Business Policy and Strategic Management

23 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

BUSINESS POLICY AND STRATEGIC MANAGEMENT

DEFINITION OF BUSINESS POLICY 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.

Features of Business Policy An effective business policy must have following features-

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.

Difference between 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 follows-

1. 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.

24 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

ORIGIN OF BUSINESS POLICY

1. The origin of business policy can be traced back to 1911, when Harvard Business School

introduced an integrative course in management aimed at the creation of general

management capability. This course was based on interactive case studies which had been use

at the school for instructional purposes since 1908.The course was intended to enhance

general managerial capability of students. However, the introduction of business policy in the

curriculum of business schools/ management institutes came much later.

2. In 1969, the American Assembly of Collegiate Schools of Business, a regulatory body for

business schools, made the course of business policy, a mandatory requirement for the

purpose of recognition. During the next few decades, business policy as a course spread to

different management institutes across different nations and become an integral part of

management curriculum.

3. Basically, business policy is considered as a capstone, integrative course offered to students

who have previously been through a set of core functional area courses.

4. Development in business policy arose from the use of planning techniques by managers.

Starting from day to day planning in earlier times, managers tried to anticipate the future

through preparation of budgets and using control systems like capital budgeting and

management by objectives. With the inability of these techniques to adequately emphasize

the role of future, long range planning came to be used. Soon, long range planning was

replaced by strategic planning, and later by strategic management; a term that is currently

used to describe the process of strategic decision making.

5. Business Policy as defined by Christensen and others is the study of the functions and

responsibilities of senior management, the crucial problems that affect success in the total

enterprise, and the decisions that determine the direction of the organization and shape its

future. The problems on policy in business, like those of policy in public affairs , have to do with

the choice of purposes, the molding of organizational identity and character, the continuous

definition of what needs to be done, and the mobilization of resources for the attainment of

goals in the face of competition or adverse circumstance.

STRATEGY

"Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations".

25 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

Strategy at Different Levels of a Business

Strategies exist at several levels in any organization - ranging from the overall business (or group of businesses) through to individuals working in it.

Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement".

Characteristics of corporate strategy

Long range in nature, though valid for short range situations. Action oriented and more specific than objectives Multi- pronged and integrated Flexible and dynamic. Formulated at the top management level, though middle and lower level managers are

associated in formulation and in designing the sub strategies. These include the determination of business lines, mergers, new investment and divestment areas, R&D projects etc.

Generally meant to cope with a competitive and complex setting. Flows out of the goals and objectives of the enterprise and converts them into

performance actions. Concerned with perceiving opportunities and threats and concerned with deployment

of limited organizational resources in the best manner. Gives importance to the actions timing combination, sequence and depth of various

moves and the action initiative take by the managers to handle the situation. Provides unified criteria for managers in function of decision making.

Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.

Operational Strategy - is concerned with how each part of the business is organized to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.

How Strategy is Managed - Strategic Management

In its broadest sense, strategic management is about taking "strategic decisions" - decisions that answer the questions above.

26 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

In practice, a thorough strategic management process has three main components, shown in the figure below:

Generic Strategic Alternatives

There are four generic ways in which strategic alternatives can be considered. These are stability, expansion, retrenchment and combinations.

Stability strategy This strategy is to safeguard the existing interests and strengths. This is to continue with well established and tested objectives to continue the chose business objectives. This is to continue the business on a sustained basis, to consolidate the commanding position already reached.

A stability strategy can be pursued by a firm when:

1. It continues to serve in the same or similar markets and deals in same products and services. 2. The strategic decisions focus on incremental improvement of functional performance.

This strategy involves keeping track of new developments to ensure that this strategy makes sense. Some small organizations frequently use stability as a strategic focus to maintain comfortable market and profit position.

Expansion strategy It is implemented by redefining the business by adding the scope of business, by increasing the efforts of current business. This also includes diversifying, acquiring and merging the business. They may take the enterprise along the unknown and risky paths which may be full of promises and pitfalls.

Expansion through diversification Diversification is defined as entry into new products or product lines, new services or new markets involving different skills, technology and knowledge. When the entity introduces a new product which does not have connection with the existing product it is

27 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

known as conglomerate diversification. Innovative and creative firms always look for opportunities and challenges to grow.

Sometimes diversification refers to utilizing the existing facilities and capabilities in a more effective and efficient manner. Expansion can be through acquisitions and mergers.

Retrenchment Strategy A business organization can redefine its business by divesting a major product line or major market. In case of adverse situations retrenchment strategy is necessary. If the other strategies are not suitable retrenchment strategy is sought. The timing, nature and extent of retrenchment strategy are to be decided by the management depending upon the contingencies. The entity has several options to carry out retrenchment strategy. In the first stage the enterprise can cut back on its capital and revenue expenditure, new buildings, replacement of worn out machinery, advertising and R&D activities, employee welfare subsidies, community development projects, executive perks, etc.

As a second stage, as in more serious case of hard times, reduction in inventory level, manufacturing level, manpower, plant maintenance, dividend to shareholders, interest rates, etc.

In the third stage, withdrawal of slow- moving items, winding up some branch offices, removing some executive positions etc.

In the fourth stage, the company may decide to sell some of the units or products. As a last option an enterprise may seek liquidation which means corporate death.

Combination strategies The above strategies are not mutually exclusive. It is possible to adopt a combination of the above. The enterprise may seek stability in some areas, expansion in some areas and retrenchment in some areas of operations.

Dynamics of competitive strategy - Strategic thinking consists of the orientation of the firms internal environment with the changes of the external environment. The economic and technical components of the external environment are considered as major factors leading to new opportunities to the organization.

The society in which the organization operates should also be considered as an important factor to determine the competitive strategy. The strength and weakness are the internal factors and opportunities and threats are the external factors, which determine the corporate strategy.

The organization should find out in which functional area the organization is superior to the competitors. The functional areas may be R&D, marketing, production, etc. The strength is to be considered in the context of the opportunities arising in the external environment.

STRATEGIC MANAGEMENT

The organizations have to make long range plans considering the changing needs. Strategic planning is an important component of strategic management. This involves developing a strategy to meet

28 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

competition and ensure long term survival and growth.The overall objective of strategic management is two-fold:

To create competitive advantage so that the company can outperform compared to other competitors.

To guide the company successfully through all changes in the environment.

Strategic management starts with developing a company mission, objectives, goals, business portfolio and functional plans.

Success of the organization depends on how well each department performs its customer value adding activities and how well the departments work together to serve the customer.

Value chains and value delivery networks have become popular in the organizations that are sensitive to the needs of customers. The ultimate aim of strategic management is to serve the companys business products, services and communications so that they achieve targeted profits and growth.

The term strategic management refers to the managerial process of forming a strategic vision, setting objectives, crafting strategy, implementing and executing the strategy; and then overtime initiating the required corrective adjustments in vision, objectives, strategy and execution are deemed appropriate.

Framework of strategic process

The strategy making/ strategy implementing process consist of five interrelated managerial tasks. These are

1. Setting vision and mission: Forming a strategic vision of where the organization is headed, so as to provide long- term direction, delineate what kind of enterprise the company is trying to become and infuse the organization with a sense of purposeful action.

2. Setting objectives: converting the strategic vision into specific performance outcomes for the company to achieve

3. Crafting a strategy to achieve the desired outcomes 4. Implementing and executing the chosen strategy efficiently and effectively. 5. Evaluating performance and initiating corrective adjustments in vision, long-term direction,

objectives, strategy, or execution in light of actual experience, changing conditions, new ideas and opportunities.

Importance of strategic management

1. Strategic management provides the framework for all the major business decisions in the enterprises. Strategic planning works as a pathfinder in various activities and also serves as a corporate defense mechanism.

2. Strategic management has to identify and provide the business organization with certain core competencies and competitive advantage for survival and growth. It is not only to

29 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

project the future or to forecast the jobs. It is concerned with ensuring a good future for the enterprise and also to prepare the corporation to face the future in its favor.

3. When the environment is uncertain, there is a definite need for strategic management. Strategic planning and implementation are a must for any organization. The organization has to adopt the policy to win the situation. The organization has to build its competitive advantage over the competitors in the business in order to win. This is possible only when strategy is properly made, formulated and implemented.

Strategic decision making

Decision making is a managerial process and function of choosing a particular course of action out of several available alternatives. Strategic decision making is for the purpose of achieving the organizational goals. The decisions may be major or minor, relating to day to day operations.

Strategic decisions are different in nature than all other decisions.

The major dimensions are as indicated.

Dimension Reasoning

Requires top management decisions Involves thinking in totality of the organizations, lots of risk involved

Involve the allocation of large amounts of company resources

Require huge financial investment and manpower with new set of skills in them.

Impact on the long term prosperity of the firm The results are not seen immediately

Future oriented Predicting the future environmental conditions and change likely to occur

Major multi functional or multi business consequences

Pervasive throughout the organization

Necessitate consideration of factors in the firms external environment

Orienting the internal environment to the changes of external environment.

Strategic Management Model

1. Strategic management process can be best understood by using a model. This model is widely accepted and used. It represents a clear approach for formulating, implementing and evaluating strategies.

2. The starting point is to identify situation and condition may not require certain course of action and may dictate a particular course of action.

3. Every organization has vision, objectives, mission and strategies though sometimes they are not properly defined. The strategic management process is dynamic and continuous. A change in any one of the models may initiate major changes in other models.

4. In many organizations clear cut procedures may not be available. Generally there is a give and take among hierarchical levels or organization.

30 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

5. Many organizations conduct formal meetings, semi annually, quarterly to discuss and update the firms vision/ mission and objectives, opportunities and threats, strength and weakness, policies and performances etc.

6. Application of strategic management process is more formal in larger and well established organizations. Bigger organizations are formal in conducting the meetings and applying the strategic concepts. The strategic management process is associated with the cost, comprehensiveness, accuracy and success of planning across all types of organizations.

Vision, Mission and Objectives

In the early stage of strategy making process the companys senior managers must wrestle with the issue of what directional path the company should take and what changes are required in companys product- market- customer technology focus to improve the current market position and future prospects.

Top managements views and conclusions about the companys direction and the product- customer-market technology focus constitute a strategic vision for the company. A strategic vision points an organization in a particular direction, charts a strategic path for it to follow in preparing for the future and moulds organizational identity.

A strategic vision is a roadmap of companys future providing specifics about technology and customer focus, the geographic and product markets to be pursued, the capabilities it plans to develop, and the kind of company that the management is trying to create.

The three elements of strategic vision

1. Coming up with a mission statement that defines what business the company is presently in and conveys the essence of who we are and where we are now.

2. Using the mission statement as basis for deciding on a long term course making choice about where we are going?

3. Communicating the strategic vision in clear, exciting terms that arouse organization- wide commitment.

How to develop a strategic vision?

Thinking of how to develop the company for future. It is an exercise of intelligent entrepreneurship. Many successful organizations need to change direction to maintain their

success (not for survival) It creates enthusiasm for the course management has charted and engages the

members of the organization The best worded vision statement illuminates the direction in which the

organization is headed.

31 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

MISSION

According to Glueck & Jauch, Mission is an answer to the question, what business are we in? The organization should have mission because of the following reasons:

To ensure unanimity of purpose within the organization To provide a basis for motivating the use of organizations resources To develop a basis for allocating the organizations resources To establish organizational climate To serve as a focal point for those who can identify with organizations purpose and direction. To facilitate the translation of objectives and goals into work structure. To specify organizational purposes and translation of these purposes and goals.

A Companys mission statement is typically focused on its present business scope who we are and what we do. Mission statements broadly describe an organizations present capabilities, customer focus, activities and business make up.

Mission should contain elements of long term strategy as well as desired outcomes. A good mission statement should be precise, clear, feasible, distinctive and motivating. It should indicate major component of strategy.

While creating the mission statement for a company the consideration of following points will be useful:

The mission is to make profit. The mission statement is to give the organization its own special identity, business

emphasis and path for development.

A companys business is identified by what needs it is trying to satisfy, the targeted customer group and by the technologies and competencies it uses and the activities it performs.

Good mission statements are highly personalized, unique to the organization for which they are developed.

The well known management experts peter F Drucker and Theodore Levitt were among the first to agitate and discuss the concept of mission.

The starting point in business planning is to clarify the corporate mission and define accurately the business. The firm should raise the following questions and answer them to make the mission statement.

What is our mission? What is our ultimate purpose? What do we want to become? What kind of growth do we seek?

32 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

What business are we in? Do we understand our business correctly and define it accurately? Do we know our customer? Whom do we intend to serve? What brings us to this particular business? In what business would we like to be, in future?

The corporate mission is an expression of the growth ambition of the firm. IT provides a dramatic picture of what the company wants to become. The mission is a grand design of the firms future. The mission serves as a justification for the firms very presence and existence. It legitimizes the firms presence. The vision is spelt out through mission. It represents the common purpose, which the entire firm shares and pursues.

A mission is not a confidential affair to be confined at the top level. All levels of management should know it. Its the corporations guiding principle. A mission doesnt represent a specific target. It represents the whole thrust of the firm. Its main purpose is to give internal direction for the future of the corporation.

The mission is a statement which defines the role that an organization plays in the society. The organizations also have some purpose, that is, anything the organization strives for. Organizations relate their existence in satisfying the particular need of the society. Mission is a statement which defines the role that an organization plays in the society. Mission and purpose go hand in hand. Mission strictly refers to purpose; it relates to what the organization strives to achieve in order to fulfill its mission to the society.

OBJECTIVES and GOALS

Business organizations translate their vision and mission into objectives. Sometimes objectives and goals are synonymously used. However they vary in certain aspects.

Objectives are open- ended attributes that denote the future states or outcome. Goals are close ended attributes which are precise and expressed in specific terms. Goals are more specific and translate the objectives to short term perspective. The pursuit of objectives is an unending process such that the organizations sustain themselves. They provide meaning and sense of direction to organizational Endeavour.

Organizational structure and activities are designed and resources are allocated around the objectives to facilitate their achievement. Objectives also act as benchmarks for guiding organizational activity and for evaluating how the organization is performing.

Objectives are organizations performance targets- the results and outcomes it wants to achieve. Objectives function as yardstick for tracking an organizations performance and progress.

Characteristics of Objectives

33 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

Objectives should define the organizations relationship with its environment. They provide the basis for strategic decision making. They should provide standards for performance appraisal. They should be facilitative towards achievement of mission and purpose. Objectives should be understandable concrete and specific. Objectives should be related to time frame. Objectives should be measurable and controllable. Objectives should be challenging Different objectives should correlate with each other Objectives should be set within the constraints.

Strategic levels in the organization

In most companies, there are two main types of managers: general managers who bear responsibility for overall performance of the company or for one of its major, self- contained subunits or divisions, and functional managers who are responsible for supervising a particular function, that is, a task, activity or operation. Like finance and accounting, production, marketing, R&D, information technology, or materials management.

An organization is divided into several functions and departments that work together to bring a particular product or service to the market. If a company provides several different kinds of products or services, if often duplicates these functions and creates a series of self contained decisions to manage each different product or service.

The general managers of these divisions then become responsible for their particular product line. The overriding concern of general managers is for the health of the whole company or division under their direction, they are responsible for deciding how to create a competitive advantage and achieve high profitability with the resources and capital they have at their disposal. The figure depicts the levels of management of a company. The corporate level of management consists of the chief executive officer (CEO), other senior executives, the BODs and the corporate staff. These individuals occupy the apex of the decision making within the organization.

The CEO is the principal general manager. In consultation with other senior executives, the role of corporate level managers is to oversee the development of strategies for the whole organization. This role includes defining the mission and goals of the organization, determining what businesses it should be in, allocating resources among the different businesses, formulating and implementing strategies that span individual businesses, and providing leadership for the organization.

Level of strategy Definition Example

Corporate strategy Market definition Diversification into new products or geographic markets

Business strategy Market navigation Attempts to secure competitive advantage in existing product or geographic

34 SREERAM ACADEMY ( FORMERLY SREERAM COACHING POINT)

markets.

Functional strategy Support of corporate and business strategy

Information systems, human resources practices and production processes that facilitate achievement of corporate and business strategy.