STRATEGIC MANAGEMENT

SYLLABUS

UNIT-I
Strategy and Process: Conceptual framework for strategic management, the Concept of Strategy and the Strategy
Formation Process – Stakeholders in business – Vision, Mission and Purpose – Business defi nition, Objectives and Goals
- Corporate Governance and Social responsibility-case study.
UNIT-II
Competitive Advantage: External Environment - Porter’s Five Forces Model-Strategic Groups Competitive Changes
during Industry Evolution- Globalisation and Industry Structure - National Context and Competitive advantage
Resources- Capabilities and competencies–core competencies-Low cost and differentiation Generic Building Blocks of
Competitive Advantage- Distinctive Competencies-Resources and Capabilities durability of competitive Advantage-
Avoiding failures and sustaining competitive advantage-Case study.
UNIT-III
Strategies: The generic strategic alternatives – Stability, Expansion, Retrenchment and Combination strategies - Business
level strategy- Strategy in the Global Environment-Corporate Strategy-Vertical Integration-Diversifi cation and Strategic
Alliances- Building and Restructuring the corporation-Strategic analysis and choice - Environmental Threat and
Opportunity Profi le (ETOP) - Organizational Capability Profi le - Strategic Advantage Profi le - Corporate Portfolio
Analysis - SWOT Analysis - GAP Analysis - Mc Kinsey’s 7s Framework - GE 9 Cell Model - Distinctive
competitiveness - Selection of matrix - Balance Score Card-case study.
UNIT-IV
Strategy Implementation & Evaluation: The implementation process, Resource allocation, Designing organisational
structure-Designing Strategic Control Systems- Matching structure and control to strategy-Implementing Strategic
change-Politics-Power and Confl ict-Techniques of strategic evaluation & control-case study.
UNIT-V
Other Strategic Issues: Managing Technology and Innovation- Strategic issues for Non Profi t organisations. New
Business Models and strategies for Internet Economy-case study.
 STRATEGIC MANAGEMENT
SCHEME OF LESSONS

Page No.

UNIT I
Lesson 1 Conceptual Framework for Strategic Management 7
Lesson 2 Strategy Formation Process 33
Lesson 3 Corporate Governance and Social Responsibility 60

UNIT II
Lesson 4 External Environment 77
Lesson 5 Porter’s Five Forces Model 96
Lesson 6 Globalization and Industry Structure 114
Lesson 7 Competitive Advantages 133

UNIT III
Lesson 8 Strategic Alternatives 159
Lesson 9 Strategic Analysis and Choice 186
Lesson 10 Distinctive Competitiveness 211

UNIT IV
Lesson 11 Strategy Implementation 227
Lesson 12 Strategic Control and Evaluation 252
Lesson 13 Strategic Change, Power, Politics and Conflict 273

UNIT V
Lesson 14 Managing Technology and Innovation 305
Lesson 15 Strategic Issues 330
Lesson 16 New Business Model and Strategies for Internet Economy 341
Model Question Paper 361
 Lesson 1 - Conceptual Framework for Strategic Management

Notes
UNIT I
LESSON 1 - CONCEPTUAL FRAMEWORK FOR
STRATEGIC MANAGEMENT

CONTENTS
Learning Objectives
Learning Outcomes
Overview
1.1 Concepts of Strategy
1.1.1 Characteristics of Strategy
1.1.2 Need for Strategy
1.2 Strategic Management
1.2.1 Elements of Strategic Management
1.2.2 Key Attributes of Strategic Management
1.2.3 Importance of Strategic Management
1.3 Strategic, Tactical and Operational Planning
1.3.1 Benefits of Strategic Planning
1.4 Strategy Makers and Strategic Decisions
1.4.1 Strategic Decisions
1.4.2 Reasons for Failure of Strategies
1.5 Strategic Management Process
1.5.1 Steps in the Strategic Management Process
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of strategy
 Describe the strategic management

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Notes  Explain the strategic, tactical and operational planning

 Describe the strategy makers and strategic decisions
 Explain the strategic management process

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 concepts of strategy and explain its strategy
 explain characteristics of strategy
 basics of strategic management and explain its elements
 recall benefits of strategic planning
 identifying reasons for failure of strategies
 explain steps in the strategic management process

OVERVIEW
As the intensity of competition increases in the market, the performance gap
between the well-managed company and the poorly managed company is
widening by the minute. Competition is coming in from all directions. In these
turbulent times, it is very difficult for a company to survive without a clear
understanding of where it is and where it wants to go. For going without a clear
direction of where you want to reach is like looking for a well in a desert
without having any idea of which direction it is in. The chance of finding it has
very little probability. Strategic management is meant to provide that sense of
direction to the company, to find the well of success in the desert of
competition.
In this lesson, you will learn about strategy and strategy makers and strategic
decisions. The strategy process is a systematic process of developing a
strategic vision and mission. You will be introduced to the in-depth of strategy.
At the end of this lesson, you will understand the strategic management
process.

1.1 CONCEPTS OF STRATEGY

‘Strategy’, narrowly defined, means “the art of the general” (from the Greek
Strategos). In a strictly military sense, the term first gained currency at the end
of the 18th century, and had to do with stratagems by which a general sought to
deceive an enemy, with plans the general made for a campaign, and with the
way the general moved and disposed his forces in war.
The term ‘strategy’ has expanded far beyond its original military meaning.
Strategy is now used in all the areas where the horizon is long term, there is a

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competition for the use of resources, and the objective is to realise some goals. Notes
With the evolving importance of strategy as a theoretical discipline, scholars
have tried to identify the principles of strategy that have traditionally guided
military strategists in war.
Strategy is a set of key decisions made to meet objectives. It refers to a
complex web of thoughts, ideas, insights, experiences, goals, expertise,
memories, perceptions and expectations that provides general guidance for
specific actions in pursuit of particular ends. Nations have, in the management
of their national policies, found it necessary to evolve strategies that adjust and
correlate political, economic, technological and psychological factors, along
with military elements. Be it management of national policies, international
relations, or even of a game on the playfield, it provides the preferred path that
we should take for the journey that we actually make.
Every firm competing in an industry has a strategy, because strategy refers to
how a given objective will be achieved. ‘Strategy’ defines: what it is we want
to achieve and charts our course in the marketplace; it is the basis for the
establishment of a business firm and it is a basic requirement for a firm to
survive and to sustain itself in today’s changing environment.
An organisation cannot operate effectively without a strategy. The strategy
may have been developed explicitly through a planning process or it may have
evolved implicitly through the operations of the various functional departments
– but in order to function effectively in the marketplace, the organisation must
have answers to these questions:
 What business are we in? What products and services will we offer?
 To whom?
 At what prices? On what terms?
 Who are the competitors?
 On what basis will we compete?
If the organisation asks any of these key questions and it has the answers, then
there is a strategy in place.

1.1.1 Characteristics of Strategy

The characteristics of strategy are as follows:
 The decisions are concerned with the long-term direction of an
organisation.
 Strategic decisions are normally about trying to achieve some advantages
for the organisation.
 The decision is likely to be concerned with the scope of an organisation’s
activities and may involve major changes in the business of the
organisation, such as the products or services it offers.

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Notes  The scope of activities is fundamental to strategic decisions because it

affects the perceptions of management on the boundaries within which they
operate.
 The decisions can be seen as a matching of the activities of an organisation
to the environment in which it operates.
 The decision has major financial or other resource implications – for
example, on staffing or equipment.
 The decision will involve building on or stretching an organisation’s
resources and competencies. It will result in a significant amount of change
in the organisation or will affect the whole organisation or a large part of it.
 The decision will have a major impact outside the organisation – for
example, on customers or other bodies.
 The decision entails significant risks to the business.
 Strategic decisions are likely to affect operational decisions.
 The decision is related to other important decision areas, and raises issues
of complexity and ‘cross-cutting’ interactions.
 The strategy of an organisation will be affected by the values and
expectations of persons with power in and around the organisation.
Strategic decisions demand an integrated approach to the management of the
organisation. Unlike functional problems, there is no one area of expertise, or
one perspective that can define or resolve the decision-making. The
management has to cut across functional and operational boundaries to make
strategic decisions. Very often, there is a conflict of interest and perhaps
priorities, between management involved in different functional or operational
areas.

Strategy is the direction and scope of an organisation over the long-

term, which achieves advantage in a changing environment through its
configuration of resources and competencies with the aim of fulfilling stake
holder’s expectations.

1.1.2 Need for Strategy

Those in favour of setting strategies argue that strategies are needed to give
direction to companies. Without strategies and incorporating objectives,
companies would be adrift. If companies do not decide where they want to go,
any direction and any activity are fine. People in companies would not know
what they were working towards and, therefore, would not be able to judge
what constitute effective managerial behaviour. However, those not in its
favour argue that direction setting strategies can also block out peripheral
vision, keeping companies sharply, yet myopically, focused on one course of

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action. Thus, strategies may limit the company’s ability to be open to new Notes
opportunities and threats as these unfold and to deviate from a set course as the
company interacts with its environment and learns. The following may be
noted in this regard:
 Strategists hit back arguing that an early commitment to a course of action
is highly beneficial. By setting objectives and drawing up a strategy to
accomplish these, companies can invest resources, train people, build up
production capacity and take a clear position within their environment.
 Strategies allow companies to mobilise themselves and to dare to take
actions that are difficult to reverse and have a long payback period.
 Strategic plan also has the benefits of coordinating all strategic initiatives
within a company into a single cohesive pattern.
 A companywide strategy can ensure that differences of opinions are ironed
out and one consistent course of action is followed throughout the entire
company, avoiding overlapping, conflicting and contradictory behaviour.
 Strategies also permit corporate level strategists to compare the course of
action proposed by their various business units and to allocate scare
resources to the most promising initiatives.

1.2 STRATEGIC MANAGEMENT

Strategic management is defined as “the process by which an organisation tries
to determine what needs to be done to achieve corporate objectives and more
importantly, how these objectives are to be met. Ideally, it is a process by
which the senior management examines the organisation and the environment
in which it operates and attempts to establish an appropriate and optimal fit
between the two to ensure the organisation’s success.” Stated precisely,
strategic management consists of the analyses, decisions and actions that an
organisation undertakes in order to create and sustain competitive advantages
and thereby achieve superior profitability.
Therefore, we can say that strategic management is the process of identifying,
choosing and implementing activities that will enhance the long-term
performance of a company by setting direction and by creating the changing
external environment within which it operates.
Key parts of strategic management are discussed below:
 Strategic management helps a company to achieve its goals.
 Strategic management involves decisions and actions.
 Strategic management is not a single and simple action but a series of
related decisions and actions.
 The strategic management compares the organisational strengths and
weaknesses with the environmental opportunities and threats.

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Notes In simple terms we can say that strategic management involves a series of steps
in which organisational members analyse the current situation, decide on
strategies, put those strategies into action, and evaluate/modify/change
strategies as and when needed.
All managers’ positions involve performance of management functions
(planning, organising, directing, staffing and controlling). But, there are
differences among managerial jobs. The differences arise because of the
existence of various levels of management in a typical organisation. The term
‘levels of management’ refers to a line of demarcation between various
managerial positions. In a large organisation, three levels of management are
usually identified: (i) Top level management (ii) Middle level management and
(iii) Lower level management. The functions performed by top managers,
middle managers, and lower level managers, respectively, may be briefly stated
thus:
 Top Managers: Top managers decide goals, policies and strategies for the
entire organisation. Titles found in this group, include – president, vice
president, chairman and chief executive officer. They often represent their
organisations in community affairs, business deals and government
negotiations. They generally focus on long-term issues and emphasize the
survival, growth and overall effectiveness of an organisation. The job of a
top manager is likely to be complex and varied. They often work long
hours; spend much of their time in meetings or on the telephone. In most
cases, top managers are also very well paid several million rupees a year
in salary, bonuses and stock.

 Middle Managers: Middle managers implement the plans and policies of

the top managers above them and supervise and coordinate the activities
of the first line managers below them. Divisional heads, plant managers,
operations managers fall in this category. Middle managers take corporate
objectives and break them down into business unit targets, put together
separate business unit plans for the units below them for higher level
corporate review; and serve as linchpins of internal communication,
interpreting and broadcasting top management priorities downward and
channelling and translating information from the front lines upward.
Middle managers work in close coordination with frontline managers,
customers and employees and are, generally, conversant with the practical
side of the coin. Since they operate in the middle, they are able to see the
picture more clearly and often have a better grip over the problem in
hand. Good middle managers, therefore, provide the operating skills and
practical problem solving that keeps the company going. In times of
crisis, middle management levels are usually cut down to size. Eastman
Kodak cut middle management by 30 per cent and reduced its middle
management levels from seven to three (Wall Street Journal). It was the
case with GE Medical Systems between 1985 and 1995.

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 Frontline Managers: They are the lower level managers who supervise Notes
and coordinate the activities of operating employees. They make short
term operating decisions directing the daily tasks of non-managerial
personnel. They are there to implement the specific plans developed by
middle management. Their principal job is to put systems, methods,
procedures, rules and regulations in place, in order to achieve production,
offer technical help and motivate employees at their command. The
period at this level is pretty short, with the special focus on how to get
things done on a day-to-day-basis. Frontline managers need strong
technical skills and expertise to teach subordinates and supervise their
day-to-day tasks.

1.2.1 Elements of Strategic Management

Strategy Formulation
It means defining the firm’s business, setting a vision and deciding long-term
objectives. Here, the effort should be directed at finding what is best for the
total organisation, not just a single functional area.

Strategic Analysis
It means analysing internal as well as external environment. This is concerned
with the strategic situation of the organisation. Here, the organisation looks
into issues such as changes in the organisational environment and its likely
impact on the organisation, assessment of its resources and strengths and
weaknesses in the light of changes in environment. A vigilant and proactive
organisation always tries to get ahead of competition through a constant re-
examination of its position in the marketplace in terms of its products, services,
strategies, etc. The aim is to include multiple stakeholders while analysing
internal situation and external environment — including owners, employees,
customers, suppliers and the community at large, etc.

Strategic Choice
It means selecting appropriate strategies and implementing them. Strategic
analysis provides a basis for strategic choice. This is basically concerned with
the formulation of suitable courses of action, their evaluation and the choices
between them. The relevant issues include deciding what new businesses to
enter, what businesses to abandon, how to allocate resources, whether to
expand operations or diversify, whether to enter international markets, whether
to merge or form a joint venture and how to avoid a hostile takeover, etc. The
chosen strategies must incorporate both long-term and short-term perspectives
that is setting the eyes on the future looking at the present operating
environment.

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Notes
Example: Laying-off employees may help to cut costs and improve
short-term profitability, but will have a telling effect on the moral of people
working in a firm. While trying to select and enforce a plan of action,
managers need to look at both short-term impacts and the long-term
consequences on the firm as well as its multiple stakeholders.

Strategy Implementation
It means focusing attention on the operational side of the coin. This is the
action stage of strategic management. Implementing means mobilising
employees to translate formulated strategies into concrete action. This step
requires a firm to: (a) establish annual objectives; (b) devise policies;
(c) motivate employees; (d) allocate resources; (e) develop a strategy of
supportive culture; (f) create an effective organisation structure; (g) channel
marketing efforts; (h) prepare budgets; (i) develop and utilise information
systems; and (j) link employee rewards to organisational performance. Often,
successful strategy implementation hinges upon a manager’s ability to motivate
people.

Strategy Evaluation
It means evaluating a firm’s performance to see whether strategies have
delivered results or not. To this end, managers must allocate resources wisely
and obtain excellent performance from people by striking rapport between
organisational effort and organisational goals — both short-term as well as
long-term; in other words, doing the right thing (effectively and also doing
things right (efficiently). In order to deliver results, managers must make many
trade-offs. Sometimes, profitability might take precedence over everything
else; at other times, expanding the firm’s product market scope might demand
close attention. They must, in the end, try to align resources to exploit existing
product markets thoroughly while proactively trying to exploit emerging
opportunities. Evaluation is required because success today is no guarantee of
success tomorrow. Success creates new and complex problems. So, managers
need to constantly: (a) review external and internal factors that are the basis for
current strategies; (b) measure performance; and (c) take corrective steps.
Ultimately, all strategies are subject to change because the environment in
which they operate is constantly changing.

1.2.2 Key Attributes of Strategic Management

The essence of strategic management is the study of why some firms perform
better than the others do. How to position a firm so that it is able to create and
sustain competitive advantages in the marketplace? Should the firm be known
as a low cost producer or be known for creating products that are innovative,
novel and enjoy a ‘star’ status because of their unique features. As experience
would tell us, it is always better to be exceptional at one thing than good at
many things.

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Notes
Example: From the corporate world, a number of examples can be
readily advanced here: the adhesives and fasteners specialist — 3M; Gillette,
the Godzilla of razor blades; Carrier, the air conditioning specialist; Sikorsky,
the helicopter specialist; Pratt & Whitney, the jet engine specialist; etc.
Of course, a successful specialist has to stay specialised. You cannot begin to
chase other businesses, but will begin to erode your prospect’s perceptions of
your being a specialist. To survive and flourish in these days of killer
competition, you have to live by certain well-established principles.
Some of the important attributes of strategic management may be listed thus:
 Strategic management is all about finding how a firm can create
competitive advantages in the marketplace that are not only unique and
valuable but also difficult for rivals to copy or substitute. Strategy is all
about being different from everyone else. If the firm does not have
anything to differentiate itself and its products, it should seek shelter
behind a low price. To create and sustain a competitive advantage, the firm
should move closer to the hearts of customers by harping on something that
it is able to create, communicate and deliver differently.
 Strategy should put the organisation on a path that is coordinated with
organisational strengths. It must help the organization exploit market
opportunities leveraging on its own unique skills and capabilities.
 Strategy is for the long-term. At the same time, the short-term perspective
should not be discounted altogether. If a firm wants to show the door to
employees because of poor market conditions, the impacts of such a
decision both in the short-term as well as long-term need to be taken into
account.
 Strategy must meet the expectations and concerns of multiple stakeholders
including employees, shareholders, customers, suppliers, etc.
 Strategy is something to be studied keeping all parts of an organisation in
mind. That is, effort must be directed at what is best for the total
organisation, not just a single functional area.
 Finally, strategic management involves the recognition of trade-offs
between effectiveness and efficiency. To survive and flourish in a
competitive world, a firm should allocate its resources wisely without
losing sight of the overall organisational objectives. It must strike a happy
balance between doing the right thing (effectiveness) and doing things right
(efficiency).

1.2.3 Importance of Strategic Management

Modern corporations are confronted with many challenges. They must manage
their internal resources efficiently and effectively. Only then, they will be able
to please customers and offer outstanding service in a consistent manner.

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Notes Becoming a star in the marketplace through competent handling of resources is

only one part of the story. The superior performance must be backed up by
clever moves – all intended to outwit, confuse or fool the rivals in a
competitive race. The actions of rival firms, no doubt create hurdles from time
to time. To create space for itself, the firm must be fully equipped to offer a
superior product or service at an attractive price – in the process, pushing the
rivals to the wall. Price is not the only weapon to outwit competition.

Example: The firm can come out with a premium brand like Rolex –
loaded with exquisite features – and leave an indelible impression in the minds
of customers in terms of outstanding quality.
Somehow, it must erect barriers that are impregnable and insurmountable in
terms of price, quality, technical superiority and speed of service. It must
restrict rival firms from becoming too powerful. Simultaneously, it must move
closer to the hearts of millions of customers, understanding their changing
tastes, preferences, lifestyles, choices, etc. The customers, in any case, are
notoriously fickle minded. So the firm must make every attempt to catch the
trend, exploit an opportunity and remain ahead of competition. It must capture
mindshare and conquer markets, if it wants to survive and flourish in a
competitive environment. The world, after all, is an economic jungle – full of
wild animals – and only the fittest will survive. So the firm must do everything
possible to adapt itself and be in the reckoning. To achieve success, the firm
cannot rely on luck. It must be constantly looking for managerial talent and be
ready to be guided by their creative thinking and concrete action plans.
Superior organisational performance is actually determined by the choices
managers make in order to put the firm on a steady growth path. To this end,
managers have to come out with a plan of action, show proper direction, and
put the firm on a profitable route, putting resources to best advantage —
insulating the firm against possible threats and risks. The whole exercise is
meant to achieve a firm’s ends by choosing a path that best fits its needs. In the
end, success is not about having the right people, the right tools, the right role
models or the right organisations. They all help but they do not put you over
the top. It’s all about having ‘the right strategy’. When businesses do not have
a proper game plan to stay ahead of competition, they go off the track and fail
to deliver things for which they were famous earlier. They are no more in a
position to create, communicate and deliver value to customers.

Learning Activity
Visit any company of your choice and try to meet top manager of
that company and try to collect information on their strategic
management activities. Prepare a presentation on the strategic
management activities of that company.

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1.3 STRATEGIC, TACTICAL AND OPERATIONAL Notes

PLANNING
The first three decades of the twentieth century witnessed significant changes
in business activity. Firms focused their energies on increasing production of
standardised goods to derive the economies of scale. They were more
comfortable working with day-to-day, operational plans. Whatever came into
the market, got readily absorbed? Large volumes, standardised products and
ever-increasing demand characterised this era. After the 1930s, firms
witnessed increased environmental turbulence. Competition became intense
with the emergence of new players. Technological changes were swift and
government policies restricted the economic freedom of the firms in most
countries. Consumer tastes and preferences changed radically. New products
with novel features made headlines and to sustain demand, firms had to
promote products heavily and spend significant amounts on market
segmentation. They had to commit their resources carefully, assessing various
alternatives offered by the external environment from time to time. The
reactive, ad hoc responses rarely yielded results, forcing firms to change their
orientation (from short-term to long-term) and look beyond the four walls of
the organisation, more closely.
The 1950s saw dramatic changes in technology; new products emerged
rapidly; competition became cutthroat; multinational corporations began to
dominate global markets and governmental policies encouraged free market
forces. These environmental complexities literally compelled the firms to come
out with proactive steps by pinning their hopes on route maps provided by
strategic plans. They had to be lean and flexible so that they could remain
solvent and move fast.
They had to almost undo existing styles, systems and standards, looking at
internal as well as external environments from a strategic perspective.
Strategic planning, thus, is long-term in nature. It tends to be a top
management responsibility. It requires looking outside the organisation for
threats and opportunities. It also requires looking inside the organisation for
finding out weaknesses and strengths. It affects many parts of the organisation,
as its decisions have enduring effects that are difficult to reverse. It tries to
equip the organisation with capabilities needed to confront future uncertainties,
by taking a holistic view of the entire organisation. Its focus is clearly on the
‘jungle, not the trees’. The main objective is to position the firm in an
advantageous position in relation to the environment, keeping the firm’s own
capabilities in mind.

Example: In business, it means how much money is going to be

dedicated to a project, and by when you expect the project to be completed.

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Notes In personal life, suppose you plan a wedding, it means deciding on the budget
and the date.

Tactical planning translates broad strategic goals and plans into specific goals
and plans that are relevant to a definite portion of the organisation, such as a
functional area like marketing or human resources. Tactical plans focus on
major actions a unit must take to fulfil a part of the strategic planning. They are
often focused on 1-2 years in the future. This is the implementation of the
strategic plan stage, combining your available resources, looking at obstacles
and reviewing alternatives.

Example: In business, it means an analysis of resource combination,

planning for obstacles, and general timetable. In personal life, for the wedding,
it means, finding the place, developing a guest list, deciding on a menu and
music. Some of the important differences between strategies and tactics are
listed below (of course, these need not be taken quite seriously, since decision
makers might resort to strategies and tactics depending on situational
demands).
Operational planning identifies the specific procedures and processes required
at lower levels of the organisation. Frontline managers usually focus on routine
tasks such as production runs, delivery schedules, human resource needs, etc.
They typically focus on the short term, usually 12 months or less. These plans
are the least complex of the three and rarely have a direct effect or other plans
outside of the department or unit for which the plan was developed.

Example: In business, it means engaging the team, developing and

answering the who, what, when, where and how management questions. In
personal life, for the wedding; it means, choosing the band, finding the caterer,
deciding on flowers, etc. To be fully effective, the organisation’s strategic,
tactical and operational plans must be aligned, that is, they must be consistent,
mutually supportive and focused on meeting the common purpose and
direction.

Strategic planning is laborious and time-consuming. There are very

few satisfactory short-cuts. Immediate results are rarely obtained. Further,
establishing and maintaining a formal system involves many expenses.

1.3.1 Benefits of Strategic Planning

 It provides the roadmap for the firm; it shows the way for achieving targets.
 It helps the firm to utilise its resources in the best possible manner. It
allows more effective allocation of time and resources for identifying
opportunities.

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 The firm can respond to environmental changes in a better way – by Notes

exploiting opportunities to its advantage and avoiding costly mistakes in
investment decisions.
 It minimises the chances of mistakes and unpleasant surprises. It seeks to
prepare the firm to confront future challenges through certain proactive
steps and even shape the future to its advantage. As rightly pointed out by F
R David, strategic planning ‘allows an organisation to initiate and influence
(rather than just respond to) activities and thus exert control over its own
destiny.’
 It creates a framework for internal communication among personnel. It
helps to integrate the behaviour of individuals into a total effort. It provides
a basis for the clarification of individual responsibilities. It gives
encouragement to forward thinking. It encourages a favourable attitude
towards change. It provides a cooperative, integrated and enthusiastic
approach for tackling problems and realising opportunities.

1.4 STRATEGIC MAKERS AND STRATEGIC DECISION

Organisations, of course, are clearly impacted by the behaviours, values and
attitudes exhibited by strategy makers at various points of time.

Strategists provide a vision of the future. They set the goals for the
organisation as a whole. They gather information, pool resources and hire
people for getting things done. They look into gaps in the marketplace and
exploit them through strategies. They develop a framework and clear
boundaries within which staff can make decisions.
In short, they are the people who are responsible for the success or failure of an
organisation. Some of the important actors in strategy making would include:

Board of Directors
It plays an important role in the strategic management process. A strategy
committee commonly audits various components of an organisation’s strategic
management process in order to make it more effective and efficient.

Example: The board can demand re-examination of the company’s

mission, its long-term goals, its corporate strategy, and its approach to the
competition.
In essence, the board functions as the brain and soul of the organisation and as
the guardian of shareholders’ interests. Its pervasive influence in many aspects
of organisational life is believed to enrich the firm. Strategic decisions are
evaluated by the board of directors, but are the responsibility of top

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Notes management, supported by corporate planning staffs, that perform analyses and
manage the planning processes.

Chief Executive Officer

The CEO is the principal strategist and is more or less the brand ambassador of
an organisation. He presides over Board meetings, chalks out a clear path for
the entire organisation, puts right people on right jobs, assigns work, allocates
resources and gets things done. Successful execution is the CEO’s most
important job. Wine business leaders who are deeply and actively engaged in
directing their organisation increase the probability of achieving profit goals
and building stronger businesses that thrive over the long run. Without strong
execution practices, wineries frequently miss plan projections by years and
millions of dollars in revenues and expenses. Much has been said about the
importance of such things as strategic planning, innovation and culture.
Execution is seen as the tactical side of business – something to be delegated to
others. Nothing could be further from the truth. Execution is a leadership
discipline, a set of practices and behaviours that must be instilled in the way a
company operates. Instilling and maintaining that discipline is the job of the
CEO.

Three Critical Elements of a CEO, Job

To master execution, the CEO must consistently drive and link together three
critical elements, the three core processes of any business:
 Strategy: Do we all know where we are going? Developing strategy is first
and foremost about setting clear goals that define what success means for
your winery and making choices about how it will compete and win in the
marketplace.
 Operations: Do we have a clear road map to get there? Managing
operations means having an annual plan that identifies specific programmes
aimed at achieving strategic goals. The operating plan is more than the
typical budget in that it includes product launches, production plans,
marketing programmes and sales objectives. This plan ensures that the
company has measurable goals that support its long-term direction and
mechanisms to regularly track progress and results.
 People: Do we have the right people in the right jobs? Execution ultimately
occurs through people. Strong businesses make sure that they have the right
person in every job, as well as the necessary people management processes
that support their success and continued development. Much of the benefit
of redefining strategy comes from how it is developed. As CEO, you set the
tone with your team. Your role requires you to look at the organisation as
an integrated completely, insist on realism and drive a deeper
understanding of your business and how it achieves success.

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Based on our own experience and studies of companies with powerful Notes
strategies, we recommend the following:
 Connect strategy to family needs and goals (critical in a family owned
business).
 Engage key members of your team.
 Insist on robust dialogue (opposing points of view, vigorous debate).
 Drive for deep understanding (true insights, not just the facts).
 Link strategy to your operations and people

Other members of the strategy making team

Important members who participate in strategy making activities include:
Senior vice-presidents, Divisional managers, Functional heads, Corporate
planners, Consultants and Executive assistants. The CEO generally consults the
team members, collects vital bits of information from consultants and market
analysts, talks to internal teams, invites suggestions from technical experts and
arrives at crucial decisions keeping the organisational capabilities in mind.

1.4.1 Strategic Decisions

Strategic decisions are mainly concerned with the selection of the product-mix
that the firm intends to produce and the markets in which it will sell its
products. Such decisions affect the organisation as a whole over long periods
of time. As strategic decisions have such a tremendous impact on a firm and
because they require large commitments of company resources, they can only
be made by top managers in the organisational hierarchy. Typically, strategic
issues have the following dimensions:

Top Management Involvement

Strategic issues require the CEO to carefully assess the likely impact on
various divisions, allocate resources thereafter and oversee the implementation
process closely. At every stage, strategic decisions require consistent support
and continued blessings from the top management.

Allocation of Large doses of Resources

Strategic decisions require commitment of large doses of internal as well as
external resources over an extended period.

Effect on Long-term Prosperity of the Firm

Strategic decisions have long-term impacts on the future of a firm. Once a firm
embraces a particular strategy, its image and competitive advantages are
invariably linked to that strategy.

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Notes Future-Oriented
Strategic decisions are built around forecasts. The emphasis is on selecting a
suitable course of action from the available alternatives and moving ahead with
confidence. In a turbulent environment, a firm will succeed only if it takes a
proactive stance toward change.

Multi-functional or Multi-business Consequences

Strategic decisions have complex implications for most areas of the firm. They
influence various strategic business units especially in areas related to product-
mix, customer-mix, organisation structure, competitive focus, etc.

Focus on External Groups

In order to successfully position a firm in a competitive environment,
strategists must look beyond its operations. They must keep in mind how the
other stakeholders (competitors, customers, suppliers, creditors, government
and labour) are likely to react to its own strategic moves from time to time.

Strategic decisions are the essence of strategic management.

Strategies can be put into practice only after choices (decisions) have been
made. Strategic decisions by their very nature are characterised by
considerable risk and uncertainty.

1.4.2 Reasons for Failure of Strategies

Strategies fail for a variety of reasons. It could be due to poor planning, weak
leadership, improper communication or ineffective control. Important reasons
that could put a big question mark over strategies include:

Directional Journey
The company does not know where it is going. It does everything and is
everywhere. The so-called market opportunities might eventually prove to be
suicidal traps.

Failure to Understand Market Dynamics

The company does not understand the dynamics of competition in the
marketplace. In the name of serving customers at every price point, if a car
manufacturer starts selling cars at every price point, then that is the road to
hell, as indicated at the beginning of the lesson – the curious case of General
Motors. Either you are at the top end or at the low end of the market. You have
to be necessarily right or left on the roadside. Those who walk in the middle
would eventually be crushed and wiped out.

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Leadership Traps Notes

Many a time, strategies fail because the leader was over-confident, not willing
to run the show coordinated with situational demands or obstinate. The impact
of those tendencies on strategy making is very negative when strategy is
developed from ego, preconceptions of what causes success, stubbornness, and
old, worn conceptual models.

Lack of Team Involvement

If the strategy fails to get people involved and make them work with
enthusiasm, zeal and commitment, the end result is going to be a flop show.

Poor Communication
Strategies are derailed due to poor communication. How can any organisations
implement a plan without communicating details to staff? Failure to
communicate means lost time to get things done at a right time, keeping people
in dark would sometimes lead people to pedal in the opposite direction and
work at cross-purposes – spoiling the entire show.

Weak Commitment of Management to the Plan

Strategies require consistent support and continued blessings from top
management. Strong management commitment to plan will mean that you will
stick to time and even deliver the plan ahead of schedule.

Failure to Establish Effective Feedback and Monitoring of the Plan

All plans should have key milestones and regular reviews. Without an effective
feedback mechanism, it is possible that a plan will drift so far off the course
that another plan will be needed to get back on track. Monitor and feedback
against plan, make small adjustments along the way to keep everyone heading
in the right direction.

Invalid Planning
Ineffective strategy formulation and nothing more to say here but back to the
drawing board. Were alternative scenarios defined and assessed? Check your
assumptions. Were they correct? Did engage in sufficient research to establish
background data upon which you based your decisions and tactics? Were
current trends properly diagnosed or based on gut instinct?

Inconsistent Functional Plans

Were congruent plans created so that there were no competing key
performance indicators across functional boundaries? How did you reward
normally competing functional areas for collaboration on the overall strategic
plan?

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Notes Incorrect Assessment of Resource Requirements/Allocation

Were sufficient resources defined and allocated to ensure the meeting of
deadlines? Before embarking on rolling out your strategic plan you would be
well advised to ensure that you have adequately reviewed each of the listed six
principle reasons why strategies fail. That way you stand a much better chance
than the current average success rate of developing and implementing a
winning strategic plan.

Disruptive Technologies
Many a time, disruptive technologies may spoil the show. Successful
companies miss seeing the threat of disruptive technologies because they are
essentially caught in the routine of maintaining the status quo, i.e. their current
success. To spot future disruptive technologies and plan for combat against
them, a company would need to invest resources in the scanning for and
development of disruptive technologies; be willing to enter into the market
when a potentially disruptive technology emerges; be adept at developing new
ways of analysing emerging markets; and be aware that improving their
product, and increasing its price, create vacuums at the lower price range for
emerging technologies to enter. The goal is to be able to both sustain
successful products and processes, yet at the same time be able to see, evaluate,
and develop disruptive technologies.

Example: Examples of disruptive technologies are the small, off-road

motorcycles that were introduced by Japanese manufacturers into the United
States. Over time, they threatened the product lines of Harley-Davidson and
BMW.
Strategies fail to live up to their full potential due to lack of commitment, lack
of direction, lack of strong leadership and lack of appropriate checks and
balances. They fail because they have not bothered to look at the dark side of
the moon – all the while focusing on organisational strengths and totally
discounting the weaknesses. Successful organisations, most of the time, are
those that know what they cannot obviously do in a competitive environment.
If you want to be everywhere, you are nowhere. Where strategies are not in
place, employees do not know how the strategy applies to their work. The
organisation’s business systems or processes would not support the strategy.
In such a scenario, performance metrics and rewards are not aligned with the
strategy.

Learning Activity
Prepare a detailed note of your understanding about the reasons of
failure of the strategy of a company. Support your report with the
relevant company examples.

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1.5 STRATEGIC MANAGEMENT PROCESS Notes

The term ‘Strategic Management Process’ refers to the steps by which
management converts a firm’s mission, objectives and goals into a workable
strategy. In a dynamic environment, each firm needs to tailor its strategic
management process in ways that best suit its own capabilities and situational
requirements. Strategic Management process, basically, aims at formulating
and implementing effective strategies. Effective strategies, of course, are those
that help a superior fit between the organisation and its environment and the
achievement of strategic goals. Strategies necessarily need to change overtime
to suit environmental changes. In order to remain competitive, organisations
develop those strategies that focus on core competence, develop synergy and
create value for customers.
 Core Competence: An organisation’s core competence is something it does
exceptionally well, in comparison to its competitors. It reflects a distinct
competitive advantage (like superior research and development, mastery of
a technology, distribution channel, manufacturing efficiency or customer
service) that provides the firm: (a) access to variety of products/markets;
(b) contributes greatly to customer benefits in the end products;
(c) exclusive and inimitable preserve of the firm that is long-lasting and
cannot be easily copied by competitors.
 Synergy: When organisational parts interact to produce a joint effort, that is
greater than the sum of the parts acting alone, synergy occurs. Some call
this, the 1+1=3 effect. In strategic management, managers are urged to
achieve as much market, cost, technology and management synergy as
possible, when arriving at strategic decisions (such as mergers,
acquisitions, new products, new technology, etc.).

Example: Wal-Mart’s new Super centres and Super K-marts that

put a discount store and a grocery store under one huge roof (Crossroads,
Mumbai; Spencer’s in Chennai) are good examples of market synergy in
action.
 Value Creation: Exploiting core competencies and achieving synergy
helps an organisation to create value for their customers. Value is the sum
total of benefits received and costs paid by the customer, in a given
situation. Ideally, the purpose of a strategy should be to create a lasting
value that is greater than the cost of resources that are used to create it.

1.5.1 Steps in the Strategic Management Process

The various steps involved in the strategic management process are:

Vision, Mission and Objectives

In the organisational context, vision is a picture of the organisation – the core
values for which an organisation stands and a clear description of what the

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Notes organisation wishes to become in the years ahead. A mission statement, on the
other hand, specifies what an organisation is and why it exists. The strategic
management process begins with an evaluation of the organisation’s current
vision, mission objectives and strategy. The principal value of a mission
statement lies in its specification of a firm’s ultimate aims. It offers a sense of
shared expectations among all levels and generations of employees. It
consolidates values over time and across individuals and interest groups. It
projects a glorified sense of worth and intent that can be identified and
assimilated by external groups too. It also exhibits a firm’s commitment to
responsible action in line with the firm’s internal (survival, growth and
profitability) as well as external (ethics, corporate governance and social
responsibility) objectives.

External and Internal Analysis

The firm’s external environment is challenging and complex. Owing to the
impact of the external environment on performance, the firm must develop
requisite skills to identify opportunities and threats existing in that
environment. The external environment has three important parts: (i) the
general environment (elements in the broader society that affect industries and
their firms); (ii) the industry environment (factors that influence a firm, its
competitive actions and responses, and the industry’s profit potential); and
(iii) the competitive environment (in which the firm examines each major
rival’s future objectives, current strategies, assumptions and capabilities). In
order to exploit environmental opportunities to its advantage, a firm must have
internal resources and capabilities. A systematic internal appraisal helps a firm
find: (i) where it stands in terms of its strengths and weaknesses; (ii) pick up
opportunities that are in tune with its resource base; (iii) take steps to bridge
any resource gaps; and (iv) select appropriate areas that help consolidate its
position in the industry. A major task of strategists, while carrying out internal
analysis, is to match the conditions of the external environment with the firm’s
internal strengths and weaknesses. If a firm can perform an activity better than
its rivals, it then possesses a distinctive (or core) competence that helps the
firm to build its own source of competitive advantage. In the final analysis, the
choice of which strategy to pursue should be based on using and exploiting the
firm’s competitive advantage.

Strategy Formulation
Strategy formulation is the process of offering proper direction to a firm. It
seeks to set the long-term goals that help a firm exploit its strengths fully and
encash the opportunities that are present in the environment. There is a
conscious and deliberate attempt to focus attention on what the firm can do
better than its rivals. To achieve this, a firm seeks to find out what it can do
best. Once the strengths are known and opportunities to be exploited are
identified, a long-term plan is chalked out for concentrating resources and
effort. Since strategies consume time, energy and resources, they must be

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formulated carefully. Strategies, once formulated, must ensure a best fit Notes
between goals, resources and efforts put in by people. The ultimate goal of
every strategy that is being formulated should be to deliver outstanding value
to customers at all times if the firm wants to survive and flourish in a
competitive environment. In the words of Daft, “strategy formulation may
include assessing the external environment and internal problems and
integrating the results into goals and strategy. …It includes the planning and
decision-making that lead to the establishment of the firm’s goals and the
development of a specific long-term plan.” A firm’s strategy formulation
occurs at three levels, namely, corporate level, business level and at functional
level.

Strategic Analysis and Strategic Choice

Strategic analysis is concerned with the strategic situation of the organisation.
Here, the organisation looks into issues such as changes in the organisational
environment and its likely impact on the organisation, assessment of its
resources and strengths and weaknesses in the light of changes in environment.
A vigilant and proactive organisation always tries to get ahead of competition
through a constant re-examination of its position in the marketplace in terms of
its products, services, strategies, etc. Strategic choice is concerned with the
selection of appropriate strategies taking a broad view of various factors such
as: internal capabilities, competencies, resource strength, degree of risk
involved, timing of the decision, overall organisational vision and mission,
competitive reactions, reactions from government, customers, society at large,
etc. Strategic analysis provides a basis for strategic choice. This is basically
concerned with the formulation of suitable courses of action, their evaluation
and the choices between them. The relevant issues include deciding what new
businesses to enter, what businesses to abandon, how to allocate resources,
whether to expand operations or diversify, whether to enter international
markets, whether to merge or form a joint venture and how to avoid a hostile
takeover, etc. The chosen strategies must incorporate both long-term and short-
term perspectives, that is, setting the eyes on the future looking at the present
operating environment.

Example: Laying-off employees may help to cut costs and improve

short-term profitability, but will have a telling effect on the moral of people
working in a firm. While trying to select and enforce a plan of action,
managers need to look at both short-term impacts and the long-term
consequences on the firm as well as its multiple stakeholders.

Strategy Implementation
This is the action stage of strategic management. Implementation means
mobilising employees to translate formulated strategies into concrete action.
This step requires a firm to: (a) establish annual objectives; (b) devise policies;
(c) motivate employees; (d) allocate resources; (e) develop a strategy of

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Notes supportive culture; (f) create an effective organisation structure; (g) channel
marketing efforts; (h) prepare budgets; (i) develop and utilise information
systems; and (j) link employee rewards to organisational performance. Often,
successful strategy implementation hinges upon a manager’s ability to motivate
people.

Strategy Evaluation
This is the final stage in strategic management. Evaluation is required, because
success today is no guarantee of success tomorrow. Success creates new and
complex problems. So, managers need to constantly: (a) review external and
internal factors that form basis for current strategies; (b) measure performance;
and (c) take corrective steps. Ultimately, all strategies are subject to change
because the environment in which they operate is constantly changing.

Kodak

E astman Kodak revolutionised photography industry by recording

images on a film (as against the traditional glass plates) through a
novel product called, portable camera, in early 1901. The camera
was a major hit with millions of customers. The name – Kodak – became
the most respected brand of photographic films almost instantaneously.
Continuous innovations (especially the colour film – those yellow little
boxes of film) and the absence of competition took Eastman Kodak
Company to dizzying heights over the years. It became a giant corporation
registering sales of over $20 billion by 1990 – powered by contributions
from a vast army of over 1 lakh employees. The ad campaign: “You press
the button; we do the rest” – made Kodak a household name all over the
globe. Meanwhile, Fuji Photo Film Company of Japan entered the fray with
a little green box of film that challenged Kodak’s dominance for over a
century. Using latest manufacturing technologies, Fuji cut the price down
aggressively without, of course, sacrificing quality. For the customers, both
were equally good. But the big price differential between product prices
brought Kodak down and the company lost the title of “official film of the
1984 Summer Olympics” to Fuji. From then onwards, Fuji gained market
share steadily as customers came to realise that Fuji is a legitimate
alternative to Kodak and is not just a low price brand. The introduction of
digital imaging technologies at around the same time from the likes of Sony,
Cannon, Motorola, Casio and Hewlett-Packard changed the rules of the
game, more or less, permanently. In the interim, a bad acquisition (a pharma
company) and some failed innovations (entering office copier business,
introducing a 35mm camera; a disposable camera – in a belated manner —
and some heavy investments in Kodak Advantix system running to over
$200 million) have had a telling effect on the brand image. When the mobile
Contd…

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phone technology took off and the home computer market exploded in a big Notes
way, it was all over for Kodak (2008 reported revenues just $442 million).
The lethargic response to tumultuous changes in the industry environment,
according to experts, brought the company down. As Trout commented, ‘if
you are known for one thing, the market will not give you another thing’.
Kodak is a film in the minds of the marketplace and not camera (Nikon fits
such a description). As it turned out, Kodak could not find a rewarding
space in the marketplace beyond the realm of conventional photography.
When you fail to make intelligent moves – proactively and in sync with
market expectations and remain stuck with a well-entrenched position and
fail miserably in exploiting emerging opportunities, you get punished and
pushed aside. Before hiding its head in the sand, Kodak did try a trick or
two to cover the lost ground by embracing the digital imaging technology.
However, it was too late for it to make any difference. Adding salt to its
injuries, due to fierce competition, the digital camera business got
commoditised and the Kodak brand did not offer any value for money. In
2006, the company had to close the business and show the door to over
27,000 people. The most respected brand for over 100 years in photographic
films had been decimated tremendously within a span of just 10 years!
Questions
1. How Kodak was fail in making the good strategy for their company.
2. Analyze the above case in your own words and prepare a detailed note
on it.

1. Strategic planning involves decisions about the

organisation’s long-term goals such as survival,
growth, etc. It involves setting long-term objectives
(by top management) and deciding about the judicious
deployment of resources to achieve those objectives.
2. A responsible and effective board should require of
its management a unique and durable corporate
strategy, review it periodically for its validity, and
use it as the reference point for all other board
decisions.

SUMMARY
 Strategy is the direction and scope of an organisation over the long-term,
which achieves advantage in a changing environment through its
configuration of resources and competencies with the aim of fulfilling
stakeholders’ expectations.

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Notes  Strategies allow companies to mobilise themselves and to dare to take

actions that are difficult to reverse and have a long payback period.
 Strategic plan also has the benefits of coordinating all strategic initiatives
within a company into a single cohesive pattern.
 A companywide strategy can ensure that differences of opinions are ironed
out and one consistent course of action is followed throughout the entire
company, avoiding overlapping, conflicting and contradictory behaviour.
 Tactics are the specific short-term action plans designed to implement
policy decisions.
 Strategic planning is the process by which top management determines
overall organisational objectives and how they are to be achieved.
 Strategic management consists of the analyses, decisions and actions an
organisation undertakes in order to create and sustain competitive
advantages and thereby achieves superior profitability.
 A strategic decision is that affects or is intended to affect the organisation
as completely over long periods of time as opposed to parts, sections or
elements of it.

KEYWORDS
Strategy: Strategy is a set of key decisions made to meet objectives. It refers to
a complex web of thoughts, ideas, insights, experiences, goals, expertise,
memories, perceptions and expectations that provides general guidance for
specific actions in pursuit of particular ends.
Strategy Formulation: It means defining the firm’s business, setting a vision
and deciding long-term objectives. Here, the effort should be directed at
finding what is best for the total organisation, not just a single functional area.
Strategic Choice: It means selecting appropriate strategies and implementing
them. Strategic analysis provides a basis for strategic choice. This is basically
concerned with the formulation of suitable courses of action, their evaluation
and the choices between them.
Strategy Implementation: It means focusing attention on the operational side
of the coin. This is the action stage of strategic management. Implementing
means mobilising employees to translate formulated strategies into concrete
action.
Strategy Evaluation: It means evaluating a firm’s performance to see whether
strategies have delivered results or not.
Strategic Management: It is a process by which the senior management
examines the organisation and the environment in which it operates and
attempts to establish an appropriate and optimal fit between the two to ensure
the organisation’s success.

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Strategic Decisions: Strategic decisions are the decisions that are concerned Notes
with whole environment in which the firm operates the entire resources and the
people who form the company and the interface between the two.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. Define strategy.
2. List the elements of a strategy.
3. Explain any five features of a strategy.
4. Define strategic management.
5. What are the key attributes of a strategic management?
6. Explain any three dimensions of strategic decisions.
7. Who are the strategy makers in an organisation?
8. What are the elements of strategic management process?
9. Describe the characteristics of the strategy.
10. Explain the need for strategy.
11. What is strategic plan?
12. What is strategy formulation?
13. What is strategic choice?
14. What is strategy implementation?
15. What is strategy evaluation?
16. Explain the strategic decisions.
17. Explain the lack of team involvement.
18. What is poor communication?
19. What is inconsistent functional plan?
20. What are disruptive technologies?

Long Answer Questions

1. Define strategic management and bring out its distinguishing features.
2. What are the elements of strategic management? What are the benefits of
strategic management?
3. What are the various levels at which a strategy may exist in an
organisation?
4. Explain the need for and benefits of strategic management.
5. How do you define ‘strategic management’ and what are its key attributes?

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Notes 6. Explain the essential features of strategic decisions taken at the top level.
7. Explain the strategic, tactical and operational planning with examples.
8. Describe who are strategy makers are and what are strategic decisions?
9. Explain the reasons for failure of strategies in detail.
10. Explain the strategic management process in detail.

FURTHER READINGS

Parthasarthy, R. (2009), Fundamentals of Strategic Management,

Biztantra, New Delhi
Pearce J. A., (2011), Strategic Management, Tata McGraw Hill,
New Delhi
Dess G. G., (2011), Strategic Management, Tata McGraw Hill,
New Delhi
David F. R., (2009), Strategic Management, Prentice Hall, New
Delhi

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 Lesson 2 - Strategy Formation Process

LESSON 2 - STRATEGY FORMATION PROCESS Notes

CONTENTS
Learning Objectives
Learning Outcomes
Overview
2.1 Strategy Formation
2.1.1 Role of Strategic Manager
2.1.2 Corporate Level Strategy
2.1.3 Business Level Strategy
2.1.4 Porter’s Competitive Strategies
2.1.5 Functional Level or Operational Level Strategy
2.2 Stakeholders in Business
2.2.1 Classification of Stakeholders
2.3 Strategic Intent
2.3.1 Hierarchy of Strategic Intent
2.3.2 Business Definition
2.3.3 Objectives and Goals
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Describe the strategy formation process
 Explain about stakeholders in business
 Understand the strategic vision, mission and purpose

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Notes LEARNING OUTCOMES

Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 basics of strategy formation
 explain functional level or operational level strategy
 recall stakeholders in business
 determine classification of stakeholders
 concept of strategic intent and explain hierarchy of strategic intent

OVERVIEW
Let us first review the previous lesson. You have studied about strategy and its
significance. You also learnt the strategic management. At the end of the
lesson, you have learnt about strategic management process and their steps.
Now, you will know about the strategy formation. You will also learn the
strategic intent and the business definition.
Business enterprises are greatly influenced by strategy. As a rule, therefore,
business managers are expected to run the show in sync with expectations of
employees, consumers, suppliers and the society at large. Quite often,
businesses that failed to understand the impacts from environmental forces and
respond in an appropriate manner have been consigned to flames.
We advise you to learn this lesson carefully. It will give you a better
understanding of the present scenario of the world’s strategic environment.
This lesson will help you to understand the concepts of the strategic intent.

2.1 STRATEGY FORMATION

Strategy formation is the process of offering proper direction to a firm. It seeks
to set the long-term goals that help a firm exploit its strengths fully and in cash
the opportunities that are present in the environment. There is a conscious and
deliberate attempt to focus attention on what the firm can do better than its
rivals. To achieve this, a firm seeks to find out what it can do best. Once the
strengths are known and opportunities to be exploited are identified, a long-
term plan is chalked out for concentrating resources and effort. Since strategies
consume time, energy and resources, they must be formulated carefully.
Strategies, once formated, must ensure a best fit between goals, resources and
efforts put in by people. The ultimate goal of every strategy that is being
formulated should be to deliver outstanding value to customers at all times if
the firm wants to survive and flourish in a competitive environment. In the
words of Daft, “strategy formulation may include assessing the external
environment and internal problems and integrating the results into goals and
strategy. It includes the planning and decision-making that lead to the

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establishment of the firm’s goals and the development of a specific long-term Notes
plan.”

Corporate Level Strategy

Business Level Strategy Strategy

Formation
Process
Functional Level Strategy

Figure 2.1: Strategy Formation Process

A firm’s strategy formulation occurs at three levels, namely, corporate level,
business level and functional level.

2.1.1 Role of Strategic Manager

This means accepting the strategic function as a strategic partner in both the
formulation of the company’s strategies, as well as in the implementation of
those activities through policies and practices. While formulating the strategic
plan:
 Strategic Manager can play a vital role, especially in identifying and
analysing external threats and opportunities (environmental scanning) that
may be crucial to the company's success.
 Strategic Manager can also offer competitive intelligence (e.g., new
incentive plans being used by competitors, data regarding customer
complaints, etc.) that may be helpful while giving shape to strategic plans.
 Strategic Manager can also throw light on company's internal strengths and
weaknesses. The resulting strategic plans capitalise on the firm’s strengths
and opportunities and minimise or neutralise its threats and weaknesses.

2.1.2 Corporate-level Strategy

Corporate strategy represents the firm’s decisions and actions to gain
advantages over rivals by managing a portfolio of products or businesses. It
focuses on the scope of the business enterprise, that is, the range of products /
businesses in which the firm will compete and the value chain activities it will
perform to realise growth or profits. Corporate strategies are formulated by the
top management of an organisation. They are mainly concerned with decisions
regarding the product or service to produce and the geographic location to
target. They give a direction to an organisation to achieve its objectives.
Decisions regarding allocation of resources, expansion moves, exploiting new
opportunities, striking deals with outside firms, moves to deal with competition
effectively, etc. also come under the purview of corporate strategy. Corporate
strategies are also known as grand or master strategies. They specify the time
period to achieve the long-term objectives of an organisation.

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Notes Corporate level strategies fall into four general categories: growth/expansion,
stability, retrenchment and combination.

Growth or Expansion Strategy

Organisations generally seek growth in sales, market share or some other
measure as a primary objective. When growth becomes a passion and
organisation’s motive is to seek sizeable growth (as against slow and steady
growth), it takes the shape of an expansion strategy. The firm tries to redefine
the business, enter new businesses, that are related or unrelated or look at its
product portfolio, more intensely. Growth or expansion moves are made in
order to survive in a competitive terrain. Growth options, when exploited
properly, offer scale economies and permit best use of talent and push the
organisation to commanding heights. Growth may be an exciting option for
firms willing to go that extra mile and willing to burn cash on risky ventures.
However, before taking the call, managers must see whether growth is
manageable or not. Growth must happen in accord with environmental
demands. Of course, a firm can have as many alternatives as it wants, by
changing the mix of products, markets and functions. Thus, the growth
opportunities may come internally or externally. Internal growth possibilities
may be exploited through intensification (all resources and efforts put on a
single product or a single market to achieve growth) or diversification (efforts
and resources put on different areas irrespective of whether the business has
strengths in it or not, so it can be related to diversification or unrelated
diversification). External growth options include mergers, takeovers and joint
ventures.

Stability Strategy
A stability strategy involves maintaining the status quo or growing in a
methodical but slow manner. The firm follows a safety-oriented, status quo
type strategy without bringing about any major changes in its present
operations. The resources are put on existing operations to achieve moderate
incremental growth. As such, the primary focus is on current products, markets
and functions, maintaining the same level of effort as present.

Retrenchment Strategy
It is a corporate level, defensive strategy followed by a firm, when its
performance is disappointing or when its survival is at stake. When a firm is
confronted with a precipitous drop in demand for its products and services, it is
forced to effect across-the-board cuts, in personnel and expenditures.
Retrenchment strategy, as such, is adopted out of necessity, not by deliberate
choice. In actual practice, retrenchment may take one of the following forms:

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 Divestment: When a company sells or “spins off” one of its business units, Notes
it is engaging in divestment. Divestment usually takes place when the
business unit is not doing well or when it no longer fits the company’s
strategic profile.
 Turnaround: A turnaround is designed to reverse a negative trend and
bring the organisation back to normal health and profitability. It usually
involves getting rid of unprofitable products, trimming the workforce,
pruning distribution outlets and finding other useful ways of making the
organisation more efficient. If the turnaround is successful, the organisation
may focus on growth strategy.
 Liquidation: This is a strategy to be followed as ‘last resort’. When neither
a turnaround nor a divestment seems feasible, liquidation is used.
Liquidation involves selling or disposing of, all or part of, an organisation’s
assets.
 Bankruptcy: It is a means whereby an organisation that is unable to pay its
debts can seek court protection from creditors and from certain contract
obligations while it tries to regain financial health and stability
(reorganisation bankruptcy). In case of a more serious one, liquidation
bankruptcy, the liquidating firm agrees to distribute all assets to creditors,
most of whom receive a small fraction of the amount they were owed. If
the firm can convince its creditors about the revival of the firm in the near
future, a reorganisation bankruptcy comes into existence.

Combination Strategy
Large, diversified organisations generally use a mixture of stability, expansion
or retrenchment strategies either simultaneously (at the same time in various
businesses) or sequentially (at different times in the same business).

Example: Growth could be achieved by an organisation through

acquisition of new businesses or divesting itself of unprofitable ventures.
Depending on situational demands; therefore, an organisation can employ
various strategies to survive, grow and remain profitable. In recent times, three
more strategies have gained popularity, namely, joint ventures, strategic
alliances and consortia.

2.1.3 Business-level Strategy

Business-level strategy is concerned with how a business competes
successfully in a particular market — what steps the firm would take to gain
competitive advantage or superiority in a particular business. Thus, it is a
strategy for a single business. Its main focus is dealing with competitive
threats. That is why; it is also known as competitive strategy. It seeks to
achieve superior performance by building competitive advantages – either
through a favourable market position (it is able to exploit this better than rivals

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Notes are) or by acquiring a unique internal strength or core competence (rivals not in
a position to compete simply because they are not able to acquire such a
strength despite best efforts).
According to the Resource Based View (RBV), in order to develop a
competitive advantage, a firm must have resources and capabilities superior to
those of its competitors. Without this superiority, the competitors would easily
replicate what the firm was doing and any advantage would disappear quickly.
A firm is able to create value for its customers through its resources, including
physical, financial, social, human and technological resources. Valuable, scarce
and relevant resources and capabilities help a firm to build a cost or
differentiation advantage. Capabilities refer to the firm’s ability to put its
resources to the best use.

Example: The ability to deliver packages overnight like FedEx, 3M’s

capability to develop radically different products rapidly, Toyota’s capability
to manufacture cars efficiently).
Such capabilities are embedded in the routines of the firm and therefore,
difficult for competitors to copy. The firm’s resources and capabilities together
form its distinctive competencies. A distinctive competency is the ability of a
firm to perform competitively critical tasks relatively well.

Example: Putting lean production methods to best use, Toyota has been
able to build cars far less expensively than others in the industry. Toyota, thus,
has a distinctive competency in the economical production of cars. By reducing
inventory costs and by using a direct distribution channel, Dell is able to offer
PCs at lower cost and gain market share from its competitors consistently.
Such distinctive competencies enable innovation, efficiency, quality and
customer responsiveness — all of which can be leveraged to create a cost
advantage or a differentiation advantage. A firm generally positions itself in
the industry through its choice of low cost or differentiation. This decision is
an important element of the firm’s competitive strategy. Competitive strategy
is the means by which organisations seek to achieve and sustain competitive
advantage. Porter argues that competitive strategy means ‘taking offensive or
defensive actions to create a defendable position in an industry, to cope with
competitive forces and thereby yield a superior return for the firm.’
 Defensive strategies take the structure of the industry as given, and position
the company to match its strengths and weaknesses to it.
 In contrast, offensive strategies are designed to do more than simply cope
with each of the competitive forces; they are meant to alter the underlying
cause of such forces, thereby altering the competitive environment itself.
There are, of course, many specific strategies of each type (offensive or
defensive), and identifying which is best depends on the circumstances.

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However, Porter suggests three broad or generic strategies (They are called Notes
generic strategies because they are not firm or industry dependent and can
be pursued in different kinds of market environments) for creating a
defendable position in the long run and outperforming competitors.

2.1.4 Porter’s Competitive Strategies

According to Porter’s description of 5 forces of competition, firms can raise
their profitability by placing their activities in markets or industries with a low
degree of competition. By doing so, the firm will potentially develop a large
market share and great profits. However, firms also have a second opportunity
to generate profitability. They can optimise their position within a particular
industry and thereby obtain great profits – even if the industry in general may
have below average profitability. Therefore, it is claimed that if firms position
their products or services effectively, they may be able to generate great
profits, even if the industry is generally crowded with players all wanting a
piece of a pie. Porter proposes that firms have the opportunity to position their
products or services by either costs or differentiation and this positioning can
be applied to either a narrow or a broad scope of buyers. This results in three
generic strategies, which are popularly known as cost leadership strategy,
differentiation strategy and focus strategy.

Figure 2.2: Porter’s Generic Strategies

Cost Leadership Strategy

The firm aims to become the lowest cost producer so as to enjoy pricing power
and grab market share from rivals. Here, the firm tries to do things better than
its rivals with a view to drive down costs to backbreaking levels. Such an
exercise, it is firmly believed, would help the firm outwit competitors and push
them to a corner. This strategy is generally associated with fairly large firms
offering ‘standard’ products with relatively little differentiation that are
perfectly acceptable to the majority of customers. Occasionally, a low-cost
leader will also discount its product to maximise sales, particularly if it has a
significant cost advantage over the competition and, in doing so, it can further
increase its market share. A low-cost strategy defends the firm against
powerful buyers. Buyers can drive price down only to the level of the next
most efficient producer. Such a strategy defends against powerful suppliers.

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Notes Cost leadership provides flexibility to absorb an increase in input costs,

whereas competitors may not have this flexibility. The factors that lead to cost
leadership also provide entry barriers in many instances. Economies of scale
require potential rivals to enter the industry with substantial capacity to
produce, and this means that the cost of entry may be prohibitive to many
potential competitors. Firms that succeed in cost leadership often possess the
following internal strengths:
 Access to the capital required to make a significant investment in
production assets; this investment represents a barrier to entry that many
firms may not overcome.
 Skill in designing products for efficient manufacturing, for example, having
a small component count to shorten the assembly process.
 High level of expertise in manufacturing process engineering.
 Efficient distribution channels.

Differentiation Strategy
It involves offering a product or service with unique attributes that are valued
by customers and that customers perceive to be better than or different from the
products of the competition. The value additions made by the firm would help
it charge a premium price for its offering and earn above average profits.
Differentiation can take many forms.

Example: Design or brand image (Rolex watches, Levi’s Jeans, Pepsi

or Coca Cola for brands); technology (Apple’s IPhone, IPads Honda's vehicles
or Hyster in lift trucks); customer service (City Bank or HDFC), unique
channels (Tupperware), unique features (Mercedes-Benz or Cross writing
instruments) quality (Xerox in copiers or Rolls Royce).
Differentiation works best when the differentiating factor is both important to
customers and difficult for competitors to imitate. If buyers are loyal to a
company's brand, a differentiation strategy can reduce rivalry with competitors.
Of course, when costs are too high, customers may choose less costly
alternatives, even though they forego some desirable features. Moreover,
customer tastes and needs can change, so firms following a differentiation
strategy must carefully evaluate customer's shifting preferences from time to
time. Firms that succeed in a differentiation strategy often have the following
internal strengths:
 Access to leading scientific research
 Highly skilled and creative product development team
 Strong sales team with the ability to successfully communicate the
perceived strengths of the product
 Corporate reputation for quality and innovation

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Focus Strategy Notes

It is a strategy that emphasises making a firm more competitive by targeting a
specific regional market, product line or buyer group. The firm can use either a
differentiation or low cost approach, but only for a narrow target market. The
logic of this approach is that a firm that limits its attention to one or a few
market segments can serve those segments better than firms that seek to
influence the entire market. The firm can focus all its resources and efforts on a
niche segment and improve the quality of its offering substantially.

Example: Products such as Rolls-Royce automobiles, Titan jewellery

watches and Cross pens are designed to appeal to a narrow segment of the
market and serve the same well rather than trying to cover the whole ground.
A firm using the focus strategy often enjoys a high degree of customer loyalty
and this entrenched loyalty discourages other firms from competing directly.
Due to a narrow market focus, firms pursuing a focus strategy will have to live
with lower volumes, and therefore, less bargaining power with their suppliers.
However, firms following a differentiation-focused strategy may be able to
pass on higher costs to customers since close substitute products do not exist.
Firms that serve niche segments are able to put excellent product development
strategies in place since they know the niche segment very well. The important
risks are possibilities that the costs for the focused firm will become too great
relative to those of less focused one, differentiation too will become less of an
advantage as competitors serving broader markets embellish their products,
and competitors will begin focussing on a group within the customer
population being served by the firm with the focus strategy.

According to Porter, a firm can choose any one of these strategic

positions in order to achieve success. It can deliberately become an
industry-wide cost leader, an industry-wide differentiator or a focus
strategist and defend such a position, by erecting entry barriers so as to
emerge victorious while selecting and maintaining a strategic position.

2.1.5 Functional Level or Operational Level Strategy

It deals with strategies followed by major functional departments within a
business unit. Key focus areas here would be resources, processes, people,
methods, procedures, etc. Managers heading each functional department (such
as production, finance, marketing, etc.) would be basically choosing actions
and decisions that help them gain competitive edge to effectively pursue the
business level and corporate level goals. Functional level strategies always run
in sync with the firm’s chosen business and corporate level strategies.

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Notes
It is important to note that ‘how we support the business-level
competitive strategy’ is the main concern of functional-level strategy.

A firm’s operations create the product and services that the firms need to serve
customers profitably. Without requisite operational capabilities, a firm may not
achieve success in the marketplace. It may not be able to deliver want-
satisfying goods and services to customers in an effective and efficient way. To
meet its own competitive goals, a firm needs to put its act in place. A cost
leader should be armed with an operations system that ensures a cost advantage
for the firm. A differentiator must have an operations system and is capable of
delivering innovative products with zero defects in a consistent way. In high
performance companies, as the research evidence clearly indicates, there is
perfect harmony between operational capabilities and business goals. A
successful operations strategy reflects managerial decisions and actions aimed
at meeting changing needs of customers by developing strong operations
capabilities. Superior operations effectiveness can support existing strategy as
well as contribute to new strategic direction that can be difficult for
competitors to copy. When a firm’s operations effectiveness is based on
capabilities that are ingrained in its employees, its culture and its operating
processes, the firm can be tough to beat. Managers typically aim to seek four
important objectives while developing a highly effective operations system:
 Achieving superior customer responsiveness
 Achieving superior innovation with speed and flexibility
 Achieving superior quality
 Achieving superior efficiency
To operate efficiently, innovate and produce high quality items that meet
customer’s needs, the firm must have reliable deliveries of high quality,
reasonably priced supplies and materials. It also requires an efficient and
dependable system for distributing finished products making them readily
accessible to millions of customers. Operations managers, therefore, must run
the show keeping how integrated the activities are in the entire supply chain.
Supply chain management is the term for managing the sequence of suppliers
and purchasers covering all stages of processing from raw materials to
distributing finished goods to final consumers.

Example: Dell’s integrated supply chain is a good example to quote

here. Even Dell Inc.’s rivals, for example, admit that the most efficient way to
make, sell and deliver PCs is the way Dell does it. Dell’s PCs are made to
order and delivered directly to customers. Each customer gets exactly what
he/she wants and gets it faster and cheaper than the competitors could provide
it. Dell is electronically connected to suppliers, contract manufacturers and

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distributors so that everyone along the supply chain has almost completely Notes
transparent information about sales, orders, shipments, and other data. That
means, for instance, that suppliers have data about order and production levels
and know what parts Dell’s factories are going to need and when they will
need them. Distributors know when computers will be ready for shipment and
when they will be going. At the end of the supply chain, Dell develops close
connections to customers through a range of channels, including sales and
services, call centres and a direct sales force and technical personnel serving
larger customers. Dell’s role in the supply chain is to manage the electronic
information flows and physical connections among suppliers, partners and
customers.

Formulating Operations Strategy

The operations function plays a very important role in implementing strategy.
It establishes the level of quality as a product is manufactured and a service is
offered. For example, the decision whether to stress high quality regardless of
cost, lowest possible cost regardless of quality or some combination of the two,
has numerous important implications. A highest possible quality strategy
dictates state-of-the-art technology and strict adherence to design and material
requirements. A combination strategy may require lower-grade technology and
less concern about product design and materials specifications. If the firm
decides to upgrade the quality of its products, but lacks production capabilities
and does not have the resources to replace its technology, it becomes difficult
to reach the new standards. Therefore, just as strategy affects operations
management; in a similar way, operations must always be consistent with
corporate strategy so that the full potential of operations’ resources can be
harnessed in pursuit of the companies’ goals.
Operations strategy is the recognition of the important role of operations in
organisational success and the involvement of operations managers in the
organisations’ strategic planning. According to Wheel Wright and Hayes, there
are four stages in the evolution of operations strategy. At stage one; business
strategy is set without taking the capability of operations into account.
Operations management is regarded as an essentially neutral function and is
viewed as incapable of positively affecting the organisation’s competitive
success. The primary focus, then, is on labour costs and operational efficiency,
trying to minimise any negative impact that internal operations may have on
the organisation. At stage two, the operations department sets goals according
to industry practice. The operations attempt to be current with regard to
operations management techniques and views capital investment in plant and
equipment, quality control and inventory management as ways to be
competitive. At stage three, operations strategy is in time with company
strategy and the operations department will find new ways to enhance
competitiveness. Operations managers are involved in implementing and
supporting strategy but not in formulating it. At stage four, operations
managers adopt new technologies on their own with a view to deliver goods

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Notes and services of highest quality. Here operations strategy is regarded as a

genuine competitive weapon. Managers try to anticipate potential technological
advances that could impact operations and to gain the necessary internal
expertise well before the implications are obvious. At this stage, organisations
try to use innovation as a means of making strategic jumps ahead of the
competition. In order to carry out operations strategy successfully, it is
necessary to design and implement well-conceived operating systems. The
primary operating systems that are used in operations management are
discussed below:

Quality

Capacity
Product-Service Mix Planning

Key Design
Issues

Technology

Facilities

Productivity

Figure 2.3: Designing Operating System

 Product-Service Mix (What to Produce): Initially, every firm should
decide about the product service mix, how many and what kind to offer,
keeping the following objectives in mind.
 Productivity: It is the degree to which a product or service can actually be
produced for the customer within the firm’s operational capacity.
 Cost efficiency: It is the sum total of all materials, labour and overhead
expenses associated with a product or service. Striving for simplicity
and few parts keeps product and service designs within reasonable
limits. A company that stresses cost efficiency will keep its operating
costs low relative to those other, similar companies.
 Quality: It is the excellence of the product or service – the serviceability
and value that customers gain by purchasing the products. A company that
stresses quality will consistently try to provide a level of quality that is
significantly superior to that of its competitors, even if it has to pay
something extra to do so.
 Reliability: It is the degree to which the customer can count on the
product or service to fulfil its intended function. The product should
work as designed for a reasonable length of time.

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 Flexibility: It is the degree to which a company can respond to changes Notes

in product design, product mix or product volume.
In actual practice, a company cannot simultaneously have a product that is
lowest in cost, highest in quality and instantly available in every corner of the
country. Depending on factors such as operational capabilities, availability,
resources and technical skills, each company must earmark its niche areas and
design products so as to maximise return-on-investment.
Currently, a growing number of companies are using Design for
Manufacturability and Assembly (DFMA) to avoid problems. The focus of
DFMA is simplicity, making the product easy and inexpensive to manufacture.
DFMA often demands restructuring operations, creating teams of experienced
designers’ manufacturers and assembles to work together.

Capacity Planning (How Many to Produce)

Capacity planning is a process of forecasting demand and then, deciding what
resources will be required to meet that demand. Demand forecasting is the
process of estimating the future demand that can be expected for the
organisation’s various offerings under an array of different market conditions.
According to McClain and Thomas, capacity planning involves the following
sequential steps:
 Predict future demands and competitive reactions: The Company must
estimate customer reaction to the products offered by it and also take care
of potential countermoves by competitors.
 Translate above estimates into capacity needs: Based on forecasts,
management must decide the amount of each offering that can be
manufactured keeping limitations in mind, such as plant, equipment,
human resources, etc.
 Create alternative capacity plans: Depending on what the market might
consume and what the organisation can produce, management should come
out with alternative capacity plans for various products/services that are
offered to customers.
 Evaluate each alternative: As the firm adds to the variety of its offerings
(or volume), costs tend to go up. Such additional costs should be carefully
evaluated in terms of expected payoffs, identifying the opportunities and
threats associated with each choice.
 Select and execute a particular capacity plan: The capacity plan that best
serves corporate objectives and strategies should be picked up and
implemented.

Technology and Facilities Planning (How to Produce)

Process selection and facilities planning (which determines how the product or
service will be produced) involves several important decisions (Stoner).

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Notes  Major Technological Choice: The operations manager at this stage should
pay attention to questions such as: does technology exists to produce the
products, are there competing technologies among which to choose, should
the company import technology through collaborations and joint ventures
or develop it indigenously, etc.
 Process Planning: Here, the operations manager is concerned with
evaluating transformation processes for costs and for consistency with
desired product and capacity plans. Basically, there are two options
available: repetitive processing and batch processing. Repetitive processing
moves the flow of materials through a continuous transformational process.
Batch processing calls for work to be done on materials in batches or
separate orders. Once the basic transformational process is identified, the
decision then shifts to the physical arrangements to be made within the
process.
 Facilities Location Planning: It deals with the selection of the location for
a production or service facility.

Example: Subway needs to find favourable locations for new

restaurants, or Intel needs to find beneficial locations somewhere in the
world for a new research facility or a new chip assembly and testing centre.
Every firm has its own criterion for choosing a particular site for locating a
new facility. In addition to cost considerations associated with purchasing
and building new sites, many other factors must be evaluated including the
supply of skilled labour, access to raw materials and supplies, access to
transportation and communications systems, governmental incentives, etc.
Firms usually carry out a cost-benefit analysis before identifying the most
preferred location where it can set up shop. Of course, new location
scouting software in the recent times is helping managers turn facilities
location from guesswork into a science.
 Facility Layout Planning: Facility layout planning establishes the manner
in which workspace is to be arranged for each operation. For virtually any
type of operation, management must determine the most effective way to
layout the physical facilities. Among the traditional approaches are product
layouts, process layouts and fixed-position layouts.

Learning Activity
Select any organisation of your choice, study its strategic
operational strategy along with its business activities. Prepare a
short report on your understanding about the strategy of an
organisation.

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2.2 STAKEHOLDERS IN BUSINESS Notes

Stakeholders are the individuals and groups who can affects and are affected
by the strategic outcomes, achieved and who have enforceable claims on a
company’s performance.
The stakeholders’ concept reflects that individuals and groups have a stake in
the strategic outcomes of the company because they can be either positively or
negatively affected by those outcomes and because achieving the strategic
outcomes may be dependent upon the support or active participation of certain
stakeholder groups.

2.2.1 Classification of Stakeholders

Stakeholders can be classified as follows:

Primary Stakeholders
 Capital Market Stakeholders

Example: Stock Market, Investors, Debt Suppliers, Banks (Public

and Commercials).
 Products Market Stakeholders
 Organisational Stakeholders

Secondary Stakeholders
Beyond the primary stakeholders, there are other secondary stakeholders as
well and include entities like the community at large, environmental groups,
governments, etc.
Each type of stakeholders has different expectations or demands. This leads to
potential conflicts between these stakeholders, causing frictions. The primary
expectations of each group are summarised in Table 2.1.
Table 2.1: Expectations of Stakeholder Groups
Stakeholder Membership Primary Expectation or Demand
Groups
Capital Market Shareholders, Lenders Wealth enhancement, wealth preservation
Product Market Customers, Suppliers Product reliability at least possible price, receive
highest sustainable price
Organisational Employees, Unions Secure, dynamic, stimulating and rewarding career
Stakeholders environment, ideal working conditions, job security
for members
Secondary Environmental groups Environment protection
Stakeholders
Government Honest tax payments, safety of public, proper
utilisation of resources

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Notes When we review the primary expectations or demands of each stakeholders

group it becomes obvious that a potential conflicts exists.

Example: Shareholders generally invest for wealth maximisation

purpose and are, therefore, interested in a company maximising its Return on
Investment (ROI).

2.3 STRATEGIC INTENT

Strategic intent is all about what a firm wants to achieve in the long-term. It is
an ambitious, bold and obsessive target that the firm seeks to achieve by taking
a big leap. Such an exercise would stretch the firm fully and think beyond the
obvious. The firm seeks to grow big, achieve dominance in marketplace, grab
market share from rivals, indulge in radical innovation, and set seemingly
impossible targets for people to achieve. Strategic intent offers a sense of
purpose to organisational members and compels them to keep their sights
focused always on the targets to be met.
‘Strategic Intent’, therefore, is the leveraging of a firm's internal resources,
capabilities and core competencies to accomplish the firm’s vision, mission
and objectives in a competitive environment. It is all about winning
competitive battles and gaining leadership position by putting organisational
resources to the best use. When established effectively, a strategic intent can
cause people to turn out excellent performance.
 Strategic intent is said to exist when all employees and levels of a firm are
committed to the pursuit of a specific but significant performance target.
 The strategic intent can take the form of a broad vision or mission
statement or a more focused route covering specific objectives and goals.
 Strategic intent tries to establish the parameters that shape the values,
motives and actions of people throughout their organisation.
 A firm expresses itself clearly in terms of what it wants to achieve in the
long-term through its strategic intent. It is actually a stretch exercise in that
it helps individuals and organisations share the common intention to
survive and continue or extend themselves through time and space.
 Defining your strategic intent clarifies objectives for both you and your
employees.
 By setting out strategic intent, you make clear your company’s goals and
help set the path for future successes.

2.3.1 Hierarchy of Strategic Intent

The hierarchy of strategic intent includes the following elements:
 A broad vision of what the organisation should be,

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 Organisation’s mission, Notes

 Strategic objectives and specific goals to be pursued relentlessly,
 Plans that are developed to accomplish the intentions of management in a
concrete way

‘Strategic Intent’ is the leveraging of a firm's internal resources,

capabilities and core competencies to accomplish the firm's vision, mission
and objectives in a competitive environment.

Vision and Mission

Vision
A vision is a long-term goal describing what an organisation wants to become.
It is a vividly descriptive image of what a company wants to be or wants to be
known for in future – a kind of an idealistic dream. Of course, the projected
future is not something that can be reached in normal course; it requires a
quantum leap. It describes a desired end in inspirational terms and induces
purposive, committed action. Vision is generally expressed in ambitious terms
like ‘to be the most admired firm in the industry’ or ‘to be a technological
leader’ or ‘to be the best innovator,’ etc. Vision Statements could reveal the
following:
 An organisation's fundamental reason for existence beyond just making
money
 Its timeless, unchanging core values. The core values define the enduring
character of an organisation that remains unchanged as it experiences
changes in technology, competition, management styles, etc.
 Huge and audacious but achievable aspirations for its future
 Vision is something unique to each firm that differentiates it from the
competition. It offers an inspirational foundation for managers to make the
right strategic choices that will put a firm on a desired path keeping the
strengths of the firm in mind. It projects an ideal future that inspires and
motivates people to give their best and reach the summit.
 Clear statements of vision help people to remain focused on the firm’s
future and engage in activities that lead to a desired outcome.

Example: Vision statements of some companies:

 BHEL: ‘A world class innovative, competitive and profitable
engineering enterprise providing total business solutions.’

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Notes  Colgate-Palmolive: ‘To be the company of first choice in oral and

personal hygiene by continuously caring for consumers and partners.’
 NTPC: ‘To make available, reliable and quality power in increasingly
large quantities.’ Shareholders generally invest for wealth maximisation
purpose and are, therefore, interested in a company maximising its
Return on Investment (ROI).

Mission
Organisations are founded for a purpose. Although the purpose may change
over time, it is essential that stakeholders understand the reason for the
organisation's existence, that is, the organisation’s mission. The mission
describes the organisation's values, aspirations and reason for being. It reveals
the long-term vision of an organisation in terms of what it wants to be, where
exactly it wants to go, and whom it wants to serve. According to Thompson,
‘The mission reflects the essential purpose of the organisation, concerning
particularly why it is in existence, the nature of the business(es) it is in, and the
customers it seeks to serve and satisfy.’ It is a kind of visionary statement, a
dramatic picture of what the company wants to become and grand designs of
the firm's future (While the mission statement answers the question, what is
our business; the vision statement answers the question, what do we want to
become.) The mission is generally expressed in a broad manner and it is
unlikely that it can ever be achieved completely. The mission is an enduring
statement of purpose that distinguishes one business from other similar firms.
It identifies the scope of its operations in product and market terms. It implies
the image the firm seeks to project and reflects the values and priorities of the
firm's strategic decision makers. The obvious purpose of a mission statement is
to give a public announcement to insiders and outsiders about what the firm
stands for, what makes the firm different (instead of stating the obvious) and a
more effective competitor. Firms which succeed in the long-term are those
which create competitive advantages and sustain their strong positions with
flexibility and improvement. In the end, the mission statement should support
this position.

Features of a Good Mission Statement

A good mission statement has the following features:
 Clarity: The mission statement should be clear enough to lead to action.
The corporate dream must be presented in crystal-clear manner preferably
in a positive tone.

Example: SBI with you all the way.

 Long-term Purpose: Mission refers to a firm’s long-term purpose and its
solemn resolve to achieve it. There is a clear indication of what the firm
intends to become in the future and how the firm wants to convert its intent

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into a concrete reality. A well-articulated and inspiring mission statement is Notes

in fact, the starting point for a firm’s path to success. It lays down a clear
path for employees to follow.
 Broad and Enduring: The mission is a grand design of the firm's future. It
is a general statement of the firm's intent, a kind of self-image the firm
intends to project for years to come. However, it should neither be so
narrow as to restrict the firm's operations nor should it be too general to
make itself meaningless. To make things clear, mission statements come in
two forms: primary mission (a general category of business to be engaged
in) and secondary mission (defining everything more specifically).
 Identity and Image: The mission sets a firm apart from other firms of its
style. Through this statement, the firm wants to maintain its distinct image
and character in terms of excellent quality and service, latest technology,
and unique product offerings, etc.

Example: Asian Paints stresses, 'Leadership through Excellence';

BSNL strives for ‘Connecting India’, HCL’s mission is ‘To be a world
class competitor,’ etc.
 Realistic: Missions should be realistic and achievable, of course, by
running that extra mile. Air India would be deluding itself if it adopted the
mission to become the world's favourite airline.
 Specific: Missions should be specific. They must define the competitive
scopes within which the company will operate, that is the range of
industries in which a company will operate (industrial goods, consumer
goods and services)
 Values, Beliefs and Philosophy: The mission lays emphasis on the values
the firm stands for, what it intends to do so that it stands out in a crowd,
what is unique about its offerings, how it strives to meet the needs of its
customers, employees, suppliers and dealers. The statement of a company's
philosophy, known as the company creed, usually accompanies or appears
within the mission statement. To be useful, statements of company
philosophy must give a realistic picture of what the company stands for.
 Vision: The mission is an expression of the vision of the corporation; its
leader or founder. A vision statement usually describes what the company
wishes to become in the (long-term) future. Mission is what an organisation
is and why it exists.

Example: Mission statements of some companies:

Bharat Heavy Electrical Ltd. (BHEL): ‘To achieve and maintain a leading
position as suppliers of quality equipment, systems and service to serve the
national and international market in the field of energy. The areas of

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Notes interest would be the conversion, transmission, utilisation and conservation

of energy for applications in the power, industrial and transportation fields,
to strive for technological excellence and market leadership in these areas.’
Oil and Natural Gas Commission (ONGC): ‘To stimulate, continue and
accelerate efforts to develop and maximise the contribution of the energy
sector to the economy of the country.’

Purposes of Mission Statement

Mission statement has the following purposes:
 Reference Point: The mission guides the operations of a firm by providing
proper direction and a sense of purpose. Objectives and strategies are
generally designed, keeping the broad picture offered by mission in the
background.
 Educative Value: The mission educates people about corporate vision and
purpose: why the company is there, what existence it seeks, where it wants
to go in future, etc. When everyone is able to understand the corporate
mission properly, a kind of unity of purpose is achieved.
 Motivating Force: The mission offers a broad roadmap to all people. They
draw meaning and direction from it. The targets are set, work is assigned,
resources are committed to best use and people can now compare
themselves against the benchmarks set by the mission. They can change
direction whenever they go off the track and set everything along right
paths. Mission helps people to understand organisational priorities and
commit resources accordingly.
 Productive use of Resources: The mission helps to ensure that the
organisation will not pursue conflicting purposes. It does not allow the
constituent elements of an organisation to move in different directions. ‘As
a result, resources are put to best use, avoiding waste and conflict at various
levels. Thus, corporate mission helps in focussing human effort, ensuring
compatibility of organisational purposes; provides a rationale for resource
allocation; indicates broad areas of job responsibility and offers the
foundation for organisational objectives. It provides managers with a unity
of direction that transcends individual, parochial and transitory needs. It
promotes a sense of shared expectations among all levels and generations
of employees. It consolidates values over time and across individuals and
interest groups. It projects a sense of worth and intent that can be identified
and assimilated by company’s outsiders. Finally, it affirms the company's
commitment to responsible action, which is symbiotic with its need to
preserve and protect the essential claims of insiders for sustained survival,
growth and profitability of the firm (Pearce).

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Notes
The mission statement should be clear enough to lead to action.
The corporate dream must be presented in crystal-clear manner preferably in
a positive tone.

2.3.2 Business Definition

A business definition is a clear statement of the business the firm is engaged in
or is planning to enter. It answers the question: What is our business, in a
precise way. Consider the statements: “we are in the business of computing
technology’ (Intel). “We are watch makers to the nation” (HMT); “We are in
the transportation business” (TELCO). These statements define the ‘space’ that
the business wants to create for itself in a competitive terrain. They broadly
specify the opportunities that the business may exploit within that space and
the threats it may encounter from rival firms in course of time. Of course, the
firm has to define its business in a broad way, keeping changing customer
tastes and aspirations in mind.
An organisation, obviously, needs to define its business covering three vital
aspects: (1) The product/service offering, (2) Customer segment and (3) Value
creation.
 The Product /Service Concept: A product or service concept is the way in
which a firm likes to position its products/services in the market, in terms
of product features, quality, price, service, distribution, differentiating
elements, etc. While trying to position its products/services in a distinct
manner, the company should not lose sight of its present and potential
rivals, competitive environment, changing preferences of customers, etc.
 Customer Segment: A firm cannot appeal to all buyers in the market in the
same way since buyers are too numerous, too widely scattered and too
varied in their buying needs and buying practices. Moreover, different
firms vary widely in their abilities to serve different segments of the
market. Under these circumstances, covering a lot of ground without any
focus does not ensure success. Each firm, therefore, needs to focus its
energies and resources in a target market that is best suited to its core
competencies.
 Value Creation: A firm, in the final analysis, has to define the factors that
offer 'value' to customers in terms of low price, high quality, fast delivery,
novel features, excellent after-sales service, etc. Simply stated, value is the
ratio between what the customer gets (both functional and emotional
benefits) and what he/she gives (in terms of money paid, energy expended,
time spent and the opportunity scarified). To survive and flourish in a
competitive market, a firm should always define its business in terms of
how it is going to offer certain benefits to customers more effectively than
its rivals do.

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Notes The vision, mission and business definitions help a firm to define its basic
philosophy to be adopted in the long-run. Objectives and goals try to translate
this rhetoric into concrete action plans in the short-term. The next section
throws light on this aspect.

2.3.3 Objectives and Goals

A goal or objective (both terms used interchangeably in the text) is a specific
target that the firm intends to reach in the long-term. It indicates the result that
an organisation expects to achieve in the long-run. It is the end result, the end
point, something that you aim for, and try to reach. It is a desired result
towards which behaviour is directed in the organisation. The organisation may
or may not reach the desired state, but the chances of doing so are greater if the
objectives are framed and understood properly.
Objectives are the products of specific, concrete thinking. They commit
persons and organisations to verifiable accomplishments. In fact, the concept
of goal has acquired a variety of meanings, depending on the perspective of the
writer. It is sometimes used to legitimise the role of the organisation in society
or to provide a motive for organisation's activity.
A goal may also be a specific accomplishment such as manufacturing a
particular quantity of automobiles during a given time period. In another sense,
goals may be considered as the set of constraints that the organisation must
satisfy, i.e. making profits for the shareholders, meeting the governmental
safety standards, pacifying the environmentalists and satisfying customers.

Characteristics of Objectives
The following are the characteristics of objectives:
 Objectives form a hierarchy: In many organisations, objectives are
structured in a hierarchy of importance. There are objectives within
objectives. They all require painstaking definition and close analysis, if
they are to be useful separately and profitable as a whole. The hierarchy of
objectives is a graded series in which organisation's goals are supported by
each succeeding managerial level down to the level of the individual. The
objectives of each unit contribute to the objectives of the next higher unit.
 Objectives form a network: Objectives interlock in a network fashion.
They are inter-related and inter-dependent. The concept of network of
objectives implies that once objectives are established for every department
and every individual in an organisation, these subsidiary objectives should
contribute to meet the basic objectives of the total organisation.
 Multiplicity of objectives: Organisations pursue multifarious objectives. At
every level in the hierarchy, goals are likely to be multiple.
 Long and short-range objectives: Organisational objectives are usually
related to time. Long-range objectives extending over five or more years
are the ultimate or ‘dream’ objectives for the organisation. They are
abstractions of the entire hierarchy of objectives of the organisation.

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Notes
Learning Activity
Select any organisation of your choice, study its strategic vision,
mission and business functions along with its business objectives
and goals. Prepare a short report on your understanding about the
strategy of an organisation.

Dell

T he AICPA Information Technology Executive Committee recently

visited the Dell Server Production facility in Austin, Texas to see
first-hand how Dell has revolutionised the concept of Mass
Customisation. Dell has recently become the number one maker of file
servers in the US as well as holding the number two position worldwide.
The production process from order to delivery is managed electronically,
which allows Dell to build servers very efficiently and their customers to
know where their server is during each step of the process.
The production process begins with the customer ordering the server and
individual components (over 50% are ordered via the Dell website or a
customised page created for business customers). This information is placed
in a production queue that breaks out every component that is to be
assembled into the server. The required inventory is then allotted to the
assembly area to make sure that it is adequately queued. Dell partners with
suppliers to provide them with the production pipeline, so they can have
inventory readily available on the loading docks (that are connected to the
factory floor). This allows Dell to maintain only two hours of actual
inventory on the factory floor.
The detailed specifications and listing of components are then printed on a
‘traveller’ form, which includes the assigned customer service tag for the
server. The actual production begins with the chassis, motherboard and
memory assembled and moved to the ‘kit’ area where the various internal
components (such as drives, cards and connectors) are added to the tray.
These kits then move to the assembly area where they are automatically
routed to the next available assembler (the server facility we visited had 80
such stations with individuals producing between 18 and 26 servers in two
shifts each day). The traveller form then lists each item in the order to be
implemented and the assembler scans the bar code to ‘check’ it off the
completed list, so no part can be left out. Remarkably, as the assembler is
building the current server, they are simultaneously performing primary
testing on up to four additional servers they have built. Dell originally had
two individuals assembling each computer, but found they could increase
Contd...

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Notes production 30-40% by having certified individuals responsible for the entire
build. Each assembler only builds the servers they are certified on (which
can be up to fifteen different models).
During preliminary testing, if a problem is encountered that cannot be
corrected within five minutes, a technician is called by switching a green
light above their work area to red. In turn, if the technician cannot resolve
the issue at the assembly station within five minutes, it is brought to a
special section on the floor where expert technicians diagnose the problem
and direct a solution. If they cannot fix the issue, a new production order is
placed and the inoperable unit is sent to a special laboratory for detailed
diagnostics.
The servers then move down the assembly line and are automatically
stacked into carts holding four units each, which are transferred to the burn-
in area and tested for six to eighteen hours depending on specifications. If
there is specific customer software to be loaded, it is installed and tested in a
special part of the burn-in area. Once a server has completed testing, it is
placed mechanically in a shipping container to minimise any risk of
damage. At the same time, the ‘collateral’ materials that are to be shipped
with the server are assembled by an automated ‘pick’ system, which turns a
light on in front of each item that is to be placed in the shipping container,
again removed by a scanning of the bar code on the item to ensure
everything is included. Then the box passes through a conveyor system,
reaches a centralised shipping area and is delivered to the client. Though
production occurs very quickly, each server is customised on a mass scale
making Dell one of the leaders in the server market.
Questions
1. How Dell meets the changing needs of customers through mass
customization? Explain it.
2. Analyze the above case study in your own words and prepare a detailed
note on it.

1. Strategy formulation is the process by which an

organization chooses the most appropriate courses of
action to achieve its defined goals.
2. The challenge is not only to set the effective business
objectives, but smooth coordination is also required.
A better-coordinated objective keeps business
activities on right track. It makes behaviour in
organisation more rational, more coordinated and,
thus, more effective, because everyone knows the
accepted goals to work towards.

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SUMMARY Notes
 Mission statement is a broad declaration of the basic, unique purpose and
scope of operations that distinguish the organisation from others of its type.
 Strategy formulation is the process of determining appropriate courses of
action for achieving organisational objectives and thereby accomplishing
organisational purpose.
 A vision is vividly descriptive image of what a company wants to be or
wants to be known for in future. A vision is generally stated as an
ambitious long-term target.
 Purpose is anything which an organisation strives for.
 Goal is a specific target that the firm intends to reach in the long-term.
 Strategy formulation is the process of offering proper direction to a firm. It
seeks to set the long-term goals that help a firm exploit its strengths fully
and in cash the opportunities that are present in the environment.
 Strategic Manager can play a vital role, especially in identifying and
analysing external threats and opportunities (environmental scanning) that
may be crucial to the company's success.
 Strategic Manager can also offer competitive intelligence (e.g., new
incentive plans being used by competitors, data regarding customer
complaints, etc.) that may be helpful while giving shape to strategic plans.
 Strategic Manager can also throw light on company's internal strengths and
weaknesses. The resulting strategic plans capitalise on the firm’s strengths
and opportunities and minimise or neutralise its threats and weaknesses.
 Corporate strategy represents the firm’s decisions and actions to gain
advantages over rivals by managing a portfolio of products or businesses.

KEYWORDS
Strategic Intent: Strategic intent is the leveraging of a firm's internal resources,
capabilities and core competencies to accomplish the firm’s vision, mission
and objectives in a competitive environment.
Corporate Level Strategy: This strategy is formulated by the top management
for the overall company.
Business Level Strategy: A competitive strategy that focuses on meeting
competition, protecting market share and achieving profits at the business unit
level.
Functional Level Strategy: The strategy pursued by each functional area of a
business unit such as finance, marketing, personnel, production, etc.

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Notes Strategic Management: It is a process by which the senior management

examines the organisation and the environment in which it operates and
attempts to establish an appropriate and optimal fit between the two to ensure
the organisation’s success.
Divestment: When a company sells or “spins off” one of its business units, it is
engaging in divestment. Divestment usually takes place when the business unit
is not doing well or when it no longer fits the company’s strategic profile.
Turnaround: A turnaround is designed to reverse a negative trend and bring
the organisation back to normal health and profitability.
Liquidation: This is a strategy to be followed as ‘last resort’. When neither a
turnaround nor a divestment seems feasible, liquidation is used. Liquidation
involves selling or disposing of, all or part of, an organisation’s assets.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What is strategic intent?
2. What is vision?
3. What is mission?
4. What are objectives?
5. What is goal?
6. Define the business.
7. Explain the purposes of strategic mission.
8. What is corporate level strategy?
9. What do you understand by combination strategy?
10. What is liquidation?
11. What is turnaround?
12. What is divestment?
13. What is functional level strategy?
14. What is business level strategy?
15. What is corporate level strategy?
16. What is stability strategy?
17. What is retrenchment strategy?
18. What is a purpose?
19. What is an expansion strategy?
20. What is an external growth?

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Long Answer Questions Notes

1. ‘All vision statements are not effective.’ Discuss.
2. What do you mean by vision? Explain the key features of a good vision
statement.
3. Explain the role of vision in strategic management of a firm.
4. What do you mean by mission? Why is it necessary as a starting point in
the process of strategic management?
5. Explain the concepts of the strategy formation process in detail.
6. Describe the corporate level strategy in detail.
7. Explain the concepts of the retrenchment strategy in detail.
8. Describe the concepts of stakeholders. How they are important for the
organization? Explain it with their types also/
9. Explain the concepts of strategic intent along with their various parts with
relevant company examples.
10. What is business? What are the business objectives and goals? Explain
their characteristics also.

FURTHER READINGS

Srinivasan R. (2008), Strategic Management: The Indian Context

PHI Learning Pvt. Ltd., New Delhi
Sengupta Nitish and Chandan J.S., (2003), Strategic Management
- Contemporary Concepts and Cases, Vision Books, Delhi
Salwan Prashant and Carpenter Mason A, (2006), Strategic
Management: Concepts and Cases, Pearsons India, Delhi
Gupta Vipin, Gollakota Kamala and Srinivasan R, (2007),
Business Policy and Strategic Management: Concepts and
Applications PHI Learning Pvt. Ltd. New Delhi

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Notes
LESSON 3 - CORPORATE GOVERNANCE AND
SOCIAL RESPONSIBILITY

CONTENTS
Learning Objectives
Learning Outcomes
Overview
3.1 Corporate Governance
3.1.1 Objectives of Corporate Governance
3.1.2 Principles of Corporate Governance
3.1.3 Need for Corporate Governance
3.2 Corporate Governance in India
3.3 Corporate Social Responsibility
3.3.1 Argument against Social Responsibility
3.3.2 Argument for Social Responsibility
3.3.3 Types of Social Responsibility
3.4 Corporate Social Responsibility in India
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of corporate governance
 Describe the corporate governance in India
 Explain about social responsibility
 Understand the social responsibility in India

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LEARNING OUTCOMES Notes

Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 basics of corporate governance
 analyzing objectives of corporate governance
 explain corporate governance in India
 concept of corporate social responsibility
 identifying argument against social responsibility
 determine corporate social responsibility in India

OVERVIEW
Let us first review the previous lesson. You have studied about strategy
formation process and its significance. You also learnt various strategy
formations. At the end of the lesson, you have learnt about the stakeholders in
business. Now, you will know about the corporate social responsibility. You
will also learn the corporate governance.
Business enterprises are greatly influenced by strategy. As a rule, therefore,
business managers are expected to run the show in sync with expectations of
employees, consumers, suppliers and the society at large. Quite often,
businesses that failed to understand the impacts from environmental forces and
respond in an appropriate manner have been consigned to flames.
We advise you to learn this lesson carefully. It will give you a better
understanding of the present scenario of the India’s corporate governance and
social responsibility of strategic environment.

3.1 CORPORATE GOVERNANCE

Corporate governance is the acceptance by the management of the inalienable
rights of shareholders as the true owners of the corporation and their own role
as trustees on behalf of the shareholders. It deals with conducting the affairs of
a company such that there is fairness to all stakeholders and that their action
benefits the greatest number of stakeholders.
Corporate governance is a relationship among stakeholders that is used to
determine and control the direction and performance of companies. It is
determining how shareholders can ensures that managers develop and
implement strategic decisions that are in the best interests of the shareholders
(owners) and not primarily self-serving (in the best interests of managers only,
to the detriment of shareholders). In the absence of effective internal
governance mechanisms, the market for corporate control – an external
governance mechanism – may be activated.

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Notes Several governance mechanisms are used in a modern corporation. Some of

them are as follows:
 Ownership Concentration representing the relative amounts of stock
owned by individual shareholders and institutional investors.
 Boards of Directors or the individuals responsible for representing the
company’s owners by monitoring the strategic decisions of top-level
managers.
 Executive Compensation or the use of salary, bonuses and long-term
incentives to align the interests of managers with those of shareholders
(owners).
 Market for Corporate Control or the purchase of a company that is under
performing relative to its industry rivals in order to improve its strategic
competitiveness.
The primary purpose of the governance mechanisms is to prevent severe
problems that may occur because of the separation of ownership and control in
large companies by positively influencing managerial behaviour. The ability of
governance mechanisms to direct top-level manager’s action towards preferred
shareholders objectives are dependent on the correct combination of
mechanisms being used.

3.1.1 Objectives of Corporate Governance

Good corporate governance consists of a system of structuring, operating and
controlling a company in order to achieve the following:
 Ethical Side: A culture based on a foundation of sound business ethics.
 Achievement of Goals Keeping the Interest of all Stakeholders: Fulfilling
the long-term strategic goal of the owners while talking into account the
expectations of all the key stakeholders.
 Employees: Consider and care for the interests of employees past, present
and futures.
 Customers: Work to maintain excellent relations with both customers and
suppliers.
 Environment and Local Communities Interests: Take account of the
needs of the environment and the local community.
 Legal Compliance: Maintaining proper compliance with all the applicable
legal and regulatory requirements under which the company is carrying out
its activities.

3.1.2 Principles of Corporate Governance

The following are the principles of corporate governance:

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Rights and Equitable Treatment of Shareholders Notes

Organizations should respect the rights of shareholders and shareholders to
exercise those rights. They can help shareholders exercise their rights by
effectively communicating information that is understandable and accessible
and encouraging shareholders to participate in general meetings.
Interest of other Stakeholders
Organizations should recognize that they have legal and other obligations to all
legitimate stakeholders.
Role and Responsibilities of the Board
The board need a range of skills and understanding to be able to deal with
various business issues and have the ability to review and challenges
management performance. It needs to be sufficient size and have an
appropriate mix of executive and non-executive directors. The key roles of
chairperson and CEO should not be held by the same person.
Integrity and Ethical Behaviour
Ethical and responsible decision-making is not only important for public
relations, but it is also a necessary element in risk management and avoiding
lawsuits. Organizations should develop a code of conduct for their directors
and executives that promote ethical and responsible decisions making. It is
important to understand, though, that reliance by a company on the integrity
and ethics of individuals is bound to eventual failure. Because of this, many
organizations establish Compliance and Ethics Programmes to minimize the
risk that the firm steps outside of ethical and legal boundaries.
Disclosure and Transparency
Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide shareholders with a level
of accountability. They should also implement procedures to independently
verify and safeguard the integrity of the company’s financial reporting.
Disclosure of material matters concerning the organization should be timely
and balanced to ensure that all investors have access to clear, factual
information.
3.1.3 Need for Corporate Governance
Corporate governance has assumed additional significance in the light of a
series of corporate frauds and scandals hitting almost every country in the
recent past. Without good governance in place, the funds entrusted to managers
are likely to be diverted for private purposes. Management might pursue a
scandalous private agenda away from public gaze and scrutiny, literally
throwing mud on the faces of regulatory authorities and the gullible public.
And when capital is squandered away like that, global capital might not flow
into companies and countries where there is a question mark over ethics and
morals. Foreign institutional investors might skip those companies and

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Notes countries and might even downgrade them as risky bets. Good governance is
the only outstanding guarantee that funds are put to best use. Banks and
financial institutions can lend to such companies safely. When every company
adopts a strict ethical and moral code, there is very little risk of companies
failing to meet the expectations of stakeholders according to Varun Bhat, good
governance is essential because of the following reasons:
 Good governance ensures transparency, accountability and enforceability
in the marketplace.
 Countries where there are no question marks over governance are safe bets
for foreign institutional investors. It is widely believed that corporate
governance can raise efficiency and growth.
 In an open market, investors choose from a variety of investment vehicles.
The existence of a corporate governance system is likely a part of this
decision-making process. In such a scenario, firms that are “more open and
transparent,” and thus well governed, are more likely to raise capital
successfully because investors will have “the information and confidence
necessary for them to lend funds directly” to such firms. Moreover, well-
governed firms likely will obtain capital more cheaply than firms that have
poor corporate governance practices because investors will require a
smaller “risk premium” for investing in well-governed firms.
 Also, sound corporate governance practices enable management to allocate
resources more efficiently, which increases the likelihood that investors
will obtain a higher rate of return on their investment.
 Leading indices show that developing countries that have good governance
structures consistently outperform developing countries with poor
corporate-governance structures. Thus, in an efficient capital market,
investors will invest in firms with better corporate-governance frameworks
because of the lower risks and the likelihood of higher returns. At a macro
level, if firms in developing countries attract investment, they will
stimulate growth in the local economy. If they “cannot attract equity
capital, they are doomed to remain on a small, inefficient scale,” and they
will not be able to stimulate growth in their host country.
 Finally, research shows that well-governed firms are valued significantly
higher than firms with imperfect corporate-governance practices are.

Five Golden Rule of Best Corporate Governance

Ethics: A clearly ethical basis to the business.
Align Business Goals: Appropriate goals, arrived at through the creation of
a suitable stakeholder decision-making model.
Strategic Management: An effective strategy process which incorporates
stakeholder value.
Contd...

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Organisation: An organisation suitably structured to effect good corporate Notes

governance.
Reporting: Reporting systems structured to provide transparency and
accountability.

3.2 CORPORATE GOVERNANCE IN INDIA

The organisational framework for corporate governance initiatives in India
consists of the Ministry of Corporate Affairs (MCA) and the Securities and
Exchange Board of India (SEBI). The first formal regulatory framework for
listed companies specifically for corporate governance was established by the
SEBI in February 2000, following the recommendations of Kumar Mangalam
Birla Committee Report. It was enshrined as Clause 49 of the Listing
Agreement. Thereafter SEBI had set up another committee under the
chairmanship of Mr N R Narayana Murthy, to review Clause 49, and suggest
measures to improve corporate governance standards. Some of the major
recommendations of the committee primarily related to audit committees, audit
reports, independent directors, related-party transactions, risk management,
directorships and director compensation, codes of conduct and financial
disclosures. The Ministry of Corporate Affairs had also appointed Naresh
Chandra Committee on Corporate Audit and Governance in 2002 in order to
examine various corporate governance issues. It made recommendations in two
key aspects of corporate governance: financial and non-financial disclosures,
and independent auditing and board oversight of management. It had also set
up a National Foundation for Corporate Governance (NFCG) in association
with the CII, ICAI and ICSI as a not-for-profit trust to provide a platform to
deliberate on issues relating to good corporate governance, to sensitise
corporate leaders on the importance of good corporate governance practices as
well as to facilitate exchange of experiences and ideas amongst corporate
leaders, policy makers, regulators, law enforcing agencies and non-
government organisations.
An effective regulatory and legal framework is indispensable for the proper
and sustained growth of the company. In the rapidly changing national and
global business environment, it has become necessary that regulation of
corporate entities is in tune with the emerging economic trends, encourage
good corporate governance and enable protection of the interests of the
investors and other stakeholders. Further, due to continuous increase in the
complexities of business operation, the forms of corporate organisations are
constantly changing. As a result, there is a need for the law to take into account
the requirements of different kinds of companies that may exist and seek to
provide common principles to which all kinds of companies may refer while
devising their corporate governance structure.
The important legislations for regulating the entire corporate structure and for
dealing with various aspects of governance in companies are Companies Act,

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Notes 1956 and Companies Bill, 2004. These laws have been introduced and
amended, from time-to-time, to bring more transparency and accountability in
the provisions of corporate governance. That is, corporate laws have been
simplified so that they are amenable to clear interpretation and provide a
framework that would facilitate faster economic growth. Secondly, the
Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of
India Act, 1992 and Depositories Act, 1996 have been introduced by Securities
and Exchange Board of India (SEBI), with a view to protect the interests of
investors in the securities markets as well as to maintain the standards of
corporate governance in the country.

The Report of SEBI Committee (India) on Corporate Governance

defines corporate governance as the acceptance by management of the
inalienable rights of shareholders as the true owners of the corporation and
of their own role as trustees on behalf of the shareholders.

Learning Activity
Prepare a detailed note of your understanding about the corporate
governance. Your report must be based upon the corporate
governance of Indian scenario. Support your answer with a
relevant company (Maruti-Suzuki) example.

3.3 CORPORATE SOCIAL RESPONSIBILITY

Corporate responsibility is more commonly addressed as Corporate Social
Responsibility (CSR). It determines whom should the organisation be there to
serve, and how the direction and purposes of the organisation should be
determined. The difference between Corporate Governance and CSR is that
CSR is inherently multidimensional and has a more external focus, or
considering a wider range of stakeholders. In addition to its shareholders, an
organisation also interacts with employees, consumers, public authorities, non-
governmental organisations, all of which entertain differing expectations, but
have a stake in the well-being of the organisation.

3.3.1 Argument against Social Responsibility

The principal arguments against social responsibility are as follows:
 A competitive business cannot be genuinely selfless. Management cannot
commit funds irrationally just to satisfy public expectations in areas where
there are no direct or indirect benefits. If an enterprise spends lavishly on
social action programmes and its competitors do not emulate the example,
it will significantly increase the cost of the socially responsible institution

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and hence, its prices will be higher and it will certainly lose business. Notes
Managers, as employees of shareholders, have no discretion to indulge in
this type of extravagance.

According to Milton Friedman, the Nobel Laureate, social

responsibility is a ‘theft’; managers are trying to distribute what is not
theirs, strictly speaking. It is an illegitimate exercise of power.
 The corporation is basically an economic institution. It is not a charitable
agency or a community service institution. Outlays for general socially
responsible activities will distort the allocation of scarce funds available to
a firm and will turn the firm into a vast wasteland in the long run. Actually,
social responsibility should be the function of government, civic
organisation and other social institutions. “Social problems can be
successfully solved only by those institutions best fitted to deal with them."
In the case of a firm, it has neither the necessary freedom nor the
appropriate standards of selection for pursuing many of the socially
desirable activities blessed by society. Social responsibility is clearly anti-
business rhetoric smuggled into the economic scene just to mollify an
angry public.
 Managers are not trained to pursue social goals. They do not have an
appropriate apparatus to destroy the public ‘bads’ and concentrate on
public ‘goods’. They are not competent to orchestrate the non-economic
objectives successfully and decide the issue of turning corporate ‘bad guys’
into corporate ‘good guys’ by applying their value judgements. If these
pious intentions were to be turned down by the society, they may find
themselves suddenly in a no-win position. Since there is a considerable
disagreement among the public as to what should be done, corporate
managers hence will be criticised, no matter what is attempted.
 Managers are not magicians. Society cannot expect the corporation
managers to perform miracles. They cannot offer goods at fair prices,
satisfy ever-hungry working groups, fatten the coffers of shareholders, keep
the inflation monster under check, pay exorbitant taxes and also bless the
numerous unrelated social projects in a selfless manner. “Business
corporations are not bottomless cornucopia able to solve all of society’s
ills.’ Attempts to soft-pedal profit maximisation policies would prove to be
disastrous for the firm in the long run. Profit implies socially preferred
behaviour. It means placement of funds to the best advantage; loss means
impoverishment of society. Profit is the dynamic element and motivating
force behind economic development and all-round progress. Further, social
responsibility is a fair-weathered concept; management cannot dream of
philanthropy unless profits are sufficient.

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Notes Emphasis upon the profit objective tends to obscure the existence of other
goals of the enterprise. Every business has other objectives that it must
accomplish, however, primarily focussing on its sales and realisation of its
profits. The social responsibility of business, as it is often termed, implies a
sense of obligation on the part of the business towards the general public.

3.3.2 Argument for Social Responsibility

The issue of social responsibility is a complex one since it deals with an
institution that is at the heart of society. Businesses employ a vast majority of
the workforce in India and are in control of vast human and financial resources.
Any modification or decision about how these resources are put to use has
obvious consequences for the balance of society. It is this resource power base
that generates many of the arguments favouring greater social involvement of
business:
 A healthy business cannot exist in a sick society: An organisation does not
flourish in a vacuum. In all its operations, it is vitally influenced by its
environment. Corporations are social institutions and as such must live up
to society’s exacting standards. Society’s expectations of business have
broadened considerably in the recent years to encompass more than the
traditional economic function. In the light of the ‘revolution of rising
expectations’, it is the first duty of every business to ensure that its
decisions and operations meet the needs and interests of society. It must
mirror the ideals and values of society of which it is an ‘integral part’.

The prescriptions provided by Milton Friedman and others are

convincing, but quite often many problems cannot be satisfactorily
resolved through a sudden rush to profit calculus.

It is true that managers are not given any rigorous training to assume social
roles, but the social and political influence of their actions is inevitable and
will have far-reaching consequences. The decisions made by corporations
not only affect the community but may affect significantly both the national
and international economic activity.

Example: When a manager decides to raise product prices or

move out of an economically backward region, the lives of millions of
people are affected. Modern corporation, thus, is the principal producer of
environmental impacts. Managers as such must bear the responsibility for
the social impacts. It is too late to claim incompetence and inexperience. A
healthy organisation should visualise these impacts realistically and deal
with them firmly, by converting these social problems into opportunities
for ‘successful performance and positive contribution’. After all, business
cannot survive for long in a sick and impoverished society.

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 Business has surplus to distribute: The market economy model does not Notes
operate now; competition is no longer a strict disciplinarian; oligopolistic
industries abound; owners do not control firms, and government is keenly
interested in market power. Organisations during this decade have
ballooned to gigantic proportions; they command an enviable reservoir of
resources, hold the powerful threads of control and are economically
empowered to raise the standard of living of the people. Society expects
these institutions to be socially responsible. As business organisations grow
in size and economic strength, society continues to expect more benefits
from them, to improve their ‘quality of life’ and living standards.
Corporations will have to pay a heavy price, if social expectations are
neglected or dismissed as ‘trivial issues’. They can function successfully
only by public consent. Social power and social responsibility form an
equation that must be rationally balanced. When an institution’s power
grows, its responsibility also grows accordingly. In fact, proper solution to
such important issues such as product quality, product safety, healthy
working environment, pollution and other ecological problems are in the
best interests of the corporation itself. These areas should not require any
great public outcry or government action to cause management to do its
utmost to meet sound standards.
 Inexpensive insurance: For many firms, social responsibility provides an
extremely inexpensive insurance package. If business firms fail to learn the
new language of accountability, the government with its potential for
inefficiency and insensitive bureaucratic methods will step into the arena,
usurp the power and place restraints on corporate performance. Social
pressures generate legal measures; it is in the best interests of the business
of pursue socially responsible programmes.
 Profit motive is the Villain: Increased profits are not always by-products of
exorbitant prices or economic exploitation. Firms these days do not try to
maximise profits, they try to optimise and achieve reasonable profits which
can only provide a satisfactory cushion to absorb business shocks and
vicissitudes. It is fundamentally wrong to consider profits and social
responsibility as mutually distinct, hostile and excludable items.
 Conflicting interests: A corporation in today’s changing world, faces many
challenges and is confronted by a whole array of ‘inward’ and ‘outward’
responsibilities. It is true that if corporations were to live up to every rule
and regulation laid down by the society, government, employees and
others, it would be paralysed to inactivity and will have a catastrophic end.
It is also true that the corporation is an inappropriate instrument for
bringing out socio-economic reforms. Still, corporations must be genuinely
concerned about society’s needs and interests because, society is the
ultimate entity which sanctions business operations. However, these
collateral objectives should not frustrate the firm in achieving the primary
goal of wealth maximisation. Managers shall have to balance these

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Notes conflicting demands and think of an appropriate solution. In future, they are
expected to create wealth, generate profits and provide employment for the
fulfilment of public policy. Simultaneously, they must police their own
activities, keep their houses in order, enforce self-discipline and self-
regulation and display a basic regard for human values.

3.3.3 Types of Social Responsibility

In determining a firm’s social responsibility, managers must identify the
groups that are influenced by its actions and what are their expectations out of
the business. In a broad sense, such groups may include owners, employees,
customers, the community, the government, suppliers and the society in
general.
 Responsibility to owner:
 Committing funds in the best possible manner
 Ensuring a fair rate of return regularly
 Fair and honest reporting of business operations from time-to-time
 Responsibility to employees:
 Recognise the social needs of workers and provide adequate
participation to employees in the matters affecting their life.
 Fair and reasonable rate of pay
 Improving the quality of working life of employees
 Responsibility to customers:
 Avoiding deceitful, false and highly exaggerated advertisements
 Management should not indulge in anti-social activities
 Providing goods of superior quality at reasonable price
 Responsibility to creditors and suppliers:
 Provide accurate information regarding the financial health of the
organisation
 Ensure the reasonable price for the article supplied
 Promote a healthy atmosphere where creditors, suppliers are treated as
partners in cooperative endeavour
 Responsibility to community:
 Develop constructive relationship with members of the community
 Participate in community activities and promote community welfare
 Providing safe and secure communities with good housing and efficient
transportation

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 Responsibility to government: Notes

 Follow fair trade policies and practices
 Pay taxes to the government honestly
 Obey the government law
 Responsibility to society:
 Elimination of the poverty
 Provision of quality health care services
 Preservation of the environment by reducing the level of pollution
 Providing equal opportunity for employment
 Providing equal opportunity for education, regardless of race, gender or
colour

3.4 CORPORATE SOCIAL RESPONSIBILITY IN INDIA

For most Indian companies CSR is not a duty, mandated by militant unions,
angry public or demanding legislative provisions. Most undertake CSR work
out of empathy, not sympathy. They do not consider it as charity but try to
integrate CSR work with corporate image-building exercise.

Example: The Taj Group of Hotels recently unveiled the Varanasi

hand-woven saree that will now be worn by all their front-of-house staff: in
one stroke, keeping the craftsmanship of the Varanasi artisans alive and their
livelihood going, preventing an art form from going extinct and at the same
time adding to the image of the Group.
Let’s now have a look at CSR activities of some of the major companies in
India.

Example: Bajaj Auto

The company has been running a Samaj Seva Kendra at Akrudi near Pune
since 1975 (900 families as members). The Kendra aims at improving the
quality of life of its members by providing education, healthcare, vocational
training, etc. The company also runs the Janki Devi Bajaj Gram Vikas Sanstha
near Pune. The Sanstha’s aim is to promote rural development (water
management, procuring vital agricultural inputs, feed and vaccination for
livestock, sanitation, etc.).

Example: Larsen & Toubro

The Company spends about ` 10 crores annually on social projects. In
healthcare, it sponsors efforts directed towards birth control; mother and child

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Notes care; organises camps to check for tuberculosis, leprosy and special surgery
camps along the lines of the Life Line Express – the world’s first ever hospital
on rails. L&T also helps the local populace to source seeds, improve soil
quality and encourages dairy and poultry development in and around the areas
of its work. Finally, as part of its environment enhancement schemes, it assists
in afforestation and promoting biogas plants and smokeless chullhas (stoves).

Example: Shriram Investments

The Shriram Group formed a trust in 1992 to carry out its social projects. It
runs five schools for over 2,000 children. A home for orphans is run by the
group. The group offers worksheds along with capital and management support
to women in Thanjavur who make incense sticks and candles. In 1995, the
group had launched the Shriram Rural Development Project in Kanchipuram
district of Tamil Nadu with a view to reduce indebtedness and offer credit to
rural population at concessional rates.

Learning Activity
Visit any company of your choice or contact any top manager of
any company, try to collect information on their CSR activities.
Prepare a presentation on the CSR activities of that company.
Include Tata Steel as your choice of company.

Suman

F ormer CEO of PepsiCo. India P M Sinha – popularly called Suman –

is known for igniting the spirits of his followers through unusual
moves. He created what he called an upside down organisation. His
favourite presentation always focused on a novel organisation chart which
showed salesmen right on top with the rest of the organisation under them,
supporting their efforts. The CEO was at the bottom of that inverted
pyramid, his role being to support the entire organisation. His other moves
included the removal of status walls between people. Everyone was made to
wear identical shirts to work, with the Pepsi logo emblazoned on the
pockets, right across their hearts. There were no ‘bosses’ or ‘sirs’. Suman
would be addressed as Suman by the entire team. In every visit to the
market, in every conference Suman would make sure that he projected
salesmen as the real heroes of PepsiCo. Even the television commercials
showed salesmen doing everything possible for the company. Everyone
including the truck drivers was made to believe that he/she is out on a battle
ready to kill the enemy Coke. People say that this is what made Pepsi win
the battle in India against Coke. In fact, if you stopped a Pepsi truck and
Contd...

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asked the salesman what he was doing, chances would be high that he Notes
would say he is helping Pepsi win the cola war. Not just selling Pepsi.
Remember what the then President of America, John F Kennedy was
greeted with when he posed a question to the janitor working at the
Kennedy Space Centre, Florida, ‘what do you do here?’ She replied “I am
helping America put a man on the moon!” And that is what is called as
Vision sharing. When employees share the vision, they can scale new
heights continually and put the company on top of the world, quite easily.
Questions
1. How PepsiCo India did have won the war with Coke?
2. What kind of strategy has adopted by Mr Suman to get success for
PepsiCo India?
Source: Prakash Iyer, The Habit of Winning, Penguin, New Delhi, 2011.

1. Corporate governance is the system by which

companies are directed and controlled. Corporate
governance decides whom should the organisation be
there to serve and how the direction and purpose of
the organisation should be determined.
2. There is one and only one social responsibility of
business and that is to generate profits, so long as it
stays within the rules of the game, by engaging in open
and free competition without deception and fraud.

SUMMARY
 Corporate governance is the acceptance by the management of the
inalienable rights of shareholders as the true owners of the corporation and
their own role as trustees on behalf of the shareholders.
 It deals with conducting the affairs of a company such that there is fairness
to all stakeholders and that their action benefits the greatest number of
stakeholders.
 Corporate governance is a relationship among stakeholders that is used to
determine and control the direction and performance of companies.
 It is determining how shareholders can ensures that managers develop and
implement strategic decisions that are in the best interests of the
shareholders (Owners) and not primarily self-serving (in the best interests
of managers only, to the detriment of shareholders).
 In the absence of effective internal governance mechanisms, the market for
corporate control – an external governance mechanism – may be activated.

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Notes  The primary purpose of the governance mechanisms is to prevent severe

problems that may occur because of the separation of ownership and
control in large companies by positively influencing managerial behaviour.
 The ability of governance mechanisms to direct top-level manager’s action
towards preferred shareholders objectives are dependent on the correct
combination of mechanisms being used.
 Ethical and responsible decision-making is not only important for public
relations, but it is also a necessary element in risk management and
avoiding lawsuits.
 Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide shareholders with a
level of accountability.
 Corporate responsibility is more commonly addressed as Corporate Social
Responsibility (CSR). It determines whom should the organisation be there
to serve, and how the direction and purposes of the organisation should be
determined.

KEYWORDS
Corporate Governance: Corporate governance is a relationship among
stakeholders that is used to determine and control the direction and
performance of companies.
Ownership Concentration: Ownership concentration representing the relative
amounts of stock owned by individual shareholders and institutional investors.
Boards of Directors: The boards of directors or the individuals responsible for
representing the company’s owners by monitoring the strategic decisions of
top-level managers.
Executive Compensation: Executive compensation or the use of salary,
bonuses and long-term incentives to align the interests of managers with those
of shareholders (owners).
Ethical Side: The ethical side a culture based on a foundation of sound
business ethics.
Legal Compliance: Legal compliance maintaining proper compliance with all
the applicable legal and regulatory requirements under which the company is
carrying out its activities.
Corporate Responsibility: Corporate responsibility is more commonly
addressed as Corporate Social Responsibility (CSR). It determines whom
should the organisation be there to serve, and how the direction and purposes
of the organisation should be determined.

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SELF-ASSESSMENT QUESTIONS Notes

Short Answer Questions

1. What is corporate governance?
2. What are the various objectives of the corporate governance?
3. What are the principals of the corporate governance?
4. Why do companies need corporate governance?
5. What is social responsibility?
6. What are the various arguments for corporate social responsibility? (Any
two)
7. What are the various types of the social responsibility?
8. Explain the ownership concentration.
9. Who are the boards of directors?
10. What is executive compensation?
11. What is the market for corporate control?
12. Who are employees?
13. Who are customers?
14. What is legal compliance?
15. What are rights of shareholders?
16. What are the equitable treatments of shareholders?
17. What is the interest of other stakeholders?
18. What is integrity?
19. What is ethical behaviour?
20. What are the various role and responsibilities of the board?

Long Answer Questions

1. Describe the importance and concepts of the corporate governance. Support
your answer with company examples.
2. Explain the objectives of the corporate governance in detail. Relate the
objectives with any company’s corporate governance objectives.
3. Describe the principles of corporate governance in detail.
4. Why do we need corporate governance? Support answer with the relevant
company examples.
5. Describe the concepts of corporate governance in India.

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Notes 6. Prepare a short note on the Indian companies who are exercising the
corporate governance.
7. Explain the concepts of the corporate social responsibility with Indian
company examples.
8. Describe the arguments against of corporate social responsibility in detail.
9. Explain the arguments for corporate social responsibility and their types.
10. Prepare a detailed note on the corporate social responsibility in India.

FURTHER READINGS

Parthasarthy R., (2011), Fundamentals of Strategic Management,

Biztantra, New Delhi
Pearce J. A., (2011), Strategic Management, Tata McGraw Hill,
New Delhi
Dess G. G., (2011), Strategic Management, Tata McGraw Hill,
New Delhi
David F. R., (2009), Strategic Management, Prentice Hall, New
Delhi

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 Lesson 4 - External Environment

Notes
UNIT II
LESSON 4 - EXTERNAL ENVIRONMENT

CONTENTS
Learning Objectives
Learning Outcomes
Overview
4.1 External Environment
4.1.1 Features of Environment
4.1.2 Importance of Business Environment
4.2 Components of External Environment
4.2.1 Political-Legal Environment
4.2.2 Economic Environment
4.2.3 Social and Cultural Environment
4.2.4 Technological Environment
4.3 Environmental Analysis or Scanning
4.3.1 Purpose of Environmental Scanning
4.3.2 Process of Environmental Scanning
4.3.3 Modes of Environmental Scanning
4.3.4 Techniques of Environmental Scanning
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of external environment
 Describe the components of external environment
 Explain the environmental analysis or scanning

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Notes LEARNING OUTCOMES

Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 basics of external environment
 list out importance of business environment
 analyzing components of external environment
 identifying environmental analysis or scanning
 analyzing purpose of environmental scanning
 explain techniques of environmental scanning

OVERVIEW
Let us first review the previous lesson. You have studied about corporate
governance and corporate social responsibility and its significance. You also
learnt arguments against and for the social responsibility. At the end of the
lesson, you learnt about corporate governance and social responsibility. Now,
you will know about the external environment. You will also learn the
components of external environment.
Business enterprises are greatly influenced by environmental factors. As a rule,
therefore, business managers are expected to run the show in sync with
expectations of employees, consumers, suppliers and the society at large. Quite
often, businesses that failed to understand the impacts from environmental
forces and respond in an appropriate manner have been consigned to flames.
We advise you to learn this lesson carefully. It will give you a better
understanding of the present scenario of the external strategic environment.
This lesson will help you to understand the concepts of the environmental
scanning also.

4.1 EXTERNAL ENVIRONMENT

The external environment consists of those factors that affect a firm from
outside its organizational boundaries. Of course, the boundary that separates
the organization from its external environment is always not clear and precise.

Example: Shareholders are part of the organization, but in another

sense, they are part of its environment.

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4.1.1 Features of Environment Notes

Aggregative
The environment of business is the aggregate of conditions, events and
influences that surround and affect it.

Interrelated
The various elements of business environment are closely interrelated and
interconnected. A change in one element impacts other elements in one way or
the other.

Complex
The environment comprises of multifarious events, factors, conditions and
influences arising from various sources. They interact with each other
constantly and often produce an entirely new set of influences. It is not easy to
state clearly as to what kind of forces constitute given environments.

Dynamic
The environment of an organization is dynamic and constantly changing.
Changes in technology, government regulations, competitive forces, etc.
compel organizations to shift gears and change direction quite often. At times,
there could be too many changes in too little time, leading to shocks and
surprises in the marketplace.

Challenging
All firms are impacted by political, legal, economic, technological and social
systems and trends. Together, these elements comprise the macro-environment
of business firms. As these forces are so dynamic, their constant change
presents myriad opportunities and threats or constraints to strategic managers.

It is important to note that, environment of business is the sum-

total of all things that are external to and beyond the control of individual
businesses.

4.1.2 Importance of Business Environment

The environment of business is multifaceted, complex and dynamic in nature.
Economic, technological, political, social, cultural and legal forces affect
business operations continuously. When business is able to respond to
environmental influences in an appropriate manner and run the show in sync
with the expectations of society at large, the benefits could be immeasurable.
Let’s present the arguments in a systematic manner:

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Notes Exploit Opportunities Early

An analysis of external environment helps a company to identify opportunities
ahead of rivals and exploit them quickly.

Example: In late 1990s, Sanjay Shah and Atul Shah spotted the
vegetarian habits of people in Gujarat, Rajasthan and Maharashtra. They came
out with a vegetarian toothpaste (calcium carbonate, dicalcium phosphate and
glycerin are the main ingredients in it, the last two obtained from animal
sources) called Anchor and fought competition head-on (the likes of Colgate,
HLL) and eventually won the game. The company Anchor Health and Beauty
Care Pvt. Ltd. is able to build a business of nearly 500 million over the years.
The electrical switches company’s foray into toothpaste market has not
happened by chance. Shah Brothers observed the environment closely and
spotted an opportunity that was largely ignored by Multinational players.
Thereafter, they did not waste much time in putting their act together and
presenting a product that is loved by vegetarians all over the India.

Contain Damage
If a company is able to focus clearly on its environment (in order to find out
who is doing what), it is able to find out the early warning signals ahead of
competition.

Example: Maruti trying to bring out multifarious models at every price

point every now and then, the purpose is to prevent rivals from stealing its
market share by playing the quality/technology/price game.

Serve Customers Well

Awareness of environment helps a firm to serve customers well. Once a
company is able to understand the habits of customers well, it is able to
position itself efficiently in the minds of the prospective customers.

Example: Coffee lovers remember the tremendous amount of effort put

in by Cafe Coffee Day (CCD) in order to promote the habit, woo the customers
to its stores, present premium coffee at an affordable price, offer rich ambience
(like wi-fi, music and even books at the backdrop) and a variety of other items
kept for sale that are liked by customers.

Put Resources to Best Use

When a firm is able to understand the dynamics of the marketplace well, it is
able to put its resources to good use.

Example: It can bring out a car that is in sync with customers’

expectations (Maruti’s Swift), offer an air conditioner at a rock bottom price

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(Voltas AC at ` 10,000) and even bombard people with excellently designed Notes
watches at mouth watering prices (Titan watches). The relevant point is to do
everything possible to deliver value to customers by playing on the company’s
strengths and avoiding mistakes of all kinds.

Keep the Firm Alert, Flexible and Dynamic

Environmental analysis and study is essential to keep a firm alert in its
approach and actions. If the environment is devoid of changes, then business
activities will remain dull and lifeless. If the business is surprised by a variety
of problems, it compels a firm to be vigilant and careful. It forces a firm to be
ready for an opportunity that might present itself out of the blue. When the
company is really prepared for battles in the marketplace, it is able to fight
competition successfully. It can handle tough situations in a competent manner.
It can take advantage of favourable trends with electrifying speed.

Learn from Mistakes and Get Past Competition

A firm that monitors its environment from close quarters is able to take right
steps at a right time. It is able to focus attention on what it can do best. It can
adapt quickly to all kinds of changes – technology, competitive, government
policy changes, etc. – putting resources to good advantage. While running the
show, it can learn from mistakes and use the experience to improve its
performance over time.

4.2 COMPONENTS OF EXTERNAL ENVIRONMENT

The external environment of a firm – also known as the macro-environment or
the general environment – includes all of those environmental forces and
conditions that have an impact on every firm and organization within the
economy. Most managers readily agree that an organization’s external
environment is more difficult to understand and manage than the internal
environment. The reasons are fairly obvious. The external forces are
frustratingly large in number, difficult to assess and predict and are not easily
amenable to advance planning and policymaking. Essentially, organizations
have to deal with economic, social, political, technological, regulatory, market
and supplier-related effects which offer opportunities and pose threats at
regular intervals. To remain competitive, organizations must visualize these
trends and deploy their resources judiciously.

4.2.1 Political-legal Environment

Political actions can have a major impact on industrial activity through impacts
created through environmental and labour laws, tariffs, trade restrictions and
tax policies. Many political factors influence how managers formulate and
implement strategic direction.

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Notes
Example: Coca Cola had to wait many years to gain a foothold in India.
In the name of protecting local manufacturers of cars, scooters, televisions, etc.
many MNCs were prevented from entering the Indian market in the 60s, 70s
and 80s. Barriers to entry, protectionist policies, high tariffs, anti-nationalist
slogans and bad publicity have had a cumulative effect in creating a closed
economic model where people had to wait years together to buy a Bajaj
Scooter or a Fiat car in India. When things turned bad to worse, the situation is
sought to be remedied through a bold liberalisation programme in early 90s.
Rupee got devalued, many sectors have been thrown open for private
participation, sick PSUs have been sold out, foreign direct investment flows
have been allowed, tax rates have been cut, restrictions on movement of goods
and services have been removed, deregulation and dereservation happened in a
big way, the doors for mergers and acquisitions have been opened, and
financial sector and capital market reforms happened in a major way. Every
attempt has been made to put the economy on rails.

Example: Chandrababu Naidu, the former Chief Minister of Andhra

Pradesh was instrumental in giving a boost to the IT industry in Hyderabad,
which has been nicknamed Cyberabad by the Media. Likewise, another Chief
Minister, Nitish Kumar is trying to put Bihar on rails by doing everything
possible to encourage major investments by industrialists in that state in the
recent times.
Governments, therefore, have the power to regulate industrial activity in a
significant way. They can impose trade regulations (preventing export of
sensitive commodities such as sugar, fertilizers, rice, etc.); cut tariffs (on
aviation fuel, for example, to encourage air travel); impose pricing restrictions
(say on basic drugs meant for common man); increase interest rates (to contain
inflation); cut taxes (on items of mass consumption to boost up spending); set
minimum wages (for improving the living conditions of working class) and
impose industrial safety regulations (to protect health and safety of industrial
labour).
Government regulation, thus, can directly influence the manner in which firms
conduct their show across many industries. They can tighten regulatory
framework in order to prevent financial scandals.

Example: Satyam Computers, Enron, WorldCom, Tyco Corporation,

etc., happening again and again
They can also enact laws forcing companies to earmark significant sums for
protecting the environment.

Example: As a result of such measures, not surprisingly, MNCs like

GM, Whirlpool, Maytag, GE, DuPont and Dow Chemical are made to spend

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big amounts on developing more energy efficient and environmentally friendly Notes
technologies in the recent times.

Example: Daimler Chrysler, to cite another example, is looking for

ways to build a car entirely out of recyclable plastics and metals. Political
actions can significantly alter the future direction of a business and, therefore,
every firm needs to have a political strategy in place in order to find a way out
when hit by various pieces of legislation that government might bring in to
gain popularity.

4.2.2 Economic Environment

Economic factors greatly influence the strategies and policies pursued by a
firm. In a high interest rate regime, firms may be forced to plough back profits
rather than borrow from outside. When the market is hit by high inflation,
firms may have to compulsorily find ways and means to cut costs and earn the
respect and goodwill from customers.
At the national and international level, the firm must look into the general
availability of credit, the level of disposable income and the propensity of
people to spend. Interest rates, inflation rates, unemployment rates, trends in
the gross national product, governmental policies, sectoral growth rates of
agriculture, industry infrastructure, etc. are other economic influences it must
consider.
Understanding the dynamics of global markets; developing appropriate
strategies to move in line with changes in the domestic as well as global
economies; keeping track of currency movements, interest rates, rate of
inflation and cyclical nature of industry in which the firm operates; the growth
rate of a particular nation, etc. are some of the toughest challenges confronting
global managers. In the new global marketplace, managers are required to play
challenging roles and create a competitive advantage for the firm through
people-friendly policies and practices.

Liberalisation, Privatisation and Globalisation (LPG) initiatives

from early 1990s: Liberalisation made life easier for private sector
companies. The erstwhile controls over crucial sectors have been eliminated.
Multinational companies have been encouraged to expand their operations in
India. Unviable Public sector units have been sold off. PSUs are being
forced to remain cost competitive. The Licence-permit Raj is outdated now.
Foreign direct investment is encouraged, imports have been liberalised,
import duties have been cut down to size, items which were reserved for
public sector are now turned over to private sector, companies are allowed to
tap global markets, foreign institutional investors are allowed to operate in
Indian stock, money and commodity markets with lot of freedom.

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Notes 4.2.3 Social and Cultural Environment

The social factors that affect a firm include the values, attitudes, beliefs,
opinions and lifestyles of persons in the firm's external environment, as
developed from demographic, cultural, religious, educational and ethnic
conditioning. Like other forces in the external environment, social factors
change continually. As social attitudes, beliefs and values change, so does the
demand for various types of attire, books, leisure activities, etc.
 Demographic Factors: Demographic characteristics that describe the broad
characteristics of people in a nation, state or region such as population, age
distribution, religious composition, literacy levels, inter-state migration,
rural-urban mobility, income distribution, etc. influence a firm's strategic
plans significantly.
 The entry of women into the labour market has, in the recent times,
affected the hiring and compensation policies of their employers. This has
also expanded the market for a wide range of products and services
necessitated by their absence from their homes (such as convenience foods,
microwave ovens, day-care centres, etc.).
 The shifts in age distribution caused by improved birth control methods
have literally compelled producers to go after youth-oriented goods (beauty
products, hair and skin care preparations, fitness equipment, etc.). The
growing number of senior citizens has made government to pay more
attention to tax exemptions, social security benefits, etc.
 Another important concern is the desire for a better quality of work life.
Employees expect more from organisations than simply a pay cheque. They
want cleaner air and water as well as more leisure time to enjoy life more
fully.

Demographic Profile of India

Population (Census 2011): 1210.19 million: Males: 623.72 million,
Females: 586.46 million
Birth Rate (2001 census): 24.8%
Death Rate (2001 census): 8.9%
Density of Population (Census 2011): 382 persons per square kilometre
Life expectancy at Birth (as of September 2005): Males: 63.9 years,
Females: 66.9 years
Ethnic Groups: All the five major racial types – Australoid, Mongoloid,
Europoid, Caucasian and Negroid find representation among the people of
India.
Contd…

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Religions: According to the 2001 census, out of the total population of Notes
1,028 million in the Country, Hindus constituted the majority with 80.5%,
Muslims came second at 13.4%, followed by Christians, Sikhs, Buddhists,
Jains and others.
Languages: There are 22 different languages that have been recognised by
the Constitution of India, of which Hindi is an Official Language. English
has by law been designated the language for official purposes.
Literacy Rate (Census 2011): 74.04%, Males: 31.98%, Females: 49.10%

Cultural Factors
Social attitudes, values, customs, beliefs, rituals and practices also influence
business practices in a major way.
 Festivals: Christmas offers great financial opportunities for card
companies, toy retailers, tree growers, mail order catalogue firms and other
related businesses. Social values refer to abstract thinking about what is
good, right and desirable.
 Beliefs: They reflect the characteristics of physical and social phenomena.

Example: McDonald's does not serve the beef burgers in India

because Indians consider cows as sacred animals (Hindu tradition prohibits
the consumption of beef in any form).
 Trends in Society: Growing health consciousness is a trend that every
company wants to exploit to its advantage.

Example: Godrej currently trying to exploit the changing

preferences of GenNext through products such as air-purifiers, anti-bacteria
notebook keyboards, nutritional microwaves (with bio-ceramic enamel
cavity which preserves food nutrition), steam washing machines, etc.
 Concern for health and fitness: There is growing concern for health and
fitness and the urban middle class is serious about making investments that
help maintain their figure. As a result, providers of health spas and
manufacturers of natural food, exercise equipment and weight reduction
products discovered abundant opportunities. In some cases, the
opportunities proved to be big enough to convert even mom and pop
operations into big businesses. Vitamin and health food companies too
joined the race and exploited the cultural trend to their benefit in a big way.
In contrast, producers of fatty foods, starchy snacks and cigarettes are
experiencing a strong negative reaction to their products and face product-
liability lawsuits that threaten their long-term survival.
 Culture plays a big role: Values and beliefs vary from culture to culture
and before going ahead in a big way, companies must study the socio-

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Notes cultural environment of a country thoroughly to avoid costly mistakes. To

market soup in Japan, the manager/marketer must realise that soup is
regarded there as a breakfast drink rather than a dish served for lunch or
dinner. The loyalty shown by Japanese workers towards their employees, to
take another example, is far greater than that shown by Indian workers for
their employers. The distinction obviously can be traced back to their
respective socio-cultural roots!
 It’s always a tight rope walk (Religious, ethical and moral factors): India
is a country where people belonging to almost all religious faiths live:
Hindus, Muslims, Sikhs, Christians, Buddhists and Jains. They speak
different languages. With a population of over 1 billion and 65 per cent
literacy level, the country offers exciting opportunities to marketers. The
country – specific risks in terms of corruption, political instability, vast
cultural differences, poor infrastructure, etc. are equally threatening. The
ethical and moral roots of society are, however, very strong. People believe
in joint family system (especially in North India), carry on prayers daily,
believe in destiny, respect elders and senior citizens, perform rituals
scrupulously, and are generally God-fearing. The spread of consumerism,
the rise of middle-class with high disposable incomes, the flashy lifestyles
of people working in software, telecom, media, multinational companies
and stock market addicts seem to have changed the socio-cultural scenario
in the recent times. After the 90s, people have started rationalising the
philosophy ends justify the means. Such lower ethical standards have
become a real threat now to business organisations which have traditionally
been carrying out their operations in a fair way.

4.2.4 Technological Environment

Technological factors represent major opportunities and threats that must be
taken into account while formulating strategies. Technological breakthroughs
can dramatically influence organization’s products, services markets, suppliers,
distributors, competitors, customers, manufacturing processes, marketing
practices and competitive position. Technological advancements can open up
new markets, result in a proliferation of new and improved products, change
the relative cost position in an industry, and render existing products and
services obsolete. Technological changes can reduce or eliminate cost barriers
between businesses, create shorter production runs, create shortages in
technical skills, and result in changing values and expectations of customers
and employees. Technological advancements can create new competitive
advantages that are more powerful than the existing ones.
Recent technological advances, as we very well know, in computers, lasers,
robotics, satellite networks, fibre optics, biometrics, cloning and other related
areas have paved the way for significant operational improvements.

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Manufacturers, banks and retailers, for example, have used advances in Notes
computer technology to carry out their traditional tasks at lower costs and
higher levels of customer satisfaction.

Example: Take the stunningly successful case of MP3, a freely-

available standard for the compression and transmission of digital audio. The
big guns of the music business: Sony, RCA and the rest were so confident
about their control over the music industry that they couldn't see the threat
posed by a tiny player like MP3.com, which quietly spun its own B-web. The
company didn't try doing everything: the B-web had a combination of content
companies (like MP3); manufacturers such as S3 (maker of the Rio MP3
player); distribution technologies (like Napster); and, of course, hundreds of
thousands of teenagers who swore by the music, but couldn't pay for it.
Technological change, thus, can create or even decimate existing businesses or
even entire industries, since it shifts demand from one product to another.
Examples of such change include the shifts from vacuum tubes to transistors,
from steam locomotives to diesel and electric engines, from fountain pens to
ball points, from propeller aeroplanes to jets and from typewriters to computer-
based word processors.

In the present competitive world, technological breakthroughs can

dramatically influence an organisation’s service markets, suppliers,
distributors, competitors, customers, manufacturing processes, marketing
practices and competitive position.

Learning Activity
Prepare a detailed note on external environment of business. Your
report must be based upon any company of your choice and the
technical changes and their impacts on the selected company of
your choice.

4.3 ENVIRONMENTAL ANALYSIS OR SCANNING

Environmental analysis or scanning is the process of monitoring an
organizational environment to identify both present and future threats and
opportunities that may influence the firm's ability to reach its goals. Properly
used environmental analysis can help to ensure organizational success in many
ways:
 It helps firms to adjust to environmental change at a right time, that is,
encashing opportunities as they arise and eliminating the negative impacts
of environmental threats through proactive planning. It helps an

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Notes organisation to come out with an early warning system to ward off threats
from competitive forces and develop suitable strategies to turn problems
into opportunities.
 It tries to improve organisational performance by making managers and
divisional managers aware of issues that arise in the firm's environment, by
having a direct impact on planning and by linking corporate and divisional
planning.
 It helps strategists to focus on alternatives that help to achieve
predetermined goals and eliminate those options that are not in line with
anticipated opportunities or threats.

4.3.1 Purpose of Environmental Scanning

The basic purpose of environmental scanning is to help a firm decide its
strategic direction in future. Scanning simply involves reviewing and
evaluating whatever information about internal and external environments can
be gleaned from several distinct sources. Environmental scanning, in a way, is
a mixture of events, trends, issues and expectations that directly or indirectly
shape organizational responses from time to time.
 Important events that have shaped the outcomes in various sectors of an
economy
 Major trends that are influencing various elements of environment
 Significant issues that need to be looked into in order to deal with events
and trends influencing organizational actions
 Expectations of stakeholders and demands made by other interest groups in
response to organizational actions.

Example: Scandals and scams in the recent times are major events that
have affected the lives of corporate chiefs in sectors such as infrastructure,
telecommunication, electronics and construction. The earlier trend to ignore
corruption at high places as something part of the system to get things done is
being put aside now in view of the arrest of some of the big guns of politics
and industry, including high profile corporate executives and ministers holding
key portfolios. Every major corporate house is made to critically examine their
actions, almost forcing them to take a 360 degree view of every action that they
intend to take in order to get certain jobs done through shady deals which have
come to acquire a kind of legalized corruption. Thanks to social activists like
Anna Hazare, corruption at high places is not being viewed as something that
can be put aside as a trivial, insignificant issue. The people involved in such
scams are being dragged to courts, put behind bars and asked to explain the
reasons behind such reckless, careless behaviour. The stakeholders – in this
case, the public at large – are making their voice heard almost everywhere,
making it necessary for every corporate house to examine and re-examine their

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actions in public and also behind the curtain carefully. The political, legal and Notes
social, economic and cultural environment of business, as a result, seems to be
undergoing a dramatic change. Firms which tend to ignore such trends, issues,
concerns and expectations may have to pay a heavy price in the years to come
if they continue to conduct their operations, showing scant respect to ethics,
values and scruples.

4.3.2 Process of Environmental Scanning

As environmental change has a direct link to planning, it is essential that
environmental scanning form an integral part of an organization’s strategic
planning. The five fundamental steps in a formal environmental scanning
process:
 Identify the environmental scanning needs of the organisation before
launching the scanning process, a few items must be determined: purpose
of scanning, participants, and time and resource allocation.
 Gather the information. Translate the needs of the organisation into specific
information and a list of questions, select the information sources and
collect the information.
 Analyse the information. Information gathered should be analysed for
trends and issues that may affect the organisation.
 “Communicate the results.” Potential effects should be communicated to
decision-makers in a concise format and manner that fit their preference.
 “Make informed decisions.” Based on the information provided, decision-
makers can take corresponding steps to equip the organisation to be
responsive to potential opportunities or threats.

4.3.3 Modes of Environmental Scanning

There are a number of ways to conceptualize scanning. The four types of
scanning are:
 Undirected viewing consists of reading a variety of publications for no
specific purpose other than to be informed.
 Conditioned viewing consists of responding to this information in terms of
assessing its relevance to the organisation.
 Informal searching consists of actively seeking specific information but in
a relatively unstructured way.
 These activities are in contrast to formal searching, a proactive mode of
scanning entailing formal methodologies for obtaining information for
specific purposes.
Other experts simplified Aguilar's four scanning types as either passive or
active scanning. Passive scanning is what most of us do when we read journals
and newspapers. However, the organizational consequences of passive

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Notes scanning are that we do not systematically use the information as strategic
information for planning, and we miss many ideas that signal changes in the
environment. Active scanning focuses attention on information resources that
span the task and industry environments as well as the macro-environment.
Scanning can also be examined from another angle – as something irregular,
periodic and continuous. Irregular systems are used on an ad hoc basis and tend
to be crisis initiated. These systems are used when an organization needs
information for planning assumptions and conducts a scan for that purpose
only. Periodic systems are used when the planners periodically update a scan,
perhaps in preparation for a new planning cycle. Continuous systems use the
active scanning mode of data collection to systematically inform the strategic
planning function of the organisation. The rationale underlying active scanning
is that potentially relevant “data” are limited only by your conception of the
environment. These data are inherently scattered, vague and imprecise and
come from a host of sources. Since early signals often show up in unexpected
places, your scanning must be on-going, fully integrated within your
institution, and sufficiently comprehensive to cover the environments
important to your decision makers.

4.3.4 Techniques of Environmental Scanning

For scanning the environment, companies often use a number of techniques
depending on their specific requirement in terms of quantity, quality,
relevance, cost, etc. The whole exercise is very demanding and involves sifting
through a number of sources carefully to draw a picture of the opportunities
and threats present in the micro as well as macro environment in which a
company operates. The following techniques are generally pressed into service
while carrying out environmental scanning:

SWOT Analysis
SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and
Threats. SWOT analysis is an important tool for auditing the overall strategic
position of a business and its environment. Once key strategic issues have been
identified, they feed into business objectives, particularly marketing objectives.
SWOT analysis can be used in conjunction with other tools for audit and
analysis, such as PEST analysis and Porter's Five Forces analysis. SWOT
analysis helps an organization match its strengths and weaknesses with
opportunities and threats operating in the environment. An appropriate strategy
is one that capitalizes on the opportunities by using organizational resources
and capabilities to the best advantage and neutralizes the threats by minimizing
the adverse influence of weaknesses.

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Notes

Figure 4.1: SWOT Analysis

 Strength is an in-built capability which an organisation can use to gain
strategic advantage over its competitors.

Example: Superior R&D skills of Ranbaxy Laboratories Ltd.

 A weakness is an inherent limitation that creates a strategic disadvantage.
Managers often use SWOT (acronym for Strengths, Weaknesses,
Opportunities and Threats) analysis to match the strengths and weaknesses
existing within an organization with the threats and opportunities operating
in the environment before formulating an effective strategy.

Example: Colgate's single-product image.

 An opportunity is a favourable condition in the organisation's environment
that enables it to consolidate and strengthen its position.
 A threat is an unfavourable condition that creates a risk and causes damage
to an organisation.

Example: The slowdown in the US market is a real threat to Indian

software exporters while outsourcing is perceived as an opportunity to be
exploited.

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Notes
Learning Activity
Prepare a detailed note on SWOT analysis external environment
of business. Your report must be based upon any company of your
choice. You can take a choice of company like – Bata India Ltd.

Arvind Mills

A rvind Mills was struggling in the past because it took huge loans for
the installation of what has turned out to be excess capacity. Due to
flourishing markets in early 90s, the management over-estimated
future sales and increased plant capacity. When demand subsided, fashion
changes occurred and new entrants came with a bang. Arvind Mills’ market
share fell drastically. Moreover, denim (its main product) is not regularly
used by an average person as it is a fashion item. The company, as a result,
started looking at overseas markets seriously in order to pay off its debts
and survive. Such a strategy ensured its survival and helped the firm survive
the onslaughts from rival firms. Thus, a large production capacity may be an
internal strength in an expanding economy, but it could be a tremendous
burden and an internal weakness in a recessionary period. Here, it would be
better to evaluate the external environment than the internal. In actual
practice, since both external and internal forces interact and impact
organisational survival and growth, managers would do well to examine
both sets of factors at the same time. The external environment reveals
opportunities and threats and the internal environment uncovers strengths
and weaknesses.
Questions
1. Prepare a short note on the SWOT analysis of Arvind Mills.
2. Analyze the above case study in your own words and prepare a detailed
note on it.

1. An external environment is composed of all the

outside factors or influences that impact the operation
of business. The business must act or react to keep up
its flow of operations.
2. Environmental analysis is a strategic tool. It is a
process to identify all the external and internal
elements, which can affect the organization’s
performance.

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SUMMARY Notes
 The external environment consists of those factors that affect a firm from
outside its organizational boundaries. Of course, the boundary that
separates the organization from its external environment is always not clear
and precise.
 All firms are impacted by political, legal, economic, technological and
social systems and trends. Together, these elements comprise the macro-
environment of business firms.
 The environment of business is multifaceted, complex and dynamic in
nature. Economic, technological, political, social, cultural and legal forces
affect business operations continuously.
 When business is able to respond to environmental influences in an
appropriate manner and run the show in sync with the expectations of
society at large, the benefits could be immeasurable.
 Environmental analysis and study is essential to keep a firm alert in its
approach and actions. If the environment is devoid of changes, then
business activities will remain dull and lifeless.
 A firm that monitors its environment from close quarters is able to take
right steps at a right time. It is able to focus attention on what it can do best.
 It can adapt quickly to all kinds of changes – technology, competitive,
government policy changes, etc. – putting resources to good advantage.
 Governments, therefore, have the power to regulate industrial activity in a
significant way. They can impose trade regulations (preventing export of
sensitive commodities such as sugar, fertilizers, rice, etc.)

KEYWORDS
External Environment: The external environment consists of those factors that
affect a firm from outside its organizational boundaries.
Aggregative: The environment of business is the aggregate of conditions,
events and influences that surround and affect it.
Interrelated: The various elements of business environment are closely
interrelated and interconnected.
Exploit Opportunities Early: An analysis of external environment helps a
company to identify opportunities ahead of rivals and exploit them quickly.
Political Environment: Political actions can have a major impact on industrial
activity through impacts created through environmental and labour laws,
tariffs, trade restrictions and tax policies. Many political factors influence how
managers formulate and implement strategic direction.

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Notes Economic Environment: Economic factors greatly influence the strategies and
policies pursued by a firm. In a high interest rate regime, firms may be forced
to plough back profits rather than borrow from outside.
Demographic: Demographic characteristics that describe the broad
characteristics of people in a nation, state or region such as population, age
distribution, religious composition, literacy levels, inter-state migration, rural-
urban mobility, income distribution, etc. influence a firm's strategic plans
significantly.
Environmental Analysis: Environmental analysis or scanning is the process of
monitoring an organizational environment to identify both present and future
threats and opportunities that may influence the firm's ability to reach its goals.
SWOT Analysis: SWOT is an abbreviation for Strengths, Weaknesses,
Opportunities and Threats. SWOT analysis is an important tool for auditing the
overall strategic position of a business and its environment.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. Define environmental scanning.
2. What do you mean by external or environmental analysis?
3. List the important characteristics of environment.
4. Define the term, ‘industry environment.’
5. What is an external environment of business?
6. Define the SWOT analysis.
7. What is an environmental analysis?
8. What are the demographic characteristics?
9. Explain the economic environment.
10. What is aggregative?
11. What are interrelated?
12. Explain exploit opportunities early.
13. Describe the political environment.
14. Describe the cultural consideration for the strategic environment.
15. What are the importances of the business environment?
16. Explain containing damage to the external environment.
17. Describe the serve customer well.
18. Explain put resources to best use.

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19. Describe the keep the firm alert, flexible and dynamic. Notes
20. Explain learn from mistakes and get past competition.

Long Answer Questions

1. Define the term 'environment'. Explain why environmental analysis is
necessary in strategic management.
2. What are the various environmental factors that affect the business?
Discuss their relative importance.
3. A new company is proposed to be floated for the production and sale of
household kitchen appliances. What are the relevant environmental factors
that ought to be looked into by the promoters before taking up such a
venture?
4. Chose an industry in which you would like to compete. Use the
environmental force and SWOT analysis to explain why you find that
industry attractive.
5. What is an external environment of the business? Explain their features and
importance to the strategic environment in detail.
6. Describe the components of the external environment of the business.
7. Explain the socio-cultural environment of the business. Support your
answer with the Indian scenario of the socio-cultural environment for the
strategic business.
8. Explain the technological environment of the company and support your
answer with the relevant company examples.
9. What do you understand by the environmental scanning? What is the
various purpose of doing the environmental analysis?
10. What are the various process and modes of environmental scanning?

FURTHER READINGS

Jauch, L.R., (2009), Business Policy and Strategic Management,

Frank Brothers, New Delhi
Gupta Vipin, (2010), Business Policy and Strategic Management,
Prentice Hall, New Delhi
Haberberg, A. & Rieple, A., (2008), Strategic Management,
Oxford, New Delhi, 2008
Miller, A., (2008), Strategic Management, McGraw Hill, New
York

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Notes
LESSON 5 - PORTER’S FIVE FORCES MODEL

CONTENTS
Learning Objectives
Learning Outcomes
Overview
5.1 Porter’s Five Forces Model
5.1.1 Threat of New Entrants
5.1.2 Bargaining Power of Suppliers
5.1.3 Bargaining Power of Buyers
5.1.4 Threats of Substitute Products
5.1.5 Intensity of Rivalry
5.2 Interpreting the Five Forces Model
5.2.1 Five Forces - Critique
5.3 Strategic Group
5.3.1 Factors Used to Form Strategic Groups
5.3.2 Competitive Changes during Industry Evolution
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of porter’s five forces model
 Describe the interpreting the five forces model
 Explain the strategic group

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LEARNING OUTCOMES Notes

Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 explain porter’s five forces model
 analyzing threats of substitute products
 how to interpret the five forces model
 concept of strategic group and explain factors used to form strategic groups
 identifying competitive changes during industry evolution

OVERVIEW
Let us first review the previous lesson. You have studied about the
environment of the business and its significance. You also learnt the
components of the external environment. At the end of the lesson, you learnt
about the environmental analysis. Now, you will know about the Porter’s Five
Forces Model and the strategic group.
Business enterprises are greatly influenced by environmental factors. As a rule,
therefore, business managers are expected to run the show in sync with
expectations of employees, consumers, suppliers and the society at large. Quite
often, businesses that failed to understand the impacts from environmental
forces and respond in an appropriate manner have been consigned to flames.
We advise you to learn this lesson carefully. It will give you a better
understanding of the present scenario of the world’s strategic environment.
This lesson will help you to understand the concepts of the Porter’s Five Forces
of business environment and strategic group.

5.1 PORTER’S FIVE FORCES MODEL

The ‘Five Forces Model’, developed by Michael Porter, provides the
groundwork for strategic action. Competitive forces determine profitability and
are, therefore, of foremost importance to the firm. Competition is not
manifested only in the other players. Competition is rooted in the underlying
economic structure. Customers, suppliers, potential entrants and substitute
products, all have the potential to impact the market depending on the industry.
The model is shown in Figure 5.1.

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Notes

Threat of Potential
Nobility Entrants

Suppliers Competitive Rivalry Buyers

Bargaining Bargaining
Power Power

Threat of
Substitutes Substitution

Figure 5.1: Five Forces Model

It represents the competitive universe of the firm. The main purpose of this
analysis is to provide a structure for discussion and debate around the theme of
strategy. It is a powerful and simple tool for analysis. At a generalised level,
the variety of influences will be so great that it will reduce the value of the
analysis. This model is found to be very effective at the level of the Strategic
Business Unit (SBU). The unit under analysis or the products that are being
examined should be such that there is no great difference between the five
forces. If there is a large difference, the unit or the product group should be
broken down to a more congruent configuration for the greatest effectiveness
of the model.
There has been some criticism that because of its simplification of complex
relationships, it is linear in structure. In response, Porter has increased the
complexity of the model, which is beyond the scope of this discussion.
However, even in its simplest form, the ‘Five Forces Model’ can be extremely
helpful in most cases. The five forces considered in this model are:
5.1.1 Threat of New Entrants
New entrants bring in new capacity, the desire to gain market share and often-
substantial resources. They may offer products or services at lower prices or
with some advantage. The extent to which there are high ‘entry barriers’ is an
indication of strategic strength. Entry barriers come in the form of economies
of scale – the new entrant may have to come in on a large scale or accept a cost
disadvantage. Cost disadvantages to the new entrants are sometimes there
when there is an established operator who knows the market well and has good
relationships with the suppliers and the buyers.

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Notes
Example: Examples of economies of scale are relevant in the
production of electrical components, or fast moving consumer goods.
Requirement of large financial resources can also deter the competitors to
entering in the product market. This could be the case in industries such as
chemicals, power or mining. Brand identification may require very high entry
expenditures in the form of advertising and promotion. Entrenched companies
may have price advantages that are not available to potential competitors.
These advantages may stem from proprietary technologies, lower asset costs,
effects of the learning curve, etc. It may also be very cost effective to set up
new distribution network to compete with the entrenched players. Sometimes
there may be Governmental restrictions in terms of licensing requirements. All
these factors can act as barriers to the entry into the market.

Entry Barriers
Entry barriers are as follows:
 Economies of Scale
 Proprietary Product Differences
 Brand Identity
 Capital Requirements
 Access to Distribution Channels
 Government Policy

5.1.2 Bargaining Power of Suppliers

Suppliers can exert bargaining power in an industry by raising prices or by
changing the quality of their goods and services. Powerful supplier groups can
squeeze the profitability of the company or industry. The supplier group is
strong when it is large and dominated by a few companies; for example, a
major steel producer is selling to a small metal fabricator. In this case, the
client firm is in a weak position and its ability to compete with a large extent
depends on the steel producer. If, for example the supplier decided to raise
prices, the firm would have little option but to carry the cost. When its product
is unique or differentiated; it does not have sufficient competition; it has the
ability to integrate forward into the industry; or the industry is not an important
customer so long as the supplier is strong.

It is important to note that, powerful supplier groups can squeeze

the profitability of the company or industry.

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Notes A significant outcome of analysing suppliers is that strategies can be developed

that can enhance the power of the organisation or create a situation of mutual
interest.

Example: An example of enhancing the power of the organisation was

seen when the Government of India, in the early 1950s floated an organisation,
“Directorate General of Supplies and Disposals (DGS&D)”. This organisation
had, as one of its objectives, to consolidate the buying power of Government
purchases so as to maximise the negotiating power of the Government.

Determinants of Suppliers’ Power

Determinants of suppliers’ power are as follows:
 Differentiation of Inputs
 Switching Costs
 Presence of Substitute Inputs
 Supplier Concentration
 Importance of Supply Volumes
 Total Purchase in Industry

5.1.3 Bargaining Power of Buyers

Customers can lower the profitability of the firm by forcing down prices,
playing competitors against each other, or demand better quality, service and
design. The bargaining power of the buyers is high if it purchases in large
quantities; there is little switching costs associated with purchase decision;
there are lower cost substitute products available to the buyer; the price, quality
and brand identity of the product is not critical to the purchase decision. The
buyer will pose a threat to the industry if they decide to integrate backwards to
make the industry's product. Depending upon the configuration of factors, the
buyers can have a profound effect on the market of the product.
Here also, the organisation can develop strategies that can enhance the power
of the organisation, create a situation of mutual interest or develop mutually
beneficial links.

Determinants of Buyers’ Power

Determinants of buyers’ power are as follows:
 Buyer Volumes
 Switching Costs
 Buyer Information
 Substitute Products

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 Purchasing Price Notes

 Product Differentiation
 Quality and Performance

Consumers, generally speaking, “tend to be more price-sensitive if

they are buying products that are undifferentiated and expensive relative to
their incomes and where quality is not particularly important”.

5.1.4 Threats of Substitute Products

Substitute products limit the potential of an industry by placing a ceiling on the
prices it can charge. The more attractive the price performance trade-off
offered by such products, the greater are the limitations of the industry to
improve profitability. Substitute products that have the potential to improving
their price performance trade-off with the industry are potential threats. For
example, a new technology could simultaneously open the doors to substitutes
and lower entry barriers to other players. Equally, a firm that has a product,
cannot be easily substituted, either because it is unique or because it has some
form of protection (e.g. a patent), is in a strong position.
The key question for this analysis is whether or not the substitute poses a threat
to the organisation's product or service or provides a higher perceived value or
benefit. Another issue is: what is the ease with which buyers can switch to
substitutes. Can the organisation reduce the risk of substitution by building in
switching cost?

Determinants of Substitute Products

Determinants of substitute products are as follows:
 Relative Price of Substitute Products
 Relative performance of Substitute Products
 Switching Costs
 Buyer Propensity to Substitute Products

5.1.5 Intensity of Rivalry

There is a competitive rivalry between firms on a continuing basis, the various
players in a particular sector or niche try to constantly jockey for position and
try new product and process innovations in order to develop a strategic edge
and hence a stronger position in the competitive space. Intense rivalry is related
to a number of factors; competitors are large in number and of comparable
sizes; industry growth is slow; the product or service has low switching costs;
fixed costs are high; the product is perishable; exit barriers are high; etc.

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Notes In strategic terms, the most competitive conditions will be those in which entry
is likely, substitutes threaten, and buyer and suppliers exercise control.
Intensity of Rivalry involves the following:
 Industry Growth
 Fixed Costs and Value Added Services
 Intermittent Over Capacity
 Product Differences
 Brand Identity
 Switching Costs
 Corporate Stakes and Stakeholders
 Diversity of Competitors
 Exit Barriers

Even when returns are low, high exit barriers do not allow a firm to
leave the field. Examples of exit barriers are fixed assets that have no
alternative uses, labour agreements and strategic interrelationships between
the business unit and other business units within the same company,
management’s unwillingness to leave an industry because of pride and
governmental pressure to continue operations to avoid adverse economic
effects in a geographic region.

Learning Activity
Prepare a detailed note of your understanding about the Porter’s
Five Forces Model.

5.2 INTERPRETING THE FIVE FORCES MODEL

Porter’s model, described above, is one of the most useful conceptual
frameworks used to assess the nature of the competitive environment and to
describe an industry’s structure. Evidently, these five forces interrelate to
determine an industry’s attractiveness. A highly attractive industry is one
where a firm is able to make profits easily. In an unattractive industry, the
profitability is generally low or consistently depressed. To remain an effective
competitor, a firm should:

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 Appreciate one of the five forces which is the most significant (it can be Notes
different for different industries) and concentrate strategic attention in this
area.
 Position itself for the best possible defence against any threats from rivals.
Knowledge of the firms’ capabilities and of the causes of the competitive
forces will highlight the areas where the firm should challenge competition
head-on and where to avoid it.

Example: When Hindustan Lever Ltd. (HLL) was under attack from
smaller competitors who were slowly but steadily eating away market share in
various product categories, i.e. shampoos (Cavin Kare), Soaps (VVF Ltd.),
toothpastes (Anchor), Skincare (Paras Pharma) and detergents (Nirma, Ghadi),
it had to act quickly and decisively. The retaliation tactics included incessant
promos, freebies, series of product launches, focused brand modifications,
rejuvenating the top selling power bands squeezing out efficiencies from the
supply chain, trimming overheads, hawking non-core businesses, etc. HLL had
to shift strategy in certain categories (where it is futile to engage in a direct
fight), if not totally exit them. A beginning has been made in ice creams;
unable to compete in the mass market with Amul, HLL is now focusing almost
entirely on the premium end.
 Influence the forces detailed above through its corporate and competitive
strategies.
 Anticipate changes or shifts in the forces, the factors that are generating
success in the short-term may not succeed in the long-term.
Firms can certainly influence the structure of an industry through their brand
power and thus erect barriers deterring new entrants. They can join hands (like
cement firms in India) and operate from a position of strength, instead of
distributing their profits to powerful buyers through cut-throat competition.
They can resort to the same tactics to curtail the power of suppliers. Again, if a
firm is able to achieve a superior competitive position as compared to the rest
of the firms in a particular industry, it can earn much more than the industry
average.

Example: Infosys Technologies Ltd. in software industry, Britannia in

biscuit industry, HDFC Bank in banking industry, etc.

5.2.1 Five Forces - Critique

Porter’s model of Five Competitive Forces has been subject of much critique.
Its main weakness results from the historical context in which it was
developed. In the early eighties, cyclical growth characterised the global
economy. Thus, primary corporate objectives consisted of profitability and
survival. A major prerequisite for achieving these objectives has been
optimisation of strategy in relation to the external environment. At that time,

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Notes development in most industries has been fairly stable and predictable,
compared with today’s dynamics. In general, the meaningfulness of this model
is reduced by the following factors:
 In the economic sense, the model assumes a classic perfect market. The
more an industry is regulated, the less meaningful insights the model can
deliver.
 The model is best applicable for analysis of simple market structures. A
comprehensive description and analysis of all five forces gets very difficult
in complex industries with multiple interrelations, product groups,
by-products and segments. A too narrow focus on particular segments of
such industries, however, bears the risk of missing important elements.
 The model assumes relatively static market structures. This is hardly the
case in today’s dynamic markets. Technological breakthroughs and
dynamic market entrants from start-ups or other industries may completely
change business models, entry barriers and relationships along the supply
chain within a short time.
 The Five Forces model may have some use for later analysis of the new
situation; but it will hardly provide much meaningful advice for preventive
actions.
The model is based on the idea of competition. It assumes that companies try to
achieve competitive advantages over other players in the markets as well as
over suppliers or customers. With this focus, it does not really take into
consideration, strategies like strategic alliances, electronic linking of
information systems of all companies along a value chain, virtual enterprise-
networks or others. Overall, Porters’ Five Forces Model has some major
limitations in today’s market environment. It is not able to take into account
new business models and the dynamics of markets. Nevertheless, the value of
Porters model is more because it enables managers to think about the current
situation of their industry in a structured, easy-to-understand way as a starting
point for further analysis.

5.3 STRATEGIC GROUP

At any point of time, a firm’s competitive behaviours and strategies are likely
to be different from that of its rivals in a given industry. All the players in the
industry might face similar pressures from buyers, suppliers, substitutes, etc.
but their reactions might be different, based on their own unique
characteristics. Firms in a given industry could operate with dissimilar features.
They could differ in terms of their product attributes, emphasis on product
quality, type of technology used, type of distribution channel used, etc. As
such, they are likely to respond to environmental forces in line with their own
individual strategic postures and competitive strategy.

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Studying characteristics of every firm within an industry can be an extremely Notes

taxing and time-consuming affair. Hence, managers generally classify firms
within an industry into strategic groups. Strategic groups are groups of firms
that pursue similar types of strategies within the same industry. Firms within
each strategic group are similar in their competencies, product offerings, and
price and distribution channels. Strong economic compulsions often constrain
these firms from switching one competitive posture to another (such as price
wars, advertising campaigns, concessions to distributors, etc.).

Strategic groups are groups of firms that pursue similar types of

strategies within the same industry. Firms within each strategic group are
similar in their competencies, product offerings, and price and distribution
channels.

While constructing strategic groups, however, care should be taken to select

only those dimensions (product line breadth, type of technology used, type of
buyer served, emphasis on product quality, type of distribution channel used,
number of markets served, etc.) that best describe the firm’s industry
environment. Managers require experience and industry knowledge in order to
assess properly the strategic groups in their competitive environment. Research
has shown that industries vary greatly in the similarity of their firms in terms of
strategies pursued (some are very homogeneous while others are
heterogeneous).

Example: The paperboard industry consists of several competing firms

that look almost identical in terms of plants they operate, the products they
produce, their marketing practices, etc.

5.3.1 Factors Used to Form Strategic Groups

Factors commonly used to form strategic groups are mentioned below:

Breadth of Market
Firm that serves the entire market.

Example: Tata Motors

Firm that serves a particular niche segment of the market.

Example: Vico SF (Sugar Free) Toothpaste

Product Service Quality

Firm that produces a standard product.

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Notes
Example: Titan Watches
Firm that produces a premium or luxury products.

Example: D’Damas Platinum and Gold Jewellery

Geographic Distribution
When firm is a national player.

Example: Bharat Petroleum Corporation Ltd.

When firm is a regional player.

Example: Nirula’s (Restaurant) in Delhi

Profit/Non-profit
Some industries can be sorted into distinct groups as for profit and not-for-
profit competitors.

Example: Non-Governmental Organisations (NGOs) – Youth Ki Awaz,

CARE and Hospitals.

5.3.2 Competitive Changes during Industry Evolution

An industry is a group of firms offering products or services that are similar or
close substitutes for each other. Consumers perceive these products as
satisfying the same basic need and are willing to substitute one for the other.

Example: Whether you sell directly to customers (like Avon) or sell

through stores (like Revlon), you belong to the same industry that is selling
cosmetics.

Example: Dell and Gateway belong to the same industry because their
PCs and servers compete to satisfy the same need (information storage and
processing). It is the customers who decide whether to watch a movie or a
television serial and define the nature and extent of competition between firms.
The boundaries of competition are set by consumers themselves.

Example: A cricket match is no competition for a movie for all

practical purposes. However, if the match is between two warring nations such
as India, Pakistan, Bangladesh and Sri Lanka, and of limited over, then the
moviemakers have to postpone their plans to release until the cricketing battle
comes to an end. It is always useful to look at ‘industry’ as nothing but a

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collection of firms offering similar products or services that often compete for Notes
the same space because they are perceived by consumers to be serving the
same need.
Competitive changes that need to be incorporated because of the revolution in
the industry are:
 Define Your Arena: It helps executives determine the arena in which their
firm is competing.

Example: Television software companies operate in the

entertainment industry, not in the television industry. As such, they need to
find what others are doing in the movie business, music industry, and
theatre business and print media. This helps them find winning ways which
are favoured by the general public at large.
 Focus on the Competitors: Defining competitive changes helps the firm to
clearly identify the competitors and producers of substitute products. Such
an external focus enables a firm to alter its competitive strategies in tune
with changing market trends and customer preferences.

Example: Tea manufacturers have had a fantastic run in the recent

times when they positioned tea as a health drink and tried to hit the market
with multiple choices such as ginger tea, lemon tea, herbal tea, iced tea, etc.

Example: When customers began to look at the low priced car,

Nano as a poor man’s car, competitors immediately started emphasising
‘value for money’ by launching cars at the lower end of the car market.

Example: Hyundai’s Eon, Maruti Udyog’s Alto, etc

 Identify Profitable Segments: A definition of competitive changes helps
executives to find crucial factors for success. Instead of doing everything
possible within an industry, a firm can focus on industry segments that it
can serve best playing the differentiation game. The goal in differentiation
is to closely match the firm’s offerings to the unique tastes and preferences
of consumers with a view to restrict competition.

Example: Within the auto industry, BMW caters to the premium

segment; Honda takes care of the mid-segment and Hyundai, Maruti and
Tata Motors take care of rest of the market. BMW plays the product
differentiation game and competes with Mercedes, Lexus. Maruti plays the
cost-leadership game and competes with Tata Motors, Hyundai, etc.
Firms within an industry can take an informed decision whether to play the
game at the top end of the ladder or at the lower end. If they have the

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Notes technological edge and create a perception that they offer value for money,
then they can think of staying at the top charging premium prices for their
products or services. Firms at the lower end of the segment need to focus
on customer convenience, price and operational efficiency. Whichever way
you look at it, answers to questions such as where to operate, what skill sets
are required and what to do to develop requisite skills, etc. can be found
only when the firm is able to earmark its space clearly. Cash rich firms,
now-a-days, try to do everything under the sun in an attempt to expand
their reach and remain at the top. As a result, you have hospital chains
offering health insurance and fitness products, retailing giants selling
consumer finance, auto makers selling motor insurance and real estate
giants setting up malls, software export zones, movie theatres, retail stores,
etc.
The basic purpose of industry analysis is to assess the relative strengths and
weaknesses of an organisation, as compared to the other players in the
industry. It tries to highlight the structural realities of a particular industry
and the extent of competition within that industry. Through industry
analysis, an organisation can find whether the chosen field is attractive or
not and assess its own position within the industry. Industry analysis helps
the firms in the following ways:
 Industry Attractiveness: Industry analysis helps to find out: (a) the growth
potential of the industry (b) the profitability of the industry and (c) the
relative abilities of players in that industry. Where the growth prospects are
good and profit potential is great, the firm can safely conclude that the field
is attractive and offers enough room for others to enter and exploit the
field. At this stage, the firm needs to answer certain basic questions such
as: (a) Is it a growing industry? (b) If yes, at what pace the industry is
growing? (c) Are there any limits to growth in the industry? (d) Does it
offer good returns consistently, etc.?
 Competitive Position: Where does the firm stand in comparison to others in
a particular industry. Finding answers to such a question is important for
various reasons. First, it helps the firm to find its own advantageous/
disadvantageous place. Second, it enables the firm to know whether it is
able to deliver value for money as compared to others in the industry.
Third, it can think of effective improvements in its product and service
offerings in an attempt to defend and improve its standing in the
marketplace.
By analysing competition, the firm can have a realistic picture of its own
strengths and weaknesses. It can think of defending its territory by focusing
attention on its strengths and launch attacks on the weak spots of its rivals
in a precise way. A superior competitive position in an attractive industry
helps a firm to run the race ahead of other.

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Notes
Example: However, in a dynamic, ever-changing world, it is not
easy to remain at the top of the ladder (remember yesterdays’ sun rise
industries such as floriculture, granite industry and aqua culture), unless the
firm is able to create a superior or distinctive competence in some
function/area relative to the competition (Sony’s walkman; caterpillars’
earth moving equipment; Maruti’s small car; Honda in engines; canon in
optics and Honda in design and manufacture of engines).

Learning Activity
Prepare a detailed note on strategic groups of an automobile
company and a restaurant company of your choice.

Automobile Industry

T he global automobile industry during the 1950s and 1960s was

dominated by the Big Three – namely General Motors, Ford and
Chrysler (now part of DaimlerChrysler). Mass production (of
standardised cars) through the use of assembly line techniques dominated
the scene. Huge volumes of diverse models were readily absorbed by
customers looking for space, comfort and economy. The Big Three secured
an impressive share of the market through a series of mergers and
acquisitions of smaller firms. Price competition was intense and everyone
wanted to get past the immediate rival through aggressive pricing and
distribution. Demand grew steadily and the players were never pushed to a
corner to look for innovative ways of improving the large, stylish gas
guzzlers. They never felt the need to look for constant product improvement
since customers, mostly, got carried away by advertising gimmicks and
occasional styling changes. The market looked for large, stylish and
powerful vehicles at economical prices and the Big Three stepped in to fill
those gaps. Car manufacturers had to simply adapt their ways to market
requirements and they were largely successful in this since they never had to
stretch themselves looking for innovation, research and development or
product development.
The oil crisis in 1970s changed the scenario dramatically. Skyrocketing fuel
prices and rising cost of living compelled consumers to look for fuel-
efficient models. Around this time, women also started competing in the job
market. The logic of having one big family car was pushed aside. The need
for a compact car with a clear focus on quality, safety, reliability and fuel
efficiency was clearly felt. The change in the outlook and buyer preferences
did not come by overnight. However, the Big Three were shaken out of their
deep slumber, when customers began to look for competitively priced
Contd...

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Notes compact cars in place of elephant-sized models. Prolonged market

dominance, coupled with a past history full of glory; virtually compelled
them not to look for customer insights and feedback from time to time.
Environmental scanning would have forewarned them allowing a reasonable
amount of time to adapt to changing customer tastes and preferences.
Blinded by past success, they were quite reluctant to undertake radical
changes in manufacturing processes and product design. The internal
resources and capabilities of the Big Three could no longer meet the
demand for high quality, fuel-efficient compacts. Other auto majors –
including the likes of Honda, Toyota – quickly moved in to fill the gap. The
Japanese automobile companies were particularly good at carrying out the
competitor analysis. As an expert remarked, “they came in groups…they
measured, they photographed, they sketched and they tape-recorded
everything they could. Their questions were precise. They were surprised at
how open the Americans were”. The Japanese also studied the European
market, particularly the design and engineering aspects. In contrast, the
Americans were late at even recognising the competitive threat from Japan
and were never so good in analysing the competitive environment they were
going to face. When firms ignore environmental changes for fairly longer
periods, market forces tend to crush them and push them out of the arena.
With proactive thinking and advanced planning, things could have helped
the Big Three to put their resources and capabilities to the best use, in sync
with the changing tastes and preferences of customers. After all,
“understanding environmental change is a necessary first step towards
company profits and progress.”
Questions
1. What environmental changes note you can take from the above stated
case study?
2. “Understanding environmental change is a necessary first step towards
company profits and progress.” Explain this statement.

1. Frequently used to identify an industry's structure to

determine corporate strategy, Porter's model can be
applied to any segment of the economy to search for
profitability and attractiveness.
2. All firms in a strategic group follow a similar
business model. Customers tend to view the products
of such firms as direct substitutes for each other.
Therefore, a company’s closest competitors are those
in its strategic group rather than those in other
strategic groups in the industry.

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SUMMARY Notes
 The ‘Five Forces Model’, developed by Michael Porter, provides the
groundwork for strategic action.
 Competitive forces determine profitability and are, therefore, of foremost
importance to the firm.
 Competition is not manifested only in the other players. Competition is
rooted in the underlying economic structure.
 Customers, suppliers, potential entrants and substitute products, all have
the potential to impact the market depending on the industry.
 ‘Porter’s Five Forces Model’ is a tool for strategic action and involves the
analysis of customers, suppliers, potential entrants and substitute products,
all of whom have the potential to impact the market depending on the
industry.
 The decline in unit costs of a product which occurs as the absolute volume
of production per period of time increases, that results in barriers to entry
for a firm.
 An alternative product that may satisfy similar consumer needs and wants
but differ somewhat in specific characteristics is substitute products.
 A one-time cost that buyers of an industry’s outputs incur if they switch
from one company’s products to another is switching costs.
 Intensity of rivalry creates fierceness with which competing firms jockey
one another for competitive position and superiority.
 'Strategic Group Analysis' is the identification of groupings within the
industry that have similar strategic characteristics, or follow similar
strategies or are competing on similar bases.

KEYWORDS
Strategic Groups: The grouping of firms that follow similar strategies in
response to environmental forces within an industry known as strategic groups.
Industry: An industry is a group of firms offering products or services that are
similar or close substitutes for each other.
Industry Attractiveness: Industry attractiveness is the potential for profit that
results from competing in a particular industry.
Breadth of Market: Firm that serves the entire market and firm that serves a
particular niche segment of the market.
Product Service Quality: Firm that produces a standard product and firm that
produces a premium or luxury products.

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Notes Define Your Arena: It helps executives determine the arena in which their firm
is competing.
Competitive Position: Where does the firm stand in comparison to others in a
particular industry.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What are the five forces which affect an industry’s structure according to
Porter?
2. What do you mean by strategic groups?
3. Why do firms carry out a competitor analysis?
4. Give two reasons for possessing buyer bargaining power.
5. What do you mean by industry attractiveness?
6. What are substitute products?
7. What are economies of scale?
8. Identify two forces driving industry change.
9. What are mobility barriers?
10. List two limitations of five forces model.
11. What are switching costs?
12. What is an external environment of business?
13. Explain the different types of barriers to entry.
14. Explain the features of strategic groups.
15. How a strategic group can be formed?
16. Explain define your arena.
17. Describe the competitive position.
18. What is product service quality?
19. What is breadth of market?
20. What is an industry?

Long Answer Questions

1. Identify an industry that has low barriers to entry and one that has high
entry barriers. Explain how these differences in barriers to entry affect the
intensity and form of competition in those two industries.
2. A new company is proposed to be floated for the production and sale of
household kitchen appliances. What are the relevant environmental factors

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that ought to be looked into by the promoters before taking up such a Notes
venture?
3. In an intense rivalry, especially one that involves competition in the global
marketplace, how can the firm gather competitor intelligence ethically
while maintaining its competitiveness?
4. ‘There are five competitive forces that determine an industry’s profit
potential.’ Explain.
5. What conditions would prompt a firm to retaliate aggressively against a
new entrant to the industry?
6. Of the ‘players’ described by the five forces analysis (customers, suppliers,
producers of substitutes, potential new entrants, you and your direct rivals),
which are most likely to engage in cooperative strategies to better compete?
7. Chose an industry in which you would like to compete. Use the five-force
method of analysis to explain why you find that industry attractive.
8. Explain the concepts of strategic group. How it is formed and describes
their importance to the strategic environment of the company?
9. Explain the detailed concepts of the competitive changes during the
industry evolution.
10. Describe the bargaining power of the supplier. How it affects the company
strategy and company’s profit?

FURTHER READINGS

Krishnamurthy Baragur Venkateshiah, (2010), Five Forces Model:

Analysis from an Emerging Economy Social Science Research
Network, India
Jauch, L.R., (2009), Business Policy and Strategic Management,
Frank Brothers, New Delhi
Gupta Vipin, (2010), Business Policy and Strategic Management,
Prentice Hall, New Delhi
Haberberg, A. & Rieple, A., (2008), Strategic Management,
Oxford, New Delhi
Miller, A., (2008), Strategic Management, McGraw Hill, New
York

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Notes
LESSON 6 - GLOBALIZATION AND INDUSTRY
STRUCTURE

CONTENTS
Learning Objectives
Learning Outcomes
Overview
6.1 Globalization in Industry
6.1.1 Features of Globalization
6.1.2 Merits and Demerits of Globalization
6.1.3 Entry and Barriers of Globalization
6.2 Industry Structure
6.2.1 Industry Life Cycle
6.3 Globalization in National Context
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Explain the globalization in industry
 Describe the industry structure
 Understand the concepts of globalization in national context

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 basics of globalization in industry
 explain features of globalization
 determine merits and demerits of globalization

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 analyzing entry and barriers of globalization Notes

 design industry structure and explain globalization in national context

OVERVIEW
Let us first review the previous lesson. You have studied about the Porter’s
five forces model and its significance. You also learnt the interpreting of five
forces model. At the end of the lesson, you learnt about strategic group. Now,
you will know about the globalization in industry. You will also learn the
industry structure.
Business enterprises are greatly influenced by environmental factors. As a rule,
therefore, business managers are expected to run the show in sync with
expectations of employees, consumers, suppliers and the society at large. Quite
often, businesses that failed to understand the impacts from environmental
forces and respond in an appropriate manner have been consigned to flames.
We advise you to learn this lesson carefully. It will give you a better
understanding of the present scenario of the world’s strategic environment.
This lesson will help you to understand the concepts of the globalization.

6.1 GLOBALIZATION IN INDUSTRY

Globalization refers to the flow of goods and services, capital and knowledge
across country borders. It is nothing but a shift towards a more integrated and
interdependent world economy. Globalization in a broader sense means
Globalization of production, Globalization of technology, Globalization of
markets and Globalization of investment. It is the integration of domestic
economy with the global world. It is viewing the entire world as a potential
market or source of inputs for the firm. Globalization has empowered even
small firms by obtaining skills, knowledge, expertise that it lacks from other
established firms to set up shop anywhere in the world gaining access to
resources and markets in other countries. It is compelling firms to collaborate
and then compete in order to survive and grow in a technology and knowledge-
dominated world. If you lose touch with the latest developments in your arena,
you might face extinction within no time. Globalization has made all of us
regardless of our country of origin, next-door neighbours and competitors.

6.1.1 Features of Globalization

Globalization has the following features:
 Locational and operational freedom: A firm can operate from anywhere.
It can sell anything – as long as it is able to offer value to customers.
 Buy and sell anywhere and anything: It can buy and sell from any part of
the world (buy and sell freely, using Internet Technology as a major
facilitator).

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Notes  Manufacturing and distribution: Production, distribution, logistics

planning, etc. can be carried out from anywhere.
 Resources and inputs: Crucial resources and inputs can be obtained from
anywhere (includes capital, materials, people, knowledge, talent, expertise,
managerial competencies, etc.).
 Collaborate and compete: A firm can collaborate with anyone and
compete with any market of its choice (collaborate and compete is the new
survival mantra and a successful formula; as a result, Toyota may
collaborate with Ford in one country but compete with the same in another
country)
 Interdependent economies: There is economic interdependence among
countries and organisations across countries.
 Dramatic change in competitive landscape: Big firms pushed out of
market by smaller players, established firms being overthrown by up-starts,
global firms being pushed to a corner by dynamic, innovative outfits is a
common sight in the borderless, boundaryless, and networked ‘global
village’ now-a-days.

Over the past few decades, world output and trade have grown at a
dramatic pace. As trade is liberalised in the most countries, competition is
set to increase and the more efficient players will survive. To succeed in
this fiercely competitive environment, managers need to understand the
complexities and explore the opportunities in a careful manner in order to
increase the competitiveness of their firms.

6.1.2 Merits and Demerits of Globalization

Merits of Globalization
Following are some of the merits of globalization:

Exploit the Homogeneity of Demand

Factors such as the rising income levels, passion for latest, trendy products and
services available in other countries, fascination towards items that are not
available in domestic markets (luxury cars, tennis rackets, smart phones,
designer watches) have compelled firms to look at international markets quite
seriously. They are forced, in a way, to realise the fact that people’s desires for
products and services are becoming steadily more homogeneous. Homogeneity
of demand means that irrespective of where customers are physically located,
customers are likely to prefer the same kind of product or service with certain
similar characteristics.

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Notes
Example: Blockbuster movies and television shows produced by
Hollywood studios are clear winners wherever they are shown worldwide.

Example: Smart phones of various companies: Motorola of United

States, Siemens of Germany, TCL of China, LG Electronics and Samsung of
South Korea, Nokia of Finland or Apple of USA is offered to customers in the
same size with identical features irrespective of the location of customers.

Example: Where tastes, preferences and desires for a certain product

converge, manufacturers find a great opportunity to come out with products
that would meet the expectations of customers world wide (e.g., Sony
Walkman, Hollywood movies, Apple’s Bipods, Nokia’s Cellular phones,
semiconductors, machine tools, Levi’s jeans, McDonald’s burgers, KFC’s
chicken varieties, Pizzas from Pizza Hut, soft drinks such as Coke and Pepsi,
etc.).
Modern communications and transport technologies have created the
conditions for a convergence of tastes and preferences of customers from
different nations and the trend would continue in the years ahead as well.

Spread Research and Development Costs

Firms in industries that face escalating R&D costs are compelled to spread
their operations globally. Intel alone spent over $7.5 billion in 2011 for both
research and capital equipment despite the downward trend in the semi-
conductor industry during that year.

Example: While developing the highly complex ad prohibitively

expensive Itanium chip, Intel had to collaborate with Hewlett-Packard, which
of course offered its design expertise, in order to cut down the risk and cost.

Example: Commercial aircraft manufacturers are forced to secure

orders from different national airlines before building a single place (a new
model or line of aircraft could suck up to $4 billion!).

Example: In the pharmaceutical and biotechnology sector, developing a

new anti-cancer drug independently could turn out to be a suicidal proposition.

Example: The large markets provided by international expansion are

attractive in other cases also (for e.g., computer hardware, electronics, medical
equipment, fibre optics, semi-conductors) because they expand the opportunity
to recover a large capital investment and large-scale R&D expenditures.

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Notes Increased Market Size

Firms can expand the size of their potential market, quite dramatically, by
moving into global markets.

Example: Faced with limited growth opportunities in their home

country, soft drink manufacturers such as Coca-Cola and Pepsi have entered
the international arena to take advantage of the new growth opportunities. Over
75 percent of Coke’s revenues come from overseas markets (mostly Asia) now.
Coke’s strategic mission speaks about placing the soft drink “within an arm’s
reach of desire” no matter where the customer might be. The secret behind
Coca Cola’s enormous popularity and market success lies in the company’s
continuous desire to innovate new products and enter new markets, no matter
how prohibitive they may seem initially.

Example: Benetton decided to expand outside its European base

because it had a firm belief that its brand value could be extended to other
geographic markets.

Example: Pharmaceutical firms have been doing significant foreign

direct investment into China due to the size of the market. Larger markets, as
we all know, offer higher potential returns and thus pose less risk for a firm’s
investments.

Example: In commodity businesses such as petroleum, semiconductors

and athletic footwear where the needs and tastes of customers all over the
globe are uniform, the pressure for global expansion is high because high
volume production and large market share offer mouth-watering benefits. In
such situations, firms are able to sell their existing standardised products in
large numbers in certain favourable international locations and thereby achieve
their growth targets at a lower cost.

Rising Economies of Scale

Firms need a large customer base to achieve economies of scale. Global
markets offer exciting opportunities for firms to exploit the latent demand there
and expand their production volumes to profitable levels.

Example: Japanese automakers such as Toyota, Honda and Nissan are

able to penetrate international markets, offer their products at commercial
prices (due to economies of scale and experience curve effects) and maintain
their low cost position, as compared to their rivals, quite successfully. Firms
may also be able to exploit core competencies in global markets through
resource and knowledge sharing between units across country borders. Such a

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sharing generates synergy which helps the firm to produce higher quality goods Notes
at lower cost. Firms can also profit from learning opportunities that come their
way.
Favourable Government Policies
Support from the government in the form of subsidies, preferential tax
treatment and export incentives could spur domestic firms to expand their
operations globally.

Example: Generous loans, subsidies, etc. have helped South Korean

firms such as Samsung and LG to invest huge sums in new technology and
build global-sized plants for export.

Example: Low corporate and personal tax rates generally encourage an

inflow of capital. Ireland and Puerto Rico offer two compelling examples. Each
offers corporate tax rates that are considerably lower than those in many
industrialised nations are and has attracted considerable foreign direct
investment as a result. The imposition of higher taxes on foreign made chips
helped domestic manufacturers of advanced semiconductors in China for a
long time.

Exploit Local Advantages

One of the important reasons that have prompted many firms to beyond their
national boundaries is the prevalence of low-cost labour and resources in
various parts of the world.

Example: Countries such as India, Taiwan and Israel are becoming

important engineering, manufacturing, and development centres for key skills
such as software and computer design. Availability of cheap labour, cheap land
prices, low energy costs, etc. in countries such as China, India, Indonesia and
other South-east Asian countries has encouraged many Japanese, Korean and
American companies to build factories there. The resultant savings in costs
would help such firms to compete quite effectively in international markets.
The availability of qualified, English-speaking engineers, who could be hired
for a lesser wage as compared to their counterparts in developed countries, has
opened the doors for the outsourcing industry in India. The dramatic expansion
of the Internet market in China in the recent years presents an exciting
opportunity for internet-oriented companies to set up shop over there.

Demerits of Globalization
Globalisation, thus, can help a multinational company to achieve numerous
benefits. The MNC can overcome the limits of domestic growth (maturing,
stagnating, slowing down, etc.). It can develop new insights, identify new
product opportunities and exploit them profitably. It can recover the huge

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Notes investments needed for new products and processes quickly. It can build a
powerful image worldwide. It can learn from new markets and transfer the
knowledge so gained within the firm. However, globalisation is a double-edged
sword. Coordinating operations across multifarious markets may be difficult.
There could be several other factors affecting the firm’s operations negatively.
Following are some of the demerits of the globalization:

Failure to Understand Foreign Customer Preferences

The MNC may not understand foreign customer preferences and fail to offer a
completely attractive product.

Example: Take the case of Wal-Mart which made significant mistakes

in some Latin American countries. Wal-Mart executives learned that giant
parking lots do not draw large numbers of customers in a country where the
shoppers do not have autos. The lots were so far away from the bus stops used
by many Mexicans for travelling and shopping that potential customers did not
come to Wal-Mart stores because they could not easily get their goods home.
Wal-Mart committed another blunder of stocking its shelves with footballs in
Brazil where soccer rules. By failing to do its homework properly, Wal-Mart
lost nearly $50 million. Perhaps most damaging was the company’s insistence
on doing things ‘the Wal-Mart Way’ (bringing stock-holding equipment that
did not work with standardised local pallets in Latin America, installing a
computerised book keeping system that didn’t take Brazil’s complicated tax
system, etc.). In the end, the company had to pay a lot of tuition to learn what it
had to learn. Wal-Mart encountered difficulties in translating the warehouse
club concept to Hong Kong. As a young accountant eyed a 4-pound jar of
peanut butter, he said, ‘the price is right, but where would I put it?’

Failure to Appreciate the Level, Intensity and Complexity of Competition in

Global Markets
MNCs that are used to a highly competitive domestic market experience more
complexities in international markets. Caused not only by the number of
competitors encountered but also by the differences among those competitors.

Example: A US firm venturing into a European country may have to

live with competition from European, Asian, and Latin American, African and
Australian firms. Firms from some of these countries may have low labour
costs, others may have easy access to financing and low capital costs and still
others may have access to new, high technology. Adapting to the vast
differences in the way these firms act and react is not an easy job.
Failure to Understand Host Country’s Rules of the Game
The MNC may fail to understand the host country’s business culture or does
not know how to deal effectively with foreign nationals. It may underestimate

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foreign regulations and incur heavy costs. Host governments have myriad laws Notes
concerning libel statutes, consumer protection, and information and labelling,
employment, safety and wages. Global firms must learn these and regulations
and abide by them. When it first established operations in China, Anheuser
Busch was unaware that employers were required to provide employees with
lunch. When it provided lunch, the firm was startled to find that many more
people were eating at the plant than were working there (an accepted informal
norm there!). If managers lack requisite skills to counter threats from political,
economic and legal forces in the host country, the firm may be out of the
business scene completely.

Example: In Mexico City; government inspectors made a surprise visit

to Wal-Mart’s safer centre and charged that more than 10,000 of the store
items were improperly labelled or lacked instructions in Spanish (Daft).
Failure to Understand Political Risks
Another frequently cited problem for international firms is political instability
which includes riots, revolutions, civil disorders and frequent changes in
government.

Example: Civil wars and large-scale violence have taken place in

Malaysia, Thailand, Sri Lanka and Indonesia. Companies moving into former
Soviet Republics have faced continued instability due to changing government
personal policies and political philosophies. Consider, for example, the
ongoing tension and violence in the Middle East between Israelis and
Palestinians and the social and political unrest in Indonesia and Iraq. Such
hazardous conditions increase the likelihood of destruction of property and
disruption of operations at frequent intervals. Coupled with this if such
countries have weak laws, then the losses could be monumentally big.
Microsoft, for example, has lost billions of dollars in potential revenue through
piracy of its software products in many countries, including China.

Example: Pharmaceutical giants have lost billions of dollars in

potential revenue due to weak patent and intellectual property rights in most
developing countries. Global firms, in addition, have to live with trade barriers
imposed by local governments. To compound the problem further, there is the
currency risk – unfavourable movements of currencies to which firms are
exposed – trying to eat away every opportunity that a global firm seeks to
exploit.

Example: The sales of a global firm in India, for example, might rise
but due to the depreciation of local currency, the rupee, revenues and margins
might be negatively impacted. The crisis that confronted Thailand in 1997

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Notes where the local currency Baht virtually collapsed to precarious levels is worth
remembering here, since the revenues of the firms located there have sunk in
dollar terms to zero levels. When Russian Rubble was devalued in 1998, the
country failed to honour its debt obligations too. Firms exposed to countries
with fluctuating currencies should be prepared for substantial risks in the form
of serious negative impacts on costs of production and net profits.

6.1.3 Entry and Barriers of Globalization

Entry of Globalization
A firm has many options available to it when it decides to expand into
international markets. The different modes of entry in this regard may be listed
thus:

Exporting
This is the simplest and easiest way of entering a foreign market. Here, the
firm tries to manufacture the product in one or a few central locations –
preferably in the home country – and ships it to another country or several
countries for sale. Exporting does not demand heavy establishment
expenditure, but would certainly require the firm to set up sales and
distribution outlets in key foreign locations. By manufacturing the product in
favourable locations – home country generally and exporting it to other host
countries, the firm is able to realise significant scale economies from its global
sales volume.
Licensing
Licensing is an arrangement whereas a firm (licensor) allows another company
(licensee) to use its trademark, technology, talent, copyright or other assets in
return for a fee or royalty. The licensor typically restricts licensee sales to a
particular geographic locale and limits the time period covered by the
arrangement. The licensor thus, gains entry into another country at little risk
and the licensee, in turn, gains production expertise or a well-known product or
brand name. Factors that lead to such an arrangement include excessive
transportation costs, government regulations, and home production costs.
Franchising is a form of licensing in which the franchiser provides foreign
franchisees with a complete package of material and services, including
equipment, products, product ingredients, trademark and trade name rights,
managerial advice and a standardised operating system. Franchise agreements
typically require payment of a fee upfront and then a percentage of the
revenues.

Example: McDonald’s offers a good example of a firm that has grown

big putting the franchising policy to good use. It has set down strict rules as to
how franchisees should run a restaurant. These rules cover many things such as
menu, cooking methods, human resource policies and restaurant design and

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location. McDonald’s also organises the supply chain for its franchisees and Notes
offers management training and financial support.
Licensing generates royalties and builds market share. It can also build a firm’s
standardised global image with relatively little cost. This strategy is generally
used for entry into less-developed countries where obsolete technology is still
acceptable and, in fact, may be state-of-the-art on the negative side, licensing
gives the firm very little control over the manufacture and marketing of its
products in other countries. Further, licensing provides the least potential
returns, because returns must be shared between the licensor and the licensee.
Worse, the host-country firm may learn the technology and produce and sell a
similar competitive product after the license expires.
Strategic Alliances
In a strategic alliance, two or more firms jointly cooperate for mutual gain.
Each partner in an alliance brings knowledge or resources to the partnership. In
the long run, alliance partners can learn from each other and develop new core
competencies that help to increase the firm’s strategic competitiveness. In a
joint venture which is a special type of strategic alliance, a company shares
costs and risks with another firm, typically in the host country to develop new
products, build a manufacturing facility or set up a sales and distribution
network. Some of the commonly cited advantages of joint venture
arrangements (whether it is an equity venture, which involves a financial
investment by the MNC in a business enterprise with a local partner or a non-
equity venture, where one group offers service to another) include the
following:
 Improvement of efficiency: The creation of a joint venture can help the
partners to achieve greater economies of scale and scope, something which
can be difficult to accomplish by one firm operating alone. Additionally,
the partners can spread the risks among themselves and profit from the
synergies which arise from the complementarily of their resources.
 Access to knowledge: In joint ventures, each partner has access to the
knowledge and skills of the others. So one partner may bring financial and
technological resources to the venture while another will bring knowledge
of the customer and market channels.
 Political factors: A local partner can be very helpful in dealing with
political risk factors such as a hostile government and/or restrictive
legislation.
 Collusion or restriction in competition: Joint ventures can help partners
overcome the effects of local collusion or limits that are being put on
foreign competition. By becoming part of an ‘insider’ group, foreign
partners manage to transcend these barriers.

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Notes

Strategic alliances are not easy to manage. Partners could disagree

on various aspects; one partner might want to reinvest earnings for growth,
and the other partner might want to take home more in the form of
dividends. There is no guarantee that the shared knowledge or skills would
remain within the four walls of the factory.

Direct Investment
Direct investment occurs when an MNC headquartered in one country builds or
purchases operating facilities or subsidiaries in a foreign country. The foreign
operations then become wholly owned subsidiaries of the firm. A wholly
owned subsidiary, thus, is an overseas operation that is totally owned and
controlled by an MNC.
Thus, to enter a global market, a firm may select an entry mode that is best
suited to its resource base and competency levels. In some cases, the various
options listed above may be adopted sequentially – beginning with exporting
and ending with direct investment. In other instances, the firm may use several,
but not all of the different entry modes, each in different markets. The decision
regarding the entry mode to be followed is basically an outcome of the
industry’s competitive conditions, the country’s situation, government policies
and the firm’s unique set of resources, capabilities and core competencies.

Barriers of Globalization
Low Cost Pressures and Low Pressure for Local Responsiveness
A strategy may still work in situations where the firm has distinctive
competencies that local firms in host countries lack. The principal criticism
against international strategy is the centralisation of facilities in one place. Any
attempt to enforce centralised control without taking care of local dynamics
would not help a firm in the long run. Multinational companies, to survive and
flourish in this economic jungle, need to take advantage of an optimally
distributed value chain. They need to put their best foot forward by responding
to local needs in a spontaneous way. Any firm that is not receptive to new
ideas and innovation from its foreign subsidiaries may have to live with missed
opportunities which might even seal its fate prematurely.

High Pressure to Reduce Costs and Low Pressure for Local Responsiveness
Firms pursuing a global strategy focus on increasing profitability by relying on
cost reductions that arise out of economies of scale and location economies.
They follow a low cost strategy on a global scale. They set up production,
marketing and R&D activities in certain favourable locations. The head office
would try to coordinate and control operations of various units with a view to
deliver ‘value for money’ to customers. The responsiveness to local needs is

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also pretty low. Such a strategy would work when there are strong pressures Notes
for cost reductions and demand for local responsiveness is minimal. It would
work in situations where the firm is armed with products that often meet
universal needs.

A global strategy puts emphasis on operating with worldwide

consistency and standardization of key processes and product designs at low
relative cost.

Learning Activity
Prepare a detailed note on your understanding about the
globalization and its impacts and significance on the Indian
companies.

6.2 INDUSTRY STRUCTURE

Large firms in a small domestic market known as enthusiastic
internationalisers obviously want to exploit opportunities available elsewhere
once they reach a saturation point, in terms of sales in their domestic market.
Firms which are relatively smaller in size and from smaller countries such as
Reliance, known as follower internationalisers, especially in a domestic market
also exhibit a lot of interest in extending their operations to countries where
their products could be favoured and in many cases they may succeed as well.
Large firms in a large domestic market especially the likes of TATA, may want
to expand their reach in a slow and steady manner, therefore known as slow
internationalisers.
Finally, small firms in a large domestic market do not have the requisite
resources to go on a path of aggressive internationalisation and they remain
locked up in their own country and undertake the journey only occasionally –
hence, the name occasional internationaliser.
Developing strategies for expansion on a global scale is not an easy task.
Managers have to learn other languages, understand host-country laws, deal
with volatile currencies, face political uncertainties, and redesign products to
suit different customer needs and expectations. The firm may have to incur
heavy losses, if mistakes occur due to ignorance, negligence or over
confidence.

6.2.1 Industry Life Cycle

The Industry Life Cycle is an important parameter in determining the
profitability of companies in a given industry. Let us look at the different

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Notes stages of the cycle, before we see the implications to the profitability of the
companies.

Figure 6.1: Industry Life Cycle

Introduction Stage
In this stage of the cycle, the industry is in its infancy. It mainly concerns the
development of a new product, from the time it is initially conceptualized to
the point it is introduced in the market. The firm having an innovative idea
first, will often have a period of monopoly, until competitors start to copy
and/or improve on the product.
There is significant risk to investors during the introduction stage as the
companies will need a significant amount of cash to promote their products.

The principal points of risk at this stage are: technical problems in

manufacture, packaging, storage, etc., insufficient production capacity –
inability to meet demand, obstacles in distribution and inadequate display at
the point of sale, customer resistance to new products and reluctance to
change consumption habits.

Growth Stage
If the new product is successful, sales will start to grow and new competitors
will enter the market, slowly eroding the market share of the innovating firm.
The product may begin to be exported to other markets and substantial efforts
are made to improve its distribution. During this phase competition mainly
takes place on the basis of product innovations rather than on the basis of price.
In the growth stage, there are multiple companies in the industry seeking to
differentiate themselves and earn market share. Like the introduction stage, the
growth stage requires a significant cash outlay from the companies, but the
funding is used toward more focused marketing efforts and expansion. It is
during this phase that companies may start to benefit from economies of scale
in production. This stage of industry growth, while still presenting risk to
investors, demonstrates the viability of the industry.

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Maturity Stage Notes

At this stage, the product has been standardized, is widely available on the
market and its distribution is well established. Competition increasingly takes
place over cost and a growing share of the production takes place in low cost
locations. This is the stage where the industry will start to see slowed growth
with the rate of sales growth often slowing to the rate of overall economic
growth. Late entrants appear in this stage seeking to capture market share
through lower-cost offerings, thus requiring the existing companies to continue
their marketing efforts. For investors, maturity of an industry can mean
relatively stable stock investments with the possibility of income through
dividends.

Decline Stage
As the product begins to become obsolete, production essentially takes place in
low costs locations. Production and distribution economies are actively sought
as profit margins decline. Eventually, the product will be retired, an event that
marks the end of its life cycle. A decline is inevitable in any industry as
technological innovations and changing consumer tastes adversely affect sales.
At this stage, some companies may exit the industry or merge and consolidate.
An investor should approach stocks in declining industries with caution.

6.3 GLOBALIZATION IN NATIONAL CONTEXT

Indian government has woken up to the challenge of Globalization and has
taken several initiatives that are aimed at making Indian firms globally
competitive. The important steps in this regard include:
 Entry Barriers: Barriers to the entry of multinational firms have been
removed in almost all sectors (barring retail, media, defense, etc.)
 Alliances Permitted: Indian companies have been empowered to compete
on a global scale; they can enter into strategic alliances with any other firm.
 Import Liberalization: It was carried out as desired by the IMF and the
World Bank.
 Export Promotion Measures: Initiatives to boost up exports taken lower
taxes, tax exemption to software exports, etc.
 Measures to Boost FDI Flows: Initiatives to boost up Foreign Direct
Investment taken; allowed foreign institutional investors to invest in Indian
capital market.
 Incentives to Set up Business: Incentives for setting up business in India
by foreign firms announced.
 Devaluation of Rupee: Rupee devalued in a phased manner and full
convertibility being put in place.

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Notes  Raise Funds Anywhere: Indian companies allowed to tap foreign markets
to meet their capital requirements.
 Rationalized Duty Structure: A more rationalized duty and tariff structure
put in place.
 Lifting of Exchange Controls: Exchange controls lifted in a phased
manner.
 Rationalized Tariff Structure: Tariff structure has been rationalized. The
peak tariff rate regime is gone now. With substantial cut in duties, Indian
companies can now think of competing with the global majors on equal
terms.
 Capital Market Reforms: These reforms have come in a big way. Listing
norms have been liberalized. Foreign funds and foreign institutional
investors are welcome now in almost all areas, bond markets, equity
markets, mutual fund industry, etc. The Securities and Exchange Board of
India (SEBI) is the apex body that governs the behaviour of members as
well as their operations.

Learning Activity
Prepare a detailed note on your understanding about the
globalization. Prepare a short note and a list of Indian Global
Companies.

McDonald’s

M cDonald’s in India: McDonald’s does not serve beef in India (first

restaurant set up in 1996). Pork is also a strict No in the
Indianised version of their menu. The US menu at McDonald’s
sports sandwiches made up of 100% pure beef and pork, such as Big Mac,
Hamburger and August Bacon & Cheese. In India, even the non-vegetarian
menu at McDonald’s restaurants is restricted to chicken, fish and lamb
products. Indian consumers initially had an aversion towards American
multinationals which were considered a threat to the local economy and
native culture. They never liked the American way of dining out at regular
intervals. Food, after all, is a family affair in India and most people
preferred to eat in groups at home. To overcome these age-old beliefs and
customs, McDonald’s had to spend considerable time and effort and finally
developed a customised menu for India – a menu that reflects both the taste
and beliefs of the natives. Hinduism is the most prevalent religion in India.
The followers of this religion revere cows as sacred. Cow slaughtering is a
crime in this religion; therefore, beef is out of the question in an India
restaurant menu. The second largest community, the Muslims, do not eat
Contd...

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pork. To establish a market in India, McDonald’s managed to design a menu Notes

that includes only chicken, fish and mutton products. The Big Mac was
baptised the Chicken Maharaja Mac. They also devised a comprehensive
range of vegetarian products as a large population in North India prefers
Vedic style of eating, which propagates vegetarian food. Not to forget the
spices to add Indian flavour to the McDonald’s burgers. The US-based fast
food chain resorted to localisation even in terms of supply chain
management. The Indian burgers are prepared from ingredients produced in
India. This helped the company to weather protests from politicians and
social activists. It also helped to reduce the manufacturing cost and thus
serve McDonald’s burgers just for $0.5 (` 25). Unmatchable taste at an
unbeatable price became the USP of the Indian version of McDonald’s.
That’s how McDonald’s became a Household Name in India. In the US,
McDonald’s is branded as a fast food restaurant that offers QSC&V
(Quality, Service, Cleanliness and Value). In India, the company has to
market products to a group of people who prefer family dining. Thus,
McDonald’s was marketed as a fine dining restaurant where a family can
enjoy group meals in a comfortable set up. Incorporating this philosophy in
the USP of the company, McDonald’s launched a series of television
commercials, such as ‘Toh Aaj McDonald’s Ho Jaye’ (Let’s go to
McDonald’s today) and ‘McDonald’s Mein Hai Kuch Baat’ (McDonald’s
has something that attracts you). Initially, the restaurant targeted children
and teenagers. In 2004, the Happy Price Menu was launched to attract price-
sensitive middle-class individuals to the restaurants. In 2008, a new
advertising campaign, Prices of the Yesteryears, was launched to attract
teenagers as well as adults.
Questions
1. How does globalization (multi-domestic strategy) help the McDonald’s
establish in Indian market?
2. Analyze the above case and prepare a detailed note of your
understanding about the above case.

1. The main disadvantage of direct investment is that

the firm “exposes a large investment to risks such as
blocked or devalued currencies, worsening markets
or expropriation”.
2. The growth of an industry's sales over time is used to
chart the life cycle. The distinct stages of an industry
life cycle are: introduction, growth, maturity, and
decline. Sales typically begin slowly at the
introduction phase, then take off rapidly during the
growth phase.

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Notes SUMMARY
 Globalization refers to the flow of goods and services, capital and
knowledge across country borders. It is nothing but a shift towards a more
integrated and interdependent world economy.
 Globalization in a broader sense means globalization of production,
globalization of technology, globalization of markets and globalization of
investment.
 It is the integration of domestic economy with the global world. It is
viewing the entire world as a potential market or source of inputs for the
firm.
 Globalization has empowered even small firms by obtaining skills,
knowledge, expertise that it lacks from other established firms to set up
shop anywhere in the world gaining access to resources and markets in
other countries.
 It is compelling firms to collaborate and then compete in order to survive
and grow in a technology and knowledge-dominated world. If you lose
touch with the latest developments in your arena, you might face extinction
within no time.
 Globalization has made all of us regardless of our country of origin, next-
door neighbours and competitors.
 A global economy is one in which goods, services, people, skills and ideas
move freely across geographic boundaries.
 Globalization views the world as a single market for the firm; the process
by which the firm expands across different regions and national markets.

KEYWORDS
Global Strategy: This is a strategy that seeks to achieve a high level of
consistency and standardisation of products processes and operations around
the world; coordination of the many subsidiaries to achieve high
interdependence and mutual support.
International Strategy: It seeks to sell a product that serves universal needs,
where the firm has very little pressure to reduce cost or adapt the product to
suit local needs.
Competitive Position: Where does the firm stand in comparison to others in a
particular industry.
Locational and Operational Freedom: A firm can operate from anywhere. It
can sell anything – as long as it is able to offer value to customers.
Exporting: Exporting is the simplest and easiest way of entering a foreign
market.

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Licensing: Licensing is an arrangement whereas a firm (licensor) allows Notes

another company (licensee) to use its trademark, technology, talent, copyright
or other assets in return for a fee or royalty.
Strategic Alliances: In a strategic alliance, two or more firms jointly cooperate
for mutual gain. Each partner in an alliance brings knowledge or resources to
the partnership.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What is globalization?
2. What is strategic alliance?
3. What is licensing?
4. What is exporting?
5. Explain competitive position.
6. What is an international strategy?
7. What is a global strategy?
8. Explain the locational and operational freedom.
9. Explain the features of globalization.
10. How globalization helps in buying and selling anywhere?
11. How globalization helps in manufacturing anywhere?
12. How globalization helps in distribution anywhere?
13. What is an interdependent economy?
14. How globalization helps in collaboration?
15. How globalization helps in competing with other competitors?
16. What is an industry structure?
17. Explain the industry life cycle.
18. Explain the globalization in Indian context.
19. How globalization rationalized tariff?
20. How globalization controls the exchange?

Long Answer Questions

1. Explain the term “Globalization”. What are the features of globalization
and how it affects the industry and economy?
2. Describe the impacts of globalization on Indian economy.

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Notes 3. Explain the merits and demerits of the globalization.

4. Describe the entry patterns and the barriers to the globalization.
5. Describe the concepts of the industry structure in detail.
6. Explain the concepts of the industry life cycle in detail.
7. Describe the concepts of strategic alliance in detail.
8. “Now a days every companies are going global.” Explain this statement.
9. Explain the concepts of the investment. Why companies are looking for
investment in themselves?
10. Describe the concepts of direct investment and foreign direct investment.

FURTHER READINGS

Chattopadhyay Amitava and Batra Rajeev, (2012), The New

Emerging Market Multinationals: Four Strategies for Disrupting
Markets and Building Brands, Tata McGraw Hill, India
Jauch, L.R., (2009), Business Policy and Strategic Management,
Frank Brothers, New Delhi
Gupta Vipin, (2010), Business Policy and Strategic Management,
Prentice Hall, New Delhi
Haberberg, A. & Rieple, A., (2008), Strategic Management,
Oxford, New Delhi
Miller, A., (2008), Strategic Management, McGraw Hill, New
York

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LESSON 7 - COMPETITIVE ADVANTAGES Notes

CONTENTS
Learning Objectives
Learning Outcomes
Overview
7.1 Resources
7.1.1 Tangible Resources
7.1.2 Intangible Resources
7.2 Capabilities and Competencies
7.2.1 Capability
7.2.2 Competency
7.3 Core Competencies
7.3.1 Distinctive Competencies
7.3.2 Low Cost Strategies
7.3.3 Differentiation Strategies
7.3.4 Generic Building Blocks of Competitive Advantages
7.4 Sustainable Competitive Advantages
7.4.1 Steps of Creating Sustainable Competitive Advantages
7.4.2 Avoiding Failures
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concept of resources
 Describe capabilities and competencies
 Explain core competencies
 Understand sustainable competitive advantages

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Notes LEARNING OUTCOMES

Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 basics of resources and explain its types
 define capabilities and competencies
 concept of core competencies
 explain differentiation strategies
 recall generic building blocks of competitive advantages
 identifying steps of creating sustainable competitive advantages

OVERVIEW
Let us first review the previous lesson. You have studied about the
globalization in industry. You have also learnt the industry structure. At the
end of the lesson, you gained knowledge about globalisation in national
context.
Now, you will know about the internal environment of the business. You will
familiarise with the internal resources of the firm. Along this, you will study
the firm’s capabilities and competencies. As we know that the present scenario
is going global, so you will learn how company is sustain themselves through
their core competencies.
We advise you to learn this lesson carefully. It will give you a better
understanding of the present scenario of the world’s strategic environment.
This lesson will help you to understand the concepts of the business internal
environment, their resources, capabilities and competencies of a firm.

7.1 RESOURCES
Resources are inputs into a firm’s value creation process. By developing and
deploying these inputs effectively, a firm is able to deliver value to customers.
It is worth noting that mere possession of a certain type and class of resources
does not bring in any value to a firm. It is only when they are put to some
productive use that value follows. Resources can be categorised as tangible and
intangible resources.

7.1.1 Tangible Resources

Tangible resources are the physical assets of a firm such as plant, machinery,
buildings, etc. They have a physical presence. They are visible and hence easy
to identify and evaluate.

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Physical Assets Notes

Physical assets such as factories, offices, computer systems, etc. can be bought
from the open market. Competitors can also buy these, however new or up-to-
date these might be. In fact sometimes, competitors might be able to acquire
these cheaply. It is quite unusual for physical assets to be the basis of
sustainable competitive advantage. Physical resources also cover a wide range
of operational resources.

Example: Production facilities (location of existing production

facilities, current production processes), marketing facilities, IT systems, etc.

Financial Assets
Financial assets also do not prove to be strategic, since money is available from
financial institutions, stock markets and venture funds. Of course, firms with
deep pockets having large cash reserves or borrowing capacity might be able to
survive a price war or a recession.

Example: They might entice talent away from rivals in industries such
as sports, entertainment, banking, etc.

7.1.2 Intangible Resources

Intangible resources are largely invisible and difficult to quantify. It is not easy
for competitors to understand, purchase, imitate or substitute such resources,
which cannot be seen directly. Unlike tangible assets, their use can be
leveraged.

Example: You cannot use the same company bus on five different
routes at the same time. However, sharing knowledge among employees does
not diminish its value for any one person. On the contrary, two employees
sharing their individualised knowledge sets often can leverage them to create
additional knowledge that is new to each of them and relevant to help the firm
to create value for its stakeholders. With intangible assets the larger the
network of users, the greater is the benefit to each party.

Human Assets
Human assets are more heterogeneous than physical or financial assets as there
are considerable differences in the knowledge, skill sets and expertise of
people. Likewise, they differ in terms of adaptability, commitment and loyalty.
They are therefore, much more likely to give rise to advantages that are rare
and difficult to copy. This is applicable, especially in businesses which require
considerable creative, intellectual inputs from people such as advertising,
consultancy and financial services. People with rare skills carry a premium

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Notes value and might easily spell the difference between success and failure in
businesses where the rate of change is pretty high.

Example: Someone like Ratan Tata or N R Narayana Murthy might be

undoubtedly regarded as a strategic asset.

Intellectual Assets
Intellectual assets such as patents, customer data bases, research programmes
often prove to be invaluable since these cannot be developed overnight.
Knowledge, after all, cannot be written down. It cannot be copied or stolen.

Example: Sometimes, it may be possible to lure research teams away

from rivals, but delivering results through such people is linked to many other
factors such as team spirit, culture of the organisation, encouragement from the
top, proprietary software, etc.
Reputational Assets
Reputational assets include the brands: a Maruti car, a Kingfisher beer or a
Titan watch and their reputation in the marketplace. The goodwill of the
company such as Tata, Wipro and Infosys would also come under this
classification. Companies with strong brands are clear winners in the
marketplace for a variety of reasons. Customers love them and buy them
almost blindly. Price wars do not affect them negatively. The impregnable
walls built by a company around its brands in the form of design, style,
advertising, etc. seem to protect them from competitive threats or price wars.
Likewise, the reputation of a company paves the way for an easy and
comfortable choice from customers all over the globe.

Example: If customers are pressed for time, they may head straight for
the nearest Wills Life Style store rather than laboriously comparing prices in
different shops. Wills Life Style’s reputation as the provider of products at
mouth-watering prices would prevent many competitors to think twice before
entering the arena. In the present day economic jungle, where survival of the
fittest is the rule and not an exception, a good reputation can be valuable to a
company like Wipro, Infosys in its relationship with a variety of stakeholders,
employees, customers, suppliers, financiers and even its rivals.

Relational Assets
Relational assets include relationships with customers, suppliers and alliance
partners who are nurtured through shared routines and cultural norms. Such
relations get cemented through mutually supportive actions over time. Once
they take an effective shape, they become difficult to copy. Sometimes
relationships with key institutions such as governments, local administrations,
regulators and religious bodies also play a key role in getting things done

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smoothly. Firms having a healthy network of mutually supporting network Notes

partners and friendly administrators will find it relatively easy to run through a
complex web of rules and regulations effortlessly. They are able to build
alliances and transfer crucial tacit knowledge to their partners quickly. They
seem to enjoy better relationship with other firms in their supply chain. Supply
Chain Management (SCM) is the oversight of materials, information and
finances as they move in a process from supplier to manufacturer to wholesaler
to retailer to consumer. Supply chain management involves coordinating and
integrating these flows both within and among companies.

Resources can be sources of competitive advantage if it is difficult

for competing firms in the industry to copy or acquire.

7.2 CAPABILITIES AND COMPETENCIES

7.2.1 Capability
Resource-based view defines capability as the ability of a bundle of resources
to perform an activity. It is a way of combining assets, people and processes to
transform inputs into outputs. Physical assets, financial resources and human
skills are of no use, unless these are put to good use, in order to produce
results. This can be represented mathematically as:
C = F (TA, IA, S)
Where C = Capability, TA = Tangible Assets, IA = Intangible Assets and
S = Skills
Capabilities, thus, reflect a company’s skills in coordinating its resources and
putting them to productive use. These skills reside in a firm’s rules, routines
and procedures that are style of manner through which it makes decisions and
manages its internal resources while achieving goals. They emerge over time
through a complex process of interaction between tangible and intangible
resources. The whole purpose is to create and exploit external opportunities
and develop sustained advantages over competitors in the field. Through
repetition and constant practice, capabilities become stronger and more
valuable strategically. Capability, thus, is nothing but a firm’s proficiency in
certain activity areas, indicating the level of learning the firm has attained in
those areas.

Example: 3M’s capability in developing radically new products

frequently; Sony’s in making high quality consumer electronic products in
compact sizes; Toyota’s in manufacturing cars efficiently; and Dell’s in
delivering custom-built PCs in a speedy and inexpensive manner.

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Notes Capability emerges from the firm’s stock of knowledge, employee skills and
organisational routines which are developed over time through complex
interactions among the firm’s resources. Customers and other stakeholders can
easily find out whether their orders are executed quickly, whether their
requests for service are attended to promptly, whether their bills are paid
quickly or not. On the basis of these observations, customers and stakeholders
often come to a conclusion whether they want to do business with a firm and if
so, whether they are willing to pay any kind of price premium. Capability is,
somewhat, specific to a firm. Years of experience in combining inputs and
collectively processing them give birth to a firm’s capability. It is well worth
noticing here that competitors, over the years, can always perfect the art of
doing things in a fine manner through constant observation, experimentation,
imitation and execution.

A company’s capabilities represent its capacity to integrate

individual company resources to achieve desired objectives. However, this
ability does not emerge overnight. Capabilities develop over time as a result
of complex interactions that take advantages of the interrelationships
between companies’ tangible and intangible resources that are based on the
development, transmission and exchange of sharing of information and
knowledge as carried out by the company’s employees (its human capital).

7.2.2 Competency
The term ‘competency’ refers to the ability of a firm to perform exceptionally
well and increases its stock of targeted resources. It is a kind of unique strength
through which a firm is able to fight competition and deliver superior
performance. Over a period of time, competitors play the catch up game and
see that the firm does not enjoy the competitive superiority by possessing
certain unique strengths. Unless a firm develops certain enduring strengths
which cannot be easily copied by putting its resources and capabilities to best
use, it may not be able to sustain its competitive edge over its competitors in
the marketplace.

7.3 CORE COMPETENCIES

Core competencies are the crown jewels of a firm – the activities that the firm
performs especially well as compared to competitors and through which the
firm adds value to its goods and services over a long period of time. Core
competencies serve as a source of competitive advantage for a firm over its
rivals. They emerge over time through an organisational process of
accumulating and learning how to deploy organisational resources and
capabilities. When developed, nurtured and applied appropriately throughout a
firm, core competencies serve as the basis for a firm’s competitive advantage,

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its strategic competitiveness (strategic competitiveness is achieved when a firm Notes

successfully formulates and implements a value creating strategy of which
other firms are unable to duplicate the benefits or find it too costly to imitate)
and its ability to earn above average returns. The important issue here is not
capabilities per se, but incapabilities relative to others. Experts, therefore, look
at competitive advantage as a firm’s ability to outperform its industry, to create
more value to its customers by running that extra mile. To be successful, firms
must identify external opportunities that can be exploited by putting their
resources and capabilities to best use while avoiding competition in areas of
weakness.

Example: Dell is able to outwit competition by a mile all these years

only on the strength of certain core competencies that competitors find it
difficult to emulate, namely ability to make high quality, user-configurable
computers, keeping costs low, managing inventory efficiently and having a
firm grip over e-commerce direct sales and support processes. Competitors, no
doubt, are deeply familiar with Dell Inc’s successful direct sales model.
However, to date, no competitor has been able to imitate Dell’s capabilities as
suggested by the following comment: “There is no better way to make, sell and
deliver PCs than the way Dell does it and nobody executes that model better
than Dell.”
The more unique and the better the organisation's performance is on its core
competencies, the larger will be the economic value for the organisation and
for the customer. The reverse is also important, that is, the more similar the
organisational competencies are to its direct competitors the lower the
economic value for the organisation. The more distinctiveness and uniqueness
can be built into the companies core competencies, the more market leverage
and margin performance the company can anticipate. And, in addition, more
customer loyalty will also develop.
While the core competencies vary by industry and by company, following is a
selected list of skills, processes or systems that might be considered as core
competencies:
 Product Development – Marketing
 Supply Chain – Speed to Market
 Sales Force – Customer Service
 Technology – Strategic Alliances
 Manufacturing Practices – Engineering
 Service Levels – Design
 Efficient Systems – Product Innovation.
Core competency analysis creates a realistic view of the skill sets, processes
and systems the company is uniquely good at performing. It helps to generate

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Notes focus on the value adding activities and provides a review format useful in
identifying the need for improvement in key strategic activities, practices and
systems. And, finally it helps in the decision process used to determine which
activities are candidates for outsourcing.

Example: Reliance Industries has grown to be the largest private

enterprise in India in the last twenty five years. The secret of its phenomenal
success is its competencies. Its competencies are its project management skills,
perhaps among the best in the world, its competence to mobilise large
quantities of low cost finance, manage the regulatory environment and speed.
These competencies allowed Reliance to set-up world scale plants at the lowest
capital costs of any company in India and extend its activities to span
exploration and production (E&P) of oil and gas, refining and marketing,
petrochemicals (polyester, polymers and intermediates), textiles, financial
services and insurance, power, telecom and infocom initiatives.
In each company or industry there are different sets of core competencies that
are important to the success of the business. In the most instances, the list of
important competencies is relatively short. However, this short list, when well
selected and developed, provides the opportunity to leverage the strategy of the
company. Porter has identified some competencies that determine competitive
strategy. These are presenting in Table 7.1.
Table 7.1: Identification of Core Competencies
Area Competence Requirement
Products Standing of products from the user's point of view, in each market
segment
Breadth and depth of the product line
Dealer or Distribution Channel coverage and quality Strength of channel relationships
Ability to service the channels
Marketing & Selling Skills in each aspect of the marketing mix Skills in market research and
new product development Training and skills of the Sales force
Operations Manufacturing cost position – economies of scale, learning curve, age of
equipment etc. Technological sophistication of facilities and equipment
Flexibility of facilities and equipment, Proprietary know-how and unique
patent or cost advantage, Skills in capacity addition, quality control,
tooling etc., Location, including labour and transportation costs Labour
force climate, unionisation situation Access to and cost of raw materials,
Degree of vertical integration
Research & Engineering Patent and copyrights In-house capability, in the research and
development process (product research, process research, basic research,
development, imitation, etc.), R&D staff skills in terms of creativity,
simplicity, quality, reliability etc., Access to outside sources of research
and engineering (e.g. suppliers, customers, contractors, consultants etc.)
Overall Costs Overall relative costs, Shared costs or activities with other business units
Scale and other factors that are key to our cost position

Competency need not be contained within the firm. It is also possible to build
upon competencies held elsewhere. The requirement in such a case is to
develop the relationships necessary to access the complementary knowledge,

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equipment, resources, etc. We should not only be able to borrow but also to Notes
internalise the skills through various alliances.
Strategic advantage comes when the firm can mobilise a set of internal and
external competencies that make it difficult for others to copy or enter the
market.

Learning Activity
Prepare a detailed note on core competencies of Maruti Udyog Ltd.

7.3.1 Distinctive Competencies

Firms enjoy superior market returns when they develop such distinctive
competencies. A distinctive competency is the ability of a firm to perform
competitively critical tasks relatively well.

Example: Using lean production methods, Toyota, for example, is able

to build cars less expensively than others in the industry. Techniques such as
just-in-time procurement, rapid design-manufacturing change over and total
quality management have helped Toyota to keep its product costs under
control.
Distinctive competencies often help a firm to perform critical tasks
exceptionally well, keep customers happy and enjoy superior returns in the
marketplace. A firm is able to earn above average returns for a long time when
the sources underlying its competitive advantage resist imitation,
substitutability and mobility.
 Imitation: Generally speaking, advantages based on tangible resources are
quickly copied. On the other hand, advantages that are not clearly visible
(technology-based or people-based) are more durable and defy imitation.
 Substitutability: Generally speaking, the more invisible capabilities, the
more difficult it is for the firms to find substitutes.

Example: Firm specific knowledge and time based working

relationships between managers and non-managerial personnel that existed
for years at Southwest Airlines are examples of capabilities that are
difficult to identify and for which finding a substitute is challenging.
 Transferability: When resources and capabilities can be easily acquired
and absorbed by a rival, the firm’s competitive advantage cannot be
sustained. Tangible resources can be easily absorbed. The core strengths of
a firm in the form of its culture, learning and cumulative experience bring
in long lasting benefits because they are firm-specific and are not easily
transferable.

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Notes In the end, firms are able to get past competition and maintain their superiority
for a long time if they are in possession of unique resources and operate on the
strength of certain exceptional capabilities. Merely having a set of unique
resources is not enough; the firm must have the distinctive capabilities to
exploit them profitably. Sometimes, firms gain competitive edge because they
are well positioned in attractive industries. They get past competition because
of a conscious choice because they have chosen a field with high profit
potential deliberately. They are able to consolidate their position quickly by
moving closer to the hearts of customers arrest new competitor entry, generate
profitable volumes and derive superior profits. Other firms have excelled over
time because they possess certain unique internal capabilities (The Resource
Based View). They are able to outwit competition, irrespective of market
conditions because they have acquired unique skills, knowledge and
experience – the so-called capabilities and competencies – relevant to their
chosen fields which are not easily available to rivals. Their ability to perform
certain activities exceptionally well relative to competition is what makes them
a ‘winner’ in the economic jungle. In a dynamic market environment, every
firm should, therefore, recognise that competitive advantages can disappear
fairly quickly. So instead of resting on past laurels, firms must invest in R&D
and exploit gaps that have been ignored.

7.3.2 Low Cost Strategies

Low cost strategies are based on a firm’s ability to offer a product or service at
a lower cost than its rivals. When a firm is able to build a substantial cost
advantage over other competitors, it can pass on the benefits to customers and
gain a large market share. When buyers get the same value at a lower price, he
would certainly prefer to buy from the cost leader than from others. Cost
leaders gain the edge over competition by keeping their margins low and get
benefited by the increased volume of sales. Cost leaders would be able to win
competitive battles that could stretch a number of years, especially in mature
industries. The focus of cost leadership strategy is on containment of internal
costs so as to outperform competition. To meet this goal, cost leaders focus on
building efficient-scale facilities; keep a close watch over production and
overhead costs; minimise the costs of sales, product research and development
and service; and invest in state-of-the-art manufacturing technologies. The
primary and secondary activities in the value chain are also effectively linked
in order to drive down costs to rock bottom levels. Such a strategy would help
the cost leader to withstand sluggish demand conditions, weather out business
cycles and get past competitors in most cases. All said and done, cost
leadership is meant to drive down costs to such levels in an industry where
there is only one cost leader. This requires relentless focus on efficiency. The
firm needs to focus on what is important to customers and what is not (and
saving on the latter). A successful cost-leadership strategy requires that the
firm is the cost leader and is unchallenged in this position.

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Notes
Example: Examples of firms that have successfully put the low cost
strategy to good use include Big Bazaar in retailing, Tata in automobiles and
Titan in watches, etc.

Sources of Cost Leadership Strategy

The sources of cost leadership include: economies of scale, efficiency and
effectiveness of human resources, ability to control overhead expenditure,
quality of management, low cost production techniques and methods, excellent
process design and manufacturing facilities, use of latest technologies,
favourable location, easy and quick access to low cost sources of supply,
reduction in waste, etc. A low cost strategy builds competitive advantage
through economies of scale, experience curve effects and other factors to
capture a substantial share of the market.
 Economies of Scale: Large established firms produce, sell and advertise in
greater volume than smaller firms and late entrants. The substantial
volumes that they are able to generate help them to take advantage of
economies of scale within many primary and supporting value-adding
activities. More employees are required to carry out an activity. This, in
turn, helps them to specialise and achieve greater productivity. Fixed costs
can be spread over a large volume. The firm can gain from quantity
discounts available on components, inputs and other raw materials.
Moreover, large volume players are in a better position to vertically
integrate and make their own inputs at a lower cost. High levels of vertical
integration enable firms to control all of the inputs, supplies, and equipment
required to convert raw material into the final end product. At the same
time, firms could also think of buying more than they make. They can
focus effort on these few activities, which they are best equipped to carry
on and get supplies from others, thereby avoiding large fixed-cost capital
investments. They can also avoid investing in those technologies or
production processes that could become obsolete in a short span of time.

Example: Dell Computer does not invest in making chips or

designing software; it simply assembles and distributes personal computers
by buying key components from outside suppliers. The savings obtained
through tight inventory and production cost control are passed on to buyers.
 Experience Curve Effects: The principal source of experience-based cost
reduction is learning by organisational members. As employees repeat
activities, they learn how to carry out them more quickly and accurately.
The net effect is continuing improvement in both productivity and quality
as employees’ experience base expands. Again, as a firm’s engineers
become more familiar with the way a product is manufactured, they can
often redesign components that cause problems in later assembly, reduce
the number of components needed to make the product and substitute better

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Notes materials. These changes help in reducing manufacturing costs and

improving the product quality over time. Increasing experience also helps
engineers to bring small but useful improvements in the way the product is
manufactured by changing the workflow or altering the equipment design.
 Vertical Integration: Extending control over sources of supply (upstream
operations) is vertical integration. High levels of vertical integration which
can be achieved by fairly large firms help firms to control all of the inputs,
supplies and equipment required to convert raw materials and equipment
into finished products. Firms pursue vertical integration where their
products and technologies tend to remain fairly stable over long periods.
Vertical integration could be an important cost driver in cases when the
firm manufactures components that directly feed into its final products.
 Location of Activities: The actual location where a value-added activity is
carried out could be an important factor in determining a firm’s cost
advantage.

Example: Maruti Udyog Ltd. works with key suppliers to build

their component factories near its own assembly plant in Gurgaon. This
way, it gets the parts it needs without the costs of holding inventory.

Firms obsessed with low costs may find themselves ambushed by

competitors talking a different strategy designed to outflank a dominant
industry player.

7.3.3 Differentiation Strategies

Differentiation strategies are based on offering buyers something unique or
different that makes the firm’s products or services distinct from that of its
rivals. The firm makes a conscious effort to enrich the product with unique
and novel features that are valued by customers. Possible strategies for
achieving differentiation may include: warranties, brand image, superior
technology, distinctive features, excellent service, excellent quality, dealer
network, etc. The important assumption behind differentiation strategies is that
customers are ready to pay a premium price for a product that is distinct (or at
least perceived as such) in some important way like superior quality, special
appeal, better service, etc. The primary focus here is on the product and its
features, or the way it is offered as an important means of gaining an edge over
competition. Competitive advantage results when customers perceive the
firm’s offerings to be novel, unique (value for money) and distinct and show
continued willingness to pay a premium price. Differentiation is highlighted by
the firm through its repeated emphasis on how its product or service offering is
an extraordinary one something the customers would love to own,
enjoy/experience and recommend.

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Notes
Example: Blue Dart focuses on reliable and timely delivery of
packages, Titan and Fast Track on product styling, Godrej on safety, etc., while
trying to differentiate the product or service offering.
Differentiation works because customers perceive the product to be genuinely
superior to other competitive offers. The ability to charge a premium price for
its offering is what separates a differentiator from other competitors in the
marketplace. Cost containment is not something that is seriously looked into
here. Every firm, in any case, would love to keep costs low so as to maximise
revenues and a differentiator too would love to go this way as long as things
work. The differentiator would surprise the market with periodical price
increases, keeping a close watch over demand-supply mismatch and generate
additional revenues to cover product improvement costs. Customers generally
remain loyal to the differentiated product and do not generally switch unless
they perceive a significantly higher value in competing brands.

Differentiation strategies can be pursued by firms when: (a) the

market is too large to be served by a few firms offering standardised
products/services (b) the customers’ needs and preferences are too
diversified to be met through standardised products/services, (c) the firm is
able to change a premium for an advantage that is valued by customers, and
(d) the product is such that customer loyalty can be obtained and sustained.

Differentiation demands close attention to innovation and research and

development aimed at improving the product features continually, keeping
changing tastes and preferences of customers in mind. The improvements must
be such that competitors are not able to duplicate easily and which are loved
and welcomed by customers. The more a firm’s product/service is unique, the
more sustainable is the competitive advantage that the firm obtains from it. To
be successful, a differentiator can either become a focused differentiator, trying
to compete in a niche segment with very few models or a broad differentiator
using a variety of products to cover several niche market segments.

7.3.4 Generic Building Blocks of Competitive Advantages

Ways to Build or Acquire Competitive Advantages

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Notes Generic Building Blocks of Competitive Advantages

Innovation

Integration

Mergers and Acquisitions

Patents and Licenses

Location Sites, Channel Access, Supply Access, etc.

Strong Research and Development Capabilities

Exclusive Re-selling or Distribution Rights

Ownership of Capital Equipment

Internal Strengths

Technology

Benchmarking

Value Chain Approach

Strategic Business Unit (SBU) Structure

Figure 7.1: Generic Building Blocks of Competitive Strategy

Firms usually build sustainable competitive advantages using the following
routes:

Innovation
Innovation is a new idea applied to initiating or improving a product, process
or service. Today's successful organisations must foster innovations and master
of the art of change or they will become candidates for extinction. Victory will
go to those organisations that maintain their flexibility, continually improve

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their quality and beat their competition in the marketplace through a constant Notes
stream of innovative products and services.

Example: Similarly, the need for chemical-free foods is being

successfully exploited by Whole Foods that offer organic produce, meat, dairy
and fish free from additives in the recent years.

Integration
Integration often helps a firm to build a sustainable competitive advantage
which helps a firm tune its product/service offering in sync with market
requirements.

Example: Denim (Arvind Mills) traditionally a manufacturer of

clothing, has diversified forward by opening retail stores to market its textile
products rather than producing them and selling them to another firm to retail.
Backward integration allows the diversifying firm to exercise more control
over the quality of the supplies being purchased. Backward integration also
may be undertaken to provide a more dependable source of needed raw
materials. Forward integration allows a manufacturing company to assure itself
of an outlet for its products. Forward integration also allows a firm more
control over how its products are sold and serviced. Furthermore, a company
may be better able to differentiate its products from those of its competitors by
forward integration. By opening its own retail outlets, a firm is often better able
to control and train the personnel selling and servicing its equipment.

Mergers and Acquisitions

This is a way of building core strengths in areas that the firm has got very little
exposure and does not seem to be doing well. There are compelling reasons for
mergers and acquisitions happening with frustrating regularity these days.
A merger takes place when two companies decide to combine into a single
entity. An acquisition involves one company essentially taking over another
company. While the motivations may differ, the essential feature of both
mergers and acquisitions involves one firm emerging where once existed two
firms. Merged entities will be able to obtain economies of scale and grab
market share. The combined, larger entity may have competitive advantages
such as the ability to buy bulk quantities at discounts, the ability to store and
inventory needed production inputs, and the ability to achieve mass distribution
through sheer negotiating power. Greater market share may also result in
advantageous pricing, since larger firms are able to compete effectively
through volume sales with thinner profit margins. This type of merger or
acquisition often results in the combining of complementary resources, such as
a firm that is very good at distribution and marketing merging with a very
efficient producer. The shared talents of the combined firm may mean
competitive advantages versus other, smaller competition. If there is vertical

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Notes integration, the acquirer has the advantage of gaining control over raw
materials and distribution outlets. Centralised decisions and faster
communications would help the firm improve operational efficiencies in the
long run. The resultant tax benefits might help the firm pass on the benefits to
customers.

Patents and Licenses

Early entrants sometimes own patents on important technology, which gives
them a head start over competition.

Example: Xerox Corporation, held early patent right to the xerographic

duplicating process. This helped the firm to run ahead of competition for many
years.

Location Sites, Channel Access, Supply Access, etc.

A favourable location could be a source of competitive advantage, say in
respect of a fast food restaurant which grabs a centrally located area for its
operations. Early entrants are able to lock up the most desirable channels of
distribution. New entrants or smaller existing firms may find it difficult to
obtain suitable outlets for their products. Early entrants in several cases
monopolise critical supplies. Later entrants find it difficult to secure essential
inputs for running their business on equitable terms.

Strong Research and Development Capabilities

A business can gain a strong competitive advantage in its industry if it has
strong research and development capabilities. Strong research and development
reflects in the company’s product development processes. Companies with
strong research capabilities often lead the market with innovation.

Exclusive Re-selling or Distribution Rights

Holding exclusive distribution right is a source of sustainable competitive
advantage. When a company holds exclusive rights to a product within a given
territory, that product can only be sourced from the distributor or holder of
such rights.

Ownership of Capital Equipment

This source of competitive advantage is mainly exploited by companies
operating in industries where heavy machinery is needed.

Example: Such industry where ownership of capital equipment is a

competitive advantage includes: publishing, manufacturing, oil exploration,
construction and mining.

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Internal Strengths Notes

A firm with the best marketing strategy might win the competitive battle with
ease. Likewise, firms with very strong cash flows might be able to weather out
the ups and downs in business quite successfully. After all, there is a big
difference between a billion dollar company and a million dollar company.
Again, firms backed up by strong leaders outshine others. Strong management
teams create and exploit market opportunities quickly. Likewise, businesses
that have built strong entry barriers also are able to check competition at the
gate.

Technology
The technology of an organisation’s input, conversion, and output processes is
an important source of a company’s competitive advantage. Why is Microsoft
the most successful software company? Why is Toyota the most efficient car
manufacturer? (Though it suffered a loss recently) Why is McDonald’s the
most efficient fast-food company? Each of these organisations excels in the
development, management and use of technology to create competences that
lead to higher value for stakeholders. Organisations with out-dated technology
will either be shown the door or decimated quickly. Furthermore, technological
change in the recent times has become increasingly diverse and complex. Its
pace is stepping up, making the executives more and more concerned with the
adequacy of organisation structure (and new forms of organisation) to meet and
match the needs. New technology will affect organisations in ways we cannot
yet predict. It is not entirely without reason that mass customisation is gaining
popularity among leading firms too. You can now buy clothes cut to your
proportions, supplement with the exact blend of the vitamins and minerals you
like, CDs with the music tracks you choose and textbooks whose chapters are
picked up by your professor. Companies are able to make these bold moves
because they are able to organise around a dynamic network of relatively
independent operating units. The Internet and the World Wide Web are
changing the way companies and individuals communicate market, buy and
distribute faster than organisations can respond.

Benchmarking
Benchmarking is a way of comparing your own products and processes against
the very best (rivals) in the world. The basic purpose of benchmarking is to
initiate or improve upon the best practices of other companies. Benchmarking
is an important tool in building competitive advantage.

Example: In the late 1970s, Xerox wanted to find how Japanese

competitors (Fuji) were able to produce more reliable copiers at a price equal
to its own manufacturing cost. By buying Japanese copiers and analysing them
through ‘reverse engineering,’ Xerox found new ways of improving its own
products (called as competitive benchmarking where a firm’s performance is

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Notes compared with the best in the same industry). Later, Xerox also looked
internally for benchmarks or standards, identifying the locations or units within
its own organisation that have the best processes, and bringing the other
location or units up to the same performance level (called internal
benchmarking). Quite often, benchmarking could be used by a forward-
thinking leader to improve internal practices and processes and build a
sustainable competitive advantage.

Value Chain Approach

The value chain approach also helps in identifying and building competitive
advantage. Every firm is a collection of activities that are performed to design,
produce, market, and deliver and support its product. The value chain identifies
nine strategically relevant activities that create value and cost in a specific
business. The value adding activities consist of primary activities and support
activities.
The primary activities represent the sequence of bringing materials into
business, operating them, sending them out, marketing and servicing them. The
support activities occur throughout all of these primary activities. Procurement
involves the purchasing of various inputs for each primary activity.
Technology Development and HRM occur in all departments.
The firm’s primary focus should be on its costs and performance in each value
creating activity and to look for improvements. It should estimate its
competitor’s costs and performance as benchmarks. To the extent that it can
carry out certain activities better than its competitors, it can achieve a
competitive advantage.

Strategic Business Unit (SBU) Structure

Firms can also achieve competitive advantage by dividing their operations into
separate strategic business units. An SBU has three features: (i) It is a single
business or collection of related businesses that can be planned separately from
the rest of the company. (ii) It has its own set of competitors. (iii) It has a
manager who is responsible for strategic planning and performance and who
controls most of the factors affecting profit. SBUs usually benefit from
separate planning efforts, face competitors with a lot of advance preparation
and are managed effectively as profit centres. The resources of a firm are
allocated to various SBUs based on their market attractiveness and profit
potential. SBUs carry out their own strategic business planning, remain close to
their environment and profitably exploit new opportunities that come their
way.

7.4 SUSTAINABLE COMPETITIVE ADVANTAGES

Sustainable competitive advantages must be built on core resources and
capabilities. Are all resources and capabilities capable of creating
sustainability? The most important ones are those arising from the combination

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and integration of human skills, knowledge and technologies. Furthermore, Notes

sustainable competitive advantage must be reflected on the development of
competitive products, integrating a combination of features. How the firm turns
its strategic assets into valuable strengths putting its human, physical and
financial resources to best use and builds its reputation based on constant
innovations would help answer the question whether it would succeed or not in
a world of terrific competition.
It is not always possible for companies to sustain individual sources of
competitive advantage for long (rivals copy and do everything possible to wipe
out the edge through their own innovations). So, the best way to maintain
leadership is to continually seek new forms of advantage through constant
experimentation, innovative efforts and investments in the latest technology.
Table 7.2 is showing the sustainable competitive advantages.
Table 7.2: Sustainable Competitive Advantages

Valuable Rare Costly to Non- Competitive Performance

Imitate substitutable Consequences Implications

No No No No Competitive Below Average

Disadvantages Returns

Yes No No Yes/No Competitive Parity Average Returns

Yes Yes No Yes/No Temporary Average/Above

Competitive Average Returns
Advantage

Yes Yes Yes Yes Sustainable Above Average

Competitive Returns
Advantages

Major inferences that you can draw from Table 7.2 are as follows:
 Resources and capabilities that are neither valuable, rare, costly to imitate,
nor non-substitutable mean that the company will be at competitive
disadvantage and will earn below average returns.
 Resources and capabilities that are valuable, but are neither rare nor costly
to imitate and may or may not be non-substitutable mean that the company
can achieve competitive parity and earn average returns.
 Resources and capabilities that are both valuable and rare, but are not
costly to imitate and may or may not be non-substitutable, may enable the
company to achieve a temporary competitive advantage and will earn
above average to average returns.
 Resources and capabilities that are valuable, rare, costly to imitate, and
non-substitutable will enable the company to achieve a sustainable
competitive advantages and earn above average returns.

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Notes 7.4.1 Steps of Creating Sustainable Competitive Advantages

Following are some of the steps involved in creating the sustainable
advantages:

Establish Brand Loyalty

Customers will often remain with a brand they have loyalty towards, even
though the company does not offer the cheapest or most effective product.
Focus on building strong relationships with your customers and delivering a
great customer experience and service.

Patent Your Product

There has been a lot of debate recently about the true value of a patent. While
patents are not a ‘cure all’, they are an important weapon in an entrepreneur’s
competitive advantage arsenal.

Continually Innovate
Customers like updates and upgrades. Keeping your product fresh and
compatible with the market place (particularly if software), is essential.

Hire ‘Connected’ Team Members

If your market includes large companies and government departments,
connections to key individuals within these organizations can dramatically
accelerate your ability to meet and secure contracts. Try to have at least one
member on your team who is ‘connected’.

Use Long Term Contracts and Incentives

This step has to be executed carefully, as it can backfire. If you can establish a
long-term contract with your customer, then clearly they are less likely to
switch to a competitor. If you only offer long terms contracts, however, and
your competitors are offering short terms contracts, then you are likely to lose
business.

7.4.2 Avoiding Failures

Competitive advantages generally knowledge-based capabilities that are
company’s core competencies become more valuable as they are used over
time.
 Sharing knowledge across people, jobs and organisational functions may
result in an increase in the value of that knowledge in ways that are
competitively relevant.
 Core competencies can also become core rigidities (or core incompetence).
 Core competencies must be strategically relevant, which means that
companies must continually strive to develop new competencies.

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 New competencies must be developed to meet the changes and challenges Notes
of the new competitive landscape as both technological and global factors
are rapidly changing.
Thus nurturing existing competencies must be balanced by efforts to encourage
the development of new competencies.

Learning Activity
Prepare a detailed note on your understanding about the
competencies and core competencies. Also write down its impacts
and significance on the companies. Your note must be based on a
company of your choice.

Maruti Suzuki India Ltd.

C ore competencies of an organisation can be simply defined as a set

of qualities, which are unique to a particular organisation that cannot
be easily imitated by its competitors. Core competencies are factors
which give competitive advantage to the organisation in its chosen market.
Core competencies may be of various types – technical expertise,
relationship with customers, employees’ dedication, manufacturing process,
etc. An analysis of the Maruti Suzuki India Ltd. shows three core
competencies: Strong Customer Base and Brand Image, Well Developed
Sales and Service Network throughout India and Very Strong Knowledge of
Indian Market.
A detailed study of these core competencies shows how each of these core
values can improve the company’s competitive advantage.
Strong Customer Base and Brand Image
The MSIL has a market share of about 55% in the Indian passenger car
segment and is the largest manufacturer of small cars in India. The company
have been voted as first by Indian customers for level of customer service
and customer satisfaction. The company manufactures affordable small cars
which serve the needs of an average Indian customer faithfully and hence
have a strong brand image as the common man’s car in India, which an
average Indian customer identifies with. Such a strong brand image and
huge customer base can sustain the position of the company as the market
leader in the Indian small car segment.
ell Developed Sales and Service Network throughout India
The Maruti Suzuki India has a strong dealership network comprising more
than 450 cities across India and a huge service network of more 2,750
Contd...

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Notes franchises of service outlets spreading about 1,300 cities throughout India.
Such a widely distributed sales and service network can help the company
to relate with its customers across India, also facilitates bargaining power
with suppliers and increases profitability.
Very Strong Knowledge of Indian Market
The Maruti Suzuki India has a strong knowledge of the Indian market which
has helped them to grow their sales and market share in India.
Questions
1. How core competencies of MSIL are explained in above case?
2. What kind of strategy can be adopted by MSIL to get commercial
success of car business in domestic as well as global market?
Source: (http://www.studymode.com/essays/Core-Competencies-With-An-Organisational-Example-539130.html )

1. A resource is rare in supply if it is not widely

possessed by other competitors. Resources available
freely do not make life tough for competitors because
they can be obtained anywhere, any time without any
problem. Only when a resource is scarce, it acquires
strategic importance such as limited supply of talent
– someone like Steve Jobs running the show, a
unique location, scarce natural resources, etc.
2. Distinctive competence refers to something that the
firm does well relative to competition.

SUMMARY
 Resources are inputs into a firm’s value creation process. By developing
and deploying these inputs effectively, a firm is able to deliver value to
customers.
 Tangible resources are the physical assets of a firm such as plant,
machinery, buildings, etc. They have a physical presence. They are visible
and hence easy to identify and evaluate.
 Physical assets such as factories, offices, computer systems, etc. can be
bought in the open market. Competitors can also buy these, however new
or up-to-date these might be. In fact sometimes, competitors might be able
to acquire these cheaply.
 Financial assets also do not prove to be strategic, since money is available
from financial institutions, stock markets and venture funds. Of course,
firms with deep pockets having large cash reserves or borrowing capacity
might be able to survive a price war or a recession.

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 A resource is rare in supply if it is not widely possessed by other Notes

competitors. Resources available freely do not make life tough for
competitors because they can be obtained anywhere, any time without any
problem.
 Intangible Resources are largely invisible and difficult to quantify. It is not
easy for competitors to understand, purchase, imitate or substitute such
resources, which cannot be seen directly. Unlike tangible assets, their use
can be leveraged.
 Intellectual assets such as patents, customer data bases, research
programmes often prove to be invaluable since these cannot be developed
overnight. Knowledge, after all, cannot be written down. It cannot be
copied or stolen.
 Resource Based View defines capability as the ability of a bundle of
resources to perform an activity. It is a way of combining assets, people
and processes to transform inputs into outputs.
 A company’s capabilities represent its capacity to integrate individual
company resources to achieve desired objectives. However, this ability
does not emerge overnight. Capabilities develop over time as a result of
complex interactions that take advantages of the interrelationships between
companies’ tangible and intangible resources that are based on the
development, transmission and exchange of sharing of information and
knowledge as carried out by the company’s employees (its human capital).
 Core competencies are the crown jewels of a firm – the activities that the
firm performs especially well as compared to competitors and through
which the firm adds value to its goods and services over a long period of
time. Core competencies serve as a source of competitive advantage for a
firm over its rivals.

KEYWORDS
Resource: Resource is the stock of assets and skills that belong to a firm at a
point of time.
Capability: It means the ability of a bundle of resource to perform an activity.
Competency: It means the ability of an organisation to achieve its purpose. It is
the ability to perform exceptionally well and increases the stock of targeted
resources of a firm.
Core Competencies: These are the activities that the firm performs especially
well when compared to its competitors and through which the firm adds value
to its goods and services over a long period of time.
Internal Analysis: It is carried out by a firm to identify strengths to build on;
and weaknesses to overcome, as it formulates strategies for competitive
advantage.

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Notes Value Chain: It describes all of the activities that make up the economic
performance and capabilities of the firm. It describes activities required to
create value for customers of a given product or service.
Innovation: It is a new idea applied to initiating or improving a process,
product or service.
Benchmarking: It is the process of finding the best available product features,
processes and services and using them as a standard (benchmark) for
improving a company’s own products, processes and services.
Cost Leadership Strategy: It is a competitive strategy based on the firm’s
ability to provide products or services at lower cost than its rivals.
Differentiation Strategy: It is a competitive strategy based on providing buyers
with something special or unique that makes the firm’s product or service
distinctive.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What do you mean by business level strategy?
2. Name two business level strategies.
3. What do you mean by cost leadership strategy?
4. What is differentiation strategy?
5. Why do firms follow a differentiation strategy?
6. What are learning curve effects?
7. What do you mean by ‘internal analysis’?
8. Explain the benefits of carrying out internal analysis.
9. What do you mean by ‘value chain analysis’?
10. What is competitive advantage?
11. What do you mean by ‘organisational capabilities’?
12. What are resources?
13. What are the intangible resources?
14. What are the tangible resources?
15. What are the human assets?
16. What do you understand by the relational assets?
17. What are reputational assets?
18. What is vertical integration?

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19. What is innovation? Notes

20. What are mergers and acquisitions?

Long Answer Questions

1. Explain the interaction between resources, capabilities and core
competencies.
2. What are the factors that decide whether a competency is core or not?
3. How do sustain a core competency?
4. After conducting an internal audit, a company discovers a total of one
hundred strengths and one hundred of weaknesses. What procedures could
then be used to determine the most important of these? Why is it important
to reduce the total number of key factors?
5. How one can build or acquire competitive advantage?
6. Explain the concepts of resources with their various types and significance.
7. Describe the concepts of capabilities and competencies in detail.
8. Explain the core competencies and distinctive competencies in detail.
9. Describe the low cost leadership and differentiation strategy.
10. How a firm can sustain their competitive advantages? Explain it.

FURTHER READINGS

Johnson Gerry, (2011), Exploring Corporate Strategy, Pearson,

New Delhi
Hill, G.W.L. & Jones G.R, (2009), Strategic Management,
Biztantra, New Delhi
Saloner G, (2011), Strategic Management, John Wiley & Sons,
New York
Thomas, R., (2009), New Product Development: Managing and
Forecasting for Strategic Success, John Wiley & Sons, New York

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Notes

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Notes
UNIT III
LESSON 8 - STRATEGIC ALTERNATIVES

CONTENTS
Learning Objectives
Learning Outcomes
Overview
8.1 Generic Strategic Alternatives
8.1.1 Some Aspects of Generic Strategies
8.2 Types of Strategies
8.2.1 Stability Strategy
8.2.2 Expansion Strategy
8.2.3 Retrenchment Strategy
8.2.4 Combination Strategy
8.3 Business Level Strategy
8.3.1 Cost Leadership Strategy
8.3.2 Differentiation Strategy
8.3.3 Focus Strategy
8.4 Corporate Level Strategy
8.4.1 Vertical Integration
8.4.2 Diversification
8.4.3 Strategic Alliances
8.4.4 Corporate Restructuring
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of generic strategic alternatives
 Describe the business level strategy

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Notes  Explain the corporate level strategy

 Understand the global strategic environment

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 explain aspects of generic strategies
 analyzing types of strategies
 identifying business level strategy
 concept of corporate level strategy and strategic alliances

OVERVIEW
Let us first review the previous lesson. You have studied about the internal
environment of the business. You have learnt the internal resources of the firm,
along with the firm’s capabilities and competencies. Also you studied about the
present scenario sustaining companies through their core competencies in
global environment.
In this lesson, you will study about the general strategic alternatives available
with the business. You will also learn about the business and corporate-level
strategies and its significance on the strategic business environment. At the end
of the lesson, you will learn about the strategy in global environment.
We advise you that learn this lesson carefully. It will give you a better
understanding of the present scenario of the world business and corporate level
strategic environment. This lesson will help you to understand the concepts of
the strategies available with a business.

8.1 GENERIC STRATEGIC ALTERNATIVES

The objective of an organisation is to yield a superior rate of return on the
investment for the organisation. The principle to meet this objective is that
organisations achieve competitive advantage by providing their customers with
what they want, or need, better or more effectively than competitors and in
ways the competitors find difficult to imitate. The best strategy for the
organisation, therefore, is ultimately unique, reflecting the particular
circumstances it faces.
In order to succeed, organisations have found many offensive and defensive
actions to defend their position in the industry and cope with the five
competitive forces. A firm's relative position within its industry determines
whether a firm's profitability is above or below in the industry average. The
fundamental basis of above average profitability in the long run is sustainable
competitive advantage. There are two basic types of competitive advantage a

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firm can possess: low cost and differentiation. The two basic types of Notes
competitive advantage combined with the scope of activities by which a firm
seeks to achieve them, lead to three internally consistent generic competitive
strategies that can be used by the organisation to outperform in the competition
and defend its position in the industry. These strategies are as follows:
 Cost Leadership
 Differentiation, and
 Focus and Niche Strategies

8.1.1 Some Aspects of Generic Strategies

The three generic competitive strategies are differing in many dimensions.
Implementing them successfully requires different resources and skills. These
have been summarised in Table 8.1. Organisations pursuing different strategies
will find that they attract different sorts of people. This should result in
different styles of leadership that can translate into different corporate cultures
and atmospheres.
If the organisation is in a position where it is between the three strategic
options, it usually takes time and sustained effort to come out of this position.
In spite of the fact that successfully executing each generic strategy involves
different resources, strengths, organisational arrangements and managerial
style. Some organisations try to flip back and forth among the generic
strategies. In addition, the organisation would be amenable to a blurring of the
corporate culture and conflicting motivation system. Obviously, this happens
when organisations do not exercise their options based on their capabilities and
limitations.
An organisation must take a fundamental strategic decision to select one of the
three generic strategies. Failing to develop a strategy in any of the three
directions will result in low profitability. It will either lose the high volume
customers who demand low prices or operate with reduced profits to get this
business away from low cost competition. It will also lose high margin
businesses to competition that have achieved differentiation overall.
Table 8.1: Generic Strategies
Generic Strategy Required Skills and Resources Organisational Requirements
Cost Leadership Sustained Capital Investment capability Tight cost control
and access to Capital Frequent, detailed control reports
Process Engineering Skills Structured organisation and
Intense supervision of labour responsibilities
Product designed for ease in Incentives based on meeting strict
manufacture quantitative targets
Differentiation Strong marketing abilities Strong coordination among
Product engineering functions in R&D, product
Creative flair development and marketing
Strong capability in basic research Subjective measurement and
incentives instead of quantitative

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Notes Reputation for quality or technological measures

leadership Amenities to attract highly skilled
Long tradition in the industry or unique labour, scientists or creative people
combination of skills from other areas
Strong cooperation from channels
Focus Combination of the above, directed at Combination of the above, directed
the particular strategic target at the particular strategic target

8.2 TYPES OF STRATEGIES

Different types of strategies are discussed below:
8.2.1 Stability Strategy
A stability strategy involves maintaining the status quo or growing in a
methodical, but slow manner. The firm follows a safety-oriented, status-quo-type
strategy without effecting any major changes in its present operations. Stability
strategy implies commitment to current activities of the firm without any major
changes in direction. Where the environment is unstable and the firm is doing
well, a stability strategy is generally preferred to other alternatives especially by
small businesses. Such a strategy is most likely to be followed by firms that do
not want to marry risk for any reason whatsoever. Stability strategies are
implemented by ‘steady as it goes’ approaches to decisions. No major functional
changes are made in the product line, markets or functions. However, stability
strategy is neither a ‘do nothing’ approach nor does it mean that goals such as
profit growth are abandoned. The stability strategy can be designed to increase
profits through such approaches as improving efficiency in current operations.
The resources are put on existing operations to achieve moderate, incremental
growth. As such, the primary focus is on current products, markets and
functions, maintaining the same level of effort as at present.
Types of Stability Strategies
A stability strategy can take four different shapes in organisations, depending,
on organisational focus and resource deployment:
Incremental Growth: The firms are following this strategy to concentrate on
one product line at a time, growing steadily. It is a low-risk, low-market share,
change resistant kind of strategy followed by firms that are very comfortable
with their present line of business.
Profit or Harvesting Strategy: This is followed when the primary goal of the
firm or any of its strategic business units is to generate cash so as to ensure a
steady growth of business.

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Notes

Profit strategy is useful when: (i) the unit’s product is in a

stable/declining market; (ii) when the product is not prestigious to the
firm; (iii) when the unit’s market share is small and increase in market
share is a costly exercise; (iv) the unit’s contribution is not significant to
the total sales of the firm; (v) the unit’s sales will decline less rapidly than
the reduction in corporate support.
Sustainable Growth Strategy: This strategy is followed when the firm
perceives the external environment that is not favourable due to certain critical
resource constraints like financial resources or raw materials, import/export
restrictions, government policy changes, entry of a big player, etc.

Example: The likely entry of Chinese two-wheeler companies is

forcing Indian companies like Bajaj Auto and TVS Suzuki to stay on course
and focus on cost reduction and quality improvement aspects. This could also
constrain the firm to stay on course and seek only sustainable growth.
Stability as a Pause Strategy: After organisations have undergone a turbulent
period of rapid growth, managers often pause for a while to integrate strategic
business units; consolidate their position; improve operational efficiency, R&D
marketing, etc.; pause for a while and prepare themselves for another big leap
forward.

Stability strategies would work only when the firm is doing well
and the environment is not excessively volatile.

8.2.2 Expansion Strategy

Expansion strategy is pursued basically to accelerate the pace of growth of an
organisation. Most organisations chase expansion in order to exploit market
opportunities. Expansion helps a firm to dominate the market and gain control
over competition. Organisational resources can be put to good use. Expansion
strategies are also known as growth strategies.

Example: The Tata group (4,25,000 employees worldwide and one of

the wealthiest groups in India, over $ 80 billion revenues and total assets of
around $ 70 billion) comprises 114 companies and subsidiaries in several
primary business sectors chemicals, consumer products, energy, engineering,
information systems and services. Tata group has operations in more than 80
countries across six continents and its companies export products and services
to 80 nations. When growth becomes a passion and organisations try to seek
sizeable growth, (as against slow and steady growth) it takes the shape of an

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Notes expansion strategy. The firm tries to redefine the business, enter new
businesses, that are related or unrelated or look at its product portfolio more
intensely. The firm can have as many alternatives as it wants by changing the
mix of products, markets and functions. Thus, the growth opportunities may
come internally or externally. Internal growth possibilities may be exploited
through intensification or diversification. External growth options include
mergers, takeovers and joint ventures.
Growth strategies are extremely popular because most managers tend to equate
growth with success. Obviously, a firm that fails to move ahead may fall
behind in the competitive race. The firm that operates in a dynamic
environment must grow in order to survive. Growth implies greater sales and
an opportunity to take advantage of the environmental opportunities. As the
firm grows in size and experience, it gets better at what it is doing and reduces
costs and improves productivity. A growing firm can cover up mistakes and
inefficiencies more easily than can a stable one. There are more opportunities
for advancement, promotion and interesting jobs in a growing firm. Growth per
se is exciting and ego enhancing for managers. A corporation tends to be seen
as a winner or on the move by the marketplace and by potential investors.
Growth strategies gain importance if a firm’s industry is growing quickly and
competitors are engaging in price wars so as to slice out a larger share of the
market. If the firm is not able to find a profitable niche, it cannot flourish in a
volatile environment.

Example: Anchor vegetarian toothpaste and triple-refined Dandi Salt.

More specifically, the compelling motives for pursuing growth strategies may
be furnished to:
Ensure Survival: In the long run, growth is necessary for the very survival of
the organisation, especially when the environment is turbulent and highly
competitive. If the organisation does not grow, it may by push out of the
market by new entrants.

Example: Ambassador Car, Ideal Jawa and Diner’s credit card business
are the inglorious examples in this regard, where the organisations failed to
take stock of competitive reactions and were eventually forced out of business.
Obtain Economies of Scale: Growth is tempting because of innumerable
benefits offered by large-scale operations. Fixed costs could be spread over a
large volume of units and the resultant savings could be recycled into the
product and offer the same at economical rates ensuring continued
organisational success. Great penetration into the market is ensured thereby.

Stimulate Talent: Managers and entrepreneurs with a high degree of

achievement and recognition would prefer to work in companies always on the

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move rather than companies where there are limited opportunities to exploit Notes
their talents fully.

Example: The stupendous rate of growth achieved by Hero Honda,

Infosys and Wipro in the recent years bears ample testimony to this fact.

Reach Commanding Heights: Growth ensures market control. It means

prestige and power. It means securing investor confidence.

Example: Companies such as Nestle, Britannia, ITC, HLL, etc., have a

high level of reputation in the corporate world owing to this reason. They are
held high and rated as ‘winners’ in the corporate world owing to their relentless
efforts to grow in various profitable directions.
Growth, obviously, brings satisfaction to employees, investors in particular and
innumerable benefits to society in the form of increased employment, low-
price-high-quality-goods and so on. Growth allows the organisation to reach
commanding heights in the economy; it can increase its market share, secure a
high degree of control over the market and influence market behaviour in a
significant way.

8.2.3 Retrenchment Strategy

Retrenchment revolves around cutting sales. It seeks to reduce the size or
diversity of an organisation's operations. It is a way of working with limited
resources and cutting down expenditures in order to remain financially stable.
It involves withdrawing from certain markets or the discontinuation of selling
certain products or service in order to bring the business back on track.
Retrenchment is often followed by a firm when its performance is
disappointing or when its survival is at stake for a variety of reasons. Economic
recessions, production inefficiencies and innovative breakthroughs by
competitors are only three causes. Managers choose retrenchment when they
think that the firm is neither competitive enough to succeed through a counter
attack (on market forces affecting its sales negatively) nor nimble enough
(effecting fast changes) to be a fast follower. However, retrenchment does not
mean death knell for every business under attack. Many healthy companies
have faced life-threatening competitive situations in the past, successfully
addressed their weaknesses and have put themselves back on track.
Retrenchment calls for a radical surgery to cut the ‘extra fat’ – say, laying-off
employees, closing superfluous offices or branches, reducing employee
benefits, cutting salaries, dropping items from a production line, eliminating
low-margin customer groups, avoiding elaborate promotional efforts, etc. The
firm can also deal with retrenchment in another way – get out of markets that
have very little profit potential and exclusively concentrate on markets that are
promising. Apart from the above cost reductions, retrenchment calls for drastic

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Notes steps to improve cash flows through sale of assets. Retrenchment strategy, as
such, is adopted out of necessity, not by deliberate choice.
Retrenchment may prove to be an effective strategy when:
 The firm, having got some distinctive competencies, fails to meet its
objectives consistently over time.
 The firm remains a weak competitor in a given industry.
 The firm is plagued by inefficiency, low profitability, and poor employee
morale and faces pressure from shareholders to improve its performance.
 The firm has failed to capitalise on external opportunities, minimise
external threats, take advantage of internal strengths and overcome internal
weaknesses overtime, that is, when the firm’s strategic managers have
failed.
 The firm has grown so large so quickly that major internal restructuring is
required.

8.2.4 Combination Strategy

Large, diversified organisations generally use a mixture of stability, expansion
or retrenchment strategies either simultaneously (at the same time in various
businesses) or sequentially (at different times in the same business).

Growth could be achieved by an organisation through acquisition

of new businesses or divesting itself of unprofitable ventures. Depending
on situational demands, therefore, an organisation can employ various
strategies to survive, grow and remain profitable.

In the recent times, three more strategies have gained popularity namely, joint
ventures, strategic alliances and consortia.

Joint Ventures
When two or more firms pool resources to accomplish a task that a firm could
not accomplish, or that can be done more effectively by joining, the result is a
joint venture. Like a merger or acquisition, a joint venture is not a strategy but
a way of implementing a strategy. It helps a firm to undertake giant projects by
spreading risks more efficiently.

Example: The joint ventures between Maruti Udyog and Suzuki;

TELCO and Hitachi Construction Company; etc. In addition, the Tata’s, the
Birla’s, the Oberoi’s, the Kirloskar’s and many software giants also have joint
ventures with global partners from outside the country.

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To be successful, however, joint venture partners should be willing to share Notes

technology in the real sense, resolve cultural differences clearly and integrate
operations at various locations in a more compact manner. In any case, “joint
ventures often limit the discretion, control and profit potential of partners,
while demanding managerial attention and other resources that might be
directed toward the firm’s mainstream activities”.

Strategic Alliances
In a joint venture, the companies involved take an equity stake in one another.
In strategic alliances, however, the partners contribute their skills and expertise
to a cooperatively conceived and executed project for a specific period.
Partners, during the said period, try to peep into each other’s know-how and
learn from one another. Alliances could take the shape of a licensing agreement
too, where licensor would transfer his property right over patents, trademarks,
technical know-how, etc. to a licensee for a specified time in return for a
royalty.

Example: Outsourcing is a useful approach to strategic alliances that

helps firms to gain a competitive advantage (especially in technology intensive
fields such as software, telecommunications, electronics, bio-technology, etc.).

Consortia
Consortia are interlocking relationships between businesses of an industry. It
works more or less like a Japanese Keiretsu involving up to 50 different firms
that are joined around a large trading company or bank and are coordinated
through interlocking directories and stock exchanges (like Sumitomo, Mitsui,
Mitsubishi and Sanwa).

Learning Activity
Prepare a detailed note on your understanding about the joint
venture. Also write down its impacts and significance on the
company. Your note must be based on a company of your choice.

8.3 BUSINESS LEVEL STRATEGY

Business level strategy deals with how a particular business competes. The
principal focus is on meeting competition, protecting market share and earning
profit at the business unit level by performing activities differently and offering
superior value to customers. It is a strategy designed to gain competitive
advantage or superiority in a single business (unlike corporate strategy which
deals with actions firms take to gain competitive advantage by operating in
multiple markets or industries simultaneously). How to overcome threats from
competitors through a favourable market position and/or acquisition of unique
internal competencies is the focal point of study here. How the firm should

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Notes compete in its business or industry is put to a detailed examination. Such a

question is generally influenced by beliefs, values, past experiences of
managers regarding running a business and winning over competition over the
years. Unless a firm is able to create and deliver value to customers through
effective use of resources, developing unique strengths and constant
innovations it is not possible to survive in the present-day economic jungle.
When a firm is able to organise and perform value chain activities better than
its rivals consistently, it is able to get past competition and emerge as a winner
in a competitive world. Porter argues that performing similar activities better is
not a strategy; it is an operational effectiveness, the ability to execute similar
activities more efficiently than rivals do that gives a firm the needed strength to
gain an upper hand in the marketplace. A firm should do things differently and
do them consistently better than its rivals in order to deliver superior value to
customers.
A firm is able to deliver superior value to customers when it is able to offer the
same benefits as competitors but at a lower cost (cost advantage) or deliver
unique and distinct benefits that exceed those of competing products
(differentiation advantage). Offering a product at a lower cost or delivering
valued benefits to customers is possible only when a firm is able to build
unmatched capabilities that few or no rivals in the industry possess through
years of hard work. A firm’s competitive edge may be due to a favourable
market position, a unique internal capability or a combination of the two. The
key drivers of competitive advantage are cost leadership and differentiation of
product. A firm should, of course, focus its energies on advantages that it
possesses and that are perceived to be valuable from the customers’ point of
view. Any advantage from among the several potential competitive advantages
that are worth pursuing that the firm chooses to pursue, must be important,
distinctive, superior, communicable, affordable and profitable.

Figure 8.1: Porter’s Generic Strategies

According to Porter’s description of five forces of competition, firms can raise
their profitability by placing their activities in markets or industries with a low
degree of competition. By doing so, the firm will potentially develop a large
market share and great profits. However, firms also have a second opportunity

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to generate profitability. They can optimise their position within a particular Notes
industry and thereby obtain great profits even if the industry in general may
have below average profitability. Therefore, it is claimed that if firms position
their products or services effectively, they may be able to generate great
profits, even if the industry is generally crowded with players all wanting a
piece of a pie. Porter proposes that firms have the opportunity to position their
products or services by either costs or differentiation and this positioning can
be applied to either a narrow or a broad scope of buyers. This results in three
generic strategies, which are popularly known as cost leadership strategy,
differentiation strategy and focus strategy.

8.3.1 Cost Leadership Strategy

The firm aims to become the lowest cost producer so as to enjoy pricing power
and grab market share from rivals. Here, the firm tries to do things better than
its rivals with a view to drive down costs to backbreaking levels. Such an
exercise, it is firmly believed, would help the firm outwit competitors and push
them to a corner. This strategy is generally associated with fairly large firms
offering ‘standard’ products with relatively little differentiation that are
perfectly acceptable to the majority of customers. Occasionally, a low-cost
leader will also discount its product to maximise sales, particularly if it has a
significant cost advantage over the competition and, in doing so, it can further
increase its market share. A low-cost strategy defends the firm against
powerful buyers. Buyers can drive price down only to the level of the next
most efficient producer. Such a strategy defends against powerful suppliers.
Cost leadership provides flexibility to absorb an increase in input costs,
whereas competitors may not have this flexibility. The factors that lead to cost
leadership also provide entry barriers in many instances. Economies of scale
require potential rivals to enter the industry with substantial capacity to
produce, and this means that the cost of entry may be prohibitive to many
potential competitors. Firms that succeed in cost leadership often possess the
following internal strengths:
 Access to the capital required making a significant investment in
production assets; this investment represents a barrier to entry that many
firms may not overcome.
 Skill in designing products for efficient manufacturing, for example, having
a small component count to shorten the assembly process
 High level of expertise in manufacturing process engineering
 Efficient distribution channels

8.3.2 Differentiation Strategy

Differentiation strategy involves offering a product or service with unique
attributes that are valued by customers and that customers perceive to be better
than or different from the products of the competition. The value additions

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Notes made by the firm would help it charge a premium price for its offering and earn
above average profits.
Differentiation works best when the differentiating factor is both important to
customers and difficult for competitors to imitate. If buyers are loyal to a
company's brand, a differentiation strategy can reduce rivalry with competitors.
Of course, when costs are too high, customers may choose less costly
alternatives, even though they forego some desirable features. Moreover,
customer tastes and needs can change, so firms following a differentiation
strategy must carefully evaluate customer's shifting preferences from time to
time.

Example: Differentiation can take many forms, for example, design or

brand image (Rolex watches, Levi’s Jeans, Pepsi or Coca Cola for brands);
technology (Apple’s IPhone, IPads Honda's vehicles); customer service (City
Bank or HDFC), unique channels (Tupperware), unique features (Link writing
instruments) and quality (Xerox in copiers).
Firms that succeed in a differentiation strategy often have the following
internal strengths:
 Access to leading scientific research
 Highly skilled and creative product development team
 Strong sales team with the ability to successfully communicate the
perceived strengths of the product
 Corporate reputation for quality and innovation

8.3.3 Focus Strategy

Focus strategy is a strategy that emphasises making a firm more competitive by
targeting a specific regional market, product line or buyer group. The firm can
use either a differentiation or low cost approach, but only for a narrow target
market. The logic of this approach is that a firm that limits its attention to one
or a few market segments can serve those segments better than firms that seek
to influence the entire market. The firm can focus all its resources and efforts
on a niche segment and improve the quality of its offering substantially.

Example: Products such as Rolls-Royce automobiles, Titan jewellery

watches are designed to appeal to a narrow segment of the market and serve
the same well rather than trying to cover the whole ground.
A firm using the focus strategy often enjoys a high degree of customer loyalty
and this entrenched loyalty discourages other firms from competing directly.
Due to a narrow market focus, firms pursuing a focus strategy will have to live
with lower volumes, and therefore, less bargaining power with their suppliers.
However, firms following a differentiation-focused strategy may be able to

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pass on higher costs to customers since close substitute products do not exist. Notes
Firms that serve niche segments are able to put excellent product development
strategies in place since they know the niche segment very well. The important
risks are possibilities that the costs for the focused firm will become too great
relative to those of less focused one, differentiation too will become less of an
advantage as competitors serving broader markets embellish their products,
and competitors will begin focussing on a group within the customer
population being served by the firm with the focus strategy.

The biggest benefit of a focus strategy is that the firm is able

to find a market niche against larger, broader-line competitors. Through
specialisation and high concentration of its resources in a given area, the
firm is able to serve the requirements of a niche segment better than
others, and insulate itself from the attention of bigger players in the field.
Over time, it is able to improve other sources of value-adding activities
that contribute to cost or differentiation.
The biggest risk associated with a focus strategy is that the distinctive
tastes and product characteristics may blur over time. This, in turn,
reduces the defensibility of the niche.

8.4 CORPORATE LEVEL STRATEGY

‘What business are we in?’ is the cornerstone of corporate strategy. Corporate
strategy represents the firm’s decisions and actions to gain advantages over
rivals by managing a portfolio of products or businesses. It focuses on the
scope of the business enterprise, that is, the range of products/businesses in
which the firm will compete and the value chain activities it will perform to
realise growth or profits. Corporate strategies are formulated by the top
management of an organisation. They are mainly concerned with decisions
regarding the product or service to produce and the geographic location to
target. They give a direction to an organisation to achieve its objectives.
Decisions regarding allocation of resources, expansion moves, exploiting new
opportunities, striking deals with outside firms, moves to deal with competition
effectively, etc. also come under the purview of corporate strategy. Corporate
strategies are also known as grand or master strategies. They specify the time
period to achieve the long-term objectives of an organisation. Figure 8.2
displays the various types of corporate level of strategy.

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Notes Corporate Level Strategy

Backward Integration

Vertical Integration

Forward Integration

Diversification
Concentric or Related
Diversification

Strategic Alliances
Unrelated or Conglomerate
Diversification

Corporate Restructuring

External Restructuring

Internal Restructuring

Figure 8.2: Corporate Level Strategy

8.4.1 Vertical Integration

Vertical integration allows the firm to enlarge its scope of operations within the
same overall industry. It takes place when one firm acquires another that is
involved in an earlier stage of the production process either (backward or
upstream) or in a later stage of the production process (forward or
downstream). It gives a firm control over successive stages of the product’s
processing, marketing and retailing. It strengthens a firm’s market position and
internal capabilities, thereby helping it to show superior performance. A
company following a strategy of vertical integration extend its operation either
backward of forward into an industry.

Backward Integration
Backward integration occurs when the companies acquired; supply the firm
with products, components or raw materials.

Example: Reliance Industries, for example, started its business with

textiles and went for backward integration to manufacture PFY and PSF,
critical raw materials for textiles, PTA and MEG-raw materials for PSF and
PFY, Paraxylene raw materials for PTA and MEG, and ultimately Naphtha for
producing Paraxylene. The company has also gone in favour of forward
integration by opening retail shops for marketing its textile products.
The main reason for backward integration is to gain a firm’s grip over supply
and quality of raw materials. Backward integration is quite common in

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industries where low cost and certainty of supply are important to maintaining Notes
the firm's competitive advantage in its end markets.

Example: Drug companies, often exhibit high levels of backward

integration to ensure supply of necessary chemical ingredients for their
pharmaceuticals.
Backward integration may prove to be beneficial when:
 A firm’s present supplies are expensive or unpredictable or incapable of
meeting the firm’s need for parts, components, assemblies, etc.
 The number of suppliers is small and the number of competitors is large.
 The firm competes in an industry that is growing rapidly.
 The firm has both capital and talent required to handle the new business of
supplying its own raw materials.
 The business of supplying products or services is having excellent margins.
 The firm has the advantage of stable prices where it can stabilise the cost of
its raw material and the associated prices of its products through backward
integration.

Forward Integration
Forward integration, a Personal Computer maker that sells its PCs through
company-owned retail stores illustrates forward integration.

Example: In 2001, Apple Inc. entered the retail industry when it

decided to set up a chain of Apple Stores to sell its computers and later iPods,
I pads, etc.
Forward integration helps a firm to gain control over sales and prices of its
existing products. However, increased risks are inherently present in both types
of integration. It is not easy to share the additional burden and diverse
responsibilities thrust upon managers in the changed scenario. The longer chain
increases the costs of coordination and bureaucracy. At times, a technological
innovation in the vertical channel may compel all of the vertically linked
businesses to modify their operations. In a dynamic setting where changes in
technology and demand are highly unpredictable, outsourcing (for suppliers
and distributors) may be a better option.

8.4.2 Diversification
Diversification is a strategy that takes a firm into new markets with new
products or services. A firm may choose a diversification strategy for a variety
of reasons. The under-utilised resources and capabilities of a firm might be put
to good use by seeking to expand its operations in related and unrelated areas.
Its managerial talent and expertise gained over the years could be exploited

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Notes profitably in untested territories. The firm might be keen on diversification in

order to cross subsidise one product with the surplus of another. This way a
firm endowed with a diverse portfolio of products might be able to grow in
power in different markets and withstand prolonged price competition. After
having subsidised one product for fairly longer periods, it might be able to gain
a firm grip over the market. Diversification helps a firm to spread financial risk
over different markets and products. However, it is well worth remembering
here that in the name of diversification, a firm should not neglect areas where
its core strengths lie. There are two types of diversification, which are as
follows:

Concentric or Related Diversification

Concentric diversification occurs when an organisation diversifies into a
related, but distinct business. With concentric diversification, the new
businesses can be related to existing businesses through products, markets or
technology. The new product is a spin-off from the existing facilities, products
and processes.

Example: Philip’s, the electronics major, decided to diversify into

related businesses such as cellular phones, telecommunication equipment,
electronic components, etc. to exploit its core advantages in the form of related
technology, strong distribution network, etc.
Concentric diversifications may occur due to factors such as common
distribution channel, marketing skills, common brand name and common
customers.

Example: Pharmaceutical firms such as Cipla and Ranbaxy sell

numerous products to a single set of customers: hospitals, doctors, patients and
drugstores.

Unrelated or Conglomerate Diversification

Conglomerate diversification takes place when an organisation diversifies into
areas that are unrelated to its current business. It is a type of diversification
whereby a firm enters (through acquisition or merger) into an entirely different
market that has little or no synergy with its core business or technology. The
decision to diversify into unrelated areas is generally undertaken by firms in
volatile industries that are subject to rapid technological change. The obvious
purpose is to reduce the risk. It is also assumed that by restructuring the
portfolio of businesses, the firm would be in a position to create value.
Similarity in products, technology or marketing knowledge between the two
firms is not an issue here; the acquiring firm simply wants to make an
attractive investment.

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Notes
Example: Philip Morris acquisition of Miller Brewing was a
conglomerate move.
Products, markets and production technologies of the brewery were quite
different from those required to produce cigarettes. Another oft-quoted reason
for conglomerate moves is to improve the firm’s growth rate. To a large extent,
this might work provided the new area has growth opportunities greater than
those available in the existing line of business. Operating unrelated businesses,
in any case, is not an easy job. Managers from different divisions may have
different backgrounds and may be unable to work together effectively.
Competition between strategic business units for resources may entail shifting
resources away from one division to another. Such a move may create rivalry
and administrative problems between the units. If the firm does not have the
requisite managerial talent to convert the rhetoric into a concrete action plan,
the seemingly promising opportunities might disappear within no time.
Without some form of strategic fit, the combined performance of the individual
units will probably not exceed the performance of the units operating
independently. In fact, combined performance may deteriorate because of
controls placed on the individual units by the parent conglomerate. Decision-
making may become slower due to longer review periods and complicated
reporting systems.
It is worth noting the principal difference between concentric and
conglomerate diversification here. Concentric diversification emphasises some
commonality in markets, products, or technology, whereas conglomerate
diversification is based on profit considerations only. The firm thinks that it is
able to spot an attractive investment opportunity faster than the market and
commit its resources accordingly. Of course, it is always open to doubt
whether the new business justifies its acquisition cost. Thus, the selection of
attractive acquisition candidates is largely a matter of managerial judgement.
The basic source of value in a conglomerate is senior management’s ability to
time the market to buy and sell businesses. Consistent success in such matters,
however, cannot be guaranteed. Throughout the 1990s, not surprisingly, many
conglomerates failed to deliver the goods. Unrelated diversification moves
have actually destroyed value instead of creating it (dys synergy, in which
individual businesses may actually be worth more on their own rather than
when placed under a larger corporate umbrella with other unrelated units).
Conglomerates have failed in the most cases because of various reasons:
inadequate focus, failure to understand the business fully, competitive
disadvantage compared to organisations that use related diversification.

8.4.3 Strategic Alliances

In this case, partners own different percentages of equity in a new venture.
Many foreign direct investments are completed through equity strategic
alliances, such as those by Japanese and US companies in India (Maruti, Hero

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Notes Honda, Birla, Tata, A&T, etc.). Equity strategic alliances are more effective at
transferring know-how between firms because they are close to hierarchical
control than are non-equity alliances. Non-equity strategic alliances are formed
through contractual agreements given to a company to supply, produce or
distribute a firm’s goods or services without equity sharing. Such contractual
arrangements may cover marketing and information sharing activities too. As
there is no need to bring in equity investments, such licensing agreements are
less formal and demand fewer commitments from partners than joint ventures
and equity strategic alliances. Under licensing agreements, the proprietary
rights of a foreign partner are passed on to the other under a licensing
agreement. Firms such as Coca-Cola, Hilton, Hyatt, Holiday Inns, Kentucky
Fried Chicken, McDonald's and Pepsi have long engaged in licensing
agreements with foreign distributors as a way to exploit new markets with
standardised products that can profit from marketing economies.

Reasons for Strategic Alliances

Firms enter into strategic alliances for a number of reasons, but they all involve
some kind of risk reduction. Let us see how this happens:
New Market Entry
Strategic alliances aim at helping players speed up market entry.

Example: Big drug firms generally cross-license their new drugs to one
another. Such arrangements help the alliance partners reduce high fixed costs
of R&D and global distribution.

Example: The alliance between Nestle and Coca-Cola helped both

partners to gain access to each other’s distribution network quickly (Coke
distributes Nestlé’s line of fruit juices and coffee while the latter offers Coke
and its other soft drink products through its channels). Without such a
cooperative arrangement, both companies would have to spend more time,
energy and money to enter certain market segments.
Define Future Industry Standards
Strategic alliances can help to define emerging industry standards or new
products.

Example: In the desktop printing industry, Canon has become the

world’s longest supplier of engines that power laser printers. By joining hands
with Hewlett-Packard, IBM and other manufacturers, Canon ensures that over
60 per cent of the world’s laser printers use a Canon made engine to power the
machine.

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Learn and Apply New Technologies Notes

Companies use alliances to learn or to gain access to new technologies.

Example: IBM, for instance, has teamed up with Motorola and Toshiba
to enhance its semiconductor manufacturing capabilities in making super dense
chips. From Motorola, IBM learns how to design new products for emerging
wireless technologies. Toshiba offers its expertise in miniaturisation skills.
Both IBM and Motorola work together to develop new x-ray photolithography
techniques that neither company can afford on its own.

Fill Gaps in Product Line

Companies use the alliances route to fill gaps in their product line.

Example: Ford formed an alliance with Nissan Motor to build new

generation minivans. The alliance with Mazda helped Ford to co-produce Ford
Escort. In turn, Mazda has learnt from Ford as to how to build the Ford’s
popular line of recreational vehicles.

Risks and Costs of Alliances

Through alliances, firms can gain access to new technologies, develop new
products; acquire latest skills and knowledge that are otherwise not available to
them in their individual capacity. However, working with an alliance partner
may prove to be a painful experience in some cases.
 Incompatibility of Partner: Over the years, technologies, market
conditions and consumer tastes are bound to change. Alliance partners
having a smooth run may find the going tough, if the changed scenario
requires them to shift their focus and alter their strategies. Growing
incompatibility in developing strategies and objectives may often lead to a
serious rift between alliance partners.

Example: The joint venture between Godrej Soaps and Proctor &
Gamble India illustrates this point. Both wanted to build strong brands by
meshing their skills in new product development, marketing and
distribution. An intermediate review of joint venture by Godrej revealed, to
its dismay that its own brands have suffered in the marketplace. Again PG
has not utilised Godrej’s plant capacities fully, as was agreed initially.
There was a growing, uneasy feeling that the international giant has tried to
improve its market share at the expense of Godrej. The joint venture, under
the circumstances, could not flourish and Godrej had to stop for the day
and pull out of the agreement.
 Risk of Knowledge/Skills Drain: Firms taking part in a strategic alliance
must carefully identify and isolate what types of skills and knowledge can

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Notes be safely shared with a partner. This is particularly important in industries

that are converging.

Example: The computer, communications and consumer electronics

industries grow similar where an alliance based on designing new types of
computers will have a decisive impact on communications devices too. In
such cases, the firm that has access to latest skills and knowledge would
run the risk of giving more insight into its knowledge base than intended.
 Risk of Dependence: Alliances can make a firm too dependent on its
partner unwittingly. The partner having critical skills naturally starts
exercising a high degree of control over the dependent firm. Over-reliance
makes the other firm complacent about new designs from its own
manufacturing line. When the relationship turns sour and the alliance
partners decide to pull out, the dependent firm is made to pay to heavy
penalty in terms of loss of market share and the absence of technology
driven power brands in its product portfolio.

Example: When Piaggo of Italy pulled out of the joint venture,

LML witnessed a steep fall in its scooter sales. The proposed motor cycle
launch was a year behind schedule. Profits vanished too soon when the
bikes launched by LML without an international technology partner
(Energy, Adreno) failed to lift the spirits of CEO, Deepak Singhania.

8.4.4 Corporate Restructuring

With rapid advances in Information Technology and acute resource constraints
across the globe, the business world has become more complex and fluid in the
recent times. To survive and compete, present-day organisations should do
away with their existing culture, policies, structure and start with a clean sheet.
They have to put more emphasis on the business process as a whole (both
external and internal focus) and do everything to keep the smile on the
customer’s face. Externally the organisation must search for new products, new
service and new market opportunities, working with suppliers, distributors and
customers to redefine markets and industries. Internally structures,
management styles and cultures must be capable of creating and delivering
these products and services. Strategic awareness, information management and
change are very important if the organisation wants to get ahead of its
competitors.
Corporate restructuring, thus, involves destroying old paradigms, old
technology, old ways of doing things and starting all over afresh. It demands a
strong cultural willingness to make a clear beginning taking a realistic look at
one's company and deciding to reshape the whole place to remain continuously
competitive.

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Process of Restructuring Notes

The process of corporate restructuring, generally speaking, covers the
following steps:
 Customer Focus: Restructuring should, ideally speaking, begin and end
with the customer. To succeed in a highly competitive world, every
business will have to listen to the customer, find out what he/she needs and
deliver more than what he/she expects. Customers are notoriously lacking
in foresight.

Example: Ten or fifteen years ago, how many of us were asking for
cellular telephones, fax machines and copiers at home, 24-hour discount
brokerage accounts, multi-value automobile engines, compact disc players,
cars with on-board navigation systems, hand-held global satellite
positioning receivers, automated teller machines, MTB or the Home
Shopping Network? Sony, of course, exemplifies creative marketing in its
introduction of many successful new products (such as Walkmans, Video
Cameras, CDs ahead of their time) that customers never asked for or even
thought were possible. The organisation must take care of internal
customers as well as fulfilling the aspirations of employees working at
various levels.
 Core Business Processes: The organisation should make up its mind and
decide what it is really good at making. Then, it must divide itself into
strategic business units – focusing on an individual core competency. Then,
it should divide the individual SBU into core business processes by
deciding what product attributes, technologies, designs, skills, etc. are the
most important factors from the customer's point of view. Once the key
processes are identified, it is necessary to decide which areas need to be
restructured and the order in which they should be handled, since
restructuring all the processes simultaneously is not possible.
 Structural Changes through Reengineering: In order to respond to
internal and external signals quickly and to bring about a radical change in
core-business processes, the organisation should have an appropriate
structure. The conventional hierarchical structure fails to deliver the results
here, as it is loaded with layers, rules, regulations and bureaucratic
procedures. The traditional double-digit hierarchies should yield ground to
multi-disciplinary, autonomous work teams and task forces, sharing
authority and decision-making powers while realising goals. Such a
structural shift makes many of the levels in the organisational hierarchy
redundant and leads to a flatter organisation structure where work gets
organised around processes (as opposed to functions).
 Cultural Changes: A strategic change often requires changing the culture
of an organisation. A culture change refers to a change in employees'
values, norms, attitudes, beliefs and behaviour.

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Notes
Example: Much the same way, the Chairman and Managing Director of
Infosys Technologies, N R Narayana Murthy leads the company by example,
setting impossible targets, putting in 70-90 hours each week, sharing wealth
with all employees, and sticking to personal values that he often preaches (for
example, not using company resources for personal use, sharing information
with all, never violating laws, having a simple down-to-earth lifestyle, sending
children by bus, not employing a domestic help, not allowing his IIT gold
medallist wife to set foot in his office, travelling by economy class, staying in
budget hotels, etc.). He believes that “leadership is about making what seems
impossible. It's about changing the perception of what reality is.”

Methods of Restructuring
The methods of corporate restructuring may broadly be classified into two
categories:

External Restructuring
This can be carried out through asset restructuring or capital restructuring.
Asset-based restructuring is undertaken through:
 Acquisition/takeover, merger/ amalgamation
 Asset swaps (entails divesting and acquisition of each other’s business by
two companies where the differences in valuation are settled either through
cash payment by any other mutually agreed mode)
 Demerger/spin off
Capital restructuring (also called financial restructuring) is carried out through:
 Leveraged buyouts
 Share buyback (buying back shares of the company whose valuations are
tempting; the basic purpose is to enhance the value of shares to the
remaining shareholders
 Conversion of debt to equity (undertaken to increase the profitability of a
company)
Internal Restructuring
This may involve portfolio restructuring or organisational restructuring. Here,
the focus is on bringing about change in organisational design, improving
decision-making, information flow and effecting changes in management style.
The CEO needs to pay attention to changing the culture of an organisation,
improving decision-making capabilities of people working at various levels,
offer training opportunities to the deserving candidates, investing in best
human resource practices, reorganising the pay structure, etc. The key focus
areas of internal restructuring are: improving employee morale, bringing about

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a change in an organisational culture and elimination of redundant staff. The Notes

process of reducing the size of a company by laying-off incompetent and
inefficient employees is known as smart sizing.

Learning Activity
Prepare a detailed note on your understanding about the corporate
restructuring. Also write down its impacts and significance on the
company. Your note must be based on a company of your choice.

DuPont

D uPont’s nylon provides a classic story of new-use expansion. Every

time nylon became a mature product, DuPont found a new use.
Nylon was first used in parachutes, then as a fibre for women's
stockings; later, as a major material in women's blouses and men's shirts;
still later it entered automobile tyres, seat upholstery and carpeting. The
recent discovery that the use of aspirin may lower the incidence of heart
attacks is expected to boost sales in the analgesic market tremendously
(Another discovery that drinking tea boosts the body's defences against
infection and tea actually contains a substance that might be turned into a
drug to protect against disease is likely to boost sales of tea throughout the
globe).
Questions
1. How did new expansion policies help DuPont to gain success in their
business?
2. What kind of expansion strategy was adopted by DuPont to get
commercial success of their diversified business?
Source: Times of India, 22-04-2003

1. The strategic alternatives are sometimes used as

strategic choices and strategic option. They enhance
managers to identify strategic option. For the
strategic option the business should analyse strength
and weakness and threats and opportunities.
2. Full integration occurs when the firm seeks to control
all stages of the value chain related to the final end
product or service. Partial integration here refers to a
selective choice of those value-adding stages that are
brought in-house. Two such partial vertical

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Notes integration strategies are “taper” integration and

“quasi” integration. Taper strategies demand firms to
manufacture a portion of their requirements and
purchase the rest from outside suppliers. Quasi
integration strategies require firms to buy most of
their requirements from other firms in which they
have an ownership stake.

SUMMARY
 Grand strategy is a general plan of major action by which a firm intends to
achieve its long-term goals.
 Vertical integration exists when a firm is producing its own inputs
(backward integration) or owns its own sources of distribution of outputs
(forward integration).
 Related diversification extends the firm’s distinctive competence into new
industries that are similar to the firm’s original business (in terms of
markets, products or technology).
 Unrelated diversification occurs when a firm seeks to enter into new
industries without relying on a distinctive competence to link up business
units.
 Conglomerates are the firms that practice unrelated diversification.
 Corporate strategy spells out the business in which the firm will participate,
the markets it will serve and the customer needs it will satisfy.
 Stability strategy involves maintaining the status quo or growing in a
methodical but slow manner.
 Retrenchment strategy is a defensive strategy adopted as a reaction to
operational problems such as internal mismanagement, surprises caused by
competitors, changing market conditions, etc. involving reduction of any
existing product or service line to improve its performance.
 A turnaround strategy is designed to reverse a negative trend and bring the
organisations back to normal health and profitability.
 Combination strategy is a mixture of stability, expansion or retrenchment
strategies applied simultaneously or sequentially.
 Consortia are defined as large interlocking relationships between
businesses of an industry.

KEYWORDS
Joint Ventures: Joint ventures when two or more firms create an independent
company by combining parts of their assets, known as joint ventures.

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Strategic Alliance: These are usually partnerships that exist for a definite Notes
period during which partners contribute their skills and expertise to a
cooperative project.
Merger: Merger occurs when two or more organisations (roughly similar in
size) combine to become one.
Acquisitions: It is the purchase of a firm by a firm that is considerably larger.
The firm that acquires is called the acquiring firm and the other, the merging
firm.
Stability Strategy: A stability strategy involves maintaining the status quo or
growing in a methodical, but slow manner. The firm follows a safety-oriented,
status-quo-type strategy without effecting any major changes in its present
operations.
Consortia: These are interlocking relationships between businesses of an
industry.
Backward Integration: It occurs when the companies acquired; supply the
firm with products, components or raw materials.
Full Integration: It occurs when the firm seeks to control all stages of the
value chain related to the final end product or service.
Partial Integration: It refers to a selective choice of those value-adding stages
that are brought in-house.
Conglomerate Diversification: It takes place when an organisation diversifies
into areas that are unrelated to its current business.
Corporate Restructuring: It involves destroying old paradigms, old
technology, old ways of doing things and starting all over afresh. It demands a
strong cultural willingness to make a clear beginning taking a realistic look at
one's company and deciding to reshape the whole place to remain continuously
competitive.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What do you mean by corporate level strategy?
2. Name five growth strategies.
3. Define grand strategy.
4. Name two external growth strategies.
5. Name two internal growth strategies.
6. What do you mean by forward integration?
7. What do you mean by backward integration?

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Notes 8. Define horizontal integration.

9. Define concentric diversification.
10. Define conglomerate diversification.
11. What do you mean by stability strategy?
12. Define retrenchment strategy.
13. Name two defensive strategies.
14. What is corporate restructuring?
15. Explain the terms ‘mergers’ and ‘acquisitions’.
16. Explain the various types of corporate restructuring.
17. Distinguish between strategic alliances and joint ventures.
18. What do you mean by business level strategy?
19. Name two business level strategies.
20. What is differentiation strategy?

Long Answer Questions

1. What is corporate level strategy? Why is it important for a diversified firm?
2. Identify the compelling reasons for over-diversification. What are the
consequences of such a step?
3. Do you believe that by the year 2020, large firms will be more or less
diversified than they are today? Why?
4. Describe different forms of diversification and give an example of each.
5. Evaluate the most common reasons for diversifying in terms of their impact
on competitive advantage and financial performance.
6. Distinguish between concentric diversification and conglomerate
diversification as strategic alternatives.
7. What motives might encourage managers to engage a firm in more
diversification than seems appropriate?
8. Briefly explain why companies usually follow a stability strategy.
9. What factors would compel a firm to pursue a stability strategy? Illustrate
with examples.
10. Define ‘Corporate Restructuring’. Explain the process of corporate
restructuring citing relevant examples wherever necessary.

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FURTHER READINGS Notes

Pearce, J.A. and Robinson, R.B., (2010), Strategic Management,

McGraw Hill, New York
Hammer, M. and Champy, J., (2003), Reengineering the
Corporation, Nicholas Brearly, London
Stahl, Gunter and Mendenhall, Mark E., (2005), Mergers and
Acquisitions, Stanford University Press, CA
DePamphilis, Donald, (2008), Mergers, Acquisitions and Other
Restructuring Activities, Elsevier Academic Press, New York

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Notes
LESSON 9 - STRATEGIC ANALYSIS AND
CHOICE

CONTENTS
Learning Objectives
Learning Outcomes
Overview
9.1 Strategic Choice
9.1.1 Gap Analysis
9.1.2 Environmental Threat and Opportunity Profile (ETOP)
9.2 Organizational Capability Profile
9.2.1 Financial Capabilities
9.2.2 Marketing Capabilities
9.2.3 Technological Capabilities
9.2.4 Strategic Business Alignment or Management Capabilities
9.2.5 Strategic Advantage Profile
9.3 Corporate Portfolio Analysis
9.3.1 BCG Portfolio Matrix
9.3.2 BCG Positions throughout the Product Lifecycle
9.4 SWOT Analysis
9.4.1 SWOT Terminology
9.4.2 Key Issues in SWOT Analysis
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of strategic choice
 Describe the Environmental threat and opportunity profile

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 Explain the organizational capability profile Notes

 Understand the strategic advantages profile
 Describe the corporate portfolio analysis
 Understand the concepts of SWOT analysis

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 basic of strategic choice
 explain environmental threat and opportunity profile
 recall organizational capability profile
 determine strategic business alignment or management capabilities
 analyzing corporate portfolio analysis
 design BCG portfolio matrix
 SWOT analysis and explain key issues in SWOT analysis

OVERVIEW
Let us first review the previous lesson. You have learnt about general strategic
alternatives available with the business. You have also studied about the
business and corporate-level strategies and its significance on the strategic
business environment. At the end of the lesson, you will learn about the
strategies to be adopted in a global environment.
In this lesson, you will know about the strategic analysis and choice available
with the business. You will also learn about the various strategic analysis tools
like the SWOT, ETOP, Gap Analysis, etc.
We advise you to learn this lesson carefully. This lesson will help you to
understand the concepts of strategic analysis and choice.

9.1 STRATEGIC CHOICE

Strategists collect and evaluate the information to assess the strengths and
weaknesses of the internal environment and opportunities and threats of the
external environment. Such an assessment presents a list of possible strategic
alternatives. From among those alternatives, choices are made. Strategic choice
addresses the question “where shall we go”. It determines the characteristics
and form of an organisation’s strategic direction. Strategic choice is “the
decision to select among the grand strategies considered the strategy which will
best meet the enterprise’s objectives”. It involves, basically four steps:

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Notes (a) focussing on a few alternatives (b) determining the selection factors
(c) evaluating alternatives and (d) making the strategic choice.
 Alternatives: It is virtually impossible for any strategist to consider all the
alternatives due to time and cost constraints. Considering too many options
would make the process complex, unwieldy and frustrating. Therefore, the
choice has to be narrowed down to a manageable number of feasible
alternatives. Deciding such a magical number is particularly a difficult job
because the decision maker will always have a lingering doubt whether
important things have been left out or not. To resolve this dilemma, certain
useful concepts have been advanced by theorists.
 Criteria: These must be analysed further against a set of objective and
subjective factors. Objective factors are based on data or facts and
analytical tools that facilitate a strategic choice. Subjective factors deal
with behavioural issues affecting strategic choice.
 Evaluation: The subjective and objective factors provide a useful
framework for evaluating the alternatives. The attempt here is to find how
each alternative fits with the firm’s resources, environment and
stakeholders’ objectives and values. Adequate care must be taken to see
that the firm does not commit its resources to a specific course of action
without discounting environmental uncertainties, competitive reactions and
risk factors in a broad way.
 Choice: At this stage, decision-makers pick up a suitable strategy, keeping
the organisational capabilities in mind. For an optimal choice in this regard,
the following issues need to be resolved successfully:
 Is the strategy chosen clearly identifiable? Is it adequately clear to those
who implement it?
 Does the strategy fully exploit the environmental opportunities?
 Is it consistent with the resources of the firm and its competitive
advantage and core competence?
 Does it balance acceptable minimum risk with maximum returns
consistent with organisational capabilities and prospects?
 Has it been thoroughly evaluated against the appropriate criteria such as
past, present and future; economic, social, political and technological
trends?
 Is it in tune with the values and aspirations of the firm?

9.1.1 Gap Analysis

Gap analysis focuses on the management’s attention that is based on the
difference between what was intended and what was achieved. If a firm is not
able to achieve its stated objectives through an existing strategy, it must try to
bridge the gap through an alternative course of action.

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Objective or Target Aspiration Notes

The Gap
Sales

Achievement
Unchanged
Strategy

Time

Figure 9.1: Gap Analysis

Gap analysis compels managers to measure their performance and to audit their
gap closing capabilities through soul-searching questions such as: what are the
current objectives and what are our future aspirations in terms of profit,
growth, market share, etc.? Are our results adequate? Are we working hard
enough? Are we over-reaching? Should our strategy or objectives be changed?
As Figure 9.1 indicates, gap analysis compares achievement with aspiration. In
this example, the future sales of the firm, if it pursues its current strategy
unchanged (the bold line); appear likely to fall, although the management is
keen on very substantial growth (the dotted line). The gap is the difference
between target and likely achievement.
If the gap is negative, as in Figure 9.1, we may wish to consider whether our
resources, including our competencies and competitive advantages, are up to
the task. A more modest ambition might be more rewarding and less risky,
because it is feasible. Alternatively, we might seek projects, programmes and
strategies to close the gap. If the gap is positive and performance exceeds
aspiration, we should consider the merits of revising objectives upwards
(expansion strategies). If the gap is negative due to bad performance, certain
hard decisions should be taken (retrenchment strategies).
Gap analysis is, thus, a process of examining business practices for areas that
need improvement. Essentially, it shows the difference between where the
company is and where it wants to be. This is usually only applied to a single
area, such as sales. Gap analysis requires a lot of data on expected standards
and benchmarks as well as current reports on business statistics and output.
Gap analysis, when used in an appropriate manner, can be applied to a wide
variety of situations where a firm wants to show improvement. It is particularly
useful to those business leaders who want to make plans on a long-term basis.
It allows teams to quickly diagnose problems and create ways to solve those
problems through integral changes in business practices. Of course, on the
negative side, gap analysis can be very vague. It explores the nebulous area

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Notes between goals and current abilities and requires very exact data measurement
to be useful. People must be willing to explore and choose solutions to bridge
the gap, and companies must be willing to implement these changes.

9.1.2 Environmental Threat and Opportunity Profile (ETOP)

ETOP is the acronym for environmental threat and opportunity profile. It is a
summarised picture of the environmental factors and their likely impact on the
organisation. Initially, the different aspects of relevant environment are listed.
Importance of each factor is assessed closely and expressed in qualitative
(high, medium or low) or quantitative terms (3, 2, 1). A relevant factor so
analysed might leave a positive or negative impact. Positive impact of a factor
is an opportunity and negative impact is a threat. In the final stage, the
importance of each factor and its impact is combined to produce a compact,
overall picture.

ETOP Involves
 Dividing the environment into different sectors. Each sector can be
sub-divided into sub-sectors.
 Analysing the impact of each sector and sub-sector on the organisation
 Describing the impact in the form of a statement

Advantages and disadvantages of ETOP

ETOP comprises some advantages and disadvantages which are shown in
Table 9.1.
Table 9.1: Advantages and Disadvantages of ETOP
Advantages Disadvantages
It clarifies which sector and sub-sectors have It doesn’t show the interactions between
favourable impact on the organisation. It helps to factors.
interpret the result of environment analysis. It can’t reflect the dynamic environment.
The organisation can assess its competitive It’s a subjective analysis too.
position.
Appropriate strategies can be formulated to take
advantage of opportunities and counter the threat.
It helps in preparing the SWOT analysis quickly
and easily.

9.2 ORGANISATIONAL CAPABILITY PROFILE

The starting point for analysing capabilities and competencies is recognising
that market position and market power is a result of the mastery of
competencies and capabilities of competing firms. Differences in resource base
rarely explain the differences in performance of organisations in the same
industry. Organisations that perform better do so because of the manner in
which they deploy their resources. The effective employment of resources
allows the firm to develop a sum of knowledge and operative capabilities,

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resulting in greater competencies. Thus, competencies and capabilities result Notes

from the way the organisation uses its resources to create knowledge and skills.
When these competencies and capabilities are linked together effectively, they
sustain excellent performance and give the organisation market position and
market power. Traditionally, the capabilities of the organisation have been
described under the following heads:
 Financial Capabilities
 Marketing Capabilities
 Technological Capabilities
 Strategic Business Alignment Capability or Management Capability

9.2.1 Financial Capabilities

The financial strength of an organisation is determined by its ability to grow,
its quick response ability, ability to respond to change and staying power. This
is demonstrated by its cash flow, short and long term borrowing capacity (debt
equity ratio, etc.), and its capacity to attract new equity in the foreseeable
future and financial management ability, which includes negotiation, raising
capital, credit, inventories and accounts receivable.
An organisation can effectively show financial capability if it can carry all its
stakeholders with it. Investors will invest in the firm if the market has
confidence in the stock; providers of funds will assess the risk attached to the
borrowings and the competence with which the borrowings are managed; the
competence with which the organisation is governed and administered will
determine the ability of the organisation to match the funds brought in by the
providers of funds. Table 9.2 provides a summary of some of the critical
financial parameters to determine the financial capability of the organisation.
Table 9.2: Critical Areas Defining Financial Capabilities
Key Parameters
Ability to Grow What is our sustainable growth in financial terms? Can it grow with
the industry? Can it increase market share? How sensitive is
sustainable growth to rising of outside capital? To achieving good
short term results?
Sustainable Growth = Asset turnover after tax return on sales
(assets/debt)*(debt/equity)*fraction of earnings retained
Quick Response Ability What is our capacity to respond quickly to moves by others, or to
mount an immediate offensive? Uncommitted cash reserves,
Reserve borrowing power, Excess plant capacity and On-the shelf
new products

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Notes Ability to respond to Change What are our fixed versus variable costs? Cost of unused capacity?
How will this influence our response to change? What is our ability
to adapt and respond to changed conditions in each functional area?
For example:
Competing on cost, Managing more complex product lines, Adding
new products, Competing on service, Escalation in marketing
activity,
Can we respond to possible exogenous events such as:
A sustained high rate of inflation, Technological changes which
make obsolete existing plant, Recession, Increase in wage rates,
Probable forms of Government regulation that will affect this
business
Do we have exit barriers that will tend to keep us from scaling
down or divesting in operations in the business?
Do we share facilities with other parts of the firm? Can these
provide constraints?
Staying Power What is our ability to sustain a protracted battle, which may put
pressure on earnings or cash flow?
Status of cash reserves, Unanimity among management, Long time
horizon in financial goals and Lack of stock market pressure

9.2.2 Marketing Capabilities

Traditional sources of competitive advantage are the economic or financial
capability: able to produce goods or services at lower cost than competitors,
and the strategic marketing capability: products or goods that differentiate a
firm from its competitors, typically by “adding-value” or “product-portfolio
mix.”
Marketing and sales provide the means whereby consumers and users are made
aware of the product or service offered by the organisation. Marketing and
sales also provide the customer the ability to procure the product or service in a
manner that they perceive a fair exchange of value.
Marketing is the foundation of a good business. It is the anticipation and
fulfilment of customers' needs taking account of an organisation's core
competencies. As customers become more demanding, their needs change, new
technologies emerge and competition increases, many organisations find that
they need to build or enhance their own marketing capability. Marketing
capability pertains to building the right products, establishing a close
relationship with the customer and effectively marketing products and services.

Traditional Requirements
The organisation should have the ability of selecting its target markets, and
developing and maintaining a marketing mix that will produce mutually
satisfying exchanges with target markets. This requires the ability to identify
which part of the population it wants to sell its product or service, its Market
Segment. The market segment is a homogeneous group of people that can be
identified according to a well-defined criterion such as: Age, Frequency of
Product Use or Lifestyle.

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The organisation must have the capability to reach the target market. Target Notes
market is the market segment of consumers whose wants or needs a firm will
attempt to satisfy. Management must have an understanding of why customers
make purchases and why non-customers do not. The marketing program should
lead to a more efficient allocation of the available marketing resources.
The organisation must have the capability for Implementation, Evaluation, and
Control of the marketing plan itself. Implementation is the process that turns
marketing plans into action assignments, and ensures that these assignments
are executed in a way that accomplishes the plan's objectives. Evaluation is the
method of gauging the extent to which marketing objectives have been
achieved during the specified time period. Control provides the mechanisms
for evaluating marketing results in light of the plan's goals and for corrective
actions that will help them reach those goals.

New Concepts in Marketing Capability

Marketing capability is becoming more complex. Marketing competence has
changed from the traditional functional view. Today's products and services
offer simultaneous improvements on multiple dimensions:
 Greater Benefits
 Improved Quality
 Greater Customisation
 More Focused Marketing Communications
 Lower Prices
One area where specialised skills are becoming increasingly critical is in the
tailoring of marketing programs to consumer segments and even individual
consumers. Sophisticated, demanding and micro-segmented consumers are no
longer willing automatically to place their confidence in premium-priced
brands; consumers increasingly trust only their own ability to seek value. This
means that marketers will have to deliver sharply articulated value to their set
of consumers.
This fragmentation in demographics and user needs has affected even the most
homogenous of product categories. There are now a range of market segments
within these product categories. This has already happened in developing
countries and will soon become necessary in India. The best companies in
these countries are now using specialists to develop, interpret and communicate
the results of models that predict likely consumer behaviour based on past
purchases. A few organisations are using parallel computer processing systems
to gain competitive advantage in target marketing.

Example: Big Bazaar has developed an advanced information system

that enables it to tailor merchandise store by store.

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Notes

Sophisticated direct marketing programs are already enhancing the

ability of marketers to communicate efficiently with smaller and smaller
segments of the population.

9.2.3 Technological Capabilities

In developing countries and the less developed countries, economic growth is
based on industrial development. The focus in these countries is on the
secondary sector of the economy (manufacturing sector). Therefore, the most
critical competence concern is the current technological base of the
organisation, its distinctive technological capability and competence. It is
important to try to get a good fit between what the organisation currently
knows about and the proposed changes it wants to make. One of the important
considerations to determine this is an understanding of the technological
capabilities of the organisation.
The organisation has to recognise there different types of technological
capabilities and the role of these capabilities in the various functions of the
organisation. By this is meant the types of knowledge and skills it requires in
terms of the product or service and how it is produced or delivered effectively.
This knowledge may be embedded in particular products or equipment, but is
also present in the people and systems needed to make the processes work.
Generally, technological capability of an organisation is a measure of its
innovativeness. As the level of innovative capability of a firm goes up, the
organisation's capacity to face challenges also undergoes significant change. A
major component of technological capability is learning from others. The
process of diffusion is an important source of technological capability. An
organisation that is a member of a value chain, where the product or service
can be broken-up into its individual components, passes on its knowledge one
to another through the process of ‘diffusion’.

Example: The software industry has this attribute; this is also the case
in the most mechanical industries. When components of the product or service
are outsourced, it leads to an improvement in the technological capability of
the sub-contractors.
There are a number of models of technological capability. The technological
capability models of an organisation, as adapted from the Ramanathan's
Eclectic models are described below:

Ramanathan's Eclectic Model

In this classification, six levels of technological capabilities are identified. The
level of technological capability of the firm increases as it goes down the
ladder formed by these technology types.

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Reverse Engineering: Reverse engineering is a legally method of copying the Notes

technology of the existing product.

Example: Sharp Corp. imported a crystal radio set from USA in 1925;
reverse engineered it and made Japan's first radio, the Sharp-Dyne.
Product Innovation: Innovations that lead to improvements of existing
products or development of new products. The innovations could be
incremental, architectural, modular or radical.
Process Innovation: Improvements in the manufacturing process or integration
of steps in the manufacturing process leading to reductions in cycle time or
reductions in the number of process types, improving the manufacturing
process yields, etc.
Application Innovation: Utilisation of an existing idea or concept for a new
application, or a new design, method or measurement technique. It can
sometimes dramatically improve existing products and processes.

Example: The development of Nylon into material for use as tyre

cords.
Systems Innovation: Innovations involving integration of sub-systems and
several innovations. This may be through linking or integration of a variety
sub-system, and involving product, process and application innovations.

Example: Application of fuzzy logic to improve continuous cold rolling

mills in steel manufacturing to washing machines, to eccentrics the wash/rinse
operation, enabling it to simulate a hand wash.
Core Competency Leveraging Innovations: Ability to leverage and enhance
innovative activity from its areas of core competence. A firm's capability to
innovate in all phases of the innovation process, such as design, engineering,
testing and manufacturing, forms its core competence:
 Expansion of innovation in the different phases of innovation
 Extension of core competence horizontally into a new field
 Fusing core competence in different areas

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Notes

The classification of technological capability is important because it

permits the firm to evaluate its position on the technological capability
continuum from time to time. This enables it to take the decisions necessary
to continue raising its capabilities. As the technological capability increases,
so does the innovative capability. With an increase in the innovative
capability of the firm, more skills and knowledge are added to the firm.

9.2.4 Strategic Business Alignment or Management Capabilities

Conventional requirements of management are being challenged by the
developments in the complexity of organisational structures. As organisations
become more complex, they achieve focus through the creation of business
units, as strategic business units, virtual structures, strategic enterprises, etc.,
each with its own internal value chain. In spite of their complexity,
organisations have to be increasingly more competitive and enhance their
capability to respond rapidly by to events.
Strategic business alignment represents the capability of an organisation to
coordinate the activities of all of its components for the purpose of achieving
its strategic objectives. It is grounded in a shared vision and common
understanding as well as ownership by all stakeholders of what the
organisation wants to achieve and why. It replaces the concepts of management
and IT capability in the modern organisation.
Strategic Business Alignment Capability provides the modern organisation the
capability to rethink the conventional wisdom about consistency, conflict, and
leadership. Strategic alignment of the different business units has become a
crucial aspect in exercising managerial capability.
Strategic Business Alignment (SBA) represents the organisation's capability to
coordinate the activities of all its components for the purpose of achieving its
strategic objectives. SBA is grounded in a shared vision and common
understanding – as well as ownership by all stakeholders – of what the
organisation wants to achieve and why. Though the driving factors for SBA are
organisational control, performance metrics and short-term accountability, the
focus is on achieving and sustaining a corporate climate that serves as the basis
for collaborating effectively.
The key capabilities to assess in determining the Strategic Business Alignment
capability of the organisation are shown in Table 9.3:
Table 9.3: Key Strategic Business Alignment Capabilities
Production Capabilities Existing production facilities; capacity; investment and
maintenance requirements, Current production processes
quality; method, cost and organisation, Extent to which
production requirements of the strategy can be delivered
by existing facilities

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Capabilities of Organisational Alignment Related system of performance incentives and rewards, Notes
Compelling company vision and mission, Clearly
understood corporate strategic business goals,
Distribution of Resources across organisational
boundaries, Effective communications across
organisational boundaries
Information Technology Capabilities IT systems, Congruence of work processes across
organisational boundaries, Seamless transfer of
information across organisational boundaries
Service Capabilities Integration with customers and suppliers, Performance
metrics, Integrating widely dispersed work force

SBA applies in many discrete organisational and operating

circumstances. Alignment is especially important: (i) When drawing up the
business objectives and business strategy of the different business units. This
generally requires standardising corporate processes that cut across all
operations. (ii) Following acquisitions and mergers. Many companies with a
history of acquisitions find themselves with legacy cultures sustained by
employees with very different institutional memories and very different
processes. (iii) When aligning certain functions and processes such as
Human Resources, Information Technology, Productivity Programs, Re-
engineering, implementation of Enterprise Resource Planning (ERP)
Systems, etc.

9.2.5 Strategic Advantage Profile

Strategic advantage profile tries to find out organisational strengths and
weaknesses in relation to certain critical success factors (advantage factors or
competence factors) within a particular industry. Many industries have
relatively smaller but extremely important sets of factors, which are essential
for successfully gaining and maintaining competitive advantages, known as
Critical Success Factors (CSFs). CSFs have a significant bearing on the overall
growth of a firm within an industry. Research has identified four major sources
of CSFs in general:
 Industry Characteristics: CSFs are often industry-specific. CSFs
supermarket chains include inventory turnover, product-mix, sales
promotion and pricing. In the airline industry, CSFs would be somewhat
different, i.e. fuel efficiency, load factors, excellent reservation system, etc.
No one set of CSFs applies to all industries. As industries change, CSFs
would also change.
 Competitive Position: CSFs vary with a firm’s position relative to its rivals
in the field.

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Notes
Example: Now-a-days, old rivals Coke and Pepsi are discovering
that there is more money in water than coloured water. Things are warming
up in the ` 1,000 crore-bottled-drinking water market and competitors,
including Parle’s Ramesh Chauhan (Bisleri Brand) face the threat of a
white wash in the days ahead. Every competitive move by the big players
poses innumerable problems to smaller firms (price concessions, changing
size of bottle, promotional offers, etc. become CSFs), putting a big question
mark on their survival in the marketplace how-so-ever well-established
they might be.
 General Environment: Changes in any of the dimensions of the
general environment, i.e. political-legal, socio-cultural, demographic,
technological, macroeconomic, global, etc. can affect how CSFs emerge.

Example: Imposing tax on exports of software companies; not

giving tax exemptions to R&D expenditure of pharmaceutical and
biotechnology firms would always come in the way of growth and
expansion plans of local as well as multinational players in these fields.
 Organisational Developments: Internal developments, too, take the centre
stage and give rise to new CSFs.

Example: If several key executives of an investment-banking are

quit to form a competing ‘spin off firm,’ rebuilding the executive team
would become a key issue for the original firm.

The key factors for success of different industries may live in

different functions, areas, distribution channels and so on. These can be
identified along the various functional areas of business starting from raw
materials to customer servicing.

9.3 CORPORATE PORTFOLIO ANALYSIS

Resource deployment is the most important job of the corporate level strategist.
Burning cash quickly through related and unrelated diversification moves does
not provide the answer. Why? There is the entry and exit problem with regard
to resource commitments. Businesses are not liquid investments and it is
difficult to redeploy assets. Second, relatedness is difficult to realise quickly
and at the most takes time to develop. Third, investing in high-return business
is always not easy. Moreover, diversification upsets established power bases
within a firm. Redeployment in a way is nothing but reallocation of power.
Those who have commanded the resources of a unit do not like to part with
them without a bitter fight. Power and resources often go hand in glove. Such

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power struggles compel strategists to pour disproportionate resources into the Notes
old businesses and unconsciously restrict investments in new ventures.
Inappropriate resource development, thus, guarantees failure on every front.
Analytical tools have come to play a major role since the mid-1960s, to prevent
unconscious misallocations of capital. Portfolio strategy pertains to the mix of
business units and product lines that fit together in logical manner to offer
synergy and an individual trying to balance his investment portfolio – by
picking up some high-risk stocks, some low-risk stocks and perhaps a few
income bonds. In much the same way, diversified corporations like to have a
balanced mix of business divisions called Strategic Business Units (SBUs). An
SBU is a division of the organisation that has a unique business mission,
product line, competitors and markets relative to other SBUs in the same
corporation. It can be a single business or a collection of related businesses.
Many companies set up SBUs as separate profit centres, sometimes giving
them virtual autonomy, other companies have tight control over their SBUs,
enforcing corporate policies and standards down to very low levels in the
organisation. The portfolio strategy was originally developed by General
Electric in 1971 to integrate its many different businesses. Since then, the
Boston Consulting Group (BCG) has refined the approach for use by other
organisations.

9.3.1 BCG Portfolio Matrix

The BCG matrix compares the various businesses in an organisation’s portfolio
based on relative market share and market growth rate. Relative market share is
determined by the ratio of a business’s market share (in terms of unit volume)
as compared to the market share of its largest rival. Market growth rate is the
growth in the market during the previous year relative to growth in the
economy as a whole. The combinations of high and low market share and high
and low business growth rate provide four categories for a corporate portfolio.

Figure 9.2: BCG Matrix

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Notes Stars (High Share, High Growth)

SBUs that are stars have a large share of a high-growth market and typically
require large amounts of cash to support their rapid and significant growth.
They have additional growth potential and so profits should be ploughed back
into this business for future growth and profits.

Example: Software, entertainment, electronics and telecommunications

are some of the industries which have a very high growth rate. The appropriate
strategy for stars is to maintain the market share through large closes of
investment (both internal as well as external).

Cash Cows (High Share, Low Growth)

SBUs that are ‘cash cows’ (provide a lots of cash for the firm) have a high
market share in a slowly growing market. As a result, they tend to generate
more cash than is necessary to maintain their market position. Cash cows are
often former stars and can be valuable in a portfolio because they can be
‘milked’ to provide cash for other riskier and struggling businesses.

Question Marks (Problem Child or Wild Cat – Low Share, High Growth)
SBUs are ‘question marks’ that have a small share of a high growth market.
The question mark business is risky, since there is already a leader in that
business. As such it requires lot of funds to invest in plant, equipment and
personnel in order to keep pace with the fast-growing market. The term
‘question mark’ is well conceived, because at every stage the organisation has
to think hard about whether to keep investing funds in the business (to turn it
into a star) or to get out.

Dogs (Low Share, Low Growth)

SBUs are that ‘dogs’ which have a relatively small share of a low-growth
market. They may barely support themselves, or they may even drain cash
resources that other SBUs have generated. Usually, dogs are harvested,
divested or liquidated (if turnaround is not possible).

9.3.2 BCG Positions throughout the Product Lifecycle

After the SBUs of an organisation are plotted on the growth-share matrix, the
next step is to evaluate whether the portfolio is healthy and well-balanced. A
balanced portfolio, obviously, has a number of stars and cash cows and not too
many question marks or dogs.

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Notes

Figure 9.3: BCG Positions throughout the Product Lifecycle

Depending on the position of each SBU, four basic strategies can be
formulated while building a balanced portfolio:

Build
Heavily invest in Stars. High market share and high industry growth mean
higher probability of future success.

Hold
Maintain cash cows because they provide resources for future growth –
investment in wild cats and stars. Here, the company invests just enough to
keep the SUB in its present condition.

Harvest
Here the company reduces the amount of investment with a view to maximise
the short-term cash flows and profits from the SBU. It is a strategy best suited
to cash cows that are weak or which are in a market with bleak prospects. It is
also used on occasions when the first in need of cash and is willing to forgo the
future of the product in the interest of short-term requirements. Harvesting is
also used for question marks when there seem to be few real opportunities to
turn them into stars and for dogs.

Divest
Here the attempt is to get rid of the dogs and use the capital the firm gets to
invest in stars and question marks.
As time passes, SBUs change their position in the growth-share matrix.
Successful SBUs have a lifecycle. They start as question marks, become stars,
then cash cows and finally dogs towards the end of their lifecycle. Therefore,
companies should keep an eye not only on the current positions of their
businesses but also on their moving positions. Each business should be
examined as to where it was in the past years and where it will probably move
in the years ahead. If the expected journey of a business is going to be a tough
one, alternative plans must be kept ready. The growth-share matrix, thus,

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Notes becomes a useful planning framework for strategists. They can use it to try to
assess each SBU and assign the most reasonable objective in the light of past
experiences, current situation and future trends. Mistakes, however, could turn
the tide against the above theoretical reasoning especially in cases where all
SBUs are asked to aim for the same growth rate or return level. As we all
know, the very basis of SBU analysis is that each business has a different
potential and requires its own objective.

Learning Activity
Prepare a detailed note on your understanding about the corporate
portfolio analysis. Your note must be based on an automobile
company (Maruti Suzuki India Ltd. or Ford India (Ford-Ikon)) of
your choice.

9.4 SWOT ANALYSIS

SWOT is an acronym for the internal strengths and weaknesses of a firm and
the external opportunities and threats facing that firm. SWOT analysis helps
the managers to have a quick overview of the firm’s strategic situation and
assesses whether there is a sound fit between internal resources, values and
external environment. A good ‘fit’ maximises a firm’s strengths and
opportunities and minimises its weaknesses and threats. The primary purpose
of SWOT analysis is to identify the key internal and external factors that are
important to achieving the goals. One useful way of putting SWOT analysis to
good effect is to exploit market opportunities by leveraging on the strengths of
a firm. At the same time, a firm can also convert its weaknesses or threats into
strengths or opportunities by proactively taking appropriate steps. An example
of such a conversion strategy is to find new markets. If the threats or
weaknesses cannot be converted, a firm should try to minimise or avoid them.

Figure 9.4: SWOT Analysis

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9.4.1 SWOT Terminology Notes

An overview of the four factors (Strengths, Weaknesses, Opportunities and
Threats) is given below:

Strengths
Having an ability to deliver against the placement of an order within 12 hours
is strength to a firm if customers require delivery within a day and its major
competitors are not able to fulfil this requirement. Strength is something that is
of value to customers and which a firm does better than its competitors do.
Strengths are the qualities that help a firm to achieve its goals effectively and
efficiently. Strengths can be tangible as well as intangible covering human
competencies, process capabilities, financial resources, products and services,
customer goodwill and brand loyalty.

Example: The examples of organisational strengths are huge financial

resources, broad product line, no debt, committed employees, etc.

Weaknesses
The term ‘weakness’ refers to the inherent limitation that creates a strategic
disadvantage for a firm. Weaknesses come in the way of a firm meeting its
goals. They have a negative influence on firm’s success and growth.
Weaknesses might stare at a firm in the form of uneconomical operation,
outdated plant, worn-out machinery or militant labour class, narrow product
range, poor decision-making, high employee turnover, etc. Weaknesses need to
be minimised or eliminated if the firm wants to get past competition and
deliver want-satisfying goods and services to customers.

Opportunities
It is the external environment which presents limitless opportunities to a firm.
They arise because of changes in the marketplace which create certain gaps
which are either not recognised or poorly served. By exploiting such
opportunities and leveraging on its resource capabilities, a firm is able to
improve its performance and its competitive advantage. It is, however, not easy
to spot opportunities and exploit them profitably. Opportunities may arise from
market, competition, industry/government and technology.

Threats
Firms are vulnerable to external threats in the form of changes in tastes of
consumers, technological changes, and emergence of new products, price wars,
nuclear war, earthquakes, and changes in tax laws, employee unrest, etc.
Threats in the form of innovative products like IPhone, IPod and IPad can
completely turn the tables against established players in the marketplace. This
being the case most firms need to keep their eyes always focused on
experimentation, research and innovation. When it is able to keep everything

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Notes battle ready, it is able to neutralise threats from external (sometimes internal
forces) environment to a great extent.

9.4.2 Key Issues in SWOT Analysis

In order to carry out a good SWOT, the firm should look into certain key
issues:
Table 9.4: Key Issues in SWOT Analysis
Strengths Weaknesses
 A distinctive competence  No clear strategic direction
 Adequate financial resources  A deteriorating competitive position
 Good competitive skills  Obsolete facilities
 Well thought of by buyers  Sub-par profitability
 An acknowledged market leader  Lack of managerial depth and talent
 Well-conceived functional area strategies  Missing key skills or competencies
 Access to economies of scale  Poor track record in implementing
 Insulated (at least somewhat) from strong strategy
competitive pressures  Plagued with internal operating problems
 Proprietary technology  Vulnerable to competitive pressures
 Cost advantages  Falling behind in R&D
 Competitive advantages  Too narrow a product line
 Product innovation abilities  Weak market image
 Proven management  Competitive disadvantages
 Below-average marketing skills
 Unable to finance needed changes in
strategy
Opportunities Threats
 Enter new markets or segments  Likely entry of new competitors
 Add to product line  Rising sales of substitute products
 Diversity into related products  Slower market growth
 Add complementary products  Adverse government policies
 Vertical integration  Growing competitive policies
 Ability to move to better strategic group  Vulnerability to recession and business
 Complacency among rival firms cycle
 Faster market growth  Growing bargaining power of customers
or suppliers
 Changing buyer needs and tastes
 Adverse demographic changes

Learning Activity
Prepare a detailed note on your understanding about the SWOT
Analysis. Discuss its impacts and significance on the company.
Your note must be based on a company (Dell Computers or Bata
Shoes) of your choice.

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Notes

LAKSHMI MACHINE WORKS LTD.

T he Coimbatore based, Lakshmi Machine Works Ltd. (LMW),

established in 1962, is one of the three companies in the world
making the entire range of spinning and weaving machinery and the
largest textile machine manufacturer in India. In 1996, it had a turnover of
about ` 600 crore in the ` 1,500 crore-textile machinery market in India.
LMW had a fairly steady and fast growth. Its sales increased from ` 322
crore in 91-92 to ` 600 crore in 95-96 and the net profits increased from
about ` 44 crore to ` 52 crore during the same period. On an average, more
than 90 per cent of the profits were ploughed back so that its reserves soared
from about ` 52 crore in 1991-92 to ` 176 crore in 1995-96. The assets of
the company, historically valued at ` 450 crore, was estimated to be around
` 1,000 crore in current prices in 1996. LMW, which had a nearly zero debt
position in 1994-95, had a debt of ` 56 crore in 1995-96, necessitated by its
expansion and modernisation plans involving a total outlay of ` 250 crore.
LMW’s capacity was expanded by 40 per cent and a new foundry was
established to meet its requirements of casting. It also invested ` 60 crore in
a big iron manufacturing unit to supply iron and steel for the company and
promoted units to ensure steady supply of components at reasonable prices.
LMW had also diversified into unrelated businesses such as agro-business
like oil palm-cultivation and floriculture (investment: ` 11 crore) and
granite (investment: over ` 8 crore)
LMW have had no dearth of orders and its order books used to be full for
the next two or three years. Even in 1996-97 when there was recession it
had orders worth more than ` 2,000 crore. As the company took 10 per cent
of the value of the order as interest free advance it did not have to seek other
sources for its working capital. Because of the heavy order position, it took
18 to 24 months to deliver a machine after order was placed with it. The
management planned to bring the delivery time to about 12 months.
The liberalisation has thrown up a number of threats and challenges for
LMW. The competitive environment has been fast changing. The
liberalisation of foreign investment facilitated the entry of several foreign
firms via the joint venture route or the increase in their stake in the existing
ventures. Rieter Machine Works of Switzerland, who was LMW’s
technology supplier and who held 13% equity in LMW, set up a 100 per
cent subsidiary in India in 1995. Technology agreements between Rieter
and LMW for some of the machines had already expired but not renewed
and the remaining ones were not expected to stretch further beyond the
expiry of the agreements. In the new business environment, foreign firms
would not be willing to part with their latest technology without a
controlling or significant stake in the business.
Contd...

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Notes LMW has set up a full-fledged R&D centre with the aim of developing its
own technology and has increased the allocations for R&D. The machines
of the foreign firms, priced high, cater to the upper segment of the market.
There are textile firms which use both LMW machinery and that of the
foreign firms. The machines of the foreign firms are generally used for
production for the quality conscious foreign markets. Although the size of
the quality segment is small now, the intensification of competition in the
international market for textile items following the phase out of MFA as per
the Urgency Round Agreement and the expansion of the premium quality
market segment in India are expected to expand the demand for high quality
machines.
One of the important threats faced by the LMW has been the import of
second hand machinery, available at 50 to 60 per cent of the price of new
ones, the customs duty on such machines having cut from 25 to 10 per cent.
Although the prices of new machines imported are 20 to 30 per cent higher
than the domestic ones, the delivery time in respect of them is only 2 to 3
months, compared to 18 to 24 months in the case of LMW.
In 1998-99, the textile industry being under recession, the LMW faced some
serious problems. Most of the spinning mills opted to postpone their
delivery schedules, although they had placed orders by advance payments.
Only some mills confirmed their willingness to take delivery (and even
some of them have been reported to have gone back on their promise). Yet,
LMW had orders worth ` 1,250 crore in hand, which would take at least
18 months to complete the execution on its enhanced capacity. Since most
of the textile machinery is tailor-made for each customer, late changes in
delivery schedules cause serious problems. LMW’s inventory of finished
goods in June 98 was reported to be at around ` 90 crore compared to
average monthly inventory of ` 20 crore in 1996-97, whereas there was not
a single machine in stock until the previous year end. In 1997-98, net profit
amounted to nearly ` 25 crore (about 10 per cent increase over the previous
year) on a turnover of about ` 514 crore. The LMW script (face value
` 100), which ruled at about ` 12,000 in April 1996 crashed to nearly
` 5,000 in the next year and tumbled further about ` 1,500 in 1998 but
improved to over ` 2,000 in same year.
Questions
1. Make a SWOT analysis of LMW.
2. Suggest measures to overcome the problems faced in the recessionary
situation.
Source: http://www.citehr.com/17221-case-study-swot-analysis.html

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1. The Operating cash flow (Cash flow provided by Notes

operations) is a central and crucial concept for
financial management. It measures the ability of the
firm to generate, through its day-to-day operations, a
flow of cash, and therefore evaluates its capacity for
survival and for long-term growth. The operating
cash flow is the long-term engine of the company.
2. The BCG matrix does not directly address the majority
of businesses that have average market shares in
markets of average growth (the matrix tells about only
two categories, high and low for each dimension).

SUMMARY
 Gap analysis focuses management’s attention on the difference between
what was intended and what was achieved. If a firm is not able to achieve
its stated objectives through an existing strategy, it must try to bridge the
gap through an alternative course of action.
 Gap analysis is, thus, a process of examining business practices for areas
that need improvement. Essentially, it shows the difference between where
the company is and where it wants to be.
 Environmental threats and opportunity profile is a summarised picture of
the environmental factors and their likely impact on the organisation.
 The financial strength of an organisation is determined by its ability to
grow, its quick response ability, ability to respond to change and staying
power.
 Marketing and sales provide the means whereby consumers and users are
made aware of the product or service offered by the organisation.
 Marketing and sales also provide the customer the ability to procure the
product or service in a manner that they perceive a fair exchange of value.
 Marketing is the foundation of a good business. It is the anticipation and
fulfilment of customers' needs taking account of an organisation's core
competencies.
 As customers become more demanding, their needs change, new
technologies emerge and competition increases, many organisations find
that they need to build or enhance their own marketing capability.
 Marketing capability pertains to building the right products, establishing a
close relationship with the customer, and effectively marketing products
and services.

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Notes  Technological capability of an organisation is a measure of its

innovativeness. As the level of innovative capability of a firm goes up, the
organisation's capacity to face challenges also undergoes significant
change.

KEYWORDS
Strategic Advantage Profile: It is a summarised view of the advantages
available to a firm in key areas and the impact of these factors on its
functioning.
Portfolio Strategy Approach: It is a method of analysing an organisation’s mix
of business in terms of both individual and collective contributions to strategic
goals.
Strategic Choice: Selection of a strategy that will best meet the firm’s
objectives is known as strategic choice.
Gap Analysis: It tries to find out the difference between projected and actual
performance. It emphasises what a firm wants to achieve; whether it is
achieving it or not and how it can achieve it.
Portfolio Analysis: An analytical approach which asks managers to view
corporations as portfolios of businesses to be managed for the best possible
return is known as portfolio analysis.
Strategic Business Unit: It has a unique business mission, product line,
competitors and market share relative to other SBUs in the corporation.
BCG Matrix: It is a method of evaluating businesses relative to the growth rate
of their market and the organisation’s share of that market.
Dogs: Dogs are businesses that have a very small share of a market that is not
expected to grow.
Cash Cows: Cash cows are businesses that have a large share of a market that
is not expected to grow substantially.
Question Marks: Question marks are businesses that have only a small share
of a quickly growing market.
Stars: Stars are businesses that have the largest share of a rapidly growing
market.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What do you mean by internal analysis?
2. Explain the benefits of carrying out internal analysis.
3. What is competitive advantage?

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4. Explain the important benefits and limitations of SWOT analysis. Notes

5. What do you mean by organisational capabilities?
6. What do you mean by key factor rating?
7. Explain why financial analysis is carried out?
8. What do you mean by strategic analysis and choice?
9. Explain the product lifecycle concept.
10. What do you mean by portfolio analysis?
11. What are the problems in using BCG Matrix?
12. What factors influence the portfolio strategy?
13. What are critical success factors?
14. Explain gap analysis.
15. What is portfolio analysis?
16. What is ETOP?
17. What are strengths and weaknesses?
18. What is strategic advantages profile?
19. Explain the financial capabilities of an organisation.
20. Explain the marketing capabilities of an organisation.

Long Answer Questions

1. What do you mean by internal analysis? Discuss the role of internal
analysis in strategy formulation.
2. How are the methods of financial analysis and key factor rating used in
internal analysis?
3. Why is it so important to assess a firm’s strengths and weaknesses in
relative terms? What are the factors a manager should consider to find a
comparison standard that is useful in making assessments in relative terms?
4. Prepare Functional Area Profile and Strategic Advantage Profile for a
firm’s operations in a tough and competitive environment.
5. ‘Assessment of the internal capabilities of the firm centres on the appraisal
of performance in different functional areas’. Critically examine the
statement.
6. ‘The matching of external threats and opportunities with strategic
advantage factors which may be carried out by SWOT analysis provides
the necessary backdrop for strategic planning.’ Discuss.
7. Discuss the important factors that influence the choice of an appropriate
strategy from various alternatives.

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Notes 8. ‘Strategic choice is made in the context of decision situation and decision
maker’. Give comment on it.
9. Explain the method of constructing BCG Matrix. What are its uses and
limitations?
10. Define portfolio analysis. What are the important issues to be looked into
while constructing a business/product portfolio? How does portfolio
analysis help in arriving at strategic choice?

FURTHER READINGS

Glueck, W.F. & Jauch, L.R., (2010), Business Policy and Strategic
Management, McGraw Hill, New York
Pearce, J.A. & Robinson, R.B., (2010), Strategic Management,
McGraw Hill, New York
Parthasarthy R. (2011), Fundamentals of Strategic Management,
Biztantra, New Delhi
Pearce J.A., (2011), Strategic Management, Tata McGraw Hill,
New Delhi
David F.R. (2009), Strategic Management, Prentice Hall, New
Delhi.

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LESSON 10 - DISTINCTIVE Notes

COMPETITIVENESS

CONTENTS
Learning Objectives
Learning Outcomes
Overview
10.1 Selection of Matrix
10.1.1 GE 9 Cell Matrix
10.1.2 McKinsey 7-S Framework
10.2 Balance Scorecard
10.2.1 Advantages of Balance Scorecard
10.2.2 Disadvantages of Balance Scorecard
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of GE 9 cell matrix
 Describe the McKinsey 7-S framework
 Explain the balance score card

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 how to do selection of matrix
 design and explain GE 9 cell matrix
 analyzing McKinsey 7-S framework
 design balance scorecard and explain its advantages and disadvantages

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Notes OVERVIEW
Let us first review the previous lesson. You have learnt about strategic analysis
and choice available with the business. You have also studied various strategic
analysis tools like the SWOT, ETOP and Gap Analysis etc.
In this lesson you will study about the various matrix analysis tool like- GE 9
Cell Matrix, McKinsey’s 7s Framework. In the end of the lesson you will
understand about the balance scorecard.
We advise you, that learn this lesson carefully it will give you a better
understanding of the strategic matrix analysis. This lesson will help you to
understand the concepts of the balance scorecard.

10.1 SELECTION OF MATRIX

Techniques of portfolio analysis have their greatest applicability in developing
strategy at the corporate level. It charts and characterizes the different
businesses in the organization's portfolio and helps in determining the
implications for resource allocation. The Boston Consulting Group Matrix
(BCG Matrix) is the best-known portfolio-planning framework. The GE/
Mckinsey Business screen is another well-known portfolio framework, but it is
a more complex version of the BCG matrix. The aim of these techniques is to
develop growth strategies for adding new products and businesses to the
portfolio, and decide which businesses or products should no longer be
retained.

10.1.1 GE 9 Cell Matrix

General Electric company has developed a 3 x 3 (9) business portfolio matrix
in the 1970s with the help of McKinsey & Company (also called GE Business
Screen or McKinsey Screen). In this matrix, there are two dimensions: industry
attractiveness (similar to BCG’s industry growth rate) and relative business
strength (similar to BCG’s market share). Industry attractiveness is measured
by a number of factors like size of market, market growth rate, industry
profitability, competitive intensity cyclicality, economies of scale,
technological requirements, etc. Likewise relative business strength is rated
considering a number of factors such as market share, profit margins, ability to
compete on price and quality, knowledge of customer and market competitive
strengths and weaknesses, technological capability and calibre of management.
These two dimensions make excellent marketing sense for rating a business.
Companies will be successful if they enter attractive markets with required
business strengths. If one or the other is missing, the firm may fail to deliver
the goods. Neither a strong company operating in an unattractive market nor a
weak company operating in an attractive market will do well.

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Factors that affect Market or Industry Attractiveness Notes

Factors that affect market or industry attractiveness are:
 Market Size
 Market growth
 Market profitability
 Pricing trends
 Competitive intensity/rivalry
 Overall risk of returns in the industry
 Opportunity to differentiate products and services
 Entry barriers
 Segmentation
 Distribution structure (e.g., retail, direct, wholesale
 Technology development

Factors that Affects Competitive or Business Strength

Factors that affect competitive or business strength are:
 Strength of assets and competencies
 Relative brand strength
 Market share
 Customer loyalty
 Relative cost position (cost structure compared with competitors)
 Distribution strength
 Record of technological or other innovation
 Quality
 Access to financial and other investment resources
 Management strength
Both the dimensions (industry attractiveness and relative business strength) are
further divided into three zones having nine cells. The shaded cells at the upper
left include the strong SBUs in which the company should invest and grow.
The diagonal cells contain SBUs that are medium in overall attractiveness. The
company should maintain its level of investment in these SBUs. The three
shaded cells at the lower right indicate SBUs that are low in overall
attractiveness. The company should seriously think of harvesting or divesting
those SBUs.

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Notes Business Strength

Strong Average Weak

C
A
High

attractiveness
Industry
Medium B D

Low

Figure 10.1: GE 9 Cell Portfolio Matrix

The circles indicate four company SBUs: the areas of the circles are
proportional to the relative sizes of the industries in which these SBUs
compete. The pie slices within the circles represent each SBUs market share.
Thus, circle A shows a company SBU with a 75 percent market share in a good
sized, highly attractive industry in which the company has strong business
strength. Circle B represents an SBU that has a 50 percent market share, but
the industry is not very attractive. Circles C and D indicate two other
companies: SBUs in industries where the company has small market shares and
not much business strength. Viewed broadly, the company should build A,
maintain B, and make some hard decisions on what to do with C and D. The
GE Business Screen, as shown above, has three main advantages over the BCG
Matrix. The terminology is more acceptable, especially the portion covering
the harvest and/or divests section of the matrix. The GE Screen includes more
information about businesses. Multiple factors are taken into account in
determining where a business fits on the two dimensions. Finally, the three
categories for industry attractiveness and business strength result in finer
distinctions among businesses, especially those that are average. On the
negative side, the screen does not mention the strategies that should be adopted
by various businesses, nor does it offer a means for identifying businesses that
are just about to move into a period of high growth.

10.1.2 McKinsey 7-S Framework

Given the complexities inherent in organisational change and strategy
implementation, it is easy to find out why efforts at both so often fail. The
McKinsey Company, a well-known management consultancy firm in the
United States, towards the end of 1970s was asked to find a solution to this
knotty issue. The researchers, Peters and Waterman found after examining
America’s best run companies that the problem in strategy lay in its
implementation and structure was only one lever in the hands of management.
The other levers were systems, staff, style, skills and super ordinate goals. A
strategy is usually successful when the other S's in the 7-S framework fit into
or support the strategy.

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Notes

Figure 10.2: Mckinsey 7-S Framework

The principal job of strategists then is to achieve a good fit

among the Seven Ss by making necessary alterations from time to time.

Strategy
A set of decisions and actions aimed at gaining a sustainable competitive
advantage.

Example: Typical questions here include:

 What is our strategy?
 How do we intend to achieve our objectives?
 How do we deal with competitive pressure?
 How are changes in customer demands dealt with?
 How is strategy adjusted for environmental issues?

Structure
The organisation chart and associated information that shows who reports to
whom and how tasks are both divided and integrated.

Example: Typical questions here include:

 How is the company/team divided?
 What is the hierarchy?
 How do the various departments coordinate activities?

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Notes  How do the team members organise and align themselves?

 Is decision-making and controlling centralised or decentralised? Is this as it
should be, given what we are doing?
 Where are the lines of communication? Explicit and implicit?
Systems:
The flow of activities involved in the daily operation of a business, including
its core processes and its support systems.

Example: Typical questions here include:

 What are the main systems that run the organisation? Consider financial
and HR systems as well as communications and document storage.
 Where are the controls and how are they monitored and evaluated?
 What internal rules and processes does the team use to keep on track?

Style
How managers collectively spend their time and attention and how they use
symbolic behaviour. How management acts is more important than what
management says.

Example: Typical questions include:

 How participative is the management/leadership style?
 How effective is that leadership?
 Do employees/team members tend to be competitive or cooperative?
 Are there real teams functioning within the organisation or are they just
nominal groups?

Staff
How companies develop employees and shape basic values.

Example: Typical questions here would include:

 What positions or specialisations are represented within the team?
 What positions need to be filled?
 Are there gaps in required competencies?

Shared Values
Commonly held beliefs, mindsets and assumptions that shape how an
organisation behaves – its corporate culture.

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Notes
Example: Typical questions here would include:
 What are the core values?
 What is corporate/team culture?
 How strong are the values?
 What are the fundamental values that the company/team was built on?

Skills
An organisation’s dominant capabilities and competencies.

Example: Typical questions include:

 What are the strongest skills represented within the company/team?
 Are there any skills gaps?
 What is the company/team known for doing well?
 Do the current employees/team members have the ability to do the job?
 How are skills monitored and assessed?

The 7-S framework highlights the importance of some interrelated

and interconnected factors within the organisation and their role in
successful implementation of strategy. The successful implementation of a
strategy depends on the right alignment of all the seven Ss.

Learning Activity
Prepare a detailed note of your understanding about the McKinsey
7-S framework. Prepare your note which must be based upon a
company of your choice.

10.2 BALANCE SCORECARD

The Balanced Scorecard is a strategic planning and management tool used to
align business activities with the vision and strategy of the organisation,
improve internal and external communications, and monitor organisational
performance against strategic goals. The approach recognises that financial
performance is just one part of the larger picture of organisational
performance. It seeks to balance a company's financial “perspective” with three
non-financial ‘perspectives’ such as customer, internal processes, and
workforce learning and development. An organisation’s balanced scorecard

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Notes encompasses the company’s mission, vision, core values, critical success
factors, objectives, performance measures, targets and improvement actions. It
is communicated and translated into the scorecards of all business units, teams
and individuals to provide a framework that not only provides performance
measurements, but helps planners identify how to continuously improve
strategic performance and results. The idea behind this is that by alerting
managers in areas where performance deviates from expectations, they can be
encouraged to focus their attention on these areas, and hopefully as a result
trigger improved performance. By using the balanced scorecard as a
framework for measuring performance against the organisational goals,
executives can truly align their workforce to execute their corporate strategy.

Recognising some of the weaknesses and vagueness of previous management

approaches, the balanced scorecard approach provides a clear prescription as to
what companies should measure in order to ‘balance’ the financial perspective.
The balanced scorecard is a management system (not only a measurement
system) that enables organisations to clarify their vision and strategy and
translate them into action. It provides feedback around both the internal
business processes and external outcomes in order to continuously improve
strategic performance and results. When fully deployed, the balanced scorecard
transforms strategic planning from an academic exercise into the nerve centre
of an enterprise.
The balanced scorecard retains traditional financial measures. But financial
measures tell the story of past events, an adequate story for industrial age
companies for which investments in long-term capabilities and customer
relationships were not critical for success. These financial measures are
inadequate, however, for guiding and evaluating the journey that information
age companies must make to create future value through investment in
customers, suppliers, employees, processes, technology and innovation.

The Balanced Scorecard (BSC) moves beyond the traditional goals

of income, cash flow and financial ratios. It adds process performance
measurements around issues like continuous improvement, supply chain
management, and customer satisfaction. BSC offers two significant
improvements over traditional financial or even non-financial measures of
performance.

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Notes

Figure 10.3: Balance Scorecard Framework

Companies use balanced scorecards to make an assessment of their overall
performance. The tool makes such an assessment by evaluating achievement of
goals in the financial, customer, learning and growth, and internal-business
process factors, and by identifying key processes that could possibly drive
strategic success and distribute resources among technology, people, and other
capital for the best results. The balanced scorecard suggests that we look at an
organisation from four perspectives and develop metrics, collect data and
analyse it relative to each of these perspectives:
Financial Measures: The financial measures include the results like profits,
increase in the market share, return on investments and other economic
measures as a result of the actions taken.
Customers Measures: These measures help to get data on customer
satisfaction, the customers’ perspective about the organisation, customer
loyalty and acquiring new customers. The data can be collected from the
frequency and number of customer complaints, the time taken to deliver the
products and services, improvement in quality, etc.
Internal Business Measures: These are the measures related to the
organisation’s internal processes which help to achieve the customer
satisfaction. It includes the infrastructure, the long-term and short-term goals
and objectives, organisational processes and procedures, systems and the
human resources.

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Notes Innovation and Learning Perspective: The innovation and learning measures
cover the organisation’s ability to learn, innovate and improve. They can be
judged by employee skills matrix, key competencies, value added and the
revenue per employee.

Balance Score Card is not primarily an evaluation method, but

is a strategic planning and communication device. It provides strategic
guidance to managers and describes links between lagging and leading
measures of financial and non-financial performance. The BSC describes
the steps necessary to reach financial success – invest in specific types of
knowledge to improve processes.

10.2.1 Advantages of Balance Scorecard

The approach, thus, incorporates measures, not only of financial results but
also of drivers that influence those results. It requires that the needs of all
stakeholder groups, including customers and employees, be understood and
addressed. This gives business leaders a better-rounded view of company
performance and promotes more effective alignment of operations with
strategy.

Balance
The primary benefit of a balanced scorecard is the balance itself. Rather than
focusing on a specific area of performance usually financial, business leaders
learn to consider the full spectrum of business performance. In addition to
financial measures, they look at measures of customer experience, employee
development and retention and process efficiency. This prevents the problems
that can arise when performance in one area is improved simply by sacrificing
another area, which does not represent a sustainable solution.

Scalability
Generally, balanced scorecards reflect overall company performance at the
highest level. However, an advantage of the scorecards is that they are
scalable: the same or related metrics can be used at different levels of
operations to assess performance. In fact, some businesses actually use the
term “balanced scorecard” to refer to the performance management system
used to track individual employee performance. Metrics for evaluating
individual performance should tie directly to the metrics used at the department
and company level. They should follow the same principle of balancing the
needs of different stakeholders, and should focus not only on what is
accomplished but also on how it is accomplished.

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Customer Focus Notes

The balanced scorecard inherently highlights the customer perspective, rather
than focusing solely on internal business goals and financial outcomes.
Understanding and responding to customer requirements is a critical
component of quality methodologies and is a prerequisite for implementing
sustainable improvements to processes and products.

Employee Focus
Business leaders who incorporate a balanced scorecard also gain insights into
the employee experience. Metrics in the growth and development area provide
information about employee satisfaction, which ultimately affects employee
retention and thus business productivity and profitability. They may also
include assessments of the success of employee development and succession
planning efforts, which are necessary for business growth. In addition, many
employees appreciate that their performance metrics are tied in a direct way to
overall business performance, making the measurement system seem fairer and
appropriate.

Proactive Approach
The balanced scorecard methodology helps leaders to move from reactive
mode to proactive mode. A good scorecard contains not only output or result
metrics, but also metrics that provide insight about ongoing performance and
drivers that influence results. Thus, managers maintain awareness of
performance levels and any problems that arise, so that action can be taken to
mitigate the effects.

Example: Process errors or customer complaints can be addressed

before they lead to reduced customer retention, increased defects and a reduced
profit margin.

10.2.2 Disadvantages of Balance Scorecard

Balanced score card approach is not always on the credit side of the ledger.
The negative side of the coin may be presented thus:
 First, the balanced scorecard takes forethought. It is not a tool one can just
think up one night to solve a problem. Instead, it is recommended to hold a
meeting to plan out what goals one would like to see the company achieve
in each of the four above areas. Once these objectives are clearly stated,
these objectives can be broken down into what you will need, financially,
to bring these objectives to fruition.
 Second, while the balanced scorecard gives an overall view of the four
areas for concern in business growth and development, these four areas do
not paint the whole picture. The financial information included on the
scorecard is limited. Instead, to be successfully implemented, the balanced

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Notes scorecard must be part of a bigger strategy for company growth that
includes meticulous accounting methods.
 Finally, many companies use metrics that are not applicable to their own
situation. It is vitally important when using balanced scorecards to make
the information being tracked applicable to the needs. Otherwise, the
metrics will be meaningless.

Learning Activity
Prepare a detailed note on balance scorecard and its impacts and
significance on the companies. Prepare your note which must be
based upon a company of your choice.

Infosys

Balanced Scorecard Helps Infosys Transformation into a Leading

Consultancy.
In the early 2000s, Infosys Technologies was a company in transition. The
Bangalore-based company was a market leader in information technology
outsourcing, but needed to expand to meet increased client demand. Infosys
invested in many new areas including business process outsourcing, project
management, and management consulting. This put Infosys in direct
competition with established consulting firms, such as IBM and Accenture.
Led by CEO Sri Gopalakrishnan, the company developed an integrated
management structure that would help align these new, diverse initiatives.
Infosys turned to the balanced scorecard to provide a framework the
company could use to formulate and monitor its strategy. The balanced
scorecard measures corporate performance along four dimensions financial,
customer, internal business process, and learning and growth.
The balanced scorecard immediately played a role in the transformation of
Infosys. The executive team used the scorecard to guide discussion during
its meetings. The continual process of adaptation, execution, and
management that the scorecard fostered helped the team respond to, and
even anticipate, its clients’ evolving needs. Eventually, use of the scorecard
for performance measurement spread to the rest of the organization, with
monetary incentives linked to the company’s performance along the
different dimensions.
Over time, the balanced scorecard became part of the Infosys culture. In
recent years, Infosys has begun using the balanced scorecard concept to
Contd...

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create “relationship scorecards” for many of its largest clients. Using the Notes
scorecard framework, Infosys began measuring its performance for key
clients not only on project management and client satisfaction, but also on
repeat business and anticipating clients’ future strategic needs.
The balanced scorecard helped successfully steer the transformation of
Infosys from a technology outsourcer to a leading business consultancy.
From 1999 to 2007, the company had a compound annual growth rate of
50%, with sales growing from $120 million in 1999 to more than $3 billion
in 2007. Infosys was recognized for its achievements by making the Wired
40, Business Week IT 100, and Business Week Most Innovative Companies
lists.
Questions
1. Make a balance scorecard report for Infosys in you own understanding.
2. Suggest measures to prepare balance scorecard for Infosys.
Source:(http://ebooks.narotama.ac.id/files/Cost%20Accounting-A%20Managerial%20Emphasis%20%2814th%20
Edition%29/Chapter%2013%20Strategy,%20Balanced%20Scorecard,%20and%20Strategic%20Profitability%20An
alysis.pdf)

1. 7-S of McKinsey Framework are structure, strategy,

systems, skills, style, staff and shared values. The
model is most often used as an organizational
analysis tool to assess and monitor changes in the
internal situation of an organization.
2. A balanced scorecard is a performance metric used in
strategic management to identify and improve
various internal functions of a business and their
resulting external outcomes.

SUMMARY
 Techniques of portfolio analysis have their greatest applicability in
developing strategy at the corporate level. It charts and characterizes the
different businesses in the organization's portfolio and helps in determining
the implications for resource allocation.
 The Boston Consulting Group Matrix (BCG Matrix) is the best-known
portfolio-planning framework. The GE/Mckinsey Business screen is
another well-known portfolio framework, but it is a more complex version
of the BCG matrix.
 The aim of these techniques is to develop growth strategies for adding new
products and businesses to the portfolio, and decide which businesses or
products should no longer be retained.

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Notes  General Electric company has developed a 3 x 3 (9) business portfolio

matrix in the 1970s with the help of McKinsey & Company (also called GE
Business Screen or McKinsey Screen).
 Industry attractiveness is measured by a number of factors like size of
market, market growth rate, industry profitability, competitive intensity
cyclicality, economies of scale, technological requirements, etc.
 Relative business strength is rated considering a number of factors such as
market share, profit margins, ability to compete on price and quality,
knowledge of customer and market competitive strengths and weaknesses,
technological capability and calibre of management.
 Both the dimensions (industry attractiveness and relative business strength)
are further divided into three zones having nine cells.
 The shaded cells at the upper left include the strong SBUs in which the
company should invest and grow.
 The diagonal cells contain SBUs that are medium in overall attractiveness.
The company should maintain its level of investment in these SBUs.
 The three shaded cells at the lower right indicate SBUs that are low in
overall attractiveness. The company should seriously think of harvesting or
divesting those SBUs.
 The Balanced Scorecard (BSC) moves beyond the traditional goals of
income, cash flow and financial ratios.

KEYWORDS
Strategy: A set of decisions and actions aimed at gaining a sustainable
competitive advantage.
Structure: The organisation chart and associated information that shows who
reports to whom and how tasks are both divided and integrated.
Systems: The flow of activities involved in the daily operation of a business,
including its core processes and its support systems.
Style: How managers collectively spend their time and attention and how they
use symbolic behaviour. How management acts is more important than what
management says.
Staff: How companies develop employees and shape basic values.
Shared Values: Commonly held beliefs, mindsets and assumptions that shape
how an organisation behaves – its corporate culture.
Skills: An organisation’s dominant capabilities and competencies.
Balanced Scorecard: The Balanced Scorecard is a strategic planning and
management tool used to align business activities with the vision and strategy
of the organisation, improve internal and external communications, and
monitor organisational performance against strategic goals.

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SELF-ASSESSMENT QUESTIONS Notes

Short Answer Questions

1. Explain the nine cell GE Matrix.
2. What do you understand by SBU?
3. What are the factors affecting market attractiveness?
4. What are the factors affecting the business strengths?
5. What is BCG matrix?
6. What are the low industry promises?
7. What is an entry barrier?
8. What is segmentation?
9. Explain the distribution structure.
10. Describe the technology development.
11. What is balance scorecard?
12. What is customer focus?
13. What is employee focus?
14. Explain the McKinsey 7-S model.
15. What is strategy?
16. What do you understand by the structure?
17. What is system?
18. What is style?
19. What is shared values?
20. What are the skills?

Long Answer Questions

1. How does the GE Business Screen differ from the BCG Matrix?
2. Explain the role of behavioural considerations of McKinsey 7-S
framework.
3. A multinational company with a diversified portfolio consisting of steel,
automobiles, Information Technology, chemicals, and tea businesses wants
to chalk out a blueprint for success for the next five years. How can you
assist the company in preparing such a strategic plan?
4. Describe the GE 9Cell Matrix in detail.
5. Explain the McKinsey 7-S framework with their components.

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Notes 6. Describe the concepts of balance scorecard in detail.

7. Explain the advantages and the disadvantages of the balance scorecard.
8. How you will prepare a balance scorecard for a company? Explain it with
relevant example.
9. At present time, how companies are using of adopting McKinsey 7-S
model? Explain.
10. What are the different measures of the balance scorecard?

FURTHER READINGS

Robbins, S.P. (2010), Organization Theory, Prentice Hall, NJ

Gerry Johnson, (2011), Exploring Corporate Strategy, Pearson,
New Delhi
Hill, G.W.L. & Jones, G.R., (2009), Strategic Management,
Biztantra, New Delhi
Haberberg, A. & Rieple, A. (2008), Strategic Management,
Oxford Press, New Delhi

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Notes
UNIT IV
LESSON 11 - STRATEGY IMPLEMENTATION

CONTENTS
Learning Objectives
Learning Outcomes
Overview
11.1 Resource Allocation
11.1.1 Types of Resources
11.1.2 Means of Resource Allocation
11.1.3 Problems in Resource Allocation
11.2 Strategy Implementation Process
11.2.1 Nature of Strategy Implementation
11.2.2 Key Issues in Strategy Implementation
11.2.3 Steps Involved in Strategy Implementation
11.2.4 Institutionalisation of Strategy
11.2.5 Barriers to Strategy Implementation
11.3 Organisational Structure
11.3.1 Functional Organisational Structure
11.3.2 Production or Divisional Structure
11.3.3 Strategic Business Unit Structure
11.3.4 Matrix Organisational Structure
11.3.5 Team Structure
11.3.6 Network Organisational Structure
11.3.7 Free Form Organisational Structure
Summary
Keywords
Self-Assessment Questions
Further Readings

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Notes LEARNING OBJECTIVES

After studying this lesson, you should be able to:
 Understand the concepts of resource allocation
 Describe the strategy implementation process
 Explain the strategic organizational structure

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 define resource allocation
 determine problems in resource allocation
 explain strategy implementation process
 recall steps involved in strategy implementation
 design organisational structure and analyzing matrix organisational
structure

OVERVIEW
Let us first review the previous lesson. You have learnt about the various
matrix analysis tools such as GE 9 Cell Matrix and McKinsey’s 7-S
Framework. At the end of the lesson, you have gained knowledge about the
balanced scorecard.
Previously you have studied about resources. In this lesson; you will study
about resources and resource allocation. At the end of the lesson, you will
understand the strategy implementation process and the strategic organisational
structure.
We advise you to learn this lesson carefully. It will give you better
understanding of the strategic resource allocation in an organisation. This
lesson will help you to understand the concepts of the strategy implementation
in a firm.

11.1 RESOURCE ALLOCATION

Resources are inputs into a firm’s value creation process. By developing and
deploying these inputs effectively, a firm is able to deliver value to customers.
It is worth noting here that mere possession of a certain type and class of
resources does not bring in any value to a firm. It is only when they are put to
some productive use that value follows.

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11.1.1 Types of Resources Notes

Resources can be categorised as tangible and intangible.

Tangible Resources
Tangible resources are the physical assets of a firm such as plant, machinery,
buildings, etc. They have a physical presence. They are visible and hence easy
to identify and evaluate.

Example: Production facilities (location of existing production

facilities, current production processes), marketing facilities, IT systems, etc.

Example: They might entice talent away from rivals in industries such
as sports, entertainment, banking, etc.

Intangible Resources
Intangible resources are largely invisible and difficult to quantify. It is not easy
for competitors to understand, purchase, imitate or substitute such resources,
which cannot be seen directly. Unlike tangible assets, their use can be
leveraged.

Example: Someone like Ratan Tata or N R Narayana Murthy might be

undoubtedly regarded as a strategic asset.

Example: Sometimes, it may be possible to lure research teams away

from rivals, but delivering results through such people is linked to many other
factors such as team spirit, culture of the organisation, encouragement from the
top, proprietary software, etc.
While implementing strategies, the scarce resources of a firm (financial,
physical, human, technological) need to be allocated carefully, according to a
plan. In this regard, one can follow a top-down or a bottom-up approach. In a
top-down approach, resources are allocated through a process of segregation
down to the operating levels. The Board of Directors, Managing Directors and
other members of top management typically decide the requirements of each
subunit and distribute resources accordingly. In the bottom-up approach,
resources are distributed after a process of aggregation from the operating
level. A mix of these two may also find favour in fairly large, multi-plant
organisations.

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Notes 11.1.2 Means of Resource Allocation

There are several ways of allocating resources in a systematic way, namely:

Strategic Budget
Keeping the assumptions made before the formulation of a budget, divisional
heads of SBUs and functional managers focus their efforts on allocating funds,
through an interactive exercise, taking the opinions of all those who matter the
most. The external influences and their likely impact and the internal
capabilities of a firm, are also kept in mind in this joint budgeting effort
(hence, the name strategic budget).

Capital Budget
The primary purpose of a capital budget is to maximise the long-term
profitability of a firm while deploying resources. Various techniques like
internal rate of return, payback period and net present value are used to find
where a rupee invested would earn maximum returns.

Performance Budget
Here the basic purpose is to focus attention on the work to be carried out,
services to be rendered rather than things to be spent for or acquired. It
concentrates attention on physical aspects of achievement. Here, there is not
really a work plan but also a work plan in terms of work done. It takes a
systems view of activities trying to associate the inputs of the expenditure with
the output of accomplishment in terms of services, benefits, etc.

Zero-based Budget
The key element of ZBB is future-objective orientation of past objectives.
Instead of taking the last year's budgets and adjusting them for finding out the
future level of activity and preparation of budget there from, ZBB forces
managers to review the current, on-going objectives and operations. ZBB is,
therefore, a type of budget that requires managers to re-justify the past
objectives, projects, and budget and to set priorities for the future. The essential
idea of ZBB that differentiates from traditional budgeting is that it requires
managers to justify their budget request in detail from scratch, without any
reference to the level of previous appropriations. It tantamounts to
recalculation of all organisational activities to see which should be eliminated,
funded at a reduced level, funded at the current level or increased finances
must be provided.
ZBB process runs into the following cardinal sequence of steps:
Decision Package
Each discrete department’s activity and programme is broken-down into a
decision package. Decision package summarises the scope of work,
requirements, anticipated benefits, time schedule, and expected consequences

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if the element is not performed, etc. Thus, decision package provides a running Notes
commentary of all the activities in a particular project.

Ranking
Each decision package is ranked against packages for other proposed projects
or activities, and the projects that are running (operating) currently. Decision
packages are ranked according to their benefits to the total organisation during
the budget period.
Resource Allocation
The above ranking leads to ‘organisation-wide’ list of prioritised and priced out
decision packages built from zero-base or ground up. Resources are then
allocated to the packages according to the preferential rank in the organisation.
When properly executed, the zero-base budgeting provides an opportunity for
the managers to carefully examine, evaluate and prioritise each organisational
activity and see whether modification, continuance or termination is feasible.

Resource allocation is concerned with both the identification of

resource requirements and how those resources will be deployed to create
the competencies needed to undertake the particular strategies.

11.1.3 Problems in Resource Allocation

The following problems are related to the resource allocation:
 Resource allocation, in actual practice, is not an easy job.
 Strategists should prioritise tasks that require maximum attention initially
taking political relations, overall objections, external influences, etc., into
account.
 Each department may fight for garnering a maximum share of the scarce
resources that are available leading to destructive conflict and bitter
personality clashes.
 External influences such as government regulations, shareholder
preferences for higher dividends, credit restrictions imposed by financial
institutions also affect the process of resource allocation considerably. To
avoid trouble at a later stage, strategists need to prioritise everything and
decide budgetary allocations in the initial stages.
 Many ‘budget battles’ could be avoided if targets, resource sharing,
prioritisation and midway revisions, etc., are decided in an atmosphere of
close cooperation and participation, especially at departmental and
divisional levels.
 Allocating resources to specific divisions and departments alone does not
mean successful strategy implementation.

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Notes  There are other troublesome issues to be looked into more closely. After
resolving the knotty issues concerning resource allocation, the strategists
should look for a suitable organisational structure for implementing
strategies.

Learning Activity
Prepare a detailed note on your understanding about the resources
and the resource allocation. Suppose you are the Managing
Director of your company and responsible for strategic
management of your company. You need identify your
company’s resources and allocation of it. Prepare your note which
must be based on identification and allocation of your company’s
resources.

11.2 STRATEGY IMPLEMENTATION PROCESS

Strategy implementation is the process through which a chosen strategy is put
into action. It is concerned with the design and management of systems to
achieve the best integration of people, structures, processes and resources in
reaching organisational objectives. Strategy implementation is a crucial issue
because any strategy is as good as the effort behind it to move it forward.
Successful strategy implementation requires support, discipline, motivation and
hard work from all managers and employees. More importantly, it requires a
suitable organisation structure to translate ideas into concrete action plans. In
spite of having all these supporting elements, strategy implementation, on the
most occasions proves to be a tricky job. Creating a 'fit' between firm's goals
and its other activities proves to be a tough exercise. Multifarious reasons
could be cited in support of this statement. Strategy is dependent on many
variables internal as well as external and to compound the problem further,
there are countless, interrelated change factors that could upset managerial
calculations overnight. As change factors interrelate, changing only one or two
things seldom brings any significant overall organisational change. There are
certainly no magic bullets to assist managers in bringing about organisational
change either automatically or slowly.
 Evaluate the strategic plan. The first step in the implementation process is
to step back and make sure that you know what the strategic plan is.
 Create a vision for implementing the strategic plan. This vision might be a
series of goals to be reached, step by step, or an outline of items that need
to be completed.
 Select team members to help you implement the strategic plan. Make sure
you have a team that “has your back”, so to speak, and understands the
purpose of the plan and the steps involved in implementing it.

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 Schedule meetings to discuss progress reports: Present the list of goals or Notes
objectives, and let the strategic planning team know what has been
accomplished.

Strategy Implementation Process

Evaluate the Strategic Plan

Create a vision for implementing the

Strategic Plan

Select team member to help you implement

the Strategic Plan

Schedule meeting to discuss progress report

Involve the upper level management

where appropriate

Figure 11.1: Strategy Implementation Process

 Involve the upper management where appropriate. Keep the organization’s
executives informed on what is happening, and provide progress reports on
the implementation of the plan.

11.2.1 Nature of Strategy Implementation

The essential nature of strategy implementation may be stated thus:

Action Focus
Implementation demands translation of formulated strategies into actionable
plans.

Involvement
To translate the rhetoric into concrete plans, you require commitment from
people working at various levels. They must whole-heartedly extend their
cooperation and support to the implementation process at every stage.

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Notes Moreover, you need people with requisite skills and right attitudes to put
everything on track.

Blessings of Top Management

Leadership support is necessary for achieving the best fit between what has
been planned and what has been put into action.

Coordination
To connect people, processes, structure, technology, environment, etc., and to
bring about change within an organisation, overcoming barriers is not an easy
job. You need to integrate everything in order to obtain best results.

11.2.2 Key Issues in Strategy Implementation

Strategy implementation has the following key issues:
 The successful implementation of strategy requires an effective
organisation.
 People working within a firm should know how their actions interrelate
with the actions of others to support and execute the firm's strategy.
 Without a structural framework, the roles of management and employees
cannot be drawn-up clearly leading to confusion, duplication of efforts and
chaos at various levels.
 Apart from a sound organisational structure, the services of talented and
capable leaders are also required to translate corporate vision into a
connectable reality. The principal task of leaders then would be to see that
the various elements of an organisation fit together and make logical sense.
 In the race to get ahead, of course, they should not sacrifice ethical and
social values.
 Functional plans and policies need to be formulated carefully and
implemented with active support from employees at various levels. These
should help employees to find solutions to several operational issues that
need to be resolved on a day-to-day basis.
 The political factors that come in the way of effective implementation of
strategies should also be understood properly.
 Every attempt should be made to remove the irritants first before minor
problems turn into major emergencies at a later date.
 Finally, the strategies that are formulated by top management, keeping in
view the changes in internal as well as external environment, guide the
manner in which they are translated into action. Here, leadership comes to
play a big role.

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11.2.3 Steps Involved in Strategy Implementation Notes

The following steps are involved in strategy implementation:
 Institutionalisation of strategy
 Formulation of action plans
 Project related issues in implementation
 Procedural issues in implementation
 Resource mobilisation and allocation
 Structural issues in implementation
 Behavioural issues in implementation
 Functional strategies operations, finance, marketing and HRM required for
implementation
 Leadership issues in implementation
 Strategy evaluation and control

11.2.4 Institutionalisation of Strategy

 In order to deliver best results, it is essential to institutionalise the strategy.
People must support the chosen strategy wholeheartedly instead of treating
it as a personal strategy chosen by the strategist.
 People must own it, in every sense of the term, rather than feeling that it is
imposed on them from ‘above’ and the strategist must do everything
possible to create that feeling in people.
 This, of course, requires open and honest sharing of relevant information, a
good organisational culture encouraging people to put their best foot
forward.
 The beneficial aspects of a chosen strategy must be communicated to
people in a sincere way presenting facts clearly.
 Doubts and objections raised must be put to rest and every attempt must be
made to gain acceptance from people. Debate and discussion would help
clear the fog in most cases.
 Appropriate operating plans supported by an appropriate organisational
structure with clear-cut guidelines must be put in place, ensuring clarity
and consistency. The action plans might cover areas such as purchasing
new equipment, hiring additional staff, developing new process, etc. The
type of action plan, in any case, would depend on the nature of strategy.
 While formulating the strategy, the strategist should check out the
objectives and the resources required in carrying out the action plans. Well-
conceived procedures and rules must be laid down so as to ensure
uniformity and consistency in actions.

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Notes  The key result areas that are critical to the successful implementation of a
strategy must be taken care of. Resources must be put to best use keeping
the objectives in mind.
 Periodic reviews must also be made to see whether the chosen strategy is
relevant in the light of rapid environmental change.

11.2.5 Barriers to Strategy Implementation

Strategy implementation is a tough job. As research evidence indicates, it may
be easy to formulate strategies but to translate them into meaningful actions
proves to be a very challenging exercise due to several complicated factors that
come in the way, such as:
 Poor or vague strategy
 Inability to manage change
 Refusal to share information with people at various levels
 Unable to make people accountable for results
 Working at cross-purposes without any clear guidelines
 Lack of support and whole-hearted commitment from people
 Poor coordinating and integration efforts

11.3 ORGANISATIONAL STRUCTURE

A suitable organisational structure is essential to implement strategies and
achieve stated goals. The manager generally determines the work activities to
get the job done, writes job descriptions, puts people into groups and assigns
them to superiors. He then fixes goals and deadlines and establishes standards
of performance. Operations are then controlled through a reporting system. The
whole structure takes the shape of a pyramid. Thus, the term 'organisational
structure' describes the framework of an organisation in which individual effort
is coordinated. It is nothing but a chart of relationships. To be effective, the
basic structure is governed by a set of rules and regulations, reward-
punishment systems, information networks, control procedures, etc. The
structural components are generally designed, keeping the requirements of
organisational members in mind (where they are encouraged to take up the
assigned jobs, meet the expectations of superiors, earn the rewards and keep
the organisation going). Structure, thus, is a means to an end and not an end in
itself. It is there to facilitate the smooth translation of organisational plans,
strategies and policies into concrete action. Without a proper fit between
strategy and structure, there will be chaos and confusion in the organisation.
Various parts do not move in harmony. Delays, duplications and waste motions
may occur with frustrating regularity. It may ultimately lead to improper use of
facilities and failure to achieve goals. Research evidence also suggests that
structure follows strategy.

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Notes

Generally speaking, organisations perform more effectively when

they implement strategy with the most appropriate structure, while
evaluating whether an organisation is properly structured and stuffed to
meet the requirements of the strategy.
It is, more or less, agreed now that changes in strategy lead to changes in
organisational structure. Structure should be designed to facilitate the strategic
pursuit of a firm and, therefore, follows strategy. Without a strategy or reasons
for being (mission), structure is not important. Institutionalising a strategy
definitely requires a strategy-structure fit. Functional structure is useful when
the firm begins operations at a single site. The emphasis here is on increasing
volumes. As business expands, the firm begins to perform the same function in
different locations. Such geographical dispersal of activity calls for inter-unit
coordination. Vertical integration is the next growth strategy. Firms operate
within the same industry but carry out additional functions. In the final phase,
firms indulge in product diversification resulting in a large, multi-divisional
structure. Current research indicates that the greater the diversity among the
businesses in multi-business firms, the greater is the necessary degree of
decentralisation and self-containment. Four important guidelines can be
advanced in this regard:
 A single product firm or single dominant business firm (where one business
accounts for 70-95% of sales) should employ a functional structure.
 A firm in several lines of business that are somehow related should employ
a multi-divisional structure.
 A firm in several unrelated lines of business should be organised into
Strategic Business Units (SBUs).
 Early achievement of a strategy-structure fit can be a competitive
advantage.
While trying to relate the structure to strategy, managers have a wide choice
based on how authority relationships are prescribed, how departments are
created, etc. The design choices basically revolve around the following types:
the functional structure, the divisional structure, the profit and matrix forms,
the emerging structures such as teams, virtual teams and boundary less
organisations.

11.3.1 Functional Organisational Structure

In the functional structure, activities are grouped together by common function.
Each functional unit has a dissimilar set of duties and responsibilities. In a
medium size business, functional structure would mean a set of departments
such as production, finance, marketing, personnel, advertisement, sales, market
research, etc.

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Notes
Chief Executive Officer

Production Sales Finance

Figure 11.2: Simplified Functional Structure

11.3.2 Production or Divisional Structure

Product or divisional structure (known as divisionalisation) is particularly
adaptable to tremendously large, complex and multi-product organisations. The
organisation here is divided based on product lines, type of customers served or
geographic areas covered. The products which need to be carefully nursed
likewise, customer groups to be served or geographic locations to be nurtured
and skilfully developed will receive prompt and improved attention. Other
products whose life is over may be discontinued. In response to changing
conditions, products can be developed, added or dropped. Divisionalisation
prevents some products from being neglected and others being
overemphasised. Accountability is clear. If the product fails, the
division/product manager is held responsible. Sometimes an organisation may
change its management structure.

Example: The Divisional structure is quite popular in India. Companies

like Hindustan Lever Ltd., ITC, L&T, Siemens and Thermax have been using
this model quite successfully.
Chief Executive Officer (Production)

Manager Automobiles Manager Refrigerators Manager Spare Parts

Figure 11.3: Product or Divisional Structure

11.3.3 Strategic Business Unit Structure

The SBU structure is an extension of the divisional structure. In its most
extreme from, the SBU operates as a separate autonomous organisation and
may periodically send profits to the corporate parent. Each unit will have a
clearly defined strategy, based on its capabilities and overall organisational
needs. The SBU’s autonomy will decrease if profits are lower than the parent
expects. The parent may impose controls at various levels to ward off risks
arising out of independent operations at a different location. Important features
of an SBU include the following:
 Has its own mission with a clear focus on specific products
 Competes with definable groups of competitors

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 Prepares its own integrative plans Notes

 Manages its resources in important areas
 Has a respectable size neither too large nor too small
 Runs the show independently

Figure 11.4: SBU Structure

SBU improves coordination between divisions with similar strategic

concerns and product or market environments. It also increases focus on
products or markets and tightens the strategic management and control of
large and diverse business enterprises.

11.3.4 Matrix Organisational Structure

A permanent organisation designed to achieve specific results by using teams
of specialists from different functional areas in the organisation, is a matrix
organisation. It is actually hybrid structure combining both functional and
product structures in the same organisation. In the matrix structure, specialists
from different functional departments work on projects that are led by a project
manager. The project manager has authority over the functional managers who
are part of his/her team in areas related to the project’s goals. However,
decisions regarding promotions, rewards, annual performance reviews typically
remain the functional manager’s responsibility. To work effectively, both
managers have to be in touch with each other regularly. They need to work in
close coordination, resolving conflicts smoothly.
Table 11.1: Matrix Organisation
Functions Purchase Production R&D Marketing Finance
Manager Manager Manager Manager Manager
Projects
Project A
Manager
Project B
Manager

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Notes Project C
Manager
Project D
Manager
Project E
Manager

Hybrid Structure
It is a combination of both functional organisation and project organisation
structure. On the right hand side of the Table 11.1, you have functional heads
running the show. On the left hand side, you have project managers leading
teams of specialists. Employees have to work under the two bosses
simultaneously.

Top Leadership
The top leader holds the balance of power. He must be willing to delegate
decisions. He must emphasise direct contact and group problem solving at
lower levels so as to promote effective communication throughout the
organisation. He must also see that the power balance is maintained properly.

Functional Heads
The functional heads take care of issues related to their function such as
promotion, salary recommendations, annual reviews, etc. They are mainly
concerned with the operational aspects of their department.

Matrix Bosses
Matrix bosses or project managers have authority over project employees
relative to projects’ goals. They share subordinates in common with other
bosses. They do not have full control over subordinates. The functional head's
responsibilities pertain to functional rules and standards what to do, how to do,
when to do, etc., and review performance periodically. The project manager
acts as an integrator. He/she is required to achieve the specific project by
balancing time, cost and performance. Matrix bosses must also be willing to
face one another on disagreements. Managing highly competent professional
employees demands a great deal of time, patience and skill from project heads.

Matrix Subordinates
Matrix subordinates are often confronted with an agonising choice. They suffer
from what is known as jurisdictional clarity. The dual assignments one
reporting to their functional head and simultaneously working on a specialised
project might cause role ambiguity and career related issues. Matrix
subordinates also known as two bosses managers might have to work under a
tough and demanding functional head and report to a project head that might
encourage them to experiment, innovate and take considerable amount of risk.
Reporting to two bosses (in a matrix form, the unity of command principle is

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violated) can create confusion and a difficult interpersonal situation unless Notes
steps are taken to prevent these problems from arising.

Problem of Unity of Command

In the matrix structure, the matrix subordinates or two bosses’ managers are at
the receiving end, because they have to report to two superiors. This means
prioritising multiple commands (from functional head as well as the project
head one may ask them to run and the other might ask them to go slowly) and
sometimes even receiving conflicting orders.

11.3.5 Team Structure

The term ‘team structure’ refers to the use of teams as a central device to
coordinate work activities. The bureaucratic structure is not suitable for the
most of today’s dynamic organisations. Employees with diverse skills and
experience are required to work together (as teams) to successfully complete
complex projects. As such traditional work areas have given way to more of a
team effort, building and capitalising on the various skills and backgrounds
that each member brings to the team. Team members have a commitment,
purpose, establish specific goals and have the leadership and structure to
provide focus and direction. They are held responsible – individually and
jointly – for results. They rely on each other and develop healthy interpersonal
relations based on trust. They exchange information, resources, feelings and
thoughts freely and openly. The point is that teams do go beyond traditional
formal work groups by having a collective synergistic (the whole is greater
than the sum of its parts) effect. The basis of these work teams, then, is driven
by the tasks at hand. Involving employees gives them an opportunity to focus
on the job goals. The freedom that they enjoy empowers them to develop the
means to achieve the desired ends.

11.3.6 Network Organisational Structure

The most recent approach to divisionalisation extends the idea of horizontal
coordination and collaboration beyond the boundaries of the organisation. The
network structure (a more dynamic and flexible version is also known as
virtual or modular organisation) means that the firm subcontracts many of its
major functions to separate organisations and coordinates their activities from a
small headquarter organisation. The services are outsourced to separate firms
that are connected electronically to the central office. Sub-contractors flow into
and out of the organisation, depending on the changing needs of a firm.
Another novel outcome of the network is the virtual network organisation
which is a continually evolving group of companies that unite temporarily to
exploit specific opportunities or attain strategic advantages and then disband
when objectives are met. A virtual or modular organisation is composed of
temporary arrangements among members that can be assembled and
reassembled to meet a changing competitive environment.

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Notes
Design Company Accounts Processing
(Australian) Company (India)

Core Company
(Hub)

Transportation Manufacturing Distribution

Company Company (China) Company

Figure 11.5: Network Organisational Structure

Data and information sharing takes place over the net (electronically) among
participating companies. Unlike the network structure in which the hub
organisation maintains control over work processed by various sub-contractors,
in a virtual unit each independent company gives up some control to
temporarily become part of a larger network.

Example: Companies like Bata have succeeded by concentrating on

their core strengths in design and marketing and contracting all their footwear
manufacturing to outside suppliers.

11.3.7 Free Form Organisational Structure

A free form of organisation is purely an adhocratic structure. It has no
boundaries. It is flexible, adaptive and is built around special problems to be
solved by a group of experts possessing diverse professional skills. These
experts have decision-making authority and other powers. The adhocratic
structure is usually small, with an ill-defined hierarchy. Such a design is
suitable for high technology and high growth organisations where an arranged
and inflexible structure may be a handicap.

Example: Jack Welch is famous for having using the boundaryless

structure for making GE more efficient and effective. A boundaryless
organisation, according to Jack Welch was an open, anti-parochial
environment, friendly toward the seeking and sharing of new ideas, regardless
of their origin. The purpose of this initiative was to remove barriers between
various departments as well as between domestic and international operations.
The following figure illustrates an adhocratic type of organisational structure.

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Notes

Figure 11.6: Free Form Organisational Structure

Advantages of Free Form Organisational Structure

The free form organisation offers some significant advantages to firms which
have a genuine hunger for growth and diversification.
 It is highly flexible and dynamic and can be followed in order to suit the
unique requirements of each project.
 There is very little focus and emphasis on positions, departments and
divisions. The focus is on getting the project completed on schedule as per
the requirements of the customer. Pooling of talent and expertise is the
biggest worry here.
 Authority is not pinned down to specific positions. It is passed on to people
who matter most, who can deliver results.
 People are expected to slip into roles that are not clearly defined. They
need to perform anything and everything, depending on the demands made
by a specific problem. Role clarity is missing but in its place, people are
greeted with an exciting opportunity to do things on their own. They need
to meet the deadlines, schedules and expectations by doing everything
possible. It is a question of converting a pious dream into a concrete reality.
 Communication can flow in any direction. The primary focus is on making
people realise the importance of working in teams and maintaining friendly
relations. In place of commands and instructions, you have people trying to
reach out to others wherever they are, through open, transparent and
friendly communications.

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Notes As can be seen from the above, the free form of organisation is suitable for
industries which operate in dynamic settings, marked by rapid change where
decisions have to be taken quickly.

Learning Activity
Prepare a detailed note on organisational structure and its various
types. Your note must be based on a company of your choice.

Bharat Petroleum Corporation Ltd.

B urmah Oil Refineries Ltd. was incorporated in 1952 as a joint

venture between Burmah Oil Company, UK and Shell Petroleum
Company by an agreement with the Indian Government to set up a
refinery at Mahul in Mumbai, which went on stream in 1957. In 1976 the
Indian Government nationalised the petroleum industry and acquired 100%
equity in Burmah Oil Refineries and named it Bharat Refineries Ltd. The
name was later changed to Bharat Petroleum Corporation Ltd. (BPCL) in
1977.
BPCL was an integrated refining and marketing company. It markets a
diverse range of products from petrochemicals, solvents, specialty
lubricants, aviation fuel and LPG. The Mahul refinery had a capacity of 6
million tons per annum and it operated at 127% of the capacity in the year
ending March 2000. It also had an installed capacity of 98000 MT of
benzene, 17600 MT of Toluene, 90000 MT of lubricants and 10950 MT of
sulphur. It was the first Indian industrial unit to obtain ISO 9002 and ISO
14001 certification and the only Indian Refinery (and one of the 34
refineries worldwide) to achieve a Level 7 on the International Safety
Rating System (ISRS).
BPCL’s retail network was the third largest in the country with around
4,500 retail outlets (petrol pumps/gas stations), around 950 dealerships for
kerosene and light diesel oil, and 1200 LPG distributors. It had 22 LPG
bottling plants, 3 lube blending and filling plants, 6 port installations, 13
aviation service stations, 67 company operated depots and 23 dispatch units.
It completed a 250 km long cross-country pipeline between Mumbai and
Manmad in March 1998. It had a market share of around 22% in petroleum
products and 20% in LPG. In 2000, the total sales grossed over 36,000 crore
of rupees and 18.86 million tons of petroleum products. Industrial customers
contributed to 27% of sales, LPG 7%, aviation fuel 3% and lubricants 0.5%
of the total sales. The refinery and the marketing infrastructure are
considered the best in the industry and most efficient.
Contd...

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Designing the New Structure Notes

There was a clear consensus among the change management team, top
management team and the consultants that the functional structure would
not be able to sustain initiatives taken to create the customer centric
organisation. The obvious solution was to create customer centric Strategic
Business Units (SBUs). The change management team with assistance of
the consultants considered various options. The redesign process took about
a month. The CMD was personally involved in this. To prevent any
interference from day to day activities he officially took leave and presented
himself as a resource person. The change team discussed the various choices
in structure with all the stakeholders. There were apprehensions among
senior managers regarding the new structure and no consensus emerged on
the new structure. Politicking and power plays were observed, with each
function trying to retain the existing status in terms of power and control.
Finally the CMD personally called for a meeting of the functional heads and
other senior managers. Asking the group to discuss, negotiate and come
with a concrete solution acceptable to everyone, he locked the room and
waited outside. Finally a design was approved that was acceptable to all.
The final structure was not the optimum structure as envisioned by the
change team but one acceptable to all the members of the top management
team.
Implementation
The new structure was rolled out in phased manner to ensure effective
implementation. The new structure was first implemented in the LPG SBU.
Based on the experience, the new design was implemented across the
organisation with necessary modifications. Further, in each of the proposed
SBUs specific regions were identified and the new structure was
implemented to verify the smooth functioning before full implementation.
Organisational Structure
The older structure was functionally organised. There were mainly four
functions (refineries, marketing, finance and personnel) each headed by an
executive director reporting to the CMD. Other support departments like
corporate affairs, legal, audit, vigilance, coordination and company
secretary were directly under the CMD. The Director refinery was in charge
of refinery, corporate planning, JV refineries and special projects. Other
than corporate finance and marketing finance EDP was also under the
Director finance. In marketing, there were different departments for retail,
industry, LPG, lubricants and aviation segments. Corporate communication
was also under Director marketing. The whole of India was divided into
four regions and further into 22 divisions. Each region was headed by a
Regional Manager who was in charge of all activities within the region and
reported to the Director marketing. Each region had a manager in charge of
each of regional personnel, regional engineering, regional industrial
Contd...

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Notes customers, regional retail, and regional finance. Regional LPG was under
regional industrial customers. The division was the responsibility of the
Divisional Manager reporting to the Regional Manager. He had a manager
each for sales, operations and engineering. Each of these was responsible
for sales, depots and engineering respectively for all the customer segments.
Across the marketing function, except for the corporate departments (LPG,
industrial customer, etc.) specifically looking after a customer segment,
every individual and role is focused on multiple customer segments. For
example any strategy addressing the industrial customers originates from
the Corporate Department (Industrial Customer), goes via the Director
Marketing, Regional Manager, Divisional Manager to the Sales Officer. All
of them are responsible for multiple customer segments like retail, LPG,
industrial, etc. and deal with different classes of customers. Hence, there
was very low customer awareness in terms of the unique needs of the
different customer segments, with no single individual at the operational
level having clarity on any single customer segment. Moreover, the
marketing strategy was formulated by people who were far from the
customer with very low understanding of the customer they were targeting.
The implementers were responsible for diverse customers with a low
understanding of the logic of these strategies meant for each customer
segment. Thus, the old structure had created a bottleneck between the
strategy formulators and implementers in terms of the regional structure,
and between the field staff and the corporate offices and refinery. Activities
of a business process are spread out across different functions and levels of
hierarchy, engaging many individuals. There was a long chain of non-value
adding linkages between any two activities targeting a business/customer.
For example, when an industrial customer gives a special order of lubes to
the sales officer, the corporate lubes purchases the base oil, plant blends it,
S&D packs it and the sales officer sells it. The Sales Officer would
communicate the order to the Divisional Manager, who passes it on to the
Regional Manager. Then the order would be routed to the Corporate Lubes
for processing. Everyone involved in the activities of this process belong to
different functions and hierarchy levels. This long chain of communication
had led to a lack of customer orientation, low awareness of customer needs
and expectations and slow response.
New SBU Structure
The new structure was focused on the business processes and the customer.
The new structure at the top management level is the same. Five SBUs –
Retail, Lubes, Industry/Commercial, LPG and Aviation are customer-
centred SBUs and come under the director (marketing). The sixth SBU,
Refinery along with two new departments IT & Supply Chain and R&D are
under the director (refineries). Each SBU would have its own HR, IS,
finance, logistics, sales, engineering, etc. The number of layers in the
organisation was reduced to four from six or seven. The major change is the
Contd...

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introduction of the territories covering a smaller geographical area and Notes

focusing on specific customer segments. In retail SBU the new structure had
66 territories reporting to the four regional offices, whereas in the earlier
structure there were only 22 divisions which catered to all segments. In
other SBUs the regional office was removed and territories were designed to
directly report to the SBU heads. Each territory team leader was responsible
for sales in the territory only for a specific product. The territory structure
was designed to enable the field staff to focus on specific customer
segments. Authority was also delegated down the hierarchy and decision
making pushed to the lowest possible levels. Decisions earlier taken at the
regional level were taken now at the territory level. Further authority was
delegated to the role and not the hierarchy level. Administrative offices have
been moved to supply locations that consist of 125 terminals for main fuels
and 35 LPG bottling ones. In LPG SBU head office there are only nine
personnel and across the territories even managers at senior positions have
been forced to get business. The new design incorporated recalibration of
roles and responsibilities and redeployment of more than two thousand
people (around one fifth of total employee strength) across the organisation.
It created new roles at the front effectively using redundant manpower to
increase customer interface and interaction. Since the corporate and support
functions are now located within the SBUs the new design included lateral
linkage mechanisms. Governance Councils, Process Councils, and Task
forces (to address specific organisational issues) were the mechanisms for
integrating the different parts of the organisation.
Some salient features of new structure were:
 Highly empowered work force
 Decentralised decision making
 De-linking of authority from hierarchical levels
 Orientation towards internal and external customers
 Regular market research and customer surveys
 Conscious brand building efforts
Addressing the participants of a Top Management Program at IIM
Ahmedabad Mr Sundararajan stated “One can be prepared to face the tiger
but we will never know how one will behave unless one faces the tiger. I
feel we are prepared for full deregulation but we will know how much only
when it becomes a reality.”
Questions
1. Prepare a detailed note on the SBU structure for BPCL.
2. Suggest measures to prepare and formulate the SBU structure for BPCL.
Source: http://dspace.iimk.ac.in/bitstream/2259/400/1/BPCL_IIMK_Case.pdf

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Notes
1. Sustainable competitive advantage is achieved by
continuously developing existing and creating new
resources and capabilities in response to rapidly
changing market conditions.
2. Organizations need to be efficient, flexible,
innovative and caring in order to achieve a
sustainable competitive advantage.

SUMMARY
 Resources are inputs into a firm’s value creation process. By developing
and deploying these inputs effectively, a firm is able to deliver value to
customers. It is worth noting here that mere possession of a certain type
and class of resources does not bring in any value to a firm.
 Tangible resources are the physical assets of a firm such as plant,
machinery, buildings, etc. They have a physical presence. They are visible
and, hence, easy to identify and evaluate.
 Intangible resources are largely invisible and difficult to quantify. It is not
easy for competitors to understand, purchase, imitate or substitute such
resources, which cannot be seen directly. Unlike tangible assets, their use
can be leveraged.
 While implementing strategies, the scarce resources of a firm (financial,
physical, human, technological) need to be allocated carefully, according to
a plan. In this regard, one can follow a top-down or a bottom-up approach.
In a top-down approach, resources are allocated through a process of
segregation down to the operating levels.
 Strategic budget keeping the assumptions made before the formulation of a
budget, divisional heads (SBUs) and functional managers focus their
efforts on allocating funds, through an interactive exercise, taking the
opinions of all those who matter the most.
 The primary purpose of a capital budget is to maximise the long-term
profitability of a firm while deploying resources.
 Resources are then allocated to the packages according to the preferential
rank in the organisation. When properly executed, the zero-base budgeting
provides an opportunity for the managers to carefully examine, evaluate
and prioritise each organisational activity and see whether modification,
continuance or termination is feasible.
 In order to deliver best results, it is essential to institutionalise the strategy.
People must support the chosen strategy wholeheartedly instead of treating
it as a personal strategy chosen by the strategist.

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 Doubts and objections raised must be put to rest and every attempt must be Notes
made to gain acceptance from people. Debate and discussion would help
clear the fog in most cases.
 While formulating the strategy, the strategist should check out the
objectives and the resources required in carrying out the action plans. Well-
conceived procedures and rules must be laid down so as to ensure
uniformity and consistency in actions.

KEYWORDS
Organisational Structure: Organisational structure is the framework in which
the organisation defines how tasks are divided, resources are deployed and
departments are coordinated.
Organising: It is the deployment of organisational resources to achieve
strategic goals.
Departmentation: It is a process of grouping jobs according to some logical
arrangements.
Matrix Structure: Matrix structure is a structure that superimposes a horizontal
set of divisional reporting relationships onto a hierarchical functional structure.
Decision Package: It summarises the scope of work, requirements, anticipated
benefits, time schedule, and expected consequences if the element is not
performed, etc.
Resource Configuration: It is concerned with creating capabilities for the
future by identifying the broad mix of resources and competencies and the
unique resources and core competencies on which competitive advantage will
be built.
Product or Divisional Structure (known as divisionalisation): It is
particularly adaptable to tremendously large, complex and multi-product
organisations. The organisation here is divided based on product lines, type of
customers served or geographic areas covered.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. Define organisational structure.
2. List the important elements of an organisational structure.
3. What do you mean by functionalisation?
4. Name any four forms of an organisational structure.
5. What do you understand by SBU?
6. Explain the important features of a matrix organisation.

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Notes 7. What is a network structure?

8. Explain the major benefits and limitations of a divisional structure.
9. What is the relationship between strategy and structure?
10. Define the product structure.
11. How are strategies activated?
12. How does strategy affect structure?
13. What is a functional structure?
14. Define the matrix structure.
15. Explain the resources.
16. What are tangible resources?
17. What are intangible resources?
18. What is resource allocation?
19. Define the barriers of strategy implementation.
20. Explain the steps of strategy implementation.

Long Answer Questions

1. What do you mean by strategy implementation? What are the important
issues involved in it?
2. “Resource allocation is one of the important processes in an organisation.”
Explain. What are the bases for resource allocation?
3. Explain why organisational structure is so important in strategy
implementation.
4. What do you mean by organisational systems and processes? Explain the
various types of organisational systems.
5. Is it possible for managers to put various elements of information system in
place in order to serve customers in a better way? Why or why not?
6. Would you recommend a divisional structure by geographic area, product,
customer or process for a medium-sized bank in your local area? Why?
7. Explain why successful strategy implementation often hinges on whether
the strategy-formulation process empowers managers and employees.
8. Why do large companies follow the divisional structure of organisations?
Do you think this structural form is superior to that of a functional form?
9. ‘Different organisational forms result from different types of growth’.
Explain.
10. Take the case of an MNC operating in the FMCG sector. What steps should
it take to allocate its resources to different competing divisions? What kind
of problems could be expected to surface during such an exercise? How
can they be dealt with?

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FURTHER READINGS Notes

Hitt M.A., (2011), Management of Strategy, Cengage, New Delhi

David F.R., (2009), Strategic Management, Prentice Hall, New
Delhi
Dess G.G., (2011), Strategic Management, Tata McGraw Hill,
New Delhi
Kortmann Sebastian, (2012), The Relationship between
Organizational Structure and Organizational Ambidexterity,
Springer

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Notes
LESSON 12 - STRATEGIC CONTROL AND
EVALUATION

CONTENTS
Learning Objectives
Learning Outcomes
Overview
12.1 Strategic Evaluation
12.1.1 Importance of Strategy Evaluation and Control
12.1.2 Barriers to Strategic Evaluation
12.1.3 Evaluation Criteria
12.2 Strategic Control
12.2.1 Premise Control
12.2.2 Implementation Control
12.2.3 Strategic Surveillance
12.2.4 Special Alert Control
12.3 Operational Control
12.3.1 VRIO Framework
12.3.2 Value Chain Analysis
12.3.3 PEST Analysis
12.3.4 Gap Analysis
12.3.5 SWOT Analysis
12.3.6 Quantitative Performance Measurements
12.3.7 Benchmarking
12.3.8 Balanced Scorecard
12.3.9 Key Factors Rating
Summary
Keywords
Self-Assessment Questions
Further Readings

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LEARNING OBJECTIVES Notes

After studying this lesson, you should be able to:
 Understand the concepts of strategy evaluation and control
 Describe the strategic control
 Explain the operational control

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 basics of strategic evaluation
 explain importance of strategy evaluation and control
 concept of strategic control and determine implementation control
 define operational control and explain value chain analysis
 recall quantitative performance measurements

OVERVIEW
Let us first review the previous lesson. You have learnt about the resources and
the resource allocation. You have also studied the strategy implementation
process and the strategic organisational structure.
In this lesson, you will study about strategic evaluation and strategic control.
At the end of the lesson, you will familiarise with operational control.
We advise you to learn this lesson carefully. It will give you a better
understanding of the strategic evaluation and control of an organisation. This
lesson will help you to understand the concept of the strategic control in a firm.

12.1 STRATEGIC EVALUATION

Strategy Evaluation and Control (SEC) is the final phase of strategic
management. The basic purpose of strategy evaluation and control is to
determine the effectiveness of a given strategy in achieving the organisational
objectives and taking appropriate corrective actions, whenever required.
Strategy evaluation includes three basic activities: (i) examining the underlying
bases of a firm’s strategy (ii) comparing expected results with actual results
and (iii) taking corrective actions to ensure that performance conforms to
plans.

Strategy evaluation generally operates at two levels: strategic and

operational. At the strategic level, managers try to examine the consistency
of strategy with environment. Whereas, at the operational level, the focus is
on finding out how a given strategy is effectively pursued by the
organisation.

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Notes 12.1.1 Importance of Strategy Evaluation and Control

There are several reasons why a strategy may not produce desired results. The
external factors may not be in tune with the strategy. Competitors may also
spring surprises occasionally with unexpected moves that may create major
gaps in the strategy. Having spent time, effort and money while formulating
strategies; it is therefore, not advisable to leave the implementation of strategy
to chance. Managers need to constantly monitor everything, introduce checks
and balances and carry out mid-course connections at an early stage while
implementing the strategies. SEC helps an organisation in several ways.

Feedback
SEC offers valuable feedback on how well things are moving ahead. It also
throws light on the strategic choice made previously. Most importantly, SEC
tries to closely monitor performance and offer feedback by answering certain
critical questions such as:
 Are we moving in the proper direction?
 Are key things falling into place?
 Are our assumptions about major trends and change correct?
 Are we doing the critical things that need to be done?
 Should we adjust or abort the strategy?
 How are we performing?
 Are objectives and schedules being met?
 Are costs, revenues and cash flows matching projection?
 Do we need to make operational changes?
Reward
SEC helps in identifying the rewarding behaviours that are in tune with
formulated strategies. It helps in pinpointing responsibility for failures as well.
Where people find it difficult to stick to a planned course of action due to
circumstances beyond their control, managers can take note of such things and
suggest suitable rectification steps immediately.

Future Planning
SEC offers a considerable amount of information and experience to decision
makers that can be quite valuable in the formulation of new (often improved)
strategic plans.

12.1.2 Barriers to Strategic Evaluation

There are three types of barriers in evaluation: the limits of control, difficulties
in measurement and motivational problems.

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Limits of Control Notes

It is not easy for strategists to decide the limits of control. Too much control
prevents the managers from taking initiative, experiment with their creative
ideas and gain through calculated risk-taking. On the other hand, when there is
very little control people tend to go off the hook, waste resources without any
fear of punishment and work at cross purposes putting a big question mark on
the very survival of the firm.

Difficulties in Measurement
It is not easy to find measurement techniques that are valid and reliable.
Validity is the extent to which an instrument measures what it intends to
measure (for example, measuring the speed and accuracy of a typist in a typing
test). Reliability is the confidence that an indicator will measure the same thing
every time. “A yardstick that measures me 70 inches tall every time I use it is
reliable”. In the absence of reliability and validity, the control system gets
distorted. It may fail to measure results uniformly or measure attributes that are
not required to be measured. When people are not confident about the
measures used for judgments, they resist the whole process vehemently.

Motivational Problems
Having taken a position while formulating and implementing the strategy,
strategists are often reluctant to admit their mistakes when things go off-the-
track. Instead of setting their own house in order, they tend to shift the blame
on others. This may also prevent them from leaving off unprofitable divisions,
reversing wrong decisions and go in search of more viable alternatives quickly.
There could be problems arising out of not establishing a direct relationship
between performance and rewards. Where rewards are tied to political
considerations and not to performance especially in family-owned concerns
managers are not motivated to put their strategies to close examination. To
avert such a situation; it is always a good idea to invite outsiders into the top
management team and take an objective and rational look at what is going on
inside a firm. When people come to know that their rewards are linked to
performance, they tend to put their best foot forward and deliver results.
These barriers, of course, can be avoided if people at all levels begin to look at
evaluation in a positive manner. To establish truth, several qualitative and
quantitative criteria should be used. Once the criteria are known to everyone, it
becomes easy to find gaps, pinpoint responsibility and imitate mid-course
connections quickly.

12.1.3 Evaluation Criteria

The critical factors that could help in evaluating a strategy may broadly be
classified into two categories: quantitative factors and qualitative factors.

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Notes Quantitative Factors

Quantitative criteria commonly employed to evaluate strategies are financial
ratios, which strategists use to make three important comparisons:
 Comparing the firm’s performance over different periods
 Comparing the firms’ performance to competitors
 Comparing the firms’ performance to industry averages
Some key financial ratios that are particularly useful as criteria for strategy
evaluation are as follows:
Return on Investment (ROI): It is one way of calculating profits in relation to
capital invested. The purpose of ROI is to arrive at per period rates of return on
amounts invested in a project. It is calculated as:
(Gain from Investment – Cost of Investment)
ROI 
Cost of Investment
Return on Equity (ROE): It is also known as return on net worth. It measures
a company’s profitability by showing how much profit it has generated with
the money shareholders have invested. It is calculated thus:
Return on Equity = Net Income/Shareholder's Equity
Net income is for the full fiscal year (before dividends are paid to common
stockholders but after paying dividends to preferred stockholders).
Shareholder's equity does not include preference shares.
Z-score: How do you know when a company is pushed to the wall and is on
the verge of a collapse? To detect any signs of looming bankruptcy, investors
calculate and analyse all kinds of financial ratios: working capital, profitability,
debt levels and liquidity. The trouble is that each ratio is unique and tells a
different story about a firm's financial health. At times they can even appear to
contradict each other. Having to rely on a bunch of individual ratios, the
investor may find it confusing and difficult to know when a stock is going to
the wall. In a bid to resolve this conundrum, NYU Professor Edward Altman
introduced the Z-score formula in the late 1960s. Rather than search for a
single best ratio, Altman built a model that distils five key performance ratios
into a single score. As it turns out, the Z-score gives investors a pretty good
snapshot of corporate financial health. The formula for calculating Z-score for
manufacturing firms is built out of the five weighted financial ratios:
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings before Interest and Tax/Total Assets

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D = Market Value of Equity/Total Liabilities Notes

E = Sales/Total Assets

Strictly speaking, the lower the score, the higher the odds that a
company is headed for bankruptcy. A Z-score lower than 1.8 in particular,
indicates that the company is heading for bankruptcy. Companies with
scores above 3 are unlikely to enter bankruptcy. Scores in between 1.8 and 3
lie in a grey area.
Return on Capital Employed: This is similar to return on assets but takes into
account sources of financing. Capital employed here denotes total assets minus
current liabilities, or fixed assets plus working capital. If one were to include
the average of the opening and closing capital for an accounting period, one
gets what is known as return on average capital employed. Return on capital
employed is a ratio that shows the efficiency and profitability of a company’s
capital investments. It is calculated thus:
Net operating profit after tax
ROCE 
Capital Employed
(Here, net operating profit after tax denotes operating profit or EBIT less tax
less non-operating items.)
Economic Value Added: The goal of all companies is to create value for the
shareholder. But how is value measured? Wouldn't it be nice if there was a
simple formula to figure out whether a company is creating wealth? A growing
number of analysts and consultants think that there is an answer. Like many
economic formulas, the measure Economic Value Added (EVA) is both
intriguingly clever and maddeningly deceptive. Does EVA simplify the task of
finding value-generating companies or does it just muddy the waters? EVA is a
performance metric that calculates the creation of shareholders’ value, but it
distinguishes itself from traditional financial performance metrics such as net
profit and Earnings Per Share (EPS). EVA is the calculation of what profits
remain after the costs of a company's capital – both debt and equity – are
deducted from operating profit. The idea is simple but rigorous: true profit
should account for the cost of capital. According to Stern Stewart, EVA is
based on the concept that a successful firm should earn at least its cost of
capital. Firms that earn higher returns than financing costs benefit shareholders
and account for increased shareholders’ value. In its simplest form, EVA can
be expressed as the following equation:
EVA = Net Operating Profit after Tax (NOPAT) – Cost of Capital
NOPAT is calculated as net operating income after depreciation, adjusted for
items that move the profit measure closer to an economic measure of
profitability. Adjustments include such items as: additions for interest expense

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Notes after-taxes (including any implied interest expense on operating leases);

increases in net capitalised R&D expenses; increases in the LIFO reserve; and
goodwill amortisation. Adjustments made to operating earnings for these items
reflect the investments made by the firm or capital employed to achieve those
profits.
Market Value Added: The market value added method shows the difference
between the market value of a company and the capital contributed by
investors (both bondholders and shareholders). In other words, MVA is the
sum of all capital claims held against the company plus the market value of
debt and equity. MVA is calculated thus:
MVA = Company’s Market Value – Invested Capital
The higher the MVA, the better it is. A high MVA indicates the company has
created substantial wealth for the shareholders. A negative MVA means that
the value of management's actions and investments are less than the value of
the capital contributed to the company by the capital market (or that wealth and
value have been destroyed).
Ratio Analysis: A general technique for analysing performance of a business
or its potential performance is Ratio Analysis. Ratio Analysis involves
calculating ratios for a business or proposed business and comparing them with
ratios of other businesses within the same industry. Ratios involve dividing
numbers from a business' Balance Sheet and Income Statement to create
percentages and decimals. Ratios can be found out by dividing one number by
another number. A ratio is simply a statistical yardstick by means of which
relationship between two or various figures can be compared or measured.
Ratios show how one number is related to another. It may be expressed in the
form of coefficient, percentage, proportion, or rate.

Example: The current assets and current liabilities of a business on a

particular date are $200,000 and $100,000, respectively. The ratio of current
assets and current liabilities could be expressed as 2 (i.e. 200,000/100,000) or
200 per cent or it can be expressed as 2:1, i.e. the current assets are two times
the current liabilities.
Ratio sometimes is expressed in the form of rate.

Example: The ratio between two numerical facts, usually over a period
of time, e.g. stock turnover is three times a year. When existing businesses
apply for a loan, for example, bankers will look at the company's ratios and
compare them to ratios of other businesses within the same industry. This will
determine how “stable” the company is compared to other businesses within
the same industry. Moreover, ratio analysis will assist investors in determining
three things about an existing business: how the business is presently

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performing, how the business has performed in the past and how the business Notes
is performing relative to other business units in the industry.
Following are some commonly used ratios:
 Liquidity Ratios measure a company's abilities to provide sufficient cash to
cover its short term obligations. The most common liquidity ratios include
the current ratio and the quick ratio.
 Activity Ratios indicate how much a company has invested in a particular
type of asset (or group of assets) relative to the revenue the asset is
producing. The most common activity ratios include the average collection
period ratio and the inventory turnover ratio.
 Leverage Ratios measure a company's use of debt to finance its operations.
The most common leverage ratios include debt ratio and debt-to-equity
ratio.
 Profitability Ratios are of great importance to investors since they measure
how effectively a firm's management is generating profits on sales, total
assets and stockholders' investment. The most common profitability ratios
include gross profit margin ratio, net profit margin ratio, return on total
assets ratio and return on equity ratio.

There are some potential problems associated with using

quantitative criteria for evaluating strategies. Firstly, most quantitative
measures are tied to annual objectives rather than long-term objectives.
Secondly, different accounting methods can provide different results on
many quantitative measures. Thirdly, dividing the quantitative measures for
various purposes involves judgments.
For these and other reasons, qualitative criteria are also to be taken into
account while evaluating strategies.

Qualitative Factors
Many managers feel that qualitative organisational measurements are best
arrived at simply by answering a survey of important questions aimed at
revealing important facts of organisational operations. The following list of
questions could be useful for the practicing manager:
 Is the strategy internally consistent?
 Is the strategy consistent with the environment?
 Is the strategy appropriate in view of available resources?
 Does the strategy involve an acceptable degree of risk?
 Does the strategy have an appropriate time framework?
 Is the strategy workable?

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Notes 12.2 STRATEGIC CONTROL

A strategy is built around several assumptions. These are related to the
environmental and organisational factors which are ever changing. Strategies
once formulated are not translated into action immediately. The
implementation process itself, takes a lot of time. During the intervening
period, the changes might occur that have major ramifications for the strategy’s
ultimate success. As a result, the traditional post action controls should be
replaced by some early warning systems that let managers rectify things as the
strategies are implemented. “Strategic Control” is concerned with tracking a
strategy when it is being implemented, detecting problems or changes in its
underlying premises and making necessary adjustments. The most important
purpose of strategic control is to help the top management to achieve
organisational goals through monitoring and evaluating the strategic
management process.
As we have seen, the strategic management process results in an assessment of
organisational environment (environmental analysis), the establishment of
organisational mission and goals (establishing organisational direction), the
development of ways to deal with competition in order to reach these goals and
fulfil the organisation’s mission (strategy formulation), and a plan for
translating organisational strategy into action (strategy implementation).
Strategic control provides feedback that is critical for determining whether all
steps of the strategic management process are appropriate, compatible and
functioning properly.

Strategic Control

Premise Implementation Strategic Special Alert

Control Control Surveillance Control

Figure 12.1: Strategic Control

There are four types of strategic control and these types of strategic control are
discussed below:

12.2.1 Premise Control

As mentioned above, strategy is built around certain assumptions about
environmental and organisational factors. Premise control is designed to check
systematically and continuously whether the premises on which the strategy is
based are still valid. If an important premise is no longer valid, the strategy
may have to be changed.

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Notes
Example: The slowdown in the economy in the late 90s has forced
commercial vehicle manufacturers (Ashok Leyland, TELCO) to trim their
workforce, shift to a 4-day work-week with reduced working hours and initiate
several cost-cutting measures, simultaneously. They did not wait for the
economy to pick up nor continued with their traditional ways of working.
Instead they have tried to take corrective action at the right time taking note of
the futility of continuing with a strategy based on invalid assumptions.
To save time and expenses, managers must pick up only those premises whose
change is likely and would have a major impact on the firm and its strategy.
The responsibility for identifying such key premises and checking on their
continued validity can be assigned to the corporate planning staff.

Premise control helps strategists to reject an invalid premise and

shift their focus towards an alternative that is feasible and advantageous.

12.2.2 Implementation Control

Strategy implementation takes place as series of steps, programmes,
investments and moves that occur over an extended period of time. In order to
implement a strategy resources are allocated, key people are put in place, and
special efforts are made from time-to-time. Implementation control is aimed at
assessing whether the plans, programmes and policies are actually guiding the
organisation towards its predetermined objectives or not. If the resources that
are committed to a project at any point of time fail to benefit an organisation as
envisaged, corrective steps should be undertaken immediately. This way the
organisation can find the success of new product launches, diversification
moves and proceed in a cautious manner. An important method for achieving
implementation control is the milestone review in which all key activities
necessary for implementation of a strategy are identified in terms of events,
major resource allocation or time. After tracking important milestones, a
thorough review of the implementation process is undertaken to find its
continued relevance to achievement of objectives.

12.2.3 Strategic Surveillance

Strategic surveillance aims at a more generalised overreaching control
designed to monitor “a broad range of events inside and outside the company
that are likely to threaten the course of a firm’s strategy”. It is done generally
through a general kind of monitoring based on selected information sources to
uncover events that are likely to affect the strategy of an organisation.

12.2.4 Special Alert Control

A special alert control is the thorough and often rapid reconsideration of the
firm’s strategy because of a sudden, unexpected event.

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Notes
Example: The sudden fall of a government, complete shift in
competitor’s posture, natural calamity, racial or religious riots, industrial
disaster, etc. In the case of such unexpected events, the firm should respond
immediately, and reassess its strategies quickly. Contingency plans and crisis
management teams must be kept ready to handle such situations.

Learning Activity
Prepare a detailed note on your understanding about the ratio
analysis and show its impacts on the financial health of an
organisation. Your note must be based on identification and
calculation of ratio analysis of any company of your choice.

12.3 OPERATIONAL CONTROL

Operational control provides post-action evaluation and control over short
periods. They require systematic evaluation of performance against
predetermined standards. An important issue here is identification and
evaluation of performance deviations with careful attention paid to find the
underlying causes for and strategic implication of observed deviations before
management reacts. Firms generally employ trigger points and contingency
plans for this purpose.
The techniques that are employed for operational control are briefly
summarised below:

12.3.1 VRIO Framework

VRIO framework rests on the premise that a firm can build a sustainable
competitive advantage leveraging on its resources and capabilities that are
valuable, rare and inimitable; and put them to effective usage. It is based on the
following fundamental questions (when the firm is able to find answers to
these questions, it can have a grip over issues relating to operational control):
 Question of Value: “Is the firm able to exploit an opportunity or neutralise
an external threat with the resource/capability?”
 Question of Rarity: “Is control of the resource/capability in the hands of a
relative few?”
 Question of Imitability: “Is it difficult to imitate and will there be
significant cost disadvantage to a firm trying to obtain, develop or duplicate
the resource/capability?”
 The Question of Organisation: “Is the firm organised, ready and able to
exploit the resource/capability?”

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12.3.2 Value Chain Analysis Notes

Firms employ value chain analysis to identify and evaluate the competitive
potential of resources and capabilities. By studying their skills relative to those
associated with primary and support activities, firms are able to understand
their cost structure, and identify their activities through which they can create
value.

12.3.3 PEST Analysis

Another common strategic evaluation technique is the PEST analysis, which
identifies the political, economic, social and technological factors that may
impact the firm’s ability to achieve its objectives. Political factors might
include such aspects as impending legislation regarding wages and benefits,
financial regulations or even the risk of a military invasion in another country.
Economic factors include all shifts in the economy, while social factors may
include demographics and changing attitudes. Technological pressures are also
inevitable as technology becomes more advanced each day. These are all
external factors, which are outside of the firm’s control but which must be
considered throughout the decision-making process.

12.3.4 Gap Analysis

The gap analysis is one strategic evaluation technique used to measure the gap
between the firm’s current position and its desired position. The gap analysis is
used to evaluate a variety of aspects of business, from profit and production to
marketing, research and development and management information systems.
Typically, a variety of financial data is analysed and compared to other
businesses within the same industry to evaluate the gap between the firm and
its strongest rivals.

12.3.5 SWOT Analysis

The SWOT analysis evaluates the organisation’s strengths, weaknesses,
opportunities and threats. Strengths and weaknesses are internal factors, while
opportunities and threats are external factors. This identification is essential in
determining how best to focus resources to take advantage of strengths and
opportunities and combat weaknesses and threats.

12.3.6 Quantitative Performance Measurements

Most firms prepare formal reports of quantitative performance measurements
(such as sales growth, profit growth, economic value added, ratio analysis, etc.)
that managers review at regular intervals. These measurements are generally
linked to the standards set in the first step of the control process.

Example: If sales growth is a target, the firm should have a means of

gathering and exporting sales data. If the firm has identified appropriate
measurements, regular review of these reports helps managers stay aware of
whether the firm is doing what it should be. In addition to these, certain

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Notes qualitative bases based on intuition, judgments, opinions, or surveys could be

used to judge whether the firm’s performance is on the right track or not.

12.3.7 Benchmarking
Benchmarking is a process of learning how other firms do exceptionally high-
quality things. Some approaches to benchmarking are simple and
straightforward.

Example: Xerox Corporation routinely buys copies made by other

firms and takes them apart to see how they work. This helps the firms to stay
abreast of its competitors’ improvements and changes.

12.3.8 Balanced Scorecard

Balanced scorecard tries to do away with the bias in performance measures
towards financial tools and tries to build a comprehensive, holistic objective
system of measurement. The balanced scorecard takes into account four key
performance measures:
 Customer Perspective: How do customers see us?
 Internal business perspective: What must we excel at?
 Innovation and learning perspective: Can we continue to improve and
create value?
 Financial Perspective: How do we reward shareholders?

12.3.9 Key Factors Rating

It is based on a close examination of key factors affecting performance
(financial, marketing, operations and human resource capabilities) and
assessing overall organisational capability based on the collected information.

Learning Activity
Prepare a detailed note on your understanding about the strategic
evaluation and control and its impacts and significance. Your note
must be based on (Ashok Leyland or TELCO) any company of
your choice.

Starbucks Coffee Company Expanding into India

Current Situation
Starbucks is a provider of high-end coffee products and more importantly, a
relaxed experience. Starbucks as it is known today was purchased in 1987
and has seen tremendous amounts of growth over the years. The company is
Contd...

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known globally and does business internationally, although it’s Notes

headquartered in the United States. Starbucks has historically had a
differentiation strategy, with prices comparably high and uniquely high-
quality products, service and environment for the consumer. This
differentiation strategy is used with a horizontal growth strategy
internationally. Starbucks currently has a market expansion strategy focused
around Asia, and has recently seen both problems and great sales figures
arise from this market in China and Japan. The objective of this strategic
campaign is to capitalise on the highly dense Asian market, with its high
population and growing wealth. In 2002, Starbucks announced that it
intended on breaking into the Indian market, however has failed to do so
four years later. The problem facing Starbucks right now is whether or not
to expand into India and if the company were to expand, how it would go
about doing so. If Starbucks does decide to expand into India with a
promising strategy, there is still the problem of finding a suitable partner
currently in India to form a partnership with. Environmental scanning
involves the external factor analysis and the external opportunities and
threats that face Starbucks. These will later be addressed in terms of how
they can be taken advantage of or avoided. The opportunities that Starbucks
may take advantage of are the Indian interest in Western brands, the
geographic popularity of coffee, the characteristics of the Indian population,
and the market for the product. Threats to Starbucks include the obesity and
obesity-related disease rate in India, the beverage habits in India, barriers to
entry, the conflict seen within global policies, and established competition.
The internal factor analysis shows the internal strengths and weaknesses that
Starbucks has and will either use to an advantage or try to minimise.
Starbucks’ strengths include its strong company mission, vision and values,
the company’s brand awareness, the experience Starbucks has in expanding
into global markets, high buying power and high quality products.
Weaknesses of Starbucks include the lack of a presence in India, which is a
highly populated country, Starbucks’ premium priced products, small
product breadth and the company’s corporate structure. These external and
internal factors are then combined in the strategic factor analysis show the
most influential factors of a company’s environment. The internal factors
chosen by a weighted score include the experience in expanding into global
markets, the strong company mission, vision and values, the small product
breadth and the premium priced products. The external factors chosen based
on a weighted score include the Indian population, the geographic
popularity of coffee, established competition and beverage habits in India.
These factors are also given a time range in regard to when they affect the
company, such as Starbucks’ experience in expanding into global markets
will help them in the long run rather than immediately in the short run.
These important factors of the environment are then used in a TOWS Matrix
to show different business strategies that can be used based on these factors.
One SO strategy that can be used is to examine past successful global
Contd...

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Notes expansions in Starbucks’ history and imitate the methods used there and the
lessons learned in these countries. An example of a ST strategy is to acquire
the best Indian ingredients for local Indian tea for use in Indian Starbucks.
One WO strategy within the TOWS Matrix is to increase product breadth by
adding more varieties of coffee, beverages, snacks, etc. This is more likely
to appeal to a broader range of the population and will make it easier for
Starbucks to penetrate into the Indian market. A WT strategy that Starbucks
may wish to use is to set a price penetration strategy when first expanding
into India. It has been stated that Starbucks will adjust its prices for India,
but these prices should be lower than the competitors’ in order to gain
immediate customers.
Recommendation
It is recommended that Starbucks expand into India immediately, as to
avoid letting its current competition expand. Starbucks cannot carry over its
same business operations as it had in other countries however, and must
instead adapt and change as it did in Japan. Recommendations for the
expansion of Starbucks into India include: Contact Pantaloons Retail in
regards to forming a partnership in India. This possible partner has over 100
stores in Indian cities, where the target market of Starbucks lives. The
partner also owns Big Bazaar, Food Bazaar, and Pantaloons, which have
comparably high sales and would be good start-off locations for Starbucks
outlets. The group has revenues of $10.73 billion, as of 2005. Advertise
heavily in urban areas. This is where Starbucks’ target market lives, so this
should be where the Starbucks’ brand is recognised the most. Use the
challenges faced when expanding into China and Japan as examples to
adapt quickly to the customer need. Certain needs can be met to satisfy the
new customer base while still maintaining the same vision, mission and
values. Adjust Starbucks positioning to reflect its differentiation strategy.
The local competition already has a dominating amount of market share and
provides the service in India that Starbucks is known for in the U.S., only
better than Starbucks does. Instead of being known as the place to get
gourmet coffee in India, position Starbucks to be the place to relax in style
with a coffee. Continuously analyse the competition’s expansion methods.
Starbucks has vast experience expanding and can capitalise on any mistakes
made by the competition. Consider expanding product breadth in the future
to include a larger variety of tea-based products, primarily iced teas, and
preferably using Indian-grown ingredients. This larger product line should
also include spices that may mix well with tea, coffee or other Starbucks
products. It is believed that if Starbucks uses this strategy with these
guidelines, then it will be able to effectively expand into India.
Strategy Implementation Plan
Starbucks must contact Pantaloons Retail to form a partnership with this
company. In doing so, Starbucks will have its foot in the door in India.
Pantaloons Retail also operates several chains of retail stores, which
Contd...

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Starbucks could set up small outlets inside of, or in cooperation with. It is Notes
also likely that the experience this partner has with the food industry (Food
Bazaar) in India will be beneficial to the initial Starbucks development
team. It can only be assumed through the company’s current fiscal situation
and its projected sales that Pantaloons Retail has high brand name
recognition and a good reputation in its field, which is essential in a
partnership with Starbucks. Starbucks will be implementing a market
expansion strategy, focused around horizontal growth through
differentiation.
Action Plan
CEO, Howard Schultz, must contact CEO of Pantaloons Retail about
forming a partnership in India. This is the first step in forming a partnership
with the firm, so this action must be taken immediately. In three months,
plans for the installation of Starbucks outlets in Pantaloons Retail owned
centres must be underway. If partnership is agreed upon, nine months is the
cut-off date in which one Starbucks outlet is to begin construction within a
Pantaloons Retail store. As a precaution, Howard Schultz should remain in
contact with another possible partner, the K Raheja Group. Operations
managers should inquire with third party manufactures in India about the
local supply of raw materials, and focusing on acquiring locally grown
ingredients for spices and teas. This action must start immediately, at least
six months prior to the first opening of a Starbucks branch in Mumbai,
India. The CEO will be directly responsible for overseeing the timeliness
and effectiveness of this action. This is expected to lower variable costs due
to non-international shipping, with a contingency plan of shipping raw
materials from Starbucks’ prior roasting facility in Kent. An international
advertising team will be sent to Mumbai, India, two months prior to the
installation of the new Starbucks branch to ensure proper advertisements are
in place for the incoming store. This team will stay abroad for one year until
a localised advertising team can be trained in India. The CMO will be
responsible for overseeing the timeliness and effectiveness of this team.
This action is in an attempt to increase sales, but requires a high rate of
fixed costs in terms of advertising expenses and salaries. The contingency
plan for this action is to hire a local advertising consultant firm located in
India. This may drastically modify the general message of the marketing
mix of Starbucks in India, and may be more expensive, but may be more
effective in reaching the target audience due to cultural familiarity.
Evaluation and Control
Starbucks encountered several problems when expanding into China and
Japan, which need to be avoided when expanding into India.
Japan: Starbucks locations too close in proximity, Lacked enough food
options for Japanese culture, No-smoking policy conflicts with Japanese
Contd...

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Notes societal habits, High rent, High cost of labour Starbucks didn’t have a
roasting facility in Japan.
China: Many opposed a Western coffee chain in China – traditionally a tea
country and dominance of instant coffee intense competition. These
concerns will be assessed and adjusted if needed, every quarter, using the
balanced scorecard approach as follows:
Financial: How are Starbucks sales figures progressing compared to the
projected sales for the year in India? Are any locations of Starbucks
gaining/losing profitability? Is this due to close proximity to another
Starbucks? Is Starbucks in India keeping up with the growing market trends
towards coffee in India? If not, compare to competition and instant coffee
manufacturers. How does the contribution margin of Starbucks in India
compare to other international markets? Is there a higher fixed cost/variable
cost rate that needs to be allocated for and if need be, used to readjust
pricing?
Customer: Conduct in-store surveys bi-annually to get customer feedback
and suggestions. This will give insight into any problems like lack of variety
in food or problems with Starbucks policy like the no-smoking policy.
Conduct geographical surveys to see if any region is less likely to have
Starbucks consumers in it. This may be due to cultural opinions towards
Western business expansion.
Internal Business Perspective: Examine weak points within the new
Starbucks outlets in India on an individual basis. Are there any outlets that
do not reflect the differentiation strategy used by Starbucks? How can this
be adjusted?
Innovation and Learning: Are sales and brand awareness increasing at a rate
in India that would warrant further expansion? Are there opportunities that
are not being taken advantage of? After these evaluations are assessed,
control can be implemented on an organisational level. After every financial
quarter, these factors must be recognised and adjusted to maximise
Starbucks’ market expansion growth strategy and ensure a solid future for
Starbucks in India.
Questions
1. Prepare a SWOT Analysis and TOWS Analysis for Starbucks for Indian
market scenario.
2. Suggest measures and strategy for Starbucks for successful expansion in
Indian market.
Source: (http://www.slideshare.net/BCronin2/starbucks490)

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1. Strategic evaluation allows the manager to anticipate Notes

responses to expected problems. The continuous
evaluation of the results of an implemented
(alternative) strategy creates an opportunity to
constantly refine and improve the strategy.
2. SWOT analysis is a framework used to evaluate a
company's competitive position by identifying its
strengths, weaknesses, opportunities and threats.

SUMMARY
 Strategy Evaluation and Control (SEC) is the final phase of strategic
management.
 The basic purpose of strategy evaluation and control is to determine the
effectiveness of a given strategy in achieving the organisational objectives
and taking appropriate corrective actions, whenever required.
 Strategy evaluation includes three basic activities: (i) examining the
underlying bases of a firm’s strategy (ii) comparing expected results with
actual results and (iii) taking corrective actions to ensure that performance
conforms to plans.
 SEC offers valuable feedback on how well things are moving ahead. It also
throws light on the strategic choice made previously.
 SEC helps in identifying rewarding behaviours that are in tune with
formulated strategies. It helps in pinpointing responsibility for failures as
well.
 SEC offers a considerable amount of information and experience to
decision makers that can be quite valuable in the formulation of new (often
improved) strategic plans.
 When there is very little control people tend to go off the hook, waste
resources without any fear of punishment and work at cross purposes
putting a big question mark on the very survival of the firm.
 It is not easy for strategists to decide the limits of control. Too much
control prevents the managers from taking initiative, experiment with their
creative ideas and gain through calculated risk-taking.
 Strategic control is concerned with tracking a strategy when it is being
implemented, detecting problems or changes in its underlying premises,
and making necessary adjustments.
 The most important purpose of strategic control is to help the top
management to achieve organisational goals through monitoring and
evaluating the strategic management process.

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Notes KEYWORDS
Return on Investment (ROI): It is one way of calculating profits in relation to
capital invested. The purpose of ROI is to arrive at per period rates of return on
amounts invested in a project.
Return on Equity (ROE): It is also known as return on net worth. It measures
a company’s profitability by showing how much profit it has generated with
the money shareholders have invested.
Return on Capital Employed: It is similar to return on assets but takes into
account sources of financing. Capital employed here denotes total assets minus
current liabilities, or fixed assets plus working capital.
Economic Value Added: It is a performance metric that calculates the creation
of shareholder value, but it distinguishes itself from traditional financial
performance metrics such as net profit and Earnings Per Share (EPS).
Net Operating Profit After Tax (NOPAT): It is calculated as net operating
income after depreciation, adjusted for items that move the profit measure
closer to an economic measure of profitability.
Market Value Added: This method shows the difference between the market
value of a company and the capital contributed by investors (both bondholders
and shareholders).
Ratio Analysis: It is a general technique for analysing performance of a
business or its potential performance. Ratio analysis involves calculating ratios
for a business or proposed business and comparing them with ratios of other
businesses within the same industry.
Premise Control: It is designed to check systematically and continuously
whether the premises on which the strategy is based are still valid. If an
important premise is no longer valid, the strategy may have to be changed.
Strategic Surveillance: It aims at a more generalised overreaching control
designed to monitor “a broad range of events inside and outside the company
that are likely to threaten the course of a firm’s strategy”.
Special Alert Control: It is the thorough and often rapid reconsideration of the
firm’s strategy because of a sudden, unexpected event.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What do you mean by strategy evaluation?
2. Define strategic control.
3. List the various types of organisational control.
4. What is concurrent control?

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5. What do you mean by feed forward control? Notes

6. Explain the meaning of feedback control.
7. What is premise control?
8. What do you mean by strategic surveillance?
9. Explain the meaning of special alert control.
10. What do you mean by EVA?
11. What do you mean by MVA?
12. What is premise control?
13. List the steps in a control process.
14. Explain the importance of strategic evaluation and control.
15. What is reward?
16. What is feedback?
17. What is future planning?
18. What are the various barriers of strategic evaluation?
19. What is Return on Investment (ROI)?
20. What is Return on Equity (ROE)?

Long Answer Questions

1. Distinguish strategic control from operating control. Give an example of
each.
2. Explain the differences between premise control, implementation controls,
strategic surveillance and special alert controls. Also give examples of
each.
3. Explain the nature and importance of strategy evaluation and control.
4. What kind of barriers are there in strategy evaluation and control? Suggest
suitable ways to overcome these barriers.
5. Explain the process of operational control. What actions do you suggest to
bridge the gap between standard and actual performance?
6. Outline the various qualitative and quantitative criteria for strategy
evaluation and control. State the problems faced by strategists while
meeting those criteria.
7. Under what conditions are corrective actions not required in the strategy
evaluation process?
8. Identify types of organisations that may need to evaluate strategy more
frequently than others. Justify your choice.

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Notes 9. ‘Strategy evaluation allows an organisation to take a proactive stance

towards shaping its own future.’ Discuss the meaning of this statement.
10. “Evaluation of Strategy is a difficult exercise.” Do you agree with this
statement? Give reasons.

FURTHER READINGS

Jauch L.R., (2009), Business Policy and Strategic Management,

Frank Brothers, New Delhi
Pearce J.A., (2011), Strategic Management, Tata McGraw Hill,
New Delhi
Johnson Gerry, (2011), Exploring Corporate Strategy, Pearson,
New Delhi
Hill G.W.L. and Jones G.R., (2009), Strategic Management,
Biztantra, New Delhi
Haberberg A. and Rieple A., (2008), Strategic Management,
Oxford, New Delhi
Parthasarthy R., (2011), Fundamentals of Strategic Management,
Biztantra, New Delhi

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LESSON 13 - STRATEGIC CHANGE, POWER, Notes

POLITICS AND CONFLICT

CONTENTS
Learning Objectives
Learning Outcomes
Overview
13.1 Strategic Change
13.1.1 Types of Changes
13.1.2 Change Processes
13.1.3 Forces for Change
13.1.4 Resistance to Change
13.1.5 Overcoming Resistance to Change
13.1.6 Management of Change
13.2 Power and Authority
13.2.1 Sources of Power
13.3 Politics
13.3.1 Reasons for Political Behaviour
13.3.2 Political Strategies and Tactics to Acquire Power
13.3.3 Managing Political Behaviour
13.4 Conflict
13.4.1 Features of Conflict
13.4.2 Ways to Resolve Conflict
13.4.3 Conflict Resolution Styles
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of strategic change
 Describe the power and authority

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Notes  Explain the politics

 Understand the conflict

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 concept of strategic change
 how to overcome resistance to change
 explain power and authority
 analyzing political strategies and tactics to acquire power
 basics of conflict and explain its features

OVERVIEW
Let us first review the previous lesson. You have learnt about strategic
evaluation and strategic control. At the end of the previous lesson, you have
gained knowledge about operational control.
In this lesson, you will understand strategic change, power and politics in an
organisation. At the end of the lesson, you will know about strategic conflict
and its management.
We advise you to learn this lesson carefully. It will give you a better
understanding of the strategic change and political behaviour in the
organisation. This lesson will help you to understand the concept of strategic
conflict and ways of managing it.

13.1 STRATEGIC CHANGE

Organisational change may be defined as “the adoption of a new idea or
behaviour by an organisation”. It is a way of modifying an existing
organisation any alteration of people, structure or technology. The purpose of
undertaking such modifications is to increase organisational effectiveness i.e.,
the extent to which an organisation achieves its objectives. Organisational
change is largely structural in nature as it brings about modifications in
organisational structure, methods and processes. Most leaders agree that if an
organisation has to be successful, it must change continually in response to
significant developments such as customer needs, technological breakthroughs,
economic shocks and government regulations. It is not sufficient today to
simply react to change. Leaders need to anticipate change and ideally be the
creator of change. Leaders who undertake appropriate changes at a right time
achieve success and put their organisations ahead of others in the race.

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13.1.1 Types of Changes Notes

Changes can be understood in a variety of ways:

Evolutionary Changes
Some changes are evolutionary in nature and do not greatly violate the
traditions and status quo expectations. They are usually piecemeal and take
place one-by-one. Because they are adjustments within the status quo, they
seldom promote great enthusiasm, arouse deep resistance, or have dramatic
results. Since they do not constitute significant departures from the past
practices, they are unlikely to provoke resistance. One limitation of such
changes is that they are very slow and organisation may fall behind the
requirements.

Revolutionary Changes
Changes sometimes may be cataclysmic. The revolutionary changes result in
overturning the status quo arrangements, cause violations, rejections or
suppression of old expectations. The revolutionary churnings generally pose
strong resistance and sometimes only an exercise of power can order the
implementation of such changes. Revolutionary changes are rarely introduced
except where situation becomes highly intolerable having no other acceptable
options.

Proactive versus Reactive Changes

Proactive change takes place when some forces to change lead an organisation
to conclude that a particular change is desirable. Reactive change occurs when
these forces to change make it necessary for a change to be implemented.

Example: Introduction of a new employee-benefit scheme would be

proactive when the management strongly believes that it enhances satisfaction
and motivation to employees. The change (introduction of scheme) would be
reactive if the benefit plan was introduced because of demands made by
employees. Thus, proactive change is the change initiated by an organisation
because it is identified as desirable (i.e. it is not forced on the organisation). On
the other hand, reactive change is the change implemented in an organisation
because it is made necessary by outside forces.

Planned Changes
A new and scientific way of viewing change is “the planned alteration in the
existing organisational system”. Planned organisational change is the
intentional attempt by an organisation to influence the status quo itself.
Planned changes are made by the organisation with the purpose of achieving
something that might otherwise be unattainable, or accomplishable with great
difficulty. Through planned changes organisations reach new frontiers and
progress more rapidly towards a given set of goals and objectives.

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Notes 13.1.2 Change Processes

Three-step sequential models of the change process are discussed below:

Figure 13.1: Strategic Change Process

Unfreezing
Unfreezing involves making the need for change so obvious that the individual,
group or organisation can readily see and accept it. The following elements are
vitally necessary during this unfreezing phase:
 The physical removal of the individuals being changed from their
accustomed routines, sources of information and social relationships
 The undermining and destruction of social support
 Demeaning and humiliating experience to help individuals being changed
to see their old attitudes or behaviour as unworthy and thus become
motivated to change
 The consistent linking of reward with willingness to change, and of
punishment with unwillingness to change
Unfreezing is, thus, the breaking down of the existing mores, old taboos and
traditions the primitive ways of doing things, so that people are ready to accept
new alternatives. It involves discarding the orthodox and conventional methods
and introducing a new dynamic behaviour that is most appropriate to the
situation.

The essence of this unfreezing phase is that the individual is made

to realise that his beliefs, feelings and behaviour are no longer appropriate or
relevant to the current situation in the organisation.

Changing
It is the phase where new learning occurs. When the individuals are convinced
that their behaviour is inappropriate, they happily come forward to accept the

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change. In order to change, it is not enough to sense that the current behaviour Notes
is inadequate. The necessary condition is that various alternatives or behaviour
must also be made available in order to fill the vacuum created by unfreezing
phase. During this phase of ‘changing’, individuals learn to behave in new
ways; the individuals are provided with alternatives to choose the best one.
 Compliance or force occurs when individuals are forced to change either by
rewards or by punishment.
 Internalisation occurs when individuals are forced to encounter a situation
that calls for new behaviour.
 Identification occurs when individuals’ recognise one among various
models provided in the environment that is most suitable to their
personality.

Refreezing
During this phase, individuals’ internalise the new beliefs, feelings and
behaviour learned in the ‘changing’ phase, that is to say a person accepts the
new behaviour as a permanent part of his behaviour repertoire. He has to
practice and experiment with the new method of behaviour and see that it
effectively blends with his other behavioural attitudes. It is very important for
the manager concerned with ‘introducing change’ to visualise that the new
behaviour is not extinguished soon.

Refreezing is appropriate when it permanently installs behaviours

that maintain essential core values, such as a focus on important business
results and those values maintained by the companies that are “built to last”.

13.1.3 Forces for Change

Organisational changes do not occur spontaneously; they occur when the
forces encouraging changes become more powerful than those resisting
changes. These forces to change can be either internal (emanating from within
an organisation) or external forces (coming from outside an organisation).

Internal Forces
The forces to change which are internal and emanate from within an
organisation are discussed below:
Increased Size: Increased size is followed by major shifts in internal structure
(increased specialisation, growing complexity, etc.). As organisations prosper
and grow in size, they generate more resources. These resources help them
undertake new opportunities, enter new markets, experiment with novel ideas,
etc. They tend to be more flexible and open to change.

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Notes Performance Gaps: When there is a gap between set targets and actual results
in terms of market share, profits and employee productivity it’s time to change,
innovate and go ahead. If companies do not change hats and switch gears
quickly, they may go off-track and reach a dead-end too soon. Like success,
disappointing performance can also be a stimulus for change.
Employees’ Needs and Values: Effective organisations have to tune their
policies and procedures in line with employee needs and values. Attractive
financial incentives, challenging assignments, vertical growth opportunities are
all part of the same game. If employees change their attitudes towards financial
rewards and expect more freedom and autonomy at work followed by flexible
schedules, then organisations, too, must follow suit.
Change in the Chief Executive: One of the frequently cited reasons for major
changes in an organisation is the change of executives at the top. No two
managers have the same styles, skills or managerial philosophies.

Example: Managerial behaviour is always subjective so that a newly

appointed manager might favour different organisational design, objectives,
procedures and policies than a predecessor. The newly appointed manager or
the newcomer usually begins by examining the structure below to see whether
it corresponds to his ideas. If it is not so, he indulges in making sweeping
changes. Thus, the filling of the top vacancies where the new person comes in
from outside, presents a strategic opportunity for re-examine the entire
structure and explanation of the changes to the people who are affected. The
point to note here is that the managerial differences cannot be overlooked, for
inevitably they will influence task performance.

External Forces
The components of external forces are enlisted below:
Technology: The pace of technological change is increasing and literally
wiping out businesses, every day. Advancements in technology can
dramatically affect an organisation’s products, services, markets, suppliers,
distributors, competitors, customers, manufacturing processes, marketing
practices and competitive position. New products could hit the market with
electrifying speed. New markets could sprout up from nowhere. Technological
changes can reduce or eliminate cost barriers between businesses, create
shorter production runs, lead to shortages in technical skills and could even
turn the customers against the company if it fails to meet expectations. No
company, unfortunately, is insulated against emerging technological
developments.

Example: The emergence of Nano car from Tata Group could alter the
thinking of automobile industry forever, especially towards cost-effective, fuel-
efficient cars.

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Competition: Competition in virtually all industries is intense and sometimes Notes

cut-throat. Most companies are fighting a do-or-die battle for survival.

Example: The rising oil prices, stock market crash, internet bubbles,
collapse of banks and financial institutions, crashing real estate markets, rising
unemployment, corporate crimes and scandals have complicated matters
further especially after 2007.

Example: Cash-hungry companies are finding it difficult to experiment

with new ideas. Companies with heavy debt burden find it very tough to carry
out business in the traditional way.

Example: Customers have begun to question the way a shampoo is

priced, a car is manufactured and service warranty is written for say, an air
conditioner. Any company that is not able to run the race in terms of price,
quality, speed, efficiency, etc. is shown the door without any mercy.
To survive in this economic jungle, companies are trying every trick in the
book to woo customers away from competitors through cost-effective, high-
quality innovative products and services. To this end, factories are organised
around products – working with self-managed teams taking appropriate
decisions at the shop-floor level itself while actually doing the job, instead of
relying on top management. Quality, speed and flexibility are the new
corporate mantras.

Example: Lean manufacturing is the order of the day. Lean

manufacturing is based on a commitment to making an operation both efficient
and effective; it strives to achieve highest possible productivity and total
quality cost effectively, by eliminating unnecessary steps in the production
process and continually striving for improvement.

Example: New alliances are formed, sometimes even with rivals just to
withstand economic shocks and stay afloat. Cooperative agreements between
competitors, not surprisingly, are gaining popularity in recent times.

Social and Political Changes

Cultural, social, demographic, political and environmental changes have a
significant impact upon virtually all products, services, markets and customers.
Social trends keep changing, thanks to the ever-changing consumer tastes and
preferences and the heightened competition in the marketplace. People share
information in Internet chat rooms. The percentage of women in the workforce
is rising steadily. Workforce diversity in terms of race, religion, region,
educational background, age, skills, etc. is something that every company must

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Notes look into carefully and adjust its antennae accordingly. Consumers keep
chasing discount stores in order to maximise their return as well as satisfaction.
There is, of course, the growing realisation that a business cannot survive
without consistent and continued support from government. Many new legal
provisions in the corporate sector get introduced every time, affecting the
organisations.

Example: Changes in Patent laws, antitrust legislation, tax rates and

lobbying activities can impact firms significantly. The increasing global
interdependence among economies, markets, governments and organisations
makes it imperative that firms consider the possible impact of political
variables on their internal policies and strategies. In short, organisations cannot
afford to be rigid and inflexible in the wake of environmental pressures, they
must be dynamic and viable, so that they survive.

13.1.4 Resistance to Change

Resistance to change may be individual or organisational. People resist change
for a variety of reasons: fear of losing job, obsolescence of skills, status quo
and social relationships, etc. Organisations, too, resist changes because of
resource constraints, difficulty in bringing about structural and technological
changes, etc. Let’s examine these in greater detail.

Economic Reasons
The economic reasons underlying resistance to change are discussed below:
Fear of Economic Loss: Employees often feel insecure about loss of
employment and economic benefits such as:
 fear of technological unemployment
 fear of reduced work hours and consequently less pay
 fear of demotion and thus reduced wages
 fear of speed up and reduced incentive wages
Machines, computers and Robots have destroyed thousands of jobs in the
recent past. Employee fears in this regard, therefore, seem genuine and well-
founded.

Obsolescence of Skills: Change may render existing employees’ skills and

knowledge obsolete. What they have been doing for ages together might be
under threat. If employees feel that they do not possess requisite skills that are
currently in demand, they resist changes quite seriously.

Personal Reasons
The various personal reasons accounting for resistance to change are discussed
below:

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Fear of Unknown Change is resisted often because of its unknown Notes

consequences. Whenever people do not know exactly what happens, they are
likely to resist it with all their might.

Example: A bank employee may resist posting to a rural branch

because of the anxiety of unknown area. Female clerks in Indian banks often
refuse promotions because promotion requires relocating. In all such cases,
employees do not know how a change will affect them and worry about
whether they will be able to meet the demands of a new procedure, technology,
or location.
Status Quo: People like status quo because they have adjusted to the demands
of a job over a period of time. Change would render all such experience,
knowledge and learning somewhat useless. When introduced, change would
require people to learn new or even difficult ways of doing things. This means
loss of expected rewards, convenience and comforts. This kind of emotional
turmoil forces them to embrace status quo arrangements passionately. Why to
rock the boat and invite trouble?
Self-interest and Ego-defensiveness: Employees typically resist a change
which they believe will take away something of value. A proposed change in
job design, structure or technology may lead to a perceived loss of power,
prestige or company benefits. Many impending changes threaten the self-
interests of some managers in the organisation. A change may diminish their
power and influence within the company, so they fight it.

Example: A salesperson’s suggestion to expand sales by offering

seasonal discounts may be turned down by the branch manager who thinks the
sales executive might steal the credit (different perceptions).
Social Reasons
Social reasons that make employees resist change are given below:
Social Displacement: Change often causes social displacement of people by
breaking informal groups and friendly relationships. Employees get
emotionally upset when friendships break down. They dislike new adjustments,
new groupings and new relationships brought forward by change efforts and,
therefore, resist vehemently.
Peer Pressure: People may resist change because of peer pressure. As
individuals, they may like computerisation, but refuse to accept it for the sake
of the group. Any change that upsets group norms is likely to be opposed, even
if it is known to have a positive impact.

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Notes Organisational Issues

Apart from abovementioned reasons, the various organisational issues for
resistance to change are presented below:
Threats to Power and Influence: Some people consider change as a potential
threat to their position and influence in the organisation. Novel ideas and the
new use of resources can disrupt the power relationships and, therefore, are
often resisted at organisational level. People who are occupying the top place
in the organisation resist some changes because any change might threaten
their existing power. That is to say people resist change on the ground that it
might affect their position-power.

Organisational Structure: Some organisational structures have inherent forces

acting against change.

Example: In a bureaucratic structure, jobs are narrowly defined, lines

of authority are clearly spelt out and the information flows from top to the
bottom. In such an organisation, novel and innovative ideas do not find favour
and are screened out. The structural inertia favours stability and status quo
rather than change and innovation.
Resource Constraints: An organisation many a time operates under some
resource constraints. If the resources with which to operate are available in
abundance, there will be no problem of introducing change. But the necessary
financial, material and human resources may not be available to the
organisation to make the needed changes.
Sunk Costs: The plight of some companies is such that heavy capital is
blocked in fixed assets. If an organisation wishes to introduce change, then,
difficulty arises because of these sunk costs. Sunk costs are not restricted to
physical things alone; further, they can be expressed in terms of people also.

Example: Some members in the organisation retain their jobs by virtue

of enough seniority, though they do not significantly contribute to the
organisation. Unless they are motivated properly to higher performance, the
payments for their services (for example, fringe benefits, salaries and other
payments) represent the sunk costs for the organisation.

13.1.5 Overcoming Resistance to Change

Some of the approaches, at the individual as well as group level, designed to
reduce resistance to change, may be listed thus:

Education and Communication

One of the easy ways to overcome resistance to change is to help employees
understand the true need for a change as well as the logic behind it. Tell them

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clearly as to what is going to occur and why to dispel their fears. To this end, a Notes
manager should specifically explain:
 What the change is?
 When it is to be introduced?
 How it will be implemented?
 Why the change is required?
 What is the basic purpose of change?
 How the change is going to help them?
When employees realise the need for change and understand the logic behind
it, they tend to accept it easily. However, it is a very time-consuming approach.
Managers have to explain everything patiently in order to gain acceptance from
employees.

Participation and Involvement

Participation is another key concept in gaining acceptance. If people participate
in what is happening, they will be more likely to go along. They get a chance
to express their opinions freely, get their doubts clarified and understand the
perspectives of others. As a result, uncertainty is reduced; self-interests and
social relationships are less threatened. Involving users and potential resisters
in the change process has other benefits also. It helps managers identify
potential problems and understand the differences in perceptions of change
among employees. After a series of discussions, any change effort that is likely
to be made is going to be accepted wholeheartedly. People generally support
what they help create. People who participate will be committed to
implementing change. However, it is a time-consuming and costly exercise.

Facilitation and Support

Change agents can offer a range of supportive efforts to reduce resistance.
Compassionate and sympathetic listening may be used to reduce employee’s
fears and anxieties.

Example: Managerial support can also come in the form of special,

new-skills training; job stress counselling and compensating time-off. The
approach, obviously, rests on the belief that people have the ability to solve
their own problems with the help of a sympathetic listener. The role of the
manager as a facilitator is one of understanding and perhaps advising rather
than passing judgement. This requires a somewhat permissive and friendly
atmosphere.

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Notes Negotiation and Agreement

Sometimes management can neutralise potential or actual resistance by
exchanging something of value for cooperation. It can offer rewards to those
who go along with the change. It can also agree to protect those who will
potentially be damaged by the change. Every attempt can be made to see that
people do not lose their face in the change process. Unions and their
representatives, who bargain for their members, should be allowed to air their
opinions freely so as to have a clear picture of what they stand for. When
management is able to strike a deal by offering something of value, an
agreement is reached. Negotiation as a tactic works when resistance comes
from a powerful source. Its costs can be quite high when the field is wide open
to several contending groups.

Manipulation and Co-optation

Manipulation occurs when managers selectively withhold undesirable
information, create false rumours, distort facts to get potential resisters accept
the change. In co-optation, the change agent seeks to buy off the leaders of a
resistance group by giving them a key role in the change process. This method,
however, is not a form of participation because the change agent does not
really want advice from those co-opted. In this sense, co-optation would prove
to be a non-productive, self-defeating exercise. People who feel that they have
been tricked, are not being treated fairly, or are being lied to, are likely to
respond negatively to a change. Once the co-opted members discover the
tactics, the change agent’s credibility may nosedive.

Coercion
In coercion, managers use formal power to force employees to change.

Example: Resisters are told to accept the change or lose rewards

(threats of transfer, loss of promotions, negative recommendations) or even
their jobs. This approach may not pay in the long run because employees feel
like victims, are angry at change agents and may even sabotage the changes. In
critical situations, where an urgent response is required, coercion works.

Group Dynamics
Forces operating within groups can be used to overcome resistance to change.
A group can be very effective in changing members’ attitudes, values and
behaviour especially in those areas as are related to the purpose of the group. In
a group where members share perception that change is required, change can
be easily implemented. The source of pressure for change lies within the group.
Likewise, open communication with group members helps in resolving knotty
issues amicably and implement the change smoothly.

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13.1.6 Management of Change Notes

In large-scale organisations, changes seldom occur without a bit of chaos.
Usually change agents try to minimise it by imposing some order on the
change process. Change becomes orderly when it is planned and implemented
in a systematic way. The process of planned change comprises the following
steps:

Identify the Need for Change

First of all, the manager should identify the forces demanding change. These
forces may be internal or external.
 Internal forces include:
 Employee turnover
 Change-related role conflicts
 Mounting problems from its growing size
 Any other internal changes

Example: Introduction of new department due to expansion in

sales, production, etc.
 External forces demanding change, on the other hand, include:
 Technological changes
 New marketing strategies
 New production techniques, etc.
The above forces may not demand change but some may require immediate
and careful attention of management. The minor forces, therefore, must be
isolated and the focus must shift to the major ones. Feedback information,
control mechanisms generally help in identifying where major gaps have
occurred between the desired performance and the actual performance in key
areas. A performance gap is the difference between what the organisation
wants to do and what it actually does. A careful examination of performance
reports would help the manager put the finger on the problem causing trouble.

Diagnose the Problem

This step involves the identification of the root cause. ‘Most organisational
problems have multiple causes; seldom is there a simple and obvious cause and
seldom does only one perspective needs to be considered.’ Several techniques
may be used, therefore, for diagnosis, e.g. interviews, attitude surveys, team
meetings, questionnaires, etc. Where the problem can be traced to a single
department, the focus of diagnosis is limited to that area. If the problem has
wider implications and affects a large number of departments, organisational
analysis is required. Organisational analysis includes exhaustive study of

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Notes organisational goals, principles, practices and performance at a macro level.

After such an exhaustive analysis, the change agent would be in a position to
identify the areas where modifications have to be made. It must be realised
here that a change in one part may affect other parts of the organisation. A new
product may require changes in technology, and a new technology may require
new people, skills or a new structure.

Plan the Change

This is a crucial step in the management of change. It involves answering three
important questions:
 When to bring the change (Timing)
 How to bring the change (Methods)
 Who will introduce the change (Change Agent)
While introducing change, reactions from people must be carefully assessed.
People affected by change must be consulted; the likely impact should be
explained patiently; sufficient time to pick up new skills should be given and
adequate rewards to those who follow change should be indicated. As a rule,
individuals should get information that will help them answer the following
change-related questions:
 Will I lose my job?
 Will my old skills become obsolete?
 Am I capable of producing effectively under the new system?
 Will my power and prestige decline?
 Will I be given more responsibility than I care to assume?
 Will I have to work longer hours?
 Will it force me to betray or desert my old friends?
In addition, selection of an appropriate method is essential to bring about
changes in technology, products, structure, strategy or people. Changing
structure involves reorganisation of the departments, re-specification of span of
control, decentralisation, etc. Changing task includes job enrichment, job
specification and specialisation and job redefinition or any other changes
concerned with the task of employees. Changing technology involves
introduction of new lines of production, installing new control system,
instituting new selection and recruitment, etc.

Implement the Change

While implementing any change programme, managers encounter three
programmes: resistance, power and control. There is the problem of resistance
to change. Again, change may undermine the balance of power in the
organisation and disrupt the existing control system.

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Regardless of which approach is used (to change technology, design, task or Notes
people), the ability to sustain change depends primarily on how well the
organisation reinforces newly learned behaviours during and after the change
effort. A combination of money, pats on the back and stimulating job/growth
opportunities help create a climate that reinforces new behaviours. Where the
rewards are perceived to be fair, employees commit themselves to the ‘new
ways of doing things’ wholeheartedly.

Follow-up and Feedback

Management of change is incomplete without proper follow-up. Organisation
must evaluate the effects of change. Objectives must be presented and be
compared with the performance to see the degree of success in change. End
results should be operationally defined and measurements must be done both
before and after the implementation of change. This enables change agent to
compare the performance after the introduction of change with the one prior to
it. The change agent must make sure that the change is implemented in such a
fashion as to maximise the benefits to the organisation by the effective
changes.

Learning Activity
Suppose you are the CEO of any company, you have recently left
your previous organisation to join the new organisation (which is
a MNC organisation). What kind of organisational changes you
will find in both the organisations? Prepare a detailed note on your
understanding about the changed situation of both the
organisations.

13.2 POWER AND AUTHORITY

Power is the potential ability to influence the behaviour of others. It is, in other
words, “the capacity that A has to influence the behaviour of B, so B does
something he would not otherwise do”. It is the ability to make things happen
or get things done the way you want.
Managers use power to achieve influence over the people in the work setting.
Control is the ultimate form of influence wherein acceptable behaviour is
specified and individuals or groups are prevented from behaving otherwise.

Example: Internal accounting procedures are designed to control

financial transactions and prevent employee theft. Locked gates, hidden
cameras, and other physical security devices are designed to control the flow of
merchandise and prevent shoplifting.

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Notes Authority is the formal power that a person has because of the position he
holds in the organisation. Persons in higher positions have legal authority over
subordinates in lower positions. The person at the top, thus, enjoys a legal right
to exercise authority over subordinates. Of course, such an officially
sanctioned privilege may or may not get the results. One may alternatively
possess authority but have no power, possess no authority yet have power, or
possess both authority and power.

Example: When employees respond to the wishes of the supervisor’s

spouse. Finally, a manager who gets employees to work hard on an important
project has both authority and power.

13.2.1 Sources of Power

The important sources of Power may are:
Expert Power
Power resulting from a leader's special knowledge or skill regarding the tasks
carried out by followers is referred to as expert power. When the leader is a
true expert, subordinates go along with recommendations because of his or her
superior knowledge.
In short, expert power can be maintained only if there is a critical need for the
skills and knowledge of the expert that cannot be conveniently obtained
elsewhere.

Charismatic Power (Referent Power)

Charisma refers to a leader's ability to influence others through his personal
magnetism, enthusiasm and strongly held convictions. Often, leaders are able
to communicate these convictions and their vision for the future through a
dramatic persuasive manner of speaking. As Yukl remarked, charismatic
leaders – such as Mahatma Gandhi, Abraham Lincoln, Nehru, etc. – attempt to
create the image of competence and success. They are often hailed as heroes
and role models everywhere. The more those followers admire their leaders
and identify with them, the more likely they are to accept the leaders’ values
and beliefs. This acceptance helps charismatic leaders to exercise great
influence over their followers' behaviours (Yukl, 1989). If they set high
standards for themselves, subordinates follow their steps religiously. Such
leaders, as researchers pointed out, are most likely to be effective during
periods of organisational crisis or transition. Stressful situations are more likely
to encourage employees to repose faith in a leader who seems to steer the ship
out of trouble. If the leader's strategy works and organisational performance
improves, his power base too will expand dramatically.

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Reward Power Notes

Top managers can get others to implement the organisation’s strategies by
making changes in formal reward systems. Those who carry out the strategy
will receive pay raises, bonuses, promotions, etc. Those who support the
strategic initiatives and remain loyal to the leader will assume responsible
positions and get away with ‘plum’ posting. If the leader has a number of
rewards under his control, which are valued and desired by subordinates
strongly, he will be able to secure cooperation and compliance from
subordinates easily.

Information Power
A manager’s access to important information and control over its distribution,
often, help him influence the behaviour of subordinates.

Example: The CEO is generally the best informed member of an

organisation. He is able to oversee everything from the top and he has excellent
external contacts to secure as much information as possible. He may not, of
course, know everything, however, he usually knows more than anyone else. If
the CEO's information is reliable and complete, no one will be able to question
his decisions, based on lot of information and knowledge.

Legitimate Power
This power is a prerogative of a manager by virtue of his position in the
organisation. Power is inherent in the position and authority a manager has. In
our society, people accept the right of top managers to direct the organisation.
They are conditioned to accept the authority of the mangers or superiors in
higher positions. Moreover, managers have control over the distribution of
resources and this control earns power for them over others. The quantum of
legitimate power a manager exercises depends on the nature of his task, the
organisation and the willingness of the manager to exercise power.

Coercive Power
Managers, apart from legitimate power, also have “reward power” or “coercive
power”. Coercive power is generally exercised by the manager against
unproductive or disturbing elements and to restore discipline in the task
environment. Coercive power is associated with the ability to assign distasteful
tasks, withhold promotions, harass subordinates by not rewarding performance
suitably, etc. Managers threaten the employees, when exercising this kind of
coercive power, with the job-related punishments such as dismissal, demotion,
reprimand, transfer and discourage low performance, etc. Coercive power, if
used properly, can lead to strong leadership. If punishments are inflicted
indiscriminately, several dysfunctional consequences will automatically follow
such as damaging leader-member relations, frustration of the punished people,
irreparable damage to the organisational set-up, etc. The punished person may

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Notes be totally frustrated that he retaliates by aggressive and violent responses

which may prove very costly for the organisation in the end.
Leaders generally exhibit coercive power with the employees in the lower
rungs and use expertise power or other types with professional employees.

Example: Top executives in governmental organisations, military, etc.,

have more position power than the managers in educational, service-motive,
religious and charitable institutions. Sometimes even within the same
organisation, if the manager is placed in a revenue department, he commands
more position power than when he is in advisory position or department.
Further, the more willingness a manager has to exercise power and authority or
to reward or punish the more position power he will possess.

Relationship between authority and power is – the right but not the
ability to get subordinates to do things (Authority but No Power), The right
and the ability to get subordinates to do things (Authority plus Power) and
The ability but not the right to get other people to do things (Power but No
Authority).

13.3 POLITICS
Political behaviour is a general way of getting and using power for personal
gain. Organisational politics may be defined as those activities engaged in by
people in order to acquire, enhance and employ power and other resources to
achieve preferred outcomes in organisational setting characterised by
disagreement or uncertainty about choices. Politics in an organisation refers to
those activities that are not required as part of one’s formal role in the
organisation, but that influence, or attempt to influence, the distribution of
advantages and disadvantages within the organisation.

13.3.1 Reasons for Political Behaviour

Politics is a fact of life in organisations. The reasons are fairly obvious and
these are as follows:

Organisational Factors
Scarce Resources: To improve efficiency, organisations have to affect
reductions in resources, from time-to-time. Competitive pressures may also
force organisations to tighten the belt every now and then. As a result, the
scarce resources have to be reallocated on a priority basis carefully. Threatened
with loss of resources, people engage in political actions to safeguard what
they have.

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Limited Opportunities: Not many opportunities for vertical growth exist in Notes
every organisation. Promotional avenues are very limited, especially in an
environment characterised by change and uncertainty. Everyone wants to get
ahead leaving others behind in the race. Such unhealthy competitive situations
result in increased politicking.
Lack of Trust: Where the organisational climate is marked by mistrust and
suspicion, people tend to rush ahead of the pack. They feel that honesty does
not pay and sincerity will not work. They do not believe in equity, justice and
fair play and hence try their level best to push others to a corner in an unfair
manner.
Role Ambiguity: Where role descriptions are not clear, people overstep their
authority, jurisdictional limits, and come in the way of others. The greater the
role ambiguity, the more one can engage in subtle political activity.
Performance Evaluation: Performance appraisals often put employees in a
spot. The subjective criteria set by the manager may defy logic and lead to
greater ambiguity. If performance is evaluated on a single outcome measure,
everyone would do whatever is required to look good on that measure often
causing serious heartburn to others.
Delay in Feedback: There is, generally, time lag in the feedback. The lag is so
long that by the time an individual’s actions are compared with outcomes, he is
likely to move to different positions in the organisation. People are moved,
frequently, to another position or other positions before their contribution in
the current job is actually assessed and fully appraised. By this, they are
sometimes forced to emphasise only visible actions, i.e. pseudo-performance,
and get promotions by eye-wash tactics.
Pressure to Perform Well: Tight schedules, strict deadlines and ambitious
targets often compel people to give their best and stay ahead in the race. The
more pressure that employees feel to perform well, the more likely they rush to
politicking. Also, accountability for results compels people to do everything
and anything to look good.
Employee’s Participation in Decision-making: Decentralisation has made the
present-day organisation autocratic. Power-hungry managers find it hard to
share their power with employees and in order to retain their power and
establish their supremacy they constantly try to engage in manoeuvring and
manipulating. Sometimes, an employee outclasses the manager by rendering
valuable suggestions in decision making and an intolerable manager resorts to
politics and might discard the decision by saying that it is at the cost of
company’s welfare.
Politicking by Top Management: Politically active people often grab attention
and get rewarded too. Unable to control such politically active people, top
management may offer carrots temporarily (to put an end to the nuisance). This

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Notes has an unhealthy influence on others’ thinking. Subordinates try to adopt such
tactics in an attempt to grab a superior position quickly.

Individual Factors
Individuals who are high self-monitors (sensitive to social cues and demands),
possess an internal locus of control (they believe that they can control their
own destiny) and have a high need for power are more likely to engage in
political behaviour.

13.3.2 Political Strategies and Tactics to Acquire Power

Various political strategies are pursued by individuals with a view to enhance
their image and gain respect from others. Successful political behaviour
involves keeping people happy, cultivating contacts and wheeling and dealing.
Some commonly employed political strategies are given below:

Forming Alliances
Maintain alliances with powerful people, especially those who are close to the
most powerful person in the organisation.

Selective use of Information

Control the flow of important pieces of information to suit personal ends. It
includes withholding unfavourable information from superiors, keeping useful
information from competitors and interpreting information in a way that is
favourable to oneself.

Scapegoating
Scapegoating means that ensuring someone else is blamed for a failure. Skilful
politicians make sure that they will not be blamed when something goes
wrong, and get credit when something goes right.

Image Building
Skilled politicians know the importance of being viewed positively and go out
of their way to create positive images of themselves. It includes dressing
appropriately, highlighting one's successes, being enthusiastic about the
organisation, adhering to group norms, etc. Also, they always try to present a
conservative image of themselves. It can be disadvantageous to be seen as too
radical an agent of change.

Networking
Ensuring that one has many friends in positions of influence, skilful politicians
extend favours to cultivate rewarding relationships with others. They praise
people and avoid critical, negative remarks about others. They are generally
very cordial in their interpersonal dealings.

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Compromise Notes
Giving in on an important issue in order to gain an ally who will be on your
side when an issue of importance to you arises at a later date.

Rule Manipulation
Refusing an opponent's request on the grounds that it is against company
policy but granting an identical request from an ally on grounds that it is a
‘special occasion.’

Fabianism
Avoiding decisive engagement means going slow and easy – an evolutionary
rather than a revolutionary approach to change. By not 'ruffling feathers', the
power seeker can slowly but steadily become entrenched and gain the
cooperation and trust of others.

One Step at a Time

Skilful politicians take one step at a time instead of pushing whole project or
reorganisation attempt at a time. One small step can be a foothold that the
power seeker can use as a basis to get other, more important things
accomplished.

Persuasion
Another tactic is persuasion which relies on both emotion and logic. An
operations manager wanting to construct a new plant on a certain site might
persuade others to support his goal on grounds that are subjective and logical
(land is cheap, tax concessions are great) as well as subjective and personal.

13.3.3 Managing Political Behaviour

Political behaviour, by its very nature, defies logical thinking and systematic
handling. But managers can prevent excessive damage to organisational
performance by initiating certain steps:

Define Job Duties Clearly

It is better to define job duties to recognise individual contributions. This helps
employees know what they are expected to do and provides a criterion for
evaluation. As a result, they are less prone to use politics as a means to gain
recognition.

Design Jobs Properly

For another thing, design jobs to stimulate excitement and enthusiasm. If
employees are busy and focus attention on getting things done, they may not
have time for gossip and office politics.

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Notes Demonstrate Proper Behaviours

The leader should set an example by not condoning or encouraging gossip.
Better not to rely on reports from ‘Yes-men’ alone, and act hurriedly on
inaccurate and one-sided information. Managers should avoid covert activities.
Behind-the-scene activities give the impression of political intent even if none
really exists.

Promote Understanding
Discuss issues clearly, encourage divergent views, clarify doubts and present
various options before the subordinates, every time an assignment is made.
There is no use pitting units and managers against each other, thus compelling
people to engage in a permanent game of mutual recrimination and shifting of
blame. The leader must encourage informal meets as well so as to gain a clear
insight into what people feel about organisational activities. He should get
disagreements out in the open so that subordinates will have less opportunity
for political behaviour, using conflict for their own purposes.

Allocate Resources Judiciously

Set justifiable criteria for allocation of scarce inputs, giving no room for
political battles later on. ‘Firmly established policies and guidelines are
mandatory, but managers must be careful to apply them consistently.’
Competitive approaches always encourage empire-building tendencies at the
sub-unit level, leading to street battles if things go out of hand. In such a
scenario, teamwork and cooperation among units will not develop.

Example: Manufacturing might be acquiring resources that could be

better utilised to enhance a firm's marketing network. Ultimately, the overall
effectiveness of the firm is likely to suffer.

13.4 CONFLICT
Conflict is a perceived difference of values between two or more parties that
results in mutual opposition. It implies both, opposing interests or goals;
opposing or incompatible behaviour. It is a process in which A deliberately
tries to offset the efforts of B by some form of blocking that will result in
frustrating B in attaining his goals or frustrating his interests.

13.4.1 Features of Conflict

The following are the features of conflict:

Incompatibility
Conflict occurs when two or more parties pursue mutually exclusive goals,
values or events. It is based on the assumption that there are two or more
parties whose interests or goals appear to be incompatible.

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Perception Notes
Conflict arises out of two perceptions.

Example: If X perceives his goals to be incompatible with those of Y,

there is conflict; if, however X has no opportunity to frustrate the goal
attainment of Y, there is no conflict.

Blocking
Conflict refers to deliberate (blocking) behaviour.

Example: X deliberately tries to prevent Y from attaining his (Y’s)

goals. If interference is accidental, there is no conflict.

Scarcity
Conflict arises, basically because of scarce resources. Possibilities for conflict
expand when there are limited resources such as office space, equipment,
training opportunities, operating funds and pay allocations.

Latent or Overt
Conflict can exist either at the latent or overt level; but generally speaking,
conflict is a term that is limited to overt acts.

Verbal or Non-verbal
Conflict behaviour may be verbal or non-verbal. One can express opposition
by words, by a shake of the head, by an indecent gesture, by writing a scathing
memo, or by scratching the paint of a new car with a nail as it moves down the
assembly line.

Active or Passive
Conflict behaviour may be active or passive. One can sometimes counter the
behaviour of another by tactics such as ‘dragging one’s feet’ or withholding
information. It is implicit in what has been said that perception of a loss or of a
potential loss, accurate or inaccurate, can create conflict.

Conflict is not limited to interacting groups alone, since it can also

occur within groups and between individuals and between organisations.
Conflict occurs when two groups have mutually exclusive goals and their
interactions are intended to defeat, suppress or inflict damage on the other.

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Notes 13.4.2 Ways to Resolve Conflict

Conflict, which is somewhat dysfunctional, may be dealt with in the following
ways:

Separate the Warring Factions

Use your authority and disallow the warring groups to interact with each other.

Create a Procedure of Appeal

Make people follow a procedure obviously created by you, for getting their
grievances resolved.

Appoint an Integrator
Appoint an integrator, who knows the language of both parties, to resolve the
dispute. However, much depends on the experience, expertise and persuasive
skill of the integrator to get the parties to agree to a thing.

Rotate Members
Force people to move out of their departments. When placed in another
department, people will see the big picture. Break the departmental boundaries.
Allow them to step into the shoes of another. Role reversal helps people to
come out of their ‘shell’ and look at things in a broad way.

Reduce Interdependence
Make the people and departments fully equipped, to the extent possible. The
feeling of scarcity and competition for a bigger share, often, makes people
insensitive to other's needs. When they stand on their own, the scope for
conflict situations gets reduced.

Emphasise Overall Goals

Make people to realise that they are working for the firm, not for the
department where they are placed. Politicians often speak about external
threats from neighbouring countries, so that internal groups do not fight
beyond a point. Putting emphasis on goals such as market share, service with a
smile and profitability makes people to be on the target instead of working
towards mutually conflicting departmental goals.

Ignore the Conflict

At times, this may also work. Allow the fire to take its own course for some
time, especially when the issue is trivial.

Bargain with both Groups

Bring both groups to the negotiating table. Allow them to make their respective
demands. Make them realise the importance of ‘give and take’. When
concessions are agreed upon by both parties, agreements are bound to come.

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Practice Integrative Problem Solving Notes

When there is a minimum level of trust between both parties and there is no
time pressure for a quick solution, the best way is to follow integrative
problem-solving. Here, parties are made to define the problem, develop as
many alternative solutions as possible and pick up the one which is best suited.
Supply information, facts, etc., and force the parties to deliberate the issues
fully and develop the solution(s) in a dispassionate way.

13.4.3 Conflict Resolution Styles

Conflict management style is often viewed in terms of a two-dimensional
model. Thompson suggested five styles: competitive, sharing, avoidant,
collaborative and accommodating. The choice and use of the five conflict
handling styles is likely to depend upon both, the nature of the individual and
the situational factors.
Competing (Dominance)
The competitive style is high on assertiveness, and low on cooperativeness.
This style is power-oriented and is associated with direct physical aggression
and heavy reliance on punishment to gain control over others. One party’s gain
is another party’s loss. Parties use weapons like fights, arguments and
intimidation to achieve their goals. Such a style generally creates forces which
aggravate the struggle and does little to discover innovative, constructive
solutions acceptable to all.

Avoiding (Withdrawal)
This strategy is associated with behaviours such as withdrawal, indifference,
evasion, apathy and flight reliance upon fate and isolation. Parties to conflict
fail to address important problems. They may detach themselves from the
conflict believing that conflict avoidance is more mature and reasonable than
childish arguments. It is only a method of avoiding conflict. The person stays
out of conflicts, ignores disagreements, takes no position on the issues involved
and may even be hesitant to talk about the situation. As a result, the conflict is
neither effectively resolved, nor is it eliminated.

Accommodating (Smoothing)
The accommodative style is low in assertiveness and high on cooperativeness.
Parties will be generous and self-sacrificing. The emphasis is on the common
interests of the conflicting group and a de-emphasis on their differences.
Implicit in this style is the belief by the individual or group that others will cut
off their relationship if he or she expresses self-oriented concerns. So, better go
along with whatever the other person requests, rather than get into difficulties
of direct confrontation. “In a conflict issue that is associated with expressions
of intense and aggressive feelings, the accommodative style may be very
beneficial as a starting point.” Smoothing is a more sensitive approach than the

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Notes withdrawal approach. Smoothing can be used when a temporary solution is

needed in the short-run.

Compromising Style (Lose-lose)

This is a traditional method of resolving conflicts. There is no distinct winner
or loser because each party is expected to give up something of value for a
concession. It is commonly used where the conflict involves differences in
goals, attitudes or values. It is effective when the sought-after goal (for
example, resource sharing) can be divided. In this style, the emphasis is on the
process of compromise and bargaining. It is based on a simple give-and-take
process and typically involves negotiation and a series of sacrifices. The
amount given up by each party in conflict, however, will be in direct relation to
its strength.

Problem Solving or Confrontation or Collaboration (Win-win Style)

Problem solving is said to be the opposite of conflict because it demands a
complete rethinking of the conflict situation. Parties openly share information,
attempt to listen and develop empathy. There is an attempt to depersonalise the
issue. Parties debate the issue bringing together all relevant information,
consider full range of alternatives and try to solve the problem rather than
merely trying to accommodate different points of view. Through sharing and
communicating, the problem is mutually defined. Questions of who is right or
wrong; who wins or loses are avoided. All parties are seen as playing a
constructive role.
Problem solving is characterised by the following:
 Conflict is viewed as a non-zero sum game
 Other party is seen as a mutual problem solver
 Parties purpose joint outcomes
 Issues are looked at objectively
 Open, honest sharing of information
 Flexibility
 Tries to solve the conflict in a way that will benefit both the parties

Learning Activity
Prepare a detailed note on your understanding about the conflict
and its management. Your note must be based on any company of
your choice.

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Notes

Infosys

I nfosys Technologies Ltd. the company founded by Murthy, is currently

rated as the best employer in India. The 50-acre Infosys campus in
Bangalore is considered India’s Mecca of knowledge. Murthy had the
creative imagination, foresight and guts to exploit ‘knowledge opportunity’
that came his way and set up the body shopping outfit with a seed capital of
` 10,000 in 1981. The early 1990s saw the death of distance, as
geographical barriers crumbled. Murthy and his team quickly changed
outstation software jobs from on-site to offshore, having programmes for
client companies in Chicago or Los Angeles from Bangalore or Mumbai. In
that Jurassic first decade (1980-1990) of no internet, no satellite connections
and certainty, no government support (for a telephone connection Infosys
had to wait for a painfully long time!), Murthy had visualised the existence
of a big market for Indian techies – with their skills, knowledge of English
and cheap salaries. A major contract with Reebok, followed by another from
Digital Equipment turned the fortunes for Infosys and Murthy did not look
back thereafter. Murthy was perhaps the first Indian middle-class
entrepreneur to share his wealth with his employees, including drivers and
office boys. At last count, Infosys had nearly 2000-rupee millionaires and
over 200 dollar millionaires. Murthy still eats his lunch with staff at the
canteen and lives in his modest three-bedroom house in Jayanagar,
Bangalore. He avoids five star hotels, travels economy, even cleans the
bathroom of his house and refuses to use the company car for private
purposes. But his vision is truly global. Even when the company had
truckloads of cash, acquisitions were never carried out in a rash manner –
during the internet boom. Murthy never believed in importing ideas from
elsewhere. In a world that is prepared to do anything for acquiring power,
Murthy stepped down from mainstream business operations voluntarily.
Top management changes at the top level are very smooth and never make
headline news – thanks to the highly admirable moralistic path that Murthy
has so carefully chosen to take the company to greater heights. Not
surprising to find is the fact that the company’s CEO, Sri Gopalakrishnan,
paid penalty in 2008 to the stock exchange for having failed to inform
within mandated time, performing last rites for his departed mother! His
recent move to commit his entire stake for social projects is, indeed,
shocking news for many in this materialistic world.
Questions
1. What kinds of organisational changes have been laid down by Mr
Murthy, to exploit the Infosys as an organisation?
2. From the above case, which instance shows the conflict situation and its
management?

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Notes
1. A planned change has two important goals. First, it
seeks to improve the ability of the organisation to
adapt to changes in its environment. Second, it seeks
to change employees’ behaviour.
2. Three conditions are essential to maintain expert
power. Firstly, since expert power is based on
knowledge and skill, the experts must continue to be
perceived as competent; those who become obsolete
lose their expert power. The secondly requirement is
to make certain that the organisation continues to
need the expert's knowledge and skill. The expert
power of many accountants and lawyers is created by
complex laws and tax regulations. If these laws were
repealed, the expertise of accountants and lawyers
would suddenly become unnecessary. Finally,
individuals who are exerting expert power must
prevent other experts from replacing them.

SUMMARY
 Organisational change may be defined as ‘the adoption of a new idea or
behaviour by an organisation’. It is a way of modifying an existing
organisation any alteration of people, structure or technology.
 The purpose of undertaking such modifications is to increase organisational
effectiveness i.e., the extent to which an organisation achieves its
objectives.
 Organisational change is largely structural in nature as it brings about
modifications in organisational structure, methods and processes.
 Most leaders agree that if an organisation has to be successful, it must
change continually in response to significant developments such as
customer needs, technological breakthroughs, economic shocks and
government regulations.
 Some changes are evolutionary in nature and do not greatly violate the
traditions and status quo expectations. They are usually piecemeal and take
place one-by-one. Because they are adjustments within the status quo, they
seldom promote great enthusiasm, arouse deep resistance or have dramatic
results.
 The revolutionary changes result in overturning the status quo
arrangements, cause violations, rejections or suppression of old
expectations.
 The revolutionary changes generally pose strong resistance and sometimes
only an exercise of power can order the implementation of such changes.

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 Revolutionary changes are rarely introduced except where situation Notes

becomes highly intolerable having no other acceptable options.
 Forces operating within groups can be used to overcome resistance to
change.
 A group can be very effective in changing members’ attitudes, values and
behaviour especially in those areas as are related to the purpose of the
group.
 In a group where members share perception that change is required, change
can be easily implemented.

KEYWORDS
Organisational Structure: The formal ways that tasks and responsibilities are
allocated to individuals and the ways individuals are formally grouped into
departments and divisions.
Span of Control: The number of employees reporting directly to a given
manager.
Power: The potential ability to influence behaviour of others.
Politics: Acts of influencing others through the acquired power to obtain one's
preferred outcomes.
Political Behaviour: The activities carried out for the specific purpose of
acquiring, developing and using power and other resources to obtain one's
preferred outcomes.
Problem Solving: It is said to be the opposite of conflict because it demands a
complete rethinking of the conflict situation.
Compromising Style (Lose-lose): It is a traditional method of resolving
conflicts. There is no distinct winner or loser because each party is expected to
give up something of value for a concession.
Accommodative Style: It is low in assertiveness and high on cooperativeness.
Parties will be generous and self-sacrificing. The emphasis is on the common
interests of the conflicting group and a de-emphasis on their differences.
Avoiding (Withdrawal): This strategy is associated with behaviours such as
withdrawal, indifference, evasion, apathy and flight reliance upon fate and
isolation.
Competitive Style: It is high on assertiveness and low on cooperativeness. This
style is power-oriented and is associated with direct physical aggression and
heavy reliance on punishment to gain control over others.

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Notes SELF-ASSESSMENT QUESTIONS

Short Answer Questions
1. Define the term strategic change.
2. Define power.
3. Define politics.
4. Define authority.
5. What is resistance to change?
6. Define political behaviour in an organisation.
7. What are the elements of the change prevailing in an organisation?
8. What are the sources of power?
9. Why do people resist change?
10. What is an evolutionary change?
11. What is revolutionary change?
12. What is proactive change?
13. What is reactive change?
14. What are planned changes?
15. What is unfreezing?
16. What is refreezing?
17. What are performance gaps?
18. What is obsolescence of skills?
19. What is status quo?
20. What is social displacement?

Long Answer Questions

1. What practical steps strategists can take to make strategic use of power and
politics?
2. What different types of power can one person exercise over another? Are
they interrelated? Explain.
3. Why do some people engage in organisational politics? Name some
political tactics that are frequently used in modern organisations.
4. Why is leadership an important element in strategy implementation? Using
an example, state how a CEO has implemented innovative strategies in a
unique way.

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5. What key structural considerations must be incorporated in strategy Notes

implementation? Why does structural change often lag a change in
strategy?
6. How do policies aid in strategy implementation? Illustrate your answer.
7. Resource allocation is one process of functional policy implementation.
Explain what is involved in it. How is it important for strategy
implementation?
8. “A firm’s rewards should be designed to offer the most appropriate and
effective incentives that will engender high performance.” Do you agree?
Why and why not?
9. What do you understand by the strategic changes? What are the various
types of it and how do you manage the change?
10. What is conflict? What are the features of conflicts? How do you resolve
the conflict and through which way?

FURTHER READINGS

Dess G.G., (2011), Strategic Management, Tata McGraw Hill,

New Delhi
David F.R., (2009), Strategic Management, Prentice Hall, New
Delhi
Hitt M.A., (2011), Management of Strategy, Cengage, New Delhi
Pilts R.A. & Lei David, (2009), Strategic Management, South
Western Publishing, Cincinnati, Ohio

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UNIT V
LESSON 14 - MANAGING TECHNOLOGY AND
INNOVATION

CONTENTS
Learning Objectives
Learning Outcomes
Overview
14.1 Managing Technology
14.1.1 Technology and Competitive Advantage
14.1.2 Designing a Technology Strategy
14.1.3 Technology Lifecycle and Competitive Advantage
14.1.4 Marketing of Technology
14.1.5 Technology Forecasting (TF)
14.1.6 Barriers to Technology Planning and Management
14.2 Innovation Management
14.2.1 Research and Development Strategies
14.2.2 Innovation Process
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Understand the concepts of Managing Technology
 Describe the concepts of Innovation Management

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Notes LEARNING OUTCOMES

Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 how to manage technology
 explain technology lifecycle and competitive advantage
 analyzing barriers to technology planning and management
 basics of innovation management
 determine research and development strategies
 concept of innovation process

OVERVIEW
Let us first review the previous lesson. You have learnt about the concept of
strategic change, power and politics in the organisation. At the end of the
lesson, you have studied about strategic conflict and its management, strategic
evaluation and strategic control.
In this lesson you will study about the managing technology and innovation
management. At the end of the lesson, you will familiarise with the R&D
strategic and innovation process.
We advise you to learn this lesson carefully. It will give you a better
understanding of managing technology in the organisation. This lesson will
help you to understand the concepts of innovation and the R&D strategies of an
organisation.

14.1 MANAGING TECHNOLOGY

Technology is the methods, processes, systems and skills used to transform
organisational inputs into outputs. It is a systematic application of scientific
knowledge to a new product, process or service. The technologies that
employees use range from simple to highly complex. A simple technology
involves decision-making rules to assist employees perform routine jobs.

Example: Bank clerks who enter savings and loans data into computers
perform routine tasks and work under such rules demanding few independent
decisions. A complex technology is one that requires employees to make
numerous decisions, sometimes with limited information to guide them.

Example: A doctor treating a cancer patient must answer many

questions and make many decisions without having much help because the
technology for treating the disease has not been perfected.

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Every organisation has at least one technology for converting its resources into Notes
products or services.

Example: Car manufacturers, for instance, predominantly employ an

assembly line process to manufacture cars and Management Institutes use a
number of instruction technologies (lectures, cases, group discussions,
programmed learning, experiential exercises, etc.) to empower students with
latest thinking in various disciplines.
The important point is to see how organisations tune their resources in line
with changes in the environment, produce eco-friendly and want-satisfying
products and survive the onslaughts from competitors. New technologies have
changed the rules of the game completely, especially during the last quarter-
century, throwing well-established, sound businesses out of gear. “Transistors
hurt the vacuum-tube industry, xerography hurts the carbon-paper business,
autos hurt the rail roads, and television hurts the newspapers.” The face of
technology can produce problems for organisations, even those on the cutting
edge of technology.

14.1.1 Technology and Competitive Advantage

A firm that outperforms its competitors consistently, generally speaking, has a
sustained competitive advantage. Through the innovative use of IT and other
strategic innovations, firms are able to capture market share by offering more
value (defined as the difference between the perceived value of a good to a
customer and the total cost per unit to produce the good) to customers than
their rivals. The perceived value of goods is assigned by customers based on
the product’s features, performance, design, and quality and so on.

Example: Customers are willing to pay more for BMW car because
they perceive the car to be superior in quality, design, features, etc.

Example: Toyota through its lean manufacturing system was able to

produce cars that were perceived to be of higher value by customers due to
superior quality and features, while at the same time the unit cost was lower as
compared to the cars manufactured by the US or European car makers in the
same class.
When a firm is able to get past the competition by creating superior value at a
lesser cost as compared to its rivals it is able to enjoy the competitive
advantage for fairly longer periods of time. To enjoy such a position, managers
need to exploit a firm’s strengths thoroughly and develop capabilities and
competencies that rivals find it difficult to copy or imitate. Competitive
advantage requires a fit between a firm’s internal strengths and weaknesses and
external opportunities and threats. To obtain a competitive advantage, a firm
must have competencies that allow it to create a higher perceived value than its

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Notes competitors or produce the same or similar products at a lower cost or to do

both simultaneously. Superior competencies help a firm create higher
perceived value and/or achieve a lower cost structure.

Example: McDonald’s outstanding success all these years can be

attributed to its ability to put its resources to the best use, carry out its value-
chain activities in a coordinated way in sync with a carefully crafted strategy in
order to deliver superior value to customers at a lesser cost. To remain at the
top, firms must constantly innovate; come out with novel products that offer
superior value to customers at an affordable price. Introducing new products
helps firms create more value for customers.

Technology Brings Competitive Advantage

Computerisation of equipment and machinery in the last quarter century has
brought phenomenal changes in the marketplace and the speed of change is
likely to continue to accelerate in the 21st century. Among today's important
information technologies are computers and computer networks,
telecommunication systems, broadcast and entertainment systems, document
reproductions systems, and satellite communication systems. Skilful
management of this dizzying array of information technologies is no longer a
question of choice. It is a matter of competitive survival. Information, over the
years, has become a valuable strategic resource. Organisations using
appropriate information technologies to get the right information to the right
people at the right time will enjoy a competitive advantage. Information
technology, more importantly, creates innumerable alternatives, including the
following that simply were not feasible with older technologies.

Computer Aided Design

Computer aided design linked to versatile, computer-controlled machines
permits short production runs of custom designs with economies of scale
approaching those of traditional large-scale manufacturing facilities.

Example: Johnson & Johnson Pharmaceuticals uses Infosimulation

software from Entelos that compiles all known information about a disease
such as diabetes or asthma and runs extensive virtual tests of new drug
candidates. With a new drug failure rate of 50 per cent even at the last stage of
clinical trials, the process helps scientists cut the time and expense of early
testing and focus their efforts on the most promising prospects.

Example: Telephone companies such as AT&T are investing in

technology to push deeper into the television and broadband markets.

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Notes
Example: Automakers Daimler Chrysler, GM and Toyota are
perfecting fuel cell power systems that could make today’s internal combustion
engine as obsolete as the steam locomotive.

Example: Computer companies are developing computers that are

smart enough to configure themselves, balance huge workloads, and know how
to anticipate and fix problems before they happen.

Computers and High Speed Internet

Computers and high speed internet connections have become more freely
available at lower cost, now-a-days, helping small firms and individuals to
afford technologies once limited to large organisations, and to vary their mode
and place of work and or purchasing. Bar coding, RFID radio tags, EPOS
(electronic point of sale) equipment have helped firms to gather more data than
ever before about their operations and customers.

Example: In the case of Seven-Eleven, Japan, the company has

aggressively invested in IT and uses this system to monitor and meet customer
needs. Japanese customers place a high premium on product freshness. Many
years ago, the company began using its IT system to create a just-in-time
arrangement that relies on multiple daily deliveries of products. Today each
store’s fresh food changes over entirely three times a day, which permits
managers to change their unit’s physical layout throughout the day, as the flow
of customers shifts from housewives to students to working people. Moreover,
the company’s just-in-time system allows the stores to be extraordinarily
responsive to customers’ shifting tastes.

Example: If a particular kind of take out lunch sells out by noon, extra
stock can be in the store within an hour. Conversely, if it’s raining; the IT
system will remind cash register operators to put umbrellas on sale next to each
register. This level of responsiveness is made possible by a sophisticated point
of sale data collection system and an electronic ordering system that links
individual stores to a central distribution centre.

Groupware
Groupware is a software that enables a group of people on a network to
collaborate over long distances at the same time. Intranet is a network that
applies computer and internet technologies to a firm or selected groups within
a firm. Similarly, the extranet also uses computer and internet technologies; it
connects selected users inside as well as outside the organisation.

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Example: A purchasing agent linked to certain vendors and ‘wikis’
help several people in different locations to collaborate in developing a product
while instant messaging, blogs, and social networking software like MySpace
transform the ways in which people interact socially and discover music and
other media.

Internet
The Internet has transformed many industries, ranging from
telecommunications to travel. It is inexpensive, found almost everywhere and
more importantly is an open system that has led to the phenomenal growth of
internet companies.

Example: Netscape, Yahoo, Cybercash and many others that did not
exist a few years ago. It is also transforming the way business is conducted and
service is offered to customers.

E-Commerce and M-Commerce

Thanks to E-Commerce and M-Commerce, businesses have been able to
conduct their operations from anywhere and reach out to customers situated in
any part of the world effortlessly. E-Commerce or simply electronic
commerce, is the process used to distribute, buy, sell or market goods and
services, and the transfer of funds online, through electronic communications
or networks. Ecommerce allows people to carry out businesses without the
barriers of time or distance. One can log on to the Internet at any point of time,
be it day or night and purchase or sell anything one desires at a single click of
the mouse. Mobile Commerce, on the other hand, is any transaction, engaging
the transfer of ownership or rights to use goods and services, which is started
and completed by using mobile access to computer-mediated networks with the
help of an electronic device. It is a type of e-commerce conducted through
mobile devices such as mobile phones, personal digital assistants and other
mobile devices with a wireless connection, including smart phones and net
books and notebooks.

Technological forces require that management keep abreast of the

latest developments and where possible, incorporate advancements to
maintain the organisation’s competitiveness. The right technology at a right
time would bring in the requisite benefits.

14.1.2 Designing a Technology Strategy

Technology strategy is basically concerned with choices between alternative
new technologies, the manner in which they are implemented into new

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products and processes and the utilisation of resources that will allow their Notes
successful implementation. It cuts across such functional policies as finance,
manufacturing, marketing, R&D, as well as corporate wide policies regarding
product-market focus, personnel, resource allocation, and control. Technology
strategy is an important but often ignored link in the strategy formulation
process. This is not to state that technology is thoroughly discounted by
technology-intensive companies, but it generally comes in a fragmented,
piecemeal fashion as part of other functional strategies such as marketing. This
is understandable, as the concept of technological strategy is relatively new and
is yet to take firm roots in the strategic management skills set. With new
technologies making serious inroads into the manufacturing processes of most
industries in the recent times, a technological strategy needs to be given proper
weightage and due importance.
 To develop such a strategy, several major issues should be considered
thoroughly
 Developing generic strategies for technology-based businesses in corporate
portfolio
 Choosing product-market combinations in the light of their evolving
technological needs
 Understanding sources of technology-based synergies and technological
leverage
While making choices regarding technology, a firm has to pay special attention
to the following issues:

Selection
What technologies to invest in are promising from the perspective of
existing, new, or related product lines? How should proposals for new
technologies/products be evaluated? What technologies provide opportunities
for improved product performance or lower cost?

Embodiment
How should these technologies be utilised in new products? What performance
parameters should dominate?

Technology Sources
To what extent should a firm rely on internal development? To what extent
should external sources, such as contract research and licensing from
individual inventors, research and engineering firms, and/or competitors, be
relied upon?

Competitive Timing
Whether to lead or lag new product introduction, consider the benefits of
leading versus the risk of uncertain market acceptance of a new product. Are

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Notes there benefits in developing an improved product after allowing a competitor to

go first, then evaluating market acceptance?

Level of R&D Investment

How much to invest in technologies and internal staffing versus external
staffing? Should the firm let R&D investment or profit oscillate?

Organisation and Policies for R&D

Should there be a central R&D facility? How should it be structured? Is a
separate career track needed for scientists with compensation compatible with
or leading the industry? Project teams versus matrix organisation for the
sharing of resources? How closely will top management be involved in
technological decisions? How to allocate funds for R&D projects? What
should policies be concerning patents, publications, and protecting
technological know-how?

Competence Levels
Given the competitive environment, how close to the state-of-the-art should a
firm be in a technology to achieve its objectives? How proficient to become in
understanding and applying the technology? Should the firm emphasise
straightforward applications of the technology through product engineering, or
emphasise advancing knowledge of technology through basic or applied
research?

14.1.3 Technology Lifecycle and Competitive Advantage

Technological innovations, generally speaking, follow a relatively predictable
pattern called technology lifecycle. The word ‘technology lifecycle’ refers to a
predictable pattern followed by a technological innovation from its inception
and development to market saturation and replacement. Figure 14.1 shows the
technology lifecycle.

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Notes

Figure 14.1: Technology Life Cycle

A company that wants to get the most out of its technology must plan carefully
to realise the full market value of that technology at all stages of its
Technology Life Cycle (TLC) evolution. The TLC model generally identifies
the various phases that product technologies go through during their lifetimes.

Technology Development
This stage begins long before any production, when research shows a
potentially valuable technology. Since everything is in an embryonic stage, the
major focus will be on whether further development of technology should take
place. Normally, development takes place if:
 The technology fits with the company’s overall strategy and finds
application in an identifiable market.
 The company has financial resources to develop the technology and the
technology is compatible with the company’s production and marketing
skills.
 The projected returns on development are favourable as compared to
alternative investments.

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Notes

Real-life situations are, often, very complex. The technology may

have several potential but unclear and possibly unrelated applications. It
may not be clear as to which application would produce rewards matching
investments. When the picture is hazy, companies go after joint ventures or
even sell the technology at a remunerative price.

Technology Application
Once a company decides to apply a technology to a new product whether for
its own products or for production by others it incurs its first major costs. In
view of the heavy initial costs, companies usually take a cautious approach at
this stage. While embodying technology in a product, companies incur heavy
costs in developing associated process and product technologies available with
other companies. It may be necessary to join hands either through licensing or
joint risk-bearing strategies.

Application Launch (Abernathy and Utterback)

If a technology has been developed to the point of a product launch without the
involvement of potential buyers, decisions on its exploitation become more
complex. A number of issues may go against pre-set plans. There may not be
enough companies around with requisite skills to employ the new technology
properly. Sale of technology at this stage may also get delayed because of long
lead times involved in customer purchase of a relatively unproved technology.
It took a long time for NIIT, Aptech, ICFAI, etc. to sell their private
information technology and finance courses to students because of the
‘unapproved’ (not given recognition by the government) nature of the courses.
Lack of governmental patronage may add to the woes.

Example: The sale of technology may also be not possible if the

technology has strategic or military implications, in fields like computer
networks, high-energy lasers, wide-bodied aircraft, etc. The originating
company may also delay the sale of a technology (so that it will find
innumerable applications outside) until it recovers its costs by taking advantage
of the opportunity to skim the market as a monopoly supplier.

Application Growth
This is the stage of sales maximisation. The originating company begins to
reap the rewards of increasing product sales. Competitors evince keen interest
to have their own alternative versions of products based on the technology. A
technology sale at this stage is most difficult but it is always better to get out
before customer interest lessens and competitors come out with improved
technologies. A realistic assessment, often, depends on several other issues
such as:

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Market Size: It may be difficult to exploit an innovative technology through Notes

own production facilities. Selective license arrangements with regional players
may be a better option to expand market size quickly.
Technological Leadership: If the originating company is willing to share the
technology with others, competitive incentive to engage in their own
technological development lessens considerably. The originator, by investing
its additional cash flows in further R&D, can improve its market leadership.
Standardisation: The originator of a technology enjoys the early bird
advantage and the first product becomes the standard. However, by stage four
competitors may come out with alternative technologies and if they enjoy any
production advantages, may soon flood the market with own versions. In such
a scenario, active sale of licenses may help the original company incorporate
its technology into the production of as many companies as possible.

Example: Philips N V successfully achieved such standardisation in the

market for pocket dictating machine cassettes. Although Philips does not
produce all the cassettes for all the machines in the world, most are produced
as per its design and are subject to a royalty payment to Philips.

Technology Maturity
Maturity implies awareness, active participation and successful implementation
of processes surrounding a technology. Both the originator and competing
companies have their own versions of technology applications covering the
marketplace in various degrees. No longer is timing of technology sales
crucial. The focus now shifts to other issues such as production costs, relations
with buyers and own production facilities. The originator’s production will
level off or decline as the market stabilises at a particular level. The only fresh
markets for the technology will now be found in less developed countries that
are eager to substitute their own production for imports.

Degraded Technology
By this stage, the technology finds universal application, the licensing
arrangements will more or less expires; there will be very little left in the
technology in the form of commercial value. There could be some exceptions
when older technologies could still find application in other countries which
have not been exposed to similar technological advances hitherto.

14.1.4 Marketing of Technology

A firm can immensely benefit if it is able to sell technology at the stage of
technology maturity. In order to market technology effectively, a firm needs to
pay close attention to the following issues:

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Notes Develop a Coherent Strategy

Just as a company analyses its product portfolio according to the position of its
products in their lifecycle, so it should pay attention to the TLC positions of its
existing product and process technologies. Important questions in this regard
would be; is the company dependent on a single main technology? Is it
excessively dependent on vulnerable sources of raw materials? Do the
competitors have access to the technology in the near future? Will they be able
to bring out alternative versions of technology quickly, perhaps at lower cost?

Decide on Acquisition and Divestment Issues at an Appropriate Time

TLC planning requires marketing decisions regarding licensing or sale of
technology at an appropriate time. These need to be constantly monitored
before and after application launch. If the company lacks production or
marketing resources, the possibility of outright sale should be built into
technology development plans initially. In any case timing is most important
in TLC planning. “Full exploitation of a technology frequently involves earlier
rather than later license or sale”.

Separate Technology Marketing Function from General Activities

Technology buyers usually have a better idea of where they stand in terms of
technology (gaps, weaknesses, inadequacies, etc.) as compared to competitors.
To affect the sale in such a situation the technology seller must handle the
marketing function carefully and hand over the job to specialist marketing staff
that is well versed in the field only after these specialists have carried out
detailed analyses of a technology and its potential markets should their work be
integrated with that of general strategic planners.

14.1.5 Technology Forecasting (TF)

Given the growing importance of technology and the rapid pace of
technological growth, managers are virtually compelled to look into issues like
technological forecasting, research and development strategies and investments
more closely. Technological forecasting focuses on predicting what future
technologies are likely to emerge and when they are likely to be economically
feasible. It may be defined as “the description of prediction of a foreseeable
technological innovation, specific scientific refinement, or likely scientific
discovery that promises to serve some useful function, with some indication of
the most probable time of occurrence”. In an era when technological
innovations have become the rule rather than the exception, managers must be
able to anticipate new developments. If a manager invests heavily in existing
technology (such as production processes, equipment, and computer systems)
and the technology becomes obsolete in the near future, the company’s very
survival becomes difficult.

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Use Current Knowledge to Build Future Notes

The primary role of TF is to evaluate today’s knowledge systematically,
thereby identifying what can be achieved and how one technological advance
in conjunction with another would satisfy human needs.

Specific Scientific Refinement

TF puts exclusive emphasis on a specific development (in terms of threats,
opportunities or innovations) rather than undertaking a macro level study of
various factors – which ultimately may derail the study. Such a concentrated
effort, of course, is generally preceded by a broad investigation to ensure that
the effort is being allocated to the right task.

Promises to Serve Some Useful Function

TF is basically guided by market needs. As one study indicated, ‘real needs
result in accelerated technological growth’. In TF it is always necessary to
draw the distinction between what could happen because of man’s capabilities
and what is likely to occur because of what he wants. Practical objectives are
essential for technological progress and this can come only when TF takes
market requirements into account sincerely.

Quantitative Conclusions to Guide Judgement

TF offers useful quantitative data, based on which executives can take
informed, reliable decisions.
Technological forecasting, it must be mentioned here, can’t help the decision
maker to predict the future with certainty. However, it can assist him in
refining his judgements. The value of forecasting is highly dependent on the
quality of informational inputs to the forecasting process (information from the
past plus the knowledge of the present) and the calibre of the minds applied to
it. Forecasting techniques can only be aids to the process and care should,
therefore, be taken to see that TF does not absorb greater resources than can be
justified in economic terms.

Technology Forecasting Techniques

Some of the important TF techniques may be listed thus:

Trend Projections
This is based on the assumption that the future grows out of the past. The past
data, accordingly, is projected into the future. The leading indicators or turning
points in technological innovations are spotted from the information collected
on national, industrial, competitive indices, market trends, etc. Based on these
important changes in technological activity over a period of time and on the
information collected, the future trends are predicted.

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Notes
Example: In respect of power generation equipment, improvements in
power to weight ratio, power to loss ratio or conversion efficiency over the
years are plotted against time and then the past trend is projected into the
future. However, as experts point out, mere trend projections do not always put
the researcher on the track unless he/she combines such projections with other
intuitive and econometric approaches.

Intuitive Methods
In this case, the information regarding various technological indicators is
collected and analysed (expert opinion, polls, panels, Delphi). The analyst by
using his/her judgement and experience, summarises the main factors, draws
inferences and then develops various forecasts. The forecasts are prepared
continuously and, as and when necessary, they are revised (in the light of fresh
information). Forecasts, thus, are not products of scientific data but are the
results of analyst’s conclusions based on market survey and opinions of
experts.
Scenarios: A scenario is a written description of a possible future.
Multiple scenarios are simply written accounts of several possible futures.
Some of the typical questions that need to be looked into while writing the
scenario for a large retail chain related to electronic commerce would be:
 How could developments in electronic commerce significantly change
traditional retailing?
 What types of strategies might be useful in preventing, diverting,
encouraging or dealing with the possible future for electronic commerce?
Scenarios offer a wider range of possibilities against which strategies can be
evaluated. They help in the identification of events that require the
development of contingency plans. They assist managers and others spot
patterns, generalisations, and interrelationships.

Econometric Models
These are systems of simultaneous multiple regression equations involving
several predictor variables that are used to identify and measure relationships
or interrelationships that exist in the field of technology related to an area.
Such models try to predict the likely future directions of the technological
growth and the impact of changes such as proposed tax concessions to
computer education firms, sops to software products, benefits to software
exporters, etc. on the growth of qualified, competent computer professionals in
the country. The development of econometric models is quite complex and
expensive. As a result, such models are beyond the scope of most managerial
jobs and all but very large organisations.

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Monitoring Methods Notes

These methods offer early warning signals of important changes in established
patterns and relationships so that managers can assess the likely impact and
plan responses, if required. Quantitative approaches to monitoring generally
depend on a tracking signal. A tracking signal is a mathematically derived
measure that is based on recent fluctuations in a variable of interest and is
designed to find possible important deviations presently occurring that are
worthy of managerial attention. Once designed, the tracking signal is employed
to measure present movements in the variable of interest, it is set so that it
automatically signals when deviations from expected patterns are merely
random fluctuations that can be ignored or represent a possible non-random
shift in direction. Manager may then be asked to evaluate the importance of the
apparent pattern shift. Whilst the practical utility of TF is still limited, its use is
likely to increase once managers gain an insight of what it can do to improve
R&D decision-making. However, as a word of caution, it must be stated that
TF alone will never remove completely the uncertainties inseparable from any
consideration of the future.

Learning Activity
Suppose you are the CEO of any company, you have recently left
your previous organisation to join the new organisation (which is
an IT organisation). You are asked to prepare a detailed note on
company’s technology management. How will you prepare your
note? And how will you forecast technology requirement for your
new organisation?

14.1.6 Barriers to Technology Planning and Management

There are not many successful firms in this world that have successfully
converted technological ideas into useful, acceptable products. Those firms that
have an envious track record in this regard have obviously succeeded in
integrating technological innovations and corporate planning efforts
successfully and emerged as winners in the last couple of years are Intel
Corporation, Minnesota Mining and Manufacturing (3M) Polaroid, Hewlett
Packard, Digital Equipment, etc. There are, of course, historical reasons for not
giving technology its due place in corporate planning. They are as follows:

Lack of Training
Managers usually possess expertise in areas such as law, accounting,
manufacturing, finance or some other corporate function. Their limited training
in science and technology areas does not give them enough confidence to deal
with technological change quickly. Consequently, they fail to take technological
inputs while making economic forecasts. Market research also tends to have a
short-term perspective in the absence of adequate technological inputs.

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Notes Lack of Knowledge

We know very little about the process of technological change; the knowledge
we have is new (accumulated in the last 10 to 15 years) and has yet to be
synthesised.

Lack of Appropriate Framework

Partly due to limited experience, we lack adequate frameworks for viewing
technological change. There is nothing comparable in this field to the
simplifying frameworks for strategic business planning which have become
prevalent in the last decade. The management of technology, as a result, stands
neglected and discounted even in business schools.

Lack of Long-range Focus

Technological innovations demand long-term planning, demanding top
management support and commitment of resources on a long-term basis. Most
corporations, however, focus their energies on short-term objectives partly
dictated by their short term cash flow needs. Moreover, the development
objectives are biased toward existing needs such as product improvement, cost
reduction, etc.

Lack of Initiative to Take Risks

Most businesses are organised around the production process. They are not
organised to recognise or reward the uncertainties, risks and time constraints of
the technological innovation process. As a result, the most important
technological change originates outside the firm or even outside the industry
that ultimately uses it.

14.2 INNOVATION MANAGEMENT

The ability to innovate is a vital core strength that a manager must possess in
order to build a growing, profitable organisation. Innovation is a high risk,
high-return area that cannot be put aside easily. To promote a culture of
innovation, managers must try to set goals for innovation, commit adequate
funds for research and development, inspire people with ideas to realise their
potential fully, focus on what the customer actual likes and demands and more
importantly, do not get rattled by failure and mistakes. At the end of the day,
managers must realise that innovation is like skydiving; funny, scary and risky.
They must know when to stop and when to go all out dying for an idea. To
survive and flourish in a competitive environment, every company must
innovate. In the long run, innovation could be essential for creating and
sustaining competitive gains. Innovation, broadly speaking, may involve
exploiting existing capabilities of an organisation to improve production speed
or product quality. It may involve exploring new knowledge, seeking to
develop new products or services. Innovative firms must invariably invest their

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time and resources in order to encourage employees to experiment and find Notes
novel ways of doing things.
Innovation is the process of creating and implementing a new idea. As new
ideas can take many forms, many types of innovation are possible. Technical
innovation is the creation of new products and services. Process innovation
involves creating a new means of producing, selling and or distributing an
existing product or service. Administrative innovation takes place when
creation of a new organisation design better supports the creation, production
and delivery of products and services (virtual teams, IT systems, etc.).
Innovations in organisations can range from radical new breakthroughs (such
as laser technology) to small, incremental improvement (such as an improved
paper tray on a computer printer). Although radical advances are important to
many firms, incremental improvements also can be beneficial. Japanese firms
are known for their ability to enhance products and services through a variety
of small, incremental improvements.

Example: Japan-based Matsushita Electric Industrial Company, a team

of 100 technicians, PhD scientists and factory engineers persisted for 8 years
before developing an improved glass lens for use in projection televisions and
several laser-based products, such as videodisc systems and compact disk
players. Moreover, the new lenses can be made for 90 per cent less than the
cost of existing lenses. Thus, a relatively modest goal improving a component
in successful products led to a rapidly expanding market share for the
company, especially for use in compact disk players.

14.2.1 Research and Development Strategies

Firms can significantly improve operations by putting more emphasis on
research and development R&D spending helps identify new products, new
users for existing products, and new methods for making products. Each of
these contributes to productivity significantly.

Example: As we all know, new product innovations such as chilled

prepared meals (Marks and Spencer), the compact disc (Philips) and the anti-
lock braking system for cars (Bosch) took place in companies with established
R&D strategies.

Example: Bausch & Lomb almost missed the boat on extended-wear

contact lenses because the company had discounted R&D. When Bausch &
Lomb became aware that its principal competitors were almost a year ahead in
developing the new lenses, management made R&D a top priority item. As a
result, the company made several scientific breakthroughs, shortened the time
required to introduce new products, and greatly enhanced both total sales and
profits and all with a smaller workforce than the company used to employ.

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Notes Firms that lag behind in the technology race find it extremely difficult to
recover the lost ground.

Example: Philips marketed the first VCR in 1972, getting a three year
lead on its Japanese competitors. However, in the seven years that it took
Philips to develop its second generation of VCR models, Japanese
manufacturers had come out with at least three generations of new products. A
victim of its own complacency, Philips never recovered from the Japanese
onslaught.

The key to implementing innovation is first defining the type of

your organisation’s needs. The hardest kind of innovation to manage is
Breakthrough which creates an entirely new way to deliver value. Few and
far between, these game changers hold the greatest potential for business
success. Most innovations are incremental, which can mean a tweak on an
existing product, process, or service. Examining how your innovation effort
fits into the current organisation’s needs is critical at this go/no go
checkpoint (There is nothing wrong to focus and start with Incremental
Innovation or Line Extensions, get some early wins, get the organisation
engaged and excited and create a structured repeatable process).

The traditional model of innovation calls for the R&D department to come out
with a novel idea and research on it, then have an engineering design, which
they present it to the manufacturing department to produce and finally over to
sales to sell. Such a sequential process may pose several hurdles on the way.
The manufacturing department may send the design back to engineers
expressing inability to produce it at the targeted cost; the engineers may spend
time to redesign the whole thing only to be told by sales people that the product
can’t be sold because customer needs have either not been met fully or have
changed. The parties involved in the sequential play, thereafter indulge in
mutual recrimination and shifting of blame when the idea fails to deliver the
goods. To speed up innovation and new product development companies,
therefore, follow a team-oriented approach, striking right chords between
R&D, and engineering, manufacturing, purchasing, marketing and finance
departments from the beginning. Most successful Japanese firms take up new
product ideas from a marketing point of view and create a cross-functional
team to guide the project through its development. They also bring customers
in at an early stage to get their views. Historically, new product ideas have
failed to yield good results not because they are scientifically tested but
because they failed to take note of customer preferences and incorporate them
in the product in appropriate measures.

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Notes
Example: The Maxwell House Division of General Foods found that
consumers wanted a brand of coffee that was ‘bold, vigorous and deep tasting.’
Its laboratory technicians spent over four months working with various coffee
brands and flavours to formulate a corresponding taste. It proved very costly to
produce and the company ‘cost reduced’ the brand to meet the target
manufacturing cost. The change compromised the cost, however, the new
coffee brand failed to sell in adequate members in the marketplace. To avoid
such costly mistakes companies usually follow a stage gate system.

Customer demand affects the successful outcome of your

innovation. Beyond asking your customers what features they would like to
see, ask them what their biggest concerns are and that will help shed light on
the products and functionalities they require for a more successful innovation.

14.2.2 Innovation Process

To put everything in place, firms may have to take care of the following steps:

Inventing
The innovation process begins with an idea. To this end, firms must encourage
people to come forward with different ideas: crazy ones, silly ones, even idiotic
ones. These ideas could take up anything that helps in cutting costs, improving
the speed, enhancing the quality, whatever. Technology ideas could include
ideas like employing bar coding or better management of inventory or reaching
out to global customers through speed and efficiency. Product ideas could
cover inventions of new products or services or enhancement of existing ones.
Process ideas focus on inventions for improving manufacturing processes.

Example: Adopting products to make a manufacturing process more

efficient or redesigning work stations to make workers more productive.
Management ideas focus attention on ways and means to improve
organisational work covering issues such as improving human resource
management, redesigning organisational structure, changing organisational
leadership or refining competitive strategy.

Developing
Here the new idea takes a practical shape. Ideas that are not viable should not
be pursued for longer periods of time. Even if the ideas are creative and novel,
they must be sent to their burial grounds simply because they are not
commercially viable.

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Notes
Example: The world famous innovative company 3M encourages
people to give their best. It has achieved this fame through a formal, simple
and well established company policy that helps to assure that every idea that
deserves to be developed is indeed developed. This policy encourages
employees to see if managers in other parts of the company will help to
develop a new idea after the employee’s immediate boss has rejected it.

Diffusing
At this stage, end users and consumers put the new idea to use. When the idea
gets established and is developed step by step, it needs to be seen whether it
actually works or not. So organisation members who would be affected by the
idea would explore it further to find out its utility and worth. End users could
be approached with a prototype of the product to find their reactions. A
positive customer feedback would help the company decide whether to go
further or to stop at this stage itself.
Integrating
Here the invention is being accepted and established as a permanent part of the
organisation. If the invention focuses on a new organisational process, for
example, management takes steps to make the new process standard operating
procedure within the organisation. If the invention focuses on a new product,
management takes steps to start manufacturing and selling the new product to
the marketplace.

Learning Activity
Prepare a detailed note on your understanding about the
innovation management and research and development strategies
and its impacts on an organisation. Your note must be based on
any company of your choice.

Dr Reddy's Laboratories Ltd. (DRL)

D rug discovery is a time-consuming, high-risk process. Globally, the

money spent on a new drug is as high as $800 million and up to 7
years can elapse between the discovery and the launch. To optimise
its R&D spend, DRL restricts the research universe to its strength areas,
which are organic chemistry and natural products. Second, the company
collaborates on research with laboratories in India and abroad besides
outsourcing 50 per cent of its toxicology that is, chemical development
inputs. Finally, it stops short of clinical trials, selling the technology to
someone who is willing to do that (the clinical-trial costs are prohibitively
Contd...

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high). With investments of less than 50 crore and around 230 scientists, the Notes
company has successfully turned out 17 patents in the US during the last
two decades. The company's anti-diabetes molecule DRF-2593 has been
licensed to NOVO Nordisk at an attractive price. Normally, an average
performing company files 2.5 patents for $10 million R&D spend; whereas
DRL has filed 36 patents during the last 5 years! DRF-2593, DRF-2725,
DRF-1644 (anti-cancer molecules) are currently undergoing clinical trials
and in addition $8 million that it has received as milestone payments for
DRF-2593 it is expected to receive $15 million very soon. On a projected
turnover of 1,000 crore for 2000-1 the company spends less than 5 per cent
on R&D and to further optimise the R&D expenditure it has useful tie-ups
with national (ISC, Bangalore; IICT, Hyderabad) and International research
outfits (NOVO Nordisk, National Cancer Institute, USA)
Questions
1. What kinds of R&D strategies have been adopted by DRL in the above
case study?
2. Prepare a short note on the R&D strategies of DRL in your own words.

1. Innovations in manufacturing (like lean

manufacturing) and business processes (re-
engineering) allow firms to lower the cost structure.
This is where technology and innovation come to play
a major role in building a sustainable competitive
advantage.
2. The Delphi technique is a forecasting aid based on a
consensus of a panel of experts. The experts refine
their opinions, step by step, until they reach a
consensus. As the technique is heavily dependent on
opinions, it obviously is not fool proof. However, the
consensus arrived at tends to be much more accurate
than a single expert's opinion.

SUMMARY
 Technology is the methods, processes, systems and skills used to transform
organisational inputs into outputs. It is a systematic application of scientific
knowledge to a new product, process or service.
 The technologies that employees use range from simple to highly complex.
 A simple technology involves decision-making rules to assist employees
perform routine jobs.

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Notes  Through the innovative use of IT and other strategic innovations, firms are
able to capture market share by offering more value (defined as the
difference between the perceived value of a good to a customer and the
total cost per unit to produce the good) to customers than their rivals.
 When a firm is able to get past the competition by creating superior value
at a lesser cost as compared to its rivals it is able to enjoy the competitive
advantage for fairly longer periods of time.
 Competitive advantage requires a fit between a firm’s internal strengths
and weaknesses and external opportunities and threats. To obtain a
competitive advantage, a firm must have competencies that allow it to
create a higher perceived value than its competitors or produce the same or
similar products at a lower cost or to do both simultaneously. Superior
competencies help a firm to create higher perceived value and/or achieve a
lower cost structure.
 Computer aided design linked to versatile, computer-controlled machines
permits short production runs of custom designs with economies of scale
approaching those of traditional large-scale manufacturing facilities.
 Groupware is a software that enables a group of people on a network to
collaborate over long distances at the same time. Intranet is a network that
applies computer and internet technologies to a firm or selected groups
within a firm. Similarly, the extranet also uses computer and internet
technologies; it connects selected users inside as well as outside the
organisation.
 The Internet has transformed many industries, ranging from
telecommunications to travel. It is inexpensive, found almost everywhere
and more importantly is an open system that has led to the phenomenal
growth of internet companies.
 Innovation is the process of creating and implementing a new idea. As new
ideas can take many forms, many types of innovation are possible.
 Technical innovation is the creation of new products and services.
 Process innovation involves creating a new means of producing, selling and
or distributing an existing product or service.
 Administrative innovation takes place when creation of a new organisation
design better supports the creation, production and delivery of products and
services (virtual teams, IT systems, etc.).

KEYWORDS
Technology Lifecycle: It is a predictable pattern followed by a technological
innovation, from its inception and development to market saturation and
replacement.

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Technological Forecasting: It is the prediction of the future technologies that Notes

are likely to emerge and when they are likely to be economically feasible.
Technology: Technology means the knowledge, tools, equipment and work
techniques used by an organisation in delivering its product or service.
Network: Network is a linkage between an organisation and its environment.
Reengineering: It means creating new ways to get work done, often involving
redesigning the processes related to logistics, distribution and manufacturing.
Performance Gap: This is the difference between what the organisation wants
to do and what it actually does.
Forecasting: It involves predicting, projecting or estimating future events or
conditions (generally beyond the organisation’s control) in an organisation’s
environment.
Extrapolation: It is the projection of some tendency from the past or present
into the future.
Scenario: Scenario is a written description of a possible future.
Delphi Technique: It is a structured approach to gaining the judgements of a
number of experts on a specific issue related to the future.
Simulation: It is a representation of a real system.
Judgmental Forecasting: It is a type of forecasting that relies mainly on
individual judgements or committee agreements regarding future conditions.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What do you mean by technology management?
2. Define the term technology.
3. What is the relationship between technology and competitive advantage?
4. What do you mean by technology lifecycle?
5. Briefly explain the important technology forecasting techniques.
6. Explain the terms innovation and creativity.
7. Explain what you mean by In-house development of technology.
8. What is innovation?
9. What is competitive advantage?
10. What is computer aided design?
11. What is Groupware?
12. What do you understand by the Internet?

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Notes 13. What is technical innovation?

14. What is an administrative innovation?
15. What is a process innovation?
16. What do you mean by research?
17. What do you mean by the development?
18. Explain the R&D.
19. What are the R&D strategies?
20. What is the various innovation processes?

Long Answer Questions

1. Define ‘technology’. Explain why it is important to win the technology
race in modern times.
2. What is the relationship between technology development and strategic
planning? How can a firm design an appropriate technology strategy?
3. Explain the important phases of the technology lifecycle, using examples
wherever necessary.
4. What factors have made the management of technology at enterprise level
important? Explain.
5. ‘Technology is a valuable strategic resource’. Comment on it.
6. ‘Technology creates options’. Elaborate.
7. What are the essential components of planning for technology? Cite
examples in support of your arguments.
8. Some have said that the information revolution now occurring is like the
industrial revolution in terms of the magnitude of its impact on
organisations and society. What leads to such a view? Why might this view
be an overstatement?
9. “R&D must be integrated to the corporate strategy”. Why is it necessary to
do so? What would happen when both are not welded properly?
10. Define ‘technology forecasting’. List the various techniques of technology
forecasting.

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FURTHER READINGS Notes

Drucker Peter, (2012), Technology, Management and Society

Butterworth-Heinemann, New York
Burgelman R.A. and Maidique M.A., (2009), Strategic
Management of Technology and Innovation, Irwin, Homewood,
Illinois
Peters L.S., (2000), Radical Innovation, Harvard Business School
Press, Cambridge
Bateman T.S. and Snell S.A., (2009), Innovation Management,
McGraw Hill, London
Farrukh C.J.P, Phaal R. and Probert David, (2000), Technology
Management Assessment Procedure: A Guide for Supporting
Technology Management in Business, Hobbs, England

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Notes
LESSON 15 - STRATEGIC ISSUES

CONTENTS
Learning Objectives
Learning Outcomes
Overview
15.1 Strategic Issues
15.1.1 Unethical Practices of Managers
15.1.2 Social Audit
15.1.3 Environmental Audit
15.1.4 Energy Audit
15.2 Strategies for Non-profit Organisations
15.2.1 Popular Strategies for Non-profit Organisations
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Explain the strategic issues
 Understand the strategies for non-profit organizations

LEARNING OUTCOMES
Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 list out strategic issues
 explain unethical practices of managers
 analyzing environmental audit
 identifying strategies for non-profit organizations

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OVERVIEW Notes
Let us first review the previous lesson. You have learnt about managing
technology and innovation management. At the end of the lesson, you have
studied about R&D strategic and innovation process.
In this lesson, you will study about the strategic issues and strategies for non-
profit organisations.
We advise you to learn this lesson carefully. It will give you a better
understanding of other strategic issues related to business. This lesson will help
you to understand the concepts of new business model and the internet
economy.

15.1 STRATEGIC ISSUES

Strategic issues are fundamental policy questions or critical challenges that
affect:
 An organization's mission and values
 Product or service level and mix
 Clients, users, or payers, or
 Cost, financing, organization or management
A statement of a strategic issue should contain three elements:
 The issue should be described succinctly, preferably in a single paragraph,
and it should be framed as a question the organization can do something
about.
 The factors that make the issue a fundamental challenge should be listed.
 In particular, what in terms of the organization's mandates, mission, values,
internal strengths and weaknesses, and external opportunities and threats,
make this a strategic issue?
The consequences of failing to address the issue should be identified, so that
the organization will know what kind of issues it faces.

15.1.1 Unethical Practices of Managers

The word ‘ethics’ refers to principles of behaviour that distinguish between
good and bad; right and wrong. It is a person’s own attitude and beliefs
concerning good behaviour. Ethics reside within individuals and as such are
defined separately by each individual in his/her own way.
The leader’s real world of deciding shades of difference is far more
challenging and complex than the bookish ethical problem situations. In
addition to the above factors, there are other complicated factors involved in
making a choice between right and wrong. Often, it may be difficult for the

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Notes leader to free him/her from bias and prejudice and look at issues objectively. In
spite of good intentions, he/she becomes passionately involved in the situation
and becomes identified with certain positions or viewpoints. It becomes
difficult to step back and to take a detached standpoint in examining the issue
from an ethical perspective.
The unethical practices of managers include:
 Falsifying information on application blank
 Trading stocks on the basis of inside information
 Padding expense accounts
 Divulging trade secrets to competitors
 Taking company property or materials for personal use
 Giving or receiving gifts in return for orders
 Quitting a job or firing someone without giving adequate notice
 Stealing
 Soliciting/offering kickbacks
 Cheating customers, overselling, unfair credit policies

Factors that rise ethical standard are providing clear guidelines for
ethical behaviour; teach ethical guidelines and their importance; and
conduct frequent and unpredictable audits.

15.1.2 Social Audit

The term ‘social audit’ means different things to different people. To some it
means revealing a company’s social performance in broad day light, to others it
is an internal assessment of how well a company has discharged its social
obligations and to some others it is a systematic and comprehensive evaluation
of an organisation’s social performance as distinguished from its economic
performance. ‘Social performance’ here signifies organisational efforts
enriching the general welfare of the whole community and the whole society.

A social audit is a systematic assessment of a company’s activities

in terms of their social impact.

The need for social audit arises because of various reasons:

 Business may postpone investments in social areas, while trying to
maximise profits, and expect others to take the initiative. This way, it is
hoped, the firm would be able to price its products much cheaper and get

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ahead of competition. Unless there is some moral pressure from the general Notes
public, government and social activists, such firms may not pursue socially
responsible actions in the larger interest of society.
 Business is a part of society. It receives various inputs from society, obtains
benefits from the government and survives only when both these external
agencies welcome its products positively. While converting the crucial
resources into useful products, it must, therefore, behave responsibly
without using its power in any unfavourable way.

Example: The Sachar Committee felt that “the Company must behave
and function as a socially responsible member of the society like any other
individual. It cannot shun moral values nor can it ignore actual compulsions.
The real need is for some form of accountability on the part of the management
not being limited to shareholder alone. In modern times, the objective of
business has to be the proper utilisation of resources for the benefit of others. A
profit is still a necessary part of the total picture but it is not the primary
purpose. The company must accept its obligation to be socially responsible and
to work for the larger benefit of the community”.
 Society expects businesses to share the fruits of progress and growth. A
healthy business cannot exist in a sick, impoverished society.
 Socially active and responsible organisations may not be at the receiving
end whenever there is an outcry against issues such as inflation, pollution,
black marketing, poor quality, etc. because of the goodwill and positive
image generated over the years.

A company’s social performance is usually measured in the terms

of activities such as producing goods and services that people need, creating
jobs for society, paying fair wages, ensuring worker safety, making efforts
to preserve the natural environment, etc. Such a measurement gives some
indication of the economic contribution the organisation is making to
society.

15.1.3 Environmental Audit

In developed countries, people protest violently whenever companies try to
pollute the environment (dumping off chemical wastes, releasing dangerous
effluents into the rivers, discharging toxic materials into air, etc.). The
awareness levels are high and consumer associations and environmentalists
fight such issues on a war footing. As a result, most manufacturing units there
have realised the importance of ‘green behaviour’. They not only comply with
regulations but also proactively explore opportunities to recycle wastes into
useful products.

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Notes
Example: Industries have developed a whole new generation of
successful products in response to the Clean Air Act and reuse and recycling
regulations. The Environmental Protection Act, 1986, and the Water
(Prevention and Control of Pollution) Act, 1974, take care of environmental
concerns in India. An internal group constituted by the unit concerned prepares
a report about the way the environmental issues of importance are being taken
care of. This report is generally re-examined by an outside auditor to see
whether air/water pollution measures, release of toxic wastes, safety
regulations have been complied with or not.

15.1.4 Energy Audit

After the oil crisis in the early 70s, most companies have realised the
importance of conserving energy the world over. There have been hectic
efforts to identify alternative sources of energy as well. To conserve existing
sources, energy audits are undertaken to investigate how energy is obtained,
consumed and preserved.

Learning Activity
Prepare a detailed note of your understanding about the strategic
issues. Take a company of your choice, study their strategic
environment and their strategic issues they are facing, include
those all strategic issues of that particular company in your report.

15.2 STRATEGIES FOR NON-PROFIT ORGANISATIONS

Over the years, a number of Non-government Organisations (NGOs) have
emerged for delivering charitable and public services mostly to underprivileged
target groups.
Non-profit organisations include charitable, voluntary and other public interest
bodies not owned by the state. They are engaged in voluntary and philanthropic
activities. The growth of NGO has been driven by decreased role of public
organisations in social services, along with an increased demand for such
services. These organisations, by definition, differ from profit-oriented
business organisations.

Example: Homeless people, street children, women abuse.

There are drivers’ types of NGO in India as in other countries. The common
features of these organisations are:
 Their services are intangible.
 The influence of clients is limited.
 They are funded by grants and donations.

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 Internal management is subjects to regulation by funding bodies. Notes

 The personnel are committed to a cause or ideal. Their allegiance to the
organisation is weak.
 Rewards and punishments are subjects to restraints.
Because of these characteristics on NGO and since strategic planning
techniques have developed out of experience of large business enterprise, these
are generally managed in a short-term operational sense rather than a long-term
strategic sense.
This situation was obtaining in 1970. Today radical changes have come even in
the management of NGO. Mainly because of reduction in Govt. funding and
the presence of businessmen on the board of trustees of these organisations,
strategic planning techniques are being increasingly adopted in NGO also.
Today, research shows that countless NGOs have been using strategic
management process effectively. Many NGOs outperform private firms on
innovativeness, motivation, productivity and strategic management.

15.2.1 Popular Strategies for Non-profit Organisations

Strategic Piggybacking
It means developing a new activity that would generate funds needed to make
up the difference between revenues and expenses. Its purpose is to subsidise
the primary service programmes.

Mergers
Dwindling resources are leading an increasing number of non-profit
organisations and NGOs to merge with other sound organisations.
Strategic Alliances
NGO can develop cooperative ties with other organisations for strengthening
their resources as well as services.
To sum up, NGO and Government agencies and departments are finding that
their employees get excited about participating in the strategic management
process.

The government should empower local government, local

communities and local citizen groups through techniques such as
community policing, resident control of public housing, etc.

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Notes

Learning Activity
Suppose you are running a NGO for 10 years. Now the world is
more competitive and you are required to match with the
competitive speed. Which kinds of strategies you will adopt to run
your own NGO at the competitive pace?

Aftermath of a Tragedy

S
hortly after midnight, on December 3, 1984, outside Bhopal, India, a
cloud of deadly methyl isocyanate gas leaked from a pesticide plant,
owned by the Indian subsidiary of Union Carbide. The choking gas
covered the town, quickly killing hundreds – including many children, who
were less resistant to the gas than adults – and forcing Bhopal’s 6,70,000
inhabitants to flee in panic. By the end of the week, more than 2,000 people
had died from inhaling the gas, and 150,000 more had to be hospitalised for
respiratory and eye damage, making Bhopal’s ‘night of death’ the worst
industrial disaster in history. Images of stunned families burying or burning
their relatives and blaming Union Carbide for their agony were broadcast
worldwide.
There were immediate repercussions for Union Carbide and for the
chemical industry as well. The Indian government accused the plant
management of failing to take adequate safety precautions and indicated that
it held the parent company ultimately responsible. Lawsuits brought by
American lawyers on behalf of the victims asked for billions of dollars in
compensatory and punitive damages and threatened to send the company
into bankruptcy. Union Carbide’s stock price plummeted; it halted
production of methyl isocyanate at its West Virginia plant that produced the
chemical in the United States.
Officials in the United States and India called for increased regulation and
inspection of chemical processing plants. Many US localities considered
passing “right-to-know” laws that would require chemical companies to
provide detailed information about hazardous materials to the employees
who make them and to residents living near the plants. Several companies
countered with voluntary right-to-know programmes to head off public
sentiment for government regulation. In the wake of protests against Union
Carbide in other parts of the world, some multinational corporations
claimed that the Bhopal disaster had chilled the international climate for US
business.
Contd...

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Union Carbide, which had earned an above-average record on industrial Notes

safety over the decade preceding the disaster, appeared paralysed by the
magnitude of Bhopal’s suffering. Corporate Chairman, Warren Anderson,
rushed to India to inspect the site and was briefly arrested by Indian
authorities. Union Carbide’s one lakh employees observed a moment of
silence for the dead and injured; many donated money for disaster relief.
Top management spent sleepless nights grappling with the company’s
crushing problems and its uncertain future. Morale at the company was low;
production at many plants temporarily dropped. However, while expressing
profound sympathy for the Bhopal victims and promising to make a fair
restitution, Union Carbide maintained its essential innocence. “There’s no
criminal responsibility here,” said Anderson.

Questions
1. What are the key issues in this case?
2. If you were the manager of Union Carbide, what effect would the news
of the disaster have on you? What would you tell your subordinates?

1. Ethics are principles, values and beliefs that define

what is right and wrong behaviour.
2. Horizontal merger is a combination of two or more
firm in the same line of business, formed primarily to
obtain economies of scale in production or broaden the
product line, eliminate competition or to gain better
control over market.

SUMMARY
 Non-profit organisations include charitable, voluntary and other public
interest bodies not owned by the state. They are engaged in voluntary and
philanthropic activities.
 The growth of NGO has been driven by decreased role of public
organisations in social services, along with an increased demand for such
services.
 Today research shows that countless NGO have been using strategic
management process effectively. Many NGO outperform private firms on
innovativeness, motivation, productivity and strategic management.
 Dwindling resources are leading an increasing number of non-profit
organisations and NGOs to merge with other sound organisations.
 The government should empower local government, local communities and
local citizen groups through techniques such as community policing,
resident control of public housing, etc.

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Notes  The word ‘ethics’ refers to principles of behaviour that distinguish between
good and bad; right and wrong. It is a person’s own attitude and beliefs
concerning good behaviour.
 Ethics reside within individuals and as such are defined separately by each
individual in his/her own way.
 The leader’s real world of deciding shades of difference is far more
challenging and complex than the bookish ethical problem situations.
 In addition to the above factors, there are other complicated factors
involved in making a choice between right and wrong.
 Often, it may be difficult for the leader to free him/her from bias and
prejudice and look at issues objectively.
 In spite of good intentions, he/she becomes passionately involved in the
situation and becomes identified with certain positions or viewpoints.
 It becomes difficult to step back and to take a detached standpoint in
examining the issue from an ethical perspective.

KEYWORDS
Horizontal Merger: This is a combination of two or more firm in the same line
of business, formed primarily to obtain economies of scale in production or
broaden the product line, eliminate competition or to gain better control over
market.
Strategic Piggybacking: It means developing a new activity that would
generate funds needed to make up the difference between revenues and
expenses. Its purpose is to subsidize the primary service programmes.
Ethics are principles, values and beliefs that define what is right and wrong
behaviour.
Social Audit: A social audit is a systematic assessment of a company’s
activities in terms of their social impact
Social Performance: A company’s social performance is usually measured in
the terms of activities such as producing goods and services that people need,
creating jobs for society, paying fair wages, ensuring worker safety, making
efforts to preserve the natural environment, etc.
Non-profit Organizations: Non-profit organizations include charitable,
voluntary and other public interest bodies not owned by the state. They are
engaged in voluntary and philanthropic activities.

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SELF-ASSESSMENT QUESTIONS Notes

Short Answer Questions

1. What is NGO?
2. What are the features of NGOs?
3. What is strategic piggybacking?
4. What are mergers?
5. What is horizontal merger?
6. What are strategic alliances?
7. What is ethics?
8. What is ethical behaviour?
9. What is social audit?
10. What is environmental audit?
11. What is energy audit?
12. What are strategic issues?
13. What is an unethical behaviour?
14. Business may postpone investments in social areas why?
15. Business is a part of society. Explain it.
16. What is social performance?
17. What is the Environmental Protection Act, 1986?
18. What is the Water (Prevention and Control of Pollution) Act, 1974?
19. What are the consequences of the strategic issues?
20. Explain the unethical behaviour of managers. Any two.

Long Answer Questions

1. Explain the concepts of non-profit organisation in detail.
2. What are the various strategies for non-profit organisations? Describe it.
3. Social audit exposes a firm to considerable risk’. Is this true? If yes,
state reasons clearly citing relevant examples.
4. Briefly outline the different approaches to social audit.
5. Are there any concrete reasons why firms must undertake social audit on
their own? What are the possible positive and negative outcomes of social
responsibility actions?

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Notes 6. Define social audit. Outline the reasons why modern companies need to
undertake social audit voluntarily.
7. How should, in your opinion, managers manage social responsibility and
ethics in today’s world?
8. Since 2000, a number of corporate scandals have been brought to light.
Many companies have responded, for example, by appointing a Chief
Ethics Officer, starting an ethics-training programme for employees,
writing a formal code of ethics, setting up a hotline for whistleblowers. In
your opinion, are these measures likely to increase organisational ethics in
the long run? If so why? If not, what would be effective in improving
organisational ethics?
9. Are the ethics of business and its managers changing? Discuss.
10. It is necessary that a company should feel responsibility towards social and
community development?

FURTHER READINGS

Bhayana Sanjay, (2007), Corporate governance practices in India,

Regal Publications, Delhi
Joshi Vasudha, (2004), Corporate Governance: The Indian
Scenario, Foundation Books, Delhi
Das (2008), Corporate Governance in India: An Evaluation, PHI
Leaqrining Pvt. Ltd. Delhi
Agarwal K. Sanjay, (2008), Corporate Social Responsibility in
India, SAGE Publications, Delhi

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LESSON 16 – NEW BUSINESS MODEL AND Notes

STRATEGIES FOR INTERNET ECONOMY

CONTENTS
Learning Objectives
Learning Outcomes
Overview
16.1 New Business Model
16.1.1 Value Proposition
16.1.2 Market Segment
16.1.3 Value Chain Structure
16.1.4 Revenue Model
16.1.5 Competitive Strategy
16.1.6 Growth Strategy
16.2 Strategies for Internet Economy
16.2.1 Forms of Electronic Commerce
16.2.2 Internet Add Value
16.2.3 Internet Affect Competition
16.2.4 Effects of Internet on Competitive Strategies
Summary
Keywords
Self-Assessment Questions
Further Readings

LEARNING OBJECTIVES
After studying this lesson, you should be able to:
 Explain the new business models
 Describe the strategies for Internet economy

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Notes LEARNING OUTCOMES

Upon completion of the lesson, students are able to demonstrate a good
understanding of:
 design new business model
 how to draw value chain structure
 basics of competitive strategy
 explain strategies for internet economy
 determine forms of electronic commerce
 recall internet affect competition
 explain effects of internet on competitive strategies

OVERVIEW
Let us first review the previous lesson. You have learnt about the strategic
issues.
In this lesson, you will study about the new business models. At the end of the
lesson, you will gain knowledge about the internet economy.
We advise you to learn this lesson carefully. It will give you a better
understanding of other strategic issues related to business. This lesson will help
you to understand the concepts of new business model and the internet
economy.

16.1 NEW BUSINESS MODEL

The business model explains how an organisation makes, express and retain
value, in social and economic prospects. The process of business model
formulation is the part of business strategy.
The business model represents the core aspects of a business, which includes
its strategic mission and vision, customers, product/service offerings,
organisational structures and operations. Business model convert innovation to
economic value, Figure 16.1 shows the business model.

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Notes

Figure 16.1: Business Model

16.1.1 Value Proposition

Exploiting core competencies and achieving synergy helps an organisation to
create value for their customers. Value is the sum total of benefits received and
costs paid by the customer, in a given situation. Ideally, the purpose of a
strategy should be to create a lasting value that is greater than the cost of
resources that are used to create it.
A firm, in the final analysis, has to define the factors that offer 'value' to
customers in terms of say low price, high quality, fast delivery, novel features,
excellent after-sales service, etc. Simply stated, value is the ratio between what
the customer gets (both functional and emotional benefits) and what he/she
gives (in terms of money paid, energy expended, time spent and the
opportunity scarified). To survive and flourish in a competitive market, a firm
should always define its business in terms of how it is going to offer certain
benefits to customers more effectively than its rivals.

16.1.2 Market Segment

Segment marketing recognises that buyers differ in their needs, perceptions and
buying behaviours. So the firm here tries to isolate broad segments that make
up a market and adapts its offers to more closely meet the needs of one or more
segments. Firms also pursue niche marketing to cater to the specific needs of a
sub-group within each segment. A niche is a more narrowly target marketing.
It is the decision to distinguish the different groups that comprise a market and
to develop corresponding products and marketing mixes for each target market.
Target marketing is increasingly taking the shape of micro-marketing
nowadays where marketing efforts are tailored to meet the specific
requirements of customer groups on a local basis.

Example: Retailers, such as Pantaloons and Wills Life Style routinely

customize individual stores merchandise and promotions to match its specific
clientele.

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Notes

A market segment should be measurable, accessible by

communication and distribution channels different in its response to a
marketing mix durable substantial enough to be profitable.

16.1.3 Value Chain Structure

The term ‘value chain’ is a way of looking at a business as a chain of activities
that transform inputs into outputs that customer’s value. Any product must go
through stages of activities, such as research, product design, procurement,
component manufacturing, assembly, marketing, sales, distribution and after-
sales service, during which value is added to the product at every stage before
it is sold to the consumer. By analysing those strategically relevant activities, a
firm is able to find out where it is able to do things better than competitors
(offering at a lower cost, delivering service much faster, etc.) Value chain
analysis, thus, offers an excellent means by which managers can find the
strengths and weaknesses of each activity vis-à-vis the firm’s competitors. It
tells where low cost advantages exist; in what way each activity can be
undertaken so as to differentiate it from that of a firm’s competitors; how to
deliver satisfaction to customers as quickly as possible, etc. Business is viewed
as a process, a chain of activities in order to find the strengths and weaknesses
of a firm operating in a competitive environment.
The value creating activities of a firm, according to Porter, may be divided into
two categories: primary activities and secondary activities. Primary activities
represent the important tasks a firm performs to produce and deliver a product
or service to a customer. These include inbound logistics, operations, outbound
logistics, marketing and sales, and service. Support activities work to enhance
or to help the functioning of primary activities. These include the firm’s
infrastructure, human resource management, technology development and
procurement.

16.1.4 Revenue Model

A business monetises its service through a system, which is known as the
revenue model. Revenue models generate revenue through-premium,
subscription or on-line shopping.

16.1.5 Competitive Strategy

According to Porter’s description of five forces of competition, firms can raise
their profitability by placing their activities in markets or industries with a low
degree of competition. By doing so, the firm will potentially develop a large
market share and great profits. However, firms also have a second opportunity
to generate profitability. They can optimise their position within a particular
industry and thereby obtain great profits even if the industry in general may
have below average profitability. Therefore, it is claimed that if firms position

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their products or services effectively, they may be able to generate great Notes
profits, even if the industry is generally crowded with players all wanting a
piece of a pie. Porter proposes that firms have the opportunity to position their
products or services by either costs or differentiation and this positioning can
be applied to either a narrow or a broad scope of buyers. This results in three
generic strategies, which are popularly known as cost leadership strategy,
differentiation strategy and focus strategy.

16.1.6 Growth Strategy

Organisations generally seek growth in sales, market share or some other
measure as a primary objective. When growth becomes a passion and
organisation’s motive is to seek sizeable growth, (as against slow and steady
growth) it takes the shape of an expansion strategy. The firm tries to redefine
the business, enter new businesses, that are related or unrelated or look at its
product portfolio, more intensely. Growth or expansion moves are made in
order to survive in a competitive terrain. Growth options, when exploited
properly, offer scale economies and permit best use of talent and push the
organisation to commanding heights. Growth may be an exciting option for
firms willing to go that extra mile and willing to burn cash on risky ventures.
However, before taking the call, managers must see whether growth is
manageable or not. Growth must happen in sync with environmental demands.
Of course, a firm can have as many alternatives as it wants, by changing the
mix of products, markets and functions. Thus, the growth opportunities may
come internally or externally. Internal growth possibilities may be exploited
through intensification (all resources and efforts put on a single product or a
single market to achieve growth) or diversification (efforts and resources put
on different areas irrespective of whether the business has strengths in it or not,
so it can be related diversification or unrelated diversification). External
growth options include mergers, takeovers and joint ventures.

Learning Activity
Prepare a detailed note on your understanding about the business
model and its impacts on an organisation. Your note must be based
on any company of your choice.

16.2 STRATEGIES FOR INTERNET ECONOMY

E-business is the use of Internet technologies to improve and transform key
business processes. The critical aim of companies making a foray into
e-business is to offer what the customer wants without the expenses incurred in
traditional businesses. Perhaps the greatest technological influence on strategic
management in the 21st century has been the widespread dissemination of the
Internet.

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Notes Internet is the ‘network of networks’ that allows exchange of data, content,
voice and video, as well as linking with the suppliers through the Extranet, and
various internal divisions through the Intranet.
Internet strategy aims at managing business through relationship, information
and knowledge-based coordination. The rise of the Internet has greatly
influenced the strategic management process. The Internet has provided a new
channel of distribution, a more efficient means of gathering and disseminating
strategic information, and a new way of communicating with customers. The
most fundamental change, however, concerns the dramatic shifts in
organisational structure and their influence on viable business models; that is,
the mechanisms whereby the organisation seeks to earn a profit.
E-business means conducting business electronically. Generally speaking,
business entails buying and selling of goods and services. E-business includes
buying and selling on the internet. In a broader sense, business involves the
following key components:
 Ensuring the supply and availability of stock (supply chain management)
 Ensuring transport and delivery support (logistics)
 Ensuring responsiveness to the customer demand (customer relationship
management)
 Ensuring payment (transactions)

Electronic Business (e-business) strategy addresses how best these

various components of business can be managed ‘electronically’.

The origin of e-business can be traced to electronic funds transfer, which

allowed banks and organisations to transfer funds among one another, without
the need for physical paperwork and money activity to take place. Later, the
technology evolved into Electronic Data Interchange (EDI), and enabled
organisations to conduct business transactions such as ordering, invoicing and
paying electronically over expensive private networks. In the 1990s, the
companies started managing information on an integrated basis using
Enterprise Resource Planning (ERP). The ERP approach was built around the
best industry wide practices, and required the firms to modify or substitute
their existing process with the industry best practices identified by the ERP
software vendors. Later, the same transactions and more are being performed
over the publicly associated networks viz. the World Wide Web (WWW). The
technical platform of www enables diverse types of business applications,
including marketing, customer support, logistics management, sourcing and
facilitating the production processes online. Since the web-based protocols
allow for an automatic connectivity, one can effectively formulate and
implement strategies that involve collaboration among different divisions or
firms. Thus, internet has become a strategic priority.

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E-business strategy requires a business model that is responsive to the macro Notes
environment, and that supports internal resources and collaborative external
alliances.

16.2.1 Forms of Electronic Commerce

Electronic commerce activities can be classified into four basic categories by
identifying businesses and consumers as initiators and recipients of the offer.

Business-to-Business (B2B)
Business-to-business (B2B) is the largest classification of Internet business
estimated at $1.3 trillion in 2002. Because Internet reduces transaction costs
(i.e., costs associated with searching for suppliers, negotiating terms, etc.), it
provides exceptional opportunities for streamlining business-to-business
operation. B2B is widely used as a means of increasing the efficiency of
transactions. Many consumers are unaware of the size of B2B related to online
forms.

Business-to-Consumer (B2C)
The business-to-consumer (B2C) segment is the second largest and fastest
growing segment, including such competitors as Amazon.com and
1800flowers.com. B2C successes are often associated with advances in
consumer acceptance of the Internet as a retail alternative.
B2C offers retailers with a number of advantages over traditional forms of
retailing, one of which is the potential for a larger average transaction. For
example, when consumers read the description of a book at Amazon.com, they
also see what others who ordered the same book also purchased, resulting in
opportunities for increased business.
B2C can reduce transaction costs by eliminating the need for much of the
overhead associated with traditional retailing. However, it is easy to
overestimate the extent to which overhead can be reduced. Many analysts
believe that the “dotcom debacle” of 2000 and 2001, during which time a
number of Internet businesses filed for bankruptcy, was due to expected
efficiencies and overhead reductions that never fully materialised.
B2C can offer exceptional convenience for consumers by enabling them to
search large catalogs in only a few seconds, build an order over several days,
and configure various products and view actual prices. “Frequently Asked
Questions” (FAQ) pages can provide customers with clear, accurate answers to
their most common questions instantaneously and at virtually no cost to the
business. Most studies suggest, however, that the vast majority of potential
customers who select items for purchase abandon the site before completing
the purchase, creating an interesting challenge for strategic managers at e-
tailing.

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Notes The challenges associated with a successful e-tailing operation are simple to
identify, yet difficult to resolve. Simply stated, e-tailers must persuade
consumers to frequent their sites, stay there long enough to evaluate the
offerings and complete their purchases. Needless to say, e-tailers must be able
to fulfill these orders as advertised.

Consumer-to-Consumer (C2C)
The consumer-to-consumer (C2C) segment involves utilisation of the Internet
as a facilitator of transactions involving only consumers. Because transaction
costs can be very high, intermediaries such as eBay to manage the exchange of
information and to facilitate payments are often vital to success of the
operation. A number of C2C businesses were established solely to take
advantage of technological advantages of the Internet and/or to meet consumer
needs specifically created by the existence of the Internet.

Consumer-to-Business (C2B)
In the consumer-to-business C2B segment, consumers generate the offer and
businesses accept or decline it. This form of electronic commerce is the least
developed of the four and includes competitors such as Priceline.com. Under
the Price line “reverse auction” model, consumers name their prices for goods
and services such as airline tickets, hotel rooms, and long-distance phone
service, and businesses are free to accept or reject them. Unlike traditional
models, the reverse auction allows for price discrimination because any given
buyer does not know how much other buyers are paying for the same good or
service.

16.2.2 Internet Add Value

Clearly, the Internet has changed the way business is conducted. By conducting
business online and using digital technologies to streamline operations, the
internet is helping companies to add value. Four value-adding activities that
have been enhanced by Internet are:

Search Activities
Search refers to the process of gathering information and identifying purchase
options. The Internet has enhanced both the speed of information gathering and
the breadth of information that can be accessed. This is one of the key reasons
the Internet has lowered switching costs by decreasing the cost of search.
These gains have greatly benefited buyers and suppliers.

Evaluation Activities
Evaluation refers to the process of considering alternatives and comparing the
costs and benefits of various options. Online services that facilitate
comparative shopping provide product reviews and catalogue customer
evaluation of performance; have made the Internet a valuable resource.

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Problem-solving Activities Notes

Problem-solving refers to the process of identifying problems or needs and
generating ideas and action plans to address those needs.

Example: Online travel services (Travelocity) help customers select

from many options to form a unique travel package. Furthermore, problem-
solving often involves providing answers immediately. Firms in industries
such as medicine, law and engineering are using the Internet and digital
technologies to deliver many new solutions.

Transaction Activities
Transaction refers to the process of completing the sale, making payments and
taking delivery. Numerous types of Internet-enabled activities have lowered
the transaction costs. Auctions of various sorts e-procurement are examples.
The above four activities are supported by three different types of content that
Internet businesses use. They are:
 Customer feedback
 Expertise
 Entertainment programming
Strategic use of the above can help build competitive advantage and contribute
to profitability.

Cooperative Environment and Internet

Internet links several value players: customers, suppliers, business partners,
employees and managers. Such a linkage facilitates several value adding
activities:
e-commerce: Internet helps create three types of added e-commerce value for
customers:
Improved Selling Process: Internet helps more targeted marketing and more
expression of the product features, thereby improving the selling process.
Improved Buying Experience: Internet enables easier and more economical
support services to better match product to customer needs.
Improved Usage Experience: Internet also enables delivery of support services
that raise customer satisfaction over the life cycle of product use.
e-procurement: Internet helps to create value in procurement through lower
transaction costs. Transaction costs mean the communication and coordination
costs of procuring inputs and services from other divisions within or outside
the company. Electronic sourcing facilitates access to a wider supply base and
more competitive prices.

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Notes e-ventures: e-ventures are the internet-generated ventures that help

collaboration with other firms. The web has enabled firms to have several new
kinds of partnerships, such as industry consortia and online exchanges.
e-operations: Internet helps to accelerate the reengineering of business
processes. It enables more efficient automation of the routine administrative
functions such as e-recruitment, e-training and a host of other functions. It
fosters a more IT-savvy work force, and an agile business culture.
e-learning: e-learning means the use of Internet for organisational learning.
Internet is becoming major tool for communicating and distributing data,
information and knowledge.

16.2.3 Internet Affect Competition

In terms of a firm’s competitive environment, most of the changes brought
about by the Internet can be understood in the context of Porter’s five forces
model of industry analysis.

Threat of New Entrants

Internet technologies reduce many barriers to entry.

Example: It is relatively inexpensive for a new firm to create a website

that is even more impressive than the website of a larger or more established
competitor. Business launched on the internet enjoys many savings like office
rent, sales-force salaries, and printing and postage.
New entrants may capture a market share by offering a product more
efficiently than existing competitors. Thus, a new entrant can use the savings
provided by the Internet to charge lower prices and compete on price despite
the established companies scale advantage. By so doing, it can capture small
pieces of established firms’ business and erode profitability. Another potential
benefit of web-based business is access to distribution channels.

Bargaining Power of Buyers

The Internet and wireless technologies may increase buyer power by providing
consumers with more information to make buying decisions and lowering
switching costs.

Bargaining Power of Suppliers

Use of the Internet and digital technologies to speed up and streamline the
process of acquiring supplies is already benefiting many sectors of the
economy. In general, one of the greatest threats to supplier power is that the
Internet inhibits the ability of suppliers to offer highly differentiated products
or unique services. Most procurement technologies can be imitated.

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Threat of Substitutes Notes

In general, the threat of substitutes is heightened by the Internet, because the
Internet provides information about new ways of fulfilling the needs. Internet
technologies have led to the development of numerous substitutes, for
example, teleconferencing, electronic storage, online market research, product
testing in cyberspace, etc.

Intensity of Competitive Rivalry

The Internet heightens the intensity of rivalry among existing competitors as
competition tends to be more price-oriented and technology-based advantages
are easily imitated.

The Internet has had a profound effect on the field of strategic

management. It increases access to information for all parties involved in a
transaction, acts as a distribution channel for goods and services, can
improve transaction speed, offers opportunities for interactivity among
participants in business transactions, and presents potential for cost
reductions and cost shifting.

16.2.4 Effects of Internet on Competitive Strategies

The way companies formulate strategies and implement them is also changing
because of the impact of the Internet on many industries.

Overall Cost Leadership

An overall low-cost leadership strategy involves managing costs in every
activity of a firm’s value chain and offering no-frills products. Internet and
digital technologies now provide even more opportunities to manage costs and
achieve greater efficiencies. In terms of strategizing this, the Internet is
creating new opportunities for firms to achieve low-cost advantage. Of course,
the same potential benefits are available to all firms. But some firms have
adopted these capabilities more rapidly or implemented them more efficiently.
These cost savings are available throughout a firm’s value chain. Some of the
benefits are as follows:
 Online bidding and order processing
 Online purchase orders
 Collaborative design efforts using Internet
 Online testing and evaluation in the hiring process
 Online training

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Notes There are, however, some Internet-related pitfalls for low-cost leaders. As
Internet technologies become more widespread, the cost advantages that early
movers enjoyed may be available to many firms. One of the biggest threats to
low-cost leaders is imitation. This problem is intensified for business done by
way of the Internet. Another major pitfall is the availability of information
online that allows consumers to compare goods more easily.

Differentiation
A differentiation strategy involves providing unique, high-quality products and
services and charging premium prices. The Internet is creating new ways of
differentiating by enabling mass customisation, which improves the response
of companies to customer wishes. Some of the techniques that firms are using
to achieve successful differentiation are as follows:
 Internet-based knowledge management systems that link all parts of the
organisation help shorten response times and accelerating organisational
learning.
 Personalised online access helps customers to process orders directly on the
supplier’s website.
 Quick online response and rapid feedback to customers
 Online access to real-time sales and service information
 Automated procurement and payment system

Focus
A focus strategy involves targeting a narrow market segment with customised
products and or specialised services. For companies that pursue focus
strategies, the Internet offers new avenues to compete because they can access
markets less expensively (low cost) and provide more services and features
(differentiation). Internet provides the following avenues to the focusers:
 Chat rooms, discussion boards etc.
 Niche portals
 Virtual organising and online officing
 Procurement technologies that match buyers and sellers
Many aspects of the Internet economy seem to favour focus strategies because
niche players and small firms can often implement Internet capabilities as
effectively as their larger competitors. However, the same technologies are
also available to major players. Therefore, the focusers need to understand the
dangers as well as the potential benefits of Internet-based approaches.

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Notes
One of the potential Internet-related pitfalls for differentiation is
that it will become harder to use the web to differentiate. The Internet-based
gains from differentiation will deteriorate if companies offer unique
products that customers don’t want or create a sense of uniqueness that
customers don’t value.

Thus, the Internet, while promising to provide new opportunities for creating
value and fostering firm growth, may make the competitive landscape more
challenging for many established firms.

Learning Activity
Prepare a detailed note on your understanding about the internet
and its impacts on an organisation. Your note must be based on
any company of your choice.

Information System in Banking

M uch of the data about Information Technology (IT) in the banking

sector in India emanates from the Reserve Bank of India partly
because most commercial banks do not have good enough Web
sites for disseminating information and do not communicate what their
targets for IT are and the actions they have taken to realise them. The RBI
does not provide information about IT investments by the commercial banks
and in the banking sector as a whole.
From the balance sheets, however, one can get some idea of the expenditure
incurred on computerisation and information technology including those
relating to network associations but such spending often includes
investments as well as operational expenditure. It is not easy to check
whether the investment outlays, where they can be identified, are in line
with the targets for the periods.
There is, however, no doubt that the expenditure of the banking sector on IT
has increased in the last eight-nine years, in particular after the scare about
the year 2000. A number of banks used the opportunity afforded by the Y2K
scare to update their computerisation systems, procure new Y2K-compliant
computers and, in general, extend computerisation to cover some front- and
back-office operations.
Contd...

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Notes Technology Gap

Even at the risk of being labelled as gross generalisations, it is useful to
appreciate at the outset, that in the last five years, a number of commercial
banks have opened ATM branches thereby economising on the costs that
devolve in opening of branch offices in cities and major towns. Almost all
bank branches in cities and major towns have computerised the savings
bank and current accounts.
They also have computerised major loan accounts. The investment
operations of banks and clearing systems have also been computerised at the
head office levels. Still there are gaps in technology upgradation in the
commercial banking system. This is best reflected in the yawning chasm
between the technology adaptations of public sector banks as a group and
the new private banks. For convenience, let us term this situation as a
technology gap; even among public sector banks, this is quite high. There is,
however, no such gap that is worth noticing between the new private banks
and foreign banks in India. Technology use in old Indian private sector
banks is not in the same league as that in their modern counterparts.
Computerisation Attracts Customers
The technology gap raises many questions. How is it that a country that is
considered the world's IT hub does not have technologically advanced
commercial banks? Is it because the predominant number of bank customers
is used to, and content with, paper-based systems?
Even if it is true that a large majority of bank customers are not comfortable
with computers, there is no reason why technologically laggard banks
should impose on their customers high transaction costs in terms of the time
and money spent on visits to branch offices and in terms of the delays in
completing their transactions.
Such banks rarely have Net banking facilities for their customers. They
generally offer to make payments on behalf of their customers to utilities
and the Life Insurance Corporation of India if the customers agree in writing
for debiting their accounts amounts equivalent to what is to be paid to the
utilities/LIC.
The offer of this service is not enough because the technologically laggard
banks should realise that the economic class and age composition of their
customers is already not favourable. Most young professionals, irrespective
of their economic class, prefer to do business with technologically advanced
banks. The relatively well to do as well as those who find their career
graphs are on the rise also bank with such banks. It would obviously be
difficult for laggard banks to attract new young customers if they do not
increase their investments on IT.
The policy-makers have unwittingly allowed asymmetric treatment of bank
customers in that those who bank with the laggards have to pay larger
Contd...

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transaction costs than those who transact with technologically advanced Notes
facilities. Besides, the policy-makers, in the given context of the
considerable inflows of foreign exchange, would have to ensure that all
Indian banks are technologically modern and internationally competitive.
They have to work out a definitive period for technological advancement of
all commercial banks for a variety of reasons. It is said that IT investment in
banking would help improve the productivity of many enterprises especially
those in engineering, commerce, finance and pharmaceuticals as well as the
organisational capabilities and management strategies within the banks.
Besides, there is evidence of IT capital increasing employment, job growth
being a function of the increase in utilisation of IT. A large IT presence also
improves the value of the equity share of a bank that accesses the capital
market.
What should be the range of technological upgradation that should be aimed
at? It is difficult to speculate on the advances that will happen in IT in the
near to medium term. But one needs to make sure that the known
technologies are used. For example, all banks would have to go beyond
operating on intrabank or interbank networking systems.
Open Global Network
To be a major player in the financial world at home and abroad with
capabilities to deliver all customer services, it is necessary to cover the
interactions among the various players under an open global network. Banks
would have to also ensure that technologies are continuously updated to
achieve a high degree of risk management capability. This would require
strategies that involve asset and liability management, and take care of
exchange, interest rate, liquidity and operational risks; these must be
comparable with the international best. In addition, banks would need to
take measures to have secure information and safe and quick retrieval. The
RBI has done well in recent years to give the lead in payment and settlement
systems and computerising the government securities, money market and
foreign exchange operations in the banking sector as a whole. It encouraged
the use of electronic debits and credits and electronic fund transfers; set up
the Indian financial network covering all banks; and had a committee to
examine issues relating to technology upgradation in banks. In the current
context of the need to achieve average annual growth rates of 8-10 per cent
to reduce unemployment, the RBI would do well to review IT investments
in banks. It should constitute a group that evaluates the technologies in use
in individual banks and makes suggestions on the required investments for
upgrading them within a set period for reasons explained above.
Banks should be encouraged to educate their customers about the use and
benefits of new technologies. Incentives/disincentives could be set for
complying with the period for technology upgradation. For example, the
Contd...

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Notes non-complaint banks may be denied access to the capital market and may be
pressured to consider offers of merger from other banks.
Questions
1. What kinds of IT strategies have been adopted by RBI in the above case
study?
2. Prepare a short note of your understanding about the case study.
Source: (http://www.thehindubusinessline.in/2005/09/15/stories/2005091500221000.htm)

1. A revenue model describes how a business generates

revenue streams from its products and services. It is
one of the key components of the business model.
2. Internet economy refers to an economy that is based on
digital computing technologies, although we
increasingly perceive this as conducting business
through markets based on the internet and the World
Wide Web.

SUMMARY
 The business model explains how an organisation makes, express and
retain value, in social and economic prospects. The process of business
model formulation is the part of business strategy.
 The business model represents the core aspects of a business, which
includes its strategic mission and vision, customers, product/service
offerings, organisational structures and operations.
 Segment marketing recognises that buyers differ in their needs, perceptions
and buying behaviours. So the firm here tries to isolate broad segments that
make up a market and adapts its offers to more closely meet the needs of
one or more segments.
 E-Business is the use of Internet technologies to improve and transform key
business processes. The critical aim of companies making a foray into
e-business is to offer what the customer wants without the expenses
incurred in traditional businesses.
 Internet strategy aims at managing business through relationship,
information and knowledge-based coordination. The rise of the Internet has
greatly influenced the strategic management process.
 The Internet has provided a new channel of distribution, a more efficient
means of gathering and disseminating strategic information and a new way
of communicating with customers.

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KEYWORDS Notes
Horizontal Merger: This is a combination of two or more firm in the same line
of business, formed primarily to obtain economies of scale in production or
broaden the product line, eliminate competition or to gain better control over
market.
Strategic Piggybacking: It means developing a new activity that would
generate funds needed to make up the difference between revenues and
expenses. Its purpose is to subsidize the primary service programmes.
Revenue Model: A business monetises its service through a system, which is
known as the revenue model. Revenue models generate revenue through-
premium, subscription or on-line shopping.
Internet: It is the ‘network of networks’ that allows exchange of data, content,
voice and video, as well as linking with the suppliers through the Extranet and
various internal divisions through the Intranet.
Internet Strategy: It aims at managing business through relationship,
information and knowledge-based coordination.
E-business: It means conducting business electronically. E-business includes
buying and selling of goods and services on the internet.
Consumer-to-consumer (C2C): This segment involves utilisation of the
Internet as a facilitator of transactions involving only consumers.
Search Activities: These activities refer to the process of gathering information
and identifying purchase options.
Evaluation Activities: These activities refer to the process of considering
alternatives and comparing the costs and benefits of various options.
Problem-solving Activities: These activities refer to the process of identifying
problems or needs and generating ideas and action plans to address those
needs.
Transaction Activities: These activities refer to the process of completing the
sale, making payments and taking delivery. Numerous types of Internet-
enabled activities have lowered the transaction costs.

SELF-ASSESSMENT QUESTIONS
Short Answer Questions
1. What is strategic piggybacking?
2. What are mergers?
3. What is horizontal merger?
4. What are strategic alliances?

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Notes 5. What is business?

6. What is e-business?
7. Explain the origin of e-business.
8. What is business-to-business (B2B)?
9. What is business-to-consumers (B2C)?
10. What is consumer-to-consumer (C2C)?
11. What is consumer-to-business (C2B)?
12. What is search activity of the internet?
13. What is intranet?
14. What is extranet?
15. What are evaluation activities of internet?
16. What is e-procurement?
17. What is e-venture?
18. What is e-learning?
19. What is a revenue model?
20. What is segmentation?

Long Answer Questions

1. Explain the concepts of e-business and their origin of business.
2. Describe the major forms of e-business.
3. Explain how the internet adds value to the e-business.
4. Describe the cooperative environment of the internet business.
5. How does internet affect the business competition?
6. What are the various effects of internet on the competitive strategies?
Explain it in detail.
7. Explain the concepts and ideas of new business model.
8. What are the various competitive strategies of the business?
9. “Present scenario is the technology intensive, so every business is going
technically efficient.” Comment on this statement.
10. Explain the detailed effect of technology on the competitive strategy of the
organization.

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FURTHER READINGS Notes

Award Elias M., (2006), Electronic Commerce: From Vision to

Fulfilment, PHI, New Delhi
Strauss Judy, El-Ansary Adel, and Frost Raymond, (2003),
E-Marketing, Pearson, New Delhi
Bharihoke, Deepak, (2006), Fundamentals of IT, Excel Books,
New Delhi
Kumar Dharminder & Gupta Sangeeta, (2010), Management
Information System: A Computer Oriented Approach for Business
Operations, Excel Books, New Delhi

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Notes

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 Model Question Paper

Model Question Paper

Reg. No.:

M.B.A. DEGREE EXAMINATION

Third Semester
DBA 7303— STRATEGIC MANAGEMENT
(Common to all Branches)
(Regulations 2013)
Time: Three hours Maximum: 100 marks
Answer ALL questions.

PART A – (10 × 2 = 20 marks)

1. How mission is different from vision?
2. Define corporate governance.
3. What do you mean by environmental scanning?
4. What are core competencies?
5. What do you understand by the term strategic alliance?
6. Define strategic advantage profile.
7. What is procedural implementation?
8. Define strategic audit.
9. What is innovation?
10. What do you mean by strategic piggybacking?

PART B – (5 × 13 = 65 marks)
11. (a) Explain the various phases of strategy formulation with an illustration.
Or
(b) What is Corporate Governance? State the concept, need and principles of corporate governance.
12. (a) Discuss the porter’s five force model of industry analysis with suitable illustration.
Or
(b) Explain how will you identify corporate capability factors of different functional areas with
examples.

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13. (a) Discuss the advantages and limitations of growth strategies with examples.
Or
(b) Discuss the Mc.Kinseys 7s framework for organisational analysis with an illustration.
14. (a) Give a detailed account on various human resources activities that contribute to the effective
strategy implementation.
Or
(b) Discuss the process of strategic evaluation and control in detail.
15. (a) Describe in detail the strategic management process in non-profit organisations.
Or
(b) Give a detailed account on new strategies adopted by Indian organisations in the internet
economy.

PART C – (1 × 15 = 15 marks)
16. (a) “Corporate Social Responsibility as a business imperative must not be accepted grudgingly or
half heartedly. Instead, it must be practiced with full vigor and straight from the heart passion
and this certainly helps the companies in the long run” – Critically analyse the statement with
Indian examples.
Or
(b) Do a SWOT Analysis for Reliance Gio 4G services in Indian market and analyse the strategic
approach of reliance communication in this regard.

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