STRATEGIC MANAGEMENT

Transcription

1 Qkhokn 1 STRATEGIC MANAGEMENT M.Com. (Fina) Directorate of Distance Education Maharshi Dayanand University ROHTAK

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3 Qkhokn 3 Contents Chapter 1 Strategic Management An Introduction 5 Chapter 2 Leves and Approaches to Strategic Decision Making 29 Chapter 3 Process of Strategic Management 42 Chapter 4 Roes of Strategists, Mission and Objectives 47 Chapter 5 Strategic Business Unit 69 Chapter 6 Environment-Concept, Components and Appraisa 74 Chapter 7 Organisationa Dynamics and Structuring Organisationa Appraisa 120 Chapter 8 SWOT Anaysis 159 Chapter 9 Strategy Formuation 175 Chapter 10 Strategy Anaysis and Choice 204 Chapter 11 Strategy Impementation Aspects, Structures, Design and Change 231 Chapter 12 Behavioura Impementation Leadership, Cuture, Poitics, Power, Vaues and Ethics 284 Chapter 13 Functiona Impementation Pans and Poicies 338 Chapter 14 Strategic Evauation and Contro 373

4 4 Strategic Management jktuhfr fokku Paper-7 Max. Marks.: 100 Time: 3 Hrs Note: There wi be three sections of the question paper. In section A there wi be 10 short answer questions of 2 marks each. A questions of this section are compusory. Section B wi comprise of 10 questions of 5 marks each out of which candidates are required to attempt any seven questions. Section C wi be having 5 questions of 15 marks each out of which candidates are required to attempt any three questions. The examiner wi set the questions in a the three sections by covering the entire syabus of the concerned subject. Course Inputs Unit-1 Strategic Management Process: Defining Strategy, Leves at which Strategy operates, Approaches to Strategic Decision making, Process of Strategic Management, Roes of Strategists in Strategic Management; Mission and purpose, Objectives and goas, Strategic Business Unit. Unit-2 Environment and Organisationa Appraisa: Concept of Environment and its components. Environmenta Scanning and Appraisa; Organisationa appraisa-its Dynamics, Considerations, Methods and Techniques. Structuring Organisationa Appraisa, SWOT Anaysis. Unit-3 Strategy Formuation: Corporate eve Strategies; Grand Strategies, Stabiity Strategies, Expansion Strategies, Retrenchment Strategies, Combination Strategies, Corporate Restructuring; Business eve Strategies and Tactics. Strategic Anaysis and Choice: The Process of Strategic Choice, Corporate Leve Strategic Anaysis, Business Leve Strategic Anaysis, Subjective Factors in Strategic Choice, Contingency Strategy, Strategic Pan. Unit-4 Strategy Impementation: Inter reationship between formuation and Impementation. Aspects of Strategic Impementation, Project Impementation, Procedura Impementation, Resource Aocation. Strategy and Structures: Structura Considerations, Structures for Strategies; Organisationa Design and Change. Behavioura Impementation: Leadership Impementation, Corporate Cuture, Corporate Poitics and Use of Power, Persona vaues and Business Ethics. Unit-5 Functiona Impementation: Functiona Strategies, Functiona Pans and Poicies, Marketing Pans and Poicies, Financia Pans and Poicies, Personne Pans and Poicies, Operations Pans and Poicies. Strategic Evauation and Contro: An Overview of Strategic Evauation and Contro, Techniques of Strategic Evauation and Contro.

5 Strategic Management An Introduction 5 Chapter 1 Strategic Management An Introduction Strategic management is the process by which an organisation formuates its objectives and manages to achieve them. Strategy is the means to achieve the organisationa ends. A strategy is a route to the destination viz., the objectives of the firm. Picking a destination means choosing an objective. Objectives and strategies evove as probems and opportunities are identified, resoved and expoited. The interocking of objectives and strategies characterise the effective management of an organisation. The process binds, coordinates and integrates the parts into a whoe. Effective organisations are tied by means-ends chains into a purposefu whoe. The strategies to achieve corporate goas at higher eves often provides strategies for managers at ower eves. Managers must have strategic vision to become strategic managers and thereby to manage the organisation strategicay. Strategic vision is a pre -requisite of the strategic managers. Strategic vision impies a profound scanning abiity of the environment in which the company is in i.e., knowing the objectives and vaues of the organisation stakehoders and bringing that knowedge into future projections and pans of the organisation. The managers strategic vision invoves: The abiity to sove compex and more compex probems; The knowedge to be more anticipatory in perspective and approach, and The wiingness to deveop options for the future. Strategic management can be defined as the art and science of formuating, impementing, and evauating cross-functiona decisions that enabe an organisation to achieve its objectives. As this definition impies, strategic management focuses on integrating management, marketing, finance/accounting, production/operations, research and deveopment, and information systems aspects of a business to achieve organisationa success. The term strategic management is used at many coeges and universities as the tite to the capstone course in business administration, business poicy, which integrates materia from a business courses. The strategic-management process consists of three stages: strategy formuation, strategy evauation. Strategy formuation incudes deveoping a business mission, identifying an organisation s externa opportunities and threats, determining interna strengths and weaknesses, estabishing ong-term objectives, generating aternative strategies, and choosing particuar strategies to pursue. Strategy-formuation issues incude deciding what new businesses to enter, what businesses to abandon, how to aocate resources, whether to expand operations or diversify, whether to enter internationa markets, whether to merge or form a joint venture, and how to avoid a hostie takeover.

6 6 Strategic Management Strategy impementation requires a firm to estabish annua objectives, devise poicies, motivate empoyees, and aocate resources so that formuated strategies can he executed; strategy impementation incudes deveoping a strategy-supportive cuture, creating an effective organisationa structure, redirecting marketing efforts, preparing budgets, deveoping and utiizing information systems, and motivating individuas to action. Strategy evauation monitors the resuts of formuation and impementation activities and incudes measuring individua and organisationa performance and taking corrective actions when necessary. Athough making good strategic decisions is the major responsibiity of an organisation s owner or chief executive officer, managers and empoyees both must aso be invoved in strategy formuation, impementation, and evauation activities. Participation is a key to gaining commitment for needed changes. Peter Drucker says the prime task of strategic management is thinking through the overa mission of a business:... that is, of asking the question What is our Business? This eads to the setting of objectives, the deveopment of strategies, and the making of today s decisions for tomorrow s resuts. This ceary must be done by a part of the organisation that can see the entire business; that can baance objectives and the needs of today against the needs of tomorrow; and that can aocate resources of men and money to key resuts. The strategic-management process must be a peope process to be successfu! Peope, incuding a managers and empoyees, make the difference! The chief executive officer of Rock We Internationa expains, We beieve that fundamenta to effective strategic management is fuy informed empoyees at a organisationa eves. We expect every business segment to inform every empoyee about the business objectives, the direction of the business, progress towards achieving objectives, and customers, competitors and product pans. The strategic-management process can be described as an objective, ogica, systematic approach for making major decisions in an organisation. It attempts to organise quaitative and quantitative information in a way that aows effective decisions to be made under conditions of uncertainty. Yet, strategic management is not a pure science that ends itsef to a nice, neat, one-two-three approach. Based on past experiences, judgment, and feeings, intuition is essentia to making good strategic decisions. Intuition is particuary usefu for making decisions in situations of great uncertainty or itte precedent, or when highy interreated variabes exist, there is immense pressure to he right, or it is necessary to choose from severa pausibe aternatives. These situations describe the very nature and heart of strategic management. Some managers and owners of businesses profess to have extraordinary abiities for using intuition aone in devising briiant strategies. For exampe, Wi Durant, who organised Genera Motors Corporation, was described by Afred Soan as a man who woud proceed on a course of action guided soey, as far as I coud te, by some intuitive fash of briiance. He never fet obiged to make an engineering hunt for the facts. Yet at times he was astoundingy correct in his judgment. Abert Einstein acknowedged the importance of intuition when he said, I beieve in intuition and inspiration. At times I fee certain that I am right whie not knowing the reason. Imagination is more important than knowedge, because knowedge is imited, whereas imagination embraces the entire word.

7 Strategic Management An Introduction 7 Athough some organisations today may survive and prosper because they have intuitive geniuses managing them, most are not so fortunate. Most organisations can benefit from strategic management, which is based upon integrating intuition and anaysis in decision making. Choosing an intuitive or anaytica approach to decision making is not an either-or proposition. Managers at a eves in an organisation shoud inject their intuition and judgment into strategic-management anayses. Anaytica thinking and intuitive thinking compement each other. Operating from the I ve aready made up my mind, don t bother me with the facts mode is not management by intuition; it is management by ignorance. Drucker says, I beieve in intuition ony if you discipine it. Hunch artists, who make a diagnosis but don t check it out with the facts, are the ones in medicine who ki peope, and in management ki businesses. In a sense, the strategic-management process is an attempt to dupicate what goes on in the mind of a briiant intuitive person who knows the business. Successfu strategic management hinges upon effective integration of intuition and anaysis, as Henderson notes beow: The acceerating rate of change today is producing a business word in which customary manageria habits in organisations are increasingy inadequate. Experience aone was an adequate guide when changes coud be made in sma increments. But intuitive and experience-based management phiosophies are grossy inadequate when decisions are strategic and have major, irreversibe consequences. The strategic-management process is based on the beief that organisations shoud continuay monitor interna and externa events and trends so that timey changes can be made as needed. The rate and magnitude of changes that affect organisations are increasing dramaticay. Consider, for exampe, merger/acquisition mania, hostie takeovers, ceuar phones, monocona antibodies, fiber optics, the aging popuation, taxes on services, computer technoogy, and the unification of Western Europe in To survive, a organisations must be capabe of astutey identifying and adapting to change. The strategic-management process is aimed at aowing organisations to effectivey adapt to change over the ong run. In today s business environment, more than any preceding era, the ony constant is change. Successfu organisations effectivey manage change, continuousy adapting their bureaucracies, strategies, systems, products, and cutures to survive the shocks and prosper from the forces that decimate the competition. Information technoogy and gobaisation are environmenta changes that are transforming business and society today. On a poitica map, the boundaries between countries are as cear as ever, but on a competitive map showing the rea fows of financia and industria activity, the boundaries have argey disappeared. Speedy fow of information has eaten away at nationa boundaries so that peope wordwide readiy see for themseves how other peope ive. Peope are traveing abroad more; ten miion Japanese trave abroad annuay. Peope are emigrating more; East Germans to West Germany and Mexicans to the United Stares are exampes. We are becoming a borderess word with goba citizens, goba competitors, goba customers, goba suppiers, and goba distributors! The word is changing, and businesses must adapt to these changes or face extinction. The need to adapt to change eads organisations to key strategic-management

8 8 Strategic Management questions, such as: What kind of business shoud we become? Are we in the right fieds? Shoud we reshape our business? What new competitors are entering our industry? What strategies shoud we pursue? How are our customers changing? Are new technoogies being deveoped that coud put us out of business? The history of business and industria management is one of decision-making under ever increasing environmenta turbuence. At each phase of such turbuence, management practices have been deveoped to successfuy meet the impacts of the environment. The evoution of management from budget-based management to strategic management through corporate panning, ong-range panning, strategic ong-range panning, and strategic panning is a continuous picture of this deveopment process. Environmenta Turbuences Management Strategy Interaction The discussion of evoution of the panning process from budgetary and financia contro through corporate panning to strategic management can best be initiated by referring to an artice by three members of McKinsey & Company (1) which is diagrammaticay depicted in Exhibit Effectiveness of strategic decision-making Increasing Annua budgets * Functiona focus * Muti-year budgets * Gap anaysis * Static aocation of resourees * Thorough situation anaysis and competitive assessment * Evauation of strategic aternatives * Dynamic aocation of resources * We-defined strategic framework * Strategicay focused organisation * Widespread strategic thinking capabiity * Coherent reinforcing management processes * Negotiation of objectives * Review of progress * Incentives * Supportive vaue system and cimate Phase 1 Financia panning Vaue system * Meet budget Phase 2 Forecast based panning * Predict the future Phase 3 Externay oriented Panning * Think strategicay Phase 4 Strategic Management * Create the future TIME Exhibit 1.1: Phases in the Evoution of Strategic Panning The phases shown in the Exhibit. 1.1 can be separated into two parts. In the first phase, a target, usuay a financia one, is set out for the year and imits are paced on what a divisiona manager and his/her peope are expected to achieve and to spend in the form of expenses or in capita expenditure to achieve the desired bottom ine. Reviews of how cosey the performance is keeping to the programme are made quartery or sometimes even monthy. Such efforts are often tied to corporate targets reating to annua capita budgets, desired rates of return to sharehoders equity or investment. Likewise, activities such as empoyment, training, appraisas, and compensation of management are cosey tied to this annua cyce. Operationay this is termed budgeting or budgetary contro, practised during the earier days of manageria evoution.

9 Strategic Management An Introduction 9 The impications of interaction between tempos in environmenta change and the intensity of management contro systems woud be cear from Exhibit 1.2. Budgeting and financia contro on an annua basis were created during phase 1: the stabe environment. Soon, however, it was found that environmenta change was registering an acceerating rates, and by and arge the environment entered the transitiona stage. Whie a segments of environment go through the same cyce: stabe transitiona turbuent unstabe, the rates of change for the segments are however different. For instance consumer behaviour or market may change at a rate quite different than technoogy, or competition, or empoyee attitude. Man and his creation, society, abhor uncertainty. But change creates uncertainties, often great uncertainties. Historicay, during the post-budget phase, depicted in Exhibit 1.1 by phase 2, whie the technoogica segment continued to be fairy stabe, other segments depicted a fairy unstabe environment. Many managers, unabe to face this uncertainty preferred to go back to the od rues of budgeting, even if there was a feeing that the system was fast becoming obsoete. Others opted for forma schedues of goa definition, environmenta scanning, strategy formuation, in short, for formaised corporate panning, with the entire strategy of panning being based on forecast with the assumption of a fairy stabe technoogy base. Sow 2 1 Transitiona Stabe Environmenta Changes Turbuent 3 Unstabe 4 Fast High Management Contro System Low Exhibit 1.2 Acceerating Environmenta Change Budgeting Budgeting is best understood in the context of time of deveopment and use. In its eary manifestation, a budget can be regarded as primariy a pan to reach a goa or objective and is perhaps best defined as a basic panning and contro system. In its ater manifestation, budgeting forms a part of the strategic panning process, unike the earier manifestation when budgeting and budgetary management constituted a stand aone panning and contro system. Budgeting is, in fact, a too for running the activities of a firm systematicay. It carefuy ooks at the resources avaiabe or within reach, decides upon the aocation of these

10 10 Strategic Management resources (within the constraints of avaiabiity) to the various activities in order that the desired objectives may be fufied. In consequence, comparison of the actuas against the budget aso provides a basis of manageria contro. Thus, a saes budget wi indicate the voume of saes the company expects to achieve. This ceary eads to the aocation of resources to production and purchasing and, therefore, budgets for these activities. Simutaneousy, the summation of the resources aocated to various component activities shoud indicate whether or not the tota resources aocated obey the constraints of avaiabiity. For ease in operation and contro, budgets are mainy formuated in financia terms. Budgets are basicay of two types: i. Static budget, based on a singe estimate of saes and production, i.e., a singe performance estimate. ii. Fexibe budgets refecting different production and saes voumes. The foowing sets of information form the buiding bocks for a fexibe budget. a. Revenues, expenses and income for a number of eves of saes voumes. b. Manufacturing costs for a corresponding number of production voumes. c. Manufacturing costs adjusted to what they shoud have been for a recent actua production voume. The major budget concerning a the significant activities of the firm, and usuay for a period of one year, is the master budget. The foowing is a schematic isting of a the suppementary budgets. Operationa Capita Production budget Capita expenditure Inventory budget Aocation of funds Direct abour budget Management of funds Direct materias budget Manufacturing overhead budget Procurement budget Saes budget (by products and departments) Seing and distribution expense budget Administrative expense budget Other incomes and expenses budget Simutaneousy, cash fow is budgeted through a cash fow budget showing budgeted receipts, outgoings, and baances on a short-term basis. Simiary, investment decisions and the expenses they entai tend to be monitored and controed by a capita expenditure budget, showing project, yeary expense, and tota capita expense budgeted, so that the actua outays may be monitored project by project.

11 Strategic Management An Introduction 11 The master budget is summarised in two forms: i. The budgeted income and expenditure statement: showing tota revenues, cost of goods sod, other costs broken down under major heads, and the budgeted profits. ii. The budgeted baance sheet showing annua assets and iabiities. Budgetary Contro Since the objective of budgeting is to monitor and contro the performance of the firm, the first step is to determine budget figures. Efficiency standards with regard to a the activities enumerated above are impicit in the budgetary projections. The estimated productivity figures are commony based on standards of performance either derived from historica observations or computations from the firm s interna data, or from figures obtained based on financia statements of competitors (inter-firm comparisons). Other approaches are to base these on predetermined performance standards or from negotiations conducted within the management by objectives (MBO) framework. For contro purposes, it is not enough to evauate the budget figures carefuy. As Ackoff puts it, contro is the evauation of decisions after they have been impemented. It invoves predicting the outcome of the decisions, comparing of it with the actua outcome, and taking corrective actions when the match is poor. In a budgetary contro system, the budgets are the predictions of the outcome of the contempated decisions. The actuas are potted against the budget. The differences are the variances, and corrective actions are taken when the variances are arge and significant. Financia Contro Like budgets and budgetary contro, financia contro operates using monetary figures. Initiay designed to manage and contro cash, it now provides the basis for contro of many other functions. To enabe financia contro to be better utiised, any economic entity/corporation is usuay subdivided into we-defined segments with ceary defined scope of activities entrusted to responsibe individua managers. These become responsibiity centres, and depending on the nature of the functions, are caed costs centres, expense centres, activity centres, revenue centres, profit centres, investment centres, and the ike. The financia contro system is buit around a rather sma number of key variabes which, when carefuy monitored, aow managers to track over a stipuated period the performance of the various functiona activities and business units of the firm. These indicators are derived from the basic information compied for assembing the budget. A vauabe too in exercising financia contro is the use of financia ratios both for assessment of the company s own financia performance and status, as aso to compare them with simiar companies. These ratios are divided into the foowing major groups: Liquidity ratios Leverage/capita structure ratios Profitabiity ratios Turnover ratios

12 12 Strategic Management The major weakness of budget and budgetary contro is their short time horizon. In the scenario in which it was originay initiated, the environment was comparativey ess turbuent, and competition was ess intense. It seemed adequate to ook after a particuar year s business and performance. References to a possibe change in direction in future, capita investment spreading over successive years, easing out of weakening activities etc. were comparativey ess important, if not considered entirey irreevant in the context of Budgetary Contro. Refixing budgetary figures ab initio each year was aso considered unnecessary. It was enough to buid on previous years figures, suitaby adjusting and updating these. With years, both environmenta turbuence and competitive pressures have increased significanty. Short time-span budgetary contro was no onger considered adequate. A much onger horizon began to be considered necessary not ony for a firm s we-being, but even for its surviva. As a ogica coroary, corporate panning suppanted budget and budgetary contro as a basic too for panning and monitoring a firm s performance. Budgeting did not, however, ose a its reevance. With corporate panning and strategic panning as a ater deveopment, budgeting and budgetary contro became the principa arm of action pans at the impementation and contro stages. A new approach to budgeting required the use not ony of historic data but, for the estabishment or emergence of commitments arising out of the strategic or corporate pan, it aso caed for negotiations conducted within the framework of management by objectives (MBO). Meanwhie, the very process of budget preparation has gone through stages of refinement. New concepts have been introduced. These incude the concept of fexibe budgeting which permits the origina standards used to measure performance to be modified with changes in the actua eve of operations. Simiary Zero-Base Budgeting (ZBB) estabishes a set of very comprehensive rues to force managers to justify their budgetary aocations from base zero, rather than defining the new budget incrementay. Resort to financia measures and a tota preoccupation with budgetary contro for a particuar year has eft managers overy preoccupied with profitabiity as the key criterion for measurement of the firm s and hence their own performances. This trend has, however, continued into the corporate panning phase, when ROI has tended to become the a important preoccupation of management. The resut has been that too many firms have, in their preoccupation with ROI, inadvertenty weakened their asset base and discouraged necessary investments by compromising the ong-term competitive standing of the firm in exchange for a hefty ROI for the foowing year. The pecuiar standing of executive management with sharehoders in many countries, together with the behaviour of the share market where immediate profit-taking becomes the a engrossing consideration as aso taxation poicies of many governments discouraging capita gains, has ony encouraged this tendency. Indeed, an immediate sure return versus ong-term risk of increased return and growth tended to dichotomize management attitude and poicy, as aso the government attitude in many companies and states. Firms which depend entirey on budgetary and financia contro measurements for panning purposes are exceedingy vunerabe to faing into the near-sighted ROI traps. Uness these are cear articuations of the business s competitive spirit and strategy, propery understood at a organisationa eves, a pure budgeting and financia contro system wi prove inadequate in warding off undesirabe consequences.

13 Strategic Management An Introduction 13 Corporate Panning To assist a sharp definition and consideration of the Corporate Panning Process, we refer to Exhibit 1.3. The expanation of the steps foows. Objectives Before discussing the panning process and the objective setting, a few factors perhaps justify eary consideration and emphasis: Objectives Diversification objectives Interna appraisa Externa appraisa Exhibit 1.3: The Tota Corporate Pan Deveopment Process i. The process is being undertaken in the context of changing environment, based ii. iii. on forecast. Momentum Hence the strategy pan is being drawn up in the context of partia ignorance. As the panning horizon eongates and extends into the future, the uncertainty and ignorance Deveopment impinging objectives upon the forecasting process increases, thereby putting the reiabiity and credibiity of resuts of the forecasting process increasingy at risk. This puts an effective upper imit on Synergy the panning structure horizon if the pan is to function as an Expansion effective pan instrument of contro. On the other hand, the weaknesses of annua panning or budgeting are manifest and have aready been discussed, indeed, the practice is overwhemingy in support of a five year panning horizon. Diversification pan However, the horizon is partiay dependent on the investment horizon, a time period necessary for investment to Key start yieding = Comparator a reasonabe revenue. With a short investment horizon, therefore, a three year panning horizon is aso in practice. A corporation is a purposive organisation, and it is evident, therefore, that efficient utiization of the resources at its disposa towards fufiment of its objective(s) shoud be its purpose. This brings us squarey into the arena of objective setting,. The setting up of objective(s) is not however, an ad hoc decision, but the cumination of a process. It woud perhaps be usefu at this stage to consider this entire process.

14 14 Strategic Management The concept of a corporation being a purposive organisation, and the efficient utiisation of resources as the path to achieving its objectives, invariaby brings forward the concept of strategy. It is perhaps usefu to subdivide objectives into a few basic divisions, e.g. The primary, or profit objective of the business, set in advance of strategy. The secondary objectives, argey narrative, again set in advance of strategy. (This woud incude economic, socia, technoogica, etc. objectives.) Goas that are time-assigned targets derived from the strategy. Standards of performance (often coterminous with goas) assigned to particuar individuas. Primary or Profit Objectives When considering profit objective, two aspects require attention: a. The phiosophy of profit namey that it is not simpy one of short-term gains but of ong-term profit growth aowing for corporate renewa. b. The dimensiona aspects of profit quantity and efficiency. An efficiency target may be return-on capita empoyed with further quaification on the time period and the trend. The quantity dimension, quaified for simiar time period, inked to efficiency becomes a good dimensiona measure of profit. A simiar quantitative measure of profit target woud be earning per share. A number of factors shoud be borne in mind when setting the profit target. Trends over previous years. Progress by other firms of simiar size or in the same industry. Performance of eading companies quoted on the stock exchange. Opportunities for profitabe investments esewhere. The ambitions of the chief executive. The strategic need for growth to reach a size that enabes the company to at east maintain its position of infuence in its trade. Rates of infation. Once the profit objectives have been set for the company, it shoud be foowed up with objectives of the divisions and subsidiaries. Secondary Objectives Secondary objectives are descriptive and attempt to set out the key eements of the business of the future. These examine the nature and scope of the business, the geographica sphere of operation, and some of the key factors about the company. These incude statement of the way the company intends to conduct its reations with its empoyees, customers, and society, as aso the concept of mora and ethica standards it proposes to adopt. Aso part of the secondary objective is that the company s attitude to technoogy, in the context of the business it is in, is stated unequivocay.

15 Strategic Management An Introduction 15 Goas If we regard objectives as the map reference, goas may be considered to be the andmarks and miestones that the firm must pass as it progresses aong the chosen route. In effect, a network of goas provides a mode of the company s strategy over the whoe period of the pan. Some possibe definitions or measures of goas woud be: Percentage market share (by products and/or country). A ratio, such as return on saes. An absoute figure for saes. A minimum figure for customer compaint. A maximum figure for hours ost in industria disputes. A abour productivity ratio. Tota number of empoyees. A maximum empoyee wastage rate. A standard cost. A cost reduction target. A date by which a particuar event must take pace (e.g. a new product aunch). Quantified vaues of some of the financia ratios woud aso constitute measures and definitions of goas. Standards of Performance Standards of performance are essentiay derivations from goas. Whie a goa is a corporate, divisiona or departmenta target, a standard of performance is something which is individuay assigned to a named person. Some times the persona standard may be something which is coterminous with the corporate goa. For instance, a market share goa may be assigned to the product manager responsibe. Sometimes the standard may be something derived from the goa: spitting up the corporate target and making individuas responsibe for each segment (for instance the persona saes target assigned to a representative). Frequenty, these are time-assigned tasks. The overa concept may be visuaised as a network of targets, a interinked in some way to the company s primary and secondary objectives. The importance of persona standards is that they provide a too for ensuring that pans are converted into tasks peope can perform. A direct ink is thus estabished between the task of the individua persons and the tota corporate strategy. It is aso important to reaise the reation between the system of persona standards, as briefy described above, and the technique of management by objectives (MBO) deveoped by Humbe Persona standards as a system is essentiay a simpe variant of MBO, athough its aims are narrower. The Appraisa Process It has aready been briefy mentioned how the comparativey stabe technoogy base accompanied by an unstabe, indeed turbuent, environment in the corporate segments

16 16 Strategic Management gave rise to the fet need for formaized or informa environmenta scanning. Aso, the pan is a projection of the company s performance and expectations into the future based on the panned strategy. Essentiay, therefore, the appraisa process consists of the foowing major eements: Externa appraisa Together comprising Interna appraisa environmenta anaysis SWOT anaysis Gap anaysis Forecasting Environment monitoring and anaysis can perhaps be depicted in a concentric diagram (Exhibit 1.4). In Exhibit 1.4, everything except the interna environment is a constituent of the externa environment. Exhibit 1.4: Environments to be Monitored Externa appraisa is carried out to evauate and judge the externa environment both in regard to existing activities and aso new opportunities for new products and activities. It thus provides the basis for evauating the scope, opportunities, threats, etc. Interna Appraisa It is basicay to evauate the firm s own capacities and to meet the requirements of existing activities efficienty and effectivey; and aso to meet the chaenges or threats indicated on the basis of externa appraisa. It further identifies the strengths, weaknesses, and resources of the company keeping the objectives, the externa environment, and the forecast in view; the strengths to be utiised, the weaknesses to be corrected. It is important to reaise that athough there is interreationship between interna appraisa and environment anaysis, the two are reay different and isoated from each other. In effect, interna appraisa is best done against the background of environment anaysis. A number of basic concepts shoud be borne in mind as the appraisa progresses, and performance rated against then. It shoud aways be assumed that there might be a better way of doing something unti the contrary is proved.

17 Strategic Management An Introduction 17 It is usuay a reativey sma amount of effort that produces most of the returns. Usuay, around 80 percent of the profit comes from, say, 20 per cent of effort, the remaining 20 percent requiring the baance 80 percent effort. Any action that reduces the amount of ess profitabe action shoud ead to corporate improvement. This, in effect, is an iustration of the Pareto Principe. Often knowedge of what is being done is not as perfect as managers within a company beieve. One of the tasks of corporate appraisa shoud be to ascertain the facts. When what is being done has been estabished, the question why shoud be asked. The future is more important than the present where the trends and effects on the aspects studied can be foreseen. The appraisa shoud cover a aspects of the company. The foowing factors shoud be considered as part of the interna appraisa: 1. Trends of resuts: For exampe, trends in profits, saes, capita empoyed, and the various commony used ratios. This wi show whether the company is improving or worsening in its performance. 2. Sources of profit: This anaysis shoud be mosty marketing oriented. 3. Risk: Arising from such factors as the buk of profit coming from a singe product, over-dependence on a singe market, too few customers for a product, raw materias difficuty varying from difficuty of suppy, duty, shortage, to overdependence on one suppier, other market risks, technoogica risks not ony in product obsoescence but in production processes, etc. 4. Manufacturing activity: The purpose being production cost reduction, consideration of the process shoud incude, apart from the manufacturing process, pant and equipment appropriateness and efficiency, correct abour depoyment and efficiency, aso the raw materias, the standards set for their purchase and the efficiency of the company as buyer (skis, technoogy absorption creation). 5. Rationaisation of resources: This invoves rationaisation reocations of faciities, pants and buiding, distribution depots, suppy and demand patterns, etc. 6. Organisation and management structure: This invoves studying the basic organisationa structure, assessment of manageria capabiities, the company s abour reations, company s reation with its trade unions, morae of empoyees, corporate motivation, etc. 7. Financia resources: Study of the company s iquid resources and expected future cash-fow position. 8. Corporate capabiity: This is brought out in the anaysis of the company s synergy structure. 9. Systems: This woud invove assessment of the forma and informa systems and communications, authorities and participation within the company. 10. Use of resources: This essentiay invoves a study of aocation of resources between the products and a comparison of this with their rea profit contribution. Resources here mean not ony money, buiding, and pant, but aso what are

18 18 Strategic Management probaby the scarce resources of management taent, capabiity, and technica skis. 11. Skis and technoogy: This refers to the avaiabiity of the required technoogy in the organisation, as aso the speciaised skis for the technoogy absorption, adaptation, and creation. Interna appraisa shoud aso incude the foowing: a. The organisation cimate and cuture: Whether this is compatibe with the environment at arge. This is an area in particuar where a shift in either the organisationa cimate or of the environment surrounding it and the consequent incompatibiity may prove disastrous or near disastrous. b. A shift in organisationa eadership: Such a shift within an unchanged organisationa cuture may again produce wasting conficts, often eading to a decrease in efficiency which, once identified, requires considerabe effort and interna readjustment to correct. Externa Appraisa a. Customer environment: The scanning shoud incude the foowing: Tracking customer compaints and compiments. Monitoring return rates. Listening to customer needs and concerns. Extent of quaity improvement/maintenance/deterioration as refected in customer reactions. Extent of competitive pressures from possibe substitutes, as refected in customer reaction. b. Competitive environment: Surveiance of competitive environment shoud incude consideration of: Competitor profie. Market segment pattern. Trend in market shares. Research and deveopment trends. Emergence of new competitors. Threat through possibe emergence of new substitutes. c. Industry environment: Industry environment monitoring shoud incude the foowing: Structure of the industry. How is the industry financed. Changes in the degree of government reguations. Changes in the typica products offered by the industry. Changes in typica industry marketing strategies and techniques.

19 Strategic Management An Introduction 19 Trends in the tota market for the industry. d. Macro environment: Macro environment surveiance shoud incude the foowing: Forecasting Socia factors, e.g. demographic changes. Technoogica factors. Economic factors, e.g. prime interest rates; consumer price index, etc. Poitica factors, e.g. increases or decreases in government reguations and contro, taxation aws, etc. Socia factors, e.g. awareness about environment, etc. As corporate panning extends to a firm s activities into the quite distant future, perhaps five years or so, it wi be reaised that there is need for forecasting of saes into these years. These forecasts of the product or industry saes and the deductions from these of the company s expected saes or panned saes woud determine the panning of resources. These forecasts may be of products aready on sae production by the company; products on the same or simiar ines which the company may take up, products currenty in the research and deveopment stage, or products the company may take up for diversification. Depending on the status of the product vis-a-vis the company s actions, pans or intentions, the forecasts woud extend to or extend over varying time periods into the future. Aso, an exact knowedge of the product attribute wi vary accordingy. A forecasts project into the future and hence are subject to uncertainty. The degree of uncertainty depends consideraby on how far into the future the forecast extends and the status of knowedge of the product attributes. Before discussing forecasting methods, however, it is important to emphasise the difference between forecast and market share. Forecast is directy a projection of anticipated saes. It is thus independent of how the market itsef grows or changes. Market share is a derivative of the combined effects of saes forecast and change in the voume of tota market. Market share is an important driver for the process of strategy formuations. A products usuay go through a ife cyce with a genera shape such as that shown in Exhibit 1.5. It is easy to reaise that for any saes forecast of any existing product it is important to find out the phase of the product ife cyce that the product is in. There are, however, three difficuties, namey a. Determining the phase the product is in. b. Determining the duration of the various time phases which are dependent on many externa factors. c. Actions which can be taken by the company to extend and modify the ife cyce.

20 20 Strategic Management Take off Increasing saes: profit starts growing Saes Introduction : ow saes; ow or no profit Maturity: fairy static saes; constant or sighty decining profits Saes sti grow but sowy: ower profit growth Decine: decine in saes and profit, perhaps justifying the withdrawa of the product from the market. Forecasting Methods 1. Statistica Projections This methodoogy is based on past data and can assume increasing sophistication as foows: Trend Anaysis i. Simpe growth pattern ii. iii. iv. This is quite usefu for short-term forecasts, say for instance, for a few months, particuary to gain a perspective of the future prospects. This method is based on the average annua growth rate, cacuated over a period, worked out simpy by expressing the atest year as an index of the eariest and correcting out for the erratic factor. Moving averages In it the seasona or cycica pattern is eiminated by obtaining a smooth underying trend for tweve months. Then, for each advancing month or quarter, etc. the data for the same period is added and the data for the corresponding period at the tai end is eiminated and a fresh trend ine is worked out. Exponentia smoothing This method is in concept the same as moving averages, except that the average is exponentiay weighted so that the more recent data is given a greater weightage, and the past forecasting error is taken into account in each successive period. Mathematica trends Mathematica trends are methods in which a mathematica fit is used to express the past data. Some of the methods of using mathematics with increasing compexity are as foows: Simpe regression mode Time Exhibit 1.5: The Product Life Cyce

21 Strategic Management An Introduction 21 In this, mode, a dependent variabe (sae) is expressed as a mathematica function of a second variabe (say year, or GNP), This function may take any form, e.g. * inear, Y = a+bx; * exponentia, Y = e a+bx ; or for computationa ease, * quadratic, Y = a+bx 2 ; og e Y = (a+bx)(og e e) = a+bx; * cubic, Y = a+bx+cx 2 +dx 3, etc. Mutipe Regression Mode A mutipe regression mode is appicabe when the dependent variabe (sae) is a function of two or more independent variabes (GNP, sae of stee, etc.). Thus, for two independent variabes, the functiona form woud be, Y = a + b 1 x 1 + b 2 x 2 This functiona form may aso be non-inear, but in most instances, particuary for computationa purposes, these can be transformed into inear forms. The advantage of mathematica regressions (both simpe and mutipe) is that their fit may be statisticay tested. Auto-regressive Schemes: An auto-regressive scheme is a method of regression where the dependent variabe is a function of past vaues of the same variabe with increasing time ags. Thus the genera form is, Y t = a 1 + b 1 Y t 1 + b 2 Y t b k Y t k U t. 2. Econometric Modes In this method, the dependent variabe is expressed through a system of equations invoving severa independent variabes, themseves dependent on one another. Thus for exampe, the interdependencies of the dependent and independent variabe may take the foowing form: Saes Production cost cost) Seing expenses Advertising = f (Saes ) Price = f (GNP, Price, Advertising) = f (Number of units produced, inventories, abour costs, materia = f (Advertising, other expenses) = f (Production cost, seing expenses, administrative overhead, profit) In econometric modes, we are faced with many tasks simiar to those in mutipe regression anaysis. These tasks incude:

22 22 Strategic Management 1. Determining which variabes to incude in each equation. 2. Determining the functiona form (e.g., inear, exponentia, ogarithmic, etc.) of each of the equations. 3. Checking the vaidity of the assumptions invoved. 4. Estimating simutaneousy the parameters of the equations. 5. Testing the statistica significance of the resuts. Input-output method The input-output mode is a specia type of econometric mode, in which a number of inputs are chosen, and for each reationship the quantities of a number of different inputs are reated to quantities of a number of different outputs through inear reationships. The inputs being independent variabes, the outputs woud be the forecasted dependent variabes. End-use method In end-use method, the product for which demand is to be forecast is reated to the various end uses to which it is put and the quantitative reationship between units of the product and corresponding units of the end-use product is estabished. This reationship is known as the bridging factor. The projected demand of the end-use product over the forecasting period is now obtained and worked backwards to obtain the demand forecast of the product. An exampe wi make the procedure cear. Suppose it is desired to project the demand forecast for forging stee over a forecasting interva. It is easy to ist the different end products in which forged stee is used, e.g. automobies (cassified into trucks, LCVs, passenger cars, etc.), raiway engines, 3 wheeers, motorcyces and cyces. It is aso possibe to estabish the number of kiogrammes of forged stee required per unit of these end products, giving the bridging factor. Once bridging factors have been estabished, demand projection of the different end products wi enabe demand forecast of forged stee to be determined. It wi be seen that there is considerabe simiarity between input-output anaysis and the end-use method. A major obvious difference is that whereas in input-output anaysis, the inputs are the independent variabes, in the end-use method, the position is reversed. Aso, in the input-output method, mutipe inputs and outputs are considered simutaneousy, any output having one or more inputs, just as any input may be reated to one or more outputs. As against that, in the end use method a singe product is considered and is reated to a the end products which have significant requirement of the product. The forecast derivation of the end-use method is thus more direct and data requirement is often ess. Both the methods, it may be mentioned, are extremey important and significant, having extensive use in forecasting. 3. Marketing and Market Research Methods The forecasting methods discussed ti now are a based on projections based on past data, either of the product itsef, or of the industry together with modes of their reationship with one or more independent variabes, estabished statisticay or through causa anaysis

23 Strategic Management An Introduction 23 based on economic ogic and tested statisticay. Another source of possibe forecast for future saes can, however, be through direct contact with the existing or prospective market through variations of market anaysis and market research. Some of these are briefy described beow: i. Anaysis of estimates submitted by fied saesmen ii. iii. iv. For an existing product, in a fairy known marketing environment, the estimates of future saes submitted by fied saesmen, propery fitered and anaysed, provide a fairy satisfactory basis for short-term forecasting. Comparative studies A usefu forecasting method is to examine the performance of something simiar to the item being forecast. Thus a company aunching, say, a new cough mixture, woud find it usefu to study the price, promotion, and progress of other cough mixtures, or simiar products introduced during the past five years. Leading indicator The eading indicator is indeed very akin to an econometric method except that it tends to be quaitative and argey subjective. A eading indicator is an event which aways precedes an event of another type, thus giving prior warning of change. Thus the fast pace of rura eectrification and the creation of a succession of ow and medium capacity TV reay stations, providing extensive rura coverage for teevision in India, woud be a sure indication of surge in demand for teevision sets; particuary back and white TV sets. Experimenta market research Under this heading woud be incuded a systematicay conducted market research experiments, based on sampe survey and designed to obtain the quantitative forecast desired. Conducted propery, they usuay provide vauabe forecast for the period, within reason considered vaid. The disadvantage of such tests is that whie a true experiment eiminates a variabes except those being measured, this is not aways possibe for such experiments. Aso the source of inaccuracy creeping in through samping error is ever present. v. Intention-to-buy surveys These may be used for both consumer and industria goods. There are two major uses: a. To obtain information about proposed new products, both to assess their potentia as aso to verify or obtain information on product attribute suitabiity, need for change, product pacement, etc. b. To obtain an index about their market acceptance vis-a-vis competitive products which can be reated to actua performance and guide both the forecast and marketing strategy. A pitfa is that an interviewee s reactions during interview may be widey divergent from his/her behaviour at the time of actua purchase.

24 24 Strategic Management vi. Marketing judgements There are many occasions where itte or no data exist on which to base a forecast of a product or environmenta event, but where the knowedge of the company s empoyees can be caed upon, or when common sense can be used to forecast bands of possibe resuts based on some other data. Indeed, this can be further refined to quantify judgement by buiding a subjective demand curve. Its accuracy may be questioned, but its usefuness, in the absence of any constructive aternatives is underiabe. 4. Technoogica Forecasting This is usefu for forecasts for the comparativey distant future. Indeed, the term technoogica forecasting is rather oosey formuated, since it may be used to forecast not ony a technoogy but aso matters of nontechnica interest. Since it is a forecast of a comparativey distant future, the uncertainty surrounding it is consequenty greater. A technoogica forecast shoud therefore not usuay be a prediction of what wi happen, but of what is possibe and what can be made to happen. It is thus a guide to catayse strategic eadership vision rather than an operating methodoogy. When technica, it often provides a guide to action on what can be made to happen and serves as an invauabe aid to a visionary strategic eader and decision-maker in times of discontinuity. Defining Strategy and Other Key Terms The word strategy is derived from the Greek word Strategtia, which was used first around 400 B.C. This connotes the art and science of directing miitary forces. The strategy, according to a survey conducted in 1974 which asked corporate panners to define what they meant by strategy, incudes the determination and evauation of aternative paths to an aready estabished mission or objective and eventuay, choice of the aternative to be adopted. Simpy put, a strategy outines how management pans to achieve its objectives. Strategy is the product of the strategic management process. Genenray, when we tak of organisationa strategy, it refers to organisation s top eve strategy. However, strategies exist at other eves aso. Chander made a comprehensive anaysis of interreationships among environment, strategy, and organisationa structure. He anaysed the history of organisationa change in 70 manufacturing firms in the US. Whie doing so, Chander defined strategy as: The determination of the basic ong-term goas and objectives of an enterprise and the adoption of the courses of action and the aocation of resources necessary for carrying out these goas. Chander refers to three aspects: Determination of basic ong-term goas and objectives. adoption of courses of action to achieve these objectives, and aocation of resources necessary for adopting the courses of action. Professor Ansoff is a we-known authority in the fied of strategic management and has been a proific writer for the ast four decades. In one of his earier books, Corporate Strategy (1965), he expained the concept of strategy as: The common thread among

25 Strategic Management An Introduction 25 the organisation s activities and product-markets... that defines the essentia nature of business that the organisation was or panned to be in future. Ansoff has stressed on the commonaity of approach that exists in diverse organisationa activities incuding the products and markets that define the current and panned nature of business. Andrews beongs to the group of professors at Harvard Business Schoo who were responsibe for deveoping the subject of business poicy and its dissemination through the case study method. Andrew defines strategy as: The pattern of objectives, purpose, goas and the major poicies and pans for achieving these goas stated in such a way so as to define what business the company is in or is to be and the kind of company it is or is to be. This definition refers to the business definition, which is a way of stating the current and desired future position of company, and the objectives, purposes, goas, major poicies and pans required to take the company from where it is to where it wants to be. Another we-known author in the area of strategic management was Gueck, who was a Distinguished Professor of Management at the University of Georgia ti his death in He defined strategy precisey as: A unified, comprehensive and integrated pan designed to assure that the basic objectives of the enterprise are achieved. The three adjectives which Gueck has used to define a pan make the definition quite adequate. Unified means that the pan joins a the parts of an enterprise together, comprehensive means it covers a the major aspects of the enterprise, and integrated means that a parts of the pan are compatibe with each other. Michae Porter of the Harvard Business Schoo has made invauabe contributions to the deveopment of the concept of strategy. His ideas on competitive advantage, the five-forces mode, generic strategies, and vaue chain are quite popuar. He opines that the core of genera management is strategy, which he eaborates as:... deveoping and communicating the company s unique position, making trade-offs, and forging fit among activities. Strategic position is based on customers needs, customers accessibiity, or the variety of a company s products and services. A company s unique position reates to choosing activities that are different from those of the rivas, or to performing simiar activities in different-ways. However, a sustainabe strategic position requires a trade-off when the activities that a firm performs are incompatibe. Creation of fit among the different activities is done to ensure that they reate to each other. It must be noted that the different approaches referred to above to define strategy cover neary a quarter of a century. This is an indication of what a compex concept strategy is and how various authors have attempted to define it. To put it in another way, there are as many definitions as there are experts. The same authors may change the approach they had earier adopted. Witness what Ansoff said 19 years ater in 1984 (his earier definition is of 1965): Basicay, a strategy is a set of decision making rues for the guidance of organisationa behaviour. We have tried to give you an assortment of definitions out of the many avaiabe. Rather than an assortment, it may be more appropriate to ca this section a bouquet of definitions and expanations of strategy. Each fower (definition) is respendent by itsef yet contributes synergisticay to the overa beauty of the bouquet. The fied of strategy is indeed fascinating, prompting an author to give the tite What is Strategy and

26 26 Strategic Management does it matter? to his thought-provoking book, Druckcr goes to the extent of terming the strategy of an organisation as its theory of the business. By means of the deeper insight that the authors have deveoped through years of experience and thinking, they have attempted to define the concept of strategy with greater carity and precision. This comment is vaid for most of the concepts in strategic management since this discipine is in the process of evoution and a uniform terminoogy is sti evoving. By combining the above definitions we do not attempt to define strategy in a nove way but we sha try to anayse a the eements that we have come across. Strategy may be summarised as foows: a pan or course of action or a set of decision rues forming pattern or creating a common thread, the pattern or common thread reated to the organisation s activities which are derived from its poicies, objectives and goas, reated to pursuing those activities which move an organisation from its current position to a desired future state, concerned with the resources necessary for impementing a pan or foowing a course of action, and connected to the strategic positioning of a firm, making trade-offs between its different activities, and creating a fit among these activities. Strategists are individuas who are most responsibe for the success or faiure of an organisation. Strategists have various job tites, such as chief executive officer, president, chairman of the board, executive director, chanceor, dean or entrepreneur. Strategists differ as much as organisations themseves, and these differences must considered in the formuation, impementation, and evauation of strategies. Strategists differ in their attitudes, vaues, ethics, wiingness to take risks, concern for socia responsibiity, concern for profitabiity, concern for short-run versus ong-run aims, and management stye. Some strategists wi not consider some types of strategies due to their persona phiosophy. Mission Statements Mission statements are enduring statements of purpose that distinguish one business from other simiar firms. A mission statement identifies the scope of a firm s operations in product and market terms. It addresses the basic question that faces a strategists: What is our Business? A cear mission statement describes the vaues and priorities of an organisation. Deveoping a business mission compes strategists to think about the nature and scope of present operations and to assess the potentia attractiveness of future markets and activities. A mission statement broady charts the future direction of an organisation. Externa Opportunities and Threats Other key terms in our study of strategic management are externa opportunities and externa threats. These terms refer to economic, socia, poitica, technoogica, and competitive trends and events that coud significanty benefit or harm an organisation in

27 Strategic Management An Introduction 27 the future. Opportunities and threats are argey beyond the contro of a singe organisation, thus the term externa. The computer revoution, biotechnoogy, popuation shifts, changing work vaues and attitudes, space exporation, and increased competition from foreign companies are exampes of opportunities or threats for companies. These types of changes are creating a different type of consumer and consequenty a need for different types of products, services, and strategies. Other opportunities and threats may incude the passage of a new aw, the introduction of a new product by a competitor, a nationa catastrophe, or the decining vaue of the doar. A competitor s strength coud be a threat. Unrest in Latin America, rising interest rates, or the war against drugs coud represent an opportunity or a threat. A basic tenet of strategic management is that firms need to formuate strategies to take advantage of externa opportunities and to avoid or reduce the impact of externa threats. For this reason, identifying, monitoring, and evauating externa opportunities and threats is essentia for success. Interna Strengths and Weaknesses Interna strengths and interna weaknesses are controabe activities within an organisation that are performed especiay we or poory. Management, marketing, finance/ accounting, production/operations, research and deveopment, and information systems activities of a business are areas where interna strengths or weaknesses arise. The process of identifying and evauating organisationa strengths and weaknesses in the functiona areas of a business is an essentia strategic-management activity. Organisations strive to pursue strategies that capitaise on interna strengths and improve on interna weaknesses. Strengths and weaknesses are determined reative to competitors. Reative deficiency or superiority is important information. Aso, strengths and weaknesses can be determined by eements of being rather than performance. For exampe, a strength may invove ownership of natura resources or a historic reputation for quaity. Strengths and weaknesses may be determined reative to a firm s own objectives. For exampe, high eves of inventory turnover may not be a strength to a firm that seeks never to stock-out. Long-term Objectives Objectives can be defined as specific resuts that an organisation seeks to achieve in pursuing its basic mission. Long-term means more than one year. Objectives are essentia for organisationa success because they provide direction, aid in evauation, create synergy, revea priorities, aow coordination, and provide a basis for effective panning, organising, motivating, and controing activities. Objectives shoud be chaenging, measurabe, consistent, reasonabe, and cear. In a mutidivisiona firm, objectives shoud be estabished for the overa company and for each division. Annua Objectives Annua objectives are short-term miestones that organisations must achieve to reach ong-term objectives. Like ong-term objectives, annua objectives shoud be measurabe, quantitative, chaenging, reaistic, consistent, and prioritised. They shoud be estabished at the corporate, divisiona, and functiona eve in a arge organisation. Annua objectives

28 28 Strategic Management shoud be stated in terms of management, marketing, finance/accounting, production/ operations, research and deveopment, and information systems accompishments. A set of annua objectives is needed for each ong-term objective. Annua objectives are especiay important in strategy impementation, whereas ong -term objectives are particuary important in strategy formuation. Annua objectives represent the basis for aocating resources. Poicies The fina key term to be highighted here is poicies the means by which annua objectives wi be achieved. Poicies incude guideines, rues, and procedures estabished to support efforts to achieve stated objectives. Poicies are guides to decision making and address repetitive or recurring situations. Poicies are most often stated in terms of management, marketing, finance/accounting, production/operations, research and deveopment, and information systems activities. Poicies can be estabished at the corporate eve and appy to an entire organisation, at the divisiona eve and appy to a singe division, or at the functiona eve and appy to particuar operationa activities or departments. Poicies, ike annua objectifies, are especiay important in strategy impementation because they outine an organisation s expectations of its empoyees and managers. Poicies aow consistency and coordination within and between organisationa departments.

29 Leves and Approaches to Strategic Decision Making 29 Chapter 2 Leves and Approaches to Strategic Decision Making The definitions of strategy, varied in nature, depth and coverage, offer us a gimpse of the compexity invoved in understanding this daunting, yet interesting and chaenging, concept. In this section, we sha earn about the different eves at which strategy can be formuated. Leves of Strategies The strategic panning process cuminates into formuation of strategies for the organisation. A business strategy must contain we-coordinated action programs aimed at securing a ong-term competitive edge and which shoud be sustained by the company (Refer Exhibit 2.1) Corporate Leve Exhibit 2.1: Leves of Strategies In an organisation, there are basicay three eves. The top eve of the organisation consists of chief executive officer of the company, the board of directors, and administrative officers. The responsibiity of the top management is to keep the organisation heathy. This impies that their responsibiity is to achieve the panned financia performance of the company in addition to meeting the nonfinancia goas viz. socia responsibiity and the organisationa image. The issues pertaining to business ethics,

30 30 Strategic Management integrity, and socia commitment are deat with, at this eve of strategic decisions. The corporate eve strategies transates the orientation of the stakehoders and the society into the forms of strategies for functiona or business eves (Refer Exhibit 2.2). Corporate Leve of Strategies Marketing Strategies System Strategies Reward System Strategies Financia Strategies R & D Strategies Exhibit 2.2: Corporate Leve Strategies By using portfoio approach, a set of natura and generic strategies are generated that must be considered by each business group, depending on their position in the industry attractiveness and competitive strength dimensions. This is the eve where vision statement of the companies emerges. Exhibit 2.3 shows typica eves of strategy-making in an organisation. Corporate Leve Sub Business Unit-1 Leve Sub Business Unit-2 Leve Sub Business Unit-3 Leve Operationa Leve Business Leve Exhibit 2.3: Leves of Strategy-Making This eve consists of primariy the business managers or managers of Strategic Business units. Here strategies are about how to meet the competitions in a particuar product market and strategies have to be reated to a unit within an organisation. The managers at this eve transate the genera statements of direction and intent churned out at

31 Leves and Approaches to Strategic Decision Making 31 corporate eve. They identify the most profitabe market segment, where they can exce, keeping in focus the vision of the company. The corporate vaues, manageria capabiities, organisationa responsibiities, and administrative systems that ink strategic and operationa decision-making eve at a the eves of hierarchy, encompassing a business and functiona ines of authority in a company are deat with at this eve of strategy formuation. The manageria stye, beiefs, vaues, ethics, and accepted forms of behaviour must be congruent with the organisationa cuture and at this eve, these aspects are diigenty taken care of by strategic managers. Operationa Leve Panning aone cannot create massive mobiisation of resources and peope and can never generate high quaity of strategic thinking required in compex organisationa context. For this to happen, the panning shoud be carefuy dovetaied and integrated with significant administrative systems viz. management contro, communication, information management, motivation, rewards etc. It is aso vita that a these systems are supported by organisationa structure that define various authority and responsibiity reationships, among various members of the company and specificay at operationa eve. The cuture of the organisation shoud be accounted for, and these systems shoud find adaptabiity with the cuture of the organisation. Strategies at Operationa Leve Strategies at Operationa Leve Strategies at Operationa Leve Strategies at Operationa Leve Strategies at Operationa Leve Strategies at Operationa Leve Exhibit 2.4: Interaction of Various Functions The managers at this eve of product, geographic, and functiona areas deveop annua objective and short-term strategies. The strategies are designed in each area of research and deveopment, finance and accounting, marketing and human reations etc. The responsibiities aso incude integrating among administrative systems and organisationa structure and strategic and operationa modes and seek for congruency between manageria infrastructure and the corporate cuture. Exhibit 2.4 shows the interaction of various functions for deciding strategies at the operationa eve. Characteristics of Strategic Decisions The three eves of strategic decision have varying characteristics due to the varying responsibiity and authority at different eves of management functioning (Refer Exhibit 2.5).

32 32 Strategic Management Characteristic Corporate Leve Business Unit Leve Functiona Leve Nature Conceptua Conceptua but reated to business unit Totay operationa Measurabiity Non-measurabe Measurabe to some extent Quantifiabe Frequency Large spans 5-10 years Periodic Annuay Adaptabiity Poor Average High Character Innovative and Creative Action-oriented Totay action oriented Risk High Moderate Low Profit Large Moderate Low Fexibiity High Moderate Low Time Long range Medium range Short range Costs Invoved High Medium Low Cooperation needed High Medium Low Exhibit 2.5: Characteristics of Corporate, Business and Functiona Leve Strategies The nature of decisions taken at corporate eve give a vision to the organisation. The decisions taken are visionary in nature and hence are highy subjective. The vision of a company evoves after a ot of deiberations among the directors who decide that how their company woud be known after a ong period of time, say after ten to fifteen years. The decisions at this eve are therefore vita for seecting the directions of growth of a company. Since it is very difficut to foresee what woud happen to a company after a ong period of time, the decision essentiay shoud have buit-in fexibiity as these woud have far-reaching consequences on the operations of the company. The decisions at this eve aso invove greater risks, costs, potentia profits etc. The characteristic strategies at this eve may incude the foowing in a typica organisation. Business scope and an expression of competitive eadership. Identification of product market segments. Corporate strategic thrusts and panning chaenges reevant to the business unit. Interna security at the business eve that incudes identification and evauation of critica success factors and assessment of competitive position. Environmenta scan at business eve and identification of product markets and industry attractiveness. Formuation of business strategy is a set of muti-year broad action programmes. At the functiona eve, the decisions invove action-oriented operationa issues. Essentiay these are short-term type and hence periodicay made. They refect some or a part of the strategy at corporate eve. These decisions are aso comparativey of ow risk and invove ower costs as the resources to be used by them are from the organisation itsef. The company as a whoe is rarey invoved in these decisions. They are more concrete, cear, simpe to impement and do not disturb the ongoing processes of the company. The decisions at this eve are more criticay examined, in spite of being ess profitabe. Approaches to Strategic Decision Making Strategic panning toos have deveoped enormousy over the past 20 years. Such techniques as the growth/share matrix and the experience curve are in widespread use, and other panning techniques aow the manager to evauate the impact of aternative strategies on the stock price of the corporation. Management consuting firms offer

33 Leves and Approaches to Strategic Decision Making 33 strategic panning on a commodity basis, and any new M.B.A. comes equipped with at east one method for deveoping such pans. Unfortunatey, the toos for impementing strategies have not deveoped as quicky as the toos we use for panning. The resut of this discrepancy faied pans and abandoned panning efforts is a too visibe: A major diversified manufacturer concuded that a steady stream of new products was the most important factor in improving the stock price, yet the performance measures and management reports imposed on the division heads stress quartery profit. As a resut, division managers don t make the ong-term investment required for successfu new product deveopment. A eading consumer goods company committed itsef to strategic panning and buit a staff of over 30 panners, many with M.B.A.s, and experience in consuting firms. Unfortunatey, the expected benefits of panning faied to materiaise; in ess than two years, the department was disbanded and panning responsibiity returned to the operating units. Recenty, business writers have begun to pay more attention to the probems of strategy impementation. Corporate cuture is now widey acknowedged as an important force in the success or faiure of business ventures; studies of Japanese management practices point out the effectiveness of participative methods in securing whoehearted commitment to new strategies at a eves of the organisation. Despite this interest, three critica questions remain unanswered: How can executives be more effective in putting chosen strategies into action? How can the panning process be managed so that the strategies which emerge are reaistic/ not ony in terms of the market pace, but aso in terms of the poitics, cuture, and competence of the organisation? Research shows that managers do not anayse opportunities exhaustivey before taking action; rather, they shape strategy through a continuing stream of individua decisions and actions. How can we reconcie the static academic dogma, First formuate strategy, then impement it, with the dynamic reaity of manageria work? To shed some ight on these questions, we studied management practice at a number of companies. We have found that their approaches to strategy impementation can be categorised into one of five basic descriptions. In each one, the chief executive officer pays a somewhat different roe and uses distinctive methods for deveoping and impementing strategies. The approaches differ in a number of other dimensions as we (see Exhibit 2.6). We have given each description a tite to distinguish its main characteristics. The first two descriptions represent traditiona approaches to impementation. Here the CEO formuates strategy first, and then thinks about impementation ater. 1. The commander approach The CEO concentrates on formuating the strategy, appying rigorous ogic and anaysis. He either deveops the strategy himsef or supervises a team of panners. Once he s satisfied that he has the best strategy, he passes it aong to those who are instructed to make it happen.

34 Fa H W 34 Strategic Management 2. The organisationa change approach Once a strategy has been deveoped, the executive puts it into effect by taking such steps as reorganising the company structure, changing incentive compensation schemes, or hiring personne. The next two approaches invove more recent attempts to enhance impementation by broadening the bases of participation in the panning process: 3. The coaborative approach Rather than deveop the strategy in a vacuum, the CEO enists the hep of his senior managers during the panning process in order to assure that a the key payers wi back the fina pan. Exhibit 2.6: Comparison of Five Approaches 4. The cutura approach This is an extension of the coaborative mode to invove peope at midde and sometimes ower eves of the organisation. It seeks to impement strategy through the deveopment of a corporate cuture throughout the organisation. The fina approach begins to answer some of the questions posed above by taking advantage of managers natura incination to deveop opportunities as they are encountered. Whie it has not been widey recognised or studied up to now, we think it may represent the next major advancement in the art of strategic management. 5. The crescive approach In this approach, the CEO addresses strategy panning and impementation simutaneousy. He is not interested in strategising aone, or even in eading others through a protracted panning processs. Rather, he tries, through his statements and actions, to guide his managers into coming forward as W W or H p ap R R

35 Leves and Approaches to Strategic Decision Making 35 champions of sound strategies. (Since this invoves growing strategies from within the firm, the abe comes from the Latin crescere, to grow.) In these five approaches we see a trend toward the CEO paying an increasingy indirect and more subte roe in strategy deveopment. We question the recentraisation of strategy making at headquarters, a trend documented (and encouraged) by some recent writers. We think, at east for some firms, that this might be a mistake. Various theories have been suggested about how decisions are made. Let us examine, these first. Most writers focus on three approaches: rationa-anaytica, intuitiveemotiona, and behaviora-poitica. Rationa-Anaytica Decision Maker In this mode, the decision maker is a unique actor whose behavior is inteigent and rationa. The decision is the choice this actor makes, in fu awareness of a avaiabe feasibe aternatives, to maximise advantages. The decision maker there to considers a the aternatives as we as the consequences of a the possibe choices, orders these consequences in the ight of a fixed scae of preferences, and chooses the aternative that procures the maximum gain. This is the odest decision theory. It prescribes a rationa, conscious, systematic, and anaytica approach. It has been criticised because 1. The decision maker is often not a unique actor but part of a mutiparty decision situation. 2. Decision makers are not rationa enough or informed enough to consider a aternatives or know a the consequences. And information is costy. 3. Decision makers make decisions with more than a maximisation of objectives in mind. They tend to satisfice, that is, make a decision expected to yied a satisfactory, as opposed to an optima, outcome. Besides, the objectives may change. So descriptions of actua decision making question the vaidity of rationa processes. Intuitive-Emotiona Decision Maker The opposite of the rationa decision maker is the intuitive decision maker. This decision maker prefers habit or experience, gut feeing, refective thinking, and in-stinct, using the unconscious menta processes. Intuitive decision makers consider a number of aternatives and options, simutaneousy jumping from one step in anaysis or search to another and back again. Some who prescribe intuition or judgment as the preferred approach point out that in many, cases, judgment may ead to better decisions than optimizing tech-niques. For exampe, consider sensitivity anaysis on a too such as the economic order quantity (EOQ). EOQ modes suggest that there is an optima order quantity considering tradeoffs of ordering and hoding costs. Yet you can stray far from optima in most cases without a very significant impact on tota cost differentias. Here, then, judgment concerning other factors in the decision situation coud ead to a better overa decision about order quantities, rather than hoding fast to deciding what the rationa mode

36 36 Strategic Management prescribes. In fact, the timing of when to impement a decision based on the anaysis may require an intuitive fee for what the data are teing you. In many cases, judgment such as this might be preferabe to reying on the anaysis. Recognize, then, that anaytica modes are toos to hep the decision maker refine judgment. Those opposed to this approach argue that 1. It does not effectivey use a the toos avaiabe to modern decision makers. 2. The rationa approach ensures that adequate attention is given to consequences of decisions before big mistakes are made. Poitica-Behaviora Decision Making A third point of view suggests that rea decision makers must consider a variety of pressures from other peope affected by their decisions. An organisation interacts with a variety of stakehoders in a series of interdependent exchange reationships. Unions exchange abor for decent wages and job security. Customers exchange money for products and services. Owners exchange capita for expected returns on invest-ment. Suppiers exchange inputs for money and continued business. Government exchanges protection and economic security for taxes. Even competitors exchange information with one another through trade associations or other contacts. The ist of, agents and expectations goes on. A stakehoder is any group or individua who can affect or is affected by the achievement of an organisation s purpose. Each stakehoder gives the organisation something and expects something in return. To the extent an organisation has a favorabe exchange reationship (gets a bit mod than given) compared with other organisations and stakehoders, it has more power. More powerfu stakehoders have more infuence over decisions because the organisation is more dependent on these stakehoders. A majority stockhoder can have a greater infuence on decisions about reinvestment versus dividend payout than if stock is widey hed by many sma owners. If the firm is abor-intensive, more attention may be paid to union eaders demands for better wages than to the desires of stock-hoders for more profit, because the union might shut the firm down. Given these reaities, decision makers do a jugging act to meet the demands of the various stakehoders. Through poitica compromise, they attempt to merge competing demands so that a coaition of interests emerges that wi support the decision. This mode of decision making is a descriptive theory suggesting that the organisation in which the decision maker works imits the choices avaiabe. Decisions are made when the severa peope invoved in the process agree that they have found a soution. They do this by mutua adjustment and negotiation foowing the rues of the game the way decisions have been made in the organisation in the past. The decision maker must consider whether the decision outcome can be impemented poiticay. A Synthesis on Decision Making The human being is a mix of the rationa and the emotiona. The environment is a mixture of the anaysabe and of chaotic change and pressures. Strategic management decisions therefore are made in a typicay human way: using the

37 Leves and Approaches to Strategic Decision Making 37 rationa, conscious anaysis and intuitive, unconscious gut, in ight of poitica reaities. As stated earier, some prescribe that one component or another shoud be arger. However, because of individua differences and differences in the stabiity of the environment, the amount of the rationa versus the intuitive versus the poitica varies by the decision maker and the decision situation. In some cases the anaytica component is very arge; in others, the emotiona set may dominate. For exampe, Bi Ziff, the magnate behind the biion doar Ziff-Davis Pubishing Company, sod of much of his empire because he became more and more bored. He put TV station up for sae because, he says, they were not a turn on. But as Exhibit suggest the interaction of the three approaches (shaded area) defines where we think much decision making probaby occurs. We woud prefer that the anaytica component be arger than the others. In fact, we prescribe an anaytica-rationa approach, tempered by reaities in the situation. Thus when you set about to make decisions, you shoud appy the toos you earn. But truy rationa anaysis wi aso incorporate anaysis of the poiticabehaviora and intuitive dimensions in the decision situation. Indeed various techniques such as diaectic inquiry, devi s advocacy, hierarchica anaysis, and infuence diagrams have evoved to hep managers with these compex and messy probems. These systems aow managers to recognise and rationay structure the judgmenta and poitica factors which wi undoubtedy infuence them. Anayticarationa Poiticabehaviora Intuitiveemotiona Exhibit 2.7: Components of Strategic Decision Processes Thus a bending of these prescriptive and descriptive approaches heps to better understand how decision makers operate. And as you assess cases or business probems, attempt to diagnose the poitica or emotiona reaities of the situation in addition to using the anaytica toos at your disposa. The recommendations you make are ikey to be much more meaningfu if you do this. As strategic decision-making is a compex process, it is difficut to perform. It is incomprehensibe; it cannot be anaysed and expained easiy. Decision-makers are unabe to describe the exact manner in which strategic decisions are made. Like the working of the human mind, strategic decision-making is fathomess. And righty so, for it is based on compex menta processes which are not exposed to the view. Whie commenting on the nature of strategic decision-making Henry Mintzberg says that the key manageria processes are enormousy compex and mysterious, drawing on the vaguest of information and using the east articuated of menta processes. These

38 38 Strategic Management processes seem to be more reationa and hoistic than ordered and sequentia, and more intuitive than inteectua... For these reasons, no theoretica mode, however painstakingy formuated, can adequatey represent the different dimensions of the process of strategic decision-making. Despite these imitations, we can sti attempt to understand strategic decision-making by considering some important issues reated to it. Six such issues are: 1. Criteria for decision-making. The process of decision-making requires objectivesetting. These objectives serve as yardsticks to measure the efficiency and effectiveness of the decision-making process. In this way, objectives serve as the criteria for decision-making. There are three major viewpoints regarding setting criteria for decision-making. (a) (b) (c) The first is the concept of maximisation. It is based on the thinking of economists who consider objectives as those attributes which are set at the highest point. The behaviour of the firm is oriented towards achieving these objectives and, in the process, maximising its returns. The second view is based on the concept of satisficing. This envisages setting objectives in such a manner that the firm can achieve them reaisticay through a process of optimisation. The third viewpoint is that of the concept of incrementaism. According to this view, the behaviour of a firm is compex and the process of decisionmaking, which incudes objective-setting, is essentiay a continuay-evoving poitica consensus-buiding. Through such an approach, the firm moves towards its objectives in sma, ogica and incrementa steps. 2. Rationaity in decision-making. In the context of strategic decision-making, rationaity means exercising a choice from among various aternative courses of action in such a way that it may ead to the achievement of the objectives in the best possibe manner. Those economists who support the maximizing criterion consider a decision to be rationa if it eads to profit maximisation. Behaviourists, who are proponents of the satisfying concept, beieve that ratio-naity takes into account the constraints under which a decision-maker oper-ates. Incrementaists are of the opinion that the achievement of objectives depends on the bargaining process between different interested coaition groups existing in an organisation, and therefore a rationa decision-making process shoud take a these interests into consideration. 3. Creativity in decision-making. To be creative, a decision must be origina and different. A creative strategic decision-making process may consideraby affect the search for aternatives where nove and untried means may be ooked for and adopted to achieve objectives in an exceptiona manner. Creativity as a trait is normay associated with individuas and is sought to be deveoped through techniques such as brainstorming. One of the attitudina objectives of a business poicy course it to deveop the abiity to go beyond and think, which, in other words, is using creativity in strategic decision-making. 4. Variabiity in decision-making. It is a common observation that given an identica set of conditions two decision-makers may reach totay different concusions.

39 Leves and Approaches to Strategic Decision Making 39 This often happens during case discussions too. A case may be anaysed differenty by individuas in a group of earners, and, depending on the differing perceptions of the probem and its soutions, they may arrive at different concusions. This happens due to variabiity in decision-making. It aso suggests that every situation is unique and there are no set formuas that can be appied in strategic decisionmaking. 5. Person-reated factors in decision-making. There are a host of person-reated factors that pay a roe in decision-making. Some of these are age, education, inteigence, persona vaues, cognitive styes, risk-taking abiity, and creativity. Attributes ike age, knowedge, inteigence, risk-taking abiity, and creativity are generay supposed to pay a positive roe in strategic decision-making. A cognitive stye which enabes a person to assimiate a ot of information, interreate compex variabes, and deveop an integrated view of the situation is speciay hepfu in strategic decision-making. Vaues, as enduring prescriptive beiefs, are cuturespecific and important in matters of socia responsibiity and business ethics issues that are important to strategic management. 6. Individua versus group decision-making. Owing to person-reated factors, there are individua differences among decision-makers. These differences matter in strategic decision-making. An organisation, as it possesses specia characteristics, operates in a unique environment. Decision-makers who understand an organisation s characteristics and its environment are in advantage position to undertake strategic decision-making. Individuas such as chief executives or entrepreneurs pay the most important roe as strategic decision-makers. But as organisations become bigger and more compex, and face an increasingy turbuent environment, individuas come together in groups for the purpose of strategic decision-making. Schoos of Thought on Strategy Formation The subject of strategic management is in the midst of an evoutionary process. In the course of its deveopment, severa strands of thinking are emerging which are graduay eading to a convergence of views. This is a subte indication of the maturing of this subject. We now have a weath of insight into the compexities of strategic behaviour the observabe characteristics of the manner in which, an organisation performs decisionmaking and panning functions with regard to the issues that are of strategic importance to its surviva, growth and profitabiity. Strategic decision-making is the core of manageria activity, strategic behaviour is its manifestation, whie the outcome is the formation of strategy. Here, in this section, we dwe upon the compendium of various perspectives to strategy formation that have evoved over a period of time. Severa persons, among whom are the doyens in the fied of strategy, have contributed to the formuation of these perspectives. These offer the reader, a meaningfu insight into the deveopment of the concept of strategy. Indeed, Mintzberg and his associates, from whose writings these perspectives have been adopted here, ca them the 10 schoos of thought on strategy formation. The schoos of thought can be cassified under three groups as beow.

40 40 Strategic Management The Prescriptive Schoos 1. Design schoo where strategy formation is a process of conception 2. Panning schoo where strategy formation is a forma process 3. Positioning schoo where strategy formation is an anaytica process The Descriptive Schoos 4. Entrepreneuria schoo where strategy formation is a visionary process 5. Cognitive schoo where strategy formation is a menta process 6. Learning schoo where strategy formation is an emergent process 7. Power schoo where strategy formation is a negotiation process 8. Cutura schoo where strategy formation is a coective process 9. Environmenta schoo where strategy formation is a reactive process 10. Configuration schoo where strategy formation is a process of transformation. The Integrative Schoo Given beow is a description and expanation of each schoo of thought. 1. The design schoo, which perceives strategy formation as a process of conception deveoped mainy in the ate 1950s and 60s. Under this schoo, strategy is seen as something unique which is in the form of a panned perspective. The CEO as the main architect guides the process of strategy formation. The process of strategy formation is simpe and informa and based on judgement and thinking. The major contributors to the design schoo are Seznick (1957) and Andrews (1965). 2. The panning schoo, which perceives strategy formation as a forma process deveoped mainy in the 1960s. Under this schoo, strategy is seen as a pan divided into substrategies and programmes. The panners pay the ead roe in strategy formation. The process of strategy formation is forma and deiberate. The major contributor to the panning schoo is Ansoff (1965). 3. The positioning schoo, which perceives strategy formation as an anaytica process deveoped mainy in the 1970s and 80s. Under this schoo, strategy is seen as a set of panned generic positions chosen by a firm on the basis of an anaysis of the competition and the industry in which they operate. The ead roe in strategy formation is payed by the anaysts. The process of strategy formation is anaytica, systematic and deiberate. The major contributors to the positioning schoo are Schende and Hatten (1970s), and Porter (1980s). 4. The entrepreneuria schoo, which perceives strategy formation as a visionary process deveoped mainy in the 1950s. Under this schoo, strategy is seen as the outcome of a persona and unique perspective often aimed at the creation of a niche. The ead roe in strategy formation is payed by the entrepreneur/ eader. The process of strategy formation is intuitive, visionary, and argey deiberate. The major contributors to the entrepreneuria schoo are Schumpeter (1950s), Coe(1959) and severa others, most of whom are economists.

41 Leves and Approaches to Strategic Decision Making The cognitive schoo, which perceives strategy formation as a menta process, deveoped mainy in the 1940s and 50s. Under this schoo, strategy is seen as an individua concept that is the outcome of a menta perspective. The ead roe in strategy formation is payed by the thinker-phiosopher. The process of strategy formation is menta and emergent. The major contributors to the cog-nitive schoo are Simon (1947 and 1957), and March and Simon (1958). 6. The earning schoo which perceives strategy formation as an emergent process has had a egacy from the 1950s through the 1990s. Under this schoo, strategy is seen as a pattern that is unique. The ead roe is payed by the earner within the organisation whoever that might he. The process of strategy formation is emergent, informa and messy. The major contributors to the earning schoo are Lindbom (1959, 1960), Cyert and March (1963), Weick (1969), Quinn (1980), Senge (1990), and Prahaad and Hame (eary 1990s). 7. The power schoo, which perceives strategy formation as a negotiation process, deveoped mainy during the 1970s and 80s. Under this schoo, strategy is seen as a poitica and cooperative process or pattern. The ead roe in strategy formation is payed by any person in power (at the micro eve) and the whoe organisation (at the macro eve). The process of strategy formation is messy. consisting of confict, aggression and cooperation. At the micro eve the process of strategy formation is emergent whie at the macro eve it is deiberate. The major contributors to the power schoo are Aison (1971), Pfeffer and Saancik (1978), and Astey (1984). 8. The cutura schoo, which perceives strategy formation as a coective process deveoped Mainy in the 1960s. Under this schoo, strategy is seen as a unique and coective perspective. The ead roe in strategy formation is payed by the coectivity dispayed within the organisation. The process of strategy formation is ideoogica, constrained, coective and deiberate. The major contributors to the cutura schoo are Rhenman and Normann (ate 1960s). 9. The environmenta.schoo, which perceives strategy formation as a reactive process, deveoped mainy in the ate 1960s and 70s. Under this schoo, strategy is seen as something generic occupying a specific position or niche in reation to the environment. The ead roe in strategy formation is payed by the environment as an entity. The process of strategy formation is passive and imposed, and hence, emergent. The major contributions to the environmenta schoo are Hannan and Freeman (1977) and contingency theorists ike Pugh e. a. (ate 1970s). 10. The configuration schoo, which perceives strategy formation as a transformation process deveoped during the 1960s and 70s. Under this schoo, strategy is viewed in reation to a specific context and thus coud be in a form that corresponds to any process visuaised under any of the other nine schoos. The ead roe may be payed by any actor identified in the other nine schoos. The process of strategy formation is inegrative, episodic and sequentia. In addition, the process coud incorporate the eements pointed out under the other nine schoos of thought. The major contributors to the configuration schoo are Chander (1962), Mintzbcrg and Mier (ate 1970s), and Mies and Snow (1978).

42 42 Strategic Management Chapter 3 Process of Strategic Management Business poicy is a term traditionay associated with the course in business schoos devoted to integrating the educationa program of these schoos and under-standing what today is caed strategic management. In most businesses in earier times (and in many smaer firms today), the focus of the manager s job was on today s decisions for today s word in today s business. That may have been satisfactory then instead of focusing a their time on today, managers began to see the vaue of trying to anticipate the future and to prepare for it. They did this in severa ways. They prepared systems and procedures manuas for decisions that must be made repeatedy. This aowed time for more important decisions and ensured more or ess consistent decisions. They prepared budgets. They tried to anticipate future saes and fows of funds. In sum, they created a panning and contro system. Budgeting and contro systems heped, but they tended to be based on the status quo the present business and conditions and did not by themseves dea we with change. These systems did provide better financia contros and are sti in use. Later variations incuded capita budgeting and management-by-objectives systems. Because of the ack of emphasis on the future in budgeting, ong-range panning appeared. This movement focused on forecasting the future by using economic and technoogica toos. Long-range panning tended to be performed primariy by corporate staff groups, whose reports were forwarded to top management. Sometimes their reports and advice were heeded (when they were understood and were credibe); otherwise, they were ignored. Since the corporate panners were not the decision makers, ong-range panning had some impact, but not as much as woud be expected if top management were invoved. Then, too, they were producing first-generation pans. First-generation panning means that the firm chooses the most probabe appraisa and diagnosis of the future environment and of its own strengths and weak-nesses. From this, it evoves the best strategy for a match of the environment and the firm a singe pan for the most ikey future. Today s approach is caed strategic panning or, more frequenty, strategic management. The board of directors and corporate panners have parts to pay in strategic management. But the starring roes are for the genera managers of the corporation and its major operating divisions. Strategic management focuses on secondgeneration panning, that is, anaysis of the business and the preparation of severa scenarios for the future. Contingency strategies are then prepared for each of these ikey future scenarios. Strategy formuation is the process of estabishing a business mission, conducting research to determine critica externa and interna factors, estabishing ong-term objectives, and choosing among aternative strategies. Sometimes the strategy formua stage of strategic

43 Process of Strategic Management 43 management is caed strategic panning. The difference between strategic panning and strategic management is that the atter incudes strategy impementation and strategy evauation. As iustrated beow three basic strategy-formuation activities are conducting research, integrating intuition with anaysis, and making decisions. Conducting research invoves gathering and assimiating information about a given Arm s industry and markets. This process is sometimes caed environmenta scanning. Internay, research is conducted to identify key strengths and weaknesses in the functiona areas of business. Interna factors can be determined in a number of ways that incude computing ratios, measuring performance, and comparing to past periods and industry averages. Various types of surveys can aso be deveoped and administered to examine interna factors such as empoyee morae, production efficiency, advertising effectiveness, and customer oyaty. There are numerous strategic-management techniques that aow strategists to integrate intuition with anaysis in generating and choosing among feasibe aternative strategies Some of these toos are the Externa Factor Evauation (EFE) Matrix, the Interna Factor Evauation (IFE) Matrix, the Strategic Position and Action Evauation (SPACE) Matrix, the Boston Consuting Group (BCG) Matrix, and the Quantitative Strategic Panning Matrix (QSPM). Since no organisation has unimited resources, strategists must make decisions regarding which aternative strategies wi benefit the firm most. Strategy-formuation decisions commit an organisation to specific products, markets, resources, and technoogies over an extended period of time. Strategies determine ong-term competitive advantages. For better or worse, strategic decisions have enduring effects on an organisation and major mutifunctiona consequences. Strategists have the best perspective to fuy understand the ramifications of formuation decisions; they have the authority to commit the resources necessary for impementation. STAGES ACTIVITIES Strategy formuation Conduct research Integrate intuition with anaysis Make decisions Strategy Impementation Estabish annua objectives Devise poicies Aocate resources Strategy evauation Review interna and externa factors Measure performance Take corrective actions Exhibit 3.1: Stages and Activities in the Strategic-Management Process

44 44 Strategic Management Strategy Impementation Strategy impementation is often caed the action stage of strategic management. Impementing means mobiising empoyees and managers to put formuated strategies into action. Three basic strategy-impementation activities are estabishing annua objectives, devising poicies, and aocating resources. Often considered to be the most difficut stage in strategic management, strategy impementation requires persona discipine, commitment, and sacrifice. Successfu strategy impementation hinges upon managers abiity to motivate empoyees, which is more an art than a science. Strategies formuated but not impemented serve no usefu purpose. Interpersona skis are especiay critica for successfu strategy impementation. Strategy impementation incudes deveoping strategy supportive budgets, programs, and cutures, and inking motivation and reward systems to both ong-term and annua objectives. Strategy-impementation activities affect a empoyees and managers in an organisation. Every division and department must decide on answers to questions such as What must we do to impement our part of the organization s strategy? and How best can we get the job done? The chaenge of impementation is to stimuate managers and empoyees throughout an organisation to work with pride and enthusiasm toward achieving stated objectives. Strategy Evauation The fina stage in strategic management is strategy evauation. A strategies are subject to future modification because externa and interna factors are constanty changing. Three fundamenta strategy-evauation activities are (I) reviewing externa and interna factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evauation is needed because success today is no guarantee of success tomorrow! Success aways creates new and different probems; compacent organisations experience demise. Strategy formuation, impementation, and evauation activities occur at three hierarchica eves in a arge diversified organisation: corporate, divisiona or strategic business unit, and functiona. By fostering communication and interaction among managers and empoyees across hierarchica eves, strategic management heps a firm function as a competitive team. Most sma businesses and some arge businesses do not have divisions or strategic business units, so these organisations have ony two hierarchica eves. The strategic-management process can best be studied and appied using a mode. Every mode represents some kind of process. The framework iustrated beow is a widey accepted, comprehensive mode of the strategic-management process. This mode does not guarantee success, but it does represent a cear and practica approach for formuating, impementing, and evauating strategies. Reationships among major components of the strategic-management process are shown in the mode. (Exhibit 3.2)

45 Process of Strategic Management 45! " # "$ $%& '(!)* $(+ "$ $%&!*!+$ $(+ "$ $%&, *) $(+ Exhibit 3.2: A Comprehensive Strategic Management Mode Identifying an organisation s existing mission, objectives, and strategies is the ogica starting point for strategic management because a firm s present situation and condition may precude certain strategies and may even dictate a particuar course of action? Every organisation has a mission, objectives, and strategy, even if these eements are not consciousy designed, written, or communicated. The answer to where an organisation is going can be determined argey by where an organisation has been. The strategic-management process is dynamic and continuous. A change in any one of the major components in the mode can necessitate a change in any or a of the other components. For instance, a shift in the economy coud represent a major opportunity and require a change in ong-term objectives and strategies; or a faiure to obtain annua objectives coud require a change in poicies; or a major competitor coud announce a change in strategy that requires a change in the firm s mission. Therefore,strategy formuation, impementation, and evauation activities shoud be performed on a continua basis, not just at the end of the year. The strategic-management process never reay ends.

46 46 Strategic Management Toward more formaity and more detais Organisation Sma one-pant compaines Large compaines Management styes Poicy maker Democratic-permissive Authoratic Day-to-day operationa thinker Intuitive thinker Experienced in panning Inexperienced in panning Compexity of environment Stabe environment Turbuent environment Litte competition Many markets and customers Singe market and customer Competition severe Compexity of production processes Long production ead times Short production ead times Capita intensive Labor intensive Integrated manufacturing processes Simpe manufacturing processes High technoogy Low technoogy Market reaction time for new Production is short Market reaction time is ong Nature of probems Facing new compex, tough probems having ong-range aspects Facing tough short-range probems Purpose of panning system Coordinate division activities Train managers Toward ess Formaity Fermaity y and Fewer detais Exhibit 3.3: Forces Infuencing Design of Strategic Management Systems The strategic-management process is not as ceany divided and neaty performed in practice as the strategic-management mode suggests. Strategists do not go through the process in ockstep fashion. Generay, there is give-and-take among hierarchica eves of an organisation. Many organisations conduct forma meetings semiannuay to discuss and update the firm s mission, opportunities/threats, strengths/weaknesses, strategies, objectives, poicies, and performance. These meetings are commony hed off-premises and caed retreats. The rationae for periodicay conducting strategicmanagement meetings away from the work site is to encourage more creativity and candor among participants. Mutidirectiona arrows in Exhibit 3.3 iustrate the importance of good communication and feedback throughout the strategic-management process. As shown in Exhibit 3.3 a number of different forces affect the formaity of strategic management in organisations. Size of organisation is a key factor: smaer firms are ess forma in performing strategic-management tasks. Other variabes that affect formaity are management styes, compexity of environment, compexity of production processes, nature of probems, and purpose of panning system.

47 Roes of Strategists, Mission and Objectives 47 Chapter 4 Roes of Strategists, Mission and Objectives Strategists are individuas or groups who are primariy invoved in the formuation impementation, and evauation of strategy. In a imited sense, a managers are strategists. There are persons outside the organisation who are aso invoved in various aspects of strategic management. They too are referred to as strategists. The top management function is usuay performed by the Chief Executive Officer (CEO) of the organisation, by whatever name caed, in coordination with the Chief Operating Officer (COO) or President, Vice-Presidents, and divisiona and departmenta heads. The top managers are aso known as genera manager. Top management especiay the CEO is responsibe to the board of directors for overa management of the organisation. The job of the top management is muti-dimensiona and oriented towards the wefare of the tota organisation. Though the specific top management functions may vary from organisation to organisation, one coud have a good idea about it from an anaysis of an organisation s mission, objectives, strategies and key activities. The Chief Executive in most of the companies is caed the Managing Director (Chairman-cum-Managing Director) or President. Where the executive head of the organisation is the Managing Director or Chairman-cum-Managing Director, the President is usuay in the position of the Chief Operating Officer (COO). The Executive eader, of a major segment of the organisation such as a division, department or unit is typicay caed a genera manager. The Chief Executive Officer (CEO) is a strategist, organisationa buider and eader. The CEO is the principa strategist of his organisation. Athough the BODs and other members of the top management pay an important roe, the CEO cannot reay deegate a his strategic responsibiities to anyone ese. He is in fact a strategic thinker. He is the person who inks the interna word of the corporation with the externa word. This roe can be described as the gate keeping roe of the CEO; it is both fag fying and transmitting to and receiving signas from the externa environment. It is he who has both the corporate understanding and the vantage joint perspective which is required to transate the signas from the outside word. These signas may often be subte, and not very perceptibe. He has to sow seeds for new thoughts within the organisation and has to nurture and sustain those which come from outside. Many CEOs are so invoved in the day-to-day operations that they hardy have any time eft for strategic matters, it has been righty said that routine drives out creativity. The CEO has to see to it that he is eft with sufficient time for strategic responsibiities. An American Survey indicated that the executives who reached to the top aocated the argest part of their time to ong range panning and poicy setting. They even wished that they had more time for ong range panning and human resource management.

48 48 Strategic Management Whie operating within the environment and the resources at hand, the CEO has to buid the organisation. Organisation buiding is a continuous process invoving organisationa change. Some of organisationa buiding responsibiity can certainy be deegated but the CEO, being at the hem of the affairs, has to remain the initiator for experimenting with new ideas, approaches and systems. He is the key person in the organisation. The organisationa changes shoud be made graduay and reguary, and not suddeny or sporadicay. It is a human tendency to resist change for a variety of reasons, the main being uncertainty. It is therefore important to recognise resistance to change prior to attempting to make organisationa changes. The common reasons for peope resisting change are: vested interests, differing perceptions, misunderstanding and ack of trust, and ow toerance for change. Some usefu ways to dea with resistance are: education and communication, participation and invovement, and faciitation and support. A these utimatey ead to the creation of a cimate of better confidence. The CEO is the first among eaders of his organisation. He must have the wi to manage. To manage we a person has to want to manage; he has to reay ove it. How a Chief Executive can turn around a company is ampy reveaed in a case history. An expatriate was caed to India to boost the performance of an Indian subsidiary in the processingmarketing, industry. The company had tremendous goodwi in the market but its performance was whoy out of aignment with its image. In spite of good products, the company was not abe to do we because of traditiona management which was characterised by ethargy and ack of articuation. The new CEO, who was gente in his speech, sensitive to human reations and had charming socia manners, was often perceived by company executives as an academic who had somehow strayed into the word of business. However, soon after joining his new position, the new CEO started questioning the current assumptions reating to product strategies, marketing and distribution. He started the system of target setting and performance appraisa. It soon became cear that the vevet gove conceaed an iron fist. He eft nobody in doubt about his conviction that if the company had to move forward it had to be sensitive to the environment and reguatory poicies, and pu itsef up by the organisationa boot straps. He redefined product-market posture and reconstituted product groups into divisions with profit responsibiity, after taking into consideration the technoogica, marketing and manageria dimensions which have an impact on performance. He seected the heads of the new divisions carefuy. Panning systems were st:eamined, targets regarding saes, cost, profit, product deveopment etc. were deveoped on the basis of open discussion and information sharing. Considerabe autonomy was devoved upon the divisiona heads with regard to staffing, resource aocation, and marketing strategies. Many eyebrows were raised about his stye of tough-minded behaviour, quite unknown in the history of the organisation. Within a period of ess than two years the organisation turned the corner and was found attempting for market eadership in the industry. Mentoring and heping others aong the road to success is an important activity of managers and more so of CEO. The higher a manager gets in an organisation, the more responsibiity he has for such heping activities. It is a characteristic of a reay genuine eader at any eve to ift others up, even beyond his own eve at every egitimate opportunity.

49 Roes of Strategists, Mission and Objectives 49 Thus, a CEO is simutaneousy a strategic thinker, an organisationa buider, and a eader. He is aso a spokesman, an innovator, a father figure and a prime decision maker, as wi be borne out in our ater discussion. Top management comprises a team of peope, incuding the CEO, who perform certain vita tasks. Athough there may be differences among writers as to whether peope hoding certain positions in a body corporate can be regarded as members of top management or not, yet there is a good dea of agreement on tasks performed by them. The tasks performed by the team or group of peope who can be regarded as constituting top management are: Providing direction Setting vision Setting standards. Direction Top management, undoubtedy, is expected to give direction to the organisation. Shoud the organisation continue to produce goods and services provided hitherto? Shoud there be a change in products suppied? What are the areas, from which the organisation shoud withdraw? What are the new areas into which it shoud enter? In a reasonaby stabe environment these questions are not that reevant. But in a changing environment there is a need to keep a cose watch. Some products/ businesses which were doing we in recent years may not continue to do so. What shoud the organisation do? Disinvest, but what are the new areas into which it coud go? Most big industria houses have graduay withdrawn from texties or are in the process of doing so. These incude Biras, Tatas, Shri Ram Group, Modis. They have entered into new areas such as chemicas, automobies, tyres, eectronics, reprographics. Who decided about these? Of course the top management or more specificay top management team. Vision Setting Having given the direction to the organisation, top management team is expected to set standards for the short run and the ong run. What is to be achieved, say 5 to 10 years from now? What are the targets for the given years? Can you guess which task is more important setting standards for the short run or the ong run? Of course, both are equay important and are interconnected. An overemphasis on the achievement in the short run may mean that the organisation is not abe to initiate action in time for moving into more promising areas in the ong run. Simiary, an overy concern for achievements in the ong run may put the organisation, in difficuty for meeting the short term requirements of cash and other faciities. Evoving a baanced perspective of the short term and ong term interests has been emphasised in the iterature. It is argued that the top management needs to have bifoca gasses which hep it in managing the short term as we as ong term interests of the organisation simutaneousy.

50 50 Strategic Management Standard Setting Top management not ony sets standards but evauates the performance of various units or groups of businesses. Setting standards has no meaning without some system of contro. Deveoping a system of contro is one of the tasks of top management. The frequency of such exercise on evauation differs from situation to situation. However, the evauation shoud provide scope for initiating corrective action. One of the forma ways of having a system of evauation is provided by Management by Objectives. In this approach an attempt is made to arrive at an agreement on what is to be achieved. These targets, then constitute the basis on which evauation is attempted. The dimension reating to the manageriay derived expectations of the Board of Director s roe seems to be of reativey recent origin. In the ast two decades or so, industria deveopment has been marked by far-reaching technoogica changes, eading to equay fundamenta competitive reorientation at the goba eve. As a resut, many erstwhie great names in industry have been humbed. With such rapidy mounting changes and uncertainties, the roe of BODs has begun to be viewed from much wider and ong-term perspective beyond the minimum requirements of aw. Probaby, upto the 1970 s, the duty of BODs to superintend, contro and direct had gone by defaut. Stabe environment had heped this key roe to remain dormant. What arc then the renewed ramifications of this roe at present? These are meant to ensure that: the enterprise continues to remain effective on the standpoint of technoogy parameters. the enterprise continues to achieve heathy market growth in competitive conditions, divestment and diversification take pace on sound ines. ong-term productivity and quaity are never sacrificed at the atar of short-term profitabiity. judicious earnings retention poicy is adopted for financing growth, modernisation etc. serious and sustained attention is devoted towards buiding a sound system of human vaues and exated corporate cuture. It is a common observation that BODs function rather passivey. Often the members are seected not because of their knowedge of the specific functioning of the company which they are supposed to oversee but because of their compatibiity, prestige or esteem in the community. Traditionay, as it happens, the board members arc expected (or requested) to approve the proposas put forward to them by top management. Usuay, the Chief Executive Officer (CEO) or the group of promoters have a free reign in choosing the directors and in having them eected by the sharehoders. The CEO or the promoter group may seect board members who in their opinion, wi not disturb the company s poicies and functioning. The directors so seected often fee that they shoud go aong with any proposas made by the CEO and his group. Thus, a strange or somewhat paradoxica situation arises. The board members find themseves accountabe to the very management they are expected to oversee.

51 Roes of Strategists, Mission and Objectives 51 Even today, the boards in India, especiay in famiy owned or cosey hed companies, are mere figureheads. Over the recent past, however, ending institutions, financia media and corporate anaysts have seriousy questioned the roe of BODs. The investors and government in genera arc now better aware of the roe of BODs. In genera, it is fet that there is a critica ack of responsibiity on the part of BODs. Though the Companies Act throws some ight on the powers of BODs and the restrictions paced on those powers, it does not specify to whom they are responsibe and what for. However, there is a broad agreement that BODs appointed or eected by the sharehoders are expected to: oversee the management of the company s assets estabish or approve the company s mission, objectives, strategy and poicies review management actions and financia performance of the company hire and fire the principa executive and operating officers of the company. An important issue in this context is : shoud BODs merey direct or may they manage aso? Many experts and practicing top managers say that BODs shoud ony oversee and direct, and never get invoved with detaied management. There are others who fee that, for direction to be reaistic and sensibe, some in-depth invovement with detais is necessary. The majority view, however, is in favour of directors directing the affairs of the company and not managing them. Probaby, in the majority of cases in India, the rea probem is one of non-invovement of board members amost to the extent of caousness in enterprise affairs. Especiay in those enterprises which are sick, or are near to this state, it shoud be ceary decided whether their BODs wi merey direct and fee satisfied, for such enterprises often ack competent managers at a eves. So, whom woud BODs direct? Is there a need, therefore, for the BODs here to spend more time and manage such enterprises too for a stipuated period of time? The board is expected to act with due care. That is they must act with that degree of diigence, care, and ski which ordinariy prudent men woud exercise under simiar circumstances in ike positions. If a director or the Board as a whoe fais to act with due care and, as a resut,, the company in some way is, harmed, the careess director or directors may be hed personay iabe for the harm done. Further, they may be hed personay responsibe not ony for their own actions but aso for the actions of the company as a whoe. In addition, directors must make certain that the company is managed in accordance with the aws and reguations of the and. They must aso be aware of the needs and demands of the constituent groups so that they can bring about a judicious baance between the interests of these diverse groups, whie ensuring at the same time that the company continues to function. According to Bacon and Brown, a BODs, in terms of strategic management, has three basic tasks. To initiate and determine: A board can deineate an organisation s mission and specify strategic options to its management.

52 52 Strategic Management To evauate and infuence: A board can examine management proposas, decisions and actions; agree or disagree with them; give advice and offer suggestions; deveop aternatives. To monitor: By acting through its committees, a board can keep abreast of deveopments, both inside and outside the organisation. It can thus bring new deveopments to the attention of the management which it might have overooked. The members of the board may be having varying commitments to the organisation in terms of their invovement with the above strategic tasks. The degree of invovement of the board in the organisation s strategic affairs can be viewed as a continuum, ranging from phantom boards, with no rea invovement, to catayst boards, with a very high degree of invovement. Expectedy, highy invoved boards tend to be very active. They take their task of initiating, evauating and infuencing, and monitoring seriousy and provide advice to management whenever it is fet necessary and keep them aert. As depicted in Exhibit 4.1, a catayst board may be deepy invoved in the strategic management process. The BODs of some pubic enterprises (e.g., BHEL and HMT) and some private sector companies with mutinationa inks (e.g., Hindustan Lever and L&T) have a reputation for their active invovement in strategic affairs. You wi see that the degree of invovement essens as we move further to the eft of the continuum. The three types of boards towards the eft of the continuum can be described as passive boards. Such boards in genera do not initiate or determine strategy. The Board members interest may be aroused ony when a crisis overtakes the company. Very few companies are fortunate to have catayst boards or even boards with active participation, The boards of most of the companies in the private sector wi fa in any one of the four categories on the eft side of the continuum. DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT Low (passive) HIGH (Active) Phantom Never knows what to do, if anything, no degree of invovement. Rubber Stamp Permits officers to make a decisions. It votes as the officers recommend on action issues. Minima Review Formay reviews seected issues that officers bring to its attention Nomina Participation Invoved to a imited degree in the performance or review of seected key decisions, indicators, or programs of management Active Participation Approves, questions, and makes fina decisions on mission, strategy, poicies, and objectives. Has an active board committees. Performs fisca and management audits. Catayst Takes the eading roe in estabishing and modifying the mission, Objectives, Strategy, and poicies. It may have a very active strategy committee. Exhibit 4.1: Board of Directors Continum A great responsibiity ies on the chairman of the BODs. It is he who can ensure that the board functions effectivey. The infuentia sharehoders, financia institutions, managements of hoding companies can aso pay an important roe in this regard. Whie a BODs is not expected to invove itsef in day-to-day operating decisions, they are nonetheess expected to consider and give their views on a such matters that have ong-term connotations. In fact, such matters by convention are referred to the board. These reate to issues such as introduction of a new product, new technoogy, coaboration agreements, senior management appointments and major decisions regarding industria reations.

53 Roes of Strategists, Mission and Objectives 53 The directing function of the board has interna and externa components. Interna component reates to various actions taken by the executives and their impications for the organisation, incuding R&D, capita budgeting, new projects, new competitive thrusts, reationships with financia institutions and banks, foreign coaborators, major customers and suppiers. Externa component -reates to identifying broad emerging opportunities and threats in the environment and feeding them to the management so that strategic mismatches do not occur. The hoard shoud see that the organisation aways remains in aignment with the socia, economic and poitica miieu. It is quite ikey that many Chief Executive Officers (CEOs) and some board members may not want the board to be invoved in strategic maiers at more than a superficia eve. The reasons are not far to seek. Many companies may not have an expicit or we articuated strategy. The management of such companies take strategic decisions intuitivey rather than through a rigorous process of search and anaysis. Further, the managements of some companies do not ike outside directors to know enough about the new strategic decisions or postures. They may perceive the invovement of board members in strategic decision making as a threat to their power. Roe of Entrepreneurs According to Drucker, the entrepreneur aways searches for change, responds to it and expoits it as an opportunity. The entrepreneur has been usuay considered as the person who starts a new business, is a venture capitaist, has a high eve of achievementmotivation, and is naturay endowed with the quaities of enthusiasm, ideaism, sense of purpose, and independence of thought and action. However, not a of these quaities are present in a entrepreneurs nor are these found uniformy. An entrepreneur may aso demonstrate these quaities in different measures at different stages of ife. Contrary to the generay accepted view of entrepreneurship, entrepreneurs are not to be found ony in sma businesses or new ventures. They are aso present in estabished and arge businesses, in service institutions, and aso in the bureaucracy and government. By their very nature, entrepreneurs pay a proactive roe in strategic management. As initiators, they provide a sense of direction to the organisation, and set objectives and formuate strategies to achieve them. They are major impementers and evauators of strategies. The strategic management process adopted by entrepreneurs is generay not based on a forma system, and usuay they pay a strategic roes simutaneousy. Strategic decision-making is quick and the entrepreneurs generate a sense of purpose among their subordinates. Roe of SBU-eve Executives The rationae for organising the structure according to SBUs is to be abe to manage a diversified company as a portfoio of businesses, each business having a ceary defined product-market segment and a unique strategy. The roe that the SBU-eve executives pay is, therefore, important in strategic management. SBU-eve executives, aso known as either profit-center heads or divisiona heads, are considered the chief executives of a defined business unit for the purpose of strategic management. In practice, however, the concept of an SBU is adapted to suit traditions, shared faciities and distribution channes, and manpower constraints. Therefore, an SBU-eve executive wieds

54 54 Strategic Management considerabe authority within the SBU whie maintaining co-ordination with the other SBUs in the organisation. With regard to strategic management, SBU-eve strategy formuation and impementation are the primary responsibiities of the SBU-eve executives. Many pubic and private sector companies have adopted the SBU concept in some form or the other. There are severa famiy-managed groups today who boast of their professfsionay-managed organisation structure. Each of their companies has a chief executive who... has tota responsibiity.. and authority over the profit center. There are even separate management boards to review the performance of each profit center. At Shriram Fibres, the strategic panning system covered the different businesses ranging from nyon yarn manufacture to the provision of financia services. Strategic pans were formuated at the eve of each SBU as we as at the corporate eve. The corporate panning department at the bead office coordinated the strategic panning exercise at the SBU eve. Each SBU had its own strategic panning ce. Roe of Consutants Many organisations which do not have a corporate panning department owing to reasons ike sma size, infrequent requirements, financia constraints, and so on, take the hep of externa consutants in strategic management. These consutants may be individuas, academicians or consutancy companies speciaising in strategic management activities. According to the Management Consutants Association of India, management consutancy is a professiona service performed by speciay trained and experienced persons to advise and assist managers and administrators to improve their performance and effectiveness and that of their organisations. Among the many functions that management consutants perform, corporate strategy and panning is one of the important services rendered. The main advantages of hiring consutants are: getting an unbiased and objective opinion from a knowedgeabe outsider, cost-effectiveness, and the avaiabiity of speciaists skis. According to a senior consutant of a arge consutancy firm, the trend is that famiy-owned companies and the pubic sector are reying more heaviy on consutancy services than the mutinationas. There are many consutancy organisations, arge and sma, that offer consutancy services in the area of strategic management in India. Instances of companies seeking the hep of consutants in various strategic exercises such as diversification, restructuring, and so on, are egion. It shoud be noted that consutants do not perform strategic management, they ony assist the organisations and their managers in strategic management by working of specific time-bound consutancy assignments. Roe of Corporate Panning Staff David Hussey has enisted the many and varied principa responsibiities of corporate paners. Essentiay, the corporate-panning staff pays a supporting roe in strategic management. It assists the management in a aspects of strategy formuation, impementation and evauation. Besides this, they are responsibe for the preparation and communication of strategic pans, and for conducting specia studies and research pertaining to strategic management. It is important to note that the corporate panning department is

55 Roes of Strategists, Mission and Objectives 55 not responsibe for strategic management and usuay does not initiate the process on its own. By providing administrative support, it fufis its functions of assisting the introduction, working, and maintenance of the strategic management system Roe of Midde-eve Managers The major functions of midde-eve managers reate to operationa matters and, therefore, they rarey pay an active roe in strategic management. They may, at best, be invoved as sounding boards for departmenta pans, as impementers of the decisions taken above, foowers of poicy guideines, and passive receivers of communication about functiona strategic pans. As they are basicay invoved in the impementation of functiona strategies, the midde-eve managers are rarey empoyed for any other purpose in strategic management This does not, however, precude the possibiity of using their expertise. Many of the exampes that we have provided in the previous sub-sections show that managers and assistant managers can aso contribute to the generation of ideas, the deveopment of strategic aternatives, the refinement of business, functiona and deveopment pans, target-setting at departmenta eves, and for various other purposes. The importance of the midde management cadres ies in the fact that they form the catchments areas for deveoping future strategists for the organisation. Roe of Executive Assistant The emergence of executive assistants in the manageria hierarchy is a reativey recent phenomenon. An executive assistant is a person who assists the chief executive in the performance of his duties in various ways. These coud be: to assist the chief executive in data coection and anaysis, suggesting aternatives where decisions are required, preparing briefs of various proposas, projects and reports, heping in pubic reations and iaison functions, coordinating activities with the interna staff and outsiders, and acting as a fiter for the information coming from different sources. Among these the most important and what one manager abes the bread and butter roe of EA (executive assistant) coud be that of corporate panner. The reason being that the increasing compexity of business and strategic decision-making has ed to a situation where it is the function of the executive assistant to monitor the changing context and evove strutcgics in tundcin with senior management. But in companies where a corporate panning department exists, this function not assigned to the executive assistants. Since executive assistants assist the chief executive they hep to optimise their time utiisation. In terms of skis and attitudes, the requirements for an executive assistant incude a generaist s orientation, a few years ine experience, exposure to different functiona areas, exceent written and ora communication abiity, and a peasing personaity. Generay the quaification required is an MBA or a CA. The position of an executive assistant offers a unique advantage to young managers as nowhere ese can he or she gain a comprehensive view of the organisation, which can hep in career panning and deveopment, and rapid advancement to the senior eves of management. We end this chapter on this encouraging note.

56 56 Strategic Management Mission and Objectives The two most basic questions faced by corporate-eve strategists are, (1) What business are we in? and (2) Why are we in business? An answer to the first question requires a consideration of the mission definition, or the scope of the business activities the firm pursues. The second question invoves estabishing objectives to be accompished. Both questions hep define the nature of the business and provide a framework for anaysis, choice, impementation, and evauation processes. Mission and Business For ong-term surviva (often viewed as the utimate objective), most organisations must egitimise themseves. This is normay done by performing some function which is vaued by society. Of course, some functions are vaued more highy than others, and priorities can change over time. In the United States, professiona sports teams are vaued for their entertainment function, and they have become big business. Organisations which make a net contribution to society are ikey to be caed Legitimate. These organisations are ikey to be aowed to survive over the ong term. Chaenges to egitimacy are not frequent, but once made they can damage surviva potentia or imit the scope of action and increase the cost of doing business. For exampe, over a dozen of the argest U.S. defense contractors were under investigation in 1985 for cost and abor mischarges, bribery and kickbacks, defective pricing, and so on. Congress acted to stop payments on some contracts and made it harder to acquire the more ucrative contracts because the egitimacy of the action of these firms was caed into question. Many organisations define the basic reason for their existence in terms of a mission statement. Such a definition can provide the basic phiosophy of what the firm is a about. It usuay emanates from the entrepreneur who founded the firm or from major strategists in the firm s deveopment over time. The mission can be seen as a ink between performing some socia function and more specific targets or objectives of the organization. Thus the mission can be used to egitimize the organisation. When the mission of a business is carefuy defined, it provides a statement to insiders and outsiders of what the company stands for its purpose, image, and character. Mission definitions can be so broad as to be meaningess, or they can merey be pubic pronouncements of ideas, which few coud ever reach. The specificity and breadth of goa or mission statements are important considerations for strategists. But a good mission statement focuses around customer needs and utiities. For exampe, AT&T is in communications, not teephones; Tenneco is in energy, not just oi and gas; MGM provides entertainment, not just movies. The customer needs for communication, energy, or entertainment are not product-specific nor are mission statements. Avon defines itsef as being in the beauty business. The mission of most pubic universities is to provide teaching, research, and pubic service -but many aso provide entertainment (sports teams). The mission must be cear enough so that it eads to action. Organisations must at some point estabish specific targets to shoot for which wi be used as guides for evauating

57 Roes of Strategists, Mission and Objectives 57 progress. NASA s mission in the 1960s was to begin space exporation and and a man on the moon. Without estabishing specific goas to get to aong the way, we might be sti waiting for that first sma step. So firms aso must express their mission and phiosophy by estabishing statements about the grand design, quaity orientation, atmosphere of the enterprise, and the firm s roe in society. After Roger Smith took over as chairman of Genera Motors, he moved quicky to sove some probems at GM and atered its strategy. As part of the process, he distributed cuture cards to be carried in the pockets of executives to remind them of their new mission. The card reads The fundamenta purpose of Genera Motors is to provide products and services of such quaity that our customers wi receive superior vaue, our empoyees and business partners wi share in our success, and our stockhoders wi receive a sustained, superior return on their investment. Other firms consciousy (or subconsciousy) deveop core principes, or norms, which guide decision making or behavior. These principes serve as mechanisms for sefcontro to guide managers at a eves of the organisation. Hence, if quick decisions are needed at ower eves of an organisation, such core principes serve as guides to making decisions or taking action consistent with the overriding mission and strategy of the business. These are different from poicies in that they are frequenty part of the cuture, or ways of doing things, that emerge in the informa organisation. In practica, everyday decision making, most organisations are not immediatey concerned with questions of continued existence. Surviva for most is reativey assured within the time frame of thinking of those in charge. And the mission tends to become an ideoogica position statement which is ony occasionay referred to in support of egitimisation. So what tends to occupy the minds of the moders of organisation purpose are various objectives to improve performance. However, prescriptivey, a mission statement and core principes ought to serve as guideines for strategic decisions rather than as a set of patitudes. Otherwise, short-term thinking can get in the way of the ong-term best interests of the organisation in society. Business Part of the mission statement is the definition of the business itsef. By this we mean a description of the products, activities, or functions and markets that the firm presenty pursues. Products (or services) are the outputs of vaue created by the system to be sod to customers. Markets can refer to casses or types of customers or geographic regions where the product and/or service is sod. When we refer to functions, we mean the technoogies or processes used to create and add vaue. For exampe, in agricuture one might pant and grow seeds, harvest crops, mi grain, process grain into various food products, and distribute or retai the finished product. Each stage adds vaue and represents a separate function. Some firms do a the functions whie others do a imited number or ony one. Consider a fu-service airine versus a no-fris carrier. One operates fu-service ticket counters in airports and downtown ocations; the other may ticket on the pane, offer no interine ticketing, offer few fare options, and so on. The no-fris airine may use first come-first-serve seating versus ticketing at gates. On board, the no-fris carrier may not serve food or drink or charge extra for the service. The fu-

58 58 Strategic Management ine carrier may provide free baggage checking whie the no-fri firm charges or provides no interine baggage connection. Each of these options represents a service or function configuration. Functions of ticketing, gate operations, on-board service, and baggage handing can provide options for adding vaue to services provided. A good business definition wi incude a statement of products, markets, and functions. For exampe, a business definition for Appe might state the foowing: We design, deveop, produce, market, and service microprocessor-based persona computers in United States and foreign countries. In contrast, Tandy might be defined as a U.S. manufacturer and retaier of consumer eectronic equipment. Note that Tandy performs fewer functions than Appe and is a bit more restricted geographicay, but it has a wider product definition. Westinghouse manufactures, ses, and services equipment and components which generate, transmit, distribute, utiize, and contro eectricity. Note that this definition incudes a very broad ine: it specifies a ocus around which the products are reated but ignores market issues (except for the notion that its markets invove eectricity). In its 1985 Annua Report, Schuumberger asks, What are our businesses? The answer: First, we are an oified services company, bringing technoogy to the oi industry anywhere, anytime. [We are] aso an eectronics company. We are ready to expand in the internationa markets through eadership in eectricity,.. eectronic payments,... instruments, bringing technoogy to the utiities, to the aerospace industry, to the banking community... A good statement of the business definition of the firm shoud meet certain criteria: it shoud be as precise as possibe and indicate major components of strategy (products, markets, and functions). Some go a bit further than this by aso indicating how the mission is to be accompished. Defining the mission and business definition is the starting point of strategy anaysis. It answers the question, What business are we in? When performing the initia gap anaysis we find that such a statement indicates where the firm s current strategy has been going up to this point is time and what resuts might be expected if it continues. From there, once objectives have been specified and other anayses have been performed, determinations can be made about whether such a definition can continue successfuy, or must be atered to cose gaps. In other words, the strategic management process starts with the current business definition but proceeds with other questions: What business shoud we be in? Who are our customers? How do we serve them? That is, some conditions might ca for a strategic change in products, markets, or functions, or changes in the way in which that business definition is going to be accompished (competitive strategy and poicies). For exampe, ong after cars, interstate highways, and airpanes sent many rairoad companies into bankruptcy court, some rairoad companies are reemerging with new corporate identities. The Reading Company, a major regiona rairoad estabished in 1833, now owns ony 16 mies of track. Like many former rairoad firms, Reading is now a major rea estate operator (even though the Monopoy game board earns it immortaity as a rairoad). A probem many firms find themseves with is that through acquiring a series of businesses unreated to their mission or business definition, they become congomerates, with itte to tie them together other than financia objectives. Many firms have found a need to return to basic business definitions because they cannot effectivey manage the

59 Roes of Strategists, Mission and Objectives 59 diversity. It took Genera Mis onger than most, but after 17 years of trying they finay sod off their toy division and nonfood ines to get back to the kitchen, which they knew best about. Changing the business definition is one of the basic strategy aternatives. But before strategy determination is made, the other major aspect of strategic gap anaysis is a determination of whether desired objectives wi be attained. Anaysts must determine if continuation with the mission and adherence to the business definition wi ead to expected outcomes cose to those desired. What Objectives and Goas Are Pursued? Objectives are the ends which the organisation seeks to achieve through its existence and operations. A variety of different objectives are pursued by business organisations. Some exampes incude continuity of profits; efficiency (for exampe, owes costs); empoyee satisfaction and deveopment; quaity products or services for customers or cients; good corporate citizenship and socia responsibiity; market eadership (for exampe, to be first to market with innovations); maximization of dividends or share prices for stockhoders; contro over assets; adaptabiity and fexibiity; service to society. It is important that severa points be made about objectives so that you understand their nature fuy. These are as foows: The ist just given contains 10 objectives, which is not to suggest that most organisations pursue 10 objectives or these exact 10. But research ceary demonstrates that firms have many objectives. A but the simpest organisations pursue mutipe objectives. Many organisations pursue some objectives in the short run and others in ong run. For exampe, with respect to the ist of 10 objectives, many firms woud view efficiency and empoyee satisfaction as short-run objectives. They woud probaby view profit continuity, service to society, and good corporate citizenship as ong-run objectives. Some other objectives such as adaptabiity or asset contro may be medium-range objectives. In sum, the objectives pursued are given a time weighting by strategists. One of the major diemmas of corporate-eve strategists is the short-term-ongterm trade-off decision. With the ogic of net present vaue and the importance of return on investment, combined with pressures from Wa Street and corporate rained for good quick profits and cash fows, modern managers have been pressured town short-term thinking. This kind of thinking aso fiers down to the business eve where a desire for quick returns may infuence SBU managers. There appears to be ess patience to invest in the future in the United States than there is in other countries (such as Japan). This ack of patience can have a severe impact on strategic decision making; and the timing of goa accompishment needs carefu anaysis in this regard Since there are mutipe objectives in the short run at any one time, normay some of the objectives are weighted more highy than others. The strategists are responsibe for estabishing the priorities of the objectives. Priorities are crucia when resources and time are imited. At such times, trade-offs between profitabiity and market share, etc., must be known so that the major objective of the particuar

60 60 Strategic Management time is achieved. Thus strategists shoud estabish priorities for each objective among a the objectives at corporate and SBU eves. There are many ways to measure and define the achievement of each objective. For exampe, some objectives can be measured through the use of an efficiency criterion; others may be measured in terms of effectiveness. Efficiency is the ratio of inputs to outputs. Effectiveness refers to the degree of achievement of a goa in reation to some idea. At times, trade-offs between efficiency and effectiveness are required. For exampe, instaing poution-contro equipment may be effective in achieving cean-air goas, but these goas may be achieved at the expense of a goa of efficient pant operation. At other times, trade-offs of efficiency goas within units of an organisation are required. This is a basic factor in suboptimisation. As each subsystem seeks efficiency, the entire system may ose effectiveness. For exampe, a credit manager is charged with estabishing a poicy to minimise credit osses; a saes manager is asked to maximise saes. If they both maximise in their own way, confict is ikey. Saes to some casses of customers wi increase credit risk. Trade-offs in the goas of each unit may be caed for. Here, goa priorities of the whoe organisation need to take precedence. In each part of the organisation such goa conficts are ikey and require resoution. The guidance shoud come from mission definitions. The impementation phase of strategic management invoves carifying the measurement of achievement, of objectives. There is a difference between officia objectives and operative objectives. Cooperative objectives are ends actuay sought by the organisation. They can be determined by anaysing the behavior of the executives in aocating resources. Officia objectives are ends which firms say they seek on officia occasions such as pubic statements to genera audiences. The objectives that count are those the strategists put their money and time behind. For instance, executives officia goas may focus on providing empoyees with a quaity work environment; whether operative goas are the same depends on how much money is spent to improve actua working conditions. An officia goa may be to contribute to socia responsibiity; yet a firm may fai to spend money on poution-contro equipment or even fight reguations designed to prevent acid rain because of the costs invoved. Or a firm may state that it wishes to integrate activities of SBUs to achieve synergy whie its organisation structure grants decentraised autonomy to divisions which prevent this from happening. Anderson, Cayton & Co. has searched for an acquisition in the food business for a decade; but anaysis suggest its refusa to take on a debt to cinch a big acquisition reay suggests that its operative goa is to not discourage potentia buyers of the firm itsef. According to one former officer, they are managing the company to be sod. There may be imits to the attainment of some goas. Some firms may try to maximise sharehoder weath but find that they are constrained by the need for funds to achieve ower-cost operations to meet competition. Excessive increases in market share might come at the cost of unpeasant antitrust consequences, which, in effect, coud be counterproductive from a surviva perspective. Again, there are trade-offs among goas which managers must make.

61 Roes of Strategists, Mission and Objectives 61 Finay, objectives are not strategies. Strategies are means to an end. Note that expansion was not among the objectives isted. Expansion is one type of strategy but not an end in itsef. In itsef, expansion of saes or assets may not improve performance. But cutting back (retrenchment) in certain areas of the operation coud aso be a way to increase efficiency and improve performance. So expansion and retrenchment are ways in which goas can be achieved, and both can ead to performance increases (e.g., growth in returns). Not a managers agree with this distinction, but we beieve it is an important one. (This is a probem with strategic management terminoogy in genera.) One other issue regarding objectives which has become important to strategists is the priority attached to objectives reating to socia responsibiity. Socia responsibiity is an i-defined term, but the basic idea is that the economic functions provided by business ought to be performed in such a way that other socia functions are, at worst, unharmed and, at best, promoted. Thus businesses are urged to be as concerned with human rights, environmenta protection, equaity of opportunity, and the ike, as they are with providing outcomes such as economic efficiency. Severa diemmas arise. A major probem is how to define sociay responsive behavior. Vaue systems are so diverse that achieving consensus on this issue is difficut. Equay probematic is the fact that economic organisations automaticay take resources from organisations in other sectors and often detract from performing other societa functions. Businesses weren t designed to promote pubic heath, safety and wefare (though some use charitabe giving as a marketing poy). A common exampe is detrimenta heath effects from poution created by the production of goods. Do we stop producing goods? Do we increase costs to the extent that other societa goas are adversey affected? For instance, a competey safe automobie might be so expensive that possibe cost increases to protect human safety become detrimenta to economic we-being. Cost-benefit tradeoffs are extremey difficut to make. In some cases, externa threats can be so severe as to ca into question the egitimacy of the mission of the organisation, as in the case of utiities which generate power with nucear pants. Poicies to dea with these concerns incude ignoring the issue, using pubic reations campaigns to try to mitigate unfavorabe pubicity, and atering goa priorities and changing strategies. Some creative strategists try to turn these kinds of threats into opportunities. For instance, some coa companies have increased the vaue of and originay used for strip-mining by converting the strip mines into recreation compexes. But these options are not aways avaiabe. In any case, decision makers are being urged to increase the priority given to these concerns by some. On the other hand, businesses are aso criticised if they stray too far from their economic function. For instance, business firms are chastised for creating poitica action committees as a means to infuence their environment. Whie research evidence is mixed, the predominant view is that socia responsibiity bears itte (positive or negative) reationship to financia performance objectives Ceary, then, estabishing goa priorities and resource aocation requires a consideration of issues beyond simpe economic efficiencies. Objectives Why do firms have objectives, and why are they important to strategic management? There are four reasons.

62 62 Strategic Management 1 Objectives hep define the organisation in its environment. Most organisations need to justify their existence, to egitimise themseves in the eyes of the government, customers, and society at arge. And by stating objectives, they aso attract peope who identify with the objectives to work for them. Thus objectives define the enterprise. 2 Objectives hep in coordinating decisions and decision makers. Stated objectives direct the attention of empoyees to desirabe standards of behavior. It may reduce confict in decision making if a empoyees know what the objectives are. Objectives become constraints on decisions. 3 Objectives provide standards for assessing organisationa performance. Objectives provide the utimate standard by which the organisation judges itsef. Without objectives, the organisation has no cear basis for evauating its success. 4 Objectives are more tangibe targets than mission statements. The products of an organisation or the services it performs (outputs) are probaby the most famiiar terms in which peope tend to think of objectives or goas. (It s easier to see Hamark as a producer of cards and gifts than to imagine the company as being in the socia-expression business. ) Output goas may aso be thought of in terms of quaity, variety, and the types of customers or cients who are the intended target. Nonetheess, it may be deceptivey easy to ink output goas with mission definitions. For instance, Henry Ford s origina mission of providing transportation for the common man was easiy seen through the production of the Mode A. But the private hospita offering a arge range of services with the best doctors and equipment may be avaiabe to ony a few rich cients; it may be profitabe with these services and judged effective by some, but others wi argue that it fais to satisfy a arger mission of equa heath care treatment (note the socia responsibiity cement here). Mission and objectives ought to be considered at each stage of the strategic management process. In the assessment of environmenta conditions, expected changes may force rethinking about goa priorities (e.g., changing government tax reguations may suggest a different treatment of dividend payout or retained earnings). In an anaysis of interna conditions, a goa of empoyee wefare might ater perceptions about unionisation. In choosing aternative strategies, a change in business definition coud ead to decisions to get out of some businesses in favor of others. If a goa of fexibiity is desired, the impementation of a strategy coud ead to a new form of organisation structure. So at each stage of the process, mission, business definition, and objectives shoud guide decision-making. To carry this a bit further and iustrate how objectives reate to the process as a whoe, we consider the gap anaysis as outined in Exhibit 4.2. Point A is the current eve of attainment an enterprise has reached at this time (t 1 ). Point B is the idea point at which management woud ike to see itsef at some point in the future (t 2 ). If, as a resut of foowing the strategic management process, the firm sees itsef pursuing the same strategy with a given set of assumptions about its environment management may beieve it wi arrive at point C at t 2. The gap of interest which coud trigger either strategic change or goa change is that between B and C. Note that the gap between the existing state and the desired state is not as important as the gap between the expected state and the desired state.

63 Roes of Strategists, Mission and Objectives 63 Exhibit 4.2: Gap Anaysis for Objectives The perception of this gap is important in terms of significance, importance, and reducibiity. With these conditions in mind, note that severa basic choices are avaiabe, if the gap is significant, important, and reducib an attempt coud be made to ater strategy so that the expected state (point C) wi come coser to the desired state (B). If the gap is significant and important but no reducibe, point B might be atered (e.g., expectations might be owered). If the gaps is significant and reducibe but not important, once again point B can be atered. The goa that is sought becomes ess critica when compared with other goas. If the gaps is neither significant, important, nor reducibe, no change wi occur a stabiity strategy (continuing past approaches in simiar ways) is ikey to be foowed. This is a prescriptive way to examine the anaysis of objectives as a component the strategic management process. But other factors infuence the nature of the Perceptions of these gaps as objectives are formuated. How Are Mission and Objectives Formuated? We beieve that missions and objectives are formuated by the corporate-eve strategists. But these executives do not make choices in a vacuum. Their choices are affected by severa factors: the reaities of the externa environment and externa power reationships, the reaities of the enterprise s resources and interna power reationships, the vaue systems and goas of the top executives, and past strategy and deveopment of the enterprise. The first factor affecting the formuation of mission and objectives is forces in the environment. The stakehoders with whom the organisation has an exchange reationship wi present demands or caims (expectations). These can be thought of as constraints on objectives. The stakehoders may vary, the nature of their constraints (expectations or caims) can change, and their power vis-a-vis the organization and one another may change. Taken together, they represent one set of forces within which manageria objectives must be estabished. The caims of the most powerfu stakehoders wi be met, so ong as the entire set of objectives fas within the constraints imposed by the set of stakehoders. Suppose that managers want to choose maximisation of saes as an objective. They may have to modify this objective because of governmenta reguations regarding excess profits, antitrust egisation, consumer abeing, and so on. Trade unions may require higher-than-market wage rates or fringe benefits which ead to higher costs (possiby

64 64 Strategic Management reducing saes). Competitors may se other products or services at unreaisticay ow prices and spend excessive amounts on advertising. Suppiers may become monopoised and charge outrageous prices. If the organisation is more dependent on suppiers than on any other stakehoders, the operative objective may very we be imited by the avaiibiity and cost of suppies. So the prudent strategist wi ask a variety of questions when estabishing mission, objectives, and strategy: Who are the critica stakehoders? What are our critica assumptions about each stakehoder? How do stakehoders affect each division, business, or function at various points in time. And what changes can be expected among the stakehoder groups in the future? The second factor affecting the formuation of mission and objectives is the reaities of the enterprise s resources and interna power reationships. Larger and more profitabe firms have more resources with which to respond to forces in the environment than do smaer or poorer firms. In addition to this, the interna poitica reationships affect mission and objectives. First, how much support does management have reative to others in the organisation? Does the management have the fu support of the stockhoders? For exampe, Pau Smucker has the support of the Smucker famiy stockhoders to emphasize quaity as an objective for his jam and preserves firm. If the management has deveoped the support of empoyees and key empoyee groups ike the professiona empoyees ower and midde management, then it can set higher objectives that empoyees wi hep achieve. Mission and objectives are aso infuenced by the power reationships among the strategists either as individuas or as representatives of units within the organisation. Thus if there is a difference of opinion on which objectives to seek or the trade-offs among them, power reationships may hep sette the difference. A fina interna factor is the potentia power of ower-eve participants to withhod information and ideas. To the extent that this occurs, the evauation of past goa attainment and expectations about the future can be affected. For instance, consider the saes manager who tries to hide the fact that a competitor s new product is starting to hurt saes. This might be an attempt to protect the unit, but it coud misead top managers regarding future goas and strategies. Or ower-eve managers might decide whether or not to forward a proposa which coud ead to goa changes on the basis of what they think top management is (or is not) ready to accept. Thus the exercise of this type of informa power can pay a roe in the seection of objectives. Mintzberg has advanced a theory about formuation of objectives that combines the stakehoder forces described earier with the interna power reationships. He beieves that power pays resut from interactions of interna and externa coaitions. Externa coaition Interna Coaition Power Configuration Dominated Bureaucratic The Instrument Passive Bureaucratic The Cosed System Passive Personaised The Autocracy Passive Ideoogica The Missionary Passive Professiona The Meritocracy Divided Poiticised The Poitica Arena Exhibit 4.3: Six Pure Power Configuration Affecting Objectives Formuation

65 Roes of Strategists, Mission and Objectives 65 The externa coaition incudes owners, suppiers, unions, and the pubic. These groups infuence the firm through socia norms, specific constraints, pressure campaigns, direct contros, and membership on the board of directors. Mintzberg specifies three types of externa coaitions, noted in Exhibit 4.3. The interna coaition incudes top management, midde-ine managers, operators, anaysts, and support staff. These groups infuence the firm through the personne contro system, the bureaucratic contro system, the poitica system, and the system of ideoogy. Mintzberg specifies 5 types of interna coaitions, shown in Exhibit 4.3. Mintzberg says that there are six basic power configurations, as shown in Exhibit 4.3 In the instrument power configuration, one externa infuence with cear objectives, typicay the owner, is abe to strongy infuence objectives through the top manager. In a cosedsystem power configuration, power to set objectives rests with the top manager, who sets the objectives. This is aso true in the autocracy power configuration. In the missionary power configuration, objectives are strongy infuenced by past ideoogy and a charismatic eader. Ideoogy tends to dictate the objectives. In the meritocracy power configuration, the objectives are set by a consensus of the members, most of whom are professionas. Thus the formuation of mission and objectives can be a simpe process: the top manager sets them subject to the environment. Or, more frequenty, they are set by a compex interpay of past and present, interna and externa roe payers. The third factor affecting the formuation of mission and objectives is the vaue system of the top executives. Enterprises with strong vaue systems or ideoogies wi attract and retain managers whose vaues are simiar. These vaues are essentiay set of attitudes about what is good or bud, desirabe or undesirabe. These in turn wi infuence the perception of the advantages and disadvantages of strategic action an the choice of objectives. Exhibit 4.4 ists the extremes of six seected vaues. Let s ook at each of these to see how they might affect objectives. 1 Very combative Very passive 2 Very innovative No innovative 3 Risk-oriented Risk-aversive 4 Quaity Quantity 5 Autocratic Participative 6 Persona goas Sharehoder goas Exhibit 4.4: Vaues Toward Various Groups In The Strategic Situation The foowing ist corresponds to the continuum in Exhibit 4.4. Each dimension is expained beow: 1. Some executives beieve that to be successfu a firm must attack in the marketpace. Others beieve that you go aong to get aong. 2. Some executives beieve that to succeed a firm must innovate. Others prefer to et others make the mistakes first. 3. Some executives know that to win big, you must take big risks. Others comment, Risk runs both ways.

66 66 Strategic Management 4. Some executives beieve that one becomes successfu by producing quaity. Others go for voume. 5. Some executives beieve that one shoud treat empoyees in a manner that makes them know who the boss is. Others beieve that cooperation comes from a participative stye. 6. Some executives beieve that they shoud be primary beneficiaries of corporate success whie others think the business is operated for the benefit of stockhoders. You can see that one set of executives with the set of vaues on the eft woud be incined to emphasize a different set or different eve of objectives than those who accept the set of vaues on the right in Exhibit 4.4. For instance, risk-oriented innovators might see significanty arger gaps between where they want to be and where they expect to be than risk averters. Managers on the eft on number 6 wi avoid hostie takeovers to protect their jobs, even if it comes at the expense of sharehoder oss. Corporate raiders often recognize this, and receive greenmai for their effort. Prescriptivey, from a maximizing decision perspective, these and other kinds of vaues ought not be considered when goas are being estabished. Yet some beieve that it is better to recognize the inevitabiity of their infuence on decision makers. That is, even if they are not expicity stated, vaue assumptions wi be impicit in decision premises and the types and forms of data coected. Consequenty, stating these vaues in the form of assumptions is one technique recommended to force these vaues expicity into the open, if they are incuded, the bases upon which decisions are made can be considered more, rationa than if decision makers pretended that these factors don t exist. The fourth factor affecting the formuation of mission and objectives is the awareness by management of the past deveopment of the firm. Management does not begin from scratch each year. It begins with the most recent mission and objectives. These may have been set by strong eaders in the past. The eaders consider incrementa changes from the present, given the current environment and current demands of the conficting groups. The managers have deveoped aspiration eves of what the objectives ought to be in a future period. But by mudding through, they set the current set of objectives to satisfy as many of the demands and their wishes as they can. The momentum of the arge organisation and its strategies and poicies are a current designed to accompish the existing mission and objectives. Just us it takes time the turn a arge ship around, it usuay takes time to make major corporate changes. Let s summarise what has been said so far on how mission and objectives an estabished. The factors are shown in Exhibit 4.5. Mission and objectives are no the resut of manageria power aone. These resut from the managers trying to satisfy the needs of a groups invoved with the enterprise. These coaitions of interest (stockhoders, empoyees, suppiers, customers, and others) sometimes have conficting interests. As the strongest coaition group, managers try to reconcie the conficts Management cannot sette them once and for a. Management bargains with the various groups and tries to produce a set of objectives and a mission which can satisfy the groups at that time. The goas of these groups are considered in reation to pa goas. This is a very compicated, argey consensus-buiding process with no precise beginning or end. And at any given

67 Roes of Strategists, Mission and Objectives 67 time, ony a few specific goas can be graspe and comprehended by any singe executive. Thus there appears to be a need for son grander vision as expressed by a mission definition. Note: Each of these factors represents a set of constraints on the estabishment of the priorities among future objectives. The set of mission and objectives considered at any one time is aso imited. Exhibit 4.5: Factors Infuencing the Formuation of Objectives and Mission Mission and objectives wi become a meaningfu part of the strategic management process ony if corporate strategists formuate them we and communicate them and reinforce them throughout the enterprise. The strategic management process wi be successfu to the extent that genera managers participate in formuating the mission and objectives and to the extent that these refect the vaues of management and the reaities of the organisation s situation. These factors aso pay a roe in strategic choice. Why Do Mission and Objectives Change? Athough organisations tend toward stabiity, mission and objectives change over time. As discussed before, objectives coud change on the basis of a rationa anaysis of a gap between expected and desired states. That is a normative approach. But what might ead to the determination of the states themseves? Are there some factors which woud ead to different perceptions regarding the gaps between goas and how the future goa states might be arrived at? On the basis of the foregoing discussion of how mission and objectives are formuated, we can present some descriptive reasons why mission or objectives might change. The aspiration eves of managers coud ater goa orientations. They may begin to extrapoate past achievements and say that the enterprise can do more. Or they may ook at what reevant competitors or other enterprises have achieved and decide to match or exceed these eves. The arriva of a new CEO from outside the organisation is the most prevaent condition under which mission and goas are reconsidered. New managers from the outside who are not tied or committed to past strategy and ideoogy are more ikey to ater the mission, objectives, and strategies of an organisation than are new CEOs from the inside. The mission can change in a crisis. When a firm s market disappears, for exampe, or its reason for being ceases, a crisis exists. Some firms suppying

68 68 Strategic Management equipment to the oi industry discovered this in 1974 and again in 1982 and Faced with an uncertain future, their objectives have begun to focus on fexibiity. When the cure for poio was found, the mission of the Nationa Foundation for Infantie Paraysis changed. So the attainment of objectives can aso ead to a crisis or new opportunities can create an identity crisis if a firm seeks to take advantage of them. Demands from coaition groups that make up the enterprise can change. This often occurs as the membership or eadership of groups changes or as interna power groups change. For instance, new government or abor eaders or new competitors can ater the way a business sets its goa-priorities. Simiary, if the comptroer becomes more powerfu internay, the firm might begin to stress shorter-term financia goas. Norma ife-cyce changes may occur which ater goa orientations. Though the anaogy with humans can be taken too far, there may be changes in objectives or strategies which naturay occur in the aging process. Of course, organisations may have more contro over the sequencing and timing of these stages than humans. Yet it is often difficut for an organisation to know what stage it is in. And we re not sure what might precipitate organisationa aging or movement. We do know that commitment to the past may hinder change, and new agents in coaition groups are ikey to hasten it. These four casses of factors aspirations, crisis, demands, and deveopment can be used to predict the ikeihood that mission and objectives wi remain simiar to those of the past or be subject to redefinition. Thus in considering how mission and objectives are formuated, we must examine various pressures for stabiity or change before a gap anaysis can be effectivey done.

69 Strategic Business Unit 69 Chapter 5 Strategic Business Unit A strategic business unit (SBU) is an operating division of firm which serves a distinct product-market segment or a we-defined set of customers or a geographic area. The SBU is given the authority to make its own strategic decisions within corporate guideines as ong as it meets corporate objectives. Generay, SBUs are invoved in a singe ine of business. A compementary cept to the SBU, vaid for the externa environment of a company, is a strategic business area (SBA). It is defined as a distinctive segment of the environment in which the firm does (or may want to do) business. A number of SBUs, reevant for different SBAs form a custer of units under a corporate umbrea. Each one of the SBUs has its own functiona departments, or a few major functiona departments, whie common functions arc grouped under the corporate eve. These different eves are iustrated in Exhibit 5.1. Two types of eves are depicted in this exhibit. One reates to the organisationa eves and the other to the strategic eves. The organisationa eves are those of the corporate. SBU and functions! eves. The strategic eves are those of the corporate. SBU and functiona eve strategies. Corporate eve strategy is an overarching pan of action covering the various functions performed by different SBUs. The pan deas with the objectives of the company, aocation of resources and coordination of the SBUs for optima perform-ance. SBU eve (or business) strategy is a comprehensive pan providing objectives for SBUs, aocation of resources among functiona areas, and coordination between them for making an optima contribution to the achievement of corporate eve objectives. Functiona strategy deas with a reativey restricted pan providing objectives for a specific function, aocation of resources among different operations within that functiona area, and coordination between them for optima contribution to the achievement of SBU and corporate-eve objectives. Exhibit 5.1: Different Leves of SBUs

70 70 Strategic Management Apart from the three eves at which strategic pans are made, occasionay companies pan at some other eves too. Firms often set strategies at a eve higher than the corporate eve. These are caed the societa strategies. Based on a mission statement, a societa strategy is a generaised view of how the corporation reates itsef to society in terms of a particuar need or a set of needs that it strives to fufi. Corporate-eve strategies coud then be based on the societa strategy. Suppose a corporation decides to provide aternative sources of energy for society at an optimum price and based on the atest avaiabe technoogy. On the basis of its societa strategy, the corporation has a number of aternatives with regard to the businesses it can take up. It can either be a manufacturer of nucear power reactors, a maker of equipments used for tapping soar energy, or a buider of windmis, among other aternatives. The choice is wide and being in one of these diverse fieds woud sti keep the corporation within the imits set by its societa strategy. Corporate- and business-eve strategies derive their rationae from the societa strategy. Some strategies are aso required to be set at ower eves. One step down the functiona eve, a company coud set its operations-eve strategies. Each functiona area coud have a number of operationa strategies. These woud dea with a highy specific and narrowy-defined area. For instance, a functiona strategy at the marketing eve coud be subdivided into saes, distribution, pricing, product and advertising strategies. Activities in each of the operationa areas of marketing, whether saes or advertising, coud be performed in such a way that they contribute to the funciona objectives of the marketing department. The functiona strategy of marketing is interinked with those of the finance, production and personne departments. A these functiona strategies operate under the SBU-eve. Different SBU-eve strategies are put into action under the corporateeve strategy which, in turn, is derived from the societa-eve strategy of a corporation. Ideay, a perfect match is envisaged among a strategies at different eves so that a corporation, its constituent companies, their different SBUs, the functions in each SBU, and various operationa areas in every functiona area are synchronised. Perceived in this manner, an organisation moves ahead towards its objectives and mission ike a we-oied piece of machinery. Such an idea, though extremey difficut if not impossibe of attainment is the intent of strategic management. Societa strategies are manifest in the form of vision and mission statements, whie functiona and operationa strategies take the shape of functiona and operationa impementation, respectivey. Strategic Management in Mutipe-SBU Businesses In sma businesses or in businesses which focus on one product or service ine, the corporate-eve strategy serves the whoe business. This strategy is impemented at the next ower eve by functiona pans and poicies. This reationship is iustrated in Exhibit 5.2. In congomerates and mutipe-industry firms, the business often inserts a eve of management between the corporate and functiona eves. In some firms, these units are caed operating divisions or, more commony, strategic business units (SBUs). In these firms, the strategies of these units are guided by the corporate strategies, but they may differ from one another. This situation operates as shown in Exhibit 5.3.

71 Strategic Business Unit 71 Each SBU sets its own business strategies to make the best use of its resources (its strategic advantages) given the environment it faces. The overa corporate strategy sets the ong-term objectives of the firm and the broad constraints and resources within which the SBU operates. The corporate eve wi hep the SBU define its scope of operations. It aso imits or enhances the SBU s operations by means of the resources it assigns to the SBU. Thus at the corporate eve in mutipe-sbu firms, the strategy focuses on the portfoio of SBUs the firm wishes to put together to accompish its objectives. For exampe, Mobi Corporation hired a new chief executive with the charge of revitaising Montgomery Ward, one of its poor-performing SBUs. The SBU is being pared down and turned into a speciaty retaier since it has not been abe to compete we as a genera merchandiser. Corporate-eve management set goas and has its own strategy (that of divesting Ward if it doesn t perform); but the SBU has determined its own strategy for how to redefine its business and compete effectivey. Exhibit 5.2: Reationship of Corporate Strategy and Functiona Pans and Poicies at Singe-SBU Firms Exhibit 5.3: Reationship Among Strategies and Poicies and Pans in Firms with Mutipe SBUs. Some writers make distinctions between corporate strategy, business strategy, and functiona-eve strategy, maintaining that corporate strategy focuses on the mission of the firm, the businesses that it enters or exits, and the mix of SBUs and resource aocations. Business strategy, then, focuses on how to compete in an industry or strategic subgroup, and how to achieve competitive advantage. At the functiona eve, pans and

72 72 Strategic Management poicies to be carried out (by marketing, manufacturing, personne, and so on) are designed to impement corporate and business strategy to make the firm competitive. Roger Smith, chairman of GM, has stated, Uness we want to pay a perpetua game of catch-up, we... have to do more than just meet our competition on a day-to-day basis. We have to beat them in ong-term strategy. Choices about how to compete shoud be considered in the decision about whether to exit or enter a business, as our earier exampe about Montgomery Ward iustrated. And the impementation of a strategy wi determine how effectivey the choice wi be carried out. Hence, we beieve that the process described here can assist in the reader s thinking about business and competitive strategy. As mentioned before, the mode in Exhibit 5.2 is for a singe-sbu firm. For a mutipe- SBU firm the mode is adjusted so that the process is conducted at corporate and SBU eves. The resuts of these processes feed into one another. However, at both eves, the process invoves appraisa, choice, impementation, and evauation. Strategic decision making in mutipe-sbu firms invoves interreationships between corporate-eve and business-eve panning. As can be seen in Exhibit.54 the corporateeve executives first determine the overa corporate strategy. They do this after examining the eve of achievement of objectives reative to their SBUs and other businesses they coud enter. Next they assess how the SBUs are doing reative to each other and potentia SBUs. Then they aocate funds to the SBUs and estabish poicies and objectives with them. Exhibit 5.4: A Mode of the Strategic Management Process for a Firm with Mutipe SBUs using First-Generation Panning At this point the SBUs anayse, within the guideines set by the corporate eve, how they can create the most effective strategy to achieve their objectives. This mode is, of course, a simpified representation. Depending on various organisation designs, the interreationships among units and panning processes can be quite compex

73 Strategic Business Unit 73 in a series of iterative interactions across eves and subunits. Moreover, conficts between the corporate eve and the SBU eve can create probems for both. SBU managers usuay seek greater resource aocations in an attempt to expand their units. Corporate eve, however, may wish to stabiize a unit or use cash fows from one unit to support another SBU. For exampe, whie the head of the tobacco unit at Phiip Morris in the eary 1980s wanted growth in cigarette voume and new-product deveopment, funds were being used to promote saes of the Mier Brewing acquisition. Discussions between SBUs and corporate eve must consider overa goas and resource needs.

74 74 Strategic Management Chapter 6 Environment - Concept, Components and Appraisa Understanding the environmenta context of a company is of immense significance. Successfu strategies are the where the company adapts to its environment. Companies that fai to adapt to their environment are unikey to survive in the ong run, and tend, ike dinosaurs, to disappear. An exampe of this type of faiure is provided by the near demise of the UK motorcyce industry, which faied because it did not mount an effective strategic reaction to a major environmenta change namey the emergence of its Japanese counterpart. Japanese producers panned and managed their motorcyce industry on an internationa basis. i.e. they buit factories that were designed to serve the word market rather than just their domestic market, thus having the advantage of economies of scae. Such a deveopment was a major competitive innovation to which the UK companies, with their much ess automated production and smaer saes targets, were unabe to respond effectivey. Environment woud be cassfied as foows : Macro environment Industry environment Competitive environment Interna environment We further cassified these individua casses or segments. Thus, for instance, the macro environment was further cassified into: Socia factors, e.g. demographic changes Technoogica factors Economic factors, e.g. prime interest rates, consumer price index, etc. Poitica factors The process of environmenta anaysis presents the strategic panner with a diemma: if a those environmenta eements that coud have some infuence on a company are incuded, then the anaysis becomes extremey compex and unwiedy. Aternativey, if. in the interest of reducing the eve of compexity, certain environmenta eements are omitted, then certain crucia environmenta forces may be eft out of the anaysis. In practice, deciding upon the appropriate baance between the width of environmenta anaysis and its depth is frequenty a function of the nature of the industry, and requires knowedge, experience, and judgement on the part of the strategic panner. In the discussion to foow, we woud adopt a three stage approach to anaysing the environment: Stage I: Segmenting the environment

75 Environment - Concept, Components and Appraisa 75 Stage II: Saue III: Anaysing the segments Attributing weights to each segment. Above, we have aready segmented the environment. In what foows, we provide some eaboration of each segment and thereafter anayse it, ending with a discussion of the method of attributing weight to each segment. Segmenting Environment and Anaysing Environmenta Segments Macro Environment Socia Factors Demographic Changes The decade of the eighties has seen the impact of the post War baby boom generation throughout The word. The age of the prime workforce and prime consumer popuation beonged to this generation, and their tastes and habits infuenced the habits and purchasing choices in the market, on the one hand, and motivated the manufacturing sector, on the other. Some features of this impact are worth isting. A genera increase in the educationa eve. A distinct shift in the vaue system, resuting in discernabe cutura dissatisfaction at the workpace, which in turn affected productivity. Increase in productivity, even if at a ess than expected pace, augmented by automation. Simutaneousy, changes in the vaue system and education have brought in their wake increased empoyee participation and invovement in decision-making activities. The growth of the service industry has ony height-ened the process. Such changes require changed operating procedures, shared information services, and shared authority. A Mode of Ethics: Perhaps some of these changes in the socia environment may be systematicay viewed somewhat differenty, we may approach it through a mode of ethics, as shown in Exhibit 6.1. From the figure, it can be seen that ethics consists principay of two reationships, indicated by arrows in the figure. A person or organisation is ethica if these reationships are strong. Exhibit 6.1: Mode of Ethics There are a number of sources that coud be used to determine what is right or wrong, good or bad, mora or immora behaviour. These incude, for instance, the hoy books,

76 76 Strategic Management the sti sma voice that many refer to as conscience. Indeed miions beieve that conscience is a strong guiding force. Others simpy see conscience as a deveoped response based on the intemaization of socia mores. Other sources of ethica guidance are what psychoogists ca significant others our parents, friends, roe modes, members of our cubs, associations, codes of ethics for organisations, etc. Whatever the source, there is genera agreement that persons have a responsibiity to avai themseves of the sources of ethica guidance, and individuas shoud care about right and wrong rather than just be concerned about what is expedient. The strength of the reationship between what an individua or an organisation beieves to be mora or correct and what avaiabe sources of guidance suggest is moray correct is Type I ethics. Type II ethics is the strength of the reationship between what an individua beieves in and the way he behaves. Generay, a person is not considered ethica uness possessed of both types of ethics. Socia Responsibiity Organisationa strategists have great infuence over what is right or wrong because they normay estabish poicies, deveop, the company s mission statement, and so forth. When a corporation behaves as if it had a conscience, it is said to be sociay responsibe. Socia responsibiity is the impied, enforced, or fet obigation of managers, act-ing in their officia capacities, to serve or protect the interests of stakehoder groups other than themseves. Business ethics is the appication of ethica principes to business reationships and activities. Changing vaues towards socia responsibiity To understand the socia responsibiity of a corporation, it is usefu to begin by understanding an organisationa constituency. An organisationa constituency is an identifiabe group towards which organizationa managers either have or acknowedge a responsibiity. Ceary, every business organisation has a arge number of stakehoders, some of whom are recognised as constituencies and some of whom are not. An organisationa stakehoder is an individua or a group whose interests are affected by organisationa activities. Exhibit 6.2 depicts a typica iustration of organizationa stake-hoders, those marked with asterisks being ikey to be considered constituencies. Even though no manager can reasonaby consider a stakehoder interests at a time, some strategists caim to try. The great questions a strategist has to face woud go ike this, During an economic downtrend, shoud empoyees be afforded continuous empoyment even when this is not in the ong-term best interest of the owners of the corporation and does not accord with their preferences? Shoud managers be concerned about whether suppiers receive a reasonabe profit on items purchased from them or shoud management simpy buy the best inputs at the owest price possibe? Many corporate strategists cop out on such questions by simpy assuming that the ong-term best interest of the common stakehoders shoud reign supreme. What happens, however, when stakehoders have interests that are in confict? That is when the ethica considerations

77 Environment - Concept, Components and Appraisa 77 Exhibit 6.2: The Company Stakehoders of the strategist become the important deciding factor. Before proceeding any further, we ist some accepted ethica principes and stake-hoders in Exhibit 6.3 and 6.4. Wrong, Unethica, Immora Murder Rape Lying under oath Theft Incest Severey hurting someone economicay, psychoogicay physicay Vioating a trust Anarchy Vioating aws Sacrificing the future for today Right, Ethica, Mora Giving to the poor or disadvantaged Working hard Gathering knowedge and wisdom Repaying obigations Being truthfu Caring for offspring or Caring for forebears Considering the ong-term outcomes of behaviour Exhibit 6.3: Accepted Ethica Principes An open system is an organisation or an assembage of things that affects and is affected by externa events, it is now more or ess universay recognised that a corporate organisation is an open system. Indeed, most corporate strategists recognise the existence of the grapevine or the informa communication system within and outside an organization. The open system view invoves recognising the reationships between organisations and their environments, and evauating those reationships in an inteigent, not necessariy mora, way. It is not an ethica concept. It is,

78 78 Strategic Management Common sharehoders Preferred sharehoders Trade creditors Hoders of secured debt securities Past empoyees Retirees Competitors Neighbours The immediate community The nationa society The word society Intermediate (Business) Customers Fina (consumer) customers Suppiers Empoyees Corporate management The organizationa strategists themseves The chief executives The Board of Directors Government Specia interest groups Loca government agencies Exhibit 6.4: Stakehoders (Potentia Constituents) however, cear that the organisation has obigations to other eements of society, some of which are not spet out in aw or in any other forma way. This is termed socia contract. The Socia Contract In a sense, organisations and society enter into a contract. This socia contract is the set of written or unwritten rues and assumptions about behaviour patterns among various eements of society. Thinking of the socia contract from the standpoint of the business or non-business organisation, organisationa strategists shoud contempate expected or prescribed reationships with individuas, with government, with other organisations and with society at arge. This is iustrated in Exhibit 6.5. Government Society The Organisation Other organisations Groups Individuas Exhibit. 6.5 The Socia Contract

79 Environment - Concept, Components and Appraisa 79 Obigations to Individuas It is through joining organisations that individuas find heathy outets for their energies. From the church they expect guidance, ministeria services, and feowship, and they devote time and money for its sustenance. From their empoyers they expect a fair day s pay for a fair day s work and perhaps much more. Many expect to be given time off, usuay with pay, to vote, perform jury service, and so forth. Cubs and associations provide opportunities for feowship and for community service. To the extent that these expectations are acknowedged as responsibiities by the organisations invoved, they become part of the socia contract. Obigations to Other Organisations Organisationa strategists must be concerned with reationships invoving organisations of simiar kinds such as competitors and vasty differing organisations. Commercia businesses are expected to compete wiih one another on an honourabe basis, without subterfuges or reckess ack of concern for their mutua rights. Charities expect support from businesses, customer organisations expect to be treated as Customers. Obigations to Government Government is the most important party to the socia contract. Under the auspices of the government, companies have icence to do business. They have written patent rights, trade marks, and so forth. Churches are often incorporated under state aws and given non-profit status. Many quasi-governmenta agencies, such as the Federa Depository Insurance Corporation, Regiona Panning Commission, Levy Boards, have been aocated specia missions by the government. In addition, organisations are expected to recognise the need for order rather than anarchy and to accept some degree of government intervention in organisationa affairs. The inspection rights of Occupationa Safety and Heath Administration function-aries are cases in point. Obigations to Society in Genera Businesses are expected to creativey abide by iaws that are passed for the good of society. That is, as responsibe corporate citisens, businesses shoud foow the spirit as we as the etter of the aw. This has emerged abundanty sharpy in recent cases where defence against charges of dumping of dangerous waste has tended to ake the ine of its being within ega imits. It is now cear that society considers such peas simpy unacceptabe. Indeed, views now appear to be veering towards the concept that protecting the pubic is simpy a matter of manageria sef-interest. It is the cear consensus among deveoped economies today that corporate strategists must protect other stakehoders, even when doing so couicts with manageria sef-interest or even the interest of stockhoders. Up to now, we have basicay considered the organisation s obigations to its stakehoders, government, and society, arising out of mora and ethica considerations. It is aso important to consider the infuence government and society may have on the strategic posture of the company.

80 80 Strategic Management Government and Its Roe It is convenient to divide the roe of government into two categories: government acting as an aid to business and government acting as impediment to business; athough the government may simutaneousy be performing both acts. Government as Aid to Business Government as Buyer Government is frequenty a major purchaser of goods and services, and is generay regarded by business as an exceent customer because it wi not defaut on payment and aso because government purchases, as we as being a mark of approva, are aso frequenty reativey arge. Government as Sustainer of R&D In many industries today the cost of engaging in the R&D necessary for successfu deveopment of new products and processes is frequenty beyond the financia capacities of individua companies. In such circumstances, the government may frequenty hep out by providing subsidies or even partiay bearing the cost of R&D by directy participating in joint research. MITI of Japan, particuary in the eary days, woud be a case in point. Government as Provider of Protection This is usuay in the form of provision of subsidies to the threatened industry, through erection of tariff barriers against foreign products; through imposition of quotas against foreign goods; and through exercise of preferentia procurement practices. Government as Aid to Controing Wage Cost This takes the form of government poicies introducing income norms that ease the difficuties of businesses in meeting wage demands they beieve to be excessive. Government Assistance in Training Independent of trade and industry, many governments have sponsored training programmes aimed at raising the ski eves of existing and potentia workers. Occasionay there are aso tax reiefs and grants given to companies running their own training schemes. Government Assistance in Start-up Business In many regions of high unempoyment, government provides specia concessions and assistance to start up new businesses. A simiar situation arises m backward or noindustry areas in deveoping countries, where specia faciities or concessions are given for setting up new industries. Government as Provider of New Business Opportunities Since the eighties, in many Western countries and in some deveoping countries there has been a genera trend favouring privatization of new industries. This automaticay creates new business opportunity for prospective investors.

81 Environment - Concept, Components and Appraisa 81 Government as Impediment to Business The deveopment of the web of reguations : Frequenty government increases its intervention in society through egisations and reguations. Often these work to the detriment of industries, increasing not ony costs, but procedura impediments; exampes woud be reguations controing inter-state or inter-country movement of goods and evy of excise duties on goods produced. Government as controer of prices: Income poicies are aso frequenty compemented by price poicies, which is generay regarded by industry with some hostiity. The major argument is that this conficts directy with the infuence of market forces on prices. Government as protector of the environment: Nations around the word are increasingy becoming aware of the ong-term eost of industria poution. This has resuted in a spate of egisations curbing activities beieved to be causing poution. Many industries resent this as being undue intervention. Government as guarantor of heath and safety at work: This concern for heath and safety of workers manifests itsef through various acts of egisation, invariaby resuting in increased cost to the company, and is often resented as undue penaty. Government as guarantor of equa opportunity: Legisation conforming to equa opportunity, i.e. equa rights to empoyment and promotion without regard to sex. age. race, or reigion, has been enacted in most countries in the Western word. This is again often resented by companies as undue interference and cost-enhancing measures. Government as defender of competition against monopoy: Governments in many countries seek to restrict monopoy by egisation in the interest of maintaining competition, from the socia point of view and as protection for sma firms. This is often considered by arge companies as a negative step, particuary in the context of gobaization when nationa monopoy (and hence arger size) is often considered as a prerequisite for goba success. (It may be mentioned that contrary cases abound around the word.) Government as defender of the rights of consumers: Many Western governments have enacted egisation to protect the consumer against unscrupuous business practices. It may invove insistence on honest abeing of goods, contents of advertising, standardisation of contents in pharmaceutica and food products, and price reguation in the case of utiity companies. The more extensive these aws are, the more hostie business tends to become towards these. In view of this ambivaence in government attitude to industries (sometimes beneficia, sometimes creating impediments), instead of generaizing, it woud be usefu to see the roe of government in terms of changing participation in strategic decisions. In this, a distinction must be drawn between poitica infuence and strategic eadership. The key difference is that the former cas primariy for exercise of poitica skis on behaf of a constituency, whie the atter, in addition to poitica skis, requires a cear perception of the common purposes of an organisation, and of ways of attaining them. It is common to refer to such perceptions as the vision of the organisation s future. Exhibit 6.6 summarises Ansoff s conception of changing participation in strategic decisions by different management eves in different types of industries.

82 m 82 Strategic Management Effects of Society and Cuture Like the environmenta effect of government, the socia/ cutura effects on products and services shoud aso be considered somewhat more specificay. This is now done under a few important heads. Exhibit 6.6: Changing Participation in Strategic Decisions Education: The eve, avaiabiity and participation rate in education can have major impications for many products and services. Indeed, the impact of education is being increasingy fet in most industries. Heath and fitness: Peope s concern for heath and fitness has become extremey important in recent times. This socia/cutura change has impications not just for sportsreated business, but aso for how other products and services are promoted, and how potentiay unheathy products overcome their poor image; for exampe, the tobacco industry is a major sponsor of sporting events. Famiy size: Famiy size has been decreasing amost a around the word. This has impications not just for suppiers of chidren s goods baby food, prams, cothes, etc. but aso for seemingy unreated products, such as houses and cars, where design and size is frequenty a function of famiy need. S A

83 Environment - Concept, Components and Appraisa 83 Famiy units: Famiy units have generay become ess stabe; there has been an increase in the eve of divorce and increasing tendency of young peope to eave home and ive apart form their parents. This has impications for promotion, packaging, etc. Reigion: There has been a decrease in the power of churches and their appea, especiay to young peope. This has had a major infuence on such issues as how peope spend their eisure, the types of mora attitudes that are sociay acceptabe, retai opening hours. Geographica mobiity: The advent of cheap internationa trave has greaty increased scope for internationa trave both for business and peasure. It has aso greaty increased peopes knowedge of foreign environments and tended to make goods and services more cosmopoitan. Domestic mobiity: The deveopment of mass motoring has meant a major socia change not just in recreation but aso in retaiing. This has been heped by a rise in freezer ownership. Thus many retaiers have moved from down-town sites to out-of-town shopping centres with good parking faciities. Simiar increased ownership of freezers has tended to change daiy necessity shopping to the weeky shopping trip. The roe of women in society: With the great increase in proportion of women working outside the home and the deveopment of equa opportunity egisation, there has aso been a change both in society s attitude to the roe of women as aso women s persona attitude about themseves. Thus there has been a diminution in the domestic roe of women and an increase in their broader roe in society. This has found refection in their purchasing habits and product choices. Attitude to work: is evident that there has been a distinct change in workers attitude to work and the consequent need for strategic change to accommodate it. Economic Environment The significant indicators of the economic environment woud incude: Growth rate in productivity Rate of infation Individua savings rate R&D expenditure as a percentage of GNP The key domestic socia and economic goas woud incude: Revitaisation of cities Ceaner environment Quaity education Od age security The key economic environmenta probems of recent and current times appear to be: Controing infation

84 84 Strategic Management Modernising industry Taking care of energy shortages Growing internationa interdependence Nationa economic factors. These are now sighty eaborated. Controing Infation A major ong-term poitica issue in combating infation is whether high empoyment and non-infationary economic growth can be achieved simutaneousy. The continuation of economic restraint and unempoyment to suppress infation can ony ead to further deveopment of a wefare state and the trend appears to be exacty the opposite the word over. The infationary impact of demand expansion poicies, however, wi require greater wage-price fexibiity, productivity and advance capita investment to ensure suppy avaiabiity. Such growth poicies woud, therefore, require changes in environmenta and other reguatory provisions. Modernising Industry To be internationay competitive, industry must seek economies of scae to sustain comparative advantages in efficiency and productivity. This requires continued capita investments and the appication of technoogica innovations from research and deveopment to reduce unit cost and to ead to the introduction of new and more efficient products and processes. Living with Energy Shortages The word economies at arge wi be iving in a word of graduay depeting oi, gas and, utimatey, coa reserves. This demands specia action and incentives for the deveopment of renewabe energy sources such as soar and fusion energy. Unti such aternatives are abe to meet future needs, specia attention wi be necessary to dea with the interim suppy and demand probems, incuding nationa energy poicies for the conservation and deveopment of aternative suppies. The probem has been further compicated by the changed socia vaue system and newy awakened awareness about poution and environmenta degradation through extensive use of fossi fue, on the one hand, and damage to the ecosystem through arge dam- or barrage- based hydroeectric projects, on the other. Better Labour-management Reationships The growing compexity and interreatedness of today s economic probems are ikey to increase pressure for joint abour-management probem soving. A common concern is deveoping for increased productivity that may ead to productivity bargaining. Growing Internationa Interdependence The rapid increase in movement of goods, peope, money, ideas, and probems across nationa boundaries is compicating the abiity of nations to manage their own economic affairs without reference to other nations and nationa interests. Thus the economic

85 Environment - Concept, Components and Appraisa 85 export poicies of Japan, for exampe, have significanty infuenced US and Western stee, auto, radio, and eectronics industries. The transfer of Eurodoars to high interest paying countries can significanty affect exchange rates and corresponding corporate currency adjustments (often forcing significant accounting osses or gains). The growth in word trade aso causes infation to spread rapidy from one economy to another. Less deveoped countries that contro scarce resources such as oi have increased the abundance of capita at their disposa. Important exporting nations such as Brazi, Korea, Taiwan, and now the South East Asian countries ike Indonesia, Maaysia, Thaiand, and Singapore are becoming industriaised and thus prospective members of the deveoped word. Simutaneousy a host of ess deveoped countries mosty in Africa are near bankruptcy. Intervention by internationa financia Institutions ike the Internationa Monetary Fund or the Word Bank are hardy assisting in countering the trend. Countries with baance-of-payments surpuses are becoming significant word bankers. Those with baance-of-payments difficuties are being forced into severe financia difficuties and basic probems of surviva. In sum, because of the infuence of goba economic events, it is usuay inadequate to consider nationa economic poicies without taking cognizance of the broader goba economic context in which a nationa economies must exist. This broader economic context must incude an assessment of such fundamenta indices as: Performance of the major industria countries in their - Rates of infation - Rea growth rate of GNP - Current account baances - Leves of empoyment - Interest rates Such an appraisa shoud enabe a judgement to be made about the genera state of word economy and its stage in the business cyce. Information on and anaysis of other goba issues such as - The economic deveopment and performance of nations - Goba efforts at monetary reforms - The behaviour of currency markets - Commodities - Trade taks - Activities of the Internationa Monetary Fund - Activities of the Word Bank - Third Word indebtedness The State of the Nationa Economy The anaysis of the goba economy can form the eco-nomic context within which the nationa economy can be appraised.

86 86 Strategic Management This can be done on a hierarchica basis, as discussed beow: The top economic goas of the government are assessed. Information for this can be obtained from party manifestos, government statements, budget statements, etc. The specific poicies advocated and impemented to achieve these goas are studied. The poicies fa under the foowing principa headings: Fisca poicies: What is the eve of government spending and what are its poicies on taxation? For exampe, is government, through pubic expenditure, attempting to raise the eve of demand and hence reduce unempoyment? Is the government s tax strategy designed to increase investment or increase pubic spending power? Monetary poicies: How tighty are monetary measures such as the money suppy and PSBR being constrained? Infation poicies: What is the government s attitude towards infation and what does it beieve are its causes? What steps is it taking to infuence the eve of infation? Foreign exchange and baance-of-payments poicies: What is the government s attitude towards stabiity in the vaue of the nationa currency? How do changes in the vaue of nationa currency affect the economy in genera and the organization under anaysis in particuar? Unempoyment poicies: How committed is the govern-ment to fu empoyment, and what poicies does it use to achieve empoyment goas? Privatisation poicies: How strongy committed to privatisation of nationaized industries is the government? What is the objective of privatisation: to increase competitiveness, to raise revenues for the government, or to underpin an ideoogica theory? Regiona poicies: How committed is the government to strong regiona poicies to prevent the concentration of industry and commerce in favored ocations? The operation of most of the above indicators can be quantitativey assessed. Once the impact of the economic segment has been assessed, it can be weighted. The rate of infation that prevais can be a significant environmenta infuence. It is, however, not enough ony to know the rate of infation; it is aso necessary to understand and appreciate its impact on the workings of a particuar company. This is because infation tends to act as a tax on current assets and as a subsidy on fixed assets. Thus, for exampe, a banker, a financia company, the assets of which are skewed towards money and other simiar products, must earn a return on equity at east as arge as the rate of infation, otherwise their net worth woud be eroded by infation. In contrast, a property company, for instance, woud find its fixed assets constanty understated in its baance sheet during infation, as the reaisation on sae woud be that much higher. Proposas are often heard of for the use of a word currency to repace a nationa currencies. Indeed, this appears to be becoming a reaity for EEC countries. This may seem far-fetched, but it is refective of the fact that the economic facet of the environment is infuenced by wordwide forces. The US and European auto and eectronic industries have been severey impacted by foreign competition, mosty Japanese. Recenty, when it appeared that the oi producers and exporters carte (OPEC) was about to fa apart,

87 Environment - Concept, Components and Appraisa 87 there was fear that this woud resut in a number of deveoping countries defauting on their debts to major US banks, with consequent increase in US interest rates. The recession which began in 1979 was a wordwide phenomenon, and this was aso the case with the recovery which began in Internationa trave is more feasibe than it has ever been in the past, and more and more companies engage in internationa business. Every organisation is affected by wordwide forces. In short, the economic facet of the environment is a rapidy changing one, but the more it changes, the more it remains the same. Organisationa strategists must sti compete on an economic basis. As ong as prices for goods and services are set in free markets, it wi be on the basis of economic variabes that an organisation sets its goas and measures its performance. Poitica Environment In democratic countries, business excesses generated disenchantment and a growing demand for more humanist goas to equaise income distribution and end poverty and suffering. Such pressures had caused the trend towards the wefare states in which the state (a) diverts resources into various wefare projects, (b) estabishes compusory insurance schemes, e.g na-tiona heath care, and (c) affects worker motivations to contribute. Thus, in the USA, rent subsidy, negative income tax, wefare payments, and a food stamps programme were estabished to raise the iving standard of the poor. Continued pressure for wefare states wi in a probabiity grow and affect many nations, organisations and individuas in the foowing ways: i. Tota taxes and government spending wi increase drasticay, ii. iii. iv. Worker penaties for wefare recipients wi create dysfunctiona worker motivation, Any government administration wi find it we nigh impossibe to reverse the trend towards greater wefare benefits, Resource aocation decisions wi increasingy be made on phiosophica or poitica grounds rather than on economic criteria, v. Increased worker taxation on incrementa income wi encourage worker absenteeism. vi. Government dependence wi decrease worker motivation through ack of care or worry. This trend may, however, resut in business saes stagnation eading to economic and industria decine and depression. In short, carried too far and without compatibiity with economic considerations, the wefare state trend woud in a probabiity confict with economic progress and viabiity. Indeed, in more recent times it has aready happened in many countries and the trend towards the wefare state has been reversed. Perhaps the poitica environment needs to be ooked at from certain other viewpoints as we. Corporations today spend hundreds of miions of doars on poitica contributions and obbying. These contributions are some-times designed to support principes that corporate executives beieve are worthwhie for society. More often, however, they tend to be sef-serving. This is evident from the fact that few poitica contributions are

88 88 Strategic Management made anonymousy. The poitica facet of environment is aso con-cerned with the organisation s reationships with government officias and other individuas and groups who hod poitica power. In recent times there has been fear that poitica action committees (PACs) are ikey to subvert governmenta processes by causing eected officias to serve the interests of those groups that make contributions. Poitica action committees are tax-favoured organisations formed by specia interest groups to accept contributions and infuence governmenta actions. The growth of PACs has afforded an avenue for corporations to contribute hundreds of miions of doars to poitica candidates. The returns received in the form of subsidies and price support to various industries are aso enormous. Whie the genera pubic is justifiaby concerned about the infuence of PACs and other private organisations on government, most managers express greater concern for the pervasive invovement of government in business activities. One prominent aw schoo dean. Thomas Erieh of Stanford University, compained that the increasing ega poution in America unduy constrains business. Not ony have aws become more numerous, but the propensity of citizens to itigate has become greater. Business and non-business organizations find themseves in a sea of poitica forces. The organisationa strategist must take account, if not advantage, of these forces. The decade of the sixties up to the mid-seventies has seen vast expansion in the scope and detai of government reguation of business decisions, beyond those of the New Dea era, beyond reguating pubic utiity industry, and beyond temporary periods of wage and price contros. This reguation has undoubtedy cost US business heaviy. Indeed, the probem is much more severe in the USA than in European countries. It is now acknowedged by more baanced peope in government that the government appears to be an opponent rather than friend or even neutra force vis-a-vis business and industry. The government view is of course different; namey that it has to protect pubic interest. Indeed, it is suggested that businessmen can serve their poitica interests better by ooking beyond the very narrow interests of the individua company and offering some connection between what businessmen want and the broader pubic interest. Certainy, the business-government interface is often an abrasive one. The very recent trend, however, is towards essening reguation and reducing government interfer-ence in business and private activities. Incidentay, it is noteworthy the dereguated industries themseves tend to be the most vehement opponents of dereguation, it is ikey that this opposition arises from a fear of rapid and unmanageabe change. Technoogica Environment Technoogica change resuts when new ideas are appied to existing probems for the purpose of economic and socia deveopment. As with a economic and socia changes, the acceptance of technoogica innovations takes a significant period of time, and it is aso a refection of rapidy increasing environmenta turbuence that this time span is constanty decreasing. Recent times have seen the deveopment of new products and processes with increasing frequency. The uncertainties and sow pace of deveopment of technoogica innovations make investments on them high risk. The potentia pay-off for winning innovations can,

89 Environment - Concept, Components and Appraisa 89 however, be significant and continues to encourage investment in research and deveopment. Looking carefuy, the competitive advantage of Japan in many industria and business areas woud be argey attributabe to their emphatic and consistent poicy on research and deveopment. Some of the attributabe factors woud be: i. There is a nationa poicy for setting up research and deveopment faciities for new technoogies, ii. ii. iv. There are tax and interest incentives for investors in designated technoogies. Capita is made avaiabe for designated technoogica investments at preferred interest raes, Investment in new technoogy is readiy accepted by empoyees. v. Growth in new technoogies has become part of the cuture and economic system. Future deveopments have a wide range of technoogies to draw upon. Predicting new deveopments and innovations wi be increasingy important. Consider the probem of depeting oi resources and their increasing costs. Consider the simutaneous awareness about issues reated to poution contro and environmenta protection. We are beginning to see a new emphasis on energy-reated technoogies that have yet to become commercia. Consider the foowing casses of technoogy: i. Nucear fission (breeder reactors) ii. iii. iv. Nucear fusion Synthetic hydrocarbon fues Soar energy v. Wind energy. vi. vii viii. ix. Geotherma energy Hydrostatic, tida, and ocean current energy Temperature gradient energy Advanced energy storage and distribution Today deciding, which of these technoogies research and deveopment funds shoud be invested in, is a rea gambe. Let us ook at the impact of technoogy on business and industry a itte more cosey. With today s modern computers it is possibe to obtain strategic information on a reatime basis for the first time in history. Most major merchandises now have point-ofsae eectronic accounting systems. When a customer order is checked out at the cash register, the inventory is immediatey updated. An order for a repacement item is entered if necessary, and the impact on saes, profitabiity, and other strategic variabes immediatey cacuated. In this fina anaysis, as unsetting as many of the advances is that most of these resut in the production of goods and services at ower cost both in terms of time and materias. If economic endeavour has a singe goa, this has to be it.

90 90 Strategic Management Organisationa strategists who ignore technoogica changes do so at their peri. Manufacturers of mechanica adding machines, arge propeer driven aircraft, or pasticreinforced automobie safety gass wi find amost no market today. Three possibe effects, of technoogica change are easiy discernibe: It can change reative competitive positions within a given business. It can create new markets and new business segments. It can coapse or merge previousy independent businesses by reducing or eiminating their segment cost barriers. In any event, when technoogy advances, a participants in the respective business segments are affected. To survive today companies must continuay innovate. This is not because of some externa force which has imposed upon the word a new and fearsome order of things, but because technoogica improvement is possibe. When improvement is possibe in a free economy, someone wi attempt it. The company or person who does, and succeeds in producing a better product at the same cost or a cheaper version of the same product, wi be abe to dominate the market pace. Companies that do not, wi be driven from the economic scene. Even when competitors make appropriate but deayed technoogica response, ost market shares may not be regained. Athough it is difficut to measure, except with hind-sight, the importance of technoogica change to an industry, two measures that may give reasonabe indication are suggested: The amount the industry spends on R&D. This coud either be an absoute amount or it coud be a reative measure such as R&D expenditure as a proportion of saes. The atter basis is increasingy becoming the more standard practice. The PIMS measure of innovation. This measure defines the eve of innovation as the proportion of revenues that accrue from products that have been introduced during the past three years. This measure is good indication of the reative importance to the industry of new products. When the anaysis of the technoogica environment has been competed, the threats and opportunities that prevai shoud be weighed. Industry Environment To anayse industria environment we shoud begin by understanding its purpuse. The purpose of studying industria environment or anaysing industry structure is to gain an understanding of the competitive reationships among groups of firms that compete for a specific market. The first step is a broad anaysis of industry environment. This is iustrated in Exhibit 6.7.

91 Environment - Concept, Components and Appraisa 91 Industry trends Market size/age Industry attractiveness Competition number/size/ power Rues of the game Intensity/strategy/profits Exhibit 6.7: Industry Structure A sight eaboration of the factors may be hepfu. Market size/age: Is the market reativey sma or arge, and can it be broady characterised by its stage of deveopment (start-up, emerging, growth, maturing, decining)? Number of competitors: What is the eve of competition for the market? Are there many sma rivas or a few arge, dominant ones? Aso, how easy is it for new payers to enter the industry? Some industries are easy to enter, others difficut. The rues of the game: How do firms compete in this market? Do they compete on price, quaity, technoogy, service, etc? What is the average eve of profitabiity? Is it a profitabe market or is it a high voume, ow margin fied? As an industry matures there is usuay a movement towards the cost advantage of economies of scae. When there is a major change in the cost or profit structure, competition wi tend to intensify, as, for instance, if price cutting strategies are used. Industry trends/driving forces: What are the industry trends and how rapidy do they change? Is the industry growing and innovative or stabe and sow to change? The rate of market growth is a critica factor because it infuences the equiibrium between demand and suppy. In a sow-growth industry, competition tends to increase because any growth must be taken from a riva s share. Industry attractiveness: The overa attractiveness of an industry is determined by the interaction of these key structura forces. The higher the rate of growth and the weaker the competition, the more attractive the industry. Techniques of Industry Structure Anaysis The initia anaysis of industry structure provides a map of the competitive environment. The strategist aso needs to anticipate future trends: new deveopments that may change the existing structure. There are severa techniques that may be empoyed to identify the underying competitive aignment and the major payers. Beow, We briefy discuss two such.

92 92 Strategic Management Structura Mapping One method that may be used to examine industry structure is termed structura group mapping. The map is deveoped by potting competing firms on two industry dimensions; for exampe, product quaity versus distribution channes. To give an added dimension of strategic input, the area of each circe representing a company may be made proportiona to its market share. When these two-dimensiona pottings are stretched together, the dominant strategy of each competitor and its effectiveness shows up quite distincty. Competitive Arena Mapping A second industry anaysis technique is termed competitive arena mapping. The tota market segment is diagrammed around customer needs and product offerings. This map of the information-communication arena aows the strategist to examine a the ikey moves by key payers and to anticipate possibe changes in competitive forces. By highighting the argest markets, it is possibe to visuay portray the strategy and direction of key competitors, such mapping of the information-communication arena is shown in Exhibit 6.8. It wi be seen from this iustration that competitors from a directions are converging on the growing microcomputers and office-automation markets. What is more important is the sure indication of increased competition in the future from giants converging on the attractive markets, and therefore this advance information enabes a choice to be made of the suitabe strategic response. Strategic Group Anaysis The probem that the strategic anayst wi face is conceiving of the nature of competition that the organisation faces. In particuar, who are the most direct competitors and on what basis is competition ikey. Given this understanding it is then possibe to gauge the extent to which strategy is appropriate in the competitive circumstances. One probem here is that the idea of the industry is not particuary hepfu. The boundaries of an industry can be very uncear and may not provide any precise deineation of competition. In a given industry there may be many companies each with different interests and competing on different bases. There is a need for some intermediate mapping of the basis of competition between the individua firm and the industria eve. Strategic group anaysis is one means of providing this intermediate eve of anaysis. The idea is to identify more finey defined groupings of organisations so that each grouping represents those with simiar strategic characteristics, foowing simiar strategies or competing on simiar bases. Porter argues that such groups can usuay be identified using two, or perhaps three, sets of key characteristics as a basis of competition. It is usefu to consider the extent to which organisations differ in terms of such characteristics and aso show simiarities. Some exampes of such characteristics woud be: extent of product (or service) diversity; extent of geographic coverage; number of market segments served; distribution channes used;

93 Environment - Concept, Components and Appraisa 93 extent (number) of branding; marketing effort (e.g. advertising spread, size of saes force, etc.); extent of vertica integration; product or service quaity; technoogica eadership (a eader or foower); Exhibit 6.8: Competitive Arena Map R&D capabiity (extent of innovation in product or process); cost position (e.g. extent of investment in cost reduction) utiisation of capacity; pricing poicy; eve of gearing; ownership structure (separate company or reationship with parent); reationship to interest groups (e.g. government, the city); size of organisation. This sort of anaysis is usefu for a organizations that seek to understand competition. What the anayst is ooking for is to estabish which characteristics most differentiate firms or groupings of firms from one another. Moreover, it is ikey to yied a better understanding of the competitive characteristics of competitors. It aso aows the anayst to ask how ikey or possibe it is for the organization to move from one strategic group to another. Mobiity between groups is of course a matter of considering the extent to which there are rea barriers to entry between one group and another in terms of how they compete.

94 94 Strategic Management We discuss here two modes for strategy formuation in which industry and industria environment anaysis pays a key roe. The BCG Growth/Share Matrix One of the most widey used portfoio approaches to corporate strategic anaysis has been the growth/share matrix pioneered by the Boston Consuting Group and iustrated in Exhibit 6.9. Stars Question mark Market growth rate High Low Net users of resources Net suppiers of resources Harvested or iquidated Cash Cows High Dogs Low Reative competitive position Exhibit 6.9: BCG Growth/Share Matrix The BCG matrix faciitates strategic anaysis of ikey generators and optimum users of corporate resources. Market growth rate is the projected rate of saes growth for the market to be served by a particuar business. Market growth rate provides an indicator of the reative attractiveness of the market served by each of the businesses in the corporation s portfoio. The reative competitive position is usuay expressed as the ratio of a business market share divided by the market share of the argest competitor in the market. Each business unit can aso be represented as a circe in the matrix. The size of the circe represents the proportion of corporate revenue generated by that business unit. This provides visuaisation of the current importance of each business as a revenue generator. Market growth rate is frequenty separated into high and Mow areas by an arbitrary 10 percent growth ine. The reative competitive position is usuay divided as a reative market share between 1.0 and 1.5 so that a high position signifies market eadership. Once potted, business units wi be in one of the four ces with differing impications for their roe in an overa corporate-eve strategy. The GE-Mckinsey Nine-ce Panning Grid (Directiona Poicy Matrix) Genera Eectric, assisted by McKinsey, deveoped a strategic panning grid which attempted to correct some of the imitations of the BCG matrix approach. The grid is iustrated in Exhibit First the GE grid uses mutipe factors to assess industry attractiveness and business strength, rather than the singe measures (market share and market growth, respectivey) empoyed by the BCG matrix. Second, GE expanded the matrix from four ces to nine,

95 Environment - Concept, Components and Appraisa 95 repacing the high/ow axis with a high/medium/ow one to draw finer distinctions between business portfoio positions. To determine which axis a business unit fas under, the company s business unit is rated on mutipe sets of strategic factors within each axis of the grid. Competitive Environment The best method for carrying out a study of the competitive environment is through a structura anaysis. Exhibit 6.11 provides a mode. Competitive Advantage Anaysis The choice of competitive strategy is determined first by the ong-term profitabiity of an industry, an essentia ingredient in predicting the profitabiity of the firm, and second, its reative competitive position within an industry. Hoffer and Schende have suggested four steps for anaysis of these factors. Exhibit 6.10: Genera Eectric/McKinsey Nine-Ce Panning Grid Potentia Entrants Threat of entrants Suppiers Bargaining Power Competitive Rivary Buyers Bargaining Power Substitutes Threat of substitutes Exhibit 6.11: A Mode for Structura Anaysis of the Competitive Environment

96 96 Strategic Management i. Deveop an interna anaysis profie of the organisation s principa resources and skis in severa broad areas such as financia, marketing, organisationa, production, human resources, and technoogi-ca. ii. iii. iv. Determine the key success requirements of the product/market segments in which the organisation competes. Compare the interna profie to the key success requirements to determine the major strengths on which an effective strategy can be based, and the major weaknesses to be overcome. Compare the organisation s strengths and weaknesses with those of its major competitors to identify which key poicies are sufficient to yied a competitive advantage in the market pace. Perhaps the idea of competitive advantage requires some eucidation. A competitive advantage is a position that offers an opportunity for higher profits in reation to competitors by: Differentiating products from competition. Concentrating on specific market segments. Focusing on production or distribution channes. Using seective price/cost structures. Whatever the method used, the objective is to estabish a distinct, favourabe differentiation from riva firms. This, however, raises a basic strategic issue: how can we strengthen our competitive position in reation to competitors? Four basic manageria issues have been suggested: i. The abiity to understand competitive interaction as a compete dynamic system, incuding competitors, customers, money, peope, and resources. In other words, how does the firm compete in each of its basic businesses or product groups? ii. iii. iv. The abiity to use this understanding to predict the consequences of a given intervention in that system. In effect, how does the firm respond to changing conditions? How wi it take advantage of new opportunities, reduce competitive threats, and strengthen the firm s own competitiveness? The avaiabiity of uncommitted resources that can be dedicated to different uses and purposes in the current circumstances. The wiingness to deiberatey act to make the commitment. Integrating the activities of various divisions, products, and functions into a committed corporate cuture and strategy. The purpose of strategy is to maintain or gain a position of advantage in reation to competitors. An advantage is gained by seizing opportunities in the environment so that the organisation can capitaise upon its areas of strength. The abiity of firms to identify and capitaise on the underying industry structure varies tremendousy. Most industries are characterized by one or more profitabe eader, a group of smaer, more focused

97 Environment - Concept, Components and Appraisa 97 competitors, and a arge number of firms hoding in the mid-ranges with ower performances. This pattern emerges ceary when comparing saes voume with profitabiity. Large firms tend to dominate industry by achieving economies of scae, with resuting cost advantages. Smaer firms main-tain a high profit with ower voume by focusing on a speciaized market segment. Mid-range firms remain at the bottom, being unabe to reaize competitive advantage. Being unabe to take advantage of economies of scae and not having adopted the focusing strategy, they are stuck in the midde. Competitive anaysis provides the framework for diagnosing strategic forces in the environment. It can hep prioritize strengths and weaknesses, and ocate possibe vunerabiities of rivas: a strategic window of opportu-nities that the strategist may be abe to expoit. Competitive anaysis shoud be an ongoing process if strategy formuation is to be effective. The strategy maker must identify the key success requirements for each industry situation. The strategic window concept refers to the timing of marketing opportunities. It is easier to enter when the window opens and difficut to do so after it coses. Thus IBM missed the aptop PC market window, the opportunity being taken by Zenith s Z-181. By the time the IBM aptop PC came to the market, the window was cosed. The important and reated aspects of timing and when require reference at this point. Whie discussing the concept of strategic windows, we referred to the faiure of the IBM aptop PC as against Zenith s Z 181. It is not as if IBM acked the resources or key success requirements, nor was there any error in choosing the fied of diversification. What was missing, however, was an adequate strategic concept about the timing of the move. In a strategic decisions, it is not enough ony to ook at opportunities and strengths. The third and critica eement of successfu crafting of strategy is choosing the time eement correcty. The Marketing Segment The marketing segment fas somewhere between the industry and competitive segments. Because of its significance and importance, it is being considered under a separate heading. The foowing environmenta indicators are usuay considered to be the fundamenta determinants of the demand for goods and services: The size and affuence of the market: A primary determinant of demand is the absoute size and affuence of the market for the product. The size and the affuence of the market have ed to gobaisation, and most goba companies seeking roes in the US market. The factor of size has aso been instrumenta in the deveopment of a singe European market. The trends in the market: Within a markets there are other indicators and trends that are of great significance when considering the potentia of the market. Among the more important are the foowing: Tota popuation trends: growing, static, or decining?

98 98 Strategic Management Trends in segments of the popuation: products argey tend not to be targeted at the whoe popuation but rather at particuar segments. It is, therefore, important to know how the different target segments are changing. Income trends: e.g. is the eve of income in the popuation increasing, decreasing or static, and how is the distribution of income among the various segments chang-ing? Stage in industry/product ife cyce: from the perspective of environmenta assessment it. is important for managers to be informed about the stage at which their industry is in its ife cyce. Market Identification At this stage the company attempts to identify in its environment market opportunities that it may be abe to successfuy expoit. This is when marketing research is undertaken in order to ascertain the extent and nature of opportunities, and to assess the company s interna abiity to expoit them. At this stage there is genera ack of detai in the proposed actions; it is essentiay exporatory and is reay concerned with seeing if there is a possibe match between the market and the company s capabiities, in-cuding its existing (and potentia) range of products or services. Market Segmentation Frequenty used bases of segmentation for consumer goods incude: Demography: age, sex, famiy size, income, occupa-tion, reigion, race, etc. Geography: country, region, city, town, cimate, etc. Socia basis: cass, education, occupation, etc. Product function: use sought, benefit sought, rate of usage, etc. Buyer behaviour: of actua and potentia consumers. It shoud be noted that market segmentation is often more straightforward for consumer goods than for industria goods because of the great range of uses to which many industria goods can be put and aso because there is much greater customer heterogeneity. The criteria for deciding which segments are most attractive wi vary from industry to industry, but in genera the foowing tend to be considered important infuences: Current and future growth rate of the segment in terms of voume and vaue. The degree and nature of existing competition: threats of new entrants, threats of substitutes, power of buyers, eve of rivary among existing competition, eves of profitabiity. Product Positioning Once a company has decided upon the target markets, the next stage is to determine how it ought to position its products in these in reation to competitors offerings. This invoves assessing how competitors products meet customers needs and then deveoping marketing strategies to meet these needs beter. Product positioning is a

99 Environment - Concept, Components and Appraisa 99 vita part of the process, because it is here that managers must see to the heart of the reason for competitors success and more importanty, decide upon how they wi position their own products or services so that consumers are induced to buy these. It is suggested that this can be accompished in three steps: i. Decide upon the criteria that distinguish the various products currenty avaiabe in the target market. ii. iii. Draw up a series of product pricing maps for competitors. This graphicay shows how products compete, using two key customer criteria as axes. The products are represented by circes whose areas are proportiona to their annua saes. Exhibit 6.12 iustrates such a map. Decide upon possibe positions for the company s product on the product positioning map and define the quaities associated with the position chosen. Marketing Mix Strategy Exhibit 6.12: The Product Positioning Map In order to position a product in a desired ocation in its target market segment, a company has at its disposa a great number of instruments. These incude: the quaity of the product in terms of features such as stye and image; the distribution, i.e. by whoesaer, agent, etc.; the promotion of the product in terms of advertising, methods of seing; the price of the product. These various instruments, which are used to infuence consumers have been grouped together by McCarthy under four headings: product, pace, promotion, and price, and these broader sets of strategy instruments have become known as marketing mix. The most commony used eements of the marketing mix are shown in Exhibit At this stage, the task is to bend various eements from the marketing mix into a combination that enabes the company to position its products in markets by an appropriate mix of the products, pace, promotion, and price variabes, so that it achieves its goas.