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TALDA LEARNING CENTRE
CA IPC
STRATEGIC MANAGEMENT
By
CA Amit Talda
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Chapter 1:
BUSINESS ENVIRONMENT
“It is not the strongest
of the species that
survive, Nor the most
intelligent, but the one
most responsive to
change.”
Charles Darwin
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BUSINESS ENVIRONMENT
BUSINESS &
OBJECTIVES OF
A BUSINESS
Meaning of business:
Business refers to the state of being busy for an individual, group or
organization. It is also interpreted as one‟s regular occupation or profession. A
business for our purpose can be any activity consisting of purchase, sale,
manufacturing, processing and/or marketing of products and/or services.
Objectives Of A Business:
1. SURVIVAL: It is a basic, implicit objective of most organizations. While
survival is an obvious objective for all origination, it is more important during
the initial stage of an organization. The ability to survive is a function of the
nature of ownership, nature of business competence of management, general
and industry conditions, financial strength of the enterprise and so on.
2. STABILITY: One of the most important objective of business enterprise is
stability. It is a conservative objective. A stable and steady enterprise
minimizes managerial tensions and demands less dynamism from managers.
3. GROWTH: This is a popular objective which is equated with dynamism and
success. Enterprise growth may take one or more forms like increase in
assets, manufacturing facilities, increase in sales volume in existing products
or through new products, improvement in profits and market share, Acquisition
of other business and so on.
4. EFFICIENCY: Business enterprise needs efficiency in rationally choosing
appropriate means to achieve their goals, doing things in the best possible
manner and utilizing resources in a most suitable combination to get highest
productivity. Efficiency is a very useful operational objective.
5. PROFITABILITY: It is generally said that private enterprises are primarily
motivated by the objective of profit. Some even go further and say that profit is
the sole motive of business enterprises. It is the common yardstick to compare
businesses and measure efficiency in operations of business.
Questions Asked:
1. The basic objective of a business enterprise is to monitor the environment.
True or False.
2. Profit may not be a universal objective but the business efficiency is
definitely an objective common to all business. True or False.
3. How would you analyse the meaning and importance of efficiency and
profitability as objectives of business. (Nov 12)
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ENVIRONMENTAL
INFLUENCES
Business does not function in an isolated vacuum. Business function within a
whole gambit of relevant environment and have to negotiate their way through
it. The extent to which the business grows depends on the manner in which it
interacts with its environment. A business which continually remains passive to
the relevant changes in the environment is destined to gradually fade away.
To be successful business has to not only recognise different elements of the
environment but also respect, adapt to or have to manage and influence them.
The business must continually monitor and adapt to the environment if it is to
survive and prosper. Disturbances in the environment may indicate extreme
threats or open up new opportunities for the firm. A successful business has to
identify, appraise and respond to the various opportunities and threats in its
environment.
Environment is the sum of several external and internal forces that affect the
functioning of the business. A strategist looks on the environment as posting
threats to a firm or offering immense opportunities for exploitation. Although
there are many factors, the most important of the sectors are socio-economic,
technological, supplier, competitors and government.
Problems in understanding environment influence:
i) The first difficulty is in diversity. Listing all possible environmental influences
may be possible, but it may not be of much use because no overall picture
emerges of really important influences on the organization.
ii) The second difficulty is that of uncertainty. Managers typically claim that the
pace of technological change and the speed of global communication mean
more and faster change now than ever before. It is very difficult to chase the
uncertain future possibilities.
iii) Managers are no different from other individuals in the way they cope with
complexity. Because different elements of environment are diverse, they are
also interacting with each other, making it complex to understand their
outcome on the organization.
SURVIVAL
STABILITY
GROWTH EFFICIENCY
PROFITABILITY
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Why Environmental Analysis?
i) The analysis should provide an understanding of current and potential
changes taking place in the environment. It is important that one must be
aware of the existing environment. At the same time one must have a long
term perspective about the future too.
ii) Environment analysis should provide inputs for strategic decision making.
Mere collection of data is not enough. The information collected must be useful
for and used in the strategic decision making.
iii) Environment analysis should facilitate and foster strategic thinking in
organization typically a rich source of ideas and understanding of the context
within which a firm operates. It should challenge the current wisdom by brining
fresh viewpoint into the organization.
COMPONENTS OF
BUSINESS
ENVIRONMENT
1) The environment in which an organization exists could be broadly divided
into two parts; The external and the internal environment.
2) As the environment is complex, dynamic, multi faceted and has a far
reaching impact, dividing it into external and internal components enables us to
understand it better.
3) External environment includes all the factors outside the organization which
provide opportunity or pose threats to the organization.
4) The Internal Environment refers to all the factors which an organization
which impart strengths and weaknesses of a strategic nature.
5) The environment in which an organization exists can, therefore, be
described in terms of the opportunities and threats operating in the external
environment apart from strength and weaknesses existing in the internal
environment.
6) Four environmental influences could be as follows:
i) An OPPORTUNITY is a favourable condition in the organization‟s
environment which enable it to consolidate and strengthen its position. An
example of an opportunity is growing demand for the products or services that
a company provides.
ii) A THREAT is a unfavorable condition in the organization environment which
creates a risk for, or causes damage to, the organization. An example of a
threat is the emergence of strong new competitors who are likely to offer stiff
competition to the existing companies in an Industry.
iii) A STRENGTH is an inherent capacity which an organization can use to gain
strategic advantage over its competitors. An example of strength is superior
research and development skills which can be used for new product
development so that the company gains competitive advantage.
iv) A WEAKNESS is an inherent limitation or constraint which creates a
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strategic disadvantage. An example of a weakness is over dependence on a
single product line, which is potential risk for a company in times of crisis.
An effective organizational strategy, therefore, is one that capitalizes on the
opportunities through the use of strength and neutralizes the threats by
minimizing the impact of weakness.
Questions:
1. Environmental constituents exist in isolation and do not interact each other.
True or false.
2. There is both opportunity and challenge in Change. True or False.
RELATIONSHIP
BETWEEN
ORGANISATION
AND ITS
EVIRONMENT
1) Exchange Of Information:
a) The organization understands the external environmental variables, their
behavior and changes, generates information and uses it for its planning,
decision making and control purposes.
b) Information generation is one way to get over the problem of uncertainty and
complexity of the external environment.
c) Information is to be generated on:
Economic activity
Market conditions,
Technological developments,
Social and demographic factors
Political & government policies,
Activities of other organizations and so on.
Both current and projected information is important for the organization.
d) Apart from gathering information, the organization itself transmits
information to several external agencies either voluntarily, inadvertently or
legally.
Examples,
Annual report for investors,
Reports to Regulatory agencies, (Monthly/Quarterly return to RBI/SEBI)
Annual reports are also available at company‟s website, etc.
Report to professional bodies like ICAI, ICSI, etc)
2) Exchange Of Resources:
a) The organization receives inputs –
Men,
Material,
Machines,
Money
from external environment through contractual and other arrangement. (also
known as Factors of Production “4 M‟s”)
b) The organization is dependent on the external environment for disposal of
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its output of products and services to a wide range of clientele.
c) This is also an interaction process – perceiving the needs of the external
environment and catering to them, satisfying the expectations and demands of
the clientele groups such as:
Customers,
Employees,
Shareholders,
Creditors,
General Public
Local Community and so on.
3) Exchange Of Influence And Power:
a) Another area of organizational environmental interaction is in the exchange
of power and influence. The external environment holds considerable power
over the organization both by virtue of its being inclusive as also by virtue of its
command over resources, information and other inputs.
b) Other organization, competitors, markets, customers, suppliers, investors,
etc also exercise considerable collective power and influence over the planning
and decision making processes of the organization.
If Shortage of Raw material or Only One supplier of Raw material, then
they dictate the prices and credit period and modes of delivery.
If there is Shortage of Skilled Labour, then they dictate the wages, leaves,
bonus, etc.
If supply of money is less in the market, then Money Lenders dictate the
Interest Rate and Security to be provided.
c) In turn, organization itself is sometimes in a position to exercise
considerable power and influence over some of the elements of external
environment by virtue of its command over resources and information. (WE
ARE MONPOLIST like Indian Railways or We are the only producer or
Manufacturer of a product)
Question:
1. A business enterprise is a sub system of the larger environmental system.
Discuss the relationship between the organization and its business
environment. (May 13)
CHARACTERISTI
CS OF BUSINESS
ENVIRONMENT
i) Environment Is Complex:
Environment consists of a number of factors, events, conditions and
influences arising from different sources.
All these factors do not exist in isolation but interact with each other to
create entirely new set of influences.
Hence, Environment is complex, easier to understand in parts but difficult
to grasp in totality.
Example: Many factors change simultaneously like change in government
policy, change in customer taste & preferences, Change in technology, etc.
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we can study the impact of one factor on our organization at a time, but
understanding the overall impact of change of all the factors is very
complex.
ii) Environment Is Dynamic:
Environment is constantly changing in nature. Due to the complex nature
and many influences, it changes in its shape and character.
Examples: Evolution of Laptops & Palmtops have decreased the demand
for Desktops, Evolution of Online & Virtual Classes have decreased the
demand of Face to Face Classes, etc.
iii) Environment Is Multi Faceted:
A particular change in the environment or a new development may be
viewed differently by different people.
This is evident when same development is welcomed as an opportunity by
one company while another company perceives it as a threat.
iv) Environment Has A Far Reaching Impact:
The environment has a far reaching impact on organizations. The growth
and profitability of an organization depends on the environment in which it
exists.
Questions Asked:
1. Elaborate the characteristics of business environment with reference to
decision making. (Nov 11)
2. Business Environment exhibits many characteristics. Explain (Nov 13)
3. Environment is the sum of several external and internal forces that affect the
functioning of business. Explain. (May 12)
ELEMENTS OF
MICRO
ENVIRONMENT
“COMICS”
The environment of business can be categorized into two broad categories,
Micro Environment and Macro Environment. Micro Environment is related to
small area or immediate periphery of an organization. Micro Environment
influences an organization regularly and directly. Developments in the micro
environment have direct impact on the working on the organizations. Micro
Environment includes the company itself, its suppliers, customers, competitors,
intermediaries, etc. The elements of micro environment are specific to the said
business and affects its working on short term basis.
i) CONSUMERS: customers may or may not be consumers. Customers are the
people who pay money to acquire organizations products and services.
Consumer is the one who ultimately consumes or uses the product or service.
The business has to closely monitor and analyse the changes in the
consumers taste and preferences and their buying habits.
ii) COMPETITORS: Competitors are the other business entities that compete
for resources as well as market. A study of the competitive scenario is
essential for the marketer, particularly threats from competition.
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iii) ORGANISATION: Individuals occupying different positions or working in
different capacities in organization consists of individuals who come from
outside. They have different and varied interests. Owners, Board of directors
and employees form part of an organization.
iv) MARKET: The market is larger than customers. The market is to be studied
in terms of its actual and potential size, its growth prospects and also its
attractiveness. The marketer should study the trends and development and key
success factors of the market.
v) SUPPLIER: The Suppliers provide raw material, equipment, services and so
on. Supplier with their own bargaining power affect the cost structure of the
industry. They constitute a major force, which shapes competition in the
industry.
vi) MARKET INTERMEDIARIES: Intermediaries bridge the gap between the
organizations and customers. They are in form of stockiest, wholesalers and
retailers. They exert considerable influence on the business organization. In
many cases, consumers are not aware of the manufacturer of the products
they buy as they buy it from local retailers or big departmental stores.
Questions asked:
1. What do you mean by micro environment? Explain its elements. (May 13)
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ELEMENTS OF
MACRO
ENVIRONMENT
“SET GDP”
Macro Environment is largely external to the enterprise and thus beyond the
direct influence and control of organization, but exerts powerful influence over
its functioning. The external environment consists of individuals, groups,
agencies, events, conditions and forces which the organization comes into
frequent contact in the course of its functioning. Macro Environment consists of
demographics and economic conditions, socio cultural factors, political and
legal systems, technological developments, etc. these constitute the general
environment which affects the working of all the firms.
i) DEMOGRAPHICS: The term demographics denotes characteristics of
population in a area, district, country or in world. It includes factors such as
race, age, income, education, asset ownership, employment status, home
ownership and location. Business organization need to study these different
demographic factors to understand how these factors will influence the
demand of its products and services.
ii) ECONOMIC ENVIRONMENT: The economic environment refers to the
nature and direction of the economy in which a company competes or may
compete. The economic environment includes general economic situation in
the region and the nation, Condition in the resource markets like money
market, manpower market, raw material components, etc. Economic
environment determines the strength and size of the market. The important
point to consider is to find out the effect of economic prospect and inflation on
the operations of the firms.
iii) POLITICAL & LEGAL ENVIRONMENT: It includes factors such as general
state of political development, Level of political morality, The law and order
situation, Political stability, efficiency of government agencies, government
policies, Specific legal enactments, etc. There are three important elements in
political legal environment namely Government, Legal and Political.
iv) SOCIO-CULTURAL ENVIRONMENT: Socio Cultural Environment consists
of factors related to human relationships and impact of social attitudes and
cultural values which has bearing on the business of organization. The beliefs,
values and norms of a society determine how individuals and organization
should be interrelated.
v) TECHNOLOGICAL ENVIRONMENT: Technology has changed the way
people communicate with the advent of internet and telecommunications
system. Technology has changed the way of how business operates today.
Technology can act as both opportunity and threat to a business. It can act as
opportunity as business can take advantage of adopting technological
innovations to their strategic advantage. However, at the same time,
technology can act as threat if organization are not able to adopt it to their
advantage.
vi) GLOBAL ENVIRONMENT: Today‟s competitive landscape require that
companies must analyse global environment as it is also rapidly changing. The
new concept of global village has changed how individuals and organizations
relate to each other. Due to economic reforms, Indian businessmen are also
out to see beyond the physical boundaries of the country. The indian
companies are acquiring business in different countries.
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Question Asked:
1. Can a change in the elected government affect the business environment?
Briefly explain. (June 09)
PESTLE
ANALYSIS
Political
Political stability
Current and future tax policy
Political principles
Government policies
Government term and change
Economic
Economy Situation & Trends
Market and Trade cycle
Interest and Exchange Rate
Inflation and Unemployment
Strength of consumer spending
Social
Lifestyle trends
Demographics
Consumer buying patterns
Religious factors
Media view & perceptions
Technological
Maturity of technology
Innovation potential
Intellectual property rights and
copyrights
Technology access, licensing,
patents.
Legal
Business and corporate laws
Employment laws
Competition law
Health & safety Law
International Treaty and law
Environmental
Waste disposal
Environmental Hazards
Energy Consumption
Environment Issues
Environment laws
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GLOBALIZATION,
GLOBAL
COMPANIES &
STRATEGIC
APPROACHES
Introduction: (What is a global company) Globalization means several
things to several people. For some it is a new paradigm – a set of fresh beliefs,
working methods, and economic, political and socio cultural realities in which
the previous assumption are no longer valid. For developing countries, it
means integration with the world economy. In simple economic terms,
Globalization refers to the process of integration of world into one huge market.
At company level, globalization means two things:
a) The company commits itself heavily with several manufacturing location
around the world and offers products in several diversified industries;
b) it also means ability to compete in domestic markets with foreign
competitors.
A company which goes global is also called a Multinational company (MNC).
The global company views the world as one market minimizes the importance
of national boundaries. A global company has three attributes:
(i) It is a conglomerate of multiple units located in different parts of the globe
but all linked with common ownership.
(ii) Multiple units draw a common pool of resources such as money, credit,
patents, trade name, etc.
(iii) The units respond to common strategy.
Why do companies go global?
There are several reasons why companies go global. They are:
i) One reason could be the rapid shrinking of time and distance across the
globe thanks to faster communication, speedier transportation, growing
financial flows and rapid technological changes.
ii) it is being realized that the domestic markets are no longer adequate and
rich.
iii) Companies that develop attractive new products sell them first in their
home market. Sooner or later, foreigners may learn about these products. At
this stage, most companies would export the product or service rather than
produce it abroad. But as foreign demand grows, the economics of foreign
production change. Eventually, the foreign market becomes large enough to
justify foreign investment.
iv) Company often go global to secure a reliable or cheaper source of raw
materials. For example, cheap labour in India have attracted foreign investors.
v) Companies often set up overseas plants to reduce the high transportation
costs. The higher the ratio of unit cost to the selling price per unit, the more
significant the transportation factor becomes.
vi) Motivation to go global for high tech industries is slightly different.
Companies in electronics and telecommunication must spend large sums on
research and development for new products and thus they are compelled to
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seek ways to improve sales volume to support high overhead expenses. If
domestic sales and export do not generate sufficient cash flow, companies
might look to overseas manufacturing plants and sales branches to generate
higher sales and better cash flow.
Strategic Approaches:
(i) Multi Domestic Strategy: A multi domestic strategy focuses on competition
within each country in which the firm operates. This strategy is adopted when a
company tries to achieve a high level of local responsiveness by matching their
products and services offering to national conditions prevailing in the countries
they operate in. The organization attempts to extensively customize their
products and services according to the local conditions of different countries.
(ii) Global Strategy: A global strategy assumes more standardization of
products across country boundaries. Under this strategy, the company tries to
focus on a low cost structure by leveraging their expertise in providing certain
products and services and concentrating the production of these standard
products and services at a few favourable locations across the world.
Competitive strategy is centralized and controlled by the home office.
(iii) Transnational Strategy: Many large multinational firms, particularly those
with many diverse products, may use a multi domestic strategy with some
product lines and a global strategy with others. A transnational strategy seeks
to combine aspects of both multi domestic and global strategy. Thus there is
emphasizes on both local responsiveness and global integration and
coordination. Although the transnational strategy is difficult to implement,
environmental trends are causing multinational firms to consider the needs for
both global efficiencies and local responsiveness.
When a firm adopts one or more of the above strategies, the firm would have
to take decisions on the manner in which it would commence international
operations. The decision as to how to enter a foreign market can have a
significant impact on the results. Expansion into foreign markets can be
achieved through following options:
Exporting
Franchising
Joint Venture
FDI
PORTER’S FIVE
FORCE MODEL
Five forces model of Michael Porter is a powerful and widely used tool for
systematically diagnosing the significant competitive pressure in the market
and assessing their strength and importance. The model holds that the state of
competition in an industry is a composite of competitive pressures operating in
five areas of overall market. These five forces are:
1. Threat Of New Entrants: New Entrants are always a powerful source of
competition. The new capacity and product range they bring in throw up new
competitive pressure. And the bigger the new entrant, the more severe the
competitive effect. New entrants also place a limit on prices and affect the
profitability of existing players.
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2. Bargaining Power Of Customers: This is another force that influences the
competitive condition of the industry. This force will become heavier depending
on the possibilities of the buyers forming groups or cartels. Mostly, this is a
phenomenon seen in the industrial products. Quite often, users of industrial
products come together formally or informally and exert pressure on the
producer. The bargaining power of the buyers influences not only the prices
that the producer can charge but also influences in many cases, costs and
investment of the producer because powerful buyers usually bargain for better
services which involve cost and investment on the part of producer.
3. Bargaining Power Of Suppliers: Quite often suppliers, too, exercise
considerable bargaining power over companies. The more specialized the
offering from the supplier, greater is his bargaining power. And if the suppliers
are also limited in number they stand a still better chance to exhibit their
bargaining power. The bargaining power of suppliers determines the cost of
raw materials and other inputs of the industry and therefore industry
attractiveness and profitability.
4. Rivalry Among Current Players: The rivalry among existing players is quite
obvious. This is what is normally understood as competition. For any player,
the competitors influence strategic decisions at different strategic levels. The
impact is evident more at functional level in the prices being changed,
advertising and pressure on cost, product and so on.
5. Threat From Substitutes: Substitute products are a latent source of
competition in an industry. In many cases they become a major constituent of
competition. Substitute products offering a price advantage and or
performance improvement to the consumer can drastically alter the competitive
character of an industry. Any they can bring it about all of a sudden.
The five forces together determine industry attractiveness/profitability. This is
so because these forces influences the causes that determine industry
attractiveness and profitability. For example, elements such as cost and
investment needed for being a player in the industry decide industry
profitability and all such elements are governed by these forces. The collective
strength of these five competitive forces determine the scope to earn attractive
profits. The strength of these five forces may vary from industry to industry.
Questions:
1. What are the five competitive forces in an Industry as identified by Michael
Porter? (Nov 09) (10 marks)
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2. Industry is a composite of competitive pressures in five areas of overall
market. Briefly explain the competitive pressures. (Nov 2011)
3. Explain the factors that affect the strength of competitive pressures from
substitute products. (Nov 2012)
STRATEGIC
RESPONSE TO
ENVIRONMENT
1) Least Resistance: some businesses just manage to survive by way of coping
with their changing external environments. They are simple goal maintaining
units. They are very passive in their behaviour and are solely guided by the
signals of the external environment. They are not ambitious but are content
with taking simple paths of least resistance in their goals seeking and resource
transforming behaviour.
2) Proceed With Caution:
At the next level are the business that take an intelligent interest to adapt with
the changing external environment. They seek to monitor the changes in that
environment, analyse their impact on their own goals and activities and
translate their assessment in terms of specific strategies for survival, stability
and strength.
3) Dynamic Response:
At a still higher sophisticated level, are those businesses that regard the
external environmental forces as partially manageable and controllable by their
actions. Their feedback systems are highly dynamic and powerful. They are
not merely recognise and understand threats; they convert threats into
opportunities. They are highly confident of their own strength and the
weaknesses of their external environment adversaries.
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Chapter 2:
Business Policy & Strategic Management
There are no secrets to
success, it is the result of
preparation, hardwork and
learning from failure.
Colin Powell
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BUSINESS POLICY AND STRATEGIC MANAGEMENT
Meaning &
Nature of
Management
It is used with reference to a key group in an organization in charge of its
affairs. In relation to an organization, management is chief organ entrusted
with the task of making it a purposeful and productive entity, by undertaking
the task of bringing together and integrating the disorganized resources of
manpower, money, material and machinery into a functioning unit.
The survival and success of an organization depend on a large extent on the
competence and character of its management.
The functions and process of management are wide ranging but closely
interrelated. They range all the way from design of the organization,
determination of goals and activities, mobilization and acquisition of
resources, allocation of tasks and resources among the personnel and
activity units.
What is a
Strategy?
1) A Strategy is the game plan management is using to:
Take market position;
Conduct its operations;
Attract and satisfy customers;
Compete successfully;
Achieve organizational objectives.
2) We may define strategy as a long range blueprint of an organization‟s desired
image, direction and destinationI
What it wants to Be;
What it wants to Do;
Where it wants to Go.
3) Strategies are formulated at the corporate, divisional and functional level.
Corporate strategies are formulated by the top managers. They include the
determination of business lines, expansion and growth, vertical and horizontal
integration, diversification, takeovers and mergers, R & D, and so on. These
corporate wide strategies need to be operationalized by divisional and functional
strategies regarding product lines, production volumes, quality ranges, prices,
product promotion, market penetration, and personnel development and so on.
4) Strategy is no substitute for sound, alert and responsible management.
Strategy can never be perfect, flawless and optimal. It is in very nature of
strategy that it is flexible and pragmatic;
5) Strategy is partly proactive and partly reactive:
A company‟s strategy is typically a blend of:
Proactive actions on the part of managers to improve the company‟s market
position and financial performanceX
As needed reactions to unanticipated developments and fresh market
conditions.
A part of company‟s strategy is proactive with respect to factors which have
already happened in the past and which can be anticipated in the future.
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However, remaining part of company‟s strategy is reactive as market and
competitive conditions take an unexpected turn due to unforeseen developments.
What is a
Corporate
Strategy?
Corporate strategy is basically the growth design of the firm; it spells out the
growth objective – the direction, extent, pace and timing of the firm‟s growth. It
also spells out the strategy for achieving the growth.
Characteristics
of Corporate
Strategy
1) It is generally long range in nature, though it is valid for short range situations
also and has short range implications.
2) It is action oriented and is more specific than objectives.
3) It is flexible and dynamic.
4) It is formulated at the top management level, though middle and lower level
managers are associated in their formulation and in designing sub strategies.
5) It is generally meant to cope with the competitive environment.
6) It gives importance to combination, sequence, timing, direction and depth of
various moves and action initiatives taken by managers to handle environmental
uncertainties and complexities.
7) It is concerned with perceiving opportunities and threats and taking
initiatives to cope with them. It is also concerned with deployment of limited
organizational resources in the best possible manner.
8) It flows out of the goals and objectives of the enterprise and is meant to
translate goals into realities.
9) It is also concerned with deployment of limited organizational resources in the
best possible manner.
10) It provides unified criteria for managers in function of decision making.
Nature, Scope
and Concerns of
Corporate
Strategy?
It can also be viewed as the objective –strategy design of the firm.
It is the design for filling the firm‟s strategic planning gap.
It ensures that right fit is achieved between the firm and its environment.
It helps build the relevant competitive advantage for the firm.
It spells out the businesses in which the firm will play, the market in which it
will operate and the customer needs it will serve.
Corporate objectives and corporate strategy together describe the firm‟s
concept of business.
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What does
corporate
strategy Ensure?
(Nov 2012)
1) Corporate Strategy in the first place ensures the growth of the firm and
ensures the correct alignment of the firm with its environment.
2) It helps to build the relevant competitive advantage.
3) Masterminding and working out the right fit between the firm and its external
environment is the primary contribution of corporate strategy.
4) The basic purpose of the corporate strategy is to tap the opportunities
available in the environment, countering the threats embedded therein.
5) It accomplishes this by matching the unique capabilities of the firm with the
promises and threats of the environment that it achieves this task.
6) It is obvious that responding to environment is part and parcel of firm‟s
existence. The question is how good or how methodical is the response. This is
where strategy steps in.
7) Strategy is the opposite of Adhoc responses to the changes in the
environment – in competition, consumer tastes, technology and other variables.
8) It amounts to long term, well thought out and prepared responses to the
various forces in the business environment.
Strategic
Management,
Objectives &
Benefits (Nov
2007, May 2011,
May 2013, May
2012)
The term strategic management refers to the managerial process of:
Forming a strategic vision,
Setting objectives,
Crafting a strategy,
Implementing and executing the strategy and
Then over times initiating whatever corrective adjustments in the vision,
objectives, strategy and execution are deemed appropriate.
Strategic management starts with:
Developing a company mission (to give it direction),
Objectives and goals (to give it means and methods for accomplishing its
mission),
Business portfolio (to allow management to utilize all facets of organization)
and
Functional plans (plans to carry out daily operations from the different
disciplines.
The overall objectives of strategic management are twofold:
(i) To create competitive advantage, so that the company can outperform the
competitors in order to have dominance over the market.
(ii) To guide the company successfully through all changes in the environment.
The major benefits of strategic management are:
1) Strategic management helps organization to be more proactive instead of
reactive in shaping its future. Organizations are able to analyse and take actions
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instead of being mere spectators. Therefore, they are able to control their own
destiny in a better manner.
2) SM provides framework for all major business decisions of an enterprise such
as decisions on businesses, product, markets, manufacturing facilities,
investments and organization structure.
3) SM is concerned with ensuring a good future for the firm. it seeks to prepare
the corporation to face the future and act as pathfinder to various business
opportunities. Organization are able to identify the available opportunities and
identify the ways and means as how to reach them.
4) SM serves as a corporate defense mechanism against mistakes and pitfalls.
It helps organizations to avoid costly mistake in product market choices or
investments.
5) Over a period of time SM helps organization to evolve certain core
competencies and competitive advantages that assist in its fight for survival
and growth.
Framework of
Strategic
Process
The five stages are as follows:
1) Stage One: Where are we Now? (Beginning):
This is the starting point of strategic planning and consists of doing a situational
analysis of the firm in the environmental context:
Here the firm must find out its relative market position.
Corporate Image
Its strength and weaknesses and
Also environmental threats and opportunities;
This is also known as SWOT analysis.
2) Stage Two: Where we want to be (ends):
This is a process of goal setting for the organization after it has finalized its
vision and mission.
A strategic vision is a roadmap of the company‟s future – providing specifics
about technology and customer focus, the geographic and product markets to
be perused, the capabilities it plans to develop, and kind of company that
management is trying to create.
An organization‟s mission states that what customer it serves, what need it
satisfies, and what type of product it offers.
3) Stage Three: How might we get there? (means)
Here the organization deals with the various strategic alternatives it has.
4) Which way is best? (evaluation)
Out of all the alternatives generated in the earlier stage the organization selects
the best suitable alternative in line with its SWOT Analysis.
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5) How can we ensure arrival? (Control)
This is an implementation and control stage of a suitable strategy. Here again the
organization continuously does situational analysis and repeats the stages again.
Strategic
Decision making
& its
DIMENSIONS
(Nov 2011, Nov
2013)
Decision making is a managerial process and function of choosing a particular
course of action out of several alternative courses for the purpose of
accomplishment of the organizational goals.
Decision may relate to general day to day operations. They may be major or
minor. They may also be strategic in nature. Strategic decisions are different in
nature than all other decisions which are taken at various levels of the
organization during day to day working of the organization.
The major dimensions of strategic decisions are given below:
1) Strategic issue require top management decisions: Strategic issue involve
thinking in totality of the organization and also there is lot of risk involved. Hence,
problems calling for strategic decisions require to be considered by top
management.
2) Strategic issue involve the allocation of large amount of company
resources: It may require huge financial investment to venture into a new area of
business or the organization may require huge number of manpower with new
set of skills in them.
3) Strategic issues are likely to have a significant impact on the long term
prosperity of the firm: Generally the results of strategic implementation are
seen on a long term basis and not immediately.
Where we
are now
(1)
Where we
want to be
(2)
How might
we get
there (3)
Which way
is best? (4)
How can
we ensure
arrival? (5)
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4) Strategic issues are future oriented: Strategic thinking involves predicting
the future environmental conditions and how to prepare for the changed
conditions.
5) Strategic issue usually have major consequences: As they involve
organization in totality they affect different sections of the organization with
varying degree.
6) Strategic issues necessitate consideration of factors in the firm’s
External environment: Strategic focus in organization involves orienting its
internal environment to the changes of external environment.
Strategic Management Model
Formulation Implementation Evaluation
VISION VISION:
1) Top management‟s views and conclusions about the company’s direction and
the product-customer-market-technology focus constitute a strategic vision for the
company.
Develop
vision and
mission
statement
Establish
Long term
Objectives
Generate
Analyse
and Select
Strategies
Implement
Strategies
manageme
nt issues
Implement
Strategies
Marketing,
Finance,
Accountin
g, R & D,
MIS Issue
Measure and
Evaluate
Performance
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2) A strategic vision delineates management‟s aspirations for the business,
providing a panoramic view of the “where we are going” and a convincing
rationale for why this makes good business sense for the company.
3) A Strategic vision thus points an organization in a particular director, charts a
strategic path for it to follow in preparing for the future, and molds organizational
identity.
4) A Clearly articulated strategic vision communicates management‟s aspiration to
stakeholders and helps steer the energies off company personnel in a common
direction.
5) The three elements of a strategic vision: (Nov 2012, May 2013)
i) Coming up with a mission statement that defines what business the company is
presently in and conveys the essence of “who we are and where we are now?”
ii) Using the mission statement as basis for deciding on a long term course making
choices about “where we are going?”
iii) Communicating the strategic vision in clear, exciting terms that arouse
organization wide commitment.
Example of Vision:
“World‟s leading accounting body, a
regulator and developer of trusted and
independent; professionals with world
class competencies in accounting,
assurance, taxation, finance and
business advisory services.”
“To give people the power to share
and make the world more open and
connected.”
“To make the world‟s information
universally accessible and useful.”
How to develop a Strategic Vision:
i) The entrepreneurial challenge in developing a strategic vision is to think
creatively about how to prepare a company for the future.
ii) Forming a strategic vision is an exercise in intelligent entrepreneurship.
iii) Many successful organization need to change direction not in order to survive
but in order to maintain their success.
iv) A well articulated strategic vision creates enthusiasm for the course
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management has charted and engages members of the organization.
v) The best worded vision statement clearly and crisply illuminates the direction in
which organization is headed.
MISSION Why organizations should have mission?
i) To ensure unanimity of purpose within the organization. (everyone in the
organization should know what the company wants to achieve, from board of
director to the one engaged in clerical work)
ii) To provide a basis for motivating the use of organization‟s resources.
iii) To develop a basis or standard, for allocating organization resources.
iv) To establish a general tone or organization climate.
v) To serve as a focal point for those who can identify with the organization‟s
purpose and direction, and to deter those who cannot form participating further in
the organization‟s activities.
vi) To facilitate the translation of objective and goals into a work structure involving
the assignment of tasks to responsible elements within the organization.
vii) To specify organization purpose and the translation of these purpose into
goals in such a way that cost, time and performance parameters can be assessed
and controlled.
A Company’s Mission Statement is typically focused on its present business
scope – “who we are and what we do”; mission statement broadly describe an
organizations present capabilities, customer focus, activities and business
makeup. (May 2007)
Following point must be kept in mind while writing mission statement of a
company: (Nov 2009, May 2010)
i) One of the role of a mission statement is to give the organization its own special
identity, business emphasis and path for development – one that typically sets it
apart from other similar situated companies.
ii) A company‟s business is defined by what needs it trying to satisfy, by which
customer groups it is targeting and by the technologies and competencies it uses
and the activities it performs.
iii) Technology, competencies and activities are important in defining a company‟s
business because they indicate the boundaries on its operations.
iv) Good mission statement are highly personalized – unique to the organization
for which they are developed.
Example of Mission Statement:
ICAI: ICAI will leverage technology and infrastructure and partner with its
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stakeholders to:
Impart world class education, training and professional development
opportunities to create global professionals.
Develop an independent and transparent regulatory mechanism that keeps
pace with the changing times.
Ensure adherence to highest ethical standards.
Conduct cutting edge research and development in the areas of accounting,
assurance, taxation, finance and business advisory services.
Establish ICAI member and firms as Indian Multi-national service providers.
Objectives and
Goals
Business organization translates their vision and mission into objectives.
As such the term objectives are synonymous with goals. However, we will
make an attempt to distinguish the two.
Objectives are open ended attributes that denote the future outcomes.
Goals are close ended attributes which are precise and expressed in specific
terms.
Thus goals are more specific and translate objectives into short term
perspective.
All organizations have objectives. They provide meaning and sense of
direction to organizational endeavor.
They also act as a benchmark for guiding organizational activity and for
evaluating how the organization is performing.
Characteristics of Objectives:
Should be understandable.
Should be measurable and controllable.
Should be challenging.
Should be related to a time frame.
Should be set with constraints.
Different objectives should correlate with each other.
Should provide for performance appraisal
Should provide basis for strategic decision making
Should define organization relationship with its environment.
Strategic Levels
in
Organizations
(Nov 2010)
A typical large organization is a multi divisional organization that competes in
several different businesses. It has separate self contained divisions to manage
each of these. There are three main levels of management: CORPORATE,
BUISNESS and FUNCTIONAL.
Corporate Level of Management:
The corporate level of management consists of :
The chief executive officer (CEO) and
Other top level executive;
Board of directors;
Corporate Staff.
These individuals occupy the apex of decision making within the organization.
The role of corporate level managers is to oversee the development of
strategies for the whole organization.
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This role includes defining the mission and goal of the organization, while
determining what businesses it should be in, allocating resources among
different businesses and so on rest at the corporate level.
Business Level of Management:
The development of strategies for individual business areas is the
responsibility of the general managers in these different businesses or
business level managers.
A business unit is a self contained division with its own functions – for example
finance, production, and marketing.
The strategic role of business level manager, head of the division, is to
translate the general statement of direction and intent that come from the
corporate level into concrete strategies for individual businesses.
Functional level of Management:
Functional level managers are responsible for the specific business functions
or operations such as human resources, purchasing, product development,
customer service, and so on.
Thus, a functional manager‟s sphere of responsibility is generally confined to
one organizational activity, whereas general managers oversee the operations
of whole company or division.
Characteristics of a strategic management decisions at different levels
Characteristic Corporate Business Functional
Type Conceptual Mixed Operational
Measurability Value
judgments
dominant
Semi
quantifiable
Usually
quantifiable
Frequency Periodic or
Sporadic
Periodic or
Sporadic
Periodic
Risk Wide Range Moderate Low
Profit Potential Large Medium Small
Relation to
present
activities
Innovative Mixed Supplementary
Cost Major Medium Modest
Time Long range Medium Range Short range
Co-operation
required
Considerable Moderate Little
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Chapter 3:
Strategic Analysis
“A Dream (Vision) written
down with a date, becomes
a goal, A Goal broken down
into steps becomes a Plan,
A Plan backed by Action
makes your dreams come
true.”
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STRATEGIC ANALYSIS
Introducti
on
The strategic management process, after deciding the vision, mission, goals and
objectives of the organization, turns its focus to scanning of environment in which
all organizations work as sub systems.
The environment scanning covers both scanning of external environment and
internal environment.
The scanning of external environment leads to the identification of the
opportunities and threats open to organizations while the internal analysis leads
to the study of strength and weaknesses which will decide as to what extent each
company is going to capitalize the opportunities and threats thrown open.
Situationa
l Analysis
Some form of analysis should form an essential part of any business plan and should
be reviewed over time to ensure that it is kept current. A preliminary introduction as to
what to taken into account when conducting an analysis and provide a checklist of
the important factors to consider are:
i) ENVIRONMENT FACTORS: What external and internal environment factors are
there that needs to be taken into account. This can include economic, political,
demographic or sociological factor that have a bearing on the performance.
ii) OPPORTUNITY AND ISSUE ANALYSIS: What are the current opportunities that
are available in the market, the main threats that business is facing and may face in
the future, the strengths that the business can rely on and any weakness that may
affect the business performance?
iii) COMPETITIVE SITUATION: Analyse main competitors of organization: who are
they what are they up to – how do they compare. What are their competitive
advantages? Analyse their strength and weakness.
iv) PRODUCT SITUATION: The details about current product. The details about
current product may be divided into parts such as the core product and any
secondary or supporting services or products that also make up what you sell. It is
important to observe this in terms of its different parts in order to be able to relate this
back to core needs of customer.
Question:
1. Write short note on elements considered for situational analysis. (May 12)
Strategic
Analysis
Strategy formulation is not a task in which managers can get by with intuition,
opinions, good instinct and creative thinking. Judgement about what strategy to
pursue need to flow directly from analysis of an organizational external environment
and internal situation.
The two most important situational considerations are:
(i) industry and competitive conditions and
(ii) An organizations own competitive capabilities, resources, internal strengths and
weaknesses, and market position.
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Issue to be considered for strategic Analysis:
1) Strategy involves over a period of time:
Strategy of a business is result of a series of small decisions taken over an
extended period of time.
A Sound Strategy cannot be finalized instantaneously.
It requires consideration of possible implications of routine decisions.
2) Balance:
The process of strategy formulation is often described as one of the matching the
internal potential of the organization with the environmental opportunities.
However, in reality, as perfect match between the two may not be feasible,
strategic analyses involve a workable balance between diverse and conflicting
considerations.
A manager working on a strategic decision has to balance opportunities,
influences and constraints.
There are pressures that are towards a particular choice such as entering a new
market. Simultaneously there are constraints that limit the choice such as
existence of a big competitor.
Some of these factors can be managed to an extent, however, there will be
several others that are beyond the control of a manager.
3) Risk:
Competitive markets,
Liberalization, (Global competition)
Globalization, (Global competition)
Booms, (Economy is growing at great pace resulting in higher demand)
Recession, (Lack of demand; slowdown of whole economy)
Technological advancements, (Desktops=>Laptops=>Mini Laptops=>etc)
Inter country relationship (India vs. Pakistan)
All affect businesses and pose risk at varying degree.
An important aspect of strategic analysis is to identify potential imbalances and
assess their consequences.
External risk is on account of inconsistencies between strategies and the forces in
the environment. (difference in expected government laws and actual laws,
competitor’s moves, Customers taste & preferences)
Internal risk occurs on account of forces that are either within the organization or
are directly interacting with the organization on a routine basis. (difference in
expectations of employees regarding bonus & Increment and Customers
regarding trade discount & cash discount and supplier regarding time of delivery,
discount)
Industry
and
Competiti
ve
Analysis
The analysis entails examining business in the context of a wider environment.
Industry and competitive analysis aims at developing insights in several
issues.
Analyzing these issues build understanding of a firm‟s surrounding environment
and collectively, for the basis for matching its strategy to changing industry
conditions and competitive realities.
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Dominant Economic features of the industry:
Industries differ significantly in their basic character and structure. Industry and
competitive analysis begins with an overview of the industry‟s dominant economic
features. The factors to consider in profiling an Industry‟s economic features are fairly
standard and are given as follows;
Number of rivals and their relative sizes.
Size and Nature of the business?
Market growth rate and position of business life (early development, rapid growth
and takeoff, early maturity, maturity, saturation and stagnation, decline)
Capital requirements and the ease of entry and exit.
Whether industry profitability is above/below par.
Pace of technological change in both production process and new product
introductions.
Types of distribution channels used to access customers.
Whether the products and services of rival firms are highly differentiated, weakly
differentiated or essentially identical.
Whether high rates of capacity utilization are crucial to achieving low cost
production efficiency.
Nature & Strength of Competition:
o One important component of industry and competitive analysis involves
examining industry‟s competitive process to discover what the main sources of
competitive pressures are and how strong each competitive force is.
o This analytical step is essential because managers cannot devise a successful
strategy without in dept understanding of the Industry‟s competitive character.
o Even though competitive pressures in various industries are never precisely the
same, the competitive process works similarly enough to use a common
analytical framework in gauging the nature and intensity of competitive forces.
o Porter‟s five forces model is useful in understanding the competition. It is a
powerful tool for systematically diagnosing the principle competitive pressure in a
market and assessing how strong and important each one is. Not only is it the
widely used technique of competition analysis, but it is also relatively easy to
understand and apply.
Triggers of Change:
Some of the categories or examples of drivers are follows:
Entry or Exit of Major Firms.
Product Innovation
Increasing Globalization
The internet and the new e-commerce opportunities and threats it breeds in the
Industry. (Online stores are a big threat to traditional stores)
Marketing Innovation
Change in cost and efficiency.
Changes in the long term Industry growth rate
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SWOT
Analysis
Examples STRENGTHS:
Strong Brand Name, Image or Reputation.
Superior Technological Skills
Cost Advantages
Product Innovation Skills
Strong Advertising and promotion
A reputation for good customer service
Sophisticated use of E Commerce Technology and Process.
Economies of Scale and learning curve effects
A strong Financial Condition
Better product quality compared to rivals
Wide Geographic coverage
WEAKNESS:
Weak Balance Sheet; overburdened by debt
Obsolete facilities
No clear strategic direction
Weak brand name, image or reputation
Narrow product line
Underutilized plant capacity
Short of financial resources to fund promising strategic initiatives
Weaker dealer network
Behind on product quality and / or technology and R & D
STRENGTH
It is an inherent capacityof the
organisation which it can use to gain
strategic advantage over its
competitors.
WEAKNESS
it is an inherent limitation or
constraint of the organisation which
creates strategic disadvantage.
OPPORTUNITIES
It is favourable condition which
enables it to strenghten its
position
THREATS
it is an unfavourable condition
which causes a risk for or
damage to its position.
SWOT
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OPPORTUNITIES:
Using the internet and e-commerce technologies to dramatically cut cost and/or to
pursue new sales growth opportunities.
Expanding product line to meet broader range of customer needs‟
Openings to exploit emerging new technologies
Acquisition of rival firms with attractive technological expertise
Falling trade barriers in attractive foreign markets
Integrating Forward or Backward
Alliances or Joint Ventures that expand firm‟s market coverage
THREATS:
Loss of sales to substitute products
Likely entry of potent new competitors
Slowdowns in market growth
Costly new regulatory requirement
Growing bargaining power of customers or suppliers
A shift in buyer needs and taste away from industry‟s product.
TOWS
Matrix
o Through SWOT analysis organizations identify their strengths, weakness,
opportunities and threats. While conducting the SWOT analysis managers are
often not able to come to terms with the strategic choices that the outcome
demands.
o Heinz Weihrich developed a matrix called TOWS matrix by matching strength and
weakness of an organization with the external opportunities and threats.
o The incremental benefit of TOWS matrix lies in the systematically identifying
relationships between these factors and selecting strategies on their basis. Thus,
TOWS matrix has a wider scope when compared to SWOT Analysis.
o TOWS matrix is an action tool whereas SWOT analysis is a planning tool.
o The TOWS matrix is a relatively simple tool for generating strategic options.
Through TOWS matrix four distinct alternative kinds of strategic choices can be
identified.
o By using TOWS Matrix, one can look intelligently at how one can best take
advantage of the opportunities open to him, at the same time that one can
minimize the impact of weaknesses and protect oneself against threats.
o Used after detailed analysis of threats, opportunities, strength and weaknesses, it
helps one to consider how to use the external environment to his strategic
advantage, and so one can identify some of the strategic options available to him.
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The Organization Strengths – S Weakness – W
Opportunities – O
(New Markets,
New Products,
Favourable
Government
Policies, etc)
SO Strategies:
SO is a position that any firm
would like to achieve it.
Strengths can be used to
capitalize or build upon
existing or emerging
opportunities. Such firms can
take lead from their
strengths and utilize the
resources to take the
competitive advantage.
Attacking Strategy
WO Strategies:
The strategies developed
need to overcome
organizational weaknesses if
existing or emerging
opportunities are to be
exploited to maximum.
Build Strength For
Attacking Strategy
Threats – T
(New Entrants,
New competitive
products, Chance
in customer
choice, etc)
ST Strategy:
ST is a position in which a
firm strives to minimize
existing or emerging threats
through its strengths.
Defensive Strategy
WT Strategies:
WT is a position that any firm
will try to avoid. An
organization facing external
threats and internal
weaknesses may have to
struggle for its survival. WT
strategy is a strategy which
pursued to minimize
weaknesses and as far as
possible, cope with existing or
emerging threats.
Build Strengths for
Defensive Strategy
Question:
1. How is TWOS Matrix an improvement over SWOT analysis? Describe the
construction of TWOS Matrix. (May 13) (4 Marks)
2. Discuss the relevance of TOWS matrix in strategic planning process. (Nov 2009)
Portfolio
Analysis
Portfolio analysis can be defined as a set of techniques that help strategist in
taking strategic decisions with regard to individual products in a firm‟s portfolio.
(Continue or Shut Down a particular product)
It is primarily used for competitive analysis and corporate strategic planning in
multi product and multi business firms.
The main advantage in adopting a portfolio approach in a multi product, multi
business firm is that resources could be channelized at the corporate level to
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those businesses that posses the greatest potential.
For example, a diversified company may decide to divert resources from its cash
risk business to more prospective one that hold promise of a faster growth so that
the company achieves its corporate level objectives in an optimal manner.
In order to design the business portfolio, the business must analyse its current
business portfolio and decide which business should receive more, less or no
investment.
Three Important Concepts which are pre-requisite to understand different models of
Portfolio Analysis:
Strategic Business Unit:
Analyzing portfolio may begin with identifying key businesses also termed as
Strategic Business units (SBU).
SBU is a unit of the company that has a separate mission and objectives and
which can be planned independently from other company businesses.
SBU can be a:
o Company Division
o A Product Line within a division or
o Even a Single Product or Brand.
SBUs are common in organizations that are located in multiple countries with
independent manufacturing and marketing startups.
Characteristics of a SBU:
Has its own set of Competitors.
Has a manager who is responsible for strategic planning and profit.
Single business or collection of related businesses that can be planned for
separately.
After identifying SBUs the businesses have to assess their respective attractiveness
and decide how much support each deserves.
Experienc
e Curve
Experience curve is an important concept used for applying a portfolio approach.
The concept is similar to a learning curve which explains the efficiency increase
gained by workers through repetitive productive work.
Experience curve is based on the commonly observed phenomenon that units
cost decline as a firm accumulates experience in terms of a cumulative volume of
production.
Experience curve results from a variety of factors such as:
o Learning effects, (Past experience)
o Economies of scale (production in large volumes)
o Production redesign; (kick start to self start)
o Technological improvements in production. (Keypad to touch screen)
Experience curve is considered a barrier for new firms contemplating entry in an
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industry.
It is also used to build market share and discourage competition.
For example, in a two wheeler market, the experience curve seems to be working
in favour of Bajaj Auto which for the past decade has been selling on an average
5 lakh scooter a year and retains more than 60% of market share. The primary
advantage that Bajaj Auto has is in terms of Costs.
Questions:
1. Explain the concept of experience curve and highlight its relevance in strategic
management. (Nov 2012)
Product
Life Cycle
(PLC)
It is a useful concept for guiding strategic choice.
Essentially, PLC is an S-Shaped curve which exhibits the relationship of sales
with respect to time for a product that passes through four successive stages of :
o Introduction (Slow Sales Growth),
o Growth (Rapid Market acceptance),
o Maturity (Slowdown in growth rate) and
o Decline (Sharp downward drift).
INTRODUCTIO
N STAGE
The first stage of PLC is the introduction stage in which
competition is almost negligible, prices are relatively high and
markets are limited. The growth in sales is at a lower rate
because of lack of knowledge on the part of customers.
GROWTH
STAGE
The second phase of PLC is growth stage. In the growth stage,
the demand expands rapidly, prices fall, competition increase,
and market expands. The customer has knowledge about the
product and shows interest in purchasing it.
MATURITY The third phase of PLC is maturity stage. In this stage, the
competition gets tough and market gets stabilized. Profit comes
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STAGE down because of stiff competition. At this stage organization may
work for maintaining stability.
.
DECLINING
STAGE
In the declining stage of PLC, the sales and profits fall down
sharply due to some new product replaces the existing product.
So a combination of strategies can be implemented to stay in the
market either by diversification or retrenchment.
The main advantage of PLC is that it can be used to diagnose a Portfolio of products
in order to establish the stage at which each of them exists.
Particular attention is to be paid on the businesses that are in the declining stage.
Depending on the diagnosis, appropriate strategic choice can be made.
For instance, expansion may be a feasible alternative for businesses in the
introductory and growth stages.
Mature businesses may be used as sources of cash for investment in other
businesses which need resources.
A combination of strategies like selective harvesting, retrenchment, etc may be
adopted for declining business. In this way, a balanced portfolio of businesses may
be built up by exercising a strategic choice based on the PLC Concept.
Questions:
1. PLC is an S Shaped curve. True or False. (June 09)
2. Explain Growth Stage of Product Life Cycle. (May 08)
3. Short note on Product Life Cycle. (Nov 13) (4 Marks)
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Portfolio Analysis Models
Boston
Consultin
g Group
(BCG)
Growth
share
Matrix
The BCG Growth Share matrix is the simplest way to portray a corporation‟s
portfolio of investments. Growth Share matrix is also known as for its COW and
DOG Metaphors is popularly used for resource allocation in a diversified
company.
Using BCG approach, a company classifies its different businesses on a two
dimensional growth share matrix.
In the matrix:
o The vertical axis represents market growth share and provides a measure
of market attractiveness.
o The horizontal axis represents relative market share and serves as a
measure of company strength in the market.
Using the matrix, organization can identify four different types of products or SBU
as follows:
Question
Marks
(BUILD)
Sometimes called as Problem Childs or Wildcats, are low market
share business in high growth markets. They require a lot of
cash to hold their share. They need heavy investment with low
potential to generate cash. Question marks if left unattended are
capable of becoming cash traps. Since growth rate is high,
increasing it should be relatively easier. It is for business
organization to turn them stars and then to cash cows when
growth rate reduces.
Stars (HOLD) Stars are products or SBU that are growth rapidly. They also
need heavy investment to maintain their position and finance
their rapid growth potential. They represent best opportunities for
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expansion.
Cash Cows
(HARVEST)
Cash Cows are low growth, high market share business or
products. They generate cash and have low costs. They are
established, successful, need less investment to maintain their
market share. In long run when the growth rate slows down, star
becomes cash cows.
Dogs
(LIQUIDATE)
Dogs are low growth, low share business and products. They
may generate enough cash to maintain themselves, but do not
have much future. Sometimes they may need cash to survive.
Dogs should be minimized by means of divestment or
liquidation.
Once the organizations have classified its products or SBUs, it must determine what
role each will play in the future. The four strategies that can be perused are:
1. BUILD: Here the objective is to increase market share, even by forgoing short term
earnings in favour of building a strong future with large market share.
2. HOLD: here the objective is to preserve market share.
3. HARVEST: here the objective is to increase short term cash flow regardless of
long term effect.
4. DIVEST: Here the objective is to sell or liquidate the business because resources
can be better used elsewhere.
Limitations of BCG:
The growth share matrix has done much to help strategic planning study; however,
there are problems and limitation with the method. BCG matrix can be difficult, time
consuming, and costly to implement. Management can find it difficult to define SBU
and measure market share and growth. It also focuses on classifying current
business but provide little advice for future planning. They can lead the company to
placing too much emphasis on market share growth or growth through entry into
attractive new markets. This can cause unwise expansion into hot, new, risky
ventures or giving up on established units too quickly.
Questions:
1. Explain the term Star in the context of BCG matrix. (Nov 2007)
2. In BCG matrix for what the metaphors like stars, cows and dogs are used? (May
2007)
3. In the light of BCG Growth Matrix state the situation under which the following
strategic options are suitable:
a. Build
b. Hold
c. Harvest
d. Divest (Nov 2011)
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4. Describe the construction of BCG matrix and discuss its utility in Strategic
management. (June 2009)
Ansoff’s
Product
Market
Growth
matrix
It was proposed by Igor Ansoff.
The Ansoff‟s product market growth matrix is a useful tool that helps businesses
decide their product and market growth strategy.
With the use of this matrix a business can get a fair idea about how its growth
depends upon it markets in new or existing products in both new and existing
markets.
Companies should always be looking to the future. One useful device for
identifying growth opportunities for the future is the product/market expansion
grid. The product/market growth matrix is a portfolio planning tool for identifying
company growth opportunities.
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MARKET
PENETRATION Market penetration refers to a growth strategy where the
business focuses on selling existing products into
existing markets.
It is achieved by making more sales to present customers
without changing products in any major way.
Penetration might require greater spending on advertising or
personal selling.
Overcoming competition in a mature market requires an
aggressive promotional campaign, supported by a pricing
strategy designed to make the market unattractive for
competitors.
Penetration is also done by effort on increasing usage by
existing customers.
MARKET
DEVELOPMENT Market development refers to a growth strategy where the
business seeks to sells its existing products into new
markets.
It is a strategy for company growth by identifying and
developing new market for current company products.
This strategy may be achieved through new geographical
markets, new product dimensions or packaging, new
distribution channels or different pricing policies to attract
different customers or create new market segments.
PRODUCT
DEVELOPMENT Product development refer to a growth strategy where
business aims to introduce new products into existing
markets.
It is a strategy for company growth by offering modified or
new products to current markets.
This strategy may require the development of new
competencies and requires business to develop modified
products which can appeal to existing markets.
DIVERSIFICATION Diversification refers to a growth strategy where a business
markets new products in new market. It is strategy by
starting up or acquiring businesses outside the company‟s
current products and markets.
This strategy is risky because it does not rely on either
company‟s successful product or its position in established
markets.
Typically the business is moving into markets in which it has
little or no experience.
Questions:
1. Explain the meaning of Market penetration. (May 2012)
2. Aurobindo, the Pharmaceutical company wants to grow its business. Draw Ansoff‟s
product market growth matrix to advise them of the available options. (Nov 2014)
3. The Ansoff‟s product market growth matrix is a useful tool that help businesses
their product and market growth strategy. Elucidate this statement. (May 2013)
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ADL Matrix The ADL Matrix has derived its name from Arthur D. Little is a portfolio analysis
that is based on Product Life Cycle.
The approach forms a two dimensional matrix based on:
o Stage of Industry Maturity: it is an environmental assessment that
represents a position in Industry‟s life cycle.
o Firm‟s Competitive Position, environmental assessment and business
strength assessment: it is a measure of business strength that helps in
categorization of products or SBUs into one of five competitive positions:
Dominant, Strong, Favourable, Tenable and Weak.
The competitive position of a firm is based on an assessment of the following
criteria:
Dominant This is a comparatively rare position and in many cases is attributable
either to a monopoly or a strong and protected technology leadership.
Strong By virtue of this position, the firm has a considerable degree of
freedom over its choice of strategies and is often able to act without its
market position being unduly threatened by its competitors.
Favourabl
e
This position, which generally comes about when the industry is
fragmented and no one competitor stand out clearly, results in the
market leaders a reasonable degree of freedom.
Tenable Although the firms within this category are able to perform
satisfactorily and can justify staying in the industry, they are generally
vulnerable in the face of increased competition from stronger and
more proactive companies in the market.
Weak The performance of firms in this category is generally unsatisfactory
although the opportunities for improvement do exist.
Questions:
1. Explain the meaning of ADL Matrix. (Nov 2012)
General
Electric
Model
(Stop
Light)
This model has been used by General Electric Company (developed by GE with
assistance of consulting firm McKinsey & Co). this model is also known as
Business Planning matrix, GE Nine Cell Matrix and GE electric model.
The strategic planning approach in this model has been inspired from traffic
control lights.
The lights that are used at crossings to manage traffic are: Green for GO, yellow
for CAUTION, and Red for STOP.
This model uses two factors while taking strategic decisions: Business strength
and market attractiveness.
The vertical axis indicates market attractiveness and horizontal axis shows the
business strength in the Industry.
The market attractiveness is measured by a number of factors like:
o Size of the market
o Market growth rate
o Industry profitability
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o Competitive intensity
o Availability of Technology
o Pricing trends
o Overall risk of returns in the industry
o Demand Variability
o Segmentation
o Distribution structure
Business Strength is measured by considering the typical drivers like:
o Market Share
o Market Share Growth rate
o Profit Margin
o Distribution Efficiency
o Brand Image
o Ability to compete on price and quality
o Customer loyalty
o Production capacity
o Relative Cost position
o Management Caliber
o Technological capability
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Chapter 4:
Strategic Planning
“Strategic Planning is
worthless, unless there is
first a Strategic Vision.”
John Naisbitt
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WHAT IS
PLANNING?
Planning is future oriented. It relates to deciding what needs to be done in the
future (today, next week, next month, next year, over the next couple of years,
etc) and generating blueprints for action.
Good planning is an important constituent of good management. Planning
involves determining what resources are available, what resources can be
obtained, and allocating responsibilities according to the potential of the
employees.
Planning can be strategic (Long range decisions) or operational (Short term
day to day decisions).
Strategic plans are organization wide, establish overall objectives, and position
the organization with relation to its environment. On the other hand, operational
planning specify details on how individual objectives are to be achieved.
Strategic planning deals with one or more of the three key questions:
o What are we Doing?
o For whom do we do it?
o How to improve and Excel?
Strategic planning determines where an organization is going over the next
year or more and ways for going there.
As such strategic planning is a top level management function. The flow of
planning can be from corporate to divisional level or vice versa.
There are two approaches for strategic planning – Top Down or Bottom Up.
Top Down Strategic planning describes a centralized approach to strategy
formulation in which the corporate centre or head office determines mission,
strategic intent, objectives and strategies for the organization as a whole and
for all parts. Unit managers are seen as implementers of pre-specified
corporate strategies.
Bottom Up Strategic planning is the characteristic of autonomous or semi
autonomous divisions or subsidiary companies in which corporate centre does
not conceptualize its strategic role as being directly responsible for determining
the mission, objectives or strategies of its operational activities. It may prefer to
act as a catalyst and facilitator.
STAGES OF
CORPORATE
STRATEGY
FORMULATION
PROCESS
Crafting and Executing a company‟s strategy is a five stage managerial process as
given below:
1) Developing a Strategic Vision of where the company needs to head and what
its future product-consumer-market-technology focus should be.
2) Setting objectives and using them as yardsticks for measuring the company‟s
performance and progress.
3) Crafting a strategy to achieve the desired outcomes and move the company
along the strategic course that management has charted.
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4) Implementing and executing the chosen strategy efficiently and effectively.
5) Monitoring developments and initiating corrective adjustments in the
company‟s long term direction, objectives, strategy or execution in light of the
company‟s actual performance, changing conditions, new ideas, and new
opportunities.
Stage 1: Developing a Strategic Vision;
First the company must determine what directional path the company should
take and what changes in the company‟s product-market-customer-technology-
focus would improve its current market position and its future prospect.
Top Management‟s views and conclusions about the company‟s direction and
the product-market-customer-technology focus constitute a strategic vision for
the company.
A strategic vision describes management‟s aspirations for the business and
points an organization in a particular direction, charts a strategic path for it to
follow in preparing for the future and molds organization identity.
A clearly articulated strategic vision communicates management‟s aspiration to
stakeholders and helps steer the energies of company personnel in a common
direction.
Stage 2: Setting Objectives:
Corporate objectives flow from the mission and growth ambition of the
organization. Basically, they represent the quantum of growth the firm seeks to
achieve in the given time frame.
Through the objective setting process, the firm is tackling the environment and
deciding the focus it should have in the environment.
The managerial purpose of setting objectives is to convert the strategic vision
into specific performance targets – results and outcomes the management
wants to achieve – and then use these objectives as yardstick for tracking the
company‟s progress and performance.
Balanced Score Card Approach:
o The balanced score card approach for measuring the company
performance requires setting both financial and strategic objectives and
tracking their achievement.
o Unless a company is in deep financial difficulty, such that its very
survival is threatened, company managers are well advised to put more
emphasis on achieving strategic objectives than on achieving financial
objectives whenever a trade-off has to be made.
A Need for both Short Term and Long term objectives:
o As a rule, a company‟s set of financial and strategic objectives ought to
include both short term and long term performance targets.
o Having quarterly or annual objective focuses attention on delivering
immediate performance improvements.
o Targets are to be achieved within 3 to 5 years down the road.
Long term Objectives:
o Profitability
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o Productivity
o Employee Development
o Employee relations
o Technology Leadership
o Public Responsibility
o Competitive position
Qualities of Long Term Objectives:
o Acceptable
o Flexible
o Measurable
o Motivating
o Suitable
o Understandable
o Achievable
Stage 3: Crafting a strategy to achieve the objectives and vision:
A company‟s strategy is at full power only when its many pieces are united. To
achieve this unity, the strategizing process generally has proceeded from the
corporate level to the business level and then from business level to the
functional level and operating levels.
Midlevel and frontline managers cannot do good strategy making without
understanding the company‟s long term direction and higher level strategies.
Achieving unity in strategy making is partly a function of communicating the
company‟s basic strategy themes effectively across the whole organization and
establishing clear strategic principles and guidelines for lower level strategy
making.
The greater the number of company personnel who know, understand and buy
in to the company basic direction and strategy, the smaller the risk that people
and organization units will go off in conflicting strategic direction when decision
making is pushed down to frontline levels and many people are given a
strategic making role.
Good communication of strategic themes and guiding principles thus serves a
valuable strategy unifying purpose.
In making strategic decisions, inputs from a variety of assessments are
relevant. However, the core of any strategic decision should be based on three
types of assessment. The first concerns organizational strengths and
weakness. The second evaluates competitor strengths, weaknesses and
strategies, because an organizations strength is of less value if it is neutralized
by a competitor‟s strength or strategy. The third assesses the competitive
context, the customers and their needs, the market, and the market
environment.
The goal is to develop a strategy that exploits business strengths and
competitor‟s weaknesses and neutralizes business weaknesses and
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competitors strength.
Stage 4: Implementing & Executing the Strategy:
In most situations, managing the strategy execution process includes the following
principal aspects:
Staffing the organization with the needed skills and expertise consciously
building and strengthening strategy supporting competencies and competitive
capabilities and organizing the work effort.
Developing budgets that steer ample resources into those activities critical to
strategic success.
Ensuring that policies and operating procedures facilitate rather than
impede effective execution.
Using the best known practices to perform core business activities and
pushing for continuous improvement.
Installing information and operating system that enable company personnel
to better carry out their strategic roles day in and day out.
Motivating people to pursue the target objectives energetically.
Rewards and incentives directly to the achievement of performance
objectives and goods strategy execution.
Creating a company culture and work climate conducive to successful
strategy implementation and execution.
Exerting the internal leadership needed to drive implementation forward and
keep improving strategy execution.
Stage 5: Monitoring developments, evaluating performance and making corrective
adjustments:
o A company‟s vision, objectives, strategy, and approach to strategy execution
are never final; managing strategy is an ongoing process, not an every now
and then task.
o So long as the company‟s direction and strategy seem well matched to industry
and competitive conditions and performance targets are being met, company
executives may decide to stay the course.
o But whenever a company encounters disruptive changes in its external
environment, question need to be raised about the appropriateness of its
direction and strategy.
o Successful strategy execution entails vigilantly searching for ways or
continuously improve and then making corrective adjustments whenever and
wherever it is useful to do so.
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STRATEGIC ALTERNATIVES
Glueck and
Jauch
GENERIC
Strategic
Alternative
There are four generic ways in which strategic alternatives can be considered.
STABILITY
STRATEGIES
One of the important goals of a business enterprise is stability –
to safeguard its existing interest and strengths, to pursue well
established and tested objectives, to continue in the chosen
business path, to maintain operational efficiency on a sustained
basis, to consolidate the commanding position already
reached, and to optimize returns on the resources committed in
the business.
A stability strategy is pursued by a firm when:
o It continues to serve in the same or similar markets and
deals in same products and services.
o The strategic decision focus on incremental improvement of
functional performance.
It‟s not a Do Nothing strategy. It involves keeping track of new
developments to ensure that the strategy continues to make
sense. This strategy is typical for mature business
organizations.
Characteristics of Stability Strategy:
o A firm opting for stability strategy stays with the same
business, same product market and maintaining same level
of effort as at present.
o The Endeavour is to enhance functional efficiencies in an
incremental way, through better deployment and utilization
of resources. The assessment of the firm is that the desired
income and profits would be forthcoming through such
incremental improvements in functional efficiencies.
o Naturally, the growth objective of firms employing this
strategy will be quite modest.
o Stability strategy does not involve a redefinition of the
business of the corporation.
o It is basically a safety oriented, status quo-oriented
strategy.
o It does not warrant much of fresh investments.
o The risk is also less.
o It is a fairly frequently employed strategy.
o With the stability strategy, the firm has the benefit of
concentrating its resources and attention on the existing
business/products and markets.
o But the strategy does not permit the renewal process of
bringing in fresh investment and new product and market
for the firm.
Major reason for organization adopting stability strategy:
o It is less risky, involves less changes and people feel
comfortable with things as they are.
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o The environment faced is relatively stable.
o Expansion may be perceived as being threatening.
o Consolidation is sought through stabilizing after a period of
rapid expansion.
EXPANSION
STRATEGY
Expansion is often characterized by significant
reformulation of goals and directions, major initiatives and
moves involving investments, exploration and introduction
of new products, new technology and new markets,
innovative decisions and so on.
Expansion through Diversification:
o Diversification is defined as entry into new products
or product lines, new services or new markets,
involving substantially different skills, technology
and knowledge.
o When an established firm introduces a new product
which has little or no relation with its present product
line and which is meant for a new class of
customers different from the firm‟s existing
customer‟s groups, the process is known as
Conglomerate diversification. (Example Reliance
and Tata Group)
o For some firms, diversification is a means of utilizing
their existing facilities and capabilities in a more
effective and efficient manner. They may have
excess capacity or capability in manufacturing
facilities, investible funds, marketing channels,
managerial and other manpower, research and
development, etc.
Expansion through Acquisition and Mergers:
o Acquisition or merger with an existing concern is an
instant means of achieving the expansion. It is an
attractive and tempting option in the sense that it
save the time, risks and skills involved in building
internal growth opportunities.
o Organizations consider Merger and acquisition
proposals in a systematic manner, so that the
marriage will be mutually beneficial, a happy and
lasting affair.
o Acquisition and merger are also resorted to for the
purpose of achieving a measure of synergy between
the parent and the acquired enterprises.
o Synergy may result from such bases as physical
facilities, technical and managerial skills, distribution
channels, general administration, research and
development and so on.
Characteristics of Expansion Strategy:
o Expansion strategy is the opposite of stability strategy.
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While in stability strategy, rewards are limited, in expansion
strategy they are very high.
o Expansion strategy is the most frequently used generic
strategy.
o Expansion strategy involves a redefinition of the business
of the company.
o The process of renewal of the firm through fresh investment
and new business/ products/ markets is facilitated only by
expansion strategy.
o Expansion strategy is highly versatile strategy; it offers
several permutations and combinations for growth. A firm
opting for the expansion strategy can generate many
alternatives within the strategy by altering its propositions
regarding products, markets and functions and pick the one
that suits it most.
o Expansion strategy holds within its fold two major strategy
routes:
o Intensification and
o Diversification.
o Both of them are growth strategies; the difference lies in the
way in which the firm actually pursues the growth;
o With intensification strategy, the firm pursues growth by
working with its current businesses.
o Intensification, in turn, encompasses three alternative
routes:
1) Market Penetration Strategy:
The most common expansion strategy is market penetration on
the current business. The firm directs its resources to the
profitable growth of a single product, in a single market, and
with a single technology.
2) Market Development Strategy
It consists of marketing present products, to customers in
related market areas by adding different channels of
distribution or by changing the content of advertising or the
promotional media.
3) Product Development Strategy
Product development involves substantial modification of
existing products or creation of new but related items that can
be marketed to current customers through established
channels.
o Diversification strategy involves expansion into new
businesses that are outside the current businesses and
markets.
o There are three broad types of diversification:
1) Vertically integrated diversification:
In vertically integrated diversification, firms opt to engage in
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businesses that are related to the existing business of the firm.
The firm remains vertically within the same process sequence
moves forward or backward in the chain and enters specific
product/ process steps with the intention of making them into
new businesses for the firm. the characteristic feature of
vertically integrated diversification is that here, the firm does
not jump outside the vertically linked product process chain.
Forward and backward Integration:
Forward and backward integration forms part of vertically
integrated diversification.
In vertically integrated diversification, firm opt to engage in
businesses that are vertically related to the existing
business of the firm.
The firm remains vertically within the same process. While
diversifying firms opt to engage in businesses that are
linked forward or backward in the chain and enter specific
product/process steps with the intention of making them
into new businesses for the firm.
Backward integration is a step towards, creation of effective
supply by entering business of input providers. Strategy
employed to expand profit and gain greater control over
production of a product whereby a company will purchase
or build a business that will increase its own supply
capability or lessen its cost of production. On the other
hand forward integration is moving forward in the value
chain and entering business lines that use existing
products. Forward integration will also take place where
organization enter into businesses of distribution channels.
Horizontal Integrated Diversification:
Through the acquisition of one or more similar business
operating at the same stage of the production marketing chain
that is going into complementary products, by product or taking
over competitor products.
Related Diversification
Exploiting the following:
Brand Name
Marketing skills
Sales and distribution
capacity
Manufacturing skills
Economies of scale
R & D and New Product
capability
Unrelated Diversification
Obtain high ROI
Manage and allocate
cash flow
Tax benefits
Obtain liquid assets
Vertical integration
Defend a takeover
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2) Concentric Diversification:
Concentric diversification too amounts to related diversification.
In concentric diversification, the new business is linked to the
existing businesses through process, technology or marketing.
The new product is a spin off from the existing facilities and
product/process. This means that in concentric diversification
too, there are benefits of synergy with the current operations.
However, concentric diversification differs from vertically
integrated diversification in the nature of the linkage the new
product has with the existing ones. While in vertically integrated
diversification, the new product has with the existing current
process-product chain, in concentric diversification, ether is a
departure from this vertical linkage. The new product is only
connected in a loop like manner at one or more points in the
firm‟s existing process/technology/product chain.
3) Conglomerate diversification
o Vertically integrated diversification involves going into new
businesses that are related to the current ones.
o It has two components – forward integration and backward
integration.
o The firm remains vertically within the given product –
process sequence; the intermediaries in the chain become
new businesses.
o In Concentric diversification, too, the new products are
connected to the firm‟s existing process/technology. But the
new products are not vertically linked to the existing ones.
They are not intermediaries. They serve new functions in
new markets. A new business is spinned off from the firm‟s
existing facilities.
o In Conglomerate Diversification, too, a new business is
added to the firm‟s portfolio. But it is disjoined from the
existing business; in process/ technology/ function, there is
no connection between the new businesses and the
existing one. It is unrelated diversification.
Major Reasons for adopting expansion strategy:
It may become imperative when environment demands
increase in pace of activity.
Strategist may feel more satisfied with the prospects of
growth from expansion; chief executives may take pride in
presiding over organizations perceived to be growth
oriented.
Increasing size may lead to more control over the market
vis a vis competitors.
Advantages from the experience curve and scale of
operations may accrue.
RETRENCH
MENT
STRATEGY
A Business organization can redefine its business by
divesting a major product line or market.
The nature, extent and timing of retrenchment are matters
to be carefully decided by management, depending upon
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each contingency.
It is not a matter of failure of business planning, rather well
planned exercise to get rid of unprofitable parts of business
which will help the organization concentrate its total
attention to the most profitable and promising areas of
business only.
It leads to:
o Reduction in number of employees.
o Sale of assets
o Financial restructuring
o Liquidation of the firm, in exceptional cases.
Characteristics of Retrenchment Strategy:
Divestment strategy involves retrenchment of some of the
activities in a given business of the firm or sell out of some
of the business as such.
Retrenchment is necessary in the following firm‟s
conditions:
o High Competition
o Business becoming Unprofitable
o Failure of strategy
o Industry Overcapacity
A firm opting for retrenchment strategy can do it in three
different steps:
1) Turnaround Strategy:
Retrenchment may be done either internally or externally. For
internal retrenchment to take place, emphasis is laid on
improving internal efficiency, known as Turnaround Strategy.
Major signs that indicates that organization needs a turnaround:
o Persistent Negative Cash Flow
o Continuous Losses
o Mismanagement
o Uncompetitive products or services
o Over Manning, high turnover of employees and low morale
o Declining Market Share
A set of ten elements that contribute to turnaround are:
o Changes in Top Management
o Identifying quick payoff activities
o Quick Cost reductions
o Revenue generation
o Asset Liquidation for generating cash
o Better internal coordination
2) Divestment Strategy:
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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. The option of a turnaround
may even be ignored if it is obvious that divestment is the only
answer.
Reasons for adopting a divestment strategy:
o A business that had been acquired proves to be a
mismatch and cannot be integrated within the company.
o Persistent negative cash flows from a particular business
create financial problems for the whole company, creating
the need for divestment of that business.
o Severity of competition and the inability of a firm to cope
with it may cause it to divest. (Closure of small stores
because of Malls and shopping complex opened in the
locality)
o Technological upgradation 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. (Single screen
theaters closed because of emergency of multiplexes)
o A better alternative may be available for investment,
causing a firm to divest a part of its unprofitable
businesses.
3) Liquidation Strategy:
o A retrenchment strategy considered the most extreme and
unattractive is liquidation strategy, which involves closing
down a firm and selling its assets.
o 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.
o Many small scale units, proprietorship firms, and
partnership ventures liquidate frequently but medium and
large sized companies rarely liquidate in India.
o The company management, government, banks and
financial institutions, trade unions, suppliers and creditors
and other agencies are extremely reluctant to take a
decision or ask, for liquidation.
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o Selling assets for implementing a liquidation strategy may
also be difficult as buyers are difficult to find. Moreover, the
firm cannot expect adequate compensation as most assets,
being unusable, are considered as scrap.
o Liquidation strategy may be unpleasant as a strategic
alternative but when a dead business is worth more than
alive, it is a good proposition. For instance, the real estate
owned by a firm may fetch it more money than the actual
return from doing business.
o Under the companies act, 2013 liquidation may be either by
the court, voluntary or subject to the supervision of the
court.
Questions:
1. What is conglomerate diversification? (Nov 2010)
MICHAEL
PORTER’S
GENERIC
STRATEGY
COST
LEADERSHIP
STRATEGIES
A primary reason for pursuing forward, backward and
horizontal integration strategies is to gain cost
leadership benefits. But cost leadership generally must
be pursued in conjunction with differentiation.
A number of cost elements affect the relative
attractiveness of generic strategies, including
economies or diseconomies of scale achieved, learning
and experience curve effects, the percentage capacity
utilization achieved, and linkages with suppliers and
distributors.
Striving to be the low cost producer in an industry can
be especially effective when the market is composed of
many price sensitive buyers, when there are few ways
to achieve product differentiation, when buyers do not
care much about differences from brand to brand, or
when there are a large number of buyers with significant
bargaining power.
The basic idea is to under price competitors and thereby
gain market share and sales, driving some competitors
out of the market entirely.
A successful cost leadership strategy is utilization of
entire firm in the form of:
o Higher efficiency
o Low Overhead
o Limited perks to human resources
o Minimize the waste
o Use of advance technology
o Bulk buying to enjoy quantity discount
o Rewards linked to cost reduction
DIFFERENTIATION
STRATEGY
Differentiation does not guarantee competitive
advantage especially if standard products sufficiently
meet customer needs or if rapid imitation by competitors
is possible.
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Durable products protected by barriers to quick copying
by competitors are best.
Successful differentiation can mean greater product
flexibility, greater compatibility, lower costs, improved
service, less maintenance, greater convenience.
A differentiation strategy should be pursued only after a
careful study of buyer‟s needs and preferences to
determine the feasibility of incorporating one or more
differentiating features into a unique product that
features the desired attributes.
A successful differentiation strategy allows a firm to
charge a higher price for its products and to gain
customer loyalty because customers may become
strongly attached to the differentiation features.
Special features that differentiate one‟s product can
include superior service, spare parts availability,
engineering design, product performance, useful life,
ease of use, etc.
Common organizational requirement for a successful
differentiation strategy include strong coordination
among R & D and marketing functions and substantial
amenities to attract scientist and creative people.
A risk of pursuing a differentiation strategy is that unique
product may not be valued highly enough by customers
to justify the higher price. When this happens, a cost
leadership strategy easily will defeat a differentiation
strategy.
Another risk of pursuing differentiation strategy is that
competitors may develop ways to copy the
differentiation features quickly. Firms thus must find
durable sources of uniqueness that cannot be imitated
quickly or cheaply by rival firms.
FOCUS
STRATEGY
A successful focus strategy depends on an industry
segment that is of sufficient size, has good growth
potential and is not crucial to the success of other major
competitors.
Strategies such as market penetration and market
development offer substantial focusing advantages.
Midsize and large firms can effectively pursue focus
strategy only in conjunction with differentiation or cost
leadership based strategies.
All firms in essence follow a differentiation strategy.
Because only one firm can differentiate itself with the
lowest cost, the remaining firms in the industry must find
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other ways to differentiate their products.
Focus strategies are most effective when consumers
have distinctive preferences or requirements and when
rival firms are not attempting to specialize in the same
target segment.
Risks of pursuing focus strategy include possibility that
numerous competitors will recognize the successful
focus strategy and copy it, or that consumer preferences
will drift towards the product attributes desired by the
market as a whole.
An organization using a focus strategy may concentrate
on a particular group of customers, geographic markets,
or on particular product line segments in order to serve
a well defined but narrow market better than competitors
who serve a broader market.
Merger and
Acquisition
Strategy
Merger and acquisition in simple words are defined as a process of combining
two or more organization together.
Merger is a process when two or more companies come together to expand
their business operations. In such a case the deal gets finalized on friendly
terms and both the organization share profits in the newly created entity. In a
merger two organization combine to increase their strength and financials gains
with breaking the trade barriers.
When one organization takes over the other organization and controls all its
business operations, is known as Acquisitions. In this process of acquisition,
one financially strong organization overpowers the weaker one. A deal in case
of an acquisition is often done in an unfriendly manner, it is more or less a
forced association where the powerful organization.
Types of Mergers:
HORIZONTAL
MERGER
Horizontal mergers are combinations of firm engaged
in the same industry.
It is a merger with a direct competitor.
The principle objective behind this type of merger is to
achieve economies of scale in the production process
by shedding duplication of installations and functions,
widening of line of products, decrease in working
capital and fixed assets investment, getting rid of
competition and so on.
For example, formation of brook bond Lipton India Ltd
through merger of Lipton India and Brook Bond.
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VERTICAL
MERGER
It is a merger of two organizations that are operating in
the same industry but at different stages of production
or distribution system. This often leads to increased
synergies with the merging firms.
If any organization takes over its supplier/producer of
raw material, then it leads to backward integration.
On the other hand, forward integration happens when
an organization decides to take over its buyer
organization or distribution channels.
Vertical merger results in many operating and financial
economies.
Vertical merger helps to create an advantageous
position by restricting the supply of inputs to other
players, or by providing the inputs at a higher cost.
CO-GENERIC
MERGER
In Co-generic merger two or more organization are
associated in some way or the other related to the
production processes, business markets, or basic
required technologies.
Such merger include extension of the product line or
acquiring components that are required in the daily
operations.
It offers great opportunities to businesses to diversify
around a common set of resources and strategic
requirements.
For example, organization in the goods categories
such as refrigerators can diversify by merging with
another organization having business in kitchen
appliances.
CONGLOMERATE
MERGER
o Conglomerate merger are the combination of
organization that are unrelated to each other.
o There are no linkages with respect to customer groups,
customer functions and technologies being used.
o There are no important common factors between the
organization in production, marketing, research and
development and technology. In practice, however,
there is some degree of overlap in one or more of
these factors.
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Chapter 5: Formulation of Strategy
Introduction Functional strategies play two important roles:
o Firstly, they provide support to the overall business strategy.
o Secondly, they spell out as to how functional managers will work so as to
ensure better performance in their respective functional areas.
In terms of the levels of strategy formulation, functional strategies operate below
the SBU or business level strategies. Within functional strategies there might be
several sub-functional areas. Functional strategies are made within the higher
level strategies and guidelines therein that are set at higher levels of an
organization.
Functional managers need guidance from the business strategy in order to make
decisions. Operational plans tell the functional managers what has to be done
while policies state how the plans are to be implemented.
Need of
Functional
Strategies
The development of functional strategies is aimed at making the strategies
formulated at the top management level practically feasible at the functional level.
Functional strategies facilitate flow of strategic decisions to the different parts of
an organization.
They act as basis for controlling activities in the different functional areas of
business.
The time spent by functional managers in decision making is reduced as plans
lay down clearly what is to be done and policies provide the discretionary
framework within which decisions need to be taken.
Functional strategies help in bringing harmony and coordination as they remain
part of major strategies.
Similar situations occurring in different functional areas are handled in a
consistent manner by the functional managers.
Marketing
strategy
Formulation
o Marketing is a social and managerial process by which individuals and groups
obtain what they need and want through creating, offering and exchanging
products of value with others.
o In the present day for business, it is considered to be the activities related to
identifying the needs of customers and taking such actions to satisfy them in
return of some consideration. In marketing it is more important to do what is
strategically right than what is immediately profitable.
o The term marketing constitutes different processes, functions, exchanges and
activities that create perceived value by satisfying needs of individuals. Marketing
helps in moving people closer to making a decision to purchase and facilitate a
sale.
o Marketing in recent decades has gained a lot of importance. It is an immediate
cause and effect of rapid economic growth, globalization, technological
upgradation, development of ever increasing human needs and wants and
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increasing purchasing power.
Examples of marketing decisions that may require special attention are as follows:
The kind of distribution network to be used. Whether to use exclusive
dealerships or multiple channels of distribution.
The amount and extent of advertising. Whether to use heavy or light
advertising. What should be the amount of advertising in print media, television,
or internet?
Whether to limit or enhance the share of business done with a single or a few
customers?
Whether to be a price leader or a price follower?
Whether to offer a complete or limited warranty?
Whether to reward salespeople based on straight salary, straight commission, or
on a combination of salary/commission?
Delivering
Value to
Customer
Marketing alone cannot produce superior value for the customer. It needs to work
in coordination with other departments to accomplish this.
Marketing acts as part of the organizational chain of activities. Marketers are
challenged to find ways to get all departments to think with focus on customer.
In its search for competitive advantage, the firm needs to look beyond its own
chain of activities and into the chains of its suppliers, distributors, and ultimately
customers. This partnering will produce a value delivering network.
Connecting with customers:
To succeed in today‟s competitive marketplace, companies must be customer
centered. They must win customers from competitors and keep them by delivering
greater value. Since companies cannot satisfy all consumers in a given market, they
must divide up the total market (Market Segmentation), choose the best segments
(Market targeting) and design strategies for profitably serving chosen segments
better then the competitors. (market positioning)
Marketing
Process
1) Once the strategic plan has defined the company‟s overall mission and
objectives, marketing plays a role in carrying out these objectives.
2) The marketing process is the process of analyzing market opportunities,
selecting target markets, developing the marketing mix, and managing the
marketing effort.
3) Target customers stand at the centre of marketing process.
Marketing
Mix
The marketing mix is the set of controllable marketing variables that the firm
blends to product the response it wants in the target market.
The marketing mix consists of everything that the firm can do to influence the
demand of its product.
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These variables are often referred to as the “4Ps”. The 4 Ps stand for product,
price, place and promotion.
An effective marketing program blends all the marketing mix elements into a
coordinated program designed to achieve the company‟s marketing objectives by
delivering value to consumers.
The 4Ps are from a marketer‟s angle. When translated to the perspective of
buyers, they may be termed as 4 Cs. Product may be referred as customer
solution, price as customer cost, place as convenience and promotion as
communication.
PRODUCT Product stands for the goods and service combination the
company offers to the target market.
Strategies are needed for:
o For managing existing product over time
o Adding new products
o Dropping failed products
Strategic decisions must also be made regarding:
o Branding
o Packaging
o Other product features such as warranties
o Design
o Safety
Products can be differentiated on the basis of size, shape,
color, packaging, brand names, after sales services and so on.
Organizations seek to hammer into customers minds that their
products are different from others. It does not matter whether
the differentiation is real or imaginary.
Organizations formalize the product differentiation through
Brand Names to their respective products. Brand names
enable the customers to identify the product and the
organization behind it. The product‟s and even firm‟s image is
build around brand through advertising and other promotional
strategies. Customers tend to develop strong brand loyalty for
a particular product over a period of time.
PRICE Price stands for the amount of money customers have to pay
to obtain the product.
Necessary strategies pertain to the location of the customers,
price flexibility, related items within a product line and terms of
sale.
The price of a product is its composite expression of its value
and utility to the customer, its demand, quality, reliability,
safety, the competition it faces, the desired profit and so on.
Theoretically, organizations may also adopt cost plus pricing
wherein a margin is added to the cost of the product to
determine its price. However, in the competitive environment
such an approach may not be feasible.
More and more companies of today have to accept the market
price with minor deviations and work towards their costs. They
reduce their cost in order to maintain their profitability.
For a new product an organization may either choose to skim
or penetrate the market.
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o In Skimming prices are set at a very high level. The
product is directed to those buyers who are relatively
priced insensitive but sensitive to novelty of the new
product.
o In penetration firm keeps a tempting low price for a new
product which itself is selling point. A very large
number of potential consumer may be able to afford
and willing to try the product.
PLACE Place stands for company activities that make the product
available to target consumers.
Strategies should be taken for the management of channels by
which ownership of product is transferred from producers to
consumers and in many cases, the systems by which goods
are moved from where they are produced from they are
purchased by the final consumers.
Goods must be at the right place at the right time. Example: A
soft drink seller cannot tell a customer to come tomorrow.
PROMOTION Promotion stands for the activities that communicate the merits
of the product and persuade target consumers to buy it.
Strategies needed to combine individual methods such as
advertising, personal selling and sales promotion into a
coordinated campaign.
Modern marketing is highly promotional oriented. It is
simultaneously a communication & persuasion process.
There are at least four major direct promotional methods:
o Personal selling
o Advertising
o Publicity
o Sales promotion
Personal Selling Oldest forms of promotion
Face to face interaction of sales force
with the customers.
Oral communication is made
Suffers from very high cost as sales
personnel are expensive.
It is highly effective method to persuade
a potential consumer
Advertising It is a Non Personal, highly flexible and
dynamic promotional method.
Example: Pamphlets, brochures,
newspapers, magazines, hoardings,
display boards, radio, television and
internet.
Publicity It is also a non personal form of
advertising.
Publicity is communication of a product,
brand or business by placing information
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about it in the media without paying for
the time or media space directly.
Thus it is a way of reaching customers
with negligible cost.
Basic tools of publicity are press release,
press conference, reports, stories and
internet releases.
Sales Promotion Sales promotion is a term that includes
activities that are undertaken to promote
business but are not specifically included
under personal selling, advertising or
publicity.
Activities like discounts, contests, money
refunds, installments, exhibitions and
fairs constitute sales promotion.
All these are meant to give a boost to the
sales.
Questions:
a. Enlist the components of Marketing Mix. (June 2009)
b. Write short note on elements of marketing mix. (Nov 2010)
Marketing
Strategy
Techniques
Social
marketing
It refers to the design, implementation and control of programs
seeking to increase the acceptability of a social ideas, cause or
practice among a target group.
For instance, campaign for promotion of smoking in Delhi
explained the place where one can and can‟t smoke in Delhi.
Augmented
Marketing
It is provision of additional customer services and benefits build
around the care and actual products that relate the introduction
of hi-tech services like movies on demand, online computer
repair services, secretarial services, etc.
Such innovative offerings provide a set of benefits that promise
to elevate customer service to unprecedented levels.
Direct
Marketing
Marketing through various advertising media that interact
directly with consumers, generally calling for the consumer to
make a direct response.
Direct Marketing includes catalogue selling, mail, tele-
computing, electronic marketing, shopping and TV Shopping.
Relationship
Marketing
The process of creating, maintaining, and enhancing strong,
value laden relationships with consumers and other
stakeholders.
For example, Airlines offer special lounges at major airports for
frequent flyers.
Thus, providing special benefits to select customers to
strengthen the bonds. It will go a long way in building
relationships.
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Services
Marketing
o It is applying the concepts, tools, and techniques of marketing
to services.
o Services is any activity or benefit that one party can offer to
another that is essentially intangible and does not result in the
banking, saving, retailing, educational or utilities.
Person
marketing
People are also marketed. Person marketing consists of
activities undertaken to create, maintain or change attitudes or
behavior towards particular people.
For example, politicians, sport stars, film stars, professional i.e
market themselves to get votes, or to promote their careers
and income.
Organization
marketing
It consists of activities undertaken to create, maintain or change
attitudes and behavior of target audiences towards an
organization. Both profit and non-profit organization practice
organization marketing.
Place
Marketing
Place marketing involves activities undertaken to create, maintain,
or change attitude and behavior towards particular places, say
tourism marketing. (Madhya Pradesh tourism says “Hindustan ka
dil dekho”.
Enlightened
marketing
A marketing philosophy holding that a company‟s marketing should
support the best long run performance of the marketing system; its
five principles include customer oriented marketing, innovative
marketing, value marketing, societal marketing & Sense of mission
marketing.
Differential
marketing
A market coverage strategy in which a firm decide to target several
market segments and designs separate offer for each. For
example, HUL has Lifebuoy, Lux and Rexona in popular segment
and Dove and Pears in Premium Segment.
Synchro
Marketing
When the demand for the product is irregular due to season, some
parts of the day, or on hour basis, causing idle capacity or
overworked capacities Synchro marketing can be used to find
ways to alter the same pattern of demand through flexible pricing,
promotion and other incentives. For example, products such as
movie tickets can be sold at lower price over week days to
generate demand. (Morning shows at lower price)
Concentrated
marketing
A market coverage strategy in which a firm goes after a large
share of one or few sub markets.
Demarketing Marketing strategy to reduce demand temporarily or
permanently- aim is not to destroy demand, but only to reduce
or shift it. This happens when there is overfull demand.
For example, buses are overloaded in the morning and
evening, roads are busy for most of the times, Zoological parks
are over crowded on Saturdays, Sundays and Holidays. Here
Demarketing can be applied to regulate demand.
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Explain the meaning of following concepts:
a. Service marketing (Nov 11)
b. persons marketing(Nov 11)
c. Differential marketing (May 12)
d. Demarketing (May 12)
e. Synchro marketing(Nov 12)
Financial
Strategy
Formulation
The financial strategies of an organization are related to several finance/accounting
concepts considered to be central to strategy implementation.
These are:
Acquiring needed capital/sources of funds;
Developing financial statements/budgets;
Management /usage of funds
Evaluating the worth of a business.
Some examples of decisions that may require finance policies are:
To raise capital with short term debt, long term debt, preferred stock or common
stock
To lease or buy assets
To determine an appropriate dividend payout ratio.
To extend the time of account receivable
To establish a certain percentage discount on account within a specified period of
time
To determine the amount of cash that should be kept on hand
Supply
Chain
Management
Implementing and successfully running supply chain management system will
involve:
1. Product development: Customers and suppliers must work together in the
product development process. Right from the start the partners will have knowledge
of all Involving all partners will help in shortening the life cycles. Products are
developed and launched in shorter time and help organizations to remain
competitive.
2. Procurement: Procurement requires careful resource planning, quality issues,
identifying sources, negotiation, order placement, inbound transportation and
storage.
Organizations have to coordinate with suppliers in scheduling without interruptions.
Suppliers are involved in planning the manufacturing process.
3. Manufacturing: Flexible manufacturing processes must be in place to respond to
market changes. They should be adaptive to accommodate customization and
changes in the taste and preferences. Manufacturing should be done on the basis of
just-in-time (JIT) and minimum lot sizes. Changes in the manufacturing process be
made to reduce manufacturing cycle.
4. Physical distribution: Delivery of final products to customers is the last position
in a marketing channel. Availability of the products at the right place at right time is
important for each channel participant. Through physical distribution processes
serving the customer become an integral part of marketing. Thus supply chain
management links a marketing channel with customers.
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5. Outsourcing: Outsourcing is not limited to the procurement of materials and
components, but also includes outsourcing of services that traditionally have been
provided within an organization. The company will be able to focus on those activities
where it has competency and everything else will be outsourced.
6. Customer services: Organizations through interfaces with the company's
production and distribution operations develop customer relationships so as to satisfy
them. They work with customer to determine mutually satisfying goals, establish and
maintain relationships. This in turn helps in producing positive feelings in the
organization and the customers
7. Performance measurement: There is a strong relationship between the supplier,
customer and organisation. Supplier capabilities and customer relationships can be
correlated with a firm performance. Performance is measured in different parameters
such as costs, customer service, productivity and quality.
Strategic
Role of
Human
Resource
Management
The prominent areas where the human resource manager can play strategic role are
as follows:
1. Providing purposeful direction: The human resource management must be able
to lead people and the organization towards the desired direction involving people
right from the beginning. The most important tasks of a professional management is
to ensure that the object of an organization has been internalized by each individual
working in the organization. Goals of an organization state the very purpose and
justification of its existence.
The management have to ensure that the objects of an organization become the
object of each person working in the organization and the objectives are set to fulfill
the same. Objectives are specific aims which must be in the line with the goal of the
organization and the all actions of each person must be consistent with the
objectives defined.
2. Creating competitive atmosphere: Present‟s globalized market maintaining a
competitive gain is the object of any organization. There are two important ways of
business can achieve a competitive advantages over the others. The first is cost
leadership which means the firm aims to become a low cost leader in the industry.
The second competitive strategy is differentiation under which the firm seeks to be
unique in the industry in terms of dimensions that are highly valued by the
customers. Putting these strategies into effect carries a heavy premium on having a
highly committed and competent workforce.
3. Facilitation of change: The Human resource will be more concerned with
substance rather than form, accomplishments rather than activities, and practice
rather than theory. The personnel function will be responsible for furthering the
organization not just maintaining it. Human resource management will have to
devote more time to promote changes than to maintain the status quo.
4. Diversion of workforce: In the modern organization management of diverse
workforce is a great challenge. Workforce diversity can be observed in terms of male
and female workers, young and old workers, educated and uneducated workers,
unskilled and professional employee, etc. Moreover, many organizations also have
people of different castes, religious and nationalities. The workforce in future will
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comprise more of educated and self conscious workers. They will ask for higher
degree of participation and avenues for fulfillment. Money will no longer be the sole
motivating force for majority of the workers. Non-financial incentives will also play an
important role in motivating the workforce.
5. Empowerment of human resources: Empowerment means authorizing every
member of a society or organization to take of his/her own destiny realizing his/her
full potential. It involves giving more power to those who, at present, have little
control what they do and little ability to influence the decisions being made around
them.
6. Building core competency: The human resource manager has a great role to
play in developing core competency by the firm. A core competence is a unique
strength of an organization which may not be shared by others. This may be in the
form of human resources, marketing, capability, or technological capability. If the
business is organized on the basis of core competency, it is likely to generate
competitive advantage. Because of this reason, many organizations have
restructured their businesses by divesting those businesses which do not match core
competence.
Organization of business around core competence implies leveraging the limited
resources of a firm. It needs creative, courageous and dynamic leadership having
faith in organization‟s human resources.
6. Development of works ethics and culture: Greater efforts will be needed to
achieve cohesiveness because workers will have transient commitment to groups.
As changing work ethic requires increasing emphasis on individuals, jobs will have to
be redesigned to provide challenge. Flexible starting and quitting times for
employees may be necessary. Focus will shift from extrinsic to intrinsic motivation. A
vibrant work culture will have to be developed in the organizations to create an
atmosphere of trust among people and to encourage creative ideas by the people.
Far reaching changes with the help of technical knowledge will be required for this
purpose.
Logistics
Strategy
Management of logistics is a process that integrates the flow of supplies into, through
and out of an organization to achieve a level of service that facilitate movement and
availability of materials in a proper manner. When a company creates a logistics
strategy it is defining the service levels at which its logistics is smooth and is cost
effective.
A company may develop a number of logistics strategies for specific product lines,
specific countries or specific customers because of constant changes in supply
chains. There are different areas that should be examined for each company that
should be considered and should include:
♦ Transportation: Does the current transportation strategies help service levels
required by the organisation?
♦ Outsourcing: Areas of outsourcing of logistics function are to be identified. The
effect of partnership with external service providers on the desired service level of
organisation is also to be examined.
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♦ Competitors: Review the procedures adopted by competitors. It is also to be judged
whether adopting the procedures followed by the competitors will be overall
beneficial to the organisation. This will also help in identifying the areas that may be
avoided.
♦ Availability of information: The information regarding logistics should be timely and
accurate. If the data is inaccurate then the decisions that are made will be incorrect.
With the newer technologies it is possible to maintain information on movement of
fleets and materials on real time basis.
♦ Strategic uniformity: The objectives of the logistics should be in line with overall
objectives and strategies of the organisation. They should aid in the accomplishment
of major strategies of the business organisation.
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Chapter 6: Strategy Implementation & Control
Strategy
Formulation vs
Strategy
Implementation
Many managers fail to distinguish between strategy formulation and strategy
implementation. Yet, it is crucial to realize the difference between the two
because they both require very different skills. Also, a company will be
successful only when the strategy formulation is sound and implementation is
excellent. Often people, blame the strategy model for the failure of a company
while the main flaw might lie in failed implementation. Thus organizational
success is a function of good strategy and proper implementation.
Successful strategy formulation does not guarantee successful strategy
implementation. It is always more difficult to do something than to say you are
going to do it.
Strategy Formulation Strategy Implementation
Strategy Formulation is positioning
forces before the action.
Strategy Implementation is managing
forces during the action.
Strategy Formulation focuses on
effectiveness.
Strategy Implementation focuses on
efficiency.
Strategy Formulation is primarily an
intellectual process.
Strategy Implementation is primarily
an operational process.
Strategy Formulation requires goods
intuitive and analytical skills.
Strategy Implementation requires
special motivation and leadership
skills.
Strategy formulation requires
coordination among a few individuals.
Strategy Implementation requires
combination among many
Individuals.
Organizational Structure
Functional
Structure
A widely used structure in business organisations is functional type because
of its simplicity and low cost.
A functional structure groups tasks and activities by business function, such
as production/operations, marketing, finance/accounting, research and
development, and management information systems.
Besides being simple and inexpensive, a functional structure also promotes
specialization of labour, encourages efficiency, minimizes the need for an
elaborate control system, and allows rapid decision making.
Some disadvantages of a functional structure are that it forces
accountability to the top, minimizes career development opportunities, and
is sometimes times characterized by low employee morale, line/staff
conflicts, poor delegation of authority, and inadequate planning for products
and markets. Most large companies abandoned the functional structure in
favour of decentralization and improved accountability.
Divisional
Structure
As a small organization grows, it has more difficulty in managing different
products and services in different markets. Some form of divisional structure
generally becomes necessary to motivate employees, control operations, and
compete successfully in diverse locations. The divisional structure can be
organized in one of four ways: by geographic area, by product or service, by
customer, or by process. With a divisional structure, functional activities are
performed both centrally and in each separate division.
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A divisional structure has some clear advantages. First and perhaps foremost
accountability is clear. That is, divisional managers can be held responsible for
sales and profit levels. Because a divisional structure is based on extensive
delegation of authority, managers and employees can easily see the results of
their good or bad performances. As a result, employee morale is generally
higher in a divisional structure than it is in centralized structure. Other
advantages of the divisional design are that it creates career development
opportunities for managers, allows local control of local situations, leads to a
competitive climate within an organization, and allows new businesses and
products In be added easily.
The divisional design is not without some limitations. Perhaps the most
important limitation is that a divisional structure is costly, for a number of
reasons. First, each division requires functional specialists who must be paid.
Second, there exists some duplication of staff services, facilities, and personnel;
for instance, functional specialists are also needed centrally (at headquarters) to
coordinate divisional activities. Third, managers must be well qualified because
the divisional design forces delegation of authority better-qualified individuals
requires higher salaries. A divisional structure can also be costly because it
requires an elaborate, headquarters-driven control system.
Strategic
Business Unit
SBU is any part of a business organization which is treated separately for
strategic management purposes. The concept of SBU is helpful in creating an
SBU organizational structure. It is discrete element of the business serving
product markets with readily identifiable competitors and for which strategic
planning can be concluded. It is created by adding another level of
management in a divisional structure after the divisions have been grouped
under a divisional top management authority based on the common strategic
interests.
Its Advantages are:
• Establishing coordination between divisions having common strategic
interests.
• Facilitates strategic management and control on large and diverse
organizations.
• Fixes accountabilities at the level of distinct business units.
• Allows strategic planning to be done at the most relevant level within the total
enterprise.
• Makes the task of strategic review by top executives more objective and more
effective.
• Helps allocate corporate resources to areas with greatest growth
opportunities.
Two disadvantages of an SBU structure are that it requires an additional layer
of management, which increases salary expenses, and the role of the group
vice president is often ambiguous. However, these limitations often do not
outweigh the advantages of unproved coordination and accountability.
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Matrix Structure Most organizations find that organising around either functions (in the functional
structure) or around products and geography (in the divisional structure)
provides an appropriate organizational structure. The matrix structure, in
contrast, may be very appropriate when organizations conclude that neither
functional nor divisional forms, even when combined with horizontal linking
mechanisms like strategic business units, are right for their situations. In matrix
structures, functional and product forms are combined simultaneously at the
same level of the organization. Employees have two superiors, a product or
project manager and a functional manager.
A matrix structure is the most complex of all designs because it depends upon
both vertical and horizontal flows of authority and communication (hence the
term matrix). In contrast, functional and divisional structures depend primarily
on vertical flows of authority and communication. A matrix structure can result in
higher overhead because it more management positions.
The matrix structure was developed to combine the stability of the functional
structure with the flexibility of the product form. The matrix structure is very
useful when the external environment (especially its technological and market
aspects) is very complex and changeable.
Network Structure A newer and somewhat more radical organizational design, the network
structure is an example of what could be termed a "non-structure" by its
virtual elimination of in house business functions. Many activities are
outsourced.
A corporation organized in this manner is often called a virtual organization
because it is composed of a series of project groups or collaborations linked
by constantly changing non-hierarchical, cobweb-like networks.
The network structure becomes most useful when the environment of a firm
is unstable and is expected to remain so. Under such conditions, there is
usually a strong need for innovation and quick response. Instead of having
salaried employees, it may contract with people for a specific project or
length of time. Long-term contracts with suppliers and distributors replace
services that the company could provide for itself through vertical
integration.
Electronic markets and sophisticated information systems reduce the
transaction costs of the marketplace, thus justifying a "buy" over a "make"
decision.
Rather than being located in a single building or area, an organization's
business functions are scattered worldwide. The organization is, in effect,
only a shell, with a small headquarters acting as a "broker", electronically
connected to some completely owned divisions, partially owned
subsidiaries, and other independent companies.
In its ultimate form, the network organization is a series of independent firms
or business units linked together by computers in an information system that
designs, produces, and markets a product or service.
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Leadership Role
in Strategy
Implementation
A strategic leader has several responsibilities, including the following:
♦ Environment Scanning.
♦ Dealing with the diverse and cognitively competitive situations.
♦ Managing human capital.
♦ Effectively managing the company's operations.
♦ Sustaining high performance over time.
♦ Willing to make candid, courageous, and yet pragmatic decisions.
♦ Decision-making responsibilities that cannot be delegated.
♦ Seeking feedback through face-to-face communications.
♦ Being spokesman of the organisation.
Difference
between
Transformational
and Traditional
leadership style:
1. Traditional leadership borrowed its concept from formal Top-down type of
leadership such as in the military. The style is based on the belief that power is
bestowed on the leader, in keeping with the traditions of the past. This type of
leadership places managers at the top and workers at the bottom of rung of
power.
In transformational leadership, leader motivates and empowers employees to
achieve company‟s objectives by appealing to higher ideas and values. They
use charisma and enthusiasm to inspire people to exert them for the good of the
organization.
2. Traditional leadership emphasizes characteristics or behaviours of only one
leader within a particular group whereas transformational leadership provides a
space to have more than one leader in the same group at the same time.
According to the transformational leadership style, a leader at one instance can
also be a follower in another instance. Thus there is element of flexibility in the
relationships.
3. Traditional leadership is more focused in getting the work done in routine
environment. Traditional leaders are effective in achieving the set objectives
and goals whereas transformational leaders have behavioural capacity to
recognize and react to paradoxes, contradictions and complexities in the
environment.
Transformational leadership style is more focus on the special skills or talents
that the leaders must have to practice to face challenging situations.
Transformational leaders work to change the organisational culture by
implementing new ideas.
4. In traditional leadership, followers are loyal to the position and what it
represents rather than who happens to be holding that position whereas in
transformational leadership followers dedicate and admire the quality of the
leader not of its position.
Strategic Change Steps to initiate strategic change: For initiating strategic change, three steps
can be identified as under:
(i) Recognize the need for change: The first step is to diagnose which facets
of the present corporate culture are strategy supportive and which are not. This
basically means going for environmental scanning involving appraisal of both
internal and external capabilities may it be through SWOT analysis and then
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determine where the lacuna lies and scope for change exists.
(ii) Create a shared vision to manage change: Objectives and vision of both
individuals and organization should coincide. There should be no conflict
between them. Senior managers need to constantly and consistently
communicate the vision not only to inform but also to overcome resistance
through proper communication. Strategy implementers have to convince all
those concerned that the change in business culture is not superficial or
cosmetic. The actions taken have to be credible, highly visible and unmistakably
indicative of management‟s seriousness to new strategic initiatives and
associated changes.
(iii) Institutionalise the change: This is basically an action stage which
requires implementation of changed strategy. Creating and sustaining a
different attitude towards change is essential to ensure that the firm does not
slip back into old ways of thinking or doing things. Capacity for self-renewal
should be a fundamental anchor of the new culture of the firm. Besides, change
process must be regularly monitored and reviewed to analyse the after-effects
of change. Any discrepancy or deviation should be brought to the notice of
persons concerned so that the necessary corrective actions are taken. It takes
time for the changed culture to prevail.
To make the change lasting, Kurt Lewin proposed three phases of the change
process for moving the organization from the present to the future. These
stages are unfreezing, changing and refreezing.
(i) Unfreezing the situation: The process of unfreezing simply makes the
individuals or organizations aware of the necessity for change and prepares
them for such a change. Lewin proposes that the changes should not come as
a surprise to the members of the organization. Sudden and unannounced
change would be socially destructive and morale lowering. The management
must pave the way for the change by first “unfreezing the situation”, so that
members would be willing and ready to accept the change.
(ii) Changing to New situation: Once the unfreezing process has been
completed and the members of the organization recognise the need for change
and have been fully prepared to accept such change, their behaviour patterns
need to be redefined. H.C. Kellman has proposed three methods for
reassigning new patterns of behaviour. These are compliance, identification and
internalisation.
(iii) Refreezing: Refreezing occurs when the new behaviour becomes a normal
way of life. The new behaviour must replace the former behaviour completely
for successful and permanent change to take place. In order for the new
behaviour to become permanent, it must be continuously reinforced so that this
new acquired behaviour does not diminish or extinguish.
Change process is not a onetime application but a continuous process due to
dynamism and ever changing environment. The process of unfreezing,
changing and refreezing is a cyclical one and remains continuously in action. By
the change management process, organizations can better manage the
required strategic change.
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Strategy Control
Operational
Control
The thrust of operational control is on individual tasks or transactions as against
total or more aggregative management functions. For example, procuring
specific items for inventory is a matter of operational control, in contrast to
inventory management as a whole. One of the tests that can be applied to
identify operational control areas is that there should be a clear-cut and
somewhat measurable relationship between inputs and outputs which could be
predetermined or estimated with least uncertainty.
Many of the control systems in organisations are operational and mechanistic in
nature. A set of standards, plans and instructions are formulated. The control
activity consists of regulating the processes within certain „tolerances‟,
irrespective of the effects of external conditions on the formulated standards,
plans and instructions. Some of the examples of operational controls can be
stock control (maintaining stocks between set limits), production control
(manufacturing to set programmes), quality control (keeping product quality
between agree limits), cost control (maintaining expenditure as per standards),
budgetary control (keeping performance to budget).
Management
Control
When compared with operational, management control is more inclusive and
more aggregative, in the sense of embracing the integrated activities of a
complete department, division or even entire organisation, instead or mere
narrowly circumscribed activities of sub-units.
The basic purpose of management control is the achievement of enterprise
goals – short range and long range – in a most effective and efficient manner.
The term is defined by Robert Anthony as „the process by which managers
assure the resources are obtained and used effectively and efficiently in the
accomplishment of the organisation‟s objectives. Controls are necessary to
influence the behaviour of events and ensure that they conform to plans.
Strategic Control Strategies once formulated are not immediately implemented. There is time gap
between the stages of strategy formulation and their implementation. Strategies
are often affected on account of changes in internal and external environments
of organisations. There is need for warning systems to track a strategy as it is
being implemented. Strategic control is the process of evaluating strategy as it
is formulated and implemented. It is directed towards identifying problems and
changes in premises and making necessary adjustments.
Types of Strategic Control: There are four types of strategic control as
follows:
♦ Premise control: A strategy is formed on the basis of certain assumptions or
premises about the complex and turbulent organizational environment. Over a
period of time these premises may not remain valid. Premise control is a tool for
systematic and continuous monitoring of the environment to verify the validity
and accuracy of the premises on which the strategy has been built. It primarily
involves monitoring two types of factors:
(i) Environmental factors such as economic (inflation, liquidity, interest rates),
technology, social and regulatory.
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(ii) Industry factors such as competitors, suppliers, substitutes.
It is neither feasible nor desirable to control all types of premises in the same
manner. Different premises may require different amount of control. Thus,
managers are required to select those premises that are likely to change and
would severely impact the functioning of the organization and its strategy.
♦ Strategic surveillance: Contrary to the premise control, the strategic
surveillance is unfocussed. It involves general monitoring of various sources of
information to uncover unanticipated information having a bearing on the
organizational strategy. It involves casual environmental browsing. Reading
financial and other newspapers, business magazines, meetings, conferences,
discussions at clubs or parties and so on can help in strategic surveillance.
Strategic surveillance may be loose form of strategic control, but is capable of
uncovering information relevant to the strategy.
♦ Special alert control: At times unexpected events may force organizations
to reconsider their strategy. Sudden changes in government, natural calamities,
terrorist attacks, unexpected merger/acquisition by competitors, industrial
disasters and other such events may trigger an immediate and intense review of
strategy. Organizations to cope up with these eventualities, form crisis
management teams to handle the situation.
♦ Implementation control: Managers implement strategy by converting major
plans into concrete, sequential actions that form incremental steps.
Implementation control is directed towards assessing the need for changes in
the overall strategy in light of unfolding events and results associated with
incremental steps and actions.
Strategic implementation control is not a replacement to operational control.
Strategic implementation control, unlike operational controls continuously
monitors the basic direction of the strategy. The two basis forms of
implementation control are:
(i) Monitoring strategic thrusts: Monitoring strategic thrusts help managers to
determine whether the overall strategy is progressing as desired or whether
there is need for readjustments.
(ii) Milestone Reviews. All key activities necessary to implement strategy are
segregated in terms of time, events or major resource allocation. It normally
involves a complete reassessment of the strategy. It also assesses the need to
continue or refocus the direction of an organization.
Building a strategy Supportive Corporate Culture
How culture can
promote better
strategy
execution?
Strong cultures promote good strategy execution when there‟s fit and hurt
execution when there‟s negligible fit. A culture grounded in values, practices,
and behavioural norms that match what is needed for good strategy execution
helps energize people throughout the company to do their jobs in a strategy-
supportive manner, adding significantly to the power and effectiveness of
strategy execution. For example, a culture where frugality and thrift are values
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strongly shared by organizational members is very conducive to successful
execution of a low cost leadership strategy. A culture where creativity,
embracing change, and challenging the status quo are pervasive themes is very
conducive to successful execution of a product innovation and technological
leadership strategy. A culture built around such business principles as listening
to customers, encouraging employees to take pride in their work, and giving
employees a high degree of decision-making responsibility is very conducive to
successful execution of a strategy of delivering superior customer service.
A tight culture-strategy alignment acts in two ways to channel behaviour and
influence employees to do their jobs in a strategy-supportive fashion.
A work environment where the culture matches the conditions for good strategy
execution provides a system of informal rules and peer pressure regarding how
to conduct business internally and how to go about doing one‟s job. Strategy-
supportive cultures shape the mood, temperament, and motivation the
workforce, positively affecting organizational energy, work habits and operating
practices, the degree to which organizational units cooperate, and how
customers are treated.
A strong strategy-supportive culture nurtures and motivates people to do their
jobs in ways conducive to effective strategy execution; it provides structure,
standards, and a value system in which to operate; and it promotes strong
employee identification with the company's vision, performance targets, and
strategy. All this makes employees feel genuinely better about their jobs and
work environment and the merits of what the company is trying to accomplish.
Employees are stimulated to take on the challenge of realizing the company's
vision, do their jobs competently and with enthusiasm, and collaborate with
others as needed to bring the strategy to fruition.
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Chapter 7: Reaching Strategic Edge
Business
Process
Reengineering
Definition of BPR:
Business Process Reengineering (BPR) refers to the analysis and redesign of
workflows and processes both within and between the organizations.
The orientation of the redesign effort is radical, i.e., it is a total deconstruction
and rethinking of a business process in its entirety, unconstrained by its
existing structure and pattern.
Its objective is to obtain quantum gains in the performance of the process in
terms of time, cost, output, quality, and responsiveness to customers.
The redesign effort aims at simplifying and streamlining a process by
eliminating all redundant and non-value adding steps, activities an
transactions, reducing drastically the number of stages or transfer points of
work, and speeding up the work-flow through the use of IT systems.
BPR is an approach to unusual improvement in operating effectiveness
through the redesigning of critical business processes and supporting
business systems.
It is revolutionary redesign of key business processes that involves
examination of the basic process itself. It looks at the minute details of the
process, such as why the work is done, who does it, where is it done and
when it is done. BPR focuses on the process of producing the output and
output of an organization is the result of its process.
“Business process reengineering means starting all over, starting from
scratch.” Reengineering, in other words, means pulling aside much of the
age-old practices and procedures of doing a thing developed over hundred
years of management experience. It implies forgetting how work has been
done so far, and deciding how it can best be done now.
Reengineering begins with a fundamental rethinking.
BPR involves the following steps:
1. Determining objectives and framework: Objectives are the desired end
results of the redesign process which the management and organization attempts
to achieve. This will provide the required focus, direction, and motivation for the
redesign process. It helps in building a comprehensive foundation for the
reengineering process.
2. Identify customers and determine their needs: The designers have to
understand customers – their profile, their steps in acquiring, using and disposing
a product. The purpose is to redesign business process that clearly provides
added value to the customer.
3. Study the existing process: The existing processes will provide an important
base for the redesigners. The purpose is to gain an understanding of the „what‟,
and „why‟ of the targeted process. However, some companies go through the
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reengineering process with clean perspective without laying emphasis on the past
processes.
4. Formulate a redesign process plan: The information gained through the
earlier steps is translated into an ideal redesign process. Formulation of redesign
plan is the real crux of the reengineering efforts. Customer focused redesign
concepts are identified and formulated. In this step alternative processes are
considered and the best is selected.
5. Implement the redesign: It is easier to formulate new process than to
implement them. Implementation of the redesigned process and application of
other knowledge gained from the previous steps is key to achieve dramatic
improvements. It is the joint responsibility of the designers and management to
operationalise the new process.
Problems in BPR: Reengineering is a major and radical improvement in the
business process. Only a limited number of companies are able to have enough
courage for having BPR because of the challenges posed. It disturbs established
hierarchies and functional structures and creates serious repercussions and
involves resistance among the work-force. Reengineering takes time and
expenditure, at least in the short run, that many companies are reluctant to go
through the exercise. Even there can be loss in revenue during the transition
period. Setting of targets is tricky and difficult. If the targets are not properly set or
the whole transformation not properly carried out, reengineering efforts may turn-
out as a failure.
Benchmarking What is Benchmarking?
In simple words, benchmarking is an approach of setting goals and measuring
productivity based on best industry practices. It developed out of need to have
information against which performances can be measured.
For example, a customer support engineer of a television manufacturer
attends a call within forty-eight hours. If the industry norm is that all calls are
attended within twenty-four hours, then the twenty-four hours can be a
benchmark.
Benchmarking helps in improving performance by learning from best practices
and the processes by which they are achieved. It involves regularly comparing
different aspects of performance with the best practices, identifying gaps and
finding out novel methods to not only reduce the gaps but to improve the
situations so that the gaps are positive for the organization.
Benchmarking is not a panacea for all problems. Rather, it studies the
circumstances and processes that help in superior performance. Better
processes are not merely copied. Efforts are made to learn, improve and
evolve them to suit the organizational circumstances. Further, benchmarking
exercises are also repeated periodically so that the organization does not lag
behind in the dynamic environment.
Benchmarking is a process of continuous improvement in search for
competitive advantage. It measures a company‟s products, services and
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practices against those of its competitors or other acknowledged leaders in
their field. Xerox pioneered this process in late 70‟s by benchmarking its
manufacturing costs against those of domestic and Japanese competitors and
got dramatic improvement in the manufacturing cost. Subsequently ALCOA,
Eastman Kodak, IBM adopted benchmarking.
Firms can use benchmarking process to achieve improvement in diverse range of
management function such as mentioned below:
1. maintenance operations,
2. assessment of total manufacturing costs,
3. product development,
4. product distribution,
5. customer services,
6. plant utilisation levels; and
7. human resource management.
The Benchmarking process elements: Some of the common elements of
benchmarking process are as under.
(i) Identifying the need for benchmarking process: This step will define the
objectives of the benchmarking exercise. It will also involve selecting the type of
benchmarking. Organisations identify realistic opportunities for improvements.
(ii) Clearly understanding existing business processes: This will involve
compiling information and data on performance. This will include mapping
processes also. Information and data is collected by different methods for
example, interviews, visits and filling of questionnaires.
(iii) Identify best processes: Within the selected framework best processes are
identified. These may be within the same organisation or outside of them.
(iv) Comparison of own processes and performance with that of others:
Benchmarking process also involves comparison of performance of the
organisation with performance of other organisation. Any deviation between the
two is analysed to make further improvements.
(v) Prepare a report and implement the steps necessary to close the gap in
performance: A report on benchmarking initiatives containing recommendations
is prepared. Such report also contains the action plans for implementation.
(vi) Evaluation: Business organisations evaluate the results of benchmarking
process interms of improvements vis-à-vis objectives and other criteria set for the
purpose. It also periodically evaluates and reset the benchmarks in the light of
changes in the conditions that influence the performance.
Total Quality
Management
Total Quality Management (TQM) is a people-focused management system
that aims at continual increase in customer satisfaction at continually lower
real cost.
TQM is a total system approach (not a separate area or program) and an integral
part of high- level strategy; it works horizontally across functions and
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departments, involves all employees, top to bottom, and extends backward and
forward to include the supply chain and the customer chain. TQM stresses
learning and adaptation to continual change as keys to organizational success.
Principles guiding TQM:
Preventing rather than detecting defects: TQM is a management philosophy
that seeks to prevent poor quality in products and services, rather than simply to
detect and sort out defects. "An ounce of prevention is worth a pound of cure." A
little precaution before a crisis occurs is preferable to a lot of fixing up afterward.
This also saves cost and time.
Continuous improvement and learning: TQM espouses a philosophy of
continuous improvement in all areas of an organization. This philosophy ties in
closely with the quality measurement and universal quality responsibility concepts
mentioned above. Quality measurement is needed in order to focus improvement
efforts appropriately.
Focusing on the customer: According to Lee Iacocca had only three rules:
Satisfy the customer, satisfy the customer, and satisfy the customer. This sums
up the importance of customer focus in the TQM philosophy. Ultimately it the
satisfaction of the customers that determines the success of an organisation.
Universal quality responsibility: Another basic TQM precept is that the
responsibility for quality is not restricted to an organization's quality assurance
department, but is instead a guiding philosophy shared by everyone in an
organization. TQM requires that everyone takes responsibility for quality. As
quality improves, the quality assurance department gets smaller. In fact, world
over, a few companies fully committed to TQM have done' away completely with
their quality assurance organizations.
Root cause corrective action: Most of us have experienced instances in which
problems we thought were corrected continued to occur. TQM seeks to prevent
this by identifying the root causes of problems, and by implementing corrective
actions that address problems at the root cause level.
The synergy of teams: In addition to the TQM concepts of empowerment and
involvement of employees, taking advantage of the synergy of teams is an
effective way to address the problems and challenges of continuous
improvement. Dr. Kaoru Ishikawa first formalized the teams concept as part of the
TQM philosophy by developing quality circles in Japan.
Thinking statistically: Statistical thinking is another basic TQM philosophy.
Quality efforts often require reducing process or product-design variation, and
statistical methods are ideally suited to support this objective.
Employee involvement and empowerment: Another fundamental TQM concept
is that employees must be involved and empowered. Employee involvement
means every employee is involved in running the business and plays an active
role in helping the organization meet its goals. Employee empowerment means
employees and management recognize that many obstacles to achieving
organizational goals can be overcome by employees who are provided with the
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necessary tools and authority to do so.
Value improvement: The linkage between continuous improvement and value
improvement is simultaneously obvious and subtle. This linkage becomes
apparent when one considers the definition of quality, which is the ability to meet
or exceed customer requirements and expectations. The essence of value
improvement is the ability to meet or exceed customer expectations while
removing unnecessary cost. But simply cutting costs, however, will not improve
value if the focus does not remain on satisfying customer requirements and
expectations.
Supplier teaming: Another principle of the TQM philosophy is to develop long-
term relationships with a few high-quality suppliers, rather than simply selecting
those suppliers with the lowest initial cost.
Training: Training is basic to the TQM process. The concept is based on of
empowering employees by providing the tools necessary for continuous
improvement. One of the most basic tools is training.
Six Sigma Primarily Six sigma means maintenance of the desired quality in processes and
end products. It means taking systemic and integrated efforts toward improving
quality and reducing cost. It is a highly disciplined process that helps in
developing and delivering near-perfect products and services. It strives to meet
and improve organizational goals on quality, cost, scheduling, manpower, new
products and so on. It works continuously towards revising the current standards
and establishing higher ones. Six sigma has its base in the concept of probability
and normal distribution in statistics. Six sigma strives that 99.99966% of products
manufactured are defect free.
Six sigma efforts target three main areas:
♦ Improving customer satisfaction
♦ Reducing cycle time
♦ Reducing defects
Characteristics of Six Sigma:
(i) Six sigma is customer focused. It strives to provide better satisfaction to the
customer owning the product.
(ii) Six sigma is a total management commitment and philosophy of excellence,
process improvement and the rule of measurement.
(iii) Six sigma induces changes in management operations - new approaches to
thinking, planning and executing to achieve results.
(iv) Six sigma combines both leadership and grassroots energy and involvement
for its success.
Six themes of six sigma
The critical elements of six sigma can be put into six themes as follows:
♦ Theme one − genuine focus on the customer: Companies launching six sigma
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often to find that how little they really understand about their customers. In six
sigma, customer focus becomes the top priority. For example, the measures of
six sigma performance begin with the customer. Six sigma improvements are
defined by their impact on customer satisfaction and value.
♦ Theme two − data and fact-driven management: Six sigma takes the concept
'of "management by fact" to a new, more powerful level. Despite the attention
paid in recent years to improved information systems, knowledge management,
and so on, many business decisions are still being based on opinions,
assumptions and gut feeling. Six sigma discipline begins by clarifying what
measures are key to gauging business performance and then gathers data and
analyzes key variables. Problems are effectively defined, analyzed, and resolved.
Six sigma also helps managers to answer two essential questions to support
data-driven decisions and solutions.
• What data/information is really required?
• How to use the data/information for maximum benefit?
♦ Theme three − processes are where the action is Designing products and
services, measuring performance, improving efficiency and customer satisfaction
and so on. Six sigma positions the process as the key vehicle of success. One of
the most remarkable breakthroughs in Six Sigma efforts to date has been
convincing leaders and managers. Process may relate to build competitive
advantage in delivering value to customers.
♦ Theme four − proactive management: In simple terms, being proactive means
acting in advance of events rather than reacting to them. In the real world, though,
proactive management means making habits out of what are, too often, neglected
business practices: defining ambitious goals and reviewing them frequently,
setting clear priorities, focusing on problem prevention rather than fire-fighting,
and questioning why we do things instead of blindly defending them.
Far from being boring or overly analytical, being truly proactive is a starting point
for creativity and effective change. Six sigma, encompasses tools and practices
that replace reactive habits with a dynamic, responsive, proactive style of
management.
♦ Theme five – boundaryless collaboration: "Boundarylessness" is one of Jack
Welch's mantras for business success. Years before launching six sigma, GE's
chairman was working to break barriers and to improve teamwork up, down, and
across organizational lines. The opportunities available through improved
collaboration within companies and with vendors and customers are huge. Billions
of dollars are lost every day because of disconnects and outright competition
between groups that should be working for a common cause: providing value to
customers.
♦ Theme six − drive for perfection; tolerate failure: Organizations need to make
efforts to achieve perfection and yet at the same time tolerate failure. In essence,
though, the two ideas are complementary. No company will get even close to six
sigma without launching new ideas and approaches-which always involve some
risk.
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Six Sigma Methodology
For implementing six sigma there are two separate key methodologies for existing
and new
processes. Conceptually there is some overlapping between the two. The two
methodologies
as follows:
1. DMAIC: DMAIC methodology is an acronym for five different steps used in six
sigma directed towards improvement of existing product, process or service. The
five steps are as follows:
♦ Define: To begin with six sigma experts define the process improvement goals
that are consistent with the strategy of the organization and customer demands.
They discuss different issues with the senior managers so as to define what
needs to done.
♦ Measure: The existing processes are measured to facilitate future comparison.
Six sigma experts collect process data by mapping and measuring relevant
processes.
♦ Analyze: Verify cause-and-effect relationship between the factors in the
processes. Experts need to identify the relationship between the factors. They
have to make an comprehensive analyses to identify hidden or not so obvious
factor.
♦ Improve: On the basis of the analysis experts make a detailed plan to improve.
♦ Control: Initial trial or pilots are run to establish process capability and transition
to production. Afterwards continuously measure the process to ensure that
variances are identified and corrected before they result in defects.
2. DMADV: DMADV is again acronym for the steps followed in implementing six
sigma. It is a strategy for designing new products, processes and services.
♦ Define: As in case of DMAIC six sigma experts have to formally define goals of
the design activity that are consistent with strategy of the organization and the
demands of the customer.
♦ Measure: Next identify the factors that are critical to quality (CTQs). Measure
factors such as product capabilities and production process capability. Also
assess the risks involved.
♦ Analyze: Develop and design alternatives. Create high-level design and
evaluate to select the best design.
♦ Design: Develop details of design and optimise it. Verify designs may require
using techniques such as simulations.
♦ Verify: Verify designs through simulations or pilot runs. Verified and
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implemented processes are handed over to the process owners.
Internet
Technology
The Internet is an integrated network of banks of servers and high-speed
computers, digital switches and routers, telecommunication equipments and lines,
and individual computers. The backbone of the internet consists of
telecommunication lines criss-crossing countries, continents, and the world that
allow computers to transfer data in digital form at very high speed.
Internet has made significant changes in the way businesses are being
conducted. Communications has become faster, with many interlinkages
promoting globalization. While markets have expanded, the competition has also
increased manifolds. E-commerce is a new area which has developed on account
of internet technology.
Characteristics of E-commerce environment changing competitive scenario
are as under:
(a) The Internet makes it feasible for companies everywhere to compete in global
markets This is true especially for companies whose products are of good quality
and can be shipped economically.
(b) There are new e-Commerce strategic initiatives of existing rivals and new
entrants in form of e-commerce rivals. The innovative use of the Internet adds a
valuable weapon to the competitive arsenal of rival sellers, giving them yet
another way to jockey for market position and manoeuvre for competitive
advantage.
(c) Entry barriers into the e-commerce world are relatively low. Relatively low
entry barriers explain why there are already hundreds of thousands of newly
formed e-commerce firms, with perhaps millions more to spring up around the
world in years to come. In many markets and industries, entry barriers are low
enough to make additional entry both credible and likely.
(d) Increased bargaining power of customers to compare the products, prices and
other terms and conditions of rival vendors. Online buyers gain bargaining power
because they confront far fewer obstacles to comparing the products, prices, and
shipping times of rival vendors.
(e) Possibility for business organizations to locate the best suppliers across the
world to gain cost advantage. The Internet makes it feasible for companies to
reach beyond their borders to find the best suppliers and, further, to collaborate
closely with them to achieve efficiency gains and cost savings. Organisations can
extend their geographic search for suppliers and can collaborate electronically
with chosen suppliers to systemise ordering and shipping of parts and
components, improve deliveries and communicate speedily and efficiently.
(f) Internet and PC technologies are advancing rapidly, often in uncertain and
unexpected directions. Such changes are often bringing in new opportunities and
challenges.
(g) Faster diffusion of new technology and new idea across the world.
Organisations in emerging countries and elsewhere can use the internet to
monitor the latest technological developments and to stay abreast of what is
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transpiring in the developed markets.
(h) The e-commerce environment demands that companies move swiftly. In the
exploding ecommerce world, speed is a condition of survival. New developments
occur on one front and then on another occur regularly.
(i) E-commerce technology opens up a host of opportunities for reconfiguring
industry and company value chains. Using the internet to link the orders of
customers with the suppliers of components enables just-in-time delivery to
manufacturers, slicing inventory costs and allowing production to match demand.
(j) The Internet can be an economical means of delivering customer service.
Organisations are discovering ways to deliver service in a centralised manner –
online or through telephone. Thus curtailing the need to keep company personnel
at different locations or at the facilities of major customers.
(k) The capital for funding potentially profitable e-commerce businesses is readily
available. In the Internet age, e-commerce businesses have found it relatively
easy to raise capital. Venture capitalists are quite willing to fund start-up
enterprises provided they have a promising technology or idea, an attractive
business model, and a well thoughtout strategic plan
(l) The needed e-commerce resource in short supply is human talent-in the form
of both technological expertise and managerial know-how. While some e-
commerce companies have their competitive advantage lodged in patented
technology or unique physical assets or brand-name awareness, many are
pursuing competitive advantage based on the expertise and intellectual capital of
their personnel and on their organizational competencies and capabilities.
4.3
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