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Strategic management book @ bec doms bagalkot

  1. 1. Strategic-Management BSPATIL
  2. 2. CONTENTSUnitsUnit 1Lesson 1.1 The business systemLesson 1.2 Objectives of the businessLesson 1.3 Mission – vision – goalsLesson 1.4 strategic analysis of functional areasLesson 1.5 Analyzing corporate capabilitiesLesson 1.6 SWOTUnit 2Lesson 2.1 Corporate strategyLesson 2.2 Process of strategic planningLesson 2.3 Formulation of strategyLesson 2.4 Project life cycleLesson 2.5 Portfolio analysisLesson 2.6 Strategic decision makingUnit 3Lesson 3.1 stability strategyLesson 3.2 Growth strategyLesson 3.3 Retrenchment strategyLesson 3.4 Turnaround strategyLesson 3.5 DiversificationUnit 4Lesson 4.1 Mergers & acquisition BSPATIL
  3. 3. Lesson 4.2 Amalgamation strategyLesson 4.3 joint venture strategyLesson 4.4 Organizational structure and corporate DevelopmentLesson 4.5 Line and staff functionsLesson 4.6 Management of changeUnit 5Lesson 5.1 Implementation of strategyLesson 5.2 Elements of StrategyLesson 5.3 Leadership And Organisational ClimateLesson 5.4 Planning And Control or ImplementationUnit 6Lesson 6.1 ERPLesson 6.2 ERP Package : BaaNLesson 6.3 ERP Package : MARSHALLLesson 6.4 ERP Package : SAPBibliographyModel Test Paper BSPATIL
  4. 4. STRATEGIC MANAGEMENT Unit -1 THE BUSINESS SYSTEM1.1.1. Introduction : The McKinsey analysis discovered four quite distinct phases of strategicmanagement evolution .in phase I, financial planning, management focuses on thepreparation of budgets with an emphasis on functional operation. Mostorganization has a budgeting process, in at least rudimentary from, as a way ofallocating resources among functional units, subsidiaries, or project. The second,forecast- based planning follows naturally from the first as managers projectbudget requirements beyond the one –year cycle. This phase represents an effortto extend managers’ attention beyond the immediate future as scenarios aredeveloped which describe their expectations about future time periods. Budgetsare often constructed for several years at a time and are rolled over annually sothat the appropriateness of a budgeted amount can be reviewed several timesbefore it is operationalzed. Phase 2 planning is very “now” oriented. Currentoperations and characteristics are stressed in analyses of the firm and there is littleattention to or patience for considering operational options or development ofstrategic changes. The business portfolio of a phase 2 firm is often viewed as thefinal expression of strategy rather than as an input to the strategy formulationprocess. Current structure and business activities may be considered fixed, not asstrategic variables. Phase 3, external oriented planning requires a significant change inmanagement viewpoint. Planners are required to about an external orientation andtools and procedures for environmental and internal assessment. Concern centerson understanding the organization’s environment and competitive position andgenerating ideas about how the company might better fit its environment. Severalchoices, contingency plans, are often devised for how the company might fit itsenvironment. Lower level planners and managers are often involved in theprocess of generating choices, an activity that soon puts top management in theposition of choosing a plan in which it had little involvement in developing. BSPATIL
  5. 5. Phase 4, strategic management, evolves as top management senses theneed to more heavily invest in the planning process because of its lack ofunderstanding of or involvement in the details of earlier plan development.strategic management is the meshing of Phase 3 planning and operationalmanagement into one process. It is analysis and conclusion that takes place year-round and ties performance evaluation and motivational programs to strategy.1.1.2 Deliberateness of Strategy: Sometimes outsiders impute strategy to the behavior of firms. Obviously,students analyzing case studies are placed in this position when they imputestrategy from the data they are able to generate on the firm’s operations.Similarly, journalists and the managers of competing firms may impute strategy toa firm’s behavior; and it may or may no0t accurately reflect the real strategy inplace. Outsiders may also imply intent to an imputed strategy. That is; theyassume not only that the strategy they imputed from the firm’s behavior’s is thereal strategy its employees are implementing, but they imply that this strategy isthe one intended for the firm by its management. Seldom is this the case. Mintzberg developed a taxonomy which is useful for discussing therealism and deliberateness of strategy. First, he distinguished between strategythat is the result of a plan, and of a pattern of behavior. He referred to them as“strategy as plan” and “strategy as pattern”, respectively. Strategy as pan is achosen course of action; it could be a real strategy (one intended forimplementation) or a ploy (a tactical move whereby a competitor may beinfluenced into making a mistake). Some people think that Coca-Cola’s rumoredchange in Coke’s formula in ht emid-1980s was such a poly. The implication isthat Coca-Cola had not intended to really change the formula. The implication isthat Coca-Cola had not intended to really change the formula, introduced a newproduct with a different formula that tasted a lot like a competitor’s product, andfinally graciously conceded to continue producing the old formula product whenthe public demonstrated a preference for it over the new--"similar to acompetitor’s – “formula. (Incidentally, if this was in fact a poly, it has to rankamong the top marketing moves ever attempted by any business. Coca-Cola BSPATIL
  6. 6. reaped an immediate increase in market share of about 15 percent that thrust themonce again into unquestioned dominance in the huge U.S. soft drink market).Strategy as plan, when implemented, may or may not be what the firm ends upwith. That is, the planned strategy could ultimately be either realized orunrealized. If it is realized, then the entire process would be a textbook case ofstrategy formulation and implementation in the sense that the firm successfullyimplemented what was intended. But what happens if he planned strategy is implemented and, for somereason, the strategy that is realized is not the intended one? We might say that theplanned strategy was unrealized, and the realized strategy (the one that seems todescribe what the company is actually doing) arises out of some consistency inthe behavior of the company. Mintzberg and Waters call this unintended realizedstrategy, “strategy as pattern,” or a pattern in a series of actions by theorganization. Strategy as pattern is what you will end up with when you imputestrategy to the behavior of a company you are analyzing in a case study, or whatjournalists produce when they attribute a strategy to a company based only on itsactions. “Thus, a realized strategy could be either a deliberate strategy as plan, oran “unelaborated” strategy as pattern. If the realized strategy was planned andalso accurately the firm’s actions, then strategy as pattern and strategy as planwould be synonymous. However, when realized strategy is not intended strategy(that is, it was either not what was intended by management when they drafted aplanned strategy, or they drafted a planned strategy, or they drafted no strategy atall ), then it simply “grew” out of the activities of the company. In Mintzberg’sterms it “emerged” as a pattern of behavior in the absence of intention, or despiteunrealized intention.A realized strategy is what a company is actually doing. If it is the one intendedby management then it is deliberate. If not, then the intended strategy wasundrealized, and the realized strategy is emergent. An emergent strategy is, bydefinition, not deliberate. However, a manager may choose nor to consciouslyformulate strategy and, instead, “go with” the emergent one. But even here, theresultant emergent strategy could not have been deliberate in the same way anintended strategy would have been. Often it is convenient to distinguish between BSPATIL
  7. 7. intended and emergent strategies. When management performs no strategicmanagement at all, they still will have a realized strategy that is emergent. Thisemergent strategy could be recognized by outsiders (and insiders for that matter)even though it may not have been intended my management.Question: 1. What is business policy? Why it is important for companies? 2. Under what circumstances strategic management is useful? 3. What are the commitment of top management in strategic outlook? BSPATIL
  8. 8. LESSON 1.2 OBJECTIVES OF THE BUSINESS1.2.1. IntroductionThe objective is the starting point of the marketing plan. Once environmentalanalyses and marketing audit have been conducted, their results will informobjectives. Objectives should seek to answer the question “Where do we want togo?” The purposes of objectives include: • To enable a company to control its marketing plan. • To help to motivate individuals and teams to reach a common goal. • To provide an agreed, consistent focus for all functions of an organization.All objectives should be SMART i.e. Specific, Measurable, Achievable,Realistic, and Timed. • Specific – Be precise about what you are going to achieve • Measurable – Quantify you objectives • Achievable – Are you attempting too much? • Realistic – Do you have the resource to make the objectives happen (men, money, machines, materials, minutes?) • Timed – State when you will achieve the objectives (within a month? By February 2010?)1.2.2. Examples of SMART objectives:Some examples of SMART objectives follow: 1. Profitability Objectives BSPATIL
  9. 9. To achieve a 20% return on capital employed by August 2007. 2. Market Share Objectives To gain 25% of the market for sports shoes by September 2006 3. Promotional ObjectivesTo increase awareness of the dangers of AIDS in India from 12% to 25% by June2004.To insure trail of X washing powder from 2% to 5% of our target group byJanuary 2005. 4. Objectives for GrowthTo survive the current double-dip recession. 5. Objectives for GrowthTo increase the size of out German Brazilian operation from $200,000 in 2002 to$400,000 in 2003 6. Objectives for BrandingTo make Y brand of bottled beer the preferred brand of 21-28 year old females inNorth America by February 2006.These are many examples of objectives. Be careful not to confuse objectives withgoals and aims. Goals and aims tend to be more vague and focus on the longer-term. They will not be SMART. However, many objectives start off as aims orgoals and therefore they are of equal importance. BSPATIL
  10. 10. 1.2.3 Objectives of growth: Ansoff Matrix as a marketing tool was first published in the HarvardBusiness Review (1957) in an article called ‘Strategic for Diversification’. It isused by marketers who have objectives for growth. Ansoff’s matrix offers strategic choices to achieve the objectives. Thereare four main categories for selection.Market PenetrationHere we market our existing products to our existing customers. This meansincreasing our revenue by, for example, promoting the product, repositioning thebrand, and so on. However, the product is not altered and we do not seek any newcustomers.Market development Here we market our existing product range in a new market. This means thatthe product remains the same, but it is marketed to a new audience. Exporting theproduct, or marketing it in a new region are examples of market development.Product development This is a new product to be market to our existing customers. Here we developand innovate new product offering to replace existing ones. Such product are thenmarketing to our existing customers. This often happens with the auto marketswhere existing models are updated or replaced and then marketed to existingcustomers. this often happens with the auto markets where existing models areupdated or replaced and thenmarketed existing customers.Diversification This is where we market completely new products to new customers there are totype of diversification, namely related and unrelated diversification. Related BSPATIL
  11. 11. diversification means that we remain in a market or industry with which we arefamiliar. For example, a soup manufacturer diversifies into cake manufacture(i.e. the food industry ). Unrelated diversification is where we have no previousindustry nor market experience for example a soup manufacturer invests in theroil business Ansoffs matrix is one of the most will know frameworks for deciding uponstrategies for growth. 1. 2. 4. Setting objectives based on competition: Five forces analysis helps the marketer to contrast a competitive environment. It has similarities with other tools for environmental audit, business or SBU (Strategic Business Unit) rather than a single product or range of products. For example. Dell would analyses the market for business computers i.e. one of its SBUs. Five forces looks at five key areas namely the threat of entry, the power of buyers, the power of substitutes, and competitive rivalry The threat of entry • Economies of scale e.g. the benefits associated with bulk purchasing • The high or low cost of entry e. g. how much will it cost for the latest technology. • Ease of access to distribution channels e.g. Do our competitors have the distribution channels sewn up? • Cost advantages not related to the size of the company e.g. personal contracts or knowledge that larger companies do not own or learning curve effects. • Will competitors retaliate? • Government action e.g. will new laws be introduced that will BSPATIL
  12. 12. weaken our competitive position? • How important is differention? e.g. The Champagne brand cannot be copied. This desensitizes the influence of the environment.This power of buyers • This is high where there a few, large players in a market e.g. the large grocery chains. • If there are a large numbers of undifferentiated, small suppliers e.g. small farming businesses supplying the large grocery chains. • The cost of switching between suppliers is low e.g. from one fleet suppliers of trucks to another.The power of suppliers • The power of suppliers tends to be a reversal of the power of buyers. • Where the switching costs are high e.g. Switching from one software supplier to another. • Power in high where the brand is powerful e.g. Cadillac, Pizza Hut, Microsoft. • There is a possibility of the supplier integrating forward e.g. Brewers buying bars. • Customers are fragmented (not in clusters) so that they have little bargaining power e.g. Gas/Petrol stations in remote places.The threat of substitutes • Where there is product-for-product substitution e.g. email for fax. Where there is substitution of need e.g. better toothpaste reduces BSPATIL
  13. 13. the need for dentists. • Where there is generic substitution (competing for the currency in your pocket) e.g. Video suppliers compete with travel companies. • We could always do without e.g. cigarettes.Competitive Rivalry • This is most likely to be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is always seen in the center of the diagram.Bewman’s Strategy ClockThe ‘Strategy Clock’ is based upon the work of Cliff Bowman. It’s anothersuitable way to analyse a company’s competitive position in comparison to theoffering of competitors. As with Porter’s Generic. Strategies, Bowman considerscompetitive advantage in relation to cost advantage or differentiation advantage.There a six core strategic options.Option one-low price/low added value • Likely to be segment specific.Option two-low price • Risk of price war and low margins/need to be ‘cost leader’.Option three-Hybrid • Low cost base and reinvestment in low price and differentiationOption four – Differentiation BSPATIL
  14. 14. (a) without a price premium • Perceived added value by user, yielding market share benefits.(b) with a rice premium • Perceived added value sufficient to bear price premiumOption five-focused differentiation • Perceived added value to a ‘particular segment’ warranting a premium price.Option Six – increased price/standard • Higher margins if competitors do not value follow/risk of losing market shareOption Seven – increased price/low values • Only feasible in a monopoly situationOption eight – low value/standard price • Loss of market share1.2.5 Objectives of delivering Value:The value chain is systematic approach in examining the development ofcompetitive advantage. It was created by M.E. Porter in his book, CompetitiveAdvantage (1980). The main consists of a series of activities that creat and buildvalue. They culminate in the total value delivered by an organization. The‘margin’ depicted in the diagram is the same as added value. The organization isspit into ‘primary activities’ and ‘support activities’. BSPATIL
  15. 15. Primary ActivitiesInbound LogisticsHere goods are received from a company’s suppliers. They are stored until theyare needed on the production/assembly line. Goods are moved around theorganization.OperationsThis is where goods are manufactured or assembled. Individual operations couldinclude room serviced in an hotel, packing of books/videos/games/ by an onlineretailer or the final tune for a new car’s engine.Outbound LogisticsThe goods are now finished, and they need to be sent along the supply chain towholesalers, retailers or the final consumer.Marketing and SalesIn true customer orientated fashion, at this stage the organization prepares theoffering to meet the needs of targeted customers. This area focuses strongly uponmarketing communications and the promotions mix.ServiceThis includes all areas of service such as installation, after-sales service,complaints handling, training and so on.Support ActivitiesProcurementThis functions is responsible for all purchasing of goods, services and materials.The aim is to secure the lowest possible price for purchases of the highest possiblequality. They will be responsible for outsourcing (components or operations that BSPATIL
  16. 16. would normally be done in- house are done by other organizations), andPurchasing (using IT and web-based technologies to achieve procurement aims).Technology DevelopmentTechnology is in important source of competitive. Companies need to innovate toreduce costs and to protect and sustain competitive advantage. This could includeproduction technology, internet marketing activities, lean manufacturing,customer Relationship management (CRM), and many other technologicaldevelopments.Human resource management (HRM)Employees are an expensive and vital resource. An organization would managerecruitment and selection, training and development, and rewards andremuneration. The mission and objectives of the organization would be drivingforce behind the HRM strategy.Firm InfrastructureThis activity includes and is driven b corporate or strategic planning. It includesthe Management Information System (MIS), and other mechanisms for planningand control such as the accounting department.Question: 1. Write a note a Value chain. 2. What are the methods of deciding the objectives of a business? 3. How competition is playing a role in deciding the objectives? BSPATIL
  17. 17. LESSON 1.3 MISSION – VISION – GOALS1.3.1 MissionMission is the description of an organization’s reasons for existence, itsfundamental purpose. It is the guiding principle that drives the processes of goaland action plan formulation, “a pervasive, although general, expression of thephilosophical objectives of the enterprise.” Mission should focus on “long-rangeeconomic potentials, attitudes toward customers, product and service quality,employee relations, and attitudes toward owners.” It provides identity, continuityof purpose, and overall definition, and should convey the following categories ofinformation. 1. Precisely why the organization exists, its purpose, in terms (a) its basic product or service, (b) its primary markets, and (c) its major production technology. 2. The moral and ethical principles that will shape the philosophy and charter of the organization. 3. The ethical climate within the organization.Thus mission outlines the firm’s identity and provides a guide for shapingstrategies at all organizational levels. The role played by mission in guiding theorganization is an important one. Specifically it. 1. serves as a basis for consolidation around the organization’s purpose. 2. provides impetus to and guidelines for resource allocation. 3. defines the internal atmosphere of the organization, its climate. 4. serves as a set of guidelines for the assignment of job responsibilities. 5. facilitates the design of key variables for a control system.Deal and Kennedy claim that a strong culture is the key to long-term corporatesuccess and that culture has five elements: 1. Business Environment, 2. Values, 3. Heroes (People Who Personify Values), BSPATIL
  18. 18. 4. Rites And Rituals (Routines of Day-To-Day Corporate Life), 5. The Cultural Network (Communication Systems).The mission statement describes primarily the second of these cultural factors,corporate values. The strong cultural companies studies by Deal and Kennedy allhad “a rich and complex system must be believable in that the company’sbehavior should correspond to it over both the short and long term. In this way itcan serve as the foundation for the development of respect for and pride in thefirm by management, owners, customers, suppliers, and others who interact withit.Broad-based acceptance of the values represented by mission can lead to threecharacteristics of firms that accomplish this acceptance: 1. They stand for something—the way in which business is to be conducted is widely understood. 2. From the topmost levels of management down through the firm’s organization structure to the lowest level of production jobs, the values are accepted by all employees. 3. “Employees fees special because of a sense of identity which distinguishes the firm from other firms.”Many examples of firms that have these characteristics as a result of a finelyhoned sense of cooperation and value acceptance are presented by Deal andKennedy. A few of these are listed here, along with the slogans that have come torepresent their value systems. • Dupont: “Better things for better living through chemistry—a belief that product innovation, arising out of chemical engineering… • Sears, Roebuck: “Quality at a good price—the mass merchandiser from Middle America. • Dana Corporation: “Productivity Through people—enlisting the ideas and commitment of employees at every level in support of Dana’s strategy of competing largely on cost and dependability rather than product differentiation… • Chubb Insurance Company: “Underwriting excellence—an overriding BSPATIL
  19. 19. commitment to excellence in a critical function. • Price Waterhouse and Company: “Strive for technical perfection” (in accounting). • PepsiCo’s overall mission is to increase the value of our shareholder’s investment. We do this through sales growth, cost controls and wise investment of resources. We believe our commercial success depends upon offering quality and value to our consumers and customers; providing products that are safe, wholesome, economically efficient and environmentally sound; and providing a fair return to our investors while adhering to the highest standards of integrity. • SBI ‘s mission is “To retain the bank’s position as the premier Indian financial services group, with world class standards and significant global business, committed to excellence in customer, shareholder and employee satisfaction, and to play a leading role in the expanding and diversifying financial sector, while continuing emphasis on its development banking role. • BPL’s service mission is to support the vision of the company becoming the most customer-oriented company in the country, by building a proactive service organization that continuously strives to create customer satisfaction, by internalizing the best practices of customer relationships management. • Reliance’s mission is to evolve into a significant international information technology company offering cost-effective, superior quality and commercially viable software services and solutions. Reliance will adhere to strong internal value systems such as pursuit of excellence, integrity and fairness, and these principles will manifest themselves in all of Reliance’s interactions with its clients, partners and employees. • The Videocon Group is committed to create a better quality of life for people and furthering the interests of society, by being a responsible corporate citizen.CREATING HAPPINESSWe will bring happiness into every home, offering high quality consumerdurables at affordable prices, spreading the culture of convenience, entertainmentand comfort, far and wide. BSPATIL
  20. 20. ACHIEVING PROGRESSWe will pursue innovative technologies in the fields of Electronics and Energy,create products and services that will improve the quality of life, realize the goalsof the world community and protect the environment.SUSTAINIG PROGRESSWe will be a source of pride to our business associates by ensuring mutualprosperity and growth through the implementation of forward-looking corporatestrategies, aimed at identifying opportunities and responding intelligently to thedynamics of change.PURSUING EXCELLENCEWe will provide a conducive environment for enabling our employees to developtheir potential and make a significant. Contribution to the Group’s success.Mission typically is not considered a part of a firm’s strategy set. It reflects theessential preferences of owners and managers for what the firm will do. Strategywill accomplish the task of reducing mission to operational terms. As suchmission is somewhat a personal choice of a firm’s dominant group of actors and isan input to the strategy formulation process. Mission should address the basicpurpose of the firm, the reasons for which it exists. Statements of mission can bemade up of goals and descriptions of the means for achieving them. However,mission-related goals are often qualitative as opposed to quantitative. Some ownergroups prefer to state broad goals as the organization’s purpose and defer tomanagement to set strategy as the way to achieve them.In some organizations questions about purpose are left solely to owners, whetherwidely dispersed stockholders acting through a board of directors, the small groupof owners of a closely held corporation, or the sole owner of a small business. Inthese cases managers are informed of the owners’ expectations and these goalsserve as overriding constraints or guidelines on the activities and operations ofmanagers. In other firms managers may participate in the process of deciding on BSPATIL
  21. 21. purpose, along with owners or their representatives. Managers may eve be calledupon to submit basic purpose choices to owners for affirmation or veto.The importance of a generally understood and accepted notion of purpose cannotbe overstressed. The sole owner of a $30 million-a-year industrial supply firmdecided, upon reaching fifty years of age, that he no longer saw the purpose of hiscompany as primarily a generator of cash flow for him and his family. Instead hedecided its purpose was to generate wealth ultimately through acquisition by alarger company. The change in purpose from a short-term cash generator to awell-groomed acquisition target necessitated a set of dramatic alterations in theway business was conducted on a day-to-day basis by key managers. Things thathad been previously assigned low priority-market development, productdevelopment, asset reinvestment, development of career commitments byemployees and managers, and so on-suddenly became essential goals, theachievement of which, over time, would serve the new mission.Although many managers tend to develop qualitative mission statements, they canbe expressed as a set of quantitative goals stated in financial terms. As such theyspecify the major financial outcomes expected by owners and managers fromoperation of the organization. Examples include market share, market growth,cash flow, stock performance, and dividend payout.Sapphire Infotech Ltd:To play a vital role in bringing the Global Revolution in IT enabled services without unidirectional efforts (integrating People, Process and Technology, giving aface-lift to small medium enterprises, while being conducive for the bettermentand upliftment of our society; and be a leader for world class IT solutions. Suchlike-mindedness and the attitude to be conducive in making the world a globalvillage, made the minds unidirectional. Minds of the seasoned SAP & ERP(Enterprise Resource Planning) Consultants with hands on experience in IT,Telecom or related industries to stud the corona of Indian industries with aSAPPHIRE INFOTECH (P) LTD. Was formally launched on the 12th of April,1999.Vision 2000 of SBIICM BSPATIL
  22. 22. The Institute plans to introduce specialized courses on windows-based applicationsoftware and RDBMS shortly.Plans have been finalized for completing the “Annexe” building, to augmenttraining capacity and to meet the long felt requirements of larger class rooms, aConference Hall, an Auditorium and large PC laboratories. This would help toenlarge the activities of the Institute.The Institute to become “Think-Tank” for the Bank and its Associates. TheInstitutes to open up eventually its training, software development andConsultancy services to other banks in India and for developing countries inSouth East Asia and Africa.1.3.3 Goals and objectives: 1. A goal in an expected result. Synonyms for goal include the words aim, end, and objectives. 2. A qualitative goal is an aspiration toward which effort is directed; a goal to be reached for but not necessarily grasped, rather than a quantitative level of a certain variable. Thus, a firm might aspire to be a good corporate citizen. 3. A quantitative goal is one intended to be reached, a quantified expected result. There are two types: (1) A hurdle goal value is a certain level of a quantitative goal that is to be exceeded (synonyms include instrumental and interim goal); (b) a final or overall quantitative goal is a value that should be achieved. A final goal could be established without hurdles have been reached. Achieving a ten percent increase in total revenue within three years would be a final goal. Hurdle goals would be the targeted revenue increase intended at the end of Years 1 and 2. Exhibit : Relationships Among Types of GoalsGoals Qualitative Final ValuesObjectives BSPATIL
  23. 23. Aims Quantitative Hurdle (Interim) Values Exhibit : Examples of Types of Strategic Goals and Their DefinitionsGoal Type Definition ExamplesQualitative An aspiration “Good corporate citizenship” “Ethical practices” ‘Improved quality of life” “Heightened awareness”Quantitative Numerical aim “6 percent increase in sales”(Final Goal) “Raise ROI by percent”Hurdle goal Minimum to be “Increase sales by percent per year for reached win a there timeframeAndrews suggested that breaking up the system of corporate goals and thecharacter-determining major (actions) for attainment leads to narrow andmechanical conceptions of strategic management and endless logic-chopping.According to the other view, goal setting and the formulation of means forachieving goals are distinct activities that call for the stabilization of goalsfollowed by selection of the proper strategic alternatives. The ultimate separationof goals and strategy results in applying the word strategy only to statementsabout the means for achieving goals. A set of goals would be established first andthen discussions about strategy would focus on deciding the best ways to achievethem. However, this view can result in semantic confusion. If the word strategyapplies to means, then what word will be used to refer to goals plus the means forachieving them? In practice goals plus means are often also called strategy.Goal set A collection of quantitative and qualitative goals for a particular organizational level.Action plan A description of the means by which activity is expected to be BSPATIL
  24. 24. directed toward striving for specified goals.Strategy A set of goals and their action plans for a particular strategy level.Organizational goals manifested as either qualitative or quantitative values wouldbe tied to action plans that identify the appropriate ways to work toward them. Asingle-line business would thus have a set of goals and related action plans thattogether define how it should compete within its business segment. This set ofgoals and action plans would be called its business-level strategy. It could alsohave strategies, still made up of goals and action plans, for other strategy levels.This point is covered in the next action.“Policy” and “tactic” are other terms that have been defined in many differentways. We use policy to refer to standing directions, instructions that vary littlewith changes in strategy. Thus organization can have vacation policy, a policy onabsenteeism, affirmative action policy, and so on. Policy tends to have fewercompetitive implications than strategy when used in this way. However, in manycurricula the management course is called business policy. A tactic is a short-termaction taken by management to adjust to internal or external perturbations. Theyare formulated and implemented within a strategic effort, usually with theintention of keeping the organization on its strategic track.Societal GoalsSocietal goals (also called enterprise goals), in organizations that employ societalstrategy, would occupy the topmost levels of an organization’s hierarchy of goals.In those that to not develop a separate societal strategy, these goals would bewoven into corporate-, business-, and functional-level strategies. Societal goalsmainly address expectations about the firm’s societal legitimacy. Sometimesincluded in statements called creeds or guiding philosophies, societal goalsidentify the major ways in which the organization will operate so as to stay withinthe legal, ethical, and cultural constraints placed on it by society. Although theyguide the behavior of people at all levels of the organization, they have particularrelevance for the decisions of key managers related to balancing the claims on thefirm of society’s interest groups and institutions, owners, and managers (whichwe refer to generally as the firm’s stakeholders). BSPATIL
  25. 25. Legitimacy goals should address the overall role of the firm in the dailyfunctioning of society. They should include goals that pertain to the major socialissues and legislation of the day. “Some examples are pollution standards, thefirm’s antidiscrimination position, safety in working conditions, and sexualharassment.Corporate levels GoalsCorporate-level goals consist of quantitative and qualitative outcomes thatencompass management’s expectations about the optimal combination and typesof business that make up the company. They direct the integration of theparticular collection of businesses that makes up the overall organization and theyserve as behavior specifications for staff members at the corporate level.Business-Level GoalsGoals at the business level specify the anticipated performance results of eachSBU. Their values are intended to balance with those of equivalent variables forother SBUs and thereby contribute to the achievement of corporate level goals.For example, a corporate-level final goal of sales growth of 5 percent in one yearcould be achievable partly by acquisition or divestiture moves, but primarilythrough the contributions of sales increases by present. SBUs. Therefore, in thiscase an average cross SBU sales increase of 5 percent could satisfy the corporate-level target and one would expect each business-level strategy to contain a salesgrowth element that defines that SBUs “contribution” so to speak, to the corporatelevel sales growth goal.Business-level goals integrate the activities of the SBUs functional departmentsand guide the behavior of business unit managers. In other words businesssatrategy defines the role of each functional area relative to each other and toresource requirements and availability. One might say that business-level strategybalances the roles of organizational functions within each business unit in termsof their contributions toward reaching higher level goals. BSPATIL
  26. 26. Functional-Level GoalsAt this level goals are set for each of the functional departments into which eachSBU is organized. The point of functional-level goals is to defined several aimsfor each department in such a way that their achievement would result inachievement of business-level goals. Thus to reach a business-level target of 5percent sales growth, it might be necessary for the personnel department to recruitand screen twenty-five production workers and three more clerical people; formarketing to raise advertising costs by a certain amount increase the number ofsales representatives by a specified number within a certain region, and hire onemore inside salesperson; and so on. These functional requirements become, eitherdirectly or indirectly, goals of the respective functional departments to e achievedwithin appropriate time frames.Goal FormulationFour sets of factors affect the nature of an organization’s collection of goals: (1)The present goals (and action plans); (2) the set of strengths weaknesses, threats,and opportunities that result from environmental and internal analysis; (3) the setof political influences within which individual compete over goal preferences; and(4) the personal values of the organization’s key managers that shape theirpreferences.Present Goals and Action PlansThe degree of success experienced by an organizaatio in reaching past or presentgoals and in implementing related action plans provides insight into the need fornew or modified goals. Failure to meet the goal of retired Chairman WillardRockwell, Jr., to build a $1 billion Rockwell International consumer productsdivision led company managers, under the leadership of new chairman and CEORobert Anderson, to adopt a new goal: $1 billion in foreign sales. This changeseems to have been precipitated by the widespread realization that the previousconsumer products goal was not likely to be achieved.Direction for goal formulation at any organizational level also exists in the BSPATIL
  27. 27. strategy of the next highest organizational level. These higher levels’ goals havethe effect of partially defining the context within which goals are to be set atlower levels. For example, when corporate goals are stated in terms of long-termprofitability and sales growth, then business-level goals should be consistent withthem. Of course, more information would be required about the other factors thataffect goal formulation, but at least corporate goals serve significantly to definethe goal choices available for the business level. Similarly, business-level goalscan structure the formulation of goals at the functional level and thereby definethe context of functional-level goals. Think for a moment of the difficulties thatmight be encountered by a functional department manager, say, the marketingdirector, in trying to manage the department without any idea of what business-level goals were important to top management.The Data SetThe contents of an organization’s environmental and internal data set providemajor clues for goal formulation. Threats and opportunities (determined byanalysis and forecasts of the organization’s external circumstances), along withweakness and strengths (of the organization’s internal state of affairs, in thepresent and future time frames), can be transformed into goal sets at appropriateorganizational levels.At the corporate level, goals are formulated to define the optimal collection oftypes of businesses in which the organization is engaged. The firm’s data set canbe the primary source of information about what types of businesses would bemost conducive to future success. The internal portion of the data set highlightsproblems with existing operations; the external part points out merger possibilitiesas well as types of operations to avoid. Forecasts can identify potential problemswith the present collections of businesses.Existing business-level goals can e evaluated against the contents of the data setas well. Since business-level goals address business unit performance andcompetition, such factors as performance shortcomings, competitive position,latent capabilities, potential obstacles, and new opportunities can be discoveredthrough the environment and internal analysis and their respective parts of theresultant data set. BSPATIL
  28. 28. The data set is also intended to provide major inputs into decisions about theappropriateness of functional-level goals. At this level the portions of the data setthat reflect internal strengths and weaknesses play a critical role in goal setting.One might find, for example, during financial analysis that the firm’s selling andadministrative expenses are excessively high as a percentage of sales. Furtheranalysis might show that sales growth has slowed and that turnover of salespeopleis high. Goals could be set for the marketing department that reflects moredesirable performance along these dimensions. Marketing action plans would thenbe modified to achieve the new goals.Goal Formulation TheoriesMany explanations have been offered in the management literature for howorganizational goals are formulated. Mintzberg notes that, during this century,organizational goal formulation theories have undergone a complete reversal formthe “rational man” view (one goal setter setting a single organizational goal)through the coalition bargaining view (many goals, many goal setters) to thepolitical arena view no organizational goals, power games among individuals).Some examples of the influential goal formulation theories that have appearedover the past several decades follow, in chronological order:Barnard (1938): Organizational goals are formed by a “trickle-up” process in which subordinates expectations are adopted by a consensus-based acceptance process.Papandreou (1958) A top manager forms the organization’s goals as a multivariate function of the preferences of influential actors.Cyert and March (1963): Multiple goals emerge from the bargaining among various coalitions that form out of the parrying for control and personal power by key actors.Simon (1964): Goals are constraints on profit maximization imposed BSPATIL
  29. 29. by decision makers bounded rationality.Granger (1964): Hierachy of gals results from a process of screening, filtering, and narrowing broad expectations to more focused, specific subgoals in a reasonably logical fashion.Ansoff (1965) New organization goals are tried out iteratively as means for closing gaps between present goals and hoped-for results.Allison (1971) (1) Organization process modes-reasonably stable goals emerge as incompatible constraints the represent the quasi-resolution of conflict among internal and external interest groups; (2) bureaucratic politics modes – key players play” politics to product goals they agree with as individuals.Georgiou (1973): Personal goals of individual come and go as organizational goals according to the short-term victories of key managers as they engage in political combat. There are no organizational goals as such.Hall (1978) Goals are set according to three processes, the appropriateness of which depends upon two contingencies, concentration of power and amount of goal-preference conflict: problem solving – concentrated power, no preference conflict; and bargaining – balanced power, preferences in conflict.MacMillan (1978) Organizational coalition members demand coalition commitment to personal goals; the coalition responds by developing commitment to generalized versions of individual members’ goals. These generalized goals (not the specific goals of individuals) become the BSPATIL
  30. 30. organization’s goals.Questions: 1. What are the methods of developing a mission statement? 2. Write the vision statement of Infosys and analyze the same. 3. What are the various methods of deciding the goal of companies? BSPATIL
  31. 31. LESSON 1.4 STRATEGIC ANALYSIS OF FUNCTIONAL AREAS 1.4.1 LEVELS OF STRATEGY:There is wide diversity in strategic management literature of levels attached to thedifferent levels of strategy that may exist in a firm. For example, Thompson andStrickland propose four levels: corporate strategy, business strategy, functionalarea support strategy, and operating-level strategy. They go on to say, “Each layer[is] … progressively more detailed to provide strategic guidance of the next levelof subordinate managers.” Lorange defines three levels for a typicaldivisionalized corporation: Portfolio strategy (corporate level), business strategy(division level), and strategic programs (functional level). He defines the focus ofeach as follows: 1. Portfolio strategy: Developing the desired risk/return balance among the businesses of the firm. 2. Business strategy: Source of competitive advantage of a particular business relatie to its competition. 3. Strategic programs: Bringing to bear functional managers’ specialized skills on the development of programs.He notes that smaller firms may involve only the last two of these, but in any firmthere rarely would be more than three. Hofer, list four levels of strategy forbusiness organizations. First, strategy at the societal level is concerned with thedefinition of a firm’s role in society. It would specify the nature of corporategovernance, political involvement of the firm, and trade-offs nature of corporategovernance, political involvement of the firm, and trade-offs sought betweeneconomic and social objectives. The second strategy level is corporate strategywhich addresses (1) the nature of the firm’s business and (2) management of theset of businesses necessary to achieve its goals. Third, business strategy addresseshow the firm should be positioned and managed so as to compete in a givenbusiness how the firm should be positioned and managed so as to compete in agiven business or industry. Finally, functional area strategy is the lowest level ofcorporate strategy. It is concerned with their respective functional areaenvironments. Newman and Logain present two levels-business strategy and BSPATIL
  32. 32. functional policy—for non diversified firms, and a total of three (with the additionof corporate strategy) for diversified firms. Higgins identifies for levels ofstrategy: societal response strategy (enterprise strategy), mission determinationstrategy (corporate level), primary mission strategy (business level), and missionsupportive strategy (functional level).He defines their contents as follows: 1. Societal response strategy: how the firm relates to its societal constituents. 2. Mission determination strategy: the organization’s field of endeavor. 3. Primary mission strategy: how the organization will achieve its primary mission. 4. Mission supportive strategies: how primary mission strategy will be supported.Another model proposes five level of strategy but the levels are not tied toorganizational structure. Glueck, et al suggest that the levels of planning activityconsist of corporate, sector, shared resource unit (SRU), natural business unit(NBU), and product market unit (PMU). The advantages of this system are (10 itseparates the strategic management process from organization structure to a largedegree and (2) pushes it father down the organization than traditional systems do.These characteristics stem from focusing planning level selection on strategicissues or problems shared by the organization’s activities rather than on theorganization levels of its business activities.Corporate level planning is that which involved identifying trends andformulating strategy in global, technical, and market arenas, responsibility forwhich rests with corporate headquarters in most cases. Sector level planning,where sectors represent national and technological boundaries, may involveseveral SBU’s product categories, or even product/service-based division of anorganization. Shared resources unit planning calls for the development of strategicfor activities of the business that are shared by SBU’s or the various product-market focuses which the company might have.Natural business units, “…are largely self-contained businesses with control overthe key factors that govern their success in the marketplace-their market position BSPATIL
  33. 33. and cost structure”. Finally, product-market unit planning is the lowest level atwhich planning takes place and those activities that directly relate the company’soutput to its markets.There are many other interpretations of the levels of strategy. They differprimarily in terms of the organizational levels to which they apply. Thosediscussed above and most of the others have a number of commonalities. First,the uppermost levels in each scheme tend to concern the problem of fitting theorganization to its environment; lower levels address the problem of integratingfunctional areas in ways consistent with upper-level strategy. Second, the topmostlevel tends to involve structuring the set of acquisitions of divisionalized firmsand is usually called corporate-level strategy. Third, they contain a business orstrategic business unit (SBU) level of strategy that applies almost equally to afirm comprised of only one line of business and to the individual subsidiaries ofmultibusiness corporations.Finally, the various schemes include a functional level of strategy that representsthe ways in which functional departments are expected to respond to business-level and, in turn, corporate-level goals and action plans.During the mid-1980s some authors began to include the fourth level: enterpriseor socictal goals and action plans. Societal strategy was intended to capture theessential ways in which the firm was expected to respond to goals related to themajor social issues confronting it.Interpreted fundamentally, then, there are four primary levels of strategy: societal-level, corporate-level, business-level, and functional-level. The concerns ofsocietal, corporate, and business-level strategy are clearly cross-functional. Thatis, they contain implications for each of a firm’s functional areas (although moredistantly removed in the case of societal-and corporate-level strategy), whateverthey may be and regardless of the type of firm. By contrast, functional areastrategies are more operationally focused than the others. The process ofdetermining how each functional area should be managed is a more specializedproblem, defined largely by the practice and theory applicable to each functional(or operational) area. That is, the content of marketing strategy is the subject ofmarketing texts and courses, finance strategy can be found in finance texts and BSPATIL
  34. 34. courses, personal strategy in personal texts and courses, and so on.1.4.2 Functional-Level Strategy:In contrast with the other levels of strategy, functional strategies serve asguidelines for the employees of each of the firm’s subdivisions. Which ones ofthese segments or functional areas are included in a firm’s functional strategy setis itself a matter of strategy. For example, whether to have an R & D departmentor not in the first place is a strategic decision. Functional goals and action plansare developed for each of he functional parts of the firm to guide the behavior ofpeople in a way that would put the other strategies into motion. If part of a firm’sbusiness-level strategy were a target of a 10 percent increase in sales to bebrought about by market penetration, for example, marketing strategy mightinclude a change in compensation policy for salespersons and a specified increasein the advertising budget. In that way marketing strategy would provide somedetail about how the marketing aspects of the market penetration action planwould be implemented. Similarly, financial strategy would consist of a set ofguidelines on how the financial elements of the firm would be put into effect.Personal strategy, production strategy, research and development strategy, andappropriate other functional strategy areas would do the same.1.4.3 Process of Internal AnalysisThere are two fundamental ways to conduct an internal analysis: vertical endhorizontal. For the vertical approach, strengths and weaknesses are identified ateach organizational level. The horizontal analysis corresponds to the functionalareas of the SBUs. Strength and weaknesses are identified for each function. Weprefer the horizontal approach because it seems to be more universally applicable.Analysis can be focused on functional departments, or whatever basis ofdepartmentalization has been used in a particular organization.The major dimensions of each area are outlined and discussed in the subsectionsthat follow. They are intended as beginning points for analysis to formulate theirown evaluation systems for each case study or organization analyzed. Stevensonfound that managers seem to use three types of criteria in identifying strengthsand weaknesses: historical, competitive, and normative. Analyzing functional BSPATIL
  35. 35. areas by historical criteria means comparing present values with their historicalcounterparts and identifying strength and weaknesses on the basis of thosecomparisons.Competitive comparisons involve assessing similarities and dissimilarities withsuccessful competitors and finding strengths and weaknesses accordingly.Similarly normative comparisons are those where present characteristics arecompared with ideal values as perceived by the analyst or an expert opinion. Inpractice the process of identifying strengths and weaknesses can be one of themost educational top managers can have especially enlightening are theenumeration and discussion of weaknesses. Since responsibility for theperformance of SBUs and functional often rests with single manager,identification of weaknesses at these levels can be painful and embarrassing forthese people. These discussions must be handled carefully to prevent alienationand to bring about constructive solutions to whatever problems are revealed.However, the analyst must make sure that all weaknesses are identified, eventhough some feeling may be hurt.The process of internal analysis involves the following steps: 1. Perform a complete financial analysis. 2. Comprehensively identify the major functional areas that make up SBU operations. 3. Enumerate the critical operational factors of each functional area. 4. Identify both qualitative and quantitative variables to describe performance of the SBU on each operational factors. 5. Conduct research to assign either qualitative or quantitative values to the variables identified in (4). 6. Organize findings by function according to whether they represent strengths or weaknesses.1.4.4 Identification of Major Functional Areas:Whatever organization is analyzed, the analyst should select a comprehensive setof categories that define the firm’s operations. These categories, or functionalareas, can vary from one organization to another, and depend upon whether theanalyst is conducting a vertical or a horizontal analysis. We have selected for BSPATIL
  36. 36. discussion of horizontal analysis the common functional areas of marketing,personnel, production, and R&D, along with organization structure, present andpast strategies, and external relations (in addition to finance, which was discussedearlier). Although most organizations will have these functions in operation, theanalyst should not restrict the internal analysis to them. The particular set offunctions for which data are gathered should be tailored to the firm in question.The key characteristic of the set of functions selected must be comprehensiveness.Analysis should make sure that all pertinent are covered.Operational Factors of Each Functional AreaAfter identifying the appropriate functional areas to study in the internal analysis,the next step is to decide what aspects of each one to analyze. By the time moststudents take a course in strategic management, they have completed course ineach functional area and topics related to them. Those courses and the texts usedin them are the best sources of evaluative criteria for the functions oforganizations.Marketing: Consistent with marketing convention, this function is analyzed byexamining the operqating characteristics of the organizations’ products/services,price, promotion, distribution, and new product development systems. Interest isfocused on all aspects of each of these systems that have not already beenidentifies as part of the financial analysis. Examples of checkpoints for eachfactor are as follows: 1. Products/services a. Market share b. Penetration c. Quality level d. Market size e. Market expansion rate 2. Price a. Relative position (leader or follower) BSPATIL
  37. 37. b. Image c. Relationships to gross profit margin 3. Promotion a. Effectiveness b. Appropriateness of emphases c. Budget as percent of sales d. Is return measurable, acceptable? 4. Distribution a. Delivery record b. Are other methods more appropriate? c. Unfilled orders d. Costs 5. New product development a. New product introduction rate b. Sources of ideas effective? c. Extent of market feedback d. Success rateThe problem is not to identify simply what the organization’s marketingdepartment is doing, but instead what it is doing particularly well or poorly.Personnel and Union Relations: The overall purpose of he personnel function isto manage the relationship between employees and the organization. Therefore,internal analysis of the personnel function is an assessment of the strengths andweaknesses of that relationship. This function can be analyzed by examining thefollowing factors and questions or others tailored to the organization: 1. Job analysis factors a. Are necessary skills present? BSPATIL
  38. 38. b. Are all necessary jobs present? c. Are selection and placement systems effective? d. Recruiting capability e. Training effectiveness 2. Job evaluation factors a. Pay scales appropriate? b. Image of pay scale within labor market c. Do pay differential reflect job content differences? d. Adequacy of benefits 3. Turnover/absenteeism 4. Turnover rate 5. Absenteeism rate 6. Attitude of employees, managers 7. Seasonality a factor? 8. Performance evaluation a. Reliability b. Validity 9. Union-management relations a. Unions representing employees b. Bargaining positions c. Quality of relations d. Negotiation scheduleProduction: The production or manufacturing area’s strengths and weaknessrelate to the origination’s ability to produce its products/services at the desirequality level on time at the planned-for-costs. Examples of evaluative factors forproduction are the following: 1. Facilities and equipment BSPATIL
  39. 39. a. Capacity level b. Per-unit costs of manufacturing c. Obsolescence; today, future d. Level of technology applied e. Process optimality f. Replacement, maintenance 2. Quality level a. Defective units b. Inspection costs c. Remanufacturing costs d. Competitive position e. Consistency 3. Inventory a. Level, turnover b. Costs and trends c. Is inventory rationally maintained? 4. Procurement a. Sources b. Quality of inputs c. Constant lead times 5. Planning, scheduling a. Formal system b. Is demand smoothed? c. Excessive overtime charges? d. ProductivityFor most service organizations, the process of providing the service can beroughly equated to the production of a product. Costs of providing the service, as BSPATIL
  40. 40. well as quality of the service delivered, can be the focus of analysis. Wheelwrightsuggests evaluating production strategy by analyzing its consistency andemphasis. First, the analyst should evaluate the consistency of production strategywith business strategy, other functional strategies, and with the overall businessenvironment. The categories within production strategy itself should exhibit ahigh level of consistency as well. Then, the extent to which production strategy isfocused on factors of success should be evaluated. This involves making sure thatpriorities among production activities are appropriate to business strategy, thatbusiness level opportunities have been addressed, and that production strategy iscommunicated, understood, and integrated with other functional strategymanagers.Research and Development: Research and development (R&D) provides technicalanalysis and support to other departments, and designs products or processes tomeet market needs and thereby generate a profit. Operation of R&D must strike abalance between practicality and creativity in order to contribute successfully toprofit goals. Overemphasis on practical matters can impair future profitabilitybecause few innovations will be generated. Overemphasis on creativity couldresult in generation of few marketable product ideas while researchers explore thefrontiers of their scientific disciplines. The correct balance between creativity andpracticality for a particular firm is a strategic issue that cannot be decidedabsolutely. That is, this balance is a function of the extent to which theorganization required either innovation or market emphasis and that issue is afunction of business-level goals and action plans.Conducting an internal analysis of the R&D function involves identifyingstrengths and weaknesses in R&D activities such as the following: 1. Demand for R&D a. Is demand for R&D services stable? b. Is R&D funding stable? c. Is R&D funding vulnerable to profit variations? 2. Facilities and equipment BSPATIL
  41. 41. a. Are facilities and equipment state-of-the-art? b. Is obsolete equipment expendable? c. Is space a problem? 3. Market and production inputs a. Does market information get fed into the R&D process? b. Does production information influence the R&D process? c. Are marketing and production influences balanced? 4. Planning and scheduling a. Are jobs planned and scheduled? b. Are costs effectively monitored? c. Are human resource needs planned? 5. Is the level of uncertainty associated with the type of R&D activity is which the organization is involved appropriate for the intended level of risk?Organization: Organization structure must support strategies and facilitate theirsuccessful implementation. To do so, structure must prevent a certain set ofproblems from materializing. These problems are the characteristics that aresearched for to determine the appropriateness of a change in structure. Changingstructure is risky. Therefore, it should not e tampered with unless there is either aproblem present that must be corrected or one that can reasonably be expected todevelop if a change is not made. In either case, though, organization structureshould be changes only because of specific problems. That is, there is noabsolutely best structure, but only the structure that minimizes organization-related problems.Some of the criteria that can be used to analyze organization structure are asfollows: 1. Does structure make sense? BSPATIL
  42. 42. a. Is it confusing? b. Are there too many levels? c. Are there horizontal communication channels? d. Does it expedite communication? e. Are the forms of organization used appropriate? 2. Accountability and control a. Does structure fix responsibility? b. Are there single functions assigned to more than one person? c. Are there too many committees?Present strategiesWhether present strategies are stated explicitly or must be inferred from behaviorof the organization, the goals and action plans currently applicable must eidentified and analyzed. The idea is to determine which strategies are working(that is, which action plans are being implemented in such a way that theirassociated goals are being met) and which ones are not. Information about therelative success of current strategy can the e fed into the process of formulatingand implementing new strategies. In this way problems associated with existingstrategies can e corrected by formulating modification or replacements for themand effective strategies can e improved upon, retained as is, or extended so whatstrategic success is facilitated.The following steps can be followed to evaluate current strategy at an of the fourlevels of strategy: 1. Select strategy levels for analysis. 2. Identify present goals and action plans at each level. 3. Determine extent to which short- and long-term goals have or have not been met. 4. determine which action plans have and have not been effective.Of course, a strategy successfully carried out constituted a positive attribute of thefirm, and one unsuccessfully implemented is a problem to be deal with. For an BSPATIL
  43. 43. internal analysis, however, the point is to identify strategies that are particularlyeffective – they become strengths. Examples include McDonald’s consistency,Coca-Cola’s distribution strategy, Miller Lite’s marketing strategy, and Nissan’sproduction strategy. Weaknesses are strategies that have been especiallyunsuccessful in their operation.Questions: 1. Why functional area strategies are considered crucial? 2. What are the reasons for the strategies to go by functional areas? 3. Give examples of Indian companies soley practicing based on functional areas? BSPATIL
  44. 44. LESSON 1.5 ANALYZING CORPORATE CAPABILITIES1.5.1 Introduction:A great deal must be learned about an organization so that strategy formulationdecisions can be based upon appropriate information. It almost goes withoutsaying that strategists must understand all there is to know about the internaloperations of an organization before strategy can e effectively formulated andimplemented. The external influences acting on the firm also must be analyzed,documented, and understood to mange the strategy process effectively. Thischapter focuses on conducting both external and internal analysis for the purposeof generating information for strategy formulation.An organization’s environment consists of two parts: The industry within which itoperates (for multibusiness firms, the industry is usually considered the activity’in which the firm generates the majority of its revenue), and other environmentaldimensions—economic, political/legal, social and technological. The section ofthis chapter devoted to internal analysis first addresses financial analysis—theprocess of learning about the financial performance of the firm or organization.Very often financial analysis will bring to light several financial strengths andweakness that are indicative of strategic or operating capabilities and problemswithin the various strategy levels and within functional areas.Financial analysis is typically followed by internal diagnosis of functional areas.This process identifies strengths and weaknesses within such areas as marketing,personnel, research and development, and others.Together these four analytical activities-environmental, industry, and financialanalysis and internal diagnosis of functional areas—are undertaken to generate adata set consisting of strengths, weaknesses, threats, and opportunities thatcomprehensively descries the internal and external characteristics of theorganization. This information is then used as input to the strategy formulationprocess. It is factored with data about past strategies, mission, corporate culture,and managers’ values, and so on to evaluate the success or failure of presentstrategies. As a result present strategies can be modified, left as they are orreplaced as necessary in a particular situation. BSPATIL
  45. 45. The key to effective strategic management is to make major managerial decisionsthat shape actions by the firm that will correspond positively with the contextwithin which those actions ultimately take place. On the other hand, the actioncontext is dictated to a great degree by conditions external to the firm. Theseconditions constitute the firm’s operating “environment.” To some extent the firmcan shape the overall environment to its advantage. Henry Ford’s introduction ofmass production of automobiles stimulated the U.S. economy in a manner thatinvigorated consumer markets of his products. Genentech, the recombinant DNAresearch firm, made biotechnical advances that had profound impacts, not just onGenentech’s operating circumstances, but on the future of humankind as well.Nonetheless, few firms enjoy a scale of impact that allows major shaping of theoverall climate in which they operate, particularly over the long run. Insteadwe4ll-managed business enterprises adapt to environmental change so that theycan take advantage of opportunities that arise and minimize the otherwise adverseimpacts of environmental threats. This involves assessment of presentenvironmental circumstances (for reaction) and the forecasting of futureconditions (for proaction).A data set has both present and future time frames as internal and external,positive and negative factors are forecast into future periods. Environmental andindustry analysis involves filling the right-hand sectors of the data set withinformation pertiment to a particular firm.Analysis of the internal operations of the organization results in a collection ofstrength and weaknesses that would fill the left-hand cells of the data set model.Environmental conditions affect the entire strategic management process.Management’s perceptions of present and future operating environments andinternal strengths and weaknesses provide inputs to goal and actions plan choices.They can also affect the manner in which implementation and internalcircumstances will dictate the effectiveness of strategies as they are implemented(including alternation in the environment itself).Both environmental and industry analysis procedures consist of four interrelatedprocesses: BSPATIL
  46. 46. 1. Developing an assessment taxonomy to outline major environmental dimensions. 2. Defining environmental boundaries (the “relevancy envelope”) 3. Monitoring and forecasting change in key variables. 4. Assessing potential impacts on the firm (or industry) in terms of whether they are treats of opportunities.1.5.2 Formal Versus Informal Scanning:Sensing the pulse of environmental threats and opportunities is a natural andconditions process in business planning. In many organizations it is done on aninformal basis. The construction firm executive who learns from a golfingcolleague of a request for bids on a major construction project is gaininginformation that could affect the performance of his firm—information that wouldbe not more valuable had it been acquired through more systematic means.Discovering changes in tax statues by perusing the Wall Street Journal is not lessimportant than learning about them through a well-established monitoring systemwithin the firm’s tax accounting office. Indeed, the talent for acquiring valuableinformation through informal means often marks the successful entrepreneur andmanager.To rely totally on informal means, however, increasingly exposes the firms tomissed opportunities and unforeseen threats. A reined-out golf game or anoverlooked column in the Wall Street Journal can have profound implications,even if the implication themselves go unnoticed. Therefore, a systematic approachto environmental assessment is important for the management of uncertainty andrisk.One formal approach to generating data about environmental conditions is surveyresearch. The use of both original and contracted survey research for purposes ofevaluating the present corporate environment offers a lot of promise forstrategists. For analysis of external concern in the present, survey research is away to accurately identify the attitudes of selected population groups toward thecompany. In fact, virtually any external constituency’s attitudes toward theorganization can be assessed through survey research methods. BSPATIL
  47. 47. The dimensions of environment can be generally classifies by set of key factorsthat describe the economic, political/legal, technological, and social surroundings.These, in turn, can be overlaid by the various constituents of the firm, includingshareholders, customers, competitors, suppliers, employees, and the generalpublic (Exhibit 2-3). To assess environmental conditions, concern is focused onopportunities and threats that exist, or may arise, through impacts on and by thefirm’s constituents.Key Economic VariablesFirms that anticipate economic change and identify the constituents throughwhich that change will be applied; can better adapt goals and action plans. By thelate-1990s, major oil producing firms has shifted their source of supply formmiddle-eastern countries to Venezuela because of uncertainties about the politicaland economic environment of the Middle East. Shareholder expectations offinancial return are dictated in part by alternative investments and their associatedreturn and risks. Interest rates, tax policies, shareholder incomes, availability offunds for margin-purchased equity investments, and expectations of futureeconomic circumstances will shape changes in equity investor profiles and/or thefinancial performance expectations of the firm’s owners. In the early 1980s, highreturns on money market instruments (representing corporate and governmentdebt) led to massive shifts from equity holding s by private investors to thoseshorter-term debt instruments. In many cases this disturbed long-standingshareholder composites (making more room for institutional investors to thoseshorter-term debt instruments. In many cases this described long-standingshareholder composites (making more room for institutional investors, forexample) and pressured management to focus more closely on generating highershort-term returns. Personal income, savings, employment, and price-level trendscan have dramatic effects on the attractiveness of a firm’s products or services inoutput markets—not only final markets, but intermediate markets as well. Inefforts to reduce costs during inflationary periods, automotive manufacturesduring he 1980’s reduced their reliance on outside suppliers for automobilecomponents. This, in turn, led many component manufactures to retrench orredirect their marketing efforts elsewhere (e.g. replacement parts). BSPATIL
  48. 48. Similarly, total sectoral outputs, movements in private-sector capital replacementand expansion, government spending, and the allocation of the consumer dollarcan have dramatic impacts between and within industrial sectors. Each can be setoff macroeconomic changes well outside the control of the firm, yet may bebuffered by appropriate strategic action. Twenty years of inflation, for example,increased consumer use of $50 and $100 bills in retain trade. Among otherimplications, this meant that many retailers had to replace cash drawers, or entirecash registers, to accommodate these denominations. More significantly, thecollapse of he Soviet Union has led to decreased government spending in the U.S.on defense items. Many thousands of prime defense contractors and theirsubcontractors spent the early-1990s trying to develop new strategies based onnon-military products.Economic conditions faced by competitors can play a large part in shaping afirm’s strategies and policies. The movement of manufactures out of the “snowbelt” to areas of the country with lower energy costs could provide decisivecompetitive advantages vis-avis those who remain. Transportation costs, on theother hand, could reduce those savings. Competitors selling to diverse marketsmight realize less volatility in their capital bases and abilities to compete acrosseconomic cycles than might a firm with a narrow product/market scope. In anycase it is important to recognize that the economic conditions faced by thecompetition may be different in form and substance from those faced by the targetfirm.The capacity, reliability, and, in some case, the survivability of suppliers arelargely a function of their economic climate. Both debt and equity capital marketsoften realize significant swings as a result of overall economic conditions. Thefirm accessing these markets experiences the repercussions. Federal discount ratesand change in reserve requirements have both short-term and long-termimplications in primary capital markets, and often affect the private sectorborrower through secondary markets. The available supply of goods and servicescan be affected by the overall economic health of suppliers, including theirproductivity, alternative markets, and cost structures. To the extent that the targetfirm represents a major market for a supplier. To the extent that the target firmrepresents a major market for a supplier, that firm becomes a significant factor inthe economic climate the supplier experiences. The choice of multiple versus BSPATIL
  49. 49. singular sources of supply might be dictated by assessments of suppliers’economic bases as well as by the degree of control the buying firm can maintainover them. Though could also provide buying leverage for the firm or representnew opportunities for backward integration.The economic climate of the firm is also manifested through employees. Wageand benefit escalations are often as much a function of he overall econimcicircumstances employees face as they are unilateral policy set forth by employers.Rising consumer prices are usually translated into expectations and/or demandsfor increased compensation. Shifts in employment status, including societal andregional unemployment levels, can increase or decrease these pressures.Economic conditions usually affect employees unevenly, thus requiring creativepolicy adaptation. Depression of gousing markets in the early 1980s’ for example,led a number of large employers to buy homes from transferred executives, whowere unable to sell them at reasonable prices, if at all. This inadvertently put anumber of these firms into the real estate “business” (albeit on a relatively smallscale), typing up capital and effort.Clearly, economic conditions have wide-reaching effects on the general public.These can be as abstract as an alteration in high birth rate rends or as direct aschanges in personal income. Conversely, public expectations and behaviorsubstantially determine the health or inadequacy of the economy, through earning,spending, and saving patterns. In any case the general public is so interwined inthe mechanics and psychology of a firm’s economic climate that movement byone can have dramatic implications for the other. Kinder-Care Learning Centers,Inc., a chain of child care centers, both profited by the economic (and social)trend toward working mothers and contributed to the trend by providing necessarychild care at reasonable cost. The overall impact was synergistic.Finally, in assessing he economic dimension of a firm’s environment, it isimportant to recognize the interrelated nature of the participants. The multipliereffect in macroeconomics has its micro counterpart. Raw data on prices, wages,savings, government spending, manufacturers’ shipments, and the like arevaluable in themselves but represent only the front line of a truly comprehensiveanalysis. BSPATIL
  50. 50. Key Political/Legal VariablesBusiness firms, like people, are touched directly and indirectly by political/legalinfluences at all levels of government (federal, state, and local). These influencesrun the alphabetic gamut from antitrust to zoning. The scale of facteralintervention in business is matched only by its turbulence. The Center for theStudy of American Business concluded that fedral regulation of business “cost theAmerican economy more than $100 billion on 1980. Approximately $5 billionrepresented the administrative costs of the major regulatory agencies, and thebalance, compliance costs.”In addition to serving as regulatory bodies, governments also represent a majorfactor in the private sector through fiscal policy. Taxation and governmentspending can represent both opportunities and threats, depending upon the nature,timing, and position of the impacted enterprise. And, of course, fiscal policy canhave dramatic impacts on the overall economic climate of the firm.Shareholders are affected by governments in a variety of ways. Changes in taxstructures can affect tax exposure on corporate payouts when treatments of capitalrecovery versus earnings distributions are considered. To the extent thatcorporations themselves are shareholders, intercorporate shareholding can be canaffect the “tradability” of shares as well as dictate corporate disclosures. Lawsdealing with pension funds and other forms of institutional investing canexhilarate or impair changes in investor profiles. Incorporation laws oftenconstrain flexibility in capital restructuring. All of these impositions, in turn,requirements. Governments-mandated sales prohibitions (e.g., on certainfirearms) can limit markets. Similarly, export restrictions (national and interstatecan impose market constraints. Conversely, public policies targeting industries forrejuvenation or expansion can open up a host of market opportunities (such astrade-adjustment programs in energy and steel). Social legislation (e.g.,environmental protection, health, consumer protection) can create markets fornew classes of products and services as well as limit those where noncomplianceexists.Politics and law are influenced by, and have an impact on, competitors. Antitrustcan sustain or impair industry structures and thereby affect the nature of present BSPATIL
  51. 51. and future competition. Import restriction can limit foreign competitions. Patentlaws provide competitive protection for patent holders. Governments themselvescan be suppliers (e.g., mineral rights). And, of course the viability of suppliers asa whole can be affected by all forms of political/legal influences. Duringmid-1993, hospital administrators in the state of maine estimated that they wereabout a 20 percent vacancy for a large number of facilities. Retrenchment becomenecessary to survival for a large number of facilities. The maine legisilature asset-sharing among institutions. This minor legal change alone may save countlessmillions of dollars in miane’s health care industry by eliminating unnecessaryduplication of equipment purchases and operations. Cooperation among hospitalis no longer an antitrust violation. Similarly, state legislatures adopting mandatoryautomobile insurance laws have had dramatic affects on their states’ insuranceindustries.Protection of employees is clearly a major matter in any firm. Wage laws, laborstatutes, equal employment opportunity, accupational safety and health, employeeprivacy,and pension funds controls all represent areas of strategy concern. Furtherthe public sector competes with the private sector for employees. through supportof education and training programs, the public sector also represents a source oflabor. Finally,the political/legal climate is both a function and a determinant ofpublic sentiments. Federal regulatory reform (including deregulation ) is a primeexample. Public expectations of business behavior can cause, and be caused by,shifts in partition politics, which in turn can affect the overcall socioeconomicclimate in which private sector enterprises operate. Expansionary andtechnologically aggressive moods on the part of the general public have theircounterparts in business and industry, though they need not always be similarlytimed (wall street, the public, and Washington are occasionally out of phase inthis regard ). Assessing and forecasting the political/legal environment requirecreativity and sensitivity to industry-specific matters. Unlike the economicenvironment, the political/legal environment requires largely “soft” calculuswhere numerical relationships and extrapolations are often unavailable orinappropriate. BSPATIL
  52. 52. Key Technological VariablesElectronics, bioengineering, chemicals, energy, medicine, and space are but a fewof the fields in which major technological change have opened new areas toprivate enterprise. In some cases entire industries have emerged seeminglyovernight (such as genetic engineering), bringing with them new opportunities,and new threats, in the marketplace. In other cases technological changes withinindustries have brought new forms of product competition (e.g. microtechnologies in electronics) have led to different competitive advantages inproduction costs and product quality. In all instances the firm subject totechnological obsolescence or intent on maintaining some form of technologicalleadership must stay abreast of technological innovation, and to the extentpossible, forecast future technological change and its potential for acceptance.That Timex vastly underestimated market acceptance of the digital watch early inits life cycle is but one of many instances of technological displacement havingadverse effects on those caught unaware.Technological change has had implications for shareholders, primarily throughcommunications and information processing. High-speed, computer-based marketreports are reaching increasingly larger proportions of stock market participants.On-line office and in-the-home displays mean quicker reaction time in market“plays,” and the proliferation of FAX machines and worldwide e-mail systemsmake round-the-clock real-time communications commonplace.New products and process resulting from technological innovation can result inredefinition of customer bases or customer demands. The design of new,relatively lightweight diesel engines opened up a host of opportunities in thepassenger-car industry. Computer-aided design and computer-aidedmanufacturing (CAD/CAM) have led to the expectation of shorter lead times andmuch closer tolerances in many industrial and consumer products industries (e.g.,aerospace and automobiles). The home information revolution not only mayexpand markets for consumer product retailers, but may well lead to betterinformed, more discerning retail customer.So too the nature of competition can be redefined as technological advances BSPATIL
  53. 53. unfold. In the oil-well wire-line (or “logging”) industry, new techniques sallowin-the-well sensing of critical geophysical characteristics (temperatures, pressures,etc.) while drilling gear is in place. Older technologies require expensive andtime-consuming removeal of the gear before these measurements can be made.Thus those firms with access to the new technology have a marked, competitiveadvantage. Price is no longer a significant factor when the competition forbusiness is between those with and those without the technology.In acquiring the advantages of new technology, a firm might rely heavily on itssuppliers. Manufacturers may turn to equipment suppliers for the latest inrobotics, or food processors to pharmaceutical or chemical firms for the latest inpreservatives. In each case technological advantage is passed through theproduction chain, with competitive differentials possible at each stage.Sources of supply can also be redefined with technological innovation. Fiberoptics, for example, may well displace metal wire as a primary medium intelecommunications. Telecommunications firms thus would turn to the glassindustry instead of the wire industry for this critical material.Employees continually experience the impact of technology by virtue of changesin requisite skills and job assignments. Automation has led to the conversion ofhand labor to higher skills needed in machine design, operation, and maintenance.Even work routines are affected. As telecommunicating attracts ever-greaterinterest, more and more types of work may be accomplished more effectively andefficiently away from the traditional workplace (at home or at local offices).Finally, technological change looms large in the overall picture of publicexperiences and expectations. Dissatisfaction with technological lags in the steelindustry led to government investigations. Fear about runaway advances inbioengineering have resulted in self-imposed restring among firms involved.Expectations of technological solutions to serious socioeconomic problems (e.g.,energy may have implication for public policy and for strategic adaptations withinaffected industries. And of course everyday life is changed permanently bytechnology. The spread of Automatic Teller Machines in banking hasdramatically changed our banking habits. Not many people under-thirty rememberthe pre-ATM day when consumer had difficulty accessing their cash on weekends BSPATIL
  54. 54. because the banks were closed. The time we save preparing food by microwaveoven we now lose by watching video-taped movies at home!Few firms are left untouched by technological change, although some may bemore severely or rapidly affected than others. To the extent that technologicalinnovation is a key factor of success in a given industry, it must be monitored andforecast aggressively. In al cases at least a general sensitivity to the technologicalenvironment is a primary component of successful strategic planning.Envoronmentsl boundaries can be at least generally established by examining thefirm’s strategic postures regarding: 1. Geographic diversity 2. Product/market scope 3. Sources of supply 4. Sources of capital 5. Technology/innovation 6. Regulatory vulnerability 7. Return horizon on fixed commitments 8. Overall flexibilityThe depth and breadth of environmental scanning also are constrained byavailable resources. Larger firms can often make substantial resourcecommitments within planning units to conduct formalized scans on a continualbasis. Smaller enterprises, however, rarely can make such communications andmust rely on intermittent or more closely focused analysis.FORECASTINGIn many cases the environmental forecaster needs in make multiple forecast sothat contingency goals and action plans can be developed. For example, a single-point forecast of interest rates one year hence may be a dangerous premise uponwhich to base on expansion strategy. Instead well reasoned multiple forecasts ofinterest rates can lead to contingency expansion strategies, one of which could beimplemented as certain economic conditions unfold. BSPATIL