Mba iii (business policy and strategic analysis)


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Mba iii (business policy and strategic analysis)

  1. 1. MBA - IIIrd Semester Gauhati University Business Policy and Strategic Management Unit – I INTRODUCTION : Origin, Development of Business Policy and Strategic Management, Strategic Management Process, Characteristics of Strategy and Strategy Decisions, Levels of Startegy. Business Policy In general terms, ‘policy’ means a plan of action choosen by a political party or a business. Business Policy defines the scope or spheres within which decisions can be taken by the subordinates in an organization. It permits the lower level management to deal with the problems and issues without consulting top level management every time for decisions. Business policies are the guidelines developed by an organization to govern its actions. They define the limits within which decisions must be made. Business policy also deals with acquisition of resources with which organizational goals can be achieved. Business policy is the study of the roles and responsibilities of top level management, the significant issues affecting organizational success and the decisions affecting organization in long-run. According to Christensen and Others, “Business policy is considered as the study of functions and responsibilities of the senior management related to those organizational problems which affect the success of the enterprise as a whole.” Features of Business Policy:1) It deals with the determination of the future course of action by the organization. 2) It involves a choice of purpose and defining what needs to be done in order to mould the character and identify of the organization. 1
  2. 2. 3) It is also concerned with the mobilization of resources by the help of which the organization can achieve its goals. 4) It lays down a long-term plan which the organization then follows. Nature and Objectives of Business Policy :1. Specific- Policy should be specific/definite. If it is uncertain, then the implementation will become difficult. 2. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There should be no misunderstandings in following the policy. 3. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the subordinates. 4. Appropriate- Policy should be appropriate to the present organizational goal. 5. Simple- A policy should be simple and easily understood by all in the organization. 6. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive. 7. Flexible- Policy should be flexible in operation/application. This does not imply that a policy should be altered always, but it should be wide in scope so as to ensure that the line managers use them in repetitive/routine scenarios. 8. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those who look into it for guidance. 9. Specific- Policy should be specific/definite. If it is uncertain, then the implementation will become difficult. 10. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There should be no misunderstandings in following the policy. 11. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the subordinates. 2
  3. 3. 12. Appropriate- Policy should be appropriate to the present organizational goal. 13. Simple- A policy should be simple and easily understood by all in the organization. 14. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive. 15. Flexible- Policy should be flexible in operation/application. This does not imply that a policy should be altered always, but it should be wide in scope so as to ensure that the line managers use them in repetitive/routine scenarios. 16. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those who look into it for guidance. Concept of strategy ‘Strategy’ means the process of planning something or carrying out a plan in a skilful way. The term ‘strategy’ has been derived from a Greek word ‘strategos’, which means generalship. But in business, there is no definite meaning assigned to strategy. Features of Strategy :A Strategy could be: 1) A plan or course of action or a set of decision rules making a pattern or creating a common thread; 2) The pattern or common thread related to the organisation’s activities which are derived from the policies, objectives and goals; 3) It is related to pursuing those activities which move an organization from its current position to a desired future state; 4) It is concerned with the resources necessary for implementing a plan or following a course of action; 5) The planned or actual co-ordination of the firm’s major goals and actions, in time and space that continuously co-align the firm with its environment. In simple terms, a strategy is the mean to achieve objectives. In complex terms, it may possess all the characteristics mentioned above. 3
  4. 4. Difference between Business policy and Strategy The term “policy” should not be considered as synonymous to the term “strategy”. The difference between policy and strategy can be summarized as follows1. Policy is a blueprint of the organizational activities which are repetitive/routine in nature. While strategy is concerned with those organizational decisions which have not been dealt/faced before in same form. 2. Policy formulation is responsibility of top level management. While strategy formulation is basically done by middle level management. 3. Policy deals with routine/daily activities essential for effective and efficient running of an organization. While strategy deals with strategic decisions. 4. Policy is concerned with both thought and actions. While strategy is concerned mostly with action. 5. A policy is what is, or what is not done. While a strategy is the methodology used to achieve a target as prescribed by a policy. Strategic Management Strategic management is defined as the dynamic process of formulation, implementation, evaluation and control of strategies to realize the organisation’s strategic intent. Strategic management is a dynamic process. It is a way in which strategists set the objectives and proceed about attaining them. It deals with making and implementing decisions about future direction of an organization. It helps us to identify the direction in which an organization is moving. Strategic management is a continuous process that evaluates and controls the business and the industries in which an organization is involved; evaluates its competitors and sets goals and strategies to meet all existing and potential competitors; and then reevaluates strategies on a regular basis to determine how it has been implemented and whether it was successful or does it needs replacement. Strategic Management gives a broader perspective to the employees of an organization and they can better understand how their job fits into the entire organizational plan and how it is co-related to other organizational members. It is nothing but the art of managing employees in a manner which maximizes 4
  5. 5. the ability of achieving business objectives. The employees become more trustworthy, more committed and more satisfied as they can co-relate themselves very well with each organizational task. They can understand the reaction of environmental changes on the organization and the probable response of the organization with the help of strategic management. Thus the employees can judge the impact of such changes on their own job and can effectively face the changes. The managers and employees must do appropriate things in appropriate manner. They need to be both effective as well as efficient. One of the major role of strategic management is to incorporate various functional areas of the organization completely, as well as, to ensure these functional areas harmonize and get together well. Another role of strategic management is to keep a continuous eye on the goals and objectives of the organization. Strategic Management Process The four phases of strategic management process are as follows:1) Establishment of strategic intent (Environmental Scanning) 2) Formulation of strategies 3) Implementation of strategies 4) Strategic Evaluation and Control Strategic management process has following four steps: Environmental Scanning- Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in analyzing the internal and external factors influencing an organization. After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it. Strategy Formulation- Strategy formulation is the process of deciding best course of action for accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies. 5
  6. 6. Strategy Implementation- Strategy implementation implies making the strategy work as intended or putting the organization’s chosen strategy into action. Strategy implementation includes designing the organization’s structure, distributing resources, developing decision making process, and managing human resources. Strategy Evaluation & Control - Strategy evaluation is the final step of strategy management process. The key strategy evaluation activities are: appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the organizational strategy as well as it’s implementation meets the organizational objectives. These components are steps that are carried, in chronological order, when creating a new strategic management plan. Present businesses that have already created a strategic management plan will revert to these steps as per the situation’s requirement, so as to make essential changes. STRATEGY CONTROL Fig.- Phases of Strategic Management Process Components of Strategic Management Process Strategic management is an ongoing process. Therefore, it must be realized that each component interacts with the other components and that this interaction often happens in chorus. Strategy Formulation 6
  7. 7. Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision. The process of strategy formulation basically involves six main steps. Though these steps do not follow a rigid chronological order, however they are very rational and can be easily followed in this order. 1. Setting Organizations’ objectives - The key component of any strategy statement is to set the longterm objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives. Thus, strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives. While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. Once the objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions. 2. Evaluating the Organizational Environment - The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors’ strengths and weaknesses. After identifying its strengths and weaknesses, an organization must keep a track of competitors’ moves and actions so as to discover probable opportunities of threats to its market or supply sources. 3. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments. 4. Aiming in context with the divisional plans - In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends. 7
  8. 8. 5. Performance Analysis - Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist. 6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities. Strategy Implementation Strategy implementation is the translation of chosen strategy into organizational action so as to achieve strategic goals and objectives. Strategy implementation is also defined as the manner in which an organization should develop, utilize, and amalgamate organizational structure, control systems, and culture to follow strategies that lead to competitive advantage and a better performance. Organizational structure allocates special value developing tasks and roles to the employees and states how these tasks and roles can be correlated so as maximize efficiency, quality, and customer satisfaction-the pillars of competitive advantage. But, organizational structure is not sufficient in itself to motivate the employees. An organizational control system is also required. This control system equips managers with motivational incentives for employees as well as feedback on employees and organizational performance. Organizational culture refers to the specialized collection of values, attitudes, norms and beliefs shared by organizational members and groups. Follwoing are the main steps in implementing a strategy: 1. Developing an organization having potential of carrying out strategy successfully. 2. Disbursement of abundant resources to strategy-essential activities. 3. Creating strategy-encouraging policies. 8
  9. 9. 4. Employing best policies and programs for constant improvement. 5. Linking reward structure to accomplishment of results. 6. Making use of strategic leadership. Excellently formulated strategies will fail if they are not properly implemented. Also, it is essential to note that strategy implementation is not possible unless there is stability between strategy and each organizational dimension such as organizational structure, reward structure, resource-allocation process, etc. Strategy implementation poses a threat to many managers and employees in an organization. New power relationships are predicted and achieved. New groups (formal as well as informal) are formed whose values, attitudes, beliefs and concerns may not be known. With the change in power and status roles, the managers and employees may employ confrontation behaviour. Strategic Evaluation The process of Strategy Evaluation consists of following steps1. Fixing benchmark of performance - While fixing the benchmark, strategists encounter questions such as - what benchmarks to set, how to set them and how to express them. In order to determine the benchmark performance to be set, it is essential to discover the special requirements for performing the main task. The performance indicator that best identify and express the special requirements might then be determined to be used for evaluation. The organization can use both quantitative and qualitative criteria for comprehensive assessment of performance. Quantitative criteria includes determination of net profit, ROI, earning per share, cost of production, rate of employee turnover etc. Among the Qualitative factors are subjective evaluation of factors such as - skills and competencies, risk taking potential, flexibility etc. 2. Measurement of performance - The standard performance is a bench mark with which the actual performance is to be compared. The reporting and communication system help in measuring the performance. If appropriate means are available for measuring the performance and if the standards are set in the right manner, strategy evaluation becomes easier. But various factors such as managers 9
  10. 10. contribution are difficult to measure. Similarly divisional performance is sometimes difficult to measure as compared to individual performance. Thus, variable objectives must be created against which measurement of performance can be done. The measurement must be done at right time else evaluation will not meet its purpose. For measuring the performance, financial statements like - balance sheet, profit and loss account must be prepared on an annual basis. 3. Analyzing Variance - While measuring the actual performance and comparing it with standard performance there may be variances which must be analyzed. The strategists must mention the degree of tolerance limits between which the variance between actual and standard performance may be accepted. The positive deviation indicates a better performance but it is quite unusual exceeding the target always. The negative deviation is an issue of concern because it indicates a shortfall in performance. Thus in this case the strategists must discover the causes of deviation and must take corrective action to overcome it. 4. Taking Corrective Action - Once the deviation in performance is identified, it is essential to plan for a corrective action. If the performance is consistently less than the desired performance, the strategists must carry a detailed analysis of the factors responsible for such performance. If the strategists discover that the organizational potential does not match with the performance requirements, then the standards must be lowered. Another rare and drastic corrective action is reformulating the strategy which requires going back to the process of strategic management, reframing of plans according to new resource allocation trend and consequent means going to the beginning point of strategic management process. Strategic Decisions Strategic decisions are those which affect the long term performance of the business and which relate directly to its aims and objectives. They are usually taken at the highest levels of management and carry higher levels of risk. However, effective strategic decisions bring high levels of reward. Characteristics/Features of Strategic Decisions 1 Strategic decisions have major resource propositions for an organization. These decisions may be concerned with possessing new resources, organizing others or reallocating others. 2 Strategic decisions deal with harmonizing organizational resource capabilities 10
  11. 11. with the threats and opportunities. 3 Strategic decisions deal with the range of organizational activities. It is all about what they want the organization to be like and to be about. 4 Strategic decisions involve a change of major kind since an organization operates in ever-changing environment. 5 Strategic decisions are complex in nature. 6 Strategic decisions are at the top most level, are uncertain as they deal with the future, and involve a lot of risk. 7 Strategic decisions are different from administrative and operational decisions. Administrative decisions are routine decisions which help or rather facilitate strategic decisions or operational decisions. Operational decisions are technical decisions which help execution of strategic decisions. To reduce cost is a strategic decision which is achieved through operational decision of reducing the number of employees and how we carry out these reductions will be administrative decision. Levels of Straetgy Strategy can be formulated on three different levels: • corporate level • business unit level • functional or departmental level. Corporate Strategy It is mainly concerned with choosing the right path of approach for the whole organization. It is applicable to small of big, single product or multi product company. Multi product companies have a multi-level strategy which focuses at different business units and their functioning for maximum value. An effective corporate strategy deals with three basic key issues of the firm which are as follows:1. The firm’s overall orientation towards growth and stability. (directional) 11
  12. 12. 2. The industry or markets in which firm competes through its products and strategies. (portfolio) 3. The manner, in which top management coordinates activities, transfers resources and cultivates capabilities among its product lines and business units. (parenting) The directional strategy will have growth orientation; portfolio strategy will deal with coordination and parenting all concentrate synergy among product lines by resource sharing and development. Business Unit Level Strategy A strategic business unit may be a division, product line, or other profit center that can be planned independently from the other business units of the firm. At the business unit level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced. At the business level, the strategy formulation phase deals with:  positioning the business against rivals  anticipating changes in demand and technologies and adjusting the strategy to accommodate them  influencing the nature of competition through strategic actions such as vertical integration and through political actions such as lobbying. Functional Level Strategy The functional level of the organization is the level of the operating divisions and departments. The strategic issues at the functional level are related to business processes and the value chain. Functional level strategies in marketing, finance, operations, human resources, and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively. Functional units of an organization are involved in higher level strategies by providing input into the business unit level and corporate level strategy, such as providing information on resources and capabilities on which the higher level strategies can be based. Once the higher-level strategy is developed, the functional units translate it into discrete actionplans that each department or division must accomplish for the strategy to succeed. 12
  13. 13. Unit –II Approches to Strategic Decision Making : Strategists, TOP MANAGEMENT : Constituents of Top Management - – Board of Directors, Sub-Committee, Chief Executive Officer; The Task, Responsibilities and skills of Top Management, Role and Skills of Chief Executive Officer; Corporate Governance. 13
  14. 14. Strategic Decision Making One of the essential parts of creating and running a small business is creating a mission or vision for the business and a set of goals the company aims to achieve. Strategic decision making, or strategic planning, describes the process of creating a company's mission and objectives and deciding upon the courses of action a company should pursue to achieve those goals. Strategic decision making is an ongoing process that involves creating strategies to achieve goals and altering strategies based on observed outcomes. For example, the managers of a pizza restaurant might have the objective of increasing sales and decide to implement a strategy of offering lower prices on certain products during off hours to attract more customers. After a month of pursuing the new strategy, managers can look at sales data for the month and evaluate whether the strategy resulted in increasing sales and then choose to keep the new price scheme or alter their strategy. Approcahes to Strategic Decision Making SWOT Analysis A SWOT analysis is a common strategic planning tool that managers can use to examine internal and external factors that may influence the ability to achieve goals. A SWOT analysis involves creating a list of a businesses strengths and weaknesses and the external threats and opportunities it faces. Identifying strengths, weaknesses, opportunities and threats can help managers create strategies to exploit strengths or minimize weaknesses to take advantage of opportunity and avoid threats. Cost-Benefit Analysis A cost-benefit analysis is a strategic decision making tool that can help managers choose between two or more different courses of action. In a cost-benefit analysis, managers estimate the amount of revenue they expect a certain project to generate and the expected costs of pursuing the project. By estimating the costs and benefits associated with several different projects, managers can determine which project is expected to produce the greatest benefit. Outside Advice While entrepreneurs and small business owners may be experts in their chosen industry, they are often not experts in actually managing businesses. Business owners often seek outside help to aide in the 14
  15. 15. strategic decision making process. The U.S. Small Business Administration says that mentors can be a vital source of advice for small business owners. Some businesses hire professional consultants to help them make strategic decisions. Strategists Strategist is a person who creates a strategy, and can belong to numerous fields. A design strategist has the ability to combine the innovative, perceptive and holistic insights of a designer with the pragmatic and systemic skills of a planner to guide strategic direction in context of business needs, brand intent, design quality and customer values. [1][2][3][4][5] An economic strategist is a person who can create a sustainable commercial advantage by applying innovative and quantitative ideas and systems at a sell side financial institution. A sport strategist is a professional that performs scouting and analysis of the players involved in an upcoming competitive match. Sports strategists typically analyze film footage, organize video libraries, and recommend attacks and defensive strategies in order to capitalize on an opponents' weaknesses. Working closely with investment managers, a principal investment strategist contributes revenue by providing principal investment analytics and alternative product structuring. A sales strategist develops innovative trade ideas and assists in the marketing of those trades to buy side clients. A banking strategist partners with investment bankers and capital market experts on corporate finance and capital structure analyses to identify and execute banking transactions. A trading strategist contributes revenue to the business in which his team is embedded by developing and delivering innovative trade ideas, models and analytic systems to the trading desk. Within the financial services industry, strategists are known as “strats”. A military strategist develops strategies in the field of warfare with the objective of outmaneuvering their opponent. An IT Strategist develops an IT strategy that is aligned with the business strategy to implement systems to give business processes efficiency and productivity gains and therefore a possible competitive 15
  16. 16. advantage. Top Management The highest ranking executives (with titles such as chairman/chairwoman, chief executive officer, managing director, president, executive directors, executive vice-presidents, etc.) responsible for the entire enterprise. Top management translates the policy (formulated by the board-of-directors) into goals, objectives, and strategies, and projects a shared-vision of the future. It makes decisions that affect everyone in the organization, and is held entirely responsible for the success or failure of the enterprise. Constitutents of Top Management Board of Directors A company, being an artificial person, acts through human agency. Accordingly, under the Companies Act, it is necessary for every company to have a Board of Directors. A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors. It is often simply referred to as "the board". A board's activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. Every company has a Board of Directors. Section 2 (13) defines a director, “any person occupying the position of a director by whatever name called.” The directors of the company are collectively referred in the Companies act as the Board of Directors. Role of Board of Directors:• governing the organization by establishing broad policies and objectives; • selecting, appointing, supporting and reviewing the performance of the chief executive; • ensuring the availability of adequate financial resources; 16
  17. 17. • approving annual budgets; • accounting to the stakeholders for the organization's performance; • setting the salaries and compensation of company management. Subcommittee It is a subordinate committee comprising members who belong to a larger committee. There are two main types of subcommittees : standing and working. 1) Standing Committee :- It is one that is always in existence, covering specific issues that pertain to the committee in general. One special type of standing subcommittee, the executive subcommittee, can make executive decisions on behalf of the larger group. 2) Working Subcommittee :- It is tasked with dealing with a specific and often temporary issue. Members of subcommittee are usually chosen or elected buy other members of the committee, and they are selected on the basis of experience, qualifications and willingness to serve. If the membership of a group is taken from a large committee, board or commission and the members have been specifically appointed by the large organization, they are considered a subcommittee. Similarly, the board of directors of an organization may form a subcommittee to help in the execution of decisions and plans. Chief Executive Officer A chief executive officer (CEO) is the highest-ranking corporate officer (executive) or administrator in charge of total management of an organization. An individual appointed as a CEO of a corporation, company, organization, or agency typically reports to the board of directors. In British English, terms often used as synonyms for CEO are managing director (MD) and chief executive (CE). In American English, the title executive director (ED) is sometimes used for non-profit organizations. To achieve organizational goals, a CEO has to run the organization effectively. He has to maintain close working relationship with the organisation’s chairman and director (s). The relationship between the CEO and the chairman depends on mutual trust and respect and an effective communication. 17
  18. 18. Role of CEO The responsibilities of an organization's CEO (Chief Executive Officer,US) or MD (Managing Director, UK) are set by the organization'sboard of directors or other authority, depending on the organization's legal structure. They can be far-reaching or quite limited and are typically enshrined in a formal delegation of authority. Typically, the CEO/MD has responsibilities as a director, decision maker, leader, manager and executor. The communicator role can involve the press and the rest of the outside world, as well as the organization's management and employees; the decision-making role involves high-level decisions about policy and strategy. As a leader of the company, the CEO/MD advises the board of directors, motivates employees, and drives change within the organization. As a manager, the CEO/MD presides over the organization's day-to-day, month-to-month, and year-to-year operations. The different approaches adopted to study the roles of CEOs may be broadly classified into two categories: the role modeling approach and other approaches. (A) Role Modeling Approach :- It attempts to describe the CEO in terms of the different roles that they play in organizations. For instance, CEO may be considered as: 1. The chief architect of organizational purpose, strategies or planner 2. The organization leader, organizer or organization builder 3. The chief administrator, implementer and coordinator 4. The communicator of organizational purpose, motivators, personal leader or mentor Fayol, Mintzberg, Christensen, Glueck, etc. have adopted this approach. (B) Other Approaches :- The other approaches, directly or indirectly attempts to describe the role of CEOs in terms of different parameters like: 1. How they spend time. 2. Their personal qualities and personality traits 18
  19. 19. 3. Their communication styles 4. Their demographic characteristic such as age, intelligence, education, functional background, experience, etc. 5. The managerial value they hold 6. Their managerial styles 7. The environment they operate in. Mintzberg, Drucker, Miner, Peters and Waterman adopted this approach. Skills of Top Management • INTERPERSONAL ROLES – FIGUREHEAD – LEADER – :LIAISON • INFORMATIONAL ROLES – MONITOR – DISSEMINATOR – SPOKESPERSON • DECISIONAL ROLES – INNOVATOR / ENTREPRENEUR (PLANNER) – DISTURBANCE HANDLER (CRISIS MANAGER) – RESOURCE ALLOCATOR (SLICING-THE-PIE) – NEGOTIATOR (BARGAINER) 19
  20. 20. Responsibilities of Top Management 1) Role of CEO 2) Role of Senior Managers :- The senior or top management consists of managers at the highest level of the managerial hierarchy. Senior managers perform a variety of roles by assisting the board and the chief executive in the formulation, implementation and evaluation of strategy. Organisationally, they come together in the form of different tes of committees, task forces, work groups, management teams to play a very important role in strategic management. Some of the members of the senior management act as directors on the board. Committees consisting of senior managers are responsible for implementing strategies and plans and for periodic evaluation of performance. Ad-hoc committees are formed to deal with new projects, have senior managers as project managers. 3) Role of Business Level Executives: - The business level executives, also known as either profit centre or divisional heads are considered as chief executives of a specific business unit for the purpose of strategic management. Corporate Governance Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders. Principles of corporate governance • Rights and equitable treatment of shareholders:[15][16][17] Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to 20
  21. 21. participate in general meetings. • Interests of other stakeholders:[18] Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. • Role and responsibilities of the board:[19][20] The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment • Integrity and ethical behavior:[21][22] Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. • Disclosure and transparency:[23][24] Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. Unit – III FORMATION OF STRATEGY : Kinds of Strategies, The Nature of company’s environment and its analysis; Analysis of Internal Environment; VCA Identification of Strengths and Weaknesses, Assessment of External Environment - Identification of Opportunities and Risks, Evaluating Multinational Environment; Identifying Corporate Competence and Resources; Principles and Rules of corporate strategy: Strategic Excellence Positions. 21
  22. 22. Formation of Strategy Strategy formation creates strategy, designing new businesses and organizations to carry out those businesses. Formation involves exploration, the search for new advantages and business possibilities. Strategy formation creates a theory of businessand its accompanying hypotheses. Strategy formation, or creation, is an aspect of strategic management. Kinds of Startegies Three Kinds of Business Strategy There are at least three basic kinds of strategy with which people must concern themselves in the world of business: (1) just plain strategy or strategy in general, (2) corporate strategy, and (3) competitive strategy. The purposes of this article are to clarify the differences between and among these three kinds of strategy and to provide some questions useful in thinking about all three. Strategy in General Strategy, in general, refers to how a given objective will be achieved. Consequently, strategy in general is concerned with the relationships between ends and means, between the results we seek and the resources at our disposal. Strategy and tactics are both concerned with conceiving and then carrying out courses of action intended to attain particular objectives. For the most part, strategy is concerned with how you deploy or allocate the resources at your disposal whereas tactics is concerned with how you employ or make use of them. Together, strategy and tactics bridge the gap between ends and means. Strategy and tactics are terms that come to us from the military. Their use in business and other civilian enterprises has required little adaptation as far as strategy in general is concerned. However, corporate strategy and competitive strategy do represent significant departures from the military meaning of strategy. Corporate versus Competitive Strategy Corporate strategy defines the markets and the businesses in which a company will operate. Competitive or business strategy defines for a given business the basis on which it will compete. Corporate strategy is typically decided in the context of defining the company's mission and vision, that is, saying what the company does, why it exists, and what it is intended to become. Competitive strategy hinges on a 22
  23. 23. company's capabilities, strengths, and weaknesses in relation to market characteristics and the corresponding capabilities, strengths, and weaknesses of its competitors. Nature of Company’s Environment The term Business Environment is composed of two words ‘Business’ and ‘Environment’. In simple terms, the state in which a person remains busy is known as Business. The word Business in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits. On the other hand, the word ‘Environment’ refers to the aspects of surroundings. Therefore, Business Environment may be defined as a set of conditions – Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization. Business Environment has two components: 1. Internal Environment 2. External Environment Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise. External Environment: Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two Types: 1. Micro/Operating Environment 2. Macro/General Environment Micro/Operating Environment: The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public. (1) Suppliers: – They are the persons who supply raw material and required components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier. 23
  24. 24. (2) Customers: - Customers are regarded as the king of the market. Success of every business depends upon the level of their customer’s satisfaction. Types of Customers: (i) Wholesalers (ii) Retailers (iii) Industries (iv) Government and Other Institutions (v) Foreigners (3) Market Intermediaries: - They work as a link between business and final consumers. Types:(i) Middleman (ii) Marketing Agencies (iii) Financial Intermediaries (iv) Physical Intermediaries (4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself according to the strategies of the Competitors. (5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and local public. They may be the users or non-users of the product. Macro/General Environment: – It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment: (1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations. It has three elements: (i) Economic Conditions of Public (ii) Economic Policies of the country (iii)Economic System (iv) Other Economic Factors: – Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc. (2) Non-Economic Environment: - Following are included in non-economic environment:(i) Political Environment: - It affects different business units extensively. Components: 24
  25. 25. (a) Political Belief of Government (b) Political Strength of the Country (c) Relation with other countries (d) Defense and Military Policies (e) Centre State Relationship in the Country (f) Thinking Opposition Parties towards Business Unit (ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not within the control of business, is known as Socio-Cultural Environment. These factors include: attitude of people to work, family system, caste system, religion, education, marriage etc. (iii) Technological Environment: - A systematic application of scientific knowledge to practical task is known as technology. Everyday there has been vast changes in products, services, lifestyles and living conditions, these changes must be analysed by every business unit and should adapt these changes. (iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business. (v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living, growth rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc. Every business unit must see these features of population and recongnise their various need and produce accordingly. (vi) International Environment: - It is particularly important for industries directly depending on import or exports. The factors that affect the business are: Globalisation, Liberalisation, foreign business policies, cultural exchange. Characteristics:1. Business environment is compound in nature. 2. Business environment is constantly changing process. 3. Business environment is different for different business units. 25
  26. 26. 4. It has both long term and short term impact. 5. Unlimited influence of external environment factors. 6. It is very uncertain. 7. Inter-related components. 8. It includes both internal and external environment. Value Chain Analysis Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings: (1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and (2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced"). Linking Value Chain Analysis to Competitive Advantage What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used. SWOT Analysis SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition, 26
  27. 27. Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have some measure of control. Also, by definition, Opportunities (O) and Threats (T) are considered to be external factors over which you have essentially no control. SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the business and its environment. Its key purpose is to identify the strategies that will create a firm specific business model that will best align an organization’s resources and capabilities to the requirements of the environment in which the firm operates. In other words, it is the foundation for evaluating the internal potential and limitations and the probable/likely opportunities and threats from the external environment. It views all positive and negative factors inside and outside the firm that affect the success. A consistent study of the environment in which the firm operates helps in forecasting/predicting the changing trends and also helps in including them in the decision-making process of the organization. An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s mission. These are the basis on which continued success can be made and continued/sustained. Strengths can be either tangible or intangible. These are what you are well-versed in or what you have expertise in, the traits and qualities your employees possess (individually and as a team) and the distinct features that give your organization its consistency. Strengths are the beneficial aspects of the organization or the capabilities of an organization, which includes human competencies, process capabilities, financial resources, products and services, customer goodwill and brand loyalty. Examples of organizational strengths are huge financial resources, broad product line, no debt, committed employees, etc. 2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our mission and achieving our full potential. These weaknesses deteriorate influences on the organizational success and growth. Weaknesses are the factors which do not meet the standards we feel they should meet. Weaknesses in an organization may be depreciating machinery, insufficient research and development facilities, narrow product range, poor decision-making, etc. Weaknesses are controllable. They must be minimized and eliminated. For instance - to overcome obsolete machinery, new machinery can be purchased. Other examples of organizational weaknesses are huge debts, high employee turnover, complex decision making process, narrow product range, large wastage of raw materials, etc. 27
  28. 28. 3. Opportunities - Opportunities are presented by the environment within which our organization operates. These arise when an organization can take benefit of conditions in its environment to plan and execute strategies that enable it to become more profitable. Organizations can gain competitive advantage by making use of opportunities. Organization should be careful and recognize the opportunities and grasp them whenever they arise. Selecting the targets that will best serve the clients while getting desired results is a difficult task. Opportunities may arise from market, competition, industry/government and technology. Increasing demand for telecommunications accompanied by deregulation is a great opportunity for new firms to enter telecom sector and compete with existing firms for revenue. 4. Threats - Threats arise when conditions in external environment jeopardize the reliability and profitability of the organization’s business. They compound the vulnerability when they relate to the weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival can be at stake. Examples of threats are - unrest among employees; ever changing technology; increasing competition leading to excess capacity, price wars and reducing industry profits; etc. Advantages of SWOT Analysis :SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a great subjective element. It is best when used as a guide, and not as a prescription. Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats. They also keep a watch on their overall business environment and recognize and exploit new opportunities faster than its competitors. SWOT Analysis helps in strategic planning in following manner- a. It is a source of information for strategic planning. b. Builds organization’s strengths. c. Reverse its weaknesses. d. Maximize its response to opportunities. e. Overcome organization’s threats. 28
  29. 29. f. It helps in identifying core competencies of the firm. g. It helps in setting of objectives for strategic planning. h. It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out. SWOT Analysis provide information that helps in synchronizing the firm’s resources and capabilities with the competitive environment in which the firm operates. Limitations of SWOT Analysis :SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very simple because of which the organizations might overlook certain key strategic contact which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective as there is great degree of uncertainty in market. SWOT Analysis does stress upon the significance of these four aspects, but it does not tell how an organization can identify these aspects for itself. There are certain limitations of SWOT Analysis which are not in control of management. These include- a. Price increase; b. Inputs/raw materials; c. Government legislation; d. Economic environment; e. Searching a new market for the product which is not having overseas market due to import restrictions; etc. Internal limitations may include- a. Insufficient research and development facilities; b. Faulty products due to poor quality control; c. Poor industrial relations; 29
  30. 30. d. Lack of skilled and efficient labour; etc Identifying corporate competence and resources Competencies are observable behaviours – underlying characteristics, traits, attributes or qualities that we all display when we approach our work. They explain HOW we need to perform our roles, rather than WHAT we need to deliver. They do not define the technical skills and knowledge needed to do our jobs. Competencies are helpful in identifying the development activities that may be needed to help personal improvement and the achievement of potential. The concept of organizational competencies is one of the most misunderstood and misappl ied concepts in organizational management. Organizational competencies are often thought to be simpl y employee ski l ls rather than the compel l ing cross company core competencies that drive integrated business execution and management alignment. Some of the greatest companies such as 3M, Google and Pixar have come to understand the power of identifying competencies and real igning al l elements of the business to support them. The result is a clearly aligned team with prioritized focus on executing the company’s core strategy. Many companies define the required competencies based on the goals that are identified within the context of the strategic plan. A competency map is developed over time for each part of the business and, in sophisticated applications, managers can develop methods for tracking essential skill gaps in order to ensure that the organization is staffed appropriately to achieve its mission. The concept of organizational competencies as traditionally applied is far too narrow to ensure that an organization is positioned to meet its strategic plan goals – let alone to meet and beat the competition. Principles and rules of Corporate strategy Corporate strategy deals with the overall firm. These strategic decisions cannot be made at a lower level without risking sub-optimization of resources. 1) The first task is to conduct an environmental scan (study the business environment) in order to identify strengths and weaknesses. 2) Next would be to scrutinize the firm's mission, the segmentation of its businesses and the integration of those businesses. 30
  31. 31. 3) Completion of these tasks yields answers to the questions corporate strategy must answer: What are the corporate performance objectives? How should the firm's resources be allocated to satisfy corporate, business and functional requirements? Should the design of the managerial infrastructure and the selection, promotion and motivation of key personnel change? Straetgic excellence positions Strategic success means to achieve better and more stable results than the competition. Achieving that requires superior competence, or the ability to excel, in a set of distinctive capabilities which have special value to a particular part of the marketplace. Note that excellence by itself is not enough. It must be excellence in areas of strategic significance, i.e., that determine the outcome of competition in the marketplace. That strategic excellence then forms the basis for the organization to achieve better results than the competition. In this sense it is a position which the organization “occupies” from which follows strategic success. Unit – IV STRATEGIC ANALYSIS AND CHOICE : BCG Growth / Share Matrix; Stop Light Strategic Model; Directional Policy Matrix Model; Grand Strategy; Mergers & acquisitions, Alliances, Portfolio Strategy, Competitive Strategy - Cost focus, Differentiation focus, Marketing Tactics, Behavioral considerations affecting strategic choice; contingency approach to strategic choice. 31
  32. 32. Strategic Analysis and Choice Strategic analysis is concerned with establishing the proper organization – environmental fit or matching the organizational factors with the environmental factors. Therefore strategic management involves an analysis of the organizational factors (i.e. the strengths and weaknesses of the organization) and the environmental factors (i.e., the threats and opportunities in the business environment.) BCG Matrix Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment. According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share. Relative Market Share = SBU Sales this year leading competitors sales this year. Market Growth Rate = Industry sales this year - Industry Sales last year. The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership. BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBU’s are in same industry, the average growth rate of the industry is used. While, if all the SBU’s are located in different industries, then the mid-point is set at the growth rate for the economy. Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents 32
  33. 33. a particular type of business. It includes :- 1. Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures. 2. Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBU’s are the corporation’s key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued. 3. Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars. 4. Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitor’s/rival firms. These business firms have weak market share because of 33
  34. 34. high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization. Limitations of BCG Matrix:The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as1. BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. 2. Market is not clearly defined in this model. 3. High market share does not always leads to high profits. There are high costs also involved with high market share. 4. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. 5. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. 6. This four-celled approach is considered as to be too simplistic. Stop Light Strategic Model / General Electric Matrix (GE Model) General Electric company (GE) of USA has developed a nine-cell grid with the help of Mckinsey and company of USA, a leading consultancy firm in the year 1970 in order to overcome the weaknesses of BCG portfolio matrix. GE involves SBU being positioned on a matrix on the basis of market attractiveness and business strength. These two factors make excellence marketing sense for rating any SBU. Market attractiveness 34
  35. 35. and business strength depend on anumber of factors. The procedures involve assigning each of the factors a weight depending on its perceived importance, followed by assessing how each SBU compares each factor on a 1 to 7 rating scale and then computing a weighted composite rating. Difference between BCG and GE Matrix BCG Matrix GE Matrix BCG matrix consists of four cells. It consists of nine cells. The business unit is rated against the following two The business unit is rated against the criteria. following two criteria. Relative market share Business strength Industry growth rate Industry attractiveness The matrix uses single measures to assess growth The matrix uses multiple measures to and market share. assess business strength and industry attractiveness. The matrix uses two types of classifications i.e. high The matrix uses three types of and low. classifications i.e. high/medium/low and strong/average/weak. Has many limitations. GE matrix overcomes many limitations of BCG and is an improvement over it. Demerits of GE Matrix :1) It can get quite complicated with the increase in business. 2) Though industry attractiveness and business strength appear to be objective, they are in reality subjective judgments that may vary from one person to another. 35
  36. 36. 3) It cannot effectively depict the position of new business units in developing industries. 4) It only provides broad strategic prescriptions rather than specifies of business policy. Shell’s Directional Policy Matrix A Nine Celled directional Policy Matrix:The Shell Directional Policy Matrix is another refinement upon the Boston Matrix. Along the horizontal axis are prospects for sector profitability, and along the vertical axis is a company's competitive capability. As with the GE Business Screen the location of a Strategic Business Unit (SBU) in any cell of the matrix implies different strategic decisions. However decisions often span options and in practice the zones are an irregular shape and do not tend to be accommodated by box shapes. Instead they blend into each other. Each of the zones is described as follows: 1) Leader - major resources are focused upon the SBU. 36
  37. 37. 2) Try harder - could be vulnerable over a longer period of time, but fine for now. 3) Double or quit - gamble on potential major SBU's for the future. 4) Growth - grow the market by focusing just enough resources here. 5) Custodial - just like a cash cow, milk it and do not commit any more resources. 6) Cash Generator - Even more like a cash cow, milk here for expansion elsewhere. 7) Phased withdrawal - move cash to SBU's with greater potential. 8) Divest - liquidate or move these assets on a fast as you can. Grand Strategy Selection Matrix This strategy contains two dimensions:1. Competitive position 2. Market growth All organization can be positioned in one of the four strategy quadrants of the grand strategy matrix based on their competitive position and market. Appropriate strategies for an organization to consider are listed in each quadrant of the matrix. Quadrant 1 :- Firms falling in quadrant 1 hold an excellent strategic position. For such firms, continuous concentration on current markets and products is a proper strategy. Quadrant 2:- Firms falling in quadrant 2 have a rapid market growth. However, their competitive position is not strong. Thus, they need to evaluate their present approach to the market earnestly. 37
  38. 38. Quadrant 3:- Firms falling in quadrant 3 represent the slow growth industry. They have weak competitive position. These firms should necessarily in order to avoid further decline. Quadrant 4:- Firms falling in quadrant 4 have a strong competitive position. However, they represent a slow growth industry. These firms can launch diversified programmes into more promising growth areas. Merger & Acquisitions Mergers and acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations. From a legal point of view, a merger is a legal consolidation of two companies into one entity, whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner (in which case the target company still exists as an independent legal entity controlled by the acquirer). Alliances A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives need while remaining independent organizations. This form of cooperation lies between Mergers & Acquisition M&A and organic growth. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization,[1] shared expenses and shared risk. Portfolio Strategy 38
  39. 39. Portfolio strategy is a roadmap by which investors can use their assets to achieve their financial goals. Portfolio theory refers to the design of optimal portfolios and its implication for asset pricing. Starting with the work of Markowitz (1952, 1959) and his mean-variance framework based on expected utility theory, portfolio theory has undergone rapid development. The evolution of capturing the risk-return tradeoff provides the engine for this development. The classic capital asset pricing model (CAPM) of Sharpe (1964) and Lintner (1965) predicts that an asset’s risk premium will be proportional to its beta, which is measure of return sensitivity to the aggregate market portfolio return. Subsequent evidence against the CAPM points to the fact other factors market-portfolio proxy must be considered in explaining aggregate risk premia. Fama and French’s three-factor model (1993) extended the CAPM including additional market-based factors based on company size and book-to-market values, and Carhart’s four-factor model (1997) added a momentum factor. Competitive Strategy Competitive advantage seeks to address some of the criticisms of comparative advantage. Michael Porter proposed the theory in 1985. Porter emphasizes productivity growth as the focus of national strategies. Competitive advantage rests on the notion that cheap labor is ubiquitous and natural resources are not necessary for a good economy. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade. Competitive advantage attempts to correct for this issue by stressing maximizing scale economies in goods and services that garner premium prices (Stutz and Warf 2009).[1] Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade ores or inexpensive power, or access to highly trained and skilled personnel human resources. New technologies such as robotics and information technology can provide competitive advantage, whether as a part of the product itself, as an advantage to the making of the product, or as a competitive aid in the business process (for example, better identification and 39
  40. 40. understanding of customers). Competitive Strategies/advantages Cost Leadership Strategy The goal of Cost Leadership Strategy is to offer products or services at the lowest cost in the industry. The challenge of this strategy is to earn a suitable profit for the company, rather than operating at a loss and draining profitability from all market players. Companies such as Walmart succeed with this strategy by featuring low prices on key items on which customers are price-aware, while selling other merchandise at less aggressive discounts. Products are to be created at the lowest cost in the industry. An example is to use space in stores for sales and not for storing excess product. Differentiation Strategy The goal of Differentiation Strategy is to provide a variety of products, services, or features to consumers that competitors are not yet offering or are unable to offer. This gives a direct advantage to the company which is able to provide a unique product or service that none of its competitors is able to offer. An example is Dell which launched mass-customizations on computers to fit consumers' needs. This allows the company to make its first product to be the star of its sales. Innovation Strategy The goal of Innovation Strategy is to leapfrog other market players by the introduction of completely new or notably better products or services. This strategy is typical of technology start-up companies which often intend to "disrupt" the existing marketplace, obsoleting the current market entries with a breakthrough product offering. It is harder for more established companies to pursue this strategy because their product offering has achieved market acceptance. Apple has been a notable example of using this strategy with its introduction of iPod personal music players, and iPad tablets. Many companies invest heavily in their research and development department to achieve such statuses with their innovations. Operational Effectiveness Strategy The goal of Operational Effectiveness as a strategy is to perform internal business activities better than competitors, making the company easier or more pleasurable to do business with than other market choices. It improves the characteristics of the company while lowering the time it takes to get the 40
  41. 41. products on the market with a great start. State Farm Insurance pursues this strategy by promoting their agents as "good neighbors" who actively help customers. Behavioural considerations affecting strategic choices In modern organizations, somebody should show the way to others for attaining the goals. This characteristic feature is termed as ‘leadership’. It is neither mere direction nor motivation. It is a wire between plan and action. Functions of Leadership Behaviour in Strategic Choice :1. Every leader as a superior has to delegate a part of his authority to the subordinates. 2. The leader must try to motivate the subordinates for improving their level of performance. 3. He must try to create good climate for achieving maximum operational efficiency. 4. The leader should promote and protect new novel areas. 5. The leader must always try to develop existing subordinates. Ingredients of Leadership Behaviour in Strategic Choice :1) Power :- A leader must know the nature and source of power besides its effective use in a responsible way. 2) Understanding people :- A leader must have the ability to understand the needs, beliefs, feeling, values of subordinates. 3) Inspiring followers 4) Style of Leadership Contingency Approach to Strategic Choice The contingency approach identifies the individual parts of a complete management situation. Contingency refers to the pressing situations at hand. It is the manager’s responsibility to methodically attempt to recognize the strategy or technique which would prove to be the best solution for a crisis in a 41
  42. 42. specific situation. Contingency approach emphasizes the requirement for managers to study the association between the organizational internal and external environment. The third logical element of the strategy planning process is strategic choice. Choice is the core of strategy formulation. Contingency approach, which believes that there is no single solution to a problem, helps in making strategic choices which keep its options open to a particular problem. Both contingency approach and strategic choice require wisdom and analytical skills. 42