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Strategic management

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M.com Part 1
Strategic Management Book

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  • 1. NARESH SUKHANI@gmail.com Strategic-Management CONTENTS Unit 1 Lesson 1.1 The business system Lesson 1.2 Objectives of the business Lesson 1.3 Mission – vision – goals Lesson 1.4 strategic analysis of functional areas Lesson 1.5 Analyzing corporate capabilities Lesson 1.6 SWOT Unit 2 Lesson 2.1 Corporate strategy Lesson 2.2 Process of strategic planning Lesson 2.3 Formulation of strategy Lesson 2.4 Project life cycle Lesson 2.5 Portfolio analysis Lesson 2.6 Strategic decision making Unit 3 Lesson 3.1 stability strategy Lesson 3.2 Growth strategy Lesson 3.3 Retrenchment strategy Lesson 3.4 Turnaround strategy Lesson 3.5 Diversification Unit 4 Lesson 4.1 Mergers & acquisition Lesson 4.2 Amalgamation strategy Lesson 4.3 joint venture strategy Lesson 4.4 Organizational structure and corporate Development Lesson 4.5 Line and staff functions Lesson 4.6 Management of change Unit 5 Lesson 5.1 Implementation of strategy Lesson 5.2 Elements of Strategy Lesson 5.3 Leadership And Organisational Climate Lesson 5.4 Planning And Control or Implementation Unit 6 Lesson 6.1 ERP Lesson 6.2 ERP Package : BaaN Lesson 6.3 ERP Package : MARSHALL Lesson 6.4 ERP Package : SAP Bibliography Model Test Paper
  • 2. NARESH SUKHANI@gmail.com STRATEGIC MANAGEMENT Unit -1 THE BUSINESS SYSTEM 1.1.1. Introduction : The McKinsey analysis discovered four quite distinct phases of strategic management evolution .in phase I, financial planning, management focuses on the preparation of budgets with an emphasis on functional operation. Most organization has a budgeting process, in at least rudimentary from, as a way of allocating resources among functional units, subsidiaries, or project. The second, forecast- based planning follows naturally from the first as managers project budget requirements beyond the one –year cycle. This phase represents an effort to extend managers’ attention beyond the immediate future as scenarios are developed which describe their expectations about future time periods. Budgets are often constructed for several years at a time and are rolled over annually so that the appropriateness of a budgeted amount can be reviewed several times before it is operationalized . Phase 2 planning is very “now” oriented. Current operations and characteristics are stressed in analyses of the firm and there is little attention to or patience for considering operational options or development of strategic changes. The business portfolio of a phase 2 firm is often viewed as the final expression of strategy rather than as an input to the strategy formulation process. Current structure and business activities may be considered fixed, not as strategic variables. Phase 3, external oriented planning requires a significant change in management viewpoint. Planners are required to about an external orientation and tools and procedures for environmental and internal assessment. Concern centers on understanding the organization’s environment and competitive position and generating ideas about how the company might better fit its environment. Several choices, contingency plans, are often devised for how the company might fit its environment. Lower level planners and managers are often involved in the process of generating choices, an activity that soon puts top management in the position of choosing a plan in which it had little involvement in developing. Phase 4, strategic management, evolves as top management senses the need to more heavily invest in the planning process because of its lack of understanding of or involvement in the details of earlier plan development. strategic management is the meshing of Phase 3 planning and operational management 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 impute strategy from the data they are able to generate on the firm’s operations. Similarly, journalists and the managers of competing firms may impute strategy to a firm’s behavior; and it may or may no0t accurately reflect the real strategy in place. Outsiders may also imply intent to an imputed strategy. That is; they assume not only that the strategy they imputed from the firm’s behavior’s is the real strategy its employees are implementing, but they imply that this strategy is the one intended for the firm by its management. Seldom is this the case. Mintzberg developed a taxonomy which is useful for discussing the realism and deliberateness of strategy. First, he distinguished between strategy that 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 a chosen course of action; it could be a real strategy (one intended for implementation) or a ploy (a tactical move whereby a competitor may be influenced into making a mistake). Some people think that Coca-Cola’s rumored change in Coke’s formula in ht emid-1980s was such a poly. The implication is that Coca-Cola had not intended to really
  • 3. NARESH SUKHANI@gmail.com change the formula. The implication is that Coca-Cola had not intended to really change the formula, introduced a new product with a different formula that tasted a lot like a competitor’s product, and finally graciously conceded to continue producing the old formula product when the public demonstrated a preference for it over the new--"similar to a competitor’s – “formula. (Incidentally, if this was in fact a poly, it has to rank among the top marketing moves ever attempted by any business. Coca-Cola reaped an immediate increase in market share of about 15 percent that thrust them once 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 up with. That is, the planned strategy could ultimately be either realized or unrealized. If it is realized, then the entire process would be a textbook case of strategy formulation and implementation in the sense that the firm successfully implemented what was intended. But what happens if he planned strategy is implemented and, for some reason, the strategy that is realized is not the intended one? We might say that the planned strategy was unrealized, and the realized strategy (the one that seems to describe what the company is actually doing) arises out of some consistency in the behavior of the company. Mintzberg and Waters call this unintended realized strategy, “strategy as pattern,” or a pattern in a series of actions by the organization. Strategy as pattern is what you will end up with when you impute strategy to the behavior of a company you are analyzing in a case study, or what journalists produce when they attribute a strategy to a company based only on its actions. “Thus, a realized strategy could be either a deliberate strategy as plan, or an “unelaborated” strategy as pattern. If the realized strategy was planned and also accurately the firm’s actions, then strategy as pattern and strategy as plan would be synonymous. However, when realized strategy is not intended strategy (that is, it was either not what was intended by management when they drafted a planned strategy, or they drafted a planned strategy, or they drafted no strategy at all ), then it simply “grew” out of the activities of the company. In Mintzberg’s terms it “emerged” as a pattern of behavior in the absence of intention, or despite unrealized intention. A realized strategy is what a company is actually doing. If it is the one intended by management then it is deliberate. If not, then the intended strategy was undrealized, and the realized strategy is emergent. An emergent strategy is, by definition, not deliberate. However, a manager may choose nor to consciously formulate strategy and, instead, “go with” the emergent one. But even here, the resultant emergent strategy could not have been deliberate in the same way an intended strategy would have been. Often it is convenient to distinguish between intended and emergent strategies. When management performs no strategic management at all, they still will have a realized strategy that is emergent. This emergent 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?
  • 4. NARESH SUKHANI@gmail.com LESSON 1.2 OBJECTIVES OF THE BUSINESS 1.2.1. Introduction The objective is the starting point of the marketing plan. Once environmental analyses and marketing audit have been conducted, their results will inform objectives. Objectives should seek to answer the question “Where do we want to go?” 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 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 Objectives To increase awareness of the dangers of AIDS in India from 12% to 25% by June 2004. To insure trail of X washing powder from 2% to 5% of our target group by January 2005. 4. Objectives for Growth To survive the current double-dip recession. 5. Objectives for Growth To increase the size of out German Brazilian operation from $200,000 in 2002 to $400,000 in 2003 6. Objectives for Branding To make Y brand of bottled beer the preferred brand of 21-28 year old females in North America by February 2006. These are many examples of objectives. Be careful not to confuse objectives with goals 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 or goals and therefore they are of equal importance.
  • 5. NARESH SUKHANI@gmail.com 1.2.3 Objectives of growth: Ansoff Matrix as a marketing tool was first published in the Harvard Business Review (1957) in an article called ‘Strategic for Diversification’. It is used by marketers who have objectives for growth. Ansoff’s matrix offers strategic choices to achieve the objectives. There are four main categories for selection. Market Penetration Here we market our existing products to our existing customers. This means increasing our revenue by, for example, promoting the product, repositioning the brand, and so on. However, the product is not altered and we do not seek any new customers. Market development Here we market our existing product range in a new market. This means that the product remains the same, but it is marketed to a new audience. Exporting the product, 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 develop and innovate new product offering to replace existing ones. Such product are then marketing to our existing customers. This often happens with the auto markets where existing models are updated or replaced and then marketed to existing customers. this often happens with the auto markets where existing models are updated or replaced and then marketed existing customers. Diversification This is where we market completely new products to new customers there are to type of diversification, namely related and unrelated diversification. Related diversification means that we remain in a market or industry with which we are familiar. For example, a soup manufacturer diversifies into cake manufacture (i.e. the food industry ). Unrelated diversification is where we have no previous industry nor market experience for example a soup manufacturer invests in the roil business Ansoffs matrix is one of the most will know frameworks for deciding upon strategies 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.
  • 6. NARESH SUKHANI@gmail.com  Will competitors retaliate?  Government action e.g. will new laws be introduced that will weaken our competitive position?  How important is differention? e.g. The Champagne brand cannot be copied. This desensitizes the influence of the environment. The 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 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.
  • 7. NARESH SUKHANI@gmail.com Bewman’s Strategy Clock The ‘Strategy Clock’ is based upon the work of Cliff Bowman. It’s another suitable way to analyse a company’s competitive position in comparison to the offering of competitors. As with Porter’s Generic. Strategies, Bowman considers competitive 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 differentiation Option four – Differentiation (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 premium Option 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 share Option Seven – increased price/low values  Only feasible in a monopoly situation Option eight – low value/standard price  Loss of market share 1.2.5 Objectives of delivering Value: The value chain is systematic approach in examining the development of competitive advantage. It was created by M.E. Porter in his book, Competitive Advantage (1980). The main consists of a series of activities that creat and build value. They culminate in the total value delivered by an organization. The ‘margin’ depicted in the diagram is the same as added value. The organization is spit into ‘primary activities’ and ‘support activities’. Primary Activities Inbound Logistics Here goods are received from a company’s suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organization.
  • 8. NARESH SUKHANI@gmail.com Operations This is where goods are manufactured or assembled. Individual operations could include room serviced in an hotel, packing of books/videos/games/ by an online retailer or the final tune for a new car’s engine. Outbound Logistics The goods are now finished, and they need to be sent along the supply chain to wholesalers, retailers or the final consumer. Marketing and Sales In true customer orientated fashion, at this stage the organization prepares the offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix. Service This includes all areas of service such as installation, after-sales service, complaints handling, training and so on. Support Activities Procurement This 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 possible quality. They will be responsible for outsourcing (components or operations that would normally be done in- house are done by other organizations), and Purchasing (using IT and web-based technologies to achieve procurement aims). Technology Development Technology is in important source of competitive. Companies need to innovate to reduce costs and to protect and sustain competitive advantage. This could include production technology, internet marketing activities, lean manufacturing, customer Relationship management (CRM), and many other technological developments. Human resource management (HRM) Employees are an expensive and vital resource. An organization would manage recruitment and selection, training and development, and rewards and remuneration. The mission and objectives of the organization would be driving force behind the HRM strategy. Firm Infrastructure This activity includes and is driven b corporate or strategic planning. It includes the Management Information System (MIS), and other mechanisms for planning and 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?
  • 9. NARESH SUKHANI@gmail.com LESSON 1.3 MISSION – VISION – GOALS 1.3.1 Mission Mission is the description of an organization’s reasons for existence, its fundamental purpose. It is the guiding principle that drives the processes of goal and action plan formulation, “a pervasive, although general, expression of the philosophical objectives of the enterprise.” Mission should focus on “long-range economic potentials, attitudes toward customers, product and service quality, employee relations, and attitudes toward owners.” It provides identity, continuity of purpose, and overall definition, and should convey the following categories of information. 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 shaping strategies at all organizational levels. The role played by mission in guiding the organization 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 corporate success and that culture has five elements: 1. Business Environment, 2. Values, 3. Heroes (People Who Personify Values), 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 all had “a rich and complex system must be believable in that the company’s behavior should correspond to it over both the short and long term. In this way it can serve as the foundation for the development of respect for and pride in the firm by management, owners, customers, suppliers, and others who interact with it. Broad-based acceptance of the values represented by mission can lead to three characteristics 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 finely honed sense of cooperation and value acceptance are presented by Deal and Kennedy. A few of these are listed here, along with the slogans that have come to represent their value systems.
  • 10. NARESH SUKHANI@gmail.com  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 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 HAPPINESS We will bring happiness into every home, offering high quality consumer durables at affordable prices, spreading the culture of convenience, entertainment and comfort, far and wide. ACHIEVING PROGRESS We will pursue innovative technologies in the fields of Electronics and Energy, create products and services that will improve the quality of life, realize the goals of the world community and protect the environment. SUSTAINIG PROGRESS We will be a source of pride to our business associates by ensuring mutual prosperity and growth through the implementation of forward-looking corporate strategies, aimed at identifying opportunities and responding intelligently to the dynamics of change. PURSUING EXCELLENCE We will provide a conducive environment for enabling our employees to develop their potential and make a significant. Contribution to the Group’s success.
  • 11. NARESH SUKHANI@gmail.com Mission typically is not considered a part of a firm’s strategy set. It reflects the essential preferences of owners and managers for what the firm will do. Strategy will accomplish the task of reducing mission to operational terms. As such mission is somewhat a personal choice of a firm’s dominant group of actors and is an input to the strategy formulation process. Mission should address the basic purpose of the firm, the reasons for which it exists. Statements of mission can be made up of goals and descriptions of the means for achieving them. However, mission-related goals are often qualitative as opposed to quantitative. Some owner groups prefer to state broad goals as the organization’s purpose and defer to management to set strategy as the way to achieve them. In some organizations questions about purpose are left solely to owners, whether widely dispersed stockholders acting through a board of directors, the small group of owners of a closely held corporation, or the sole owner of a small business. In these cases managers are informed of the owners’ expectations and these goals serve as overriding constraints or guidelines on the activities and operations of managers. In other firms managers may participate in the process of deciding on purpose, along with owners or their representatives. Managers may eve be called upon to submit basic purpose choices to owners for affirmation or veto. The importance of a generally understood and accepted notion of purpose cannot be overstressed. The sole owner of a $30 million-a-year industrial supply firm decided, upon reaching fifty years of age, that he no longer saw the purpose of his company as primarily a generator of cash flow for him and his family. Instead he decided its purpose was to generate wealth ultimately through acquisition by a larger company. The change in purpose from a short-term cash generator to a well-groomed acquisition target necessitated a set of dramatic alterations in the way business was conducted on a day-to-day basis by key managers. Things that had been previously assigned low priority-market development, product development, asset reinvestment, development of career commitments by employees and managers, and so on-suddenly became essential goals, the achievement of which, over time, would serve the new mission. Although many managers tend to develop qualitative mission statements, they can be expressed as a set of quantitative goals stated in financial terms. As such they specify the major financial outcomes expected by owners and managers from operation 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 with out unidirectional efforts (integrating People, Process and Technology, giving a face-lift to small medium enterprises, while being conducive for the betterment and upliftment of our society; and be a leader for world class IT solutions. Such like-mindedness and the attitude to be conducive in making the world a global village, 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 a SAPPHIRE INFOTECH (P) LTD. Was formally launched on the 12th of April, 1999. Vision 2000 of SBIICM The Institute plans to introduce specialized courses on windows-based application software and RDBMS shortly. Plans have been finalized for completing the “Annexe” building, to augment training capacity and to meet the long felt requirements of larger class rooms, a Conference Hall, an Auditorium and large PC laboratories. This would help to enlarge the activities of the Institute.
  • 12. NARESH SUKHANI@gmail.com The Institute to become “Think-Tank” for the Bank and its Associates. The Institutes to open up eventually its training, software development and Consultancy services to other banks in India and for developing countries in South 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 Goals Goals Qualitative Final Values Objectives Aims Quantitative Hurdle (Interim) Values Exhibit : Examples of Types of Strategic Goals and Their Definitions Goal Type Definition Examples Qualitative An aspiration “Good corporate citizenship” “Ethical practices” ‘Improved quality of life” “Heightened awareness” Quantitative (Final Goal) Numerical aim “6 percent increase in sales” “Raise ROI by percent” Hurdle goal Minimum to be reached win a timeframe “Increase sales by percent per year for there Andrews suggested that breaking up the system of corporate goals and the character-determining major (actions) for attainment leads to narrow and mechanical conceptions of strategic management and endless logic- chopping. According to the other view, goal setting and the formulation of means for achieving goals are distinct activities that call for the stabilization of goals followed by selection of the proper strategic alternatives. The ultimate separation of goals and strategy results in applying the word strategy only to statements about the means for achieving goals. A set of goals would be established first and then discussions about strategy would focus on deciding the best ways to achieve them. However, this view can result in semantic confusion. If the word strategy applies to means, then what word will be used to refer to goals plus the means for achieving them? In practice goals plus means are often also called strategy.
  • 13. NARESH SUKHANI@gmail.com 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 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 would be tied to action plans that identify the appropriate ways to work toward them. A single-line business would thus have a set of goals and related action plans that together define how it should compete within its business segment. This set of goals and action plans would be called its business-level strategy. It could also have 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 different ways. We use policy to refer to standing directions, instructions that vary little with changes in strategy. Thus organization can have vacation policy, a policy on absenteeism, affirmative action policy, and so on. Policy tends to have fewer competitive implications than strategy when used in this way. However, in many curricula the management course is called business policy. A tactic is a short-term action taken by management to adjust to internal or external perturbations. They are formulated and implemented within a strategic effort, usually with the intention of keeping the organization on its strategic track. Societal Goals Societal goals (also called enterprise goals), in organizations that employ societal strategy, 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 be woven into corporate-, business-, and functional-level strategies. Societal goals mainly address expectations about the firm’s societal legitimacy. Sometimes included in statements called creeds or guiding philosophies, societal goals identify the major ways in which the organization will operate so as to stay within the legal, ethical, and cultural constraints placed on it by society. Although they guide the behavior of people at all levels of the organization, they have particular relevance for the decisions of key managers related to balancing the claims on the firm of society’s interest groups and institutions, owners, and managers (which we refer to generally as the firm’s stakeholders). Legitimacy goals should address the overall role of the firm in the daily functioning of society. They should include goals that pertain to the major social issues and legislation of the day. “Some examples are pollution standards, the firm’s antidiscrimination position, safety in working conditions, and sexual harassment. Corporate levels Goals Corporate-level goals consist of quantitative and qualitative outcomes that encompass management’s expectations about the optimal combination and types of business that make up the company. They direct the integration of the particular collection of businesses that makes up the overall organization and they serve as behavior specifications for staff members at the corporate level. Business-Level Goals Goals at the business level specify the anticipated performance results of each SBU. Their values are intended to balance with those of equivalent variables for other 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 year could be achievable partly by acquisition or divestiture moves, but primarily through the contributions of sales increases by present. SBUs. Therefore, in this case 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 sales growth element that defines that SBUs “contribution” so to speak, to the corporate level sales growth goal. Business-level goals integrate the activities of the SBUs functional departments and guide the behavior of business unit managers. In other words business satrategy defines the role of each functional area relative to
  • 14. NARESH SUKHANI@gmail.com each other and to resource requirements and availability. One might say that business-level strategy balances the roles of organizational functions within each business unit in terms of their contributions toward reaching higher level goals. Functional-Level Goals At this level goals are set for each of the functional departments into which each SBU is organized. The point of functional-level goals is to defined several aims for each department in such a way that their achievement would result in achievement of business-level goals. Thus to reach a business-level target of 5 percent sales growth, it might be necessary for the personnel department to recruit and screen twenty-five production workers and three more clerical people; for marketing to raise advertising costs by a certain amount increase the number of sales representatives by a specified number within a certain region, and hire one more inside salesperson; and so on. These functional requirements become, either directly or indirectly, goals of the respective functional departments to e achieved within appropriate time frames. Goal Formulation Four 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 set of political influences within which individual compete over goal preferences; and (4) the personal values of the organization’s key managers that shape their preferences. Present Goals and Action Plans The degree of success experienced by an organization in reaching past or present goals and in implementing related action plans provides insight into the need for new or modified goals. Failure to meet the goal of retired Chairman Willard Rockwell, Jr., to build a $1 billion Rockwell International consumer products division led company managers, under the leadership of new chairman and CEO Robert Anderson, to adopt a new goal: $1 billion in foreign sales. This change seems to have been precipitated by the widespread realization that the previous consumer products goal was not likely to be achieved. Direction for goal formulation at any organizational level also exists in the strategy of the next highest organizational level. These higher levels’ goals have the effect of partially defining the context within which goals are to be set at lower levels. For example, when corporate goals are stated in terms of long-term profitability and sales growth, then business-level goals should be consistent with them. Of course, more information would be required about the other factors that affect goal formulation, but at least corporate goals serve significantly to define the goal choices available for the business level. Similarly, business-level goals can structure the formulation of goals at the functional level and thereby define the context of functional-level goals. Think for a moment of the difficulties that might be encountered by a functional department manager, say, the marketing director, in trying to manage the department without any idea of what business-level goals were important to top management. The Data Set The contents of an organization’s environmental and internal data set provide major clues for goal formulation. Threats and opportunities (determined by analysis and forecasts of the organization’s external circumstances), along with weakness and strengths (of the organization’s internal state of affairs, in the present and future time frames), can be transformed into goal sets at appropriate organizational levels. At the corporate level, goals are formulated to define the optimal collection of types of businesses in which the organization is engaged. The firm’s data set can be the primary source of information about what types of businesses would be most conducive to future success. The internal portion of the data set highlights problems with existing operations; the external part points out merger possibilities as well as types of operations to avoid. Forecasts can identify potential problems with the present collections of businesses.
  • 15. NARESH SUKHANI@gmail.com Existing business-level goals can e evaluated against the contents of the data set as well. Since business-level goals address business unit performance and competition, such factors as performance shortcomings, competitive position, latent capabilities, potential obstacles, and new opportunities can be discovered through the environment and internal analysis and their respective parts of the resultant data set. The data set is also intended to provide major inputs into decisions about the appropriateness of functional-level goals. At this level the portions of the data set that 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 and administrative expenses are excessively high as a percentage of sales. Further analysis might show that sales growth has slowed and that turnover of salespeople is high. Goals could be set for the marketing department that reflects more desirable performance along these dimensions. Marketing action plans would then be modified to achieve the new goals. Goal Formulation Theories Many explanations have been offered in the management literature for how organizational goals are formulated. Mintzberg notes that, during this century, organizational goal formulation theories have undergone a complete reversal form the “rational man” view (one goal setter setting a single organizational goal) through the coalition bargaining view (many goals, many goal setters) to the political arena view no organizational goals, power games among individuals). Some examples of the influential goal formulation theories that have appeared over 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 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
  • 16. NARESH SUKHANI@gmail.com 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 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?
  • 17. NARESH SUKHANI@gmail.com 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 the different levels of strategy that may exist in a firm. For example, Thompson and Strickland propose four levels: corporate strategy, business strategy, functional area support strategy, and operating-level strategy. They go on to say, “Each layer [is] … progressively more detailed to provide strategic guidance of the next level of subordinate managers.” Lorange defines three levels for a typical divisionalized corporation: Portfolio strategy (corporate level), business strategy (division level), and strategic programs (functional level). He defines the focus of each 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 firm there rarely would be more than three. Hofer, et.al list four levels of strategy for business organizations. First, strategy at the societal level is concerned with the definition of a firm’s role in society. It would specify the nature of corporate governance, political involvement of the firm, and trade-offs nature of corporate governance, political involvement of the firm, and trade-offs sought between economic and social objectives. The second strategy level is corporate strategy which addresses (1) the nature of the firm’s business and (2) management of the set of businesses necessary to achieve its goals. Third, business strategy addresses how the firm should be positioned and managed so as to compete in a given business how the firm should be positioned and managed so as to compete in a given business or industry. Finally, functional area strategy is the lowest level of corporate strategy. It is concerned with their respective functional area environments. Newman and Logain present two levels-business strategy and functional policy—for non diversified firms, and a total of three (with the addition of corporate strategy) for diversified firms. Higgins identifies for levels of strategy: societal response strategy (enterprise strategy), mission determination strategy (corporate level), primary mission strategy (business level), and mission supportive 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 to organizational structure. Glueck, et al suggest that the levels of planning activity consist of corporate, sector, shared resource unit (SRU), natural business unit (NBU), and product market unit (PMU). The advantages of this system are (10 it separates the strategic management process from organization structure to a large degree and (2) pushes it father down the organization than traditional systems do. These characteristics stem from focusing planning level selection on strategic issues or problems shared by the organization’s activities rather than on the organization levels of its business activities. Corporate level planning is that which involved identifying trends and formulating strategy in global, technical, and market arenas, responsibility for which rests with corporate headquarters in most cases. Sector level planning, where sectors represent national and technological boundaries, may involve several SBU’s product categories, or even product/service-based division of an organization. Shared resources unit planning calls for
  • 18. NARESH SUKHANI@gmail.com the development of strategic for 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 over the key factors that govern their success in the marketplace-their market position and cost structure”. Finally, product-market unit planning is the lowest level at which planning takes place and those activities that directly relate the company’s output to its markets. There are many other interpretations of the levels of strategy. They differ primarily in terms of the organizational levels to which they apply. Those discussed 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 the organization to its environment; lower levels address the problem of integrating functional areas in ways consistent with upper-level strategy. Second, the topmost level tends to involve structuring the set of acquisitions of divisionalized firms and is usually called corporate-level strategy. Third, they contain a business or strategic business unit (SBU) level of strategy that applies almost equally to a firm comprised of only one line of business and to the individual subsidiaries of multibusiness corporations. Finally, the various schemes include a functional level of strategy that represents the 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: enterprise or socictal goals and action plans. Societal strategy was intended to capture the essential ways in which the firm was expected to respond to goals related to the major 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 of societal, corporate, and business-level strategy are clearly cross-functional. That is, they contain implications for each of a firm’s functional areas (although more distantly removed in the case of societal-and corporate-level strategy), whatever they may be and regardless of the type of firm. By contrast, functional area strategies are more operationally focused than the others. The process of determining how each functional area should be managed is a more specialized problem, defined largely by the practice and theory applicable to each functional (or operational) area. That is, the content of marketing strategy is the subject of marketing texts and courses, finance strategy can be found in finance texts and 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 as guidelines for the employees of each of the firm’s subdivisions. Which ones of these segments or functional areas are included in a firm’s functional strategy set is itself a matter of strategy. For example, whether to have an R & D department or not in the first place is a strategic decision. Functional goals and action plans are developed for each of he functional parts of the firm to guide the behavior of people in a way that would put the other strategies into motion. If part of a firm’s business-level strategy were a target of a 10 percent increase in sales to be brought about by market penetration, for example, marketing strategy might include a change in compensation policy for salespersons and a specified increase in the advertising budget. In that way marketing strategy would provide some detail about how the marketing aspects of the market penetration action plan would be implemented. Similarly, financial strategy would consist of a set of guidelines on how the financial elements of the firm would be put into effect. Personal strategy, production strategy, research and development strategy, and appropriate other functional strategy areas would do the same.
  • 19. NARESH SUKHANI@gmail.com 1.4.3 Process of Internal Analysis There are two fundamental ways to conduct an internal analysis: vertical end horizontal. For the vertical approach, strengths and weaknesses are identified at each organizational level. The horizontal analysis corresponds to the functional areas of the SBUs. Strength and weaknesses are identified for each function. We prefer the horizontal approach because it seems to be more universally applicable. Analysis can be focused on functional departments, or whatever basis of departmentalization has been used in a particular organization. The major dimensions of each area are outlined and discussed in the subsections that follow. They are intended as beginning points for analysis to formulate their own evaluation systems for each case study or organization analyzed. Stevenson found that managers seem to use three types of criteria in identifying strengths and weaknesses: historical, competitive, and normative. Analyzing functional areas by historical criteria means comparing present values with their historical counterparts and identifying strength and weaknesses on the basis of those comparisons. Competitive comparisons involve assessing similarities and dissimilarities with successful competitors and finding strengths and weaknesses accordingly. Similarly normative comparisons are those where present characteristics are compared with ideal values as perceived by the analyst or an expert opinion. In practice the process of identifying strengths and weaknesses can be one of the most educational top managers can have especially enlightening are the enumeration and discussion of weaknesses. Since responsibility for the performance of SBUs and functional often rests with single manager, identification of weaknesses at these levels can be painful and embarrassing for these people. These discussions must be handled carefully to prevent alienation and to bring about constructive solutions to whatever problems are revealed. However, the analyst must make sure that all weaknesses are identified, even though 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 set of categories that define the firm’s operations. These categories, or functional areas, can vary from one organization to another, and depend upon whether the analyst is conducting a vertical or a horizontal analysis. We have selected for discussion of horizontal analysis the common functional areas of marketing, personnel, production, and R&D, along with organization structure, present and past strategies, and external relations (in addition to finance, which was discussed earlier). Although most organizations will have these functions in operation, the analyst should not restrict the internal analysis to them. The particular set of functions 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 Area After 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 most students take a course in strategic management, they have completed course in each functional area and topics related to them. Those courses and the texts used in them are the best sources of evaluative criteria for the functions of organizations.
  • 20. NARESH SUKHANI@gmail.com Marketing: Consistent with marketing convention, this function is analyzed by examining the operqating characteristics of the organizations’ products/services, price, promotion, distribution, and new product development systems. Interest is focused on all aspects of each of these systems that have not already been identifies as part of the financial analysis. Examples of checkpoints for each factor 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) 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 rate The problem is not to identify simply what the organization’s marketing department is doing, but instead what it is doing particularly well or poorly. Personnel and Union Relations: The overall purpose of he personnel function is to manage the relationship between employees and the organization. Therefore, internal analysis of the personnel function is an assessment of the strengths and weaknesses of that relationship. This function can be analyzed by examining the following factors and questions or others tailored to the organization: 1. Job analysis factors a. Are necessary skills present? b. Are all necessary jobs present?
  • 21. NARESH SUKHANI@gmail.com 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 schedule Production: The production or manufacturing area’s strengths and weakness relate to the origination’s ability to produce its products/services at the desire quality level on time at the planned-for-costs. Examples of evaluative factors for production are the following: 1. Facilities and equipment 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?
  • 22. NARESH SUKHANI@gmail.com 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. Productivity For most service organizations, the process of providing the service can be roughly equated to the production of a product. Costs of providing the service, as well as quality of the service delivered, can be the focus of analysis. Wheelwright suggests evaluating production strategy by analyzing its consistency and emphasis. First, the analyst should evaluate the consistency of production strategy with business strategy, other functional strategies, and with the overall business environment. The categories within production strategy itself should exhibit a high level of consistency as well. Then, the extent to which production strategy is focused on factors of success should be evaluated. This involves making sure that priorities among production activities are appropriate to business strategy, that business level opportunities have been addressed, and that production strategy is communicated, understood, and integrated with other functional strategy managers. Research and Development: Research and development (R&D) provides technical analysis and support to other departments, and designs products or processes to meet market needs and thereby generate a profit. Operation of R&D must strike a balance between practicality and creativity in order to contribute successfully to profit goals. Overemphasis on practical matters can impair future profitability because few innovations will be generated. Overemphasis on creativity could result in generation of few marketable product ideas while researchers explore the frontiers of their scientific disciplines. The correct balance between creativity and practicality for a particular firm is a strategic issue that cannot be decided absolutely. That is, this balance is a function of the extent to which the organization required either innovation or market emphasis and that issue is a function of business-level goals and action plans. Conducting an internal analysis of the R&D function involves identifying strengths 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 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?
  • 23. NARESH SUKHANI@gmail.com 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 their successful implementation. To do so, structure must prevent a certain set of problems from materializing. These problems are the characteristics that are searched for to determine the appropriateness of a change in structure. Changing structure is risky. Therefore, it should not e tampered with unless there is either a problem present that must be corrected or one that can reasonably be expected to develop if a change is not made. In either case, though, organization structure should be changes only because of specific problems. That is, there is no absolutely best structure, but only the structure that minimizes organization-related problems. Some of the criteria that can be used to analyze organization structure are as follows: 1. Does structure make sense? 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 strategies Whether present strategies are stated explicitly or must be inferred from behavior of the organization, the goals and action plans currently applicable must e identified and analyzed. The idea is to determine which strategies are working (that is, which action plans are being implemented in such a way that their associated goals are being met) and which ones are not. Information about the relative success of current strategy can the e fed into the process of formulating and implementing new strategies. In this way problems associated with existing strategies can e corrected by formulating modification or replacements for them and effective strategies can e improved upon, retained as is, or extended so what strategic success is facilitated. The following steps can be followed to evaluate current strategy at an of the four levels 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 the firm, and one unsuccessfully implemented is a problem to be deal with. For an internal analysis, however, the point is to identify strategies that are particularly effective – they become strengths. Examples include McDonald’s consistency, Coca-Cola’s distribution strategy, Miller Lite’s marketing strategy, and Nissan’s production strategy. Weaknesses are strategies that have been especially unsuccessful 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?
  • 24. NARESH SUKHANI@gmail.com LESSON 1.5 ANALYZING CORPORATE CAPABILITIES 1.5.1 Introduction: A great deal must be learned about an organization so that strategy formulation decisions can be based upon appropriate information. It almost goes without saying that strategists must understand all there is to know about the internal operations of an organization before strategy can e effectively formulated and implemented. The external influences acting on the firm also must be analyzed, documented, and understood to mange the strategy process effectively. This chapter focuses on conducting both external and internal analysis for the purpose of generating information for strategy formulation. An organization’s environment consists of two parts: The industry within which it operates (for multibusiness firms, the industry is usually considered the activity’ in which the firm generates the majority of its revenue), and other environmental dimensions—economic, political/legal, social and technological. The section of this chapter devoted to internal analysis first addresses financial analysis—the process of learning about the financial performance of the firm or organization. Very often financial analysis will bring to light several financial strengths and weakness that are indicative of strategic or operating capabilities and problems within 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 financial analysis and internal diagnosis of functional areas—are undertaken to generate a data set consisting of strengths, weaknesses, threats, and opportunities that comprehensively descries the internal and external characteristics of the organization. This information is then used as input to the strategy formulation process. It is factored with data about past strategies, mission, corporate culture, and managers’ values, and so on to evaluate the success or failure of present strategies. As a result present strategies can be modified, left as they are or replaced as necessary in a particular situation. The key to effective strategic management is to make major managerial decisions that shape actions by the firm that will correspond positively with the context within which those actions ultimately take place. On the other hand, the action context is dictated to a great degree by conditions external to the firm. These conditions constitute the firm’s operating “environment.” To some extent the firm can shape the overall environment to its advantage. Henry Ford’s introduction of mass production of automobiles stimulated the U.S. economy in a manner that invigorated consumer markets of his products. Genentech, the recombinant DNA research firm, made biotechnical advances that had profound impacts, not just on Genentech’s operating circumstances, but on the future of humankind as well. Nonetheless, few firms enjoy a scale of impact that allows major shaping of the overall climate in which they operate, particularly over the long run. Instead we4ll-managed business enterprises adapt to environmental change so that they can take advantage of opportunities that arise and minimize the otherwise adverse impacts of environmental threats. This involves assessment of present environmental circumstances (for reaction) and the forecasting of future conditions (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 and industry analysis involves filling the right-hand sectors of the data set with information pertiment to a particular firm. Analysis of the internal operations of the organization results in a collection of strength 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 and internal strengths and weaknesses provide inputs to goal and actions
  • 25. NARESH SUKHANI@gmail.com plan choices. They can also affect the manner in which implementation and internal circumstances 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 interrelated processes: 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 and conditions process in business planning. In many organizations it is done on an informal basis. The construction firm executive who learns from a golfing colleague of a request for bids on a major construction project is gaining information that could affect the performance of his firm—information that would be not more valuable had it been acquired through more systematic means. Discovering changes in tax statues by perusing the Wall Street Journal is not less important than learning about them through a well-established monitoring system within the firm’s tax accounting office. Indeed, the talent for acquiring valuable information through informal means often marks the successful entrepreneur and manager. To rely totally on informal means, however, increasingly exposes the firms to missed opportunities and unforeseen threats. A reined-out golf game or an overlooked column in the Wall Street Journal can have profound implications, even if the implication themselves go unnoticed. Therefore, a systematic approach to environmental assessment is important for the management of uncertainty and risk. One formal approach to generating data about environmental conditions is survey research. The use of both original and contracted survey research for purposes of evaluating the present corporate environment offers a lot of promise for strategists. For analysis of external concern in the present, survey research is a way to accurately identify the attitudes of selected population groups toward the company. In fact, virtually any external constituency’s attitudes toward the organization can be assessed through survey research methods. The dimensions of environment can be generally classifies by set of key factors that describe the economic, political/legal, technological, and social surroundings. These, in turn, can be overlaid by the various constituents of the firm, including shareholders, customers, competitors, suppliers, employees, and the general public (Exhibit 2-3). To assess environmental conditions, concern is focused on opportunities and threats that exist, or may arise, through impacts on and by the firm’s constituents. Key Economic Variables Firms that anticipate economic change and identify the constituents through which that change will be applied; can better adapt goals and action plans. By the late-1990s, major oil producing firms has shifted their source of supply form middle-eastern countries to Venezuela because of uncertainties about the political and economic environment of the Middle East. Shareholder expectations of financial return are dictated in part by alternative investments and their associated return and risks. Interest rates, tax policies, shareholder incomes, availability of funds for margin-purchased equity investments, and expectations of future economic circumstances will shape changes in equity investor profiles and/or the financial performance expectations of the firm’s owners. In the early 1980s, high returns on money market instruments (representing corporate and government debt) led to massive shifts from equity holding s by private investors to those shorter-term debt instruments. In many cases this disturbed long-standing shareholder composites (making more room for institutional investors to those shorter-term debt instruments. In many cases this described long-standing shareholder composites (making more room for institutional investors, for example) and pressured management to focus more closely on
  • 26. NARESH SUKHANI@gmail.com generating higher short-term returns. Personal income, savings, employment, and price-level trends can have dramatic effects on the attractiveness of a firm’s products or services in output markets—not only final markets, but intermediate markets as well. In efforts to reduce costs during inflationary periods, automotive manufactures during he 1980’s reduced their reliance on outside suppliers for automobile components. This, in turn, led many component manufactures to retrench or redirect their marketing efforts elsewhere (e.g. replacement parts). Similarly, total sectoral outputs, movements in private-sector capital replacement and expansion, government spending, and the allocation of the consumer dollar can have dramatic impacts between and within industrial sectors. Each can be set off macroeconomic changes well outside the control of the firm, yet may be buffered by appropriate strategic action. Twenty years of inflation, for example, increased consumer use of $50 and $100 bills in retain trade. Among other implications, this meant that many retailers had to replace cash drawers, or entire cash registers, to accommodate these denominations. More significantly, the collapse of he Soviet Union has led to decreased government spending in the U.S. on defense items. Many thousands of prime defense contractors and their subcontractors spent the early-1990s trying to develop new strategies based on non- military products. Economic conditions faced by competitors can play a large part in shaping a firm’s strategies and policies. The movement of manufactures out of the “snow belt” to areas of the country with lower energy costs could provide decisive competitive advantages vis-avis those who remain. Transportation costs, on the other hand, could reduce those savings. Competitors selling to diverse markets might realize less volatility in their capital bases and abilities to compete across economic cycles than might a firm with a narrow product/market scope. In any case it is important to recognize that the economic conditions faced by the competition may be different in form and substance from those faced by the target firm. The capacity, reliability, and, in some case, the survivability of suppliers are largely a function of their economic climate. Both debt and equity capital markets often realize significant swings as a result of overall economic conditions. The firm accessing these markets experiences the repercussions. Federal discount rates and change in reserve requirements have both short-term and long-term implications in primary capital markets, and often affect the private sector borrower through secondary markets. The available supply of goods and services can be affected by the overall economic health of suppliers, including their productivity, alternative markets, and cost structures. To the extent that the target firm represents a major market for a supplier. To the extent that the target firm represents a major market for a supplier, that firm becomes a significant factor in the economic climate the supplier experiences. The choice of multiple versus 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 maintain over them. Though could also provide buying leverage for the firm or represent new opportunities for backward integration. The economic climate of the firm is also manifested through employees. Wage and benefit escalations are often as much a function of he overall econimci circumstances employees face as they are unilateral policy set forth by employers. Rising consumer prices are usually translated into expectations and/or demands for increased compensation. Shifts in employment status, including societal and regional unemployment levels, can increase or decrease these pressures. Economic conditions usually affect employees unevenly, thus requiring creative policy adaptation. Depression of gousing markets in the early 1980s’ for example, led a number of large employers to buy homes from transferred executives, who were unable to sell them at reasonable prices, if at all. This inadvertently put a number of these firms into the real estate “business” (albeit on a relatively small scale), 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 as changes in personal income. Conversely, public expectations and behavior substantially determine the health or inadequacy of the economy, through earning, spending, and saving patterns. In any case the general public is so interwined in the mechanics and psychology of a firm’s economic climate that movement by one can have dramatic implications for the other. Kinder-Care Learning
  • 27. NARESH SUKHANI@gmail.com 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 necessary child care at reasonable cost. The overall impact was synergistic. Finally, in assessing he economic dimension of a firm’s environment, it is important to recognize the interrelated nature of the participants. The multiplier effect in macroeconomics has its micro counterpart. Raw data on prices, wages, savings, government spending, manufacturers’ shipments, and the like are valuable in themselves but represent only the front line of a truly comprehensive analysis. Key Political / Legal Variables Business firms, like people, are touched directly and indirectly by political/legal influences at all levels of government (federal, state, and local). These influences run the alphabetic gamut from antitrust to zoning. The scale of facteral intervention in business is matched only by its turbulence. The Center for the Study of American Business concluded that fedral regulation of business “cost the American economy more than $100 billion on 1980. Approximately $5 billion represented the administrative costs of the major regulatory agencies, and the balance, compliance costs.” In addition to serving as regulatory bodies, governments also represent a major factor in the private sector through fiscal policy. Taxation and government spending can represent both opportunities and threats, depending upon the nature, timing, and position of the impacted enterprise. And, of course, fiscal policy can have dramatic impacts on the overall economic climate of the firm. Shareholders are affected by governments in a variety of ways. Changes in tax structures can affect tax exposure on corporate payouts when treatments of capital recovery versus earnings distributions are considered. To the extent that corporations themselves are shareholders, intercorporate shareholding can be can affect the “tradability” of shares as well as dictate corporate disclosures. Laws dealing with pension funds and other forms of institutional investing can exhilarate or impair changes in investor profiles. Incorporation laws often constrain flexibility in capital restructuring. All of these impositions, in turn, requirements. Governments- mandated sales prohibitions (e.g., on certain firearms) can limit markets. Similarly, export restrictions (national and interstate can impose market constraints. Conversely, public policies targeting industries for rejuvenation or expansion can open up a host of market opportunities (such as trade-adjustment programs in energy and steel). Social legislation (e.g., environmental protection, health, consumer protection) can create markets for new classes of products and services as well as limit those where noncompliance exists. Politics and law are influenced by, and have an impact on, competitors. Antitrust can sustain or impair industry structures and thereby affect the nature of present and future competition. Import restriction can limit foreign competitions. Patent laws provide competitive protection for patent holders. Governments themselves can be suppliers (e.g., mineral rights). And, of course the viability of suppliers as a whole can be affected by all forms of political/legal influences. During mid-1993, hospital administrators in the state of maine estimated that they were about a 20 percent vacancy for a large number of facilities. Retrenchment become necessary to survival for a large number of facilities. The maine legisilature asset-sharing among institutions. This minor legal change alone may save countless millions of dollars in miane’s health care industry by eliminating unnecessary duplication of equipment purchases and operations. Cooperation among hospital is no longer an antitrust violation. Similarly, state legislatures adopting mandatory automobile insurance laws have had dramatic affects on their states’ insurance industries. Protection of employees is clearly a major matter in any firm. Wage laws, labor statutes, equal employment opportunity, accupational safety and health, employee privacy,and pension funds controls all represent areas of strategy concern. Further the public sector competes with the private sector for employees. through support of education and training programs, the public sector also represents a source of labor.
  • 28. NARESH SUKHANI@gmail.com Finally,the political/legal climate is both a function and a determinant of public sentiments. Federal regulatory reform (including deregulation ) is a prime example. Public expectations of business behavior can cause, and be caused by, shifts in partition politics, which in turn can affect the overcall socioeconomic climate in which private sector enterprises operate. Expansionary and technologically aggressive moods on the part of the general public have their counterparts in business and industry, though they need not always be similarly timed (wall street, the public, and Washington are occasionally out of phase in this regard ). Assessing and forecasting the political/legal environment require creativity and sensitivity to industry- specific matters. Unlike the economic environment, the political/legal environment requires largely “soft” calculus where numerical relationships and extrapolations are often unavailable or inappropriate. Key Technological Variables Electronics, bioengineering, chemicals, energy, medicine, and space are but a few of the fields in which major technological change have opened new areas to private enterprise. In some cases entire industries have emerged seemingly overnight (such as genetic engineering), bringing with them new opportunities, and new threats, in the marketplace. In other cases technological changes within industries have brought new forms of product competition (e.g. micro technologies in electronics) have led to different competitive advantages in production costs and product quality. In all instances the firm subject to technological obsolescence or intent on maintaining some form of technological leadership must stay abreast of technological innovation, and to the extent possible, forecast future technological change and its potential for acceptance. That Timex vastly underestimated market acceptance of the digital watch early in its life cycle is but one of many instances of technological displacement having adverse effects on those caught unaware. Technological change has had implications for shareholders, primarily through communications and information processing. High-speed, computer-based market reports 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 systems make round-the-clock real-time communications commonplace. New products and process resulting from technological innovation can result in redefinition of customer bases or customer demands. The design of new, relatively lightweight diesel engines opened up a host of opportunities in the passenger-car industry. Computer-aided design and computer-aided manufacturing (CAD/CAM) have led to the expectation of shorter lead times and much closer tolerances in many industrial and consumer products industries (e.g., aerospace and automobiles). The home information revolution not only may expand markets for consumer product retailers, but may well lead to better informed, more discerning retail customer. So too the nature of competition can be redefined as technological advances unfold. In the oil-well wire-line (or “logging”) industry, new techniques sallow in-the-well sensing of critical geophysical characteristics (temperatures, pressures, etc.) while drilling gear is in place. Older technologies require expensive and time- consuming removeal of the gear before these measurements can be made. Thus those firms with access to the new technology have a marked, competitive advantage. Price is no longer a significant factor when the competition for business is between those with and those without the technology. In acquiring the advantages of new technology, a firm might rely heavily on its suppliers. Manufacturers may turn to equipment suppliers for the latest in robotics, or food processors to pharmaceutical or chemical firms for the latest in preservatives. In each case technological advantage is passed through the production chain, with competitive differentials possible at each stage. Sources of supply can also be redefined with technological innovation. Fiber optics, for example, may well displace metal wire as a primary medium in telecommunications. Telecommunications firms thus would turn to
  • 29. NARESH SUKHANI@gmail.com the glass industry instead of the wire industry for this critical material. Employees continually experience the impact of technology by virtue of changes in requisite skills and job assignments. Automation has led to the conversion of hand labor to higher skills needed in machine design, operation, and maintenance. Even work routines are affected. As telecommunicating attracts ever-greater interest, more and more types of work may be accomplished more effectively and efficiently away from the traditional workplace (at home or at local offices). Finally, technological change looms large in the overall picture of public experiences and expectations. Dissatisfaction with technological lags in the steel industry led to government investigations. Fear about runaway advances in bioengineering 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 within affected industries. And of course everyday life is changed permanently by technology. The spread of Automatic Teller Machines in banking has dramatically changed our banking habits. Not many people under-thirty remember the pre-ATM day when consumer had difficulty accessing their cash on weekends because the banks were closed. The time we save preparing food by microwave oven we now lose by watching video-taped movies at home! Few firms are left untouched by technological change, although some may be more severely or rapidly affected than others. To the extent that technological innovation is a key factor of success in a given industry, it must be monitored and forecast aggressively. In al cases at least a general sensitivity to the technological environment is a primary component of successful strategic planning. Environmental boundaries can be at least generally established by examining the firm’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 flexibility The depth and breadth of environmental scanning also are constrained by available resources. Larger firms can often make substantial resource commitments within planning units to conduct formalized scans on a continual basis. Smaller enterprises, however, rarely can make such communications and must rely on intermittent or more closely focused analysis. FORECASTING In many cases the environmental forecaster needs in make multiple forecast so that 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 upon which to base on expansion strategy. Instead well reasoned multiple forecasts of interest rates can lead to contingency expansion strategies, one of which could be implemented as certain economic conditions unfold. Forecasts can be made in the context of reasonable ranges. Here the analyst is less concerned with anticipation of precisely what the future will bring useful when the forecasting horizon is more distant. For example, one might predict a decrease in federal defense spending in the range of 5-10 percent per year over the next five years or continued Japanese investment in U.S. industry, but at a level not to exceed that of, say, 1989. The
  • 30. NARESH SUKHANI@gmail.com general direction of change is addressed within the confines of anticipated limits. Forecasting Techniques Though a multitude of forecasting techniques might be catalogued, only a few have received recognition in strategic management circle. These techniques can often be used in conjunction with each other to identify opportunities and threats. Trend extrapolation is probably the most widely used. Most simply put, this involves picking a tracking factor or environmental variable, noting its trend (statistically or otherwise), and extending that trend into the future. Lead and lag correlates often are used in the process. Linear and nonlinear statistical models and techniques can be used when hard numerical data exist. This normally involves line fitting to historical data, and extending the line into future periods. Most spreadsheet programs and some operating systems have easy-to-use trend line extrapolation routines build into them. Of course, more sophisticated packages like SPSS (Statistical Package for the Social Sciences) and SAS (Statistical Analysis Software), installed on most computer mainframe systems and also available in microcomputer versions, allow detailed trend line analysis. As with other forecasting techniques, the validity and reliability of trend extrapolation must be carefully evaluated in each application. Parameters must be appropriately selected, and intrinsic or environmental constraints identified. If this is not done, incorrect forecasts can result – extrapolating the growth of a young blade of grass could easily yield a tree. Forecasting by analogy is another widely used technique, although it is not a formal forecasting method. It involves identification of precursor or concurrent events and simple recognition of the relationship. For example, one might have been able to forecast a decline in public interest in the Space Shuttle program after the first launch since there was a similar decline reaction to Columbus’ unspectacular second voyage to the New World. In this case the forecaster is really examining series of analogous (though not identical) events. Because forecasting by analogy is used where historical data are inadequate for the more formal trend extrapolation, its validity and reliability are open to challenge. Delphi represents yet another forecasting procedure. Developed by the Rand Corporation, it basically involves the use of expert opinion through anonymous, miterative, controlled feedback among a group of participants (the expert panel). Normally the panel is polled bgy questionnaires in a search for opinions on reasonably well- defined issues. Each member responds with a forecast and reasons for it. These responses are then satistically compiled and fed back anonymously to al member fo the panel. This routine continues through subsequent iterations as the information is reprocessed by the experts and new forecasts are generated. Ideally the composite results will move toward a consensus. Though this technique is employed fairly widely in public and private sector planning, it would be of limited use to the student case analyst. Simulations and econometric models are designed as numerical interpretations of real-world systems (e.g., national economies, ecologies, production systems). They involve the estimation of theoretical and empirically based relationships, which, when taken together interact quantitatively to produce forecast outcomes. Computers are normally use to make the calculations. A particular advantage of these techniques is the ability to performance sensitivity analysis. Here the analyst changes assumptions or estimation within the model to generate varying outcomes. For example, in a dynamic population forecasting model, one might wish to assess the impact of changes in personal income on population mobility. By varying the income variables in the model, the analyst examines this impact on whatever mobility variables the model contains, thus assessing their sensitivity to income changes. In doing so the analyst is able to evaluate the model itself, as well as gain some understanding of contingency outcomes. Cross-impact analysis is a forecasting technique designed to assess the interactions among future environmental
  • 31. NARESH SUKHANI@gmail.com conditions. The analyst begins by assuming that a set of future environmental circumstances will come true (e.g., four new industry entrants, each holding a 5 percent market share within six years). Through the use of matrix analysis, the analyst then attempts to assess the impact of these circumstances on the possibility and timing of others (such as price competition). If nothing else, the analyst is able to expose forecasting inconsistencies and to clarify underlying assumptions in the forecasts themselves. Finally, scanning and monitoring are forecasting methods insofar as they involve future thinking. The scan is the equivalent of a 360-degree radar sweep, but monitoring is the choice for specific environmental variables or factors that are tracked over time. The latter marely helps refine the make the gathering and processing of environmental information more efficient. For example, an environmental scan may identify a somewhat subtle shift in the packaging industry toward paper containers for liquid consumer products. A firm interested in this matter might then choose to monitor industry shipments in that product category closely, and ultimately generate a forecast of future volume. The forecast could involve any of the other techniques. 1.5.3 Industry Analysis Industry analysis complements analyses of the other dimensions of a firm’s environment. It focuses on the industries in which the firm competes. The breadth and depth of industry analysis and the boundaries for information gathering are defined by these industries. Thus industry analysis involves the same processes as those identified earlier for environmental analysis, except that it logically must be preceded by identification of the appropriate industries for analysis along with descriptions of the various characteristics of those industries. Industry analysis is relevant in any of these situations: 1. The firm’s strategy defines the business in terms of specific industries. 2. The firm is facing new forms of extra-industry competition. 3. The firm is contemplating entry into a new industry. An industry perspective is also useful for the student case analyst in that it provides the basis for gaining familiarity with the products, competition, resource requirements, and constraints peculiar to a line of business. The industry perspective must be use cautiously since an individual firms or business unit can hardly be considered completely protected from direct extra industry, influences. For example, relaxation in occupational safety and health standards for an industry may come at the same time that an individual firm is singled out for stricter compliance enforcement. The analyst, therefore, is cautioned to assess direct environmental influences as well as the portion of the environment that affects overall industry conditions. Michael E. Proter developed an assessment model for analyzing industry structure that focuses on the forces imposed on the process of competing by five influences: The intensity of rivalry among competitors, the threat of new entrants, the threat of substitute products the bargaining power of suppliers, and the bargaining power of buyers or customers. Defining an Industry In general an industry is nothing more than cluster of economic units (firms or business units within firms) that are grouped together for analytical or cooperative purposes. Trade associations themselves define criteria for membership and establish networks for information sharing and cooperation. Thus the American Board Builders and Repairers Association defines its own industry scope and becomes a private sector information depository (among other functions) within the confines of the scope. A more universal taxonomy for analytical purpose is that provided by the U.S. Government’s Standard Industrial Classification (SIC) scheme. It is designed ot furnish a common framework for gathering, tabulating, analyzing, and cross-referencing data in a uniform fashion. The SIC clusters “establishments” (as opposed to legal entities or firms) together on the basis of the primary type of activity in which they are engaged (normally
  • 32. NARESH SUKHANI@gmail.com defined by product or service category). These clusters are named and coded to provide the needed uniformity and comparability. The more digits in the code, the more narrowly defined is the cluster. The coding scheme results in a nesting arrangement of “divisions,” “major groups,” “groups,” and “industries”. Industries are assigned a four-digit code. Additional digits are used for subdivisions within industries. Porter’s Five Forces Model of Competition The nature of competition in an industry in large part determines the content of strategy, especially business- level strategy. Based as it is on the fundamental economics of the industry, the very profit potential of an industry is determined by competitive interactions. Where these interactions are intense, profits tend to be whittled away by the activities of competing. Where they are mild and competitors appear docile, profit potential tends to be high. Yet a full understanding of the elements of competition within an industry is easy to overlook and often difficult to comprehend. Porter has identified five basic forces that collectively describe the state of competition in an industry: 1. The intensity of rivalry among competitors. 2. The threat of new entrants to the market. 3. The amount of bargaining power possessed by the firm’s/industry’s suppliers. 4. The amount of bargaining power possessed by the firm’s/industry’s customers 5. The extent that substitute products present a threat to a firm’s/industry’s products These forces assist in identifying the presence or absence of potential high returns. The weaker are Porter’s five forces, the greater is the opportunity for firms in an industry to experience superior profitability. More generally, understanding how these forces affect competition within an industry allows the strategist to identify the most advantageous strategic position. The actors within an industry on whom these forces exert pressure are, respectively, the industry’s competing firms themselves, potential new entrants to the industry’s markets, suppliers (vendors), customers, and makers of substitute products. Obviously, the starting point for conducting an analysis of the five forces of competition is to identify all the competitors, potential new entrants, and major suppliers, the demographic of customers, and makers of and nature of substitute products. ‘Competitors would not only have to be identified, but various distinguishing data about the industry would also have to be specified. For each competitor this data would include market share, product line differences/similarities, market segments served, price/quality relationships represented by products, growth/decline trends, financial strength differences, and any other information that will help describe the industry. Using Porter’s model to analyze an industry for a particular firms, involves estimating the strength of each force, identifying its underlying source, and then formulating a strategy that will create an advantage for the firm. An advantage could be established by defining a position from which to defend itself against strong forces somewhere in the model. Drafting an offensive posture to take advantages of weak forces in the industry, or designing a way to favorably alter the forces. The key task of the analyst is to understand the underlying causes of each of the competitive forces at work. With this knowledge, a company’s strengths or weaknesses can be clarified, and the most fertile areas for drafting competitive thrusts can be defined. Also, knowing the magnitude of competitive forces allows the strategist to identify the most important trends that are emerging as opportunities and threats. Next, we’ll identify typical characteristics of each competitive force, and the kinds of factors that can create strength for the five sets of competitors.
  • 33. NARESH SUKHANI@gmail.com Industry of Rivalry among Competitors Some industries appear “sleepy” because of a low level of rivalry among competitors. An example might be industrial fasteners, the manufacturers of nuts and bolts and other devices used to connect the components of products. A large number of quite small manufacturers accept low levels of profitability as a cost of staying in business. Competition is low key with little effort and expense devoted to differentiating brands or single products. Such firms often product a catalog and send representative to trade shows to demonstrate products, or use sales forces or independent sales representatives for selling. They usually compete on the basis of price, delivery times, or the convenience of either large or small lot sizes. There are virtually no screw machine companies advertising on television! On the other hand, some industries are characterized by high level of competitive activity. For example, the brewing industry has many competitors who battle fiercely with each other over market share. There is little natural differentiability in beer, so brewing firms develop complex promotional and advertising programs to try to gain the upper hand in consumer awareness. We have seen ads, appeals, posters, jingles, demonstrations, sales and many other types of promotional and advertising program by beer brewers and distributors to differentiate their product on the basis of taste, brewing process, alcohol content, social acceptance, ingredients, price, “naturalness,” similarly to foreign beer brads, dissimilarity to foreign beer brands, strength of flavor, weakness of flavor, and so on; Lately, small retail location-based breweries have been popping up all over the country who make their own beer. For breweries of given revenue size, capital investment is large so exit barriers are high. There are few alternative uses of a defunct brewery. So participants fight it out intensely for a share of the huge beer market. 1 Relative equilibrium in size and power among a large number of competitors 2 Slow or stagnant growth of industry demand such that expansion of one competitor would come at the expense of others. 3 Undifferentiated products and low switching costs. 4 High fixed costs of product perishability 5 Even small capacity additions generate large volume increases which raise pressure to cut prices. 6 High exit barriers causing firms to bear low or negative returns on investments 7 Wide spectrum of strategies and types of firms which generates confusion and frequent “collisions” in the market. The opposite case might be an oligopoly like the automobile industry where most actions are reactions to another competitor and rivalry is somewhat orderly, albeit intense. Buyers For an industry, buyers can usually be broken into three categories: Consumer, industrial, and commercial customers. Consumers, or purchasers of the firm’s service or product for their own use, are further divided into “bundles” of demographics which collectively identify all the various market segments that are present. Firestone, for example, sells tires directly to the people who will be driving on them through its own retain outlets. The various products that make up its line cater to the needs of different sets of demographic descriptions of people. Industrial buyers are companies that purchase the firm’s product or service to be used as a component in its product. Continuing with the Firestone example, automobile manufacturers who put Firestone tires on new cars, would be one group of its set of industrial buyers. By contrast, commercial buyers would be other companies that sell Firestone’s products to consumers. AS example would be any of the large discount stored chains that handle Firestone tires, like Wal-Mart, K-Mart, Sears, etc. Buyers, whether consumer, industrial, or commercial, can enjoy positions of strength over the firm from which
  • 34. NARESH SUKHANI@gmail.com they purchase products by superior bargaining power. For example, a large retailer (“commercial buyer” to its supplier) with a loyal customer base and high volume of sales of the product in question, may be able to virtually dictate price, shipping arrangements, order quantity, quality level, and other factors to its vendors. Similarly, an automobile manufacturer could have a powerful bargaining position over a fire maker or the entire tire industry if a large volume of tires was sought for installation on a popular auto line. (Of cours, the wise tire maker would prevent itself from becoming too dependent on one buyers by strenuously soucing”—buying from several producers of the same components—to prevent dependency on too few suppliers. Thus it has a strong bargaining position on matters of price, quality, delivery times, etc., as its suppliers compete with one another to gain favor with its buyers. An industry’s buyers tend to be powerful relative to the firms they are buying from when the conditions listed below apply (keep in mid that these factors apply as well to a group on consumers and to industrial and commercial buyers) 1 Buyers are concentrated as in cooperatives, or they account for a large volume of purchases. 2 Products are undifferentiated or standardized. 3 The seller’s component represents a large portion of the total cost of the buyer’s finished product. When the seller’s product has a small cost share, buyers tend to be less price-sensitive. 4 Buyers are earning low profits and are thus more price sensitive than if they were highly profitable. 5 The sellers’ product is not critical in one way or another to the buyer. If it’s critical to the quality, price, appeal, etc., of an industrial buyer group’s finished product, for example, then the sellers will have power over the buyers. 6 There is a threat that buyers can integrate backward to make the suppliers’ product. An industry’s commercial buyers (retailers) have, in some cases, an additional source of bargaining power over their manufacturing vendors. They can influence customers’ purchase decision. This capability allows retailers to gain price, delivery time, order quantity, and other concessions from their suppliers that other classes of buyers might not receive. Suppliers Providers of goods and services to an industry have power over their customers through their ability to set price and control quality, delivery time, and order quantity. If these customers cannot successfully play off one supplier against another to protect themselves, then the industry’s profits can be drained off by suppliers. 1 The power of suppliers is high in the following situations: 2 There are few suppliers who are more concentrated than their customers 3 Suppliers’ product is differentiated 4 Customers! Switching costs are high. 5 There is little pressure on suppliers to protect themselves from substitutes or replacements for their product. 6 When suppliers have the capability to integrate forward. A supplier of engines to a manufacturer of lawnmowers would have a strong bargaining position if the mower company realized the engine supplier’s ability to make the whole-lawnmower. 7 The industry is not one of the major customers of the supplier. Important customers would be protected from aggressive moves by the supplier because of their mutual interests: unimportant customers would not enjoy this position. An interesting example of the power of suppliers is the unusual relationship between the growers of seed shrimp and the growers of mature shrimp in the shrimp mariculture industry in the country of Ecuador. The preferred seed stock (baby shrimp placed in growth ponds to grow to a marketable size) are wild post-larval shrimp
  • 35. NARESH SUKHANI@gmail.com (called “PLs”) netted in the country’s estuarine areas by fishermen. These PL shrimp are much hardier than their hatchery-grown substitutes—as many as 80 percent of the hatchery-grown PLs die before reaching maturity compared with a mortality rate of about 20 percent for the wild ones. The problem is that the supply of wild PLs fluctuates dramatically from year-to-year with climatic conditions. In some years there are not enough wild PLs to stock all the growth farms. In other years there is an oversupply of wild PLs. During the years of wild PL undersupply, the price of hatchery-grown PLs skyrockets and the PL hatchery operators thrive. Indeed, they have the power during these years to control the profitability of the much larger (in terms of revenue) mature shrimp mariculture industry. But during the wild PL oversupply years, they may receive no revenue at all. For Ecuadorian shrimp hatchery operators, periods of extremely high bargaining power and virtually no bargaining power may be separated by only a few months. Substitute Products The shrimp industry example above also demonstrates the plight of an industry facing a substitute for its product. Although it is an extreme case, seed shrimp hatchery operators really only have an industry an all during the years when their product’s substitute, wild seed shrimp, are in short supply. Hatchery operators are spending heavily on research to increase the survival rate of their product. If they are successful in this endeavor, then they may be able to displace the wild seed shrimp industry altogether. During years when there are not quite enough wild seed shrimp to go around, shrimp growers use some hatchery grown seed stock. Their availability limits the price that the wild PL fishermen can charge for their product. This price ceiling is typical of all industries facing substitutes. Manufacturers of products and suppliers of services must constantly scan their environments for the potential emergence of substitutes. The most dangerous substitute are those that show potential for improving price- performance trade-offs and those made by firms or industries earning high profits. In these cases, strategies must be formulated to protect against displacement by the substitute product/service. Potential Entrants New entrants to an industry pose several threats to existing competitors. New competitors can reduce the market share of all participants by dividing the “pie” into more pieces. They also may bring new technology or greater resources not available to present competitors and achieve a high market share position quickly to the determent of al existing participants. Corporate parent firms that diversify into an industry by acquisition are especially dangerous to existing competitors both because of their “deep pockets” and potential management expertise. A restaurant in the tourism-driven town of Newport, Rhode Island, rapidly gained market share from other restaurants in town when it was acquired by a large international corporation. The parent made capital available to the restaurant and after a major facilities overhaul, hiring of professional management, and implementation of other profit oriented moves, the restaurant quickly became of “industry leader” in Newport. Although corporate ownership does not guarantee success of a restaurant this example points out the threat to current participants presented by corporate diversification into their industry. The threat of new entrants to an industry is high when barriers to entry are low. Low entry barriers would apply in the following situations: 1 Low economies of scale. That small independent pizza parlors exists side by-side with the units of national chains of pizza stores indicates the there are few economies of scale in his industry. Thus, one finds and would expect frequent appearance of new pizza places in just about every town and neighborhood.
  • 36. NARESH SUKHANI@gmail.com 2 Undifferentiated products in an industry leads’ to new entrants. Most Americans can’t tell a good shrimp from a bad one. As a result, Ecuador’s dominant market position in the lucrative U.S. shrimp market is under attack by shrimp growers from al over the world. 3 Low capital requirements for start-up in an industry leads to new entrants. An extreme example is the house painting business where capital coasts are minimal. Every community sees the appearance of a large number of new house painters every year. 4 Low switching costs leads to new entrants because customers sense little incentive to stay with current suppliers. Homeowners frequently change rubbish pickup companies because there is little incentive to stay with current provider. Compare this situation with the costs of changing from an oil heating system to gas, or visa versa. 5 Easy access to distribution channels 6 Low familiarization costs-where “learning the ropes” in the industry easy or inexpensive for new entrants. Conducting an industry analysis following Porter’s model involve collecting data and developing explanations for the ways in which industries competition is affected by the five forces. 1.5.4 Financial analysis Financial statements can reveal much about a firm’s operating strength and weaknesses. They also serve as a basis for predicting future financial developments. To the extent that the performance of all parts of an organization is ultimately reflected in the magnitude of entries in a firm’s financial statement financial analysis can structure or bound the question of how well a strategy working. Comprehensive financial analysis consists of four elements: ratio analysis of the firm’s historical financial performance, interpretation of cash flow position, analysis of retained earnings position, and predictions of future financial statements. All findings of the financial analysis should be reduced to strengths and weaknesses of the firm and located accordingly in the data set for the present time frame. Then expected changes in each item can be forecast. Financial Ratio Analysis Financial ratio analysis (FRA) is a process whereby the analyst or manager determines the degree of financial health represented by the firm’s financial statements. Toward that goal there are a number of ways in which FRA can be useful. First, it can aid in interpreting and evaluating income statements and balance sheets by reducing the amount of data contained in them to a workable amount. After computing several key ratios whose numerators and denominators are made up of selected items from the statements, a comprehensive analysis of the firm’s financial position can be conducted by evaluation the resulting ratio. Second, FRA can make financial data more meaningful. Any ratio strikes a relationship between the numbers in its numerator and denominator. By selecting sets of numbers that are logically related, only a few ratios may be necessary to comprehensively analyze a set of financial statements. Third, ratios help to determine relative meningitides to financial quantities. For example, the magnitude of a firm’s debt has little meaning unless it, is compared with the owner’s investment in the business. Thus the debt/equity ratio strikes a relationship between these quantities such that their relative magnitudes can be established.
  • 37. NARESH SUKHANI@gmail.com Because of these advantages, FRA can help managers or external analysis make effective decisions about the firm’s credit worthiness, potential earnings, and financial strengths and weaknesses. It involves simply selecting the financial entities to be compared from either the income statement or the balance sheet, dividing one by the other, and comparing the product with a base. This comparative base could be a history of ratios for the firm (trend analysis), average ratio values from past periods computed from financial statements of other firms in the same industry (industry average comparison), or a combination of the two. To use the first of these approaches, a ratio’s historical values are computed to determine whether its trend is increasing, decreasing, or constant. The second approach requires availability of industry average financial ratios that were computed in the same way as those of the firm under analysis. There are several published sources of data for such comparisons. Financial Dimensions The financial structure of a business has several dimensions. Each financial dimension may be measure by several ratios, but the financial dimensions themselves normally are not directly measurable. To analyze a firm’s financial structure comprehensively, then, one must select a set of ratios made up of subsets, each of which represents a dimension. In this section financial dimensions are explained first. Then the ratios that collectively measure each dimension are discussed. The method of computation for each one is presented, followed by its interpretation. Liquidity: The liquidity of a firm is its ability to pay current liabilities as they come due (current liabilities are debts due within one year). The only funds available for payments of short-term debt are either cash or other current assets readily convertible to cash. Consequently liquidity is measured by ratios that strike a relationship between current liabilities and selected current assets. Current assets are those normally expected to into cash in the coure of a merchandising cycle. Ordinarily they include short-term notes and accounts receivable (due within the next twelve month ), inventory, and marketable securities (at current realizable values). Current liabilities are short-term obligation for the payment of cash due on demand or within a year. Ordinarily they include short-term notes and account payable for merchandise, current portion of long-term debt, taxes due, and other accruals. Interpretation: This ratio is a rough indention of a firm’s ability to service its current obligations. Generally the higher the current ratio, the greater is the “cushion” between current obligations and a firm’s ability to pay them. The stronger ratio reflects a numerical superiority of current assets over current liabilities. However, the composition and quality of current assets are a critical factor in the analysis of an individual firm’s liquidity. Interpretation: Also known as the “acid test” ratio, that is a refinement of the current ratio and is s more conservative measure of liquidity. The ratio expresses the degree to which a company’s current liabilities are covered by the most liquid current assets. Generally any value of less than one to open implies a reciprocal “dependency” on inventory to liquidate short-term debt. Coverage: Coverage refers to a firm’s ability to service debt that involves interest or premium payments. Ratios that measure coverage consist of one component to estimate flow of funds into the firm and another for periodic payments on debt. Interpretation: This ratio is a measure of a firm’s ability to meet interest payments. A high ratio may indicate that a borrower would have little difficulty in meeting the interest obligations of a loan. This ratio also serves as an indicator of a firm’s capacity to take on additional debt.
  • 38. NARESH SUKHANI@gmail.com Profitability: This familiar dimension of a company’s financial structure concerns managements ability to control expenses and to earn a return on committed funds. Ratios that measure profitability usually consist of a profit element and one that represents the amount of funds invested in whatever aspect of the firm is of interest to the analyst. Net profit can be calculated either before or after taxes. Robert Morris Associates and the following explanation use net profit before taxes. The analyst should ensure that the ratio elements used to compute the profitability ratios (and other as well) are the same as those used to compute the industry average against which the ratio’s value will be compared. Also note that the following two ratios are converted to and reported as percentages. Interpretation: This ratio expresses the rate of return on tangible capital employed (called net worth or capital or owners’ equity less intangibles). While it can serve as an indicator of management performance, the analyst is cautioned to use it in conjunction with other ratios. A high return, normally associated with effective management, could indicate and undercapitalized firm. A low return usually an indicator of inefficient management performance could reflect a highly capitalized, conservatively operated business. Interpretation: This ratio expresses the return on total assets and measures the effectiveness of management in employing the resources available to it. If a specific ratio varies considerably from the ranges found in published sources, the analyst will need to examine the makeup of the assets and take a closer look at the earnings figure. A heavily depreciated plant and a large amount of intangible assets or unusual income or express items will cause distortions of this ratio. Leverage: The extent to which the firm relies on debt as opposed to owner’s capital (net worth) is its leverage position. A highly leveraged firm is one with a high proportion of debt relative to owner’s investment. Interpretation: This ratio expresses the relationship between capital contributed creditors and that contributed by owners. It expresses the degree of protection provided by the owners for the creditors. A lower ratio generally indicates greater long-term financial safety. A firm with a low debt/worth ratio usually has greater flexibility to borrow inb the future. A more highly leveraged company has more limited debt capacity. Generally the order or preference given to this ratio is arranged on a continuum such that a low negative ratio is characterized as a weak debt/worth position and a high positive ratio value is perceived as a strong debt/worth position. Interpretation: This ratio measures the extent to which owner’s which owner’s (net worth) has been invested in plant and equipment (fixed assets). A lower ration indicates a proportionately smaller investment in fixed assets in relation to net worth, and a better “cushion” for creditors in case of liquidation. Similarly, a higher ratio would indicate the opposite situation. The presence of substantial leased fixed assets (not shown on the balance sheet) may lower this ration deceptively. The order of preference normally given this ratio is the same as debt/worth. Activity: Activity ratios, also called “efficiency” or “turnover” ratios, measure how effectively a firm’s assets are managed. Examining the relationship between a measure of sales and an asset account is their purpose. Interpretation: This ratio measures the number of times inventory is turned over during the year. High inventory turnover can indicate better liquidity or superior marketing. Conversely it can indicate a shortage of needed inventory for sales. Low inventory turnover can indicate poor liquidity, possible overstocking, obsolescence, or, in contrast to these negative interpretations, a planned inventory buildup in reparation for future material shortages. A problem with this ratio is that it compares one day’s inventory (at the end of the accounting period) with cost of goods sold and does not take seasonal fluctuations into account. One way to resolve this problem when sufficient data are available is to calculate cost of sales and average inventory by month to develop turnover ratios for each month. Further, it may prove extremely useful to break up cost of sales and inventory by different classes of products.
  • 39. NARESH SUKHANI@gmail.com Predicting Financial Performance The financial impact on the firm of a strategic change is presented in pro forma (predicted) financial statements. These statements include a cash budget, an income statement, and a balance sheet prepared over the appropriate planning periods. Typically the income statement and balance sheet are projected furs tot show expected sales and expenses (income statement), the level of assets necessary to generate those sales (left side of the projected balance sheet), and the way in which assets will be financed (the right side of the projected balance sheet). Then a funds flow statement is prepared to give more detail on cash or working capital transactions expected to be necessary for operations to proceed as planned (although one approach calls for constructing the cash budget first). There are four approached to projecting financial statements: The present-of-sales method, the statistical- relationship method, the budgets-and-ratios method, and the breakeven sales method. All require a sales forecast as a foundation for predicting other components. Questions: 1. What is the need for environmental scanning? 2. Under what circumstances the companies have to go by their corporate capabilities? 3. What is core competence? Give examples. 4. Explain Micheal Porter’s generic model.
  • 40. NARESH SUKHANI@gmail.com LESSON 1.6 SWOT 1.6.1 Introduction: SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. Once key issues have been identified, they feed into marketing objectives. It can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Pouter’s five-forces analysis. It is very popular tool with marketing students because it is quick and easy to learn. SWOT stands for strengths, weaknesses, opportunities, and threats. Strength and weaknesses are internal factors. For example, a strength could be your specialist marketing expertise. A weakness’ could be the lack of a new product. Opportunities and threats are external factors. For example, an opportunity could be a developing market such as the internet. A thereat could be new competitor in your home market. During the SWOT exercise, list factors in the relevant boxes. SWOT analysis can be very subjective. So not rely on it too much. Two people rarely come-up with the same final version of SWOT. TOWS analysis is extremely similar. It simply looks at the negative factors first in order to turn them into positive factors. So use it as guide and not a prescription. In order to succeed, business needs to understand what their strengths are and where they are vulnerable. Successful businesses build on their strengths, correct weaknesses and protect against vulnerabilities and threats. Just as important, they have an eye on their overall business environment and spot new opportunities faster than competitors. SWOT analysis stands for Strengths, Weaknesses, Opportunities and Threats Analysis. The technique looks at where the company has an advantage compared to its industry and where it is weak. 1.6.2 Effective SWOT analysis To be effective SWOT analysis needs a methodical and objective approach. It is too easy for a company to look at itself – and fail to see any problems, or to see strengths that are not real. We can help combat this by providing a fully objective view – which can then be used to support and enhance your business and marketing planning. SWOT analysis are undertaken by businesses at the start of planning – to identify organizational strengths, weaknesses, opportunities and threats. They should not be seen as a process in isolation – ant it is important that decisions are taken based on the findings. A SWOT starts with an external analysis of the business environment, often called a PEST analysis, and then looks at the organization’s internal strength and weaknesses, relative to internal factors such prior performance and also to external factors, which may have been highlighted in the PEST analysis. The final stage is to combine the analyses to look at opportunities and threats facing the organization and to draw up plans to take advantage of the opportunities and to counter the threats. When examining political factors, you need to look at any political changes that could effect your business. What laws are being drafted? What global change is occurring? Legislation on maternity rights, data protection health & safety, environmental policy, should be considered, for example. As an example, take a company employing a large number of women. Changes in maternity rights may have a major impact on such a business – the aware business will keep an eye out for changes in such legislation. Often the political factors spill over into economic factors. For example, tax is usually decided by politicians, based on a mixture of political and economic factors. Interest rates, in many countries are decided by a central bank, but political factors may still be important. The fall of the Soviet Union caught most businesses and Western Governments by surprise – but not all. Some companies – notably Shell Petroleum – had picked up signals that all was not well in Russia. Many of these were related to economic problems within the oviet Union. Other economic factors include exchange rates, inflation levels income growth, debt & saving levels (which impact available money) and consumer & business confidence. The current state of world stock
  • 41. NARESH SUKHANI@gmail.com markets is a typical example of the volatility of economic factors. These areas are global, but it is also important to look at factors affecting individual industries. Are paper costs rising? For a book, magazine or newspaper publisher, the price of paper is a crucial economic measure. The UK software industry is currently complaining of a shortage of computer programmers – which is driving up wage costs. Again – the global picture can be important. Some companies are now using programmers in countries like India for software development. This helps them keep costs down – and leads to competitive advantage over companies with higher costs. Advances in technology can have major impact on business success – with companies that fail to keep up often going out of business. Technological change impacts social-cultural attitudes. For example the way people spend their leisure has changed dramatically over the last 30 or so years. As well as advances in your own industry, think about the likely impact of new technologies – the Internet, EDI, mobile phones, and the increasing advances in computing and computers. Look out for any technology that could make producing your product easier. And watch out for the technology that could make your product obsolete. Finally, all this influences and is influenced by social factors – the elements ath build society. Social factors influence people’s choices and include the beliefs, values and attitudes of society. So understanding changes in this area can be crucial. Such changes can impact purchasing behavior. Typical things to look at for each of these follow : consumer attitudes to your product & industry – environmental issues (especially if your involves hazardous or potentially damaging production processes) – the role of women in Society – attitudes to health – attitudes to wealth – attitudes to age (children, the elderly, etc.) Added complication when looking at social and cultural factors are differences in ethnic and social groups. Not all groups have the same attitudes – and this impacts how they view products and services. Demographic changes can also play a major part. 1.6.3 Compiling a PEST analysis: On way of compiling a PEST analysis for your business is to take a LARGE sheet of paper. In the top left corner, put the heading Political; in the top right corner, Economic; bottom left = Socio – cultural; bottom right = technological. For each heading, think of every factor that possibly have an impact on your business. Think laterally – just because something seem unlikely does not mean that it will not have and influence in the future. Having compiled a list of key factors, think of inter-relationships between factors. For example, the rise of the Internet (technological factors) is likely to influence consumer purchasing (social factors) – while an awareness of prices in other markets through electronic commerce may lead to a narrowing of cross-border price difference (economic). Connect up al inter-related factors. You will find that some areas have more connections than others. These are often the areas that some areas have more connections than others. These are often the areas that will have the greatest potential impact on your company. These are the aspects that you most need to be aware of, in your marketing planning – and represent future opportunities and threats. The final stage in a PEST, analysis is to use the results, - Prepare contingency plans to prepare for nay threats identified. – It there are factors that lead to businedd opportunities, then include these in your planning. For example, your target customer group may be growing faster than other sectors. This is an opportunity to increase production to take advantage of more potential customers. However before the results are used effectively, you should also develop an understanding of your own companies capabilities. This comes from a SWOT analysis.
  • 42. NARESH SUKHANI@gmail.com 1.6.4 Developing SWOT analysis: A SWOT analysis builds on the results of the PEST analysis, which looks at the company’s external environment. Its purpose is to identify company strengths and weaknesses so that strengths can be maintained or increased and weaknesses corrected. A further purpose is to identify opportunities and threats resulting from external factors – especially those that have an impact on the company’s strengths and weaknesses. Company strengths and weaknesses need to be identified in all aspects of the business. - relative to the rest of the market (i.e. compared to competitors) - relative to previous performance or expected performance - relative to customer demand (for example all companies in an industry may fail to satisfy a particular customer need. This is a weakness – and the first company to match this customer need will have a strength relative to the other companies in the industry. It is also important to realize that opportunities arise out of weaknesses. Correcting a weakness presents a marketing opportunity. Similarly, failing to maintain a strength is a threat to he company. A preliminary approach for carrying out a SWOT analysis is to list perceived company strengths, weaknesses, opportunities and threats under each of these headings. Ensure that no weaknesses cancel out company strengths and potential threats to the company strength or opportunities that could arise out of correcting weaknesses. On the above list, highlight key areas of concern or areas that require action. These become the focus for future planning. This approach is preliminary – as it does not evaluate the relative importance of each issue. A further approach is to list key aspects in a table – and score them out of 5, where 5 is a major strength and 1 a major weakness. Scoring can be based on the following factors – relative to the overall industry – relative to major competitors or the next largest competitor – relative to expected performance – relative to previous performance. An item that won on all 4 categories would be a major strength and vice versa for weaknesses. Areas where the company has better performance than competitors, but where performance is below expectations would receive a higher score than where performance has improved but still is weaker than competitors. The following is list of some of the things that should be considered: Marketing Aspects Market share and market segments addressed – Competitive Structure Customer base (quality size, loyalty, etc). – Demand forecasts – Product range and quality. Services provided – Distribution capabilities and costs – Sales effectiveness – Promotional effectiveness. Image and reputation – Pricing options – Speed to market – Customer service – R&D and Innovation / New products. Marketing skills and experience – International / export market capabilities. Operational / Manufacturing Aspects Production / Manufacturing facilities (age, quality, speed…) – Economies of scale – Skills (Employee, technical, etc.) – Product failure rate – Flexibility – Costs – Supply / raw material availability. Human Resource Aspects - Employees skills, motivation, dedication and experience – Employee satisfaction – Employee costs – Work environment – Staff turnover rate – Management and Organisational Aspects Management skills and experience – Leadership and team skills – Ability to respond to market change – Flexibility and adaptability
  • 43. NARESH SUKHANI@gmail.com Financial Aspects Cost of capital – Profitability / Return on investment – Financial Stability – Sales / Employee – Cash availability This scheme allows the company to identify where it is strongest against competitors – the company’s competitive advantage – and against previous and expected performance. Finally after compiling the list, management should start to consider whether action is needed regarding each identified item. A way forward here is to rank each item on importance to the company. Low performance (i.e. a score of 1 or 2) and high importance should be the major priority. Similarly, high performance (4 or 5 score) and high importance indicates areas where performance needs to be maintained. Conversely, low importance and low performance can be given a lower priority, while low importance items that are viewed as strengths can be ignored. It is better to spend time and money improving or maintaining areas that matter to the company than worrying about perceived strengths that do not add anything worthwhile to the company. This can be summarized as: 1. Low priority – monitor for changes. Focus on only if finances and time allow. 2. Medium priority – focus on after the high priority items have been looked at, or if finances allow. 3. High priority – main focus. Ensure adequate finance to address issues. The results of this analysis then feed into a marketing or organization strategic plan. A SWOT Analysis is an effective way of analyzing your company’s potential by identifying your Strengths and Weaknesses, and to examine the Opportunities and Threats which may affect you. Carrying out an analysis using the SWOT tool will be enough to reveal changes which can be implemented easily and gain results. To carry out a SWOT Analysis effectively, get a team together from the various departments of your company for a brain storming session. If possible use a whiteboard and write down all ideas and comments that might be raised. Later you can edit each one and delete anything not relevant. The best method is to split the whiteboard into a 4 sections as follows: Strengths Weaknesses Opportunities Threats List down answers to the following questions: Strengths: What are your advantages? What do you do well? What makes you different from your competition?
  • 44. NARESH SUKHANI@gmail.com Consider this from your own point of view and from the point of view of the people you deal with. It’s important to be honest and realistic. Ensure your team feels comfortable and understands the purpose. Weakness: What could be done better? What is done badly? What should be avoided? What causes problems or complaints? It is important to be realistic not and face any unpleasant truths as soon as possible. Opportunities Where are the good chances facing you? What are the interesting trends? Examples of opportunities can be:  Changes in technology and markets  Changes in government policy or regulations  Changes in social patterns, population, lifestyle changes, economical  Local and global events Threats  What obstacles do you face?  What is your competition doing?  Are the specifications for your products or services changing?  Is changing technology threatening your business?  Do you have bad debt or cash-flow problems? Once the SWOT analysis has been completed, mark each point with the followings:  Things that MUST be addressed immediately  Things that can be handled now  Things that should be researched further  Things that should be planned for the future. Now that each point has been prioritized, set an action point for each and assign it to a person, add a deadline. Although the SWOT analysis will assist in identifying issues, the action plan will ensure that something is done about each one. With complicated issues a further brainstorming session might be done to analyze it further and decide what action to take. 1.6.5 SWOT Analysis of Indian Pharmaceutical Sector: Strengths  Cost Competitiveness  Well Developed Industry with Strong Manufacturing Base  Well Established Network of Laboratories and R&D infrastructure
  • 45. NARESH SUKHANI@gmail.com  Access to pool of highly trained scientists, both in India and abroad  Strong marketing and distribution network  Rich Biodiversity  Competencies in Chemistry and process development Weakness  Low investments in innovative R & D  Lack of resources to compete with MNCs for New Drug Discovery Research and to commercialize molecules on a worldwide basis.  Lack of strong linkages between industry and academia.  Lack of culture of innovation in the industry  Low medical expenditure and healthcare spend in the country  Inadequate regulatory standards  Production of spurious and low quality drugs tarnishes the image of industry at home and abroad Opportunities  Significant export potential  Licensing deals with MNCs for NCEs and NDDS.  Marketing alliances to sell MNC products in domestic market  Contract manufacturing arrangements with MNCs  Potential for developing India as a centre for international clinical trials  Niche player in global pharmaceutical R&D Threats  Product patent regime poses serious challenge to domestic industry unless it invests in research and development.  R&D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory requirement. For instance, restrictions on animal testing outdated patent office.  Drug Price Control Order puts unrealistic ceilings on product prices and profitability and prevents pharmaceutical companies from generating investible surplus.  Export effort hampered by procedural hurdles in India as well as non-traiff barriers imposed abroad.  Lowering of tariff protection Questions: 1. What is PEST analysis? 2. Write a note on TOWS Matrix? 3. Explain the need to undertake SWOT analysis in the Indian context.
  • 46. NARESH SUKHANI@gmail.com Lesson 2.1 Corporate Strategy 2.1.1 Evolution of Strategic It has increased both in its level of detail and in its importance as the complexity of the environment has increased. Between World War II and the early 1960s, business policy, following the so-called prostrate paradigm, addressed the problem of coordinating he operations of the various functional departments of the firm. Policies were established by top management to integrate activities that each department was to carry out. Thus policy served to standardize and specify behavior within functional departments. Strategy was usually viewed as an implicit concept reserved for the topmost managers. In the top manager’s mind, this concept, reserved for the top, most managers. In the top manager’s mind, this concept, environmental characteristics, certain organizational goals, and political circumstances, along with years of management experience, all came together ot reduce what was hoped would be the right collection of policies. Strategy was seldom analyzed once it was decided on by top management, and rarely changed. When operations did not meet expectations, it was policy that typically was analyzed and modified. Most firms were single-line businesses; business policy making was conducted in large part at what is known today as the business level. The rapid rise during the 1950s and early 1960s in the number of interest groups making demands on organizations of all kinds, along with the proliferation of mergers and acquisitions, began to strain the applicability of the relatively simple business-policy approach to management. Divisional zed firms no longer had a single line of business. Thus a different set of policies was needed for each subsidiary and managers sought a common thread that might bind them together. The internal complexity of firms had increased in an attempt to deal with the complexity of a pluralistic society. Davis and Bloodstream describe social pluralism as a society “in which diverse groups maintain autonomous participation and influences in the social system.” Business is merely one such influence (interest group) and competes with many other groups for time, money, interest, allegiance, or attention. Increasingly organization that were operated without an understanding of, or respect for, the various interest-group influence have been subjected to successful attacks by these groups. Electric utilities were forced by many interest groups to cease or radically change the nature of nuclear power plant construction projects. Through the pressure of consumer groups, automobile manufactures have been made to correct deficiencies in their products. Industrial polluters were required by environmental groups to clean up or stop harmful discharges. Product labeling requirements were tightened, Equal Employment Opportunity assurances became stricter and product safety standards were improved. These changes, and hundreds of others, were bought about largely by the political actions of interest groups. Their activities often resulted in enactment of legislation that today regulates the conduct of business. In response to this growth in the dimensions of firms’ environments, and also to the growth in the number of Divisional zed firms, strategy increasingly became interpreted as the link between an organization and its environment. All of the “policy” problems remained, but they were compounded by a baffling set of external claims, and also by the needs imposed by multiple product lines and business-level activities. Because of its inability to deal with these factors, the business-policy model underwent several evolutionary changes and emerged as what was later called strategic planning. Dubbed the initial strategy paradigm, this view of corporate management focused heavily on the process of strategy formulation with emphasis on environmental pressures, yet it had four major shortcomings. First it did not clearly differentiate between corporate-level strategy (question related to the collection of business activities a divisional zed company owned) and business level strategy (how to compete within a particular business activity). Second, the initial strategy paradigm was unclear about the nature of relationships between strategy and the operation of the various functional areas of business. How does the task of marketing management, for example, change with different strategic focuses and how can the functional areas be integrated into an effective whole? Such questions largely went unanswered.
  • 47. NARESH SUKHANI@gmail.com Third, this paradigm was incomplete in its discussion of the role of general management. Some authors contended that strategic planning was the province of only top managers, whereas others claimed that all mangers should be involved in strategic planning. Finally, there was disagreement about whether strategy included both goals and action plans, or just action plans. The strategic management paradigm, although still in its infancy, is the third step in the evolution of thought about strategy, and it addresses the shortcomings of strategic planning. As initially codified by Schedule and Hofer, strategic management is far from representing a consensus. Yet there is perceptible movement toward consolidation around many of its principles. In particular, there is now a widely accepted distinction between corporate-level business-level, and functional-level strategy. A fourth strategy level, enterprise strategy, has been proposed by An off, but the concept has not endured (enterprise strategy was defined as describing the interaction of a firm with its environment—it is now felt by many that this interaction is best incorporated in each of the other strategy levels and not reserved only for a separate category of strategy.) In some ways related to Ansoff’s concept of enterprise strategy, a more global strategic orientation is described by Magazines and Reich; they call it international strategy. Here too, during the early 1990s the idea of isolating global issues and direction in a separate strategy level has given way to the practice of incorporating international competitive matters into all levels of strategic decision making. The strategic management paradigm not only distinguishes among different levels of strategy but is sufficiently adaptable to accommodate the need for this expanded scope of strategic thinking. Next, strategic management address the issue of functional integration by identifying various functional strategies. At the same time, responsibility for strategic thinking is viewed within this paradigm as the responsibility of manager’s not just top-level executives. Although there is much work to be done in learning how best to integrate functional strategy with other strategy levels, the strategic management paradigm lays the groundwork for the conduct of such research. Finally, by separating the steps of goal formulation and strategy (action plan) formulation, this paradigm is more objective, more teachable, and less mysterious than earlier interpretations. It may help to continue the increase in popularity of strategy-focused management and thus expand the competitiveness of U.S. business in the international marketplace. 2.1.2 Researching Strategic Management’s Effectiveness: The weight of numbers tends to favor the studies that have supported the positive effects of strategic management. Only a few have not supported it. In 1957 the Stanford Research Institute analyzed some 400 firms and concluded that those that plan outperform those that do not in terms of sales and profit growth. One of the most convincing studies was undertaken by Thune and House in 1970. They identified two groups, formal planners and informal planners, among eighteen matched pairs of companies in six industries. The two groups were then compared by sales, return on stockholders’ equity and total capital, earnings per share and stock prices. One result that is important for our purposes is that the formal planners were significantly better performers on the three profit-related ratios that were the informal planners. Another test of the formal planners compared their performance before planning with their performance after planning was begun. After-planning performance was superior to preplanning performance. Also in 1970, East lack and McDonald showed correlation between planning and performance. In a replication of the Thune and House study by Harold in 1972, the previous findings were upheld—formal planners continued to outperforms informal planners. Another often-cited study, by Rue and Fulmer in 1972, also lends support to the planning-performance relationship, at least for producers of durable goods. However, for businesses in service and nondurable product industries, planners were not significantly better performers
  • 48. NARESH SUKHANI@gmail.com than no planners. In 1974 Wood and Lafarge found that banks that planned formally performed better than those that did not. More support was offered by Karger in learning how best to integrate functional strategy with other strategy levels; the strategic management paradigm lays the groundwork for the conduct of such research. Finally, by separating the steps of goal formulation and strategy (action plan) formulation, this paradigm is more objective, more teachable, and less mysterious than earlier interpretations. It may help to continue the increase in popularity of strategy-focused management and thus expand the competitiveness of U.S business in the international marketplace. 2.1.2. Researching Strategy Management’s Effectiveness: The weight of tends to favor the studies the have supported the positive effect of strategic management. Only a few have not supported it. In 1957 the Stanford Research Institute analyzed some 400 firm and concluded that those that plan outperform those that do not in term of sales and profit growth. One of the most convincing studies was undertaking by Thune and house in 1970. They identified to groups, formal planners and informal planners, among eighteen matched pairs of accompanies in six industries. The two groups were then compared by sales, return on stock prices. One result that is important for our purposes is that the formal planners were significantly better performers on the three profit- related ratio that were the informal planners. Another test of the formal planners compared their performance before planning with their performance after planning was begun. After-planning performance was superior to preplanning performance. Also in 1970, East lack and Mc Donald showed correlation between planning and performance. In a replication of the Thune and House study by Harold in 1972, the pervious finding were upheld-formal planners continued to outperform informal planners. Another often-cited study, by rue and Fulmer in 1972, also lends support to the planning-performance relationship, at least for producers of durable goods. However, for business in service and nondurable product industries, planners were not significantly better performance then no planners. In 1947 wood and Lafarge found that banks that planned formally performed better then those that did not. More support was offered by karger and Alkalis in 1975, when they showed the same result for the machinery, chemicals, drugs, and electronics industries. However, drug and electronic firms in their sample did not show as strong a relationship between planning and performance as did the other two types. Later studies in this area have tended not to support the findings of the earlier work. In research conducted by kallman and Shapiro and kudla, and Plenitudes and tezel during 1980, no positive relationship was seen between planning and performance. The only study since the mid-1979s we found which showed a positive relationship was one by Burt in Australia in 1979. He showed that the higher the quality of the planning program, the better was performance. 2.1.3 The rise and fall of corporate strategy: EARLY 1960S: Harvard professors ken Andrews and C. Roland Christensen articulate the concept of strategy as a tool to link together the functions of a business and assess a company’s strength and weaknesses against competitors. EARLY 1960S: General Electric emerges as the pioneer in strategic planning, crating a large, centralized staff of planners to ponder the future. Consultant Mc Kinsey & Co. helps GE view its products in terms of strategic business units, identify competitors for each, and evaluate its position against them. 1963: Under founder Bruce D. Henderson, Boston Consulting Group becomes the first of many strategic
  • 49. NARESH SUKHANI@gmail.com boutiques. BCG pioneers a series of concepts that tack Corporate America by storm, including the “experience curve” and the “growth and market-share matrix.” 1980: Harvard professor Michael E. Porter’s book Competitive Strategy provides a generation of MBA- trained executives with new models to plot strategy based on economic theories. 1983: New GE Chairman Jack Welch slashes the corporate planning group and purges scores of planners from GE’s operating units. Numerous companies follow his lard. EARLY 1980S:Battered by global competition, turn away from strategic planning and begin to focus on operational improvement. Executives embrace the total Quality movement and the teachings of guru Edward Deming. LATE 1980S: Corporate America begins massive downsizing and reengineering of operations to increase efficiency and productivity. Guru Michael Hammer leads the reengineering revolution. NOW: A bevy of new books are out from a new group of strategy gurus who are capturing the attention of corporate executives and redefining the process of strategy creation. 2.1.4 Contribution by Management Groups: 2.1.4.1 Gary Hamel: Of the new generation of strategy gurus, no one is in greater demand these days than Gary Hamel. Within that past 18 months, the lanky 41-year-old academic has delivered nearly 75 speeches and built a consulting company that is generating revenues of $20 million year. Together with University of Michigan professor C.K. Prahalad, Hamel has redefined the world of corporate strategy. For decades, strategists spent much of their time figuring out how to position products and businesses within an industry. Instead, Hamel argues strategy should be Wal-Mart Stores Inc. did in retailing or Charles Schwab did in the brokerage and mutual-fund businesses. Hamel urges managers to determine their company’s “core competencies,” or key corporate skills, and to create “strategic intent” based on these skills and the development of others to invent a new future. “Strategy has to be subversive, “he declares. “If it’s challenging internal company rules or industry rules, it is not strategy.” Hamel also urges clients to “democratize” the strategy-creating process “It is imagination and not resources that is scarce, “he says. “So we have to involve hundreds, if not thousands, of new voices in the strategy process if we want to increase the odds of seeing the future.” Hamel changes his own future in 1978 when he quit a job as a hospital administrator and went to the University of Michingan for a PhD in international business. At Michigan, be met Prahalad. “We shared a deep dissatisfaction with the mechanistic way strategy was carried out, “Hamel says. The pair wrote a series of influential essays published in the Harvard Business Review and put their ideas into a book, competing for the Future, in late 1994. It has become gospel to managers around the world, many of whom seek advice from Hamel’s firm, Strategos Inc. in Menlo Park, Calif. 2.1.4.2 Abrian Slywotsky: While other strategic-planning gurus start with the capabilities and skills of a company, Abrian J. Slywotsky begins with customers. A founding partner of Boston-based Corporate Decisions Inc., Stywotsky maintains that too much of strategy has been based on a mindset that failed to understand what customers want and need.
  • 50. NARESH SUKHANI@gmail.com He urges managers to begin the strategy process by studying where stock market value is migrating in an industry. Shifts in value-for example, front Sears, Roebuck & Co. to Wal-Mart Stores Inc.-usually reflect shifting customer priorities. By falling out of touch with those needs, one U.S. company after another has lost ground to new, aggressive rivals. Companies such as Microsoft Nucor, and Starbucks have captures growth and stock market value by having what Slywotsky says are “superior business designs”-configuring resources and going to market based on a keen understanding of customers’ priorities “Strategy is about or a different one? How are any customers and prospects changing? If any business model was good for yesterday’s customers how does it have to change to keep them? A Harvard-trained lawyer, Slywotsky returned to the university for his MBA in 1978. After a three-year stint with consultant Bain & Co., he founded corporate Decisions in 1983. His novel views of strategy, detailed in his book Value Migration, have won audiences at such major companies as Sears, Philips Electronics, and Scarle Pharmaceuticals. Slywotsky’s corporate fans find much appeal in his notion that strategy has paid for too much attention to simple gains in market share. By instead examining the business designs that are capturing stock-market value, Slywotsky says, managers can find templates for changes within their own organizations. 2.1.4.3 James Moore: James F, Moore, founder and chairman of Cambridge-based GeoPartners Research Inc., is an unlikely corporate strategist. For one thing, his PhD is in cognitive paychology. For another, he once taught art and photography in a New Haven high school-hardly typical training for any would-be counselor to Corporate America. But with the recent publication of The Death of Competitions, the 47-years old Moore has quickly distinguished himself as an original thinker and hot New Age strategist. Moore relives heavily on metaphors from biology and ecology to help managers better understand the dynamics of competition and create successful strategy. He urges clients at such companies as AT&T, ABB Asea Brown Boveri, Royal Dutch/Shell Group, and Hewlett-Packard to view themselves as part of a “business ecosystem. “Why? “The new paradigm requires thinking in terms of whole systems,” he says. “Seeing your business as part of a wider environment.” That demands viewing business opportunities not simply from the perspective of a solo player but as one player among many, each “co-evolving”. With the others. That’s sharply different from the convential idea of competition, in which companies work only with their own resources and do not extend themselves using the capabilities of others. Among other things, Moore favors seeking out partners to create something of value, achieve market coverage, and block alternative ecosystems. In later stages of the business ecosystem, members must look beyond their community for new ideas and work to prevent partners and customers from defecting. And all the while, be says, companies must reach out to customers to predict how marketplace change may occur. “The major challenge for many companies is to get other to co-evolve with their wision of the future, “says Moore, “In a global market, you want to make use of the other players—for capacity, innovation, and capital. “In the corporate Golapagos, It’s co-evolve—or die. 2.1.5 Evolution of market related strategies: Markets are shifting, today’s competitor is tomarrow’s collaborator, and products and services are developed and sold in Internet time. Old generation strategy, marked by fixed goals, reliable assumptions, and a “point A to point B” approach is obsolete. It fails to accommodate relentless change—the one constant that affects every aspect of business. Managers spend too much time forecasting, analyzing, and measuring strategies for a fuzzy guess at “what could be” and not enough time acting on the here and now. Competing on the edge changes all
  • 51. NARESH SUKHANI@gmail.com that. Instead of locking into a too structured approach to strategy, companies that compete on the edge create a constant flow of large and small competitive with a loosely formed organization where most planning happens at the enough freedom—to adapt, change, and ultimately reinvent the firm time and again. Moves are complicated and unpredictable and they allow the company to developing strategy today, as is recognizing patterns of change. A competing-on-the-edge strategy achieves this by relying on five key activities: improvisation, coadaptation, regeneration, experimentation, and time pacing. Questions: 1. What are the contributions to corporate strategy by Management gurus? 2. What are the important aspects of corporate strategy? 3. Trace the evolution of corporate strategy.
  • 52. NARESH SUKHANI@gmail.com LESSON 2.2 PROCESS OF STRATEGIES PLANNING 2.2.1 Introduction Strategic planning is a management tool, period. As with any management tool, it is used for one purpose only: to help an organization do a better job – to focus its energy, to assess and adjust the organization’s direction in response to a changing environment . In short strategic planning is a disciplined effort to product fundamental decisions and actions that shape and guide what an organization is, what is does, and why is does it, with a focus on the future. The process is strategic because it involves preparing the best way to respnd to the circumstances of the organization’s environment, whether or not its circumstances are know in advance; nonprofits often must respond to dynamic and even hostile environments. Being strategic, then means being clear about the organization’s objectives, being aware of the organizatio’s resources, and incorporation both into being consciously responsive to a dynamic environment. The process is about planning because it involves intentionally setting goals (i.e., choosing a desired future) and developing an approach to achieving those goals. The process is disciplined in that it calls for a certain order and pattern to keep in focused and productive. The process raises a sequence of questions that helps planners examine experience, test assumptions, gather and incorporate information about the present, and anticipate the environment in which the organization will be working in the future. Finally, the proves is about fundamental decisions and actions because choices must be made in order to answer the sequence of questions mentioned above. The plan is ultimately no more, and no less, then a set of decisions about what to do, why to do it, and how to do it. Because it is impossible to do everything that needs to be done in this world, strategic planning implies that some organizational decisions and actions are more important than others – and that much of the strategy lies in making the tough decisions about what is most important to achieving organizational success. 2.2.2. Values That Support Successful Strategic Planning: Successful strategic planning:  Leads to action  Builds a shared vision that is values-based  Is an inclusive, participatory process in which board and staff take on a shared ownership  Accepts accountability to the community  Is externally focused and sensitive to the organization’s environment  Is based on quality data  Requires and openness to questioning the status quo.  Is a key of effective management 2.2.3 Difference between strategic planning and long range planning The major difference between strategic planning and long range planning is in emphasis. Long range planning is generally considered to mean the development of a plan of action to accomplish a goal or set of goals over a period of several years. The major assumption in long range planning as that current knowledge about future conditions is sufficiently reliable to unable the development of these plans. For example, in the late fifties and early sixties, the American economy was relatively stable and therefore predictable. Long range planning was very much in fashion, and it was a useful exercise. Because the environment is assumed to be predictable, the emphasis is on the articulation of internally focused plans to accomplish agreed upon goals.
  • 53. NARESH SUKHANI@gmail.com The major assumption in strategic planning, however, is that an organization must be responsive to a dynamic, changing environment. Some would argue that this was always the case. Nonetheless, in the nonprofit sector a wide agreement has emerged that the environment is indeed changing in dynamic and often unpredictable ways. Thus, the emphasis in strategic planning is on understanding how the environment is changing and will change, and in developing organizational decisions which are responsive to these changes. 2.2.4 Strategic Planning Model: Many books and articles describe how best to do strategic planning, and many to go much greater lengths than this planning response sheet, but our purpose here is to present the fundamental steps that must be taken in the strategic planning process. Below is a brief description of the five steps in the process. These steps are a recommendation, but nto the only recipe for creating a strategic plan; other sources may recommend entirely different steps or variations of these steps. However, the steps outlined below describe the basic work that needs to be done and the typical products of the process. Thoughtful and creative planners will add spice to the mix or elegance to the presentation in order to develop a strategic plan that best suits their organization! Step One-Getting Ready To get ready for strategic planning, an organization must first assets if it is ready. While a number of issues must be addressed in assessing readiness, the determination essentially comes down to whether an organizatin’s leaders are truly committed to the effort, and whether they are able to deveote the necessary attention to the “big picture”. For example, if a funding crisis looms, the founder is about to depart, or the environment is turbulent, then it does not make sense to take time out for strategic planning effort at that time. An organization that determines it is indeed ready to begin strategic planning must perform five tasks to pave the way for an organized process:  Identify specific issues or choices that the planning process should address  Clarify roles (who does what in the process)  Created a Planning Committee  Develop an organizational profile  Identify the information that must be collected to help make sound decisions. The product developed at the end of the Step One is a Workplan. Step Two – Articulation Mission and Vision A mission statement is like an introductory paragraph: it lets the reader know where the writer is going, and it also shows that the writer knows where he or she is going. Likewise, a mission statement must communicates the essence of an organization to the reader. An organization’s ability to articulate its mission indicates its focus and purposefulness. A mission statement typically describes an organization’s in terms of it:  Purpose – why the organization exists, and what it seeks to accomplish  Business – the main method or activity through which the organization this it fulfill this purpose  Values – the principles or beliefs that guide an organization’s members as they purpose the organization purpose. Whereas the mission statement summarizes the what, how, and why of an organization’s work, a vision statement presents an image of what success will look like. For example, the mission statement of the Support Centers of America is as follows: The mission of the Support Centers of America is to increase the effectiveness of the nonprofit sector by
  • 54. NARESH SUKHANI@gmail.com providing management consulting, training and research. Our guiding principles are: promote client independence, expand cultural proficiency, collaborate with others, ensure our own competence, act as one organization. We envision an ever increasing global movement to restore and revitalize the quality of life in local communities. The Support Centers of America will be recognized contributor and leader in that movement. With mission and vision statements in hand, an organization has taken an important step towards creating a shared, coherent idea of what it is strategically planning for. At the end of Step Two, a draft mission statement and a draft vision statement is developed. Step Three – Assessing the Situation Once an organization has committed to why it exists and what it does, it must take a clear-eyed look at its current situation. Remember, that part of strategic planning, thinking and management is an awareness of resources and an eye to the future environment, so that an organization can successfully respond to changes in the environment. Situation assessment, therefore, means obtaining current information about the organization’s strengths, weaknesses, and performance – information that will highlight the critical issues that the organization faces and that its strategic plan must address. These could include a variety of primary concerns, such as funding issues, new program opportunities, changing regulations or changing needs in the client population, and so on. The point is to choose the most important issues to address. The Planning Committee should agree on no more than five to ten critical issues around which to organize the strategic plan. The products of Step Three include: a data base of quality information that can be used to make decision; and a list of critical issues which demand a response from the organization – the most important issues the organization needs to deal with. Step Four – Developing Strategies, Goals, and Objectives Once an organization’s mission has been affirmed and its critical issues identified, it is time to figure out what to do about then: the broad approaches to be taken (strategies), and the general and specific results to be sought (the goals and objectives). Strategies, goals and objectives may come from individual inspiration, group discussion, formal decision-making techniques, and so on – but the bottom line is that, in the end, the leadership agrees on how to address the critical issues. This can take considerable time and flexibility: discussions at this stage frequently will require additional information or a reevaluation of conclusions reached during the situation assessment. It is even possible that new insights will emerge which change the thrust of the mission statement. It is important that planners are not afraid to go back to an earlier step in the process and take advantage of available information to create the best possible plan. The product of Step Four is an outline of the organization’s strategic directions – the general strategies, long-range goals, and specific objectives of its response to critical issues. Step Five – Completing the Written Plan The missions has been articulated, the critical issues identified, and the goals and strategies agreed upon. This step essentially involves putting all that down on paper. Usually one member of the Planning Committee, the executive director, or even a planning consulatant wil draft a final planning document and submit it for review to all key decision makers (usully the board and senior staff). This is alos the time to consult with senior staff to determine whether the document can be translated into operating plans (the subsequent detailed action plans for accomplishing the goals proposed by the strategic plan) and to ensure that the plan answer any questions about proposed by the directions in sufficient detail to sere as a guide. Revisions should not be dragged out for
  • 55. NARESH SUKHANI@gmail.com months, but action should be taken to answer any important question that is raised at this step. It would certainly be a mistake to bury conflict at this step just to wrap up the process more quickly, because the conflict, if serious, will inevitably undermine the potency of the strategic directions chosen by the planning committee. 2.2.5. The MacMillan Matrix for Competitive Analysis of Programs: The MacMillan Matrix is an extraordinarily valuable tool that was specifically designed to help nonprofits assess their programs in that light. The matrix is based on the assumption that duplication of existing comparable services (unnecessary competition) among nonprofit organization can fragment the limited resources available, leaving all providers too weak to increase the quality and cost-effectiveness of client services. The matrix also assumes that quality and cost-effectiveness of client services. The matrix also assumes that instead, to be all things to all people can result in mediocre or low-quality service instead, nonprofits should focus on delivering higher –quality service in a tgerfgd focused (and perhaps limited way. The matrix therefore helps organization think about some very pragmatic questions:  Are we the best organization to provide this service?  Is competition good for out clients  Are we spreading ourselves too thin, without the capacity to sustain ourselves?  Should we work cooperatively with another organization to provide services? Using the MacMillan Matrix is a fairly straightforward process of assessing each current (or prospective) program according to four criteria, described below. 1. Fit Fit is the degree to which a program “belongs” or fits within an organization. Criteria for “good fir” include:  Congruence with the purpose and mission of the organization;  Ability to draw on existing skills in the organization; and  Ability to share resources and coordinate activities with programs. 2. Program attractiveness Program attractiveness is the degree to which a program is attractive to the organization from an economic perspective, as an investment of current and future resources (i.e., whether the program easily attracts resources). Any program that does not have high congruence with the organization’s purpose should be classified as unattractive. No program should be classified as highly attractive unless it is ranked as attractive on a substantial majority of the criteria below:  High appeal to groups capable of providing current and future support  Stable funding  Market demand from a large client base  Appeal to volunteers  Measurable, reportable program results  Focus on prevention, rather than cure.  Able to discontinue with relative ease, if necessary (i.e., low exit barriers)  Low client resistance to program services  Intended to promote the self-sufficiency or self-rehabilitation of client base. 3. Alternative Coverage Alternative coverage is the extent to which similar services are provided. If there are no other large, or very few small, comparable programs being provided in the same regions, the program is classified as “low coverage.”
  • 56. NARESH SUKHANI@gmail.com Otherwise, the coverage is “high.” 4. Competitive Position Competitive position is the degree to which the organization has a stronger capability and potential to deliver the program than other agencies – combination of the organization’s effectiveness, quality, credibility, and market share of dominance. Probably no program can be classified as being in a strong competitive position unless it has some clear basis for declaring superiority over all competitors in that program category. Criteria for strong competitive position include:  Good location and logistical delivery system;  Large reservoir of client, community, or support group loyalty;  Past success securing funding;  Superior track record (or image) of service delivery;  Large market share of the target clientele currently served;  Gaining momentum or growing in relation to competitors;  Better quality service and/or service delivery than competitors;  Ability to raise funds, particularly for this type of programs;  Superior skill at advocacy;  Superiority of technical skills needed for the program;  Superior organization skills;  Superior local contacts;  Ability to conduct needed research into the program and/or properly monitor program performance;  Superior ability to communicate to stakeholders; and  Most cost effective delivery of service. After each program is assessed in relation to the above four criteria, each is placed in the MacMillan matrix, as follows. For example, a program that is a good fit is deemed attractive and strong competitively, but for which there is a high alternative coverage would be assigned to Cell No. 1, Aggressive Competition.
  • 57. NARESH SUKHANI@gmail.com High Program Attractiveness: “Easy” Program Low Program Attractiveness: “Difficult” Program Alternative Coverage High Alternative Coverage Low Alternative Coverage High Alternative Coverage Low GOOD FIT Strong Competitive Position 1. Aggressive Competition 2. Aggressive Growth 5. Build up the Best Competitor 6 “Soul of the Agency” Weak Competitive Position 3. Aggressive Divestment 4. Build Strength or Get out 7. Orderly Divestment 8. “Foreign Aid” or Joint Venture POOR FIT 9. Aggressive Divestment 10. Orderly Divestment Once all programs have been placed in the appropriate positions on the matrix, an organization can review its mix of programs, sometimes called a “program portfolio,” and decide if any adjustments need to be made. Ideally, an organization would have only two types of programs. The first would be attractive programs (performs that attract resources easily), in areas that the organization performs well and can compete aggressively for a dominant position. These attractive programs can be used to support the second program type: the unattractive programs with low coverage. The unattractive program is considered unattractive by founders, with low alternative coverage, but makes a special, unique contribution and in which the organization is particularly well qualified. These programs typically fall under Cell No. 6, the should of the agency. These programs are known as the “soul of the agency” because the organization is committed to delivering the program even at the cost of subsidizing it from other programs. An organization cannot afford to fund unlimited “souls,” and might have to fact some difficult decision about how to develop a mix of programs that ensure organizational viability as well as high- quality service to clients. For example, five years ago there was little funding for case managers by AIDS Services Organizations. Unwilling to let clients fend for themselves in getting the help they needed, many organizatins devoted staff time to this service. At the time this was a “soul of the agency” program. These days, this alternative coverage. Therefore, organizations in a strong position to serve the clients well, with cultural competence and program expertise, should aggressively compete: those in a weal competitive position should get out of the business. 2.2.6 Standard Format for a Strategic Plan: A strategic plan is a simply a document that summarizes, in about ten pages of written text, why an organization exists, what it is trying to accomplist and how it will go about doing so. Its “audience” is anyone who wants to know the organization’s most important ideas, issues, and priorities: board member staff, volunteers, clients, funders, peers at other organizations, the press, and the public. It is a document that should offer edification and guidance – so, the more concise and ordered the document, the greater the likelihood that it will be useful, that is will be used, and that it will be helpful in guiding the operations of the organization. Below is an example of a common format for strategic plans, as well as brief descriptions of each component listed, which might help
  • 58. NARESH SUKHANI@gmail.com writers as they begin trying to organize their thoughts and their material. This is just an example, however, not the one and only way to go about this task. The point of the document is to allow the best possible explanation of the organization’s plan for the future, and the format should serve the message. TABLE OF CONTENTS: The final document should include a table of contents. These are the sections commonly included in a strategic plan: I. Introduction by the President of the Board A cover letter from the president of the organization’s board of directors introduces the plan to readers. The letter gives a “stamp of approval” to the plan and demonstrates that the organization has achieved a critical level of internal agreement. II. Executive Summary In one to two pages, this section should summarize the strategic plan: it should reference the mission and vision; highlight the long-range goals (what the organization is seeking to accomplish); and perhaps not the process for developing the plan, as well as thank participants involved in the process. From this summary, readers should understand what is most important about the organization. III. Mission and Vision Statements These statements can stand alone without any introductory text, because essentially they introduce and define themselves. IV. Organization Profile and History In one or two pages, the reader should learn the story of the organization (key events, triumphs, and changes over time) so that he or she can understand its historical context (just as the planning committee needed to at the beginning of the planning process) V. Critical Issues and Strategies Sometimes organization omits this section, choosing instead to “cut to the chase” and simply present goals and objectives. However, the advantage of including this section is that it makes explicit the strategic thinking behind the plan. Board and staff leaders may refer to this document to check their assumptions, and external readers will better understand organization’s point of view. The section may be presented as a brief outline of ideas or as a narrative that covers several pages VI. Program Goals and Objectives In many ways the program goals and objectives are the heart of the strategic plan. Mission and vision answer the big question about why the organization exists and how it seeks to benefit society, but the goals and objectives are the plan of actions – what the organization intends to “do” over the next few years. As such, this section should serve as a useful guide for operational planning and a reference for evaluation. For clarity of presentation, it makes sense to group the goals and objectives by program unit if the organization has only a few programs if some programs are organized into larger program groups (e.g., Case Management Program in the Direct Services Program Group), the goals and objectives will be delineated at both the group level and the individual program level.
  • 59. NARESH SUKHANI@gmail.com VII. Management Goals and Objectives In this section the management functions are separated fro the program functions to emphasize the distinction between service goals and organization development goals. This gives the reader a clearer understanding both of the difference and the relationship between the two sets of objectives, and enhances the “guiding” function of the plan. VIII. Appendices The reason to include any appendices is to provide needed documentation for interested readers. Perhaps no appendices are truly necessary (many organizations opt for brevity). They should e included only if they will truly enhance readers understanding of the plan, not just burden them with more data or complication factors. Questions: 1. What are the key elements of strategic planning? 2. What is short term planning? 3. Why long range planning is important for organizations? 4. Explain the steps in strategic planning.
  • 60. NARESH SUKHANI@gmail.com Lesson 2.3 Formulation of Strategy 2.3.1 Resource for formulation strategy: 1. Companies “go international” for many reasons, including reactive ones, such as international competition, trade barriers, trade barriers, and customer demands. Proactive reasons include seeking economies of scale, new international markets, resources access, cost savings, and local incentives. 2. International expansion and the resulting realized strategy of a firm is the result of intentions from both rational planning and responding the emergent opportunities. 3. The steps in the rational planning process for developing an international corporate strategy comprise defining the mission and objectives of the firm, scanning the environment for threats and opportunities, assessing the internal strengths and weaknesses of the firm, considering alternative international entry strategies, and deciding on strategy. The strategic management process is compelted by putting into place the operational plans necessary to implement the strategy, and then setting up control and evaluation procedures. 4. Competitive analysis is an assessment of how a firm’s strengths and weaknesses, vis-à-vis those of its competitors, affect the opportunities and threats in the international environments. Such assessment allows the firm to determine where the company has distinctive competencies that with give it strategic advantage, or where problem areas exist. 5. Corporate-level strategic approached to international competitiveness include globalization and regionalization. Many MNCs have developed to the point of using an integrative global strategy. Entry and ownership strategies are exporting, licensing, franchising, contract manufacturing, turnkey operations, management contracts, joint ventures, and fully owned subsidiaries. Critical environment and operational factors for implementation must be taken into account. 2.3.2. Success of Wal-Mart: If one looked back at the hurable beginnings of Wal-Mart stores, the question would be answered with a resounding YES. Wall-mart has grown from a small town store to over 1600 stores and Mega Centers. The company has expanded its operations unemotionally to Puerto Rico, Mexico, Canada, Brazil, Argentina, China, and Indonesia. The chain reported net sales for the year ended January 31, 1997 as $104.4 billion. Sam’s Clubs reported earnings for the same period of $19.6 billion. Sam Walton was focused and had a retail strategy that is unmatched by any U.S. Corporation. Even the computer giant IBM could not reach the $100 billion mark (and they have had more years experience, and operate in more countries that any other firm in the world. In the retail industry, Wal-Mart surpassed K-Mart, Target, and Scars stores to take the number one spot. The main strategy in consistently low prices and high customer service. Wal-Mart is also a good corporate citizen making sure that they sell environmentally safe products, contribute to the community, focus on training, control inventory, and locate in areas where they receive high visibility and find the opportunity for growth. A strategy is a comprehensive plan of action that sets critical direction and guides the allocation of resources to achieve long-term organizational objectives. There are give steps in the Strategic Planning Process, which include.  Identify organizational purpose and objectives. Questions to ask here are “what business are we in?” and “where do we want ot be in that future.  Access current performance vis-à-vis purpose and objectives, making, “how well are we currently doing?”  Create strategic plans to accomplish purpose and objectives. Ask, “How can we get where we really want to be?”
  • 61. NARESH SUKHANI@gmail.com  Implement the strategic plans, asking, “Has everything that needs to be done been done?”  Evaluate resulting and renew the strategic planning process as necessary. Questions ask here are, “are things working out as planned, and what can be improved?” When planned and implemented properly, strategic management can be used by organizations to gain a significant competitive advantage. For example: Target does not attempt to compete head to head with Wal- Mart. Instead, the company attempts to gain a competitive advantage serving department store shoppers through a emphasis on fashion apparel bargains, while matching other discounters on prices of everyday household items. Although largely a top management responsibility, managers at all levels in the organization must participate in, and support the process. Strategic Management is accomplished through a) Strategy formulation, and b) Strategy implementation. In strategy formulation current situations are analyzed, and strategies are selected that best fit the organization’s needs. After strategies are selected they are put into actions. A good example of this would be a company whose top management decides that they want to grow revenue by 20% per year over the next then years. They will in turn set objectives based on the internal and external environment. Planning sessions will be assigned what is considered a fair share of the responsibility to achieve the organization’s objectives. After deciding what resources are needed, the strategy is implemented. The plan is managed through strategic management to ensure that strategies are well implemented and are sufficient to meet the organization’s long term organizational success. Before an organization can focus on the strategic management of its objectives, there must be a mission. An organization’s mission is referred to as its reasons for existence, and reflects the organization’s basic purpose as a supplier of goods and/or services. There are official objectives which state the basic purpose of the organization as a supplier of goods and/or services; and operating objectives which state specified ends toward which organizational resources are actually allocated, identifying key results that are pursued in the organizations day to day activities. Several common operating objectives for managers are: profitability, market share, human talent, financial health, cost efficiency, product quality, innovation, and social responsibility. If you look at an annual report of any organization, you will see these items referenced in almost 100 percent of them. Organizations want to product a net profit; they want to gain and hold the highest possible market share; recruit the most highly talented workers; they are interested in earning positive returns, while using resourced in way that lowers operating costs; product high quality goods and services in order to remain competitive; they must find innovative ways to product new products; and be a good corporate citizen by making positive contributions to the community. There are different levels of strategies used by organizations. Corporate Strategy sets overall strategic directions and answers the question, “What business should we be in?” Business strategy sets direction for a strategic business unit (SBU) and answers the question “How do we compete in this particular business area?” Functional strategy guides activities within specific functional area and answers the question, “How can we best apply functional expertise to serve the needs of the business unit or organization?” The four Grand strategies use by organizations include: 1) Growth – the pursuit to increased organizational size through expanded operations. Specific growth strategies include concentration and diversification 2) Retrenchment – reduced organizational size through operations cutbacks. Types of retrenchment strategies include Turnaround, Divestiture, and liquidation. 3) Stability – Pursuit of present course of actions. Also known as “low risk.” 4) Combination – two or more strategies at the same time. A company can have different strategies for different divisions. Major elements of the strategic management process are, Analysis of Mission – including the domain in which the organization intends to operate including its customers, products, locations, and philosophy. Analysis of
  • 62. NARESH SUKHANI@gmail.com Values – which defines the corporate culture, values, beliefs, and ethical guidelines. Analysis of the Organization - pointing out the organization’s strengths and weaknesses through SWOT Analysis, and Distinctive Competencies. Finally an Analysis of Environment – the second part of the SWOT analysis, showing the opportunities and threats to the organization. Varying environmental conditions have different implications on strategic planning. When operating in a stable environment, strategies are more stable. When the environment is dynamic, strategic become more flexible; and when the environment is uncertain, organizations use contingency strategy. Keys to successful/effective strategy implementation are: Management Systems and Practices - having the support of the entire organization. This requires the complete Management process of effective planning, organizing, leading, and controlling; and Incrementalism – incremental changes as managers learn were accomplished. In order to avoid some of these pitfalls some basic questions should be asked in an effort to double check a strategy. 1. Is the strategy consistent with the organizational mission & purpose? 2. Is the strategy feasible, given strengths and weaknesses? 3. Is the strategy responsive to opportunities and threats? 4. Does the strategy offer a sustainable competitive advantage? 5. Is the risk in the strategy a “reasonable” risk? 6. Does the strategy have an appropriate time horizon? 7. Is the strategy flexible enough? In studying Entrepreneurship we find that it is someone who is willing to take the risk that results in the creation of new opportunities for individuals and/or organizations. An entrepreneur is an individual who takes a risk and action to pursue opportunities and situations that others may fail to recognize. Most entrepreneurs have the following characteristics: Internal focus of control, high need for achievement, tolerance for ambiguity, self- confidence and are action oriented. Entrepreneurs play a very important role in the formation of small business. Small business offers two major economic advantages. They create job opportunities, and are the sources of many new goods and services. However, small businesses have a high failure rate (50 to 60 pre cent within the first five years). It has been determined that small business without a business plan are the most likely to fail. Large organizations also depend on entrepreneurial managers who are willing to assume risk. Questions: 1. What are the reasons for formulating strategy? 2. Why there is a need to evaluate the requirement of strategy formulation? 3. What are the reasons for the success of Wal-Mart?
  • 63. NARESH SUKHANI@gmail.com LESSON 2.4 PROJECT LIFE CYCLE 2.4.1 Introduction: The Guide to the Project Management Body of Knowledge (1996) defines a project as “a temporary endeavor undertaken to create a unique product or service” and proceeds into a fairly detailed explanation of the terms “temporary” and “unique product or service”. For details, peruse their we site at www.pmi.org and follow the links for PMBOK (Project Management Body of Knowledge). Our textbook, Shrub, Bard, & Globerson (1994), p.l., provide a similar definition: “a project is an organized endeavor aimed at accomplishing specific non- routine or low volume task.” They cite, on p. 5, Archibald (1996) who defined a project as “the entire process required to product a new products, new plant, new system, or other specified results”, and General Electric (1977), “a narrowly defined activity which is planned for a finite duration with a specific goal to be achieved.” Each of these definitions and others than can be identified in the literature, have strong and weak points. A project is defined and carried out to fulfill the need of a user, a client… It implies a goal and actions to be carried out with given resources. Any complex activity directed toward the productions of goods or services which will gather resources, the management of which is without strong link with the rest of the organization. Project Life Cycle (PLC) is the name given to the steady progression of a project from its beginning to its completion. The word “cycle” suggests a circular movement, but the progression is sequential. Iteration is a distance series of activities designed to float ideas or samples for review. It could be modules and components for testing before solidifying then into the final working product. The essence of iteration is to repeat the sequence to yield results successively closer to the required product. Projects can be classified on the basis of risk, business value, length, complexity and cost. At its most basic, it is generally accepted that A typical project life span consists of two broad periods each of two phases (i.e. four in all) The first period involves conceptualizing, validating and planning. The second period involves implementation, i.e. actual construction of the product followed by its transfer to the intended customer. Please phases are known by different names in different environment. 2.4.2 Attributes of the phases of PLC: The U.S. Department of Defense directive 5000.2 (1993) includes a very specific set of phases to be used in defense acquisition projects: 1. concept exploration and definition 2. demonstrate and validation 3. engineering and manufacturing development 4. production and deployment 5. operations and support Locking at the construction industry, (Morris (1981), identified four phases: 1. feasibility 2. planning and design 3. production
  • 64. NARESH SUKHANI@gmail.com 4. turnover and startup Whitten and Bentely (1998) look at the life cycle of information systems development and identify five stages or phases: 1. planning 2. analysis 3. design 4. implementation 5. support Although not immediately apparent by scanning the bullet-points of the phases above, these life cycle models maintain some characteristic similarities. Page no. 115 is cleared. Pl. type this page. Phase 2: Develop the idea into a practical plan (D)  Listening, analysis, alignment, planning, commuitment Phase 3: Execute the plan (E)  Production work, coordination, cooperation, testing Phase 4 : Finish the project (F)  Transfer of product and information, review, closure  Follow the sequence C-D-E-F  In general:  Requiring different levels of management attention  And different skill sets  In addition  The transition between one phase and the next should represent a “control gate”  That is, you don’t move to the next phase until you are satisfied with the current one.  Depending on the size, complexity, risk, sensitivity and so on, these typical phases may be broken down into sub-phases, and a variety of different stages or iterations depending on the project and its type.  These will be specific to the project, and  Will depend on the overall strategy for accomplishment. 2.4.3 Types of projects:  Type A: expected to have a very high business value, high complexity (some tasks require a technical solution not yet known)? High risk (ex: some (R&D projects), duration several years, large or small group, significant investment for the organization  Type B: shorther in lengths, technologically challenging but no research, still significant investment for the organiaation, good expected business value.  Type C: use only established technology (5 persons, about 6 months) Some special features of an internationals project
  • 65. NARESH SUKHANI@gmail.com  Participants do not have the same cultural background (various nationalities, cultures, value system, constraints…)  Necessity to have coordinating language (international English in our case)  Participants are geographically dispersed (distance, time lag…) Persons involved in Project  Project member (managers + engineers)  Future users of results (client)  Experts  Subcontractors Technical performances  One is looking performance of quality level.  One is looking to fulfill precise specifications  Desire to achieve a higher level of performance than before. Time constraint (deadline)  Fundamental characteristic of the project  Any overshooting of the deadline could be fatal to the whole project.  Ex: in a software company to create a new software to run under Windows  In all European companies: to be ready for the new Euro currency Cost objective  Budget must be respected: o The contract is fix cost o The objective is to decrease production cost (new unit of production for microprocessors, electronic market place in a B to B) 2.4.4. Typical Project Management Life Cycle: A typical project life cycle consists of the following steps: Scope of the project  State problem  Identify problem  Identify goal  Identify success criteria Develop plan  Identify activities  Resources requirements  Construct /analyze network Execute plan  Recruit project team  Establish rules  Execute tasks
  • 66. NARESH SUKHANI@gmail.com Monitor / control  Progress reporting systems  Monitor progress Close our project  Provide deliverables  Obtain client acceptance Task of project control  Motivate participants  Control realization of tasks (budget, time, quality)  Project scheduling  Estimate consequences of incidents (rescheduling…) 2.4.5. The four C’s project management:  Communicate  Coordinate  Cooperate  Control Communicate and motivate  To generate a common desire to reach the objective  To transform the goal into reality  To provide a reward system coherent with project goals Need to coordinate (organize)  To avoid the dispersion of efforts (bad use of resources)  To define the task of each project participant  To have clear responsibility for the project and for each tasks right from the beginning  To plan the necessary resources in terms of manpower, competencies equipment, finance. How to coordinate  Answer the question:  Who does what?  When?  Where?  How?  Remark: to answer the above questions you must know which tasks have to be carried out. This is a knowledge question not a management question! Styles of Decision Process  Directive: project manager for the project and activity manager for the activity makes the decision  Participative: everyone in the team contributes to the decision making process.  Consultative: the person in authority make the decision, but only after consulting all members of project team. 2.4.6 Standard Project Problem:  Lack of a particular competence, needed to achieve the goal, in the team members
  • 67. NARESH SUKHANI@gmail.com  Lack of an equipment or component  Technical solution not known  Individual tack of motivation to achieve project goal (the productivity of a workgroup seems to depend on how the group members see their own goals in relation to the goals of the organization.)  Project member does not communicate his difficulties (hopcreep)  A task ever-run the task deadline(work but no progress)  Conflicts between project members  Team member add features or functions to the deliverables… Reasons for IT project failure (based on 1000 IT managers, Standish Group 1995)  Incomplete requirements  Lack of user involvement  Lack of resources  Unrealistic expectations  Lack of executed support  Changing requirement and specifications  Lack of planning  Elimination of need for the project  Lack of IT management  Technology illiteracy Question: 1. What are the C’s in project management” 2. What are the stages in project life cycle? Give reasons 3. Identify the reasons for the success and failure of projects. 4. Explain the various types of projects.
  • 68. NARESH SUKHANI@gmail.com LESSON 2.5 PORTFOLIO ANALYSIS 2.5.1 Introduction Portfolio analysis plays a vital role in the analysis, planning implementation of various strategic business units of the organization as a whole. Portfolio planning is best advised for diversified companies than a more product coherent ones. Portfolio planning hence recognizes that diversified companies are a collection of businesses, each of which makes a distinct contribution to the overall corporate performance and which should be managed accordingly. Such companies are expected to redefine businesses for strategic business units (SBU), which may or may not differ from operating units. They then classify these SBUs on a portfolio grid according to the competitive position and attractiveness of a particular product market. Based on these, they use that framework to assign each a ‘strategic mission’ with respect to its growth and financial objectives and allocate resources accordingly. Companies can that theoretically assess the strategic position of each of their enterprises and compare these portion using cash flow a s the common variable. The four components of strategy can be seen as influences on the firm’s effectiveness and efficiency. The firm’s effectiveness is determined y the combined influences of scope, distinctive competence and competitive advantages. 2.5.2. Objective of Resources Development: 1. Implementing Corporate Level Strategy Resources development is very helpful implement corporate level strategy. Corporate level strategy is to determine what business to go into the relative allocation of resource and management of synergies among them. 2. Direct Interaction with Scope and Resources Deployment They should three fore be considered at the corporate level should not be treated as functional area policy decisions to be decided at lower levels. Business level strategy focuses on how to compete in a particular product market segment or industry. Competitive advent ages and distinction competencies thus become dominant strategic concerns at this level. At functional level, the primary focus of strategy is efficiency. 2.5.3 Types of portfolio planning: Following are ht possibilities of various types of portfolio planning undertaken by companies. Table 9.1 Types of portfolio planning Types Explanations Analytic planning Portfolio planning is only in the stage of planning tool and traditional administrative tools are used Process planning Portfolio planning as a central part of the ongoing management process and strategic mission is explicit in activities. 2.5.4 Benefits of portfolio planning:
  • 69. NARESH SUKHANI@gmail.com Since the road to portfolio planning is a long one, companies often get stack, trying to implement it and cannot realize the full potential of the approach. In implementation portfolio planning, companies often write in biases the black its usefulness, including the tendency to focus on capital investment rather than resource allocation In spite of such limitations, portfolio planning a offering the following benefits to companies is implemented properly. 1. It promotes substantial improvement in the quality of strategies developed at both the business and the corporate level. 2. It provides a guideline for adopting their overall management process to the needs of each business. 3. It provides selective resources allocation to the various SBUs. 4. It furnishes companies with a greatly improved capacity for strategic cannot when portfolio planning is applied intelligently and with attention to its limitations and problems. 2.5.5. Peter Drucker on portfolio planning: Peter Drucker suggests a mechanism of portfolio analysis of products within the company. He suggests that all products can be classified into five groups as follows: Tomorrow’s breadwinners: These are either modification or improved versions of what one company has got as their major products or new products. Today’s breadwinners: These may exist today but they really are the innovations of yesterday. Yesterday’s breadwinners: These are old hat hut eat up all that they earn. “Problem children” Difficult to live with perhaps but better parental control should make the difference between a healthy child and a potential deviant child. “Also-rains:” These are otherwise known as “me-too” products in the market whose existence itself is a question mark. 2.5.6 Boston Consulting Group Matrix The business policy portfolio models are most popular useful to understand the firms strategic concerns and choices. They defined the firm’s scope or domain by highlight the inter-relatedness of diverse factors such as 1. Market growth 2. Market share 3. Cash and Cash flow patterns 4. Capital intensity 5. Product maturity etc.
  • 70. NARESH SUKHANI@gmail.com Table BCG Growth/Share Matrix Relative market share Market Growth High Low High Star Question mark Low Cash cow Dog Star Star are high growth – High market share business which may or may not be self sufficient in term flow. This cell corresponds closely to the growth phase or product life cycle. Cash cows As the term indicates, cash cows are business which generate large amounts of cash but their rate of growth is show In terms of PLC, these are generally mature business which are reaping the benefits of experience curve. The cash generation exceeds the reinvestment that could profitably the made into ‘cash cows.” Question Marks Business with high industry growth but low market share for companies are question marks or problem children. They required large amount of cash to maintain or gain market share. Question mark is usually new products or services, which have a good commercial potential. Dogs Those businesses, which are related to slow growth industries and where a company has a low relative market share, are termed as ‘dogs’. They neither generate nor require large amounts of cash. In terms of PLC, the ‘dogs’ are usually products in the late maturity or declining stage. The firm should hold its dominant market position by reducing prices and thus keeping away the high cost competitors. Cash flows are likely to be negative during the growth phase in a dominant market since the firm will have to keep in investing to maintain its competitive edge. Dominant position generates positive cash flows, during the mentioned stage of life cycle. The BCG matrix makes it very clear that a firm for its ultimate success needs a balanced portfolio of products or businesses. The individual businesses commit the firm’s resource. Portfolio, which should act as a guide to commit the firm’s resource. Portfolio should be balanced in terms of profit, cash flows, and overall corporate risk. 2.5.7 GE Nine Cell Matrix: Another corporate portfolio analysis technique is based on the pioneering effort of general electric (GE) company of the united state supported by the consulting firm of Mckinsey & Company. The vertical axis represents industry attractiveness, which is a weighted composite rating based on eight different factors. These factors are- 1. Market size and growth rate
  • 71. NARESH SUKHANI@gmail.com 2. Industry profit margins 3. Competitive intensity 4. Seasonably 5. Cyclically 6. Economics of Scale 7. Technology and 8. Social, environmental, legal and human impacts. The horizontal axis represents business strength competitive position, which is again; a weighted composite rating based on seven factors. These factors are 1. Relative market share 2. Profit margins 3. Ability to compete on price and quality 4. Knowledge of customer & market 5. Competitive strength and weakness 6. Technological capability and 7. Caliber of management Table GE Nine Cell Matrix Industry attractiveness Business Strengths High Medium Low High Investment Growth Selective growth Selectivity Medium Selective growth Selectivity Harvest Low Selectivity Harvest Harvest The two composite values for industry attractiveness and business strength/competitive position are plotted for each business in a company’s portfolio. The PIE (Circles) denotes the proportional size of the industry and the dark segments represent the company’s market share. The nine cells of the GE matrix are grouped on the basis of low to high industry attractiveness and were to thrown business strength three zones of three cells cash are made denoting different conditions represented by green yellow and red colors for this reason, the matrix is also known as the stoplight strategy matrix. Based not the three zone, the signal is go ahead to grow and build indicating expansion strategies business in the green zone attract major investment for the yellow zone, the signal, “Wait and See” indicate hold and maintain type of strategies aimed at stability and consolidation for the red zone the signal is top indicate achievement strategies of divestment and liquidation or rebuilding approach for adopting turnover strategies. Advantages 1. It compared to the BCG matrix it offers intermediate classification of medium and average rating. 2. It incorporates a large variety of strategies variables like market there & industry size. Draw Back In only provides broad strategic prescriptions rather that the specific or business strategy. 2.5.8. Directional policy matrix (DPM)
  • 72. NARESH SUKHANI@gmail.com The DPM is a method of business portfolio analysis formulated by Shell International Chemical Company. It has nine cells in which business are located depending upon their scores on each of the two axes: Expected marker profitability and competitive positions. The horizontal axis, labeled “business actor prospects” or “prospects for market sector profitability,” is a measure similar to industry attractiveness used in the GE planning grid. A firm is rated on a scale from “unattractive,” through “average,” to “attractive” depending upon an evaluation of its industry’s market growth, market quality, and environmental aspects. Similarly, its location on a scale that has from a “weak,” through “average,” to “strong” competitive position is determined by answering questions about as market shares position, production capabilities, and R&D strongly. The cell labels represent possible strategic activities or types of resource deployments most appropriate, for the firm, given its score on cach of the two axes. More specifically these cell label’s have the following implications:  Disinvest (1.1): Likely already iosing money; net cash flow, negative over time. Losses may be minimized by divestiture or even liquidation.  Phased Withdrawal (1,2) and (2,1) : Probably not generating sufficient cash to justify continuation; assets can be reconloyed.  Cash Generator (3,1): Equivalent to a “cash cow” in the GE planning grid. A firm or product would occupy this cell in later stages of the life cycle that does not warrant heavy investment. But can be “milked” of cash due to its strong competitive position.  Proceed with Care (2,2): Similar to a “question mark,” firms falling in this sector may require some investment support but heavy investment should be extremely risky  Growth (upper-3.2) and (lower – 2.2): Similar to a GE planning grid “green light” strategy. A firm, product, or SBU in these sectors would call ford investment support to allow growth with the market. It should generate sufficient cash on its own.  Double or Quit (1.3): Units is this sector should become “high fliers” in the not too distant future. Consequently these in the upper rightmost corner of cell (1,3) should be singled out for full support. Others should be abandoned.  Try Harder 2.3): External financing may be justified to push a unit in this sector to a leadership position. However, such a move will require judicious application of funds.  Leader (3.3) (lower – 3.2): The strategy for this segment is to project this position by external investment (funds beyond those generated by the unit itself – occasionally), earnings should be quite strong and a major focus may be maintaining sufficient capacity to capitalize on strong demand. Table Directors’ Policy Matrix Insepects for sector profitability Company’s Competitive Capabilities Unattractive Average Attractive Weak Disinvest Phased Withdrawal Double or Quit Average Phased Withdrawal Custodial Growth Try harder Strong Cash generation Growth Leader Leader The DF can thus be used to identify strategies for single business as well as for plotting combinations of units in multi business or multi products firms. Locating competitors on the DPM can provide useful insights into the nature of corporate-level strategic configurations. However, there is room for crror in the positioning of a firm
  • 73. NARESH SUKHANI@gmail.com or product on the two axes, and thus DPM location should be interpreted with an upon mind and not in isolation. The Directional Policy Matrix (DPM) developed by Shell Chemicals; U.K. uses the two parameters of “business sector prospects” and “company’s competitive abilities. A number of factors such as marked growth, market quality, market supply, etc. are used to rate the business sector prospects as unattractive, attractive or average. A company’s competitive ubilities ar similarly judged weak, average, or strong non the basis of several factors. The 3 x 3 matrix when plotted from the bassi for recommientind baseline strategies. One advantage on DPM it that one of its extension; “risk matrix” provides alternative way to analyze environmental risk. In a risk matrix, environmental risk is taken as the third dimension and is divided into four categories from categories from low risk to very high risk. Each risk position is determined on the basis of environmental threats and the probability of their occurrence. 2.5.9. Business Profile matrix: This matrix is more flexible than the growth/share matrix and uses competitive position and industry maturity as the two dimensions. It uses twenty cells for clearity of resources allocation. Empirical determination of the correlates of the two dimensions is superior to the growth/share matrix. Table Business Profile Matrix Stage of Industry maturity Competitive Position Embryonic Growth Maturity Aging Dominant Strong Favourable Tenable Weak 2.5.10. Designing a portfolio: In order to design a portfolio, the following guidelines are suggested by Yoram Wind and Vijay Mahajan:  Establishing the level and unit of analysis and determining what links connect them.  Identifying the relevant dimensions, including single-variable and composite  Determining the relative importance of the dimensions  To the extent that two or more dimensions are viewed as dominant, constructing a matrix based on them.  Locating the products or businesses on the relevant portfolio dimensions  Projecting the likely position of each product or business on the dimensions if (a) no changes are expected in environmental conditions, competitive activities, or the company’s strategies and if (b) changes are expected.  Selecting the desired position for each existing and new product and developing how resources might best be allocated among these products. In order to establish a matrix our of the available information from both the company and the market, the GE matrix can be constructed using the following steps: 1. Identify the factors making for an attractive market. 2. Establish the business position factors 3. Give agreement among managers to factors. 4. Make priority list and give each a weightage as in the following table 9.6. 5. Measure each factor – by market research, internal discussion or external information.
  • 74. NARESH SUKHANI@gmail.com 6. Apply the weightage to the measurement and arrive at a total. 7. Apply the totals to the matrix and 8. Start a discussion on what the figures show. Table Market attractiveness and business position measurement Factors Weight(%) Measurement Value Market attractiveness Overall size .20 4.00 0.80 Annual growth .20 5.00 1.00 Competitive intensity .15 4.00 0.60 Technology requirements .15 2.00 0.30 Inflationary pressures .15 3.00 0.45 Energy need .05 2.00 0.10 Historical margins .10 1.00 0.10 Social/legal/Economic/ Political/Technological impact Must be acceptable 1.00 3.35 Business Strengths Market share 0.10 2.00 0.20 Share growth 0.15 4.00 0.60 Product quality 0.10 4.00 0.40 Brand reputation 0.10 5.00 0.50 Distribution strength 0.05 3.00 0.15 Promotional effectiveness 0.05 2.00 0.10 Production capability 0.05 3.00 0.45 Unit costs 0.15 5.00 0.75 R&D strength 0.10 4.00 0.40 Management effectiveness 0.05 4.00 0.60 Using the above, a, cash of Digital theater system (dts) product to be sold in the theatres of Mumbai, the following done to done to find out about the investment proposition:
  • 75. NARESH SUKHANI@gmail.com Product Digital theatre system market Recommended for investment Mumbai theatres Attractiveness factors scale Information available importance Market size Yes 1 Current coverage No 2 Competition Yes 3 Current systems Yes 4 Social aspects No 5 Legal aspects No 6 Business strength factors Five-point measure Witghtage Value Market share 2 5 10 Product quality 4 15 60 Brand reputation 5 10 50 Distribution network 5 15 75 Promotional effectiveness 2 10 20 Costs 3 5 15 Managerial personnel 2 10 20 70 250 Possible Total 350 Market attractiveness factors Five-point measure Weightage Value Market Size 5 15 75 Coverage 4 15 60 Competition 2 5 10 Current systems 4 10 40 Social aspects 2 5 10 Legal aspects 2 5 10 60 10 Possible Total 275 Table Investment matrix scales: Industry attractiveness 0 300 200 100 350 High Medium Low 233 High + Business Strengths Medium
  • 76. NARESH SUKHANI@gmail.com 117 Low 0 The next stage was to use the matrix to compare the present markets with Mumbai as a potential investment by using the same basis. Hence the + in the matrix clearly gives evidence for investment in the market concerned. Questions: 1. What are the constraints of portfolio analysis? 2. Why SBU concept is used for portfolio analysis? 3. Classify the various matrices and explain their significance? 4. Trace the developing of GE matrix.
  • 77. NARESH SUKHANI@gmail.com LESSON 2.6 STRATEGIC DECISION MAKING 2.6.1 Introduction: Although the process of creating strategy is often discussed as if it were an unconstrained design process, keep in mind that while strategists evaluate strategy, the firm is operating. This evaluation involves assessing the extent to which present strategy is meeting expectations. It may be the case that only a small part of, any, marketing strategy would have to be changed to correct a corporate – and business-level strategy, and also of he firm’s functional strategy performance is les than satisfactory, the reason often is a functional strategy shortcoming. One might say that a “good” business-level strategy would have been poorly implemented by part of its functional strategy set. For this simple example, a change in marketing strategy could improve performance while other levels of strategy would remain unchanged. Alternatively, a problem with nature of a firm’s or SBU’s business brough about by a major environmental opportunity or threat, a change in that level’s goals set, or the development of some internal capability or weakness could necessitate a business-level strategy change. The new strategy would probably include vestiges of the old along with some unfamiliar elements. In most cases a whole new functional strategy set would likely have to be designed and put into effect to implement the new business-level strategy. More generally, one could conceivably change parts of a firm’s functional strategy set without changing business-level strategy. However, rarely would one expect to encounter the case in which a change in business- level strategy did not trigger the necessity to alter functional-level strategy in some way, at least not in a successfully managed business. There is a risk of incorrectly identifying the strategy level at which a problem exists. A tendency exists in business to change functional-level strategies or organizational structure in a attempt to remedy any problem. Of course, if the problem existed within the firm’s corporate-or business-level strategy, for example, changing functional-level strategy would not correct it. In fact, this move would most akely agggaeitv the situation. The reason for this tendency is probabley that functions, strategy chages are potentially less disruptive then changes in the other levels. They certainly would offedct fewer people thatn modifications or the corporate or business levels. The result of trying to solve-business-level strategic problem with a functional-level solution is well inlnnn by the “big four” U.S. automobile companies. With overseas competo’s exporting fier-effective automobiles to the United States, and with widely acknowledged shrankages of fossil fuel suppliers,. they still stubbornly tried to retrun their old business and corporate stratregies, well into the 1970s, by changing market stretety only. A set of major environemntsal threats, particualry at the Strategies thinking is that which generates (1) creative, environmentally relevant ideas and (2) concepts about how to turn them into systematically managed action plans. It has the following prerequisites: 1. Input information is based on facts and logical data. 2. Previously unquestioned assumptions are sought out and examined. 3. A burning desire for resource conservation, and 4. In direct, spontaneous, and unexpected thought processes which are hard for competitors to predict. These requirements of strategic thinking set it apart from other kinds of decision making. First, strategic thinking required factual and logical input data because it is competitively dangerous to base strategy formulation on erroneous information. The stakes are too high to “hoof it.” Second, long-held assumptions should be identified and analyzed to make sure they still apply. This is especially true about goals which are in force, understandings about the environments and competitors, market acceptance and image, etc. Third, the
  • 78. NARESH SUKHANI@gmail.com manager attempting to thing strategically should be committed to conservation of the organization’s resources, rather than expecting that a good idea will precipitate a cornucopia of funds, people and support. It is easy to be creative while assuming that most resource requirements can be taken care of. A grater degree of creativity is required when one must conserve resources. Finally, strategic thinking must be done without setting patterns which competitors can identify and anticipate. The problems of predicatable strategic thinking are analogous to the football coach scnding in plays to his quarterback using hand signals that are understood by the opposing term’s coaches. 2.6.3 Complexity of decision making: Many people still remain in the bondage of self-incurred tutelage. Tutelage is a person’s inability to make his/her own decisions. Self-incurred is this tutelage when its cause lies not in lack of reason but in lack of resolution and courage to use it without wishing to have been told what to do by something or somebody else. Sapere aude! “Have courage to use your own reason!”, was the motto of the Enlightenment era. During this period, Franciso Goya created his well-known “The sleep of reason produces monsters” masterpiece. Through the Enlightenment era’a struggle and much suffering, “the individual” finally appeared. Eventually human beings gained their natural freedom to think for themselves. However, this has been a too heavy a responsibility for many people to carry. There has been an excess of failure. They easily give up their natural freedom to any cults in exchange for an easy life. The difficulty in life is the choice. They do not been have the courage to repeat the very phrases which our founding fathers used in the struggle for independence. What an ironic phenomenon it is that you can get men to die for the liberty of the world who will not make the little sacrifice that it takes to free themselves from their own individual bondage. Good decision-making brings about a better life. It gives you some control over your life. In fact, many frustrations with oneself are caused by not being able to use one’s own mind to understand the decision problem, and the courage to act upon it. A bad decision may force you to make another one, as Harry Truman said, “Whenever I make a burn decision, I go out and make another one.” A good decision is never and accident; it is always the result of high intention, sincere effort, intelligent direction and skillful execution; it represents the wise choice of many alternatives. One must appreciate the difference between a decision and an objective. A good decision is the process of optimally achieving a given objectives. When deciding is too complex or the interests at stake are to important, quite often we do not know or are not sure what to decide and, in many substances, we resort to an informal decision support techniques such as tossing a johoiu, asking an oracle, visiting an astrologer, etc. However formal decision support from an expert has many advantages. This web site focuses on the formal model-driven decision support techniques such as mathematical programs for optimization, and decision tree analysis for risky decisions. Such techniques are now part of our everyday life. For example, when a bank must decide whether a given client will obtain credit or not, a technique, called credit scoring, it often used. Rational decisions are often made unwillingly, perhaps unconsciously, we may start the process of consideration. It is best to learn the decision making process for complex, important and critical decisions. Critical decisions are those that cannot and must not the wrong. Ask yourself the objectives. What is the most important thing that I am trying to achieve here? The decision-maker’s style and characteristics can be classified as: The thinker, the cowboy (snap and uncompromising), Machiavellian (ends justifies the means) the historical (how others did it), the cautious (even nervous), etc. For example, political thinking consists in deciding upon the conclusion first and then finding good arguments for its.
  • 79. NARESH SUKHANI@gmail.com The decision-making process is as follows: 1. What is the goal you wish to achieve? Select the goal that satisfies your “values”. Everyone (including organizations) has a system of values by which one lives one’s life. The values must be expressed on a numerical and measurable scale. This is needed in order to find the ransks among values. The question “what do I want?” can be unbearably difficult (because of the conflicts among our desires) that we often can hardly bear to ask it. Winning a big money lottery has left most people wishing they had never brought the successful ticket. The goals follow from the values, and from our capacity (i.e., our personal abilities, and physical resources) to achieve goals. On the other hand, if there were no conflict among our desires, each desire would be unchecked and we would go careening without limit from one direction to another. Abraham Maslow formalized general human desires into a hierarchy of wants, with the biological-genetic needs at the bottom and “self-realization” for creativity at the top. 2. Find out the set of possible actions youi can take and then gather reliable information aoutr each one of them. Information can be classified as explicit and tacit forms. The explicit information can be explained in structured form, while tacit information is inconsistent and fuzzy to explain. The explicit information bout the course of actions may also expand your set of alternatives. The more alternatives your develop the better decisions you may make. Creativity in the decision-making process resides in the capacity for evaluation of uncertain, hazardous, and conflicting information. You must become a creative person to expand your set of alternatives. Creativity, arises out of thinking hard (i.e., becoming of a thinker) rather than working hard (i.e. becoming of a workaholic). A bulldozer must work hard, a human being must think hard. A deep immersion in your decision-making process makes you more creative. The roots of creativity lie in consciousness incubation, and in the unconscious aesthetic selection of ideas that thereby pass into consciousness, by the usage of mental images, symbols, words, and logic. The blocks to creativity are Saturation or too Narrow thinking, Inability to incubate (this, one must learn from cows), and the Fear of standing alone doing something new. Most people treat knowledge as a liquid to be swallowed easily rather than as a solid to be chewed, and then wonder why it provides so little nourishment. Aristotle noted, “We call in others to aid us in deliberation on important questions, distrusting ourselves as not being equal deciding.” Be objectives about yourself and your business. More than half of my students semester after semester, raise their hands when I ask “Is your judgment better than that of the average person?” It is important to identify your weaknesses as well as your strengths. There is no such thing as a creative/non-creative persons. It is the creative process which makes you more creative. Pablo Picasso realized this fact and said about himself: “All human beings are born with the same creative potential. Most people squander theirs away on million superfluous things. I expend mine on one thing and one thing only: my art.” Creative decision alternatives are original, relevant, and practical. 3. Predict the outcome for each individual course of action by looking into the future 4. Choose the best alternative with the least risk in achieving your goal. 5. Implement your decision. Your decision means nothing unless you put at into action. A decision without an action plan is a daydream. The logic of worldly success rests on a fallacy: the strange error that our perfection depends on the thoughts and opinions and applause of other men! A weird life it is, to be living always in somebody else’s imagination, as if that were the only place in which one could a last become real! On a daily basis a manager has to make many decisions. Some of thee4 decision are routine and inconsequential, while others have drastic impacts on the operations of the firm for which he/she works. Some
  • 80. NARESH SUKHANI@gmail.com of these decision could involve large sums of money being gained or lost, or could involve whether or not the firm accomplishes its mission and its goals. In our increasingly complex world, the tasks of decision-makes are becoming more challenging with each passing day. The decision-maker (i.e., the responsible manager) must respond quickly to events that seem to take place at an ever-increasing pace. In addition, a decision-maker must incorporate a sometimes-bewildering array of choices and consequences in this or her decision. Routine decisions are often made quickly, perhaps unconsciously without the need for a detailed process of consideration. However, for complex, critical or important managerial decisions it is necessary to take time to decide systematically. Management means making critical decisions that cannot and must not be wrong or fail. One must trust one’s judgment and accept responsibility. There is a tendency to look for scapegoats or to shift responsibility. Decisions are at the heart of any organization. At times there are critical moments when these decisions can be difficult, perplexing and nerve-wracking. Making decisions can be hard for a variety of structural, emotional, and organizational reasons. Doubling the difficulties are factors such as uncertainties, having multiple objectives, interactive complexity, and anxiety. Strategic decisions are purposeful actions. Making good strategic decisions is learnable and teachable through and effective, efficient, and systematic process known as the decision-making process. This structured and well- focused approach to decision-making is achieved by the modeling process, which helps in reflecting in the decisions before taking any actions. Remember that: one must not only be consisious of his/her purposeful decision, one must also find out the causes for which they are made. There is no such thing as “free will.” Those who believe in their free wills are in fact ignorant to the causes that impel them to their decisions. There is not such thing as arbitrary in any activity of man, least of all in his decision-making, and just as be has learned to be guided by objectives criteria in making his physical tools, so he is guided by unconscious objectives criteria in forming his decision in most cases. The simplest decisions model with only two alternatives, is known as Manicheanism, which was adapted by Zarathustra and then taken by other organized religions. Manidheanism is the quality concept, which divides everything in the world into discrete either/or and opposite polar, such as good and evil, black and white, night and day, mind (or soul) and body, etc. This duality concept was a sufficient model of reality for those old days in order to make their world manageable and calculateable. However, nowdays we very well know that everything is becoming and has a wide continuous spectrum. There are not real opposites in nature. We have to see the world through our colorful mind’s eyes; otherwise we do not understand complex ideas well. The Industrial Revolution of the 19th century probably did more to shape life in the modern industrialized world than any event in history. Large factories with mass production created a need for managing them effectively and efficiently. The field of Decision Science (DS) also known as Management Science (MS), Operations Research (OR) in a more general sense, started with the publication of The Principles Scientific Management in 1911 by Frederick W. Taylor. His approach relied on the measurement of industrial productivity and on time/movement studies in the factories. The goal of his scientific management was to determine the best method for performing tasks in the least amount of time, while unfortunately using the stopwatch in an inhumane manner. A basic education in OR/MS/DS for managers is essential. They are responsible for leading the business system and the lives in that system. The business system is dynamic in nature and will respond as such to disturbances internally and externally. The OR/MS/DS approach to decision making includes the diagnosis of current dicision making and the specification of changes in the decision process. Diagnosis is the identification of problems (or opportunities for improvement) in current decision behavior; it involves determining how decisions are currently made, specifying how decision should be made, and understanding why decisions are not made as they should be, Specification of changes in decision process involves choosing what specific improvement in decision behavior
  • 81. NARESH SUKHANI@gmail.com are to be achieved and thus defining the objectives. Nowadays, the OR/MS/DS approach has been providing assistance to managers in developing the expertise and tools necessary to understand the decision problems, put them in analytical terms and then solve them. The OR/MS/DS analysis are, e.g., “chief of staff for the president”, “advisors”, “R&D modelers” “systems analysis”, etc. Applied Management Science is the science of solving business problems. The major reason that MS/OR has evolved are quickly as it has is due to the evolution in computing power. 2.6.4 Foundations of Good Decision-Making Process: When one talks of “foundations,” usually it includes historical, psychological, and logical aspects of the subject. The foundation of OR/MS/DS is built on the philosophy of knowledge, science, logic, and above all creativity. In this web site the decision “problem”, does not refer to prefabricated exercises or puzzles with which most educators continually confront students, such as the problem of finding a solution to a system of equations, without giving any motivation for its need-to-know. Science some decision problems are so complicated and so important, the individuals who analyze the problem are nto the same as the individuals who are responsible for making the final decision. Therefore, this site distinguishes between a management scientist, someone who studies what decision to make and a decision maker, someone responsible for making the decision. When deciding to make good decisions there are possibilities to be confronted with decision problems. It means real problems, the effective handling of which can make a significant difference. Almost all decision problems have environments with similar components as follows: 1. The decision-maker. The term decision-maker refers to an individual, not a group. 2. The analyst who model the problem in order to help the decision maker, 3. Controllable factors (including your personal abilities and physical resources). 4. Uncontrollable factors, 5. The possible outcomes of the decisions, 6. The environment/structural constraints, 7. Dynamic interactions among these components. 2.6.5 Deterministic versus Probabilistic Models: All the decisions models can be classifies as either deterministic or probabilistic models. In deterministic models your good decisions bring about good outcomes. You get that which you expect, therefore the outcome is deterministic (i.e., risk-free). However, in probabilistic decision models, that outcome is uncertain, therefore making good decisions may not product good outcome is uncertain, therefore making god decisions may not produce good outcomes. Unlike deterministic models where good decisions are judged by the outcome alone, in probablilistic models, the decision maker is concerned with both the outcome value and the amount of risk each decision carries. When the outcome of your decision is rather certain and all the important consequence occur within a single period, then your decision problem is classified as a deterministic decision. However, in many instances, these types of models are encumbered with the two most difficult factors – uncertainty and delayed effects. Both difficulties can be overcome by probabilistic modeling which includes the time discounting factor. We will over both deterministic and probabilistic decision-making models. After recognizing this no-nonsense classification of decision-making components, the OR/MS/DS analyst performs the following sequence with some possible feedback loops between its steps: 1. Understanding the Problem: It is critical for a good decision maker to clearly understand the problem, the objective, and the constraints involved.
  • 82. NARESH SUKHANI@gmail.com 2. Constructing an Analysis Model: This step involves the “translation” of the problem into precise mathematical language in order to make calculations and comparison of the outcomes under different possible scenarios. 3. Finding a good Solution: It is important here to choose the proper solving technique, depending on the specific characteristics of the model. After the model is solved validatin of the obtained results must be done in order to avoid an unrealistic solution. 4. Communicating the Results with the Decision-Maker: The results obtained by the OR/MS/DS analyst have to be properly communicated to the decision-maker. This is the “sale” part. If the decision-maker does not buy the OR/MS/DS analyst recommendations, he/she will not implement any of them. Problem understanding encompasses a problem structure, and a diagnostic process to assist us in problem formulation (i.e., giving a From to a complex situation) and representation. This stage is the most important aspect of the decision-making process. Problem understanding is an interactive process between the decision maker and the OR/MS/DS analyst. The decision maker may be unfamiliar with the analyst details of the problem formulation such as what elements to include in the model, and how to include them as variables, constraints, indexes, etc. Since the strategic solution to any problem involves making certain assumptions, it is necessary to determine the extent to which the strategic solution changes when the assumptions change. You will learn this by performing the “what-if” scenarios and the necessary sensitivity analysis. Gathering reliable information at the right time is a component of good decisions. It is helpful to understand the nature of the problem by asking “who?”, “what”, “why”, “when”, “where” and “how”. Finally, break them into three input groups, namely: Parameters Controllable, and Uncontrollable inputs. Uncontrollable factors are the main components of decision-making which must be dealt with, by, e.g. forecasting. In making conscious decisions, we all make forecasts. We may not think that we are forecasting, but our choices will be directed by our anticipation of results of our actions or omissions. One must evaluate the various courses of actions within the controllable inputs, consider various scenarios for uncontrollable inputs, and then decide the best course of action. As you know, the whole process of managerial decision-making is synonymous functions. Planning, for example, involves the following decisions: What should be done? How? Where? By whom? As shown in the following diagram: 2.6.6. Structural Modeling The structured modeling process is at the heart of OR/MS/DS activities. The main question then becomes, “How close is the model to the real world?” Know that a model is not reality, but it does contain some parts of reality. The question is: “Does it contain the important parts relevant to the decision problem?” Modeling is a structured process is consecutive –focused –strategic thinking for understanding reality for utilitarian purposes. The connection between partitioning a circle into 360 degrees and a year into a number of days in an interesting example. This desire for a mathematical model of the universe and its processing difficulties is apparent. Some analogous ones exited in music, architecture, etc. these mathematical models to represent reality required fitting between small integer number (for ease of representation ), and complex phenomena whose numerical parameters did not exactly fit in the integer –based scheme. It is credible that the 360-system and the 6-8-9-12 scheme in music were the result of this conflict; these example are mathematically suitable models and semantically justified. As bill Gates side, “If you, re any good at math at all, you understanding business. It’s not its own deep, deep subject.” With mathematics as a language we can explain the mysteries of the universe or the secrets of DNA. We can understand the forces of planetary motion, or discover cures for catastrophic diseases. Mathematics is not just for calculus majors. It’s for all of us. And it’s not just about making good strategic decisions.
  • 83. NARESH SUKHANI@gmail.com Mathematics is part of human culture because it does not exist outside of the human mind. Symbolic reasoning and calculations with symbols are central to analytical (i.e. mathematical) modeling. Therefore, like any foreign language you must develop an understading of mathematics, which si the language of all sciences, including the OR/MS/DS modeling process aimed at assisting the decision-maker. Here is an example of the usefulness of mathematical symbols. Suppose you wish to buy a shirt for $50 (tax included), the tax is 5%, what is to original price of your shirt? Let x and y be the amount of the tax and the original price respectively, therefore, the mathematical modes is 50 = x + y, and x = 0.05y. This gives, 50 = 0.05y + y = 1.05y. Therefore, the original price is 50/1.05 = $47.62. How much is the tax? How do you generalize this result? You may ask, what is this x, in mathematics? Well, whatever we do not know we call it x (or any other latter from the end of alphabet series). X also has a political significance as in Malcom X. A mental model is a representation of your thoughts about reality. Therefore, it is an objectification of reality, which in turn means the subjective begetting of the reality. Mathematical models employ symbols and notations, including numbers. Thus, there are three distance concepts: the reality, the mental model, and the representation. In its many different forms, analytical modeling is a procedure that recognized and verbalizes and problem and then quantifies it by turning the words into mathematical expressions. Modeling is a structured consecutive-focused-strategic thinking for understanding the decision problems and actions. In all high schools around the world mathematics is used to translate Word or Story Problems into symbolic representations (i.e., mathematical models). After solving, the results are translated back into the original language in which the problem was stated. OR/MS/DS is a systematic approach to problem solving in that it considers the context of the problem as important as the problem itself. It utilizes, a team approach by capitalizing on the talent of an OR/MS/DS analyst to asses, coordinate, and incorporate knowledge relevant to solving a certain decision problem from experts in other fields, (known also as think-tank approach). The difficulties in clear communication among the team members in any OR/MS/DS project can increase with the size of the team. Span of management refers to the numbers of employees supervised by a single person. The term itself has nothing to do with a desired size of the span. In other words, whether the one supervise two employees or one hundred, span of management is the tern applied to the number. In the three-person group (i.e., one supervisor and two employees), the six possible relationships or interactions may exist. By applying a scientific approach, managers are also able to make accurate predictions for what is not under their control. OR/MS/DS modeling process is a scientific approach in that it uses measurable and numerical scales to translate observed phenomena. If ‘God geometrizes’ as Plato says, man certainly arithmetizes. The world is qualitative. However, human can understand compare, and manipulate numbers only. Qualitative information may be characterized and processed by assigning numbers. Therefore, we use some measurable, numerical scales to quantify the world. This enables us to understand the world by finding any relationship, and using manipulation comparison, calculation, etc. Then we use the same scale to qualify it back to the world. This is the essence of the “human understanding structured process”. Quantative analysis tends to rive out qualitative analysis, even in the Liberal Arts areas of study, such as organization science, sociometrics, and psychometrics. The “fuzzy set theory” has even been developed to quantify qualitative terms that we use to express out feelings. However, it is questionably whether the internal world of one’s experience can also be subjected to analytical modeling. Just like the external world. The following is a paraphrase of what Adam Smith said about the main difficulty in representation of feeling “It is not an easy task to construct analytical model for feeling, become our senses will never inform us of what, e.g. somebody is in suffering as long as we ourselves are at our cases. “However, in the medical professions it is common to be questioned, “on a scale of one to ten, one being the worst, how do you feel? This elicits subjective answers from the patients.
  • 84. NARESH SUKHANI@gmail.com Mathematical modeling can claim to be the most original creation of mankind. The originality of modeling lies in the fact that in model building connections between things are exhibited which, apart from the agency of human reason, are extremely unobvious. This the ideas, now in the minds of modeling lie very remote from any notions that can be immediately derived by perceptive through the senses; unless it is perception stimulated and guided by an antecedent modeling process. 2.6.7 Advantages of using the modeling approach to problem solving: A question for you: “When a management scientist goes to work, does he/she wait for problem to be assigned or does he/she go find problems?” Do not create problems for yourself and others. Wait for the problem to be assigned to you. The problem owner(s) and the management scientist consultant are two different parties. A management scientist provides and and/or facts to the decision maker in order to make a better decision. The management scientist should not attempt to make these decisions or to influence the decisions. As such, the management scientist and the decision maker should not be the same person. The management scientist, therefore, is to serve as an objective voice to interpret a managerial decision problem that cannot be solved internally because of proximity or bias. A mathematical (i.e, analytical) model is the one whose relationships are expressed in the rigorous language of mathematics. In this way, a mathematical model is abstract because one cannot visualize the system it is supposed to portray by merely looking at it. Defining the system boundaries: Often, in modeling process the analysts do not model “systems” – rather, they model specific problems that the decision makers (i.e., the managers) wish to understand. It is important and necessary to clearly define the boundaries of the system’s decision problem under investigation. In this context a system is the restricted portion of the universe under consideration and its boundaries are the limits that separate the system from the remainder of the universe. Boundaries isolate the system from its surrounding. Often it may turn out that the initial choice of boundaries is too restrictive. Therefore, to fully analyze a given system it may be necessary to expand the system boundaries to include other substems that strongly affect the decision strategy. Suppose you are to study and make a descriptive model of an international airport, what are the boundaries for such a large system? Components of Analytical Modeling Process Classification of Knowledge Knowledge about Objects, Events, Processes, Relations Types of Comprehension Understand, Interpret, Relate, Select, Recall, Compare Types of Analysis Relate, Compare, Interpolate, Extrapolate, Generalize, Specify Results of Model Evaluations Accept, Reject, Possible, Irrelevant Know that analytical modeling is more than a collections of concepts and skills to be mastered; it includes methods of investigation and reasoning, and the means of communications (i.e., making common what is individually experienced). Depending on the audience of the report, the mathematical model may or may not be included. It is the task of the management science team to write a report that is understandable by all that will read it. 2.6.8. Analytical Modeling Process for Decision - Making
  • 85. NARESH SUKHANI@gmail.com A decision is a reasoned choice among alternatives. Makings a decision is part of the broader subject of problem solving. Although the management science approach cn be used to construct a mathematical model, it is useless if the result is too complex to be communicated to the decision maker. Regarding the importance of communication in the OR/MS/DS modeling process, I have found that people tend to overcomplicate and issue. The worst offense seems to be in written reports. There is a general “fear” of appearing unsophisticated or even unintelligent if one writes in a a straightforward, simplistic manners. The end result is a product that is incomprehensible to the decision maker. To avoid such an outcome, the analysis should be done in stages. You must ever come the communication barriers. Depending on the audience of the report, the mathematical model may or may not be included. It is the task of the management sciences team to write a report that is understandable by all that will read it. Decisions deserve appropriate time. As a decisions scientist, you want the opportunity to see a decision unfold, revealing opportunities for study and assessment. The general procedure that can be used in the process cycle of decision- making contains the following similar steps: (1) describe the problem, (2) prescribe a solution, and (3) control the problem by assessing/ updating the strategic solution continuously in the face of changing business conditions. Clearly, there are always feedback loops among these general steps. The general steps in this process are analogous to the structured process of treating an illness. When a patient has a health problem, the patient goes to see the doctor to solve the problem. In order to do so, the doctor, with the participation of the patient, describes the problem by taking a blood test or x-ray, to diagnose the illness. Then the doctor prescribes medications (prescribing medicine). There are also follow-up visits to make sure the prescription actions are effective in curing the patient; otherwise the doctor changes the medications. That is possible why what the doctors to they call it “practice”. Remember that, here there are two distinct parties because if patients wanted to talk diagnosis, they talk drugs. If they wanted to talk symptoms, they talk drugs. They talk about solutions before understanding the problem. In this analogy, the doctor is the management scientist while the patient is the decision maker (the owner of the problems.) Descriptive modeling process is using OR/MS/DS techniques to describe how people see their worlds. A god descriptive model comes from good observation and representation that is validated and verified against evidence. This increases confidence in the descriptive model, and then could be used for prescriptive purposes. Description of he Problem: As soon as you detect a problem, think about and understand it in order to adequately describe the problem in writing. Develop a mathematical model or framework to re-present reality in order to devise possible solutions to the problem. The model must be validated before you offer a solution. Clearly, one needs to be skilled at having many different perspective to get closer to reality. When different models are combined using different perspective, we get a better understanding of reality. That’s why OR/MS/DS modeling process utilizes a team approach by capitalizing on the talent of individuals to assess, coordinate, and incorporate knowledge relevant to solving a certain decision from experts of other fields, (known also as thing-tank approach). Describing all components of a problem is also called inverse-engineering in the field of cognitive science. The most important part of decision-making is to understand the problem. An excellent example is, “name a former president of the United States who is not buried in the USA.” This is a wonderful example of the need to understand the question before attempting to answer. Remember that the formulation of the problem is often more essential that its solution. In fact, if you understand the problem, it usually tells you how to solve the problem. Here is another example for problem understanding: give the number of automobiles produced in America during the year of your choice. Prescription of a Solution: This is an identification of a strategic solution and its implementation stage. Search for a strategic solution using OR/Ms/DS modeling process solution techniques. Any given managerial decision problem has several solutions. A satisfactory strategic solution, also called a “good decision”, is desired. There is no such thing as the solution for real-life problems. Choose an appropriate solution. One size does not fit all. Solutions depend on budget, time, and many other constraints and conditions. Think of the design process as
  • 86. NARESH SUKHANI@gmail.com involving first the generation of alternative and then the testing of these alternative against a whole array of requirements and constraints. Here is a question for you: does a good decision always result in the good outcome? Why not? Give an example. Managerial Interpretations and Communication: The decision problem is often stated by the decision maker in non-technical terms. When you think over the problem and find out what module of the software to use, you will use the software to get the solution. The strategic solution should also be presented to the decision maker in the same style of language which is understandable by the decision maker. Therefore, do not just giver her/him the computer printout. You must also provide managerial interpretations of the strategic solution in some non- technical terms while preparing a business report or presentation. Post-prescription: Change is the norm in most organizations. Business cycles and management philosophies change, demographic factors shift, sales and profits increase or decrease, employees come and go, technology is introduced and technology becomes obsolete, some changes occur quickly, whereas others are almost imperceptible. The speed and duration of change may vary considerabley, but nevertheless change in continuous. Therefore you must allow for revising the model as necessary. This stage of problem solving is practiced in the free-based economy societies in contract to the programmed-based economy societies where the model (i.e. the programs) is taken more seriously than reality itself! The model is in the service to reality, not the other way around. George Bernard Shaw said “The only man who behaved sensibly was my tailor; he took my measurements a new every time he saw me, while all the rest went on with their old measurements and expected them to fit me.” Monitoring Activities: These activities include updating the strategic solution in order to control the problem. A dictionary tells as that “to manage” means “to control.” On the other hand, “everything changes” except the fact that “everything changes”. Everything flows; nothing remains unchanged. In this ever-changing world of ours, it is crucial to periodically update solutions to any given problem. Good decision-making process is a creative idea; it can only be effective in changing forms of creative ideas. Monitor that progress of the implementation. A model that heretofore was valid may lose validity due to changing conditions. Thus becoming and inaccurate representation of reality and adversely affection, the ability of the decision-maker to make god decisions. The model you create should be able to cope with changes. Unlike mathematical puzzles (e.g., solving equation 2X – 6 = 0 where there is one and only one correct solution), real life problems do not have a single, correct solution. They cannot be “solvent once and forever.” One must learn to live with dynamic nature, that is, to update he solutions. Therefore, in this sense, the OR/MS/DS modeling process to problem solving is not an exact science such as Mathematics, but one where decisions must ultimately be made by the decision maker. The Importance of Feedback and Controls: It is necessary to emphasize more on the importance of strategic thinking about the feedback and control aspects of a decision problem. It would be a mistake in discussing the context of the OR/MS/DS decision process to ignore the fact that one can never expect to find a never- changing, immutable solution to a business decision problem. The very nature of the environment in which decision-making takes place is change, and therefore feedback and control are an important part of the context of the OR/MS/DS modeling process. Questions: 1. What is strategic decision making? 3. Explain the models used in strategic decision making.
  • 87. NARESH SUKHANI@gmail.com UNIT 3 Lesson 3.1 Stability Strategy 3.1.1 Introduction Strategy means “the basic programmes of actions chosen to reach these goals and objectives and major patterns of resource allocation used to relate the organization to its environment”. According to Alfred Chandler, the strategy means the determinations of the basic long-term goals and objectives of enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. Strategic decision making, at the corporate level, is related to the organization wide policies and is most useful in the case of multidivisional companies having wide range of business. Corporate strategy means financial policy decision involving acquisition, diversification and structural redesigning of the firms assets. At the business levels, the decision makers are primarily concerned with immediate product, market issues and the policies bearing on the integration of the functional units. Among other things, strategic decision at this level include policies regarding developing new product, marketing mix, research and development, etc. The following are the features of strategy:  It is top level management decision  Allocation of Resources.  Forecasting of future strategies.  Strategies are concerned with long range planning.  Strategic decisions will have implications for multiple functions, product divisions and operating units.  Strategic decision will have environmental factors. The Corporate level generic strategic pertain to the question which businesses the company shall be in? The generic strategies are concerned with the portfolio strategy. (These generic strategies re also applicable to SBUs when they confront the question of the businesses they shall be in) A stable strategy arises out of a basic recognition by management that the firm should concentrate on using it’s present resources for developing it’s competitive strengths in particular in particular market area. In simple words, stability strategy refers to the company’s policy of continuing the same business and with the same objectives. 3.1.2 The need for Stability strategy: As Jauch and Glueck observe, a stability strategy is a strategy that a firm pursues when:  It continues to serve the customers in the same product or service, market and functional sectors as defined in its business definition, or in very similar sectors.  Its main strategic decisions focus on incremental improvement of functional performance.  The focus is on maintaining and developing competitive advantages consistent with the present resources and market requirements. In an effective stability strategy, a company will utilize its resources for its competitive advantages. A stability strategy may lead to defensive movies such as taking legal action or obtaining a patent to prevent unethical competition by others. Stability usually involves keeping track of new developments to make sure the strategy continues to make sense. The stability approach is neither a ‘do nothing’ approach nor does it mean that profit growth are abandoned. The stability strategy can be designed to increase profits through such approaches as improving efficiency in current operations.
  • 88. NARESH SUKHANI@gmail.com Godrej, the umbrella brand for things ranging from steel to shaving creates its one of the top most brand in soaps is Old Cinthol and it is being the stable among the most customers. The other soaps from the HLL, the major competitor Old Cinthol plays a dominant role in the market and also the trusted brand. G’axe Smithkline’s Horlicks is doing remarkable well in the market. Hurlicks is a widely regarded 130 years old brand. It makes in to the top 10 brands in the segment. Rural areas, housewives, young females and lower income household continue to back the brand strongly. In order to understand how stability strategy works, here are the two examples to illustrate how organization could aim at stability in each of the two dimensions of customer groups, customer functions respectively. 1. Coca Cola Company provides a separate service to its institutional buyers apart from its consumer sales through market intermediaries to order to encourage bulk buying and this improve its marketing efficiency 2. Hero Honda Company provides better after-sales service through their dealers to its existing customers to improve its company, product image and increase the sale of accessories and consumables. However, when a new motorcycle is brought from the Hero Honda, free 5 times service is provided by the company and also two year guarantee for the motorcycle purchased. Note that all the companies here do not go beyond what they are presently doing, they serve the same market with the present products using the existing technology. The strategies aim at stability by causing the companies to marginally improve their performance, or at least letting them remain where they are in case they face a volatile environment and a highly competitive market. The essence of stability strategies is, therefore, not doing anything but sustaining a moderate growth in line within the existing trends. 2.1.3. Advantages of Stability strategy: The firm’s executives pursue the stability strategy: as there are more advantages. They are:  The firm is successfully run and the objectives are achieved and there is satisfactory performance. Therefore the management may want to continue with the same activities.  A stability strategy is less risky. Unless the conditions are really bad, a firm need not take any additional risk.  The management doesn’t foresee any change in the environment, or opportunity in the market or any threat.  When pursuing this strategy, there is no disruption in routine work. By pursuing stability strategy, the executives normally aim at stable growth. Stability strategy is therefore called the stable growth strategy. Stability strategy is adopted with different designs depending on the circumstances in which such a strategy is preferred. The stability strategy is not a “do nothing” strategy. As indicated above, it may involve incremental improvements. It also required adoption of appropriate competitive strategies to remain successful in the business. It may also have to make offensive and defensive moves vis-à-vis the competitors. Long term stability also requires reinvestment, R&D and innovation. However, the business definition remains the same. In short this “do-the-same thing” strategy endeavors to “do-the-same thing better.” 3.1.4 Reasons for Stability Strategy:
  • 89. NARESH SUKHANI@gmail.com The important reasons for pursuing stability strategy are the following:  The company is doing fairly well and it is hopeful of the same in future.  A family dominated or private company may not like to expand its business if it amounts to diluting the control or if effective supervision is not possible by the family members.  The feeling that sticking to the known business is always better and safe.  The company may not have the resources and capabilities for expansion. 3.1.5 Examples: In southern part of Tamil Nadu, Kalimark Industries for Soft drink playing a major role in soft drinks, particularly among the lower middle class people and the company have a brand name for long time. For the company, the competitors are Pepsi and Coca Cola and there are not capabilities for expansion. The company may not want to take risks of growth and expansion Tortoise, the mosquito repellent manufactures only mosquito coils and the company does and expand his business with other repellent like mosquito mats and liquidators. The company may not want to take risk of growth and expansion. The company which has core competence in the existing business does not want to take the risk of losing sufficient attention to the current business by going for the diversification. The management does not have the mind-set of a strategist to analyses the environmental opportunities and seize the opportunities. 3.1.6. Types Of Stability Strategy NO-CHANGE STRATEGY: This stability strategy is a conscious decision to do nothing new, that is to continue with the present business definition. Taking no decision is sometimes a decision too. When faced with the predictable and certain external environment a stable organizational environment, a firm decides to continue with its present strategy. Because,  The firm does not find it worthwhile to alter the present situation by changing the strategy.  No significant opportunities or threats operating in the environment.  No major new strengths and weaknesses within the organization.  No new competitors.  No obvious threat of substitute products. Taking into account the external and internal environmental situation, the firm decides not to do anything new. Several small and medium sized firms operating in a familiar market – more often a niche market that is limited in scope and offering products or services through a time-tested technology rely on the no-change strategy. PROFIT STRATEGY This strategy is adopted in large firms. Firms would be generating cash flow as primary concern for ensuring durable stability durable stability of the organization. Under the following circumstance, a profit strategy may arise:  If there is a decline of sales of the product in the market.  Expansion became impossible due to heavy cost.
  • 90. NARESH SUKHANI@gmail.com  Contribution of the unit to the total sales in less.  Exchange the market as and when possible.  To step out from the market where the product has lost its value. A frequent method to tide over temporary difficulties and to keep afloat through a profit strategy is to sell off assets such a prime land in a commercial locality and move out to the suburbs. Others have hived off some division in non-core businesses to raise money, while few have resorted to provide services to other organization which need outsourcing facilities. PAUSE/PROCEED-WITH-CAUTION STRATEGY Pause/proceed-with-caution strategy is such a tactic. It is employed by firms that wish to test ground before moving ahead with a full-fledged grand strategy. It is a temporary strategy just like the profit strategy. It defers in the way of objectives are defined. The Pause/proceed-with-caution strategy is a deliberate and conscious attempt to adjourn major strategic changes to a more opportune time or when the firm is ready to move on with rapid strides again. Example: In the Indian shoe market dominated by the Bata and Liberty, not many of them might be aware that Hindustan Levers, better known for FMCGs, produces substantial quantities of shoe uppers for the export markets. In late 2000, it started selling a few thousand pairs in the cities unobtrusively to gauge market reaction. This could possibly be a proceed-with-caution strategy before it goes full stream into another FMCG sector that has a lot of potential. Question: 1. Under what circumstances stability strategy is followed? 2. Why stability strategy is found to be an important aspect? 3. Give examples of stability strategy followed in India. 4. Trace the various types of stability strategy. Lesson 3.2 Growth Strategy 3.2.1. Introduction: Analysis of company failures from the late 1980s is instructive in that it reveals the significant extent to which individual corporate failure is caused by management rather then external factors. Commentators, depending on their allegiances, place different weightings on the various factors which appear to have caused corporate problems. Factors blamed include:  Deregulation of the banking system and the subsequent over-supply of available money for lending:  Widespread community expectations of continuing inflation in asset prices encouraging speculation rather than productions;  The bias towards higher gearing ratios caused by the tax deductibility of interest and asset price speculation;  More favourable treatment of capital gains as opposed to income by the taxation system;
  • 91. NARESH SUKHANI@gmail.com  Poor bank-lending practices;  Bad management on the part of borrowers;  Inadequate corporate regulation and poor corporate morality; and  Government management of macro-economic policy There is little doubt that each of these factors contributed to an environment in which we cold expect a higher- than-normal company failure rate. But they do not explain why some companies fail while others do not. The inability of a particular company to withstand major setbacks without becoming insolvent can usually be traced back to the quality of management. Most of the high-profile corporate failure in the last two or three years have involved bad management, either in the sense of a flawed business strategy inappropriate speculation with borrowed funds or a lack of business morality in acting as custodian of shareholders’ interests. Many of them have involved a high-profile, domineering chief executive – which is itself a warning signal of potential management problems – or a board where there is a majority of executive directors. Some of the corporate failure have had within their structure some very successful and well managed business. 2.3.2. Lesson for Management The Importance of Planning From an individual company’s point of view the first basic lesson from the failures of the 1980s is in relation to the importance of planning. Success sometimes occurs in spite of lack of planning, but normally in any commercial enterprise the only way to ensure success is to draw up plans based on achievable assumptions about turnover, et cetera, and to work those plans through to make sure that if everything goes according to plan, the results will be satisfactory. This does not mean that every business strategy should be profitable in the short term. It may be that a discounting period is a justified management decision, but before making the decision, management should be aware of the expected impact on cash flow and profit. Management can only be sure of this by using financial budgeting. Plans or budgets should be produced by management (or consultants, if necessary) and then ratified by the board as being budgets with which, if they were achieved, the board (and, presumably, the shareholders) would be pleased. The planning process also involves business risk assessment. All business are subject to risks due to variables beyond their control, but many of these risks can actually be identified. For example, speculators in the property industry in the 1980s were subject to the risk that asset prices would level off or actually decline. It is up to speculators to decide whether to accept that risk in view of their assessment of the potential for gain. In a company’s case, the planning adopted by a board of directors should not expose the company to failure merely because a quite identifiable risk moves against the company. Directors need to ask themselves “What if” questions relevant to their particular business. Examples are “What if interest rates remain high?”, What if exchange rates move against us?”, “What if budgeted turnover is not achieved?”, “What if property prices fall?”, et cetera, and if the answers are that the business would not survive, the business plans need to be adjusted to reduce the company’s exposure to the particular risk involved. The Need for a Strong Financial Function The second lesson from the 1980s is in relation to the need for good financial reporting systems. There is a tendency for those of us trained in financial management to assume that business managers have some basic understanding of finance and accounting skills, which we can presume without further explanation. We are wrong to make that assumption. There are a variety of other skills involved in running a business successfully,
  • 92. NARESH SUKHANI@gmail.com including selling skills, marketing skills, administrative ability and personnel management. Good technical skills (for example, actuarial) often result in promotion to senior management, but they do not guarantee good management skills. Some successful business people are able to combine all of their necessary skills and run a business personally. A more common occurrence, however, is that successful business people to not hold all the necessary skills personally, but instead make judicious use of their own skills and the skills of others (whether employees or outside consultants) as the need arises. The lack of finance and accounting skills is obvious in many corporate failures. Some of our more flamboyant Australian directors apparently believed that it is possible to run a business with scant regard to conventional financial practice. Typical examples are the total inability to distinguish between cash and profit, failure to use budgeting as a planning tool, and failure to use regular reporting of actual results to adjust business strategies. Even worse, and surprisingly common, is the failure to keep proper books and records. How can directors expect to make good planning decisions if they are unable to determine their company’s current position, or the effect that previous decisions have had? The lesson for directors is that they must ensure that their company has a strong financial function capable of producing up-to-date financial reports and forward budgets on a timely basis and the directors must make use of an analysis of those reports to enable them to monitor and assess the success of the company various activities. Monthly reporting is almost universally accepted as good business practice, and many larger businesses in fact now report more frequently. Monthly reports allow management to assess how their plans and budgets are in fact working out, and to take whatever remedial action asperse to be necessary before problems become critical. Of course, in order for the monthly reports to be useful, they must be analyzed and compared with the expected results. Financial trends need to be explained, particularly if they are unfavorable. The only reason for taking no action would then be because the unfavorable trend has been explained and accepted as a temporary aberration. Some readers might thing this is all terribly basic, but it is ignored surprisingly often. Insolvency practitioners often take charge of companies with turnover measured to millions, where the company records show no sign of monthly budgeting or cash flow planning, and where financial reports were only available to the board on an annual basis. Goal-Setting for Competitive Performance Good planning and reporting systems are not only essential for survival, they are also essential for competitive performance and growth.  Future survival depends on being able to match the competition,  Cost efficiency is a necessary but not sufficient condition for competitiveness. The aim must be to improve product quality, reliability, service, customer awareness, innovation and technology.  Our standards of quality and service are below the world average.  Management and employees must change their goals to aim at world-best performance. Expansion Strategies The expansion grand strategy is followed when an organization aims at high growth by substantially broadening the scope of one or more of its businesses in terms of their respective customer groups, customer functions, and alternative technologies – singly or jointly – in order to improve its overall performance. Because of the many reasons for which they are adopted, expansion strategies are quite popular. Given below are three examples to show how companies can aim at expansion either in terms of customer groups, customer functions or alternative technologies.  A chocolate manufacturer expands its customer groups to include middle-aged and old persons among its existing customer comprising of children and adolescents.  A stockbroker’s firm offers personalized financial services to small investors apart from its normal functions of dealing in shares and debentures in order to increase the scope of its business and spread its
  • 93. NARESH SUKHANI@gmail.com risks.  A printing firm changes from the traditional latter-press printing to desk-top publishing in order to increase its production and efficiency. In each of the above cases, the company moved in one or the other direction so as to substantially alter its present business definition. Expansion strategies have a profound impact on a company’s internal configuration customer extensive changes in almost all aspects of internal functioning. AS compared to stability, expansion strategies are more risky. Expansion Strategies (a) Expansion through concentration (b) Expansion through integration (c) Expansion through diversification (d) Expansion through cooperation (e) Expansion through internationalization. Expansion Strategies Growth is a way of life. Almost all organization s plans to expand. This is why expansion strategies are the most popular corporate strategies Companies aim for substantial growth. A growing economy, burgeoning markets, customers seeking new ways of need satisfaction and emerging technologies offer ample opportunities for companies to seek expansion. In this section, we will try to cover a lot of ground by describing types of expansion strategies. (a) Expansion through concentration (b) Expansion through integration (c) Expansion through diversification (d) Expansion through cooperation (e) Expansion through internationalization (a) Expansion through concentration Concentration is a simple, first –level type of expansion grand strategy. It involves converging resources in one or more of a firm’s businesses in terms of their respective customer needs, customer functions, or alternative technologies, either singly or jointly, in such a manner that it results in expansion. In business policy terminology concentration strategies are know variously as intensification, focus or specialization strategies. In practical terms, concentration strategies involve investment of resources in a product line for an identified market with the help of proven technology. This may be done by various means. A firm may attempt focusing intensely on existing markets with its present products by using a market penetration type of concentration. Or it may try attracting new users for existing products resulting in a market development type of concentration. Alternatively it may introduce newer products in existing markets by concentration on product development. For expansion, concentration is often the first – preference strategy for a firm, for the simple reason that it would like to do more of what it is already doing. A firm that is familiar with an industry would naturally like to invest more in known businesses rather than unknown ones. Each industry is unique in the sense that there are established ways of doing things. Firms that have been operating in an industry for long are familiar with these ways. So they prefer to concentrate on these industries. ( b) Expansion through integration
  • 94. NARESH SUKHANI@gmail.com Recall that we referred to the horizontal and vertical dimensions of grand strategies in the first section. These dimensions are used to define what are known as integration strategies. The pivot around which integration strategies are designed in the present set of customer functions and customer groups. In other words a company attempts to widen the scope of its business definition in such a manner that it results in serving the same set of customers. The alternative technology dimension of the business definition undergoes a change. A value chain is a set of interlinked activities performed by an organization right from the procurement of basis raw materials down to the marketing of finished products to the ultimate consumers. So a firm may move up to down the value chain to concentrate more comprehensively on the customer groups and needs than it is already serving. A firm that adopts integration as the expansion strategy commits itself to adjacent businesses. Integration is an expansion strategy as its adoption results in a widening of the scope of the business definition of a firm. Integration is also a subset of diversification strategies as it involves doing something different from what the firm has been doing previously. Several process-based industries, such as, petrochemicals, steel, textiles or hydrocarbons, have integrated firms. These firms deal with products with a value chain extending from the basic raw materials to the ultimate consumer. Firms operating at one end of the value chain attempt to move up or down in the process while integrating activities adjacent to their present activities. (d) Expansion through Cooperation Much of strategy literature assumes competition to be a natural state of existence for companies to operate in. Several strategy experts, notably Michael Porter, have based their work on the assumption that companies compete in the market for a limited market share. One company can benefit at the cost of others. It is a win-lose situation where if one wins then one or several others have to lose. A contrary view has been expressed by thinkers such as James Moore, Ray Noorda, Barry J. Nalebuff and Adam M. Brandenburger that competition could co-exist with cooperation. Corporate strategies could take into account the possibility of mutual cooperation with competitors while competing with them at the same time, so that the market potential could expand. The term ‘co-operation’ expresses the idea of simultaneous competition and cooperation among rival firms for mutual benefit. The central point is of complementarity among the interests of rival firms. This sections deals with the strategic alternatives based on cooperation among firms. As we will shortly see, such cooperation could take place in various ways. Cooperative strategies could of the following types: 1. Mergers 2. Takeovers (or acquisitions) 3. Joint Ventures 4. Strategic Alliances Merger and takeover (or acquisition) strategies essentially involve the external approach to expansion. Basically two, or occuasionally more than two, entities are involved. There is not much difference in the three used for such types of strategies and they are frequently used synonymously. But a subtle distinction can be made. While mergers take place when the objectives of the buyers firm and the seller firm are matched to a large extent, takeovers or acquisitions usually are based on the strong motivation of the buyer firm to acquire. Takeover is a common way for acquisition and may be defined as “the attempt (often sprung as a surprise) of one firm ot acquire ownership of control over another firm against the wishes of the latter’s management (and perhaps some of its stock-holders)”. But this definition need not be taken very seriously as in practice, many
  • 95. NARESH SUKHANI@gmail.com takeovers may not have any element of surprise, and may not necessarily be against the wishes of the acquired firm. In fact, takeovers are frequently classifies as hostile takeovers (which are against the wishes of the acquired firm), and friendly takeovers (by mutual consent in which case they could also be described as mergers). Without being too fastidious, one can use these terms synonymously. Recall that strategic management is in an evolutionary phase and such confusion in terms has often to be taken in one’s stride. Joint ventures occur when an independent firm is created by at least two other firms. In an era of globalization, joint ventures have proved to be an invaluable strategy for companies looking for expansion opportunities globally. Strategic alliances are partnerships between firms whereby their resources, capabilities, and core competencies are combined to pursuer mutual interests to develop, manufacture, or distribute gods or services. Like joint ventures, strategic alliances have become quite popular as strategic alternatives for firms looking for cooperation among national as well as international partners. Before we mover further, another important point to point is that these strategies are very often used as a means of diversification. Recall, for instance, the example in the previous section related to horizontal integration. Spartek took over Neycer in order to integrate horizontally. Hi Beam Electronics merged with two other units to form Tristar Electronics, subsequently name as Solidaire India Ltd. Merger, takeover, joint venture, and strategic alliance strategies are, therefore, also the means of achieving diversification and integration. (e) Expansion through Internationalization In this subsection, we first have a look at the context – international and national – in which firms adopt international strategies for expansion. Then we explain the term ‘international strategies’. A brief description of the types of international strategies is followed by a reference to the international entry options available to a firm. Questions: 1. Why expansion strategies are important for companies? 2. What is expansion through cooperation? Give examples. 3. When and why expansions through integration need to be followed? Give examples. 4. Give justification for strategic alliances.
  • 96. NARESH SUKHANI@gmail.com LESSON 3.3 RETRENCHMENT STRATEGY 3.3.1. Introduction Retrenchment can actually serve as a turnaround strategy, meaning the business gains new strength by streamlining its operations and eliminating waste. If you really want to know what a no-holds-barred lay-off feels like, recall the Titanic scenes. The ship doesn’t sink silently or swiftly into obscurity. Instead, in agonizing detail you hear the scream of tortured metal, the wrenching sounds of the hull breaking, the sickening churn that threatens to drown everything in sight, and the last lingering groans as the ship finally sinks into its final journey to the bottom of the ocean. That’s the kind of anguish that swirls around a corporate in the middle of a retrenchment. Now, this was no fly- by-night operation: it was the India operations of a global dotcom brand, which has launched operation with much fanfare last year. Interestingly, none of the laid-off employees expressed shock that they had lost their jobs. All were outraged at the manner in which the message was relayed to them: at noon, in walked a suit from the USA into the Mumbai head-office. He bluntly announced that the operations were being shut down from that moment on, and on a note of gallows humor concluded: “Don’t come back after lunch”. Moreover, any management which believes that its soon-to-be-ex-employees deserve no time and attention will soon see that strategy boomerang. The most immediate impact is n employees who are still on the rolls: the harsher the treatment to retrenched employees, the greater the insecurity in those left behind. Instead of being a highly-motivated lot who should be focusing on how to bring the company out of the doldrums into calmer waters, these employees not live under constant fear of the sword. Instead of pushing on productivity, they are not focused on polishing resumes, scanning the classifieds and hunting for a more secure job in a more trustworthy company. This isn’t just the worm’s eye view-smart companies know that they need to minimize the damage control retrenchment bring by being open, sensitive and values-led while planning a layoff. Scrolling down the f— edcompany.com postings, I found a memo to Cisco employees in the first weak of April 2000, which highlights how retrenchment need not be more painful than it. Firmly focused on the long-term health and reputation of the company, the Cisco note shows event in this difficult time the company is clinging to the “core values of trust, open communication and integrity”. A formal transition support strategy has been worked out and shared with all employees. Each affected employee is to receive two months’ pay and benefits continuation to seek a new assignment or other employment outside of Cisco. Those who sign a severance agreement get an additional four months’ pay and benefits continuation. To ensure that information is freely and fully available and Transition Website has been set up. Then, displace employees are being offered extensive outplacement support: right from career counseling to resume writing. Finally, Cisco partners and customer have been offered the chance to interview and hire affected employees as a first preference. Clearly, smart companies retrench with brains – and a heart. 3.3.2 Retrenchment strategy in schools: Now that we’ve covered the potential market size, and have seen the opportunities that await us…we must act. The following plan describes the general course of action and recommendations with a brief discussion of the organizational strategies and the four P’s of the marketing mix. It is also segmented by product marketing, channel marketing, on-line marketing, public relations and advertising. Before determining the appropriate product marketing mix we first have to consider whether we should attempt either a growth or a consolidation strategy for each existing product (older discontinued products and eval
  • 97. NARESH SUKHANI@gmail.com releases are not considered). Currently the company produces the following products: Imagine the educational options that may be available for children in 2010.  Charter technology schools – private, but publicly funded (could also be funded by a software or Internet company).  Religious schools – private, perhaps publicly funded for secular curricula.  Charter Cultural/ethnicity schools—publicly or globally funded schools for children whose parents want them to retain their heritage or learn about another.  Home schools—private, publicly funded, many selections from the cable/Interned channel. Instructional sites could be anywhere in the world, such as Sydney, Australia; Palo Alto, Calif.; or Bali.  Public-university collaboration – publicly funded for college-track 5-year-olds.  Private-industry charter schools—public, designed to offset the shortage of electricians, carpenters, plumbers, and other craftspersons.  And, of course, the local public schools—publicly funded for the remainder of the school-age population. With the rise of charter schools, school choice, and wireless communication, the reality of such a list is closer than many may think. Add to these developments the general concerns voiced by public officals about the quality of public schools, and the reality becomes closer still. It is clear, then, that leaders of public schools need to create a competitive strategy to survive the intense rivalry for dollars inherent in these diverse educational options. Public schools no longer have a monopoly on public education, and to survive, they must compete more effectively. They must choose their strategy and develop congruent internal mechanisms to effectively implement that strategy. Broadly speaking, schools may compete either on cost leadership or through differentiation. The nettlesome question is, what would it take for this generic competitive - strategy model popularized by the Harvard Business: School’s Michael E. Porter to work for U.S. public schools. A school competing on cost leadership premises to offer standard education at a minimal cost. Characteristics of this school would include basic educational curricula (the there R’s), large class size, low administrative component and other overhead costs, intensive screening of budget requests, and employee participation in cost-control efforts. Public schools no longer have a monopoly on public education, and to survive, they must compete more effectively. Efficiency is the primary focus in organizational decision making at this kind of school. Management’s role is to continuously standardize curricula and pedagogy and to install volume “resource procurement” strategic to derive economies-of-scale benefits. Management also will periodically re-engineer tasks and activities for efficiency, and will creatively tighten the value-adding chain to minimize waste. In public education, cost leadership may become the retrenchment strategy for districts devastated by a deluge of exiting students, taking their “voucher” funds with them. On the other hand, public schools may find success by imitating schools of choice and charter schools through differentiation strategies. Differentiators create value for their products by distinguishing them from rivals’. They meet or exceed customer expectations for products and services offered. Differentiators may offer, besides the basics, specialized subjects such as foreign languages, informational technology, business management, and global economics, all areas that have singular value for some students.
  • 98. NARESH SUKHANI@gmail.com Schools may compete either on cost leadership or through differentiation. Tomorrow’s successful schools will be build on the shifting sands of competition. They will consciously elect to compete for student and staff resources based on price or product differentiation. Choosing a strategy will require schools to analyze their internal resources, to identify and appropriate competency, and to select a choice that is congruent with that competency. Schools will systematically evaluate customer needs and like business, make internal modification to meet those needs. Essential to the success of tomorrow’s schools will be administrators who understand and demonstrate strategic leadership. During the early and mid-1990s, schools allocated a large portion of their resources to embrace strategic planning. They wrote mission statements, belief statements, and organizational philosophies for their schools. They scanned their external and internal environments using so-called SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) to gain insight into their terrain. Choosing a competitive strategy was not on the agenda. Now, with increasing globalization and the emergence of choice as a dominant theme in social and economic matters, schools must take that next step in strategic planning. Public school leaders must offer a choice to a public that demands it, and they must be able to implement that choice more effectively than their competitors. 3.3.3 Retrenchment strategy in service sector: The role envisaged for the Employment Services within the new Skills Development Strategy embraces a range of functions which include:  Broadening the vision of employment to include development programmes, service programmes and small business initiatives. Activities would include directing individuals to job opportunities where they occur in these initiatives and assisting other to begin such ventures on their own;  Assisting individuals and communities to put together project proposals to the SETOs for learning programmes linked to local economic initiatives.  Advising people about the range of support services available to them. These may be welfare or insurance schemes such as UIF, assessment of existing capabilities which may have been informally acquired, as well as information regarding learning opportunities linked to career objectives which people are assisted to develop.  Targeting those people facing retrenchment. Where large numbers of people are involved, the Employment Services agents would aim to assist both employers and workers to plan how to achieve the best package of measures to relieve the hardship that unemployment could bring. This would be an integral part of what have become known as “Social Plan” measures;  Assisting the most vulnerable groupings to acquire the basic capabilities required to take advantage of the support detailed above. This includes laying foundation for personal development and social responsibility. Of particular importance is assistance with learning which enable people to interview skills, job search skills, time management, communication skills and the like. The Department of Labour proposes of offer an integrated set of advice services through Local Employment Services Centres. The Centres will offer advice on the following services to individuals, trade unions or companies who are involved in the process of retrenchment:  Where skills assessment and accreditation may be accessed (including recognition of prior learning)  Counseling and carrer guidance (this service may be directly provided or in the event of large retrenchments, referral to other agencies may be required.  Re-training programmes – where they may be accessed and what public financial support is available.  Where possible, placement in other jobs and industries. Somewhere along the road to prosperity the utility diversification bandwagon overturned. Out of the
  • 99. NARESH SUKHANI@gmail.com wreck tumbled a number of smart and well reached companies that had expected diversification to lead to better financial results. As the wreckage was being cleared a second bandwagon rolled up, this one jammed with enthusiasts heading in the opposite direction, towards retrenchment. The road between diversification and retrenchment has been well traveled—traveled—in both direction—by US utilities for more than a decade. In the late 1980s Pinnacle West Capital Corp lost millions of dollars when its savings and loss unit failed. In 1994 Pacific Enterprises paid $45-mil to ease shareholders ire after the company embarked on what ultimately proved to be a failed venture in discount drug and sports equipment retailing. In 1990 FPL Groups wrote off $689-mil from its unsuccessful forays into cable TV, insurance and citrus fruit. More recently Connective Communication was sold by its parent utility holding company at a loss of $100- mil to $125-mil. Reliant Energy Communications was put on the block after it made less than acceptable levels of revenue growth, and Touch America, which recently spun away from its parent Montana Power, has since seen its stock value drop dramatically. Researchers a decade ago looked at 20 utilities that diversified during the 1980s. Of the $6.5-bil invested in those ventures, the average return was 1.1%. The returns in general have not improved over the years. Diversification is almost always a wealth destroyer, said R Charles Moyer, dean of the Babcock School of Management at Wake Forest University, an expert in utility finance. 3.3.4. Retrenchment in non-profit organization: This strategy may work for two reasons. First, the current scale of operations may be inefficiently large – economists would say that diseconomies of scale can occur in some cases. For example, the unit cost of production day care may rise for groups above a certain size because of variable costs that increase with scale such as supervision or security. Cutting back, while eliminating services for some children, could achieve savings, permitting the organization to remain solvent under existing fee schedules and rising costs of certain inputs. Second, the organization may have certain fixed sources of revenue, such as grants or annual contributions, that would not change substantially if services are cut back. If these are revenue are stable, cutting back could eliminate costs without commensurate losses in revenue, again permitting the maintenance of solvency. Rising costs of particular inputs are nothing new to the nonprofit sector. In the 1980s, for example, many nonprofit had to curtail programs because of rising premiums for liability insurance. Following a retrenchment strategy, some YMCAs and YWCAs closed their pools. Overall, however, nonprofit have a number of different ways to cope with the rising costs of insurance, space, talented staff or other specific inputs to their operations. A systematic examination of these options ensures that all possibilities will considered in thee difficult situations now promoted by a booming economy. Questions: 1. Why retrenchment is adopted by companies? 2. How retrenchment is practiced in Indian companies? 3. Give justification for some of the recent practices of retrenchment.
  • 100. NARESH SUKHANI@gmail.com LESSON 3.4 TURNAROUND STRATEGY 3.4.1. Introduction: A strategic turnarounds is a more serious form of external retrenchment and leads to divestment or liquidation. Turnaround strategies derive their name from the actions involved, that is, reversing a negative trend. There are certain conditions or indicators which point out that a turnaround is needed if the organization has to survive. These danger signs are: 1. Persistent negative cash flow 2. Negative profits 3. Declining market share 4. Deterioration in physical facilities 5. Overmanning in physical facilities 6. Overmanning, high turnover of employees, and low morale 7. Uncompetitive products or services. 8. Mismanagement. An organization which faces one or more of these problems is often referred to as a ‘stick’ company. 3.4.2. The elements in a Turnaround Strategy: Ten comparable Indian companies, in five groups of two each, were selected for study. In each group, one company seemed to have been more successful while the other less successful in adopting the turnaround strategy. Based on a set of 10 elements that contribute to a turnaround, the case studiers of these 10 companies were analyzed. First, it is important to not what these 10 elements are: 1. Changes in the top management 2. Initial credibility – building actions 3. Neutralizing external pressures 4. Initial control 5. Identifying quick payoff activities 6. Quick cost reductions 7. Revenue Generation 8. Asset liquidation for generating cash 9. Mobilization of the organizations 10. Better internal coordination The comparative analysis of the actins taken by more successful companies and less successful companies revealed that no significant differences was there as far as the first three elements were considered. The crucial difference lies in the way the companies attempted a turnaround on the basis of initial control of operation by the new management, quick cost reductions through various means,
  • 101. NARESH SUKHANI@gmail.com mobilizing the organization for improving motivation and morale, and better internal coordination. 3.4.3 Recent Industrial Sickness – Turnaround Strategies  The last five years in the Indian corporate world has been one of the most difficult times in this history. Industrial growth has decelerated. New jobs are not being created. Small industry has suffered to the point of extinction. Export growth fell in 1998 and 1999. Infrastructural bottlenecks perist. The environment of political instability, coupled with nuclear tests and sectarian violence, has not provided atmosphere conductive to domestic and foreign investment. There has been real recession in many sectors of the industry and sickness as we understand has been endemic across the industry.  The seeds of the industrial sickness were sown around ten years ago by processes beyond our control. The reasons are many and it is important to understand some of them before we attempt to chart out the turnaround strategies.  This round of sickness is not only about management or technology failure. It has occurred due to the changing ways we do business, the phenomena of globaliasation, liberalization, the evolution of e- Commerce, the Telecommunication revolution, Lower Tariff Regime, WTO are all responsible for re- aligning our business needs. These have permanently impacted value of businesses in this country. There is an urgent need for business restructuring in the changed environment and financial restructuring to match current valuation s of business. Unless this is done many businesses as we know may has to be closed in the next five years.  In the early 1990s, there was a dream which seemed to be tantalizing within reach the dream of becoming a new tiger, a fast growing economy, of finding just one decade of GDP growth at 8 per cent per year, so that poverty can be wiped out. The dream continues to be elusive.  First a few numbers: The Background A few frequently asked questions on this round of Industrial sickness have to be answered before attempting to work out the turnaround strategies. The following are the excerpts of the interview with the Finance minister of India during 1998.  Is the Globalization and Liberalization responsible for the recessionary trends in the Industry? Globalization and Liberalization are two different phenomena.  Globalization refers to the integration of the world markets into a seamless single market, without artificial barriers created by nations on tariff, physical restrictions on movement on labour and services and restrictions on investments in selected areas.  Liberalisaitn refers to the domestic response to the globalization process, where our nation responded to the pressures of global forces. Definitely, the path of opening the economy is fraught with difficulties and the sickness can be attributed to the liberalization process.  How did we liberalize?  We have permitted foreign direct investment in many areas hitherto un – thought of. We have reduced (rationalized) duty structures to permit import of many finished goods. We are opening up service sectors to foreign competition. We have introduced regulatory bodies to match international standards of regulation and supervision.  Did we have to liberalize?  Communications are integrating global markets like never before and it is important to note that this communications revolution is mostly responsible for the phenomena we are witnessing. We do not have a choice but to liberalise. There could be a debate on degrees and on the pace but in the long run there is no place for insular economies.  Did the conditionality of the loan from the IMF trigger the recessionary process?  Every lender comes with his conditions. This is to be expected. Political wisdom and expert
  • 102. NARESH SUKHANI@gmail.com negotiating skills are needed to soften the blows of this borrowing. It must be understood that the first tranche of loan came in when the forex reserves of out country were at a low of $2 Billion, hardly enough to finance a month of imports. We could not have been at a commanding position to dictate terms to the creditor to determine what we wanted. While most of the conditions are relevant in a globalised economy, what could have been delayed and implemented in stages were hurried. The pains of transition only increased. We were not prepared enough.  Did the South East Asian crisis impact our economy? The collapse of the Asian economies plunged the area into an era of high interest rates, high inflation; large scale drops in asset values, high unemployment and high devaluation of currencies. There is definitely a domino effect on out country; through we were largely insulated from the ills of the collapse. The effect resulted in cheaper impost into the country. The South Asian crises did impact Foreign Direct Investment into this country. Our rupee did not devalue at the same rate as the other currencies in this region. Even now, four years after the collapse, exports from India in Textiles and Consumer Goods are less competitive than from these economies.  While we undertook the painful transition from a command economy to a liberalized one in these years, it is unfortunate that the collapse happened at the same time rubbing salt into the wounds. Definitely the fires of the recession in the economy were fuelled by the South Asian collapse.  Is the loss of protection a reason for recession? Of course, yes for two reasons. 1. The domestic capital goods industry was inefficient. a. The industry was not technologically contemporary to enable efficient processes. b. The costs were definitely higher than similar goods in the west c. The capacities in the capital goods industry were small in comparison to global sizes making it that much inefficient in production levels and costs. The capital goods industry was unable to compete  The high tariffs for imports in the earlier years clouded many of the inefficient processes of the domestic industries. These cost were passed on to the customers. On liberalization, these cost inefficiencies were exposed. Better quality goods could be imported and were available at lesser prices. The consumer was in no mood to pardon sub-standard quality and also was willing to pay a higher price in exchange of quality or aesthetics. This fundamental change happened only because consumer was exposed to these products unlike never before.  Did the collapse of the capital market impact? The capital markets were waiting to collapse. Valuations were high and unjustified and unrelated to performance. Companies were accessing the markets without adequate asset bases or without underlying business plans. The confidence of the investor was shattered many times. This can largely be attributed to poor appraisal skills, poor regulation and greed of the investor. The collapse took the primary market into a deep coma with not signs of revival except in the IT sector. There is a lesson here for all of us. Naturally, a vagrant economy depends hagiology on an active capital market. With the Government slowly withdrawing from supporting Financial Institutions and Investment introduces through state funded agencies drying up it has become increasingly important for an active primary capital market as the basis for revival.  Did the Banking Sector help? The high Non Performing Assets of the banking sector impacted credit growth in two ways. (a) The higher, rather stricter provisioning norms impacted profits of the banking sector. (b) Bankers shifted from cautious lending to Non-lending to save their jobs. Risk taking which is the core of a lending exercise was given a go by. (c) There are definitely a shift credit to investments with most banks taking to “safe investments” resulting in low credit expansion. (d) The slow response of the bankers to the difficult times, creating sickness in many industries which otherwise could have been prevented.
  • 103. NARESH SUKHANI@gmail.com  Did the high borrowing to fund fiscal deficit induce sickness? The high revenue and fiscal deficits of the government did not help the situation either. The government extensive borrowing programme largely involves borrowing to finance deficits and interest payments. This results in “crowding out” the investments. Money earlier available to the Government to fund Development Financial Institution was going to meet revenue deficits. This fiscal profligacy does not help capital formulation. Stricter fiscal discipline has to be conformed if the government wants to at the forefront of the restructuring process. The resource building done by the government for decades has definitely shrunk and impacted the recessionary process. 3.4.4 Turnaround Strategies: The solution to these problems, however, lies within. Understanding the impact of the above phenomena is integral to any turnaround strategy. Any turnaround strategy or restructuring exercise (and I am using these terms in this paper interchangeably) involves Organizational Restructuring Portfolio Restructuring and Financial Restructuring 3.4.4.1 Organizational restructuring: The response from within companies have to redesign their operations for a variety of reasons. The text book prescription is to align company structure with strategy. This includes redrawing of divisional boundaries, flattening of hierarchic levels, spreading of spans of control, reducing product diversification revising compensation streamlining process and reforming governance. Some of the response will take years to achieve. The core of restructuring seems to be to hasteh decision making processes – without affecting quality. Employee compensation does play an important role in the turnaround strategy. It pays to unlock the entrepreneurial spirit of the employees by offering them stock options in exchange of performance. Results could be dramatic it the employees know that they could be pare owners of the company. The new emphasis on improved corporate governance is not misplaced. The rules of running the company at an apex level must lend itself to more transparent processes if lenders have to have confidence in the way the company rules itself. This would include broad basing the Board with independent directors, working Audit Committees, transparent compensation packages etc. 3.4.4.2. Portfolio Restructuring The second part of the turnaround strategy is the shedding of unrelated assets, identifying slow and non moving stocks shifting emphasis within the current assets portfolio and maybe even outsourcing production if it results in reduction of costs. The restructuring need not be one way. If it makes sense to acquire businesses, say, raw material production companies for efficient process, such acquisition should be considered. Is the era of diversification as a strategy as a strategy over? Diversification as a growth strategy was relevant in the permit raj. The diversified conglomerate is seen as a relic of the licence raj when strict MRTP controls
  • 104. NARESH SUKHANI@gmail.com forced corporates to venture into new areas in order to grow. The first four decades saw the rise of conglomerates like Century Textiles, JK Corp, Indian Rayon. But what was a panacea for growth became brimstone in the neck under the liberalized regime of the nineties. Lacking in focus and saddled with un- remunerative assets, the erstwhile giants were not equipped to combat the emergence of global sized competitors. Many a blue chip fell by the wayside in this decade. Recessionary pressures forced restructuring processes very often cutting down and hiving out businesses which were not relevant to the corporate growth strategy. The classic case of a diversified company unable to respond to the liberalization processes will be Voltas. The company was the manufacturer of Air Conditioners, refrigerators, Turnkey projects engineering services, washing machine, fruits drinks the list goes on. The strategy of diversification worked till the advent of liberalization. The lack of focus, limited accountability across dispersed facilities, high employee cost and high degree of inoperative assets required a surgical response. The core of the strategy of turnaround in Voltas seems to be:  To identify the businesses in which the company has in built strengths  To hive off non core businesses  To relocate excess labour due to the down sizing of operations.  To fund voluntary retirement schemes (VRS) to shift the excess labour These are obviously painful but he restructuring exercise is being geared to meet the changing market competition. Voltas, really has no choice. 3.2.5.3 Financial restructuring process: This involves a) Identifying value drivers in cash flows b) Developing cost consciousness c) Driving quality d) Understanding impact of information technologies on the business process e) Understanding tax structures and the direction tax structure would take f) Understanding capital needs for financial restructuring between debt and equity 3.4.5 Understanding Value as a turnaround strategy: Fundamental to financial restructuring, is understanding valuation of businesses. There are many techniques of valuation. But there is not superior method to understanding the cash flow of the business. In a scenario where there is widespread crosion in business more due to global forces rather than die to management failures it is important to understand Value and adjust capital structures and cost to the changed value. The early nineties witnessed a spate of Aqua Culture companies dotting the coast line. These companies were set up shifting production from the coast links of Thailand, South Korea and Malaysia. Without understanding the dynamics of this shifting, there was large scale investment in facilities. However, stricter environment conditions imposed on these units rendered the units un-viable. In fact many of them had to close down. What has been missed in this is the act that small farms continue to thrive well. Capital costs did not take into account the cost of degradation of land. Values were permanently affected by the global trends in protection of environment. The case in Granite is slightly different. The late eighties saw a spate of industries being set up to convent the raw blocks into finished stones. However the industry was over capitalized and poor management practices saw the death of the industry. Excess capacities were built up not related to the mining rights. Capital
  • 105. NARESH SUKHANI@gmail.com costs were justified on Institutional interest not on real values. The crash was bound to happen. The survivors are slowly building up markets a reduced capital costs. This would involve a) Understanding cash flows of the existing businesses b) Estimating future free cash flows in the changed scenario c) Shedding surplus assets and hiving off unrelated assets Lee Iacocca, when he took over Chrysler noticed that the company was bleeding cash made the remark that “there is no expenditure which cannot go down by 10%”. The significant development in the last five years on the performance of corporates has been in the area of cost control. Earlier, in an era of growth (during the period 1980-1992) acquisition of capital and growth in assets was driving corporates. However, this was done independent of costs of such acquisition and indifferent to whether the costs of capital matched the returns on assets. The slump in the stock market coupled with cost and time overruns in these project, resulted in increasing dependence for debt funds to complete projects and a consequent increase in interest costs. The changing demand patterns also left companies with huge inventories and excess capacities. Interest cost rose significantly. Sickness was natural in such a scenario with costs far outstripping revenues. The past three years has changed all that. Cost consciousness has pervaded every aspect of the organization. It is significant that the success of many turnaround stories in the country has centred around cost control. There should be no expense which cannot be questioned. The good old Zero based budgeting techniques should find a place in every turnaround strategy. Another major turnaround response is the time tested fire fighting exercise – better working capital management. Managing working capital irrespective of the industry has been the focus for most Indian companies. The lower credit expansion in the banking sector and also a study of the working capital rations indicate sharper working capital management practices. The belt tightening has happened across industries including cement, FMCG sector, industrial products and capital goods. Continuous re engineering of operations results in effective use of working capital over the years. This includes lowering raw material inventory holding levels. Hindustan Levers, Britannia Industries, Cadbury, Bata have all achieved almost negative working capital through right management of inventory and receivables. This needs some participation of large industries in the supply chain management of its vendors. Current technology permits banking systems to transfer funds instantly at costs which are lower than the interest costs due the delayed transit times. Customers must be enthused to use bang technologies for quicker transfer of funds. Identifying slow moving and non moving stores at the factory and shop floor and disposing them is a must. Some freight consolidation may help. It should be possible to save costs on freight if that local customers can be serviced locally by exchange of information between companies across various states. Standardization of products and quality orientation permits this. With states very soon achieving rationalization of sales tax structures, freight saving provides a tremendous opportunity in commodity products. There can be no better response to a difficult situation than to make the customer notice that ultimately you have a better product, and a product which one can product with consistency over a period of time. Quality is an attitude which most of the time costs little in material but more in behavioral costs. Every employee must be able to feel for the quality of work he is delivering to the organization. Quality does net also merely mean
  • 106. NARESH SUKHANI@gmail.com that of the product but also of the delivery system and relationship management of the customer. Documentation, service and quality of warranty will definitely influence the customer to stick to the product. Introduction of Total Quality management, ISO 9000 must be initiated even in small enterprises. The customer derives comfort if the system of the vendor is driven to quality. The IT sector and consequently e-Commerce will change the way of businesses are run in the next twenty years. The impact will be as significant as the use of the electricity and the motor car in the beginning of this millennium. Business will be totally transformed and no turn around strategy can be complete without understanding the impact of IT on the business processes. The benefits are well known. It is still worth recounting some obvious ones.  Larger amount of information and analysis of this information as available with the corporate for decision making processes.  Implementation of ERP related systems lends the organization to respond as a organic whole. This definitely makes the organization more efficient and definitely pays back the investment.  Wider interaction with customers, vendors, users of the corporate is possible  Internal decision making processes can be more efficient and effective  Top quality management time can be devoted to organisatinal responses and not merely to data validation. A debt restructuring process will usually include one or more of the following:  The deferment of payment of interest to be repaid over a period of time  The deferment of payment of principal to be repaid over a period of time  The lowering of interest rates to match available cash flow. This is done by reworking interest rates from the date of declaration of the unit as an NPA. This is unrelated to the value of the business but gives comfort to the banker in decision banking.  Waiver of penal interest and liquidated damages  The conversion of interest or principal dues into risk bearing equity/preference shares not a popular method, but an obvious one.  Settlement with trade creditors either at a reduced level of payment over a period of time-maybe even exchanges it with equity.  One Time Settlement of dues with the institutions and banks to result in reduction of debt burden of the company.  Issue of fresh equity to rationalize the debt equity structure and the funding capital requirements.  Issues of Sales tax, Excise Duty concessions which are usually granted through the BIFR. Any deferment of interest or principal payments is only a manner of readjusting debt and adjusting the repayment ability on future cash flows. It is not a solution to reduction of debt, which can happen through waivers. A particular mention must be made of One Time Settlement (OTS) of dues with the financial institutions and banks. As understood, this refers to the ability to settle the dues of the corporate at a discounted value to the outstanding. Usually these payments are made over a period of time between 3 – 36 months. The discount will enable write backs in the balance sheet which will strengthen the debt equity structure. The banks, though have to take a write of on their books but is makes sense to them to transfer risk to a new lender or a risk taker. The new lender may decide to support the unit based on the rationalization of the capital structure. Banks are increasingly resorting to OTS as a method of recovering bad loans. However, the system is still not geared to fund these OTS and there is still reluctance amongst the nationalized banks to fund the dues at a discounted values. The scene is steadily changing. This however still a difficult decision to take as the banker has to judge the amount of write off he is willing to take on his balance sheet. This needs a through understanding of the
  • 107. NARESH SUKHANI@gmail.com value of the business and a fair understanding of future cash flows. Most banker s may not be endowed with the knowledge of valuation or with the courage to understand erosion and admit a write off. For instance, a modern textile mil of 25000 spindles which would have cost Rs 40 crores to establish is now available at half the price within this country. The mills are competing with similar capacities established in South and South East Asia. These economies have experience a dramatic fall in exchange rates. The recession in the capital goods industry has also impacted the prices of machinery. This twin impact would mean that the capacities in these nations will become more competitive for exports. It is here that Trade Associations play an important role to sensitize the institutions and lenders to the altered rules of the game. The power of negotiating as a group is obviously must more and it is Important for the banker and institutions to distinguish between management failures and failure due to the changed economic situations. The former should be punished. The latter should have a response in restructuring. 3.4.6 Turnaround Management Process: 5-Step Process Below is Turnaround Central’s 5-step process to successfully get your business back on track. Assessment Phase (2 weeks) 1. Evaluate the firm’s condition and future viability, and develop next steps 2. Conduct the Alignment Meeting with the management and other stakeholders to present assessment results, discuss the action plan and determine who will lead the turnaround. Implementation Phase (6-18 months) 3. Create a detailed Business Plant based on the short-term and long-term considerations. 4. Stabilize the Business – Take immediate steps to increase liquidity, improve creditor relations, and reduce costs. 5. Restructure the business including recorganizing finance, executing the business plan, improving employee morale, empowering the management team, building consensus, and increasing communications throughout the company. In addition, accountabity and control processes are put into place including robust financial reporting. Balanced scorecards, budgets and monthly sales and expense reviews. If necessary identify strategic investors, tenders and buyers to recapitalize or sell the firm. Questions: 1. What is turnaround management? Give examples. 2. Explain the process of turnaround management. 3. Explain understanding value as a turnaround strategy 4. Write a note on portfolio restructuring
  • 108. NARESH SUKHANI@gmail.com LESSON 3.5 DIVERSIFICATION 3.5.1 Introduction In this corporate world, organizations strive very hard to reach top positions. The organizations tend to follow various type of strategies and get good results out of it. In the era of heavy competitions organization think in different ways and try to bring new innovative strategies. One among the strategies is the diversification strategy which is widely implemented by major companies. Diversification strategy offers high rewards if steps are taken for their proper implementation. In this section the various case studies of different companies are presented which shows how success has touched their doorsteps through diversification strategy. Diversification is a much-used and much-talked about set of strategies. These strategies involve all the dimensions of strategic alternatives. Diversification may involve internal or external, related or unrelated, horizontal or vertical, and active or passive dimensions – either singly or collectively. Essentially, diversification involves a substantial change in the business definition – singly or jointly – in terms of customer functions, customer groups, or alternative technologies of one or more of a firm’s businesses. 3.5.2 Different types of diversification strategies: 1) Concentric diversification When an organization takes up an activity in such a manner that is related to the existing business definition of one or more of a firm’s businesses, either in terms of customer groups, customer functions or alternative technologies, it is called concentric diversification. Concentric diversification may be of three types: 1. Marketing – related concentric diversification 2. Technology – related concentric diversification 3. Market and technology – related concentric diversification 2) Conglomerate diversification When an organization adopts a strategy which requires taking up of those activities which are unrelated to the existing business definiti of one or more of its businesses, either in terms of their respective customer groups, customer functions or alternative technologies, it is called conglomerate diversification. The idea whether diversification is an effective strategy has assumed significance in view of the fact that ideas of core competence and focus (what we call concentration here) have gained greater acceptability among companies, investors. Consultants and academicians in the developed countries, Diversifications, specially unrelated ones, seem to be out of favor. But there is a divergent and interesting view of which strategic could be better for companies in developing countries like India. The case study of various companies are given below: 1. The Essar Group: All the major business newspaper headlines in India on 21 July 1999, were screaming, “Essar creates history, defaults on FRN $250 million”. Essar group has defaulted on its loan repayment of $250 million of floating rate notes if international markets. It became the first Indian Company to default in International market raising fears in Indian corporate sector regarding future fund raising capabilities in the international market.
  • 109. NARESH SUKHANI@gmail.com For last one year, it had been frantically trying to avoid the unavoidable and in the process, rolling itself in many controversies. During 1998, steel consumers has accused Government of India in media of creating import barriers to favor and bail out Essar. This created a political controversy and caused embarrassment to the government. Essar became untouchable for government controlled financial institutions. The financial institutions which had major exposure in Essar, backed off and left Essar in the lurch when it came to disburse sanctioned land for the ongoing projects of Essar. It was not only a financially disastrous year for the group but its public image also suffered major setback. Ruia brothers, Shashi, 55 and Ravi, 50 who had stunned Indian corporate sector with their vision and daring entrepreneurship were today in a quagmire of their own making. While on diversification spree, entering one business after another, they were obviously not aware that very soon the group would become a case study at the management school. Today Essar group is considering various options to consolidate, sell companies that it had nurtured with heavy debt exposure in past few years. Its major companies are in core infrastructure areas with strict regulations, controls and major companies are in core infrastructure areas with strict regulations, controls and major government role and interventions. Essar is wondering what went wrong in its dreams and their executions. Was it safe, Pokharn nuclear tests in 1998, continuing recession in Indian and world market, stock market depressions in India or was it structured to doom. Group Profile Nand Kishore Ruia, a marwari businessmen settled in Madras in 1956, founded the Essar group. Essar started off by exporting iron ore. In 1956, it acquired a stevedoring contract for bringing iron from the mine heads and loading it onto sheds. Sahsi (ESS) and Ravi (AR) diversified from family business of trading and ventured into shipping in 1969. After shipping Essar moved into construction activity and then into the supply critical support services for the oil and gas sector. Their major breakthrough came in the form of a drilling contract awarded by ONGC. From these successful medium-sized business in marine and port constructions, oil-drilling, and shipping, Essar first took the opportunity provided by the gas pipeline to start a very successful sponge iron business. It has been the entrepreneurial sprit and opportunism that has been driving the group from a Rs. 150 core shipping company to a Rs. 4000 core conglomerate. The group was slowly adding one business after another until late eighties. In 1990’s Government of India started economic liberalization programme that promised growth and vision of catching up with the late industrializing economies of Southeast. Capital markets were opened up and reaising finances became much easier and it became a prime facilitator of rapid growth. The incredible rate of growth of Essar group during this period saw them in virtually all the core sectors. Ruia brothers had a resplendent vision of creating a huge empire and they exploited every opportunity that same their way and created many new avenues to realize their vision. Mr, Shashi Ruia engineered Essar’s conquests and they were well capitalized by his younger brother Ravi. Essar restructured itself in 1994 to include senior professional managers from leading public sector undertakings to manager their growing, diversified businesses. These professionals were given free had for running independent units. Mr. Sashi Ruia kept the group’s external environment & business development activities with himself. Ravi Ruia ws given charge of the operations & overseas businesses. The second generation also started making their way in family business. Today Prashant Ruia is the director-in-charge of Essar’s Power, Oil & Steel businesses along with communications and personnel. Anshuman Ruia looks after Shipping.
  • 110. NARESH SUKHANI@gmail.com Essar group entered in global business by commissioning a $90 million cold rolled steel plant, Essar Dhananjaya (ED), in Indonesia in 1994 of 150,000 tonnes capacity fed by HRC from Essar Gujarat Limited in a joining venture with the Garama group of Indonesia. ED was to import hot rolled coils from Essar Gujarat’s Steel plant in India. During that period Ruias had been working up on setting more such ventures in Bangladesh, Saudi Arabia or Pakistan. The focus for such expansions was to beat possible downturs in domestic demand. Essar also acquired a three-year-old textile mill Woventex Ltd. in Mauritius. Through this they wanted to move in Africa which they belieed would soon see and economic upsurge. On Essar new business strategy Sashi Ruia commented, “We will get into any new business that will make us more money”. Ravi Ruia commented on Essar’s global strategy in 1994, “We will get into any new business that will make us more money”. Ravi Ruia commented on Essar’s global strategy in 1994, “We are looking at impact of globalization on existing businesses in country. Next we are looking for opportunities opening up overseas. Not just those with synergies with our existing operations, but also those that have potential for us”. Commenting on new opportunities he said, “Today the canvas is wide open. We must have an open mind. We should have basic synergies with what we do, but we must not miss a major opportunity just because it does not fit in with our basic operations”. According to Prashant Ruia, Chairman of ESSMCO for reasons of fast acquisition by Essar shipping limited is “… buying ships has become easier now: it takes less time and the access to funds us easier”. This philosophy became their prime motivator for a rapid expansion and acquisition. Their strategy hinged on a simple premise – one project will nurture another project & co on. In mid 90’s the joke at the corporate headquarters of Essar group at Essar House, Mumbai used to be that which new company has the group opened today. Essar group wanted increase its assets to Rs. 31,300 crore, income to Rs.19,400 crore and gross profit to Rs.7,500 crore by the year 2001-02. In this process they went on an expansion spree even at high cost debt to reap benefits from the post liberalization growth in India. However the economy growth which they envisaged didn’t last long. Their steel project was delayed. It was plague and then floods in Sturat, Gujarat (their plant location) that took their tool on project. But major factors ere their planning and project management skills. They had changed the project plan and basic technology number of times. Because of this they could not exploit the price boom in steel sector and could not repay the loans to the financial institutions. When they came on stream with steel plant, Indian economy started cooling off, Southeast Asian crises happened, overcapacity in steel sector led to a global glut and price recession in steel, all working against their risky debt strategy. Today, it has assets worth Rs. 14,530 crore, income of Rs. 4,030 crore and gross profit of Rs. 1,150 crore. Essar is one of India’s leading business groups and has phenomenal presence in Steel, Shipping, Oil & Gas, Power Telecom and few financial services companies besides other small businesses. Steel accounts for 70.30 percent of the group’s turnover, while shipping accounts for 17.30 percent. The portfolio is rather diverse with very little synergy amongst them, except that all big companies core industries. Tamilnadu Mercantile Bank Essar group had mastered the art of diverting funds, and did not limit itself to the manufacturing or
  • 111. NARESH SUKHANI@gmail.com trading activities. They had a long association with Tamil Nadu and had been eyeing acquisition of Tamil Nadu Mercantile Bank, a Tuticorin-based leading bank. During 1994, Essar group acquired 71 percent stake controlling stake in TNMB, at a cost of Rs. 70 crore. TMB is bank run by Nadar community of Tamil Nadu. The Nadar’s held 80 percent of the bank’s Rs.1044.04 crore deposits. The takeover however entered into controversy when Nadar community protested against the transfer. There was an 18-months long tussle to gain control Law Board approved it. The Nadar community, which promoted the Bank, tried to ensure that the control of the bank did not pass out of its hands. The community floated the Nadar Mahajan Bank Share Investros Forum and tried to buy back Essar’s stake through its Share Retrieval Trust. The fight starting from RBI, CLB finally went o Supreme Court of India. Essar demanded Rs. 90 crore from Nadar community for buyback of shares in an out of court settlement. The Esar group by then had given up its hopes to acquire the Tamilnadu Mercantile Bank Ltd. (TNMB). Nadar community could not muster the much needed funds to buyback the shares. Essar then sold its stake for Rs. 130 crore to Mr. C Sivasankaran, and NRI businessman. The group achieved good returns on its investments of Rs. 70 crore made in TNMB to acquire majority stake two years ago. Besides all these companies Essar holding included two financaial companies and investments of $50 million in Afro-Asian Satellite Company. There are numerous companies and ventures where Essar holds equity shares and future participation strategy. Essar group is having a strong step in diversification strategy, it is sure to reach success. 2. Britannia Industries Repositioning of Britannia Industries looks at the issues relating ot Britannia’s repositioning and diversification exercise. Britannia kicked off its repositioning exercise in 1997 when it changed its logo and corporate slogan to transform itself from a bakery business to a food business. Subsequently as a part of its diversification plans it entered the dairy business. But, it has not got so much name in this field, and it is not able to compete with Amul. 3. Fairness Wars Fairness Wars focuses on the fierce competition among the major players in the fairness products segment of the personal care market. The case deals with HLL’s Fair & Lovely, Cavin Kare’s Fairever, and Godrej’s Fair Glow. The case also talks about how the fairness formula was not more restricted to creams, but was also extended to soaps and talcum powders. It has followed concentric diversification strategy and it is striving to achieve victory in the fairness wars. 4. Tanishq’s Success Tanishq’s Success Story talks about Tanishq’s initial failure, the recovery process and the eventual success. The branded jewelry line from Titan Industries was not very successful when it was first launched in 1995. The company followed a concentric diversification strategy which was a failure in the starting and then it has started to pick up. Amul: Spreading Wide through diversification The Gujarat Co-operative Milk Marketing Federation (GCMMF) is India’s largest food marketing body and is the apex body of milk co-operatives in Gujarate. Amul, promoted by GCMMF entered into the areas of ice creams, curd, panner, cheese and condensed milk in 1996, based n the recommendations of IMRB, which conducted a consumer survey to identify the products that customers wanted from Amul. In 1999, Amul launched its branded “yoghurt” and entered the instant coffee market in 2001 through a tie-up with Tata coffee. Many multinational food corporations backed by liberalization and economic reforms in the country, flooded the Indian market with a variety of food products, thereby forcing a change in the lifestyles and food
  • 112. NARESH SUKHANI@gmail.com tastes of the people in India. Amul took advantage of this by introducing its branded “pizzas” into the market, thereby diversifying its portfolio. In 2001, Amul launches pizzas in the Indian market in the Rs. 20-25 price range. This price was significantly lower than those of the Pizza Hut and Domino’s. The case study focuses on the entry of Amul into the fast food segment and provides an insight into Amul’s diversification strategy behind introducing the pizzas into the market. Boeing’s diversification strategy Since moving its corporate headquarters to Chicago in September, Boeing has weathered one difficulty after another. A downturn in the aviation industry took a turn for the worse with September’s terrorist attacks. The company announced its plans to lay off 30,000 commercial jet workers; the company’s 2001 delivery projection of 538 aircraft for Boeing Commercial Airplanes was reduced to 500 and 2002 could see deliveries in the low 400s. In mid-November, Boeing Co. CEO Phil Condit estimated it would take 28 to 42 months for airline traffic to recover from 9/11, a span in which Boeing should lose production of more than 1,000 airplanes. The hard luck didn’t end there, though. The company cut its 2002 sales forecast by $1 billion after the Pentagon awarded the largest military contract in history, $200 billion. Shriram Group is an organization with a strong corporate personality. A multi-locational, multi- dimensional Rs. 2.7 billion concern serving 2.7 million customers, Shriram today has acquired a significant national presence in the field of financial services, with a leadership position in many segments. Our Policy is to achieve service exclusivity; corporate identity and customer care quality through our vast Network Structure, Collection Centres and Network Management. We have also successfully diversified into transport and property development. It’s hard to imagine that we started off as a single operation in a single town. With a vibrant and young management team heading each activity, the group is always on the lookout for associations and opportunities, both internationally and in India. Despite all our enthusiasm of progress, however our management has never forgotten that they have a special responsibility towards the service provided. Voltas, a Tata group company, has embarked, upon an exercise to chare out a long-tern strategy for the various businesses in its fold. This has been christented as Project Eagle. Ishaat Hussain, chairman, Voltal said in a statement distributed at he 48th annual general meeting. “The title is apt; the panoramic and all encompassing field of vision of that sharp-eyed bird reflects the long range perspective, which we have also attempted. The exercise seeks to ascertain what could be the eventual future of each line of business in year to come. In all of these, the broad trend is to move towards being a ‘total solutions provider’. This role promises a better utilization of Voltas’ technological capabilities and its global alliances and agencies as well as better prospects of sustained relationships and interactions with our clientele, Hussain said. The company has decided to strengthen and establish its core businesses. Some businesses include electrical and mechanical business, central air conditioning and refrigeration, mining and construction equipment, textile machinery, cooling appliances among others. Over the past few years, the company has been divesting its interests in non-core subsidiaries, while certain subsidiaries such as Voltas International have been merged with the parent. Hussain said these measures have been taken to maximize the potential of our chosen businesses, to
  • 113. NARESH SUKHANI@gmail.com sharpen our edge and increase our competitiveness. The company had undertaken a financial restructuring which has bought down the debt-equity ration to 0.52 : 1. The company is targeting a turnover of over Rs. 1,000 crore in the current fiscal. The company’s electrical and mechanical projects and services is expanding its business by establishing marketing offices in Qatar, Singapore and Egypt. Also, with the company entering into a joint venture for participating in the queen mary II project, will provide an entry an entry into more such marine businesses in Europe. The company is also planning to bid for large infrastructure projects in India. The central air conditioning and refrigeration will pursue its growth strategy by offering total customized cooling solutions. The company is also planning to expand into mining services related to operations and maintenance contracts for mining equipment with large mining companies in coal and other minerals such as iron ore. Voltas corporate strategy includes manufacturing world-class products, whereby it can penetrate and new overseas regions for many of its diverse businesses. Especially in areas such as forklift trucks, room air conditioners, water coolers, pumps and water purification and sewage equipment. Questions: 1. Write a note on the types of diversification 2. “Diversification is the order of the day” – Discuss. 3. “Diversification is done for short term gains” – Evaluate the statement. 4. Explain how Voltas undertook diversification strategy.
  • 114. NARESH SUKHANI@gmail.com UNIT 4 LESSON 4.1 MERGERS & ACQUISITION STRATEGY 4.1.1 Introduction: The single larges impact globalization has made on our economy is on size. Gone are the days when it was possible to serve domestic markets with local sized capacities. Capacity creation in the country was also concentrated on serving domestic markets (this was not small). But the globalized export driven economies demanded size and efficiencies, which these capacities could not match. The disadvantages of serving markets in fragmented capacities created inefficiencies that were waiting to be corrected. Corporates must seriously look into developing size as a strategy. The cement industry has been a spate of mergers in the past one year. Pharmaceutical industry is in the business of consolidating. Textiles should not be far behind and only consolidation will make this industry strong in the wake of global competition. Banking Sector mergers have just begun. What does this mean for the small company? Can an SSI merge as efficiently as a large corporate? Isn’t this strategy irrelevant for the thousands of sick small companies? The difficulty in finding “associated” entities in the SSI sector is appreciated. Mergers impact performance in the many ways  Marketing becomes efficient with the company able to offer a wider range of products under one roof. Customers are benefited from not having to go to different producers for their needs.  Purchasing is definitely more efficient. Increase in size of purchases will imply more discounts and hence lesser costs.  Administrative and marketing expenses will come down on a per unit of cost basis.  Interest costs also will come down if the lenders view the growth as an efficient process giving more leverage to the borrower to bargain on interest rates.  Implementation of quality standards is easier across a wider range of production. Once again, the costs of implementing the demanding standards of quality especially in the wake of international competition are high. To survive in such an environment, it is important to be able to implement these standards  These are only some of the benefits of larger sizes 4.1.2 Dangers of M & A:  Control: The possible loss of control consequent to a merger process would be the single largest stumbling block in going ahead with this strategy. There are issues related to sentiment, family ownership, leadership status in the limited area of operations, control over resources and finally control over the decision making processes.  Competition: Mergers with the competitors as a strategy may also imply that suddenly one day we find discussing strategy with our biggest competitor. Confidential information of the control of which give status in the company may now have to share with competition whose interests is not clear.  Employment: Inherent in a merger process is downsizing employment. More often than not, there is wide scale retrenchment as there is a definite economy of labour achieved due to scale and duplication of effort. The moral hazard of instigating retrenchment is an issue.  Culture: More mergers come to naught on cultural differences. These would typically cover work styles, information flow patterns levels of transparency, differences in compensation packages etc. 4.1.3 Examples of M&A in India:
  • 115. NARESH SUKHANI@gmail.com Tata Teleservices and Hughes Tele.com have signed a memorandum of understanding (MoU) to merge their basic telephony operations in a deal valued at more than $1 billion. The Tat as will be the single largest shareholder in the merged entity that covers the Andhra Pradesh and Maharashtra circles with a subscriber base of over 160,000. The other equity partners in the venture will be Hughes, Networks, the Mittals of the Ispat group and Tlltel Corporation. The enterprise value has been arrived at on the basis of the two firms’ business earnings and total investments. The merger with Hughes Tele.com in aimed at enhancing the Tat as’ presence in the key Maharashtra and Mumbai circles. By merging their basic operations, the two plan to eliminate competition and save costs. HLL’ grew rapidly through its acquisitions of Lakme and Brooke Bond. In 1999 alone, $2.3 trillion worth or mergers and acquisitions were announced. 4.1.4 Growth based on M&A: At Kearney has recently looked at 24,000 companies across 53 countries in 24 different industries. These companies account for 98 per cent of the words market capitalization. And we looked at them over a 12- year period, from 1988-2000. We were asking the question: Are these companies creating shareholder value? We found that 44 per cent of them were under-performers, adding to neither their top line nor their shareholder wealth. Only one out of five companies was a value grower, adding to both their top line (by about 20 per cent) as well as the shareholder wealth (by about 22 per cent). In these companies, 60 per ent of the growth year-on- year was driven by internal growth. The balance growth came from M & As. Most companies fail to execute M&As. In fact, seen out of 10 companies emerge failures. They don’t create any shareholder value above the industry average. And we have studied companies for long periods, starting three months prior to acquisition and up to two years after, to judge success. The reason for failure is not lack of strategy. The fault lies with distinguish their vast majority from the minority of successes. Lack of speed in implementation is one. Similarly, successful mergers exhibit a number of characteristics or best practices – mostly around rigorous execution. In fact, for an M & A to succeed issues like size of the deal and the relative size of the acquiring company, mostly perceived to be the key, do not count. Nor are successes or failure industry-specific. For an M&A activity follows an ‘S’ curve that takes approximately 20 years, going from a stage of deconcentration on to accumulation and focus and then closing with alliances. M&A is at its peak in the accumulation state. The study AT Kearney did with 24,000 companies showed the top three players held about 30 percent market share in the first stage. This is the time when government deregulation and technical innovation may happen. The next stage shows a flurry of activity in M&A. Companies build scale, achieve core competence, build economies of scale and avoid hostile takeover. Following that is the focus stage where the top three players have up to 60 percent market share. Here too, there is ample M&A activity. However, companies not slow down, pick and choose carefully and strengthen their true core competence. In the final alliance stage, M&A drop down. The top three companies have 70 percent market share now. Mega mergers become unlikely as the government steps in or the anti-trust laws come in. In fact, AT Kearney will soon be releasing this study. The integration process has to be planned and executed carefully. For an a acquisition to be a success, the post-merger scenario requires that the acquiring company dose not behave like a conqueror. Where economies of scare are involved, layoffs are inevitable and they have to be handled as humanely as possible. On cross border acquisition extra care is required in the due diligence process with regard to tax laws, political stability, repatriation of dividends, company law, cultural fit, post merger management structure among other things. Cross border acquisitions like some done recently in India are used to gain entry into a market. 4.1.5. Size and M & A
  • 116. NARESH SUKHANI@gmail.com Size is said to lead a virtuous cycle, Larger projects, higher billing rates, greater value addition all help grow a company./ Foreign customers are also reported to have become scale-sensitive, preferring to work with big players. Size is thought to be a factor behind the relatively superior performance of frontline players vis-à-vis. Tier-II players in the IT services industry. Against this backdrop, Tier-II players have unveiled strategies to readdress the handicap. It is also being suggested that venture capital companies have also been forcing the management of Tier-II players to become bigger to survive. The traditional approach in addressing the issue of size has been to merge or acquire. A few Indian companies have done this route. In fact, in the heyday of 2000, when the larger software players were only talking about acquisitions, Tier-II players had already put through a few acquisitions. The acquisitions of companies operating abroad made by erstwhile BFL. Software, Trigyn Technologies, Silver line Technologies, DSQ Software, SSI and Aptech are some examples. However, the mergers, put through in 2000 and 2001, did little to enhance these companies’ prospects. The mergers may have even acted as a setback to their fortunes. Only for BFL Software the acquisition appears to have made sense. In its case, the merger with Emphasis may even have been godsend. Nevertheless, the cost paid for the acquisition has for long pegged back the stock’s valuation. The deal was valued at a price to sales multiple of around / times compared to acquisitions that are made now at a price to sales multiple of less than 2. In Silver line Technologies’ case, the acquisitions of companies only increased the head count with little to show in terms of increased sales growth. Similarly, for SSI, the highly-publicized acquisition did not bring in the expected benefits as the transfer of projects from onsite to offshore was slower than anticipated. The second wave of acquisitions activity in this segment evolved the merger of group companies operating from India. Aptech decoupled its software business from its training business and merged its with another service company from the same group – Hexaware. PSI Data systems, which was acquired by Indian Rayon of Birla group, was merged with Birla Technologies, a wholly-owned subsidiary of Greasim Industries, CMC’s acquisition by the Tata’s may set off a wave of re-organisaion within the Tata group after the listing of Tata Consultancy Services. A third wave involving mergers of unrelated. Tier-II players may happen. However, possibilities for that seem limited given the objectives of the various promoter groups that are apparently incompatible. However, over the medium- term, it may boil down to merging to survive. Another distinct possibility appears to be the acquisition of Tier-II players by overseas services companies. There is increasing demand for India-based services from end-customers abroad. The values proposition offered by India development centres is now well accepted. Against this backdrop, overseas services companies may be on the look out for acquiring Indian companies. Some among the Tier-II players are also adopting the route of alliances address the size handicap. Alliances cannot strictly be seen as an alternative to mergers and acquisitions. In fact, some companies such as Mastek are adopting two-pronged approach involving alliances and acquisitions. For the Indian companies, these alliances are in the nature of sub-contracting of work. Since the Indian companies lack the resources to address the customer directly, they have to work as a sub-contracting partner with larger player. Understandably, this kind of partnership has implications for the companies’ operating margins. In the normal course, the margins are unlikely to be high given that the volumes are guaranteed.
  • 117. NARESH SUKHANI@gmail.com Such combinations look set to be in vogue at least in the medium-term. How the combinations will evolve over the long-term remains clouded. These partnerships quickly develop trouble over the incompatible objectives of the two partners. Many such ventures have collapsed in the past and the future is unlikely to be any different. Now withstanding such risks, some have already adopted the alliances route. These include Mastek, Hex aware, Aztec, and Zensar. For example, Mastek has a joint venture with Deloitte Consulting aimed at offering India-based services to the elements of Deloitte Consulting. According to Aztec, it is also allying with a consulting firm. In Haxaware’s case, a partnership ahs been struck with Valtech with the setting up of offshore development centers that will service the customers of Valtech and its subsidiaries. For its part, Zensar has started a venture with Han Consulting of China to address the Chinese market. INDIA Cements, one of the prime players in the market for acquisitions has done a backtracking of sorts by pulling out of a company it acquired in 1999-2000. The sale of Sri Vishnu Cements by India Cements is driven mainly by the need to generate cash flows and but the company’s debt burden. The deal highlights the need for a beer flow of information to shareholders and would- be investors on the financial implications of acquisitions – big of small. In the last three-and-half years, India Cements has been one of the most aggressive buyers of cement units. A spate of deals – Raasi Cement, Sri Vishnu Cements and units of the Cement Corporation of India – added to its capacity and made it one of the five major layers with a capacity of around 10.5 million tones. But this came at a stiff price as the company took on a debt burden of Rs. 1,800 crore. Questions: 1. What re the circumstances under which M&A takes place? 2. What are the benefits of M&A? 3. What are the dangers of M&A?
  • 118. NARESH SUKHANI@gmail.com LESSON 4.2 AMALGAMATION STRATEGY 4.2.1 Introduction An amalgamation refers to the merger of two or existing companies into a single new company. It indicates either merger of one or more Companies with another Company or the merger of two or more Companies to form one company. According to section 2(1B) of the Income-tax Act, 1961 (hereinafter referred to as the Act), amalgamation in relation to companies means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that: 1. All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of amalgamation. 2. All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of amalgamation, 3. Shareholders holding not less than 3/4th in value of the shares in amalgamating company or companies (other than shares held therein immediately before the amalgamation or by a nominee for the amalgamated company or this subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of distribution of such property to the other company after the winding up of first mentioned company. 4.2.2 Tax Concession: If any amalgamation takes place within the meaning of section 2(1B) of the Act, the following tax concession shall be available. 1. Tax concession to amalgamating company 2. Tax concession to shareholders of the amalgamating company 3. Tax concession to amalgamated company (i) Tax Concession to Amalgamating company: Capital gains tax not attracted: According to section 47(vi) where there is a transfer of any capital asset in the scheme of amalgamation, by an amalgamating company to the amalgamated company, such transfer will not be regarded as a transfer for the purpose of capital gain provided the amalgamated company, to whom such assets have been transferred, is an Indian company. (ii) Tax concessions to the shareholders of an amalgamating company section 47(vii) : where as shareholder of an amalgamating company transfers his shares, in a scheme or amalgamation, such transaction will not be regards as a transfer for capital gain purposes, if following conditions are satisfied.  The transfer of shares is made in consideration of the allotments to him of any share or shares in the amalgamated company and  The amalgamated company is an Indian company. Cost of acquisition such shares of the amalgamated company are later on transferred. The cost of acquisition of such shares of the amalgamated company shall be the cost or acquisition of the shares in the amalgamating company. Further, for computing the period of holding of such shares, the period for which such share were held in the amalgamating company shall also be includes.
  • 119. NARESH SUKHANI@gmail.com (iii) Tax concessions to the amalgamated company: The amalgamated company shall be eligible for tax concession only if the following two condition are satisfied.  The amalgamation satisfies all the three conditions laid down in sections 2(1B) and  The amalgamation company is an Indian company If the above conditions are satisfied the amalgamated company shall be eligible for following tax concessions. (a) Expenditure on Scientific Research Section 35(5): Where an amalgamation company transfer any asset represented by capital expenditure on the scientific research to the amalgamated Indian company in a schedule of amalgamation, the provisions of section 35 which were applicable to the amalgamating company shall become applicable to the amalgamated company consequently.  Unabsorbed capital expenditure on scientific research of the amalgamating company will be allowed to be carried forward and set off in the hands of the amalgamated company.  If such asset ceases to be used in a previous year for scientific research related to the business of amalgamated company and is sold by the amalgamated company without having being used for other purposes, the sales prices, in the extent of the cost of the asset shall be treated as business income other amalgamated company. The excess of the sale price over the cost of the asset shall be subject to the provisions of the capital gains. (b) Expenditure on acquisition of patent rights or copy rights or copy rights Section 35A(6) : Where the patent or copyrights acquired by the amalgamating company is transferred to any amalgamated Indian company, the provisions of section 35A which were applicable to the amalgamating company shall become applicable in the same manner to the amalgamated company consequently.  The expenditure on patents copyrights not yet written off shall be allowed to the amalgamated company in the same number or balance installments.  Where such rights are later on sold by the amalgamated company, the treatment of the deficiency/surplus will be same as would have been in the case of the amalgamating company. However, if such expenditure is incurred by the amalgamating company after 31-3-1998, deduction under section 35A is not allowed, as such expenditure will be eligible for depreciation as intangible asset to this case, provisions of depreciation shall apply. (c) Expenditure of know-how Section 35AB(3): With effect from assessment year 2000-01, where there is a transfer of an undertaking under a scheme of amalgamation, the amalgamated company shall be entitled to claim deduction under section 36AB in respect of such undertaking to the same extent and in respect of he residual period as it would have bee allowable to the amalgamating company, had amalgamation not taken place. However, if such expenditure is incurred by the amalgamating company after 31-3-1998, deduction under section 35AB is not allowed, as such expenditure will be eligible for depreciation as intangible asset. In case provisions of depreciation shall apply. (d) Treatment of preliminary expenses Section 35D(5): Where an amalgamating company merges in a scheme of amalgamation with the amalgamated company, the amount of preliminary expenses of the amalgamating company, which are not yet written off, shall be allowed as deduction to the amalgamated company in the same matter as would have been allowed to the amalgamating company. (e) amortization of expenditure in case of amalgamating Section 35DD: Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes
  • 120. NARESH SUKHANI@gmail.com of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous year beginning with the previous year in which the amalgamation or demerger or takes place. (f) Treatment of capital expenditure on family planning Section 35(1))(ix): Where the asset representing the capital expenditure on family planning is transferred by the amalgamating company to the Indian amalgamated company, in a scheme of amalgamation, the provisions of section 36(a)(ix) to the amalgamating company shall become applicable in the same manner, the amalgamated company. Consequently  Such transfer shall not be regarded as transfer by the amalgamating company.  The capital expenditure on family planning not yet written off shall be allowable to the amalgamated company in the same number of balance installments.  Where such assets are sold by amalgamated company, the treatment of the deficiency/surplus will be same as would have been in the case of amalgamating company. (g) Treatment of bad debts Section 36(1)(vii): Where due to amalgamation, the debts of amalgamating company have been taken over by the amalgamated company and subsequently such debt or part of the debt becomes bad, such bad debt will be allowed a deduction to the amalgamated company. (h) Deduction available under section 801A to 801B: Where an undertaking which is entitled to deduction under section 801A/801B is transferred in the scheme of amalgamation before the expiry of the period of deduction under section 80-1A or 801B.  No-deduction under section 80-1A or 80-1B shall be available to the amalgamating company for the precious year in which amalgamation take place and  The provisions of section 80-1A or 80-1B shall apply to the amalgamated company in such manner in which they would have applied to the amalgamating company. (i) Carry forward and set off of business losses and unabsorbed depreciation of the amalgamating company: Under the new provision of Section 72A of the Act, the amalgamated company is entitled to carry forward the unabsorbed depreciation and brought forward loss of the amalgamating company provided the following conditions are fulfilled.  The amalgamation should be of a company owing an industrial undertaking or ship  The amalgamated company holds at least 3/4the of the book value of fixed assets of the amalgamating company for a continuous period of 5 years from the date of amalgamation.  The amalgamated company continuous the business of the amalgamating company or to ensure that the amalgamation is for genuine business purposes. It may be noted that in case of amalgamation, the amalgamated company gets a fresh lease of 8 years to carry forward and set off the brought forward loss and unabsorbed depreciation for the amalgamating company. 4.2.3. Areas of concern for Amalgamations: `The new Act allows two or more companies to be amalgamated. When this is done these companies become fused or consolidated as a single corporate entity. This fused entity is entitled to all of the properties, rights, benefits and assets fo all of the former companies. It is also subject to all of the liabilities and obligations of the former companies. These provisions are among the most practical and useful features of the new Act. Key features of amalgamation are that: it avoids the necessity and expense of transferring assets to a single entity; and pre-existing contracts remain in place and do not need to be assigned. Amalgamation in therefore a very desirable mechanism to effect the reconstruction of conglomerates or to create a union of companies for operational reasons. In some situations it can also facilitate effective tax planning.
  • 121. NARESH SUKHANI@gmail.com The first step in carrying out an amalgamation is to draw up an agreement incorporating the terms and means of effecting the amalgamation including the form of the proposed by-laws and means of effecting the amalgamation including the form of the proposed by-laws. It is desirable that the by-law of one of the amalgamation companies by adopted as the by-laws of the amalgamated entity. After the amalgamation agreement has been drawn up, it must be approved by the Boards of Directors of the amalgamating companies and must be submitted to the shareholders of each of the amalgamating companies for approval. If the shareholders approve of the amalgamation, then Articles of Amalgamation in the prescribed form must be filed with the Registry accompanied by a declaration of solvency; particulars of directors and the registered office. A holding company which seeks to amalgamate with one or more of its wholly-owned subsidiaries is not required to prepare and submit an amalgamation agreement for the approval of shareholders if:  The directors of each company approve the amalgamation; and  The resolutions of each Board provide that: o The shares of each amalgamating subsidiary will be cancelled without repayment of capital; o The articles of amalgamation will be the same as the articles of incorporation of the bolding company; and o No shares or debentures will be issued by the amalgamated company in connection with the amalgamation. A fairly similar short-form mechanism is available to enable two or more wholly-owned subsidiaries of a common parent body to amalgamate. A directors of officer of each amalgamating company is required to make a statutory declaration establishing to the satisfaction of the Register that:  Each amalgamating company is and the amalgamated company will be able to pay its liabilities as they become due;  The realizable value of the amalgamated company’s assets will not be less than the aggregate of its liabilities and stated capital of all classes; and  Either that no creditor will be prejudiced by the amalgamation or that adequate notice has been given to all known creditors and no creditor objects except on grounds that are frivolous or vexatious. 4.2.4 Procedural Aspects of amalgamation: Mergers and acquisitions have become a symbol of the new economic world. Almost every day one reads of a new merger or acquisition doing the rounds of the corporate circles. It also brings with it complex issues relating to laws and regulations impacting such M & A decisions. In today’s business scenario all companies are possible targets for acquisitions or mergers. As a result a knowledge of the laws relating to them is extremely useful. At the same time they are critical to the health of the businesses and thereby the shareholders. Hence this subject is assuring greater importance in today’s business world. The author has attempted to bring out the fundamental issues under the companies Act, 1956 and the implications under the Income tax Act, 1961. 4.2.5 Reasons for amalgamation: There is not one single reason for a amalgamation but a multitude of reasons, namely There is not one single reason for a amalgamation but a multitude of reasons, namely (i) Synergy in operating economies: When two or more undertakings combine their resources
  • 122. NARESH SUKHANI@gmail.com and efforts they may with combined efforts produce better resuls than two separate undertakings because of the savings in operating costs viz. Combined sales offices, staff, staff facilities, plant management etc. Synergy is also possible in areas of production, finance, technology etc. (ii) Taxation advantages: Mergers take place to have benefits of tax laws and company having accumulated losses may merge with profit earning company that will shield the income from taxation. Section 72A of the Income Tax Act provides this incentive. (iii) Other advantages:  Growth  Diversification  Production capacity reduction  Operating efficiencies  Procurement of supplies  Financial Strengths (because of larger size of merged assets) One significant cost disadvantage could be the implication of Stamp Duty which is applicable on transfer of assets from one owner to another. In some states the rate of duty is significant and hence may to some extent neutralize the cost advantages of savings in tax. One significant cost disadvantage could be the implication of Stamp Duty which is applicable on transfer of assets from one owner to another. In some states the rate of duty is significant and hence may to some extent neutralize the cost advantage of savings to tax. 4.2.6 Amalgamation Evolution in India: Compelled by the present economic scenario and market trends, corporate restructuring through mergers, amalgamations, takeovers and acquisitions, has emerged as the best form of survival and growth. The opening up of the Indian economy and the government’s decision to disinvest, has made corporate restructuring more relevant today. To the last few years, India has followed the worldwide trends in consolidation amongst companies through mergers and acquisitions. Companies are being taken over, units are being hives off, joint ventures tantamount to acquisition in the last few years must be more than the corresponding quantum in the four and a half decades post independence. Supreme Court of India in the landmark judgment of HLL-TOMCO merger has said that “in this era of hypercompetitive capitalism and technological change, industrialists have realized that mergers/acquisitions are perhaps the best route to reach a size comparable to global companies so as to effectively compete with them. The harsh reality of globalization has dawned that companies which cannot compete globally must sell out as an inevitable alternative:. 4.2.7 Example of Amalgamation: Broke bond India ltd. which did its operations separately in their business. Same like Lipton India Ltd. also in the market, they were in a same business holding major share in their market. Later due to heavy competition by many players they planned to joined together to strengthen their business. In the year 1994 they merger together and the new amalgamated company is called by Broke Bond Lipton India Ltd. Now they pay a vital role in their market. It shows positive results for amalgamation. And it helps in many aspects.
  • 123. NARESH SUKHANI@gmail.com Questions: 1. What are the requisites for amalgamation in India? 2. What are the legal constraints of amalgamation? 3. Identify the difficulties faced in amalgamation. 4. Bring out with some examples of amalgamation.
  • 124. NARESH SUKHANI@gmail.com LESSON 4.3 JOINT VENTURE STRATEGY 4.3.1 Introduction After World War II, many countries adopted the socialistic goal of state ownership of productive activities in their economies. This led to a confrontation between the multinationals and developing countries, particularly in extractive industries, and many expropriations. As a result, new contractual forms dealing with mineral-based participation with foreign firms. In case of the manufacturing sector multinationals felt that it was not necessary to have 100 cent ownership to exercise control. A joint venture is an enterprise which is jointly owned and managed by a local entrepreneur and a foreign entrepreneur. In some cases, there are more than two parties involved. For example, Pepsi’s Indian Joint Venture involves Voltas and Punjab Agro Industries Corporation. A joint venture may be brought about by: (i) Both the foreign and local entrepreneurs jointly setting up a new firm  Foreign firm buying an interest in a local firm  A local firm acquiring shares in an existing foreign firm. It is also a common practice to split the local share holding between a partner and various public participation (including public sector firm or industrial development organization). By them term joint venture what is generally referred to is the Indian Joint Venture Abroad. 4.3.2 Types of Joint Ventures: Joint Venture are common within industries and in various countries. But they are specially useful for entering international markets. From the point of view of Indian organization, the following types of joint ventures are possible.  Between two firms in one industry  Between two firms across different industries.  Between an Indian firm and a foreign company in India.  Between an Indian firm and a foreign company in that foreign country.  Between an Indian firm and a foreign company in a third country. 4.3.3 Indian joint Venture’s Abroad: At the beginning of 1977, there were 189 joint ventures with a total equity of Rs.209 crores in operation and 520 with total investment of Rs. 1917 crores under implementation. The largest numbers of the Indian joint ventures are in Asia, mostly in South-East Asia. Europe and America have a good number. There is also a significant number in Africa. The Indian joint ventures are mostly in engineering industries, construction, consultancy, shipping, trading, textiles, electrical and chemicals. The total benefit accrued to the country from the joint ventures till the end of 1991 was only Rs. 451.73 crores. This included dividend of Rs. 42.45 crores; other repatriations of Rs. 72.3 crores and Rs. 337.98 crores from additional investments. The new economic policy of India is expected to encourage foreign investment by Indian companies. The curbs on growth, even by mergers and acquisitions, have been removed, financing restrictions have been eased, areas of business opened to the private sector companies have been substantially enlarged and foreign tie up policies have been liberalized. Further, domestic market is becoming increasing competitive. All these factors should encourage the Indian companies to invest in other countries and take advantage of he economic liberalization in many foreign countries.
  • 125. NARESH SUKHANI@gmail.com Indications are that several Indian companies are drawing up plans for establishing subsidiaries or joint ventures abroad. The 1990s was a decade of real test for Indian companies in this respect. The following are the some joint venture companies in India. 1. L&T Info city Ltd., the Rs. 71 crores joint venture between L&T and Andhra Pradesh Industrial Infrastructure Corporation Ltd., (APIIC). 2. HDFC Standard Life Insurance Co., Ltd., the 74:26 joint Venture between HDFC Ltd. and Europe’s leading mutual life company, Standard Life Assurance Company. 3. Birla Sun Life Insurance Company Ltd. (BSLICL) is an joint venture between the Aditya group and the Canada based Sun Life Financial. 4. Lusas-TVS is a joint venture between TVS and sons, India and Lucas plc. UK. 5. Commins Engine Company and Tata Engineering and Locomotive Company formed a joint venture to manufacture Talco engines 6. Tata Industrial and Bell Canada, Ashok Leyland and Singapore Telecom are some of the joint venture companies. 4.3.4 Advantage Strategic advantages are important for joint ventures to be set up and sustained. The important reasons or advantages of joint venture are the following: 1. In countries where fully foreign owner firms are not allowed or favored joint venture is the alternative if the international marketer is interested in establishing an enterprise in the foreign market. Many foreign companies entered the communist, socialist and other developing countries by joint venturing. 2. One important advantage of joint venturing is that it permits a firm with limited resources to enter more foreign markets than might be possible under a policy of forming wholly owner subsidiaries. 3. In some cases, it is also possible to swap know-how (such as patent rights for equity) in forming joint venture as a means of securing ownership in foreign operations. 4. Partnership with local firms has certain specific advantages. The local partner would be in a better position to deals with the government and the publics. Further, there would not be much public hostility when there is a local partner; it would be much less when there is equity holding by the government sector and the public.  Other benefits are o Minimizing risk o Reducing an individual company’s investment o Having access to foreign technology o Broad-based equity participation o Access to governmental and political support o Higher profitability o Opprotunities for regular technology up gradation o Entering new fields of business and synergistic Advantages. A right local partner for a joint venture can have major impact on firm’s competitiveness because such a partner can serve as a cultural bridge between the company and the market. 4.3.5 Disadvantages:
  • 126. NARESH SUKHANI@gmail.com 1. India was not able to make much progress in investing abroad due to various reasons like government control, lack of competition in the domestic market etc. 2. There is no goal convergence between the shareholders of the Indian companies. 3. MRTP and IRDA are some acts restrict the foreign companies to enter into joint venture strategy. So, foreign companies not like to enter joint venture in India. 4. Example, IRDA guidelines specify a maximum stake of 26 percent for the foreign joint venture partners. 5. Some companies after creating the joint venture, they felt individual benefit. So they want to call off venture. 6. Example Prolease, a process solutions provider in the US, entered into a tie-up with KGISL in October 2001 to cover the entire gamut of IT service including software development, testing, systems integration, application development and R&D service. But Porlease had not invested any sum in KGISL, so for, and with the partners deciding to call off the venture, Prolease’s investment decision would not hold good any more. 7. Other disadvantages are, i. Problems in equity participation ii. Foreign exchange regulations iii. Lack of proper coordination among participating firms iv. Cultural and behavioral differences 4.3.6 Motivation for Joint Venture Formation: There are basically three perspective to explain the motivations for forming joint ventures:  Transaction costs  Strategic behaviour, and  Organizational learning Transactions costs theory views joint ventures as an efficient method to reduce both transactions costs and the hazards of economic transaction. In the strategic behaviour, joint ventures represent a form of defensive investment by which firms hedge against uncertainty, deter entry through preemptive patenting, and enhance competitive power in the context of competitive rivals and collusive agreement. In the organizational learning view point, a joint venture is used to transfer organizationally embedded knowledge that cannot easily be blueprinted or packed through licensing or market transactions. Joint ventures are used as a vehicle to exchange an imitate knowledge, though controlling and delimiting the process of exchange to limit the dissipation of firm-specific advantages can itself be a cause of instability.
  • 127. NARESH SUKHANI@gmail.com LESSON 4.4 ORGANISATIONAL STRUCTURE AND CORPORATE DEVELOPMENT 4.4.1 Introduction: Corporate culture refers to a company’s values, benefits, business principles, traditions, ways of operating, and internal works environment. An organization’s culture is bred from a complex combination of sociological forces operating within its boundaries. An organization’s culture is either an important contributor or an obstacle to successful strategy execution. Strong cultures promote good strategy execution when there’s fir and hurt execution when there’s little fit. A deeply rooted culture well matched to strategy is a powerful lever for successful strategy execution. In a strong-culture company, values and behavioral norms are like crabgrass: deeply rooted and difficult to weed out. A strong culture is a valuable asset when it matches strategy and a dreaded liability when it doesn’t. Adaptive cultures are a valuable competitive asset-sometimes a necessity-in fast-changing environments. Today’s dot-com companies are classic examples of adaptive cultures. Once a culture is established, it is difficult to change. A wards ceremonies, role models, and symbols are a fundamental part of culture-shaping and reshaping efforts. An ethical corporate culture has a positive impact on a company’s long-term strategic success; an unethical culture can undermine, it. Values and ethical standards must not only be explicitly stated but must also be ingrained into the corporate culture. A results-oriented culture that inspires people to do their best is conducive to superior strategy execution. MBWA is one of the techniques effective leaders use to stay informed on how well strategy implementation and execution are proceeding. It’s a task that can’t be delegated to others. What organizational leaders say and do plants the seeds of cultural change. Only top management has the power and organizational influence to bring about major change in a company’s culture. The faster a company’s business environment changes, the more attention managers must pay to keeping the organization innovative and responsive. Identifying and empowering champions helps promote an environment of innovation and experimentation. It’s a constant organization-building challenge to broaden, deepen, or modify organization capabilities and resource strengths in response to ongoing customer-market changes. High ethical standards cannot be enforced without the open and unequivocal commitment of the chief executive. Managers are an organization’s ethics teachers-what they do and say sends signals and what they don’t do and don’t say sends signals. Corrective adjustments in the company’s approach to executing strategy are normal and have to be made as needed. 4.4.2 Developing corporate culture: Building a strategy-supportive corporate culture is important to successful strategy execution because it produces a work climate and organizational esprit de corps that thrive on meeting performance targets and being part of a winning effort. An organization’s culture emerges from why and how it does things the way it does, the values and beliefs that senior managers espouse, the ethical standards expected of organization members, the tone and philosophy underlying key policies, and the traditions the organization maintains. Culture thus concerns the atmosphere and feeling a company has and the style in which it gets things done. Very often, the elements of company culture originate with a founder or other early influential leaders who articulate the values, beliefs, and principles to which the company should adhere, and that then get incorporated into company policies, a creed of values statement, strategies, and operating practices. Over time, these values and practices become shared by company employees and managers. Cultures are perpetuated as new leaders act to reinforce them, as new employees are encouraged to adopt and follow them, as stories of people and events illustrating core values and practices are told and retold, and organization members are honored and rewarded for displaying cultural norms. Company cultures vary widely in strengths and in makeup. Some cultures are strongly embedded, while others are weak and fragmented. Some cultures are unhealthy; these are often dominated by self-serving politics, resistance to change, and inward focus. Such cultural taints are often precursors to declining company performance. In fast-changing business environments, adaptive cultures are best because people tend to accept
  • 128. NARESH SUKHANI@gmail.com and support company efforts to adapt to environmental change; the work climate in adaptive-culture companies is receptive to new ideas, experimentation, innovation, new strategies, and new operating practices provided such change are compatible with core values and beliefs. One significant defining trait of adaptive cultures is that top management genuinely cares about the well-being off all key constituencies-customers, employees, stockholders, major suppliers, and the communities where it operates-and tries to satisfy all their legitimate interests simultaneously. The philosophy, goals, and practices implicit or explicit in a new strategy may or may not be compatible with a firm’s culture. A close strategy-culture alignment promotes implementation and good execution; a mismatch poses real obstacles. Changing a company’s culture, especially a strong one with traits that don’t fit a new strategy’s requirements, is one of the toughest management challenges. Changing a culture requires competent leadership at the top. It requires symbolic actions and substantive actions that unmistakably indicate serious commitment on the part of top management. The stronger the fit between culture and strategy, the less managers have to depend on policies, rules, procedures, and supervision to enforce what people should and should not do rather, cultural norms are so well observed that they automatically guide behavior. Because each instance of executing strategy occurs under different organizational circumstances, a strategy implementer’s actions agenda always need to be situation-specific-there’s no neat generic procedure to follow. And, as we said at the beginning, executing strategy is an action-oriented, make-the-right-things-happen task that challenges a manager’s ability to lead and direct organizational change, create or reinvent business processes, manage and motivate people, and achieve performance targets. Healthy corporate culture are also grounded in ethical business principles, moral values, and socially responsible decision making. Such standards connote integrity, “doing the right thing,” and genuine concern for stakeholders and for how the company does business. To be effective, corporate ethics and values programs have to become a way of life through training, strict compliance and enforcement procedures, and reiterated management endorsements. Moreover, top managers must practice what they preach, serving as role models for ethical behavior, values-driven decision making, and a social conscience. Successful managers do a number of things to exercise stratregy-executing leadership. They keep a finger on the organization’s pulse by spending considerable time outside their offices, listening and talking to organization members, coaching, cheerleading, and picking up important information. They take pains to reinforce the corporate culture through the things they say and do. They encourage people to be creative and innovative in order to keep the organization responsive to changing conditions. Alert to new opportunities and anxious to pursue fresh initiatives. They support champions of new approaches or ideas who are willing to stick their necks out and try something innovative. They work hard at building consensus on how to proceed, what to change, and what not to change. They enforce high ethical standards and insist on socially responsible corporate decision making. And they actively push corrective actions to improve strategy execution and overall strategic performance. 4.4.3 Adapting to changing environment: The major focus of corporate strategy is to present a method by which any business can adapt to a changing envoronemnt. The focus of corporate strategy is to enable a business to improve it’s competitive advantage. Corporate strategy theory presents us with the following questions:  Where are we now?  Where do we want to be?  How do we get there? Corporate Self Analysis
  • 129. NARESH SUKHANI@gmail.com Corporate self analysis is about answering the first question, where are we now? The logic is to examine the current status of the business. Areas to look at within corporate self analysis include:  Is the business aware of who it’s stakeholders are?  Does your business have a mission statement?  What are the long term objectives of your business?  What are your current business strategies? – Are they simple to understand and communicate to the workforce?, or Are they difficult to understand and communicate?  What is the state of the marketplace? – Is it in growth/decline?, Who are your biggest competitors?  Review your business internally, look at your business – Does it support growth and adaptability to change? How effective are your production processes? How well do Sales/Personnel/Marketing/Finance perform?  How well does the business control its internal reasons? Formulating Strategy When devising any business strategy, you need to consider:  The reasoning behind the strategy, what are your objectives? – Achieve x amount of growth/cost reduction?  What are all your options? – does it have to be done in a certain manner?  Examine all options, when strategy is going to the most feasible in terms of acceptance? When evaluating the different strategic direction a business can take there are several routes a business can explore:  DO NOTHING – In this scenario, the business does little in terms of reaching to changes in the marketplace.  DEVELOPMENT – Spend vast amounts of money on research, the developing new product ranges.  INTEGRATION – Integrate in a backward manner by going back and buying up your business suppliers to achieve growth by getting lower priced raw materials. Integrate in a forward manner by buying your product distributors, sell your product direct to the consumers, thereby generating increased profits. Integrate in a horizontal manner, by buying your competitors to gain increased market shares.  STRATEGIC ALLIANCES- join forces with one of your competitors to develop a stronger position in your marketplace.  NEW MARKETS- the business decides to embark on positioning itself into new markets. The overriding logic of formulating strategy is – that any strategy must be in line with business objectives, ensuring stakeholders needs are maintained and that needs of the surrounding environment are adhered to. After developing several potential strategies, the next step in the process is to look at the different strategies to see which one the most suitable:  What is the cost of each potential strategy likely to be?  Does the business have the correct current machining capabilities(if applicable?) In terms of evaluating any potential strategy, two key elements need to be observed, the first in the financial viability of the strategy, how soon will the costs be recouped?, and will the benefits to the business be long-term?. The second element must be the effect of a strategy on the current facilities and resources, does the
  • 130. NARESH SUKHANI@gmail.com business require additional employees to both implement the strategy and maintain it? Implementing Strategy There is no clear cut advice that can be given on how to implement a strategy. The only advice we can give is to keep it simple, clear, precise. But above all make sure everyone understands what is expected of them. Studies of how to implement a strategy by Nutt showed that the success rate for strategies was greater when the strategic managers sent more time looking at how implementation issues, as opposed to merely forcing a strategy, questions raised by Nutt on implementing a strategy include:  Does implementation exceed the manager’s authority to set?  Does a technically sound plan exist?  Can the manager shape the plan so it falls under his/her control?  Does the plan deal with a recurring problem?  Can plan acceptance be negotiated with the affected parties?  Should consultants be used?  Do time constraints exist? When looking at the implementing strategy it is advisable that you keep the aim and text of the strategy as simple as possible. From the outline of the strategy, the next step is to define the processes and tasks which are needed to implement the strategy. From identifying the tasks for implementation the next phase will be identify who will be responsible to carry out the implementation stages, and finally to ensure the review of the strategy: 1. Break the aim of the strategy into clear implementation tasks 2. Decide who will be responsible for implementing the strategy 3. Ensure regular review and adjustments to the targets set within the strategy as and when necessary. If a business is to remain competitive in an ever changing environment, then strategic reviews need to take place from the management of the business to assess the business in relation to it’s environments, accordingly adjusting the strategic focus of the business. Questions: 1. What are the requirements of joint venture? 2. Under what circumstances joint venture in useful? 3. Mention the difficulties faced by joint nature players in India. 4. Give some examples of joint venture in India under different categories.
  • 131. NARESH SUKHANI@gmail.com LESSON 4.5 LINE AND STAFF FUNCTIONS 4.5.1 Introduction: Business enterprise at their inception are primarily economic entities but as they grow the emphasis shifts towards a more social character. Its actions are to be justifiable in terms of spirit in which society allows it to function. Organizations are also cradled of power games and political behavior hence cannot be totally divorce from political governance. Unless the political culture of organization changes, responsible corporate governance will come about. Corporate governance is not blind adherence to externally imposed norms and codes only but a commitment to the spirit of internally developed management ethos. Management is not a mere discipline but a culture with its own values, beliefs, tools. In today’s complex environment a manager can hardly thrive on native brilliance and intuitive understanding of the situation he confronts. Management is interdisciplinary by nature: an engineer manager knowing only engineering is not enough; he has to have understanding of the social, political, legal and economic environment within which he has to operate. He is also required to know behavioral science, information technology, the way finances is managed, the way the structures and systems operate within the firm, the strategic implication of his actions and inactions and so on and so forth. To groom managers to be fit to survive is necessary. The impact of technology is actually more difficult to predict than most other factors. Economic and social prophets have the dismal record ad predicators to technology and its impact. Therefore, once the technology become effective careful monitoring of the actual impact (both beneficial and detrimental) is essential. Monitoring is a managerial responsibility and requires to be exercised. 4.5.2. Developments in Line-Staff functions: 1. To be multi-functional 2. To be multi-disciplinary 3. To be multi-sector think-tank 4. To be disperse rapidly new knowledge 5. To be disperse rapidly new capabilities 6. To have distilled knowledge reservoir about place and people To the coming age of the new technology worker, work cannot be organized if planning is divorce form doing. The more planning a worker does and the more responsibilities he takes for what he does, the more productive be can be. A worker who does only as instructed can do only harm. One needs a management structure which magnifies and indeed respects the roots of a person and yet a true team with diversities is made. Binding between employer and worker can be achieved either through life-time employment (as in Japan) or through partnership in time of profit and loss. Predictability of behavior and action is required Rules and laws help make behavior predictable but total adherence is not a good way to assure success. Framing of rules must include organizational culture. Redundancy may be in the skills of workmen and also in the total learning available with managers. If redundancy is present the CEO is to leave his cocoon of “Deciding & Directing” to “Managing Organizational Learning”. Top team must examine and improve its own ability to learn. People today don’t want to be “used” by the organization as “Victims” or “Pawn”. Rather they want. “Melting pot’ assimilation of culture is out; “Salad bowl”, concept is in. Culturally diverse workers want to be “themselves” and retain their cultural identities, they resist conforming to the “one size fits all” organizational culture. Empowerment involves trust and demands true leadership. Effective delegation no longer means delegation only but release of authority as well as giving of responsibility. Hierarchies are replaced by self-managing structures like networks multidisciplinary teams etc., if not done to do it in order to match with development. The time has come to choose between capacity and transparency. Opacity
  • 132. NARESH SUKHANI@gmail.com means a plethora of complex rules, compartmentalization, and information limited to very few. Transparency means established simple norms, massive flow of information across the interfaces. Transparency returns good dividends. Broadly speaking, the overall profile of the business scenario is as follows: 1. In family enterprise top post in inherited 2. In private sector, it is centralized control and closed system based on divide-&-rule policy. 3. In public sector top heavy administration; limited tenure of chief executives and a multilevel and slow decision making process. 4. In multinationals a highly specialized management; stiff competition, deadline and frequent mergers, trimming off staff etc. 4.5.3 Strategic for different levels: Core Level 1. Be proactive instead of reactive 2. Integral Management approach contrary to fire fighting 3. To grow core areas. Structural Level 1. De-staffing, staffing and re-staffing wherever required only for business strategy point of view. 2. Matrix of Responsibility, Authority and Accountablity 3. Team of self-propelled managers (not those ‘look busy’, ‘pensioner’, type) 4. Scientific Monitoring Implementation Level 1. To change mind-set 2. Awareness of objective and compare data at all levels 3. Clarity of customers, what they want for others 4. Ensuring shop-flow employees capable of implementing top decision Questions: 1. What re the developments in line and stag functions? 2. What are the various levels at which functions are decided?
  • 133. NARESH SUKHANI@gmail.com LESSON 4.6 MANAGEMENT OF CHANGE 4.6.1 Introduction: Change is the Law of Nature. It is necessary way of life in most organization for their survival and growth through there many may be some discontentment, during the early days of the change, persons learn to meet the change and adopt themselves to the changing situation here resistance to change would be short – term phenomenon. Man has to mould himself continuously to meet new demand and face new situations. Despite the fact that change is persistent phenomenon, it is a common experience that people resist change, whether in the context of their pattern of life or in the context of their work situation in an organization. Change could be both reactive and proactive. A Proactive change has necessarily to be planned to attempt to prepare for anticipated future challenges. A reactive change may be an automatic response or a planned response to change taking place in the environment conditions change in Managerial personnel. Deficiency in existing organizational pattern, Technological and Psychological reasons, Government policy, size of the organization. Types of Change Changes can be broadly divided into  Work change  Organisational change Work change includes change in Machinery, working hours, Method of work, job enlargement and enrichment, job redesign or re-engineering. Change may working hours and shift change. a. Radical change b. Fundamental change c. Factors to be considered for the change management are: i. Triggers for change ii. Type of change needed iii. Extent of resistance encountered iv. Extent of Urgency created v. Reasons for choice of change strategies vi. Reason for resistance vii. Factors which helped most in over coming resistance viii. Factors given most consideration during change ix. Methods used most to activate people x. Methods used most to support people during change xi. Most important implementation actions taken. While a research was undertaken to get additional information apart from the closed ended responses in the questionnaires, it revealed the following: Triggers for Change Triggers Number of respondents Opting Increased competition 4 Financial Loss None
  • 134. NARESH SUKHANI@gmail.com Drop in profit None An opportunity (or) Event foreseen 1 Improper utilization of staff None Additional Information Other triggers were, RBI guidelines (for banking organizations) Over size. Inferences We find that the most important, trigger as perceived by majority of the respondents is, Increased competition Type of Change Needed. Triggers types of Change Major Modification Minor Modification Immediate Change Minor Transformation Major Transformation No. of Respondents - 3 2 - - Additional Information The others type of change needed was, Structural change Inference Most of the respondents have preferred a ‘minor modification’ followed by an ‘immediate change’. Amount of resistance Encountered Extent of Resistance Number of Respondents Preferring High 1 Low 2 Medium 2 Inference Most of the respondents have encountered either medium (or) moderate resistance, or low resistance. In fact one among the respondents, did not encounter nay resistance, as the change was needed. Amount of Urgency Extent of Urgency High Low No. of respondents 3 2 Inferences 3 of the respondent have perceived that the change in their organization was very urgently needed.
  • 135. NARESH SUKHANI@gmail.com Majority have taken the changes in their organization to be very urgent. Reasons for choosing a specific change strategy Reasons Employees Participation Employee Motivation Confident ability Cultural Fit Post change motivation No. of Respondents - 2 1 - 1 Additional Information For educational institutions it was necessary to provide a strong base to students for a best career. Inferences 2 unit of the 5 respondents have considered ‘employee motivation’, while 1 respondents each have considered ‘confidentiality’ and ‘Post change motivational’. One among the 5 respondents did not give his opinion in this aspect. Reasons for Resistance Reasons Fear of change Personal compact Resentment of change Lack of faith Emotional hang-up No. of respondents 2 - 1 - 1 Inferences Majority have considered ‘fear of change’ as a main reason for resistances, followed by ‘resentment of change’ and ‘emotional hang up’. Factors which helped to overcome resistance Factor Employee Participation Communication Training Motivation Education No. of Respondents 1 3 2 3 1 Additional Information The trade unions decision to uphold the organization premier position. Inferences Majority of respondents consider ‘motivating employees’ and ‘Communication of change philosophy’ to be more important, followed by ‘Training’, ‘Education’ and ‘Employee participation’. Factor Most considered in change Factor Reward System Organization culture Organisation Structure People in the Organisation Intended Result
  • 136. NARESH SUKHANI@gmail.com No. of Respondents Choosing the factor 1 1 2 1 2 Inference The major factors considered by most of the respondents are ‘organisation structure’ and ‘intended result’ followed by ‘reward system’, culture of the organization and ‘people in the organization. Method used most to activate people Method Training Public relations Personal contact Workshop and conference Communicating with employees No. of Respondents 3 - 3 2 1 Inferences Most of the respondents have used ‘Training’ and ‘Personal contact’ mainly to activate people. This is followed by ‘workshop & conferences’ and ‘Communicating with Employees’. Additional Information One of the respondents opined that the employee must be made to realize that he can assist the organization realize it position it’s a premier. Most used support method Support Method Expression Confidence Providing Coaching Empowering Key people Having Empathy Using Rewards No of respondents 3 2 1 2 1 Additional Information The frictionless assignment of work would prevent egoism among employees. Inferences The most used support method as per the majority of ‘respondents’ opinion is ‘expressing confidence working with employee’, which is followed by ‘providing coaching’, ‘having empathy with people’, ‘empowering key people’ and ‘using rewards’. Most Important Implementation Action Action Project Management Short term Plans Budgets Strategies to Implement vision Monitoring change Controlling changes No. of Respondents - 2 2 2 2 Additional Information
  • 137. NARESH SUKHANI@gmail.com Devising new systematic procedure through R & D. Procedures to improve customer service through computerization Plans to achieve set goals are to be implemented slowly and steadily. Inferences There is a equal consideration given for the action, “Project Ma” Short Term Plans & Budgeting”, “Strategies to implement vision”, “Monitoring change” and “Controlling change”. Findings Normally, it is thought that all changes will have to encounter a resistance. But in certain situations similar to the one as described by one of the respondents, there was no resistance to the change process. In fact, the change was expected by the organization. The changes needed in response to increases competition, are to be very urgently done, Fear of Change’ as normally perceived is the major cause for resistance. ‘Employee Motivation’ and ‘Effective Communication of ideas of change’ are more important to overcome resistance. ‘Organistion Structure’ and ‘Intended Result’ are the most important factors considered while brining about the change. ‘Training’ and ‘ Personal contact’ are most used to activate people. ‘Expressing Confidence with employees’ is the most used support activity Budgets, short terms plans, Strategies, Monitoring and controlling change process are considered equally in importance. The trade unions, employees should be convinced of vitality of their role in the organization prosperity. 4.6.2 Phases and level of organizational change: Stages of Organisational Change: Denying Dodging Doing Sustaining 1 2 3 4 First Stage : Denying : Theme – This does not affect India
  • 138. NARESH SUKHANI@gmail.com It starts with a presentation of he date supporting a change into an organization. It centres on processing information its value, relevance or timeliness. The change agent may be any where in the organization and will meet the denial from above and below: Second Stage :Dodging: Theme – Ignore this. Don’t get involved It begins when the accumulated evidence shows that the change process is likely to take place. It is agreed that a small amount of change is needed, but what is questioned is whether it is critical to change or not. As the change is coming from outside, dodging is the equivalent of organizational anger. This anger is expressed in a passive – aggressive non-participation. A sub-ordinate can confuse the issue by pretenting the weakness of the approach to the change. Another method to subvert is to change the form, if the discussion is on work – flow change, change it to personnel. If it is on personnel, change it to bulk capital budget funding or to the expense budget. In fact, quiet behaviour, sometimes indicating agreement, is read at this phase as disagreement and insubordination. The need for the team to adapt the process and approach is essential in this stage to make in their own. Third Stage : Doing : Theme – This is very important. We have got to do it now. This stage occurs quickly and sometimes startles the observes in its contrast. It is earmarked by energy used in going for the change. As the specific change is worked on, things are uncovered that require change. Minor moves, such as budgeting, restructuring, hiring, emerge. For the manager, the general tendency is to let the momentum take over. The difficult part of gaining consent and involvement is over to sit back and let it happen This is dangerous for two reasons. a) If the team labour is not divided well between teams and individuals this can were the relationships and destroy the whole change process. b) The dangers of overloading the change process with trying too may things. At this stage the focus phones from ‘change generators’ to the ‘change implementers’. There needs to be bargaining as to what can or cannot be put into the change. There are two outcomes to the issues of this stage (i) One is death, where the whole thing collapses under its own weight. (ii) The other is a focusing of energy. What required is an accurate drawing of the force fields of the change to that the critical elements in the change are pinpointed and appropriate goals are set.
  • 139. NARESH SUKHANI@gmail.com Fourth Stage : Sustaining : Theme – We have a way of proceeding This stage is less well defined but is a key stage of any change but is a key stage of any change process. It is the focusing of energy to follow through an programmes and projects. This is the refreezing stage and the ‘change adopters’ come into prominence. The successful come completion of this stage is the integration of the change into the habitual patterns of behaviour and structure. Questions: 1. What is resistance to change? 2. Why change management is important in the present context? 3. What are the difficulties in management if change? 4. What is the process of management of change?
  • 140. NARESH SUKHANI@gmail.com UNIT 5 LESSON 5.1 IMPLEMENTATION OF STRATEGY 5.1.1 Introduction: The Strategy will be implemented through the concerted actions of all staff working within a partnership framework. The Board will set objectives and parameters, for the implementation of the strategy, and will review progress in achieving objectives. Management will tae ownership, give leadership and agree with staff clearly defined roles and responsibilities in achieving targets and milestones. It is also recognized that resources issues may affect the full implementation of the strategy. The following actions have been identified which will help to achieve the eight Priority Goals, outlined above, and which will drive and complement business planning activities. 5.1.2 The Strategy Implementation Process: It is done through:  Action Plans  Timelines, Critical paths  Resouces requirements  Linkages to budget “The Strategy Implementation Process provides a comprehensive, manageable approach to organizational alignment.” Phase I – Data Collection and Analysis Workshops on Strategic Alignment and interviews with selected executive and employees provide the key to uncovering hidden obstacles standing in the way of implementation:  Perceptions of management, the business, and the polities or the organization  Conflicting programs, goals, directives and policies.  Unsupported dimensions of he organization’s strategy Phase 2 – Facilitation The management teams derives clear, consistent, compatible objectives:  Future state of the organization required for strategic success  Congruent, focused organizational goals whose achievement will implement the strategy Phase 3 – Implementation Strategic Alignment is accomplished by deploying constructive progress and policies:  Communication of the organization’s purpose and strategy  Training of missing skills and knowledge  Collection of essential measurements  Setting of customer-derived unit goals  Creating of strategy-driven incentive pay
  • 141. NARESH SUKHANI@gmail.com 5.1.4 Internal Implementation 1. To assist management in carrying out its role in delivering the strategy and whatever may evolve in the future, and integrated management development programme, with a particular focus on business planning and performance management, will a particular focus on business planning and performance management, will be provided. In addition, project groups will be established to bring forward detailed proposals in respect of issues arising from the eight Priority Goals. 2. It is anticipated that other issues will emerge as the process evolves. The project groups will comprise of management and staff, at all levels, who have expressed an interest, and who have some expectise/knowledge, in the topic areas. 3. A Steering Group will be established, through the Partnership Framework, to set terms of reference, to agree resources and deadlines, to monitor and support progress and to ensure the integration of project group activity and outputs into progressing the organization’s strategy. 4. At Unit, Regional and Divisional level, annual business plans will be developed and these will also draw on the work of the project groups. These plans will be directly related to the Priority Goals and overall organizational strategy. The job of strategy execution is to convert strategies plans into actions and good results. The rest of successful strategy execution is whether actual organization performance matches or exceeds the targets spelled out in the strategic plan. Shortfalls in performance signal weak strategy, weak execution, or both. In deciding how to implement a new or revised strategy, managers have to determine what internal conditions are needed to execute the strategic plan successfully, Then they must create these conditions as rapidly as practical. The process of implementing and executing strategy involves:  Building an organization with the competencies,. Capabilities, and resource strengths to carry out the strategy successfully.  Developing budgets to steel ample resources into those value chain activities critical to strategic success.  Establishing strategy – supportive policies and procedures.  Instituting best practices and pushing for continuous improvement in how value chain activities are performed.  Installing support systems that enable company personnel to carry out their strategies roles successfully day in and day our.  Tying rewards and incentives to die achievement of performance objectives and good strategy execution.  Reating a strategy-supportive work environment and corporate culture.  Exerting the internal leadership needed to drive implementation forward and to keep improving on how the strategy is being executed.  Exerting the internal leadership needed to drive implementation forward and to keep improving on how the strategy is being executed. The challenge is to create a series of right fits (1) between strategy and the organization’s competencies, capabilities, and structure; (2) between strategy and budgetary allocations; (3) between strategy and policy; (4) between strategy and internal support systems; (5) between strategy and the reward structure; and (6) between strategy and the corporate culture. The tighter the fits, the more powerful strategy execution becomes and the more likely targeted performance can actually be achieves. Implementing strategy is not just a top-management function; it is a job for the whole management team. All managers function as strategy implementers in their respective areas of authority and responsibility. All managers have to consider what actions to take in their areas to achieve the intended results-they each need an action agenda.
  • 142. NARESH SUKHANI@gmail.com The three major organization-building actions are (1) filling key positions with able people, (2) building the core competencies and organizational capabilities need to perform value chain activities proficiently, and (3) structuring the internal work effort and melding it with the collaborative efforts of strategic allies. Selecting able people for key position tends to be one of the earliest strategy implementation steps because it takes a full complement of capable managers and employees to get changes in place and functioning smoothly. Building strategy –critical core competencies and competitive capabilities not easily imitated by rivals is one of the best ways to gain a competitive advantage. Core competencies emerge from skills and activities performed at different points in the value chain that, when linked, create unique organizational capability. The key to leveraging a company’s core competencies into long-term competitive advantage is to concentrate more effort and more talent than revivals competitive advantage is to concentrate more efforts and more talent than revivals of on strengthening and deepening organizational competencies and capabilities. The multiskill, multiactivity character of core competencies and capabilities makes achieving dominating depth an exercise in (1) managing human skills, knowledge bases, and intellect, and (2) coordinating and networking the efforts of different work groups, departments, and collaborative allies. It is a task that senior management must lead and be deeply involved in chiefly because senior managers who are in the best position to guide and enforce the necessary networking and cooperation among individuals, groups departments, and external allies. Building organizational capabilities means more than just strengthening what a company already does. There are times when management has to be proactive in developing new competencies to complement the company’s existing resource base and promote more proficient strategy execution. It is useful hare to think of companies as a bundle of evolving competencies and capabilities, with the organization-building challenge being one of developing new capabilities and strengthening existing ones in a fashion calculated to achieve competitive advantage through superior strategy execution. One capability-building issue is whether to develop the desired competencies and capabilities internally or whether is makes more sense to outsource them by partnering with key suppliers or forming strategic alliances. Decisions about whether to outsource or develop in-house capability often turn on the issues of (1) what can be safely delegated to outside suppliers versus what internal capabilities are key to the company’s long-term success and (2) whether noncritical activities an be outsourced more effectively or efficiently than they can be performed internally. Either way, though, calls, for action. Outsourcing means launching initiative relationships. Developing the capabilities in-house means hiring new personnel withs skills and experience relevant to he desired organizational competence/capability, then linking the individual skills/know-how to form organizational capability. Matching structure to strategy centers around making strategy-critical activities the main organizational building blocks, finding effective ways to bridge organizational lines of authority and coordinate the related efforts of separate internal units and individuals, and effectively networking the efforts of internal units and external collaborative partners. Other big consideration includes what decisions to centralize and what decisions to decentralize. All organization structures have strategic advantages and disadvantages; there is no one best way to organize. Functionally specialized organization structures have traditionally been the most popular way to organize single-business companies. Functional organization works well where strategy-critical activities dlosely match discipline-specific activities and minimal interdepartmental cooperation is needed. But it has significant drawbacks: functional myopia, empire building, interdepartmental rivalries, excessive process fragmentation, and vertically layered management hierarchies. In recent years, business process reengineering has been used to circumvent may of the disadvantages of functional organization. Whatever basic structure is chosen, it usually has to be supplemented with interdisciplinary task forces, incentive compensation schemes tied to measures of joint performance, empowerment of cross-functional and/or self-directed work teams to perform and unity fragmented process and strategy-critical activities, special
  • 143. NARESH SUKHANI@gmail.com project teams, relationship managers, and special top management efforts to knit the work of different individuals and groups into valuable competitive capabilities. Building core competencies and competitive capabilities emerges from establishing and nurturing collaborative working relationships between individuals and groups in different departments and between a company and its external allies, not from how the boxes are arranged on an organization chart. New strategic priorities like short design-to-market cycles, multiversion production, personalized customer service, aggressive pursuit of e-commerce opportunities, and winning the race for positions of leadership in global markets and/or industries of the future have prompted increasing numbers of companies to create lean, flat, horizontal structures that are responsive and innovative. Such designs for matching structure to strategy involve fewer layers of management authority, managers and workers empowered to act on their own judgment, reengineered work processes to reduce cross-department fragmentation, collaborative partnerships with outsiders (suppliers, distributors/dealers, companies with complementary products/services and even select competitors), increased outsourcing of selected value chain activities, leaner staffing of internal support functions, and rapidly growing use of e-commerce technologies and business practices. A change in strategy nearly always calls for budget reallocations. Reworking the budget to make it more strategy-supportive is a crucial part of the implementation process because every organization unit needs to have the people, equipment, facilities and other resources to carry out its part of the strategic plan (but no more than what it really needs). Implementing a new strategy often entails shifting resources from one area to another-downsizing units that are overstaffed and overfunded, upsizing those more critical to strategic success, and killing projects and activities that are no longer justified. Anytime a company alter its strategy, managers are well advised to review existing policies and operating procedures, deleting or revising those that are out of sync and deciding if additional ones are needed. Prescribing new or freshly revised policies and operating procedures aids the task of implementation (1) by providing top-down guidance to operating managers supervisory personnel, and employees regarding how certain things need to be done; (2) by putting boundaries on independent actions and decisions; (3) by promoting consistency in how particular strategy-critical activities are performed in geographically scattered operating units; and (4) by helping to create a strategy supportive work climate and corporate culture. Thick policy manuals are usually unnecessary. Indeed, when individual creativity and initiative are more essential to good execution than standardization and conformity, it is better to give people the freedom to do things however they see fit and hold them accountable for good results rather tan try to control their behavior with policies and guidelines for every situation? Hence, creating a supportive fit between strategy and policy can mean many policies, few policies, or different policies. Competent strategy execution entails visible, unyielding managerial commitment ot best practices and continuous improvements. Bendhmarking, the discovery and adoption of best practices, reengineering core business processes, and total quality management programs all aim to improved efficiency, lower costs, better products quality, and greater customer satisfaction. All these techniques are important tools for learning how to execute a strategy more proficiently. Benchmarkign provides ad realistic basis for setting performance targets. Instituting “best-in-industry” or “best-in-world” operating practices in most or all value chain activities provide a means for taking stratregy execution to a higher plateau of competence and nurturing a high-performance work environment. Reengineering is a way to make quantum progress toward becoming a world-class organization, while TQM unstills a commitment to continuous improvement. Effective use of TQM and contimuous improvement techniques is a valusable competitive asset in a company’s resource portfolio-one than can product important competitie capabilities (in reducing costs, speeding new products to market, or improving product quality, service, or customer satisfaction) and be a source of competitive advantage. Company strategies can’t be implemented or executed will without a number of support systems to carry on business operations. Well-conceived state-of-the-art support systems not only facilitate better strategy exaction is to make strategically relevant measures of performance the dominating basis for designing
  • 144. NARESH SUKHANI@gmail.com incentives, evaluating individual and group effort, and handing out rewords. Positive motivation practice generally work better than negative ones, but there is a place for booth. There’s also a place both monetary and no monetary incentives. For an incentive compensation system to work well (1) the monetary payoff should be a major percentage of the compensation package,(2) the use of incentives should extend to all managers and workers,(3) the system should be administered with care and fairness, (4) the incentives should be linked to performance target spelled out in the strategic plan, (5) each individual’s performance targets should involve outcomes the person can personally effect,(6) rewards should promptly follow the determination of good performance.(7) monetary rewards should be supplemented with liberal use of no monetary rewards, and (8) skirting the system to reward non-performers should be scrupulously avoided. Questions: 1. What are the phases of strategy implementation process? 2. What is benchmarking? 3. What are the techniques for effective implementation of strategy?
  • 145. NARESH SUKHANI@gmail.com LESSON 5.2 ELEMENTS OF STRATEGY 5.2.1 Introduction: Examples of strategy elements include:  Customer focus  Customization capability  The highest functionality products and/or service  The most robust product or service  The bets process  Fastest time to market  Value-adding Engineering  Lowest-cost competitor  Re-use  The widest range of products and services  Automation  Standardization  Flexibility  Reduce to core Engineering activities  Minimize Engineering costs  Partnering  Skilled workforce/UL 5.2.2. How elements are used for corporate strategies? Corporate – level strategies are basically about the choice of direction that a firm adopts in order to achieve its objectives. There could be a small business firm involved in a single business, or a large, complex and diversifies conglomerate with several different businesses. The corporate strategy in both these cases in about the basic direction of the firm as a whole. In the case of the small firm it could mean the adoption of courses of action that would yield a better profit for the firm. In the case of the large firm the corporate – level strategy is also about managing the various businesses to maximize their contribution to the overall corporate objectives. Corporate-level strategies are basically about decisions related to allocating resources among the different business of a firm, transferring resources from one set of business to others, and managing and nurturing a portfolio businesses in such a way that the overall corporate objectives are achieved. An analysis based on business definition provides a set of strategic alternative that an organization can consider. “Strategic alternative revolve around the question or whether to continue or change the business the enterprise is currently in or improve the efficiency and effectiveness with which the firm achieves its corporate objectives in its chosen business sector”. According to Glueck, there are four grant strategic alternatives: stability, expansion, retrenchment, and any combination of these three. These strategic alternatives are termed as grand strategies. Other authors refer to them as basic strategies or generic strategies. We will shortly see what each of these grand strategies mean and why they are called as such. Expansion Strategies The expansion grand strategy is followed when an organization aims at high growth by substantially broadening the scope of one or more of its businesses in terms of their respective customer groups, customer functions, and alternative technologies – singly or jointly – in order to improve its overall performance.
  • 146. NARESH SUKHANI@gmail.com Because of the many reasons for which they are adopted, expansion strategies are quite popular. Given below are three examples to show how companies can aim at expansion either in terms of customer groups, customer functions or alternative technologies.  A chocolate manufacturer – expands its customer groups to include middle-aged and old persons among its existing customers comprising of children and adolescents.  A stockbroker’s firm offers personalized financial services to small investors apart from its normal functions of dealing in shares and debentures in order to increase the scope of its business and spread its risks.  A printing firm changes from the traditional letter-press printing to desk-top publishing in order to increase its production and efficiency. In each of the above cases, the company moved in one or the other directions so as to substantially later its present business definition. Expansion strategies have a profound impact on a company’s internal configuration causing extensive changes in almost all aspects of internal functioning. As compared to stability, expansion strategies are more risky. Sometimes strategies, like army commanders, do think it better to retreat that to advance. It is in such situations that retrenchment is a feasible strategic alternative. Expansion Strategies Growth is a way of life. Almost all organizations plan to expand. This is why expansion strategies are the most popular corporate strategies. Companies aim for substantial growth. A growing economy, burgeoning markets customers seeking new ways of need satisfaction, and emerging technologies offer ample opportunities for companies to seek expansion. In this section, we will try to cover a lot of ground by describing five types of expansion strategies. a) Expansion through concentration b) Expansion through integration c) Expansion through diversification d) Expansion through cooperation e) Expansion through internationalization a) Expansion through Concentration Concentration is a simple, first – level type of expansion grand strategy. It involves converging resources in one or ore of a firm’s businesses in terms of their respective customer needs, customer functions, or alternative technologies, either singly or jointly, in such a manner that it results in expansion. In business policy terminology concentration strategies are known variously as intensification, focus or specialization strategies. In practical terms concentration strategies involve investment of resources in a product line for an identified market with the help of proven technology. This may be done by various means. A firm may attempt focusing intensely on existing markets with its present products by using market penetration types of concentration. Or it may try attracting new users for existing products resulting in a market development type of concentration. Alternatively it may introduce newer products in existing markets by concentration on product developments. For expansion, concentration is often the first – preference strategy for a firm, for the simple reason that it would like to do more of what it is already doing. A firm that is familiar with an industry would naturally like
  • 147. NARESH SUKHANI@gmail.com to invest more in known businesses rather than unknown ones. Each industry is unique in the sense that there are established ways of doing things. Firms that have been operation in an industry for long are familiar with these ways. So they prefer to concentrate on these industries. ASHOK LEYLAND Key Factors for an Organisation One of the most successful “invasions” in the post-Second World War era has been that of Japanese companies in the American market. They had two strong motive impulses: a national mission to redeem the pride suffered at the World War and a very limited domestic market. These organization reflected values. The organizations had the self-confidence not to abandon their management and manufacturing systems, which made their products good value propositions. The products were different and answered latent needs of foreign markets. In fact, they transformed the market. The success formula stays the same in the current low tariff regime: firstly, there should be a strong urge – both need and mission – to succeed. This should be backed by global competencies in technology, manufacture, management and customer servicing, with distinct competitive advantage in at least one of these. The robust forays made by Indian IT companies in foreign markets validate this premise. Attracted by ready and remunerative foreign markets, these companies – young, confident and ambitious – entered into foreign markets. All of them have a huge competitive advantage in one quintessential factor, namely, high caliber and low cost human resource. External and Internal environment to build world class competitiveness A clear distinction has to be drawn between knowledge-based industries and others. The traditional industries operate in an environment with greater dependence on various external factors. In knowledge industries, the essential factors of competitiveness are more company-dependent. The capabilities that make up the competencies are individual rather than collective. Within this major difference, the external factors range from government policies, cost of finance, availability of infrastructure, competition and the state of the domestic market. How mature the domestic market is will determine the ability and readiness of the organization to service a foreign market. In industry segments barring a few exceptions like automobiles, the dominant domestic market segments are not in the same stage of evolution as most global markets. Irrespective of the industry segment, export orientation would presuppose organizational leadership that has the vision to look beyond national boundaries and set up recci missions even as they fight battles in the domestic market. An organizational culture of learning and daring is an equally important precondition. Comment on the steps taken by Ashok Leylond to bring in World Class Competitiveness. We have always invested in evolving technology appropriate to the market, in order to offer better value to the customer and thereby create and retain a competitive advantage. The industry’s subsequent acceptance of these new technologies as norms and the ongoing gains in our market share are only confirmative corollaries of this strategy. In the early 90s, in anticipation of economic reforms, we set global benchmarks of products and process technologies and quality standards. Accordingly, we have secured technology tie-ups with global technology leaders and put the organization and the systems through assessments for a series of international quality norms. Our make or buy decisions have been guided by maximization of value addition. We chose for ourselves the route of technology driven growth. During the slowdown of the mid-90s, we concentrated on enhancing our internal efficiencies. Our initial focus area was materials, which constitute close to 70% or out product cots. The
  • 148. NARESH SUKHANI@gmail.com processes covering he entire supply chain have since been rationalized, aided by IT connectivity covering vendors, manufacturing units, sales and marketing office, warehouses and dealerships. We have always been a learning organization given the complexities of technology. The learning culture has been further intensified. Simultaneously, the HR systems have been strengthened to facilitate performance management along with quite few people intensive processes, which have heightened employee participation in the efficiency improvement programmes. Company MD View on how Indian companies can enhance their competitiveness to match other successful MNCs. Most Indian companies have a long distance to go before they level up on product quality, productivity and internal efficiencies. In process industries where productivity and quality are build into the equipment, we have intrinsic advantage, but the caveat is that they re capital intensive. In mass production through assembly operations, we are comparatively weaker due to poor shop floor managerial material and make the carrot and stick combination work at the shop floor. India’s best chance in the manufacturing sector lies in leveraging its natural resources. Industries based on minerals and agri-products will have a competitive advantage. Restructuring, size rationalization and technological self-sufficiency apart, there are at least three areas where Indian companies can learn from the success of MNCs. One reason for the success of MNCs is that they are market driven. The second distinguishing feature is that they are long term players. The third factor is one of size. Whether we like it or not – and more than egos will be hurt – consolidation is the key. Consolidation within the domestic industry and in some cases transnational alliances. (b) Expansion through Integration Recall that we referred to the horizontal and vertical dimensions of grand strategies in the first section. These dimensions are used to define what are known as integration strategies. The pivot around which integration strategies are designed is the present set of customer functions and customer groups to other words a company attempts to widen the scope of its business definition in such a manner that it results in serving the same set of customers. The alternative technology dimension of the business definition undergoes a change. A value chain is a set of interlinked activities performed by an organization right from the procurement of basic of raw materials down to the marketing of finished products to the ultimate consumers. So a firm may movie up or down the value chain to concentrate more comprehensively on the customer group and needs than it is already serving. A firm that adopts integration as the expansion strategy commits itself to adjacent businesses. Integration is an expansion strategy as its adoption results in a widening of the scope of the business definition of a firm. Integration is also a subset of diversification strategies as it involved doing something different from what the firm has been doing previously. Several process-based industries, such as, petrochemicals, steel, textiles or hydrocarbons, have integrated firms. These firms deal with products with a value chain extending from the basic raw materials to the ultimate consumer. Firms operating at one end of the value chain attempt to more up or down in the process while integrating activities adjacent to their present activities. (d) Expansion through Cooperation Much of strategy literature assumes competition to be a natural state of existence for companies to
  • 149. NARESH SUKHANI@gmail.com operate in. Several strategy experts, notably Michael Porter, have based their work on the assumption that companies compete in the market for a limited market share. One company can benefit at the cost of others. It is a win-lose situation where if one wins then one or several others have to lose. A contrary view has been expressed by thinkers such as James Moore, Ray Noorda, Barry J. Nalebuff and Adam M. Brandenburger that competition could co-exist with cooperation. Corporate strategies could take into account the possibly of mutual cooperation with competitors while competing with them at the same time, so that the market potential could expand. The term ‘co-operation’ expresses the idea of simultaneous competition and co-operation among rival firms for mutual benefit. The central point is of complementarily among the interests of rival firms. Cooperative strategies could of the following types: 1. Mergers and Takeovers (or acquisitions) 2. Joint Ventures 3. Strategic Alliances Merger and takeover (or acquisition) strategies essentially involve the external approach to expansion. Basically two, or occasionally more than two, entities are involved. There is not much difference in the three terms used for such types of strategies and they are frequently used synonymously. But a subtle distinction can be made. While mergers take place when the objectives of the buyer firm and the seller firm are matched to a large extent, takeovers or acquisition usually are based on the strong motivation of the buyer firm to acquire. Takeover is a common way for acquisitioj and may be defined as “the attempt (often sprung as a surprise) of one firm to adquire ownership of control over another firm against the wishes of the latter’s management (and perhaps some of its stock-holders)”. But this definition need not be taken very seriously as in practice, many takeovers may not have any element of surprise, and may not necessarily be against the wishes of the acquired firm. In fact, takeovers are frequently classifies as hostile takeover (which are against the wishes of the acquired firm), and friendly takeovers (by mutual consent in which case they could also be described as mergers). Without being too fastidious, one can use these terms synonymously. Recall that strategic management is in an evolutionary phase and such confusion in terms has often to be taken in one’s stride. Joint ventures occur when an independent firm is created by at least two other firms. In an era of globalization, joint ventures have provided to be an invaluable strategy for companies looking for expansion opportunities globally. Strategic alliances are partnerships between firms whereby their resources, capabilities, and core competencies are combined to pursue mutual interest to develop, manufacture, or distribute goods or services. Like joint ventures, strategic alliances have become quite popular as strategic alternative for firms looking for cooperation among national as well as international partners. Spartek took over Neyeer in order to integrate horizontally. Hi Beam Electronics merged with two other units to form Tristar Electronics, subsequently named as Solidaire India Ltd., Merger, takeover, joint venture, and strategic alliance strategies are, therefore, also the means of achieving diversification and integration. (e) Expansion through Internationalization In this subsection, we first have a look at the context – international and national – in which firms adopt international strategies for expansion. Then we eddgdg the terms ‘international strategy’. A brief description of the types of international strategies is followed by a reference to the international entry options available to a firm. Context for International Strategies
  • 150. NARESH SUKHANI@gmail.com International economic dynamics, accompanied by geopolitical changes, over the past several years, particularly since the oil crisis of 1973, have changed the paradigms of international business. Globalisatin has emerged as a potent force owing to global integration – the intensification of economic linkages among nations – and the internationalization of markets, trade, finance, technology labour, communication, transportation and the economic institutions. In the context of a changing international environment, nations need to identify the industries and business that their firms need to firms need to focus upon to gain a competitive edge Porter, in The Competitive Advantage of Nations, has extended his idea of the competitive advantage of firms to the analysis of competitive advantage of nations. In his opinion, four national characteristics create an environment that is conducive to creating globally competitive firms in particular industries. 1. Factor conditions: The special factors or inputs of production such as natural resources, new materials, labour, and so on that a nation is specially endowed with. 2. Demand condition: The nature and size of the buyer’s needs in the domestic market. 3. Related and supporting industries: The existence of related and supporting industries to the ones in which a nation excels. 4. Firm strategy structure and rivalry: The conditions in the nation determining how firms are created, organized, and managed and the nature of domestic competition. On the basis of an analysis of these four sets of factors, a country can determine the industry or industry niche in which a cluster of companies that are globally competitive can be developed. But doing so is a task that requires concerted and coordinated action on the part of the national government and the business firms. Questions: 1. What are the elements of strategy? Give examples. 2. Under what context expansion strategies are planned? 3. What are cooperative strategies? How to plan them? 4. What circumstances force an organization to plan international strategies?
  • 151. NARESH SUKHANI@gmail.com LESSON 5.3 LEADERSHIP AND ORGANIZATIONAL CLIMATE 5.3.1 Introduction: A person may be both a manager and a leader. On the job, a formal leaders is one who is appointed, but an informal leader emerges fro the work group. Abraham Zeleznik of the Harvard business school argues that leaders and managers are very different kinds of people. They differ in motivation, personal history and how they think and act. John Koller, a colleague of Zaleznile at Harvard, also argues that leadership is different from management but for other reasons. Management he proposes, in about coping with complexity good management brings about order and constituency by drawing up formal plans, designing rigid structures and monitoring results against the plans. Leadership in contrast, in about coping with change. Leader establish direction by developing a vision of the future, then they align people by communicating this vision and inspiring them to overcome huddles. He claims use need to forces more on developing leadership in organization because the people in charge today are too concerned with keeping things on time and on budget and with doing what has done yesterday, only doing it 5 percent better. Leadership may be defined as both a process and a property. As a process, leadership is the use of non coercive influence to shape to direct the activities of a group towards group goals. As a property, leadership is the set of characteristics attributed to those individuals who are perceived to use that influence successfully. In other words, leaders are those who have the ability to influence the behavior of other without the use of force. 5.3.2. Theories of Leadership Trait Theories: This theory sought the personality, social, physical or intellectual traits that differentiated leaders from non leaders. The first leadership researches sought a unique set of traits that distinguished leaders like Gandhi and Lincoln from their peers. Gary yoki (1981) summarized the research by identifying the following traits and skills that are found to be. Characteristics of successful leaders: Traits characteristics of successful leaders.  Adaptable to situations  Alert to the social envie  Ambitions and achievement oriented  Assertive  Co-operative  Dependable  Decisive  Dominant (the desire to influence others)  Energetic (high activity level)  Persistent  Self-confident  Jolyant of stress  Willing to assume responsibility Skills of characteristics of successful leaders:
  • 152. NARESH SUKHANI@gmail.com  Cleuer (intelligent)  Conceptually skilled  Creative  Diplomatic and tactful  Fluent in speaking  Knowledge abut the group task  Organized (administrative ability)  Persuasive  Socially skilled In the early 1980s kotter (1982) conducted in depth studies of successful general managers and found cutain characteristics more helpful than others. He devised the helpful personality characteristics into four categories. Needs / Motive of Successful leaders:  Linked power  Linked achievement  Ambitions Cognitive orientation of Successful leader:  Above – average intelligence  Moderately – strong analycally  Ambitions Temperament of Successful Leaders:  Emotional stable and even  Optimistic Interpersonal:  Personable – good at developing relationship with people  Unusual set of intervals that allowed them to relate easily to a broad set of business specialists. Knowledge of successful leaders:  Knowledge about their business  Knowledge about their organizations Behavioural Theories: The behavioral approach was designed to determine those behavior that were associated with successful leadership. The leadership was associated with three fundamental leadership behavior.  Task performance  Group maintenance  Employee participation in decision making  Task performance * Task Performance If leadership is to be successful the leader must get the job done. The necessary task performance
  • 153. NARESH SUKHANI@gmail.com behavior refers to the things the leader does to ensure that the group reaches its objectives. The most common task performance factor i) fast work speed ii) good quality / high accuracy iii) high quality iv) observation at the rules.  Group maintenance: Maintenance oriented behavior are those taken by the leader to ensure the social stability of the group to develop and maintain harmonious work relationships and to maximize the satisfaction of group member i) feeling ii) comfort iii) stress reduction iv) appreciation.  Participation: The successful leader knows that employees ward to art in making decisions that will have an impact on their work environment. Thus the decision participation dimension of leadership behavior can range from autocratic to democratic. Autocratic leaders make the decisions by themselves and then communicate them to group members or even turn the decision making role over to the group. Michigan Leadership Studies: The Michigan leadership studies were conducted at the University of Michigan under the direction Rens’s likert to determine the pattern of behavior. Two basic forms of leader behavior were identified. a) Job Centered Leader Behavior: It includes paying dose attention to the work of subordinates explaining work procedures and being concerned about performance. b) Employee Centered Leader Behavior: It includes developing a cohesive work group and ensuring that subordinated are fundamentally satisfied with their job. Ohio State Studies: The Ohio State University leadership studies conducted in the late 1940s and early 1950s also identified to major types of leadership behavior. a) Initiating Structure: The extent to which a leader is likely to define and structure his or her role and those of subordinates in the search for goal attainment. b) Consideration: The extent to which a leader is likely to have job relationship characterized by mutual trust, respect for subordinates ideas and regards for their feelings.
  • 154. NARESH SUKHANI@gmail.com In conclusion the Ohio State Studies suggested that the ‘high-high’ style generally resulted in positive outcomes but enough exceptions were found to indicate that situational factors needed to be integrated into the theory. Managerial Grid: The leadership style was developed by Blake and Mouton. They proposed a managerial grid based on the styles of “concern for people” and “concern for production” which essentially represent the Ohio state dirhensions of considerations and initiating structure or the Michigan dimensions of employee oriented and production oriented. Based on the findings of Blake and Mouton managers were found to perform best under 9.9, style. Since there is little substantine and evidence to support the conclusion that a 9.9, style is most effective in all situations. iii) Contingency Theories: a) Fiedler Model: The theory that effective groups depend upon a proper upon a proper match between a leaders style of interacting with subordinated and the degree to which the situation gives control and influence to the leader. Fiedler developed an instrument which he called the least preferred co-work questionnaire that purports to measure whether a person is task or relationship oriented. Task Vs Relationship Motivation: The task motivation is similar to the job-centered and initiating structure behavior. Relationship motivation is similar to the employee centered and considering behavior. One major difference in fielders approach is that task versus relationship motivation is seen as a trait that remains fairly constant. b) Path Goal Theory: The path-goal theory of leadership as developed by evans and house is a direct extension of the expectancy theory of motivation. The path goal theory of leadership is a contingency approach arguing that the principal function of a leader is to make valuable organizational awards available in the work place and to clarify for the subordinate the kinds of behavior that will lead to goal accomplishment and valued awards. It stipulates four kind of leader behavior i) directive ii) supportive iii) participative and achievement oriented. Situational Factors: * locus of control * perceived ability Characteristics Leader behavior * Directive * Supportive Subordinate’s motivation to perform
  • 155. NARESH SUKHANI@gmail.com i) Directive Leadership:  Informal subordinates as to what is expected  Offering directive on what to do and how  Establishing schedules for the work to be done  Maintaining specific standards of performance  Clarifying the leaders role in the group ii) Supportive Leadership:  Making the work and the work environment more pleasant  Treating group members as equals  Being friendly and approachable  Demonstrating concern for the status, well being and needs of subordinates. iii) Participative Leadership:  Getting subordinates involved in decision making  Consulting with subordinates  Asking subordinates for suggestion  Considering those suggestions seriously before making decision. iv) Achievement Oriented Leadership:  Establishing challenging goals  Expecting subordinate to perform these high levels  Demonstrating confidence that continued improvement in performance  Stressing excellence and continued improvement in performance Path goal theory makes the assumption that the same leader may display any or all of these leadership styles depending on the situation. The theory suggests that there are two basic types of situational factor influencing how a leader related to subordinate satisfaction.  Locus of Control
  • 156. NARESH SUKHANI@gmail.com  Perceived Ability c) The Uroom-Yetton Jago Model: This model of leadership describes a leadership style for a given salutation and it assumes that a manager is capable of various leadership styles. It deals with the aspect of leadership behavior-subordinate participation in decision making. It is a decision free approach which allows the leader to assess the situation in terms of a variety of variables and based on these variables to follow the path through the decision-free to a recommended course of action. This model contains the following five decision styles:  The manager makes the decision alone.  The manager asks subordinates for information but makes the decision alone  The manager shares the situation with subordinates asking for their information and evaluation. Subordinates to not meet as a group. The manager takes the decision alone.  The manager and the subordinate meet as a group, discuss the situation but manager makes the decision  The manager and subordinates meets as a group, discuss the situation and the group makes the decision. The attribution theory model show that in order to select the proper course of action, the leader most their deal with three types of information.  the consistency of the employees performance  the dist inclutienses of the task  Whether there is high or low coarseness among subordinates relate to the task Charismatic Leadership: Charismatic leadership assumes as the trait theories, that charisma is an individual characteristic of the leader. Charisma is an individual characteristic of the leader. Charisma is a mysterious human quality that is hard to describe but inspires follows to grant almost unquestioned allegiance to the leader possessing it. House (1977) developed a theory of charismatic leadership that attributed charisma to the following characteristics:  followers trust the correctness of leader’s beliefs  followers beliefs are similar to the leader’s belief  followers accept the leader unquestioningly  followers feel affection for the leader  followers obey the leader willingly  followers have heightened performance goals Characteristics:  Self – confidence  A vision  Ability to ultimate the vision  Behavior that in our of ordinary  Perceived as being of change agent  Environment sensitivity
  • 157. NARESH SUKHANI@gmail.com (iii) Transactional Leader’s Vs Transformational Leader: Transactional Leader: Leaders who guide or motive their followers in the direction of established goals by classifying role and taste requirements. Characteristics:  Contingent Reward: Contracts exchange of rewards for effort, promises rewards for good performance, recognizes accomplishments.  Management by Exception (active): Watches & searches for deviations from rules and standards, takes collective action.  Management by Exception (passive) Intervenes only of standards are not met  Ldissy- faire: Abdicates responsibilities, avoid making decisions. iv) Life Cycle Theory: The Hussy and Blanchard life cycle theory of leadership contents that the most effective leadership style depends on the maturity of subordinates. The theory defines maturity, not as age or emotional stability, but as a desire for achievement a willingness to accept responsibility and task-related experience and ability. The appropriate leadership style is described by a prescriptive curve that follows the association between superior and subordinates through a ‘life cycle’ at four phases: a) Telling b) Selling c) Participating d) Delegating a) Telling: In the initial phase of the life cycle, when subordinates first enter the work group, the manager uses a telling leadership style, as subordinates must be instructed in their tasks and working environment. During this introductory stage, the manager must assume responsibility for subordinates, because workers at this level cannot take responsibility and have not matured enough emotionally to want responsibility. b) Selling: At the second level of workers, maturity managers tend to use selling leadership, style of support, by
  • 158. NARESH SUKHANI@gmail.com direction in an effort to get workers to ‘buy into’ the desired performance level. Often subordinates at this level of maturity are willing but unable to assure responsibility for their own work behavior. c) Participating: The leader and follower share in decision making with the main role of the leader being facilitating and communicating. d) Delegating: The leader provides little direction or support. 5.3.3 The Most Recent Approaches to Leadership There are an attribution theory of leadership. Charismatic leadership, transactional versus transformational leadership and visionary leadership. Transformational Leaders: Leaders who provide individualized consideration and intellectual stimulation and who posses Charisma. Characteristics:  Charisma  Inspiration  Intellectual Stimulation  Individualized Consideration iv) Visionary Leadership The ability to create and articulate a realistic, credible, attractive vision of the future for an organization or organizational unit that grows our of improves upon the present. This vision of property selected and implemented in so energizing that it “in effecting starts the future by calling forth the skills talents, and resources to make it happen.” Leadership profile for the next century: 1. First and foremost of the next century need to radically change their mindset because the leadership traits and qualities which were very important till now may not stand the test of time in the years to come. In keeping with changing times it is improvement that leaders develop their adaptive capabilities. 2. For a leader to be successful, integrity of character the most important attribute. As a former head of New York Stock Exchange once said “The public may be wiling to forgive us for the mistake in judgment, but it will not forgive us for the mistakes in motive.” According to Joseph Badaracco & Richard Ellsworth (1989) “Leadership in a world of dilemmas is not fundamentally, a matter of style, charisma or professional management techniques. In is s difficult daily quest for integrity Commitment to leadership through integrity can help managers through the inevitable periods of anxiety, doubt, and trial, and give them a sense of priorities to guide them through an uncertain world”. 3. Leaders should have a clear ‘vision’ of how things should be. They should also be able to communicate the vision becomes a shared vision and everybody willingly contributes towards fulfilling the vision. 4. A leader’s credibility should be based on the six criteria, also known as the six C’s Conviction,
  • 159. NARESH SUKHANI@gmail.com Character, Care, Courage, Composure and Competence (Bornstein & Smith, 1997) 5. To be able to deal effectively with the complexities of change in a more flexible manner, leaders of the future should posses cross-functional rather than narrow functional knowledge and expertise. In other words you must continue to gain expertise, but avoid thinking like an expert. Acquisition of knowledge should be viewed as a lifelong experience do not a collection of facts or skills. Not ling ago what you learned in school and college was largely enough for the rest of your life. With knowledge expanding exponentially this is no longer true. 6. Some of the key words a leader of the future is required to put into action are: options not plans, the possible rather than the prefect, involvement instead of obedience (Handy, 1997). 7. Leaders need to realize that while setting the vision, values, mission and major goals the pyramid should be upright where the boss is responsible and the subordinates are responsive. But when it comes to implementation the pyramid needs to be turned upside down so that the roles are reversed – the people become responsible and the management responsive to them (Blanchard, 1997). 8. As Benjamin Disraeli once stated that, “In a progressive country, change is constant… Change is inevitable”. The same is true for effective organization. Change will remain a core consideration for 21st century leaders. The process of change starts with self-change. You cannot expect your people to change without you your-self being willing to change. With accelerated pace of change in the economic, political and socio-cultural environment leaders not only need to acquire new knowledge and skills but they also need to unlearn many of the things that have outgrown their purpose. 9. Leaders need to realize what motivates the knowledge workforce. Their needs are of a higher order than just physiological and safety needs. Leaders could possibly motivate people by following the PRIDE System (smith, 1997) which stands for: P. Provide for a positive working environment R-Recognise everyone’s efforts l-Involve everyone D-Develop skills and potential E-Evaluate and measure continuously. 10. The leader of the next century would to well to view responsibility form a different perspective. As Stephen Covey (1989) defines responsibility in his own way: Response – ability i.e., the ability to choose your response. Higher proactive people recognize their responsibility and do not blame circumstances, conditions or conditioning for their behavior. Their behavior is a product on values, rather than a product of their conditions, based on feelings. 11. Leaders need to have a deep insight into the realitites of the world and be receptive to the changes taking place and opportunities that these changes offer. 12. Leaders need to have high level of commitment to the organizational goal and the perseverance to achiever the goal in spite of all the impediments. 13. As the tasks become to complex and information too widely distributed, leaders need to involve others and elicit their participation in problem solving and decision – making. 14. in large organization the leader should be willing to share power and control so that leadership is encourages at various levels. 15. Leaders should test the assumptions and be prepared to change them but at the same time they should stick to their conventions. 16. Some of the implements on the road to excellence which leaders need to overcome are following the path of mediocrity and relying on conventional wisdom. 17. Successful leaders set their own standards and compete with themselves, and not with others. 18. Leaders should learn to depend on them selves and not on other people, material rewards, prestigious position etc. for their self-worth as this is not long-lasting. Self-respect which comes from within cannot be taken away by anyone. 19. Innovation is the need of the hour. Only when a leader is innovative can be find opportunity in every crisis. Innovation is also to do with finding new application for old ideas that cannot be discarded. Innovativeness will help the leaders to view the world not for what it is, but for what it could be. 20. Leaders should be capable of taking calculated risks as maintaining status quoleads to complacency and mediocrity. As he old proverb goes “You must learn from your past mistakes, but not lean on your past successes,” It has been found that low and high achievers behave quite differently when taking risks (McClelland, 1961). Low achievers do one of the two things: either they minimize risk as much as
  • 160. NARESH SUKHANI@gmail.com possible or they take wile. Irrational risks. High achievers, by contrast, typically take moderate risks but the nub of it is that they calculate risks against circumstances and their own abilities. 21. To encourage teamwork within organizations mechanism have to be created to broaden the concept of individual competence to include working with others and building trusting relationship by breaking brriers of communication across bound arises and encouraging collaborative rather than competitive behavior. 22. The corporate environment had become increasingly unstable and unpredictable and vulnerable to outside forces and pressures. Managers must learn to cop with non-linear forces (Toffler, 1985). These observations have become every more relevant in the present day. Ross Nisbett (1991) puts it this way: “tinkering, testing piloting, experimenting – these are the strategic tools of the leaders of the twenty-first century. You cannot control the future, you can’t really predict it, put you can experiment; you can flex the business; you can rearrange management teams. Remember, leaving things as they are can be just as predictable as changing everything. You lose (or win) both ways.” 5.3.4 Organization culture: Organization culture could be defined as the set of philosophies ideologies, values, assumption, beliefs etc that joins together are organization and are shared by its employees. The Characteristics which help to understand the nature of culture better are: Individual Initiative : The degree of responsibility freedom and independence that individuals have. Risk Tolerance : The degree of which employees are encouraged to be aggressive, innovative and risk seeking. Direction : The degree to which the organization creates clear objectives and performance expectations. Integration : The degree to which units within the organization are encouraged to operate in a coordinated manners Control : The number of rules and regulation, and the amount of direct supervision that is used to oversees and control employee behavior. Selectivity : The degree to which members identify with the organization as a whole rather then with their particular work group or field of professional expertise. Reward System : This degree to which reward allocations all based on employees performance criteria in contract to seniority, favoritism, and so on. Conflict Tolerance. : The degree to which employees are encouraged o air conflicts and criticism openly.
  • 161. NARESH SUKHANI@gmail.com Communication Pattern : The degree to which organizational communications are restricted to the formal hierarch of authority. How Culture is formed: In order to understand how culture is formed, lets take up an examples: Imagine a company beginning its operations for the first time. So, each day people come in to work and product are needs and sold. The company operates in the traditional business manner. Since the company is started for the first time, there is no existing tradition, history or culture. All these are to created. And within days of starting, quite district behavioral norms begin it develop. People called each other by their names, as district form having a Mr. or Mrs. The people cane to and left on time, punctuality was valued, Mea breakers however, were rarely adhered to and workers routinely absented themselves fro the shops floor without consulting supervisors. From the outset, production was uneven, there was month end syndrome, as people struggled to catch upon their output targets. These behavioral norms of formality, punctuality, discipline and output were accompanied by similar norms relating to almost every other types of behavior. The development of expectation through over behavior one thinks about the consequent result and will expect certain things to happen. Now suppose a couple of years have passed, and people have gone through the “Expectation” loop quite number of times, and later we will find that a new factor has emerged called as attitude. Expectation arise quickly where as, attitude take much more longer time to form. And one is aware about expectation, but much less about the attitude. And with the attitude are will take things for granted. Now that the company has been working for a couple of years, and people have been through the two loops, will find another element emerging called “Culture”. Attitudes arose over months / a year, and are dimly aware of it, where as culture arrived over many years, and we would be entirely unaware of culture. How Culture is Sustained Once a culture is created, there were practices within the organization that help keep it alive. Three each practices are selection process, actions of top management, and socialization methods. Selection The main purpose of selections process is to have right people for right jobs. When, for a given job, two or more candidate, with identical skills and abilities, are available, final selection is influenced by how well the candidate fits into the organization. By identifying candidate who can culturally match the organizational culture. Top Management The actions of top management have a major impact on the organization’s culture. Through what they say and
  • 162. NARESH SUKHANI@gmail.com how they behave, senior executive establish norms that filter down through the organization as to whether risk taking is desirable; how much freedom managers should give their subordinates etc. Socialization No matter how good job the organization does in hiring people, new employees are not fully indoctrinated in the organizations culture. This way be because they re not familiar with the culture. Therefore the organization has to help new employees adapt to its culture. Impact of Culture on Organisations’s Effectiveness: Impact of culture on organization’s effectiveness could be both functional as well as dysfunctional culture makes are organization a class. Among culture could put considerable pressure on employees to confirm. But modern organization is known for diversity of workforce. Workforce diversity is being accepted, and even encouraged. Culture acts as a barrier to mergers and acquisitions. If there is a mismatch acquisitions are likely to fail. On the positive side, culture has an impact on control, normative, order, and employee performance and satisfaction. Effective Control Organisaion culture serves as a control mechanism in directing behavior. As the culture is diffused through out the organization. People understand what they ar supposed to do and what they should not do, when individuals are not in accordance with the belief and values of the culture, managers and co-workers will step in and insists on corrective action. A strong culture is characterized by shared belief and expectations to which all must adhere. Normative Order Closely linked to effective control is the use of norms to guide behaviors. These expectations regarding appropriate and inappropriate behavior are greatly influenced by culture, and strong culture have both consensus and intensity regarding these norms. In weak cultures, consensus may be present but intensity is no. Performance and Satisfaction Organizational culture has its impact on performance and satisfaction of organizational members, but not in equal proportions. There is relatively strong relationship between cultures and satisfaction, but this is moderated by individual needs and culture satisfaction will be the highest when there is congruence between the individual needs and the culture. If the culture is informal, creative and supports risk taking and conflict, performance will be higher if the technology is non-routine. The more formally structured organizations that are risk averse, that seek to eliminate conflict, and that are prove to more task oriented leadership will achieve higher performance when routine technology is utilized. How Culture is Analysed The culture could be analyzed by a method developed by Harry C. Miller, professor of the Dept. of Educational leadership at Southern Illinious University. It is a three-step process known as:
  • 163. NARESH SUKHANI@gmail.com Trade Winds : The organization’s purpose people are brought together and actions co-ordinated to achieve some purpose. Temperature : The hotness or coldness of morale relative to each person’s perception or work “hot” individuals feel good about what is happening in the organization, and ‘cold’ individuals don’t feel okay about their work. Ceiling Level : The level of desire, commitment and energy for organizational goals. This depends on the organization’s history, traditions and norms. This measure indicates the fit between the prevailing culture and the individual values and needs. If the employees adopt the values of the prevailing culture, the climate is said to be “good”; if it is “poor and morale, motivation and productivity are expected to drop. The Creation and Change of Organization culture: One would say that people working in factories and offices in an area would being to the same industrial culture. They would all be the member of the came organizational society. Their work and life experience would be qualitatively different from those of individuals living in more traditional societies. Organizations are mini-societies that have their over distinction pattern of culture and sub culture. Different organizational cultures form around varying corporate purposes, founder styles, industry norms of behavior and environmental contingencies. Culture: A social learning process Culture is formed out of a serial learning process. A founder creates a culture from a pre-conceived cultural paradigm: and the organization, there leaves about this paradigm. This learning could be based on both positive reinforcement (repeating what works) and avoidance learning (avoiding painful experiences). In the cultural learning, the organization might face the problems of not having a common language or a common set of rules for relating to the environment and to each other. Once people in the organization learn set of assumptions, beliefs and values that work the handle internal and external contingencies, the uncertainly and the stimular overload would be reduced. This is why cultures resist change. A stable culture producers a feeling of safety. Changing the Culture As an organization changes and grows through its life cycle, its culture needs to change as well, to meet new realities. Even a positive culture can become dysfunctional if ignored. The culture should be changed if its guiding beliefs are inadequate to meet present and future competitive needs. That is if an organisation’s initial beliefs and values are no longer assets to it, a cultural change is indicated. How Culture can be changed The true change must begin at the top, because leadership initially creates cultural norms and boundaries. With top management commitment, several strategies can be used to create more effective cultures.
  • 164. NARESH SUKHANI@gmail.com Mergers often provide the space for a change. Facing potential conflict between the different cultures of two companies, a merged organization can create a new joint culture. To create this new “partnership” these steps could be taken up:-  Create a new, single culture that is appropriate for all the entities that have become part of the merged organization. Define its purpose, what it stands for, why it exists.  Define norms, rituals etc that will enhance unity of spirit, result orientation. Example: XEROX has gone thrugh three different types of cultures during its life. The first wars created under Joseph Wilson, an entrepreneur who has CEO of Xerox from 1961 to 1968. Under Wilson, Xerox and a typical entrepreneurial environment, with an informal, Rick-taking culture. Virtually everyone knew everyone else, and this made for a highly motivated workforce. C. Peter Mc Collough took over as CEO in 1968, and began the era of professional management. Growth led to bureaucratic controls, and culture became formal. This culture of risk aversion and bureaupathic behavior hindered new product development. In 1982 David Kearns took over as CEO. Kerans trimmed Xerox down, stressed quality and delegated power downward in the organization. Rules and policies became less important, and the innovative spirit returned. A culture that prevents a company from addressing competitive pressures or adapting to changing economic contingencies can lead to stagnation and demise. Example: Pepsico had faced the above problem. Pepsi’s cultural emphasis had changed from passivity to aggressiveness; once the company was content to be ‘Number 2’ offering Pepsi as a cheaper alternative to coke. But today as a new Pepsico employee learns, beating Coke is the path to success. Pepsi marketing now takes on Coke directly. In recent year’s consumer have been asked to compare the tastes of the two colas. This direct confrontation is reflected inside the company as well managers are pitted against each other for market share to work harder, and to bring more profit out of their business. Because winning is a key value a Pepsico, losing has its penalties. Employees feel the pressure of this culture. Questions: 1. It the leader born or made? Justify 2. What are the various leadership theories? 3. How organization culture plays a vital role in shaping an organization? 4. How organization culture is changed and maintained? 5. Bring out the culture aspects of Xerox.
  • 165. NARESH SUKHANI@gmail.com LESSON 5.4 PLANNING AND CONTROL OF IMPLEMENTATION 5.4.1 Introduction: In the old days in science, the universe was fairly simple, Nearly every science museum had a huge, old model of the solar system win which all the movements of the planets were controlled with clockwork gears, Then we realized that reality was much more complex. Al motion was relative. Business has also entered an age of new realities, it is essential to understand and take advantage of the dynamic motion and flux of out global markets and technological breakthroughs. Moreover, a fundamental shift in thinking is necessary for coping with these changes, while companies have struggled to try to sustain their advantages, in fact, no organization can build a competitive advantage that is sustainable. Every advantage erodes. So in this hypercompetitive environment, companies must actively work to disrupt their own advantages and the advantages of competitors. To cope with this new reality, managers must employ a new 7S’s framework that can be used to analyze industries and competitors and to identify one’s own strengths and weaknesses in meeting the challengers of hypercompetition. We have seen giants of American industry, such as General Motors and IBM, shaken to their cores. Their competitive advantages, once considered unassailable, have been ripped and torn in the fierce winds of competition. Technological wonders appear overnight. Aggressive global competitors arrive on the scene. Organizations are restructured. Markets appear and fade. The weathered rule books and generic strategic once used to plot our strategies no longer work as well in this environment. The traditional sources of advantages no longer provide long-term security. Both GM and IBM still have economies of scale, massive advertising budgets, the best distribution systems in their industries, cutting-edge R&D, deep pockets, and many other features that give them power over buyers are suppliers and that raise barriers to entry that seem impregnable. But these are not enough any more. Leadership in price and quality is also not enough to assure success. Being first is not always the same as being best. Entry barriers are trampled down or circumvented. Goliaths are brought down by clever Davids with slingshots. 5.4.2. Hypercompetition Hypercompetition results from the dynamics of strategic maneuvering among global and innovative combatants. It is a condition of rapidly escalating competition based on price-quality positioning, competition to create new know-how and establish first-mover advantage, competition to protect or invade established product or geographic markets, and competition based on deep pockets and the creating of even deeper pockets dalliances. In hyupercompetitions the frequency, boldness, and aggressiveness of dynamic movement by the players accelerates to create a condition of constant disequilibrium and change. Market stability is threatened by short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders, repositioning by incumbents, and radical redefinitions of market boundaries as diverse industries merge. In other words, environments escalate toward higher and higher levels of uncertainty, dynamism, heterogeneity of the players, and hostility. It is not just fast-moving, high-tech industries, such as computers, or industries shaken by deregulation, such as the airlines, that are facing this aggressive competition. There is evidence that competition is heating up across the board, even in what once seemed the most sedate industries. From software to soft drinks, from microchips to corn chips, from package delivery services, there are few industries that have escaped hypercompetition. As Jack Welch, CEO of General Electric, commented, “It’s going to be brutal. When I said a while back that the 1980s were going to be a white-knuckle decade and the 1990s would be even tougher, I may have understated how hard it’s going to get.” (4)
  • 166. NARESH SUKHANI@gmail.com There are few industries and companies that have escaped this shift in competitiveness. Even such seemingly comatose industries as hot sauces of such commodity strongholds as U.S. grain production have been jolted awake by the icy waters of hyperdompetition. Competition American corporations have traditionally sought established markets wherein sustainable profits were attainable. They have done so by looking for low or moderate levels of competition. Low and moderate-intensity competition occurs if a company has a monopoly (or quasi monopoly protected by entry barriers) or if competitors implicitly or explicitly collude, allowing each other to “sustain” an advantage in one or more industries or market segments. Collusions or cooperation, while it can be useful in limiting aggressiveness, is limited because there in incentive to cheat on the collusive agreement and gain advantage. Entry and mobility barriers are destroyed by firms seeking the profit potential of industries or segments with low or moderate levels of competition. Gentlemanly agreements to stay out of each othre’s turf fall apart as firms learn how to break the barriers inexpensively. As competition shifts toward higher intensity, companies begin to develop new advantages rapidly and attempt to destroy competitors’ advantages. This leads to a further escalation of competitions into hypercompetition, at which stage companies actively work t string together a series of temporary movers that undermine competitors in an endless cycle of jockeying for position. Just one hypercompetitive player (often from abroad) is enough to trigger this cycle. At each point firms press forward to gain new advantages or tear down those of their rivals. This movement, however, takes the industry to faster and more intense levels of competition. The most interesting aspect of this movement is that, as firms maneuver and outmaneuver each other, they are constantly pushing toward perfect competition, where no one has an advantage. However, while firms push toward perfect competition, they must attempt to avoid it because abnormal profits are not at all possible in perfectly competitive markets. In hypercompetitive markets it is possible to make temporary profits. Thus, even though perfect competition is treated as the “equilibrium” state in static economic models, it is neither a desired nor a sustainable state from the perspective f corporations seeking profits. They would prefer low and moderate levels of competition but often settle for hypercompetitive markers because the presence of a small number of aggressive foreign corporations won’t cooperate enough to allow the old, more genteel levels of competition that existed in the past. 5.4.3 The new 7S’s : Paraphrasing George Bernard Shaw, while reasonable people adapt to the world, the unreasonable ones persist in trying to adapt the world to themselves. This, all progress depends upon the unreasonable person. In hypercompetition the reasonable strategic that focus on sustaining advantages do not lead to progress. It is not enough to merely adapt to the environment. Companies make progress in hypercompetition by the unreasonable approach of actively disrupting advantages of other to adapt the world to themselves. These strategies are embodied in the New 7S’s. Unlike the old 7S framework, originally developed by McKinsey and Company, the new framework in based on a strategy of finding and building temporary advantages through market disruption rather than sustaining advantage and perpetuating an equilibrium. It is designed to sustain the momentum through a series of initiatives rather than structure the firm to achieve internal fit or fit with today’s external environment as if today’s external condition will persist for a long period of time. The New 7S’s are:  superior stakeholder satisfaction
  • 167. NARESH SUKHANI@gmail.com  strategic soothsaying  positioning for speed  positioning for surprise  shifting the rules of the game  signaling strategic intent  simultaneous and sequential strategic thrusts. Because of the nature of the hyper competitive environment, the New 7S’s are not presented as a series of generic strategies or a recipe of success. Instead, these are key approaches that can be sued to carry the firm in many different directions. They are focused on disrupting the status quo through a series of temporary advantages rather than maintaing equilibrium by sustaining advantages. The exact strategic actions formulated under this system will depend on many variables wihtihn the industry and the firm. Many types of strategic initiatives can be carried out using the New 7S’s, and there are many variations. Successful firms learn how to disrupt the status quo. A key to their choice of a disruption is the realization that not all disruptions are good. The disruptions that work are those that involve the first S-the creating of a temporary ability to serve the customer better than competitors can. Before the Pentium chip, Intel rarely asked customers what they wanted, but now they have instituted a process of concurrent engineering to get customers (and internal manufacturing) involved as early as possible. Now, when designing new chips, Intel designers visit every major customer and major software housed to ask them what they want in a chip. Intel has also provided early software simulations of its new chips to computer makers, allowing them to get a jump on designing their new machines, and has produced software compliers to help software companies use the new chip. CEO Andrew Grove holds regular meeting with employees from all parts of the organization to brainstorm about the future, competitive challenges, and customer needs. Employees are motivated and empowered to serve customers’ priorities above their own. Employees have a right to demand AR—“action required” – of any executive. Over the years Intel has also worked to avoid layoffs through asking staff to put in overtime or cut back on hours, so employees remain motivated to serve customers. Disruptions that satisfy current customer needs are not enough. Constantly improving customer satisfaction is now so standard that firms that once led the pack on customer satisfaction now find themselves without nay lead at all. Thus, the key to achieving real advantage from customer satisfaction is to :  identify customer needs that even the customer cannot articulate for him/herself  find new, previously unserved customer s to serve.  Create customer needs that never existed before  Predict changes in customer needs before they happen. To do this, firms are now engaging in the second S, strategic soothsaying. This allows firms to see and create future needs that they can serve better than any competitor does, even if only temporarily. The ability to see and create these future need depends upon the firm’s ability to predict future trends, to control the development of key technologies and other know-how that will shape the future, and to create self-fulfilling prophecies. Intel CEO Grove has quipped that the company bets millions on science fictions. (5) As pressure builds from clone makers and rival systems, engineers are brought together to consider the emerging technological capabilities nd the performance needed to keep ahead of competitors. Intel has also expanded into other areas such as supercomputers, flash memories, video chips, and networking boards. Its sales in these areas are
  • 168. NARESH SUKHANI@gmail.com climbing at an average rate of 68 percent per year. (6) It has gained 85 percent of the emerging market for flash memory chips and practically owns one third of the market for massively parallel computers. This experience provides knowledge that Intel can then apply to standard chips, adding features such as video. The second S, strategic soothsaying, is concerned with understanding the future evolution of markets and technology that will proactively create new opportunities to serve existing or new customers. This also contributes to the firm’s vision of where the next advantage will be discovered and where the company should focus its disruption. To act on this vision, companies need two key capabilities: speed and surprise. As in fencing, speed and surprise are key factors in gaining an advantage before competitors are able to do so and in delaying competitor reactions to the new advantages. If two companies recognize the opportunity to create a new advantage at the same time, the company that can create the advantage faster will win. Because success depends on the creation of a series of temporary advantages, a company’s ability to move quickly from one advantage t the next is crucial. Speed allows companies to maneuver to disrupt the status quo, erode the advantage of competitors, and create new advantages before competitors are able to preempt these moves. Intel used to bring out one or two new chips each year and a new microprocessor family every three or four years. In 1992 it drove out nearly thirty new variations on its 486 chip and introduced the next generation of chip, the Pentium. To stay ahead of clonemakers, Intel plans to create new families of chips every year r two throughout the 1990s.(7) Instead of waiting until the current generation of chip is rolled out before working on the next one, Intel now develos several generations of chips at one. It is already working on making its chips obsolete before they have even hit the market. Intel has created design-automation software that allows it to add two or three times the transistors to each new chip design with no increase in development time. It also has achieved a breakthrough in modeling systems that promises to cut the four-year product – development cycle by six months. The new Quick turn system will allow Intel to perform engineering tests up to thirty thousand times faster. If a competitor is unaware of the opportunity to create a new advantage surprise can maintain that lack of awareness. While this is not a source of sustainable advantage (once the competitor recognizes the advantage, it can usually move quickly to duplicate it), surprise allows the company to create the advantage and to extend the period in which the advantage in unique. Surprise also allows companies to act to undermine competitor advantages before the competitors can take defensive actions. Intel’s multiple capabilities – with strengths in microprocessors, other chips, flash memories, personal computers, and supercomputers-keep competitors guessing about its next move. Since its early days, it has often pursued a strategy of simultaneously pursuing alternative technology, and it currently has its own versions of the competing RISC-based chip (Reduced Instruction-Set Computing) although it continues to defend its stronghold of CISE (Complex Instruction-Set Computing), which offers more software. Not wanting to compete with its customers, Intel hasn’t entered the personal computer market under its own name, but it has developed the capabilities to do so as the only supplier to computer manufacturers with a brand name—so competitors never know when it might decide to enter the PC market. Intel has used advance in modeling and design of new chips to surprise competitors. Its new modeling system gave it a strategic victory over a competing RISC – based chip. At a technology forum in 1991, An Intel executive demonstrated a working model of he Pentium chips, using a link to the model, before and actual chip was ready. In what may have been a response to Intel’s signal, six months later Compaq Computer corporation canceled plans to launch a RISC-based personal computer(8) And it is still unclear whether new research efforts in RISC chips will surprise Intel.
  • 169. NARESH SUKHANI@gmail.com Intel also maintains a flexible workforce, shifting employees to different projects and keeping operations lean. Despite its continued growth in revenues, the number of Intel employees declined between 1984 and 1992 to maintain flexibility. Capabilities for speed and surprise are therefore key elements for successfully disrupting the status quo and creating temporary advantages. These capabilities are flexible in that they can be deployed across a wide range of specific actions. Tactics for Disruption: The Last Three S’s The final three S’s-shifting the rules of he game, signaling and simultaneous and sequential strategic thrusts-are concerned with the tactics used in delivering a company’s disruption, especially tactics that influence the flow of future dynamic strategic interaction among competitors. These three S’s follow the visions developed by the first two S’s and use the potential for speed and surprise from the third and fourth S’s. In contrast to strategic approaches to strategy, these final three S’s are concerned with a dynamic process of creations and interactions. Most planning is concerned with the company’s next more to gain advantage. It usually analyzes potential competitive responses but doesn’t shape those responses to its advantage. The view presented here is a set of tactics designed to disrupt the status quo and create temporary advantage. Tactics such as actions that shift the rules of competition create a sudden and discontinuous move in the industry, reshaping the competitive playing field and confusing the opponent. Intel’s move into new areas such as supercomputers, interactive digital video, and flash memory has helped shift the rules of competition. Flash memory provides an alternatives to the standard memory market, where Intel lost out to Japanese competitors. Intel is adding ancillary products, such as networking circuit boards and graphic chips that make it easier for computer makers to add these features. It has also designed a personal computer with workstation power, the Panther, which it is licensing to computer makers. This shifts the rules by creating a machine that Intel is not marketing itself. The purpose of the design is to take full advantage of Intel’s Pentium chip. Signaling can delay or dampen the competitor’s actions to create advantage, throw the competitor off balance, or create surprise. Grove has signaled Intel’s intent to flight the clonemakers “with everything we’ve got.”(9) It has also stated a vision of making the company the center of al computing, from palmtops to supercomputers. Its precise strategy for doing this is less visible. Although it has clearly revealed that it has 686 and 786 chips in the works, what these chips will be able to do is still open to speculation. As discussed, Intel used signaling to shift the rules of competition by transforming computer chips from a hidden commodity to a marketing asset through its Intel Inside campaign. By making the chip visible and using branding in marketing PCs, it made major gains in its battle against the clones. But the brand is only as powerful at the computer chip behind it. Competitive thrusts in this environments are rapid-either a sequence of moves or a set of simultaneous actions-to upset the equilibrium of the industry, disrupt the status quo, and open opportunities for new advantaged. As an example of a set of simultaneous thrust, a company might feint a mover in one direction and then move forcefully in another direction, creating surprise and temporary advantage from the misdirection of the opponent. One can think of sequential thrust as being akin to the sequence of plays used in a football game. One team ay run the ball several times until the defense is conditioned to expect a run play. Then the offense switches to the long bomb at a time that should call for a run. The sequence of actions create surprise and temporary advantage, since once the play is used, the defense will watch out for the long bomb in future plays.
  • 170. NARESH SUKHANI@gmail.com Intel has used a variety of simultaneous and sequential strategic thrusts to seize the initiative. In the late 1970s, struggling with its 8086 microprocessor chips, Intel launched an all-out assault-code-named. Operation Crush-against Motorola and other competitors, Intel set up war roomed to work toward making the 8086 the industry standard. It was this effort to simultaneously attack several segments of the market that helped lead to IBM’s decision to adapt the 8088 as the center of its personal computer. (10) Intel rode the wave of the PC’s growth to dominance in the microprocessor industry. Intel also participated in both the memory and microprocessor markets at various points in time. In a way, Intel’s retreat from the memory chip market and return with flash memory might be seen as a sequential set of moves skin to a strategic retreat followed by regrouping and counterattack. It has used multiple exploratory attacks to develop a variety of know-how and technology capabilities and gauge competitor and customer reactions (for example, its simultaneous development of RISC and CISC technology). It has also explored promising markets (such as video and massively parallel computing) and moved into those with the highest potential for growth. It has built its businesses by using a sequential strategy, moving from memory chips to microprocessors, to boards, to building personal computers (although not marketing them). These three tactics reflect the increasing speed and intensity of hypes competitions. Although these actions sometimes push companies into the gray areas of antitrust because the behaviors could be construed as exclusionary or anticompetitive actions, companies are increasingly seeing them as necessary for competitive survival. As suggested earlier, while the traditional 7S’s are concerned with capitalizing on creating a static strategic fir among internal aspects of he organization, the New 7S’s are concerned with four key goals that are based on understanding dynamic strategic interactions over long periods of time. 1. Disrupting the status quo. Competitors disrupt the status quo by identifying new opportunities to serve the customer, signaling, shifting the rules, and attacking through sequential band simultaneous thrusts. These moves end the old pattern of competitive interaction between rivals. This requires speed and surprise; otherwise, me company’s competitors simply change at the same rate. 2. Creating temporary advantage. Disruption creates temporary advantages. These advantages are based on better knowledge of customers, technology, and the future. They are derived from customer orientation and employee empowerment throughout the entire organization. These advantages are short-lived, eroded by fierce competition. 3. Seizing the initiative. By moving aggressively in each arena, acting to create a new advantage or undermine a competitor’s old advantage, the company seizes the initiative. This throws the opponent off balance and puts it at a disadvantage of for a while. The opponent s forced to play catch-up; reacting rather than shaping the future with its own actions to seize the initiative. The initiator is proactive, while competitors are forced to be reactive. 4. Sustaining the momentum. Several actions in a row to seize the initiative create momentum. The company continues to develop new advantages and doesn’t wait for competitors to undermine them before launching the next initiative. For example, while U.S. manufacturers are dong remedial work in quality improvement, Japanese manufacturers are now building key advantages in flexibility. This successions of action sustains the momentum. This is the only source of sustainable competitive advantage in hypercompetitive environments. In hyper competition it is not enough to build a static set of competencies. Good resources are not enough. They must be used effectively. This is precisely why successful firms pay attention to tactics as well as capabilities and vision in an environment of traditional competition and to competencies in an environment of hypercompetition. In slower and less aggressive competitive environments, companies could concentrate primarily on making great swords. In hypercompetition, they have been forced to concentrate much more on the skills of fencing. It is these dynamic skills that re the most significant competencies of the firm. Thus, a
  • 171. NARESH SUKHANI@gmail.com company’s success depends equally upon its swords and its fencing skills, and the New 7S’s are intended to guide firms towards making the right swords, learning how to fence, and pointing them in the right direction. Some Tradeoffs One final analysis can be done using the New 7S’s. In choosing which to concentrate on, companies are forced to make tradeoffs among them. This makes it difficult for companies to do all seven equally well. Companies choose among the seven to confront different challenges and opportunities that present themselves. Thus, it is possible to analyze a competitor (or one’s own company) to see what types of tradeoffs have been made. Once these are identified, the weakness of the competitor (or one’s own company) is apparent. Furthermore the tradeoff means that the competitor can’t plug the weakness without giving up something else. Thus, it is possible to identify weakness, which, if attacked, forces the competition to be slow to respond or to give up some other strength in order to respond. Either way the competitor loses. Among the tradeoffs implied by the New 7S’s are the following:  Tradeoffs at the expense of stakeholder satisfaction (S-1) can be undermined by speed (S-3), as companies may sacrifice product or service quality to gain speed or push employees to work harder and faster. Speeding products to market with little testing could also reduce customer satisfaction. Similarly surprise (S-4), shifting the rules (S-5), signaling (S-6), and simultaneous and sequential strategic thrusts (S-7) also have the potential to confuse customers, employees and shareholders as well as competitors.  Tradeoffs at the expense of future orientation/soothsaying, Strategic soothsaying (S-2) can be hurt by speed (S-3), which often eaves little time for reflecting on what lies ahead, and surprise (S-4), which is sudden and unpredictable enough to make prognosticating irrelevant or impossible. Shifting the rules (S- 5) often reshapes competition in a way that unpredictably changes future opportunities so that soothsaying becomes difficult. To the extent that competitor reactions are not anticipated,. Simultaneous and sequential strategic thrusts (S-7) sometime make soothsaying more difficult.  Tradeoffs at the expense of speed. Speed (S-3) can be eroded through the slowness of decision making in an organization such as the ones used to increase stakeholders satisfaction (S-1). Also, strategic alliances used to shift the rules (S-5) sometimes reduces speed because of negotiations. Shifting the rules of competitions (S-5) may require a tradeoff with speed. It can temporarily reduce sped (S-3), for example, because of the confusion and time it takes to regroup and retool to create the new rules. Simultaneous and sequential strategic thrusts (S-7) can reduce speed (S-3) because they require more effort than single thrusts.  Tradeoffs at the expense of surprise. The flexibility and stealth of surprise (S-4) can be eroded by strategies to increase capabilities for speed. For example, just in time system could decrease the company’s flexibility while increasing speed. Alliances to shift the rules sometimes also decrease surprise because the alliances are usually public. Signaling can also reduce the element of surprise because it often involves revealing the strategic intent of the company. Sequential thrusts can reduce surprise (S-4) by committing the company to a clear set of actions. These tradeoffs mean that firms can’t always do all of the New 7S’s equally well even if they are above a reasonable threshold on each one of them. Thus, a competitor can do a tradeoff analysis to identify the maneuvers it can do through use of the S’s that the opponent can’t do well because the opponent can’t respond without depleting its strengths in one of the other S’s. Other firms will creatively switch among the New 7S’s to shift the rules of competition. Sometimes focusing on the opponent’s weaker S’s sometimes using several in concert. Moreover, firms have limited resources, so they can’t acquire all seen of he New S’s at once. They must prioritize them and make tradeoffs. Thus, it will be rare that a firm is equally good at all of the New 7S’s. This will create opportunities for a new type of hypercompetitive behavior whereby firms use the resource
  • 172. NARESH SUKHANI@gmail.com investment tradeoffs made by a competitor to determine which of he New 7S’s should be invested in first. Finally, truly hypercompetitive firms, like Intel, will find ways to eliminate the tradeoffs. Tradeoffs exist only if firms believe that tradeoffs re necessities and stop looking for ways to do both alternatives. After all, it was once said that firms could not achieve low cost and high quality at the same time. Now it is not just a reality but a necessity for survival in many industries. Like all know-how, knowledge of how to use the New 7S’s might eventually be expected to erode as it becomes widely assimilated. As knowledge using them-this is already taking place-one might expect that any advantage would be neutralized. In particular, this erosions my be seen in the temporary advantages of a customer focus. As customer by the total quality movement and other forces, it has become less of an advantage and more of a requisite to succeed in business. While the impact of the New 7S’s may be diminished somewhat by their widespread adoption, there are several factors that promise to continue to make them a source advantage event after they are widely used. First, the New 7S’s have some inherent flexibility so that different companies using the new 7S’s can take very different strategies. The use of simultaneous and sequential strategic thrusts (S-7) present a wide range of options and variation. There are many other trusts that can be designed for specific opportunities, making it difficult for firms to exactly replicate a competitor’s use of New 7S’s Second, the New 7S’s are dynamic. Companies use them in different ways over time. Stakeholder satisfaction changes, competitive opportunities change, sourced of temporary advantage change. The New 7S’s and their goals of creating disruption and seizing the initiative remain constant, but the methods companies use to achieve these goals constantly change. In this way, even if all competitors in an industry are using the New 7S’s, their moves will continue to be unpredictable. Third, companies usually cannot use all of the New 7S’s at once because of inherent. Tradeoffs among the 7S’s. Companies perform a balancing act in weighing these tradeoffs. This adds to the unpredictability of competitive movers, because companies can use any of the New 7S’s in developing their next strategic move, and the tradeoffs may make in difficult to respond. XEROX NOT CLEARED IN ONLY ONE PARA. The one certain impact is that as the New 7S’s become more widespread, competition will become more aggressive. Instead of having one or two competitors seeking to disrupt the status quo, every competitors will be looking for the next source of temporary advantage. With this father intensification of hyper competition, one might expect and increased interest in alliances and other forms of cooperation to dampen the intensely of competition (as has already been seen.) Ultimately, however, the only way our or this dilemma is for companies to become more aggressive in seizing the initiative. Cooperative attempts to end this cycle of aggression will be seen as either illegal (collusive antitrust violations), or futile, since it is like shoveling sand against the tide. Leading firs will be wary of cooperative efforts that ask them to be less aggressive and give up their temporary advantage. Lagging firms with the fire in their bellies to be number one will not be satisfied with their permanent status as second-class citizens. So the New 7S’s will be used more aggressively and more frequently in the future world of hypercompetition. While the New 7S’s will continue to be important, especially with the intensifying competitions of the future, there may be even newer 7S’s that emerge as key so competitive success. Hypercompetitive companies will continue to monitor and define these new strategic approached in new attempts to provide temporary advantages and sustain momentum with a series of successful short-term advantages. The recommendations of this new framework for increasing speed and targeting disruption make sense to those of us who have played different roles during major organizational upheavals and change. Given the choice of participating in the group that planned the change versus being in the group on which the bomb is to
  • 173. NARESH SUKHANI@gmail.com be dropped, most of us chose the former. Despite our lack of skills, we preferred positioning ourselves “behind the wheel”. D’Aveni’s examples also hit close to home. He could have used Motorola just as easily as Intel for the article. While positioned as the dominant U.S. player in two-way radios and systems in the 1970s and 1980s, Motorola chose not to try and shield itself from emerging technologies, but rather quickly moved to develop these into paging and cellular communications products-products that were in direct competition with those in its core businesses. When Japanese electronic firms showed signs of capturing the growing cellular phone market with better quality, smaller products, Motorola launched its Six Sigma quality program, driving itself toward unheard of quality goals on a timetable accelerated beyond what is considered rapid by most industry standards. Motorola’s worldwide success today clearly supports D’Aveni’s position. There are some question to be raised, however. The fact that Motorola’s experience fits so well causes me to wonder if the new 7S’s framework is appropriate for organizations operating in more slowly changing markets. Like a cash cow, might it not be better to milk a moderately competitive situation as long as possible while building organizational capability to launce into the new 7S’s model at the first sign of hypercompetition? Another issue that concerns me involves the notion of this new framework as a replacement for the original one. When reading the article, I saw many of the new “S’s” as an expansion of the strategy “S” in the McKinsey model. It would be easy to make the argument that in order to effectively implement D’Aveni’s recommendations, you should evaluate your organization in light of the other 6 S’s. Does your company have the systems, style, staff, shared values, skills and structure needed to pull off the new 7S’s? Back to the brakeless car metaphor given that slowing down is not an option, wouldn’t you want to make sure the rest of the car was ready for higher speeds? The power and handling characteristics of a Ferrari would no doubt be preferred over a heavily loaded 65 Volkswagen bus with bald tires. It also won’t hurt to have taken emergency driver’s training and have a passenger on board who was a master map reader. This means you want to have a change management strategy and dome professional internal or external expertise to guide the change process. As a final recommendation for driving accelerated change, I’d advocate telling our passengers (our employees what, we have in mind before we slam down that accelerator; their screaming and grabbing at the wheel could be downright distracting. Hypercompetition is reality in many markets. The failure to fully address the original 7S’s may make the new framework difficult if not impossible to execute, especially for larger firms with technically complex product lines requiring lengthy developmental cycles. This is not to imply that the new 7S’s are less valuable; the new framework provides substances food for thought for business leaders trying to maintain their company’s competitive edge in hypercompetitive environments. On the other hand, organizational leaders may e deluding themselves if they attempt to utilize the new 7S’s theory before they have fully attended to those in the original one. It may be useful to reflect on the likelihood if a general with a eleve strategy achieving victory in a battle in light of the fact that his troops are poorly trained, have inadequate logistical support, or don’t know why they are fighting. As the old saying goes, “for want of a nail the battle was lost.” Even the most brilliantly conceived strategies will be of little consequence if a company fails to correct fundamental problems stemming form marginal alignment. Questions: 1. What are the impediment of strategy implementation? 2. What is the new 7s framework? 3. What are the characteristics of hyper competition? Give example.
  • 174. NARESH SUKHANI@gmail.com UNIT 6 Lesson 6.1 ERP 6.1.1 Introduction Enterprise resource planning software, or ERP attempts to integrate all departments and functions across a company onto a single computer system that can serve all those different departments’ particular needs. That is a tall order, building a single software program that serves the needs of people in finance as well as it does the people in human resources and in the warehouse. Each of those departments typically has its own computer system optimized for he particular ways that the department does its work. But ERP combines them all together into a single, integrated software program that runs off a single database so that he various departments can more easily share information and communicate with each other. That integrated approach can have a tremendous payback if companies install the software correctly. Take a customer order, for example. Typically, when a customer places and order, that order begins a mostly paper-based journey form in basket to in-basket around the company, often being keyed and rekeyed into different departments’ computer systems along the way. Al that lounging around in in-baskets causes delays and lost orders, and all the keying into different computer systems invites errors. Meanwhile, no one in the company truly knows what the status of the order is at any given point because there is no way for the finance department, for example, to get into the warehouse’s computes system to see whether the item has been shipped. ERP vanquishes the old standalone computer systems in finance, HR, manufacturing and the warehouse, and replaces them with a single unified software program divided into software modules that roughly approximate the old standalone systems. Finance, manufacturing and the warehouse all still get their own software, except not the software in linked together so that someone in finance can look into the warehouse software to see if an order has been shipped. Most vendors’ ERP software is flexile enough that you can install some modules without buying the whole package. Many companies, for example, will just install an ERP finance or HR module and leave the rest of the functions for another day. 6.1.2 Benefits of ERP: ERP’s best hope for demonstrating value is as a sort of battering ram for improving the way your company takes a customer order and processes it into an invoice and revenue – otherwise known as the order fulfillment process. That is why ERP is often referred to as back-office software. It doesn’t handle the up-front selling process (although most ERP vendors have recently developed CRM software to do this); rather, ERP takes a customer order and provides a software road map for automating the different steps along the path to fulfilling it. When a customer service representative enters a customer order into an ERP system, he has all the information necessary to complete the order (the customer’s credit rating and order history from the finance module, the company’s inventory levels from the warehouse module and the shipping dock’s trucking schedule fro the logistics module, for example). People in these different departments al see the same informant and can update it. When one debarment finished with the order it is automatically routed via the ERP system to the next department. To find out where the order is at any point, you need only log in to the ERP system and track it down. With luck, the order process moves like a bolt of lightning through the organization, and customers get their orders faster and with fewer errors than before. ERP can apply that same magic to the other major business processes, such as employee benefits or financial reporting. With ERP, the customer service representatives are no longer just typists entering someone’s name into a computer and hitting the return key. The ERP screen makes tem businesspeople. It flickers with the customer’s credit rating from the finance department and the product inventory levels from the warehouse. Will the customer pay on time? Will we be able to shi the order on time? These are decisions that customer service
  • 175. NARESH SUKHANI@gmail.com representatives have never had to make before, and the answers affect the customer and every other department in the company. But it’s not just the customer service representatives have to wake up. People in the warehouse who used to keep inventory in their heads or on scraps of paper now need to put that information online. If they don’t customer service reps will see low inventory levels on their scrcens and tell customers that their requested item is not in stock. Accountability, responsibility and communication have never been tested like this before. To do ERP right, the ways you do business will need to change and the ways people do their jobs will need to change too. And that kind of change doesn’t come without pain. Unless, of course, your ways of doing business are working extremely well (orders all shipped on time, productivity higher than all your competitors, customer s completely satisfied), in which case there is no reason to even consider ERP. The important thing is not to focus on how long it will take—real transformational ERP efforts usually run between one and three years, on average --- but rather to understand why you need it and how you will use it to improve your business. 6.1.3 Reasons for ERP implementation: There are five major reasons may companies undertake ERP. Integrate financial information – As the CEO tries to understand the company’s overall performance, he may find many different versions of the truth. Finance has its own set of revenue numbers, sales has another version, and the different business units may each have their own version of how much they contributed to revenues. ERP creates a single version of the truth that cannot be questioned because everyone is using the same system. Integrate customer order information – ERP systems can become the place where the customer order lives from the time a customer service representative receives it until the loading dock ships the merchandise and finance sends an invoice. By having this information in one software system, rather than scattered among many different systems that can’t communicate with one another, companies can keep track of orders more easily, and coordinate manufacturing, inventory and shipping among many different locations at the same time. Standardize and speed up manufacturing process – Manufacturing companies – especially those with an appetite for mergers and acquisition-often find that multiple business units across the company make the same widget using different methods and computer systems. ERP systems come with standard methods for automating some of the steps of a manufacturing process. Standardizing those processes and using a single integrated computer systems can save time, increase productivity and reduce head count. Reduce inventory – ERP helps the manufacturing process flow more smoothly, and it improves visibility of the order fulfillment process inside the company. That can lead to reduced inventories of the stuff used to make products (work-in-progress inventory), and it can help users better plan deliveries to customers reducing the finished good inventory at the warehouses and shipping docks. To really improve flow of your supply chain, you need supply chain software but ERP helps too. Standardize HR information – Especially in companies with multiple business units, HR may not have a unified, simple method for tracking employees’ time and communicating with them about benefits and services. ERP can fix that. In the race to fix these problems, companies often lose sight of the fact that ERP packages are nothing more than generics representations of the ways a typical company does business. While most packages are exhaustively comprehensive, each industry has its quirks that make it unique. Most ERP system were designed to be used by discrete manufacturing companies (that make physical things that can be counted), which immediately left all the process manufacturers (oil, chemical and utility companies that measure their products by flow rather than individual units) out in the cold. Each of these industries has struggled with the different ERP vendors to modify core ERP programs to their needs. 6.1.4 The cost of ERP:
  • 176. NARESH SUKHANI@gmail.com Meta Group recently did a study looking at the total cost of ownership (TCO) of ERP, including hardware, software, professional services and internal staff costs. The TCO numbers include getting the software installed and the two years afterward, which is when the real costs of maintaining, upgrading and optimizing the system for your business are felt. Among the 63 companies surveyed – including small, medium and large companies in a range of industries – the average TCO was $15 million (the highest was $300 million and lowest was $400,000). While it’s hard to draw a solid number fro that kind of range of companies and ERP efforts, Meta come up with one statistic that process that ERP is expensive no matter what kind of company is using it. The TCO for a “heads-down” user over that period was a staggering $53,320. Meta Group study of 63 companies found that it tool eight months after the new system was in (31 months total) to see any benefits. But the medium annual savings from the new ERP system were $1.6 million. Although different companies will find different land mines in the budgeting process, those who have implemented ERP packages agree that certain costs are more commonly overlooked or underestimated than others. Armed with insights from across the business, ERP pros vote the following areas as most likely to result in budget overrun. 1. Training Training is the near-unanimous choice of experienced ERP implements as the most underestimated budget item. Training expenses are high because workers almost invariably have to learn a new set of processes, not just a new software interface. Worse, outside training companies may not be able to help you. They are focused on telling people how to use software, not on educating people about the particular ways you do business. Prepare to develop a curriculum yourself that identifies and explains the different processes that will be affected by the ERP system. One enterprising CIO hired staff from a local business school to help him develop and teach the ERP business-training course to employee. Remember that with ERP, finance people will be using the same software as warehouse people and they will both entering information that affects the other. To do this accurately, they have a much broader understanding of how others in the company do their jobs than they did before ERP came along. Ultimately, it will be up to your IT and businesspeople to provide that training. So take whatever you have budgeted for ERP training and double or triple it up front. It will be the best ERP investment you ever make. 2. Integration and testing Testing the links between ERP packages and other corporate software links that have to be built n a case-by-case basis is another often-underestimated cost. A typical manufacturing company may have add-on applications form the major – e-commerce and supply chain – to the minor – sales tax computation and bar coding. All require integration links to ERP. If you can buy add-ons from the ERP vendors that are pre-integrated, you’re better off. If you need to build the links yourself, expect things to get ugly. As with training, testing ERP integrating has to be done from a process-oriented perspective. Veterans recommend that instead of plugging in dummy data and moving it from one application to the next, run a real purchase order through the system, form order entry through shipping and receipt of payment—the whole order-to-cash banana-preferably with the participation of the employees who will eventually do those jobs. 3. Customization
  • 177. NARESH SUKHANI@gmail.com Add-ons are only the beginning of the integration costs or ERP. Much more costly, and something to be avoided if at all possible, is actual customization of the core ERP software itself. This happens when the ERP software can’t handle one of your business processes and you decide to mess with the software to make it do what you want. You’re playing with firs. The customizations can affect every linked together. Upgrading the ERP package-no walk in the park under the best of circumstances- becomes a nightmare because you’ll have to do the customization all over again in the new version. Maybe it will work, maybe to won’t. No matter what, the vendor will not be there to support you. You will have to hire extra staffers to do the customization work, and keep them on for good to maintain it. 4. Data conversion It costs money to move corporate information, such as customer and supplier records, product design data and the like, from old system to new ERP homes. Although few CIOs will admit it, most data in most legacy systems is of little use. Companies often deny their data is dirty until they actually have to move it to the new client/server setups that popular ERP packages require. Consequently, those companies are more likely to underestimate the cost of the move. But even clean data may demand some overhaul to match process modifications necessitated – or inspired – by the ERP implementation. 5. Data analysis Often, the data from the ERP system must be combined with data from external systems for analysis purposes. Users with heavy analysis needs should include the cost of a data warehouse in the ERP budget-and they should expect to do quite a bit of work to make it run smoothly. Users are in a pickle here: Refreshing al the ERP data every day in a big corporate data warehouse is difficult, and ERP systems do a poor job of indicating which information has changed from day to day, making selective warehouse updates tough. One expensive solution is custom programming. The upshot is that the wise will check all their data analysis need before signing off on the budget. 6. Consultants and infinitum When users fail to plan for disengagement, consulting fees run wild. To avoid this, companies should identify objectives for which its consulting partners must aim when training internal staff. Include metrics in the consultants contract; for example, a number of the user company’s staff should be able to pass a project-management leadership test-similar to what Big Five consultants have to pass to lead an ERP engagement. 7. Replacing your best and brightest It is accepted wisdom that ERP success depends on staffing the project with the best and brightest from the business and IS divisions. The software it too complex and the business changes too dramatic to trust he project to just anyone. The bad news is a company must be prepared to replace many of those people when the project is over. Though the ERP market is not as hot as it once was, consultancies and other companies that have lost their best people will be hounding your HR policies permit. Huddle with Hr early on to develop a retention bonus program and create new salary strata for ERP veterans. If you let them go, you’ll wind up hiring them-or someone like them-back as consultants for twice what you paid tem in salaries. 8. Implementation teams can never stop
  • 178. NARESH SUKHANI@gmail.com Most companies intend to treat their ERP implementation as they would any other software project. Once the software is installed, they figure the team will be scuttled and everyone will go back to his or her day job. But after ERP, you can’t go home again. The implementers are to valuable. Because they have worked intimately with ERP, they know more about the sales process than the salespeople and more about the manufacturing process tan the manufacturing people. Companies can’t afford to send their project people back into the business because there’s so must to do after the ERP software is installed. Just writing reports to pull information out of the new ERP software is installed. Just writing reports to pull information out of the new ERP system will keep the project team busy for a year at least. Ant it is in analysis – and, one hopes, insight-that companies make their money back on an ERP implementation. Unfortunately, few IS departments plan for the frenzy of post-ERP instillation activity, and fewer still build it into their budgets when they start their ERP projects. Many are forced to beg for money and staff immediately after the go-live date, long before the ERP project has demonstrated any benefit. 9. Waiting for ROI One of the most misleading legacies of traditional software project management is that the company expects to gain value from the application as soon as it is installed, while the project team expects a break and maybe a pat on the back. Neither expectation applies to ERP. Most of the systems don’t reveal their value until after companies have had them running for some time and can concentrate on making improvements in the business process that are affected by the system. And the project team is not going to be rewarded until their efforts pay off. 10. Post-ERP depression ERP systems often weak cause have in the companies that install them. In a recent Deloitte Consulting survey of 64 Fortune 500 companies, one in your admitted that they suffered a drop in performance when their ERP system went live. The true percentage is undoubtedly much higher. The most common reason for the performance problems is that everything look and works differently from the way it did before. When people can’t do their jobs in the familiar way and haven’t yet mastered the new way, they panic, and the business goes into spasms. 6.1.5 Reasons for possible failure of ERP: At its simplest level, ERP is a set best practices for performing different duties in your company, including finance, manufacturing and the warehouse. To get the best most from the software, you have to get people inside in the different departments that will use ERP don’t agree that the work methods embedded in the software are better than the one they currently use, they will resist using the software or will want IT to change the software to match the ways they currently do things. This is where ERP projects break down. Political fights break out over how-or-even whether-the software will be installed. IT gets bogged down in long, expensive customization efforts to modify the ERP software to fit with powerful business barons’ wishes. Customizations make the software more unstable and harder to maintain when it finally does come to life. The horror stories you hear in the press about ERP an usually be traced to the changes the company made in the core ERP software to fit its own work methods. Because ERP covers so much of what a business does, a failure in the software can bring a company to a halt, literally. But IT can fix the bugs pretty quickly in most cases, and besides, few big companies can avoid customizing ERP in some fashion – every business is different and is bound to have unique work methods that a vendor cannot account for when developing its software. The mistake companies make is assuming that changing people’s habits will be easier than customizing the software. It’s not. Getting people inside, your company to use the software to improve the ways they do their jobs is by far the harder challenge. If your company is resistant to change, then your ERP project is ore likely to fail.
  • 179. NARESH SUKHANI@gmail.com 6.1.6 Organizing ERP projects: There are three commonly used ways of installing ERP The Big Bang – In this, the most ambitious and difficult of approaches to ERP implementation, companies cast off all their legacy system at once and install a single ERP system across the entire company. Though this method dominated early ERP implementations, few companies dare to attempt it anymore because it calls for the entire company to mobilize and change at once. Most of the ERP implementation horror stories from the late 90’s warn us about companies that used this strategy. Getting everyone to cooperate and accept a new software system at the same time is a tremendous effort, largely because the new system will not have any advocates. No one within the company has any experience using it, so no one is sure whether its will work. Also, ERP inevitably involves compromises. Many departments have computer systems that have been honed to match the ways they work. In most cases, ERP offers neither the range of functionality not the comfort of familiarity that a custom legacy system can offer. In many cases, the speed of the new system may suffer because it is serving the entire company rather than a single department. ERP implementation requires a direct mandate from the CEO. Franchising strategy – This approach suits large or diverse companies that do not share many common processes across business units. Independent ERP systems are installed in each unit, while linking common processes, such as financial bookkeeping, across the enterprise. This has emerged as the most common way of implementing ERP. In most cases, the business units each have their own “instances” of ERP-that is, a separate system and database. The systems link together only to share the information necessary for the corporation to get a performance big picture across al the business units (business unit revenues, for example), or for processes that don’t vary much from business unit to business unit (perhaps HR benefits).Usually, these implementations begin with a demonstration or pilot installation in a particularly open-minded and patient business unit where the core business of the corporation will not be disrupted if something goes wrong. Once the project team gets the system up and running and works out all the bugs, the team begins selling other units on ERP, using the first implementation as a kind of in-house customer reference. Plan for this strategy to take a long time. Slam dunk – ERP dictates the process design in this method, where the focus is on just a few key processes, such as those contained in an ERP system’s financial module. The slam dunk is generally for smaller companies expecting to grow in ERP. The goal here is to get ERP up and running quickly and to ditch the fancy reengineering in favor of the ERP system’s “canned” processes. Few companies that have approached ERP this way can claim much payback from the new system. Most use it as an infrastructure to support more diligent instillation efforts down the road. Yet many discover that a slammed-in ERP system is little better than a legacy system because it doesn’t force employees to change any of their old habits. In fact, doing the hard work of process reengineering after he system is in can be more challenging than if there had been no system at all because at that point few people in the company will have felt much benefit. 6.1.7. Fitting ERP with e-commerce: ERP vendors were not prepared for the onslaught of e-commerce. ERP is complex and not intended for public consumption. It assumes that the only people handling order information will be your employees, who are highly trained and comfortable with the tech jargon embedded in the software. But now customers and suppliers are demanding access to the same information your employees get through the ERP system. – things like order status, inventory leaves and invoice reconciliation – except they want to get all this information simply, without all the ERP software jargon, through your website.
  • 180. NARESH SUKHANI@gmail.com E-commerce means IT departments need to build two new channels of access in to ERP systems-one for customers (otherwise know as business-business consumer) and one for suppliers and partners (business-to-business). These two audiences want two different types of information from your ERP system. Consumers want order status and billing information, and suppliers and partners want just about everything else. Traditional ERP vendors are having a hard time building the mlinks between the Web ant their software, though they certainly all realize that they must do it and have been hard at work at it for years. The bottom line, however, is that companies with e-commerce ambitions fact a lot of hard integration work to make their ERP systems available over the Web. For those companies that were smart-or lucky-enough to have bought their ERP systems from a vendor experienced in developing e- commerce wares, adding easily integrated applications from that same vendor can be a money-saving option. For those companies whose ERP systems came for vendors that are less experienced with e- commerce development, the best-and possibly only-option might be to have a combination of internal staff and consultants back through a custom integration. But no matter what the details are solving the difficult problem of integrating ERP and e-commerce requires careful planning which is key to getting integration off on the right track. One of the most difficult aspects of ERP and e-commerce integration is that the Internet never stops. ERP applications are big and complex and require maintenance. The choice is stark if ERP is linked directly to the Web-take down your ERP system for maintenance and you take down your website. Most e-commerce veterans will build flexibility into the ERP and e-commerce links so that they can keep the new e-commerce applications running on the Web while they shut down ERP for upgrades and fixes. The difficulty of getting ERP and e-commerce applications to work together-not to mention the other application together –not to mention the other applications that demand ERP information such as supply chain and CRM software-has led companies to consider software knows alternatively as middleware and EAI software. These applications act as software translators that take information from ERP and convent it into a format that e-commerce and other applications can understand. Middleware has improved dramatically in recent years, and though it is difficult to sell and prove ROI on the software with businesses leaders-it is invisible to computer users-it can help solve many of the biggest integration woes that plague IT these days. Questions: 1. Write a not on the evolution of ERP. 2. What are the benefits of ERP? 3. What are the software of ERP? 4. What are implementation difficulties of ERP? 5. How ERP can be fitted with e-commerce?
  • 181. NARESH SUKHANI@gmail.com 6.2 ERP PACKAGE : BAAN 6.2.1 Introduction: Baan was founded in 1978 in the Netherlands. Since then, Baan has built on its early expertise in software for the manufacturing industry to become a leading enterprise application provider. Today it supplies innovative, increasingly integrated software solutions and services for every major are a of business. The salient features of the company are:  Worldwide headquarters in the Netherlands  Part of the Production Management division of Invensys plc.  More than 15,000 customer sites worldwide  Domain expertise in target industry environments More than 200 alliances including Microsoft, IBM etc. Baan helps industrial operations optimize their enterprise performance strategic and compete in the knowledge- driven networked economy, with us ever-increasing demands for information, integration, and collaboration. Through its open and powerful iBaan suite of Internet-enabled solutions,. Baan is ideally placed to support organizations in the manufacturing, logistics, services and engineering industries. Baan can help them as they move towards tighter integration of their complex processes, closer collaboration throughout their value chain, and greater accessibility of cross-enterprise transactional and analytical information. 6.2.2. iBaan: The relationship between companies and their customers is changing. The customer is moving closer to every player in the ‘value chain’, and the Internet is central to that change. iBaan is the only internet-enabled family of solutions based on a comprehensive framework of open, flexible, easy-to-configure components that address manufactures’ growing demands for tighter integration and full visibility throughout the supply chain. These solutions address every phase of an enterprise: form the factory, to the warehouse, to the service center, to the online business presence. iBaan can help bring companies, partners, suppliers and end-users together into a virtual, collaborative working environment that brings down costs and reduces waste, without having to abandon existing IT investments. With a synchronized enterprise everything can be more efficient, more agile and more profitable. 6.2.3. Baan Consulting: Baan Consulting helps customers get measurable business results from Baan solution. By helping you realize capabilities and add value to your business, the Baan Consulting approach is designed to help you improve your business agility.  It’s collaborative, with a strong emphasis on knowledge transfer from our consultants to your people on the front line.  We provide a single point of contact and responsibility for all issues relating to your implementation.  Most of all, our industry and technology consultants have ‘been there’ – so you get the benefit of our experience as well as our knowledge of Baan business tools. 6.2.4 Services and resources: Baan Consulting services span the full range of Baan Solutions – iBaan CRM, iBaan Planning, iBaan Services, iBaan Manufacturing, iBaan Distribution, iBaan Finance, and iBaan Procurement- as well as
  • 182. NARESH SUKHANI@gmail.com the Baan architecture and common components for collaboration and e-commerce; information; iBaan Business Intelligence; and integration; iBaan Open World. Baan Consulting Customers: Some of our better-known clients include Boeing, Andersen Windows, Snecma, Elcoteq, Nortel, Flextronics, Hermann Miller, Dana, Solar Turbines, Siemens and B&O. Baan consultants have the longest and most in-depth exposure to the Baan products through involvement in beta testing, product release programs and implementations at customer sites. This experience, combined with the knowledge of Baan processes and a deep involvement in the Baan network, enables Baan consultants to provide authoritative process and technical recommendations. They will assist your project team in resolving process-related issues, having dealt with the same or related scenarios in the past.  As a rule, Baan functional consultants are hired with extensive industry background  Most have 10 to 15 years of experience working in functional positons in finance, manufacturing, distribution and service  Most have experience implementing software systems while in those positions Baan’s technical consultants are most familiar with Baan’s technical architectures. When it comes to difficult decisions about configuration of a multi-dimensional environment, Baan consultants play a central role in establishing software requirements and managing set-up and use.  This knowledge is available not only through the consultants themselves and their colleagues, but also through Baan development and the support organizations. Baan Consulting draws upon a wealth of experience, leveraging past involvement in numerous complex implementations.  Their familiarity with Baan’s business object interface (BOI) development and Data Access Layer (DAL) technologies allows for unique insight and quicker turn-around time for interfaces, data migration, customizations, software architecture design another technical problem solving.  The unique to leverage DCS (Development Consulting Services) resources in situations involving complex technical issues compliments the strength of our technical teams. Baan Consulting Solution Packs are crafted to address multiple business needs, may be tailored to your specific situation, and will vary according to your needs – so you get the results you want, as quickly as possible. Just some of the features and benefits include.  Reduced risk, on-time, low budget implementations  Cost-effective solution and services bundling  Access to experienced Baan consultants  Single point of contact and responsibility  Access to a huge network of Baan resources  Targeted implementation with measurable goals and milestones. Baan Consulting Solution Packs embrace a broad range of iBaan solutions. We encourage the use of solution packs to help improve your company’s efficiency, and open up new possible in the way you use Baan software. Baan Consuldng’s project and program management methodology focuses on Goal Directed Project Management, or GDPM, and is supervised by the Baan Project Management Office. 6.2.5 Benefit of Baan:  Support for any project
  • 183. NARESH SUKHANI@gmail.com Our Resource Management Office has access sot experienced people and resources across the globe to provide you with local support.  Helps reduce risk Experience in Baan back-office applications, industry knowledge, strong project management capabilities – and the fact that we are the software developer – helps reduce the risks inherent in any software implementation project. Program and project reviews complement our implementation services to help further reduce risks.  Single point of contact and responsibility We provide customers with a single point of contract and responsibility for business, software, integration, implementation, and measurement issues related to your stated business goals.  Baan network Baan consultants have unique access to a global network of resources within Baan – consulting service lines, documentation database/libraries, development, Internet Knowledge Bases, sandbox environments and personal networks – so benefit from our knowledge of application development and migration, and gain a way to influence future releases. 6.2.6 Application management Application Management offerings help customers with the control and management of Baan-related production systems. Ban is able to offer a range of different services, from purely technically oriented to conceptually or functionally oriented. System Control System Control helps customers reduce the complexity and effort associated with the maintenance of their business system. This service offers and extended systems review and periodic analysis of the system environment, including technical functional and user aspects. In addition, a dedicated Support Account Executive will take responsibility for planning, as well as coordination and management of a system-control plan for the customer. This plan will include the installation of updates and service packs on the customer’s system. To do this, Baan will set up and organize a customer-specific test, involving both customer users and Baan experts who will apply Baan’s automated test tools. The control plan includes data archiving. System Help System help is a contract-based service that’s intended to take over some or all of the customer’s daily system and application management tasks. It includes activities such as report changes, user definitions and back-ups. System help is designed to support customers in addressing the significant knowledge management problems that can arise from the increasing number of technologies being introduced in the industry. It brings first-line support activity to a customer’s internal organization and manages communications with second-or even third party support organizations. As a result, System Help can help customers solve these knowledge management problems while simultaneously reducing costs. Customization Care
  • 184. NARESH SUKHANI@gmail.com Customization care is intended to take over the care, support, maintenance, and release management of customized software applications. System Control is mandatory for this services. In addition to Support & Application Management, Baan can provide a number of Optimization Services to customers upon request. Optimization Services deliver ad-hoc services that fall outside the scope of the Support & Application Management agreements. Optimization Services are based on years of experience with different versions of Baan applications, which are already applied to various types of customers all over the world. The staff deployed has access to all necessary resources. This ranges from Baan Development, Porting, Performance and Benchmarking, to competence centers from our strategic alliances It’s all geared to help customers ‘get to the point’ to solving a particular issue or problem. Questions: 1. What is Baan? 2. What are the benefits of Baan?
  • 185. NARESH SUKHANI@gmail.com LESSON 6.3 ERP PACKAGE : MARSHALL 6.3.1 Introduction: In an age when focus is all the range the Rs 200 crore Ramco Industries is an oddball, a little like Wipro. It consists really of two disparate companies bundled into one. One makes asbestos building materials. The other, known as Ramco System and currently a division of the parent, is well known for its enterprise resource planning (ERP) software that was launched and endorsed by Microsoft chairman Bill Gates in 1997. The ERP product, originally called Ramco Marshall and now renamed Ramco e.Applications, is considered by many to be India’s only truly world-class software product. In 1998-99 Ramco Systems’ sales were about Rs. 71 crore. The figure is expected to grow to about Rs. 100 crore this year. This average market capitalization of good software companies in India is nto less than eight times the sales figure. By this reckoning, Ramco Systems’ value is about Rs. 800 crore. A total of 2,200 man years has been invested in developing Ramco Marshall. In the international ERP market the cost per year is into less than $70,000. At this rate, Marshall can be valued at about $164 million or over Rs. 650 crore. Unlike most Indian software firms, it is not active in software services, having placed most of its eggs in the ERP basket. A second difference is that being a software product. Marshall cost a lot of money to develop and nto yielded much profit; last year the software division probably lost money. But its development costs are mostly in the past whereas revenues lie in the future. An accurate valuation will have to wait until December when the hive-off –-formulated by KPMG – is completed. Ramco Systems will then be listed as separate company by allotting. Ramco Systems shares to Ramco industries shareholders in the ratio of 1:1.Some analysts say Ramco’s intellectual property, technological competence and human resources –all intangibles –should be valued at close to Rs 1000 crore The ERP arena is dominated by big foreign players like SAP, BaaN, People soft and initially no one gave Ramco any chance. But Ramco has survived with Marshall and now promises a lot with its latest upgrade, e.Applications. The proof of the pudding is that many are cating it. Ramco’s ERP product today has 120 customers, including Hyundai, Migros and NEC. It is working to ensure that e.Applications is Net-enabled and is already part of the way there. The next version of e.Applications, which will be a completely web-based product is due for release 12-18 months from 2002. Another major development is that Ramco Systems recently added two new lines of business – e- commerce and rapid application development – thereby product – based business model. It has an advantage in rapid application development because it is in the forefront of a revolution in software development; component-based architecture. Here, a customized application is developed merely by assembling components. This reduces the cost of and time taken to develop software and gives the user the flexibility to change anything he wants. These two added revenue streams – from high-end e- commerce and other services and customized non-product based software development projects –will help Ramco System software development costs and let it have the best of both words: software services and products. Ramco Systems provides complete enterprise solutions (ERP, RAM & HR) form development to implementation and support. 6.3.2 e-Applications: Ramco’s ERP, EAM & HR suite – Ramco e.ApplicationTM provides business solutions to over 15 industries in four broad areas – ERP or manufacturing and service industries, EAM (enterprise asset management) for asset intensive industries, Human Resources Management, and E-commerce solutions. Ramco ERP, EAM & HR solutions are built up form over 35 applictions. Added to this are seven Web products that get you Internet ready and running. A number of functions and industry specific complementary solutions held integrate the ERP solution to solutes-partner solutions. Development practices are ISO 9001 and Y2K certified. Ramco does the ERP, EAM & HR implemntatins for most customers. Ramco does the ERP,
  • 186. NARESH SUKHANI@gmail.com EAM & HR implementations for most customer demonstrating our commitment to make the solution work for you. Our global help desk is available for round-the-clock support. The organization like Sunkist Growers, Intel, ICICI and Columtia Helicopters accepted effective enterprise solutions (ERP, EAM & HR) – On budget, within schedule. Ramco e.Applications comprise over 35 crore business applicatiosn. These applications can be combined with functions and industry specific add-ons to deliver either generic enterprise solutions or focused industry and organization specific solutions. The Ramco e- application applications are enabled for the Internet, ecommerce and EDI. 6.3.4 Enterprise Intelligence: Enterprise intelligence – more than data or information – is an organization’s most important resource. Organizations today operate in a highly competitive environment characterized by a state of flux – accurate business information is critical for success. Ramco Enterprise Intelligence (REI) uses the capability of OLAP tools which are built into relations database systems to provide you a user-friendly data warehousing solution that integrates with existing business process and enterprise applications. REI enables you to flexibly analyze a number of dimensions, measures, and the levels of dimensions of business, through a simple dread and drop interface. The information required for decision making a usually available within an organization enterprise applications system or online transaction processing (OLTP) system. However, the information may not be available in the required form, may be inaccessible in the required level of detail, or may be analyzed differently by different functional departments in the enterprise. Conventionally, information for decision making is retrieved through an OLTP system. However, this method has ilimitations considering the hierarchy of information needs for effective decision making. OLTP typically supports lower level information reporting – it helps generate operational and statutory reports and provides a basic level of data drill down. But in addition to this, managers need to analyze multi-dimensions and to splice and dice data for better consolidation. In a typical enterprise application, only two-dimension analysis can be carried – data subsets cannot be spliced and diced. Further, the performance of the operating system deteriorates under pressure from the volume of data involved and the complex joins required across tables in databases. REI solution used online analytical processing to provide you the flexibility to use various combinations of dimensions to analyze the data quickly and more efficiently than having a large number of reports. Main features 1. Calculations and modeling applied across multi-dimensions through hierarchies and/or across members 2. Trend analysis over sequential time periods 3. Slicing and dicing subsets for on-screen viewing 4. Drill-down to deeper levels of consolidation 5. Proven tools for building and delivering customized analytical application 6. Architecture that enables effective exploration using SQL query 7. Allows access of data vis the Internet or intranet 8. Rigorous security 9. Access rights can be defined for users at different levels 10. Easy and quick administration 11. Integrated models with conformed dimensions provide consistent “snapshot” of information across multiple functions of organizations 12. Integrated infrastructures built on multi-tier architecture to facilitate efficient sharing and distribution of information 13. Data loaded from any source or system, including third party and legacy applications. REI is a complete solutions that gathers data from disparate sources, and combines and delivers it in the from of cube. This provides the ideal platform to retrieve and analyze organization performance metrics. You can choose various dimensions depending on your information or analysis needs. Consider profitability analysis, for
  • 187. NARESH SUKHANI@gmail.com example. Business organization need to analyze profitability to determine pricing, promotional activities, allocation of resources or product development. Profitability, therefore, can be considered from various perspectives – a region, a product, a product category, a customer or a customer segment. REI delivers an integrated solution that helps you to measure and analyze profitability from all these different perspectives and by combinations of them across time periods. 6.3.5 Enterprise Asset Management Solutions: The business environment for asset intensive enterprises is very challenging today – the regulatory environment is changing, new capacity addition is expensive output demand is fluctuating, and customers expect service at Internet speed. This is where Ramco Enterprise Asset (EAM) Management solutions help. Ramco EAM solutions – part of the Ramco e-Applications TM family of enterprise solutions – are designed on the basis of two critical principles: The enterprise solution needs of maintenance intensive industries are distinct and different from the enterprise solution needs of manufacturing centric industries. In today’s Internet economy organizations must use IS solutions to transit from conventional ‘brick and mortar” business models to information age business models that will enable them to stay agile and respond effectively to higher customer expectations. Ramco EAM solutions comprehensively cover operations, maintenance, logistics, HR and financials to mobile computing and e-commerce capabilities. Questions: 1. What is the applications of Marshall? 2. Why e-Applications are different from Marshall? 3. Mention the EAM of Ramco Systems 4. Mention the main features of e-applications.
  • 188. NARESH SUKHANI@gmail.com LESSON 6.4 ERP PACKAGE : SAP 6.4.1 Introduction SAP the company was founded in Germany in 1972 by five ex-IBM engineers. In case you’re ever asked, SAP stands for Susteme, Andwendugen, Produckte in her Datenverarbeitung which – translated to English – means systems, Applications, Products in Data Processing. So now you know! Being incorporated in Germany the full name of the parent company is SAP AG. It is located in WAlldorf, Germany which is close to the beautiful tows of Heidelberg. SAP has subsidiaries in over 50 countries around the world from Argentina to Venezuela (and pretty much everything in between). SAP America (with responsibility for North Amerca, South America and Australia – go figure!) is located just outside Philadephia, PA. the original five founders have been so successful that they have multiplied many ties over such that SAP AG is now the third largest software maker in world, with over 17,500 customers (including more than half of the world’s 500 top countries). SAP employs over 27,000 people worldwide today, and had revenues of $7.34 billion and Net Income of $581 millions in FY01. SAP is listed in Germany (where it is one of the 30 stocks which make up the DAX) and on the NYSE (ticker-SAP). There are now 44,500 installatins of SAP, in 120 countries, with more then 10 million users. Badk in 1979 SAP released SAP R//2 was the first integrated, entrrprise wide package and was an immediated success. For years SAP stayed within the German borders until it had panetreated practically every large German Company. Looking for more growth, SAP expanded into the remainder or Europe during the 80’s. Towards the end of the 80’s, client-server architecture became popular and SAP responded with the release of SAP R/3 (in 1992). This turned out to be a killer app for SAP, especially in the American region into which SAP expanded in 1988. The success of SAP R/3 in North America has been nothing short of stunning. Within a 5 year period, the North American market went from virtually zero to 44% of total SAP worldwide sales. SAP America alone employs more than 3,000 people and has added the names of many of the Fortune 500 to it’s customer list (8 of the top 10 semiconductor companies, 7 of the top 10 pharmaceutical companies etc). SAP today is available in 46 country-specific Of course that there is someone around who understands how they work!). Sweeping them away and replacing them with an integrated system such as SAP can save much money in support. Of course, if you have a burning platform as well the question becomes even easier. 2. Enabling business process change – From the start, SAP was built in a foundation of process best practices. Although it sounds absurd, it is probably easier (and less expensive) to change your companies processes to adopt to SAP than the other way around. Many companies have reported good success from combining a SAP implementation with a BPR project. 3. Competitive advantage – The CFO types around have heard this old saying form the CIO types for many years now. The question still has to be asked … can you gain competitive advantage from implementing SAP? The answer, of course, depends on the company. It seems to us however, that:  being able to accurately provide delivery promise dated for manufacturing products (and meet them) doesn’t hurt … and  being able to consolidate purchase decisions from around the globe and use that leverage when negotiating with vendors has gotta help … and  being able to place kiosks in stores where individual customers can enter their product specifications and them feed this data directly into it’s production planning process is pretty neat, etc. 6.4.3 The cost of SAP:
  • 189. NARESH SUKHANI@gmail.com Implementing SAP is expensive. But the potential rewards can dwarf the costs (and have for many existing customers already). One customer reportedly made enough savings on the procurement of a single raw material to pay for the entire enterprise-wide SAP implementation! Of course these are hard to substantiate, but visit SAP’s website and take a look at the customer testimonials. SAP sells it’s R/3 product on a ‘price per user basis’. The actual price is negotiated between SAP and the customer and therefore depends on numerous factors which include number of users and modules (and other factors which are present in any negotiation). You should check with SAP, but for a ballpark planning number your could do worse than starting with $4000 per user. There is also an annual support cost of about 10% which includes periodic upgrades. Again, check with SAP. Then there is the implementation cost. It is about now that you need to get the business case out again and remind yourself why you need to do this. The major drivers of he total implementation cost are the Timeframe, Resource Requirements and Hardware. 1. Timeframe- The absolute quickest implementation we have ever heard of is 45 days … but this was for a tiny company with very users and no changes to the delivered SAP processes. At the other end of the scale you get the multi- national who are implementing SAP over 5 to 10 years. These are not necessarily failures …. Many of them are planned as successive global deployments (which seem to roll around the globe forever ). Of course the really expensive ones are those we don’t beat about! For the most part, you should be able to get your (single instance) project completed in a 9 to 18 months period. 2. People – The smallest of SAP implementations can get done on a part-time basis without outside help. The largest swallow up hundreds of people (sometimes over a thousand) and include whole armies of consultants. This adds up fast. Again, get that business case out. The types of people you will need rung the range from heavy duty techies to project managers. 3. Hardware – The smallest of SAP implementations probably use only three instances (boxes) … one for the production system, one for test, and one for development. The largest implementations have well over 100 instances, especially if they involve multiple parallel projects (otherwise known as a program) 6.4.4 The Software: Companies both large and small traditionally utilized multiple software- applications from various vendors or developed their own applications in-house to process their critical business transactions Prior to the proliferation of SAP, most companies supported a full staff of program developers who wrote their necessary business applications from scratch or developers who wrote their necessary business applications from scratch or developed highly complicated interfaces to allow pre-packaged applications from several vendors to pass data back and forth as necessary to complete any full cycle business transactions. This process was extremely costly, time-consuming, and error prone. It also made it very difficult for business managers and executive to get a timely, comprehensive view of how their business managers and executives to get a timely, comprehensive view of how their business was doing at any given time. SAP was the first and, to date, the most successful company to integrate nearly all business processes into one software solution for use in any business in any country in the world. Not only did SAP’s applications reduce the need for complex and redundant in-house development, but it also created new business efficiencies by automating many tasks across a corporation and incorporating business’ best practices into each updated version of its software. Using SAP’s products, companies can now integrate their accounting, sales, distribution, manufacturing, planning, purchasing, human resources, analysis and other transactions into one application. SAP applications thus provide an environment where “transactions are synchronized throughout the entire systems, meaning a sales-order entry triggers action’s within each application that related and is relevant to the transaction.
  • 190. NARESH SUKHANI@gmail.com Although SAP is recognized as the ERP market leader, several competitors have found their footing in this arena. Oracle, perhaps SAP’s most significant competitor, has set its sites on SAP’s prestigious ERP leadership position. Other competitors include People Soft, JD Edwards, and a range of mid-market ERP vendors who all provide similar packaged ERP application. Questions: 1. Trace the evolution SAP. 2. Explain how SAP is different from other software 3. Identify the purpose of SAP 4. How SAP is different on account of the cost? Model Question Paper Paper 3.2 : Strategic Management Time : 3 hours Maximum Marks : 100 PART – A (5 X 8 = 40) Answer any Five questions 1. Define Mission and give examples 2. What constituted core competency? 3. What do your mean by turnaround? Give examples 4. How the diversification strategies are undertaken by companies? 5. Illustrate with examples the need for corporate strategy. 6. What is management of change? 7. What are the leadership qualities needed for corporate success? 8. Write a note BaaN PART – B (4 X 15 = 60) Answer any Four questions Question No. 15 is Compulsory 9. Evaluate the role played by business policy in organizational success.
  • 191. NARESH SUKHANI@gmail.com 10. Critically evaluate the growth strategies adopted by Indian organizations. 11. Mention the of importance for organization to succeed in new areas of operations. 12. Describe the various portfolio models and illustrate their limitations 13. Discuss the various elements of corporate strategy. 14. Elucidate the 7’s framework with its uses to Indian companies. 15. Read the following case carefully and answer the questions at the end of the case. All the major business newspaper headlines in India on 21st July 1999 were screaming ,”Essar creates history, defeats on FRN $250 million”. Essar group had default on its loan repayments of $250 million of floating rate notes in international markets. It became the first Indian Company to default in International market raising fears in Indian corporate sector regarding future fund raising capabilities in the international market. For last on year it had been frantically trying to avoid the unavoidable, and in the process, rolling itself in many controversies. During 1998, steel consumers had accused Government of India in media of creating import barriers to favour and bail our Essar. This created a political controversy and caused embarrassment to the government. Essar became an untouchable for government controlled financial institutions. The financial institutions, which had major exposure in Essar, backed off the left Essar in the lurch when it came to disastrous year for the group but its public image also suffered a major setback. Ruia brothers, Sashi, 55 and Ravi, 50 who had stunned Indian corporate sector with their vision and daring entrepreneurship were today in a quagmire of their own making. While on diversification spree. Entering one business after another, they were obviously not are that very soon the group would become a case study at the management school. Today Essar group is considering various options to consolidate, sell companied that it had nurtured with heavy debt exposure in past few years. Its major companies are in core infrastructure areas with strict regulations, controls and major government role intervention. Essar is wondering what went wrong in its dreams and their executions. Was it fate, Pokhran nuclear tests in 1998, continuing recessions in Indian and world market, stock market depression in India or was it structured to doom. Group Profile Nand Kishore Ruia, a marwari businessmen settled in Madras in 1956, founded the Essar group. Essar started off by exporting iron ore. In 1956, it acquired a stevedoring contract for bringing iron from the mine heads and loading it onto sheds. Sahsi (ESS) and Ravi (AR) diversified from family business of trading and ventured into shipping in 1969. After shipping Essar moved into construction activity and then into the supply critical support services for the oil and gas sector. Their major breakthrough came in the form of a drilling contract awarded by ONGC. From these successful medium-sized business in marine and port constructions, oil-drilling, and shipping, Essar first took the opportunity provided by the gas pipeline to start a very successful sponge iron business. It has been the entrepreneurial sprit and opportunism that has been driving the group from a Rs. 150 core shipping company to a Rs. 4000 core conglomerate. The group was slowly adding one business after another until late eighties. In 1990’s Government of India started economic liberalization programme that promised growth and vision of catching up with the late industrializing economies of Southeast. Capital markets were opened up and raising finances became much easier and it became a prime facilitator of rapid growth. The incredible rate of growth of Essar group during this period saw them in virtually all the core sectors. Ruia brothers had a resplendent vision of creating a huge empire and they exploited every opportunity that came their way and created many new avenues to realize their vision. Mr. Sashi Ruia engineered Essar’s
  • 192. NARESH SUKHANI@gmail.com conquests and they were well capitalized by his younger brother Ravi, Essar restructured itself in 1994 to include senior professional managers from leading public sector undertakings to manage their growing, diversified businesses. These professionals were given free hand for running independent units. Mr. Sashi Ruia kept the group’s external environment & business development activities with himself. Ravi Ruia was given charge of the operations & overseas businesses. The second generation also started making their way in family business. Today Prashant Ruia is the director-in-charge of Essar’s Power, Oil & Steel business along with communications and personnel. Anshuman Ruia looks after shipping. Essar group entered in global business by commissioning a $90 million cold rolled steel plant, Essar Dhananjaya (ED), in Indonesia in 1994 of 150,000 tonnes capacity fed by HRC from Essar Gujarat Limited in a joining venture with the Garama group of Indonesia. ED was to import hot rolled coils from Essar Gujarat’s Steel plant in India. During that period Ruias had been working up on setting more such ventures in Bangladesh, Saudi Arabia or Pakistan. The focus for such expansions was to beat possible downturns in domestic demand. Essar also acquired a three-year-old textile mill Woventex Ltd. in Mauritius. Through this they wanted to move in Africa which they believed would soon see and economic upsurge. On Essar new business strategy Sashi Ruia commented, “We will get into any new business that will make us more money”. Ravi Ruia commented on Essar’s global strategy in 1994, “We will get into any new business that will make us more money”. Ravi Ruia commented on Essar’s global strategy in 1994, “We are looking at impact of globalization on existing businesses in country. Next we are looking for opportunities opening up overseas. Not just those with synergies with our existing operations, but also those that have potential for us”. Commenting on new opportunities he said, “Today the canvas is wide open. We must have an open mind. We should have basic synergies with what we do, but we must not miss a major opportunity just because it does not fit in with our basic operations”. According to Prashant Ruia, Chairman of ESSMCO for reasons of fast acquisition by Essar shipping limited is “… buying ships has become easier now: it takes less time and the access to funds us easier”. This philosophy became their prime motivator for a rapid expansion and acquisition. Their strategy hinged on a simple premise – one project will nurture another project & co on. In mid 90’s the joke at the corporate headquarters of Essar group at Essar House, Mumbai used to be that which new company has the group opened today. Essar group wanted increase its assets to Rs. 31,300 crore, income to Rs.19,400 crore and gross profit to Rs.7,500 crore by the year 2001-02. In this process they went on an expansion spree even at high cost debt to reap benefits from the post liberalization growth in India. However the economy growth which they envisaged didn’t last long. Their steel project was delayed. It was plague and then floods in Sturat, Gujarat (their plant location) that took their tool on project. But major factors ere their planning and project management skills. They had changed the project plan and basic technology number of times. Because of this they could not exploit the price boom in steel sector and could not repay the loans to the financial institutions. When they came on stream with steel plant, Indian economy started cooling off, Southeast Asian crises happened, overcapacity in steel sector led to a global glut and price recession in steel, all working against their risky debt strategy. Today, it has assets worth Rs. 14,530 crore, income of Rs. 4,030 crore and gross profit of Rs. 1,150 crore. Essar is one of India’s leading business groups and has phenomenal presence in Steel, Shipping, Oil & Gas, Power Telecom and few financial services companies besides other small businesses. Steel accounts for 70.30 percent of the group’s turnover, while shipping accounts for 17.30 percent. The portfolio is rather diverse
  • 193. NARESH SUKHANI@gmail.com with very little synergy amongst them, except that all big companies core industries. *****************

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