on their situation, there
also exist generic strategies that can be applied across a wide range of firms. Michael Porter
identified cost leadership, differentiation, and focus as three generic strategies that may be
considered when defining strategic alternatives. Porter advised against implementing a
combination of these strategies for a given product; rather, he argued that only one of the generic
strategy alternatives should be pursued.
Implementation
The strategy likely will be expressed in high-level conceptual terms and priorities. For effective
implementation, it needs to be translated into more detailed policies that can be understood at the
functional level of the organization. The expression of the strategy in terms of functional policies
also serves to highlight any practical issues that might not have been visible at a higher level.
The strategy should be translated into specific policies for functional areas such as:
Marketing
Research and development
Procurement
Production
Human resources
Information systems
In addition to developing functional policies, the implementation phase involves identifying the
required resources and putting into place the necessary organizational changes.
Control
Once implemented, the results of the strategy need to be measured and evaluated, with changes
made as required to keep the plan on track. Control systems should be developed and
implemented to facilitate this monitoring. Standards of performance are set, the actual
performance measured, and appropriate action taken to ensure success.
Dynamic and Continuous Process
The strategic management process is dynamic and continuous. A change in one component can
necessitate a change in the entire strategy. As such, the process must be repeated frequently in
order to adapt the strategy to environmental changes. Throughout the process the firm may need
to cycle back to a previous stage and make adjustments.
Drawbacks of this Process
The strategic planning process outlined above is only one approach to strategic management. It is
best suited for stable environments. A drawback of this top-down approach is that it may not be
responsive enough for rapidly changing competitive environments. In times of change, some of
the more successful strategies emerge informally from lower levels of the organization, where
managers are closer to customers on a day-to-day basis.
Another drawback is that this strategic planning model assumes fairly accurate forecasting and
does not take into account unexpected events. In an uncertain world, long-term forecasts cannot
be relied upon with a high level of confidence. In this respect, many firms have turned
to scenario planning as a tool for dealing with multiple contingencies.
The hierarchy of Strategic intent:

Strategic Intent Defined
Strategic intent is a high-level statement of the means by which your organization will achieve
its vision. It is a statement of design for creating a desirable future (stated in present terms).
Simply put, a strategic intent is your company's vision of what it wants to achieve in the long
term. In complexity science's terms, strategic intent is decomposition of exploration rules into
the next level of detail, the linkages to the exploration rules and the transition rules that define
how it will migrate from its current design and ecosystem to a future business design and
ecosystem.1
Purpose of Strategic Intent
The logic, uniqueness and discovery that make your strategic intent come to life are vitally
important for employees. They have to understand, believe and live according to it.
Strategy should be a stretch exercise, not a fit exercise. Expression of strategic intent is to
help individuals and organizations share the common intention to survive and continue or
extend themselves through time and space.
Strategies are involved in the formulation, implementation and evaluation of strategy. The
hierarchy of strategic intent lays the foundation for strategic management process. The
process of establishing the hierarchy of strategic intent is very complex. In this hierarchy, the
vision, mission, business definition and objectives are established. Formulation of strategies is
possible only when strategic intent is clearly set up. This step is mostly philosophical in nature.
It will have long term impact on the organization.
Vision is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like
to become. Mission is the essential purpose of the organization, concerning particularly why it
is in existence, the nature of the business it is in, and the customers it seeks to serve and
satisfy." The mission statements stage the role that organization plays in society.
Business definition explains the business of an organization in terms of customer needs,
customer groups and alternative technologies.
Objectives refer to the ultimate end results which are to be accomplished by the overall plan
over a specified period of time. The vision, mission and business definition determine the
business philosophy to be adopted in the long run. The goals and objectives are set to achieve
them
Unit-2
Analyzing a companys external environment:
A business does not function in a vacuum. It has to act and react to what happens outside the
factory and office walls. These factors that happen outside the business are known as external
factors or influences. These will affect the main internal functions of the business and possibly
the objectives of the business and its strategies.
Main Factors
The main factor that affects most business is the degree of competition how fiercely other
businesses compete with the products that another business makes.
The other factors that can affect the business are:
Social how consumers, households and communities behave and their beliefs. For
instance, changes in attitude towards health, or a greater number of pensioners in a
population.
Legal the way in which legislation in society affects the business. E.g. changes in
employment laws on working hours.
Economic how the economy affects a business in terms of taxation, government

spending, general demand, interest rates, exchange rates and European and global
economic factors.
Political how changes in government policy might affect the business e.g. a decision to
subsidise building new houses in an area could be good for a local brick works.
Technological how the rapid pace of change in production processes and product
innovation affect a business.
Ethical what is regarded as morally right or wrong for a business to do. For instance
should it trade with countries which have a poor record on human rights.
Changing External Environment

Markets are changing all the time. It does depend on the type of product the business produces,
however a business needs to react or lose customers.
Some of the main reasons why markets change rapidly:
Customers develop new needs and wants.
New competitors enter a market.
New technologies mean that new products can be made.
A world or countrywide event happens e.g. Gulf War or foot and mouth disease.
Government introduces new legislation e.g. increases minimum wage.
Business and Competition

Though a business does not want competition from other businesses, inevitably most will face a
degree of competition.
The amount and type of competition depends on the market the business operates in:
Many small rival businesses e.g. a shopping mall or city centre arcade close rivalry.
A few large rival firms e.g. washing powder or Coke and Pepsi.
A rapidly changing market e.g. where the technology is being developed very quickly
the mobile phone market.
A business could react to an increase in competition (e.g. a launch of rival product) in the
following ways:
Cut prices (but can reduce profits)
Improve quality (but increases costs)
Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs
money)
Cut costs, e.g. use cheaper materials, make some workers redundant
Social Environment and Responsibility

Social change is when the people in the community adjust their attitudes to way they live.
Businesses will need to adjust their products to meet these changes, e.g. taking sugar out of
childrens drinks, because parents feel their children are having too much sugar in their diets.
The business also needs to be aware of their social responsibilities. These are the way they act
towards the different parts of society that they come into contact with.
Legislation covers a number of the areas of responsibility that a business has with its customers,
employees and other businesses.
It is also important to consider the effects a business can have on the local community. These are
known as the social benefits and social costs.
A social benefit is where a business action leads to benefits above and beyond the direct benefits
to the business and/or customer. For example, the building of an attractive new factory provides
employment opportunities to the local community.
A social cost is where the action has the reverse effect there are costs imposed on the rest of
society, for instance pollution.
These extra benefits and costs are distinguished from the private benefits and costs directly
attributable to the business. These extra cost and benefits are known as externalities external
costs and benefits.
Governments encourage social benefits through the use of subsidies and grants (e.g. regional
assistance for undeveloped areas). They also discourage social costs with fines, taxes and
legislation. Pressure groups will also discourage social costs.
Analyze the companys external environment and identify opportunities and threats it
faces. List the opportunities and threats the company faces in two columns just as you listed
strengths and weaknesses in two columns. Once weve studied the industry life-cycle model and
the Porter 5-forces model in Chapter 3, try using them to analyze the situation your company
faces.
If you think of additional strengths and weaknesses as you are listing opportunities and threats,
add them to the lists you created in Step 2.
Here is a list of opportunities and threats developed from the Sun Microsystems case. Note that
this list, based on the case published in 2001, shows more threats than opportunities. The threats
shown here played a significant role in the serious problems that Sun experienced in 2001 and
2002.
Opportunities
Threats
Sales of networking equipment for web,

other large-scale applications are
growing
Many competitors can make Unix

servers
Digital contents creation business is

growing
Microsoft Windows NT can in theory do

everything Solaris does and offer much
wider compatibility
Linux offers strong competition for
Solaris and is more open
Industry analysis:
Definition: A market assessment tool designed to provide a business
with an
idea of the complexity of a particular industry. Industry analysis involves
reviewing the economic, political and market factors that influence the way the
industry
develops. Major factors can include the power wielded
by
suppliers and buyers, the condition of competitors, and the likelihood of new
market entrants.
Industry Analysis
The course is based on the ability of students to define their business, conduct an
effective industry analysis, and identify the "key success factory" for firms competing
in the industry. Such industry analysis is based on:
A. DEFINE
THE
BUSINESS. The
boundary
for
industry
analysis
is
the markets and products that describe the domain of the industry. Once you understand the
business segment that is to be analyzed, identify the capabilities required to participate in that
industry, and those competitors that are able to effectively target the same business segments.
These four elements set the parameters for understanding and analyzing the industry. As
industries like printers, copiers, scanners, and facsimile machines converge, business definitions
become more difficult. In industries like computers, consumers are becoming more demanding
for customized products and services.
B. DESCRIBE THE INDUSTRY STRUCTURE. For each product-market segment, an
industry analysis will describe the "five-forces" of competition.
1. A primary force comes customer segments that make up the markets. The size and
importance of customers provide the power to negotiate prices and deals that reduce the
profitability of the industry. The size and growth of segments determine their potential
influence on product development and level of competition.
2. A second force comes from the competitors and their strategies for gaining market
share. Each competitor offers a set of products and services that attempts to provide
higher value to the product-market segments they address. Strategies can be to provide
some combination of higher performance, more fashion and features, higher quality, or
lower price. Increased rivalry often leads to price or service competition that can reduce
the profitability of the business.
3. A third force comes from the industry suppliers. Industry suppliers often control critical
inputs that can affect a firms ability to compete. Access to critical equipment, materials,
or components can determine what firms will lead the industry. For this reason, increased
outsourcing often leads to lower entry barriers for new competition.
4. The fourth force represents the barriers to change in industry structure, either from new
competitors entering the industry or current competitors existing the industry. Barriers
to entry often include heavy investment in capital, equipment, and market
development. Barriers to exit often include outstanding warranty or service contracts
that must be honored, and alternative use or potential sale of equipment and facilities.
Once specialized facilities are established, they are seldom shut down, but are often sold
to another industry participant.
5. The fifth force represents the potential for change in product-market structure of the
industry through the substitution of products or services with alternative approaches to
satisfying the customer's needs. This requires the identification of potential substitutes
and the characteristics that would cause rapid substitution. Price often becomes a driver
for substitutes, such as plastics for metals in cars and plumbing supplies. Today, the
Internet is becoming a substitute for mail service and, eventually, telephone service.
C. IDENTIFY KEY SUCCESS FACTORS. The primary purpose of industry analysis is to
identify the requirements and trends that determine the key success factors for the business.
These factors encompass (1) customer requirements, (2) competitive factors that must be met, (3)
regulations/industry standards in the business, (4) the resource requirements to implement
competitive strategy, and other (5) technical requirements to build a competitive position.
1. Customers are looking for products that provide some level of value for the price they
pay. Each buyer segment has different requirements that affect its key success factors.
Requirements can include high performance, durability, special features or fashion, ease
of use, or rapid availability.
2. Competing firms often use similar product-market strategies. Competition is often based
on price, quality, and delivery. Depending on their strategic focus, each firm must
develop a set of skills (strategic weapons) that allow it to perform better than their
competitors on each competitive dimension.
3. Industry regulations or standards are often minimum requirements for participation in a
competitive arena. Goverment regulations often affect safety issues for the environment
or end users. Industry standards often determine technical compatibility, process
performance, and interface issues for network or system products. Industry standards can
be set by a special body, like the Industry Standards Organization (ISO), or become ad
hoc standards set by leading competitiors, like Intel and Microsoft.
4. Resource requirements are be coming increasingly critical as markets become global and
economies of scale become critical for research and development, manufacturing, and
marketing. Investments now excede $1 billion for facilities in semiconductors, paper
making, and steel production. In high technology areas, like information technology,
shortages of qualified personnel are forcing firms to outsource much of their capabilities.
5. Technical requirements are also key to today's competitive environment. Without access
to, or internal technology, firms are not able to participate in many industries. This is
especially important for suppliers, such as component suppliers for electronics or
automobiles. As firms reduce their number of suppliers, suppliers must increasingly add
research and development capabilities to stay in the game.
Business Strategies Analysis
Competitive product-market strategies are critical to business success. Business strategy analysis
requires the following:
A. IDENTIFY STRATEGIC GOALS. A firm's strategic goals drive business strategy and
address the key success factors of the industry. Strategic goals often include the vision or mission
statement for the business. They should also set the direction and standard for financial and
market results against which actual performance can be measured. The two most common
stategic goals are:
1. Competitive and market goals that define market share or market growth and penetration
for the firm's products or services.
2. Financial performance in terms of key ratios, like return on investment and sales, and
growth in revenues and/or profitability.
B. DEFINE BUSINESS STRATEGY. The definition of business strategy includes six areas of
analysis. The product-market focus is the first step. The underlying capabilities in implementing
a product-market strategy include the technologies, processes and market access that a firm has.
These address the business and its key success factors. Businesss strategy includes customer
targeting, product lines and positions, technical capabilities, strategic processes, and market
access.
1. Describe the customer targeting strategy and its requirements. Without targeting a
specific customer segment, it is impossible to develop effective products or services that
meet specific customer needs and requirements. Each segment, by definition, has a
different set of requirements. While differences may be minor at time, they affect the
decision of the customer to purchase the product or service.
2. Describe the product line and product positioning strategies for the market segment.
The business unit must decide what it will offer and how those offerings will be
positioned within the competitive environment. A firm can have one product or a product
line that covers a range of prices with a variety of features. The price-qualityperformance position is a relative determination compared with competitors' prices,
quality levels and features when comparing your products with alternative products in the
marketplace.
3. Identify the technologies required to implement the product-market strategy.
Technologies provide the basic capabilities needed to develop products or services, as
well as the associated processes used in developing or delivering them to the
marketplace. Technology determines the range of products and speed with which they can
be developed and delivered to the marketplace.
4. Identify the strategic process(es) required to implement the product-market
strategy. The core capabilities of a firm are embedded in the business processes and
functions. Strategic processes can either improve the product or marketing capabilities of
a firm. These processes and functions are the basis of a firms competitive strengths and
weaknesses, and make up the core competencies of the firm. These skills and capabilites
are described in section C below.
5. Identify the market access strategy. The final element of strategy requires that a firm
have access to its market or customers. Today, the Internet is considered the new channel
for accessing markets. In the 1960s, 1-800 numbers were the new method of access. At
the same time, discount superstores grew their market share in retail walk-in sales
markets.
C. IDENTIFY INTERNAL CAPABILITIES AND SKILLS. The ability of a firm to
implement its strategy is dependent upon both the functions and business processes that
supports its strategy. Depending on the nature of the organization, its functions and business
process capabilities and skills are central to strategy implementation. These capabilities can be
classified into product or service creation functions and processes, and product or service
delivery and satisfaction functions and processes.
Product-related functions and processes are dependent upon a firm's R&D and
manufacturing/purchasing capabilities.
1. The R&D function generates proprietary technologies that can be applied to the
development and production of new products. In the electronics industry, access to basic
components, like hard disk drives and floppy disk drives and high precision production
equipment are fundamental to making smaller, lighter, higher quality products. Each
generation of smaller products, like palm corders, stimulates market growth for the
company that is first to the market. Each generation of smaller products also reduce
packaging and shipping costs, reduce power consumption, extend battery life, and are
more convenient to carry.
2. The time-to-market process is required to integrate new technology into a firm's
products and services. Today, competitive advantage is often related to the speed with
which a firm can introduce the next generation of technologies into the market through
new product and process developments. Once the product is developed, production
capacity often becomes the limiting factor of market growth.
3. The manufacturing function transforms a set of purchased components and software
into a firm's products. Having acceptable products available in a timely manner for
customers is central to making sales. The ability to provide the highest quality products in
the most efficient allows companies to gain market share by offering competitive prices
and ready availability. Experience curve effects from high volumes can lead to lower
costs.
4. The integrated-supply-chain process coordinates purchasing of components for
assembly, product outsourcing, otherwise making sure products are available to meet
customer order requirements. Outsourcing and alliances increase a firm's ability to offer a
wider range of products or to introduce new products more rapidly. Increased flexibility
provides competitive advantage in responding to rapid market changes.
Market-related functions and processes are directed at serving the customer in the most
effective manner possible. Distribution and marketing activities, including sales and service, are
central to fulfilling customer demands and ensuring customer satisfaction.
1. The distribution function is essential for a firm in gaining market access. The company
that dominates the sales channels for a given market often controls the market. Market
share is related to product availability, i.e. the number and type of locations that make the
products and services available to your customer target. The Internet is providing the next
generation of distribution and marketing system.
2. The market-to-collection process is used to obtain customers and deliver products. The
Internet is changing the role of sales from face-to-face communication to phone or
computer communications. It is expected that many intermediary roles (such as
distributors and agents) will change to that of infomediary. As product quality and
durability improve, service becomes less important, and new channels can be developed.
3. The marketing function provides the customer with information and education about a
firm's products and services. Product information and education is often needed to let
customers know about product capabilities. Advertising is the part of marketing that
helps pull the customer into the market-to-colletion process by creating recognition and
image for the brand's products and services. It helps pull the customer into the store and
create brand image. Coca Cola, with the largest advertising budget, spends less money
per bottle of soft drink sales than any other competitor. That gives them competitive
advantage.
4. The customer-service and satisfaction process is critical to sustain a company's brand
loyalty. It is much less expensive to keep an existing customer than to acquire a new
customer. Once a customer relationship is established, it is important that appropriate
customer service activities are established to maintain the relationship, and solve
problems that might hurt the relationship. When after sales service is required, customers
need a company contact. 1-800 numbers and the Internet are rapidly providing direct
purchase opportunities and technical support capabilities. Dell Computers, for example,
guarantees 48 hour repairs of their products (often next day service). Xerox provides 7day, 24-hour repair service to their large system customers.
D. STRATEGIC PERFORMANCE. Performance is an outcome of strategy. The success with
which a firm's business strategy effectively addresses its industry's key success factors will
determine its strategic performance. Strategic performance is measured in terms of both financial
and market success.
1. Financial performance is essential for continued business operations. Financial

capabilities are critical in supporting functional strategies and making required
infrastructure investments. For example, a company with adequate funding can expand or
invest, or can provide customer financing.
2. Market share demonstrates a firm's ability to create and hold customers, which
determines the long term success of a firm. The freshness of product lines and market
positioning affect a firm's ability to attract customers ahead of their competition.
Porters dominant economic features:
HOME
Industrys Dominant Economic Features

Identification of industrys dominant economic features is very important for analyzing a
companys industrys and competitive environment. It also provides an overview of the over all
landscape of industry. So basically it helps the organization to know the different kind of
strategic moves that industry members are likely to employ. Some of the important industrys
dominant economic features are given below.
Market size and growth rate
Market size refers to the total number of firms operating in the industry. It is also important to
know whether the industry is growing, static or declining. It depends upon the position of
industry in the business life cycle i.e. earlydevelopment, rapid growth, early maturity, maturity,
stagnation, decline.
Number of rivals
Organizations should also know whether the industry contains too many small rivals or is it
dominated by a few large firms. Similarly they should also know about the
various development in the industry such as mergers andacquisitions etc.
Scope of competitive rivalry
Scope of competitive rivalry is an important factor for the organizations to know about the level
of competition. Industry members must know about the nature of future competition. For
example if a company realizes that its future success depends upon diversification,
product development and market expansion, then it must start planning from the very first day.
Buyer needs and requirements
Industry members must take into consideration the need and taste of final buyers as well as the
middlemen. So, basically organizations have to do a lot of periodic research in order to know the
major shifts in buyers needs and requirements. They should also know the about the various
factors factors affecting consumer behavior.
Degree of product differentiation
Product differentiation is another important factor for analyzing the overall industry situation. If
all the products of industry are not fully differentiated then it will increase competition among
the members of industry. In such case prices of the products will be low and the new entrants
will find it difficult to compete with the existing firms.
Product innovation
Product innovation can be used as a measure to know the dominant industry features. If the
industry is characterized by rapid product innovation and short product life cycle then
the research and development is very important for the success of an organization. In such cases,
members of the industry must come up with new products to compete effectively.
Pace of technological change
If the industry is characterized by rapid pace of technological change then the art of the state
technology is imperative for the success of organizations. For example Industry of mobile
phones requires rapid changes in the technology in order to meet the
changing consumer demands.
Vertical integration
It is important to know whether the competitors in the industry are partially or fully integrated.
Similarly the competitive advantages and disadvantages of fully, partially and non integrated
firms should be taken into consideration. Vertical integration can cause potential cost of
production differences.
Economies of scale
Organizations must also know about the different economies of scale in

purchasing, manufacturing, and other activities. They should analyze whether the companies
with high scale operations has any cost advantage or not. Any reduction in the cost of production
leads to higher competitiveness which ultimately results higher profits.
http://mba-lectures.com/tag/industrys-dominant-economic-features
Competitive Environment Analysis
Competitive Environment Analysis explains the structure, participants and forces that affect the
competitive intensity and profitability of an industry or market. It is a useful tool to complement
a SWOT analysis and to assess the attractiveness of a potential business diversification.
Five Forces Model

The best-known model for analysing a competitive environment is Michael Porter's Five
Forces model. Porter classifies the five forces or "rules of competition" as:
1. Threat of new entrants
2. Bargaining power of suppliers
3. Bargaining power of buyers
4. Threat of substitute products or services
5. Rivalry among existing competitors.
The analyst has to measure the individual and overall strength of the five forces; then
answer the questions:
how attractive is the industry/market? How can we compete?
A Competitive Environment Analysis can be very useful provided accurate information is used
and the analysis is objective. A thorough analysis may require more research analyst resource
than the Competitive Intelligence team can spare.
We Can Analyse Your Competitive Environment
Intelligentsia is expert in Competitive Environment Analysis. We work closely with clients'
competitive strategy teams, to either refresh existing analyses as competitive forces change or to
create the analysis to begin the process.
The Benefits of Outsourcing
Outsourcing a competitive environment analysis is cost-effective. You receive a well researched
piece of analysis and can, if you wish, deploy the analysis on other priorities in the business.
Analysis of competition
The third element of Strategic analysis is to look at the competitive environment
- what your competitors are doing, where the next technological developments are
coming from and the general directions the market is moving.
Competitive and environmental analysis
A competitive and environmental analysis of your markets should include all the key
influencing factors that affect the way in which you can compete. A competitive
review is important for two reason.
Firstly, even if you know what the customers want and have the resources to meet
the customers' demands, it may be that the competitive environment means that it
is not worth pursuing particular parts of the market for a whole range of strategic
reasons, such as the threat a price war, channel conflict, or legal or ethical
considerations.
Secondly, you need to know if your competitors are doing things better than you
are, or more dangerously, whether they are looking to change the basis of
competition in the market, for instance by moving to a direct sales model, or by
introducing some revolutionary new product or technology.
The main types of competitive analysis from a strategic point of view are:
"The Five Forces"
Benchmarking and competitive evaluation
Market Intelligence is the primary mechanism for gathering information about

competitors (although some may come from talking to customers in your own
market surveys). Notanant is our on-line market knowledge system for collecting,
sharing and managing customer and competitor knowledge provided by Gegen
CIS.
Five forces
The five forces come from Porter's famous framework and are:
Power of Buyers
Power of Suppliers
Threat of substitutes
Barriers to entry
Competitors
The idea is that change in your market is likely to come as the basis of one of these
five areas. For instance, buyers may distort the market by forcing prices down, or
by deciding to take build products in-house.
In considering how these "forces" act on your markets, you get a picture of issues
such as channel conflict, threats from vertical integration, the impact of regulatory
change or the advent of new technology. You can also take a view as to how you
are or can affect the competitive situation for your own benefit, rather than
statically accepting the status quo.
Consequently it becomes possible to play around with different future competitive
scenarios and to use these to test different propositions to try and guess how the
market will change. Your strategy can then include contingencies and responses to
changes that might affect you, or changes that you might make to the market.
Benchmarking
Benchmarking is used to ascertain how well you are doing against the competition.
Are there areas that you can learn from the competition? Are there ideas in markets
outside your own that would be worth bringing into your market to give you a
competitive advantage?
Your competitors can also be a source for information about the general market.
Their advertising and marketing is telling you something about the messages and
approaches that they think are applicable to your market. If they have done their
research, you can learn from their approaches.
One common issue that comes from looking at the competition is what do
you do about it? The options are:
Ignore
Fight
Adopt
In practice, if there is merit in something new and you ignore it, it is likely to bite
you later. If you fight against it, you add to your costs potentially just to save
market share, rather than to win market share.
Consequently often adoption of the competition's good ideas is the best way
forward (although perhaps after a little fighting to test whether the ideas are
sound). Microsoft's Embrace and Extend and Intel's "Only the Paranoid Survive" are
good examples of companies that use the competition to keep their products at the
cutting edge.
Often there can internal cultural issues that mean this can be difficult to accept. But
learning from the competition, doesn't mean following the competition. This
approach, known as an "invest in your threats"strategy, can be an extremely
effective way of keeping up with and ahead of the market.
http://www.dobney.com/Strategies/competences.htm
Porter's 5 Forces Analysis:

The model originated from Michael E. Porter's 1980 book "Competitive Strategy: Techniques for
Analyzing Industries and Competitors." Since then, it has become a frequently used tool for
analyzing a company's industry structure and its corporate strategy.
In his book, Porter identified five competitive forces that shape every single industry and market.
These forces help us to analyze everything from the intensity of competition to the profitability
and attractiveness of an industry. Figure 1 shows the relationship between the different
competitive forces.
1. Threat of New Entrants - The easier it is for new companies to enter the industry, the
more cutthroat competition there will be. Factors that can limit the threat of new entrants
are known as barriers to entry. Some examples include:
Existing loyalty to major brands

Incentives for using a particular buyer (such as frequent shopper
programs)
High fixed costs
Power of Suppliers - This is how much pressure suppliers can place on a business. If one
supplier has a large enough impact to affect a company's margins and volumes, then it
holds substantial power. Here are a few reasons that suppliers might have power:
Scarcity of resources
High costs of switching companies
Government restrictions or legislation
There are very few suppliers of a particular product

There are no substitutes
Switching to another (competitive) product is very costly
The product is extremely important to buyers - can't do without it
The supplying industry has a higher profitability than the buying
industry
Power of Buyers - This is how much pressure customers can place on a business. If one
customer has a large enough impact to affect a company's margins and volumes, then the
customer hold substantial power. Here are a few reasons that customers might have
power:
Small number of buyers

Purchases large volumes
Switching to another (competitive) product is simple
The product is not extremely important to buyers; they can do
without the product for a period of time
Customers are price sensitive
SUPPLIER POWER
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or
differentiation
Switching costs of firms in the
industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in
industry
THREAT OF
NEW ENTRANTS
Barriers to Entry
Absolute cost
advantages
THREAT OF
Proprietary learning
SUBSTITUTES
curve
-Switching costs
Access to inputs
-Buyer inclination to
Government policy
substitute
Economies of scale
-Price-performance
Capital requirements
trade-off of substitutes
Brand identity
Switching costs
Access to distribution
Expected retaliation
Proprietary products
BUYER POWER
DEGREE OF RIVALRY
Bargaining leverage
-Exit barriers
Buyer volume
-Industry concentration
Buyer information
-Fixed costs/Value
Brand identity
added
Price sensitivity
-Industry growth
Threat of backward integration
-Intermittent
Product differentiation
overcapacity
Buyer concentration vs. industry
-Product differences
Substitutes available
-Switching costs
Buyers' incentives
-Brand identity
-Diversity of rivals
-Corporate stakes
Availability of Substitutes - What is the likelihood that someone will switch to a

competitive product or service? If the cost of switching is low, then this poses a serious
threat. Here are a few factors that can affect the threat of substitutes:
The main issue is the similarity of substitutes. For example, if the

price of coffee rises substantially, a coffee drinker may switch over to a
beverage like tea.
If substitutes are similar, it can be viewed in the same light as a
new entrant.
Competitive Rivalry - This describes the intensity of competition between existing firms
in an industry. Highly competitive industries generally earn low returns because the cost
of competition is high. A highly competitive market might result from:
Many players of about the same size; there is no dominant firm

Little differentiation between competitors products and services
A mature industry with very little growth; companies can only
grow by stealing customers away from competitors
Industry Driving Forces:

Organizations of all types are continually striving to enhance their business information systems.
Four major driving forces affect the strategies that CIOs and other IT leaders pursue relative to their
legacy systems. These drivers include:
Customer needs The capability and quality of such systems to fulfill the needs of
customers often differentiate an organization from its competitors.
Regulatory changes and emerging standards Concurrently, organizations are continually

under pressure to respond to changes in laws, regulations and policies that govern their
operations. Similarly, emerging industry standards may require changes in system
functionality.
Evolving technologies New functionality in new versions of products or entirely new

products provide opportunities to enhance systems. Sometimes, as technology evolves,
vendors discontinue support for a component of a system, which in some cases puts missioncritical legacy systems at risk.
Budget and time constraints Leaders responsible for legacy systems must endeavor to
balance all driving forces with the cost of systems development and operations. In fact,
organizations typically face the need to provide more and better functionality in shorter time
frames and reduced budgets.
key success factors and implementation: no
analyzing company's resource competitive position:

analysis of companys present strategies:
1. How well is the companys present strategy working?
2. What are the companys strengths, weaknesses, opportunities, and threats?
3. Are the companys prices and costs competitive?
4. How strong is the companys competitive position?
5. What strategic issues does the company face?
Strategy and Competitive Advantage

The Five Generic Competitive Strengths
When one strips away the details to get at the real substance the biggest and most
important differences among competitive strategies boil down to (1) whether a
companys market target is broad or narrow and (2) whether it is pursuing a
competitive advantage linked to low costs or product differentiation. Five distinct
approaches stand out:
1. A low-cost leadership strategy Appealing to a broad spectrum of customers
based on being the overall low cost provider of a product or service.
2. A broad differentiation strategy Seeking to differentiate the companys
product offering from rivals in ways that will appeal to a broad spectrum of
buyers.
3. A best-cost provider strategy Giving customers more value for the money
by combining an emphasis on low cost with an emphasis on upscale
differentiation; the target is to have the best (lowest) costs and prices relative to
producers of products with comparable quality and features.
4. A focused or market niche strategy based on lower cost Concentrating
on a narrow buyer segment and outcompeting rivals by serving niche members
at a lower cost than rivals.

5. A focused or market niche strategy based on differentiation
Concentrating on a narrow buyer segment and outcompeting rivals by offering
niche members a customized product or service that meets their tastes and
requirements better than rivals offering.
SWOT Analysis
SWOT analysis is a tool for auditing an organization and it environment. It is the first stage of
planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses,
opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and
threats are external factors.
SWOT Analysis
A scan of the internal and external environment is an important part of the strategic planning
process. Environmental factors internal to the firm usually can be classified as strengths (S) or
weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats
(T). Such an analysis of the strategic environment is referred to as a SWOT analysis.
The SWOT analysis provides information that is helpful in matching the firm's resources and
capabilities to the competitive environment in which it operates. As such, it is instrumental in
strategy formulation and selection. The following diagram shows how a SWOT analysis fits
into an environmental scan:
SWOT Analysis Framework
Environmental Scan
/
\
Internal Analysis
External Analysis
/\
/\
Strengths Weaknesses
Opportunities Threats
|
SWOT Matrix
Strengths
A firm's strengths are its resources and capabilities that can be used as a basis for developing
a competitive advantage. Examples of such strengths include:
patents
strong brand names
good reputation among customers
cost advantages from proprietary know-how
exclusive access to high grade natural resources
favorable access to distribution networks
Weaknesses
The absence of certain strengths may be viewed as a weakness. For example, each of the
following may be considered weaknesses:
lack of patent protection
a weak brand name
poor reputation among customers
high cost structure
lack of access to the best natural resources
lack of access to key distribution channels
In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has
a large amount of manufacturing capacity. While this capacity may be considered a strength
that competitors do not share, it also may be a considered a weakness if the large investment in
manufacturing capacity prevents the firm from reacting quickly to changes in the strategic
environment.
Opportunities
The external environmental analysis may reveal certain new opportunities for profit and
growth. Some examples of such opportunities include:
an unfulfilled customer need
arrival of new technologies
loosening of regulations
removal of international trade barriers
Threats
Changes in the external environmental also may present threats to the firm. Some examples of
such threats include:
shifts in consumer tastes away from the firm's products
emergence of substitute products
new regulations
increased trade barriers
The SWOT Matrix

A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a
better chance at developing a competitive advantage by identifying a fit between the firm's
strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in
order to prepare itself to pursue a compelling opportunity.
To develop strategies that take into account the SWOT profile, a matrix of these factors can be
constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below:
SWOT / TOWS Matrix
Strengths
Weaknesses
S-O strategies W-O strategies

Opportunities
Threats
S-T strategies W-T strategies
S-O strategies pursue opportunities that are a good fit to the company's strengths.
W-O strategies overcome weaknesses to pursue opportunities.
S-T strategies identify ways that the firm can use its strengths to reduce its
vulnerability to external threats.
W-T strategies establish a defensive plan to prevent the firm's weaknesses from
making it highly susceptible to external threats.
value chain analysis

Introduction
Value Chain Analysis describes the activities that take place in a business and relates them
to an analysis of the competitive strength of the business. Influential work by Michael
Porter suggested that the activities of a business could be grouped under two headings:
(1) Primary Activities - those that are directly concerned with creating and delivering a
product (e.g. component assembly); and
(2) Support Activities, which whilst they are not directly involved in production, may
increase effectiveness or efficiency (e.g. human resource management). It is rare for a
business to undertake all primary and support activities.
Value Chain Analysis is one way of identifying which activities are best undertaken by a
business and which are best provided by others ("out sourced").
Linking Value Chain Analysis to Competitive Advantage
What activities a business undertakes is directly linked to achieving competitive advantage.
For example, a business which wishes to outperform its competitors
through differentiating itself through higher quality will have to perform its value chain
activities better than the opposition. By contrast, a strategy based on seeking cost
leadership will require a reduction in the costs associated with the value chain activities,
or a reduction in the total amount of resources used.
Primary Activities
Primary value chain activities include:
Primary ActivityDescription
Inbound
All those activities concerned with receiving and storing externally sourced
logistics
materials
Operations
The manufacture of products and services - the way in which
resource inputs (e.g. materials) are converted to outputs (e.g. products)
Outbound
All those activities associated with getting finished goods and services to
logistics
buyers
Marketing and Essentially an information activity - informing buyers and consumers about
sales
products and services (benefits, use, price etc.)
Service
All those activities associated with maintaining product performance after
the product has been sold
Support Activities
Support activities include:
Secondary
Activity
Procurement
Description
This concerns how resources are acquired for a business (e.g. sourcing and
negotiating with materials suppliers)
Those activities concerned with recruiting, developing, motivating and
rewarding the workforce of a business
Human
Resource
Management
Technology
Activities concerned with managing information processing and the
Development development and protection of "knowledge" in a business
Infrastructure Concerned with a wide range of support systems and functions such as
finance, planning, quality control and general senior management
Steps in Value Chain Analysis
Value chain analysis can be broken down into a three sequential steps:
(1) Break down a market/organisation into its key activities under each of the major
headings in the model;
(2) Assess the potential for adding value via cost advantage or differentiation, or identify
current activities where a business appears to be at a competitive disadvantage;
(3) Determine strategies built around focusing on activities where competitive advantage
can be sustained
The Value Chain analysis:

To better understand the activities through which a firm develops a competitive

advantage and creates shareholder value, it is useful to separate the business
system into a series of value-generating activities referred to as the value chain.
In his 1985 book Competitive Advantage, Michael Porter introduced a generic
value chain model that comprises a sequence of activities found to be common to
a wide range of firms. Porter identified primary and support activities as shown in
the following diagram:
The goal of these activities is to offer the customer a level of value that exceeds
the cost of the activities, thereby resulting in a profit margin.
The primary value chain activities are:
Inbound Logistics: the receiving and warehousing of raw materials, and

their distribution to manufacturing as they are required.
Operations: the processes of transforming inputs into finished products and

services.
Outbound Logistics: the warehousing and distribution of finished goods.
Marketing & Sales: the identification of customer needs and the generation
of sales.
Service: the support of customers after the products and services are sold
to them.
Porter's Generic Value Chain
Inbound
Logistic
s
> Operations >
Outbound
Logistics
>
Marketing
&
Sales
> Service >
M
A
R
G
I
N
Firm Infrastructure
HR Management
Technology Development
Procurement
These primary activities are supported by:
The infrastructure of the firm: organizational structure, control systems,

company culture, etc.
Human resource management: employee recruiting, hiring, training,

development, and compensation.
Technology development: technologies to support value-creating activities.
Procurement: purchasing inputs such as materials, supplies, and

equipment.
The firm's margin or profit then depends on its effectiveness in performing these
activities efficiently, so that the amount that the customer is willing to pay for the
products exceeds the cost of the activities in the value chain. It is in these
activities that a firm has the opportunity to generate superior value. A
competitive advantage may be achieved by reconfiguring the value chain to
provide lower cost or better differentiation.
The value chain model is a useful analysis tool for defining a firm's core
competencies and the activities in which it can pursue a competitive
advantage as follows:
Cost advantage: by better understanding costs and squeezing them out

of the value-adding activities.
Differentiation: by focusing on those activities associated with core

competencies and capabilities in order to perform them better than do
competitors.
Cost Advantage and the Value Chain

A firm may create a cost advantage either by reducing the cost of individual value
chain activities or by reconfiguring the value chain.
Once the value chain is defined, a cost analysis can be performed by assigning
costs to the value chain activities. The costs obtained from the accounting report
may need to be modified in order to allocate them properly to the value creating
activities.
Porter identified 10 cost drivers related to value chain activities:
Economies of scale
Learning
Capacity utilization
Linkages among activities
Interrelationships among business units
Degree of vertical integration
Timing of market entry
Firm's policy of cost or differentiation
Geographic location
Institutional factors (regulation, union activity, taxes, etc.)
A firm develops a cost advantage by controlling these drivers better than do the
competitors.
A cost advantage also can be pursued by reconfiguring the value chain.
Reconfiguration means structural changes such a new production process, new
distribution channels, or a different sales approach. For example, FedEx
structurally redefined express freight service by acquiring its own planes and
implementing a hub and spoke system.
Differentiation and the Value Chain
A differentiation advantage can arise from any part of the value chain. For
example, procurement of inputs that are unique and not widely available to
competitors can create differentiation, as can distribution channels that offer high
service levels.
Differentiation stems from uniqueness. A differentiation advantage may be

achieved either by changing individual value chain activities to increase
uniqueness in the final product or by reconfiguring the value chain.
Porter identified several drivers of uniqueness:
Policies and decisions
Linkages among activities
Timing
Location
Interrelationships
Learning
Integration
Scale (e.g. better service as a result of large scale)
Institutional factors
Many of these also serve as cost drivers. Differentiation often results in greater
costs, resulting in tradeoffs between cost and differentiation.
There are several ways in which a firm can reconfigure its value chain in order to
create uniqueness. It can forward integrate in order to perform functions that
once were performed by its customers. It can backward integrate in order to have
more control over its inputs. It may implement new process technologies or
utilize new distribution channels. Ultimately, the firm may need to be creative in
order to develop a novel value chain configuration that increases product
differentiation.
Technology and the Value Chain
Because technology is employed to some degree in every value creating activity,
changes in technology can impact competitive advantage by incrementally
changing the activities themselves or by making possible new configurations of
the value chain.
Various technologies are used in both primary value activities and support
activities:
Inbound Logistics Technologies

o
Transportation
Material handling
Material storage
Communications
Testing
Information systems
Operations Technologies
o
Process
Materials
Machine tools
Material handling
Packaging
Maintenance
Testing
Building design & operation
Information systems
Outbound Logistics Technologies

o
Transportation
Material handling
Packaging
Communications
Information systems
Marketing & Sales Technologies

o
Media
Audio/video
Communications
Information systems
Service Technologies
o
Testing
Communications
Information systems
Note that many of these technologies are used across the value chain. For
example, information systems are seen in every activity. Similar technologies are
used in support activities. In addition, technologies related to training, computeraided design, and software development frequently are employed in support
activities.
To the extent that these technologies affect cost drivers or uniqueness, they can
lead to a competitive advantage.
Linkages Between Value Chain Activities
Value chain activities are not isolated from one another. Rather, one value chain
activity often affects the cost or performance of other ones. Linkages may exist
between primary activities and also between primary and support activities.
Consider the case in which the design of a product is changed in order to reduce
manufacturing costs. Suppose that inadvertantly the new product design results
in increased service costs; the cost reduction could be less than anticipated and
even worse, there could be a net cost increase.
Sometimes however, the firm may be able to reduce cost in one activity and
consequently enjoy a cost reduction in another, such as when a design change
simultaneously reduces manufacturing costs and improves reliability so that the
service costs also are reduced. Through such improvements the firm has the
potential to develop a competitive advantage.
Analyzing Business Unit Interrelationships

Interrelationships among business units form the basis for a horizontal strategy.
Such business unit interrelationships can be identified by a value chain analysis.
Tangible interrelationships offer direct opportunities to create a synergy among
business units. For example, if multiple business units require a particular raw
material, the procurement of that material can be shared among the business
units. This sharing of the procurement activity can result in cost reduction. Such
interrelationships may exist simultaneously in multiple value chain activities.
Unfortunately, attempts to achieve synergy from the interrelationships among
different business units often fall short of expectations due to unanticipated
drawbacks. The cost of coordination, the cost of reduced flexibility, and
organizational practicalities should be analyzed when devising a strategy to reap
the benefits of the synergies.
Outsourcing Value Chain Activities
A firm may specialize in one or more value chain activities and outsource the rest.
The extent to which a firm performs upstream and downstream activities is
described by its degree of vertical integration.
A thorough value chain analysis can illuminate the business system to facilitate
outsourcing decisions. To decide which activities to outsource, managers must
understand the firm's strengths and weaknesses in each activity, both in terms of
cost and ability to differentiate. Managers may consider the following when
selecting activities to outsource:
Whether the activity can be performed cheaper or better by suppliers.
Whether the activity is one of the firm's core competencies from which
stems a cost advantage or product differentiation.
The risk of performing the activity in-house. If the activity relies on fastchanging technology or the product is sold in a rapidly-changing market, it
may be advantageous to outsource the activity in order to maintain
flexibility and avoid the risk of investing in specialized assets.
Whether the outsourcing of an activity can result in business process

improvements such as reduced lead time, higher flexibility, reduced
inventory, etc.
The Value Chain System

A firm's value chain is part of a larger system that includes the value chains of
upstream suppliers and downstream channels and customers. Porter calls this
series of value chains the value system, shown conceptually below:
The Value System
...
Supplier
Firm
Channel
Buyer
> Value Chain > Value Chain > Value Chain > Value Chain
Linkages exist not only in a firm's value chain, but also between value chains.
While a firm exhibiting a high degree of vertical integration is poised to better
coordinate upstream and downstream activities, a firm having a lesser degree of
vertical integration nonetheless can forge agreements with suppliers and channel
partners to achieve better coordination. For example, an auto manufacturer may
have its suppliers set up facilities in close proximity in order to minimize transport
costs and reduce parts inventories. Clearly, a firm's success in developing and
sustaining a competitive advantage depends not only on its own value chain, but
on its ability to manage the value system of which it is a part.
Benchmarking:
Definition
Benchmarking is the process of identifying "best practice" in relation to both products
(including) and the processes by which those products are created and delivered. The search
for "best practice" can taker place both inside a particular industry, and also in other industries
(for example - are there lessons to be learned from other industries?).
The objective of benchmarking is to understand and evaluate the current position of a
business or organisation in relation to "best practice" and to identify areas and means of
performance improvement.
The Benchmarking Process
Benchmarking involves looking outward (outside a particular business, organisation, industry,
region or country) to examine how others achieve their performance levels and to understand
the processes they use. In this way benchmarking helps explain the processes behind excellent
performance. When the lessons learnt from a benchmarking exercise are applied appropriately,
they facilitate improved performance in critical functions within an organisation or in key
areas of the business environment.
Application of benchmarking involves four key steps:

(1) Understand in detail existing business processes
(2) Analyse the business processes of others
(3) Compare own business performance with that of others analysed
(4) Implement the steps necessary to close the performance gap
Benchmarking should not be considered a one-off exercise. To be effective, it must become an
ongoing, integral part of an ongoing improvement process with the goal of keeping abreast of
ever-improving best practice.
Types of Benchmarking
There are a number of different types of benchmarking, as summarised below:
Type
Description
Strategic
Benchmarking
Where businesses need to improve overall

performance by examining the long-term
strategies and general approaches that have
enabled high-performers to succeed. It
involves considering high level aspects such as
core competencies, developing new products
and services and improving capabilities for
dealing with changes in the external
environment. Changes resulting from this type
of benchmarking may be difficult to
implement and take a long time to materialise
Businesses consider their position in relation to
performance characteristics of key products
and services. Benchmarking partners are
drawn from the same sector. This type of
analysis is often undertaken through trade
associations or third parties to protect
confidentiality.
Performance
or Competitive
Benchmarking
Most Appropriate for the

Following Purposes
- Re-aligning business
strategies that have
become inappropriate
_ Assessing relative level

of performance in key
areas or activities in
comparison with others in
the same sector and
finding ways of closing
gaps in performance
Process
Benchmarking
Functional
Benchmarking
InternalBench
marking
External
Benchmarking
Focuses on improving specific critical

processes and operations. Benchmarking
partners are sought from best practice
organisations that perform similar work or
deliver similar services. Process benchmarking
invariably involves producing process maps to
facilitate comparison and analysis. This type of
benchmarking often results in short term
benefits.
Businesses look to benchmark with partners
drawn from different business sectors or areas
of activity to find ways of improving similar
functions or work processes. This sort of
benchmarking can lead to innovation and
dramatic improvements.
involves benchmarking businesses or
operations from within the same organisation
(e.g. business units in different countries). The
main advantages of internal benchmarking are
that access to sensitive data and information is
easier; standardised data is often readily
available; and, usually less time and resources
are needed. There may be fewer barriers to
implementation as practices may be relatively
easy to transfer across the same organisation.
However, real innovation may be lacking and
best in class performance is more likely to be
found through external benchmarking.
involves analysing outside organisations that
are known to be best in class. External
benchmarking provides opportunities of
learning from those who are at the "leading
edge". This type of benchmarking can take up
significant time and resource to ensure the
comparability of data and information, the
credibility of the findings and the development
of sound recommendations.
- Achieving improvements
in key processes to obtain
quick benefits
- Improving activities or
services for which
counterparts do not exist.
- Several business units

within the same
organisation exemplify
good practice and
management want to
spread this expertise
quickly, throughout the
organisation
- Where examples of good

practices can be found in
other organisations and
there is a lack of good
practices within internal
business units
International
Benchmarking
Best practitioners are identified and analysed

elsewhere in the world, perhaps because there
are too few benchmarking partners within the
same country to produce valid results.
Globalisation and advances in information
technology are increasing opportunities for
international projects. However, these can take
more time and resources to set up and
implement and the results may need careful
analysis due to national differences
- Where the aim is to

achieve world class status
or simply because there
are insufficient"national"
businesses against which
to benchmark.
The benchmarking process consists of five phases:

1. Planning. The essential steps are those of any plan development: what, who and how.
What is to be benchmarked? Every function of an organization has or delivers a

product or output. Benchmarking is appropriate for any output of a process or function,
whether its a physical good, an order, a shipment, an invoice, a service or a report.
To whom or what will we compare? Business-to-business, direct competitors are

certainly prime candidates to benchmark. But they are not the only targets. Benchmarking
must be conducted against the best companies and business functions regardless of where
they exist.
How will the data be collected? Theres no one way to conduct benchmarking
investigations. Theres an infinite variety of ways to obtain required data and most of
the data youll need are readily and publicly available. Recognize that benchmarking is a
process not only of deriving quantifiable goals and targets, but more importantly, its the
process of investigating and documenting the best industry practices, which can help you
achieve goals and targets.
2. Analysis. The analysis phase must involve a careful understanding of your current process and
practices, as well as those of the organizations being benchmarked. What is desired is an
understanding of internal performance on which to assess strengths and weaknesses.
Ask:
Is this other organization better than we are?
Why are they better?
By how much?
What best practices are being used now or can be anticipated?
How can their practices be incorporated or adapted for use in our organization?
Answers to these questions will define the dimensions of any performance gap: negative,
positive or parity. The gap provides an objective basis on which to actto close the gap or
capitalize on any advantage your organization has.
3. Integration. Integration is the process of using benchmark findings to set operational targets
for change. It involves careful planning to incorporate new practices in the operation and to
ensure benchmark findings are incorporated in all formal planning processes.
Steps include:
Gain operational and management acceptance of benchmark findings. Clearly and

convincingly demonstrate findings as correct and based on substantive data.
Develop action plans.
Communicate findings to all organizational levels to obtain support, commitment and

ownership.
4. Action. Convert benchmark findings, and operational principles based on them, to specific
actions to be taken. Put in place a periodic measurement and assessment of achievement. Use the
creative talents of the people who actually perform work tasks to determine how the findings can
be incorporated into the work processes.
Any plan for change also should contain milestones for updating the benchmark findings, and an
ongoing reporting mechanism. Progress toward benchmark findings must be reported to all
employees.
5. Maturity. Maturity will be reached when best industry practices are incorporated in all
business processes, thus ensuring superiority.
Tests for superiority:
If the now-changed process were to be made available to others, would a knowledgeable

businessperson prefer it?
Do other organizations benchmark your internal operations?
Maturity also is achieved when benchmarking becomes an ongoing, essential and self-initiated
facet of the management process. Benchmarking becomes institutionalized and is done at all
appropriate levels of the organization, not by specialists.
Figure 1 Benchmarking process steps
Unit:3
Generic Competitive Strategies
M.E. Porter, Competitive Advantage, New York, 1985. This diagram has been recreated by
LMC.
LMC explains Generic Competitive Strategies
The generic competitive strategies form a business tool which helps strategists understand how
the position of a company within its industry can be directly related to the strategy it employs.
The strategy employed can then be analysed to understand where a company's competitive
advantage lies, with a view to maintaining it. Porter (1985) identified the two main types of
competitive advantage as cost advantage and differentiation. In developing and maintaining their
competitive advantage, companies have the option to adopt one of the three generic strategies:
cost leadership, differentiation or focus. The horizontal axis across the top of the graph shows the
type of competitive advantage the company has, whilst the vertical axis relates to the scope of
the competition, either broad and company-wide or narrow and limited to a market segment.
Cost Leadership
This is a strategy where a company aims to out-price its competitors by reducing overheads or
the fixed costs associated with manufacture and distribution. It requires a focus on the efficiency
of production lines and economies of scale. This strategy is employed where customers have the
ability to change supplier easily and the products or services are standardised and well
understood by the consumer. A good example of cost leadership strategy is employed by
supermarket chains on everyday necessity goods. By using this strategy, marketing the product
becomes less important. Benefits include raising barriers for competitors to enter the market and
easing the effect of fixed-cost rises across the industry.
Differentiation
This strategy is employed where a unique attribute of a product or service is highlighted relative
to similar alternatives presented by the competition. It allows a higher price to be charged or a
greater ability to command customer loyalty. Differentiation strategy is used where the company
sees its key product competencies as a more profitable advantage than simple cost leadership.
Examples include Coca-Cola, which differentiates by building a solid brand, or Sony, which
differentiates on quality or reliability of products. Customers react to this strategy by paying
more for a perceived greater reliability or quality or by returning to a trusted brand. It relies
heavily on marketing or advertising to maintain the brand identity and raises the barrier to
competitors entering the market.
Focus
This strategy is aimed at a specific target consumer group, for example cultural, economic,
political, geographical or age-related groups. The strategy employs either cost focus (3A) or
differentiation focus (3B) within its target audience, and in this sense it is a narrower application
of one of the aforementioned strategies. Saga holidays, for example, focus on a specific group of
consumers - the over 50's. Benefits include the increase in brand loyalty developed as customers
perceive the company to be a specialist.
Porter identified that one combination of the strategies is possible: combining market
segmentation with differentiation. However, in general, other combinations are not possible due
to a conflict between cost reduction and value-added differentiation. Therefore, a company
should retain one overall main strategy to maintain its long term competitive advantage.
Porter's Generic Competitive Strategies (ways of

competing)
A firm's relative position within its industry determines whether a firm's profitability is above or
below the industry average. The fundamental basis of above average profitability in the long run
is sustainable competitive advantage. There are two basic types of competitive advantage a firm
can possess: low cost or differentiation. The two basic types of competitive advantage combined
with the scope of activities for which a firm seeks to achieve them, lead to three generic
strategies for achieving above average performance in an industry: cost leadership,
differentiation, and focus. The focus strategy has two variants, cost focus and differentiation
focus.
1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of
cost advantage are varied and depend on the structure of the industry. They may include the
pursuit of economies of scale, proprietary technology, preferential access to raw materials and
other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm
can achieve and sustain overall cost leadership, then it will be an above average performer in its
industry, provided it can command prices at or near the industry average.
2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that
are widely valued by buyers. It selects one or more attributes that many buyers in an industry
perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its
uniqueness with a premium price.
3. Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an
industry. The focuser selects a segment or group of segments in the industry and tailors its
strategy to serving them to the exclusion of others.
The focus strategy has two variants.
(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation
focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on
differences between a focuser's target segment and other segments in the industry. The target
segments must either have buyers with unusual needs or else the production and delivery system
that best serves the target segment must differ from that of other industry segments. Cost focus
exploits differences in cost behavior in some segments, while differentiation focus exploits the
special needs of buyers in certain segments.
OR
Porter's Generic Strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it
operates, an important secondary determinant is its position within that industry. Even though an
industry may have below-average profitability, a firm that is optimally positioned can generate
superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued
that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation.
By applying these strengths in either a broad or narrow scope, three generic strategies result: cost
leadership, differentiation, and focus. These strategies are applied at the business unit level. They
are called generic strategies because they are not firm or industry dependent.
The following table illustrates Porter's generic strategies:
Target Scope
Broad
(Industry Wide)
Narrow
(Market
Segment)
Advantage
Low Cost
Cost Leadership
Strategy
Product Uniqueness
Differentiation
Strategy
Focus
Strategy
(low cost)
Focus
Strategy
(differentiation)
Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a given level of
quality. The firm sells its products either at average industry prices to earn a profit higher than
that of rivals, or below the average industry prices to gain market share. In the event of a price
war, the firm can maintain some profitability while the competition suffers losses. Even without
a price war, as the industry matures and prices decline, the firms that can produce more cheaply
will remain profitable for a longer period of time. The cost leadership strategy usually targets a
broad market.
Some of the ways that firms acquire cost advantages are by improving process efficiencies,
gaining unique access to a large source of lower cost materials, making optimal outsourcing
and vertical integration decisions, or avoiding some costs altogether. If competing firms are
unable to lower their costs by a similar amount, the firm may be able to sustain a competitive
advantage based on cost leadership.
Firms that succeed in cost leadership often have the following internal strengths:
Access to the capital required to make a significant investment in production assets; this
investment represents a barrier to entry that many firms may not overcome.
Skill in designing products for efficient manufacturing, for example, having a small
component count to shorten the assembly process.
High level of expertise in manufacturing process engineering.
Efficient distribution channels.
Each generic strategy has its risks, including the low-cost strategy. For example, other firms may
be able to lower their costs as well. As technology improves, the competition may be able to
leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally,
several firms following a focus strategy and targeting various narrow markets may be able to
achieve an even lower cost within their segments and as a group gain significant market share.
Differentiation Strategy
A differentiation strategy calls for the development of a product or service that offers unique
attributes that are valued by customers and that customers perceive to be better than or different
from the products of the competition. The value added by the uniqueness of the product may
allow the firm to charge a premium price for it. The firm hopes that the higher price will more
than cover the extra costs incurred in offering the unique product. Because of the product's
unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to
its customers who cannot find substitute products easily.
Firms that succeed in a differentiation strategy often have the following internal strengths:
Access to leading scientific research.
Highly skilled and creative product development team.
Strong sales team with the ability to successfully communicate the perceived strengths of
the product.
Corporate reputation for quality and innovation.
The risks associated with a differentiation strategy include imitation by competitors and changes
in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve
even greater differentiation in their market segments.
Focus Strategy
The focus strategy concentrates on a narrow segment and within that segment attempts to
achieve either a cost advantage or differentiation. The premise is that the needs of the group can
be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high
degree of customer loyalty, and this entrenched loyalty discourages other firms from competing
directly.
Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and
therefore less bargaining power with their suppliers. However, firms pursuing a differentiationfocused strategy may be able to pass higher costs on to customers since close substitute products
do not exist.
Firms that succeed in a focus strategy are able to tailor a broad range of product development
strengths to a relatively narrow market segment that they know very well. Some risks of focus
strategies include imitation and changes in the target segments. Furthermore, it may be fairly
easy for a broad-market cost leader to adapt its product in order to compete directly. Finally,
other focusers may be able to carve out sub-segments that they can serve even better.
A Combination of Generic Strategies
- Stuck in the Middle?
These generic strategies are not necessarily compatible with one another. If a firm attempts to
achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For
example, if a firm differentiates itself by supplying very high quality products, it risks
undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer, the
firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be
successful over the long-term, a firm must select only one of these three generic strategies.
Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and
will not achieve a competitive advantage.
Porter argued that firms that are able to succeed at multiple strategies often do so by creating
separate business units for each strategy. By separating the strategies into different units having
different policies and even different cultures, a corporation is less likely to become "stuck in the
middle."
However, there exists a viewpoint that a single generic strategy is not always best because within
the same product customers often seek multi-dimensional satisfactions such as a combination of
quality, style, convenience, and price. There have been cases in which high quality producers
faithfully followed a single strategy and then suffered greatly when another firm entered the
market with a lower-quality product that better met the overall needs of the customers.
Generic Strategies and Industry Forces
These generic strategies each have attributes that can serve to defend against competitive forces.
The following table compares some characteristics of the generic strategies in the context of the
Porter's five forces.
Generic Strategies and Industry Forces
Industry
Force
Generic Strategies
Cost Leadership
Differentiation
Focus
Entry
Barriers
Ability to cut price

in retaliation deters
potential entrants.
Customer loyalty can

Focusing develops core competencies
discourage potential entrants. that can act as an entry barrier.
Buyer
Power
Ability to offer lower Large buyers have less power

Large buyers have less power to
price to powerful
to negotiate because of few
negotiate because of few alternatives.
buyers.
close alternatives.
Supplier
Power
Suppliers have power because of low

Better insulated from Better able to pass on supplier volumes, but a differentiation-focused
powerful suppliers. price increases to customers. firm is better able to pass on supplier
price increases.
Can use low price to Customer's become attached Specialized products & core
Threat of
defend against
to differentiating attributes, competency protect against
Substitutes
substitutes.
reducing threat of substitutes. substitutes.
Rivalry
Better able to
compete on price.
Brand loyalty to keep

customers from rivals.
Rivals cannot meet differentiationfocused customer needs.
Strategic alliances:
Definition
Agreement for cooperation among two or more
independent firms to work together towards common objectives. Unlike in
a joint venture, firms in a strategic alliance do not form a new entity to further
their aims but collaborate while remaining apart and distinct
Types of Strategic Alliances

Collaborative agreements between businesses can take a number of forms and are becoming
increasingly common as businesses aim to get the upper hand over their competitors. The main
types of strategic alliances are listed below:
Joint Ventures
A joint venture is an agreement by two or more parties to form a single entity to undertake a
certain project. Each of the businesses has an equity stake in the individual business and share
revenues, expenses and profits.
"Joint Ventures are agreements between parties or firms for a particular purpose or venture. Their
formation may be very informal, such as a handshake and an agreement for two firms to share a
booth at a trade show. Other arrangements can be extremely complex, such as the consortium of
major U.S. electronics firms to develop new microchips," says Charles P. Lickson in A Legal
Guide for Small Business.
Joint ventures between small firms are very rare, primarily because of the required commitment
and costs involved.
Outsourcing
The 1980s was the decade where outsourcing really rose to prominence, and this trend continued
throughout the 1990s to today, although to a slightly lesser extent.
The early forecasts, such as the one from American Journalist Larry Elder, have been shown to
not always be true:
Outsourcing and globalization of manufacturing allows companies to reduce costs, benefits
consumers with lower cost goods and services, causes economic expansion that reduces
unemployment, and increases productivity and job creation.
Affiliate Marketing
Affiliate marketing has exploded over recent years, with the most successful online retailers
using it to great effect. The nature of the internet means that referrals can be accurately tracked
right through the order process.
Amazon was the pioneer of affiliate marketing, and now has tens of thousands of websites
promoting its products on a performance-based basis.
Technology Licensing
This is a contractual arrangement whereby trade marks, intellectual property and trade secrets
are licensed to an external firm. Its used mainly as a low cost way to enter foreign markets. The
main downside of licensing is the loss of control over the technology as soon as it enters other
hands the possibility of exploitation arises.
Product Licensing
This is similar to technology licensing except that the license provided is only to manufacture
and sell a certain product. Usually each licensee will be given an exclusive geographic area to
which they can sell to. Its a lower-risk way of expanding the reach of your product compared to
building your manufacturing base and distribution reach.
Franchising
Franchising is an excellent way of quickly rolling out a successful concept nationwide.
Franchisees pay a set-up fee and agree to ongoing payments so the process is financially risk-free
for the company. However, downsides do exist, particularly with the loss of control over how
franchisees run their franchise.
R&D
Strategic alliances based around R&D tend to fall into the joint venture category, where two or
more businesses decide to embark on a research venture through forming a new entity.
Distributors
If you have a product one of the best ways to market it is to recruit distributors, where each one
has its own geographical area or type of product. This ensures that each distributors success can
be easily measured against other distributors.
Distribution Relationships
This is perhaps the most common form of alliance. Strategic alliances are usually formed
because the businesses involved want more customers. The result is that cross-promotion
agreements are established.
Consider the case of a bank. They send out bank statements every month. A home insurance
company may approach the bank and offer to make an exclusive available to their customers if
they can include it along with the next bank statement that is sent out.
Its a win-win agreement the bank gains through offering a great deal to their customers, the
insurance company benefits through increased customer numbers, and customers gain through
receiving an exclusive offer.
Strategic Alliances - an Underused Marketing

Tactic:
Strategic alliances are formal partnerships between businesses which help the businesses achieve
a set of goals.
There are many types of strategic alliances, including joint ventures, affiliates and distribution
agreements. They are particularly common in industries that are experiencing rapid change, the
internet being one example, and are often the quickest way of rapidly expanding a business.
Fortune Magazine called the 1990s the decade of the strategic alliance and it has become one
of the key tools in rapidly expanding and winning market share.
Benefits of Strategic Alliances
Many startups decide that the best way to rapidly expand their business is to enter into strategic
alliances with established companies which serve a different but similar market. The many
benefits of strategic alliances are listed below:
Access to distribution channels

Access to technology, expertise or intellectual property
As a means to raise capital
New products for your customers
Lower R&D costs
Economies of scale
Raise brand awareness
For a new business looking to develop brand awareness there are few more cost-effective ways
of raising widespread awareness than partnering with an established business within the same
industry. Theres also no reason to stop there you can continue to partner with other noncompeting firms and benefit from multiple distribution channels.
When approaching a company to propose a strategic allianceremember that you must have
something to offer them in exchange.
Disadvantages of Strategic Alliances

The problem with strategic alliances is that there are a number of problems which must be
overcome for them to be a success, including:
Incoherent goals, with one business not benefiting greatly from the agreement
Insufficient trust, with each partner company trying to get the better deal
Conflicts over how the partnership works
Potential to reduce future opportunities through being unable to enter into agreements
with your partners competitors
Lack of commitment to the partnership
Risk of sharing too much knowledge and the partner company becoming a competitor
The main problem with strategic alliances is being able to develop a partnership which is
beneficial to both parties. Often a partnership is beneficial to the smaller business, perhaps due to
the wide-scale distribution channels that are gained, but the benefits for the established business
arent quite so clear.
Even when this problem has been overcome the problem of trust arises. Without a degree of
trust partnerships become beset with administrative problems and suspicions.
The best way to overcome this is to be transparent and reassess the alliance at regular intervals to
ensure that both parties are gaining from the agreement. If they arent then perhaps the terms of
the agreement need to be changed.
Finally, be careful that a partnership doesnt end up being more of a hindrance than a benefit.
Partnering with a company within a certain field will make it harder, if not impossible, to partner
or win contracts from other competing companies within the same industry.
Sometimes the risk can be even closer to home, where the partnering company gains sufficient
knowledge for them to become a competitor rather than a partner.
Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:
Strategy Development: Strategy development involves studying the alliances

feasibility, objectives and rationale, focusing on the major issues and challenges and
development of resource strategies for production, technology, and people. It requires
aligning alliance objectives with the overall corporate strategy.
Partner Assessment: Partner assessment involves analyzing a potential partners

strengths and weaknesses, creating strategies for accommodating all partners management
styles, preparing appropriate partner selection criteria, understanding a partners motives for
joining the alliance and addressing resource capability gaps that may exist for a partner.
Contract Negotiation: Contract negotiations involves determining whether all parties

have realistic objectives, forming high calibre negotiating teams, defining each partners
contributions and rewards as well as protect any proprietary information, addressing
termination clauses, penalties for poor performance, and highlighting the degree to which
arbitration procedures are clearly stated and understood.
Alliance Operation: Alliance operations involves addressing senior managements

commitment, finding the calibre of resources devoted to the alliance, linking of budgets and
resources with strategic priorities, measuring and rewarding alliance performance, and
assessing the performance and results of the alliance.
Alliance Termination: Alliance termination involves winding down the alliance, for
instance when its objectives have been met or cannot be met, or when a partner adjusts
priorities or re-allocates resources elsewhere.
The advantages of strategic alliance include:

1. Allowing each partner to concentrate on activities that best match their capabilities.
2. Learning from partners & developing competences that may be more widely exploited
elsewhere.
3. Adequate suitability of the resources & competencies of an organization for it to survive.
Collaborative partnerships:
The Collaborative Approach
This approach extends strategic decision-making to the organization's top management team in
answer to the question "How can I get my top management team to help develop and commit
to a good set of golas and strategies?"
The strategic leader and his senior manager (divisional heads, business unit general managers or
senior functional managers) meet for lengthy discussion with a view to formulating proposed
strategic changes.
In this approach, the leader employs group dynamics and "brainstorming" techniques to get
managers with differing points of view to contribute to the strategic planning process.
The Collaborative Approach overcomes two key limitations inherent in the previous two. By
capturing information contributed by managers closer to operations, and by offering a forum for
the expression of managers closer to operations, and by offering a forum for the expression of
many viewpoints, it can increase the quality and timeliness of the information incorporated in the
strategy. And to the degree than participation enhances commitment to the strategy, it improves
the chances of efficient implementation.
However, the Collaborative Approach may gain more commitment that the foregoing
approaches, it may also result in a poorer strategy.
The negotiated aspect of the process brings with several risks -that the strategy will be more
conservative and less visionary than one developed by a single person or staff team. And the
negotiation process can take so much time that an organization misses opportunities and fails to
react enough to changing environments.
A more fundamental criticism of the Collaborative Approach is that it is not really collective
decisions making from an organizational viewpoint because upper-level managers often retain
centralized control. In effect, this approach preserves the artificial distinction between thinkers
and doers and fails to draw on the full human potential throughout the organization.
Collaborative Strategies: The route to

maximising future operational savings:
Traditional approaches to partnering and outsourcing have improved performance, though
examples tend to be found in mature contracts which are now largely exhausted. The current
need is to go beyond this traditional approach and focus on overall performance improvement,
optimising the cost and revenue position.
Traditional partnering contracts tend to feature a single supplier delivering bundled services
and long term value through various forms of incentives. A collaborative strategy is a step
change from the traditional client / supplier relationship, developing a joint approach from all
the suppliers who act together to deliver greater value as a single entity.
These are not complex collaborations, however, if there is not a strong cultural and
professional contract leading to mutual economic gain, they can fail. The core to successful
collaboration is not found in traditional services (although providing these at the very best level
is important), it is the manner in which these services are combined to deliver a more valuable
outcome.
Creating solutions
A collaborative partnership is commonly defined as a link between companies to jointly pursue
a common goal. These partnerships are very different from traditional relationships between
companies and it is these differences that need to be managed to achieve exceptional
performance. By successfully linking with another firm, one or both parties may enjoy the
benefits otherwise unavailable to them.
The collaborative partnership is characterised by the following four attributes:
Shared risk and reward: The responsibility for managing the collaboration is shared by the
organisations in the partnership. This is in contrast to a traditional arrangement where
leadership is vested in one organisation designated as the prime supplier. Collaborative benefits
come from leveraging greater economies in supply chain management and a shared service
technology platform which reaches beyond the scale of a single organisation.
One of the benefits of this approach is the emergence of innovative solutions that deliver
higher value. Typically, traditional outsourcing would deliver 15-20% reduction in property
costs. However, further reductions can be derived from scope or service integration facilitated
by the collaboration. The basis of reward is for the collective group, which can be directly
related to the value delivered and has the potential to deliver a further 5-10% reduction in
property assets.
Accessing wider capabilities
In traditional partnering models there would not normally be incentives to encourage further
innovation outside the scope of the contract. By allowing members of the collaboration to
maintain their individual identities, wider capabilities are still developed outside the contract
and related intellectual property of each organisation can still be leveraged. The commercial
model is fundamentally based on shared rewards and therefore all intellectual input that
delivers savings can be distributed between all parties.
Transfer of skills
During the process of collaboration the partners provide inputs (funding, skills and personnel)
on an ongoing basis. There is a continual supply of resources and communication from parent
organisations, which drives ongoing benefits. This leads to up-skilling the team in order to
meet the needs of the client organisation, contributing more widely to the collaboration outside
the constraints of a traditional contract. This results in greater geographic spread and new areas
of operation, thereby sustaining benefits over a greater area of the business.
Significant advantages when dealing with complex problems
The collaboration model explicitly considers both the task and organisational complexity of the
challenge, leading to insights into performance issues and opportunities that can be achieved.
This is achieved through vertical integration, linking the complementary contributions of the
partners in a value chain.
The combined efforts of all partners must add up to a value chain which will produce a more
competitive end result.
Delivering value
To make collaborative partnerships successful there needs to be a degree of trust between
partners. Without this, focus will not be on the joint decisions and consultations required to
drive the value. The key attribute is an alignment of behaviours and contractual agreements
focused on mutual economic gains.
These are easier to achieve within one organisation rather than multiple organisations.
Achieving this is valuable not only in driving the transformational agenda within the
organisations Corporate Real Estate function, but in delivering a greater overall return for the
client and suppliers. By sharing a common vision and goal around clear rewards, the outcome
will exceed traditional arrangements and will enhance business performance.
Key benefits
Risk reduction- the collaboration is directly linked to mutual economic gain, driving a right
first time approach with clear accountabilities.
Product portfolio diversification- through collaboration the client has access to a much
broader range of products and services, combined to deliver maximum value. This can also
combine to offer insight into performance challenges and opportunities.
Reduction of fixed costs- the nature of the collaboration often involving the client
organisation themselves naturally leads to efficiencies. Optimisation of personnel and process
are a consequence.
Lower total capital investment- a collaborative model allows more realistic solving of
complex problems, reducing the amount of direct investment the client needs to make in
resolving these situations.
Faster payback- the mutual economic gain will drive faster outcomes as the rewards are
directly linked to the partners. This requires alignment with the client organisation.
Technology synergy- a lot of Corporate Real Estate costs are linked to an effective enterprise
level property performance system. Through collaboration the partners can make effective
investment decisions and combine technology to drive value.
Mergers and acquisition: Implementing Strategies through

Mergers, Acquisitions:
Mergers and acquisitions are two frequently used methods for implementing diversifications
strategies. A merger takes place when two companies combine their operations, creating in
effect, a third company. An acquisition is a situation in which one company buys, and controls
another company.
Horizontal mergers or acquisitions are the combining of two or more organizations that
are direct competitors.
Concentric merges or acquisitions are the combining of two or more organizations that
have similar products or services in terms of technology, product line, distribution
channels, or customer base.
Vertical merges or acquisitions are the combining of two or more organizations to

extend an organization into either supplying products or services required in producing its
present products or services or into distributing or selling its own product and services.
Conglomerate mergers or acquisitions involve the combining of two or more
organizations that are producing products or services that are significantly different from
each other.
Organizations seek mergers and acquisitions for many reasons. The primary reason for large
mergers and acquisitions is the potential benefit that can accrue to the stockholders of both
companies. Synergy is often cited as a rationale for mergers.
Synergy occurs as the result of a merger, when two operating units can be run more efficiently
(i.e.: with lower costs) and / or more effectively (i.e.: with appropriate allocation of scarce
resources given environmental constrains) together than apart.
Other reason for merging with or acquiring another company include improving or maintaining
competitive position in a particular business in order to enter new markets or acquire new
products rapidly, to improve financial position, or to avoid a takeover.
Mergers and acquisitions can be carried out in either a friendly or a hostile environment.
Friendly mergers and acquisitions are accomplished when the stockholders and management
of both organizations agree that the combination will benefits both firms and the work together to
ensure its success.
Hostile (or, as they are frequently called, takeover) mergers and acquisitions result when the
organizations to be acquired (also sometimes called the target company) resist the attempt.
Several methods are available for carrying out mergers and acquisitions:
One is, the tender offer, is well - publicized bid made by a corporation to all or a
prescribed amount of the stock of another organizations.
Another option for one company is to purchase stock of the target organization in the
open market.
The acquiring company can also purchase the assets of the target company.
Finally, the two firms may agree to an exchange of stock.
Because so many terms are used in described activities involved in mergers and acquisitions,
there is summary of the definitions of many of these terms.
Several factors need to be avoided to ensure a successful merger or acquisition. These
factors include:
1. Paying to much
2. Straying too far a field
3. Marrying disparate corporate cultures

4. Counting on key managers staying
5. Assuming that a boom market will not crash
6. Leaping before looking
7. Swallowing too large company
Numerous organizations have been able to integrate sufficiently so that the merger or acquisition
becomes a successful strategy of diversification
Mergers & Acquisition Planning:
Companies employ mergers and acquisitions strategies (M&A) in order to grow

their business and bolster their competitive advantages. For example, one company might be
great at product development, whereas another has marketing channels built into which the
products could be sold. To be successful, a company's M&A strategy must be carefully planned.
The strategic objectives set during the planning process determine the type of companies that
will be acquired.
1.
Objectives
The company may want to expand geographically by acquiring a company with a strong
presence in another market. Cost savings also can be achieved when staff functions such as
accounting or human resources are shared. Instead of having two departments performing a
function, they can be consolidated into one, and the total number of staff members can be
reduced. A company may lack a key capability, such as technical innovation, that it needs to
compete. Acquiring a company strong in this regard fills the gap.
Acquisition Criteria: Setting objectives results in the creation of a set of
acquisition criteria. These are the elements that describe the ideal
acquisition for the company. They include the size of company that will be
acquired -- in terms of revenue and pretax income -- where it is located, and
the industry or market niches the company serves.
Deal Sources: Implementing an M&A program requires what is termed "deal

flow" -- being presented with a steady stream of high-quality acquisition
candidates. Executives with responsibility for making acquisitions usually
network with professionals such as attorneys, accounts and investment
bankers that work with other businesses. The company makes it known it is
seeking to make acquisitions and these professionals refer companies that
are a good fit for the acquisition criteria the company has selected.
Acquisition Team Built: Selecting companies to acquire and completing the

negotiations up to closing of a transaction require a specific set of skills and
experience. These include an understanding of the legal aspects of making
an acquisition, such as the documentation required and compliance with
applicable securities laws. Knowledge of business valuation techniques is
also important to ensure the deal terms are fair to both parties and the
company does not overpay for the acquisition. Strategic planning skill also is
needed -- the ability to see how the two companies could fit together
strategically going forward and take advantage of each other's strengths. If
the management team does not have all of these skills, outside consultants
can be hired to assist or management personnel will be added to the team.
Funding Sources in Place: A company seeking to make an acquisition may

not have all the cash required to complete the transaction. In that case,
funding sources must be lined up. These could be equity partners or lenders
that specialize in acquisition financing. The company should have the
financing sources available prior to beginning negotiations with the company
to be acquired.
Post-Acquisition Plan: The decision whether to go ahead with an acquisition
depends on how favorable a price can be negotiated but also on the benefits
the company will receive after the transaction is closed. These benefits are
quantified through creating a post-acquisition business plan that projects the
revenues and profit for the combined entities, and presents strategies for
building the combined company's revenues and market strength. The postacquisition plan is presented to the equity partners or lenders that will be
asked to provide financing.
Difference between Mergers and Acquisitions

Though the two words mergers and acquisitions are often spoken in the same breath and are also
used in such a way as if they are synonymous, however, there are certain differences between
mergers and acquisitions.
Merger
Acquisition
The case when two companies (often of same size)

decide to move forward as a single new company
instead of operating business separately.
The case when one company takes over

another and establishes itself as the new
owner of the business.
The stocks of both the companies are surrendered,

while new stocks are issued afresh.
The buyer company swallows the

business of the target company, which
ceases to exist.
For example, Glaxo Wellcome and SmithKline

Beehcam ceased to exist and merged to become a
new company, known as Glaxo SmithKline.
Dr. Reddy's Labs acquired Betapharm

through an agreement amounting $597
million.
A buyout agreement can also be known as a merger when both owners mutually decide to
combine their business in the best interest of their firms. But when the agreement is hostile, or
when the target firm is unwilling to be bought, it is considered as an acquisition.
Mergers & Acquisition Risks

An acquisition occurs when one company buys another. When two companies agree to combine
into one company, they merge. Reasons for these corporate actions include a strategic plan to
eliminate competition by acquiring it, a desire to expand into another geographical area or
product line or a need to sell or merge the company because of owner retirement or corporate
financial difficulties. Both companies face substantial risks. It is not unusual for one company
seeking to acquire another to end up being acquired itself, and acquisition plans sometimes
become mergers.
1.
Reckless Enthusiasm: Mergers and acquisitions, also known as M&A,

begin in strategic planning sessions, when company management decides to
acquire another company, to be acquired or to merge. The next step is hiring
an investment banker or attorney specializing in M&A work. The entire
process is long, time-consuming and stressful. Most M&A specialists say the
most dangerous part is project fatigue, which causes company management

to decide on a candidate just to get the task over with. Reckless enthusiasm
born of project fatigue is one of the main reasons for failures of mergers or
acquisitions.
Return on Investment: The wrong acquisition can severely harm a company's

profitability. When AT&T acquired NCR, after five years of steadily
accumulating losses totaling $2 billion, AT&T finally admitted the failure and
sold its stake in NCR. Time Warner's purchase of AOL also ended in years of
losses and an eventual spin-off of AOL.
Much debate in the M&A industry centers around whether to perform exhaustive due diligence
and negotiations or to just jump in and buy or merge with the first company that looks good,
worrying about the consequences later. Deloitte & Touche LLP counsels a broad-based approach
involving examination of all parts of a candidate company, with planned risk management at
multiple levels.
Corporate Integration: The second main risk in M&A projects is poor
integration of the companies. An example of this is when a company
acquires another for a specific technology it developed and then in the
confusion of integrating the two companies mistakenly closes the
department that created the targeted technology asset. Other examples of
poor integration are company culture clashes, as in the Daimler BenzChrysler merger where German efficiency met head-on with American union
work rules. A third example of common integration failure is the loss of
important customers who liked doing business with the old company, not the
new one. The solution is detailed planning and testing of decisions, with a
centralized integration management team that monitors every element of
the project.
Legal Surprises: No matter how careful the due diligence effort, nearly every
merger and acquisition experiences legal surprises. These are often in the
form of lawsuits that the plaintiffs suddenly decide to file because the
combination of companies has presented greater assets to attach. You can
expect everything from expiring patents, canceled licenses, unreported
fraud, infringement on another company's patent and shareholder class
action suits. Risk management, in this case, involves the best deal contracts
that can be created, which is why good M&A attorneys are so necessary and
expensive.
o
Merger and Acquisition Strategies

Merger and acquisition are the corporate strategies that deal with buying, selling or combining
different companies with a goal to achieve rapid growth. However, the decisions on mergers and
acquisitions are taken after considering a few facts like the current business status of the
companies, the present market scenario, and the threats and opportunities etc. In fact, the success
of mergers and acquisitions largely depend upon the merger and acquisition strategies adopted by
the organizations.
Merger and acquisition strategies are the roadmap for the corporate development efforts of an
organization. The strategies on merger and acquisition are devised to transform the strategic
business plan of the organization to a list of target acquisition prospects. The merger and
acquisition strategies offer a framework, which evaluates acquisition candidates and helps the
organization to identify the suitable ones. Many big companies continuously look out for
potential companies, preferably smaller ones, for mergers and acquisitions. Some companies
may have their core cells, which concentrate on mergers and acquisitions. Merger and acquisition
strategies are devised in accordance with the policy of the organization. Some may prefer to
diversify or to expand in a specific field of business, while some others may wish to strengthen
their research facilities etc.
Merger and Acquisition Strategy Process

The merger and acquisition strategies may differ from company to company and also depend a
lot on the policy of the respective organization. However, merger and acquisition strategies have
got some distinct process, based on which, the strategies are devised.
Determine Business Plan Drivers: Merger and acquisition strategies are deduced from the
strategic business plan of the organization. So, in merger and acquisition strategies, you firstly
need to find out the way to accelerate your strategic business plan through the M&A. You need
to transform the strategic business plan of your organization into a set of drivers, which your
merger and acquisition strategies would address. While chalking out strategies, you need to
consider the points like the markets of your intended business, the market share that you are
eyeing for in each market, the products and technologies that you would require, the geographic
locations where you would operate your business in, the skills and resources that you would
require, the financial targets, and the risk amount etc.
Determine Acquisition Financing Constraints: Now, you need to find out if there are any
financial constraints for supporting the acquisition. Funds for acquisitions may come through
various ways like cash, debt, public and private equities, PIPEs, minority investments, earn outs
etc. You need to consider a few facts like the availability of untapped credit facilities, surplus
cash, or untapped equity, the amount of new equity and new debt that your organization can raise
etc. You also need to calculate the amount of returns that you must achieve.
Develop Acquisition Candidate List: Now you have to identify the specific companies (private
and public) that you are eyeing for acquisition. You can identify those by market research, public
stock research, referrals from board members, investment bankers, investors and attorneys, and
even recommendations from your employees. You also need to develop summary profile for
every company.
Build Preliminary Valuation Models: This stage is to calculate the initial estimated acquisition
cost, the estimated returns etc. Many organizations have their own formats for presenting
preliminary valuation.
Rate/Rank Acquisition Candidates: Rate or rank the acquisition candidates according to their
impact on business and feasibility of closing the deal. This process will help you in
understanding the relative impacts of the acquisitions.
Review and Approve the Strategy: This is the time to review and approve your merger and
acquisition strategies. You need to find out whether all the critical stakeholders like board
members, investors etc. agree with it or not. If everyone gives their nods on the strategies, you
can go ahead with the merger or acquisition.
Merger and Acquisition Process

Mergers and acquisitions are parts of corporate strategies that deal with buying / selling or
combining of business entities, which in turn, help a company to grow quickly. However, merger
and acquisition process is quite a complex process that consists of a few steps. Before going for
any merger and acquisition, both the companies need to consider a few points and also need to
go through some distinct steps. The merger and acquisition process is also a big point of concern
for the companies involved in the deal, as the process could be full of risk and uncertainty.
However, prior effective planning and research could make the process easy and simple.
Steps of Mergers and Acquisition Process
The process of merger and acquisition has the following steps:
Market Valuation
Before you go for any merger and acquisition, it is of utmost important that you must know the
present market value of the organization as well as its estimated future financial performance.
The information about organization, its history, products/services, facilities and ownerships are
reviewed. Sales organization and marketing approaches are also taken into consideration.
Exit Planning: The decision to sell business largely depends upon the future plan of the
organization what does it target to achieve and how is it going to handle the wealth etc. Various
issues like estate planning, continuing business involvement, debt resolution etc. as well as tax
issues and business issues are considered before making exit planning. The structure of the deal
largely depends upon the available options. The form of compensation (such as cash, secured
notes, stock, convertible bonds, royalties, future earnings share, consulting agreements, or buy
back opportunities etc.) also plays a major role here in determining the exit planning.
Structured Marketing Process
This is merger and acquisition process involves marketing of the business entity. While doing the
marketing, selling price is never divulged to the potential buyers. Serious buyers are also
identified and then encouraged during the process. Following are the features of this phase.
Seller agrees on the disseminated materials in advance. Buyer also needs to sign a
Non-Disclosure agreement.
Seller also presents Memorandum and Profiles, which factually showcases the
business.
Database of prospective buyers are searched.
Assessment and screening of buyers are done.
Special focuses are given on he personal needs of the seller during structuring of
deals.
Final letter of intent is developed after a phase of negotiation.
Letter of Intent
Both, buyer and seller take the letter of intent to their respective attorneys to find out whether
there is any scope of further negotiation left or not. Issues like price and terms, deciding on due
diligence period, deal structure, purchase price adjustments, earn out provisions liability
obligations, ISRA and ERISA issues, Non-solicitation agreement, Breakup fees and no shop
provisions, pre closing tax liabilities, product liability issues, post closing insurance policies,
representations and warranties, and indemnification issues etc. are negotiated in the Letter of
Intent. After reviewing, a Definitive Purchase Agreement is prepared.
Buyer Due Diligence
This is the phase in the merger and acquisition process where seller makes its business process
open for the buyer, so that it can make an in-depth investigation on the business as well as its
attorneys, bankers, accountants, tad advisors etc.
Definitive Purchase Agreement: Finally Definitive Purchase Agreement are made, which states
the transaction details including regulatory approvals, financing sources and other conditions of
sale.
Outsourcing - A Strategic Decision?

Does strategic outsourcing actually benefit an organization? Or will it backfire in the long run?
Here's how outsourcing has impacted organizations in India, and how it can benefit you.
by Soutiman Das Gupta
What do companies like Hero Honda Motors, Bharti Tele-Ventures Limited, the National Stock
Exchange (NSE), HDFC Bank, Sony Entertainment Television, Hyatt Services India Pvt. Ltd,
and HPCL have in common?
The common thread running through these large organizations is that all of them have chosen
outsourcing as a strategic business decision to garner tangible and intangible benefits in the near
and long run. Indeed, it's difficult to find a successful and growing organization in India,
irrespective of size, that does not outsource a certain amount of its IT infrastructure services or
management.
Focus on the core:

Given the pressures of a competitive market, organizations tend to focus on their core activities
activities that link-up directly with the revenues and hence the profitability. In such a
scenario, companies tend to outsource their non-core tasks to focus on business decision-making.
And IT infrastructure easily lends itself to outsourcing.
Hero Honda Motors is a good example of an organization that uses strategic outsourcing to focus
on core competency. We wanted to outsource all routine (IT maintenance) tasks so that we
could concentrate on the main business issues. With the headache of dealing with routine
complaints taken away, our staff focuses on user requirements and is able to deliver services to
users on time, explains SR Balasubramanian, Vice President - Information Systems, Hero
Honda Motors Limited.
Competitive business strategy:

Outsourcing is best adopted after a careful look at business needs and available options. It is
essential that the outsourcing relationship provides strategic business benefits in the future.
Outsourcing provides a competitive strategy benefit in a number of ways to an organization. It
allows ease of management, reduction in cost, lesser manpower, and frees up internal resources,
says Pankaj.
Outsourcing can, and frequently does, provide both long- and short-term benefits to companies
that outsource, provided they have a strategic objective for outsourcing. Medium and long-term
gains are best realised by selecting a vendor who brings value to your core business, rather than
one who can provide you with the lowest prices, explains Sharad Sanghi, Managing Director &
CEO, Netmagic Solution Pvt. Ltd.
Business-related:
It's important to understand that outsourcing is a business-related decision and not simply an IT
need. The ultimate goal of outsourcing is to bring benefits to the business and subsequently the
customer.
Hero Honda's Balasubramanian says, We believe an outsourcing service provider could better
handle our day-to-day management needs than our own team. We've not added numbers to our
staffing in spite of increased business activity. Since the outsourcing agency manages the data
centre round the clock, our staff has been relieved from working in shifts.
For customers, it brings innovative and streamlined products and services like billing, CRM
and data warehousing. For employees, it brings enhanced performance-critical applications like
intranet, e-mail and online collaboration. And at an overall level, the strategic alliance provides
predictable IT spends, and additional revenue streams to further enhance shareholder value, he
adds.
The changing landscape:

In the past, Indian companies were not very keen to outsource their IT needs, primarily because
their enterprise IT environments were relatively less complex, easier to manage, and inexpensive
to maintain. Besides, few outsourcing service providers offered a number of outsourcing options
under one roof.
But now, IT environments in companies have become more complex. There has been growth in
terms of volume of business, range of services, number of employees, number of competitors,
nationwide locations, and enterprise applications. This calls for more attention to IT as a service
to provide strategic business benefits. To help organizations get optimum value out IT and use it
as a strategic tool to further the cause of business, many CIOs think it worth their while to
outsource IT infrastructure management.
Innovative options:
Indian enterprises today have a variety of outsourcing options from which they can choose the
right fit. Outsourcing solution providers offer services that include desktop client management,
server management, cable management, firewall management, patch management, software
license management, IT audits, backbone and connectivity, website hosting, and IT infrastructure
management.
Thus the available services are innovative, significantly more customised, and better aligned with
individual customer requirements. An enterprise can pick-and-chose specific services and build a
reliable mode of service delivery. A company can outsource basic desktop management needs, or
the management of the entire nationwide IT infrastructure if needed.
To introduce more flexibility, many service providers offer clients hire-purchase schemes,
infrastructure on-demand, and pay-as-you-use options.
Before you outsource:

All things said, outsourcing is a strategic business decision that should be made only if a
company sees true business benefits accruing from it. Badly-planned outsourcing could result in
erosion of service value and cost escalation, but a well-planned outsourcing decision can help
you sleep better at night, knowing that the responsibility of deliverables is in safe hands.
Michele Caminos of Gartner highlights a few steps that can lead you to take a proper
decision in this context.
What type of a service is it? Identify characteristics of service and the respective type.
What perspective is driving the effort? Identify decision rights (service owner) and input
rights (other stakeholders).
How are other perspectives affected? Identify conflicts and work them out. Check 'killer'
factor. Improve solution.
Check compliance with principles and fit with architecture.
Who should carry it out? Evaluate different staffing possibilities. Select best from
combination.
Who should participate in the decision? Submit service proposal to specific decision
process. Follow it up.
The Top 10 Things You Need to Know About Outsourcing Strategies
1. One advantage is that by outsourcing, companies are able to focus more on their core
activities. When companies grow and expand, they begin to use more resources such
as human and financial. This may take away from what the company was built around.
Outsourcing these resources will allow for refocusing on those core strategies.
2. Outsourcing allows for cost and efficiency savings. Several of the jobs in a corporation
can be tedious and costly. By outsourcing these jobs, such as customer service, labor
found elsewhere can be cheaper and the company can focus on the areas that need the
most attention in order to earn profits.
3. Reducing overhead costs is another advantage of outsourcing. This relates again to
the customer service impact on a company. These positions, as well as being costly,
also require a large amount of office space depending on the size of the business.
Sometimes the employers having to make these calls to customers are responsible for
other areas and can lose focus on their main objectives. Outsourcing again cuts costs
by being able to find cheaper labor overseas as well as minimizing the required office
space.
4. Companies that have existed for a while may tend to lose operational control. For
example, a department may succumb to poor management over time due to lack of
qualified resources to fill the positions. By outsourcing, a company can look outside of
the U.S. for a manager that has specific knowledge and best fits the position they are
looking to fill.
5. Another advantage of outsourcing is that it can help develop a more skilled internal
staff. A company may have staff that lacks the knowledge needed to complete a certain
task. By outsourcing, the company can bring in the skilled people that can work
alongside and train the existing staff. Once the training is done, the employers have
gained the knowledge on the subject and in the future will be better prepared for it.
6. A disadvantage to outsourcing is that there can be a loss of managerial control. When a
company outsources an area of their business, management no longer has direct
control over how that area is operating. The control belongs to that which was
outsourced to, therefore leading to the possibility of decreased standards or standards
that fit another company, but not yours.
7. There is also the possibility of hidden costs. After signing a contract with an
outsourcing company, they may tack on additional fees that were not stated in the
initial contract. For example, they may add in legal fees for filing the contract. They do
this because this is how they earn their profits and they have probably done it before,
thereby putting your company at a disadvantage up front for future negotiations.
8. When a company chooses to outsource, there is also the threat to security and
confidentiality. There are a lot of companies that exist willing to take on the role of the
outsourced. However, by choosing the wrong one, a company bears the risk of losing
its trade secrets to the highest bidder. To prevent any incidence of this nature, the
company should make sure the outsourcing company is reliable and that the contract
includes a penalty clause for any wrong doing.
9. Another disadvantage of outsourcing could be that there is a problem in the quality of
work done. Contracts are set as fixed prices when a company outsources and the
outsourcing company is in the business of making profit. The only way for them to
maximize their profits is to reduce their expenses. This could mean that they dont
spend as much time in inspection or they simply choose to use cheap parts where good
parts are necessary.
10. As you would imagine from seeing just the few disadvantages above, when a company
chooses to outsource, they bear the risk of having bad publicity or ill-will attached to
their name. So many employees have lost their jobs over the past few years that the
term outsourcing is generally not a good thing for a company to be associated with.
Not only does it lower the morale of the community, but
Joint venture:
Three basic strategies have been proposed for use in joint ventures: the spiderls web, go
together-split and successive integration.
The spiderls web strategy is employed in an industry with few large organizations and several
smaller ones. One strategy for smaller organizations would be to enter a joint venture with one
large organization and then, in order to avoid being absorbed, enter a new joint venture as
quickly as possible with one or more of the remaining organizations.
Go together-split is a strategy in which two or more organizations cooperate for an extended
time and then separate. It is particularly appropriate projects that have ad definite life span, such
as construction projects.
Successive integration starts with a weak joint venture relationship between organizations,
becomes stronger, and ultimately may result in a merger - either friendly or hostile.
Three major considerations seem to be particularly important in forming a joint venture:
The first is choosing partner.
A second consideration is the question of control over the joint venture.
final consideration involves the management of the joint venture.
INTERNATIONAL BUSINESS LEVEL STRATEGIES:

Increased
Market Size
Return on Investment
Economies of Scale and Learning
Location Advantage
Benefits of International Strategies:
Increased market size.
Greater returns on major capital investments or new products or processes.
Greater economies of scale, scope or learning.
A competitive advantage through location.
International Strategies:
International Business Level Strategies
International Corporate Level Strategies
Multi-domestic Strategy
Global Strategy
Transnational Strategy
Determinants of National Advantage:
Factors of Production
Inputs Labour, land, natural resources, capital & infrastructure
Demand Conditions
The nature and size of he buyers needs in the home market of goods & services
Related & Supporting Industries
Industries in which the target country is considered the leader
eg. Italy - shoes with a supporting leather industry,

Japan - cameras & photocopiers,
Denmark - diary & an industry focused on food enzymes.
Firm Strategy, Structure & Rivalry make up
Germany focused on methodical product & process improvements,
Italys national pride of designers helped spawn fashion apparel, furniture &
sports car industries.
International Corporate-Level Strategy:
Multi-domestic Strategy
Global Strategy
Strategic & operating decisions are decentralized to the strategic business unit in
each country to tailor products to the local market.
Assumes more standardization of products across country markets
Transnational Strategy
The firm seeks to achieve both global efficiency and local responsiveness
Choice of International Entry Mode:

Exporting:
Common way to enter new international markets():
No need to establish operations in other nations.
Establish distribution channels through contractual relationships.
May have high transportation costs.
May encounter high import tariffs.
May have less control on marketing and distribution.
Difficult to customize product.
Licensing:
Firm authorizes another firm to manufacture & sell its products
Licensing firm is paid a royalty on each unit produced and sold.
Licensee takes risks in manufacturing investments.
Least risky way to enter a foreign market.
Licensing firm loses control over product quality & distribution.
Relatively low profit potential.
Strategic Alliances:
Enable firms to shares risks and resources to expand into international
ventures.
Most joint ventures (JVs) involve a foreign corp. with a new product or
technology & a host company with access to distribution or knowledge of local
customs, norms or politics.
May experience difficulties in merging disparate cultures.
May not understand the strategic intent of partners or experience divergent goals.
Acquisitions:
Enable firms to make most rapid international expansion.
Can be very costly.
Legal and regulatory requirements may present barriers to foreign ownership.
Usually require complex and costly negotiations.
Potentially disparate corporate culture.
Major Risks of International Diversification:

Political Risk:
National government instability may create potential problems for internationally

diversified firms.
Potential changes in attitudes or regulations regarding foreign ownership.
Legal authority obtained from previous administration may become invalid.
Potential for nationalization of firms assets.
Economic Risk:
Econ. risks are interdependent with political risks.

Differences and fluctuations in international currencies may affect value of assets &
liabilities.
This affects prices & thus ability to compete.
Differences in inflation rates may affect inter-nationally diversified firms ability to
compete.
Enforcing intellectual property rights on CDs, software, etc.
International Corporate & Business Level Strategies:
Import/Export
A basic international business strategy is the import and export of goods or resources. Companies
often acquire economic resources from international countries to take advantage of favorable
currency exchange rates and cheaper business input costs. Companies may also use written
contracts to secure economic resources at fixed prices for future use.
Exporting goods allows companies to ship economic resources or finished products to
international markets for business and consumer use. Exporting goods to international markets
often requires companies to have efficient operations for shipping goods to other countries with
specific international guidelines.
Outsourcing
An increasingly popular international business strategy is the outsourcing of specific business
functions or services. Information technology allows companies to outsource call centers,
technical support and other administrative services to international countries. Outsourcing
nonessential business services allows companies to save money on payroll costs and benefits for
employees. Setting up international business locations may also be cheaper, depending on the
political and business environment of international countries.
Outsourcing business functions allows companies to gain the full advantage of cheaper business
costs without usually making direct investments in the foreign economic market. Companies
may create business partnerships with outsourcing functions to ensure products or services meet
the company's standards.
Joint Ventures
Joint ventures are business relationships in which two companies collaborate to complete
business services or produce consumer goods. Joint ventures may be used in international
business strategies to allow an already established international company produce specific goods
or services relating to another company. This allows domestic businesses the opportunity to
develop a presence in international economic markets by licensing an international company to
produce goods or services for the international market.
Direct Investment
The most intensive international business strategy companies often make is a direct investment
into an international market. This strategy usually requires companies to purchase facilities and
equipment for producing goods or services in each international market in which they operate.
Companies must also hire employees and follow business guidelines for each international
country. While this strategy is often the most high risk and expensive international business
strategy, it may offer companies the best option for creating a competitive advantage and saturate
the international business market.
UNIT:4
Formulating Long Term Objectives and Grand Strategies
Long Term Objectives
There are seven areas in which long term objectives have to be established
1. Profitability
The ability of any firm to operate in the long term depends on attaining an
acceptable level of profits.
Strategically managed firms have a long term objective, usually expressed in
earnings per share or return on equity.
2. Productivity
Commonly used productivity objectives are the number of items produced or the
number of services rendered per unit of input.
They are also, sometimes, defined in terms of desired cost decrease.
3. Competitive position
This is in terms of relative dominance in the marketplace.
Companies often use total sales or market share as a measure of competitive

position.
4. Employee Development
Employee development in terms of training which increases productivity and

decreases employee turnover.
5. Employee relations
Proactive steps in anticipating the employee needs and expectations are

characteristics of good strategic management.
This builds employee loyalty leading to increase in productivity.
Such programs include safety training, employee stock option and worker
representation on management committees.
6. Technological leadership
Firms have to adopt different strategies depending on its intention of being a
leader or a follower of technology leadership.
e.g., Companies like Intel and Microsoft have an advantage of being

known as technological leaders in their domains.
e-commerce technology will lead to emergence of new leaders who are

better positioned to take advantage of internet technology to improve
productivity and innovation.
7. Public responsibility
Corporates ensure that their responsibility go beyond providing good products and
services to include corporate social responsibility.
They donate to educational projects, nonprofit organizations, charities and other
socially relevant activities.
e.g. MindTree is involved with Spastics Society of Karnataka, Tata Steel

in credited with development of Jamshedpur
Qualities of long-term objectives

1. Acceptable
The long term objectives should be consistent with the preferences of the
employees.
They may ignore or even obstruct an objective that offend them or that they
believe to be inappropriate and unfair.
The long term objectives should also be designed to be acceptable to groups
external to the firm.
e.g. development of hybrid cars
2. Flexible
Objectives should be adaptable to unforeseen or extraordinary changes in the
firm's competitive or environmental forecasts.
Such flexibility is at the expense of specificity.
One way of providing flexibility while minimizing its negative effects is to allow
for adjustments in the level, rather than in the nature, of objectives.
e.g. there may be some flexibility in the growth rate in terms of revenues
in times of recession
3. Measurable
The objectives must clearly state what will be achieved and by when it will be
achieved.
e.g. Adobe wants to increase its revenues from India to 5% of their total
revenue in the next five years
4. Motivating
The objectives have to be set to a motivating level which is high enough to

challenge, but not so high enough as to frustrate, and also it should not be so low as to
be easily attained.
Since different group of people have different levels of motivation, different long
term objectives should be set to motivate the groups.
5. Suitable
Long term objective must be suited to the broad aims of the firm, which are
expressed in its mission statement.
Each of the objectives should help the firm to move closer to achieving its
mission.
e.g. companies with mission of global reputation cannot do anything

which is unethical
6. Understandable
All the people involved in the execution of the objectives must be able to clearly
understand the objectives.
They should also understand the major criteria by which their performance would
be evaluated.
The objectives must be clear, meaningful and unambiguous.
7. Achievable
Objectives must be possible to achieve.
The objectives have be set to be achievable under normal conditions, when

extreme changes in the external and internal environments are not expected.
Grand Strategies
Grand strategies provide basic direction for strategic actions.
They are the basis for coordinated and sustained efforts directed towards achieving longterm business objectives.
They indicate a time period over which long-term objectives are to be achieved.
Firms involved with multiple industries, businesses, product lines or customer groups
usually combine several grand strategies.
The fifteen grand principles are:

1. Concentrated growth e.g. e-bay in online auction
2. Market development e.g. J&J catering to the adults, using sachets for market penetration
3. Product development e.g. personal care products from HUL, newer version of books,
4. Innovation
5. Horizontal integration
6. Vertical integration
7. Concentric diversification
8. Conglomerate diversification
9. Turnaround
10. Divestiture e.g. Sale of TOMCO by Tata, selling of cement division by L&T
11. Liquidation
12. Bankruptcy
13. Joint ventures
14. Strategic alliances
15. Consortia e.g. Mitsubishi, LG
Innovation
Innovation is needed since both consumer and industrial markets expect periodic changes
and improvements in the products offered.
Firms seeking to making innovation as their grand strategy seek to reap the initially high
profits associated with customer acceptance of a new or greatly improved product.
As the products enters the maturity stage these companies start looking for a new
innovation.
The underlining rationale is to create a new product life cycle and thereby make similar
existing products obsolete.
This strategy is different from the product development strategy in which the product life
cycle of an existing product is extended.
e.g. Polaroid which heavily promotes each of its new cameras until competitors
are able to match its technological innovation; by this time Polaroid normally is
prepared to introduce a dramatically new or improved product.
Intel, 3M
Horizontal integration
It is a strategy in which a firms long term strategy is based on growth through acquisition
of one or more similar firms operating at the same stage of the production-marketing
chain. E.g. Acquisition of Arcrol by Mitta Steels
Such acquisitions eliminate competitors and provide the acquiring firm with access to
new markets.
The acquiring firm is able to greatly expand its operations, thereby achieving greater
market share, improving economics of scale, and increasing the efficiency of capital use.
e.g. acquisition of Arcerol by Mittal steels, acquisition of VoiceStream Wireless
by Deutsche Telekom
The risk associated with horizontal integration is the increased commitment to one type
of business.
Vertical integration
It is a process in which a firm's grand strategy is to acquire firms that supply it with
inputs (such as raw materials) or are customers for its outputs (such as warehouses for
finished products).
The acquiring of suppliers is called backward integration.
The main reason for backward integration is the desire to increase the dependability of
the supply or quality of the raw materials used in the production inputs.
This need is particularly great when the number of suppliers are less and the number of
competitors is large.
In these conditions a vertically integrated firm can better control its costs and, thereby,
improve the profit margin.
e.g. acquiring of textile producer by a shirt manufacturer
The acquiring of customers is called forward integration.
e.g. acquiring of clothing store by a shirt manufacturer
Forward integration is preferred if great advantages accrue to stable production.
It also helps in greater predictability of demand for its outputs.
Vertical integration has a risk which results from the firm's expansion into areas requiring
strategic manager to broaden the base of their competences and to assume additional
responsibilities.
Concentric diversification
It involves the acquisition of businesses that are related to the acquiring firm in terms of
technology, markets, or products.
The selected new business must possess a very high degree of compatibility with the
firm's existing business.
The ideal concentric diversification occurs when the combined company profits increase
the strengths and opportunities and decreases the weaknesses and exposure to risk.
Thus, the acquiring firm searches for new businesses whose products, markets,
distribution channels, technologies and resource requirements are similar to but not
identical with its own, whose acquisition results in synergies but not complete
interdependence.
e.g. acquiring of Spice Telecom by Idea
Conglomerate Diversification
It is a grand strategy in which a very large firm plans to acquire a business because it
represents the most promising investment opportunity available.
The principal concern, and often the sole concern, of the acquiring firm is the profit
pattern of the venture.
It gives little concern to creating product-market synergy with existing business.
They may seek a balance in their portfolio between current businesses with cyclical sales
and acquired businesses with countercyclical sales, between high-cash/low-opportunity
and low-cash/high-opportunity businesses or between debt-free and high leveraged
businesses.
e.g. acquisition of Adlabs by Anil Dirubhai Ambani Group
Turnaround
Sometimes the profit of a company decline due to various reasons like economic
recession, production inefficiencies and innovative breakthrough by competitors.
In many cases the management believes that such a firm can survive and eventually
recover if a concerted effort is made over a period of a few years to fortify its distinctive
competences.
This is known as turnaround strategy.
Turnaround typically is begun with one or both of the following forms of retrenchment
being employed either singly or in combination.
1.
Cost reduction
It is done by decreasing the workforce through employee attrition, leasing rather
than purchasing equipment, extending the life of machinery, eliminating
promotional activities, laying off employees, dropping items from a production
line and discontinuing low-margin customers.
2. Asset reduction
This includes sale of land, buildings and equipment not essential to the basic
activity of the firm.
Research has showed that turnaround almost always was associated with changes in top
management.
New managers are believed to introduce new perspectives, raise employee morale and
facilitate drastic actions like deep budgetary cuts in established programs.
Turnaround situation
The model begins with the depiction of external and internal factors as causes of a firm's
performance downturn.
When these factors continue to detrimentally impact the firm, its financial health is
threatened.
Unchecked decline places the firm in a turnaround situation.
A turnaround situation represents absolute and relative to the industry declining

performance of a sufficient magnitude to warrant explicit turnaround actions.
Turnaround situations may be a result of years of gradual slowdown or months of sharp

decline.
For a declining firm, stabilizing operations and restoring profitability almost always
entail strict cost reduction followed by shrinking back to those segments of the business
that have been the best prospects of attractive profit margins.
Situation severity
The urgency of the resulting threat to company survival posed by the turnaround situation
is known as situation severity.
Severity is the governing factor in estimating the speed with which the retrenchment
response will be formulated and activated.
When severity is low stability can be achieved through cost reduction alone.
When severity is high cost reduction must be supplemented with more drastic asset
reduction measures.
Assets targeted for divestiture are those determined to be underproductive.
More productive resources are protected and will become the core business in the future
plan of the company. E.g . strategy adopted by Citibank
Turnaround response
Turnaround response among successful firms typically include two strategic activities:
Retrenchment phase
Recovery phase
Retrenchment phase
It consists of cost-cutting and asset-reducing activities.
The primary objective of this process is to stabilize the firm's financial condition.
Firms in danger of bankruptcy or failure attempt to halt decline through cost and asset
reductions.
It is very important to control the retrenchment process in a effective and efficient

manner for any turnaround to be successful.
After the stability has been attained through retrenchment, the next step of recovery
phase begins.
Recovery phase
The primary causes of the turnaround situation will be associated with the recovery
phase.
For firms that declined as a result of external problems, turnaround most often has been
achieved through creative new entrepreneurial strategies.
For firms that declined as a result of internal problem, turnaround has been mostly
achieved through efficiency strategies.
Recovery is achieved when economic measures indicate that the firm has regained its
predownturn levels of performance.
Tailoring strategy to fit specific industry and company situations

Strategies based on industry situation
Strategies for emerging industries
Strategies for competing in turbulent, high-velocity markets
Strategies for competing in maturing industries
Strategies for firms in stagnant or declining industries
Strategies for competing in fragmented industries
Strategies based on company situation
Strategies for sustaining rapid company growth
Strategy for industry leaders
Strategies for runner-up firms
Strategies for weak and crisis-ridden businesses
Strategies for emerging industries
An emerging industry is one which is in its formative stage.
The two critical strategic issues confronting firms in an emerging industry are:
1. How to finance initial operations until sales and revenues take off
2. What market segments and competitive advantages to go after in trying to secure a frontrunner position.
Challenges when competing in emerging industries

1. Because the market is new and unproven, there is speculation about how it will function,
how fast it will grow and how big it will get.
It is difficult to make sales and profit projections.
There will be guess work about how rapidly customers would be attracted and
how much they would be willing to pay.
2. Much of the technological know-how for the products of emerging industries is
proprietary and closely guarded.
Patents and unique technical expertise are key factors in securing competitive
advantage.
3. Often, there is no consensus regarding which of the several competing technologies will
win or which product attributes will prove decisive in winning buyer favor.
e.g. The mobile service providers are using both GSM and CDMA technologies
and they are not sure which technology will be the winner.
4. . Entry barriers tend to be low, even for entrepreneurial start-up companies.
Large companies with ample resources will enter the market if they find the promise
for explosive growth or if its emergence their existing business.
e.g. entry of large number of players to the mobile services market
5. Strong learning and experience curve effects may be present, allowing significant price
reductions as volume builds and costs fall.
6. The marketing task is to induce initial purchases and to overcome customer concerns
about product features, performance reliability and conflicting claims of rival firms.
7. Potential buyers expect first-generation products to be rapidly improved, so they delay
purchase till second or third generation products are released.
8. It will take time for companies to secure ample raw materials and components. Till
suppliers gear up to meet the industry's needs.
9. A lot of mergers and acquisitions happen as many small companies not able to fund R&D
will be willing to be acquired.
Strategic avenues for competing in an emerging market

1. Try and win early race for industry leadership with risk-taking entrepreneurship and a
bold creative strategy. Broad or focused differentiation strategies with emphasis on
technology or product superiority offers the best chance for early competitive advantage.
2. Push to perfect the technology, improve product quality and develop additional attractive
performance features.
3. As technological uncertainty clears and a dominant technology emerges, adopt it quickly.
4. Form strategic alliances with key suppliers to gain access to specialized skills,
technological capabilities and critical materials or components.
5. Acquire of form alliances with companies that have related or complementary
technological expertise as a means of helping outcompete rivals on the basis of
technological superiority.
6. Try to capture any first-mover advantage associated with early commitments to
promising technologies.
7. Pursue new customer groups, new user applications and entry into new geographical
areas.
8. Make it easy and cheap for first-time buyers to try the industry's first generation product.
Then, as the product becomes familiar to a large section of the market, shift
advertisement emphasis to increasing frequency of use and building brand loyalty.
9. Use price cuts to attract the next layer of price-sensitive buyers into the market.
Strategies for competing in turbulent, high-velocity markets
The characteristics of the turbulent, high-velocity markets is the occurrence of all the
following things at once:
rapid technological change
short product life cycles
entry of new rivals into the marketplace
frequent launches of new competitive moves by rivals
fast evolving customer requirements

e.g. mobile services, cell phones,
Strategies for coping with rapid changes
The central strategy-making challenge in a turbulent market environment is managing

change.
A company can assume any of the three strategic postures in dealing with high-velocity
change.
Ideally a company's approach should incorporate all three postures, in different

proportions.
The best-performing companies in high-velocity markets consistently seek to lead change

with proactive strategies, at the same time anticipating and preparing for the future and
reacting quickly to unpredictable and uncontrollable new developments.
1. It can react to change
The company can respond to a rival's new product with a better product.
It can counter unexpected shift in buyer tastes and buyer demand by redesigning or
repacking its product.
Disadvantages
Reacting is a defensive strategy.
It is unlikely to create fresh opportunity.
2. It can anticipate change, make plans for dealing with the expected change and
follow its plans as changes occur (fine-tuning them as may be needed)
It entails looking ahead to analyze what is likely to occur and then preparing and
positioning for that future.
It entails studying buyer behavior, buyer needs, and buyer expectations to get insight into
how the market will evolve, then preparing for the necessary production and distribution
capabilities ahead of time.
Advantages
It can open new opportunities and thus is a better way to manage change than just pure
reaction.
Disadvantages
Anticipating change is fundamentally a defensive strategy.

3. It can lead change
It entails initiating the market and competitive forces that others must respond to.
It means being the first to market with an important new product or service.
It means being technological leader.
It means having products whose features and attributes shape customer preferences and
expectations
It means proactively seeking to shape the rules of the game.
Advantage
It is a offensive strategy aimed at putting a company in the driver's seat.
Strategic moves for fast-changing markets
The strategic moves depends on the company's ability to

Improvise
Experiment
Adapt
Reinvent
regenerate
It has to constantly reshape its strategy and its basis for competitive advantage.
Cutting-edge know-how and first-to-market capabilities are very valuable competitive

assets.
A company has to have quick reaction time and should have flexible and adaptable
resources.
Organizational agility would be a competitive asset.
When a company's strategy are not doing well, it has to quickly regroup probing,
experimenting, improvising and trying again and again, until it finds something that is
acceptable by customers.
The following five strategic moves provide the best payoff between altering offensive and
defensive strategies and fast-obsolescing strategy.
1.
Invest aggressively in R&D to stay on the leading edge of technological know-how
If technology is the primary driver of change, it is important to translate technological

advances into innovative new products and remaining close to whatever advancements
and features are pioneered by rivals.
It is desirable to focus the R&D effort on a few critical areas to:

- avoid stretching the company's resources too thin
- deepen the firm's expertise
- master the technology
- fully capture learning curve effects
- become a dominant player in a particular technology area or product category.
2.
Develop quick-response capability
Since it will not be possible to anticipate all the changes that can happen, having an
organizational capability to react quickly becomes very crucial.
This means:
- shifting resources internally
- adapting existing competencies and capabilities

- creating new competencies and capabilities
- not falling far behind rivals
3.
Rely on strategic partnerships with outside suppliers and with companies making
tie-in products
As discussed earlier specialization and focus are desirable, even though technology in
high-velocity market creates new paths and product categories continuously.
It helps to Partner with suppliers making state-of-the-art parts and components and
collaborating closely with developers of related technologies and makers of tie-in
products.
e.g. PC manufacturers rely heavily on suppliers of components and software for
innovative advances. Suppliers stay on the cutting edge of their specialization and
can achieve economics of scale.
The managerial challenge is to strike a good balance between building a rich internal
resource base that keeps the firm from being at the mercy of the suppliers and allies and
at the same time maintain organizational agility by relying on resources and expertise of
outsiders.
4.
Initiate fresh actions every few months, not just when a competitive response is
needed
A company can be proactive by making proactive time-paced moves - introducing a new

or improved product every few months rather than when the market declines or when
rivals introduce new models.
It can enter a new market every few months rather wait for opportunity to present itself.
It can refresh existing brands often rather wait for its popularity to wane.
The key to successfully using time pacing strategy is the right interval.
e.g. 3M had pursued a objective of having 25 percent of its revenues come from
products less than four years old. The target has been revised to 30 percent to
have more focus on innovation.
5.
Keep the company's products and services fresh and exiting enough to stand out in
the midst of all the change that is taking place.
The marketing challenges for companies in fast changing markets is to keep the firm's
products and services in limelight.
The products should be innovative and well matched to the changes that are occurring in
the marketplace
Strategies for competing in maturing industries

What are the characters of an maturing industry?
It is moving from a rapid growth to a significantly slower growth.
Nearly all its potential buyers are already users of the industry's products.
Demand consists mainly of replacement sales to existing users, the growth is restricted to
the industry's ability to attract the remaining few new buyers and in convincing existing
buyers to up the usage.
Consumer goods industries that are mature typically have a growth rate roughly equal to
the growth of the consumer base or economy as a whole.
. What are the changes we can see in an industry as it enters the mature
stage?
1. Slowing growth in buyer demand generates more competition for market share
Firms looking for higher growth will try to take customers away from
competitors.
Price cutting, increased advertising and other aggressive tactics are seen as
markets mature.
2. Buyers become more sophisticated, often driving a harder bargain on repeat purchases
Since buyers have already experienced the product and are familiar with
competing brands, they evaluate different brands and can negotiate for a better
deal with seller
3. Competition often produces a greater emphasis on cost and service
As sellers add all features in a product, the sellers focus shifts to combination of
price and service.
4. Firms are not ready to add new facilities
5. Product innovation and new end-use applications are harder to come by
6. International competition increases
Firms start looking for foreign markets for growth. E.g. Vodafone
Production activity will be shifted to countries where products can be produced at
best cost. E.g. Automobile companies starting operations in India
Product standardization and diffusion of technical know-how lowers barrier and
encourages foreign companies to enter the market.
The focus for most global players will be to capture the large geographic markets.
E.g. P&G entering India
7. Industry profitability falls temporarily or permanently

8. Stiffening competition induces a number of mergers and acquisitions among competitors,
weaker firms are driven out and consolidation is seen. E.g. Vodafone acquired Hutch
What strategic moves can be adopted for maturing industries?
1. Pruning marginal products and models e.g. HUL reducing its number of brands
A wide variety of products is suitable for growth stage, when consumer tastes are
still evolving. E.g. cellphone handset market
A variety of products in a mature industry means additional costs in terms of
maintaining more inventory, not able to reach economics of scale, and distribution
costs.
Pruning marginal products helps the firms to cut cost, concentrate on a few items
with highest margins and where firms have competitive advantage.
e.g. HUL pruning its many brands to concentrate on only a few power
brands
2. More emphasis on value chain innovation e.g. Maruti Suzuki asking its vendors to invest
in R&D, Vendors involved in Nano, setting up company owned retail shops by companies
like Reliance (Vimal)
Value chain innovation can lead to:
lower costs
better product and service quality
greater ability to produce customized products
shorter design-to-market time
Innovation in production technology by using better technology, labor efficiency,

flexible manufacturing, redesign of assembly lines can lead to saving and
customization. E.g. using robots in automobile manufacturing
Better collaboration with suppliers and distributors can increase quality of service.
3. Trimming costs e.g. reduction in employees through automation
4. Increasing sales to present customers e.g. Credit card companies offering multiple cards
to same customers
This is a more easier option as compared to converting customers loyal to rival
companies.
This may include finding new applications for the products and sales promotions.
E.g. Johnson making soaps for mothers also
5. Acquiring rival firms at bargain prices e.g. Acquisition of Modern Breads by HUL,
acquisition of Kissan jams by HUL, acquisition of Merrill Lynch by Bank of America
Rival firms which are not doing well can be targets for acquisition at bargain
prices.
Acquisitions helps in:
increasing the customer base by adding acquired customers
reaching economics of scale, if possible
using new technologies from acquired firms
The acquisition must be done carefully to ensure the overall competitive strength
of the firm increases.
6. Expanding internationally e.g. Vodafone acquisition of Hutch
Firms should look for markets which have attractive growth potential and
competitive pressures are less.
It is more suitable when the firm's skills, reputation and products can be readily
transferable to foreign markets.
7. Building new or more flexible capabilities e.g. Toyota building multiple model of cars
from a single platform
Firms need to strengthen their competitive capabilities making them harder to
imitate.
New competencies and capabilities can be added.
Existing competencies can be made more adaptable to changing customer
requirements. E.g. ITC using its expertise in running five star hotels to customize
food products like atta
What can be the strategic pitfalls in an maturing industry?
1. A company should not choose a middle path between low cost, differentiation and
focusing.
2. Slow to mounting a defense against stiffening competitive pressures. E.g. HTM watches
against Titan
3. Concentrating more on short-term profitability rather than building long-term competitive
position. E.g. Unilever losing market share to local brands like Babool in toothpaste
4. Waiting for too long to respond to price cutting by rivals. E.g. Ambassador not
responding to introduction of smaller cars
5. Over expanding in the face of slowing growth.
6. Over spending on advertising and sales promotion efforts in a losing effort to combat the
growth slowdown.
7. Failing to pursue cost reduction at the earliest and aggressively.

Strategies for firms in stagnant or declining industries
Characteristics:
Demand is growing slower than economy-wide average.
Harvesting the business to obtain cash flow e.g. selling of Gillette to P&G, selling out
Preparing for closedown is a strategy for uncommitted firms. E.g. government selling
Modern Breads to HUL
Closing operations is always the last resort.
The performance targets should be consistent with available market opportunities. E.g.
Khadi garments
Cash flow and return-on-investment criteria are more appropriate than growth-oriented
performance measures.
Acquisition or exit of weaker firms creates opportunities for the remaining companies to
capture greater market share.
Strategies that can be followed

1. Pursue a focused strategy aimed at the fastest growing segment within the industry
Focusing on the segment within the industry which is growing will help
companies to escape stagnating sales and profits and even gain competitive
advantage. E.g. Polyester Khadi
2. Stress differentiation based on quality improvement and product innovation.
Innovation can create important new growth segments.
Differentiating based on innovation helps in being different and making it difficult
for rivals to imitate.
3. Strive to drive costs down and become the industry's low-cost leader
Potential cost-saving actions include:

cutting marginally beneficial activities out of the value chain
outsourcing functions and activities that can be performed more cheaply by outsiders
redesigning internal business processes to exploit cost-cutting
consolidating underutilized production facilities
adding more distribution channels to ensure the unit volume needed for low-cost
production
closing low-volume, high-cost retail outlets
pruning marginal products from the firm's offerings
The most common strategic mistakes
1. Getting trapped in a profitless war of attrition
2. Diverting too much cash out of the business too quickly
3. Being over optimistic about the industry's future and spending too much on
improvements in anticipation that things will improve.
Strategies for competing in fragmented industries
Characteristics:
Hundreds of small and medium sized companies, many privately held and none with a
substantial share of total industry sale.
Absence of market leaders with large market share or widespread buyer recognition.
e.g. restaurants, computer hardware assemblers, hospitals
Reasons for supply-side fragmentation

1. Market demand is so extensive and so diverse that very large number of firms can easily
coexist trying to accommodate the range and variety of buyer preferences and
requirements and to cover all the needed geographic locations. E.g. hotels and eateries
catering to various tastes and budgets of customers
2. Low entry barriers allow small firms to enter quickly and cheaply. E.g. starting a real
estate business just needs a contact number and a small office
3. An absence of scale economics permits small companies to compete on an equal footing
with larger firms.
4. Buyers require relatively small quantities of customized products.
5. The market for the industry's product or service is becoming more global, putting
companies in more and more countries in the same competitive market arena. e.g. interest
shown by automobile manufacturers the world over to launch of Nano
6. The technologies embodied in the industry's value chain are exploding into so many new
areas and along so many different paths that specialization is essential just to keep abreast
in any one area of expertise. E.g restaurants specializing in a particular variety
7. The industry is young and crowded with aspiring contenders, with no firm having yet
developed the resource base, competitive capabilities and market recognition to
command a significant market share.
Strategic options for a fragmented industry
1. Constructing and operating "formula" facilities
This approach is frequently employed in restaurant and retailing businesses
operating at multiple locations.
It involves constructing standardized outlets in favorable locations at minimum
cost and then operating them cost effectively.
e.g. Pizza Hut, Cafe Coffee Day, Adiga's, MTR
2. Becoming a low-cost operator

Companies can stress no-frills operations featuring low overhead, highproductivity, low-cost labor, lean capital budgets. E.g. low cost eateries like
Darshinis
Successful low-cost producers can use price-discounting and still earn profit
above industry average.
3. Specializing by product type
Focus on one product or service.
e.g. Dosa Corners, auto-repair shops specializing in only one brand of

vehicles
4. Specializing by customer type
Cater to customers interested in low cost or unique product attributes or

customized features.
e.g. Only outdoor caterers
5. Focusing on limited geographic area

Concentrating company efforts on a limited geographical area can produce greater
operating efficiency, speed of delivery and customer service and promote strong
brand
e.g. Supermarkets
Strategies based on company position in the industry

Strategies for sustaining rapid company growth e.g. Airtel
Companies that are focused on growing their revenues and earnings at a rapid or aboveaverage pace year after year generally have to draft a portfolio of strategic initiatives
covering three horizons.
Horizon 1
"Short-jump" strategic initiatives to fortify and extend the company's position in
existing businesses e.g. price cutting by Airtel
Short jump initiatives typically include adding new items to the company's
present product line, expanding into new geographic areas where the company
does not yet have a market presence, and launching offensives to take market
share away from rivals. E.g. prepaid cards and low price strategies of Airtel
The objective is to capitalize fully on whatever growth potential exists in the
company's present business arenas.
Horizon 2
"Medium-jump" strategic initiatives to leverage existing resources and

capabilities by entering new businesses with promising growth potential e.g.
entering into 3G segment and the DTH segment by Airtel
These initiatives become more important as the present businesses enter maturity
stage with the growth rate slowing down.
Horizon 3
"Long-jump" strategic initiatives to plant the seeds for ventures in businesses that
do not yet exist e.g. failed attempt by Airtel to acquire MTN, foray into Sri Lanka
by Airtel
It includes putting funds in R&D projects, investing in promising start-up

companies creating industries of the future, looking for new products.
e.g. Intel invests multibillion dollar in start-up companies.
Shell encourages its employees to come up with new ideas
Tatas entering defense production
The tendency of many firms is to focus on Horizon 1 strategies and devote only sporadic
and uneven attention to Horizon 2 and 3 strategies.
A study by McKinsey & Company shows that a relatively balanced portfolio of strategic
initiatives covering all the three horizons are critical to maintain above the industry
growth. E.g. initiatives by GE to look for potential business in 2025
A portfolio of initiatives also provides some protection against unexpected adversity in

present or newly entered businesses.
The risks of pursuing multiple strategy horizons

1. A company cannot pursue all the opportunities that are available in the environment
because of resource constraints.
2. Medium-jump and long-jump initiatives can cause a company to stray far from its core
competence and may end up trying to compete in businesses for which it may be illsuited. E.g. L&T entering cement manufacturing business
3. It is difficult to achieve competitive advantage in medium and long jump businesses, if
those businesses do not mesh with the present businesses and resource strengths. E.g.
L&T entering cement manufacturing business
4. The payoff's of long-jump initiatives often prove elusive; not all the initiatives are
successful, only a few may evolve into significant contributors to the company's revenue
and profit growth.
5. The losses from unsuccessful long-jump initiatives may be substantial to erode gains
from successful initiatives.
Strategies for industry leaders
Characteristics
The competitive positions of industry leaders range from "stronger than average" to
"powerful e.g. Google and Microsoft are powerful, Airtel is stronger than average
Leaders have proven strategies. E.g. acquiring and turning capabilities of Arcerol Mittal
The main concern for a leader revolves around how to defend and strengthen its
leadership position.
The pursuit of industry leadership and large market share is primarily important because
of the competitive advantage and profitability that accrue to being the industry's biggest
company. E.g . it helps in reaching economics of scale, being a technology leader
Some of the strategies that can be followed are:

1. Stay-on-the-offensive strategy
The central goal of this strategy is to be a first-mover and a proactive market
leader. E.g. Microsoft, Google
It rests on the principle that staying a step ahead and forcing rivals to follow is the
surest path to industry prominence and potential market dominance. E.g. Intel
Being the industry standard setter entails relentless pursuit of continuous
improvements and innovation. E.g. Google
Innovation involves technical improvements, new and better products, more
attractive features, quality enhancements, improved customer service and cutting
costs.
Initiatives to expand overall industry demand - spurring creation of new families
of products, making products more customer friendly, discovering new use for the
product and attracting new users. E.g. Nokia in mobile handset
2. Fortify-and-defend strategy
The essence of this strategy is to make it harder for challengers to gain ground
and for new firms to enter. E.g. Microsoft in operating system
The goals of a strong defense are:
To hold on to the present market share
Strengthen the current market position
Protect the competitive advantage
Some of the defense actions can be:
Attempting to raise the competition for challengers and new entrants

through increased spending for advertising, higher levels of customer
service and bigger R&D spending.
Introducing more product versions or brands to match the product

attributes that challengers brands have or to fill vacant niches. E.g. Nokia
Adding personalized services and other extras that boost customer loyalty
and make it harder or more costly for customers to switch to rival
products. E.g. earning points system by credit cards
Keeping prices reasonable and quality attractive
Building new capacity ahead of market demand to discourage smaller

competitors from adding capacity of their own. E.g. Nokia starting
manufacturing unit in India
Investing enough to remain cost-competitive and technologically

progressive.
Patenting the feasible alternative technologies
Signing exclusive contracts with the best suppliers and dealer distributors.
When is this suitable?
This strategy is best suited for companies that have already achieved
industry dominance and don't wish to risk antitrust action. E.g. Microsoft,
Google
It is also suitable for conditions where a firm wishes to use its position for
profits and cash flow because the industry's prospects for growth are low
and further gains in market share do not appear profitable enough to go
after.
3. Muscle-flexing strategy
Here the dominant player plays tough when smaller rivals challenge with price
cuts or mount new market offensives that directly threaten its position. E.g.
Microsofts reaction to Netscape browser
Specific response can include:
Quickly matching and exceeding challengers price cuts. E.g. 1 paise per
second offers by Aircel in response to Tata Docomo offer
Using larger promotional campaign and offering better deals to their major
customers. E.g. bundling of free browser by Microsoft
The leaders may also dissuade distributors from carrying rivals products.
Provide salespersons with documented information about the weaknesses

of competing firms
Try to fill any vacant position in their own firms by making attractive offers to the
better executives of rival firms.
Use various arm-twisting tactics to put pressure on present customers not to use
the products of rivals. like:
agreeing for exclusive arrangements in return for better prices e.g. types
sold to automobile manufacturers
charging them higher price if they use competitor's products e.g. chargers
levied by BSNL for calls originating from a competitor to their customer
landline
give special discounts to certain customers e.g. corporate discounts offered

by five star hotels
preferred treatment if they do not use any products of rivals e.g. no checkins for frequent flyers offered by major airlines
Risks
Running afoul of the antitrust laws.
Alienating customers with bullying tactics
Arousing adverse public opinion.
Strategies for runner-up firms

Characteristics
Runner-up or "second-tier" firms have smaller market share than market leaders. E.g.
Microsoft and Yahoo in online search
Some of the runner-up firms can be market challengers by employing offensive strategies
to gain market share and build a stronger market position. E.g. Microsoft in online search
Other runner-up competitors are focusers, seeking to improve their lot by concentrating
their attention on serving a limited portion of their market. E.g. Cavincare in hair care
segment
Some runner-up firms may be termed perennial runner-up, because they lack the
resources and competitive strengths to do more than continue in trailing positions. E.g.
Nirma in detergents
Obstacles for firms with small market shares

1. Less access to economics of scale in manufacturing, distributing, or marketing and sales
promotion
2. Difficulty in gaining customer recognition
3. Weaker ability to use mass media advertising
4. Difficulty in funding capital requirements
Strategic approaches for runner-up companies
1. Offensive strategies to build market share e.g. Microsoft in online search
A cardinal rule in offensive strategy is to avoid attacking a leader head-on with an

imitative strategy regardless of the resources and staying power of the runner-up
firm.
Some of the offensives can be:
Pioneering a leapfrog technological breakthrough e.g. K6 processor from

AMD
Getting new or better products into the market consistently ahead of rivals
and building a reputation for product leadership e.g. Tata Motors in
passenger car segment
Being more agile and innovative in adapting to evolving market conditions

and customer expectations. E.g. Cavincare adopted sachets before HUL
Forging attractive strategic alliances with key distributors and dealers. E.g.
Acquiring of graphics chip design company by AMD
Finding innovative ways to dramatically drive down costs and then using
the attraction of lower prices to win customers. E.g. ITC in foods in
distribution
Crafting an attractive differentiation strategy based on premium quality,

technological superiority, outstanding customer service, rapid product
innovation or online shopping. E.g. Hyundai in cars
2.
Growth via acquisition strategy e.g. Wipro consumer care acquiring
Chandrika brand
2. Vacant niche strategy e.g. successful strategy of Paramount airlines
o This strategy focuses on some niches in customer requirements which have been
overlooked by the market leader.
o The niche should be:
of sufficient size
Profitable
has growth potential
well suited to the firms ability
is hard for the leading firm to serve
3.
Specialist strategy e.g. SAP
o A specialist firm will focus on one technology, product or product family, end use
or market share.
o The aim is to use company's resource strengths and capabilities on building
competitive edge through leadership in a specific area.
5. Superior product strategy e.g. Mercedes Benz in passenger car
Here the firm uses differentiation based focused strategy with emphasis on
superior product quality or unique attributes.
Sales and marketing efforts are aimed directly at quality conscious and
performance oriented buyers.
6.
Distinctive image strategy

Some of the ways to create a distinct image are:
7.
creating a reputation for charging the lowest prices e.g. Big Bazaar
providing best quality at good price e.g. Toyota with Lexus
going all out to give superior customer service e.g. Oberoi Hotels
designing unique product attributes e.g. Apple
being a leader in new product introduction e.g. Apple
Content follower strategy e.g. HMT in watches

The firm deliberately refrain from initiating trendsetting strategic moves and
aggressive attempts to take customers from leaders.
They do not want to compete with the leader directly.
They prefer defense to offense.
They would rather react than be proactive.
GE nine cell planning grid
General Electric with the assistance of McKinsey and Company developed this matrix.
This martix includes 9 cells based on long-term industry attractiveness(on Y-axis) and
business strength/competitive position (on X-axis).
The industry attractiveness includes Market size, Market growth rate, Market
profitability, Pricing trends, Competitive intensity / rivalry, Overall risk of returns in the
industry, Entry barriers, Opportunity to differentiate products and services, Demand
variability, Segmentation, Distribution structure, Technology development
Business strength and competitive position includes Strength of assets and competencies,
Relative brand strength (marketing), Market share, Market share growth, Customer
loyalty, Relative cost position (cost structure compared with competitors), Relative profit
margins (compared to competitors), Distribution strength and production capacity,
Record of technological or other innovation, Quality, Access to financial and other
investment resources, Management strength
Plotting the Information:

1. Select factors to rate the industry for each product line or business unit. Determine the
value of each factor on a scale of 1 (very unattractive) to 5 (very attractive), and
multiplying that value by a weighting factor.
Industry attractiveness
= factor value1 x factor weighting1
factor value2 x factor weighting2
.+
factor valueN x factor weightingN
2. Select the key factors needed for success in each of the product line or business unit.
Determine the value of each key factor in the criteria on a scale of 1 (very unattractive) to 5
(very attractive), and multiplying that value by a weighting factor.
Business strengths/competitive position = key factor value1 x factor weighting1
+ key factor value2 x factor weighting2
.
+ key factor valueN x factor weightingN
3. Plot each product line's or business unit's current position on a matrix.
4. The individual product lines or business units is identified by a letter and plotted as
circles on the GE Business Screen.
5. The area of each circle is in proportion to the size of the industry in terms of sales. The
pie slice within the circles depict the market share of each product line or business unit.
6. Plot the firm's future portfolio assuming that present corporate and business strategies
remain unchanged. This is shown as an arrow which starts from the circle representing
the current position and the tip of the arrow will be the tentative center of the future
circle.
Strategic Implications
Resource allocation recommendations can be made to grow, hold, or harvest a strategic

business unit based on its position on the matrix as follows:
1. Grow strong business units in:

attractive industries
average business units in attractive industries
strong business units in average industries.
2. Hold average business units in:
average industries
strong businesses in weak industries

weak business in attractive industies.
3. Harvest weak business units in:
unattractive industries
average business units in unattractive industries
weak business units in average industries.
There are strategy variations within these three groups. For example, within the harvest
group the firm would be inclined to quickly divest itself of a weak business in an
unattractive industry, whereas it might perform a phased harvest of an average business
unit in the same industry.
GE business screen represents an improvement over the more simple BCG growth-share
matrix.
Limitations
It presents a somewhat limited view by not considering interactions among the
business units
It neglects to address the core competencies leading to value creation
Rather than serving as the primary tool for resource allocation, portfolio matrices
are better suited to displaying a quick synopsis of the strategic business units.
Harvest/Divest
Invest/ Expand: In this Zone there is opportunity to Grow through

further Investment & Expansion. This zone is characterized by high
business strength & high industry attractiveness which is a Ideal
situation for growth. How ever this situation does not remain for a long
time.
Example: Initially IT industry most attractive but later on it was facing
competition from all sorts of place.
Select/Earn : This zone presents a mix situation in which growth
possibility is low. However its presents a opportunities for selective
earning.
Harvest/Dives: In the case of red-cell organization has to stop. In this
case Harvesting or Divesting strategies suitable. Harvesting means

withdraw from a business but withdrawal is not immediate. Initially
focus is on cost-cutting i.e In R&D and advertising, the objective is to
earn short term profit.
Market Attractiveness:
Annual market growth rate
Overall market size
Historical profit margin
Current size of market
Market structure
Market rivalry
Demand variability
Global opportunities
Business Strength:
Current market share
Brand image
Production capacity
Corporate image
Profit margins relative to competitors
R & D performance
Promotional effectiveness
The BCG Growth-Share Matrix:
The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce

Henderson of the Boston Consulting Group in the early 1970's. It is based on the
observation that a company's business units can be classified into four categories
based on combinations of market growth and market share relative to the largest
competitor, hence the name "growth-share". Market growth serves as a proxy for
industry attractiveness, and relative market share serves as a proxy for competitive
advantage. The growth-share matrix thus maps the business unit positions within
these two important determinants of profitability.
BCG Growth-Share Matrix
This framework assumes that an increase in relative market share will result in an
increase in the generation of cash. This assumption often is true because of
theexperience curve; increased relative market share implies that the firm is
moving forward on the experience curve relative to its competitors, thus developing
a cost advantage. A second assumption is that a growing market requires

investment in assets to increase capacity and therefore results in the consumption
of cash. Thus the position of a business on the growth-share matrix provides an
indication of its cash generation and its cash consumption.
Henderson reasoned that the cash required by rapidly growing business units could
be obtained from the firm's other business units that were at a more mature stage
and generating significant cash. By investing to become the market share leader in
a rapidly growing market, the business unit could move along the experience curve
and develop a cost advantage. From this reasoning, the BCG Growth-Share Matrix
was born.
The four categories are:
Dogs - Dogs have low market share and a low growth rate and thus neither
generate nor consume a large amount of cash. However, dogs are cash traps
because of the money tied up in a business that has little potential. Such
businesses are candidates for divestiture.
Question marks - Question marks are growing rapidly and thus consume
large amounts of cash, but because they have low market shares they do not
generate much cash. The result is a large net cash comsumption. A question
mark (also known as a "problem child") has the potential to gain market
share and become a star, and eventually a cash cow when the market growth
slows. If the question mark does not succeed in becoming the market leader,
then after perhaps years of cash consumption it will degenerate into a dog
when the market growth declines. Question marks must be analyzed
carefully in order to determine whether they are worth the investment
required to grow market share.
Stars - Stars generate large amounts of cash because of their strong relative
market share, but also consume large amounts of cash because of their high
growth rate; therefore the cash in each direction approximately nets out. If a
star can maintain its large market share, it will become a cash cow when the
market growth rate declines. The portfolio of a diversified company always
should have stars that will become the next cash cows and ensure future
cash generation.
Cash cows - As leaders in a mature market, cash cows exhibit a return on

assets that is greater than the market growth rate, and thus generate more
cash than they consume. Such business units should be "milked", extracting
the profits and investing as little cash as possible. Cash cows provide the
cash required to turn question marks into market leaders, to cover the
administrative costs of the company, to fund research and development, to
service the corporate debt, and to pay dividends to shareholders. Because
the cash cow generates a relatively stable cash flow, its value can be
determined with reasonable accuracy by calculating the present value of its
cash stream using a discounted cash flow analysis.
Under the growth-share matrix model, as an industry matures and its growth rate
declines, a business unit will become either a cash cow or a dog, determined soley
by whether it had become the market leader during the period of high growth.
While originally developed as a model for resource allocation among the various
business units in a corporation, the growth-share matrix also can be used for
resource allocation among products within a single business unit. Its simplicity is its
strength - the relative positions of the firm's entire business portfolio can be
displayed in a single diagram.
Limitations
The growth-share matrix once was used widely, but has since faded from popularity
as more comprehensive models have been developed. Some of its weaknesses are:
Market growth rate is only one factor in industry attractiveness, and relative
market share is only one factor in competitive advantage. The growth-share
matrix overlooks many other factors in these two important determinants of
profitability.
The framework assumes that each business unit is independent of the others.
In some cases, a business unit that is a "dog" may be helping other business
units gain a competitive advantage.
The matrix depends heavily upon the breadth of the definition of the market.
A business unit may dominate its small niche, but have very low market
share in the overall industry. In such a case, the definition of the market can
make the difference between a dog and a cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool
for viewing a corporation's business portfolio at a glance, and may serve as a
starting point for discussing resource allocation among strategic business units.
Retrenchment Strategy
Retrenchment is a corporate-level strategy that seeks to reduce the size or diversity of an

organization's operations. Retrenchment is also a reduction of expenditures in order to
become financially stable.
Retrenchment is a pullback or a withdrawal from offering some current products or
serving some markets.
In a military situation a retrenchment provides a second line of defense.
Retrenchment is often a strategy employed prior to or as part of a Turnaround strategy.
Retrenchment strategy
A retrenchment grand strategy is followed when an organization aims at a contraction of its
activities through substantial reduction or the elimination of the scope of one or more of its
businesses in terms of their respective customer groups, customer functions, or alternative
technologies either singly or jointly in order to improve its overall performance. E.g: A corporate
hospital decides to focus only on special treatment and realize higher revenues by reducing its
commitment to general case which is less profitable.
The growth of industries and markets are threatened by various external and internal
developments (External developments government policies, demand saturation, emergence of
substitute products, or changing customer needs. Internal Developments poor management,
wrong strategies, poor quality of functional management and so on.) In these situations the
industries and markets and consequently the companies face the danger of decline and will go for
adopting retrenchment strategies. E.g: fountain pens, manual type writers, tele printers, steam
engines, jute and jute products, slide rules, calculators and wooden toys are some products that
have either disappeared or face decline.
There are three types of retrenchment strategies Turnaround Strategies, Divestment
Strategies and Liquidation strategies.
1. Turnaround Strategies
Turn around strategies derives their name from the action involved that is reversing a negative
trend. There are certain conditions or indicators which point out that a turnaround is needed for
an organization to survive. They are:
Persistent Negative cash flows
Negative Profits
Declining market share
Deterioration in Physical facilities
Over manning, high turnover of employees, and low morale
Uncompetitive products or services
Mis management
An organization which faces one or more of these issues is referred to as a sick company.
There are three ways in which turnarounds can be managed
The existing chief executive and management team handles the entire turnaround strategy
with the advisory support of a external consultant.
In another case the existing team withdraws temporarily and an executive consultant or
turnaround specialist is employed to do the job.
The last method involves the replacement of the existing team specially the chief
executive, or merging the sick organization with a healthy one.
Before a turn around can be formulated for an Indian company, it has to be first declared as a
sick company. The declaration is done on the basis of the Sick Industrial Companies Act (SICA),
1985, which provides for a quasi judicial body called the Board of Industrial and Financial
Reconstruction (BIFR) which acts as the corporate doctor whenever companies fall sick.
2. Divestment Strategies
A divestment strategy involves the sale or liquidation of a portion of business, or a major
division. Profit centre or SBU. Divestment is usually a part of rehabilitation or restructuring plan
and is adopted when a turnaround has been attempted but has proved to be unsuccessful.
Harvesting strategies a variant of the divestment strategies, involve a process of gradually letting
a company business wither away in a carefully controlled manner
Reasons for Divestment
The business that has been acquired proves to be a mismatch and cannot be integrated
within the company. Similarly a project that proves to be in viable in the long term is
divested
Persistent negative cash flows from a particular business create financial problems for the
whole company, creating a need for the divestment of that business.
Severity of competition and the inability of a firm to cope with it may cause it to divest.
Technological up gradation is required if the business is to survive but where it is not

possible for the firm to invest in it. A preferable option would be to divest
Divestment may be done because by selling off a part of a business the company may be
in a position to survive
A better alternative may be available for investment, causing a firm to divest a part of its
unprofitable business.
Divestment by one firm may be a part of merger plan executed with another firm, where
mutual exchange of unprofitable divisions may take place.
Lastly a firm may divest in order to attract the provisions of the MRTP Act or owing to
oversize and the resultant inability to manage a large business.
E.g: TATA group is a highly diversified entity with a range of businesses under its fold. They
identified their non core businesses for divestment. TOMCO was divested and sold to
Hindustan Levers as soaps and a detergent was not considered a core business for the Tatas.
Similarly, the pharmaceuticals companies of the Tatas- Merind and Tata pharma were divested
to Wockhardt. The cosmetics company Lakme was divested and sold to Hindustan Levers, as
besides being a non core business, it was found to be a non- competitive and would have
required substantial investment to be sustained.
3. Liquidation Strategies
A retrenchment strategy which is considered the most extreme and unattractive is the liquidation
strategy, which involves closing down a firm and selling its assets. It is considered as the last
resort because it leads to serious consequences such as loss of employment for workers and other
employees, termination of opportunities where a firm could pursue any future activities and the
stigma of failure
The psychological implications
The prospects of liquidation create a bad impact on the companys reputation.
For many executives who are closely associated firms, liquidation may be a traumatic
experience.
Legal aspects of liquidation: Under the Companies Act 1956, liquidation is termed as winding
up. The Act defines winding up of a company as the process whereby its life is ended and its
property administered for the benefit of its creditors and members. The Act provides for a
liquidator who takes control of the company, collect its assets, pay it debts, and finally distributes
any surplus among the members according to their rights.
The stability grand strategy is adopted by an organization when it attempts at an incremental
improvement of its functional performance by marginally changing one or more of its businesses
in terms of their respective customer groups, customer functions, and alternative technologies
either singly or collectively
E.g: A copier machine company provides better after sales service to its existing customer to
improve its company product image, and increase the sale of accessories and consumables
This strategy may be relevant for a firm operating in a reasonably certain and predictable
environment. Stability strategy can be of three types No Change Strategy, Profit Strategy,
Pause/ Proceed with caution Strategy.
1. No-Change Strategy
It is a conscious decision to do nothing new. The firm will continue with its present business
definition. When a firm has a stable internal and external environment the firm will continue
with its present strategy. The firm has no new strengths and weaknesses within the organization
and there is no opportunities or threats in the external environment. Taking into account this
situation the firm decides to maintain its strategy.
Several small and medium sized firm operating in a familiar market- more often a niche market
that is limited in scope and offering products or services through a time tested technology rely
on the No Change Strategy.
2. Profit Strategy
No firm can continue with the No Change Strategy. Sometimes things do change and the firm
is faced with the situation where it has to do something. A firm may assess the situation and
assume that its problem are short lived and will go away with time. Till then a firm tries to
sustain its profitability by adopting a profit strategy
For instance in a situation when the profit is becoming lower firm takes measures to reduce
investments, cut costs, raise prices, increase productivity and adopt other measures to solve the
temporary difficulties.
The problem arises due to unfavorable situation like economic recession, government attitude,
and industry down turn, competitive pressures and like. During this kind of situation that the firm
assumes to be temporary it would adopt profit strategies
Some firms to overcome these difficulties would sell off assets such as prime land in a
commercial area and move to suburbs. Others have removed some of its non-core business to
raise money, while others have decided to provide outsourcing service to other organizations.
3. Pause/ Proceed with Caution Strategy

It is employed by the firm that wish to test the ground before moving ahead with a full fledged
grand strategy, or by firms that have an intense pace of expansion and wish to rest for a while
before moving ahead. The purpose is to allow all the people in the organization to adapt to the
changes. It is a deliberate and conscious attempt to postpone strategic changes to a more
opportune time.
E.g: In the India shoe market dominated by Bata and Liberty, Hindustan Levers better known for
soaps and detergents, produces substantial quantity of shoes and shoe uppers for the export
market. In late 2000, it started selling a few thousand pairs in the cities to find out the market
reaction. This is a pause proceed with caution strategy before it goes full steam into another
FMCG sector that has a lot of potential
Growth strategy
Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when
an organization aims at higher growth by broadening its one or more of its business in terms of
their respective customer groups, customers functions, and alternative technologies singly or
jointly in order to improve its overall performance.
There are five types of expansion (Growth) strategies
1. Expansion through concentration
2. Expansion through integration
3. Expansion through diversification
4. Expansion through cooperation
1. Expansion through concentration
It involves converging resources in one or more of firms businesses in terms of their respective
customer needs, customer functions, or alternative technologies either singly or jointly, in such a
manner that it results in expansions. A firm that is familiar with an industry would naturally like
to invest more in known business rather than unknown business. Concentration can be done
through
Market Penetration: It involves selling more products to the same market by focusing
intensely on existing markets with its present products, increasing usage by existing
customers and increasing market share and restructures a mature market by driving out
competitors E.g.: Low pricing strategies
Market Development: It involves selling the same products to new markets by attracting
new users to its existing products. Market development can be geographic wise and
demographic wise. E.g.: XEROX Company educated small business entrepreneurs to
create new markets.
Product Development: It involves selling new products to the same markets by

introducing newer products in existing markets. E.g.: the tourism industry in India has not
been able to attract new customers in significant numbers. New products such as selling
India as a golfing or ayuerveda-based medical treatment destination are some of the
product development efforts in the tourism industry to attract more tourists.
Advantages of concentration strategies
Involves minimal organizational changes and is less threatening.
Enables the firm to specialize by gaining the in-depth knowledge of the businesses.
Enables the firm to develop competitive advantage.
Decision-making can be made easily as there is a high level of productivity.
Systems and processes within the firm become familiar to the people in the organization.
Disadvantages of concentration strategies
It is dependent on one industry if there is any worse condition in the industry the firm
will be affected.
Factors such as product obsolescence, fickleness of market, emergence of newer

technologies are threat to concentrated firm
Mangers may not be able to sustain interest and find the work less challenging.
It may lead to cash flow problems.
2. Expansion through Integration

It is done where the company attempts to widen the scope of its business definition in such a
manner that it results in serving the same set of customers. The alternative technology of the
business undergoes a change. It is combing activities related to the present activity of a firm.
Such a combination may be done through value chain. A value chain is a set of interrelated
activity performed by an organization right from the procurement of basic raw materials down to
the marketing of finished products to the ultimate customers. E.g.: Several process based
industry such as petro chemicals, steel, textiles of hydrocarbons have integrate firm
A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers.
The cost of making the items used in the manufacture of ones owns products are to be evaluated
against the cost of procuring them from suppliers. If the cost of making is less that the cost of
procurement then the firm moves up the value chain to make the item itself. Like wise if the cost
of selling the finished products is lesser than the price paid to the sellers to do the same thing
then the firm would go for direct selling.
Among the integration strategies are of two types vertical and horizontal integration.
Vertical Integration: when an organization starts making new products that serve its own
needs vertical integration takes place. Vertical integration could be of two types Back
ward and forward integration. Backward integration means moving back to the source of
raw materials while forward integration moves the organization nearer to the ultimate
customer. Generally when firms vertically integrate they do so in a complete manner that
is they move backward or forward decisively resulting in a full integration but when a
firm does not commit it fully it is possible to have partial vertical integration strategies
too. Two such partial vertical integration strategies are taper integration and quasi
integration. Taper integration requires firms to make a part of their own requirements and
to buy the rest from outsiders. Through quasi integration strategies firm purchase most of
their requirements from other firms in which they have an ownership stake. Ancillary
industrial units and outsourcing through sub contracting are adapted forms of quasi
integration.
Horizontal Integration: when an organization takes up the same type of products at the
same level of production or marketing process, it is said to follow a strategy of horizontal
integration. When a luggage company takes over its rival luggage company, it is
horizontal integration. Horizontal integration strategy may be frequently adopted with a
view to expand geographically by buying a competitors business, to increase the market
share or to benefit from economics of scale.
3. Expansion through Diversification

Diversification is a much used and much talked about set of strategies. It involves a substantial
change in the business definition singly or jointly- in terms of customer groups or alternative
technologies of one or more of a firms businesses. . There are two categories, concentric and
conglomerate diversification.
Concentric Diversification: when an organization takes up an activity in such a manner that is
related to the existing business definition of one or more of firms businesses, either in terms of
customer groups, customers functions or alternative technologies, it is called concentric
diversification. Concentric diversification may be of three types:
1. Marketing related concentric diversification: when a similar type of product is offered
with a help of unrelated technology for e.g., a company in the sewing machine business
diversifies in to kitchen ware and household appliances, which are sold to house wives
through a chain of retails stores.
2. Technology- related concentric diversification: when a new type of product or service is
provided with the help of related technology, for e.g., a leasing firm offering hirepurchase services to institutional customers also starts consumer financing for the
purchase of durable sot individual customers.
3. Marketing- technology related concentric diversification: when a similar type of product
is provided with the help of related technology, for e.g., a rain coat manufacturer makes
other rubber based items, such as water proof shoes and rubber gloves sold through the
same retail outlets
Conglomerate Diversification: when an organization adopts a strategy which requires taking of
those activities which are unrelated to the existing businesses definition of one or more of its
businesses either in terms of their respective customer groups, customer functions or alternative
technologies. Example of Indian company which have adopted apart of growth and expansion
through conglomerate diversification the classic examples is of ITC, a cigarette company
diversifying into the hotel industry
4. Expansion through Cooperation
The term cooperation expresses the idea of simultaneous competition and cooperation among
rival firms for mutual benefits. Cooperative strategies could be of the following types:
1. Mergers
2. Takeovers
3. Joint ventures
4. Strategic alliances
Mergers Strategies: A merger is a combination of two or more organizations in which one
acquires the assets and liabilities of the other in exchange for shares or cash or both the
organization are dissolved and the assets and liabilities are combined and new stock is issued.
For the organization, which acquires another, it is an acquisition. For the organization, which is
acquired, it is a merger. If both the organization dissolves their identity to create a new
organization, it is consolidation. There are different types of mergers they are horizontal merger,
vertical merger, concentric merger and conglomerate merger.
Horizontal Mergers: it takes place when there is a combination of two or more

organizations in the same business. E.g: A company making footwear combines with
another footwear company, or a retailer of pharmaceutical combines with another retailer
in the same businesses.
Vertical Mergers: It takes place when there is a combination of two or more

organizations, not necessarily in the same business, which create complementarities
either in terms of supply of raw materials (input) or marketing of goods and services
(outputs). E.g: A footwear company combines with a leather tannery or with a chain shoe
retail stores
Concentric Mergers: It takes place when there is a combination of two or more

organizations related to each other either in terms of customer functions, customer
groups, or the alternative technologies used. E.g: A footwear company combining with a
hosiery firm making socks or another specialty footwear company, or with a leather
goods company making purse, hand bags and so on
Conglomerate Mergers: It takes place when there is a combination of two or more

organizations unrelated to each other, either in terms of customer functions, customer
groups, or alternative technologies used. E.g: A footwear company combining with a
pharmaceutical firm.
Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by

Indian companies. Acquisitions usually are based on the strong motivation of the buyer firm to
acquire. Takeovers are frequently classified as hostile takeovers (which are against the wishes of
the acquired firm) and friendly takeovers (by mutual consent)
Friendly takeovers are where a takeover is not resisted or opposed, by the existing
management or professionals. E.g: Tata Teas takeover of Consolidated Coffee (a grower
of coffee beans) and Asian Coffee (a processor) is an example of a friendly takeover.
Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the

existing management or professionals.
Joint Venture Strategies: Joint ventures are a special case of consolidation where two or more
companies from a temporary form a temporary partnership (also called a consortium) for a
specified purpose. They occur when an independent firm is created by at least two other firms.
Joint ventures may be useful to gain access to a new business mainly under these conditions
When an activity is uneconomical for an organization to do alone.
When the risk of business has to be shared.
When the distinctive competence of two or more organization can be brought together.
When the organization has to overcome the hurdles, such as import quotas, tariffs,
nationalistic political interests, and cultural roadblocks.
Strategic alliances: They are partnership between firms whereby their resources, capabilities
and core competencies are combined to pursue mutual interest to develop, manufacture, or
distribute goods or services. There are various advantages:
Two or more firms unite to pursue a set of agreed upon goals but remain independent
subsequent to the formation of the alliances. A pooling of resources, investment and risks
occurs for mutual gain
The partner firms contribute on a continuing basis in one or more key strategic areas, for
example, technology, product and so forth.
Strategic alliances offer a growth route in which merging ones entity, acquiring or being
acquired, or creating a joint venture may not be required
Global partners can help local firms by developing global quality consciousness, creating
adherence to international quality standards, providing access to state of the art
technology, gaining entry to world wide mass markets, and making funds available for
expansions.
Restructuring strategy:
Organizational Restructuring hovers around the changes in organizational design. It brings
about changes in decision making, information flow and management style. Though this
restructuring, just like all other restructurings, is initiated by the CEO, it requires the participation
of all hierarchies of an organization, especially the employees. Organizational restructuring,
combined with portfolio restructuring and financial restructuring makes meaningful changes
materialize and touches upon the following aspects:
1) Centralization/decentralization of the organization: Functions or units of the organization
may be centralized or decentralized to create new linkages to better implement the strategy.
Nature of Decision making in the organization may be changed due to the changes in reporting
levels and hierarchy.
2) Organizational Culture: The essential fabric of the firm i.e. its culture is affected as a
consequence of changes in reporting levels and hierarchical levels.
3) Training and Redeployment: Imparting training to the workforce enables the organization to
cope better with the changing environment. At the same time some employees need to be
redeployed. However, training and redeployment may be inadequate at times and therefore
inducting educated and skilled professionals at different levels becomes necessary.
4) Changes in HR Policies: The current HR policies of the organization need to be changed in
accordance with the changing scenario. The HR department needs enable change
management.
5) Rationalization of Pay Structure: The present pay structure should be modified and reevaluated to maintain the internal and external equity among the employees.
Symptoms indicating the need for organizational restructuring
Parts of the organization are significantly over or under staffed.
Organizational communications are inconsistent, fragmented, and inefficient.
Technology and/or innovation are creating changes in workflow and production

processes.
Significant staffing increases or decreases are contemplated.
New skills and capabilities are needed to meet current or expected operational
requirements.
Accountability for results are not clearly communicated and measurable resulting in
subjective and biased performance appraisals.
Personnel retention and turnover is a significant problem.
Workforce productivity is stagnant or deteriorating.
Morale is deteriorating
Benefits of Organizational Restructuring

i. Lower cost
ii. Better formulation and implementation of strategies
Issues in Organizational Restructuring
i. Culture.
ii. Downsizing
iii. Loss of Employee Morale.
The approaches that various companies, large and small, public and private, adopted in their
efforts to restructure in terms of DOWNSIZING differed in terms of how they viewed their
employees.
One group viewed employees as costs to be cut. These are the "downsizers".
The other group viewed employees as assets to be developed. These are the
"responsible restructurers."
The 7 principles of a successful restructure

Even as the economic outlook appears to brighten, the fact remains that many organisations can
no longer operate as they had been. A key feature of this changing landscape is the need for
organisations to restructure.
Here are seven broad restructuring principles to help make any restructure a successful
one.
1. Align structure to strategy
All restructures must align to strategy. This may seem self-evident, yet a significant number of
organisations fail to do so. For example, if local conditions are a predominant factor, then stress
local sales and marketing functions rather than a centralised behemoth that then tries to matrix
with local elements.
2. Reduce complexity
Simply put, complexity costs. Whether it is a complex organisational structure, a complex
product offering or complex transactional processes, the added cost of complexity can be a drag
on performance.
To mitigate complexity, there are three considerations that help with organisational design:
Design structure for strategy before you design for specific personnel. Organisational
redesigns which are a compromise between strategic intent and line management
preferences inevitably add complexity. So, while internal political intrigue is unavoidable,
at least start with a clean and clear design that matches to strategy.
Avoid making leadership roles too complex (see principle #5).
Minimise the use of matrices. They introduce measurement overhead and a lack of clear
direction to the staff.
3. Focus on core activity

Remove noise (inefficiency in processes) and enhance core before restructuring roles. This
means that you will need to know what people are doing today by obtaining a detailed
understanding of tasks by role. This ensures that no value-added activities are thrown out when
removing a role. Similarly, duplication and redundant activity can be removed at the time of the
restructure.
4. Create feasible roles
Dont overload roles restructures generally leave an organisation with fewer people to do the
same amount of work. When restructuring to reduce headcount, make sure you understand the
current workload of employees.
This will help to ensure you design roles that are neither too heavily laden nor indeed too light.
Furthermore, role design must take into account realistic groupings of skills. Packing a role with
too many distinct skill-sets reduces the pool of durable candidates.
5. Balance own work and supervisory load of managers
The case of leadership or management loading can be particularly troublesome in restructures.

Often, the inability of managers to focus on leadership tasks due to increased output
requirements can create significant problems for an organisation. For example, time spent
mentoring and coaching staff drops off, staff become disengaged, more issues arise due to staff
errors and managers end up spending more time resolving them. To ensure management are
appropriately loaded, its critical to balance three elements:
1. The number of staff directly managed or supervised.

2. Staff ability to perform work without supervision.
3. The amount of own work managers have to do on top of their leadership activity.
6. Implement with clarity
Often there is confusion in the first weeks and months after an initial restructure. After all, who is
supposed to be responsible for what? The answer is to clarify roles and responsibilities from the
beginning, identify all functions (activities, tasks and decisions) that have to be accomplished for
effective operation, clarify who should be involved and be specific about accountability.
7. Maintain flexibility
Finally, it is important not to cut your resources too fine. If the organisational change is material,
you will need resource flexibility in the first few months. So even as you strive to operate more
efficiently, be sure to give yourself some wriggle room in your staffing. Flexibility applies not
only to staff members, but to staff capability.
Leave yourself and your leadership team some room to respond to capability gaps in the new
structure.
Common ways to do this include: a staged transition so there are fewer capability gaps to
manage at a point in time, and a temporary use of contract resources until in-house staff become
familiar with their roles.
http://www.universalteacherpublications.com/mba/free-project/p3/page10.htm
UNIT:5
STRATEGY IMPLEMENTATION:
Organizations successful at
strategy implementation effectively
manage
six key supporting factors:
1.
2.
3.
4.
5.
6.
Action Planning
Organization Structure
Human Resources
The Annual Business Plan
Monitoring and Control
Linkage.
Action Planning
First, organizations successful at implementing strategy develop detailed action plans...
chronological lists of action steps (tactics) which add the necessary detail to their
strategies. And assign responsibility to a specific individual for accomplishing each of
those action steps. Also, they set a due date and estimate the resources required to
accomplish each of their action steps. Thus they translate their broad strategy statement
into a number of specific work assignments.
Organizational Structure
Next, those successful at implementing strategy give thought to their organizational
structure. They ask if their intended strategy fits their current structure. And they ask a
deeper question as well... "Is the organization's current structure appropriate to the
intended strategy?"
We're reminded here of a client we worked with some years ago. The company was
experiencing problems implementing its strategy calling for the development of two new
products.
The reason the firm had been unable to develop those products was simple... they had
never organized to do so. Lacking the necessary commitment for new product
development, management didn't establish an R&D group. Rather, it assigned its
manufacturing engineering group the job of new product development... and hired two
junior engineers for the task. Since the primary function of the manufacturing engineering
group was to keep the factory humming, those engineers kept getting pulled off their
"new product" projects and into the role of the manufacturing support. Result no new
products.
Human Resource Factors
Organizations successful at strategy implementation consider the human resource factor
in making strategies happen. Further, they realize that the human resource issue is really a
two part story. First, consideration of human resources requires that management think
about the organization's communication needs. That they articulate the strategies so that
those charged with developing the corresponding action steps (tactics) fully understand
the strategy they're to implement.
Second, managers successful at implementation are aware of the effects each new strategy
will have on their human resource needs. They ask themselves the questions... "How
much change does this strategy call for?" And, "How quickly must we provide for that
change?" And, "What are the human resource implications of our answers to those two
questions?"
In answering these questions, they'll decide whether to allow time for employees to grow
through experience, to introduce training, or to hire new employees.
The Annual Business Plan
Organizations successful at implementation are aware of their need to fund their intended
strategies. And they begin to think about that necessary financial commitment early in the
planning process. First, they "ballpark" the financial requirements when they first develop
their strategy. Later when developing their action plans, they "firm up" that commitment.
As a client of ours explains, they "dollarize" their strategy. That way, they link their
strategic plan to their annual business plan (and their budget). And they eliminate the
"surprises" they might otherwise receive at budgeting time.
Monitoring & Control
Monitoring and controlling the plan includes a periodic look to see if you're on course. It
also includes consideration of options to get a strategy once derailed back on track. Those
options (listed in order of increasing seriousness) include changing the schedule,

changing the action steps (tactics), changing the strategy or (as a last resort) changing the
objective. (For more on this point, see "Monitoring Implementation of Your Strategic
Plan.")
Linkage - The Foundation for Everything Else
Many organizations successfully establish the above five supporting factors. They
develop action plans, consider organizational structure, take a close look at their human
resource needs, fund their strategies through their annual business plan, and develop a
plan to monitor and control their strategies and tactics. And yet they still fail to
successfully implement those strategies and tactics. The reason, most often, is they
lack linkage. Linkage is simply the tying together of all the activities of the
organization...to make sure that all of the organizational resources are "rowing in the
same direction."
It isn't enough to manage one, two or a few strategy supporting factors. To successfully
implement your strategies, you've go to manage them all. And make sure you link them
together.
Strategies require "linkage" both vertically and horizontally. Vertical linkages establish
coordination and support between corporate, divisional and departmental plans. For
example, a divisional strategy calling for development of a new product should be driven
by a corporate objective calling for growth, perhaps - and on a knowledge of available
resources - capital resources available from corporate as well as human and
technological resources in the R&D department.
Linkages which are horizontal - across departments, across regional offices, across
manufacturing plants or divisions require coordination and cooperation to get the
organizational units "all playing in harmony." For example, a strategy calling for
introduction of a new product requires the combined efforts of and thus coordination
and cooperation among the R&D, the marketing, and the manufacturing
departments. For more on the subject of linkage, please see Linkage: The Foundation for
Everything Else.
Relation Between Strategy Formulation And Strategy

Implementation:
In order to achieve its objectives, an organization must not only formulate but also
implement its strategies effectively. The Figure represents the importance of both tasks in
matrix form and suggests the probable outcomes of the four possible combinations of these
variables:
- Success is the most likely outcome when strategy is appropriate and implementation good.
-
Roulette involves
situation
wherein
poor
strategy
is
implemented
well.
- Trouble is characterized by situations wherein an appropriate strategy is poorly

implemented.
- Failure involves situations wherein a poor strategy is poorly implemented.
Diagnosing why a strategy failed in the roulette, trouble, and failure cells in order to find a
remedy requires the analysis of both formulation and implementation.
S.Certo and J. Peter proposed a five-stage model of the strategy implementation process:
1. determining how much the organization will have to change in order to implement the
strategy under consideration, under consideration;
2. analyzing the formal and informal structures of the organization;
3. analyzing the "culture" of the organization;
4. selecting an appropriate approach to implementing the strategy;
5. implementing the strategy and evaluating the results.
Implementation is successfully initiated in three interrelated stages:
1. Identification of measurable, mutually determined annual objectives.
2. Development of specific functional strategies.
3. Development and communication of concise policies to guide decisions.
A General Framework For Strategy Implementation:

The first step in implementation is identifying the activities, decisions, and relationships
critical to accomplishing the activities.
There are six principal administrative tasks that shape a manager's action agenda for
implementing strategy. In general, every unit of an organization has to ask, "What is required
for us to implement our part of the overall strategic plan and how can we bets get it
done?".
The specific components of each of the six strategy-implementation tasks:
1. Building an organization capable of executing the strategy. The organization must
have the structure necessary to turn the strategy into reality. Furthermore, the firm's
personnel must possess the skill needed to execute the strategy successfully. Related
to this is the need to assign the responsibility for accomplish key implementation tasks
to the right individuals or groups.
2. Establishing a strategy-supportive budget. If the firm is to accomplish strategic
objectives, top management must provide the people, equipment, facilities, and other
resources to carry out its part of the strategic plan. Further, once the strategy has
been decided on, the key tasks to performed and kinds of decision required must be
identified, formal plans must also be developed. The tasks should be arranged in a
sequence comprising a plan of action within targets to be achieved at specific dates.
3. Installing internal administrative support systems. Internal systems are policies and
procedures to establish desired types of behavior, information systems to provide
strategy-critical information on a timely basis, and whatever inventory, materials
management, customer service, cost accounting, and other administrative systems are
needed to give the organization important strategy-executing capability. These
internal systems must support the management process, the way the managers in an
organization work together, as well as monitor strategic progress.
4. Devising rewards and incentives that are tightly linked to objectives and strategy.
People and departments of the firm must be influenced, through incentives,
constraints, control, standards, and rewards, to accomplish the strategy.
5. Shaping the corporate culture to fit the strategy. A strategy-supportive corporate
culture causes the organization to work hard (and intelligently) toward the
accomplishment of the strategy.
6. Exercising strategic leadership. Strategic leadership consists of obtaining
commitment to the strategy and its accomplishment. It also involves the constructive
use of power and politics, and politics in building a consensus to support the strategy.
The 7-s's Framework

McKinsey and Company have developed a model know as, "the seven elements of strategic
fit," or the "7-S's."
7-S's include:
1. strategy (the coherent set of actions selected as a course of action);

2. structure (the division of tasks as shown on the organization chart);
3. systems (the processes and flows that show how an organization gets things done);
4. style (how management behaves);
5. staff (the people in the organization);
6. shared-values (values shared by all in the organization); and
7. skills (capabilities possessed by the organization).
The underlying concept of the model is that all seven of these variables must "fit" with one
another in order for strategy to be successfully implemented.
Operationalizing Strategy
Introduction
The whole concept of strategy and strategic thinking is typically advanced with an almost
mystical aura as a topic that is deeply intellectual and complex. The subject is indeed critical to
business theory, and there has been significant thought and much respected brainpower applied
to defining it, analyzing it and advising about it. However at the end of the day it is important to
remember that firm isnt judged by its strategy but by its success as a business. Business success
comes from implementation.
Businesses need a strategy. But they need strategic thinking even more. They dont need over
complicated or over nuanced concepts. They dont need anyone to tell them what their strategy
should be (at any price). Most firms though could use a disciplined approach to help surface and
organize what they already know as owners and operators about their business. Applying this
knowledge is the gist of Operationalizing strategy.
Strategy Defined
Lets start with what strategy is not. It is not:
Planning
Financial management
Innovation
Management system
A dirty word
Just the province of big companies.
Strategy is simply the process of defining decisions or choices required to meet specific business
objectives.
Note the emphasis on process. The output of the process is the choices the firm has made about
how they will accomplish something. An organization has to separate the means of achievement
from the ends or the objectives they have defined. Success is defined solely by the firm and its
stakeholders. In order to develop a vision you first have to understand where you are in order to
set the context for that vision. The vision guides your examination of the fundamental tenets for
any business. In the context of your vision you ask and answer many questions, define goals, set
objectives and develop specific operating plans.
Strategy and strategic thinking often become confused. You may have a complex and detailed
strategy or you may just have a set of ideas. Your strategy could be a boat anchor disguised as an
important looking binder with hundreds of pages, or it could be a number of to-do lists. The
process by which you developed any or all of these is accurately labeled strategic thinking.
Operationalizing
The format of the output is nowhere near as critical as your ability to be guided by it to business
success. That ability is often called operational effectivity. At Arketype we call it
operationalizing a strategy but it must be the goal of any strategic process. The discipline and
skill needed to implement or deploy a strategy is every bit as rare as the expertise and dedication
required to craft strategy. The two must be seen as different sides of the same coin. impacts, it is
usually the negative ones that concern us in the context of implementing strategy.
The mere act of defining metrics for managing progress against objectives should force
discussion and analysis of possible risks and uncertainties.
Annual objectives:
Establishing Annual Objectives in Strategy

Implementation Process:
Establishing annual objectives is a decentralized activity that directly involves all managers in an
organization. Active participation in establishing annual objectives can lead to acceptance and
commitment. Annual objectives are essential for strategy implementation because they
( 1 ) represent the basis for allocating resources;
( 2 ) are a primary mechanism for evaluating managers'
( 3 ) are the major instrument for monitoring progress toward achieving long-term objectives;
and
( 4 ) establish organizational, divisional, and departmental priorities. Considerable time and
effort should be devoted to ensuring that annual objectives are well conceived, consistent with
long-term objectives, and supportive of strategies to be implemented. Approving, revising, or
rejecting annual objectives in much more than a rubber-stamp activity.
The purpose of annual objectives can be summarized a s follows.
Clearly stated and communicated objective are critical to success in all types and sizes of firms.
Annual objectives, stated in terms of profitability, growth, and maker share by business segment,
geographic area, customer groups, and product, are common in organization.
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. Objectives
should state quantity, quality, cost, and time-and also be verifiable. Terms and phrases such as
maximize, minimize, as soon as possible, and adequate should be avoided.
Annual objectives should be compatible with employees'' and managers'' values and should be
supported by clearly stated policies. More of something is not always better. Improved quality or
reduced cost may, for example, e more important than quantity. It is important to tie rewards and
sanctions to annual objectives so that employees and mangers understand that achieving
objectives is critical to successful strategy implementation. Clear annual objectives do not
guarantee successful strategy implementation, but they do increase the likelihood that personal
and organizational aims can be accomplished. Overemphasis on achieving objectives can result
in undesirable conduct, such as faking the numbers, distorting the records, and letting objectives
become ends in themselves. Managers must be alert to these potential problems.
Functional Strategies
The success of your business-unit strategy depends not only on how well your firm positions
itself and competes in the given market segment, but also on how well you coordinate the
various functions required to design, manufacture, deliver, and support the product or service.
Therefore, functional strategies are vitally important. They can
be a major determinant of the competitive advantage of your
business, since they are based on competencies emanating from
your firm's internal processes. These internal processes add
value (the value chain of the business) and give the firm the
ability to implement certain business-unit strategies. Value chain and functional strategies are
supported by tools such as total quality management, re-engineering, and time-based
competition. These techniques, however, are not strategy tools in themselves, because they only
supportnot determinewhat your company's unique and sustainable competitive advantage
will be.
There are several types of functional strategies, many of which are addressed in other courses in
the typical business curriculum. Module 14 of your text focuses on new product
development/innovation and research and development (R&D)/technology strategies.
Maidique and Patch suggest four major technology-related strategies your firm may choose.
Each has different requirements for R&D, manufacturing, marketing, finance, organization and
timing. The technology strategy adopted by your company may be the propulsive force behind
other actions you take.
A first-to-market strategy means getting the product to the market
before the competition does. This strategy requires extensive research

and development and emphasizes medium-scale manufacturing. It will be
important to stress stimulation of primary demand and flexibility. Your
firm should also encourage risk-taking, since in the first-to-market
strategy you may need access to risk capital. Finally, your company will
want to enter the market as early as possible in the product's life cycle.
In the second-to-market technology strategy, you will want to enter the
market when the product is just beginning its growth stage. This strategy
requires advanced, flexible, and responsive research and development,
since it is very important for you to be able to differentiate your product
from the original and to stimulate secondary demand. Your firm should
also be able to swing quickly into medium-scale manufacturing, an
activity that may require access on short notice to medium to large
quantities of capital. Flexibility and efficiency are the buzz words if you
choose this "fast follower" strategy.
In the cost minimization or "late-to-market" strategy, you attempt (after
noting your competition's tactics and results) to avoid making their
mistakes. In this strategy, your product enters the market during the lategrowth or early-maturing stages in its life cycle. For this strategy to be
successful, your company must minimize selling and distribution costs,
have access to large amounts of capital, and have the capabilities for
efficient, large-scale production. When using this strategy, you should
focus your R&D on developing skills in cost-effective production. Your
company organization should stress hierarchical control, efficiency, and
enforcement of procedures.
In a market segmentation strategy, you will generally enter the market
during the growth stage of the product life cycle, although you may enter
at almost any stage. This strategy is often used by smaller producers who
have identified and reached certain segments of the market. A favorable
relationship has usually been achieved by offering a particular feature or
special service as part of the product. Flexibility is vital in both the
manufacturing and organization departments of your company in

practicing market segmentation. You will need financial backing in
medium to large amounts, and your R&D department must key its
operations toward custom engineering and advanced product-design.
Why is Concise Communication Important for Developing

Effective Strategic Leadership?
Concise communication is essential for the success of any organization and is especially
important to develop effective strategic leadership. The focus of strategic leadership is to
build and maintain a sustainable competitive advantage for the organization, according to
Ralph Stacy, author of "Learning as an Activity of Interdependent People." Concise
communication is significant in developing effective strategic leadership, as it is typically the
responsibility of leaders to translate the desires of those at the upper echelons of the
organization to those at the bottom.
1.
o
Strategic Management
The strategic planning process is a common method used to develop and
maintain a sustainable competitive advantage for an organization. In the strategic planning
process, organizational leaders develop a mission statement for the organization, explaining
its reason for existence. Managers and leaders must then develop strategies to meet this
purpose. The development of effective strategic leadership is vital to the success of the
strategic planning process, and concise communication is an essential element of this
development.
Alignment
o
Strategic leadership typically involves the alignment of the day-to-day work

activities with the organization's mission statement using strategic leadership. Concise
communication is essential to the success of any strategic management plan. For
operational activities to align with the mission statement, strategic leaders must ensure that
workers maintain a clear understanding of that mission statement. Senior managers must
encourage the clarification of expectations so workers' understanding of what is expected of
them measures up to strategic leadership metrics.
Sender/Receiver Communication Model

One of the most essential tasks of the strategic leader is to communicate

organizational strategies to those who will implement them. Concise communication is a
vital element in this process. The sender/receiver communication model is a useful tool for
developing these core competencies within strategic leaders. Every communication involves
a sender and a receiver. For strategic leaders to be truly effective, they must understand the
importance of concise communications to ensure the messages they send to workers are
received in the manner intended.
Leaders vs. Managers

o
While not all leaders are necessarily managers, it is essential that all
managers be properly developed to provide effective strategic leadership for the
organization. Warren Bennis, author of "On Becoming a Leader," describes several
differences between leaders and managers. For example, managers are administrators,
while leaders are innovators. Managers focus on completing tasks, while leaders focus on
people. Concise communication is an essential tool of the effective leader.
Institutionalizing the strategic structure:

Institutionalization of Strategy:
The first basic action that is required for putting a strategy into operation
is its institutionalization. Since strategy does not become either
acceptable or effective by virtue of being well designed and clearly
announced, the successful implementation of strategy requires that the
strategy framer acts as its promoter and defender. Often strategy choice
becomes a personal choice of the strategist because his personality
variables become an influential factor in strategy formulation. Thus, it
becomes a personal strategy of the strategist. Therefore, there is an
urgent need for the institutionalization of strategy because without it, the
strategy is subject to being undermined. Therefore, it is the role of the
strategist to present the strategy to the members of the organization in a
way that appeals to them and brings their support. This will put
organizational people to feel that it is their own strategy rather than the
strategy imposed on them. Such a feeling creates commitment so
essential for making strategy successful.
FORMUTING FUNCTIONAL STRATEGY
Recall from Chapter 4 that functional strategy provides an action plan for strategy
implementation at the level of the work group and individual. It puts corporate and
business strategy into operation by defining the activities needed for implementation.
Depending on the specific strategy to be implemented, functional strategy nay need to
be formulated by a variety of work groups within the organization Consider, for
example, the functional strategies that would be necessary if Coca-Cola decided to
develop a new line of fruit juices. The research and development department would
have to develop a formula; the marketing department would have to conduct taste
tests, develop promotional campaigns, and identify the appropriate distribution
channels; and the production department would have to purchase new equipment and
perhaps build new facilities to produce the fruit juice line. Table 5.4 outlines just a few
of the functional strategies necessary to introduce a new line of fruit juices.
The most significant challenge lies in coordinating the activities of the various work
groups that must work together to implement the strategy. The strategies must be
consistent both within each functional area of the business (such as the marketing
department) and between functional areas (such as the marketing department and the
production department).48 For example, if Coca-Cola's new fruit juice line is to be
priced at a premium level, it must be promoted to buyers who desire a premium
product and distributed through channels that reach those buyers. These marketing
decisions must be consistent. Further, the production department must purchase highquality raw materials and produce a product that is worthy of a premium price.
Without consistency within and between the work groups of the organization, the
implementation process is sure to fail.
EVERY BUSINESS UNIT DEVELOPS FUNCTIONAL STRATEGIES FOR EACH MAJOR
DEPARTMENT
MARKETING STRATEGY
FINANCIAL STRATEGY
RESEARCH & DEVELOPMENT STRATEGY
OPERATIONS STRATEGY
PURCHASING STRATEGY
LOGISTICS STRATEGY
HUMAN RESOURCES STRATEGY
INFORMATION TECHNOLOGY STRATEGY
BASIC MARKET-PRODUCT STRATEGIES : THE CUSTOMERPRODUCT DECISION:

MARKETING STRATEGIES: THE CUSTOMER-PRODUCT DECISION:
MARKET PENETRATION STRATEGY
(Stay in current markets with existing products)
INCREASE RATE OF PURCHASE/CONSUMPTION
ATTRACT RIVALS CUSTOMERS
BUY OUT RIVALS
CONVERT NON-USERS INTO CURRENT USERS
MARKET DEVELOPMENT STRATEGY
(Find new markets for current products)
ENTER NEW GEOGRAPHICAL MARKETS
FIND NEW USES FOR EXISTING PRODUCTS
FIND NEW TARGET MARKETS
PRODUCT DEVELOPMENT STRATEGY
(Develop new products for existing markets)
IMPROVE FEATURES
IMPROVE QUALITY/RELIABILITY/DURABILITY
ENHANCE AESTHETICS/STYLING
ADD MODELS
DIVERSIFICATION STRATEGY
(Develop new products for new markets)
THE 4 PS OF MARKETING:
MARKETING MIX ISSUES
Product Strategy
Specifying the exact product or service to be offered
New or existing product? for new or existing customers?
Promotion Strategy
How the product or service is to be communicated to customers
Push - spend $$$ on promotions and discounts to push products
Pull - spend $ to build brand awareness so consumers will ask for it by

name
Channel or Place Strategy
Selecting the method for distributing the product or service
Distribute through dealer networks or through mass merchandisers?
Sell directly to consumers through own stores or through internet?
Price Strategy
Establishing a price for the product or service
Skim pricing (high) when you are a pioneer
Penetration pricing (low) builds market shares
Dynamic pricing (prices vary frequently) based on demand/availability
FINANCIAL MANAGEMENT STRATEGIES:

CAPITAL ACQUISITIONS
Debt Leverage, Stock Sales, & Gains from Operations
Equity financing is preferred for related diversification
Debt financing is preferred for unrelated diversification
Leveraged buyouts (LBOs) make the acquired firm pay off the debt
CAN WE GROW BY RELYING ON ONLY INTERNAL CASH FLOWS?

DO STOCK SALES DILUTE OWNERSHIP CONTROL?
DOES A LARGE DEBT RATIO CRIPPLE FUTURE GROWTH?
DOES STRONG LEVERAGE BOOST EARNINGS PER SHARE?
DOES HIGH DEBT DETER TAKEOVER ATTEMPTS?
DO MOST LBOs UNDERPERFORM 3-4 YEARS AFTER THE BUYOUT?
RESOURCE ALLOCATIONS
Dividends, Stock Price, & Reinvestment
Reinvest earnings in fast-growing companies
Keeping the stockholders contented with consistent dividends
Use of stock splits ( or reverses) to maintain high stock prices
Tracking stock keeps interest in company, but doesnt allow takeover
RESEARCH & DEVELOPMENT STRATEGIES:
LEVEL OF INNOVATION
Pioneer (Leader) v. Copy Cat (Follower)
Technological leadership fits well with differentiation
A follower strategy makes sense with cost-leader strategies
Are we better at finding applications and customer adaptations than

actually inventing something really new?
Different types of R & D (basic, product, process)
Where is the firms historic expertise / advantage?
How competent are the R & D Personnel?
ACQUISITION OF TECHNOLOGY
Internally developed v. acquired from outside
Technology Scouts
Strategic Technology Alliances
Acquire minority stake in promising high-tech ventures
OPERATIONS STRATEGIES:
MANUFACTURING LOCATION
Internal Production v. Outsourcing
Domestic Plants v. International Locations
SYSTEM LAYOUT
Product v. Process Layouts
Job Shops v. Mass Production
Job shop/small batch production fits well with a differentiation
strategy
Continuous production / dedicated transfer lines helps achieve
cost leadership
Use of robots and CAD/CAM v. Labor intense manufacturing
Modular Manufacturing and just-in-time delivery of subassemblies

Continuous improvement systems lower costs and increase
quality
PURCHASING STRATEGIES:
SOURCING COMPONENTS AND SUPPLIES
WHERE CAN THE HIGHEST QUALITY COMPONENTS BE FOUND?
Outsourcing (our firm buys everything)
Buying on the Open Market (Spot) (prices fluctuate)
Long-Term Contracts with Multiple Suppliers (low bid)
Sole Sourcing (only one supplier) improves quality
Parallel Sourcing (two suppliers) provides protection
Backward Integration
suppliers we use)
(our firm has an ownership stake in the
Quasi-integration (minority ownership position in a supplier)

Tapered (produce some of what we need, but not all)
Full (produce all of our own needs)
Use of Component Inventories v. Just-in-time supply delivery
LOGISTICS STRATEGIES:
DO WE HAVE GOODS THAT MUST BE TRANSPORTED OR
DELIVERED?
TYPE OF MATERIALS TRANSPORTED (Bulky or Compact?)
Raw Materials, Supplies, & Components
Finished Goods
BEST MODE OF TRANSPORTATION
AIR
RAIL
TRUCK
BARGE
DO WE WANT DEPENDABILITY, LOW COST, OR HIGH QUALITY SERVICE?
OUTSOURCE TRANSPORTATION OR DO IT YOURSELF?
CONTRACT WITH OTHERS
Use Multiple Shippers v. Just One (UPS)?
Consider batch deliveries v. Just-in-time arrangements?
OWNERSHIP IN DISTRIBUTION CHAIN
Quasi
Tapered
Full
HUMAN RESOURCES STRATEGIES:
TALENT ACQUISITION
Recruit from Outside v. Internal Development
Require experienced, highly-skilled workers v. we will train you
Offer top dollar wages & benefits v. mentoring and a career
WORK ARRANGEMENTS
Individual Jobs v. Team Positions

Narrowly-defined jobs v. Positions with discretion and autonomy
On-premises Work v. Telecommuting Options
MOTIVATION & APPRAISAL
Extrinsic v. Intrinsic Reward Systems
Assessment for development v. assessment for rewards
Incentives for ideas & originality v. incentives for conformity?
INFORMATION SYSTEMS STRATEGIES:
WORKER PRODUCTIVITY & CONNECTIVITY
Employees can be networked together across the globe
Instant translation software for global firms
Follow the Sun Managementpass projects on to the next team
SALES & INVENTORY MANAGEMENT

Internet sales and development of customer databases
Instant sales reports allow immediate inventory reorders
SHIPPING & TRACKING GOODS
FEDEX PowerShip softwarestores addresses, prints labels, etc.
Tracking the progress of package shipmentFEDEX & UPS
WHICH FUNCTIONS CAN WE OUTSOURCE?
GLOBAL OUTSOURCING INCREASES EFFICIENCY & QUALITY
Averages 9% reduction in costs and 15% increase in capacity and quality
Up to 70% of Boeing planes are outsourced..built in just 4 mos v. 1 year
AMA SURVEY -- 94% OUTSOURCE AT LEAST ONE ACTIVITY
78% General & Administrative activities
77% Human Resources
66% Transportation & Distribution
63% Information Systems
56% Manufacturing
51% Marketing
18% Finance & Accounting
25% were disappointed in their outsourcing results

51% brought the outsourced activity back in-house
MOST LIKELY ACTIVITIES TO OUTSOURCE
Customer Service
Bookkeeping/Financial/Clerical
Sales/Telemarketing
Software Programming
Mailroom
OUTSOURCING DISADVANTAGES:
CUSTOMER COMPLAINTS & UNEXPECTED DELAYS
LOCKED
INTO
COMPETITIVE
LONG-TERM
CONTRACTS
THAT
ARENT
THE FIRM DOESNT LEARN NEW SKILLS & DEVELOP CORE

COMPETENCIES
A SURVEY OF 129 OUTSOURCING FIRMS

Half of the projects undertaken failed to achieve the anticipated savings
Software produced in India had 10% more bugs than comparable US
projects
SEVEN MAJOR OUTSOURCING ERRORS
Outsourcing activities that shouldnt be outsourced
Failed to keep core activities in-house
Selecting the wrong vendor
Picked a vendor that wasnt trustworthy, or who lacks state-of-the art
processes
Writing a poor contract
Balance of power favors the vendorlocked in over a long period of
time
Overlooking personnel issuesmy area of expertise was outsourced!
Losing Control over the Outsourced ActivityWere at their mercy!
Overlooking the hidden costs of outsourcingTransaction fees?
Failing to plan an exit strategyHow can we reverse out of this deal?
SUCCESSFUL OUTSOURCING:
KEY TO SUCCESS:
ONLY OUTSOURCE ACTIVITIES THAT ARE NOT RELATED TO THE FIRMS
DISTINCTIVE COMPETENCIES
TOTAL VALUE-ADDED to Firms
PRODUCTS & SERVICES
LOW
HIGH
--------------------------------------------TAPERED
FULL VERTICAL
INTEGRATION
ACTIVITYS
Produce Some
POTENTIAL FOR
Internally
COMPETITIVE
HIGH
INTEGRATION
Produce All
Internally
---------------------------------------------
ADVANTAGE
OUTSOURCE
OUTSOURCE
COMPLETELY
COMPLETELY
Buy on Open Market
Use Long-Term Contracts
LOW
-----------------------------------------
----
STRATEGIES TO AVOID:
DUMB STRATEGIES
FOLLOW THE LEADER
We can do that toobut maybe its not worth copying
HIT ANOTHER HOME RUN
A pioneer company looking to get lucky again
ARMS RACE
Battles which increase costs and decrease revenues
DO EVERYTHING
Offering something for everyonetrying to please everyone
LOSING HAND
Pouring $$ down the knotholeinvestment because of prior commitments

NONE OF THESE STRATEGIES WILL CREATE A SUSTAINABLE
COMPETITIVE ADVANTAGE FOR THE FIRM
INSTITUTIONALIZING STRATEGY
While functional strategies are essential to the strategy implementation process, it is
also important that the strategy be institutionalized within the organization.
Institutionalizing a strategy means that every member, work group, department, and
division of the organization subscribes to and supports the organization's strategy with
its plans and actions. Theory suggests that a fit must exist between the strategy of the
organization and its structure, culture, and leadership if the strategy is to be
institutionalized. Each of these topics will be examined in much greater detail in a
subsequent chapter (organizational structure in Chapter 9, culture in Chapter 11, and
leadership in Chapter 13), but here we will briefly discuss their relationship to
strategy.
Organizational Structure
Organizational structure, most commonly associated with the organizational chart,
defines the primary reporting relationships that exist within an organization.49 The
structure of an organization establishes its chain of command and its hierarchy of
responsibility, authority, and accountability.50
Departmentalization of organizational activities is the focus
of the structuring process. Organizing work responsibilities
into departments requires grouping individuals on the basis
of the tasks they perform. If, for example, work units are structured so that all
production tasks are grouped together, all marketing tasks are grouped together, and
all finance tasks are grouped together, then the departments are organized on the basis
of function. Similarly, if work units are structured so that all tasks related to serving
the U.S. market are grouped together, all tasks for the European market are grouped
together, and all tasks for the Asian market are grouped together, then organizational
members are grouped according to the geographic market served.
Alfred Chandler, one of the earliest researchers in the area of strategy, originally
advanced the idea that "structure follows strategy." 51 In essence, Chandler's findings
indicate that an organization's strategy should influence its choice of organizational
structure. For example, organizations that pursue growth through product
development may benefit from a structure that is departmentalized by products. In
contrast, those that pursue a geographic market development strategy may find an
area-based structure to be most suitable, Furthermore, when an organization fails to

change its structure in response to changes in its strategy, it will most likely
experience operational problems that will eventually result in declining
performance.52 Since Chandler's classic research, a significant body of research has
developed that suggests that organizations should develop structures that are
appropriate for and supportive of their strategies. In fact, several studies have
successfully linked a strategy-structure fit to superior financial performance. 53
In Chapter 9, a number of organizational structures will be identified and discussed. In
addition, we will examine the advantages and disadvantages of the different structures
as well as their suitability for varying strategic conditions.
Organizational Culture
The second organizational component that should be in
alignment with an organization's strategy is organizational
culture. Organizational culture refers to the system of shared
beliefs and values that develops within an organization. It guides the behavior of and
gives meaning to the members of the organization.54
Peters and Waterman's classic survey of America's best-managed companies has
drawn attention to the contribution of organizational culture to strategic success.
Peters and Waterman attributed the success of such firms as Procter & Gamble,
General Electric, and 3M, in large part, to an organizational culture that supports their
strategic Initiatives.55 Many organizations that wished to emulate the success of these
companies began to look to changes in organizational culture as a means of doing so.
In an organization with an effective culture, employees are convinced that top
management is committed to the implementation of its strategy. Further, employees
believe that they will receive the support necessary to implement the plans of the
organization. For example, 3M, which maintains a culture that values innovation,
supports its "champions" of new product designs by removing bureaucratic
impediments, giving them access to whatever resources they need, and providing
executive support for their efforts. Individuals who champion new product concepts
are confident that they will get the support necessary to bring their ideas to fruition. 56
Reward systems are also a critical component of the organization's culture. Employees
must know not only that they will be supported, but that they will be rewarded for
taking the actions necessary to implement the organization's strategy. While financial
rewards will always be important to some degree, other types of rewards can be useful
as well. For example, a manager of one of IBM's sales offices rented Meadowlands
Stadium, home of the New York Giants, to stage a special tribute to the salespeople in
his office. He invited family, friends, and colleagues of his sales personnel to attend
the ceremony and had each salesperson run through the players' tunnel to be
recognized for his or her outstanding sales achievements.
Developing a strong, pervasive organizational culture has become more challenging as
the work force in the United States has become more culturally diverse. As we
mentioned in Chapter 1, people with different backgrounds, from different nations, or
with different cultural frames of references often have very diverse views about
organizations and how they should function. Reaching agreement can be more
difficult in such groupsboth in establishing common goals and in determining
methods for achieving those goals. Managers must be prepared to work harder and
more creatively to ensure that a strong organizational culture exists within culturally
diverse organizations.
Organizational Leadership
Leadership is the third organizational component that should he in alignment with the
strategy of the organization. If an organization is to implement its strategy effectively,
it must have the appropriate leadership.57 Without effective leadership, it is unlikely
that the organization will realize the benefits of its selected strategy. This is
particularly true when a quality orientation is a key aspect
of its strategy.58
At the top of organization must be the visionary leader.
Such leaders can envision the future, communicate their
vision to those around them, empower the people of the
organization to make the vision happen, and reward them
when it becomes a reality. 59 Bill Gates of Microsoft has
often been described as a visionary leader. Gates saw an opportunity to redefine the
market for personal computing operating systems and made that vision a reality with
the introduction of Microsoft Windows. The effective implementation of that strategy
has made Microsoft one of the most successful
organizations in the United States.
Equally important to strategy implementation is
effective leadership in the ranks of managers. In
today's organizations, they may be team leaders,
coaches, or champions rather than traditional
middle managers, but the idea is the same. These
individuals must do whatever is necessary to
ensure that their work groups are making a
contribution toward fulfilling the mission of the
organization, achieving its goals, and implementing its strategy. Canon, the $19 billion
maker of cameras, copiers, printers, and fax machines, attributes its success to strong
leadership throughout the organization. Leadership is discussed in Chapter 13, where
we examine the relationship between leadership and strategy in greater detail.
It is essential for an organization to develop the systems necessary to support its
strategy. Structure, culture, and leadership are among the aspects of an organization's
system that are particularly relevant for effective strategy implementation. When a
strategy is being implemented, it is also very important to monitor both the success of
the implementation process and the effectiveness of the strategy. Strategic control
provides the mechanism for doing just that.
ROLE OF EFFECTIVE LEADERSHIP IN STRATEGY IMPLEMENTATION
1. INTRODUCTION
Effective leadership is required to lead and to guide the subordinates to perform organizational
tasks efficiently and effectively.
2. LEADERSHIP ROLE IN IMPLEMNTATION
Strategic leadership plays an important role in strategy implementation. The role of
EFFECTIVE LEADERSHIP in strategy implementation can be explained as follows:
1. Introducing Change: Change is a must for organizational growth and development. Without
changes, an organisation would lead to doom. Therefore, introducing changes in the organisation
is one of the prime responsibilities of the leadership. Organisational changes takes place as a
result of changes in technology, consumers tastes, likes and dislikes, changes in competitors
strategy, political changes, etc. Organisations have to respond and adjust to the changes in the
environment. Failure to do so would result in poor performance of the organisation and
ultimately closure. Changes affect the existing equilibrium in the organisation, and therefore,
leadership should ensure that changes do not generate resistance on the part of the people in the
organisation. For this purpose, the leadership should consider the following aspects:
While introducing a change, there should be concern for the people as well as for the
objectives of the organisation.
Employees should be encouraged to participate in the process of change right from the
initiation stage.
Change should be introduced with objective explanation.
Leadership should create a psychological climate suitable for change.
Change should be introduced on impersonal requirements rather than on personal grounds.
2. Integrating Conflicting Interests: Organisation consists of various people, groups,

departments or sub-units. Every person on group may have certain interests, which may clash
with those of others in the organisation. For instance, there can be conflict of interest between the
superior and subordinates, top level and the lower level, between the production department and
marketing department, and so on. Therefore, an important role of leadership at various levels is
to integrate the conflicting interests of people and groups in the organisation. It is to be noted that
some amount of conflicts are desirable in the organisation. This is because; some conflicts
facilitate change in the organisation. Conflicts may arise due to problems in the functioning in
the organisation. Conflicts bring to surface dormant or latent problems and help the organisation
in solving it. The solution to the problem often requires changes in the organisation. It is also true
that conflicts can create problems in the organisation. Among other things, conflicts affect interpersonal relations. This is because; each person or group tries to find faults with others rather
than trying to sort out the conflict. People involved in conflict may spread false information.
There is loss of trust and faith in each other. In general, conflicts can adversely affect the
performance of the organisation. Therefore, effective leadership is required in sorting out
conflicts in the organisation.
3. Developing Leadership Ability of Managers: - Managers need to be effective leaders. This
is because; managers need to influence and inspire the subordinates in order to accomplish the
organisational goals. For this purpose, there is a need to develop leadership abilities in the
managers. There are several measures, which can be used for developing leadership ability of the
managers:
Leadership training in which training programmes can be undertaken to expose managers

to various leadership problems and situations.
Internal exposure where managers can be exposed to various situations in the organisation
such as solving of conflicts.
Challenging tasks can be set by top management to be achieved by managers within a certain
time frame.
Autonomy and accountability where managers can be provided with enough autonomy to
handle certain situations and they should be held accountable for their actions.
4. Developing Appropriate Organisational Climate:- Effective leadership is required for

developing appropriate organisational climate in the organisation. Organisational climate refers
to a set of values, beliefs and norms that are shared by an organisations members. The
organisational climate gives a distinct identity to an organisation. It influences the morale,
motivation and performance of its members. Some of the important features of organisational
climate are:
It is a combination of social, cultural, physical, psychological, and other conditions within an

organisation.
It evolves over a fairly long period of time.
It can be relatively stable over a period of time. However, there may be changes in
organisational climate, with a change in top management, or managements philosophy.
It gives a separate identity to the organisation as compared to other organisations, as each

organisation has its own set of values, beliefs, practices, emotions, etc.
To adopt appropriate organisational climate, the leadership, especially at the top management
level must adopt certain policies and practices:
High standards of excellence in every area of operations and evaluation.
High standards of moral character, especially at the top management level.
Encouragement for innovation with consequent freedom to act upon the ideas.
Proper delegation of authority throughout the organisation.
Matching rewards with performance rather than on subjective grounds.
Situational leadership style with high concern both for people, and objectives of the
organisation.
5. Developing Motivational System:- One of the important roles of leadership is to motivate,

people in the organisation. Motivation is vital for better performance on the part of the people.
The leadership must be a dynamic force in motivating people involved in strategy
implementation. The leadership must understand the process of motivation, which involves:
Presence of needs: - Every person has certain amount of needs, which can range from
physiological needs to self-actualisation needs.
Efforts: - An individual puts in his efforts in order to satisfy such needs. The more the needs,
the more are the efforts.
Performance: - The efforts of a person lead him into certain work performance.
Rewards: - Good performance is rewarded with monetary and/or non-monetary incentives.
The leadership should note that motivation is a continuous process. This is because; human needs
and desires are never ending. When one need is satisfied, another need emerges that needs to be
satisfied. Therefore, leadership must identify the emerging needs of the people and strive to
satisfy such needs at regular intervals through a proper mix of monetary and non-monetary
incentives.
6. Clarity in Goals: - The leader must set clear and well defined goals and objectives. Before
setting goals, the leader must analyse the internal and external environment. The leader may
consult his subordinates before finalizing the goals.
A leader can be effective when there is clarity in goals and roles to be performed to achieve those
goals. In the absence of clear goals, the leader may not be able to get the support and
commitment from the subordinates in the performance of the activities.
7. Relations: - The leader must maintain excellent relations with his subordinates, and also with
the other departmental heads. The leader on his own may develop good relations with his
subordinates, but he also needs excellent support from the organisation to develop and maintain
good relations with the subordinates. Good relations facilitate inter-personal relations between
the leader and his subordinates. Therefore, the leader should have substantial hold over the
resources and authority required to manage the subordinates and to get the work done from them.
8. Leadership Styles: - A leader would be effective, if he adopts the right leadership style
depending upon the situation. He can be autocratic, especially, when the situation is quite
demanding and there is little time to consult subordinates. He may adopt consultative leadership
style, especially when subordinates views and suggestions are important in decision-making. He
may also follow participative leadership style, especially, when the participation of the
subordinates is vital in decision-making.
3. LEADERSHIP STYLES
Every manager develops a style in managing the activities. Such styles vary from leader to
leader, from situation to situation, and from organisation to organisation.
The main types of leadership styles are as follows:

1. Autocratic style: An autocrat is the one who takes all decisions by himself and expects to be
obeyed by his subordinates. The subordinates have no scope to question the superior. Certain
points to be noted in this respect:
The superior makes the decision.
The superior does not consult the subordinates in decision making.
The superior is responsible for the decision.
The relations between superior and subordinates are formal.
This style is suitable when:
Quick decisions are to be made.
Subordinates are inexperienced and it does not make any sense to consult them.
Subordinates are not affected by the decisions.
2. Bureaucratic style: This type of leadership style is more followed in government

departments. The bureaucrats often follow rules and regulations in totality. They do not use their
discretion, even to do away with more formalities. They strictly follow the scalar chain principle,
even in the case of urgency. The following points to be noted:
The bureaucrat takes the decisions by strictly following the formalities, or rules and
regulations.
The subordinates are often not consulted.
The bureaucrat may avoid responsibility.
The relations between superior and subordinates are formal.
This style results in delay and red tapism, and unwanted paper work.
3. Consultative Style: In this type, the leader consults his subordinates before taking a decision.
The leader feels that it is always advisable to consult the subordinates. This type of leader is open
minded and would welcome suggestions from the subordinates before making a decision. The
following points to be noted:
The superior consults the subordinates before making a decision.
The subordinates may give their suggestions or comments, which the superior may or may
not accept.
The superior makes the decision.
The superior is responsible for the decision.
The relations between the superior and subordinates are informal.
This type style is suitable when:
There is no urgency of the decision, which allows the leader to consult subordinates.
The suggestions and the comments of the subordinates are vital in making a decision.
The subordinates are experienced and matured and can provide suggestion and comments.
4. Participative style: The leader not only consults the subordinates, but allows them to take
part in decision making. The following points are to be noted:
The superior consults his subordinates before making his decision.
The leader along with the group takes part in decision making.
Both the leader and the group share the responsibility for making the decision.
The relations are informal.
This type style is suitable when:
Group decision making is required.
There is an immediate possibility of opposition from a group of followers.
There are experienced and matured followers.
5. Laissez-faire style: This style aims at creating a family atmosphere within the organisation.
The leader is respected and treated as a father figure by the subordinates. The following points to
be noted:
This style is mostly followed in Japanese organisations.
The leader considers himself as a parent figure.
The leader may consult his subordinates.
Mostly the leader takes the decision.
The relations are very homely.
This type of style is more suitable in small organisations, where there are handfuls of employees,
and just one leader or boss. The leader advises, guides, and helps the subordinates even during
their personal hardships.
6. Sociocratic Style: Sociocratic attempt to run their organisations like a social club. They
believe that good fellowship or friendship is more important than productivity. They keep people
happy even at the cost of the organisation. They believe in a warm and pleasant atmosphere. For
them, the interest of the subordinates comes first, and than that of the organisation. The
following points are to be noted:
The superior take the decision by keeping the interest of the subordinates. The interest of the
organisation may be secondary.
The superior consults the subordinates for decision making.
7. Neurocratic Style: A Neurocratic leader is highly task oriented and wants to get the things
done at any cost. He is highly sensitive and gets quickly upset at failures. The following points
are to be noted:
The leader may be eccentric and emotional.
The leader may not consult the subordinates in decision making.
The leader is responsible for decision making, but he may shift the responsibility on to his
subordinates.
8. Situational Style: Now-a-days, in most well managed organisations, the managers follow
situational leadership style. This means, the leadership style varies depending upon the situation.
In other words, the leader may be autocratic at times, consultative at times, and participative at
times, depending upon the decision and the situation.
Leadership for strategy implementation and change

management
Auteur
Functie
Organisatie
Don Tapscott
Strategy theorist and CEO of New
Paradigm
New Paradigm
Leadership is about more than leadership behaviour and leadership style, or telling people what
to do. Increasing complexity and
the role of knowledge work means that people now plan their own work and make their own
decisions.
Effective leadership involves a lot of management managing the people processes in the
organisation so that people can align themselves to the strategy. Henry Mintzberg makes the case
that too many problems in organisations are caused by separating the leadership and management
roles (Community-ship is the answer Financial Times).
Leaders are responsible for formulating and communicating the strategy - but responsibility
doesnt stop there. They must also manage the alignment of people for strategy implementation.
They need to ensure that the people in the organisation understand the strategy, buy into it, and
align their decisions and actions accordingly. And this alignment needs to be measured and
monitored.
Aligning your people to implement the strategy

In the most basic terms, a strategy is nothing more than a definition of what you will sell, to
whom you will sell it, how you will sell it and where you will sell it. Taken together, these also
define your customer value proposition.
Have a clear strategy and understand its implications throughout your

company
The four dominant types of strategies Price, Product, Product+ (premium/high end) and
Customer Specific Solutions should all be based on a clear customer value proposition.
Different strategies require different organisational behaviours - and therefore different
leadership skills.
Communicate the strategy and get buy-in

Effective leadership means communicating the strategy in a language that the people in an
organisation understand. Effective leaders check to ensure people know what the strategy means
for them and their job, that they buy in to the strategy, and then support it.
Align the organisation to implement the strategy

The attitudes and behaviours of the people in any organisation are driven by six dimensions of
people processes: customer proposition, strategy commitment, processes & structure, behaviour
of leaders, performance metrics and culture. Leaders lead and manage strategy implementation
by aligning people using these levers.
Measure and monitor the alignment of people to the strategy

Effective leaders check their assumptions by ensuring people alignment is
measured and monitored. Effective measurements are in line with the
strategic objectives, and actions taken in one or more areas must be
supported by actions in the other areas to get the right result.
The way to achieve strategy implementation is not just by telling people
what to do. Its by communicating the strategy in a way that everyone can
understand and buy into, and see how they can contribute.
Then you put the people processes in place to enable and encourage
strategy implementation. Management Centre Europe can help you to do this
- at MCE, we do not believe that effective leadership is only a matter of
behaviour and style. Effective leadership is also about formulating the
strategy and strategy implementation.
By the end of this decade we may look back on the history of the corporation
and see that the survivors found within themselves the leadership, not just
to forge smart strategies, but also to execute them.
Culture:
Corporate culture and strategy implementation
Folktales at FedEx abound about a delivery person who was given the wrong key to a FedEx
drop box. So ingrained was the culture of next-day delivery guarantee that the delivery person
unbolted the box from its base and took it back to the office where it was pried open. The
contents were delivered the next day. It is not important whether this folktale is true or not. What
is important is that this story illustrates Fedexs corporate culture: every employee helps in the
achievement of FedExs reputation of reliable overnight delivery. All organizations have their
own folktale. Whats yours?
This is the way we do things around here. Do you not tell this to every employee who joins
your organization? Your organization has its own work environment, its own way of doing
things, its own processes and its own politics. How your organization approaches problems, what
it believes in and its thought process defines its personality. This is what is corporate culture. It is
born out of your organizations beliefs and philosophies about why it does things the way it does.
It is born out of how you with your stakeholders. Consistently doing the things you do results in
your corporate culture.
Culture is formed by screening and selecting new employees who share the same values as your
organization. However, culture evolves, it is not static. Both internal (hiring, staff turnover, etc)
and external (technology, competition, etc.) factors shape your culture. Your beliefs, vision,
objectives and business practices may be compatible with culture. If this is the case, your culture
becomes a valuable ally in strategy implementation. On the other hand, if there is conflict then
you do not have a strategy-culture fit and you need to do something about it quickly.
Strong cultures promote successful strategy implementation while weak cultures do not. By
strong culture, I mean there is a shared belief in practices, norms and other practices within the
organization that helps energize everyone to do their jobs to promote successful strategy
implementation. For example, if your culture is built around listening to customers and
empowering employees (both authority and responsibility), it promotes the execution of a

strategy that supports superior customer service.
In weak cultures, employees have no pride in ownership of work, work is sloppy, there are very
few values and people form political groups within the organization. Such cultures provide little
or no assistance to implement strategy.
Some time ago, I was working with a small business that in the software industry. They had been
in business for a number of years before I was brought in. One of the things I noticed initially
was that there was constant re-work; i.e. bulk of the developers time was spent in fixing bugs
instead of new development work. Deliverables were always late. Customers who did receive the
product found the software buggy. The organizations reputation suffered as a result. To combat
this we initiated a number of measures; from letting unprofitable customers go to introducing
time tracking, etc. But we forgot the most fundamental aspect; to initiate a change in the culture.
Developers looked at our initiatives with skepticism. I was told statements like This will never
work or Wait for a few days and we will revert back to the old way of doing things. We did
eventually figure it out and started to implement a change in culture. Changing a culture is the
toughest of all management tasks. It takes time to change unhealthy culture and you may have to
weed out obstacles to a healthy culture. This experience was a valuable lesson for me. In weak
cultures, people do not take risks that is needed to succeed. They believe in moving cautiously,
preferring to follow than lead.
In todays dynamic business world, strategies are dynamic. Hence, it is but logical that your
organizational culture has to be dynamic too. It needs to adapt to the demands of business. In
such cultures, all employees have confidence in the teams ability to meet any challenge. In my
professional career, I have always taken the approach of doing whatever is necessary to ensure
organizational success within the bounds of organizational core values and beliefs. As a CEO
you need to encourage this culture. In fact, you should consciously seek, recruit, train and
promote individuals who exhibit such entrepreneurship capabilities
Ethical and social responsibility: no

Strategic audit and control:

The strategic audit
In our introduction to business strategy, we emphasised the role of the "business environment" in
shaping strategic thinking and decision-making.
The external environment in which a business operates can create opportunities which a
business can exploit, as well as threats which could damage a business. However, to be in a
position to exploit opportunities or respond to threats, a business needs to have the right
resources and capabilities in place.
An important part of business strategy is concerned with ensuring that these resources and
competencies are understood and evaluated - a process that is often known as a "Strategic
Audit".
The process of conducting a strategic audit can be summarised into the following stages:
(1) Resource Audit:
The resource audit identifies the resources available to a business. Some of these can be owned
(e.g. plant and machinery, trademarks, retail outlets) whereas other resources can be obtained
through partnerships, joint ventures or simply supplier arrangements with other businesses. You
can read more about resources here.
(2) Value Chain Analysis:
Value Chain Analysis describes the activities that take place in a business and relates them to an
analysis of the competitive strength of the business. Influential work by Michael Porter
suggested that the activities of a business could be grouped under two headings: (1) Primary
Activities - those that are directly concerned with creating and delivering a product (e.g.
component assembly); and (2) Support Activities, which whilst they are not directly involved in
production, may increase effectiveness or efficiency (e.g. human resource management). It is
rare for a business to undertake all primary and support activities. Value Chain Analysis is one
way of identifying which activities are best undertaken by a business and which are best
provided by others ("outsourced"). You can read more about Value Chain Analysis here.
(3) Core Competence Analysis:
Core competencies are those capabilities that are critical to a business achieving competitive
advantage. The starting point for analysing core competencies is recognising that competition
between businesses is as much a race for competence mastery as it is for market position and
market power. Senior management cannot focus on all activities of a business and the
competencies required to undertake them. So the goal is for management to focus attention on
competencies that really affect competitive advantage. You can read more about the concept of
Core Competencies here.
(4) Performance Analysis
The resource audit, value chain analysis and core competence analysis help to define the
strategic capabilities of a business. After completing such analysis, questions that can be asked
that evaluate the overall performance of the business. These questions include:
- How have the resources deployed in the business changed over time; this is "historical
analysis"
- How do the resources and capabilities of the business compare with others in the industry
-"industry norm analysis"
- How do the resources and capabilities of the business compare with "best-in-class" - wherever
that is to be found- "benchmarking"
- How has the financial performance of the business changed over time and how does it compare
with key competitors and the industry as a whole? - "ratio analysis"
(5) Portfolio Analysis:
Portfolio Analysis analyses the overall balance of the strategic business units of a business. Most
large businesses have operations in more than one market segment, and often in different
geographical markets. Larger, diversified groups often have several divisions (each containing
many business units) operating in quite distinct industries.
An important objective of a strategic audit is to ensure that the business portfolio is strong and
that business units requiring investment and management attention are highlighted. This is
important - a business should always consider which markets are most attractive and which
business units have the potential to achieve advantage in the most attractive markets.
Traditionally, two analytical models have been widely used to undertake portfolio analysis:
- The Boston Consulting Group Portfolio Matrix (the "Boston Box");
- The McKinsey/General Electric Growth Share Matrix
(6) SWOT Analysis:
SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis
is an important tool for auditing the overall strategic position of a business and its
environment. Read more about it here.
In order to better understand what strategic control performance measures are and
how a manager can take such measurements, we need to introduce two important
topics:
(1) strategic audits and
(2)strategic audit measurement methods.
Strategic Audits
A strategic audit is an examination and evaluation of areas affected by the operation of a
strategic management process within an organization. A strategy audit may be needed
under the following conditions:
Performance indicators show that a strategy is not working or is producing negative

side effects.
High-priority items in the strategic plan are not being accomplished.
A shift or change occurs in the external environment.
Management wishes: (1) to fine-tune a successful strategy and (2) to ensure that a
strategy that has worked in the past continues to be in tune with subtle internal or
external changes that may have occurred.
Assessing The Firm's Operational And Strategic Health

To aid in control, firms will occasionally perform audits to ensure that certain aspects of
their operations are in order. Such audit may includeoperational audits (assessing the
firm's operating health) and strategic audits (assessing the firm's strategic health).
Measures Of Organizational Health

Measures or indicators of a firm's current operating and strategic health are shown in
Table 6-5 and 6-6. As the tables show, to assess a firm's current operating health, shortterm financial, market, technological, and production position are used, while current
strategic health is based on strategic market position, technological position, production
capabilities, and financial health.
Strategic Audit Measurement Methods

There are several generally accepted methods for measuring organizational performance.
One way for categorizing these methods divides into the distinct types: qualitative and
quantitative. However, a few methods do not fall neatly into one or other of these
categories but rather are a combination of both types.
Qualitative Organizational Measurements

There is no universally endorsed list of critical questions designed to reflect important
facets of organizational operations. However, several that might be useful to the
practicing managers are presented below.
Sample Questions to be asked for Qualitative Organizational Measurement
Are the financial policies with respect to investment dividends and financing
consistent with opportunities likely to be available?
Has the company defined the market segments in which it intends to operate
sufficiently specifically with respect to both product lines and market segments?
Has it clearly defined the key capabilities needed for success?
Does the company have a viable plan for developing a significant and defensible
superiority over competition with respect to these capabilities?
Will the business segments in which the company operates provide adequate
opportunities for achieving corporate objectives? Do they appear as attractive as
to make it likely that an excessive amount of investment will be drawn to the
market from other companies? Is adequate provision being made to develop
attractive new investment opportunities?
Are the management, financial, technical and other resources of the company
really adequate to justify an expectation of maintaining superiority over
competition in the key areas of capability?
Does the company have operations in which it is not reasonable to expect to be

more capable than competition? If so, can the board expect them to generate
adequate returns on invested capital? Is there any justification for investing
further in such operations, even just to maintain them?
Has the company selected business that can reinforce each other by contributing
jointly to the development of key capabilities? Or are there competitors that have
combinations of operations which provide them with an opportunity to gain
superiority in the key resource areas? Can the company's scope of operations be
revised so as to improve its position vis--vis competition?
To the extent that operations are diversified, has the company recognized and
provided for the special management and control systems required?
Qualitative Organizational Measurements

There is no universally endorsed list of critical questions designed to reflect important
facets of organizational operations. However, several that might be useful to the
practicing managers are presented below.
Sample Questions to be asked for Qualitative Organizational Measurement
Are the financial policies with respect to investment dividends and financing
consistent with opportunities likely to be available?
Has the company defined the market segments in which it intends to operate
sufficiently specifically with respect to both product lines and market segments?
Has it clearly defined the key capabilities needed for success?
Does the company have a viable plan for developing a significant and defensible
superiority over competition with respect to these capabilities?
Will the business segments in which the company operates provide adequate
opportunities for achieving corporate objectives? Do they appear as attractive as
to make it likely that an excessive amount of investment will be drawn to the
market from other companies? Is adequate provision being made to develop
attractive new investment opportunities?
Are the management, financial, technical and other resources of the company
really adequate to justify an expectation of maintaining superiority over
competition in the key areas of capability?
Does the company have operations in which it is not reasonable to expect to be

more capable than competition? If so, can the board expect them to generate
adequate returns on invested capital? Is there any justification for investing
further in such operations, even just to maintain them?
Has the company selected business that can reinforce each other by contributing
jointly to the development of key capabilities? Or are there competitors that have
combinations of operations which provide them with an opportunity to gain
superiority in the key resource areas? Can the company's scope of operations be
revised so as to improve its position vis--vis competition?
To the extent that operations are diversified, has the company recognized and
provided for the special management and control systems required?
The Evaluation Of Corporate Strategy

Each organization has its own approach to evaluation. There are not absolute answers as
to the proper evaluation standards. However, there are three basic questions to ask in
strategy evaluation:
1. Is the existing strategy any good?
2. Will the existing strategy be good in the future?
3. Is there a need to change a strategy?
The first question may need additional detailing to indicate whether the current strategy
is useful and beneficial to the organization.
Seymour Tilles has written a classic article on the qualitative assessment of organizational
performance. This article serves several particular questions to be asked for evaluation.
These questions are:
1. Is the strategy internally consistent? Internal consistency refers to the cumulative

impact of various strategies on the organizations. According to Tilles, a strategy
must be judged not only in relationships to other strategies.
2. Is organizations strategy consistent with its environment? An important test of
strategy is whether the chosen strategy in consistent with environment
(constituent demands, competition, economy, product / industry life cycle,
suppliers, customers) - whether the really make sense with respect to what is
going on outside.
3. Is the strategy appropriate in view of available resources? Resources are those
things that company is or has and that help it to achieve its corporate objectives.
Included are money, competence, facilities and other. Without appropriate
resources, organization simply cannot make strategic work.
4. Does the strategy involve an acceptable degree of risk? Strategy and resources,
taken together, determine the degree of risk which the company is undertaken.
Each company must determine the amount of risk it wishes to incur. This is a
critical managerial choice. In attempting to assess the degree of risk associated
with a particular strategy, management must assess such issues as the total
amount of resources a strategy requires, the proportion of the organization's
resources that a strategy will consume, and the amount of time that must be
committed.
5. Does the strategy have an appropriate time horizon? A significant part of every
strategy is the time horizon on which it is based. For example, a new product
developed, a plant put on stream, a degree of market penetration, become
significant strategic objectives only if accomplished by a certain time.
Management must ensure that the time necessary to implement the strategy is
consistent. Inconsistency between these two variables can make it impossible to
reach goals in a satisfactory way.
6. Is the strategy workable?
Quantitative Organizational Measurements

Quantitative measurements provide information and insight as to how well an
organization is accomplishing its goods and objectives. In attempting to evaluate the
effectiveness of corporate strategy quantitatively, we can see how the firm has done
compared wit its own history, or compared with its competitors.
Many quantitative measures may be developed to determine performance results. These
standards expressed in quantitative terms include:
1. Sales (growth of sales)
2. Net profit
3. Dividend returns
4. Return on equity
5. Return on investment
6. Return on capital
7. Marker share
8. Earnings per share
The list is long and many other factors could be included. The objective of all of these
endeavors is financial control.
But financial control is only part of the total strategic management control process. Much
of the activity affects financial performance in non financial nature. This include
consideration of labor efficiency and productivity; production quantity turnover, and
tardiness; on a very limited basis, human resources accounting and personnel satisfaction
measures; more commonly, management by objectives systems; social analysis;
operational audits of any functional, divisional, or staff component, distribution cost and
efficiency; management audits modeling; and so forth.
The list is almost endless and there is no time to discuss each item here.
Which factors should be used? Establishing the standards and tolerance limit is not as
easy as we might expect. Managers need to first define the critical success factors - the
factors which are most important to the strategy and being successful in the business.
Most of these measures are internal. But objective assessments can also be made by
comparing the firm's results of similar firms (see sectionBenchmarking)
Below we present a set of worthwhile guidelines that managers might follow in designing
and implementing more comprehensive strategic audits.
A strategic audit is conducted in three phases: diagnosis to identify how, where, and in
what priority in-depth analyses need to be made; focused analysis; and generation and
testing recommendation. Objectivity and the ability to ask critical, probing questions are
key requirements for conducting a strategic audit.
Phase one: Diagnosis
The diagnostic phase includes the flowing tasks:
1. Review key document such as:
o Strategic plan
o Business or operational plans
o Organizational arrangements
o Major policies governing matters such as resource allocation and

performance measurement.
2. Review financial, market, and operational performance against benchmarks and
industry norms to identify jet variances and emerging trends.
3. Gain an understanding of:
o Principal roles, responsibilities, and reporting relationships.
o Decision - making processes and major decisions made.
o Resources, including physical facilities, capital, management, technology.
o Interrelationships between functional staffs and business or operating units.
4. Identify strategic implications of strategy for organization structure, behavior
patterns, systems, and processes.
o Define interrelationships and linkages to strategy.
5. Determine internal and external perspectives.
o Survey the attitudes and perceptions of senior and middle managers and
other key employees to assess the extent to which these are consistent with
the strategic direction of the firm. One way to accomplish this task is
through carefully focused interviews and / or questionnaires, wherein
employees are asked to identify and make trade-offs among the objectives
and variables they consider most important.
o Interview a carefully selected sample of customers and prospective
customers and other key external sources to gain understanding of how the
company is viewed.
6. Identify aspects of the strategy that are working well. Formulate hypotheses
regarding problems and opportunities for improvement based on the findings
above. Define how and in what order each should be pursued.
Phase two: Focused analysis
1. Test the hypotheses concerning problems and opportunities for improvement
through analysis of specific issues.
o Identify interrelationships and dependencies among components of the
strategic system.
2. Formulate conclusions as to weaknesses in strategy formulation, implementation

deficiencies, or interactions between the two.
Phase three: Recommendations
1. Develop alternative solutions to problems and ways of capitalizing on
opportunities.
o Test [these alternatives] in light of their resource requirements, risk,
rewards, priorities, and other applicable measures.
2. Develop specific recommendations.
o Develop an integrated, measurable, and time - phased action plan to
improve strategic results.
strategic review: no
strategic control guiding and evaluating the strategy:
Nature of Strategic Evaluation:
Evaluate effectiveness of organisational strategy in achieving organisational
objectives
Perform the task of keeping organisation on track
Importance of Strategic Evaluation:
The need for feedback
Appraisal and reward
Check on the validity of strategic choice
Congruence between decisions and intended strategy
Successful culmination of the strategic management process
Creating inputs for new strategic planning
Ability to coordinate the tasks performed
Barriers in Evaluation:
Limits of Controls
Difficulties in measurement
Resistance to evaluation
Short-termism
Relying on efficiency versus effectiveness
Requirements of Effective Evaluation:
Control should involve only the minimum amount of information
Control should monitor only managerial activities and results
Control should be timely
Long term and short term control should be used
Control should aim at pinpointing exceptions

Rewards for meeting or exceeding standards should be emphasized
Strategic Control :
Four Types of Strategic Controls:

Premise Control
Implementation Control
Strategic Surveillance
Special alert control
Premise Control:
Premises control is necessary to identify the key assumptions and its implementation.
Premises control serves the purpose of continually testing the assumptions to find out whether
they are still valid or not. This enables the strategists to take corrective action at the right time
rather than continuing with a strategy which is based on erroneous assumptions.
Implementation Control:
Implementation control is aimed at evaluating whether the plans,
programmes, and projects are actually guiding the organization towards
its predetermined objectives or not.
Strategic Surveillance:
Strategic surveillance aimed at a more generalized and overarching
control designed to monitor a broad range of events inside and outside
the company that are likely to threaten the course of a firms strategy.
Special Alert Control:
Special alert control, which is based on a trigger mechanism for rapid response
and immediate reassessment of strategy in the light of sudden and unexpected
events
Operational Control:
Aimed at the allocation and use of organisational resources
Concerned with action or performance
How do Strategic Control and Operational Control Differ:
Attribute
Strategic Control
Operational
Control
1. Basic question
Are we moving in the right direction?
How are we
performing?
2. Aim
Proactive, continuous questioning of the
Allocation
basic direction of strategy
and use of
organisation
al resources
3. Main Concern
4. Focus
Steering the organizations future
Action
direction
control
External environment
Internal
organization
5. Time Horizon
Long- term
Short- term
6. Main Techniques
Environmental scanning, information
Budgets,
gathering, questioning and review
schedules,
and MBO
Process of Evaluation:
Setting standards of performance
Measurement of performance
Analyzing variances
Taking corrective action
Setting of Standards:
Quantitative Criteria
It has performed as compared to its past achievements
Its performance with the industry average or that of major

competitors
Qualitative Criteria
There has to be a special set of qualitative criteria for a subjective assessment of

the factors like capabilities, core competencies, risk- bearing capacity, strategic
clarity, flexibility, and workability
Measurement of Performance:
The evaluation process operates at the performance level as action takes place. Standards of
performance act as the benchmark against which the actual performance is to be compared. It is
important, however, to understand how the measurement of performance can take place.
Analyzing Variances:
The measurement of actual performance and its comparison with standard or budgeted
performance leads to an analysis of variances. Broadly, the following three situations may arise:
The actual performance matches the budgeted performance
The actual performance deviates positively over the budget performance
The actual performance deviates negatively from the budgeted
Taking Corrective Actions:

There are three courses for corrective action: checking of performance, checking
of standards, and reformulating strategies, plans, and objectives.
Techniques of Strategic Evaluation and Control:

Evaluation Techniques for Strategic Control
Evaluation Techniques for Operational Control
Evaluation Techniques for Strategic Control:

Techniques for strategic control could be classified into two groups on the basis
of the type of environment faced by the organisation. The organisation that operate
in a relative stable environment may use strategic momentum control, while those
which face a relatively turbulent environment may find strategic leap control more
appropriate.
Evaluation Techniques for Operational Control:

Operational control is aimed at the allocation and use of organisational resources
The evaluation techniques are classified into three parts:
Internal analysis
Comparative analysis
Comprehensive analysis.
Establishing strategic control:

http://www.allbusiness.com/management/benchmarking-strategic-planning/2658891.html
Strategic Control: A New Perspective

Most commentators would agree with the definition of strategic control offered by Schendel and
Hofer:
"Strategic control focuses on the dual questions of whether: (1) the strategy is being
implemented as planned; and (2) the results produced by the strategy are those intended."
This definition refers to the traditional review and feedback stages which constitutes the last step
in the strategic management process. Normative models of the strategic management process
have depicted it as including there primary stages: strategy formulation, strategy implementation,
and strategy evaluation (control).
Strategy evaluations concerned primarily with traditional controls processes which involves the
review and feedback of performance to determine if plans, strategies, and objectives are being
achieved, with the resulting information being used to solve problems or take corrective actions.
Recent conceptual contributors to the strategic control literature have argued for anticipatory
feedforward controls, that recognize a rapidly changing and uncertain external environment.
Schreyogg and Steinmann (1987) have made a preliminary effort, in developing new system to
operate on a continuous basis, checking and critically evaluating assumptions, strategies and
results. They refer to strategic control as "the critical evaluation of plans, activities, and
results, thereby providing information for the future action".
Schreyogg and Steinmann based on the shortcomings of feedback-control. Two central
characteristics if this feedback control is highly questionable for control purposes in
strategic management:
(a)feedback control is post-action control and
(b) standards are taken for granted.
Schreyogg and Steinmann proposed an alternative to the classical feedback model of control: a
3-step model of strategic control which includes premise control, implementation control,
and strategic surveillance. Pearce and Robinson extended this model and added a component
"special alert control" to deal specifically with low probability, high impact threatening events.
The nature of these four strategic controls is summarized in Figure 6-4. Time (t ) marks the point
where strategy formulation starts. Premise control is established at the point in time of initial
premising (t ). From here on promise control accompanies all further selective steps of premising
in planning and implementing the strategy.
The strategic surveillance of emerging events parallels the strategic management process and
runs continuously from time (t ) through (t ). When strategy implementation begins (t ), the third
control device, implementation control is put into action and run through the end of the planning
cycle (t ). Special alert controls are conducted over the entire planning cycle.
Promise Control:
Planning premises/assumptions are established early on in the strategic planning
process and act as a basis for formulating strategies.
"Premise control has been designed to check systematically and continuously
whether or not the premises set during the planning and implementation process
are still valid.
It involves the checking of environmental conditions. Premises are primarily
concerned with two types of factors:
Environmental factors (for example, inflation, technology, interest rates,

regulation, and demographic/social changes).
Industry factors (for example, competitors, suppliers, substitutes, and barriers

to entry).
All premises may not require the same amount of control. Therefore, managers must
select those premises and variables that (a)are likely to change and (b) would a major
impact on the company and its strategy if the did.
Implementation Control
Strategic implantation control provides an additional source of feedforward information.
"Implementation control is designed to assess whether the overall strategy should be
changed in light of unfolding events and results associated with incremental steps and
actions that implement the overall strategy."
Strategic implementation control does not replace operational control. Unlike operations
control, strategic implementation control continuously questions the basic direction of
the strategy. The two basis types of implementation control are:
1. Monitoring strategic thrusts (new or key strategic programs). Two approaches
are useful in enacting implementation controls focused on monitoring strategic
thrusts: (1) one way is to agree early in the planning process on which thrusts are
critical factors in the success of the strategy or of that thrust; (2) the second
approach is to use stop/go assessments linked to a series of meaningful thresholds
(time, costs, research and development, success, etc.) associated with particular
thrusts.
2. Milestone Reviews. Milestones are significant points in the development of a
programme, such as points where large commitments of resources must be made.
A milestone review usually involves a full-scale reassessment of the strategy and
the advisability of continuing or refocusing the direction of the company. In order
to control the current strategy, must be provided in strategic plans.
Strategic Surveillance
Compared to premise control and implementation control, strategic surveillance is
designed to be a relatively unfocused, open, and broad search activity.
"... strategic surveillance is designed to monitor a broad range of events inside and
outside the company that are likely to threaten the course of the firm's strategy."
The basic idea behind strategic surveillance is that some form of general monitoring of
multiple information sources should be encouraged, with the specific intent being the
opportunity to uncover important yet unanticipated information.
Strategic surveillance appears to be similar in some way to "environmental scanning." The
rationale, however, is different. Environmental, scanning usually is seen as part of the
chronological planning cycle devoted to generating information for the new plan.
By way of contrast, strategic surveillance is designed to safeguard theestablished

strategy on a continuous basis.
Special Alert Control

Another type of strategic control is a special alert control.
"A special alert control is the need to thoroughly, and often rapidly, reconsider the
firm's basis strategy based on a sudden, unexpected event."
The analysts of recent corporate history are full of such potentially high impact surprises
(i.e., natural disasters, chemical spills, plane crashes, product defects, hostile
takeovers etc.).
While Pearce and Robinson suggest that special alert control be performed only during
strategy implementation, Preble recommends that because special alert controls are
really a subset of strategic surveillance that they be conducted throughout the entire
strategic management process.
The characteristics of each control component are detailed in Table 6-4, including the
component's purpose, mechanism used to implement it, the procedure to be followed,
degree of focusing, information sources, and organizational/personnel to be utilized.
Strategic Control Process

Although control systems must be tailored to specific situations, such systems generally
follow the same basic process.
Regardless of the type or levels of control systems an organization needs, control may be
depicted as a six-step feedback model):
1. Determine what to control. What are the objectives the organization hopes to
accomplish?
2. Set control standards. What are the targets and tolerances?

3. Measure performance. What are the actual standards?
4. Compare the performance the performance to the standards.How well does the
actual match the plan?
5. Determine the reasons for the deviations. Are the deviations due to internal
shortcomings or due to external changes beyond the control of the organization?
6. Take corrective action. Are corrections needed in internal activities to correct
organizational shortcomings, or are changes needed in objectives due to external
events?
Feedback from evaluating the effectiveness of the strategy may influence many of other
phases on the strategic management process.
A well-designed control system will usually include feedback of control information to the
individual or group performing the controlled activity.
Simple feedback systems measure outputs of a process and feed into the system or the
inputs of a system corrective actions to obtain desired outputs. The consequence of
utilizing the feedback control systems is that the unsatisfactory performance continues
until the malfunction is discovered. One technique for reducing the problems associated
with feedback control systems is feedforward control. Feedforward systems monitor
inputs into a process to ascertain whether the inputs are as planned; if they are not, the
inputs, or perhaps the process, are changed in order to obtain desired results.
Determine What To Control

The first step in the control process is determining the major areas to control. Managers
usually base their major controls on the organizational mission, goals and objectives
developed during the planning process.
Managers must make choices because it is expensive and virtually impossible to control
every aspect of the organization's activities. In deciding what to control, the organization
must communicate through the actions of its executives that strategic control is a needed
activity. Without top management's commitment to controlling activities, the control

system could be useless.
Set Control Standards

The second step in the control process is establishing standards. Acontrol standards is a
target against which subsequent performance will be compared.
Standards are the criteria that enable managers to evaluate future, current, or past
actions. They are measured in a variety of ways, including physical, quantitative, and
qualitative terms. Five aspects of the performance can be managed and
controlled: quantity, quality, time cost, and behavior. Each aspect of control may need
additional categorizing.
An organization must identify the targets, determine the tolerances those targets, and
specify the timing of consistent with the organization's goals defined in the first step of
determining what to control. For example, standards might indicate how well a product is
made or how effectively a service is to be delivered.
Standards may also reflect specific activities or behaviors that are necessary to achieve
organizational goals. Goals are translated into performance standards by making them
measurable. An organizational goal to increase market share, for example, may be
translated into a top-management performance standard to increase market share by 10
percent within a twelve-month period. Helpful measures of strategic performance
include: sales (total, and by division, product category, and region), sales growth, net
profits, return on sales, assets, equity, and investment cost of sales, cash flow, market
share, product quality, valued added, and employees productivity.
Quantification of the objective standard is sometimes difficult. For example, consider the
goal of product leadership. An organization compares its product with those of
competitors and determines the extent to which it pioneers in the introduction of basis
product and product improvements. Such standards may exist even though they are not
formally and explicitly stated.
Setting the timing associated with the standards is also a problem for many organizations.
It is not unusual for short-term objectives to be met at the expense of long-term
objectives.
Management must develop standards in all performance areas touched on by established
organizational goals. The various forms standards are depend on what is being measured
and on the managerial level responsible for taking corrective action.
Commonly uses as an example, the following eight types of standards have been set
by General Electric :
Profitability standards : These standards indicate how much profit General

Electric would like to make in a given time period.
Market position standards : These standards indicate the percentage of total

product market that company would like to win from competitors.
Productivity standards : These production-oriented standards indicate various

acceptable rates which final products should be generated within the organization.
Product leadership standards : Product leadership standards indicate what levels

of product innovation would make people view General Electric products as
leaders in the market.
Personnel development standards : Personnel development standards list

acceptable of progress in this area.
Employee attitude standards : These standards indicate attitudes that General

Electric employees should adopt.
Public responsibility standards : All organizations have certain obligations to

society. General Electric's standards in this area indicate acceptable levels of
activity within the organization directed toward living up to social responsibilities.
Standards reflecting balance between short-range and long-range goals .

Standards in this area indicate what the acceptable long- and short - range goals
are and the relationship among them.
Critical Control Points and Standards. The principle of critical point control, one of the
more important control principles, states: "Effective control requires attention against
plans". There are, however, no specific catalog of controls available to all managers
because of the peculiarities of various enterprises and departments, the variety of
products and services to be measured, and the innumerable planning programs to be
followed.
Measure Performance
Once standards are determined, the next step is measuring performance. The actual
performance must be compared to the standards. In some work places, this phase may
require only visual observation. In other situations, more precise determinations are
needed. Many types of measurements taken for control purposes are based on some form
of historical standard. These standards can be based on data derived from the PIMS
(profit impact of market strategy) program, published information that is publicly
available, ratings of product / service quality, innovation rates, and relative market
shares standings. PIMS was developed by Professor Sidney Shoeffler of Harvard University
in the 1960s.
Strategic control standards are based on the practice of competitive benchmarking - the
process of measuring a firm's performance against that of the top performance in its
industry. (see last part of this Chapter)
The proliferation of computers tied into networks has made it possible for managers to
obtain up-to-minute status reports on a variety of quantitative performance measures.
Managers should be careful to observe and measure in accurately before taking corrective
action.
Compare Performance To Standards

The comparing step determines the degree of variation between actual performance and
standard. If the first two phases have been done well, the third phase of the controlling
process - comparing performance with standards - should be straightforward. However,
sometimes it is difficult to make the required comparisons (e.g., behavioral standards).
Some deviations from the standard may be justified because of changes in environmental
conditions, or other reasons.
Determine The Reasons For The Deviations

The fight step of the control process involves finding out: "why performance has deviated
from the standards?" Causes of deviation can range from selected achieve organizational
objectives. Particularly, the organization needs to ask if the deviations are due to internal
shortcomings or external changes beyond the control of the organization.
A general checklist such as following can be helpful:
Are the standards appropriate for the stated objective and strategies?
Are the objectives and corresponding still appropriate in light of the current
environmental situation?
Are the strategies for achieving the objectives still appropriate in light of the
current environmental situation?
Are the firm's organizational structure, systems (e.g., information), and resource
support adequate for successfully implementing the strategies and therefore
achieving the objectives?
Are the activities being executed appropriate for achieving standard?
The locus of the cause, either internal or external, has different implications for the
kinds of corrective action.
Monitoring performance and evaluating deviations:

Great Value from Monitoring and Evaluation
As stated several times throughout this library topics (and in materials linked
from it), too many strategic plans end up collecting dust on a shelf. Monitoring
and evaluating the planning activities and status of implementation of the plan
is -- for many organizations -- as important as identifying strategic issues and
goals. One advantage of monitoring and evaluation is to ensure that the
organization is following the direction established during strategic planning.
The above advantage is obvious. Adults tend to learn best when they're actually
doing something with new information and materials and then they're
continuing to reflect on their experiences. You can learn a great deal about your
organization and how to manage it by continuing to monitor the implementation
of strategic plans.
Note that plans are guidelines. They aren't rules. It's OK to deviate from a plan.
But planners should understand the reason for the deviations and update the
plan to reflect the new direction.
Responsibilities for Monitoring and Evaluation

The strategic plan document should specify who is responsible for the overall
implementation of the plan, and also who is responsible for achieving each goal
and objective.
The document should also specify who is responsible to monitor the
implementation of the plan and made decisions based on the results. For
example, the board might expect the chief executive to regularly report to the
full board about the status of implementation, including progress toward each of
the overall strategic goals. In turn, the chief executive might expect regular
status reports from middle managers regarding the status toward their
achieving the goals and objectives assigned to them.
Key Questions While Monitoring and Evaluating Status

of Implementation of the Plan
1. Are goals and objectives being achieved or not? If they are, then
acknowledge, reward and communicate the progress. If not, then consider the
following questions.
2. Will the goals be achieved according to the timelines specified in the plan? If
not, then why?
3. Should the deadlines for completion be changed (be careful about making
these changes -- know why efforts are behind schedule before times are
changed)?
4. Do personnel have adequate resources (money, equipment, facilities,
training, etc.) to achieve the goals?
5. Are the goals and objectives still realistic?
6. Should priorities be changed to put more focus on achieving the goals?

7. Should the goals be changed (be careful about making these changes -know why efforts are not achieving the goals before changing the goals)?
8. What can be learned from our monitoring and evaluation in order to improve
future planning activities and also to improve future monitoring and evaluation
efforts?
Frequency of Monitoring and Evaluation

The frequency of reviews depends on the nature of the organization and the
environment in which it's operating. Organizations experiencing rapid change
from inside and/or outside the organization may want to monitor
implementation of the plan at least on a monthly basis.
Boards of directors should see status of implementation at least on a quarterly
basis.
Chief executives should see status at least on a monthly basis.
Reporting Results of Monitoring and Evaluation

Always write down the status reports. In the reports, describe:
1. Answers to the above key questions while monitoring implementation.
2. Trends regarding the progress (or lack thereof) toward goals, including which
goals and objectives
3. Recommendations about the status
4. Any actions needed by management
Deviating from Plan

Its OK do deviate from the plan. The plan is only a guideline, not a strict
roadmap which must be followed.
Usually the organization ends up changing its direction somewhat as it proceeds
through the coming years. Changes in the plan usually result from changes in
the organizations external environment and/or client needs result in different
organizational goals, changes in the availability of resources to carry out the

original plan, etc.
The most important aspect of deviating from the plan is knowing why youre
deviating from the plan, i.e., having a solid understanding of whats going on
and why.
Changing the Plan

Be sure some mechanism is identified for changing the plan, if necessary. For
example, regarding changes, write down:
1. What is causing changes to be made.
2. Why the changes should be made (the "why" is often different than "what is
causing" the changes).
3. The changes to made, including to goals, objectives, responsibilities and
timelines.
Manage the various versions of the plan (including by putting a new date on
each new version of the plan).
Always keep old copies of the plan.
Always discuss and write down what can be learned from recent planning
activity to make the next strategic planning activity more efficient.
THE NATURE OF STRATEGY EVALUATION

A. Importance of Strategy Evaluation
1. The strategic-management process results in decisions that can have
significant, long-lasting consequences. Erroneous strategic decisions can
inflict severe penalties and can be exceedingly difficult, if not impossible,
to reverse.
2. Most strategists agree, therefore, that strategy evaluation is vital to an
organizations well-being; timely evaluations can alert management to
problems or potential problems before a situation becomes critical.
3. Strategy evaluation includes three basic activities:

a. Examining the underlying bases of a firms strategy.
b. Comparing expected results with actual results.
c. Taking corrective actions to ensure that performance conforms to
plans.
4. The strategy-evaluation stage of the strategic-management process.
5. Strategy evaluation can be a complex and sensitive undertaking. Too
much emphasis on evaluating strategies may be expensive and
counterproductive. Yet, too little or no evaluation can create even worse
problems. Strategy evaluation is essential to ensure that stated objectives
are being achieved.
6. It is impossible to demonstrate conclusively that a particular strategy is
optimal, but it can be evaluated for critical flaws. Here are four criteria to
use in evaluating a strategy:
a.
b.
c.
d.
consistency
consonance
feasibility
advantage
7. These trends make strategy evaluation difficult:

a.
b.
c.
d.
e.
f.
dramatic increase in environmental complexity

difficult in predicting future
increasing number of variables
rapid rate of obsolescence
increase in the number of world events affecting organization
decreasing time spans for planning
B. The Process of Evaluating Strategies

1. Strategy evaluation is necessary for all sizes and kinds of organizations.
a. Strategy evaluation should initiate managerial questioning of

expectations and assumptions, trigger a review of objectives and
values, and stimulate creativity in generating alternatives and
formulating criteria of evaluation.
2. Evaluating strategies on a continuous rather than a periodic basis allows
benchmarks of progress to be established and more effectively
monitored.
II.
3. Managers and employees of the firm should continually be aware of

progress being made toward achieving the firms objectives. As critical
success factors change, organizational members should be involved in
determining appropriate corrective actions.
A STRATEGY-EVALUATION FRAMEWORK
The strategy-evaluation activities in terms of key questions that should be
addressed, alternative answers to those questions, and appropriate actions for an
organization to take.
A. Reviewing Bases of Strategy
1. By developing a revised EFE Matrix and IFE Matrix, the underlying
bases of an organizations strategy can be approached and reviewed.
a. A revised IFE Matrix should focus on changes in the organizations
management, marketing, finance/accounting, production/operations,
R&D, and MIS strengths and weaknesses.
b. A revised EFE Matrix should indicate how effectively a firms
strategies have been in response to key opportunities and threats.
B. Measuring Organizational Performance
1. Another important strategy-evaluation activity is measuring
organizational performance. This activity includes comparing expected
results to actual results, investigating deviations from plans, evaluating
individual performance, and examining progress being made toward
meeting stated objectives. Both long-term and annual objectives are

commonly used in this process.
2. Failure to make satisfactory progress toward accomplishing long-term or
annual objectives signals a need for corrective action.
3. Quantitative criteria commonly used to evaluate strategies are financial
ratios, which strategists use to make three critical comparisons:
a. comparing the firms performance over different time periods,
b. comparing the firms performance to competitors, and
c. comparing the firms performance to industry averages.
4. Key financial ratios for measuring organizational performance:
a. return on investment
b. return on equity
c. profit margin
d. market share
e. debt to equity
f. earnings per share
g. sales growth
h. asset growth
C. Taking Corrective Action
1. The final strategy-evaluation activity, taking corrective action, requires
making changes to reposition a firm competitively for the future.
2. Examples of changes that may be needed are altering an organizations
structure, replacing one or more key individuals, selling a division, or
revising a business mission.
3. Taking corrective action raises employees and managers anxieties.
Research suggests that participation in strategy-evaluation activities is
one of the best ways to overcome individuals resistance to change.
III.
PUBLISHED SOURCES OF STRATEGY-EVALUATION INFORMATION

A. Examples of Helpful Publications
1. A number of publications are helpful in evaluating a firms strategies.

For example, Fortune annually identifies and evaluates the Fortune
1,000 (the largest manufacturers) and the Fortune 50 (the largest retailers,
transportation companies, utilities, banks, insurance companies, and
diversified financial corporations in the United States).
2. Another excellent evaluation of corporations in America, The Annual
Report on American Industry, is published annually in the January issue
of Forbes. Business Week, Industry Week, and Duns Business Month
also periodically publish detailed evaluations of American businesses and
industries.
IV.
CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM

A. Strategy evaluation must meet several basic requirements to be effective.
1. Strategy-evaluation activities must be economical; too
much information can be just as bad as too little
information.
2. Strategy-evaluation
activities
should
also
be
meaningful; they should specifically relate to a firms
objectives.
3. Strategy-evaluation activities should provide timely
information; on occasion and in some areas, managers
may need information daily.
4. Strategy evaluation should be designed to provide a
true picture of what is happening.
B. There is more than one ideal strategy-evaluation system. The unique
characteristics of an organization, including its size, management style,
purpose, problems, and strengths can determine a strategy-evaluation and
control systems final design.
V.
CONTINGENCY PLANNING
A. Essence of Contingency Planning

1. A basic premise of good strategic management is that firms plan ways to
deal with unfavorable and favorable events before they occur.
2. Contingency plans can be defined as alternative plans that can be put into
effect if certain key events do not occur as expected.
B. Effective Contingency Planning Involves These Steps:
1. Identify both beneficial and unfavorable events that could possibly derail
the strategy or strategies.
2. Specify trigger points. Estimate when contingent events are likely to
occur.
3. Assess the impact of each contingent event. Estimate the potential benefit
or harm of each contingent event.
4. Develop contingency plans. Be sure that the contingency plans are
compatible with current strategy and financially feasible.
5. Assess the counterimpact of each contingency plan. That is, estimate how
much each contingency plan will capitalize on or cancel out its associated
contingent event.
6. Determine early warning signals for key contingent events. Monitor the
early warning signals.
7. Develop advanced action plans to take advantage of the available lead
time.
VI.
AUDITING
A. Auditing is defined by the American Accounting Association (AAA) as
a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the
degree of correspondence between those assertions and established
criteria, and communicating the results to interested users.
1. People who perform audits can be divided into three groups:
independent auditors, government auditors, and internal auditors.
2. Two government agencies, the General Accounting Office (GAO) and

the Internal Revenue Service (IRS), employ government auditors
responsible for making sure that organizations comply with federal
laws, statutes, and policies.
B. The Environmental Audit
1. For an increasing number of firms, overseeing environmental affairs is no
longer a technical function performed by specialists; rather, it has become
an important strategic-management concern. It should be as rigorous as a
financial audit.
2. It should include training workshops in which staff help design and
implement the policy. It should be budgeted and have funds allocated to
ensure its viability.
3. A Statement of Environmental Policy should be published periodically.
VII. USING COMPUTERS TO EVALUATE STRATEGIES
When properly designed, installed, and operated, a computer network can
efficiently acquire information promptly and accurately. Networks can allow
diverse strategy-evaluation reports to be generated for, and responded by
different levels and types of managers.
----------------------------------------END OF STRATEGIC NOTES---------------------

Strategic Management Essentials

Enviado por

Dados do documento

Descrição original:

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Strategic Management Essentials

Enviado por

Direitos autorais:

Formatos disponíveis

ESHWARI.

S---LORAA BUSINESS ACADEMY Page 1

The term strategic management is used to refer to the entire scope of

ESHWARI.S---LORAA BUSINESS ACADEMY Page 3

The Nature of Strategic Management:

ESHWARI.S---LORAA BUSINESS ACADEMY Page 4

Achieving Sustained Competitive

What kind of business should we become?

Are there new competitors

What strategies should we pursue?

How are our customers changing?

ESHWARI.S---LORAA BUSINESS ACADEMY Page 5

Polit ic al, Le ga l, Gove rn me nt al

ESHWARI.S---LORAA BUSINESS ACADEMY Page 6

Computer Information Systems

Comprehensive strategic management

Improved understanding of competitors strategies

Enhanced awareness of threats

ESHWARI.S---LORAA BUSINESS ACADEMY Page 7

Enhanced problem-prevention capabilities

Advantages of International Operations:

Absorb excess capacity

Disadvantages of International Operations

Scope of strategic management:

ESHWARI.S---LORAA BUSINESS ACADEMY Page 8

Components of a Strategy Statement

ESHWARI.S---LORAA BUSINESS ACADEMY Page 10

An effective vision statement must have following featuresa. It must be unambiguous.

ESHWARI.S---LORAA BUSINESS ACADEMY Page 11

Importance of strategic management:

vision of the corporations.

Why Strategic Management is so important?

Coordinates and focuses employees

Strategic Management Process

ESHWARI.S---LORAA BUSINESS ACADEMY Page 13

ESHWARI.S---LORAA BUSINESS ACADEMY Page 14

Strategic Management Process - Meaning, Steps and Components

ESHWARI.S---LORAA BUSINESS ACADEMY Page 15

Components of Strategic Management Process

Characteristics of Strategic Management:

Strategic management helps managers find new sources of sustainable competitive

ESHWARI.S---LORAA BUSINESS ACADEMY Page 16

Managing the organization in a strategic fashion requires that the interests of

Companys strategy and its business model:

The business model

What is a Business Model?

ESHWARI.S---LORAA BUSINESS ACADEMY Page 17

ESHWARI.S---LORAA BUSINESS ACADEMY Page 18

Positioning the company match your strengths and weaknesses to the

Exploiting industry change an evolution of an industry can bring changes in

ESHWARI.S---LORAA BUSINESS ACADEMY Page 19

ESHWARI.S---LORAA BUSINESS ACADEMY Page 20

Corporate-Level Strategy, Competitive Strategy, Functional Strategy, Choosing Strategies, and

3. Related Diversification (aka Concentric Diversification): In this alternative, a company

ESHWARI.S---LORAA BUSINESS ACADEMY Page 28

4. Differentiation Focus: a second market niche strategy, concentrating on a narrow customer

Some Defensive Tactics are:

ESHWARI.S---LORAA BUSINESS ACADEMY Page 32

ESHWARI.S---LORAA BUSINESS ACADEMY Page 33

* They need to be consistent with external environment factors, including realistic

Steps in Strategy Formulation Process

ESHWARI.S---LORAA BUSINESS ACADEMY Page 35