“ Without Business Policy and Strategy, an organisation is like a ship without rudder, going around in circles. It’s like a tramp; who has no place to go” – Joel Ross and Michael Kami.
Business Policy definition by Christensen :
“ Business Policy is the study of the function and responsibilities of Senior Management, the crucial problems that affect success in the total enterprise, and the decisions that determine the directions of the organisation and shape of its future.”
The problems of policy in the business, like those of policy in public affairs, have to do with choice of purposes, the moulding of organisational identity and character, the continuous definition of what needs to be done, and the mobilisation of resources for the attainment of organisational Goals in the face of competition or adverse circumstance.
Origin – 1911- Harvard Business School – Integrated Course in Management aimed at providing general management capability.
Hofer: Strategic Management – A Casebook in Policy and Planning: The Business Policy evolution has undergone four Paradigm Shifts. This transition is of overlapping nature.
Development of subject of Business Policy has always followed the demands of real life business.
1930 -1960: Environment change: New Products: Continuously changing market : Ford Foundation recommended report, by Gordon and Howell, suggested a “Capstone” course of Business Policy which would give the students an opportunity to pull together what they have learned in the separate business fields and utilise this knowledge in the analysis of complex business problems.
1969: The course was made mandatory by American Assembly of Collegiate School of Business (AACSB)
1990: The course has become an integral part of management education curriculum.
Evolution of Business Policy has undergone four Paradigms
Paradigm One: Ad-hoc Policy – making .
1900 -1930: Era of Mass Production – Maximising output, Normally a Single Product, Standardised and low cost product, catering to unique set of customers servicing limited geographical area – Informal control and co-ordination. The Strategic planning was centred on maximising output.
Evolution of Business Policy has undergone four Paradigms
Paradigm Two – Integrated Policy Formulation.
1930 - 1940: Changes in Technology , Turbulence in Political environment, Emergence of new industries, Demand for novelty products even at higher costs, Product Differentiation, Market segmentation in increasingly competitive and changing markets. These all made investment decisions increasingly difficult. This was era of integrating all functional areas and framing policies to guide managerial actions.
Paradigm Three – The Concept of Strategy.
1940 - 1960: Planned policy became irrelevant due to increasingly complex and accelerating changes. Firms had to anticipate environmental changes. A strategy needed to be formed with critical look at basic concept of Business and its relationship to the existing environment then.
Paradigm Four – The Strategic Management.
1980 & onwards: The focus of Strategic Management is on the strategic process of business firms and responsibilities of general management.
Everything out side the four walls is changing rapidly and this phenomenon is called as “Discontinuity” by Mr. Peter Drucker. Past experiences are no guarantee for future, as science and technology is moving faster. The future is no more extension of the past or the present.
The world is substantially compressed and managing the External & Internal environment becomes crucial function.
What to produce, where to market, which new business to enter, which one to quit and how to get internally stronger and resourceful are the new stakes.
Strategic Planning is required to be done to endow the enterprise with certain fundamental competencies / distinctive strengths which could take care of eventualities resulting from unexpected environmental changes.
The Indian Scenario:
However, the evolution of this fourth phase is still continuing and is yet not formed into a theory of how to manage an enterprise. But Strategic Management is a very important tool for and way of thinking to resolve strategic issues.
The Indian Scenario:
IIMs and Administrative Staff College of India formed in early sixties were based on American Model. IIM-A is based on Harvard Model. The All India Council of technical Education (AICTE), The Association of Indian Management Schools (AIMS) have recommended a standard curriculum including “ Business Policy and Strategic Management ” as a compulsory course. Business Policy is the preferred nomenclature but Strategic Management is being progressively adapted.
Evolution of Strategic Management in India is divided in three periods.
Till 1980 : Pre-liberalisation Stage :
Strategic management on Government fringes.
Entwining enterprise objectives into the national Planning framework.
Grabbing opportunities, high diversification, non- competitive scales, and weak technology.
Secretive & one man Strategic Management Process.
1980 - 2000 : Liberalisation Stage:
‘ Foreign Complex’ governed strategy.
Strategy of focus on rationalisation and operations improvement.
Strategy of growth through acquisitions, internationalisation and product market expansion.
Employing international consulting firms in Strategic Management.
Evolution of Strategic Management in India is divided in three periods .
2000- Onwards: Post Liberalisation Stage:
‘ Global maverick’ mindset & Acquire professional skills in Strategic Management and synergise entrepreneurial flair.
Portfolio rationalisation, entry into emerging sectors.
Mobilise resources and ensure adequate growth through existing business.
De-merge businesses as independent companies and improve market capabilities.
Development of Technology capabilities
Decentralise organisations, develop institutionalised control mechanism.
Core concept of Strategy:
A company’s concept of Strategy consists of the competitive moves and business approaches that managers employ to attract and please customers, compete successfully, grow the business, conduct operations and achieve targeted objectives.
Military Origins of Strategy: Strategy is a term that comes from the Greek Strategia , meaning "Generalship“. In the military, strategy often refers to manoeuvring troops into position before the enemy is actually engaged. In this sense, strategy refers to the deployment of troops. Once the enemy has been engaged, attention shifts to tactics. Here, the employment of troops is central.
Military origins of strategy are century old. It seems sensible to begin our examination of strategy with the military view.
Substitute "resources" for troops and the transfer of the concept to the business world begins to take form.
Strategy also refers to the means by which policy is effected, As per “Clauswitz” the war is the continuation of political relations via other means.
Strategy According to B. H. Liddell Hart
In his book, Strategy , Liddell Hart examines wars and battles from the time of the ancient Greeks through World War II. He concludes that Clausewitz’ definition of strategy as "the art of the employment of battles as a means to gain the object of war" is seriously flawed in that this view of strategy intrudes upon policy and makes battle the only means of achieving strategic ends.
Wiser definition of strategy could be "the practical adaptation of the means placed at a General’s disposal to the attainment of the object in view." Thus, military strategy is clearly a means to political ends.
Concluding his review of wars, policy, strategy and tactics, Liddell Hart arrives at this short definition of strategy: "The art of distributing and applying military means to fulfil the ends of policy."
Strategy According to George Steiner
George Steiner, a professor of management and one of the founders of The California Management Review . His book, Strategic Planning , is close to being a bible on the subject. Steiner points out in his notes that there is very little agreement as to the meaning of strategy in the business world.
Some of the definitions in use to which Steiner pointed include the following:
Strategy is that which top management does that is of great importance to the organization.
Strategy refers to basic directional decisions, that is, to purposes and missions.
Strategy consists of the important actions necessary to realize these directions.
Strategy answers the question: What should the organization be doing?
Strategy answers the question: What are the ends we seek and how should we achieve them?
Defining Strategy and Concept of Strategic Management
Alfred D Chandler(1962) : “The determination of basic long-term goals and the adoption of courses or the courses of action and the allocation of resources necessary for carrying out these goals”
Alfred D Chandler(1984) : “Basically, a strategy is a set of decisions-making rules for the guidance of organisational behaviour”
Kenneth Andrews(1965) : “The pattern of objectives, purpose, goals, and the major policies and plans for achieving these goals stated in such a way so as to define what business the company is in or is to be and the kind of company it is or to be
” Kenneth Andrews (1965) : “Business Strategy is a method of describing the future position of the company, its objectives, purposes, goals, policies, and plans that may be required for guiding the company from its existing position to where it desires to be”.
Defining Strategy and Concept of Strategic Management
Igor Ansoff(1965) : “The common thread among the organisation’s activities and product-markets…that defines the essential nature of business that the organisation was or planned to be in future”
William F Gleueck(1972) : “A unified , comprehensive and integrated plan that relates the Strategic advantage of the firm to the challenges of the environment and is designed to ensure that the basic objectives of the enterprise are achieved through proper implementation process ”
Henry Mintzberg(1987) : “Strategy is Organisation’s pattern of response to its environment over a period of time to achieve its goals and mission.
Michael E Porter(1996) : “Creation of a unique and valued position involving a different set of activities. The company that is strategically positioned performs different activities from rivals or performs similar activities in different ways”
If we sum up all the above definitions, then Strategy is :
A plan or course of action or a set of decisions rules forming pattern or creating a common thread.
The pattern or common thread related to the organisation’s activities which move an organisation from its current position to a desired to a desired future stage
Concerned with the resources necessary for implementing a plan or following a course of action and,
Connected to the strategic positioning of a firm, making trade-offs between its different activities, and creating a fit among these activities.
Set a clear direction to the organisation.
Enterprise knows its strengths & weaknesses compared with those of its competitors.
Essence Of Strategy
Strategy includes the determination and evaluation of alternative paths to an already established Mission and Objectives of enterprise and choosing the alternative to be adapted. Four important aspects of Strategy are:
Long Term Objectives: It emphasises on long term growth and development. These Objectives give direction for implementing Strategy.
Competitive Advantages: The external environment is continuously monitored & Strategy is made to have the firm a continuous Competitive Advantage.
Vector: is a Direction with Force. Series of actions are to be taken & they should have same direction for whole organisation.
Synergy: Once a series of decisions are taken to accomplish the objectives in same direction, there will be synergy. Synergy can happen due to Competitive Advantages and Growth Vector. The Objectives need be measurable and could be : ROI, Sales Growth Rate,
Strategy as Action & Nature of Strategy
Three types of actions are involved in Strategy:
Determination of Long Term Goals & Objectives.
Adoption of courses of action.
Allocation of resources.
Therefore, Strategy is “Creation of unique & valued position involving a different set of activities. The Company that is strategically positioned performs different activities from rivals or performs similar activities in different ways” – Michael Porter .
Thus Nature of Strategy is:
Strategy is a major course of action through which organisation relates itself to its environment. (External)
Strategy is blend of internal & external factors. Face opportunities & threats provided by external factors, internal factors are matched with them.
Nature of Strategy – contd…
Strategic actions are different for different situations. Strategy is combination of actions to solve a certain problem to achieve a desirable end.
Strategy may involve contradictory actions simultaneously or with a gap of time like closing down some operations and expanding some at same time.
Strategy is future oriented. New situations, which have not arisen in past will require revised Strategic Actions.
Strategy requires some systems and norms for its efficient adoption in any organisation.
Strategy provides overall framework for guiding enterprise thinking and action.
Strategy v/s Policies
Strategy & Policy are not synonymous.
Policy is guideline for decisions & actions to be taken by subordinates for the fulfilment of the set of objectives.
Policies are commonly accepted understanding of decision making.
Policies are thought oriented.
Policies have to be integrated so that Strategy is implemented successfully and effectively.
Strategy and policies both are the means directed towards meeting organisational objectives .
Strategies are concerned with the direction in which human and physical resources are deployed to maximise the chances of achieving organisational objectives in face of variable environment.
Strategies are specific actions suggested to achieve objectives.
Strategy is action oriented and empowers concerned to implement them.
Strategy cannot be delegated downwards.
Strategy is rule for making decision and Policy is contingent decision.
Strategy v/s Tactics
Strategy determines the major plans to be undertaken.
Goal of Strategy is to gain competitive advantage, break the opponent.
Strategic decisions cannot be delegated downwards.
Strategy formulation is dynamic, responding to environment. It can be continuous or irregular.
Strategy has a long term perspective & have a high element of uncertainty.
Strategy formulation is affected by the personal values of person involved in the process.
Tactics is means by which previously determined plans are executed.
Goal of Tactics is to achieve success in a given action.
Tactics decisions can be delegated to all levels of organisation.
Tactics are determined on a periodic basis with some fixed timetable.
Tactical decisions are more certain as they work upon framework set by Strategy.
Tactical decision implementation is impersonal.
Tactical decisions are less important than Strategic decisions.
Strategic Management :
Definition – “Strategic management is the process of systematically analysing various opportunities and threats vis-à-vis organisational strengths and weaknesses, formulating, and arriving at strategic choices through critical evaluation of alternatives and implementing them to meet the set objectives of the organisation”.
Definition – “Strategic Management is concerned with making decisions about an organisation’s future direction and implementing those decisions”. - By Lloyd L Byras.
Aspects of Strategic Management
Mission Statement indicating methodology for achieving the objectives, purposes and Philosophy of organisation as reflected in vision statement.
Company Profile, its internal culture, strengths and capabilities.
Critical study of external environmental factors, threats and opportunities.
Finding out way and deciding the desirable course of actions for accomplishing the Mission statement.
Selecting long term objectives and deciding corresponding strategies.
Evolving short term objectives , defining corresponding strategies in tune with Mission and Vision Statements.
Implementing chosen strategies in planned way, based on budgets, allocating resources, outlining action plan and tasks.
Installation of a continuous review system , creating a control mechanism and Data generation for selecting future course of action.
Five Tasks of Strategic Management
Forming a strategic Vision of what the company’s future business make up will be and where the organisation is headed. (A long term vision to infuse the organisation with a sense of purposeful action.)
Setting objectives : converting Strategic vision into specific measurable performance outcomes.
Crafting a Strategy to achieve desired outcome.
Implementing & Executing chosen strategy efficiently and effectively.
Evaluating performance & initiating corrective adjustment in Vision, Long term directions, Objectives, Strategy in light of actual experience, changing conditions, new ideas & new opportunities.
Who performs these five tasks of Strategic Management?
CEO is most important Strategy Manager, who is most visible also. He performs various roles such as, Chief direction setter, Chief objective setter, Chief strategy maker, Chief Strategy implementer.
Vice Presidents of various functions have role to play in strategy making and implementing. Functional heads like Production, Marketing, Finance, HR etc have responsibilities to deliver measurable performance as per Strategic Planning.
All major organisational units, business units, divisions, Staff, Plant support groups, district offices have leading and supporting roles in company’s strategic game plan.
CEO & Senior Corporate executives have responsibility & personal authority for major strategic decisions.
Managers with Profit & Loss responsibilities for individual business units or divisions.
Functional Heads & Departmental heads with direct responsibility over a major business areas.
Managers of operating plants: Strategy making is a job for all the line managers. Doers should be strategy makers. It should not be left to staff of Planners. Strategic Planning is not a stand alone function. It is an integrated team effort.
Aspects of Strategic Planning - 1
Strategic Planning provides the route map for the enterprise. It lends a framework which can ensure that decisions concerning future are taken in a systematic and purposeful way.
Strategic Planning provides a hedge against uncertainty, against totally unexpected developments.
Strategic Planning helps in understanding trends in a better way and generates a reference frame for investment decisions.
Strategic Planning provides the frame work for all major business decisions, decisions on business, products, markets, manufacturing facilities, investments, and organisational structure. It is a path finder for business opportunities and it is also a defence mechanism to avoid costly mistakes in choice of product market or investments.
Aspects of Strategic Planning - 2
The more intense the environmental uncertainty, more critical is the need for strategic planning.
The success of the efforts and activities of the enterprise depends heavily on the quality of strategic planning.
Considerable thought and effort must go in vision, insight, experience, quality of judgement and the perfection of methods and measures.
Strategic Planning is a management task concerned with growth and future of the business enterprise.
As a management tool, Strategic Planning utilises both intuition and logic. Logic is through Planning and information process and intuition is through experience, knowledge and vision of top people in Management.
All vital aspects of corporate governance are perfected through strategic planning, starting from corporate mission, philosophy and core values, down to choice of businesses and strategies.
Aspects of Strategic Planning - 3
Through analytical process aspect, involved in Strategic Planning, corporation understands where its core competencies are, identifies the competitive advantages, pinpoints the gaps, formulate steps to bridge them.
Main aspects of Strategic Planning are Future, Growth, Environment, basket of businesses of the firm for additions and deletions, Strategy and not day to day routine matters, creation of core competency and competitiveness and finally integration. It views the organisation / business in its totality and not a particular function. Thus Strategic Planning is Corporate Strategy.
Strategic Planning differs from other operative and administrative functions of management. Strategic Planning provides objective – strategy design: A) Growth Objective –Performance levels, Profitability target, B) Product Market scope, its penetration, C) Growth Vector – Product Market posture, development or diversification, D) Competitive Advantages, E) Synergy, strength obtained from new product-market selections.
Mintzberg’s 5Ps of strategy –
Henry Mintzberg, in his 1994 book, The Rise and Fall of Strategic Planning , points out that people use " Strategy " in several different ways, the most common being these five :
Strategy is a Plan , a "how," a means of getting from here to there.
A strategy can be a Ploy too; really just a specific manoeuvre intended to outwit an opponent or competitor.
Strategy is a Pattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy.
Strategy is Position ; that is, it reflects decisions to offer particular products or services in particular markets.
Strategy is Perspective , that is, vision and direction.
Mintzberg argues that strategy emerges over time as intentions collide with and accommodate a changing reality.
Thus, one might start with a perspective and conclude that it calls for a certain position, which is to be achieved by way of a carefully crafted plan, with the eventual outcome and strategy reflected in a pattern evident in decisions and actions over time.
This pattern in decisions and actions defines what Mintzberg called "realized" or emergent strategy.
Henry Mintzberg (pictured above,) Bruce Ahlstrand and Joseph Lampell, in their 2005 book “Strategy Bites Back”, present 5 "P's" as a way to define strategy. Each "P" shines a spotlight on what strategy is / means / encompasses from a different angle, to provide a comprehensive overview that is probably more useful than definitions that try to fit all into a couple of sentences.
Mintzberg’s 5Ps of strategy – The 5 "P's," adjusted where necessary to fit into the professional services / Industrial firms, are as follows: 1. Strategy is a PLAN To almost anyone you care to ask, strategy is a plan - some sort of consciously intended course of action , a guideline (or set of guidelines ) to deal with a situation. A kid has a "strategy" to get over a fence; a firm has one to dominate a market for a particular service or practice area. By this definition, strategies have two essential characteristics: they are developed consciously and purposefully .
2. Strategy as a PLOY: Strategy can be a ploy , too, which is really just a specific "manoeuvre" intended to outwit an opponent or competitor . The kid may use the fence as a ploy to draw a bully into his yard, where his Doberman Pincher awaits intruders. Likewise, a firm may threaten to establish a new practice area in order to discourage a competitor from trying to do the same. Here the real strategy (as plan, that is, the real intention) is the threat, not the new practice area itself, and as such is a ploy. Threatened litigation often falls into this category.
3. Strategy is a PATTERN: Strategy (whether as general plans or specific ploys) is pointless if it cannot be realized. In other words, defining strategy as a plan or ploy is not sufficient; we also need a definition that encompasses the resulting behaviour. Thus, strategy is also a pattern - specifically, a pattern in a stream of actions . By this definition, strategy is consistent in behaviour, whether or not intended. The outcome of strategy does not derive from the design, or plan, but from the action that is taken as a result .
4. Strategy is a POSITION: Strategy is also a position ; specifically a means of locating a firm in its environment. In ecological terms: strategy becomes that firm's "niche." In management terms: a "domain" consisting of a particular combination of services, clients and markets. Position is often defined competitively (literally so in the military, where it becomes the site of a battle.)
5. Strategy is a PERSPECTIVE: While position is outwardly focused, perspective looks inward into the firm; even into the heads of the strategists themselves. Strategy in terms of this definition becomes an ingrained way of perceiving the world. Some firms are aggressive pacesetters; others build protective shells around themselves. Almost every profession has about it unique perspectives, that indelibly flavour the strategies that firms practicing those professions craft for themselves. A law firm's view of their business is fundamentally different to that of an accounting firm, and engineering firm or a graphic design studio, yet all are staffed by professionals.
The Plan provides the roadmap by which the firm intends to achieve its goals. Ploys add a dimension of feint and manoeuvre, where one firm's gain is another's loss and competitive advantage is critical. Pattern emphasizes that strategy is not a once-off event but a constant stream of decisions and resultant actions that drive the firm forward, over time, towards its goal. Position adds that different firms have different mixes of markets, clients and services that they provide to those clients. Finally Perspective provides an insight onto how the firm and its strategists are informed by their own professions, their perceptions of business, and the unique characteristics of each firms own "world."
What Is Strategy? - 1 What, then, is strategy? Is it a plan? Does it refer to how we will obtain the ends we seek? Is it a position taken? Just as military forces might take the high ground prior to engaging the enemy; might a business take the position of low-cost provider? Or does strategy refer to perspective, to the view one takes of matters, and to the purposes, directions, decisions and actions stemming from this view? Lastly, does strategy refer to a pattern in our decisions and actions? For example, does repeatedly copying a competitor’s new product offerings signal a "me too" strategy? Just what is strategy? Strategy is all these—it is perspective, position, plan, ploy and pattern. Strategy is the bridge between policy or high-order goals on the one hand and tactics or concrete actions on the other. Strategy and tactics together straddle the gap between ends and means.
What Is Strategy? - 2
In short, strategy is a term that refers to a complex web of thoughts, ideas, insights, experiences, goals, expertise, memories, perceptions, and expectations that provides general guidance for specific actions in pursuit of particular ends.
Strategy, then, has no existence apart from the ends sought. It is a general framework that provides guidance for actions to be taken and, at the same time, is shaped by the actions taken.
The ends to be obtained are determined through discussions and debates regarding the company's future in light of its current situation. A SWOT analysis (an assessment of Strengths, Weaknesses, Opportunities and Threats) is conducted based on current perceptions.
Adopt / Abandon Strategy features New Initiatives & Ongoing Strategy Features continued from prior periods Adoptive reactions to Changing circumstances Company’s Strategy
It is a simple and undeniably relevant matter for managers to periodically ask the following questions of the employees reporting to them:
What have you done to improve customer service?
What have you done to improve customer satisfaction?
What have you done to reduce costs?
What have you done to increase productivity?
What have you done to increase revenues from new products and services?
Some Fundamental Questions
Regardless of the definition of strategy, or the many factors affecting the choice of corporate or competitive strategy, there are some fundamental questions to be asked and answered. These include the following:
Related to Mission & Vision
Who are we?
What do we do?
Why are we here?
What kind of company are we?
What kind of company do we want to become?
What kind of company must we become?
Related to Corporate Strategy
What is the current strategy, implicit or explicit?
What assumptions have to hold for the current strategy to be viable?
What is happening in the larger, social and educational environments?
What are our growth, size, and profitability goals?
In which markets will we compete?
In which businesses?
In which geographic areas?
Related to Competitive Strategy
What assumptions have to hold for the current strategy to be viable?
What is happening in the industry, with our competitors, and in general?
What is the current strategy, implicit or explicit?
What are our growth, size, and profitability goals?
What products and services will we offer?
To what customers or users?
How will the selling/buying decisions be made?
How will we distribute our products and services?
What technologies will we employ?
What capabilities and capacities will we require?
Which ones are core competencies?
What will we make, what will we buy, and what will we acquire through alliance?
What are our options?
On what basis will we compete?
Some Concluding Remarks -1
Strategy has been borrowed from the military and adapted for business use. In truth, very little adaptation is required.
Strategy is about means. It is about the attainment of ends, not their specification. The specification of ends is a matter of stating those future conditions and circumstances toward which effort is to be devoted until such time as those ends are obtained.
Strategy is concerned with how you will achieve your aims, not with what those aims are or ought to be, or how they are established. If strategy has any meaning at all, it is only in relation to some aim or end in view.
Strategy is one element in a four- part structure . First are the ends to be obtained. Second are the strategies for obtaining them, the ways in which resources will be deployed. Third are tactics, the ways in which resources that have been deployed are actually used or employed. Fourth and last are the resources themselves, the means at our disposal. Thus it is that strategy and tactics bridge the gap between ends and means.
Some Concluding Remarks -2
5. Establishing the aims or ends of an enterprise is a matter of policy and the root words there are both Greek: politeia and polites —the state and the people. Determining the ends of an enterprise is mainly a matter of governance not management and, conversely, achieving them is mostly a matter of management not governance.
Those who govern are responsible for seeing to it that the ends of the enterprise are clear to the people who manages that enterprise and that these ends are legitimate, ethical and that they benefit the enterprise and its members.
Some Concluding Remarks - 3 7. Strategy is the joint province of those who govern and those who manage. Tactics belong to those who manage. Means or resources are jointly controlled. Those who govern and manage are jointly responsible for the deployment of resources. Those who manage are responsible for the employment of those resources—but always in the context of the ends sought and the strategy for their achievement. 8 Over the time, the employment of resources yields actual results and these, in light of intended results, shape the future deployment of resources. Thus it is that "realized" strategy emerges from the pattern of actions and decisions. And thus it is that strategy is an adaptive, evolving view of what is required to obtain the ends in view.
Criteria for Effective Strategy
Clear, decisive, measurable objectives,
Maintaining the initiative proactively,
Concentration on what will make the enterprise superior in power,
Flexibility must be built in use of resources, buffers, reserved capabilities, manoeuvrability and repositioning,
Coordinated and committed leadership,
Surprise the opponent by use of speed, secrecy and intelligence,
Security: the organisation should secure & develop resources required, securely maintain all vital operating points for the enterprise, an effective intelligence system to prevent effects of surprise by the competitors.
Importance of Strategy
Modern era witnesses the tremendous increase in the External Threats. Companies must have clear Strategies & must implement them effectively so as to survive.
We can see some companies like Jessops, Martin Burn have become extinct and some companies like Reliance, Infosys have become market leaders.
The basic factor responsible is not the Government or infrastructure or labour relations, but the Strategic thinking that different companies have shown in conducting the business.
Strategy helps an organisation to take decisions on long range forecasts.
It allows the firm to deal with a new trend and meet competition in the effective manner.
With the help of strategy, management develops capacity to be flexible to meet unanticipated changes.
Efficient strategy formation and implementation result into financial benefits to the organisation in the form of increased profits.
Importance of Strategy -2
5. Strategy provides focus in terms of organisational objectives and provides clarity of direction for achieving the objectives.
6. Strategy contributes towards organisational effectiveness by providing satisfaction to the personnel.
7. It gets managers into habit of thinking, makes them proactive and more conscious of their environment.
8. It provides motivation to employees as they can shape their work in the context of shared corporate goals and make them work for achieving these goals.
9. Strategy formulation & implementation gives opportunity to the management to involve different of management in the process.
10. It improves Corporate communication, coordination and allocation of resources.
Identifying a Company’s Strategy – What to look For: The Pattern of Actions & Business Approaches that define a Company’s Strategy Actions to gain sales & Market share via lower prices, more performance features, more appealing design, better quality or customer service, wider production selection etc. Actions to respond changing market conditions and other external circumstances Actions to diversify the Company’s revenue & earnings by entering into new business Actions to enter new geographic or product markets or exit existing market Actions to strengthen competitive capabilities & correct competitive weaknesses Actions & approaches that define how the company manages, research & development, production, sales & marketing, finance & other key activities Efforts to pursue new market opportunities & defend against threats to the Company’s well-being Actions to form Strategic alliances & collaborative partnerships Actions to merge with or acquire rival companies .
The Strategy Hierarchy
In most (large) corporations there are several levels of strategy. Strategic management is the highest in the sense that it is the broadest, applying to all parts of the firm. It gives direction to corporate values, corporate culture, corporate goals, and corporate missions. Under this broad corporate strategy there are often functional or business unit strategies
Different Levels of Strategy Levels Structure Strategy Corporate Corporate Level SBU - A SBU - B SBU - C SBU Business level Functional Finance Marketing Operations Personnel Information Functional Level Corporate Office
Corporate Strategy: The companywide game plan for managing a set of businesses. The levels involved are CEO and other Senior Executives.
Business & Corporate Strategy
Business strategy , which refers to the aggregated operational strategies of single business firm or that of an SBU in a diversified corporation, refers to the way in which a firm competes in its chosen arenas.
Corporate strategy , then, refers to the overarching strategy of the diversified firm. Such corporate strategy answers the questions of "in which businesses should we compete?" and "how does being in one business add to the competitive advantage of another portfolio firm, as well as the competitive advantage of the corporation as a whole
Business Strategy for Strategic Business Units: One for each business, the company has diversified into. Actions to build competitive capabilities and strengthen market position. Executed by General Mangers, Plant Heads, Division heads of each business with inputs from Corporate and Functional levels.
Many companies feel that a functional organizational structure is not an efficient way to organize activities so they have re –engineered according to processes or strategic business units (called SBUs). A Strategic Business Unit is a semi-autonomous unit within an organization. It is usually responsible for its own budgeting, new product decisions, hiring decisions, and price setting. An SBU is treated as an internal profit centre by corporate headquarters. Each SBU is responsible for developing its business strategies, strategies that must be in tune with broader corporate strategies
Functional strategies include Marketing Strategies, New product development strategies, Human resource strategies, Financial strategies, Legal strategies, Supply-chain strategies, and Information technology management strategies. The emphasis is on short and medium term plans and is limited to the domain of each department’s functional responsibility and is executed by Functional heads. Each functional department attempts to do its part in meeting overall corporate objectives, and hence to some extent their strategies are derived from broader Corporate & Business strategies.
The “lowest” level of strategy is operational strategy . At this level, detailing is done to add completeness to Business & Functional Strategies. It is very narrow in focus and deals with day-to-day operational activities such as scheduling criteria. It must operate within a budget but is not at liberty to adjust or create that budget. Operational level strategy was encouraged by Peter Drucker in his theory of Management By Objectives (MBO). Operational level strategies are informed to business level strategies which, in turn, are informed to corporate level strategies. These strategies are executed by ‘Brand Managers’, ‘Operating Managers’, ‘Plant managers’. Important activities like Advertising, Web site operations, distributions are involved at this level.
Since the turn of the millennium, there has been a tendency in some firms to revert to a simpler strategic structure. This is being driven by information technology. It is felt that Knowledge Management Systems should be used to share information and create common goals. Strategic divisions are thought to hamper this process. Most recently, this notion of strategy has been captured under the rubric of Dynamic Strategy , popularized by the strategic management textbook authored by Carpenter and Sanders. This work builds on that of Brown and Eisenhart as well as Christensen and portrays firm strategy, both business and corporate, as necessarily embracing ongoing strategic change, and the seamless integration of strategy formulation and implementation. Such change and implementation are usually built into the strategy through the staging and pacing facets.
Strategists - Their Roles & Levels:
Strategists are individuals or groups who are primarily involved in the formulation, implementation, and evaluation of Strategy.
In a limited sense, all managers are Strategists. But we may have outside agencies involved in various aspects of Strategic Management, who are also Strategists.
Board of Directors :- Board is an ultimate legal authority of an organisation. Board is responsible to owners, share holders, government, controlling agencies, and financial institutes. They get elected and appointed by holding or parent company. Board is requires to direct and is involved in reviewing and screening executive decisions in light of their environmental, business and organisational implications. Role of Board of Directors is to guide the senior management in setting and accomplishing objectives, reviewing and evaluating organisational performance, and appointing senior executives. Board is involved in setting strategic direction, establishing objectives & strategy, monitoring and reviewing achievement.
Chief Executive Officer :- is responsible for all aspects of strategic management from the formulation to evaluation of strategy. CEO plays a pivotal role in setting mission, objectives and goals. He formulates and implements strategy and ensures that organisation does not deviate from a predetermined path. CEO is primarily responsible for strategic management of the organisation
Entrepreneur : - is the person who starts a new business, is a venture capitalist. He has to play a proactive role to provide sense of direction, set objectives and formulate strategies. He is different from formal system and plays all strategic roles simultaneously.
Senior management :- consists of higher management level starting from CEO to functional managers and profit centre or SBU heads. They are responsible for implementing the strategies and plans and for a periodic evaluation of their performance. Organisationally they come together in the form of committees, task forces, work groups, think tanks and play a very important role in Strategic management.
SBU level Executives :- SBUs are formed with each business having a clearly defined product – market segment and a unique strategy. They are CEOs for their SBUs and hence SBU level strategy formulation and implementation is their main role.
Corporate Planning :- It assists management in all aspects of strategy formulation, implementation and evaluation. They are responsible for preparation and communication of strategic plans, provides administrative support and plays a measurement and controlling role. They do not from strategy and do not initiate a process on their own.
Consultants :- in absence of a Corporate planning many organisation take an outside help in the form of a consultants or consulting companies. Besides providing corporate strategy and strategic planning, they are specialist, knowledgeable, outsider, unbiased and provide objective evaluation. E.g. AF Ferguson, PWC, KPMG, Billimoria, Mckinsey etc.
Middle Level Managers:- They relate to operational matters and are seldom play active role in Strategic Management. They form departmental / functional plan in light of broad objectives and goals of organisation provided in vision, mission, goals and objective statements of the organisation. They are implementers, followers of guide lines, receivers of communication about strategic plans. They are basically involved in in the implementation of functional strategies.
Executive Assistant :- An executive assistant is a person who assists the chief executive in the performance of his duties like data collection and analysis, suggesting alternatives. He prepares brief for various plans, proposals, and projects. He helps in public relations and liaison functions. He coordinates activities with the internal staff and outsiders. He is a corporate planner for CEO. Generally, he orients from finance background ensuring and opining on ROI and strategic positioning of the organisation.
We will now look at a framework developed by Richard Rumlet for evaluating alternative strategies. It is described in a series of tests: Consistency : The strategy must not present mutually inconsistent goals and policies.
Consonance : The strategy must represent an adaptive response to the external environment and to the critical changes occurring within it.
Advantage : The strategy must provide for the creation and/or maintenance of a competitive advantage in the selected area of activity.
Feasibility : The strategy must neither overtax available resources nor create unsolvable sub-problems
We shall now look into the advantages and disadvantages of the strategy:
Strategy sets direction , but can also serve as a set of blinders to hide potential dangers.
Strategy focuses efforts , there may be no peripheral vision and can become heavily embedded into the fabric of the organization.
Strategy defines the organization , but defining it too sharply results in the rich complexity of the system being lost.
Strategy provides consistency , but could hinder creativity.
Kinds of Corporate Strategy -1
There are four Grand Strategic alternatives:
Stability Strategy: Main aim here is Stabilising and improving Functional Performance.
a.1) No Change Strategy.
a.2) Profit Strategy.
a.3) Pause / Proceed with caution Strategy.
b) Expansion Strategy : Main aim is here High Growth.
Mergers, Takeovers, Joint Ventures, Strategic Alliances, Global
Strategy, Trans-national Strategy, International Strategy,
Kinds of Corporate Strategy - 2
c) Retrenchment Strategy: Main aim here is contraction of its activities. It is done through Turnaround, divestment and liquidation in modes like
c.1) Compulsory winding up.
c.2) Voluntary winding up.
c.3) Winding up under supervision of Court.
d) Combination Strategies: It is combination of all above three
policies simultaneously in different businesses or at different
Merger of TTK Chemicals with TTK pharma.
TT industries and Textiles Ltd. expanded through JV.
TTK Ltd., diversified into cooking utensils.
TTK maps and publications into the general publishing business after a turn-around.
Schools of Thought on Strategy Formation-1
The fourth paradigm (1980 onwards) says that subject of Strategic Management is still under evolution. Strategic decision making is at the core of Managerial activity, their Strategic behaviour is outcome of Formation of Strategy.
Mintzberg and other doyens in field of Strategy have formed various perspectives called as Schools of Thought :
The Perspective Schools:
Design School -(Sleznic & Andrews): Strategy is unique. The process of Strategy formation is based on Judgement and Thinking.
Planning School- (Ansoff): Strategy is seen as a plan divided into sub-strategies and programmes. The lead role in Strategy formation is played by Strategy Planners.
The Positioning School- (Schendel –Hatten & Porter): Under this school Strategy is seen as set of planned generic positions chosen by a firm on the basis of an analysis of the competition and the industry in which they operate.
Schools of Thought on Strategy Formation-2
The Descriptive Schools:
4. Entrepreneurial School - (Schumpeter & Cole): Strategy formation is mainly intuitive, visionary & deliberate. Strategy is an outcome of a personal & unique perspective to create a niche.
5. Cognitive School - (Simon & March): Strategy formation is mental process. The lead role is played by thinker philosopher.
6. Learning School - (Weick, Quinn, Senge & Lindblom): This school perceives Strategy formation as an emergent process. The process is informal and messy and lead role is played by the learner.
7. Power School - (Allison & Astley): Strategy is seen as political & cooperative process or pattern. This school perceives Strategy formation as negotiation process. The process of Strategy formation is messy, emergent & deliberate.
Schools of Thought on Strategy Formation-3
8. Cultural School - (Rhenman & Normann): Strategy is seen as collective perspective. The process of Strategy formation is ideological, constrained & deliberate.
9. Environmental School -( Hanan, Freeman & Pugh): The lead role in strategy formation is played by environment as an entity. The process of Strategy formation is reactive, passive & imposed and hence deliberate.
The Integrative School: -(Chandler, Miles & Snow):
10. The Strategy is viewed in relation to a specific context and any of the nine schools mentioned above can be used to form the Process. The Strategy formation process is integrative, episodic & sequential.
Strategic Management Process - an Overview Definition of Strategic Management: Strategic management is defined as the dynamic process of formulation, implementation, evaluation and control of strategies to realise the Organisation’s Strategic intent. Strategic Management is a continual, evolving, iterative process. It is not rigid, stepwise activities arranged in a sequential order. It is repeated over time as situation demands. Establish Strategic Intent Formulation of Strategies Implementation of Strategies Strategic Evaluation Strategic Control
Strategic Management Process-1
Creating & Communicating the Vision.
Defining the Business.
Designing a Mission Statement.
Adopting the Business Model.
Clarifying the business mission, purpose & setting broad Objectives and Goals.
Formulation of Strategies:
External Environment Survey. SWOT Analysis.
Internal Appraisal of the firm.
Setting Corporate Objectives.
Formulating the Corporate objectives.
Formulating the Corporate strategies.
Exercising Strategic Choice.
Preparing a Strategic Plan.
Strategic Management Process-2
Implementation of Strategies:
Designing Structure, Systems and processes.
Managing Behavioural Implementation.
Managing Functional Implementations.
Performing Strategic evaluation & Control:
Performing Strategic evaluation.
Exercising Strategic Control.
Syllabus 2. Strategic Intent & Strategy Formulation: Vision, mission and purpose – Business definition, objectives and goals – Stakeholders in business and their roles in strategic management – Corporate Social Responsibility, Ethical and Social considerations in Strategy (4) --------------------------------------------------------------
Strategic Intent is combination of four levels in the Management. It involves discussions of Vision, Mission, Business Definition & Goals and Objectives.
Strategic Intent refers to the purposes the Organisation strives for.
Strategic Intent lays down the frame work within which firms would operate, adopt a predetermined direction, and attempt to achieve the Goals.
Hamel & Prahalad considered Strategic Intent as an obsession with an Organisation.
Strategic Intent envisions a desired leadership positioning and establishes the criterion the Organisation will use for charting its progress. In addition to ambitions of the Organisation; it encompasses active Management Process that includes focussing the organisation’s attention on winning. It covers motivating the people by communicating the values, targets. The intent encourages individual and team contributions and attempts sustaining enthusiasm by providing new operational definitions. The Strategic Intent guides the organisation through changing circumstances and guides use of resource allocations.
Strategy Formulation- Vision, Mission and Purpose,
A vision is more dream t of than it is. Vision Statement is permanent statement of a company. Vision is future aspiration s that lead to an inspiration. It defines the very purpose of existence of a company.
The vision of a company is a direction for action for employees. The essence of a vision is forward looking view of what an organisation wishes to become.
Kotter(1990) defines Vision as “ a description of an enterprise. (an organisation, corporate culture, a business, a technology, an activity) in future”.
El-namaki(1992) defines vision as a “mental perception of the kind of environment an individual, or an organisation, aspires to create within a broad time horizon and underlying conditions for the actualisation of this perception”
Miller and Dess(1996) defines vision as “category of intentions that are broad, all inclusive, and forward thinking”
Characteristics of a Vision Statement
Inspiring and exhilarating.
It represents, a discontinuity, a step, a jump ahead to dream what it is to be.
Creation of common identity and share sense of purpose.
Competitive, original and unique and practical.
Foster risk taking and experimentation.
Foster long term thinking.
A vision is a statement about what your organization wants to become.
It should resonate with all members of the organization and help them feel proud, excited, and part of something much bigger than themselves.
A vision should stretch the organization’s capabilities and image of itself. It gives shape and direction to the organization’s future.
Visions range in length from a couple of words to several pages.
Shorter vision statements is recommended because people will tend to remember their shorter organizational vision.
Vision Statement Samples:
"Year after year, Westin and its people will be regarded as the best and most sought after hotel and resort management group in North America." (Westin Hotels)
"To be recognized and respected as one of the premier associations of HR Professionals." (HR Association of Greater Detroit)
Vision Statement of “TATA STEEL”
“ TATA Steel enters the new millennium with the confidence of learning, knowledge based and happy organisation. We will establish ourselves as a supplier of choice by delighting our customers with our service and products. In the coming decade, we will become the most cost competitive steel plant and so serve the community and the nation”.
Vision Statement of Farm Fresh Produce
“ We help the families of Main Town live happier and healthier lives by providing the freshest, tastiest and most nutritious local produce: From local farms to your table in under 24 hours.”
Developing a Vision Statement
The vision statement includes vivid description of the organization as it effectively carries out its operations.
Developing a vision statement can be quick culture-specific, i.e., participants may use methods ranging from highly analytical and rational to highly creative and divergent, e.g., focused discussions, divergent experiences around daydreams, sharing stories, etc. Therefore, visit with the participants how they might like to arrive at description of their organizational vision.
Developing the vision can be the most enjoyable part of planning, but the part where time easily gets away from you
Note that originally, the vision was a compelling description of the state and function of the organization once it had implemented the strategic plan, i.e., a very attractive image toward which the organization was attracted and guided by the strategic plan. Recently, the vision has become more of a motivational tool, too often including highly idealistic phrasing and activities which the organization cannot realistically aspire.
Strategic Vision is a road map showing the route a company intends to take in developing and strengthening the business. It defines Company’s destination and provides rational for going there. It culminates in to a Mission Statement. Strategic Vision points an Organisation in a particular direction, charts a strategic path to follow for future and moulds the organisation’s identity.
Strategic Vision is different from Mission Statement: Strategic Vision deals with where we are going, where as Mission Statement deals with Company’s present business scope and purpose.
A company Mission is guided by the buyer’s needs it seeks to satisfy, the customer groups and market segments it is endeavouring to serve, and the resources and technologies that it is deploying in trying to please customers and achieve a Market and Industry position.
Example of Strategic Vision
“ The San Antonio Express News” developed this Strategic Vision,
" EXPAND” our customer base and enhance the franchise by pursuing multimedia opportunities.
“ DELIVER” an award-winning level of journalistic excellence, building public interest, trust and pride.
“ PROVIDE” vigorous community leadership and support.
“ INSTILL” an environment of internal and external excellence in customer service.
“ EMPOWER” and recognize each employee's unique contribution.
“ ACHIEVE” the highest standards of quality.
“ IMPROVE” financial strength and profitability."
Thompson(1997) defines Mission as “the essential purpose of the organisation, concerning particularly, why it is in existence, the nature of businesses it is in, and the customers it seeks to serve and satisfy”
Hunger and Wheelen(1999) say that “mission is the purpose and reason for the organisation’s existence”
Mission statements could be formulated on the basis of vision that an entrepreneur decides on in the initial stages.
A business mission helps to evolve an executive action.
Mission of organisation is what it is and why it exists. It represents common purpose which the entire organisation shares and pursues. It is a guiding principle.
Mission of a company is expressed it terms of products and geographical scope. It includes a methodology of attaining the desired goal in vision. It defines the competitive strength of a company and it emanates from corporate vision and strategic posture of a company.
Thus the mission of a business is a statement, a build-up philosophy of its current and future expected position with regards to its products, market leadership.
Mission is statement which defines the role of organisation plays in a society.
The corporate mission is growth ambition of the firm.
Characteristics of a Mission Statement
It should be feasible, achievable & It should be precise.
It should be clear & It should be distinctive.
It should be motivating.
It should be indicative of major component of strategy & Objectives.
It should be indicative of how objectives are to be accomplished.
It should be indicative of how Policies will be achieved.
It should focus Market Rather than Product.
Mission Statement Creation
To create your mission statement, first identify your organization’s “winning idea”. This is the idea or approach that will make your organization stand out from its competitors, and is the reason that customers will come to you and not your competitors.
Next identify the key measures of your success. Make sure you choose the most important measures (and not too many of them!)
Combine your winning idea and success measures into a tangible and measurable goal.
Refine the words until you have a concise and precise statement of your mission, which expresses your ideas, measures and desired result.
Developing a Mission Statement
At is most basic; the mission statement describes the overall purpose of the organization.
If the organization elects to develop a vision statement before developing the mission statement, ask “Why does the image, the vision exist -- what is it’s purpose?” This purpose is often the same as the mission.
Developing a mission statement can be quick culture-specific, i.e., participants may use methods ranging from highly analytical and rational to highly creative and divergent, e.g., focused discussions, divergent experiences around daydreams, sharing stories, etc. Therefore, visit with the participants how they might like to arrive at description of their organizational mission.
When wording the mission statement, consider the organization's products, services, markets, values, and concern for public image, and maybe priorities of activities for survival.
Consider any changes that may be needed in wording of the mission statement because of any new suggested strategies during a recent strategic planning process.
Ensure that wording of the mission is to the extent that management and employees can infer some order of priorities in how products and services are delivered.
When refining the mission, a useful exercise is to add or delete a word from the mission to realize the change in scope of the mission statement and assess how concise is its wording.
Does the mission statement include sufficient description that the statement clearly separates the mission of the organization from other organizations?
Mission Statement of Ranabaxy
“ To become a $ 1 Billion research based global (International) pharmaceutical company”
Mission Statement of Graphite India Limited
“ To be within top three companies in the world by achieving 1,00,000 MT Production of Graphite Electrodes before 2012”
The mission statement of Farm Fresh Produce is:
“ To become the number one produce store in Main Street by selling the highest quality, freshest farm produce, from farm to customer in under 24 hours on 75% of our range and with 98% customer satisfaction.”
"Our goal is simply stated. We want to be the best service organization in the world." ( IBM )
"To give ordinary folk the chance to buy the same thing as rich people." ( Wal-Mart )
"FedEx is committed to our People-Service-Profit Philosophy. We will produce outstanding financial returns by providing totally reliable, competitively superior, global, air-ground transportation of high-priority goods and documents that require rapid, time-certain delivery." ( Federal Express )
"Our mission is to earn the loyalty of Saturn owners and grow our family by developing and marketing U.S.-manufactured vehicles that are world leaders in quality, cost, and customer enthusiasm through the integration of people, technology, and business systems." ( Saturn )
"In order to realize our Vision, our Mission must be to exceed the expectations of our customers, whom we define as guests, partners, and fellow employees. (mission) We will accomplish this by committing to our shared values and by achieving the highest levels of customer satisfaction, with extraordinary emphasis on the creation of value. (strategy) In this way we will ensure that our profit, quality and growth goals are met." ( Westin Hotels and Resorts )
Values are traits or qualities that are considered worthwhile; they represent an individual’s highest priorities and deeply held driving forces. (Values are also known as core values and as governing values; they all refer to the same sentiment.)
Value statements are grounded in values and define how people want to behave with each other in the organization. They are statements about how the organization will value customers, suppliers, and the internal community. Value statements describe actions which are the living enactment of the fundamental values held by most individuals within the organization.
The values of each of the individuals in your workplace, along with their experience, upbringing, and so on, held together to form your corporate culture. The values of your senior leaders are especially important in the development of your culture. These leaders have a lot of power in your organization to set the course and environment and they have selected the staff for your workplace.
If you think about your own life, your values form the cornerstones for all you do and accomplish. They define where you spend your time, if you are truly living your values. Each of you makes choices in life according to your most important top ‘ten’ values. It is necessary to take the time to identify what is most important to you and to your organization.
Developing a Values Statement
Values represent the core priorities in the organization’s culture, including what drives members’ priorities and how they truly act in the organization, etc. Values are increasingly important in strategic planning. They often drive the intent and direction for “organic” planners.
Developing a values statement can be quick culture-specific, i.e., participants may use methods ranging from highly analytical and rational to highly creative and divergent, e.g., focused discussions, divergent experiences around daydreams, sharing stories, etc. Therefore, visit with the participants how they might like to arrive at description of their organizational values.
Establish four to six core values from which the organization would like to operate. Consider values of customers, shareholders, employees and the community.
Developing a Values Statement
Notice any differences between the organization’s preferred values and its true values (the values actually reflected by members’ behaviours in the organization). Record each preferred value on a flash card, then have each member “rank” the values with 1, 2, or 3 in terms of the priority needed by the organization with 3 indicating the value is very important to the organization and 1 is least important.
Then go through the cards again to rank how people think the values are actually being enacted in the organization with 3 indicating the values are fully enacted and 1 indicating the value is hardly reflected at all. Then address discrepancies where a value is highly preferred (ranked with a 3), but hardly enacted (ranked with a 1).
Incorporate into the strategic plan, actions to align actual behaviours with preferred behaviours.
Samples of Values and Value Statements
"To preserve and improve human life." ( Merck )
At Merck, "corporate conduct is inseparable from the conduct of individual employees in the performance of their work. Every Merck employee is responsible for adhering to business practices that are in accordance with the letter and spirit of the applicable laws and with ethical principles that reflect the highest standards of corporate and individual behaviour...
"At Merck, we are committed to the highest standards of ethics and integrity. We are responsible to our customers, to Merck employees and their families, to the environments we inhibit, and to the societies we serve worldwide. In discharging our responsibilities, we do not take professional or ethical shortcuts. Our interactions with all segments of society must reflect the high standards we profess."
Patriot Ledger (SouthofBoston.com): "We have a total commitment to these values, shaping the way we do business for our employees, our customers and our company.
Our employees are the most valued assets of our company, essential participants with a shared responsibility in fulfilling our mission.
We recognize that the quality, motivation and performance of our employees are the key factors in achieving our success.
Goals, Objectives and Action Plans
After you have developed the key strategies, turn your attention to developing several goals that will enable you to accomplish each of your strategies. Goals should be
S M A R T : S pecific, M easurable, A chievable, R ealistic and T ime-based.
Once you have enabled strategy accomplishment through setting SMART Goals, you will want to develop action plans to accomplish each goal. You will need to follow an action plan:
Establish a cross section of professionals as a committee and meet to plan the sessions.
Select topics based on member needs assessment.
Plan advertising strategies, and so forth.
Make action plans as detailed as you need them to be and integrate the individual steps into your planning system. An effective planning system, whether it uses a personal computer, a paper and pen system, a handheld computer or a Palm, will keep your goals and action plans on track and on target.
Areas of Objectives
Objectives represent managerial commitment to achieve specific results in specific period of time. Objectives could be
: Financial Resources
: Physical facilities
: Organisation Structure & Activities
: Manager Performance & Development
: Employee performance & Activities.
: Customer Service
: Social Responsibility.
Defining the business
A clear-cut statement of the business, the firm is engaged in or planning to enter. It is elaboration of the business arena and the boundaries in which it will play.
What is our business? What will it be? What should it be?
Defining business involves three dimensions, namely “Customer Functions”, “Customer Groups” and “Alternative technologies”.
Business Definition sets and limits the contours of the business. It clarifies the opportunities business can pursue and the areas in which these opportunities are to be looked for. It clarifies to the firm the various sources from which threats and competition will come for.
Defining Customer functions and Customer groups provides Blue Print and a reference point for Product-market strategy. Mission Statement provides the basic inputs for Business definition and provides a broad frame work.
Objectives of Business Policy:
Understand various concepts, like. Strategy, policies, plans, programmes.
Knowledge of internal and external environment and how it affects the functioning of the organisation.
Application of generalised approach to deal with wide variety of situations.
Development of analytical ability to understand situation. Identify factors relevant to decision making. Analyse strength, weakness, opportunities and threats to organisation. Development of attitude of generalist and asses a situation from all angles.
Some Business definitions : Modi Zerox : Focus as a service organisation rather than vendor of zerox machines. Customer focus : Office Communication with high priced and low priced equipments, marketing services of maintenance and per copy price. Customer Function: Availability of spares, Drums, Toner, good after sales service. Technology : Collaboration with “Rank Zerox” Helen Curtice : We are in beauty enriching business. We will pursue ideas that would generate products enhancing beauty and youthfulness of men and women. Intel : We are in the business of computing technology and to consistently develop the artifice/building blocks of computing technology for the entire computer industry of the world is our business.
Attributes of a good business definition:
It must be related to human needs which the product seeks to satisfy and should not be limited to just the product.
It must be related to basic benefits the product offers.
It should not be narrow. A wrong and or narrow concept could reduce the life span of organisation.
It must be related to the functions performed by the product and not limited to just the product.
It must encompass in its fold, as many related function / benefits as possible.
It must go beyond the immediate product, beyond the immediate competitors, beyond the immediate market boundaries.
It must be wide enough to embrace new opportunities.
It must be wide enough to give a vision of latent sources of competition from say, substitute products.
Business boundaries keep changing and defining Business is a dynamic situation and becomes an exacting exercise and it needs to be re-casted over time again and again.
Benefits of Business Policy
Business Policy seeks to integrate the knowledge and experience gained in various functional areas of Management. Normally functional areas are aloof of complexities of real life business situations. Business Policy cuts across the narrow functional boundaries. Business Policy helps us to create an understanding of how policies are formulated.
Managers become more receptive to the ideas and suggestions of senior Management. Managers feel themselves to be a part of a greater design.
Understanding Business Policy provides a basic framework for understanding strategic decision making and Improvement in Job Performance.
Study of business policy leads to personal development. Managers understand the impact of policy shifts on the status of one’s department and on the positions one occupies.
Understanding Business Policy enables manger to avail the an opportunity or avoid a risk to career planning and development
Understand senior management’s view point.
Social Responsibility & Strategic Management
Social Responsibility along with ethics becomes a stated or un-stated requirement. It gets attended in Strategic Planning through environmental appraisals. It has differing views, while some do not want it to be considered in business operations, others boast around it. However, most business houses observe a balance and undertake to deliver social responsibility and business objectives without contradicting each other.
Social Responsibility extends beyond the workforce and stakeholders and many business houses take up activities for community welfare, rural development, sports etc.
Presently, with ISO:14001:2004 which concerns Environment Management Systems, it has become a necessity to address the mode and means of delivering social responsibility.
Scope of Social Responsibility is defined in terms of Social concern. Business organisation depending on its nature, size, and breadth of activity, could extend social responsiveness to the problems of the whole world, nation, local community, industry and to itself. Business organisations could also classify Social Responsibilities in terms of relatedness to its own activities.
Like any other strategic functions, for successful implementation, Organisations need to allocate resources, create Organisations Structure and evaluate its effectiveness. But all said and done, the society in large remains a major stake holder and we cannot escape our dues to society and towards social responsibility.
Corporate Governance : Social Responsibility
Business provides goods & services to Society for which it receives the price.
Society provides goods and services to Business for which it receives the price.
Business rewards to society for its inputs by paying wages/profits/dividends
Society and Business are interdependent. Their growth & welfare is dependent on this mutuality. Business owes responsibility towards society. A firm carrying very positive image in society has very strong probability of lasting growth.
Corporate Governance : Social Responsibility
“ Sole aim of a business is and should be maximisation of Shareholders’ value”, as stated by Milton Friedman, does not hold good anymore.
All modern large corporate have attained their present size due to support of society in terms of shareholders, suppliers, lenders, employees, government, local community and society at large.
Every business unit of the country must aim at becoming good corporate citizen of the country and the world as whole. World Class Quality of goods and services, reasonable prices is minimum requirement. With this companies would enjoy excellent image within area, country and world. Indian examples are Tatas, Birlas, Reliance, Bajaj, L&T, Hero Honda, HDFC, Dr. Reddy Laboratories. TCS, etc.
Industrial Corporate Citizens are trustees and should utilise their wealth for the welfare of the society / community. Trusteeship invokes code of discipline, ethical behaviour and strong principle of accountability. Capital and Labour have to have mutual, peaceful co-existence.
Corporate Governance : Social Responsibility
Common feature they all posses is their image not only as value creator but more as Top Class Corporate citizen of India and of the world. They are asset to the share holders, country and society at large by creating world class products at competitive prices and price and providing these products to society at desired time and space. Many of them provide non-core social activities for benefit of society in quest of their becoming good Corporate Citizens.
They realise their dependence on Society for their needed inputs like money, men and skills, society as a market for their outputs and realise that they cannot exist without unreserved support from Society. The more closely a company concentrates on solving societal problems, the better it is able to solve its own problem of growth and prosperity.
Corporate Governance : Social Responsibility
Capital and labour should supplement and assist each other. Capital being trustees should look after welfare of labour not only material but also moral welfare. Principle of mutually cherishing each other should be developed. Capital should look after the workers and workers should look after productivity and profit of the organisation. Presently, capital has been replaced by knowledge in newer industries like IT & Pharma. Knowledge workers (professionals) like Bill Gates, Narayan Murthy are paving the way towards social responsibilities.
Social Responsibilities have foundation of Business Ethics, the moral principles of good & bad, right & wrong or Just & unjust. Peter Drucker has stated that there are no separate ethics of business. What is unethical and immoral in society is also applicable to business. The trick is to put your-self in shoes of those, against whom a particular action is being planned / taken, which is known as empathy. Corporate ethics refers to set of rules, code of conduct acceptable to society at large without any reservations. The concept of Business ethics is global phenomenon and is recognised throughout the world.
Corporate Governance : Social Responsibility
Code of Ethics for Indian Business (by PHD Chambers)
It is believed that the best way to promote high standards of business practice is through self regulation.
Business should be conducted in a manner that earns the goodwill of all concerned through Quality, efficiency, transparency & good values with objectives as under:
a) Be faithful and realistic in stating claims.
b) Be responsive to customer need and concerns.
c) Treat all stakeholders fairly and with respect
d) Protect and promote the Environment and Community interests
Stakeholders are defined as "those groups without whose support the organization would cease to exist.
A corporate stakeholder is a party that affects or can be affected by the actions of the business as a whole.
Person, Group, or Organization that has direct or indirect Stake in an organization because it can affect or be affected by the Organisation’s actions, Objectives, and Policies.
Key stakeholders in a Business Organization include Creditors, Customers, Directors, Employees, Government ( and its Agencies) Owners, Shareholders, Suppliers, Unions, and the Community from which the business draws its Resources.
Although stake-holding is usually self-legitimizing (those who Judge themselves to be stakeholders are de facto so), all stakeholders are not equal and different stakeholders are entitled to different Considerations.
For example, a firm's customers are entitled to fair trading practices but they are not entitled to the same consideration as the firm's employees.
External Stakeholder : Definition:
Entities such as Customers , Suppliers , Lenders, or the wider society which influence and are influenced by an Organisation but are not its 'internal part'
Stakeholder: Any party that has an interest in an organization. Stakeholders of a company include stockholders, bondholders, customers, suppliers, employees, and so forth.
"The stakeholders in a corporation are the individuals and constituencies that contribute, either voluntarily or involuntarily, to its potential wealth-creating capacity and activities, and that are therefore its beneficiaries and/or risk bearers."
Any individual, group or business with a vested interest (a stake) in the success of an organization is considered to be a Stakeholder . A Stakeholder is typically concerned with an organization delivering intended results and meeting its financial objectives. In general, a Stakeholder can be one of two types: internal (from within an organization) or external (outside of an organization). Examples of a Stakeholder are an owner, manager, Shareholder , Investor , employee, customer, partner and/or supplier, among others. A Stakeholder may contribute directly or indirectly to an organization’s business activities. Other than traditional business, a Stakeholder may also be concerned with the outcome of a specific project, effort or activity, such as a community development project or the delivery of local health services. A Stakeholder usually stands to gain or lose depending on the decisions taken or policies implemented.
Types of stakeholders
People who will be affected by an endeavour and can influence it but who are not directly involved with doing the work. In the Private Sector ,*People who are (or might be) affected by any action taken by an organization or group. Examples are parents, children, customers, owners, employees, associates, partners, contractors, suppliers, people that are related or located near by. Any group or individual who can affect or who is affected by achievement of a group's objectives.
An individual or group with an interest in a group's or an organization's success in delivering intended results and in maintaining the viability of the group or the organization's product and/or service. Stakeholders influence programs, products, and services.
Any organization, governmental entity, or individual that has a stake in or may be impacted by a given approach to environmental regulation, pollution prevention, energy conservation, etc.
A participant in a community mobilization effort, representing a particular segment of society. School board members, environmental organizations, elected officials, chamber of commerce representatives, neighbourhood advisory council members, and religious leaders are all examples of local stakeholders
Examples of a company stakeholders Jobs, Involvement, Environmental issues, Shares Local Community Credit score, New contracts, Liquidity Creditors Value, Quality, Customer Care, Ethical products Customers Working conditions, Minimum Wages , Legal requirements Trade Unions Rates of pay, Job Security Non-Managerial staff Performance, Targets , Growth Senior Management staff Taxation, VAT , Legislation , Low unemployment Government Profit , Performance, Direction Owners private/shareholders Examples of interests Stakeholder
Syllabus: 3 . Strategic analysis:
Analyzing Company’s Resources and Competitive Position-
Competitive Strategy According to Michael Porter
In a 1996 Harvard Business Review article and in an earlier book, Porter argues that competitive strategy is "about being different." He adds, " It means deliberately choosing a different set of activities to deliver a unique mix of value“.
In short, Porter argues that strategy is about competitive position, about differentiating yourself in the eyes of the customer, about adding value through a mix of activities different from those used by competitors.
In his earlier book, Porter defines competitive strategy as "a combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there." Thus, Porter seems to embrace strategy as both plan and position. (It should be noted that Porter writes about competitive strategy, not about strategy in general.)
Identification and Assessment of firm’s Competitive Edge & Core Competencies
A Competence is something an Organisation is good at doing. It results out of accumulated learning and built-up proficiencies. Examples are Proficiency in Merchandising, Working with Customers, Proficiency in specific technology, Proven capabilities.
A Core Competence is a proficiently performed activity that is central to the Organisation Strategy. These are important activities in which Company is better than other internal activities. Examples are : Good after sale service, Skills in Manufacturing, High quality product at low Cost.
A Core Competence is knowledge & skill based residing in people, and in Company’s intellectual capital. (Does not appear in Balance Sheet)
A Distinctive Competence is a competitively valuable activity that Company performs better than its rivals. It is Competitive superiority in performing Core activity generating competitively superior resource strength.
A strength that is superior / distinctive to competition is competitive advantage .
Competitive advantage is a back-up for strategy without which strategy will not work.
Competitive advantage finally results in either cost advantage or differentiation advantage.
Creating entry barrier is also a way to built up competitive advantage.
Building Competitive advantage is a conscious and long term process.
Preparing Competitive Advantage Profile for the organisation is based on internal appraisal and industry-competition.
An enduring competency that cannot be easily duplicated by imitation is Core Competency . Core Competency lies at the root of products.
Techniques used are : SWOT Analysis
: Bench marking
: Value chain analysis
: Value to customers – Competitive approach
: Competitive strength assessment.
Internal Appraisal of the firm:
To know one’s organisational capabilities, Strengths and Weaknesses.
To select the most suitable Opportunities as per already appraised capabilities.
To assess the “Capability GAP” for the opportunity in hand and also for the Objectives and Goals.
To take steps to elevate the capability to achieve Objectives and Goals.
To select the Product / business in which organisation can grow as per potentials appraised.
Factors considered for Internal Appraisal:
Assessment of the Strengths-Weaknesses in different functions/areas
Identification and assessment of firm’s Competitive Edge and Core Competencies.
Appraisal of the individual business, product lines of the firm and firm’s know-how status.
Assessing strengths and weaknesses:
How well is the company’s present Strategy working?
1. Evaluate company’s competitive approach. Compare cost effectiveness of the Company products with its rivals. Are we low cost? Or does our product have distinctive features? What value for money is offered to the customers? What is the perception of Customers about our Product and the Company.
2. Core competencies, distinctive competencies are building blocks of Strategy. They give the strength. Similarly resource weaknesses make company vulnerable and need to be corrected. Strength allows Company to take advantage of opportunities and guard against threats.
3. Check Value Chain analysis. Do we competitively manage value additions in Value chain? Are we competitively stronger or weaker than our key rivals?
Check what strategic issues need managerial attention. Find out gaps and take remedial actions. Conduct Industry analysis and competitive situation analysis and prepare a “worry list”. Good company situation analysis, good industry & competitive analysis are valuable pre-condition for good strategy making.
Marketing: Market growth, market share of the firm and its competitors, Production capacity and GAP between market potential, brand equity, Product’s life cycle and estimating safe period. Customer’s perception for the product and level of satisfaction there of. Synergy of the product-mix, Prices, margins, new product capability, Advertising, Sales promotion,
Finance: Level of financial performance – profitability and productivity, analysis of Assets & Costs, DSCR (debt service coverage ratio), analysis & efficiency of Cash flow, liquidity, Appreciation of long term financial plans as per Cost of capital, adequacy of Capital Expenditures, Tax administration, dynamism in Tax planning, payback, IRR & BE analysis, earning ratios like EPS, etc.
Manufacturing/Operations: Appropriateness of manufacturing processes, skills, facilities for future requirements of product trend. Management in planning and manufacturing controls. Operating efficiency w.r.t industry standards, Industrial Engineering capability for improving product and methods. Value engineering to simplify the product. Analysis of capacity utilisation, maintenance, breakdowns, inventory analysis, cost of product analysis.
R & D: Commitment to R&D, nature & depth of R & D outfit, Allocation of resources, Speed of R & D, New product development-its records and adequacy, R & D and market needs, Analysis of patents generated, new product commercialisation, R & D expenses v/s new product launch.
Allocation of resources and Corporate Functions: chief characteristics of Top Management – Image as dynamic? Confident? Aggressive? Timid? Reticent? Change-stability oriented? Future oriented? Coping up with future challenges? Creative? Realistic? Innovation record?
Organisation Culture & Structure – Traditional? Modern? Rigid? Centralised? Flexible? Flat? Use of information Technology?
OR includes tangible, Non-tangible, assets, Capabilities, Organisational processes, Technology, Plant & Equipments, Human resources, Information, Knowledge, etc
Four Types of Resources e.g. “Valuable”, “Rare”, “Costly to Imitate” and ‘Non-Substitutable”, will eventually, lead to Strategic Advantage.
OB is manifestation of forces and influence of Internal Environment. (like, Management Philosophy, Quality of Leadership, Shared value, Culture, Quality of Work, Work Environment, Climate, Politics, use of Power)
OB affects ability of organisation to use its resources.
OR & OB creates S & W. Strength is an inherent capability of organisation used to gain Strategic Advantage. It could be finance, Technology etc. A Weakness on other hand is inherent limitation or constraint creating Strategic Disadvantage. It could be Plant Location, Layout, Obsolete machinery, Uneconomical operations etc.
Synergistic Effects Two or more attributes of S & W, do not add up mathematically but combine to produce an dramatic, enhanced or reduced effect. This is Synergy or Dysergy. e.g. when product, pricing, distribution, promotion support each other a synergistic effect will occur on marketing
Competencies OR & OB develop S & W, which when combined with Synergistic Effects manifest themselves in terms of Competencies. This helps Organisations to withstand pressures of competition. This is ability to compete with rivals. Organisational Capability Organisational Capability is inherent capacity or potential of an organisation to use its Strengths and overcome Weaknesses to exploit Opportunities & face Threats. It is a skill for coordinating resources and putting them to productive use. Without capability, resources, even though valuable & unique, will be worthless. Organisational Capability, though measurable, remains a subjective attribute.
Strategic Advantage is result of Organisational Capabilities. The advantages can be measured in terms of Profit, Market Share, Growth etc. Negative results indicate Strategic Disadvantages. When compared with known identified rivals, the Strategic Advantage is also known as Competitive Advantage. In an abundantly profit making company, Competitive Advantage is used as stimulus.
Organisation Capability Profile (OCP): 1
Organisation capability is nothing but sum total of capabilities of various functional areas. Largely accepted main functional areas could be named as Finance, Marketing, Operations, Personnel, Information and General Management. These could be different for different types of organisations.
Operations Capability: includes Production of Products and Services. Use of material resources, some factors are:
Production System: Capacity, Location, Layout, Product Design, Work systems, Automation, etc.
Operations & Control: Production Planning, Material Supply, Inventory, Cost control, Quality control, Maintenance System, Procedures, Standards etc.
R&D or Design: Facilities, Product development, Patent rights, Technology, Collaboration, etc.
Organisation Capability Profile (OCP): 2
Financial Capability: is basically, availability, sourcing, usage and management of Funds. It depends upon various factors for example:
Sources of funds :- Capital Structure, Capital procurement, controllership, financing pattern, working capital availability, borrowings, reserves & surpluses, relations with banks, audit authorities.
Usage of funds:- Capital Investment, Fixed asset acquisition, Current assets, Loans & advances, Dividend distributions, Relations with Share Holders.
Management of funds:- Financial Accounting & Budgeting Systems, Management control systems, State of Financial health, Cash inflation, Credit & Risk management, Cost reduction & Control, Tax planning.
Organisational Strength & Weaknesses related to above factors is a measure of Financial Capability.
Organisation Capability Profile (OCP): 3
Marketing Capability: is basically, pricing, promotion, penetration and distribution of Product or Service. Marketing Capability Factors are: 4 ‘P’s of Marketing:
Product: Quality, Variety, Product Mix, Differentiation, Positioning, Packaging etc.
Price: Pricing objectives & policies, Changes, Protection etc.
Place: Distribution, Transportation, Logistics, Marketing Channels, marketing intermediaries etc.
Promotion: Tools used for promotion, Sales Promotion, Advertising, Public Relations etc.
Systemic: Marketing Mix, Market Standings, Company Image, marketing System, Marketing Management Information System etc.
Organisation Capability Profile (OCP): 4
Personnel Capability: is related to use of Human resources & skills, aspects about ability to implement strategies. Some of the Factors are:
Personnel System: Manpower planning, selection, development, compensation, communication, appraisal, Position of Personnel Dept. in organisation, etc.
Organisational Characteristics: Corporate Image & Image as Employer, Quality of Managers, Staff & workers, Working conditions, Developmental opportunities, etc.
Industrial Relations: Union-Management Relations, Collective bargaining, Safety, Welfare, Employee satisfaction and moral, etc.
Organisation Capability Profile (OCP): 5
Information Management Capability: relate to design & management of flow of information for decision making. Some factors are:
Acquisition and retention of information: Sources, Quantity, Quality, Timeliness, retention, security, etc.
Processing of Information : Database Management, Computer Systems, Software Capability, Ability to synthesise.
Transmission & Dissemination : Speed, Scope, Width, depth of coverage,
Integrative, Systemic, Supportive factors : IT infrastructure, its relevance & compatibility to organisational needs, Up-gradation, Computer Professionals, Top management Support, etc
Organisation Capability Profile (OCP): 6
General Management Capability: relates to integration, co-ordination and direction of the functional capabilities. Some factors are:
General Management System: Strategic management system, Strategy formulation, Strategy implementation machinery, MIS, Corporate planning, Rewards, Incentives, etc.
General Managers: Orientation, Risk-propensity, values, norms, competence, track records, etc.
External Relationship: Influence & rapport with Govt., Financial institutions, social responsibilities,
Organisational Climate: Organisational cultures, political processes, balance of vested interests, Acceptance of management of change, Organisational Structure & Control, etc.
Organisation capability Profile (OCP) : 7
The Organisation capability Profile (OCP) can be prepared by systematically assessing the various Functional areas and subjectively assign values to the different functional capability factors and sub-factors along a scale ranging from the values -5 to +5.
After completion of charts for all the factors and sub-factors mentioned above, Strategists can assess Weaknesses and Strengths of the organisation in each of the six functional areas.
Preparing the Strategic Advantage Profile (SAP):
OCP capability Factor Rating chart becomes a base for SAP.
Strategic Advantage or Disadvantages in each of the main functional areas can be summarised and presented.
A ‘SAP’ provides ‘a picture of the more critical areas, which can have a relationship to the Strategic posture of the Firm’.
Capability Factor Strength & Weaknesses
Finance: High cost of capital. -2
Reserves & Surplus position is -3 unsatisfactory.
High Rate of Profit +4
Credit worthiness is favourable for raising Loans +2
Low rate of Dividend -1
Preparing the Strategic Advantage Profile (SAP)-2:
Operations : Plant & Machinery is in excellent +4 Condition. Vendors are available. +2 Captive sources for raw material & spare parts are available. +1
Excellent Technology +4
Poor Quality Control -3
Marketing : Excellent Pre & Post Sales service +5
Complete understanding of Customer’s changing preferences to Sales Rep. +3
Close Competition -2
Human Resources : Capable & Competent Employees +5
Managers without HRM skills -2
Favourable compensation package +3
General Management : Top Management with Progressive ideas +4
Outdated Management Style -2
4. Analyzing Company’s External Environment:
Environmental appraisal –
Scenario Planning –
Preparing an Environmental Threat and Opportunity Profile - (ETOP) –
Industry Analysis – Porter’s Five Forces Model of competition. (4)
External Environment : PESTEL : Political, Economical, Socio-Cultural, Technological, Environmental, Legal, Company and Environment Input Resources : 5 Ms Outputs Sales, Service, Transport of goods Profits Feedback Corrective Action Visions Missions, Objectives, Goals, Business- Definition Strategy Systems Structures Targets Processes Planning Manufacturing Inspection Packing
Corporate Scenario Planning
Corporate Scenarios are proforma balance sheets and income statements that forecast the effect of alternative strategy and its various programs will likely to have on division and on corporate return on investment.
Recommended scenarios are simply extension of the Industry Scenarios developed earlier. This should be done for every product and for every country.
Develop common size financial statements for the company’s or business unit’s previous years which are basis for the trend analysis projections of proforma financial statements.
Construct detailed proforma financial statements for each strategic alternatives.
Compare the assumptions underlying the scenarios with these financial statements and ratios to determine the feasibility of the scenarios.
Scenario Box for use in Generating Financial Pro Forma Statements. Others ROE ROI EPS Profits Div. Expnsn PLR FOREX SALES CPI GDP ML P O ML P O ML P O Comments 11 0 2 09 0 2 07 0 2 Trends Historical average Last Year Factor
Scenarios are tools for strategists to express their views about alternative future environment for which today’s decisions are framed.
Scenarios resemble a set of stories, built around carefully constructed plots. The stories express multiple view points, paradigms on complex events taking place in world. Scenarios present alternative future images, instead of extrapolating current trends.
Creating scenarios requires decision makers to question their broadest assumptions about the way the world works to foresee a decision, which could have been missed or denied
For an organisation, scenarios provide a common vocabulary giving effective basis for communicating complex conditions and options.
By recognising the warning signals, the threats & opportunities of future, one can avoid surprises, adapt and act effectively.
Implementation of Scenario Planning
A cross function team is constituted for identifying and monitoring issues. Employees are encouraged to participate by offering some incentives.
Step – 1 : Understand effects of external factor on the business. These can be “Technology driven” (New Product, IT integration), or “Political” (Deregulation, instability), or “Economic” ( Sudden downturn, boom), “Competitive positioning” ( moves of Competitors)
Step -2 :Classification of issues by the supportive record or documents. Then determine the uncertainty and kind of impact of these issues.
Step – 3 : Analysing and Problem Solving as per A, B, C & D categories as per given figure.
A. Can be Discarded B. Keep a close watch C. Can be used for Long term Planning D. Are of Highest Concern Low Impact High High Low Un-Certainty
Analysing Scenarios & Problem Solving
D Category : High Impact and Low Uncertainty. Highest priority issues, need to be addressed immediately and more cautiously. All employees must first focus on these issues.
B Category : High Risk issues, need to be observed closely and monitored strictly because of high uncertainty involved.
C Category : Low impact – Low uncertainty: These issues can be used for Long term Planning.
A Category : Because of High Uncertainty and Low impact to the organisation is involved, these issues can be discarded for time being.
The analysis and problem solution can be done by an individual or by a team depending upon coverage and importance. All ideas / analysis should then be submitted to the cross functional strategic teams for further analysis and strategy making.
“ ETOP” – Environmental Threat and Opportunity Profile
Managers must be prepared to steer the Company to a new direction or alter the Strategy as per the Environment. The External environment appraisal leads to the “ Opportunities & Threats ” and Internal environment appraisal will lead to find out “ Strengths & Weaknesses ” of the organisation. ETOP helps organisation to face the weaknesses and capture the Threats.
“ ETOP” – Environment Threat and Opportunity Profile” Thinking strategically about a Company’s External environment Thinking strategically about a Company’s Internal Environment Form a Strategic vision of where the Company need to head Identify promising strategic options for the Company Select the best Strategy & Business Model for the Company
Environment Survey : Purpose:
To learn about events and trends in the environment and project the future of the environment.
To identify the favourable and unfavourable factors in the environment from standpoint of the firm.
To figure out the opportunities and threats hidden in environmental events and trends.
To assess the scope of various opportunities and find out the ones having potential of becoming promising businesses and pursue them.
To draw up the opportunity-threat profile.
To formulate strategy in line with opportunities.
Scope of Survey - 1
Macro- environmental factors
Demographic Environment – Size of population, age distribution, literacy levels, religious composition, composition of workforce, household patterns, regional characteristics, population shifts.
Socio-cultural, Environment – Culture-language-education, traditions, beliefs, values, lifestyle, social class,
Economic Environment – General Economic conditions and conditions for the targeted population segment, purchasing power, consumer spending pattern, rate of growth of economy and the growth of economy of targeted sector, rate of inflation, interest rates, tax rates, price of materials and energy, labour scene – cost, skill, availability.
Political Environment –Regulating legislation, stability of the government, media, social and religious organisations, pressure groups-lobbies,
Scope of Survey - 2
Natural Environment – ecology, climate, endowment of natural resources, raw material, energy,
Technology Environment – Technology options available, their cost effectiveness, technology at International level. Govt. approach in respect of technology, technology selection.
Legal- Business legislation – Corporate affairs, Consumer protection, Employee protection, Corporate protection, Regulation on products, controls on trade practices, protecting national firms.
Government Policies – Organisations have to understand govt. policies while setting and operating units, especially MNCs who operate in various countries. For example, many MNCs prefer India over China due to India’s legal environment.
Environmental factors specific to the business concerned -1
The Market / Demand – Nature of Demand whether it is seasonal, related to specific event, repetitive etc., Demand Potential, Current level of Demand, Changes in demand, consumption pattern, buying habits, invasion of substitute products,
The Consumer - Consumer tastes and preferences keep fluctuating and need to be monitored. A perpetual analysis of customer analysis is required. Who is the customer, what needs are served by product and what needs are envisaged by customer is to be analysed. Other factors are – Purchasing power, buying motive, buying Habits, Attitudes, lifestyle, brand Awareness, brand loyalty, nearest competitor, customer’s reaction to upcoming new products.
Environmental factors specific to the business concerned -2
The Industry & competition – Knowledge of Industry and competition is a fundamental requirement in developing strategy and industry analysis. The study of demand, consumer, industry and competition is normally a on-going activity.
Government Policies – More important in regulated economies but even in free economy, Govt. plays role as large purchaser, offers subsidies, protect home producers, ban fresh entry, ban products. Some time Govt. itself is large supplier and regulates the market. Govt. policies have a great effect on socio-economic conditions.
The Supplier related factors – Suppliers as a group have their own bargaining power and can influence cost. Scarcity of raw materials can affect output and deliveries. Supplier becoming manufacturer is always a threat. Monitoring supplier environment helps in making a decision of integrating or outsourcing.
Porter’s Five Forces Model, Source: Porter, Michael E, - Competitive Strategies -1985 Potential Entrants Industry Competitors Rivalry among existing firms Suppliers Buyers Substitutes Threat of new Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of substitute products or suppliers
Forces Shaping Competition in an industry - 1
According to Porter, a firm develops its business strategies in order to obtain competitive advantage (i.e., increase profits) over its competitors. It does this by responding to five primary forces:
Rivalry amongst existing firms and jockeying for position - i.e. competition
Threat of new entrants
Bargaining power of buyers / customers
Threat form substitute products and
Bargaining power of suppliers
Forces Shaping Competition in an industry - 2
These five factors shape competition and determine Attractiveness / Profitability in an industry.
Sizing up competition within factory is not enough; all forces shaping competition and survival of industry must be sized up. We should know which of these forces are strong and how they work in its industry, how will they affect the firm in particular and how to adjust one’s position to defend or overcome or take advantage of these forces.
The company positions itself so as to be least vulnerable to competitive forces while exploiting its unique advantage (say - cost leadership). A company can also achieve competitive advantage by altering the competitive forces.
Forces Shaping Competition in an industry - 3
These five forces of competition influence the firm’s strategy. The five competitive forces model provides a solid base for developing business strategies that generate strategic opportunities. In fact the strategy should be formed in such a way to influence all these forces in favour of the firm. Strategy should be formed to build defence against these forces and finding a position in industry where the influence of these forces is weakest.
In his recent study, Porter (2001) reemphasized the importance of analyzing the five competitive forces in developing strategies for competitive advantage:
Analyzing the forces illuminates an industry’s fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future.
Rivalry amongst existing firms and jockeying for position - i.e. competition
Industry members undertake more aggressive and more frequent actions to boost their market standing & performance. This makes rivalry stronger.
Rivalry is stronger in slow growing markets.
More nos. of competitors and competitors who are equal in size and capability makes rivalry stronger.
Rivalry increases as products of rival competitor becomes more standardised giving good reliability.
Rivalry increases as it becomes less costly for buyers to switch the brand.
Rivalry increases as competitors play a price war and other competitive weapons to boost their market share.
Rivalry is strong when nos. of competitors are less than five.
8. Rivalry increases when strong companies outside the industry acquire weak firm in the industry and launch well-funded, aggressive moves to transform the acquired company in to a major contender.
Rivalry is weak in fast growing markets.
Rivalry is weak when, there are so many rivals, that impact of one’s action is thin on spread over span.
Typical weapons to combat rivalry are:
More or different features.
Better product performance with higher Quality.
Stronger Brand image & appeal.
Wider selection to customers to choose from Models & styles.
Better & bigger dealer network.
Better Customer service capabilities.
2. Threat of new entrants
Entry threats are stronger when:
Candidates have resources that make them a formidable contender.
Entry barriers are low.
Newcomers can expect good returns.
Buyer demand is growing rapidly.
Industry is unwilling / unable to stop new entrants.
Entry Threats are weaker when:
Entry candidates are small in nos.
Entry barriers are high.
Existing industry is itself struggling for profits.
Industry outlook is uncertain and risky.
Buyer demand is stagnant or slow.
Existing industry members strongly contest and does not allow new comer to settle.
3. Bargaining power of buyers / customers
When nos. of buyers is small and when a buyer is particularly important to seller.
When cost of switching brand is low to buyer.
When buyer demand is low and sellers are many
When buyers are well informed about product, prices & costs.
When buyer is capable of backward integrating and making product by themselves.
When buyers have discretion in whether & when to purchase the product & when buyer is large and can demand concessions.
Bargaining power of buyer is low when:
Infrequent and small purchases.
Buyers cost of switching to other brands is high.
It is a seller’s market & Brand reputation is important to buyer.
4. Threat form substitute products
When substitutes are readily available & attractively priced.
When buyer view substitute products at par in terms of quality, performance & other attributes.
When costs are low to end users to switch to substitutes.
5. Bargaining power of suppliers
Major suppliers can have sufficient bargaining power to influence the terms & conditions in their favour.
Item supplied is a commodity that is not readily available from other suppliers in market.
When few large suppliers are primary suppliers of a particular item. (Suppliers can have a cartel)
When it is costly or difficult for buyer to switch to new brand or alternate items.
When needed items are in short supply.
When supplied item has a differentiation, which enhances performance of final product.
When certain supplier supplies item has possibilities of cost savings to industry members on account of its added quality feature or service.
Bargaining Power of Supplier is weak when: backward integration is possible, when buyer is a major customer, when there are many suppliers available.
Identify Company Resource Strengths and Competitive
Identify Company Resource Weaknesses and Competitive
Identify Company’s Market Opportunities.
Identify External Threats to the Company’s future well
Next step will be to draw conclusions concerning the Company’s overall business situation.
Rank all factors from exceptionally weak to exceptional strong scale and find out business attractiveness.
Identify attractive and non-attractive aspects of the Company’s situation.
Third step will be to plan actions to improve Company Strategy.
Use Company’s Strengths & Capabilities to overcome weaknesses.
Pursue those opportunities that are suitable to Company’s Strengths and Competitiveness.
Correct weaknesses that affect our abilities to take advantage of market Opportunities.
Use Company’s Strengths & Capabilities to lessen the impacts of important external threats.
Factors to look for in SWOT analysis:
Potential Resource Strengths & Capabilities
# A powerful Strategy. # Core competencies.
# Distinctive Competence. # A strongly differentiated Product.
# Competencies & Capabilities matching with Key Success Factors of Industry.
# A strong financial condition providing ample resources.
# Strong brand image # An attractive Customer base.
# Superior Technological skills / Product Quality/ Patents / intellectual Capital / Innovation capabilities.
Serving new market segments / new set of customers.
Expanding to new geographic markets.
Expanding product line & range of products to meet market demand.
Online sales, e-business.
Forward or backward integration.
Overcoming Trade barriers and capturing new foreign markets.
Acquire rival firms.
Enter into alliances.
Exploit new technologies.
Potential External Threats
Increasing intensity of competition among rivals.
Slowdown of market.
Entry of new potent rivals.
Loss of sales to substitute products.
Growing bargaining power of Customers / Suppliers.
A shift in buyer needs and tastes.
Adverse demographic change curtailing demand.
Restrictive trade policies on the part of foreign Governments.
Costly new regulatory requirements.
Strengths Technological Skills Leading Brands Distribution Channels Consumer Loyalty Production Quality Scale Management Weaknesses Absence of important skills Weak Brands Peer access to distribution Low Customer retention Unreliable Product / Service Sub-scale Management Opportunities Changing customer tastes Geographical Liberalisation Technological advances Government Policies changes Lower personal Taxes Population age structure New Distribution Channels Threats Changing customer tastes Geographical Closures Technological advances Government Policies changes Lower personal Taxes Population age structure New Distribution Channels Positive Negative Internal Factors External Factors
5. Corporate Portfolio Analysis:
Business Portfolio Analysis – Synergy and Dysergy –
BCG Matrix –
GE 9 Cell Model –
Concept of Stretch, Leverage and fit
Synergy v/s Dysergy -1
The whole is greater or lesser than sum of its parts.
1 + 1 could be 2 or 11 or 111.
This effect is known as Synergy.
In any organisation, Resources, Strengths, Weaknesses, behaviours do not exist independently but they act together. If these strengths, and resources and behaviour in the Organisation are directed properly, then a Synergistic Effect could be seen. The Organisation should cultivate “Win-Win” and open communication with philosophy of “Seek to understand first and then to be understood”.
In such an atmosphere, two or more strong points add up to something more than its arithmetic sum. This is Synergy. Similarly, two or more weaknesses acting in tandem can damage more than its arithmetic sum. This is Dysergy.
Synergy v/s Dysergy -2
In practice if functions like Product, Pricing, Distribution and Promotion, work in harmony and support each other, then, synergistic effect could be seen in Marketing. Similarly, if Marketing and Production areas support each other, then synergistic effect could be seen in Operating Efficiency. Marketing inefficiencies could result in reduction of operating efficiency as dysergistic effect.
Synergistic Effects are results of quality and type of internal environment existing within organisation. These effects will only lead the organisations to develop competencies and ward off external threats.
Business Portfolio Analysis
Definition : Analyzing “ Elements ” of a firm's “ Product Mix ” to determine the “ Optimum Allocation ” of its “Resources” . Two most “Common Measures” used in a “Portfolio Analysis” are “Market Growth” and “ Relative Market Share ”.
“ The strategic units that make up the company and the attempts to evaluate current effectiveness and vulnerabilities” (McDonald et al, 1992)
“ Business Portfolio Management” enable strategic planners to select the optimal strategies for the individual products whilst achieving overall corporate objectives” (McNamee, 1985)
When a Business Portfolio comprises of Multi-business Units and / or operating at multi-location, then the Strategist often ask two questions to take a decision on Business Strategy.
How much of our time and money should we spend on our best products to ensure that they continue to be successful?
How much of our time and money should we spend developing new costly products, most of which could never be successful?
Examples of Portfolios:
Unilever : ice cream, tea, spreads,
Proctor & Gamble : Detergents, nappies,
Gillette : batteries, Shaving products
Virgin : trains, planes, cola, music stores, mobiles
Wipro : Computers, Vanaspati, Veg. Oils, Soaps,
ITC : Tobacco, Soaps, Biscuits
Business Portfolio Analysis
Portfolio Analysis is an analysis of the Corporation as a portfolio of different businesses with the objective of managing it for optimum return on its resources.
Portfolio analysis looks at the corporate investments in different products or industries under common corporate jurisdiction. It involves, analysing future implications of presents resource allocation and continuously deciding, adding, curtailing or disposing, operations or products, so that overall portfolio balance is maintained or improved.
Portfolio analysis takes into considerations aspects such as “ Companies Competitive Strength ”, “ Resource Allocation Pattern ” & “ Industry Characteristics ”.
All businesses have to balance, three basic aspects of running the business :
Net Cash Flow.
State of Development.
Boston Consulting Group – BCG’s Growth – Share Matrix
BCG’s Growth – Share Matrix
Different businesses which forms the Business Portfolio can be characterised by two parameters:
Company’s Relative Market share for the business, representing the firm’s competitive position and
The overall growth rate of the business.
For each activity in the portfolio, a separate strategy must be developed depending upon its position in 2 X 2 matrix.
Higher Market share will mean, higher profits and higher cash flows. Relative market share is defined as the market share of the relevant business divided by the market share of its largest competitor. i.e. A = 10%, B = 20% & C = 60%, then, ‘A’s relative market share is 1/6 & ‘C’s share is 3.
Higher Growth rate will mean profitable investment / expansion opportunities and easier to increase market share. Earned Cash can be ploughed back to enhance ROI.
BCG’s Growth – Share Matrix - Methodology
Step-by-step procedure to develop the business portfolio matrix and identify appropriate strategies for different businesses:
Classify various activities of the Company into different business segments or SBUs. (Strategic Business Units)
For each business segment, determine the growth rate of the market. Plot it on linear scale.
Compile assets employed for each business segment and determine the relative size of the business within the company.
Estimate the relative market shares for the different business segments. This is done on logarithmic scale.
Plot the position of each business on a matrix of business growth rate and relative market share.
BCG’s Growth – Share Matrix - illustration 1 X 10 X 1.5 X 4 X 0.5 X 0.1 X Relative market Share Business Growth rate % 2 8 6 4 2 10 20 18 16 14 12 STARS CASH COWS DOGS QUESTION MARKS
Product Life Cycle
Strategies as per Product Life Cycle-1
Expansion Strategy : Stars – are the businesses which have high growth rate & high market share. At times they are not self sufficient in cash flow, but need to be supported in view of their potential. This is ‘Growth’ phase of “Product Life Cycle” (PLC). Such businesses generate as well as use large amount of cash. The Star generate high profits and represent the best investment opportunities for growth. We need to reaffirm the Company’s Competitive Edge at this phase by sufficient doses of resources for expansion. The best strategy regarding stars is to make necessary investments and consolidate the company’s high relative competitive position.
e.g. Tiles, Electronics & Communications, Pharmaceuticals, are “Star” industries.
Strategies as per Product Life Cycle-2
Hold Strategy - Cash Cows are the businesses with low growth rate and high market share. High market share leads to high generation of cash and profits. Cash Cow is a business that generates cash flows over & above its internal needs. Cows can be milked to provide a corporate parent with funds for investing in star / Question Mark businesses, financing new acquisitions or paying dividends.
Cash cows provide the financial base for the company.
A strong cash flow resulting out of relatively high market share / low market growth rate ‘Cash Cow’ opportunities should be able to maintain market share at or around existing levels.
In this state of business, Corporate can adopt mainly Stability Strategies . Expansions & investments can be thought only if the long term prospects are exceptionally bright.
These are generally mature businesses reaping benefits of experience and expertise. Funds generated are to be used for “Question Mark” or “Star” businesses as “Cash Cow's are destined to slow down . A phased retirement need to be planned.
Strategies as per Product Life Cycle- 3
Build Strategy – Question Mark : The Businesses with high industry growth but low market share are “Question Marks”. In the business. These ‘Question Mark’ opportunities need investment in order to grow and gain market share.
Because of their high growth, the cash requirement is high, but due to their low market share cash generation is low.
These are sometimes known as “Problem Child” as someone with huge potential, but not clicking. Here, a large amount of Cash inflow is required to stabilise and enter into “Star” phase. Companies must obtain early lead to strengthen the business and capture growth opportunities.
A question Mark business can either become a Star or can go to Dogs depending upon funds & competitive edge.
Strategies as per Product Life Cycle - 4
The business is called Dogs, if business growth rate is low and the company’s relative market share is also low.
The lower market share means poor profits and as market growth is low, any investment is prohibitive as cash demanded will exceed the cash generation, causing negative cash flow.
Under such circumstances, the Strategic solution is to either liquidate, or if possible harvest or divest the DOG business.
Harvest Strategy : To develop short term cash flow irrespective of the long term damaging effect to the product or business. This strategy is appropriate for any weak products where disposal in the form of a sale is unavailable or not preferred due to high exit barriers
Divest Strategy : To change the capital of the business and allow resources to be used elsewhere of industries that have a very slow or negative market growth rate and where a company has low market share. These are products in late maturity or declining stage as mostly substitute’s start taking over these products. They stop generating large amount of Cash and face a cost disadvantage owing to low market share. Sometimes to reduce the high costs involved, a Retrenchment Strategy is also adopted.
Cash Positions of Various Businesses Funds needed to invest selectively to improve competitive position. More Less QUESTION MARK Divest and re-deploy proceeds. More Less DOG Build competitive position and grow More More STAR Funds available, so milk and deploy Less More COW Net Cash Balance Cash Use Cash Source Business Type
Limitation of BCG Matrix
Predicting Profitability from Growth and Market Share:- BCG assumes that profit depends on growth & market share. This may not be 100% true. Industry attractiveness may be different from simple growth rate and the firm’s competitive position may not be reflected in its market share.
Difficulty in determining Market Share:- BCG has heavy dependence on market Share as indicator of its competitive strength. The calculation of market share depends upon how we decide, what is total market. Sometimes, we may have to consider “niche’ market for analysis.
No consideration for experience curve synergy :- In BCG each quadrant is viewed independently. Low costs due to expertise of employees can prolong Dog, star or cash cow stages.
Disregard for Human aspect:- BCG does not recognise human aspect of business. Cash generated in one business in one business get associated with the power of concerned manager. Cash Cow unit may be reluctant to part away with its cash to other businesses in the house. Strategic options given by BCG may not be easy to implement .
General Electric’s ( or McKinsey) 9 point Multifactor Portfolio Planning Matrix
Different businesses in the organisation as SBUs can be rated for purpose of strategic planning.
Two parameters are considered based on internal appraisal of all the SBUs done individually.
1. Industry Attractiveness : How attractive is the industry? The attractiveness index depends upon business strengths. It is a product of several factors like Industry potential, the current size of industry, the rate of growth of industry, structure and profitability of the industry. This is generally highly profitable, productive arena, where firm would like to deploy best of everything. Similarly least attractive business is kept with little attention or is for grabs i.e. for divestment.
2. Company business strength : Company business strengths is a product of several factors like company’s current market share, growth rate, differentiation strength, brand image, corporate image.
GE’s 9 Point Model.
The weighted factors for both these areas are plotted in Company business Strength/Industry attractiveness
Company Business Strength Industry Attractiveness Harvest / Divest Selectivity/Earnings Invest / Grow ######## ######## Low ######## ********** Medium ********** ********** High Weak Medium Strong
Circle denotes the size of Industry , while blue colour portion corresponds to Market Share. General Electric’s Business Screen A Winners Winners B C Question Marks D F Average Businesses E Winners Losers G Losers H Losers Profit Producers Strong Average Weak Low Medium High Business Strength / Competitive position Industry Attractiveness
General Electric’s Business Screen
The vertical axis represents Industry Attractiveness. This is weighted composite rating based on eight different factors. These factors are:
Size of Market 10%
Rate of Growth of Sales & Cyclicality 10%
Industry Profit Margin. 40%
Competitive intensity including vulnerability to foreign competition. 15%
Economics of Scale. 5%
Susceptibility to Technological obsolesce 5%
Entry conditions, Social, legal, environmental & human impacts. 10%
Against each of these factors, the concerned business is
rated on a scale of 1 to 10 and then the weighted score is
determined from maximum of 10. This gives the Industry
General Electric’s Business Screen
The horizontal axis represents business strength competitive position. This is a weighted composite rating based on eight factors. These factors are:
Relative market Share.
Relative cost position.
Profit margins relative to competitors.
Ability to compete on Price & Quality.
Knowledge of Customer & Market.
Competitive Strengths & Weaknesses.
Calibre of Management.
The two composite values for ‘Industry Attractiveness’ and ‘Business Strength’ are plotted for each business in a Company’s Portfolio. The pie charts denote the proportional size of the industry – white colour & blue segment represent company share.
General Electric’s Business Screen
The horizontal axis represents business strength competitive position. This is a weighted composite rating based on seven factors. A typical scoring of Company’s Competitive position
0.4 6.9 8 5% 100% Company Image 1.6 8 20% Technical Excellence including Product and Process Engineering 1.4 7 20% Work force Harmony 0.9 6 15% Management Skill 0.5 5 10% Location and Distribution 0.7 7 10% Growth Rate 1.4 7 20% Market Share and Capacity Score Rating (1 to 10) Weightage Factor
Corporate Strategy Implications – GE Nine Cells
“ Grow & Build” Strategy for upper left three cells as Industry Attractiveness & Competitive Position are high. Top investment priority to be given to businesses in these cells.
The three diagonal cells from lower left to upper right gets medium priority. Steady investments to protect and maintain their industry position. i.e. Stability / Hold Strategy.
The businesses in lower right corner do not receive any investment decisions. Harvest or Divest Strategy may be employed.
Strengths: GE Nine Cell allows intermediate ranking between high & low and between Strong and weak.
It incorporates much wider variety of strategically relevant variables, where as BCG Matrix is based on only two considerations – Industry Growth & Relative Market Share.
Strengths: GE Nine cell stresses channelling Corporate resources to businesses with greatest probability of achieving competitive advantage and superior performance.
Weaknesses: The nine cell matrix provides no real guidance on the specific business strategy. The matrix suggests general strategy like – Aggressive Expansion, Fortify and Defend or Harvest – Divest. These strategies do not address the issue of strategic coordination between businesses, specific competitive approaches and Strategies to be adapted at business level.
Weakness: The GE Nine Cells method tend to obscure business that are about to become winners because their industries are entering the take off stage.
Gap Analysis Performance Time -1 Time -2 Achieved Performance Gap Desired Performance
Gap analysis -2
Gap analysis is done for focussing on strategic alternatives.
On dimension of time various alternatives are evaluated in different phases to get a clear picture for selection of strategies.
What is the result of the present strategy?
What should be new strategy?
What should be methodology of implementation?
If the gap is narrow, policy is to stabilise the strategies.
If the gap is due to consistent past bad performance; which is also expected in future, then retrenchment / withdrawal strategies may be more suitable.
Gap Analysis - 3
First step is to identify alternatives. Companies find it difficult to change their strategies because strategic thinking is not the core competency of managers. Hence lot of brain storming, situational analysis need to be done.
A correct definition of the problem is the Second step. A hypothesis is developed after brain storming and situation analysis. This hypothesis must be tested to developing clear understanding of the forces that actually work.
Next step is to formulate the strategy and address the driving forces in a “cause and effect” relationship. Find the 80:20 Pareto Principle and attack the most important one.
Prioritise the strategies and a plan for the projects to implement strategies on time scale is created for future guidance and analysis.
From Fit to Stretch:
Vertical Fit: If a Business house has a strategy to be “Cost Effective Leader” in the business, then resources and activities in all functional areas are to be focussed on adopting low cost structures and reducing costs.
When all functional areas like Marketing, Finance, Operations, HRD, and Information Management etc. contribute to this objective to create a low cost structure, then it is a congruence of all functional strategies and coordination between functions operating at different levels in Organisation, toward a common Objective. Such congruence is the “Vertical Fit”.
Horizontal Fit: Along with Vertical Fit, a need is there to have congruence and co-ordination amongst all the different activities taking place at same level. This is “Horizontal Fit”.
Horizontal Fit is operational implementation. It is an approach adopted by organisation to achieve operational effectiveness. All functions operate optimally by performing value creating activities. This is also a value chain. To support value chain activities various staff function departments are involved and put along operations. For e.g. Procurement Department is placed along with Operations department.
Horizontal fit means integration of all operational activities undertaken to provide a product or service to customer.
Strategy & Structure for Generating Results in Organizations : The traditional strategic planning seeks a “fit” between resources and aspirations. You set realistic goals based on what you think you can achieve with the resources at hand and then construct strategies and tactics to achieve them.
“ Fit” means positioning the firm by matching its resources to its environments as per SWOT analysis. It could be a compromise formula with regards to Firm’s objectives and Competitive posture of the Company.
Strategy as Stretch and Leverage
Hamel and Prahalad’s (1993) assertion that ‘competitiveness is born in the gap between a company’s resources and its managers’ goals’ has entered the mainstream of strategy thinking. This is one of the concepts of Stretch. Hamel and Prahalad began their deconstruction of conventional wisdom by challenging common understandings of the meaning of strategy.
Hamel and Prahalad added duel concept of “Stretch” and “Leverage” to Strategic Intent. Stretch is a gap between resources and aspirations. “Stretch” is diametrically opposite to “Fit”. Since “Fit” means positioning the firm to match its resources to its environment.
The concept of “ Leverage ” is concentrating, accumulating, complementing, conserving and recovering resources in such a manner that the meagre resources (Gap or Stretch) stretched to meet the aspirations that organisation has envisaged.
The idea of “Stretch” & “Leverage” belongs to “ Learning School of Strategy ”. Capabilities are not seen as constraints to achieving. Environment is not seen as given but something which can be created and moulded.
Strategy as Stretch and Leverage
Hamel and Prahalad considered that many managers understood strategy to mean: "… fit,” or the relationship between the company and its competitive environment; the allocation of resources among competing investment opportunities; and a long-term perspective in which ‘resource money’ figures prominently. They stressed that ‘being strategic’ implies a willingness to take the long view, and ‘strategic’ investments mean … betting bigger and betting earlier.“
This view obscures the merits of alternatives in which the ideas of Stretch, Leverage, and Consistency of effort feature. Creating stretch, "… a misfit between resources and aspirations is the single most important task Senior Manager.
Under “Fit”, Strategic intent would seem more realistic; under “Stretch” & “Leverage” Strategic Intent is more idealistic. In both cases it is essentially a desired aim to be achieved.
Porter on Strategy
- "What is strategy? It is, he wrote "… the creation of a unique and valuable position, involving a different set of activities."
But choosing a unique position is not enough to guarantee a sustainable advantage. Sustainability requires trade-offs with other possible positions - for three reasons:
To eliminate or minimise inconsistencies.
To maximise and concentrate the benefits of a chosen position.
To recognise and accept the limits of coordination and control.
The essence of strategy is choosing what not to do. "Without trade-offs there would be no need for choice, and thus no need for strategy."
Porter’s Three Types of Fit:
Porter considers ‘Strategic Fit’, as the way various components of a strategy interlink, or fit together. In this context ‘ Fit ’ locks out imitators by creating a value chain that is as strong as its strongest link, and is a more potent, and central, strategic concept.
Porter recognised three types of fit:
Fit :- First order or simple consistency between activities
Stretch :- Second order, or reinforcing activities
Leverage :- Third order, or activities which optimise organisational effort
In all three, the whole is more than any individual part. Competitive advantage grows out of the entire system of tightly linked activities.
Thus defined, strategic fit is fundamental not only to competitive advantage, but also to the sustainability of that advantage, and the more an organisation’s positioning rests on activity systems with second- and third-order fit, the more sustainable its advantage will be. The definition of strategy then becomes “Creating fit among a company’s activities."
The success of a strategy depends on doing many things and integrating them.
The strategic agenda is defining a unique position, making clear trade-offs, and tightening fit. The strategic agenda demands discipline and continuity.
For challenges of this sort to be effective, top management has to:
A) Create a sense of urgency.
B) Develop a competitor focus at every level through widespread use of competitor intelligence.
C) Provide employees with the skills they need to work effectively.
D) Give the organisation time to digest one challenge before launching another.
E) Establish clear milestones and review mechanisms.
Competitive Strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver unique mix of value – Michael F Porter.
Competitive Strategy is about analysing and then experimenting, trying, learning, and experimenting some more. – Ian C. McMillan & Rita Gunther Mcgrath.
The essence of Competitive Strategy lies in creating tomorrow’s competitive advantages faster than the competitors mimic the one you posses today. – Gary Hammel & C K Prahalad.
A Competitive Strategy concerns the specifics of management game plan for competing successfully and achieving a competitive edge over rivals.
Generic Competitive Strategies
A low-cost provider Strategy : Appealing to a broad spectrum of customers by being the overall Low Cost Provider of a Product or Service.
A broad- differentiation strategy : Seeking to differentiate the company’s Product/service by offering different from Rivals to broad spectrum of Customers.
A best-cost provider strategy : Giving customers more value for money by incorporating good to excellent product attributes at lower cost than rivals.
A focussed or market niche strategy based on Lower Cost : Concentrating on Narrow buyer segment and out competing rivals by offering at lowest cost than rivals
A focussed or market niche strategy based on differentiation : Concentrating on Narrow buyer segment and out competing rivals by offering customised attributes to niche member at lowest cost than rivals
The basis of competitive strategy lies in Low-cost or
Differentiation and finding out our own focus on market niche.
Revamp Value Chain
A Low-cost advantage can be achieved by re-vamping the “Value Chain” activities and controlling all factors that drive the costs. Re–vamping of “Value Chain” is aimed at increasing efficiencies to out-manage rivals on costs. Re-vamping of value Chain is also done by examining the elements of value chain eliminating or bypassing the activities which are adding costs but not value to the product. (Waste elimination)
Re-vamping the value Chain:
Use of internet Technology applications.
Approaching direct to end user in Sales & Marketing.
Purchasing directly from manufacturer.
Simplifying product design.
Using simpler, less capital intensive, flexible technologies. Using CADs.
Substituting high cost/imported raw materials with indigenous ones (Value Engineering)
Relocation of facilities. 8. Dropping the dead weight.
The value chain
The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organisation. The 'margin' depicted in the diagram is the same as added value. The organisation is split into 'primary activities' and 'support 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 organisation.
Operations: This is where goods are manufactured or assembled. Individual operations could include room service in a 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 organisation 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 -1.
Procurement: This function 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 organisations), and e-Purchasing (using IT and web-based technologies to achieve procurement aims).
Technology Development: Technology is an important source of competitive advantage. 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.
Support Activities -2.
Human Resource Management (HRM).
Employees are an expensive and vital resource. An organisation would manage recruitment and selection, training and development, and rewards and remuneration. The mission and objectives of the organisation would be driving force behind the HRM strategy.
This activity includes and is driven by corporate or strategic planning. It includes the Management Information System (MIS), and other mechanisms for planning and control such as the accounting department.
Five Generic Competitive Strategies Type of Competitive Advantage Desired Lower Cost Differentiation Market Share A Broad Cross Section of Buyers A narrow Buyer segment for Market Niche Overall Low Cost Provider Strategy Broad Differentiation Strategy Focussed Low Cost Strategy Focussed Differentiation Strategy Best Cost Provider Strategy
Drivers for Low-Cost Strategy -1
Low-Cost Strategy makers generally attend to following cost drivers:
Economies or diseconomies of scale : - Larger volumes can reduce the costs as fixed costs get spread over large volume. At the same time larger volume means larger inventories and higher inventory carrying costs. Manufacturing economies can be achieved by simplifying product line, longer production runs, reducing varieties of models, standardising designs and using common parts, use of modular designs etc.
Learning Curve effects: A new product, new plant is full of innumerable problems. Faster we de-bug, master the technology, improve plant layout & work flow, improve design, will bring economies of learning curve. Aggressively managed companies who capture benefits of learning are the one who can offer low costs.
Drivers for Low-Cost Strategy -2
Cost of key resource inputs: use of innovative incentive schemes for unionised labour, use of non –unionised labours, out sourcing, large scale purchasing with effective use of bargaining power, variables due to locations, Effective “Supply chain Management”
Use of industry value Chain by linking other activities for other products in the company. Also warranty claims can be linked with suppliers, there by diverting the warranty costs, sharing opportunities with other businesses in the organisations.
Using vertical integration v/s outsourcing: backward or forward integration can reduce the reliance on outsourcing and can reduce the costs.
Capacity utilisation has direct relation on spread of fixed costs in the product cost. Low cost leader has to find ways to operate at close to full capacity year round.
Drivers for Low-Cost Strategy -3
g) Strategic Choices & Operating decisions such as :
Adding / Cutting services offered to Buyers.
Incorporating more / fewer performance & quality features into product.
Increasing / decreasing distribution channels.
Lengthening / Shortening delivery times to customers.
Putting more emphasis on wages, incentives & fringe benefits to motivate employees.
Rising / Lowering the specifications for purchased materials.
Example : Wall Mart.- The Low Cost Leader :
Factors for Low Cost Strategy
Price competition is very high.
Products are identical and are easily available.
Product differentiation is low & cannot be achieved.
Most buyers use the product in the same way.
Cost of switching brand is low for customer.
Buyers are large and have power to bargain.
Newcomers can come with low price and attract buyers.
However, a Low Cost provider must always contain
enough attributes to be attractive to prospective buyers.
Low price by itself, is not appealing to buyers.
Aspects of industry for Differentiation Strategy-1
The essence of broad differentiation strategy is to be unique in ways that are valuable to a wide range of customers. and at the same it should be noted that
Easy to copy differentiators cannot provide sustainable competitive advantages. As a rule,
Differentiation yields a longer lasting effect and more profitable competitive edge, when it is based on:
Product innovation by R&D, 2. Technical superiority,
3. Product quality with superior manufacturing abilities.
8. Maintaining the cost of differentiation in line.
Aspects of industry for Differentiation Strategy-2
Such differentiation should result into:
Perceived & actual delivered value for customers
Command a premium price for its products
Increase unit sales & Gain buyer Brand loyalty
Approaches for achieving Cost Differentiation
Incorporate product attributes & user Features that lowers the buyers overall costs of using the company’s product.
Incorporate features that raise product performance like quality, reliability, durability etc.
Incorporate features that enhance buyer satisfaction in non-economic or intangible ways.
To deliver value to customers via competitive capabilities that rivals do not have or cannot afford to match.
Factors of Differentiation Strategy
The Product can be differentiated in many ways and buyers perceive these differences as having value.
Buyers needs and uses are diverse.
There is less head to head competition. Few rival firms are following differentiation approach.
Technological change is fast paced and competition revolves around evolving product features.
Any differentiation that works well gets imitated and there is need for constant up gradation.
Differentiating something that does not lower buyer’s cost or improves perceived value is a mistake.
Over differentiating increasing service needs or usage constraints is a mistake.
Trying to charge a too high a premium price.
Being timid & not striving to open up about competitors defect and differentiating that is not visible to buyers is a pitfall.
Best Cost Provider Strategies
Best Cost Provider Strategies are for giving customer ‘ more value for money '.
It is middle path between pursuing a low cost advantage and differentiation strategy.
Best Cost Provider Strategies are ‘hybrid’ Strategies balancing emphasis on Low Cost & Differentiation.
Target market is Price & Value conscious buyer, with diversity of products, where differentiation is a norm.
To be successful, Best Cost Strategy must offer, buyers significantly better product attributes, so that they can justify higher price above Low – Cost leaders and with sufficient differentiation can win over high-end Differentiation Leaders.
Focussed or Market Niche Strategies
Focussed Strategies have concentrated attention on a narrow piece of the total Market. Target market segment is called as ‘niche’. e.g. Rolls Royce- a status symbol, Porsche for sports cars, e-Bay for e-auctions.
Focussed Low Cost Strategy:
Serving buyers in the target market niche at lower cost & lower price than rivals.
Producing ‘Private-Label’ imitating Brand name merchandise & selling directly to retail chains.
Focussed Differentiation Strategy:
Serving a buyer segment that is looking for special product attributes or seller capabilities.
By offering niche members a product perceive as well suited for their own unique tastes & preferences and be at top of Market pyramid due to their strength of differentiation.
e.g. Gucci, Rolls Royce, Armani, Rolex, Reliance Fresh, Kesari Tours
Low Cost Provider Economical prices, good value, low cost year after year. Keys to sustain strategy Make virtue of product features with low cost Marketing emphasis Continuous cost reduction without sacrificing attributes Production emphasis A good basic product with acceptable quality & few frills. Product Line Lower overall costs than competitors. Basis of competitive advantage A broad cross section of the market Strategic Target
Broad Differentiation Constant innovation to stay ahead, Few key differentiators. Keys to sustain strategy Advertise features, charge a premium for differentiation Marketing emphasis Production superiority with differentiating features buyers are willing to pay Production emphasis Many Product, wide selection, with differentiating features. Product Line Ability to offer something attractively different. Basis of competitive advantage A broad cross section of the market Strategic Target
Best Cost Provider Unique expertise in managing costs while offering upscale features & attributes. Keys to sustain strategy Advertise best value, comparable features with lower value. Marketing emphasis Items with appealing & assorted upscale attributes with lower costs Production emphasis Items with appealing & assorted upscale attributes. Product Line More value for money Basis of competitive advantage Value oriented buyers Strategic Target
Focussed Low Cost Provider Stay committed to serving niche at lowest over all cost . Do not loose focus by entering other markets.. Keys to sustain strategy Communicate budget priced product features that fits niche market requirements. Marketing emphasis Continuous cost reduction without sacrificing attributes Production emphasis A product tailored to tastes & requirements of niche market. Product Line Lower overall costs than competitors in niche market. Basis of competitive advantage Narrow market niche satisfying distinctively different buyers needs & preferences. Strategic Target
Focussed Differentiation Provider Stay committed to serving niche market at better differentiation. Do not loose focus by entering other markets Economical prices, good value, low cost year after year. Keys to sustain strategy Communicate how product features does the best of meeting niche market requirements. Marketing emphasis Custom made products that match the tastes & requirements of niche market. Production emphasis A product tailored to tastes & requirements of niche market. Product Line Attributes that appeal specifically to niche members. Basis of competitive advantage Narrow market niche satisfying distinctively different buyers needs & preferences. Strategic Target
Strategic Option Menu Overall Low Cost Provider Broad Differentiation Best Cost Provider Focussed Differentiation Focussed Low Cost Provider Complimentary Strategic options: 1. Strategic Alliances & Collaborative Partnerships ? 2. Merge with or acquire other companies? 3. Integrate backward or Foreword? 4. Outsourcing? 5. Initiate offensive Strategies? 6. Defensive Strategic moves? 7. Using Internet as Distribution Channel, if so, to what extent? Functional Strategies to support above Strategic Choices: 1. R & D, Engineering. 2. Production. 3. Marketing & Sales. 4. Human Resources. 5. Finance Timing the Company’s Strategic move in marketplace: a) First Mover, b) Fast Mover? And/or c) Late Mover. STABILITY EXPANSION / GOWTH RETRENCHMENT COMBINITION
Having settled on one of the Competitive Generic Strategy, we now need to decide on other Strategic Actions to complement on the choice basic Competitive Strategy chosen.
Grand Strategies are Corporate Level Strategies, Setting a choice of Direction that a firm should adopt. It could be a small entrepreneur firm with single location and single business or a corporate conglomerate with multi-location, diversified several different businesses. The Corporate Strategy in both cases is about setting the basic direction of the firm as a whole.
Corporate Strategies are basic decisions about allocating & transferring resources among different businesses and managing & nurturing portfolios to achieve overall corporate objectives.
Any Business is defined along three dimensions and combinations thereof. These three dimensions are:
Customer Functions and
As the organisations becomes large & diversified, the business definition also becomes complex. According to Glueck, there are four Grand Strategies, which are used as alternatives and in a combined way. These Strategies are:
These Strategies are pure and depending upon various dimensions of the businesses, many mixed “strategies’ do take place. Glueck has described four dimensions, such as:
Business Dimensions 1 & 2
Internal / External Dimensions :
When the Organisation is an independent entity, it is operating under Internal Dimensions
When the Organisation adopts a strategy in association with another entity, it operates under External Dimension.
2. Related / unrelated Dimensions:
When organisation adopts a Strategy related to its existing Business Definition, the Related Dimension operates and
When organisation adopts a Strategy that is un-related to its existing business either in terms of Customer Groups, Customer functions or alternative Technology; the unrelated dimension operates.
Business Dimensions 3 & 4
3. Horizontal / Vertical Dimensions:
The horizontal dimensions operates when an organisation adopts a strategy which results in serving additional customer groups and/or satisfying other customer functions in such a way that they compliment the existing business definition of one or more of its business.
The vertical dimension operates when an organisation adopts a strategy which results in the expansion or contraction of the existing business definition of one or more businesses in terms of the utilisation of alternative technologies.
4. Active / Passive Dimensions:
The active dimension operates when an organisation adopts an offensive strategy in anticipation of environmental threats and opportunities.
The passive dimension operates when an organisation adopts a defensive strategy as a reaction to environmental threats and opportunities.
Thus combination of Four Grand Strategies, four
Dimensions and two types in each dimension give rise
to 32 possible mixed Strategies and if we consider three
dimensions of Business Definition, these possibilities
should be 32 x 3 = 96 and if we consider weight-ages
for each factor the Strategic alternatives could be mind
boggling. However, all alternatives are not feasible or
possible and we narrow down the choice of few major
1. Stability Strategies:
1.a) No-Change Policy: It is a conscious decision of not
doing anything new and continue with present business
definition. When environment is stable and predictable with
no new significant threats & opportunities in the
environment, it may not be worthwhile to alter strategy in
present situation. Also no new strengths have been
generated and no new weaknesses have been developed.
No new threat of substitutes and new entrants. However,
this should be a conscious decision and should not arise
out of in-activity and owing to inertia. It is dangerous to be
1.b) Profit Strategy: No change policy cannot sustain for
long and situations keep changing. However if company
believes that the changes like economic recession, govt.
rules, industry downturn, competitive pressures are
temporary and will turn favourable after some time,
then firm opts for maintain profit policy by artificial measures like cut costs, hold investments / replacements, raise prices, increase productivity and some such measures to tide over the difficult days. However, if the problems are not temporary, the company position deteriorates.
Pause / Proceed – with – caution Strategy is a temporary strategy like profit strategy and is used for consolidation. It is used to test the ground before going ahead with full-fledged Grand Strategy. Sometimes after a major expansion firms need to stabilise, allow strategic change to percolate through organisation structure and allowing existing systems to adopt the strategy and the move for further expansions. It is also used to bide the time for more opportune time and move on with rapid strides again.
2. Expansion Strategies
If organisation is not moving ahead, it is actually going backwards.
Companies aim for substantial growth to take advantage of Growing economy, liberalisation, burgeoning markets, globalisation, Emerging technologies etc.
2. Expansion Strategies are of 5 types.
2.a) Expansion through Concentration:
2.b) Expansion through Integration:
2.c) Expansion through Diversification:
2.d) Expansion through Co-operation:
2.e) Expansion through Internationalisation:
2.a) Expansion through Concentration : Firms tend to rely on doing what they know they are best at doing. Concentration Strategy involves investment of resources in a product line for an identified market. The firm has proven technology, market has high potential for growth and industry is sufficiently attractive for concentration to take place. The firm should also have financial strength to sustain expansion. This is a first preference strategy of firm doing what they are doing already and would like to invest more in known business. (Bajaj, Maruti)
Concentration strategy involves minimal organisation changes, improves competitive advantage due to in depth knowledge & expertise.
The limitations of Concentration Strategies are putting all resources at one project, it is industry dependent and adverse condition in industry can affect. In the Recession time, it is too difficult for concentrated firms to withdraw. Product obsolescence is another threat for the heavy investment.
2.b) Expansion through Integration : When firms use their existing base to expand in the direction of their raw material or the ultimate consumer or acquire adjacent businesses; expansion through Integration takes place. This is exploring Vertical and Horizontal dimensions of Business. Expansions are pivoted around present base of customers. Scope of business definition is widened. Alternative technologies are used for backward or forward integration. The firm moves up or down the value chain. The firm aims at cost economics. It is also one type of ‘Make or Buy’ decision. All integration strategies require Trade-offs. There are two types of Integrations.
Vertical Integration: When an organisation start making new products that serve its own need or is for self consumption.
Backward Integration means retreating to source of raw materials while Forward integration moves the organisation to its ultimate customers.
Horizontal Integration: When an organisation takes up the same type of products at the same level for production or for marketing. Many a times Horizontal Integration is a merger of like industries.
Integration strategy gives more control on Value chain but carry a risk as industry is set to serve same customer group and in case product fails or becomes obsolete.
2.c) Expansion through Diversification: Several firms diversify to reduce the risk of dependence on product and same set of customers. Diversification involves all dimensions of Strategic Alternatives. It could be internal or external, related or unrelated, horizontal or vertical, technological etc. It changes business definition.
Concentric Diversification: The activity is related to existing business definition either in businesses, customer groups & functions and /or alternative technology. It could be market related concentric diversification as different products for same set of customers or Technology related Diversification as related technology to the present business or combination of Market & Technology related diversification.
Conglomerate diversification : Diversification in activities which are totally unrelated to existing business definition of one or more of its businesses. (ITC – Tobacco & Hotel, Essar – Shipping & Steel, Shriram – Nylon Fibre & Ball bearings, etc.)
2.d) Expansion through Co-operation:
1. Mergers Strategy
2. Takeovers or Acquisitions Strategy.
3. Joint Ventures Strategy.
4. Strategic Alliances Strategy
2.e) Expansion through Internationalisation:
1. International Strategy.
2. Multi-domestic Strategy.
3. Global Strategy.
4. Trans-national Strategy.
3. Retrenchment Strategies.
Retrenchment Strategy is followed when an organisation substantially reduces scope of its activities. The organisation need to find out problem areas and diagnose the causes of the Problems, accordingly, various types of Retrenchment Strategies are adopted.
External Developments, Government Policies, Substitute Products, Changing Customer needs, Wrong Strategies, Obsolete Products, could be reasons for decline.
Symptoms are noticed in poor performance, declining profits, dwindling Cash flow, falling sales, Shrinking markets, Shrinking market share, increasing debt.
The organisation with proper monitoring controls can sense impending danger and position itself to find alternatives.
Retrenchment Strategy Situations for Recovery
Slatter has described four types of Retrenchment Strategy situations for recovery
Realistically non recoverable situation with little chance of Survival :
Not competitive company, Low potential for Improvement, Company with cost dis-advantage, Products or Services are in terminal decline..
Temporary recovery situation but no sustained turn-around:
Possible product re-positioning, new forms of Competitive advantage, cost reduction, revenue generation is possible.
Sustained survival situation but no potential for future growth :
Turnaround is possible but Industry is in slow decline, which cannot be revived. Therefore, a very little potential for growth is possible. Divestment is possible or Turn-around is possible by finding ‘niche’ market, where organisation can be a leader.
Sustained recovery situation with genuine possibility of Turn-around:
A possible new developed product, Possible market development or a possible market re-positioning. Industry has attractiveness is still available and decline was caused more by internal factors.
3.a.1 .: If CEO has credibility with Banks and Financial Institutions and if a qualified Consultant is available, then management team handles the entire turn-around strategy with support of advisory specialist external consultant.
3.a.2 : In another situation, Turnaround specialist is employed to do the job and existing team is temporarily withdrawn. The person could be deputed by banks.
3.a.3 : Replacement of existing team, especially CEO and / or merging sick unit with a healthy one.
Possible actions could be: Analysis of Product, market, production processes, competition, market segment positioning, production logic, Target setting, feedback, remedial actions.
3.b.1: Divestment is done due to negative cash flows, mismatch of business with the company, project feared to be non-viable in long range, severe competition, Technological up-gradation asking for funds which are not available, Selling a part of company for survival of organisation, a better alternative is available for investment, Divestment as a part of merger plan of mutual exchange,
Divestment is done in two ways : A part of company is divested or firm may sell a unit outright to a buyer, who finds the purchase as a strategic fit.
This is most un-attractive strategy, where company shuts down and tries to sell its assets. It is a last resort. Liquidation is difficult due to various legal constraints and protection given to employees in labour law.
Liquidation may be inevitable in spite of best efforts of the entrepreneur. In case of Textile Mills of Mumbai, writing was on wall as Mills did not invest in to new technology for more than 50 years. Secondly, it could be a planned liquidation, in view of prices of real estate in Mumbai. The neglect may have been deliberate. Some times liquidation can happen through court order for compulsory winding up and sometimes winding up can be voluntary.
Combination Strategies are mixture of Stability, Expansion and Retrenchment strategies. They are either followed simultaneously or in a sequential way. It is very difficult in the business environment to follow a single pure Strategy. Situation is Complex and business demands different strategies to suit the situational demands made upon the organisation.
As an example, we observe “Asian Paints Ltd” company following three strategies together. Addition of new variety of ‘Decorative paint’ for widening customer base, (Stability), and Adding an entirely new product like ‘Automotive Paint’ with new set of customers & functions (Expansion), while eliminating or closing the contract division, which used to take Painting Contracts (Retrenchment).
In the present era of Privatisation & Globalisation, Industries have to face altogether different challenges not faced hitherto. Rapid advances in technology, free economy, new markets in developed & under developed countries, and invasion of foreign companies are forcing Industries to enter into race of building Global presence and into race of adopting new technologies.
Industries also find that they do not have expertise for running the race of Global leadership. The global environment requires diverse & expensive skills, resources, technological skills. The fastest & surest way to fill up the gap is Alliances with enterprises having desired strengths.
Strategic Alliances are collaborative partnerships where two or more companies join forces to achieve mutually beneficial strategic outcomes. These alliances are more than company to company give & take dealings but fall short of Merger or JV. These alliances are mainly for bridging gap of resources and technology.
Advantages of Alliance:
Alliance is basically between equals, but alliances are also done with suppliers, distributors as partners by many big business houses. These alliances are mostly done with Value chain contributors.
It is now common for companies to pursue their strategies in collaboration with suppliers, distributors, makers of complimentary product and some select companies. e.g. IBM & DELL.
Advantages of Alliance:
Get into critical country markets quickly.
Gain, in-side information & knowledge about unknown / unfamiliar markets & cultures.
Access valuable skills & competencies.
Get a handle to participate in target technology or industry.
Master new technology; build new expertise & competencies faster.
Open up broader opportunities.
Stability of Alliances:
Alliances have a very high rate of divorce. In US only about 39% of Alliances are found to be stable. Others are either outright failures or are limping along.
Alliances to be successful should have partners working together. Stability of alliances depend upon their success in adopting to changing internal & external conditions, willingness to bargain on issues, real collaboration and not merely arm length exchange of ideas. Each partner must bring in high value allied skills, resources and contributions and respect each other. They should have co-operative arrangements working for win-win solutions.
Causes for failures of alliances could be, diverging objectives and priorities, inability to work together, changing conditions which make initial reason for alliance as obsolete, more attractive technologies and / or rivalry at marketplace.
Alliance partners should guard themselves from undue dependence. Over a period the partners must learn skills and technology. To be a market leader companies must develop their own capabilities or alliance will ultimately lead to Merger or Acquisition.
Merger & Acquisition Strategies:
The phrase Mergers and Acquisitions (abbreviated M&A ) refers to the aspect of corporate strategy, corporate finance and Management dealing with the buying, selling and combining of different Companies that can aid, finance, or help a growing company in a given industry to grow rapidly without having to create another business entity.
In the pure sense of the term, a Merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “Merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.
Merger & Acquisition Strategies-2:
When one company takes over another and clearly established itself as the new owner, the purchase is called an Acquisition . From a legal point of view, the Target Company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
Whether a purchase is considered a Merger or an Acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's Board of Directors , employees and Shareholders .
Hostile Takeovers are takeovers, where existing Management resists and opposition is expected. The bidder picks up shares from Market and obtains controlling interests. Bidder sometimes takes help of FI or majority share holder to enter Company’s board and gain control. Examples are NEPC bidding for Modiluft or Starlite Industries bid for Indian Aluminium.
M & A have not produced hoped-for results on many instances. Resistance of rank and file employees of two large companies is some times too formidable to resolve. Conflicts of management styles and difference in Corporate Cultures create problems in integration. Cost savings, expertise sharing, and enhanced competitive capabilities take substantially long time to materialise in view of above problems.
Pros & Cons of M & A: 1) M&A ensures management accountability, 2) offer easy growth, 3) create mobility of resources, 4) avoid gestation period & hurdles involved in new projects, 5) offers a chance to sick units to revive, have possible selective divestment, 6) venture into new business & markets, 7) increase market share & 8) decrease competition.
As against; in takeovers, 1) money power takes over professionalism. 2) Takeovers do not create any real assets for Society, 3) are detrimental to national economy, 4) reduces competition, 5) facilitate monopolistic, oligopolistic tendencies, 6) reduces employments, 7) affects cultural integration .
Strategic objectives of Mergers & Acquisitions:
To pave the way for the acquiring company to gain more market share and, further, create a more efficient operation out of combined companies by closing high cost plants and eliminating surplus capacity industry-wise.
To expand companies geographic coverage.
To extend company’s business into new product categories or international markets.
To gain quick access to new technologies and avoid the need for a time consuming R & D effort.
To try to invent new industry and lead the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities
To fill resource gaps
Unlike Integration; outsourcing is narrowing boundaries of the business. Integration has problems of mismatch of capacities, as economic size for individual items in value chain could be different and hence such specialised skilled processes or items in value chain could be outsourced to specialists.
A company should generally not perform any value chain activity internally that can be performed more efficiently or effectively by its outside business partners – the exception is when an activity is strategically crucial and internal control over the activity is deemed essential.
Advantages of Outsourcing:
Cost reduction – An activity can be performed more cheaply by outside specialists.
A particular skilled activity can be performed better by outside specialist.
The activity not connected with core competence and not crucial to firm’s ability to achieve sustainable competitive advantage and will not affect the technical ‘Know-how’ can be outsourced to advantage.
Outsourcing reduces company’s risk due to changes in technology and/ or change in buyer preferences.
Outsourcing streamlines the Company operations in ways that cut time it takes to get the newly developed product in to the market.
Outsourcing allows the company to concentrate on strengthening and leveraging its core competencies.
Offensive Strategic moves include yielding a cost advantage, a differentiation advantage, a resource advantage. These advantages, when used with initiative are termed as Offensive Strategy giving Competitive advantage to the initiator.
However, competent, resourceful rivals won’t take lightly and exert pressure to overcome the disadvantage they are facing because of initiative taken by one of their associates.
The initiator of the Offensive Strategy has to come up follow-up offensive & defensive moves to sustain the initially won competitive advantage.
Types of Offensive Strategies-1
Initiatives to match or exceed the competitor strengths : When rivals have strong competitive advantage, then firms are forced to take an initiative and take an offensive stand to whittle away from pressure.
In second instance, when competitor is very strong and established, an offensive strategy to offer alternate products at faster pace and at cheaper price sometimes works and afterwards people get used to alternate product. e.g. AMD & Intel.
One of the options is to offer equally good product at lower price.
Other option could be to outsmart competitor by bringing in latest version of product in market before him and making his product obsolete.
Adding new features, running Comparison ads, having plant in backyard of rival, superior customer service capability are some other options.
Types of Offensive Strategies-2
Initiatives to capitalise on weaknesses of the competitor: This option has better chance than challenging strengths of competitor.
Options could be going after rival whose product lag in quality & features, or making special sales campaign, Service camps where rival lacks in service department,
or Win away customers with your strong brand appeal over his weak brand,
or take advantage of geographic reasons, where rival has weak presence in market,
or paying special attention to market segment which your rival is neglecting .
Types of Offensive Strategies-3
3. Simultaneous initiatives on many fronts: Company may launch a Grand Offensive on many fronts simultaneously and compel rivals to take defensive actions,
Such offensive may include, price cuts, increased advertising, additional performance features, new models & styles, customer service thrust & improvements, free samples, coupons, rebates, in store displays, etc.
When a product has sufficient Brand image & when a new specifically attractive product or service is being launched, such an offensive measure has more chances of success
Types of Offensive Strategies- 4
End-run offensives: involves going around competitors instead of taking them head on and change rules of game & competition.
This may include, introducing new products that redefine the market & terms of competition, e.g. digital camera, wireless communication.
It could also include launching initiative in geographic area where competitors have not yet reached or introduce products in new market segments for selected buyers with different attributes & performance features, e.g. sport-utility-vehicles of Honda Accura or ford Lexus.
Taking a jump ahead- leapfrogging by using next generation technology, which support existing business & technology such as 3 G hand sets, blackberries, i-phone, LCD screens
Types of Offensive Strategies- 5
Guerrilla offensives: This is adopted by small challenger companies, who do not have resources or market visibility to challenge the leaders. This is hit & run technique.
Challenger Companies attack in areas neglected by biggies or where they have become vulnerable. Offering quality, when leaders have some quality problems
or having a big discount sale week,
or offering products at shortest & confirmed deliveries when leaders are facing delivery problems,
a short offensive and win away selected client account, prompt technical support when clients are frustrated with leaders. etc.
Types of Offensive Strategies - 6
Pre-emptive strikes : This is one of a kind offensive move. Whosoever is first gains maximum competitive advantage! Pre-emptive strategies involve being first to secure an advantageous position, where rivals are kept away and cannot duplicate and then strike competitors by
May be securing a big renowned distributor,
New geographic area, new shopping mall,
Good location for to cheap transportation & raw materials, etc,
Choose which rivals to attack. It could be leaders, who are always vulnerable or
Second run firm with weaknesses, here the challenger must be strong to strike weak company,
Struggling enterprises who are on the verge of going under,
Small local & regional firms with limited capabilities.
The pre-emptive strikes are done on the basis of core competency of challenger, where they are best in areas like Resource strengths and competitive capabilities, otherwise chance of success are dim.
In competitive environment every successful company has to face the threat of challenges from rivals and new entrants.
The defensive strategies are used to lower the risk of being attacked and weakening the impact of attack.
The defensive strategies do not improve competitive edge but they help to fortify company’s competitive position, protect valuable resources and prevent possibilities of imitation. Two forms of Defensive Strategies are:
1. Blocking the avenues open to Challengers:
Defender can participate in alternative Technology to reduce attack of better Technology which may be offered by rivals.
New Products, new features, broaden the product range, close vacant niches,
Have economy priced product range to ward off price wars.
Lengthening warranty periods, free service training or camps.
Developing capability to provide spare parts.
Providing free coupons, give away samples, sponsoring gift hampers,
Search & appoint creditable distributors & book them with volume discounts & other finance terms so as to discourage them from trying other suppliers.
2. Signalling Challengers that retaliation is likely & let challengers know that the battle will cost more than its worth.
Publicly announcing management’s commitment to maintain the firm’s present share.
Publicly committing the company to match competitors’ terms & prices.
Maintaining a war chest & marketable securities.
Making an occasional strong reaction on moves of weak competitor to enhance the company’s image of tough defender.
Strategies for Using Internet as distribution channel
The internet era has brought second wave of Internet entrepreneurship.
Companies need to address how best to make internet as part of the business to use as distribution channel.
How much emphasis to be placed for use of internet? Managers must decide how to use the Internet in positioning the company in marketplace?
Using Internet Just to Disseminate Product Information : and use internet to direct customers to distribution channel partners for sales transaction or indicate locations retail stores. This is to avoid conflict with already existing distribution channel partners. Direct sale on net will indicate weakening commitment to distributors.
Dealers are considered better positioned to deal with “brick & click” Strategy for Company products / services. Company considers that strong support and goodwill of dealer network is essential. Web is considered in partnership with dealers and not in competition.
Using Internet as Minor Distribution Channel:
Here, the strategy is to use Internet to gain online sale experience, doing market research, testing product, getting feed back from web surfers and create sufficient interest about Company’s Product and Services in web community.
e.g. ‘Nike’ selling some footwear on line, giving buyers option for colour & features so as to gain more & first hand knowledge about customers’ choices.
This path will be beneficial to dealers & will not create resistance.
Using “Brick and Click” Strategy:
Sell directly to customers on line and at the same time use traditional whole sale & retail channels.
This policy is beneficial in certain circumstances. e.g. “Software Programmes”, where direct downloading is more comfortable than going to shop and getting a CD.
Internet has more reach and geographic constraints are taken care of with help of dealers in that area, though Distribution channels are necessary and customer need to have a physical contact with Product / Services,
On-line sell improves profitability as dealer commission could be up to 35 – 40% of retail price.
Customers visiting web site are automatic prospective buyers.
Also where the technology is more suitable for ‘build to order’ strategy.
First / Fast / Late Mover Strategy
‘ When’ to make a Strategic move is equally important as ‘what’ move to make. It will depend upon the product life cycle, technology requirement. First mover has many advantages, but fast & late mover can also be a profitable move.
First mover builds up reputation & image. (Bisleri)
First mover’s early commitment to new technology, new features, new distribution channels can give a cost advantage over rivals.
Being first mover is an offensive move of ‘pre-emptive strike’. Rivals are not ready & this makes imitation difficult. Bigger the first mover advantage, more attractive the move is.
First mover’s customers are likely to retain brand loyalty giving him firm footage in market. However, first mover has to have good financial resources, important competencies, competitive capabilities and high quality management.
The first move cannot be for name sake. First mover must time his product entry with precise combination of features, customer value & sound revenue – cost – profit economics to sustain the edge over rivals and maintain market leadership.
Being the first mover need competency and cost. It may be cheaper to copy. If the product life cycle is long, the initial advantages of first mover can be nullified over a time and with safety. A follower and late mover assume that first mover to be slow in learning and updating his products.
First mover risks obsolescence due to technological advancements, smart late mover can turn apple cart & beat first mover. Sometime fence sitter moves in by fine tuning on mistakes of first mover
Being a Fast follower and late starter can also be an advantageous move with wait and see policy. It may be easier to copy first mover and improve upon by learning from errors on part of first mover and de-bug the problems.
Late mover can come up with superior product by imitating & has fewer risks as market is already developed. They can be successful if they have staying power.
At matured stage, check your portfolio and prune added products & models being in list for name sake.
Concentrate on Value Chain, trim costs, & do not allow Fat additions.
Concentrate on increased sales to present customers..
Acquire rival firms.
Build new or more flexible capabilities.
Strategies for : Firms in Stagnant or Declining Industries:
Concentrate on Value chain, drive down your costs and strategise to become industry leader as low cost provider.
Even in declining industry, some segments are growing. Know the needs of buyers in that segment & fulfil them.
Concentrate on product differentiation with quality improvement & innovation.
Strategies for: Competing in Fragmented Industries:
There are hundreds of industries co-existing in a very big market without differentiation and there is an absence of clear market leader. Entry barriers are low, initial investment can be low to start business, product is global, young product crowded with many aspirants.
Become a low cost operator.
Have good distributor chain, specialised and mange low cost with differentiation, in view of volume.
Focus on limited geographic area.
Strategies for : Sustaining Rapid Company Growth:
Short span strategy could be to expand in present business and obtain increased revenue. Time span 1 to 3 years.
Medium span Strategy: use existing resources and capabilities and enter into new business having a growth potential. Time span 3 to 5 years
Long Span Strategy: Look at businesses that do not exist today. Use present resources for venture investment. Present cash flow reduces, some loss expected on new business but strategy is longevity & significant future gains
Strategies for : Industry Leaders:
Stay on Offensive Strategy : Strategy is to be first mover and a proactive market leader. Keep rivals in reactive mode or scrambling to keep up your pace. Grow faster than the Industry as whole and wrestle marker share from rivals.
Fortify and defend Strategy: Increased spending on advertisement, bigger R & D outlay. Add personalised services. Keep prices reasonable. Patenting feasible alternative technologies.
Muscle flexing strategy :– Overkill : Quickly matching and exceeding challenges from rivals. Use Promotional campaigns to keep rivals away from gaining. Use arm twisting tactics. Display displeasure on customer for trying others and offer some specific benefits for Brand Loyalty.
Strategies for: Runner-Up Firms: These are second tier companies with lesser market share than the leader. These are also up-coming market challengers.
Offensive Strategy to build market share.
Strategy to grow through acquisition.
Strategy to fill up vacant niche.
Strategy to be a specialist, or to have superior product or to have a distinct image (Differentiation)
Strategy to be a content follower – no trendsetting moves but steal customers aggressively by copying and with special privileges.
Strategies for: Weak and Crisis-Ridden Businesses. These are Retrenchment & Turn around strategies.
Selling off Assets.
Revising the existing Strategy.
Launching efforts to boost revenues.
Pursuing cost reduction.
Using a combination of these efforts.
Crafting a successful Business Strategy: 1 :
Take a long term view for Company’s Competitive position and take those Strategic moves on top priority.
Be alert about unmet customer needs, buyer’s wishes for something better, emerging technological alternatives and be prompt in adapting to changing market conditions.
Be alert needs of non consumers, which is a very large share of the Market.( e.g.- Wall Mart at 14%)
Invest in creating sustainable competitive advantage.
Do not assume most optimistic circumstances while forming Strategies. Avoid Strategies which can be successful only in optimistic circumstances. (if not, then what?)
Do not under-estimate rivals in their reactions or commitment to do better.
Attacking competitive weakness is always safer and profitable than attacking competitive strength.
Crafting a successful Business Strategy: 2 :
Check possible cost advantages before cutting prices. You need to cut costs before cutting prices. You need to be Low cost provider for winning Price cutting war.
If you have a differentiation Strategy as a base, then we should really strive meaningful jump in quality / services / performance. Any minor variation in rival’s product will not be noticed by buyer and will not be important to them.
It should be noted that a middle path strategy and compromise strategy are two different matters. Compromise Strategies are not sustainable. Best cost provider Strategy is not a compromise, it must be a well thought & well executed.
Be aware that offensive Strategies will always invite retaliation. Aggressive moves to capture market share from rivals will invite a price war which will be detrimental to every body. Prepare your defences before being aggressive.
9. New Business Models and strategies for Internet Economy:
Shaping characteristics of E-Commerce environment –
E-Commerce Business Model and Strategies –
Internet Strategies for Traditional Business –
Key success factors in E-Commerce –
Virtual Value Chain. (6)
What is E-commerce?
E-Commerce from Communication point of view : It is the ability to deliver products, services, information, payments via network like internet.
E-commerce from Interface point of view means information and transaction exchange: Business to Business (B2B), Business-to-Consumer (B2C), Consumer to Consumer (C2C) and Business to Government (B2G).
E- Commerce as Business Process means activities that support commerce electronically by networked connections, for example, business process like manufacturing and inventory and business to business process like supply chain management are managed by the same networks as business to consumer processes.
E-Commerce as Online process : E-commerce is an electronic environment that allows sellers to buy and sell products / services and information on the internet. The products may be physical, like cars or services like news or consulting.
What is E-commerce?
E-Commerce-Structure : E-commerce deals various media: data, text, web pages, internet telephony, and internet desktop video.
E-Commerce Market : E-commerce is a worldwide network. A local store can open a web storefront and find that the world is at its door step – customers, suppliers, competitors, and payment services along with advertisement presence.
E-commerce is selling goods and services on the retail level with anyone, anywhere, via internet. It includes new business opportunities that result in greater efficiency and more effective exchange of good and services. Every transaction is blocks of information exchanged between E-merchant and a customer via the corporate Web site. Examples : www.amazon.com, www.ebay.com, www.crutchfield.com,
What is E-business?
E-business is conducting critical business systems and constituencies directly via internet, extranets and intranets.
E-business is the conduct of business on the internet, in supply-chain planning, tracking, fulfilment, invoicing and payment. It includes buying, selling as well as servicing customers and collaborating with business partners.
E-business has various Goals:
Reach new markets.
Create new products or services.
Build customer loyalty.
Enrich human capital.
Make the best use of existing and emerging technologies.
Achieve market leadership and competitive advantage.
Example: “SAP”: Provider of Business Software used for ERP. “Online banking services” is one more example.
E-commerce Business Models:1:
The important generic models are
B2B, B2C and C2B, C2C
B2B is “Business to Business” E-commerce is an automated exchange of information between different organisations. B2B involves only the firm’s business / trading partners, like Suppliers, Distributors, Dealers, Vendors and so on. This is used for awareness, product research, supplier sourcing, transactions, post-support sales. B2B transactions can be EDI, mails for purchasing goods and services, buying information, consulting services, requesting proposals, receiving proposals.
B2B are alternative ways of executing transactions between buyers and sellers that are business organisations; a network of independent organisations and long term trading partners.
B2C : “Business to Consumers” Commerce is retailing on World Wide Web.
E-commerce Business Models:2:
Storefront Model : It is an E-commerce site which offers products or goods for a price. Website displays products with product information, cost with a shopping cart and ordering mechanism. The web business merchant makes money the same way as traditional shop merchant. Typically, books, computers, electronic goods, pizza delivery are sold through Storefront Model
Click and Mortar Model is a shop that combines both Website and a physical store. Goods can be physically examined and returned to store directly.
Built to Order Merchant Model is website which offers goods or services with an ability to order customised versions. Generally Computer vendor adapts this model.
Service Provider Model: for ex. ‘Pizza delivery Service’, Movie Ticket delivery service, Flower delivery service. Some service providers provide advertising based access to their service. One of the successful ad-driven sites is www.yahoo.com
E-commerce Business Models:3:
Subscription based Access model : Visitor registers himself, pays monthly or annually and access unlimited service. Typical for accessing database, news, articles, online games. Movie shows etc. One of the Indian example is www.bharatmatrimony.com
Prepaid Access Model: Some services like telephony, movies are accessible by offering payment by minute and handled via a subscription.
Broker Model : Brokers are intermediaries; they bring buyers and sellers together and facilitate transaction between them by charging fee for every facilitated transaction. These transactions can be B2B, B2C, C2C etc. www.ebay.com is an example.
Advertiser Model : These are free sites which offer free access for something and display advertisements as banners. Visitor can click the advertisement and visit the webpage of the advertiser and can order his requirements.
E-commerce Business Models:4:
Portal Site Model : For news, Stock information, Weather, message boards, chats etc. These sites allow the visitors to personalise the interface and content. For example www.my.yahoo.com or www.my.cnn.com
Free access Model : Provides free web space. www.blogspot.com
Virtual Mall Model : A site that hosts many merchants, service providers, brokers and other businesses.
Virtual Community Model is a website that attracts a group of users with a common interest who work together on the site. Few social networks are www.orkut.com , www.facebook.com .
Infomediary Model : An Infomediary collects, evaluates and sells information on consumers and their buying behaviour to other parties. Infomediary offers something free to visitor that requires free registration by visitor, which allows Infomediary to monitor the visitor’s online activities.
Trust Intermediary Model is an entity that creates trust between buyer and the seller, which provides a secure environment for buyer and seller. They offer branded goods and provide escrow services and maintain privacy. Examples are ‘verisign’, ‘cybercash ’, https//:
Strategies for Internet Economy.
Many companies doing e-business are still in the investment and brand-building phase and have yet to show a profit. However, as e-businesses shift their focus from building a customer base to increasing revenue growth and profitability, it is required for the e-business to re-evaluate their current business strategies.
E-commerce is fundamentally changing the economy and the way business is conducted. E-commerce forces companies to find new ways to expand the markets in which they compete, to attract and retain customers by tailoring products and services to their needs, and to restructure their business processes to deliver products and services more efficiently and effectively.
McCarthy’s four marketing mix model and Porter’s five competitive forces model are used to identify strategies for Internet and achieve a competitive advantage. The development and implementation of e-business strategies will contribute to increased profit.
McCarthy's Four Marketing Mix Model:1:
Internet Economy has impact on McCarthy’s four marketing mix (product, price, promotion, and place) and also on Porter’s 5 competitive forces (the threat of new entrants, rivalry among existing firms, the threat of substitutes, the bargaining power of suppliers, and the bargaining power of buyers)
According to McCarthy (1960) and again McCarthy (1999), a firm develops its marketing strategies by first identifying the target market for its products or services. It then develops a marketing mix. A particular combination of product, price, promotion, and place (i.e., distribution and delivery functions in the supply chain) designed to enhance sales to the target market. A unique mix of these elements in a given industry allows firms to compete more effectively, thus ensuring profitability and sustainability. Since the Internet has a significant impact on the makeup of this marketing mix, Internet companies should develop strategies that take the unique nature of online marketing into account.
McCarthy’s Product Strategies
On the Internet, consumers can easily collect information about products or services without travelling to stores to inspect products and compare prices. Strategy shall be to differentiate the product by adding extra features . This is known as Product Bundling which counteracts the threat of product Substitutes and rivalry.
Introduce ‘niche’ product by understanding need of small segment of customers.
Use ‘customer centric’ strategy rather than ‘product centric’ strategy. Pull information from customers and improve and customize the products.
Internet companies can also expand their product line into areas related to their existing product lines . For example, www.amazon.com recently started selling personal computers in addition to its existing line of electronic products such as disk drives and memory.
McCarthy’s Price Strategies
Employ appropriate pricing strategies for selling products over the Internet.
Sellers can employ a price discrimination strategy that makes it difficult for buyers to compare the prices of alternative product offerings. For instance, www.staples.com charges different prices for different markets by asking customers to enter their zip codes before they can obtain prices.
Protect profits by achieving cost leadership in a particular market or industry
McCarthy’s Promotion Strategies
Mass marketing and sales promotions result in expensive, inefficient brand management. To manage e-brands effectively and efficiently, companies have to employ promotion strategies different from those used by traditional marketing
To manage e-brands effectively and efficiently, companies have to employ promotion strategies like building a direct link with consumers and enter into a dialogue with them about products ( dialogue-based marketing or one-to-one marketing) .
Build a base of loyal and profitable customers by formulating ‘customer-centric promotion strategies’ and respond to this new customer power.
A revenue-sharing marketing strategy is an affiliated marketing program with partners based on commissions. For example, www.amazon.com launched its affiliate program and now has some 400,000 affiliates
McCarthy’s Place Strategies
For most companies, place refers to the supply chain (or value chain). The place aspects of the marketing mix are closely related to the distribution and delivery of products or services. The Internet and its associated application software have significantly changed the way companies’ products or services are delivered by reducing transaction and distribution costs. One way for companies to differentiate their products from rival companies is faster and more efficient delivery of products to their customers
Integrate ‘online’ (Click) and ‘bricks-and-mortar’ businesses (clicks-and-mortar strategy). E-businesses (particularly e-retailers) need fully automated distribution warehouses to meet demand from shoppers on the Internet. For example, Amazon.com leased a new 322,560 sq. ft. distribution centre in Fernley, Nevada. By Investing in physical assets such as a warehouse, Amazon.com can compete more effectively with Barnes & Noble.
Porter's Five Competitive Forces Model
According to Porter, a firm develops its business strategies in order to obtain competitive advantage (i.e., increase profits) over its competitors. It does this by responding to five primary forces: (1) the threat of new entrants, (2) rivalry among existing firms within an industry, (3) the threat of substitute products/services, (4) the bargaining power of suppliers, and (5) the bargaining power of buyers.
The company positions itself so as to be least vulnerable to competitive forces while exploiting its unique advantage (cost leadership). A company can also achieve competitive advantage by altering the competitive forces.
The five competitive forces model provides a solid base for developing business strategies that generate strategic opportunities. The Internet dramatically affects these competitive forces. Companies should take effect of internet on these forces into account while formulating their strategies.
Analyzing the forces illuminates an industry’s fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future.
Impact of the Internet on Marketing Mix and Competitive Forces
The Internet can dramatically lower entry barriers for new competitors. Entering into e-commerce has become very easy for new entrants.
The number of people with Internet access has reached an estimated 304 million worldwide, an increase of almost 78 percent. The Internet also brings many more companies into competition by expanding geographic markets.
The Internet also changes the balance of power in relationships with buyers and suppliers by increasing or decreasing the switching costs of these buyers and suppliers.
By reducing customers' search costs, the Internet makes price comparison easy for customers, and thus increases price competition and shifts bargaining power of customer’s new promotion venues. The Internet creates new substitution threats by enabling new approaches to meeting customer needs and performing business functions (Porter 2001). World Wide Web (www) technology itself has produced new promotion venues. The Internet also facilitates an electronic integration of the supply chain activities, achieving efficient distribution and delivery. It also facilitates partnerships or strategic alliances by networking partners or allies.
E-Business Strategies for Competitive Advantage: Product, Price, Promotion, and Place Strategies Outsourcing Strategic Alliance, Click & Mortar Strategy Customer centric Promotion, Performance based Appeal, Revenue Sharing Price Discrimination, Cost leadership, Value added Products Differentiation, Innovation or Niche Product Threat of New Entrant Place Promotion Price Product
Outsourcing Strategic Alliances Clicks and Mortar Strategy Customer Centric Promotion Performance based Brand appeal Revenue Sharing Price discrimination Cost leadership. Value added products Product differentiation Innovation and or Niche Product Rivalries among Existing firms Clicks and Mortar Strategy Price discrimination Cost leadership. Value added products / services Product Differentiation like bundling Innovation and or Niche Product Customer centric strategy Threat of Substitutes Place Promotion Price Product
Outsourcing Strategic alliances Customer Centric Promotion Performance based Brand appeal Revenue Sharing Value added products / services Bargaining Power of Buyers OutsourcingStrategic alliances Revenue Sharing marketing Value added products / services Bargaining Power of Suppliers Place Promotion Price Product
Key success factors in E-Commerce.
Information is a key part of the value chain in all businesses. By providing a vehicle for the delivery of information with unprecedented availability and reach, today's information technology, in particular Internet technology, is dramatically changing the very fundamentals of business. This explosion in connectivity is the latest—and for business strategists, the most important—wave in the information revolution.
Internet technology and its derivative Intranets (connecting employees and internal systems) and Extranets (connecting external partners and systems) are having a profound and far-reaching impact on business.
Information such as pricing, costs, customer lists, supplier relationships, product information, employment statistics, legal proceedings, defect records, and historical statements and plans is now available to all freely. Businesses that do not rethink their fundamental value proposition based on this possibility may lose their competitive edge, or worse.
However, if you want to benefit from this new Internet economy, you will need to apply technology and electronic media to improve two basic aspects of your operation. You must:
Differentiate your products and services —and improve your market share.
Enhance your efficiency —a move that will lead to improved profitability
To see how these efforts can lead to greater levels of competitive success, refer to the following graphic. In this graphic, the four quadrants represent overall characteristics of value propositions—for individual products, services or entire companies in any industry. In the top right quadrant, companies successfully differentiate their products and services to capture increased market share, while at the same time leveraging the power of technology to slash the cost of sales and operations and generate market-leading profitability, which in turn finances ongoing reinvestment. In the top left quadrant, companies are often fighting a multitude of new combatants within a commoditized market, where price competition is acute. In this situation, technology must be maximally leveraged to maintain even modest profits .
In the bottom right quadrant, companies—usually inheriting their market differentiation from their legacy—still enjoy acceptable profit margins but are at extreme risk of new market entrants inventing new ways to leverage technology to deliver the same or superior value to their customers less expensively and more rapidly. In the lower left quadrant are usually the enterprises that offer customers products or services that are not differentiated from less expensive options, and that are generally trailing the pack in leveraging IT. They lose market share and ultimately risk failure.
The underlying canvas of this diagram—the market itself—is constantly being pulled down and to the left by new competitors with innovative ideas and new technologies that make those ideas less expensive to realize. Moving up and to the right, maintaining market leadership requires a disciplined focus on continual improvement along both dimensions. Following strategies are required to be employed to accomplish continual improvement in both market share and profitability.
1. Market Share: Through Increased Differentiation:1:
Customers from anywhere can reach out to merchants anywhere—and vice versa—they can evaluate their options with a few clicks of a mouse button.
In this environment, it has become difficult to differentiate products and services. If you are to remain competitive, you will need to set yourself apart from your competition.
a) Economic and Pricing Models
a.1) Customers will only purchase products or services with real, understandable value .
a.2) Profit is dependent upon differentiated value .
It is absolutely vital that differentiation be achieved and maintained through constant attention to innovation in intrinsic value, branding, distribution and affinity with complementary products and services.
1. Market Share: Through Increased Differentiation:2:
a.3) Distribution channels are more important then ever
a.4) Make sure your value proposition , as expressed on the Internet, is real and understandable , and you have a strong differentiation strategy to drive profitability and you've constructed a distribution strategy that leverages new intermediaries. Then continually improve all of the above.
a.5) Understand the information dynamics of your marketplace as it changes with the Internet, evaluate the activities of your competitors, try to develop breakthrough ideas, keep your plans confidential until they're ready to launch and continually improve every aspect of your electronic value proposition and operations. And move quickly.
b) Distribution Channel Reengineering
b.1) "Distributors are dead on the Internet." The disintermediation process is on. Large percentage of retail stock market transactions are now conducted on line rather than through human brokers. This has happened barely within 24 months since the first large-scale launch of Internet trading services.
b.2) New intermediaries known as "aggregators" such as search, news and community Web sites. Yahoo is perhaps the best known new intermediary. In many fundamental respects, so also is America Online (AOL)
b.3) Understand what's happening to intermediation within your industry, develop a strategy to grapple with it as aggressively as possible, and ensure that it works through measurement of results.
c) Customer Service Re-engineering and Optimization
c.1) Customer support is one of the most powerful differentiators in the online world. Assess where self-service Web sites can be implemented, integrate them with your existing support knowledge systems, build communities among customers and adapt the systems to the patterns of customer behaviour
d) Brand Strategy and Development :
d.1) Brand loyalty has become one of the most powerful differentiators in e-commerce. Brand gets embodied through set of thoughts and emotions. Greater the depth of these impressions, the stronger the brand—in a positive or negative direction.
d.2) In the online world, impressions can be transmitted in seconds to millions of people, therefore, the process of managing publicity —both good and bad—is as important as ever. Recognize the power of online opinion, a material market advantage might get lost and a new and an undesirable brand attribute might get attached
d.3) Understand that your online brand must be differentiated from competitors, that it must be developed within a disciplined and planned program.
e) Audience Development
e.1) On the Internet, it is easier than ever to actually communicate a message to large numbers of people. However, in many cases, it's much harder for your message to be heard. Successful online marketing program boils down to the same objective as in the physical world: developing an audience or "Audience Development" is preferred phrase for online marketing,
e.2) To succeed in any marketing endeavour, you must have an audience. Create an Audience Development .
f. User Experience Design
f.1) Users expect a Web site, Intranet or Extranet to present information in an intuitive, compelling and efficient manner, and leverage the interactivity of computing. This is part of the process of creating a powerful user experience .
f.2) Optimal user experience blends several common objectives into a seamless visual and interactive experience: the personality of the brand , the purpose of the interaction , the ease of comprehension and the speed of the results.
f.3) Critical success factors for any Internet application are usability , interactivity and efficiency . These factors should be integrated into a user experience plan aligned with brand, audience and purpose, and then measured for optimization
2 - Profitability: Through Increased Efficiency
The first step to leverage Internet technology within business processes across your company is to establish an Internet Architecture . An Internet Architecture is defined as an IT infrastructure model with the following attributes:
It should support any type of user device .
It should support self-service access to the information infrastructure. All databases should be server-based, including user profiles, as well as authentication and security systems, enabling nomadic users to access application systems and databases from any access point.
It should employ self-teaching content and make it readily accessible and understandable .
Applications should operate from within a single Internet browser standard.
It should comply with standard networking protocols
It should permit any type of device or system to act as a server.
It should support multi-tiered architecture . Multi-tiered architecture, which is the basis for client/server systems,
It should be structured within a standard network and resource management infrastructure.
Once the IT infrastructure model is ready as above, following business processes are to be used.
E-commerce, both business-to-business and business-to-consumer.
Value chain integration.
Human resources benefits administration, recruiting and stock administration.
Sales force automation.
Inventory and configuration management.
Distribution and service channel automation.
Document management and workflow.
Financial reporting, analysis and EIS.
Point-to-point, conference and broadcast communication.
3 - Profiles of Success in the Internet Economy
Successful profile in Internet Economy occurs by tapping the increased efficiencies of Internet Architecture and by adopting new differentiation strategies through the Internet. Examples are given of the businesses finding they can provide better products and services—and even new products and services—faster and at a lower cost. Some are expanding their market by making the Internet the integral core of their businesses
Dell Computers was one of the first PC makers to recognize the tremendous market potential for e-commerce on the Internet. Because its products are highly commoditized, the Web offered Dell an excellent avenue for reaching new customers and re-establishing itself as an innovator and market leader. Dell now conducts a considerable portion of its total business on line, and projects that ultimately 100 percent of its business will be conducted on line
Manheim Auctions recognized that selling used cars is a difficult, "dog-eat-dog" business that makes many potential customers uncomfortable. This company found a way to propel the used-car business into the '90s with new and innovative ways of selling that eliminated the need for high-pressure sales tactics on a car lot. The company reports that it has generated sales from more than 4,000 dealers subscribing to its online used-car auction site.
Amazon.com saw a huge market of people who prefer to browse the Web rather than browse through bookshelves in a retail store. As a result of its early innovation, the company has quickly created a large and growing Internet-based business. Amazon.com realizes all its revenues from the Internet.
Characteristics of Internet Economy
Information is a key part of the value chain in business, and Internet technologies have taken a giant leap in making information universally and economically available.
Internet has created a wave that is engulfing just about every business and changing its fundamentals.
The customers themselves are driving much of this change. They are demanding online services such as e-commerce, 24-hour service and support information, the ability to check product availability and track their accounts or portfolios, and the availability of timely news and updates.
They expect companies to make it as easy as possible for them to purchase products and services—without the need to go from store to store in search of the items and services they need. Customers are demanding that businesses deliver these services through the Internet.
Businesses must understand the complex technologies that have come together on the Internet; they also must understand how to integrate their Internet strategy with their overall business strategy.
Internet technology to be used to deconstruct and reconstruct the value chain in just about every industry,
Getting There from Here
But many are taking a haphazard approach, resulting in wasted time, effort, money and, more significantly, lost opportunity.
For example, Forrester Research found that one of the most common mistakes companies make when implementing an Internet project is not having a clear vision or purpose for the solution.
Integrating Internet technology successfully into a business involves fundamental considerations. Companies must rethink their business strategies and plans in light of the oncoming Internet wave, using it to their advantage.
Internet is a relatively new arena that will have a far-reaching impact; many companies have not yet developed the necessary skills and technology expertise in-house to create solutions that tap the full potential of the Internet.
That's why it is important to partner with companies such as Dynamic Net, Inc. that have the breadth of expertise, experience and resources necessary for developing new strategies and improving business processes using Internet-based technologies.
By partnering with a strategic firm such as Dynamic Net Inc., PWC, to help you accomplish these objectives, you can ride the Internet wave to new levels of success.
The virtual value chain:1:
The virtual value chain , created by John Sviokla and Jeffrey Rayport , is a business model describing the dissemination of value-generating information services throughout an Extended Enterprise . This value chain begins with the content supplied by the provider, which is then distributed and supported by the information infrastructure ; thereupon the context provider supplies actual customer interaction. It supports the physical value chain of procurement , manufacturing, distribution and sales of traditional companies.
There are many businesses that employ both value chains including banks which provide services to customers in the physical world at their branch offices and virtually online. The value chain is separated into two separate chains because both the marketplace (physical) and the marketspace (virtual) need to be managed in different ways to be effective and efficient (Samuelson 1981).
Nonetheless, the linkage between the two is critical for effective supply chain management .
The virtual value chain:2:
In the virtual value chain (VVC), information has become a dynamic element in the formation of a business’ competitive advantage. The information collected is utilized to generate innovative concepts and ‘new knowledge’. This translates to a new value for the consumer. An examination of the VVC model informs the business to what function they have in the chain, and if they are not currently offering services that are information based (i.e. Internet services), how they can make the transition to the information based model.
In the virtual value chain the ‘virtual’ indicates that the value adding steps are performed with information . The transfer of information between all events and among all members is a fundamental component in using this model. In the VVC the creation of knowledge/added value involves a series of five events: gathering , organization , selection , synthesize and distribution of information. The completion of these five events, allows businesses to generate new markets and new relationships within existing markets. The process of a business refining raw material into something of value and the sequence of events involved is similar to that of business collecting information and adding value through its cycle of events.
Stages of the value adding information process
Businesses implement value-adding information by using the three stages of the Rayport and Sviokla model:
Visibility – By using information businesses learn the ability to view physical operations more effectively. The virtual value chain is used to co-ordinate the activities of the physical value chain. With the assistance of IT, it is then fully possible to plan, implement, and assess events with greater precision and speed.
Mirroring Capability – Businesses duplicate their once physical activities for virtual, by producing a parallel value chain in the marketspace. In other words, the business moves the value adding activities from the marketplace to the marketspace.
New Customer Relationships – Businesses present value to the customer by new means and in new fashions. IT creates value in the marketspace. The new relationship between business and customer is strongly based on using IT. This implies that products and services are presented by IT in the form of bits.
Relevance to the business world:1:
The Virtual Value Chain has the benefit of having a view that encompasses the entire network along with its strong employment of IT. The VVC model has a strong relationship to the supply chain and the goal of that relationship is to produce materials, information and knowledge for the market. IT maintains the relationship among the members of the chain. The VVC model does not indicate any shifts in the market, or how and when the customer’s needs will change.
New technological developments in IT are drastically changing the way businesses operate. Each business’ internal and external relationships are managed by IT and value adding and generation of ideas are relying more and more on IT. This trend has led to a different approach to value chain thinking. Using this approach Mary Cronin separates the VVC into three elements: inputs from supplier, internal operations, and customer relations.
Relevance to the business world:2:
The inputs from supplier element are focused on the Internet and how it can add value to the business’s acquisition activities. In other words, business’ with use of the Internet have the capability to find different suppliers quickly (effective) and for different purposes (efficient).
The internal operations element is in regards to the business’ value adding events which are based on the effective procurement and distribution of the information within the business. It is essential that businesses can emulate this model because of the increasing large role information plays in the business world. With use of the Internet, the business can procure and distribute information globally with relative ease and low cost.
The customer relations element concentrates on applying the information directly from the customers’ needs and attitudes about the product or service to add value. The internet is a useful tool in acquiring the direct information about the customer’s needs and attitudes. The internet is also used to distribute information about the products and services to the market (i.e. electronic catalogues). Following the distribution, forums and discussion groups collect the necessary information about the products and services that the business provides
The Management of Virtual Value Chain:1:
Today managers need to concentrate on how their business creates value in both the physical and virtual world. However, the methods for creating value are different in these worlds. By careful interpretation of the differences and interactions among the value adding events of the physical and virtual worlds, managers can more clearly visualize the strategic issues facing the business.
Managers must learn to utilize and value the virtual world of information. "By thinking boldly about the integration of place and space," Sviokla and Rayport comment, "executives may be able to create valuable digital assets that, in turn, could change the competitive dynamics of industries." (Rayport et al. 1996) To properly use the information, that is to create value from it, managers must explore the marketspace. Although the value chain or the marketspace is similar to that of the marketplace, there is an increased dynamic involved. The processes for transferring raw information to products and services are unique to the information world.
The Management of Virtual Value Chain:2:
The conventional value chain model uses information for solely support, not as a source of value itself. However, with the arrival of the Internet the virtual value chain has been enabled, allowing businesses to use information for the creation of innovative products and services that are exclusive to the marketspace.
This study establishes that the strategy of IT is an important issue for a business. Productivity, quality, cost structure and profitability are all characteristics that are directly affected by IT. It is essential for businesses to use IT in the most effective way and to have knowledge to implement IT systems. Lastly, both users and businesses need to realize the potential that IT has for their business.
The Management of Virtual Value Chain:3:
An example of using the VVC to create such services includes the Federal Express Corporation which recently created a customer designed website to track packages by using their air bill number. FedEx has been able to capitalize using the VVC by adding value for the customer (for free) and in turn has increased customer loyalty in an intensely competitive market. In this increasingly information based economy managers must extract value from both the physical and virtual value chains to succeed.
10. Strategy Implementation:
Project Implementation –
Procedural Implementation –
Resource Allocation –
Organization Structure –
Matching structure and strategy.
Issues in implementation:
Functional & Operational Implementation.
Strategy Implementation is managerial exercise of putting freshly chosen Strategy into place.
Action orientation : Strategy implementation entails action, it is putting formulated Strategies into action through the management processes.
Strategy Implementation is comprehensive in scope. It includes everything that is included in the discipline of management studies.
Strategist must have somebody with a wide range of knowledge, skills, attitudes and Attributes for Implementation. Actual Implementation demands varied Skills
Wide range of involvement. Along with CEO every employee is involved in Strategy implementation.
The various tasks in strategy cannot stand alone. They are interrelated. Each task performed is related to other and thus create an interconnected network.
Adopting a clear model of Strategy Implementation : A Clear unambiguous Strategy, Clear Responsibilities & Accountabilities, Comprehending, how various elements are interconnected.
Effective management of change in complex situations : Behavioural changes, leadership style changes,
Strategy Implementation is “Activating Strategies”, preparing ground for managerial tasks & activities. ( Project implementation, Procedural Implementation & Resource Allocation)
The core of strategy implementation is “ Managing Change ”. (Structural Implementation, Leadership Implementation and Behavioural Implementation). It involves Degree of change, Timing of change & Activity areas of the change.
The outcome of Strategy Implementation is to “ Achieve Effectiveness ” through Functional and Operational Implementation. Goal Model, Resource – based Model, Internal process Model and the Conflicting Values Model. (Attempt to consolidate different view points & using diverse indicators of performance)
Formulated Strategy Intended Strategy Unrealised Strategy Deliberate Strategy Emergent Strategy Realised Strategy Implemented Strategy Mintzberg’s Conception of the Type of Strategies
Long Term / Medium Term Objectives : Market Share, ROI, ROE, New Markets. These are integrated and coordinated, consistent, prioritised and measurable objectives. Corporate Funct ional Plan Strategies Corporate Plan Sector Plan Divisional Plan Product / technology Plan Broad Object I ves Annual Operat Ion Budgets Business sector Division Product Level Long Term (5-10 years) Medium Term (3 Yrs) Short Term (1 Year)
Advantages of Annual Objectives:
Tangible Growth targets.
Focus on Growth.
Role clarity to managers and sub-ordinates.
Mobilise people and enable them to participate in direction of growth.
Unifying all groups in one direction.
Basis for strategic control.
Provide challenges for functional groups
Tool to Operationalising strategies.
1. Project Implementation: Strategic Management Process Strategy Implementation Strategy Evaluation & Control Project Objectives Initiating Planning Executing Controlling Closing Project Management Process Control Measures
Definition Phase : Preparation of Detailed Project Report considering marketing, technical, financial (eligible for scrutiny by financial institutes, economic and ecological aspects), feasibility study,
Organisation, location, whether new or Modernisation or expansion or diversification, backward integration, nature of Industry, nature of products.
Project promoters & Financial details of the company.
Project details. Detailed Cost of project.
Means of financing, Profitability and cash flow.
Economic considerations like competition, economic benefits to country or region, contribution to development, ancillaries etc.
Govt. consents like licence, capital goods, foreign Exchange, technical collaboration permission etc.
Planning and organising phase : Designs, budgets, finance, schedules, manpower, systems and procedures.
Implementation Phase : detailed engineering, order placement, testing, trial and commissioning of the project.
Clean up phase : disbanding the project set up and handing over of the facility to operation.
2. Procedural Implementation
Formation of the company
Foreign collaborations procedures
Import and Export Licences / requirements
Patenting and trade mark requirement
Labour legislation requirement
Environmental requirement and Pollution board requirements
Consumer protection requirements
Procedures for availing Incentives and facilities to get benefits.
3. Resource Allocation
Resource allocation deals with procurement and commitment of financial, physical and human resources to strategic tasks.
Project related resources are generally one time requirements and for on-going concern the resources are required on continuous basis.
Finance is primary resource. It is required for creation and maintenance of other resources. Long term resources are required for creation of capital assets and short term finance is required for working capital.
Resources could be internal or external. Internal resources are retained earnings, depreciation provisions, other reserves etc.
External resources are equity and long term loans. Also money market resources such as bank credits, hire purchase debt, instalment credit and fixed deposits.
Resource allocation : This could be top down where resources are allocated by top level to all other levels of organisation based on budgets. In a bottom up scenario budgets are drawn by operation group as required. However Strategic Budgeting is a mix of both and is dynamic. It involves to and fro communications and actions between all levels of management based on strategic decisions.
Top management Corporate Policy Guidelines Goals Short & Long Approvals & sanctions Resources availability Minimising gaps Strategic budget P R O P O S A L S Core Competencies, Marketing & past Performance, Environment, culture Executive Management Operating Management Targets / Operation Budgets Implementation
Types of Strategic Budgets SBUs / Multi-divisions / Multi-departments are identified for Resource allocations for Investment. Cash flows are based on their strengths in BCG Matrix. Indust ry Growth Rate High High Relative Market Share 20% 15% 10% 5% Low Stars Question Marks Cash Cows Dogs BCG Matrix for Strategic Decisions Low
Types of Strategic Budgets
PLC Based Budget : Product / SBU Life Cycle: Resources are allocated based on different stages Product / SBU Life Cycle.
Capital Budgeting : A separate budget is drawn for Capital requirement in case of new SBU or new product or expansion or modernisation. In case of capital sources fund raising are different.
Zero based Budgeting : ZSB is based on present evaluation and not based on past performance. Each requirement is to be justified by operation group on the basis of fresh calculation of costs and targets. In other words the resource allocation demand is based on “ground zero”
Parta System: This system is mainly used by conservative business houses where CEO is basically a financial wizard. This system is based on daily net cash flow (before tax and dividend) statement. The net cash flow is pre determined and agreed figure between SBU In-charge / Operating Management and the Chairperson / owner / major stock holder of the company. This is a daily budgeting and reporting system.
Factors affecting Resource Allocation:
Objectives of the Organisation – Realisation of Strategic Intent.
Dominant Strategists – Powerful Lobbying, influential departmental heads, CEO preferences etc.
Internal Politics – Resource allocation is construed a Power Statement and SBU In-charges, departmental heads strive for grabbing more resources for their departments.
External Influences – Government policies, statutory requirements, demands from financial institutes, Share holders, Community, necessity of Pollution control and safety equipments.
Scarcity of Resources – Financial, physical and human resources, cost of capital and that of cash credits, Government Policies with regards to raw materials and Technology.
Credit-worthiness of organisation – ability to raise funds.
Overstatement of needs – Bottom up or democratic ways of resource allocation gets developed in to every one grabbing his share of pie by overstating and dramatising their needs.
It is a role for CEO for managing resources. He need to have a Strategic Plan and communicate the same to all executives and ensure that resource allocation decisions are taken amicably.
4. Structural Implementation
Functional Divisional / Product Owner - Manager Employees CEO Public Relations Legal Production Finance Marktg. Personnel CEO Corporate Finance Legal / PR Gen. Manager - DIV . A Gen. Manager - Div. B Division Marktg., Operations, Pers., Marktg., Operations, Pers., Owner - Manager Employees
CEO Head SBU 1 Head SBU 2 Head SBU 3 Div. A,B,C Div. D,E,F Div. G,H,K
Matrix CEO F inance Operations Personnel Marketing Head – A Location / Product / Plant Head – B Location / Product / Plant Head – C Location / Product / Plant Corporate
Network Corporate HQ Project M Project N Function X Function Y Region A Region B
Product based Structures : In large volume scenario it makes a sense to have a separate organisation dedicated to a product. This enables optimum use of specialised skills. Product separation helps organisation in addition /deletion decisions.
Customer based Structures : Assuming that sales volume justifies the need of separate setup; it enables organisation to concentrate on specific customer group and provide exclusive attention required for that particular product / services. It helps in creating specialised skills and timely response to changing needs of the customers.
Geographic Structures : Set ups at different sites sometimes evolve due to expansions and mergers. It also offers advantage of nearness to raw materials or to markets / customers. It helps in fair degree of de-centralisation. It needs a very good top level co-ordination and communication amongst all locations and corporate office.
Intrapreneurial Structure : This is a cluster of various owner driven set-ups. It encourages entrepreneurial abilities of its employees. Employees as entrepreneurs with support of parent organisation can apply its full attention to his part of business for development of new ideas for products and services.
There are also “ Horizontal Organisations ” and “ Delaminated matrices .”
In horizontal type; the structure corresponds to process of providing products or services directly served to customer thereby eliminating special corporate functions like marketing, finance etc. Executives have to be multi-functional in such a case as the core process is managed by cross functional teams.
Delaminated Matrices are combination of Horizontal organisations with a Functional structure. The firm employs both process oriented horizontal teams and functional departments. These two layers of matrix organisation are separated providing depth of expertise and capabilities to the organisation.
Organisational Design : Structural Dimensions:
Formalisation: Written Documents, Procedures, Job Descriptions, Regulations & Policy Manuals.
Specialisation: Specialised tasks are subdivided into separate groups.
Hierarchy of Authority: Span of Control of Managers, Reporting structure, Nos. of Sub-ordinates.
Centralisation: Decision making process, Delegation of decision making authority.
Professionalism: Formal Education & Training requirements.
Personnel Ratios: Deployment of people to various functions & Departments, Administrative Ratio, Clerical Ratio, Indirect v/s Direct labour Ratio.
Contextual Dimensions: Environment, Goals & Strategy, Culture, Technology and size of Organisation are factors that influence the shape the structural dimensions.
Organisations are structured to implement strategic plan in best possible way. All functions and activities that are critical from strategy view point are required to be considered. Thus key activities performed to achieve Objectives and realise the Mission are required to be considered in Organisational design.
Identification of key activities necessary to be performed for achieving Objectives and realising the Mission through the formulated strategy.
The activities which are similar in nature and skills are grouped together.
Different groups of activities are accommodated in the structure.
Creation of Departments, Divisions; Regions and so on to which the group of activities are assigned.
Design establishes an interrelationship between these different departments for the purpose of coordination and communications.
value chain team-focussed Job Design Individual-focussed specialised Job Design Extensive Training Minimum Training Functional Work teams Functional Work teams Autonomous work teams Work / Quality based Teams Outsourcing and virtual organisations Vertical Integration Decentralised and participative decision making Centralised and Top-down decision Making Horizontal Communication Vertical Communication Small business units with Cooperative relationship. One large firm Emerging Organisations Traditional Organisations
Control Systems – The measurement and correction of the performance of activities of all the people in structure in order to make sure that enterprise objectives and plan devised to achieve the same is accomplished.
Information Systems – The Organisational Arrangements that provides information to managers to perform their tasks and relate their works to others. This is also known as MIS
Appraisal Systems – Evaluating managerial performance. Appraisals are used for salary fixation, awards, incentives, management development, etc.
Motivation Systems – to enforce desirable behaviour. Motivation can be monetary such as Salary, Bonus, Rewards and non monetary such as recognition, designation, perks
Planning Systems – Planning is basically formulating strategy. Planning can be centralised or decentralised depending upon Organisational Character. Plans are provided as packaged plan for implementation in centralised planning by planning committee. In decentralised planning corporate strategy performs a directive role for divisions, who in turn does planning taking environment into consideration.
Development systems – is a process of gradual, systematic improvement in knowledge, skills and performance of mangers to enable them to perform their duties.
The process of management Development Individual Characteristics Organisational Characteristics Managerial behaviour Performance Experience Learning Management Development Training & Education, New Experiences
5. Behavioural Implementation.
Behaviour of the strategist has a huge impact on implementing the chosen strategy. Implementation of strategy has thus many behavioural issues.
Use of Power.
Personal Values and Business Ethics.
Leadership in Implementation :1:
Leadership plays a critical role in the success and failure of an enterprise. It is one of the most important elements affecting Organisational performance.
Leaders have Personality traits and Qualities.
Leaders Influence relationship between individuals.
Behaviour of leader lead to actions around.
Situation in which leader has to operate decides the mettle of a leader. Subordinates and situation at times show dependence on a leader.
This generates Contingency behaviour within the leader.
Leader transacts with sub-ordinates and indicates Role differentiation.
Leader with absence of a real concepts provides anti leadership.
Leadership thrives on entire organisational Culture.
Leader uses his influence and creates intrinsic motivation and bring about Transformation of the organisation
Risk Taking Leader : Willingness to take high risks. This is required at times depending on the strategy which involves high returns.
Leadership in Implementation :2:
Technocracy : Optimum decisions based on technical needs
Organicity : The flexibility and adaptability in changing requirements is required to satisfy an agile operating staffs.
Participation : Inviting participation at all levels in the decision-making, Process and strategy implementation.
Coercion involves domination, authoritarianism by top management complied with wishes given in Mission and adjectives.
Key role of Leaders: CEO : Identifying Strategy and implement. He remains accountable for success or failures. He should identify changes in environment and should operate a trigger. He should have interpersonal skills and creativity to Mobilise people.
CEO should develop and choose future strategists. Their career planning and establish a succession plans. Normally a promotion within, is useful for moral of the organisation.
Corporate Culture is a set of important assumptions- often un-stated but most members share in common. Something like “people at top do not understand” or “Whether you work or don’t work, you will get salary”, “there is stagnation at Top” or “Turnover is important.”
Thus shared things like uniforms, Shared sayings, shared actions like service oriented approach, shared feelings like “hard work is not rewarded here” creates a Corporate culture.
Strategists have four approaches to create a strategy related supportive culture. This depends on strategy-culture relationship.
Ignore corporate culture : Changes required are very high and compatibility of change is low, then To adapt strategy implementation to suit corporate culture. Changes required are very high and compatibility of change is also high, then To change strategy to fit corporate culture Changes required are very low and compatibility of change is also low, then To change corporate culture to suit strategic requirements : Changes required are very low and compatibility of change is high, then
Corporate Politics and Power : Power is an ability to influence others and politics is carrying out activities though not prescribed by any Policy to gain advantages and influence distribution.
Corporate politics is not good or bad but it creates divisiveness which is not good.
Sources of Power : ‘ Reward Power’ – ability of Manager to reward people of his choice. ‘ Coercive Power’ – Ability to penalise negative results. ‘ Legitimate Power’ Ability of Mangers to influence behaviour of sub ordinates. Referent Power is Managers to create liking among subordinates due to charisma or knowledge. Expert Power is due to competence, knowledge and experience of Managers.
Personal Values and Business Ethics
Value is a view of life and a judgement of what is desirable and what is correct. These views forms personality of a leader and creates a group’s morale. Business ethics are traditionally been considered as core values like honesty, trust, respect & fairness.
To inculcate these value and ethics:
Consider Values & Ethics of a person during recruitment.
Incorporate in new comer trainees and in training programme.
Top management to set examples.
Communicate Values & Ethics through wide publicity.
Consistently monitor and nurture values and build ethics.
Social Responsibility and Strategic Management
Social Responsibility along with ethics becomes a stated or un-stated requirement. It gets attended in Strategic Planning through environmental appraisals. It has differing views, while some do not want it to be considered in business operations, others boast around it. However, most business houses observe a balance and undertake to deliver social responsibility and business objectives without contradicting each other.
Social Responsibility extends beyond the workforce and stakeholders and many business houses take up activities for community welfare, rural development, sports etc.
Presently, with ISO:14001:2004 which concerns Environment Management Systems, it has become a necessity to address the mode and means of delivering social responsibility.
Like any other strategic functions, for successful implementation, Organisations need to allocate resources, create Organisation Structure and evaluate its effectiveness. But all said and done, the society in large remains a major stake holder and we cannot escape our dues to society and towards social responsibility.
Functional and Operational Implementation.
Enterprise Vision, Mission, Objectives and Goals are of generic nature.
Various functions like Marketing, Operation, Finance, HRD etc. are created for effective implementation of the Strategic Plans.
Functional Plans and Policies are developed.
Functional Strategy deals with limited restricted plan which provides objectives for a specific function.
Resources are allocated function wise for their optimal contribution to the achievement of Business and Corporate level Objectives.
Functional Plans and Policies:
Functional Strategies are implemented through defined plans and policies for various functions.
The strategic decisions are implemented by all the functions of the organisations.
A basis is created for controlling activities of all different functional areas of business.
Plans are laid down clearly for all functional departments and Policies provide discretionary framework. Thus functional mangers do not spend time groping in dark.
Functional mangers can handle similar situations effectively.
Co-ordination across the different functions takes place where necessary.
Strategy Formulation Nature of Product / Services Nature of market Manner in which Market is to be served Operational System Structure Operational System Objective Operational Policies and plans
11. Behavioural issues in implementation:
Corporate culture –
Mc Kinsey’s 7s Framework –
Concepts of Learning Organization
Description of the 7-S Frame work of MC Kinsey
Description of the 7-S Frame work of MC Kinsey
The 7-S framework of McKinsey is a Value Based Management (VBM) model. Together these factors determine the way in which a corporation operates.
Shared Value: The interconnecting centre of McKinsey's model is: Shared Values. What does the organization stands for and what it believes in. These are Central beliefs and attitudes .
Strategy: Strategy is a Plan for the allocation of a firm’s scarce resources, over a time to reach identified goals. Strategy considers Environment, Competition and Customers.
Structure: The way the organization's units relate to each other: centralized, functional divisions (top-down); decentralized (the trend in larger organizations); matrix, network, holding, etc.
System: The procedures, processes and routines that characterize how important work are to be done: financial systems; hiring, promotion and performance appraisal systems; information systems.
Staff: Numbers and types of personnel within the organization.
Style: Cultural style of the organization and how key managers behave in achieving the organization’s goals.
Skill: Distinctive capabilities of personnel or of the organization as a whole. (Core Competencies).
The McKinsey 7S Framework
Ensuring that all parts of your organization work in harmony
While some models of organizational effectiveness go in and out of fashion, one that has persisted is the McKinsey 7S framework. Developed in the early 1980s by Tom Peters and Robert Waterman, two consultants working at the McKinsey & Company consulting firm, the basic premise of the model is that there are seven internal aspects of an organization that need to be aligned if it is to be successful.
The McKinsey 7S model can be applied to elements of a team or a project as well. The alignment issues apply, regardless of how you decide to define the scope of the areas you study
* The 7S model can be used in a wide variety of situations where an alignment perspective is useful, for example:
Improve the performance of a company;
Examine the likely effects of future changes within a company;
Align departments and processes during a merger or acquisition;
The Seven Elements
"Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems.
"Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful.
Shared Values Skills Style Staff Strategy Structure Systems Soft Elements Hard Elements
The way the model is presented in Figure depicts the interdependency of the elements and indicates how a change in one affects all the others.
Placing Shared Values in the middle of the model emphasizes that these values are central to the development of all the other critical elements. The company's structure, strategy, systems, style, staff and skills all stem from why the organization was originally created, and what it stands for. The original vision of the company was formed from the values of the creators. As the values change, so do all the other elements
How to Use the Model
The model is based on the theory that, for an organization to perform well, these seven elements need to be aligned and mutually reinforcing. So, the model can be used to help identify what needs to be realigned to improve performance, or to maintain alignment (and performance) during other types of change.
Whatever the type of change - restructuring, new processes, organizational merger, new systems, change of leadership, and so on - the model can be used to understand how the organizational elements are interrelated, and so ensure that the wider impact of changes made in one area is taken into consideration.
You can use the 7S model to help analyze the current situation (Point A), a proposed future situation (Point B) and to identify gaps and inconsistencies between them. It's then a question of adjusting and tuning the elements of the 7S model to ensure that your organization works effectively and well once you reach the desired endpoint.
However, it is not simple. Changing your organization probably will not be simple at all! Whole books and methodologies are dedicated to analyzing organizational strategy, improving performance and managing change. The 7S model is a good framework to help you ask the right questions - but it won't give you all the answers. For that you'll need to bring together the right knowledge, skills and experience.
When it comes to asking the right questions, we've developed a Mind Tools checklist and a matrix to keep track of how the seven elements align with each other. Supplement these with your own questions, based on your organization's specific circumstances and accumulated wisdom.
7S Checklist Questions
Here are some of the questions that you'll need to explore to help you understand your situation in terms of the 7S framework. Use them to analyze your current (Point A) situation first, and then repeat the exercise for your proposed situation (Point B).
What is our strategy?
How to we intend to achieve our objectives?
How do we deal with competitive pressure?
How are changes in customer demands dealt with?
How is strategy adjusted for environmental issues?
How is the company/team divided?
What is the hierarchy?
How do the various departments coordinate activities?
How do the team members organize and align themselves?
Is decision making and controlling centralized or decentralized? Is this as it should be, given what we're doing?
Where are the lines of communication? Explicit and implicit?
What are the main systems that run the organization? Consider financial and HR systems as well as communications and document storage.
Where are the controls and how are they monitored and evaluated?
What internal rules and processes does the team use to keep on track?
What are the core values?
What is the corporate/team culture?
How strong are the values?
What are the fundamental values that the company/team was built on?
How participative is the management/leadership style?
How effective is that leadership?
Do employees/team members tend to be competitive or cooperative?
Are there real teams functioning within the organization or are they just nominal groups?
What positions or specializations are represented within the team?
What positions need to be filled?
Are there gaps in required competencies?
What are the strongest skills represented within the company / team?
Are there any skills gaps?
What is the company / team known for doing well?
Do the current employees/team members have the ability to do the job?
How are skills monitored and assessed?
7S Matrix questions
Using the information you have gathered, now examine where there are gaps and inconsistencies between elements. Remember you can use this to look at either your current or your desired organization.
Check off alignment between each of the elements as you go through the following steps:
Start with your Shared Values: Are they consistent with your structure, strategy, and systems? If not, what needs to change?
Then look at the hard elements. How well does each one support the others? Identify where changes need to be made.
Next look at the other soft elements. Do they support the desired hard elements? Do they support one another? If not, what needs to change?
As you adjust and align the elements, you'll need to use an iterative (and often time consuming) process of making adjustments, and then re-analyzing how that impacts other elements and their alignment. The end result of better performance will be worth it.
The McKinsey 7Ss model is one that can be applied to almost any organizational or team effectiveness issue.
If something within your organization or team isn't working, chances are there is inconsistency between some of the elements identified by this classic model.
Once these inconsistencies are revealed, you can work to align the internal elements to make sure they are all contributing to the shared goals and values.
The process of analyzing where you are right now in terms of these elements is worthwhile in and of itself.
But by taking this analysis to the next level and determining the ultimate state for each of the factors, you can really move your organization or team forward.
Concepts of Learning Organization
Organisational Learning vs. Learning Organisation
There is a difference between Organisational Learning and Learning Organisation. Argyris (1977) defines Organisational Learning as the process of " detection and correction of errors"
while Senge (1990) defines Learning Organisation as "a group of people continually enhancing their capacity to create what they want to create". Senge further remarks that "the rate at which organizations learn may become the only sustainable source of competitive advantage".
Organisational Learning is a Process and Learning Organisation is a Structure.
A Learning Organisation is an Organisation that learns and encourages learning among its people in an effort to create a more knowledgeable and flexible workforce capable to adapt to cultural changes .
A Learning Organization is the term given to a company that facilitates the learning of its members and continuously transforms itself. Learning Organizations develop as a result of the pressures facing modern organizations and enables them to remain competitive in the business environment . A Learning Organization has five main features; systems thinking, personal mastery, mental models, shared vision and team learning.
Donald Schon . He provided a theoretical framework linking the experience of living in a situation of an increasing change with the need for learning.
The loss of the stable state means that our society and all of its institutions are in continuous processes of transformation. We cannot expect new stable states that will endure for our own lifetimes. We must learn to understand, guide, influence and manage these transformations. We must make the capacity for undertaking them integral to ourselves and to our institutions.
We must, in other words, become adept at learning. We must become able not only to transform our institutions, in response to changing situations and requirements; we must invent and develop institutions which are ‘learning systems’, that is to say, systems capable of bringing about their own continuing transformation. (Schon 1973: 28)
Subsequently, we have seen very significant changes in the nature and organization of production and services. Companies, organizations and governments and we have to operate in a global environment and that has altered its character in significant ways.
Productivity and competitiveness are, by and large, a function of knowledge generation and information processing. Firms and Territories are organized in networks of production, management and distribution. The core economic activities are global – that is they have the capacity to work as a unit in real time, or chosen time, on a planetary scale. (Castells 2001: 52)
A failure to attend to the learning of groups and individuals in the organization spells disaster in this context. As Leadbeater (2000: 70) has argued, companies need to invest not just in new machinery to make production more efficient, but in the flow of know-how that will sustain their business. Organizations need to be good at knowledge generation, appropriation and exploitation
Why do Learning Organizations develop?
Organizations do not organically develop into Learning Organizations; there are usually factors prompting their change.
It has been found that as organizations grow, they lose their natural capacity to learn as company structures and individual thinking becomes rigid.
When problems arise in the company, the solutions that are proposed often turn out to be only short term (single loop learning) and re-emerge in the future.
To remain competitive, many organizations have restructured, which has resulted in fewer people in the company. This means those who remain need to work more effectively.
To create a competitive advantage, companies need to be able to learn faster than their competitors and also develop a customer responsive culture.
Modern organizations need to maintain knowledge about new products and processes, understand what is happening in the outside environment and produce creative solutions using the knowledge and skills of all employed within the organization.
This requires co-operation between individuals and groups, free and reliable communication, and a culture of trust. These needs can be met through embracing the tenets of the Learning Organization.
Learning Organisation : Definitions
The Learning Company is a vision of what might be possible. It is not brought about simply by training individuals; it can only happen as a result of learning at the whole organization level. (Pedler et. al. 1991: 1) Pedler et al, later redefined this concept to “an organization that facilitates the learning of all its members and consciously transforms itself and its context”, reflecting the fact that change should not happen just for the sake of change, but should be well thought out.
"Organisations where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to learn together" (Peter Senge, 1990).
Learning organizations are characterized by total employee involvement in a process of collaboratively conducted, collectively accountable change directed towards shared values or principles. (Watkins and Marsick 1992: 118)
According to Sandra Kerka (1995) most conceptualisations of the learning organisations seem to work on the assumption that ‘learning is valuable, continuous, and most effective when shared and that every experience is an opportunity to learn’.
Characteristics of a Learning Organization-1
Learning Organization exhibits five main characteristics; Systems thinking, Personal mastery, Mental models, a Shared vision and Team learning.
This is a conceptual framework that allows people to study businesses as bounded objects.
Learning Organizations employ the method of thinking when assessing their company and develops information systems that measures the performance of the organization as a whole and of its various components.
Systems thinking also state that all the characteristics listed must be apparent at once in an organization for it to be a Learning Organization. If any of these characteristics is missing, then the organization will fall short of its goal.
However O’Keeffee believes that the characteristics of a Learning Organization are factors that are gradually acquired, rather than developed simultaneously.
Characteristics of a Learning Organization-2
Personal mastery is the commitment by an individual to the process of learning. There is a Competitive Advantage for an organisation whose workforce can learn quicker than the workforce of other organisations.
Individual learning is acquired through staff training and development. However learning cannot be forced upon an individual if he or she is not receptive to learning.
Research has shown that most learning in the workplace is incidental, rather than the product of formal training; therefore it is important to develop a culture where personal mastery is practiced in daily life.
A Learning Organisation has been described as the sum of individual learning, but it is important for there to be mechanisms by which individual learning is transferred into Organisational Learning.
Characteristics of a Learning Organization-3
Mental Models are the terms given to ingrained assumptions held by individuals and organisations.
To become a Learning Organisation, these mental models must be challenged.
Individuals tend to espouse theories, which they intend to follow, and theories-in-use, which is what they actually do.
Similarly, organisations tend to have ‘memories’ which preserve certain behaviours, norms and values. In the creation of a learning environment it is important to replace confrontational attitudes with an open culture that promotes inquiry and trust.
To achieve this, the Learning Organisation will have mechanisms for locating and assessing organisational theories of action. If there are unwanted values held by the organisation, these need to be discarded in a process called ‘unlearning’ Wang and Ahmed refer to this as ‘triple loop learning.’
Characteristics of a Learning Organization-4
The development of a shared vision is importantly provides incentive to the workforce to learn as it creates a common identity that can provide focus and energy for learning.
The most successful visions are built on the individual visions of the employees at all levels of the organisation
The creation of a shared vision is likely to be hindered by traditional structures where a company vision is imposed from above. Therefore…
Learning Organisations tend to have flat, decentralised organisational structures.
The topic of shared vision is often to succeed against a competitor, however Senge states that these are transitory goals and suggests that there should also be long term goals that are intrinsic within the company.
Characteristics of a Learning Organization-5
Team learning is the accumulation of individual learning.
The benefit of sharing individual learning is that employees grow more quickly and the problem solving capacity of the organisation is improved through better access to knowledge and expertise.
Learning Organisations have structures that facilitate team learning with features such as boundary crossing and openness.
Team learning requires individuals to engage in dialogue and discussion, therefore it is important that team members develop open communication, shared meaning and understanding.
Learning Organisations also have excellent knowledge management structures, which allow creation, acquisition, dissemination, and implementation of this knowledge throughout the organisation.
Characteristics of a Learning Organization-6
The basic rationale for such organisations is that in situations of rapid change, only those that are flexible, adaptive and productive will excel.
For this to happen, it is argued that organisations need to ‘discover how to tap people’s commitment and capacity to learn at all levels’ (Peter Senge, 1990)
And that “the pressure of change in the external environments of organisations... is such that they need to learn more consciously, more systematically, and more quickly than they did in the past...
They must learn not only in order to survive but also to thrive in a world of ever increasing change” (Pearn, 1997).
The key ingredient of the Learning Organisation is in how organisations process their experiences and how they learn from their experiences rather than being bound by their past experiences.
Learning Organisation Concepts
The concept of organisational learning evolved from the individual learning process, but organisational learning is not simply the collectively of individual learning processes, but it engages interaction between:
Individuals in the organisation
Interaction between organisations as an entity
Interaction between the organisation and its environment
The major Learning Organisational concepts focus on “Continuous Improvement”, “Culture” and “Innovation and Creativity”.
Innovation and Creativity 3. Culture 2. Continuous Improvement 1. Practices The concept of Learning Organisation Focus “ A learning organisation should consciously and intentionally devote to the facilitation of individual learning in order to continuously transform the entire organisation and its context “ (Pedler et al. 1991) The adoption of Total Quality Management practices “ A learning organisation should be viewed as a metaphor rather than a distinct type of structure, whose employees learn conscious communal processes for continually generating, retaining and leveraging individual and collective learning to improve performance of the organisational system in ways important to all stakeholders and by monitoring and improving performance” (Drew & Smith, 1995) Creation and maintenance of learning culture: adopting to cultural change, collaborative team working, employee empowerment and involvement, etc. Organisation learning is the process by which the organisation constantly questions existing product, process and system, identify strategic position, apply various modes of learning, and achieve sustained competitive advantage Facilitation of learning and knowledge creation; focus on creative quality and value innovation
Problems / issues that may be encountered in a Learning Organisation:
Even within a Learning Organisation, problems may be encountered that stall the process of learning or cause it to regress.
Most of the problems arise from an Organisation not fully embracing all the facets outlined above that are necessary in a Learning Organisation.
If these problems can be identified, work can begin on improving them.
Organisational barriers to learning:
Some organisations can find it hard to embrace personal mastery because as a concept it is intangible and the benefits cannot be quantified. Additionally, personal mastery can be seen as a threat to the organisation.
This threat can be real, as Senge points out, that “to empower people in an unaligned organisation can be counterproductive”.
Organisational barriers to learning: (Contd.)
In other words, if individuals do not engage with a shared vision, personal mastery could be used to advance their own vision.
In some organisations a lack of a pro-learning culture can be a barrier to learning.
It is important that an environment is created where individuals can share learning without it being devalued and ignored.
So more people can benefit from their knowledge and the individual becomes empowered.
A Learning Organisation needs to fully embrace the removal of traditional hierarchical structures. These are a barrier to the development of shared vision and to the sharing of knowledge.
Individual barriers to learning
Resistance to learning can occur within a Learning Organisation if there is not sufficient “buy in” at an individual level.
This is often encountered by people who feel threatened by change or believe that they have the most to lose.
The same people who feel threatened by change are likely to have closed mind sets are not willing to embrace engagement with mental models.
Unless implemented coherently across the whole organisation, learning can be viewed as elitist and restricted to more senior levels within the organisation.
If this is the case, learning will not be viewed as a shared vision.
If training and development is compulsory, it can be viewed as a form of control, rather than a form of personal development.
Learning and the pursuit of personal mastery needs to be an individual choice, therefore enforced take up will not work.
Ideas on the "Why Learning Organisation?"
Because we want superior performance and competitive advantage
For customer relations
To avoid decline
To improve quality
To understand risks and diversity more deeply
For our personal and spiritual well being
To increase our ability to manage change
For energized committed work force
To expand boundaries
To engage in community
For independence and liberty
For awareness of the critical nature of interdependence
Because the times demand
12. Functional issues:
Functional plans and policies –
Functional Plans & Policies:
Functional Strategies are derived from Business & Corporate Strategies and are implemented through Functional & operational Implementation.
Functional Strategies deal with limited plan designed to achieve Objectives in a specific Functional area, allocation of resources for that functional area and coordination among different functional operations to achieve Functional Objectives.
Functional Plans & Policies are developed for:
The Strategic decisions are implemented by all parts of an Organisation.
There is a basis available for controlling activities in different functional areas of Operation.
Plans are laid down for what is to be done and Policies provide guideline for discretions and Functional Manager’s time in decision making is reduced.
Required Coordination amongst different functions takes place.
Financial Plans & Policies
Sources of Funds:
Capital Mix Decisions.
Procurement of Capital.
Working Capital Borrowings.
Reserves & Surpluses as source of Funds.
Relationships with Lenders, Banks & FIs.
Plans & Policies related to sources of funds determine how
financial resources will be made available for implementation of
Usage of Funds:
Investment or Asset mix decisions.
Fixed Asset acquisitions,
Current Assets, Loans & Advances,
5. Dividend decisions,
6. Relationship with Shareholders,
Usage of Funds relates to efficiencies & effectiveness of
resource utilisation in the process of Strategy Implementation.
Management of Funds:
System of Finance,
Accounting & Budgeting,
Management Control Systems,
Cash, Credit and Risk Management,
Cost control, cost reduction and Tax planning
Aiming at Conservation and Optimum utilisation of Funds.
Organisations which implement business strategies of
Cost leadership must practice proper management of Funds.
Good management of funds often creates the difference
Between strategically successful or unsuccessful Company.
Marketing Plans & Policies
These are 4Ps of Marketing
Product : Goods & Services offered by Organisation to its Target market. (Choice of Models, Quality, Features, Brand names, Packaging etc.)
Pricing : Money that Customers pay in exchange of Goods & Services. (Discounts, Mode of payment, Allowances, Payment period, Credit terms)
Promotion : Marketing communications intended to convey the company and product or service image to prospective buyers. (Advertising, Personal Selling, Sales Promotion and Publicity)
Place : Distribution process by which goods or services are made available to the customers. (Transportation, logistics, inventory storage management, coverage of markets, etc.,)
Integrative & Systematic Factors :
This part of the plans & policies related to Marketing Management. (Marketing mix, Segmentation, Targeting, Positioning, Market Standing, Company Image, Marketing Organisation, Marketing System, Marketing Management Information System)
Operations Plans & Policies :
Production System – Capacity, Location, Layout, Product or Service design, Work systems, Degree of Automation, extent of vertical integration. Operation Plans & Policies deals with vital issue affecting the capability of the Organisation to achieve objectives.
Operational Planning & Control – Production Planning, Materials supply, inventory, Cost, Quality Management, Maintenance of Plant and Equipment.
Research & Development
Personnel Plans & Policies:
HRM Plans & Policies relate to providing & maintaining human resources:
Personnel System : Manpower Planning, Selection, Development, Compensation, Communication and Appraisal
Organisational & Employee Characteristics : Corporate image, Quality of Managers, Staff & Workers, Image of Organisation as an Employer, availability of Development opportunities for employees, working conditions etc.,
Information capability factors relate to design & management of the flow of information within and from outside. The value of information is source of Strategic Advantage.
Acquisition and Retention of Information : Sources, Quantity, Quality, and timeliness of Information, retention capacity and security of information.
Processing and Synthesis of Information : Database management, Computer Systems, Software capability and ability to synthesise information.
Retrieval & Usage of Information : Availability and appropriateness of Information formats and the capacity to assimilate and use information.
Transmission & Dissemination of Information : speed, scope, width & depth of coverage of information with willingness to accept the information.
Integrative, Systematic and Supportive Factors : availability of IT infrastructure and its relevance, compatibility to organisational needs, up gradation facilities, investing in state of art systems, Computer professionals, top management support.
13. Strategy Evaluation:
Operations Control and Strategic Control
Symptoms of malfunctioning of strategy
Balanced Scorecard. (2)
Balanced Score Card (BSC)
The Balanced scorecard (BSC) is a strategic Performance Management tool for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy.
Balance Card focuses not only on financial outcomes but also on the operational, marketing and developmental inputs to these. Organizations measure, those factors which influenced the financial outputs. For example, process performance, market share / penetration, long term learning and skills development, and so on.
The Balanced Scorecard helped organizations achieve a degree of “Balance " in selection of performance measures Balanced Scorecard helps provide a more comprehensive view of a business
This tool is also being used to address business response to Environmental Changes.
Organizations must also control those factors which influences the financial outputs, such as, process performance, market share / penetration, long term learning and skills development, and so on.
Organisations cannot directly influence Financial Outcomes as they relate to past. There is a "lag" between actions and Financial Outcome. Also to use of financial measures alone for the strategic control of the firm is unwise . Organizations should also measure those areas where direct management intervention is possible.
Balanced Scorecard helps organizations achieve a degree of "balance" in selection of performance measures. Scorecards achieve this balance by selecting measures from three additional categories or perspectives: "Customer," "Internal Business Processes" and "Learning and Growth."
Phrase “ Balanced Scorecard " was coined in the early 1990s . In 1992, by Dr. Robert Kaplan and David P Norton. They added another innovation, the Strategy Map. This new tool, which provided a visual way to craft business strategies.
Balanced Score Cards helps managers, in focussing their attention on strategic issues and the management of the implementation of strategy, it is important to remember that the balanced scorecard itself has no role in the formation of strategy. In fact, balanced scorecards comfortably co-exist with strategic planning systems and other tools.
Implementing Balanced Scorecards typically includes four processes:
Translating the vision into operational goals;
Communicating the vision and link it to individual performance;
Business planning; index setting;
Feedback and Learning, and adjusting the Strategy accordingly
Methodology of Strategy Mapping
Measures are selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or “Strategy Map".
The strategic objectives are distributed across the four measurement perspectives, so as to "connect the dots" to form a visual presentation of strategy and measures.
To develop a ”Strategy Map”, managers select a few strategic objectives within each of the perspectives, and then define the cause-effect chain among these objectives by drawing links between them.
A balanced scorecard of strategic performance measures is then derived directly from the strategic objectives. This type of approach provides greater contextual justification for the measures chosen, and is generally easier for managers to work through.
Strategy Mapping: A strategy map is a visual representation of the strategy of an organization. It illustrates how the organization plans to achieve its mission and vision by means of a linked chain of continuous improvements.
For a commercial business, the strategy map illustrates the long-term game plan or competitive strategy to achieve increased profitability. For a non-profit or governmental organization, it illustrates the plan by which the organization intends to improve performance of its mission. In either case it illustrates the cause-and-effect relationships between different strategic objectives and their measures, or Key Performance Indicators (KPIs) that are included in a Balanced Score Card.
Strategy maps are communication tools used to tell a story of how value is created for the organization. They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain. Generally speaking, improving performance in the objectives found in the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal Process perspective Objectives (the next row up), which in turn enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows).
Kaplan and Norton found that companies are using Balanced Scorecards to:
Drive strategy execution;
Clarify strategy and make strategy operational;
Identify and align strategic initiatives;
Link budget with strategy;
Align the organization with strategy;
Conduct periodic strategic performance reviews to learn about and improve strategy.
The four perspectives
Internal process perspective;
Innovation and learning perspective.
1. The Financial Perspective
The company’s implementation and execution of its strategy must contribute to the bottom-line improvement of the company. It represents the long-term strategic objectives of the organization and thus it incorporates the tangible outcomes of the strategy in traditional financial terms.
The three possible measurements as described by Kaplan and Norton (1996) are:
Rapid growth: Increased sales volumes, Acquisition of new customers, Growth in revenues etc
Sustain: Operations and Costs, by calculating the Return On Investment, Return On Capital Employed, EVA, etc
and Harvest: Cash Flow analysis with measures such as Payback Periods and Revenue Volume. Profit Margins, Net Operating Income
Financial KPIs : Cash Flow, Return on Investments, Financial Results, Return on Capital Employed, Return on Equity, Residual Income, Economic Value Addition, etc.
2.The Customer Perspective
The Customer Perspective defines the value proposition that the organization will apply to satisfy customers and thus generate more sales to the most desired (i.e. the most profitable) customer groups.
The measures are value that is delivered to the customer (value proposition) and Cost
Value proposition : (e.g., customer satisfaction, market share).
Cost : Delivery Time, Quality, Performance and Service,
The value proposition can be centred on one of the three: operational excellence, Customer Intimacy, or product leadership ,
KPIs could be : Cost Leadership, CSI – Customer Satisfaction Index, Quality Parameters – Six Sigma initiatives, Performance – Customer Complaint Record – Claims,
3. Internal Process Perspective
The Internal Process Perspective is concerned with the processes that create and deliver the customer value proposition. It focuses on all the activities and key processes required in order for the company to excel at providing the value expected by the customers both productively and efficiently.
These can include both short-term and long-term objectives as well as incorporating innovative process development in order to stimulate improvement.
The innovation and learning perspective is the foundation of any strategy and focuses on the Intangible Assets of an organization, mainly on the internal skills and capabilities that are required to support the value-creating internal processes.
The Innovation & Learning Perspective is concerned with the jobs (human capital), the systems (information capital), and the climate (organisation capital) of the enterprise.
These three factors relate to the infrastructure that is needed in order to enable ambitious objectives in the other three perspectives to be achieved.
This of course will be in the long term, since an improvement in the learning and growth perspective will require certain expenditures that may decrease short-term financial results, whilst contributing to long-term success.
Internal Business Processes : Capacity Utilisation, (Sold Time for Consultants, Occupancy rates for Hotels etc.), On time Delivery, Inventory Turnover,
Throughput Cycle Time = Processing Time (Value Adding) + Storage Time + Movement Time + Inspection Time (Non Value adding times),
JIT Index = Process Time / Total Cycle Time
Quality –Defective units, Late deliveries, Yields, Rework Percentage, Scrap, Machine Breakdowns, Customer Complaints and Claims, Field service Expenses, Products Returned,
Symptoms of Mal-Functioning of Strategy -1
The strategic Symptoms frequently include one or more of the following (Grant, 2002):
Low growth exposes ‘strategic sloppiness’ and ‘strategic errors’
Strategic change is often ‘lumpy’ as firms lurch from strategy to strategy to combat low growth;
Whilst some policy appears proactive, much is reactive
Contains elements of ‘hasty opportunism’
Poor Organisational Results:
Unsustainable Business Results,
Poor Financial Results and / or,
Poor Operational results.
4. Low employee Morale:
High Employee Turnover,
Missing targets too often,
Symptoms of Mal-Functioning of Strategy-2
5. Customer Dissatisfaction:
Customer Complaints non-specific to Quality,
Repeated Customer complaints for same cause,
Loss of key account Customers or loss of customers in general,
Very few repeat orders.
Delayed deliveries, missing commitments,
6. Loss of Market Share:
Lack of Innovation,
Lack of Up-Gradation,
Unable to sustain market competition,
Unable to manage competition,
7. Poor Work Climate in Organisation:
Organisation developing unsustainable work practices.
Quality taking second place lagging behind practice prevailing over law,
Resulting into decreased Quality in all spheres of Operation.
Symptoms of Mal-functioning for a CEO:
Are you attending too many meetings, and ones which are discussing the wrong things?
Do subordinates consult you too often before taking action?
Do you learn about things only after they’ve already happened?
Are your subordinates apparently trying to anticipate your likes and dislikes - and forming ‘their’ opinions accordingly?
Are you unclear about where you stand with your boss or bosses?
Are your incentives disproportionately dependent on the share price?
Do you have few, if any, activities which are not connected to the company?
All these personal behaviours are symptoms of a corporate
disease - and that illness is as common as the cold. The disease
is chronic mismanagement. All seven of the symptoms show
that you and others in the corporation are being hampered in
managing effectively by faults which manifests to failure or poor
CEO Cult in Organisations
This happens due to a CEO Cult :The Cult holds these seven
The CEO runs the company.
He or she does so, on the basis of order-and obey.
The CEO controls all events and is the source of all important information.
His or her authority is enhanced by the exercise of personality - even charisma.
The CEO has no trouble in turning the other directors into acquiescent poodles.
CEOs place pleasing shareholders above all else, primarily by boosting ‘shareholder value’ (i.e., the share price)
They are expected to deploy superhuman qualities in order to live up to the previous six postulates.
The Cult is fallacious and dangerous. Each of these seven
items puts the company and its stakeholders at risk.
What a CEO should do?
Generate collective, collaborative processes that make excellent decisions and effective execution far more likely. For example, CEO should...
Limit the number of meetings you attend to those whose purpose are clearly defined and demand your presence.
Delegate ample authority and autonomy to subordinates so that they can take decisions and actions on their own initiative.
Establish communications bottom-up, top-down and lateral so that everybody, including you, has the fullest possible picture of what’s going on everywhere.
Listen to full and frank discussion with subordinates before guiding people to the best consensus.
Operate on a mutual, advise-and-consent basis (avoiding order-and-obey) in relations with superiors and subordinates
Work out the vital metrics of the business, and concentrate on them, not the share price.
Stop the business taking over the whole of your life.
Case Study Method - Comments
Case Method is quite old & method of learning from real life situations. First introduced by Harward Law School in 1871.
A case is narration of events in, & Conditions of, an organisation. Through these events & conditions, reader of a case gets to know the situation prevailed in that organisation for him to dwell on, understand, discuss, analyse and suggest remedies and practical workable solutions.
Guidelines for systematic approach to prepare a case for
Read case once for familiarity, get a feel of the situation.
Read case again, grasp the facts, make notes, jot down important points.
Evaluate the situation described in Case. Attempt to understand objectives, strategies, policies, problems & their causes, issues and role of individuals in the case.
Prepare ETOP & SAP in your notes.
Think of Strategic Alternatives & suggest best options. Support your proposal with facts, reasons & arguments.
6. Propose comprehensive plan for Strategy Implementation considering resources and manageability of implementation.
7. Evaluate you proposal. State quantitative & qualitative criteria, you assumptions for arriving at your conclusion.
8. Keep the written analysis simple, but do not overlook major issues.
9. Adopt nice style of writing. Do not copy word to word from Case. Use headings,, Labels, Topic issues. Present whole written structure to be in one logical & integrated way.
10. Include analysis based on techniques like ETOP, SWOT, SAP, Value Chain, Industry analysis, competitive analysis.
11. Specifically state you assumptions when making recommendations. Provide supporting evidence and benchmarks used for evaluation.
12. Provide a summary, in a page, for major issues and recommendations made by you.