STRATEGIC MANAGEMENT (As per New Syllabus of Six Semester BBM, Bangalore University, w.e.f )

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2 STRATEGIC MANAGEMENT (As per New Syllabus of Six Semester BBM, Bangalore University, w.e.f ) G. Sudarsana Reddy M.Com., MBA, MFM, Ph.D. Assistant Professor, Dept. of Studies & Research in Commerce Tumkur University Tumakuru (Karnataka) K. Aswathappa, Ph. D. Former Director, Canara Bank School of Management Studies, Bangalore University, Bengaluru. MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

3 Authors No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publishers. First Edition : 2015 Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd., Ramdoot, Dr. Bhalerao Marg, Girgaon, Mumbai Phone: / , Fax: himpub@vsnl.com; Website: Branch Offices : New Delhi : Pooja Apartments, 4-B, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi Phone: , ; Fax: Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur Phone: , ; Telefax: Bengaluru : No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands, Madhava Nagar, Race Course Road, Bengaluru Phone: , , , Hyderabad : No , Lingampally, Besides Raghavendra Swamy Matham, Kachiguda, Hyderabad Phone: , Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai Mobile: Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth (Near Prabhat Theatre), Pune Phone: / ; Mobile: Lucknow : House No 731, Shekhupura Colony, Near B.D. Convent School, Aliganj, Lucknow Phone: ; Mobile: Ahmedabad : 114, SHAIL, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura, Ahmedabad Phone: ; Mobile: Ernakulam : 39/176 (New No: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi Phone: , ; Mobile: Bhubaneswar : 5 Station Square, Bhubaneswar (Odisha). Phone: , Mobile: Indore : Kesardeep Avenue Extension, 73, Narayan Bagh, Flat No. 302, IIIrd Floor, Near Humpty Dumpty School, Indore (M.P.). Mobile: Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata , Phone: , Mobile: Guwahati : House No. 15, Behind Pragjyotish College, Near Sharma Printing Press, P.O. Bharalumukh, Guwahati , (Assam). Mobile: , , DTP by : HPH, Editorial Office, Bhandup (Sunita Jadhav) Printed at : M/s. Aditya offset Process(I) Pvt. Ltd., Hyderabad. On behalf of HPH.

4 PREFACE Strategic Management has been in use for thousands of years. Great battles in the past were fought and won through successful strategies. It is only now that the terms Strategy, and Strategic Management are being used increasingly in business and management circles. This is justified because; intense competition has literally converted marketplaces into veritable battle fields. Business that strategise perfectly and execute them effectively will only survive. We have tried to make strategic management as simple as possible, without compromising on the intricacies and dynamism on the subject. However, we have tried our best to retain the rigour of the subject and the same time make it easily comprehendible to the students. We have been able to do this by illustrating the concepts with numerous examples. Strategic Management has 13 chapters, though primarily written for the students pursuing BBM course, Strategic Management shall be useful for general readers also. We are very much grateful to Sri. Niraj Pandey and Mr. Vijay Pandey of HPH, for having given us the opportunity to write this book. G. Sudarsana Reddy K. Aswat happa

5 SYLLABUS Objective: The objective of this course is to expose the students to the various strategic issues such as strategic planning, implementation and evaluation etc. Unit 1 : Introduction to Strategic Management (10 Hours) Introduction - Meaning and Definition - Need - Process of Strategic Management - Strategic Decision Making - Business Ethics - Strategic Management. Unit 2 : Environmental Appraisal (12 Hours) The Concept of Environment - The Company and its Environment - Scanning the Environment, Technological, Social, Cultural, Demographic, Political, Legal and Other Environmental Forces. SWOT Analysis - Competitive Advantage - Value Chain Analysis. Unit 3 : Strategic Planning (13 Hours) Strategic Planning Process - Strategic Plans during Recession, Recovery, Boom and Depression - Stability Strategy - Expansion Strategy - Merger Strategy - Retrenchment Strategy - Restructures Strategy - Levels of Strategy - Corporate Level Strategy - Business Level Strategy and Functional Level Strategy - Competitive Analysis - Porter s Five Forces Model. Unit 4: Implementation of Strategy (15 Hours), Aspects of Strategy Implementation - Project Manipulation - Procedural Implementation - Structural Implementation - Structural Considerations - Structures for Strategies - Organizational Design and Change - Organizational Systems. Behavioral Implementation - Leadership Implementation - Corporate Culture - Corporate Policies and Use of Power. Functional and Operational Implementation - Functional Strategies - Functional Plans and Policies. Financial - Marketing - Operational and Personnel Dimensions of Functional Plan and Policies - Integration of Functional Plans and Policies. Unit 5 : Strategy Evaluation (10 Hours) Strategy Evaluation and Control - Operational Control - Overview of Management Control - Focus on Key Result Areas. Skill Development l l l l l l Present a chart showing Strategic Management Process. Select any organization and undertake SWOT analysis. Present strategy followed by an FMCG company in Indian Market. Select any sector and make competitive analysis using Porter s five forces model. List social responsibility action initiated by any one company. Select any organization and identify the Key Result Areas

6 CONTENTS Chapter 1 Introduction to Strategic Management 1 28 Nature of Strategy Hierarchical Levels of Strategy Process and Strategic Management Vision, Mission, Objectives Key Attributes of Strategic Management Benefits of Strategic Management Reasons for Failure of Strategic Management Strategic Decision Making Strategists and their Role in Strategic Management Strategy and Business Ethics Liniaing Stra Trgy with Ethics Review Questions Skill Building Exercises Chapter 2 Environmental Appraisal External Concept of Environment The Company and its Environment Objectives of Environment Appraisal Scanning/Process of Environmental Analysis Competitive Environment Porter s Five Forces Model New Forces Driving the New Economy Strategic Groups within Industries Review Questions Skill Building Exercises Chapter 3 Environmental Appraisal Internal Scanning/Process of Internal Environment Appraisal Strengths and Weaknesses What Do They Convey? Measuring Strengths and Weaknesses Distinctive Competencies and Competitive Advantage SWOT Analysis Value Chain Analysis Generic Building Blocks of Competitive Advantage Competitive Advantage Review Questions Skill Building Exercises

7 Chapter 4 Corporate Level Strategy Nature of Corporate Level Strategy Growth Strategies Integration Diversification Strategy Review Questions Skill Building Exercises Chapter 5 Mergers and Acquisitions Mergers and Acquisitions Evolution Mergers and Acquisitions in India Types of Mergers Reasons for Mergers Benefits of Mergers Evaluation of Merger Proposal Reasons Why Mergers Fail Strategies for a Successful Acquisition Takeovers Strategic Alliances Joint Venture Review Questions Skill Building Exercises Chapter 6 Stability and Retrenchment Strategies Nature of Stability Strategies Retrenchment Strategies Review Questions Skill Building Exercises Chapter 7 Corporate Restructuring Strategy Nature of Corporate Restructuring Types/Forms of Corporate Restructuring Major Categories of Corporate Restructuring Review Questions Skill Building Exercises Chapter 8 Business Level Strategies Nature of Business Level Strategy Cost Leadership Strategy Differentiation Strategy Focus Strategy Review Questions Skill Building Exercises

8 Chapter 9 Implementation of Strategy Nature of Strategy Implementation Interrelationship between Formulation and Implementation Issues in Strategy Implementation Method of Resource Allocation Project Implementation Procedural Implementation Review Questions Skill Building Exercises Chapter 10 Structural Implementation Considerations Importance of Organisation Design The Consequences of Poor Organisational Design Key Factors in Organisation Design Strategy Structure Relationship Types of Organisation Structures Design Decisions Organisational Systems Review Questions Skill Building Exercises Chapter 11 Behavioural Implementation Leadership Nature of Organisation Culture Cultural Dimensions Types of Organisation Cultures Parameters of Good Corporate Culture Creation of Culture Sources of Organisation Culture Culture Artifacts Sustaining the Culture Effects of Culture Changing Organisation Culture Guidelines for Changing Culture Culture and Strategy Implementation Politics and Power Impact of Power and Politics on Strategy Ethics of Power and Politics Review Questions Skill Building Exercises

9 Chapter 12 Functional and Operational Implementation Functional Policies and Plans Need for Functional Plans and Policies Development of Functional Plans and Policy Review Questions Skill Building Exercises Chapter 13 Strategic Evaluation and Control Nature of Strategy Evaluation Benefits of Strategy Evaluation Types of Organisational Control Characteristics of an Effective Evaluation System Strategic Audit Review Questions Skill Building Exercises

10 Introduction to Strategic Management 1 CHAPTER 1 INTRODUCTION TO STRATEGIC MANAGEMENT LEARNING OBJECTIVES After reading this chapter, you should be able to: Give meaning, definition of strategic management. Bring out the nature of strategy. Discuss the strategy developing models. Explain hierarchical levels of strategy. Detail the strategic management process. Discuss the attributes of strategic management. Bring out the benefits and reasons for failure of strategic management. Give the meaning of strategic decision making. Explain the role of strategists in decision making. Without a strategy, an organisation is like a ship without a rudder, going around in circles. Its like a tramp, it has no place to go. By Joel Ross and Michael Kami Running a business was a simple and easy affair during the License Raj era. Competition was less severe. Where it existed, only domestic firms were competing with each other. There was huge market but scarce supplies. Whatever that was produced, was grabbed by waiting buyers. No wonder, one had to wait for seven years to get a phone connection, and 15 years to get cooking gas connection. Not anymore. Thanks to the economic liberalisation, set in motion in 1991, things changed significantly. Competition is heating up (from foreign firms included) and margins are falling though volumes are increasing. In this scenario, it has become extremely difficult for any businessman to survive and grow. He needs to be always on the toes. He needs to visioneer, strategise and execute so that he can enjoy competitive advantage. In other words, today is businessman should practice the art and science of strategic management. What are strategies? What is strategic management? These and other questions are explained in this Chapter.

11 2 Strategic Management MEANING AND DEFINITION OF STRATEGIC MANAGEMENT Strategic management refers to the process of formulating and implementing strategies and evaluating the effectiveness of the strategies. David defines strategic management as the art and science of formulating, implementing and evaluating cross-functional decisions that enable an organisation to achieve its objectives. NATURE OF STRATEGY As will be explained letters, strategic management refers to the process of formulating strategies, implementing them and evaluating the results. The first step in strategic management process is the formulation of strategies. It is useful that we are clear about what a strategy means. The concept of strategy has been borrowed from the military and adapted for use in business. In business, as in the military, strategy bridges the gap between policy and tactics. Together, strategy and tactics bridge gap between end and means (See Figure 1.1). Deploy Employ ENDS MEANS Fig. 1.1: Strategy and Tactics Strategy refers to maneuvering troops into position before the enemy is actually engaged. In this sense, strategy refers to the deployment of troops. Put in simple words, strategy is an art of war. Given the centuries old military origins of strategy, it is sensible to begin the examination of strategy with the military view. Sir Basil H. Liddell Hart examines wars and battles from the time of the ancient Greeks through World War II. Concluding his review of wars, policy, strategy and tactics, Liddell Hart arrives the following short definition of military strategy: The art of distributing and applying military means to fulfill the ends of policy. It would be very easy and suitable to adapt this definition to the business after deleting the word Military from the above definition. An appropriate definition of strategy as it is applied in business is given by Henry Mintzberg. He understands strategy in four ways: Strategy is a plan, a how, a means of getting from here to there. Strategy is a pattern in actions over time; for example, a company that regularly markets very expensive products is using a high end strategy.

12 Introduction to Strategic Management 3 Strategy is position; that is, it reflects decisions to offer particular products or services in particular markets. Strategy is perspective, that is, vision and direction. An observation of the above four ways makes it clear that strategy is a carefully crafted plan with a stream of decisions and actions over time. For our purpose, a strategy is: 1. a top management decision that directs organisation and business towards predetermined goal, 2. a carefully crafted plan with a stream of decisions and actions over time, 3. a plan or a course of action that reveals its objectives, purposes, goals, policies and plans that are required in achieving the corporate mission, 4. a unified, comprehensive and integrated plan designed to assure the basic objective of firm is achieved, 5. a plan that helps in developing competitive position, 6. a term that refers to a complex web of thoughts, ideas, insights, experiences, goals, expertise, memories, perceptions, and expectations that provide general guidance for specific actions in pursuit of particular ends, 7. the course we chart, the journey we imagine and, at the same time, it is the course we steer, the trip we actually make. Some significant strategies formulated by corporate India in the recent past are: 1. Tata Motors acquired Daewoo Commercial Vehicle company, Korea (March 2004 for $102 million) Hispano Carrocera, Spain (December 2005 for $15.5 million) with the idea to enter into Africa and Asia Market. 2. Microsoft Launches XBox 360 on 24 September 2007 at less than the price of Sony s playstations Xbox, PS3; and it is positioned as a home entertainment device. It would allow games to play online with people across the world via Xbox line. It is launched with the idea to take the growing market ($700 million by 2010 from $30 million now). 3. Tata Steel acquires Corus group (Europe s second largest steel producer) for $4.3 billion, as a defining moment for Ratan N.Tata Company and consistent with its strategy of growth through international expansion. The acquisition is a shared vision of a global strategy. Tata sail with long proud histories, both companies have compatible culture of commitment to stakeholders and complementary strengths in technology, efficiency, product mix and geographical spread. Together they will be even better equipped to remain at the leading edge of the fast changing steel industry. 4. Vodafone (UK) acquired 67 per cent of Hutchison Essar (India s fourth largest mobile phone company), with the idea to enable Vodafone s shareholders to benefit from their increased investment in the Indian mobile phone market. Vodafone aimed to raise its exposure to high growth emerging markets and offset prospective Ebitda declines in Europe.

13 4 Strategic Management HIERARCHICAL LEVELS OF STRATEGY Strategies are formulated at three levels of organisation. The three levels are: corporate level, business level and functional level. (See Fig. 1.2). Corporate Level Strategy Business Level Strategy Functional Level Strategy Fig. 1.2: Hierarchical Level of Strategy The three levels of strategy are relevant in a conglomerate a business having multi-plants and multi-divisions. Where the business has a single unit, only two levels corporate level and functional level are relevant. 1. Corporate Level Strategies At the top of the hierarchy is corporate level strategy. Corporate level strategy is formulated by Chief Executive Officer (CEO), Board of Directors (BODs), Senior Executives and other corporate staff. These managers occupy decision making power at the apex level. These top level individuals are responsible for overall purpose and director of an organisation. Corporate levels executives set objectives, analyse internal and external environment, formulate strategies, and ensure their implementation also. Tata Group is into a wide range of businesses, including Indian Hotels (IHCL), Tata Auto Group Systems, Tata Chemicals, Tata Coffee, Tata Motors, Tata Tea, Tata Technologies, Tata Consultancy Services, and VSNL. Tata Group is headed by Chairman Mr. Ratan Tata who decides on overall strategic objectives, allocates resources, and decides investment and disinvestment. Apart from this, he also oversees the performance of business level managers and also acts as a link between managers and its owners (shareholders). Therefore, corporate level managers are viewed as the guardians of shareholder wealth. 2. Business Level Strategies The second or middle decision making is at the business level. The business is a self-contained division that provides a product or service for a particular market. For example, Wipro Oil Division; or software division. Each business or division is called strategic business unit (SBU). Management at business level consists of the head of the business and a few corporate managers. The role of these managers is to translate corporate strategy into concrete objectives and strategies for individual businesses. Business level managers should determine how the firm will compete

14 Introduction to Strategic Management 5 successfully in the targeted product market, identify new promising market segment, which products and services should be developed in which markets and the like. Business level strategies should not become standalone entities. They need to be aligned with corporate level strategies. (See Fig. 1.3). Corporate Level Head Office Business Level Business 1 or SBU Business 2 or SBU Business 3 or SBU Functional Level HR Finance Production Marketing Information Fig. 1.3: Levels of Strategic Management 3. Functional (Operational) Level Strategies At the bottom of the decision making hierarchy is the functional level strategy. This level is composed of managers of different functional areas: Human Resources, Finance, Production, Marketing, Customer Service, and Research and Development. Functional level managers are responsible for developing annual objectives and short-term strategies of the concerned areas of operation. Operational level strategy was encouraged by Peter Drucker in his theory of Management by Objectives (MBO). Operational level strategies are impacted by business level strategies which in turn are influenced by corporate level strategies. Functional level managers must address the issues like efficiency and effectiveness of marketing, production, customer service, thereby help in effective implementation of corporate level strategies and help in achieving firm s goals or objectives. PROCESS OF STRATEGIC ANAGEMENT Essentially strategic management involves strategy formulation, strategy execution and evaluation of the effectiveness of strategy. Broadly, strategic management comprises the following steps: 1. Developing vision, mission and corporate objectives. 2. Analysis the corporate s external competitive environment to identify opportunities and threats. 3. Analysis corporate s internal operating environment to identify its strengths and weaknesses. 4. Formulate and select the strategies on the basis of strengths, weaknesses, opportunities and threats (SWOT Step 2 and 3). 5. Strategy implementation. 6. Strategy evaluation and control. (See Fig. 1.4).

15 6 Strategic Management The following figure 1.4 depicts the process of strategic management. The first step can be technically known as strategic intent, the second and third steps together normally referred to as environmental analysis (SWOT analysis), environmental analysis and the fourth step called as strategy formulation and the remaining steps are called as if they are written. The following paragraphs discuss strategic management process. Strategic Intent Vision, Mission and Goals (Step - 1) Environment Analysis : SWOT External Environment Internal Environment Opportunities Strengths Threats Weaknesses (Step - 2) (Step - 3) Strategy Formulation Corporate Level Strategy Business Level Strategy Functional Level Strategy (Step - 4) Strategy Implementation (Step - 5) Strategic Evaluation and Control (Step - 6) Fig. 1.4: Strategic Management Model Step 1: Developing Vision, Mission and Objectives Strategic management process begins with the development of corporate vision, mission and objectives. Every organisation has a vision, mission and objectives, even if they are not consciously developed, written or communicated. If the firm s existing vision, mission and objectives are not relevant to its business, they need to be rewritten. A corporate vision delineates management s aspirations for the business, providing a panoramic view of where we are going and convincing rationale for why this makes good business sense for the organisation. A mission statement defines

16 Introduction to Strategic Management 7 the core purpose of the organisation why it exists; it examines the raison d être for the organisation beyond simply increasing shareholder s wealth, and reflects employees motivation for engaging in the company s work. Effective missions are inspiring, long-term in nature and easily understood and communicated. Objective is a desired future state or goal that a company attempts to realise. The goals or objectives for an organisation are based on vision and mission. Objective must be specific, realistic and must be measurable. The detailed discussion on vision, mission and objectives is in order. VISION Vision is the starting point for articulating organisation s hierarchy of goals and objectives. A vision statement is a vivid idealised description of a desired outcome that inspires, energizes and helps firm to create a mental picture of its target. It represents a destination that is driven by and evokes passion, but it does not specify the means that will be used to reach the desired destination. The vision provides the point of reference on the horizon a beacon of light. It seeks to answer the basic question, what do we want to become? The corporate success depends on the vision articulated by the chief executive officer or the top management. In other words, developing and implementing a vision is one of a leader s central roles. CEO or top management need to have not only a vision statement but also a plan to implement it. This view was supported by a research conducted with sample of 1500 top level employees (630 senior leaders and 870 CEOs) from 20 different countries. The respondents were asked what they believed were the key traits that leaders must have ninety-eight per cent of respondents opined that a strong sense of vision, was the most important trait. Similarly, when asked about the critical knowledge skills, the respondents cited strategy formulation to achieve a vision, as the most important skill. Examples of Vision 1. Disneyland To be the happiest place on earth. 2. ONGC To be world-class and gas company integrated in energy business with dominant Indian leadership and global presence. 3. McDonald s - To be world s best quick service restaurant. 4. P&G Be and be recognised as, the best consumer products and services company in the world. 5. Toyota To become the most successful and respected car company in each market around the world. The vision statement may also contain slogan, a diagram, or a picture whatever grabs attention. Take example of Canon s battle with Xerox, the Canon s slogan or battle cry was Beat Xerox. Total customer satisfaction, is the Motorola s slogan. How is Vision Created? Creating a vision statement begins with and relies heavily on intuition and dreaming. In the process of creating vision, top management may have brainstorming sessions with staff or Board. By using this exercise, the organisation may evolve a vision statement. In the brainstorming session, the following questions are debated:

17 8 Strategic Management How do you want your community to be different? What role do you and your organisation play in your community? What will success look like? The vision may evolve at the end of brainstorming session or it may form in one person s head in the shower one morning. Vision takes form at the end of group discussion or in one person s head. It should consist of two major components. (1) Core ideology, and (2) Environed future. 1. Core Ideology: It means the long lasting character of a firm as it passes through the changing circumstances like competition, technology or management style. Generally, core ideology rests on the core values and core purposes. By values, we mean the beliefs, business principles, and practices that are incorporated into the way the company operates and the behaviour of the organisation personnel. Company value statements generally contain between four and eight values (treatment of employees and customers, integrity, ethics, innovativeness, emphasis on quality service, social responsibility and community citizenship) which ideally, are tightly connected to and reinforce the company s vision, strategy, and operating practices. The typical values statements consists of Ethics, Trust, Customer Focus, Teamwork, etc. Example of values. Initiative, motherhood etc. Microsoft: As a company and as individuals, we value: Integrity and honesty. Passion for customers, for our partners, and for technology. Openness and respect fullness. Taking on big challenges and seeing them through constructive self-criticism, selfimprovement, and personal excellence. Accountability to customers, shareholders, partners, and employees for commitments, results and quality. Intel s values: Discipline, risk taking, quality, customer orientation, a results-oriented atmosphere and being a great place to work guide the company s business behaviour and pursuit of its core mission of being the building block supplier to the Internet economy. Ford Motor Company: The customer is Job 1. We do the right thing for our customers, our people, our environment and our society. By improving everything we do, we provide superior returns to our shareholders. P&G: P&G is its people and the values by which we live. We attract and recruit the finest people in the world. We build our organisation from within, promoting and rewarding people without regard to any difference unrelated to performance. We act on the conviction that the men and women of Procter & Gamble will always be our most important asset. DuPont Company: Which calls itself a Science Company, and makes a wide array of products, stresses four values safety, ethics, respect for people and environmental stewardship? The first three have been in place since the company was founded over 200 years ago by E.I. DuPont. Managers who are involved in creating vision should connect values to the strategic vision, by explaining how the vision is compatible with the firm s value set. What about the values if it is a

18 Introduction to Strategic Management 9 new company? If the company is new one or with week set of values, then managers should consider what values, beliefs and operating principles will help to drive the vision forward. Finally, after considering values and beliefs, a company can officially announce and adopt the vision. Envisioned Future: It is consistent long-term goal and description of what it will be like to achieve that goal. Caution in Writing Vision: Do not try to write a vision statement with a group, because groups are meant for many things, but writing is not one of them. As one or two people to try drafting a vision statement based on group s discussion, bring it back to group and revise it until you have something that your members can agree on and that your leaders share with enthusiasm. In order to become really effective, an organisational vision statement must become assimilated into the firm s culture. Benefits of Having a Strategic Vision The process and outcome of visioning may seem vague and superfluous. But the long-term benefits are substantial: 1. Breaks you out of boundary thinking. 2. Provides continuity and avoids stumble effect of strategic planning fits and states. 3. Identify direction and share sense of purpose. 4. Promotes interest and commitment. 5. Encourages openness to unique and creative solutions. 6. Encourages and builds confidence. 7. Alerts stakeholders to needed change. 8. Promotes laser-like focus. 9. Builds loyalty through investment (ownership). 10. Provides competitive advantage through superior efficiency and innovativeness. MISSION Mission follows vision. Creating strategic vision is concerned with what do we want to become? On the other hand, a company s mission statement outlines the core purpose of the organisation, why it exists? The mission examines the raison d être of a company. The vision becomes tangible as a mission statement. A company s mission statement is defined by the buyer needs it seeks to satisfy, the customer groups and market segments it is endeavoring to serve and the resources and technologies that is developing in trying to please its customers. A mission statement is a message designed to be inclusive of the expectations of all stakeholders for the company s performance over the long run. The executives and board who prepare the mission statement attempt to provide a unifying purpose for an organisation, that will lay emphasis on business and thereby path for development. Generally, mission statement addresses the following questions: 1. Why is this firm in business? 2. What are our economic goals? 3. What is our operating philosophy in terms of quality, company image and self-concept?

19 10 Strategic Management 4. What are our core competencies and competitive advantages? 5. What customers do and can we serve? 6. How do we view our responsibilities to stockholders, employees, communities, environment, social issues and competitors? Examples of Mission Statements Microsoft: We work to help people and businesses through the world realise their full potential. Toyota: To contribute to people s lifestyles, society, and the economy through automotive manufacturing. Gillette: To achieve or enhance clear leadership, worldwide, in the existing or new core consumer product categories in which we choose to compete. Goodyear India: Constant improvement in the quality of products and services to meet our customer s needs. This is the only means to success and prosperity for Goodyear India, our associates, and investors. From the above examples of different companies mission statements, we can clearly state that all mission statements are unique (even if they are from same industry) and distinctive, highlight business purposes and also give the means of fulfilling the mission. How is Mission Created? The process of developing mission statement is almost like the one followed for visioneering. The top executive takes the initiative and he or she assisted by team of managers. Together, all will brainstorm, come out with a draft, and after series of revisions, final statement is prepared and that becomes the mission statement of the organisation. Unlike vision, mission statement keeps changing. Components of Mission Statement There are three indispensable components of the corporate mission statements. They are product or service, specific product or customer, and the principal technology for production of products or delivery. The above three components reflect the three dimensions of business. Abell has given almost the same dimensions in his definition for business (See Figure 1.5). Central to Abell s definition are three questions: Who is being satisfied (what customer group)? What is being satisfied (what customer needs)? and How they are being satisfied (by what skills)?

20 Introduction to Strategic Management 11 Who is being satisfied? CUSTOMER GROUPS What is being satisfied? CUSTOMER NEEDS Business Definition How are customer needs are satisfied? DISTNCTIVE COMPETITIVE- NESS Fig. 1.5: Abell s Framework for Defining the Business Abell s definition of business stresses the need for a customer orientation, instead of product orientation. It is because, just selling a product is not enough, it is also essential to sell a product that meets customer needs. Abell s definition helps the firm in leveraging on the changing business environment. But it excludes the values, what management believes in. Fig 1.6 takes another look at the elements of a mission statement. PURPOSE Why the business exists? STRATEGY & SCOPE What business and how? VALUES What management belives in? STANDARDS & BEHAVIOURS The rules that guide how the business operates? Fig. 1.6: Elements of Mission Statements Elements of a Mission Statement 1. A Purpose: Mission statement should consist why does the business exist? Is it there to create wealth for shareholders? Does it exist to satisfy the needs of all stakeholders? 2. A Strategy and Strategic Scope: A strategy may be to produce something. Whereas strategic scope is the boundary that sets terms of geography, market, business method, and so on. Put in simple words, strategic scope reflects the nature of business.

21 12 Strategic Management 3. Standards and Behaviours: Translation of mission into actions, needs to have policies and standards of behaviour. For example, if the business mission includes delivering Outstanding Customer Service, it needs a policy (it may be like attending to customer complaint in the same day of receipt). 4. Values: Values of a company state the beliefs of managers and employees who work in the company. These may include: Loyalty and Commitment. Benefits of Having Mission Statements The involvement of managers and employees in crafting mission can make a difference to business success. King and Cleland have given the following (benefits) of mission statement: 1. It develops unified purpose of organisation. 2. It provides a basis for allocating organisational resources. 3. It helps establish a general tone or organisational climate. 4. It facilitates the translation of objectives into work structure. 5. It specifies organisational purposes, and then to translate these into objectives, in such a way that cost, time, and performance parameters can be assessed and controlled. OBJECTIVES Vision statement tends to be very short in length but broad in scope and can be described as a destination. On the other hand, mission statements are more specific and address questions concerning the reason for an organisation to exist, and its competitive advantage in the marketplace. Vision and mission statements need to be followed by objectives. Mission statements seek to make a vision more specific and objectives are attempts to make mission statements more concrete. Put in simple words, objectives are used to operationalise the mission statement, and use them as performance targets. These objectives act as yardstick for measuring company s performance. Objectives are futuristic that a company attempts to realise. Characteristics of Objectives Well constructed objectives have the following characteristics. Objectives should be: Measurable: Since objectives are yardsticks to measure performance of company, then they should be measurable. As per Bill Hewlett (Co-founder of Hewlett Packard), You cannot manage what you cannot measure...and what gets measured gets done. For example, objective of a company is to maximise customer satisfaction. Customer satisfaction cannot be measurable in quantitative terms. Specific: Objectives should provide a clear message as to what needs to be accomplished. Say company aims at minimising waste by five per cent, thereby increasing by five per cent profit. Appropriate: Since objectives are used to operationalise mission statement, they must be consistent with vision and mission of the organisation. Realistic: It means that objective must be an achievable one, which is given after considering organisation s capabilities and opportunities in the environment. At the same time, it must be challenging but doable (that can be done). If the objective is not realistic, then employees may not show interest in achieving it.

22 Introduction to Strategic Management 13 Timely: Objectives should be achievable in a specific period. After all, as the economist John Maynard Keynes said, In the long-run, we are all dead. A definite time frame for achieving objectives motivates people to work. An easy way to remember the characteristics of a good objective is the acronym, SMART. It stands for Specific, Measurable, Achievable, Realistic, and Time bound. Kinds of Objectives Objectives may be classified as economic and social, primary and secondary, long-term and short-term (see Fig. 1.7). Short-term Primary Economic Objectives Long-term Secondary Fig. 1.7: Classification of Objectives Social 1. Economic and Social Objectives: Economic objectives are those that are aimed at improving financial performance of the company. They are generally quantified and seek to earn more profit, enhance shareholder value and make the company more prosperous. This objective is must. Firm must do. Social Objectives: Social objectives are those that are not aimed at improving firm value. Objectives deviate from the economic objective and seek to serve social interests such as clean environment, health and hygiene and education. 2. Primary and Secondary Objectives: Primary objectives may be dovetailed with economic objectives. Primary objectives seek to enhance organisational profitability. Business development, payment of regular dividends to shareholders, payment of fair wages and providing good working conditions, and provide quality products of reasonable prices are some of the examples of primary objectives. Secondary objectives are the same as social objectives. These seek to serve more of society s interest. Secondary objectives include local area development, payment of bonus, providing free hospital and education facilities to employees; develop industry as a member in the industry and so on. For example, Infosys donated computers to government schools, it is a secondary objective. Social objective is not compulsory. But firm might do. Social objectives/responsibility is discussed in detail in the last Chapter. 3. Short-term and Long-term Objectives: Economic (read primary) and social objectives (read secondary) may be for short-term or long-term. An organisation needs to have both shortterm (say less than one year) and long-term objectives (say more than two years). Short-term objectives may be a means to achieve long-term objectives. For example, if a firm has long-term objectives of doubling its sales within five years cannot wait until the fourth or fifth year to start taking actions or strategies that help in increasing sales. Firm should start from the

23 14 Strategic Management first minute of deciding the long-term objective. In other words, company has to decide annual (or quarterly) targets, to speed up at which long-range objectives are to be achieved. Short-term objective differ from long-term objectives, when organisation is evaluating performance and it cannot reach the long-term objectives in just one year. Short-term objective helps as stair steps. Approaches to Determine Objectives Objectives of an organisation may be determined with the adoption of either top-down approach or bottom-up approach. In the top-down approach, the top level managers (senior managers) determine the objectives for their subordinates. On the other hand, in bottom-up approach, subordinates determine objectives for their job and the same would be presented to top level managers for consideration. Here, top level managers decide objectives by consolidating the subordinates objectives. This approach of setting objectives with little or no guidance from top level, indicates absence of strategic leadership on the part of senior manager. But generally, many organisations adopt top-down approach for setting objectives. This process ensures the financial and strategic performance targets established for different business units, divisions, functional departments and operating units that are directly connected to the achievement of company-wide objectives. For example, top level management of an organisation which has 5 divisions, sets ` 150 crore net profit as target for the next year. The same targeted profit can be raised from all five divisions. After discussing with divisional managers of each division, top level manager may set target for each division. It is not necessarily that target profit of each division should be equal. It may be more for one division or less for another. Top-down approach is beneficial in the following ways: 1. Cohesion: It creates cohesion among the strategies and objectives of different divisions of the organisation; and 2. Unify Internal Efforts: It helps to unify internal efforts to move the organisation along with the strategic path. Areas of Setting Objectives Increase in return on investment, earnings per share, return on shareholders funds and increased shareholders value are achieved, only when objectives are set in all those strategic performance areas. Drucker says objectives need to be set in the eight prime areas: They are market standing; innovation; productivity; physical and financial resources; profitability; manager performance and development; worker performance and attitude; and public responsibility. The eight areas of setting objectives are the strategic areas which are applicable for all manufacturing organisations. Almost the same areas are identified by corporate for setting objectives. Factors Affecting Strategic Objectives Setting Objectives may be set either by top-down approach or bottom-up approach, the people involved in setting objectives have to consider the factors (internal and external) that affect the objectives. Glueck identified four factors that should be considered in setting objectives. They are: the forces in the environment; resources, capabilities and internal power relationships; top executives value system, and knowing past objectives. Let us discuss in detail.

24 Introduction to Strategic Management Enhancing Shareholders Value: As you are aware that shareholders wealth maximisation is the prime objective of any organisation, which had raised capital by issue of equity share capital. But objective setters need to consider not only equity shareholders interest but also other stakeholders (government, employees, creditors, society and customers). Interest of different stakeholders may not match, but managers need to make balance among the interests of different stakeholders. Goal setters need to keep in mind that the interest of stakeholders varies from time to time, indicating that there is a need to shift in the importance attached to different stakeholders interest. 2. Organisational Availability: Objectives are achieved based on the availability of resources (men, machine, material, money) capability and relationship among divisions (ability to share). For example, adding two new attributes to a product needs to spend financial resources on R&D, without which it is not possible to develop new attributes. At the same time, internal power has impact on objectives. Generally, top level (BODs; CEO) managers who have power may set the objectives as per their views. Power affects objectives, which may vary from time to time, because power changes from period to period. 3. Value Systems of Top Management: The value system at top executive level affects in general corporate philosophy and objectives in particular. Values are long-lasting beliefs. Values affect the process of setting objectives. For example, take Muragappa Group of Companies, acquired a liquor manufacturing company, which is running with huge profits. But the Group s values made to close the liquor manufacturing company, because they do not want to make profit by producing a product which is not socially beneficial. 4. Experience of Past Objectives: Organisation might have different objectives in the past due to different reasons. If there is no change in the business environment, then there is a need to follow same objectives, otherwise it had to change objectives. Selling objectives after considering internal and external environment is very important for any organisation. By scanning, environment firm will be able to develop strengths, weaknesses, opportunities and treats (SWOT). Step 2: Analysis of Company s External Environment The second phase of strategic management process is analysis of organisation s external operating environment. The prime purpose of analysing external operating environment is to identify (organisation s) strategic opportunities and threats for the organisation, in which organisation pursues its vision, mission and goals. The key environmental factors that affect an organisation are political and legal, economic, technological, socio-cultural and societal factors. All these factors may be grouped into three categories, they are: (1) industry environment, (2) national environment, and (3) macro environment. This is explained in Chapter 2. Step 3: Analysis of Company s Internal Environment It is the third phase of strategic management process. The essential purpose of the internal analysis is to identify strengths and weaknesses of the organisation. The internal environment of organisation consists of variables that are within the organisation itself. They are the structure, culture and resources. A business becomes strong when it has all these three in balance. The absence of all these or any of them makes the firm weak. For detailed discussion, see Chapter 3.

25 16 Strategic Management Step 4: Strategy Formulation Strategy formulation is the development of long-range plans for the effective management of environmental opportunities and threats. In this step, managers develop a series of strategic alternatives to pursue. The alternative strategies may be at global level, corporate level, business level, and functional level. Managers develop a firm specific model, which will align, fit or match the company s resources and capabilities. Strategies should help build competitive advantage. (Alternative strategies are discussed in detail in Chapters 4, 5, 6, 7 and 8). Step 5: Strategy Implementation After developing alternative strategies and selecting a specific strategy to achieve competitive advantage, strategy developers must ask managers to put it into action. Sometimes, the existing culture, structure and policies may not support the strategy implementation. In such cases, there is a need to change them or modify them according to the requirement. Managers should not pursue a strategy that does not suit the existing culture, structure and policies. Generally, strategy implementation is done by middle and operating level managers, and the same is reviewed by top level managers. (Strategy implementation and the issues relating to this is discussed in Chapter 9, 10, 11 and 12). Step 6: Strategy Evaluation and Control Strategy Evaluation and Control go side by side strategy implementation. Just strategy formulation and implementation may not help in achieving corporate objectives. Good control is critical for corporate success. Strategic evaluation and control is the process in which corporate activities and performance results are measured and monitored with a view to compare actual result with the predetermined target performance. If the corporate objectives are not achieved, then managers need to take corrective action. Evaluation and control helps in identifying weakness in implementing strategies. (See Chapter 13) KEY ATTRIBUTES OF STRATEGIC MANAGEMENT It is useful to discuss briefly the attributes of strategic management for better understanding of strategic management subject and see how this course differs from other functional areas, such as accounting, marketing, operations and finance. The following are the four main attributes of strategic management. Strategic Management Directs the Organisation towards Overall Organisational Goals and Objectives Formulation and implementation of strategy directs the overall organisation s benefit and a single functional area. When we study individual functional (subjects) areas with a view that each subject is the best interest of the firm overall. But a plan adapted by a functional area may not be the best for another functional area. For example, production department may decide to schedule long production runs of similar products in order to lower units costs. However, the standardised output may be counter to what marketing needs in order to appeal to a sophisticated and demanding target market. Therefore, strategic management subject includes cases, and strategic issues from the perspective of the organisation rather than that of the functional area.