business policy and strategic management notes

M B A

(DISTANCE MODE)

DBA 1703

STRATEGIC MANAGEMENT

III SEMESTER

COURSE MATERIAL

Centre for Distance Education

Anna University Chennai

Chennai – 600 025

ii

Author

Mr.R.Magesh

Senior Lecturer

Department of Managment Studies


Chennai - 600 025

Reviewer

Ms.Yasmeen Haider

Senior Lecturer

Department of Managment Studies

BSA Cresent Engineering College, Vandallur

Chennai - 600 048

Dr.T.V.Geetha

Professor

Department of Computer Science and Engineering


Chennai - 600 025

Dr.H.Peeru Mohamed

Professor

Department of Management Studies


Chennai - 600 025

Dr.C. Chellappan

Professor



Chennai - 600 025

Dr.A.Kannan

Professor



Chennai - 600 025

Copyrights Reserved

(For Private Circulation only)

Editorial Board

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ACKNOWLEDGEMENT

The author has drawn inputs from several sources for the preparation of this course material, to meet the

requirements of the syllabus. The author gratefully acknowledges the following sources:

• Charles W.l.Hill & Gareth R.Jones –Strategic Management Theory, An integrated approach’ –Houghton

Miflin Company, Princeton New Jersey, All India Publisher and Distributors, Chennai, 1998.

• Thomas l. Wheelen, J.David Hunger –‘Strategic Management’ Addison Wesley Longman Singapore

Pvt. Ltd., 6th edition, 2000.

• Arnoldo C.Hax, Nicholas S.Majluf – ‘The strategy concept and process’ –A Pragmatic Approach –

Pearson Education Publishing Company, Second Edition, 2005.

• Azhar kazmi –‘Business Policy & Strategic Management’ Tata McGraw Hill Publishing company Ltd.,

New Delhi- Second Edition, 1998.

• Harvard Business Review –‘Business Policy’ –parts I & II Harvard Business School.

• Saloner, Shepard, Podolny –‘Strategic Management ‘ –John Wiley 2001.

• Lawrence G.Hrebiniak,’Making strategy work’, Person Publishing Company, 2005.

• Gupta, Gollakota & Srinivasan –business Policy and strategic Management – Concepts and Application

‘ Prentice Hall of India, 2005.

Inspite of at most care taken to prepare the list of references any omission in the list is only accidental and

not purposeful.

Mr.R.Magesh

Author

v

DBA 1703 STRATEGIC MANAGEMENT

UNIT I –STRATEGIC AND PROCESSConceptual framework for strategic management, the concept of strategy and strategy formation process –A

formal Strategic planning process, corporate governance and social responsibility.

UNIT II –COMPETITIVE ADVANTAGE

External environment –Porter’s five forces model-Strategic groups competitive changes

during industry evolution – globalization and industry structure-National context and

competitive advantage resources –Capabilities and competencies- core competencies –

Low cost and differentiation generic, buildings blocks of competitive advantage –Distinctive

competencies-Resources and capabilities durability of competitive advantage –avoiding

failures and sustaining competitive advantage.

UNIT III – STRATEGIESBuilding competitive advantage through functional level strategies –Business level strategy-strategy in the global

environment –Corporate strategy –Vertical integration –Diversification and strategic alliances –Building and

restructuring the corporation –Choice of strategies –Balance score Card.

UNIT IV – STRATEGY IMPLEMENTATION & EVALUATIONDesigning organizational structure –Designing strategic control systems – Matching structure and control to strategy

–Implementing strategic change politics-Power and conflict –Techniques of strategic evaluation & control.

UNIT V –OTHER STRATEGIC ISSUES Managing technology and innovation –Entrepreneurial ventures and small business strategic issues for non-profit

organizations. Cases in strategic management

REFERENCES1. Charles W.l.Hill & Gareth R.Jones –Strategic Management Theory, An integrated approach’ –Houghton

Miflin Company, Princeton New Jersey, All India Publisher and Distributors, Chennai, 1998.

2. Thomas l. Wheelen, J.David Hunger –‘Strategic Management’ Addison Wesley Longman Singapore

Pvt. Ltd., 6th edition, 2000.

3. Arnoldo C.Hax, Nicholas S.Majluf – ‘The strategy concept and process’ –A Pragmatic Approach –

Pearson Education Publishing Company, Second Edition, 2005.

4. Azhar kazmi –‘Business Policy & Strategic Management’ Tata McGraw Hill Publishing company Ltd.,

New Delhi- Second Edition, 1998.

5. Harvard Business Review –‘Business Policy’ –parts I & II Harvard Business School.

6. Saloner, Shepard, Podolny –‘Strategic Management ‘ –John Wiley 2001.

7. Lawrence G.Hrebiniak,’Making strategy work’, Person Publishing Company, 2005.

8. Gupta, Gollakota & Srinivasan –business Policy and strategic Management – Concepts and Application

‘ Prentice Hall of India, 2005.

vii

CONTENTS

UNIT I

STRATEGY AND PROCESS

1.1 CONCEPTUAL FRAMEWORK FOR STRATEGIC

MANAGEMENT 1

1.2 THE CONCEPT OF STRATEGIC MANANGEMENT 2

1.3 BIRTH OF STRATEGIC MANAGEMENT 3

1.4 STRATEGIC ANALYSIS 4

1.5 BENEFITS OF STRATEGIC MANAGEMENT 6

1.6 VARIOUS APPROACHES OF STRATEGIC MANAGEMENT 8

1.7 STRATEGY AND STRATEGY FORMATION PROCESS 9

1.7.1 Strategic Management Processes 9

1.7.2 Top Management Decisions on Strategic Issues 11

1.7.3 Strategic Issues Likely to Have Long Term Impact 11

1.8 STRATEGY PLANNING PROCESS 12

1.8.1 Strategic Planning Model 12

1.8.2 Strategic Management Models 14

1.8.3 Working Model of Strategic Management 14

1.9 MINTZBERG’S MODES OF STRATEGIC DECISION MAKING 18

1.10 CORPORATE GOVERNANCE & SOCIAL RESPONSIBILITY 18

1.10.1 Definition of Corporate Governance 19

1.10.2 History of Corporate Governance 20

1.10.3 Impact of Corporate Governance 22

1.10.4 Parties to corporate governance 24

1.10.5 Principles of Corporate Governance 25

1.10.6 Mechanisms and controls 27

1.10.7 Systemic problems of corporate governance 28

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1.10.8 Corporate governance models around the world 31

1.10.9 Corporate governance and firm performance 35

1.10.10 Initiative of Indian Government of Corporate governance 37

UNIT II

COMPETITIVE ADVANTAGE

2.1 EXTERNAL ENVIRONMENT 42

2.2 MICHAEL PORTER FIVE FORCES MODEL 44

2.3 DYNAMIC NATURE OF INDUSTRY RIVALRY 54

2.3.1 A Combination of Generic Strategies — Stuck in the Middle? 54

2.4 GLOBALIZATION AND INDUSTRY STRUCTURE 57

2.5 PORTER’S GENERIC STRATEGIES 60

2.6 CAPABILITIES AND COMPETENCIES 70

2.6.1 Capabilities – the Basis of Your Competitive Advantage 70

2.6.2 Creating a Culture for Innovation 71

2.6.3 Building Capability through Leadership Attributes 72

2.7 CORE COMPETENCIES AND DISTINCTIVE COMPETENCIES 73

2.7.1 Core Competencies to End Products 73

2.7.2 Developing Core Competencies 74

2.8 GENERIC STRATEGIES AND THE INTERNET 77

2.9 MICHAEL PORTER COMPETITIVE ADVANTAGE 78

UNIT III

STRATEGIES

3.1 BUILDING COMPETITIVE ADVANTAGE THROUGH

FUNCTIONAL LEVEL STRATEGIES 84

3.1.1 Functional level strategies 84

3.2 BUSINESS-LEVEL STRATEGIES 88

3.3 STRATEGY IN THE GLOBAL ENVIRONMENT 92

x

3.3.1 Portfolio Planning experiences in Global Environment 94

3.4 CORPORATE-LEVEL STRATEGY 97

3.4.1 Corporate Portfolio Analysis 99

3.4.2 Corporate Grand Strategies 103

3.5 DIVERSIFICATION AND STRATEGIC ALLIANCES 105

3.5.1 Diversification Strategy 105

3.5.2 Strategic alliances and partnerships 106

3.6 STRATEGIC CHOICE 106

3.6.1 Importance of choice in the strategy formulation process 106

3.6.2 Structure of strategic choice 108

3.6.3 Options for markets and products/services 109

3.6.4 Options for building resources, capabilities, and competence 110

3.6.5 Options in methods of implementation 111

3.6.6 Contractual arrangements 112

3.7 GROUPING OPTIONS INTO STRATEGIC OPTIONS 113

3.7.1 General tests of strategic options 114

3.7.2 Who should be involved with the choice? 114

3.7.3 Theoretical frameworks for assisting strategic choice 115

3.7.4 Strategic choices in the case examples 117

3.8 BALANCE SCORE CARD 117

3.8.1 The Learning & Growth Perspective 119

3.8.2 The Balanced Scorecard and Measurement-Based Management 120

3.8.3 Management by Fact 121

UNIT IV

STRATEGY IMPLEMENTATION

& EVALUATION

4.1 DESIGNING ORGANIZATIONAL STRUCTURE 131

4.1.1 The Essentials checklists of organization structure design 135

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4.2 DESIGNING STRATEGIC CONTROL SYSTEMS 142

4.2.1 Characteristics of a Strategic Control system 145

4.3 MATCHING STRUCTURE AND CONTROL TO STRATEGY 146

4.4 STRATEGY IMPLEMENTATIONS 149

4.4.1 Fourth Task of Strategic Management in Strategy Implementation 150

4.4.2 Strategic Implementation and Evaluating Performance 150

4.5 POLITICS, POWER AND CONFLICT INFLUENCES IN

STRATEGIC IMPLEMENTATION 152

4.6 TECHNIQUES OF STRATEGY EVALUATION AND CONTROL 168

4.6.1 Financial Performance Control 168

4.6.2 Social Performance Control 177

4.6.3 Social Cost-Benefit Analysis 178

UNIT V

OTHER STRATEGIC ISSUES

5.1 MANAGING TECHNOLOGY AND INNOVATION 184

5.1.1 Managing Toward Success 184

5.1.2 Choosing a Partner 185

5.1.3 Negotiating the Alliance 186

5.1.4 Managing Toward Collaboration 189

5.1.5 Managing Innovation 190

5.2 ENTREPRENEURIAL VENTURES &

SMALL BUSINESS STRATEGIC ISSUES 194

5.2.1 Entrepreneurship 194

5.2.2 Entrepreneurship vs. Small Business 200

5.3 STRATEGIC ISSUE OF NON- PROFIT ORGANIZATION 206

5.4 CASES IN STRATEGIC MANAGEMENT 213

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NOTES

1 ANNA UNIVERSITY CHENNAI

UNIT I

STRATEGY AND PROCESS

INTRODUCTION

Strategy word derives from the greek word stratçgos, which derives from two

words: stratos (army) and ago (ancient greek for leading). Stratçgos referred to a ‘military

commander’ during the age of Athenian Democracy.

Strategy - originally a military term, in a business planning context strategy/strategic

means/pertains to why and how the plan will work, in relation to all factors of influence

upon the business entity and activity, particularly including competitors (thus the use of a

military combative term), customers and demographics, technology and communications

LEARNING OBJECTIVES

After learning this unit you must be able to:

• Understand the concepts of strategic management

• Analyze the strategic formation process

• Explain the strategic planning process

• Describe the role of corporate governance

• Know the corporate governance responsibilities for society

1.1 CONCEPTUAL FRAMEWORK FOR STRATEGIC MANAGEMENT

Definition of strategy

Johnson and Scholes (Exploring Corporate Strategy) define strategy as follows:

“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

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challenging environment, to meet the needs of markets and to fullfil stakeholder

expectations”.

In other words, strategy is about:

∗ Where is the business trying to get to in the long-term (direction)

∗ Which markets should a business compete in and what kind of activities is involved

in such markets? (markets; scope)

∗ How can the business perform better than the competition in those markets?

(Advantage)?

∗ What resources (skills, assets, finance, relationships, technical competence, and

facilities) are required in order to be able to compete? (Resources)?

∗ What external, environmental factors affect the businesses’ ability to compete?

(Environment)?

∗ What are the values and expectations of those who have power in and around the

business? (stakeholders)

1.2 THE CONCEPT OF STRATEGIC MANAGEMENT

Strategic management is the art and science of formulating, implementing and

evaluating cross-functional decisions that will enable an organization to achieve its objectives.

It is the process of specifying the organization’s objectives, developing policies and plans

to achieve these objectives, and allocating resources to implement the policies and plans to

achieve the organization’s objectives. Strategic management, therefore, combines the

activities of the various functional areas of a business to achieve organizational objectives.

It is the highest level of managerial activity, usually formulated by the Board of Directors

and performed by the organization’s Chief Executive Officer (CEO) and executive team.

Strategic management provides overall direction to the enterprise and is closely related to

the field of organization Studies.

“Strategic management is an ongoing process that assesses the business and the

industries in which the company is involved; assesses its competitors and sets goals and

strategies to meet all existing and potential competitors; and then reassesses each strategy

annually or quarterly [i.e. regularly] to determine how it has been implemented and whether

it has succeeded or needs replacement by a new strategy to meet changed circumstances,


NOTES


new technology, new competitors, a new economic environment., or a new social, financial,

or political environment.” (Lamb, 1984:ix)

1.3 BIRTH OF STRATEGIC MANAGEMENT

Strategic management as a discipline originated in the 1950s and 60s. Although

there were numerous early contributors to the literature, the most influential pioneers were

Alfred D. Chandler, Jr., Philip Selznick, Igor Ansoff, and Peter Drucker.

Alfred Chandler recognized the importance of coordinating the various aspects

of management under one all-encompassing strategy. Prior to this time the various functions

of management were separate with little overall coordination or strategy. Interactions

between functions or between departments were typically handled by a boundary position,

that is, there were one or two managers that relayed information back and forth between

two departments. Chandler also stressed the importance of taking a long term perspective

when looking to the future. In his 1962 groundbreaking work Strategy and Structure,

Chandler showed that a long-term coordinated strategy was necessary to give a company

structure, direction, and focus. He says it concisely, “structure follows strategy.”

In 1957, Philip Selznick introduced the idea of matching the organization’s internal

factors with external environmental circumstances. This core idea was developed into

what we now call SWOT anlysis by Learned, Andrews, and others at the Harvard Business

School General Management Group. Strengths and weaknesses of the firm are assessed

in light of the opportunities and threats from the business environment.

Igor Ansoff built on Chandler’s work by adding a range of strategic concepts and

inventing a whole new vocabulary. He developed a strategy grid that compared market

penetration strategies, product development strategies, market development strategies and

horizontal and vertical integration and diversification strategies. He felt that management

could use these strategies to systematically prepare for future opportunities and challenges.

In his 1965 classic Corporate Strategy, he developed the gap analysis still used today in

which we must understand the gap between where we are currently and where we would

like to be, then develop what he called “gap reducing actions”.

Peter Drucker was a prolific strategy theorist, author of dozens of management

books, with a career spanning five decades. His contributions to strategic management

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were many but two are most important. Firstly, he stressed the importance of objectives.

An organization without clear objectives is like a ship without a rudder. As early as 1954

he was developing a theory of management based on objectives. This evolved into his

theory of management by objectives (MBO). According to Drucker, the procedure of

setting objectives and monitoring your progress towards them should permeate the entire

organization, top to bottom. His other seminal contribution was in predicting the importance

of what today we would call intellectual capital. He predicted the rise of what he called the

“knowledge worker” and explained the consequences of this for management. He said

that knowledge work is non-hierarchical. Work would be carried out in teams with the

person most knowledgeable in the task at hand being the temporary leader.

In1985, Ellen-Earle Chaffee summarized what she thought were the main

elements of strategic management theory by the 1970s:

• Strategic management involves. adapting the organization to its business

environment.

• Strategic management is fluid and complex Change creates novel combinations of

circumstances requiring unstructured non-repetitive responses.

• Strategic management affects the entire organization by providing direction.

• Strategic management involves both strategy formation (she called it content) and

also strategy implementation (she called it process).

• Strategic management is partially planned and partially unplanned.

• Strategic management is done at several levels: overall corporate strategy, and

individual business strategies.

• Strategic management involves both conceptual and analytical thought processes.

1.4 STRATEGIC ANALYSIS

This is all about the analyzing the strength of businesses’ position and understanding

the important external factors that may influence that position. The process of Strategic

Analysis can be assisted by a number of tools, including:


NOTES


PEST Analysis - a technique for understanding the “environment” in which a business

operates

Scenario Planning - a technique that builds various plausible views of possible futures

for a business

Five Forces Analysis - a technique for identifying the forces which affect the level of

competition in an industry

Market Segmentation - a technique which seeks to identify similarities and differences

between groups of customers or users

Directional Policy Matrix - a technique which summarizes the competitive strength of a

businesses operations in specific markets

Competitor Analysis - a wide range of techniques and analysis that seeks to summaries

a businesses’ overall competitive position

Critical Success Factor Analysis - a technique to identify those areas in which a business

must outperform the competition in order to succeed

SWOT Analysis - a useful summary technique for summarizing the key issues arising from

an assessment of a businesses “internal” position and “external” environmental influences.

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1.5 BENEFITS OF STRATEGIC MANAGEMENT

Studies have revealed that organizations following strategic management have out

performed those that do not. Strategic planning ensures a rational allocation of resources

and improves co-ordination between various divisions of the organization. It helps managers

to think ahead and anticipate problems before they occur. The main benefit of the planning

process is a continuous dialogue about the organisation’s future between the hierarchical

levels in the organization. In short, the most highly rated benefits of strategic management

are:

• Clarity of strategic vision for the organization

• Focus on what is strategically important to the organization

• Better understanding of the rapidly changing business environment.

Strategic management need not always be a formal process. It can begin with answering a

few simple questions:

1. Where are we now?

2. In no changes are made, where will we be in the next one year? Next two years?

Next three years? Next five years?

Are the answers acceptable, if the answers are not acceptable, what actions should

the top management take with what results and payoffs. Today, as you know that business

is becoming more complex due to rapid changes in environment. It is becoming increasingly

difficult to predict the environment accurately. The internal and external environments of

organizations are now driven by multitudes of forces that were hitherto nonexistent. Earlier

the changes in technology were not so rapid but today the information from all over the

globe is pouring in through the computers. The world in fact has shrunk. This has created

fierce competition as the customers and stakeholders have become more aware of their

rights. Think of yourself as a consumer who has got several alternatives to choose from

you as a customer look for real value for your money. You have become aware of quality

and cost ratios and then diligently select the products. You are now more demanding for

better service in the least possible time. This has brought in new rules of business that

companies all over the world are evolving through their experience. The obsolence has

become so rapid that the time when you are in the process of buying a computer it might


NOTES


have already become obsolete in some part of the globe. The number of events that affect

domestic and world market are now far too many and too often.

Over reliance on experience in such situations may really work out to be very

costly for companies. (e.g) Reliance has shifted to more creativity, innovation and new

ways of looking at business and doing it in novel ways. The earlier concept of having highly

functionalized departments and developing specialization of labour is losing its credibility.

Organizations are becoming more responsive, flexible, and adaptable to changing business

situations. In such environments that are charged with high level of competition, developing

competitive edge for survival and growth has become imperative for companies. What do

you think will business strategy concepts and techniques benefit foreign businesses as

much as domestic firms? Fig1.1 The role of core values, purpose and visionary goals in a

strategy formation process

The need is now to distinguish between long-range planning and strategic planning.

The importance of strategic management in setting the directions for growth of organizations

is being increasingly realized these days. The evolution of objectives after setting directions

for growth of organisations has become necessary. The technique of strategic management

is used as a major vehicle for planning and implementing major changes in organisation.

The implementation of the strategic plans needs good teamwork and understanding of the

concept at grass root Have a look at the difference between the two:

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1.6 VARIOUS APPROACHES OF STRATEGIC MANAGEMENT

In general terms, there are two main approaches, which are opposite but

complement each other in some ways, to strategic management:

Major approach of strategic management

I-The Industrial Organizational Approach

Based on economic theory — deals with issues like competitive rivalry, resource

allocation, economies of scale

Assumptions — rationality, self discipline behaviour, profit maximization

II-The Sociological Approach

Deals primarily with human interactions

Assumptions — bounded rationality, satisfying behaviour, profit sub-optimality. An example

of a company that currently operates this way is Google.

Strategic management techniques can be viewed as bottom-up, top-down, or

collaborative processes. In the bottom-up approach, employees submit proposals to their

managers who, in turn, funnel the best ideas further up the organization. This is often

accomplished by a capital budgeting process. Proposals are assessed using financial criteria

such as return on investment or cost benefit analysis. The proposals that are approved

form the substance of a new strategy, all of which is done without a grand strategic design

or a strategic architect. The top-down approach is the most common by far. In it, the CEO

(such as Don Sheelen, Jeff Bezos and Samuel J. Palmisano) possibly with the assistance of

a strategic planning team, decides on the overall direction the company should take. Some

organizations are starting to experiment with collaborative strategic planning techniques

that recognize the emergent nature of strategic decisions.


NOTES


1.7 STRATEGY AND STRATEGY FORMATION PROCESS

1.7.1 Strategic Management Processes

The strategic management formulation and implementation methods vary with

product profile, Company profile, environment within and outside the Organization and

various other factors. Large organizations which use sophisticated planning use detailed

strategic management Models whereas smaller organizations where formality is low use

simpler models. Small businesses concentrate on planning steps compared to larger

companies in the same industry. Large firms have diverse products, operations, markets,

and technologies and hence they have to essentially use complex systems. In spite of the

fact that companies have different structures, systems, product profiles, etc, various

components of models used for analysis of strategic management are quite similar. You

must have observed that different thinkers have defined business strategy differently, yet

there are some common elements in the way it is defined and understood. The strategic

management consists of different phases, which are sequential in nature.

There are four essential phases of strategic management, they are process. In

different companies these phases may have different, nomenclatures and the phases may

have a different sequences,

however, the basic content remains same. The four phases can be listed as below.

1. Defining the vision, business mission, purpose, and broad objectives.

2. Formulation of strategies.

3. Implementation of strategies.

4. Evaluation of strategies.

These phases are linked to each other in a sequence as shown in

It may not be possible to draw a clear line of difference between each phase, and

the change over from one phase to another is gradual. The next phase in the sequence may

gradually evolve and merge into the following phase. An important linkage between the

phases is established through a feedback mechanism or corrective action. The feedback

mechanism results in a course of action for revising, reformulating, and redefining the past

phase. The process is highly dynamic and compartmentalization of the process is difficult.

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The change over is not clear and boundaries of phases overlap. My purpose to depict this

diagram is to assist you in remembering and recalling it with ease Exhibit Phases of Strategic

Management Process

Strategic management process that could be followed in a typical organization is

presented in .The process takes place in the following stages:

1. The Strategic Planner has to define what is intended to be accomplished (not just

desired). This will help in defining the objectives, strategies and policies.

2. In the light of stage I, the results of the current performance of the organization are

documented.


NOTES


3. The Board of Directors and the top management will have to review the current

performance of the documented.

4. In view of the review, the organization will have to scan the internal environment

for strengths and weaknesses and the external environment for opportunities and

threats.

5. The internal and external scan helps in selecting the strategic factors.

6. These have to be reviewed and redefined in relation to the Mission and Objectives.

7. At this stage a set of strategic alternatives and generated.

8. The best strategic alternative is selected and implemented through programmed

budgets and procedures.

9. Monitoring, evaluation and review of the strategic alternative chosen is undertaken

in this mode. This can provide a feedback on the changes in the implementation if

required. As can be seen, this provides a rational approach to strategic decision

making and it can be successfully practiced by Indian organizations, which now

have to operate in a competitive environment.

1.7.2 Top Management Decisions On Strategic Issues

To establish the vision of the firm, stating of corporate objectives, and strategic

thrust areas, defining a comprehensive corporate philosophy and values, identifying the

domains in which an organization would operate, learning and recognizing worldwide

business trends, and allocation of resources in line with corporate priorities, are some of

the key areas wherein top management of organisations take decisions. Let us now look at

the domain of top management? Strategic Issues for Sharing of Concern and Resources to

meet certain specific needs of certain customers, use of common upgraded technologies

by certain business units, deployment of people, physical assets or money from internal or

external sources and to achieve economics of scale in deployment, certain decisions may

be taken by the management.

1.7.3 Strategic Issues Likely To Have Long Term Impact

Strategic decisions for implementing a course of action have broad implications

and long term ramifications and the people of an organisation have to commit themselves

to the decisions and plans for a long period of time. Once a firm takes strategic decisions

and implements the action programs, the impact is seen slowly on its competitive image

and the advantage tied to the particular strategy start pouring in. The companies become

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known in certain markets, products, or technologies or the decisions may adversely affect

the previous progress. In today’s business world, where changes are by leaps and bounds,

some organisations may decide for radical changes through reengineering of their business

processes to gain strategically better position

Strategic Directions are Futuristic

Strategies are essentially for the future. Strategic decisions are taken based o

forecasts that are in turn based on available data on trends. The managers involved in

strategic planning concentrate on developing projections that would take the company to

better strategic position. The companies thus become proactive rather than being reactive

to business situations. Strategies have Multi Functional and Multi Business Effects Every

company has several business units. Strategic decisions are coordinative in nature among

all the business units of the company. Many strategic decisions on product mix, competitive

edge, organisational structure etc. affect various departments and functions that may be

classified as strategic business units (SBUs). Each of these units get affected by the decision

taken at the top level, regarding allocation of resources and deployment of personnel etc.

So, Business Strategy as a discipline focuses at the organization as one single unit. Strategies

are Defined Based on Study of Environment The organisation culture internal to the

organisation and also the external environment must be thoroughly scanned and studied to

decide on strategies. The interaction between the organisations and the external environment

affects both of them. The organisation tends to change the environment and the same

environment makes an impact on the organisation. The firms have to define their strategic

position with regard to the environment and decide strategies that will take it to the desired

position. The firms are part of the system, where customers, stake holders, competitors

etc. exist and the firm cannot remain insulated from these determinants of the external

environment

1.8 STRATEGY PLANNING PROCESS

1.8.1 Strategic Planning Model

Elements In Strategic Management Process

Each phase of strategic management process can be viewed to be consisting of a

number of elements, which can be clearly defined with input and output relationships.


NOTES


The steps have logical connectivity and hence these are sequential. These steps

can be illustrated with the help of a flow diagram. The following discrete twelve steps can

be considered as comprehensive.

1. Defining the vision of the company

2. Defining the mission of the company

3. Determining the purposes or goals

4. Defining the objectives

5. Environment scanning

6. Carrying out corporate appraisal

7. Developing strategic alternatives

8. Selecting a strategy

9. Formulating detailed strategy

10. Preparing a plan

11. Implementing a strategy

12. Evaluating a strategy

Figure 1.2 The Strategic Planning Process

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1.8.2 Strategic Management Models

Firstly have a look at the various models which has got relevance to the strategic

process. Now think of a firm which in your opinion has been successful over the past 15

years and list down the things you think have attributed to its success: Some of the strategic

management models are shown. Now, I will discuss each of the elements of strategic

management model.

Exhibit Strategic Management Model:

• Company vision statement

• Company mission statement

• Company profile

• External environment and internal environment

• Evolution strategic choices and selection

• Long term objectives

• Grand strategy

• Annual objective

• Functional strategy

• Operating policies

• Institutionalizing Strategy

• Control and evaluation

1.8.3 Working Model Of Strategic Management

After looking at the above given fig 1.2, we will now discuss each phase in detail.

Vision

Let us, now discuss in details the model of strategic management Vision of The

Company

Vision of a company is rather a permanent statement articulated by the CEO of the

company who may be Managing Director, President, Chairman, etc.


NOTES


The purpose of a vision statement is to:

1. Communicate with the people of the organisation and to those who are in some

way connected or concerned with the organisation about its very existence in

terms of corporate purpose, business scope, and the competitive leadership.

2. Cast a framework that would lead to development of interrelationships between

firm and stakeholders viz. employees, shareholders, suppliers, customers, and

various communities that may be directly or indirectly involved with the firm.

3. Define broad objective regarding performance of the firm and its growth in various

fields vital to the firm. So, lets talk about our own Rai University, find out what is

the vision statement and list down various purposes of our vision statement.

Vision is a theme which gives a focused view of a company. It is a unifying statement

and a vital challenge to all different units of an organisation that may be busy pursuing their

independent objectives. It consists of a sense of achievable ideals and is a fountain of

inspiration for performing the daily activities. It motivates people of an organisation to

behave in a way which would be congruent with the corporate ethics and values. Many

firms do not have clear vision statements. An indirect method of knowing whether a firm

has reached the stage of corporate strategic management is emergence of a vision statement.

Vision of a firm cannot be high jacked from a company; however, a firm may definitely get

inspired by the vision statement of another firm. It has to be evolved after a lot of

deliberations, brain storming, and thinking. It is pertinent that you as an individual working

in a firm should become an active participant and collaborator in accomplishing corporate

objectives. You must understand and share the vision of the firm because you would have

to contribute in transformation of vision into a reality through his or her actions. Total

behaviour of people of an organization should get conditioned by the basic framework of

vision. Personal objectives of individuals are very important to them and only to fulfill these

objectives people join organisations.

Vision of a company when translated into action programme must be able to meet

personal needs of people. This includes the need of achievement also. Vision of a firm thus

encompasses personal objectives of people which they try to achieve.

Step 1: Name of the company

Step 2: Practices that have made the company successful

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The primary purpose of the strategic management process is to enable companies

to achieve strategic competitiveness and earn above average returns. Researches have

indicated that companies that engage in strategic management generally out perform those

that do not. The attainment of an appropriate match or fit between a company’s environment

and its strategy, structure, and processes has positive effects on the company’s performance.

Bruce Henderson, founder of the Boston Consulting Group, pointed out that a company

cannot afford to follow intuitive strategies once it becomes large, has layers of management,

or its environment changes substantially. As the world’s environment becomes increasingly

complex and changing, today’s companies, as one way to make the environment more

manageable, use strategic management.

Strategic competitiveness is achieved when a company successfully formulates

and implements a value creating strategy. By implementing a value creating strategy that

current and potential competitors are not simultaneously implementing and that competitors

are unable to duplicate, a company achieves a sustained or sustainable competitive advantage.

So long as a company can sustain (or maintain) a competitive advantage, investors will

earn above average returns. Above average returns represent returns that exceed returns

that investors expect to earn from other investments with similar levels of risk (investor

uncertainty about the economic gains or losses that will result from a particular investment).

In other words, above average returns exceed investors’ expected levels of return for

given levels of risk. In the long run, companies must earn at least average returns and

provide investors with average returns if they are to survive. If a company earns below

average returns and provides investors with below average returns, investors will withdraw

their funds and place them in investments that earn at least average returns. Internationally

these types of companies are prime take over targets, a concept that is picking up in India.

A framework that can assist companies in their quest for strategic competitiveness is the

strategic management process, the full set of commitments, decisions and actions required

for a company to systematically achieve strategic competitiveness and earn above average.

Mission

An organization’s mission is the purpose or reason for the organizations existence.

A well convinced mission statement defines the fundamental, unique purpose that sets a

company apart other firms of its and identifies the scope of the company’s operations in

terms of products offered and market served.


NOTES


Objectives

It is the end results of planned activity. The corporate objectives achievement

should result in the fulfillment of a corporation’s mission.

Some of the areas in which corporations might establish its goals and objectives are:

• Profitability

• Efficiency

• Growth

• Shareholder wealth

• Utilization of resources

• Reputation

• Contribution to employees

• Contribution to society through taxes paid etc..,

• Market leadership

• Technological leadership

• Survival

Strategy

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”.

• 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.

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• 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.

Policies

A Policy is a broad guideline for decision making that links the formulation of

strategy with its implementation

Programs

A program is a statement of the activities or steps needed to accomplish a single

use plan. It makes the strategy action oriented.

Budgets

A Budget is a statement of a corporation’s programs in term of dollars/money

Used in planning and control, a budget lists the detailed cost of each program.

Procedures

It is a system of sequential steps or techniques that describe in detail how a particular

task or job is to be done.

1.9 MINTZBERG’S MODES OF STRATEGIC DECISION MAKING

• Entrepreneurial Mode

• Adaptive Mode

• Planning Mode

• Logical Incrementalism

1.10 CORPORATE GOVERNANCE & SOCIAL RESPONSIBILITY

Corporate governance is the set of processes, customs, policies, laws and

institutions affecting the way a corporation is directed, administered or controlled. Corporate


NOTES


governance also includes the relationship stakeholders among the many players involved

(the stakeholders) and the goals for which the corporation is governed. The principal

players are the shareholders, management and the board of directors. Other stakeholders

include employees, suppliers, customers, banks and other lenders, regulators, the

environment and the community at large.

Corporate governance is a multi-faceted subject. An important theme of corporate

governance is to ensure the accountability of the impact of a corporate governance system

in economic efficiency, with a strong emphasis on shareholders welfare. There are yet

other aspects to the corporate governance subject, such as the stake holder view and

certain individuals in an organization through mechanisms that try to reduce or eliminate the

principal –agent problem. A related but separate thread of discussions focus on the corporate

governance models around the world.

1.10.1 Definition Of Corporate Governance

In A Board Culture of Corporate Governance business author Gabrielle

O’Donovan defines corporate governance as ‘an internal system encompassing policies,

processes and people, which serves the needs of shareholders and other stakeholders, by

directing and controlling management activities with good business savvy, objectivity and

integrity. Sound corporate governance is reliant on external marketplace commitment and

legislation, plus a healthy board culture which safeguards policies and processes’.

O’Donovan goes on to say that ‘the perceived quality of a company’s corporate

governance can influence its share price as well as the cost of raising capital. Quality is

determined by the financial markets, legislation and other external market forces plus the

international organisational environment; how policies and processes are implemented and

how people are led. External forces are, to a large extent, outside the circle of control of

any board. The internal environment is quite a different matter, and offers companies the

opportunity to differentiate from competitors through their board culture. To date, too

much of corporate governance debate has centred on legislative policy, to deter fraudulent

activities and transparency policy which misleads executives to treat the symptoms and not

the cause.

Corporate Governance is a system of structuring, operating and controlling a

company with a view to achieve long term strategic goals to satisfy shareholders, creditors,

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employees, customers and suppliers, and complying with the legal and regulatory

requirements, apart from meeting environmental and local community needs.

Report of SEBI committee (India) on Corporate Governance defines corporate

governance as the acceptance by management of the inalienable rights of shareholders as

the true owners of the corporation and of their own role as trustees on behalf of the

shareholders. It is about commitment to values, about ethical business conduct and about

making a distinction between personal & corporate funds in the management of a company.”

The definition is drawn from Gandhian principle of Trusteeship and Directive

Principle of constitution. Corporate Governance is viewed as ethics and a moral duty.

1.10.2 History Of Corporate Governance

In the 19th century, state corporation law enhanced the rights of corporate boards

to govern without unanimous consent of shareholders in exchange for statutory benefits

like appraisal rights, to make corporate governance more efficient. Since that time, and

because most large publicly traded corporations in the US are incorporated under corporate

administration friendly Delaware law, and because the US’s wealth has been increasingly

securitized into various corporate entities and institutions, the rights of individual owners

and shareholders have become increasingly derivative and dissipated. The concerns of

shareholders over administration pay and stock losses periodically has led to more frequent

calls for corporate governance reforms.

In the 20th century in the immediate aftermath of the Wall Street Crash of 1929

legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means

pondered on the changing role of the modern corporation in society. Berle and Means’

monograph “The Modern Corporation and Private Property” (1932, Macmillan) continues

to have a profound influence on the conception of corporate governance in scholarly debates

today.

From the Chicago school of economics, Ronald Coase’s “Nature of the Firm”

(1937) introduced the notion of transaction costs into the understanding of why firms are

founded and how they continue to behave. Fifty years later, Eugene Fama and Michael

Jensen’s “The Separation of Ownership and Control” (1983, Journal of Law and

Economics) firmly established agency theory as a way of understanding corporate


NOTES


governance: the firm is seen as a series of contracts. Agency theory’s dominance was

highlighted in a 1989 article by Kathleen Eisenhardt (Academy of Management Review).

US expansion after World War II through the emergence of multinational

corporations saw the establishment of the managerial class. Accordingly, the following

Harvard Business School Management professors published influential monographs studying

their prominence: Myles Mace (entrepreneurship), Alfred D Chandler, Jr (business history),

Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior).

According to Lorsch and MacIver “many large corporations have dominant control over

business affairs without sufficient accountability or monitoring by their board of directors.”

Since the late 1970’s, corporate governance has been the subject of significant

debate in the U.S. and around the globe. Bold, broad efforts to reform corporate governance

have been driven, in part, by the needs and desires of shareowners to exercise their rights

of corporate ownership and to increase the value of their shares and, therefore, wealth.

Over the past three decades, corporate directors’ duties have expanded greatly beyond

their traditional legal responsibility of duty of loyalty to the corporation and its shareowners.

In the first half of the 1990s, the issue of corporate governance in the U.S. received

considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honey

well) by their boards. CALERS led a wave of institutional shareholder activism (something

only very rarely seen before), as a way of ensuring that corporate value would not be

destroyed by the now traditionally cozy relationships between the CEO and the board of

directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated).

In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia,

South Korea, Malaysia and The Philippines severely affected by the exit of foreign capital

after property assets collapsed. The lack of corporate governance mechanisms in these

countries highlighted the weaknesses of the institutions in their economies.

In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron

and Worldcom, as well as lesser corporate debacles, such as Aldelphia

Communications,AOL, Arthur Andersen, Global Crossing Tyco, and, more recently, Fannie

Mae and Freddie Mac, led to increased shareholder and governmental interest in corporate

governance. This culminated in the passage of the Sarbanes-Oxley Act of 2002. But, since

then, the stock market has greatly recovered, and shareholder zeal has waned accordingly.

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1.10.3 Impact Of Corporate Governance

Positive effect of good corporate governance on different stakeholders ultimately

results into strong economy and hence good corporate governance is tool for socio-

economic development. After East Asia economy collapse in late 20th century, World

Bank president warned those countries, that for sustainable development, corporate

governance is must to be good. Economic health of a nation depends substantially how

sound and ethical businesses are.

Enlightened Corporate Governance

Corporate governance, the unwieldy name given to the systems that guide the

control and management of corporations, is a relatively recent term that came into being in

the 1970s. Because corporate governance structures and processes specify the various

roles and duties of corporate directors, senior executives, shareholders, and other

stakeholders in the corporation, they play a large role in determining how responsible and

accountable a corporation’s leaders will be in exercising their authority. When properly

designed, governance processes guide companies toward useful objectives and help them

monitor and measure their progress in achieving those objectives; when poorly designed,

these processes permit companies to drift toward painful losses for shareholders and

everyone else with a stake in the company.

A company’s corporate governance—whether good or bad—is established by its

board of directors. Ideally, these directors will be energetic, experienced people deeply

concerned about the company’s welfare. Because the board’s most pivotal responsibilities

are to hire and supervise the company’s chief executive officer (CEO), these directors

should not be company employees who work under the CEO’s direction; instead, they

should be independent of the company’s management. When independent directors know

how to work effectively with the company’s senior management team, they are likely to

produce a corporate climate that accelerates the growth of long-term shareholder value.

Role of Institutional Investors

Many years ago, worldwide, buyers and sellers of corporation stocks were

individual investors, such as wealthy businessmen or families, who often had a vested,

personal and emotional interest in the corporations whose shares they owned. Over time,


NOTES


markets have become largely institutionalized: buyers and sellers are largely institutions

(e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups,

and banks).

The rise of the institutional investor has brought with it some increase of professional

diligence which has tended to improve regulation of the stock market (but not necessarily

in the interest of the small investor or even of the naïve institutions, of which there are

many). Note that this process occurred simultaneously with the direct growth of individuals

investing indirectly in the market (for example individuals have twice as much money in

mutual funds as they do in bank accounts). However this growth occurred primarily by

way of individuals turning over their funds to ‘professionals’ to manage, such as in mutual

funds. In this way, the majority of investment now is described as “institutional investment”

even though the vast majority of the funds are for the benefit of individual investors.

Program trading, the hallmark of institutional trading, is averaging over 60% a day

in 2007. Unfortunately, there has been a concurrent lapse in the oversight of large

corporations, which are now almost all owned by large institutions. The Board of Directors

of large corporations used to be chosen by the principal shareholders, who usually had an

emotional as well as monetary investment in the company (think Ford), and the Board

diligently kept an eye on the company and its principal executives (they usually hired and

fired the President, or Chief Executive Officer— CEO).

Nowadays, if the owning institutions don’t like what the President/CEO is doing

and they feel that firing them will likely be costly (think “golden handshake”) and/or time

consuming, they will simply sell out their interest. The Board is now mostly chosen by the

President/CEO, and may be made up primarily of their friends and associates, such as

officers of the corporation or business colleagues. Since the (institutional) shareholders

rarely object, the President/CEO generally takes the Chair of the Board position for his/

herself (which makes it much more difficult for the institutional owners to “fire” him/her).

Occasionally, but rarely, institutional investors support shareholder resolutions on such

matters as executive pay and anti-takeover measures.

Finally, the largest pools of invested money (such as the mutual fund ‘Vanguard

500’, or the largest investment management firm for corporations, State Street Corp) are

designed simply to invest in a very large number of different companies with sufficient

liquidity, based on the idea that this strategy will largely eliminate individual company financial

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NOTES


or other risk and, therefore, these investors have even less interest in a particular company’s

governance.

Since the marked rise in the use of Internet transactions from the 1990’s, both

individual and professional stock investors around the world have emerged as a potential

new kind of major (short term) force in the direct or indirect ownership of corporations

and in the markets: the casual participant. Even as the purchase of individual shares in any

one corporation by individual investors diminishes, the sale of derivatives (e.g., exchange

traded funds (ETFs), Stock market index options, etc.) has soared. So, the interests of

most investors are now increasingly rarely tied to the fortunes of individual corporations.

But, the ownership of stocks in markets around the world varies; for example, the

majority of the shares in the Japanese market are held by financial companies and industrial

corporations (there is a large and deliberate amount of cross-holding among Japanese

keirestu corporations and within S. Korean chaebol ‘groups’), whereas stock in the USA

or the UK and Europe are much more broadly owned, often still by large individual investors.

1.10.4 Parties To Corporate Governance

Parties involved in corporate governance include the regulatory body (e.g. the

Chief Executive Officer, the board of directors, management and shareholders). Other

stakeholders who take part include suppliers, employees, creditors, customers and the

community at large.

In corporations, the shareholder delegates decision rights to the manager to act in

the principal’s best interests. This separation of ownership from control implies a loss of

effective control by shareholders over managerial decisions. Partly as a result of this

separation between the two parties, a system of corporate governance controls is

implemented to assist in aligning the incentives of managers with those of shareholders.

With the significant increase in equity holdings of investors, there has been an opportunity

for a reversal of the separation of ownership and control problems because ownership is

not so diffuse.

A board of directors often plays a key role in corporate governance. It is their

responsibility to endorse the organisation’s strategy, develop directional policy, appoint,


NOTES


supervise and remunerate senior executives and to ensure accountability of the organisation

to its owners and authorities.

The Company Secretary, known as a Corporate Secretary in the US and often

referred to as a Chartered Secretary if qualified by the Institute of Charted Secretaries and

Administrators (ICSA), is a high ranking professional who is trained to uphold the highest

standards of corporate governance, effective operations, compliance and administration.

All parties to corporate governance have an interest, whether direct or indirect, in

the effective performance of the organisation. Directors, workers and management receive

salaries, benefits and reputation, while shareholders receive capital return. Customers receive

goods and services; suppliers receive compensation for their goods or services. In return

these individuals provide value in the form of natural, human, social and other forms of

capital.

A key factor in an individual’s decision to participate in an organisation e.g. through

providing financial capital and trust that they will receive a fair share of the organisational

returns. If some parties are receiving more than their fair return then participants may

choose to not continue participating leading to organizational collapse.

1.10.5 Principles Of Corporate Governance

Key elements of good corporate governance principles include honesty, trust and

integrity, openness, performance orientation, responsibility and accountability, mutual

respect, and commitment to the organization.

Of importance is how directors and management develop a model of governance

that aligns the values of the corporate participants and then evaluate this model periodically

for its effectiveness. In particular, senior executives should conduct themselves honestly

and ethically, especially concerning actual or apparent conflicts of interests, and disclosure

in financial reports.

Commonly accepted principles of corporate governance include:

• Rights and equitable treatment of shareholders: Organizations should respect

the rights of shareholders and help shareholders to exercise those rights. They can

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NOTES


help shareholders exercise their rights by effectively communicating information

that is understandable and accessible and encouraging shareholders to participate

in general meetings.

• Interests of other stakeholders: Organizations should recognize that they have

legal and other obligations to all legitimate stakeholders.

• Role and responsibilities of the board: The board needs a range of skills and

understanding to be able to deal with various business issues and have the ability

to review and challenge management performance. It needs to be of sufficient size

and have an appropriate level of commitment to fulfill its responsibilities and duties.

There are issues about the appropriate mix of executive and non-executive directors.

The key roles of Chairperson and CEO should not be held by the same person.

• Integrity and ethical behaviour: Organizations should develop a code of conduct

for their directors and executives that promotes ethical and responsible decision

making. It is important to understand, though, that systemic reliance on integrity

and ethics is bound to eventual failure. Because of this, many organizations establish

Compliance and Ethics Programs to minimize the risk that the firm steps outside of

ethical and legal boundaries.

• Disclosure and transparency: Organizations should clarify and make publicly

known the roles and responsibilities of board and management to provide

shareholders 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.

Issues involving corporate governance principles include:

• oversight of the preparation of the entity’s financial statements

• internal controls and the independence of the entity’s auditors

• review of the compensation arrangements for the chief executive officer and other

senior executives

• the way in which individuals are nominated for positions on the board

• the resources made available to directors in carrying out their duties

• oversight and management of risk

• dividend policy


NOTES


1.10.6 Mechanisms And Controls

Corporate governance mechanisms and controls are designed to reduce the

inefficiencies that arise from morald hazard and adverse selection. For example, to monitor

managers’ behaviour, an independent third party (the auditor) attests the accuracy of

information provided by management to investors. An ideal control system should regulate

both motivation and ability.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective

action to accomplish organisational goals. Examples include:

• Monitoring by the board of directors: The board of directors, with its legal

authority to hire, fire and compensate top management, safeguards invested capital.

Regular board meetings allow potential problems to be identified, discussed and

avoided. Whilst non-executive directors are thought to be more independent, they

may not always result in more effective corporate governance and may not increase

performance. Different board structures are optimal for different firms. Moreover,

the ability of the board to monitor the firm’s executives is a function of its access to

information. Executive directors possess superior knowledge of the decision-

making process and therefore evaluate top management on the basis of the quality

of its decisions that lead to financial performance outcomes, ex ante. It could be

argued, therefore, that executive directors look beyond the financial criteria.

• Remuneration: Performance-based remuneration is designed to relate some

proportion of salary to individual performance. It may be in the form of cash or

non-cash payments such as shares and share options, superannuation or other

benefits. Such incentive schemes, however, are reactive in the sense that they

provide no mechanism for preventing mistakes or opportunistic behaviour, and

can elicit myopic behaviour.

External corporate governance controls

External corporate governance controls encompass the controls external

stakeholders exercise over the organisation. Examples include:

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NOTES


• debt covenants

• government regulations

• media pressure

• takeovers

• competition

• managerial labour market

• telephone tapping

1.10.7 Systemic Problems Of Corporate Governance

• Supply of accounting information: Financial accounts form a crucial link in

enabling providers of finance to monitor directors. Imperfections in the financial

reporting process will cause imperfections in the effectiveness of corporate

governance. This should, ideally, be corrected by the working of the external

auditing process.

• Demand for information: A barrier to shareholders using good information is the

cost of processing it, especially to a small shareholder. The traditional answer to

this problem is the efficient market hypothesis (in finance, the efficient market

hypothesis (EMH) asserts that financial markets are efficient), which suggests that

the shareholder will free ride on the judgements of larger professional investors.

• Monitoring costs: In order to influence the directors, the shareholders must

combine with others to form a significant voting group which can pose a real

threat of carrying resolutions or appointing directors at a general meeting.

Role of the Accountant

Financial reporting is a crucial element necessary for the corporate governance

system to function effectively. Accountants and Auditors are the primary providers of

information to capital market participants. The directors of the company should be entitled

to expect that management prepare the financial information in compliance with statutory

and ethical obligations, and rely on auditors’ competence.

Current accounting practice allows a degree of choice of method in determining

the method of measurement, criteria for recognition, and even the definition of the accounting

entity. The exercise of this choice to improve apparent performance (popularly known as


NOTES


creative accounting) imposes extra information costs on users. In the extreme, it can involve

non-disclosure of information.

.

One area of concern is whether the accounting firm acts as both the independent

auditor and management consultant to the firm they are auditing. This may result in a conflict

of interest which places the integrity of financial reports in doubt due to client pressure to

appease management. The power of the corporate client to initiate and terminate

management consulting services and, more fundamentally, to select and dismiss accounting

firms contradicts the concept of an independent auditor. Changes enacted in the United

States in the form of the Sarbanes-Oxley Act (in response to the Enron situation as noted

below) prohibit accounting firms from providing both auditing and management consulting

services. Similar provisions are in place under clause 49 of SEBI Act in India.

The Enron collapse is an example of misleading financial reporting. Enron concealed

huge losses by creating illusions that a third party was contractually obliged to pay the

amount of any losses. However, the third party was an entity in which Enron had a substantial

economic stake. In discussions of accounting practices with Arthur Andersen, the partner

in charge of auditing, views inevitably led to the client prevailing.

However, good financial reporting is not a sufficient condition for the effectiveness

of corporate governance if users don’t process it, or if the informed user is unable to

exercise a monitoring role due to high costs.

Rules versus principles

Rules are typically thought to be simpler to follow than principles, demarcating a

clear line between acceptable and unacceptable behaviour. Rules also reduce discretion

on the part of individual managers or auditors.

In practice rules can be more complex than principles. They may be ill-equipped

to deal with new types of transactions not covered by the code. Moreover, even if clear

rules are followed, one can still find a way to circumvent their underlying purpose - this is

harder to achieve if one is bound by a broader principle.

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NOTES


Principles on the other hand are a form of self regulation. It allows the sector to

determine what standards are acceptable or unacceptable. It also pre-empts over zealous

legislations that might not be practical.

Enforcement

Enforcement can affect the overall credibility of a regulatory system. They both

deter bad actors and level the competitive playing field. Nevertheless, greater enforcement

is not always better, for taken too far it can dampen valuable risk-taking. In practice,

however, this is largely a theoretical, as opposed to a real, risk.

Action Beyond Obligation

Enlightened boards regard their mission as helping management lead the company.

They are more likely to be supportive of the senior management team. Because enlightened

directors strongly believe that it is their duty to involve themselves in an intellectual analysis

of how the company should move forward into the future, most of the time, the enlightened

board is aligned on the critically important issues facing the company.

Unlike traditional boards, enlightened boards do not feel hampered by the rules

and regulations of the Sarbanes-Oxley Act. Unlike standard boards that aim to comply

with regulations, enlightened boards regard compliance with regulations as merely a baseline

for board performance. Enlightened directors go far beyond merely meeting the requirements

on a checklist. They do not need Sarbanes-Oxley to mandate that they protect values and

ethics or monitor CEO performance.

At the same time, enlightened directors recognize that it is not their role to be

involved in the day-to-day operations of the corporation. They lead by example. Overall,

what most distinguishes enlightened directors from traditional and standard directors is the

passionate obligation they feel to engage in the day-to-day challenges and strategizing of

the company. Enlightened boards can be found in very large, complex companies, as well

as smaller companies.


NOTES


1.10.8 Corporate Governance Models Around The World

Although the US model of corporate governance is the most notorious, there is a

considerable variation in corporate governance models around the world. The intricated

shareholding structures of keiretsus in Japan, the heavy presence of banks in the equity of

german firms, the chaebols in South Korea and many others are examples of arrangements

which try to respond to the same corporate governance challenges as in the US.

• Anglo-American Model

There are many different models of corporate governance around the world. These

differ according to the variety of capitalism in which they are embedded. The liberal model

that is common in Anglo-American countries tends to give priority to the interests of

shareholders. The coordinated model that one finds in Continental Europe and Japan also

recognizes the interests of workers, managers, suppliers, customers, and the community.

Both models have distinct competitive advantages, but in different ways. The liberal model

of corporate governance encourages radical innovation and cost competition, whereas the

coordinated model of corporate governance facilitates incremental innovation and quality

competition. However, there are important differences between the U.S. recent approach

to governance issues and what has happened in the U.K..

In the United States, a corporation is governed by a board of directors, which has

the power to choose an executive officer, usually known as the chief executive officer. The

CEO has broad power to manage the corporation on a daily basis, but needs to get board

approval for certain major actions, such as hiring his/her immediate subordinates, raising

money, acquiring another company, major capital expansions, or other expensive projects.

Other duties of the board may include policy setting, decision making, monitoring

management’s performance, or corporate control.

The board of directors is nominally selected by and responsible to the share holders,

but the bylaws of many companies make it difficult for all but the largest shareholders to

have any influence over the makeup of the board; normally, individual shareholders are not

offered a choice of board nominees among which to choose, but are merely asked to

rubberstamp the nominees of the sitting board. Perverse incentives have pervaded many

corporate boards in the developed world, with board members beholden to the chief

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NOTES


executive whose actions they are intended to oversee. Frequently, members of the boards

of directors are CEOs of other corporations, which some see as a conflict of interest.

The U.K. has pioneered a flexible model of regulation of corporate governance,

known as the “comply or explain” code of governance. This is a principle based code that

lists a dozen of recommended practices, such as the separation of CEO and Chairman of

the Board, the introduction of a time limit for CEOs’ contracts, the introduction of a minimum

number of non-executives Directors, of independent directors, the designation of a senior

non executive director, the formation and composition of remuneration, audit and nomination

committees. Publicly listed companies in the U.K. have to either apply those principles or,

if they choose not to, to explain in a designated part of their annual reports why they

decided not to do so. The monitoring of those explanations is left to shareholders themselves.

The tenet of the Code is that one size does not fit all in matters of corporate governance

and that instead of a statuary regime like the Sarbanes-Oxley Act in the U.S., it is best to

leave some flexibility to companies so that they can make choices most adapted to their

circumstances. If they have good reasons to deviate from the sound rule, they should be

able to convincingly explain those to their shareholders.

The code has been in place since 1993 and has had drastic effects on the way

firms are governed in the U.K. A study by Arcot, Bruno and Faure-Grimaud from the

Financial Markets Group at the London School of Economics shows that in 1993, about

10% of the UK companies member of the FTSE 350 were compliants on all dimensions

while they were more than 60% in 2003. The same success was not achieved when looking

at the explanation part for non compliant companies. Many deviations are simply not

explained and a large majority of explanations fail to identify specific circumstances justifying

those deviations. Still, the overall view is that the U.K.’s system works fairly well and in

fact is often branded as a benchmark, followed by several countries.

• Non Anglo-American Model

In East Asian countries, family-owned companies dominate. A study by Claessens,

Djankov and Lang (2000) investigated the top 15 families in East Asian countries and

found that they dominated listed corporate assets. In countries such as Pakistan, Indonesia

and the Philippines, the top 15 families controlled over 50% of publicly owned corporations

through a system of family cross-holdings, thus dominating the capital markets. Family-

owned companies also dominate the Latin model of corporate governance, that is companies


NOTES


in Mexico, Italy, Spain, France (to a certain extent), Brazil, Argentina, and other countries

in South America.

Europe and Asia exemplify the insider system: Shareholder and stakeholder • a

small number of listed companies, • an illiquid capital market where ownership and control

are not frequently traded • high concentration of shareholding in the hands of corporations,

institutions, families or government. • the insider model uses a system of interlocking

networks and committees.

At the same time that developing countries are undergoing a process of economic

growth and transformation, they are also experiencing a revolution in the business and

political relationships that characterize their private and public sectors. Establishing good

corporate governance practices is essential to sustaining long-term development and growth

as these countries move from closed, market-unfriendly, undemocratic systems towards

open, market-friendly, democratic systems. Good corporate governance systems will allow

organizations to realize their maximum productivity and efficiency, minimize corruption and

abuse of power, and provide a system of managerial accountability. These goals are equally

important for both private corporations and government bodies.

Because of the implicit relationship between private interests and the larger

government, good corporate governance practices are essential to establishing good

governance at the national level in developing countries. A number of ties the keep the

public and private sectors closely linked. On one hand, judiciary and regulatory bodies as

well as legislatures play a role in corporate management and oversight. At the same time

cartels and large corporate interests use their size to exert not only economic, but also

political power. These two sectors are so intertwined that a country cannot significantly

change one without simultaneously instituting changes in the other.

According to Nicolas Meisel, there are four priorities which developing countries

should concentrate on while experimenting with new forms of corporate and public

governance. The first is to focus on improving the quality of information and increasing the

speed at which it is created and distributed to the public. Good communication is important

to the functioning of any organization. The second is to allow individual actors more autonomy

while at the same time maintaining or increasing accountability. Thirdly, if a hierarchical

organization used to orient private activities toward the general interest, new countervailing

powers should be encouraged to fill this role. Finally, the part the state plays and how

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government officials are selected must be considered if a developing economy is to achieve

sustainable growth. This may involve making it easier for newcomers with new ideas

incumbents who may hold to older, possibly outdated, models.

Codes and guidelines

Corporate governance principles and codes have been developed in different

countries and issued from stock exchanges, corporations, institutional investors, or

associations (institutes) of directors and managers with the support of governments and

international organizations. As a rule, compliance with these governance recommendations

is not mandated by law, although the codes linked to stock exchange listing requirements

may have a coercive effect.

For example, companies quoted on the London and Toronto Stock Exchanges

formally need not follow the recommendations of their respective national codes. However,

they must disclose whether they follow the recommendations in those documents and,

where not, they should provide explanations concerning divergent practices. Such disclosure

requirements exert a significant pressure on listed companies for compliance.

In the United States, companies are primarily regulated by the state in which they

incorporate though they are also regulated by the federal government and, if they are

public, by their stock exchange. The highest number of companies are incorporated in

Delaware, including more than half of the Fortune 500. This is due to Delaware’s generally

business-friendly corporate legal environment and the existence of a state court dedicated

solely to business issues (Delaware Court of Chancery).

Most states’ corporate law generally follow the American Bar Association’s Model

Business Corporation Act. While Delaware does not follow the Act, it still considers its

provisions and several prominent Delaware justices, including former Delaware Supreme

Court Chief Justice E.Norman veasey participate on ABA committees.

One issue that has been raised since the Disney decision in 2005 is the degree to

which companies manage their governance responsibilities; in other words, do they merely

try to supersede the legal threshold, or should they create governance guidelines that ascend

to the level of best practice. For example, the guidelines issued by associations of directors

(see Section 3 above), corporate managers and individual companies tend to be wholly


NOTES


voluntary. For example, The GM Board Guidelines reflect the company’s efforts to improve

its own governance capacity. Such documents, however, may have a wider multiplying

effect prompting other companies to adopt similar documents and standards of best practice.

One of the most influential guidelines has been the 1999 OECD Principles of

Corporate Governance. This was revised in 2004. The OECD remains a proponent of

corporate governance principles throughout the world.

The World Business Council for Sustainable Development WBCSD has also done

substantial work on corporate governance, particularly on accountability and reporting,

and in 2004 created an Issue Management Tool: Strategic challenges for business in the

use of corporate responsibility codes, standards, and frame works. This document aims to

provide general information, a “snap-shot” of the landscape and a perspective from a

think-tank/professional association on a few key codes, standards and frameworks relevant

to the sustainability agenda.

1.10.9 Corporate Governance And Firm Performance

In its ‘Global Investor Opinion Survey’ of over 200 institutional investors first

undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents

would pay a premium for well-governed companies. They defined a well-governed company

as one that had mostly out-side directors, who had no management ties, undertook formal

evaluation of its directors, and was responsive to investors’ requests for information on

governance issues. The size of the premium varied by market, from 11% for Canadian

companies to around 40% for companies where the regulatory backdrop was least certain

(those in Morocco,Egypt and Russia).

Other studies have linked broad perceptions of the quality of companies to superior

share price performance. In a study of five year cumulative returns of Fortune Magazine’s

survey of ‘most admired firms’, Antunovich et al found that those “most admired” had an

average return of 125%, whilst the ‘least admired’ firms returned 80%. In a separate study

Business Week enlisted institutional investors and ‘experts’ to assist in differentiating between

boards with good and bad governance and found that companies with the highest rankings

had the highest financial returns.

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On the other hand, research into the relationship between specific corporate

governance controls and firm performance has been mixed and often weak. The following

examples are illustrative.

Board composition

Some researchers have found support for the relationship between frequency of

meetings and profitability. Others have found a negative relationship between the proportion

of external directors and firm performance, while others found no relationship between

external board membership and performance. In a recent paper Bagahat and Black found

that companies with more independent boards do not perform better than other companies.

It is unlikely that board composition has a direct impact on firm performance.

Remuneration/Compensation

The results of previous research on the relationship between firm performance and

executive compensation have failed to find consistent and significant relationships between

executives’ remuneration and firm performance. Low average levels of pay-performance

alignment do not necessarily imply that this form of governance control is inefficient. Not all

firms experience the same levels of agency conflict, and external and internal monitoring

devices may be more effective for some than for others.

Some researchers have found that the largest CEO performance incentives came

from ownership of the firm’s shares, while other researchers found that the relationship

between share ownership and firm performance was dependent on the level of ownership.

The results suggest that increases in ownership above 20% cause management to become

more entrenched, and less interested in the welfare of their shareholders.

Some argue that firm performance is positively associated with share option plans

and that these plans direct managers’ energies and extend their decision horizons toward

the long-term, rather than the short-term, performance of the company. However, that

point of view came under substantial criticism circa in the wake of various security scandals

including mutual fund timing episodes and, in particular, the backdating of option grants as

documented by University of Iowa academic Erik Lie and reported by James Blander and

Charles Forelle of the Wall Street Journal.


NOTES


Even before the negative influence on public opinion caused by the 2006 backdating

scandal, use of options faced various criticisms. A particularly forceful and long running

argument concerned the interaction of executive options with corporate stock repurchase

programs. Numerous authorities (including U.S. Federal Reserve Board economist

Weisbenner) determined options may be employed in concert with stock buybacks in a

manner contrary to shareholder interests. These authors argued that, in part, corporate

stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion

annual rate in late 2006 because of the impact of options. A compendium of academic

works on the option/buyback issue is included in the study Scanda by author M.Gumport

issued in 2006.

A combination of accounting changes and governance issues led options to become

a less popular means of remuneration as 2006 progressed, and various alternative

implementations of buybacks surfaced to challenge the dominance of “open market” cash

buybacks as the preferred means of implementing a share repurchase plan.

1.10.10 Initiative Of Indian Government Of Corporate Governance

National foundation for corporate governance (A Trust formed by MCA, CII, ICAI

& ICSI)

Vision:

• Be A Catalyst In Making India The Best In Corporate Governance

PracticesMission:

• To foster a culture for promoting good governance, voluntary compliance and

facilitate effective participation of different stakeholders;

• To create a framework of best practices, structure, processes and ethics;

• To make significant difference to Indian Corporate Sector by raising the

standard of corporate governance in India towards achieving stability and

growth

Invites Companies to Showcase their Good Corporate Governance Practices:

In order to promote Corporate Governance in India, NFCG has undertaken a

major campaign to disseminate, to public at large, the good corporate governance practices

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followed by the Industries especially among the Small and Medium Enterprises (SMEs)

and unlisted Companies.

In case you believe that your company has initiated some benchmark Corporate

Governance initiatives then we invite you to forward. A brief audio-visual presentation

highlighting the following:-

• The Corporate Governance practices followed in your Company;

• The net worth of the Company in the terms of assets, turnover and profit before

the implementation of the good Corporate Governance practices;

• The cost of implementation of the Corporate Governance Practices;

• The effect on the net worth and business Operations of the Company after the

implementation of the good Corporate Governance practices

• The short listed presentations will be telecast on one of the prominent business TV

Channels and also given awards /certificate by NFCG.

SUMMARY

Strategic management is the art and science of formulating, implementing and

evaluating cross-functional decisions that will enable an organization to achieve its objectives.

It is the process of specifying the organization’s objectives, developing policies and plans

to achieve these objectives, and allocating resources to implement the policies and plans to

achieve the organization’s objectives. Strategic management as a discipline originated in

the 1950s and 60s. Although there were numerous early contributors to the literature, the

most influential pioneers were Alfred D. Chandler, Jr., Philip Selznick, Igor Ansoff, and

Peter Drucker.

The steps involved in strategic management process are:

1. Defining the vision, business mission, purpose, and broad objectives.2. Formulation

of strategies.3. Implementation of strategies. 4. Evaluation of strategies.

The four phases can be listed as below. 1. Defining the vision, business mission,

purpose, and broad objectives.2. Formulation of strategies.3. Implementation of strategies.4.

Evaluation of strategies.


NOTES


Corporate governance is the set of processes, customs, policies, laws and

institutions affecting the way a corporation is directed anagement are: Clarity of strategic

vision for the? organization, Focus on what is strategically? important to the

organization,Better understanding of the rapidly? changing business environment.

The four phases can be listed as administered or controlled. Corporate governance

also includes the relationship stakeholders among the many players involved (the

stakeholders) and the goals for which the corporation is governed. The principal players

are the shareholders, management and the board of directors. Other stakeholders include

employees, suppliers, customers, banks and other lenders, regulators, the environment

and the community at large.

Short Questions

Q1.Define strategy.

Q2. What is policy, procedure and budget?

Q3. Mention the three types of strategies.

Q4.Define Corporate Governanace.

Review questions

Q5.Explain the strategic formulation process.

Q6.Discuss the evolution and growth of strategic management.

Q7.Explain the different approaches of strategic management.

Q8. Discuss the key role to be played by the all levels of management in strategic

formulations.

Q9.Discuss the role of corporate governance and its influences in corporations

performances.

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NOTES


UNIT II

COMPETITIVE ADVANTAGE

INTRODUCTION

The interaction of the four environmental dimensions creates further sub-dimensions

such as political and economic environments that act as a filter between the internal and

external environment and profoundly affect the performance of the corporation. Culture

here refers to transmitted patterns of behaviour shared by members of a group which

provide them with effective mechanisms for interaction (Krefting & Krefting, 1991). Culture

can be thought of as an overriding concept (eg. western cultures and indigenous cultures)

that directs the sociocultural specificity of group environments each with its own beliefs

and rituals that are used to determine behavioural norms.

Michael Porter provided a framework that models an industry as being influenced

by five forces. The strategic business manager seeking to develop an edge over rival firms

can use this model to better understand the industry context in which the firm operates.When

a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies.The

intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or

weak,based on the firms’ aggressiveness in attempting to gain an advantage

Learning Objectives


• Analyze the external environment influencing the industry as well as strategy

• Understand the porter’s five forces model and its uses in strategic management

• Know the competitive changes and the stages of industrial analysis

• Predict the changes in the industry structure due to the globalization

• Analyze the importance of capabilities and competencies in gaining competitive

advantage

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• Implement the porter’s model on Gaining Competitive Advantage

• Planning for the sustainability of competitiveness.

2.1 EXTERNAL ENVIRONMENT

The external environment is all the conditions surrounding a person, and has been

classified in various ways. Any organization before they begin the work of strategy

formulations, it must scan the external environment to identify possible opportunities and

threats and its internal environment for strengths and weaknesses. Environmental scanning

is the monitoring , evaluating, and disseminating of information from the external and internal

environment to key people within the corporation.

The major four environmental dimensions are as follows

1. Economical factors

2. Technological factors

3. Political factors

4. Socio-cultural factors

Let us see each of the factors some influencing variables:

A Economical factors :

• GDP trends

• Interest rates

• Money supply

• Inflation rates

• Unemployment levels

• Wage/price controls

• Devaluation/revaluation

• Energy availability and cost

• Disposable and discretionary income


NOTES


B Technological factors:

• Government spending for R&D

• Technological efforts

• Patent protection

• New products

• Technology transfer

• Automation

• Internet availability

• Infrastructure

C Political and Legal factors:

• Antitrust regulations

• Environment protection laws

• Tax laws

• Special incentives

• Foreign trade regulations

• Attitude towards foreign companies

• Laws on hiring and promotion

• Stability of the government

D Socio-Cultural factors

• Life style changes

• Career expectations

• Consumer Activism

• Rate of family formation

• Growth rate of population

• Age distribution of population

• Regional shifts in population

• Life expectancies

• Birth rates

The interaction of these four environmental dimensions creates further sub-

dimensions such as political and economic environments that act as a filter between the

internal and external environment and profoundly affect the performance of the corporation.

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Although aspects of this environment are defined separately, the environmental

impact that is brought to bear on occupational performance is an integration of sensory,

physical, social and cultural dimensions V (Llorens, 1984b, Spencer, 1987).

Physical aspects of the environment refer to the natural and constructed surroundings

that form physical boundaries. This physical environment contributes to shaping occupational

performance by influencing the extent to which self maintenance; productivity; leisure and

rest occupations can be performed.

Culture here refers to transmitted patterns of behaviour shared by members of a

group which provide them with effective mechanisms for interaction (Krefting & Krefting,

1991). Culture can be thought of as an overriding concept (eg. western cultures and

indigenous cultures) that directs the sociocultural specificity of group environments each

with its own beliefs and rituals that are used to determine behavioural norms.

2.2 MICHAEL PORTER FIVE FORCES MODEL

A model for industry analysis

The model of pure competition implies that risk-adjusted rates of return should be

constant across firms and industries. However, numerous economic studies have affirmed

that different industries can sustain different levels of profitability; part of this difference is

explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced

by five forces. The strategic business manager seeking to develop an edge over rival firms

can use this model to better understand the industry context in which the firm operates.


NOTES


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I. Rivalry

In the traditional economic model, competition among rival firms drives profits to

zero. But competition is not perfect and firms are not unsophisticated passive price takers.

Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry

among firms varies across industries, and strategic analysts are interested in these differences.

Economists measure rivalry by indicators of industry concentration. The

Concentration Ratio (CR) is one such measure. The Bureau of Census periodically reports

the CR for major Standard Industrial Classifications (SIC’s). The CR indicates the percent

of market share held by the four largest firms (CR’s for the largest 8, 25, and 50 firms in an

industry also are available). A high concentration ratio indicates that a high concentration of

market share is held by the largest firms - the industry is concentrated. With only a few

firms holding a large market share, the competitive landscape is less competitive (closer to

a monopoly). A low concentration ratio indicates that the industry is characterized by many

rivals, none of which has a significant market share. These fragmented markets are said

to be competitive. The concentration ratio is not the only available measure; the trend is to

define industries in terms that convey more information than distribution of market share.

If rivalry among firms in an industry is low, the industry is considered to be

disciplined. This discipline may result from the industry’s history of competition, the role of

a leading firm, or informal compliance with a generally understood code of conduct. Explicit

collusion generally is illegal and not an option; in low-rivalry industries competitive moves

must be constrained informally. However, a maverick firm seeking a competitive advantage

can displace the otherwise disciplined market.

When a rival acts in a way that elicits a counter-response by other firms, rivalry

intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense,

moderate, or weak, based on the firms’ aggressiveness in attempting to gain an advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitive

moves:

• Changing prices - raising or lowering prices to gain a temporary advantage.

• Improving product differentiation - improving features, implementing innovations

in the manufacturing process and in the product itself.


NOTES


• Creatively using channels of distribution - using vertical integration or using a

distribution channel that is novel to the industry. For example, with high-end jewelry

stores reluctant to carry its watches, Timex moved into drugstores and other non-

traditional outlets and cornered the low to mid-price watch market.

• Exploiting relationships with suppliers - for example, from the 1950’s to the

1970’s Sears, Roebuck and Co. dominated the retail household appliance market.

Sears set high quality standards and required suppliers to meet its demands for

product specifications and price.

• The intensity of rivalry is influenced by the following industry characteristics:

• A larger number of firms increases rivalry because more firms must compete for

the same customers and resources. The rivalry intensifies if the firms have similar

market share, leading to a struggle for market leadership.

• Slow market growth causes firms to fight for market share. In a growing market,

firms are able to improve revenues simply because of the expanding market.

• High fixed costs result in an economy of scale effect that increases rivalry. When

total costs are mostly fixed costs, the firm must produce near capacity to attain the

lowest unit costs. Since the firm must sell this large quantity of product, high levels

of production lead to a fight for market share and results in increased rivalry.

• High storage costs or highly perishable products cause a producer to sell

goods as soon as possible. If other producers are attempting to unload at the same

time, competition for customers intensifies.

• Low switching costs increases rivalry. When a customer can freely switch from

one product to another there is a greater struggle to capture customers.

• Low levels of product differentiation is associated with higher levels of rivalry.

Brand identification, on the other hand, tends to constrain rivalry.

• Strategic stakes are high when a firm is losing market position or has potential

for great gains. This intensifies rivalry.

• High exit barriers place a high cost on abandoning the product. The firm must

compete. High exit barriers cause a firm to remain in an industry, even when the

venture is not profitable. A common exit barrier is asset specificity. When the plant

and equipment required for manufacturing a product is highly specialized, these

assets cannot easily be sold to other buyers in another industry. Litton Industries’

acquisition of Ingalls Shipbuilding facilities illustrates this concept. Litton was

successful in the 1960’s with its contracts to build Navy ships. But when the Vietnam

war ended, defense spending declined and Litton saw a sudden decline in its

earnings. As the firm restructured, divesting from the shipbuilding plant was not

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feasible since such a large and highly specialized investment could not be sold

easily, and Litton was forced to stay in a declining shipbuilding market.

• A diversity of rivals with different cultures, histories, and philosophies make an

industry unstable. There is greater possibility for mavericks and for misjudging

rival’s moves. Rivalry is volatile and can be intense. The hospital industry, for

example, is populated by hospitals that historically are community or charitable

institutions, by hospitals that are associated with religious organizations or universities,

and by hospitals that are for-profit enterprises. This mix of philosophies about

mission has lead occasionally to fierce local struggles by hospitals over who will

get expensive diagnostic and therapeutic services. At other times, local hospitals

are highly cooperative with one another on issues such as community disaster

planning.

Industry Shakeout. A growing market and the potential for high profits induces

new firms to enter a market and incumbent firms to increase production. A point is reached

where the industry becomes crowded with competitors, and demand cannot support the

new entrants and the resulting increased supply. The industry may become crowded if its

growth rate slows and the market becomes saturated, creating a situation of excess capacity

with too many goods chasing too few buyers. A shakeout ensues, with intense competition.

BCG founder Bruce Henderson generalized this observation as the Rule of Three

and Four: a stable market will not have more than three significant competitors, and the

largest competitor will have no more than four times the market share of the smallest. If this

rule is true, it implies that:

• If there is a larger number of competitors, a shakeout is inevitable

• Surviving rivals will have to grow faster than the market

• Eventual losers will have a negative cash flow if they attempt to grow

• All except the two largest rivals will be losers

The definition of what constitutes the “market” is strategically important.

Whatever the merits of this rule for stable markets, it is clear that market stability

and changes in supply and demand affect rivalry. Cyclical demand tends to create cutthroat

competition. This is true in the disposable diaper industry in which demand fluctuates with


NOTES


birth rates, and in the greeting card industry in which there are more predictable business

cycles.

II. Threat of Substitutes

In Porter’s model, substitute products refer to products in other industries. To the

economist, a threat of substitutes exists when a product’s demand is affected by the price

change of a substitute product. A product’s price elasticity is affected by substitute products

- as more substitutes become available, the demand becomes more elastic since customers

have more alternatives. A close substitute product constrains the ability of firms in an industry

to raise prices.

The competition engendered by a Threat of Substitute comes from products outside

the industry. The price of aluminum beverage cans is constrained by the price of glass

bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not

rivals in the aluminum can industry. To the manufacturer of automobile tires, tire retreads

are a substitute. Today, new tires are not so expensive that car owners give much

consideration to retreating old tires. But in the trucking industry new tires are expensive

and tires must be replaced often. In the truck tire market, retreating remains a viable

substitute industry. In the disposable diaper industry, cloth diapers are a substitute and

their prices constrain the price of disposables.

While the treat of substitutes typically impacts an industry through price competition,

there can be other concerns in assessing the threat of substitutes. Consider the substitutability

of different types of TV transmission: local station transmission to home TV antennas via

the airways versus transmission via cable, satellite, and telephone lines. The new technologies

available and the changing structure of the entertainment media are contributing to competition

among these substitute means of connecting the home to entertainment. Except in remote

areas it is unlikely that cable TV could compete with free TV from an aerial without the

greater diversity of entertainment that it affords the customer.

III. Buyer Power

The power of buyers is the impact that customers have on a producing industry. In

general, when buyer power is strong, the relationship to the producing industry is near to

what an economist terms a monopsony - a market in which there are many suppliers and

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one buyer. Under such market conditions, the buyer sets the price. In reality few pure

monopsonies exist, but frequently there is some asymmetry between a producing industry

and buyers. The following tables outline some factors that determine buyer power.

IV. Supplier Power

A producing industry requires raw materials - labor, components, and other supplies.

This requirement leads to buyer-supplier relationships between the industry and the firms

that provide it the raw materials used to create products. Suppliers, if powerful, can exert

an influence on the producing industry, such as selling raw materials at a high price to

capture some of the industry’s profits. The following tables outline some factors that determine

supplier power.


NOTES


V. Barriers to Entry / Threat of Entry

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility

that new firms may enter the industry also affects competition. In theory, any firm should be

able to enter and exit a market, and if free entry and exit exists, then profits always should

be nominal. In reality, however, industries possess characteristics that protect the high

profit levels of firms in the market and inhibit additional rivals from entering the market.

These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that markets

typically make. For example, when industry profits increase, we would expect additional

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firms to enter the market to take advantage of the high profit levels, over time driving down

profits for all firms in the industry. When profits decrease, we would expect some firms to

exit the market thus restoring a market equilibrium. Falling prices, or the expectation that

future prices will fall, deters rivals from entering a market. Firms also may be reluctant to

enter markets that are extremely uncertain, especially if entering involves expensive start-

up costs. These are normal accommodations to market conditions. But if firms individually

(collective action would be illegal collusion) keep prices artificially low as a strategy to

prevent potential entrants from entering the market, such entry-deterring pricing

establishes a barrier.

Barriers to entry are unique industry characteristics that define the industry. Barriers

reduce the rate of entry of new firms, thus maintaining a level of profits for those already in

the industry. From a strategic perspective, barriers can be created or exploited to enhance

a firm’s competitive advantage. Barriers to entry arise from several sources:

Government creates barriers. Although the principal role of the government in

a market is to preserve competition through anti-trust actions, government also restricts

competition through the granting of monopolies and through regulation. Industries such as

utilities are considered natural monopolies because it has been more efficient to have one

electric company provide power to a locality than to permit many electric companies to

compete in a local market. To restrain utilities from exploiting this advantage, government

permits a monopoly, but regulates the industry. Illustrative of this kind of barrier to entry is

the local cable company. The franchise to a cable provider may be granted by competitive

bidding, but once the franchise is awarded by a community a monopoly is created. Local

governments were not effective in monitoring price gouging by cable operators, so the

federal government has enacted legislation to review and restrict prices.

The regulatory authority of the government in restricting competition is historically

evident in the banking industry. Until the 1970’s, the markets that banks could enter were

limited by state governments. As a result, most banks were local commercial and retail

banking facilities. Banks competed through strategies that emphasized simple marketing

devices such as awarding toasters to new customers for opening a checking account.

When banks were deregulated, banks were permitted to cross state boundaries and expand

their markets. Deregulation of banks intensified rivalry and created uncertainty for banks

as they attempted to maintain market share. In the late 1970’s, the strategy of banks


NOTES


shifted from simple marketing tactics to mergers and geographic expansion as rivals

attempted to expand markets.

Patents and proprietary knowledge serve to restrict entry into an industry.

Ideas and knowledge that provide competitive advantages are treated as private property

when patented, preventing others from using the knowledge and thus creating a barrier to

entry. Edwin Land introduced the Polaroid camera in 1947 and held a monopoly in the

instant photography industry. In 1975, Kodak attempted to enter the instant camera market

and sold a comparable camera. Polaroid sued for patent infringement and won, keeping

Kodak out of the instant camera industry.

Asset specificity inhibits entry into an industry. Asset specificity is the extent

to which the firm’s assets can be utilized to produce a different product. When an industry

requires highly specialized technology or plants and equipment, potential entrants are reluctant

to commit to acquiring specialized assets that cannot be sold or converted into other uses

if the venture fails. Asset specificity provides a barrier to entry for two reasons: First, when

firms already hold specialized assets they fiercely resist efforts by others from taking their

market share. New entrants can anticipate aggressive rivalry. For example, Kodak had

much capital invested in its photographic equipment business and aggressively resisted

efforts by Fuji to intrude in its market. These assets are both large and industry specific.

The second reason is that potential entrants are reluctant to make investments in highly

specialized assets.

Organizational (Internal) Economies of Scale. The most cost efficient level of

production is termed Minimum Efficient Scale (MES). This is the point at which unit

costs for production are at minimum - i.e., the most cost efficient level of production. If

MES for firms in an industry is known, then we can determine the amount of market share

necessary for low cost entry or cost parity with rivals. For example, in long distance

communications roughly 10% of the market is necessary for MES. If sales for a long

distance operator fail to reach 10% of the market, the firm is not competitive.

The existence of such an economy of scale creates a barrier to entry. The greater

the difference between industry MES and entry unit costs, the greater the barrier to entry.

So industries with high MES deter entry of small, start-up businesses. To operate at less

than MES there must be a consideration that permits the firm to sell at a premium price -

such as product differentiation or local monopoly.

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NOTES


Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a

firm to leave the market and can exacerbate rivalry - unable to leave the industry, a firm

must compete. Some of an industry’s entry and exit barriers can be summarized as follows:

Easy to Enter if there is: Common technologyLittle brand franchiseAccess to distribution

channelsLow scale threshold

Difficult to Enter if there is: Patented or proprietary know-howDifficulty in brand

switchingRestricted distribution channelsHigh scale threshold

Easy to Exit if there are: Salable assetsLow exit costsIndependent businesses

Difficult to Exit if there are: Specialized assetsHigh exit costsInterrelated businesses

2.3 DYNAMIC NATURE OF INDUSTRY RIVALRY

Our descriptive and analytic models of industry tend to examine the industry at a

given state. The nature and fascination of business is that it is not static. While we are prone

to generalize, for example, list GM, Ford, and Chrysler as the “Big 3” and assume their

dominance, we also have seen the automobile industry change. Currently, the entertainment

and communications industries are in flux. Phone companies, computer firms, and

entertainment are merging and forming strategic alliances that re-map the information terrain.

Schumpeter and, more recently, The existence of such an economy of scale creates a

barrier to entry. The greater the difference between industry MES and entry unit costs, the

greater the barrier to entry. So industries with high MES deter entry of small, start-up

businesses. To operate at less than MES there must be a consideration that permits the

firm to sell at a premium price - such as product differentiation or local monopoly.

In Schumpeter’s and Porter’s view the dynamism of markets is driven by innovation.

We can envision these forces at work as we examine the following changes:

2.3.1 A Combination Of Generic Strategies —Stuck in the Middle?

These generic strategies are not necessarily compatible with one another. If a firm

attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage

at all. For example, if a firm differentiates itself by supplying very high quality products, it

risks undermining that quality if it seeks to become a cost leader. Even if the quality did not

suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter

argued that to be successful over the long-term, a firm must select only one of these three

generic strategies. Otherwise, with more than one single generic strategy the firm will be

“stuck in the middle” and will not achieve a competitive advantage.


NOTES


Porter argued that firms that are able to succeed at multiple strategies often do so

by creating separate business units for each strategy. By separating the strategies into

different units having different policies and even different cultures, a corporation is less

likely to become “stuck in the middle.”

However, there exists a viewpoint that a single generic strategy is not always best

because within the same product customers often seek multi-dimensional satisfactions such

as a combination of quality, style, convenience, and price. There have been cases in which

high quality producers faithfully followed a single strategy and then suffered greatly when

another firm entered the market with a lower-quality product that better met the overall

needs of the customers.

2.3.2.1 Generic Strategies And Industry Forces

These generic strategies each have attributes that can serve to defend against

competitive forces. The following table compares some characteristics of the generic

strategies in the context of the Porter’s five forces.

Figure 2.3.1: Generic Strategies And Industry Forces

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2.3.2.2 Significance of strategic group

A strategic group is a concept used in strategic management that groups

companies within an industry that have similar business models or similar combinations of

strategies. For example, the fast-food industry can be portrayed as consisting of several

strategic groups. The number of groups within an industry and their composition depends

on what dimensions you use to define the groups. Strategists often use a two dimensional

grid to display the position of each company along to the two most important dimensions.

Strategy is the Direction and scope of an organization over the long term which achieves

advantages for the organization.

The term was coined by Hunt (1972) in his analysis of the appliance industry

where he discovered less competitive rivalry than industry concentration ratios suggest

there should be. He attributed this to the existence of subgroups within the industry that

effectively reduce the number of competitors in each market.

Michael Porter (1980) developed the concept and applied it within his overall

system of strategic analysis. He explained strategic groups in terms of what he called

“mobility barriers”. These are similar to the entry barriers that exist in industries, except

they apply to groups within an industry. Because of these mobility barriers a company can

get drawn into one strategic group or another. Strategic groups are not to be confused with

Porter’ generic strategies which are internal strategies and do not reflect the diversity of

strategic styles within an industry.

Originally, the analysis of intra-industry variations in the competitive behaviour and

performance of firms was based primarily on the use of secondary financial and accounting

data. The study of strategic groups from a cognitive perspective, however, has gained

prominence during the past years (Hodgkinson 1997).

Strategic Group Analysis

Strategic Group Analysis (SGA) aims to identify organizations with similar strategic

characteristics, following similar strategies or competing on similar bases.

Such groups can usually be identified using two or perhaps three sets of

characteristics as the bases of competition.


NOTES


Examples of Characteristics

• Extent of product (or service) diversity

• Extent of Geographic coverage

• Number of Market segments served

• Distribution Channels used

• Extent of Branding

• Marketing Effort

• Product (or service) quality

• Pricing policy

Use of Strategic Group Analysis : This analysis is useful in several ways:

• Helps identify who the most direct competitors are and on what basis they compete.

• Raises the question of how likely or possible it is for another organization to move

from one strategic group to another.

• Strategic Group mapping might also be used to identify opportunities.

• Can also help identify strategic problems.

2.4 GLOBALIZATION AND INDUSTRY STRUCTURE

The word globalization often appears as a description rather than an analytical

concept, describing a certain phenomenon in an extremely wide range of fields. Thus, a

large list of concepts of globalization includes the globalization of financial markets, corporate

strategies, technology, consumption patterns, regulatory capabilities and governance, world

politics, and socio-cultural processes. It is easy to perceive the increase in the flow of

trade, especially intra-firm transactions by multinational corporations, and the even faster

growth of global capital markets that are obvious signs of globalization. The globalization

of production is the most visible evidence that can be detected from the growth of

manufacturing FDI, and even more significant is the expansion of the international capital

market.

The sheer scope of the globalization debate, however, raises the question about

the plausibility of a ‘universal’ understanding of globalization across political, economic

and social arenas. Under such circumstances, accumulating stories of globalization in various

fields would contribute to a more comprehensive picture of globalization. When focusing

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on global economy, globalization has two components: finance and production. Globalization

of these factors appears in the form of the increased international mobility of capital and

the growing incidence of mergers and acquisitions and strategic alliances. And for both

finance and production, markets have facilitated the globalization process, while markets

themselves also became globalized.

The level of globalization in those various aspects, however, differs significantly

depending on industrial sectors; Strange (1997) emphasized that globalization is not a

universal phenomenon, but it differs depending on sectors and firms rather than on states.

Among various industries, only a few are practicing ‘globalism’ in all aspects of sales,

production, personnel, research and development, and financing. Individual firms often

seek for localization of their activities along with their ‘global strategies’. Only a handful of

multinational corporations specifically target the global market instead of focusing on several

local markets, and operate their production globally rather than having local production

independent and separate from production in other areas. In this sense, globalization has

not permeated as thoroughly as the popularity of the word suggest

Despite the unevenness of the development, globalization has brought changes in

commitment-rules that have caused systemic transition, though not yet complete, of cross-

border economic transactions. Globalization was preceded by internationalization, which

differs from globalization in that the nation-state system itself was not in question at the

time. Internationalization is still based on ‘a comparatively stable system of sovereign states,

each with an internal hierarchy of more or less subservient local governments’, whereas

globalization is based on a system ‘characterized by emerging and still primitive governance

structures...’ The current trend aggrandizes a situation that is better described as globalization,

‘in which national economies are evolving from a condition in which they are less like

billiard balls in holistic interaction than they are permeable entities in various states of

amalgamation with one another.’ Therefore, ‘The term globalization suggests a quantum

leap beyond previous internationalization stage.’

Globalization in relation to India has been a two way process. Global forces have

had a considerable impact on India at all levels of its life. They are penetrating its economy

and reshaping its structure and mode of operation. They are forcing India to redefine its

place in the world and its relation to its neighbors and the west. India’s educational and

cultural life, TV and print media, and its perception of itself and the world are also undergoing

profound changes. Not surprisingly, India today is quite different from what it was barely

ten years ago, and it is not easy to predict how it will progress during the next few years.


NOTES


India has not been a passive recipient of global impact. Both directly and through

its diasporas, it has increasingly become a significant global presence. India’s literature,

arts, films, religions, food, textiles, fashions and music are now an integral part of life in the

west. Its doctors, IT specialists, computer scientists, small and large industrialists, managers

and engineers are present in the west in large numbers and have made a very considerable

impact. Indeed, they are admired for their skills and hard work and are much sought after.

Consider Globalization and Indian industry. In the seventies, India was just emerging

from the first stage. After 30 years from then, it has crossed second stage and going into

the third one. Year 2003 was pivotal as it saw manifestation of India’s global aspiration.

The number as well as size of the foreign targets showed steep rise. Close to 50 overseas

acquisitions, amounting $1.8 billion took place last year, which was only $0.21 billion in

2002. The increase in average deal size is from $7.5 million in 2002 to $36.5 million in

2003. India has adopted domestic policies and institutions that have enabled people to

take advantage of global markets and have thus sharply increased the share of trade in

their GDP. India has been catching up with the rich ones – our annual growth rates increased

from 1 percent in the 1960s to 5 percent in the 1990s. Now it is above 8%. Indians saw

their wages rise, and the number of people in poverty declined.

Industry wise, the software and services sector lead the mergers and acquisitions

charge overseas but now this list includes both old and new economy industries like auto

ancillaries, pharmaceuticals, telecom, agro-chemicals and steel. There are thus no

stereotypes that only new economy companies are invited to the mergers and acquisitions

ball or that only the blue chip companies are partaking of the action. It is more democratic

as smaller auto ancillary companies are also in the fray.

Globalization has changed the face of business all over the world. Those countries

who opened their doors for liberalization and globalization have recorded a tremendous

economic growth. India is one among those countries who enjoyed these benefits. Though

India opened its door very lately to these, currently she is in a better position. Globalization

has never been a remote experience. It affected industries directly and common man both

directly or indirectly. There is lot of industries or sectors, in India, which showed a tremendous

growth after the liberalization and globalization struck India. Like wise MNCs over the

world showed an exceptional growth as the globalization spread. In days to come it’s sure

that the face and nature of business will change dramatically and globalization will have a

key role to play. Here we have made an attempt to study the Impact of Globalization on

MNCs and we have succeeded in a better way.

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2.5 PORTER’S GENERIC STRATEGIES

If the primary determinant of a firm’s profitability is the attractiveness of the industry

in which it operates, an important secondary determinant is its position within that industry.

Even though an industry may have below-average profitability, a firm that is optimally

positioned can generate superior returns.

A firm positions itself by leveraging its strengths. Michael Porter has argued that a

firm’s strengths ultimately fall into one of two headings: cost advantage and differentiation.

By applying these strengths in either a broad or narrow scope, three generic strategies

result: cost leadership, differentiation, and focus. These strategies are applied at the

business unit level. They are called generic strategies because they are not firm or industry

dependent. The following table illustrates Porter’s generic strategies:

Figure 2.6.1 Porter’s Generic Strategies


NOTES


Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a

given level of quality. The firm sells its products either at average industry prices to earn a

profit higher than that of rivals, or below the average industry prices to gain market share.

In the event of a price war, the firm can maintain some profitability while the competition

suffers losses. Even without a price war, as the industry matures and prices decline, the

firms that can produce more cheaply will remain profitable for a longer period of time. The

cost leadership strategy usually targets a broad market.

Some of the ways that firms acquire cost advantages are by improving process

efficiencies, gaining unique access to a large source of lower cost materials, making optimal

outsourcing and vertical integration decisions, or avoiding some costs altogether. If

competing firms are unable to lower their costs by a similar amount, the firm may be able

to sustain a competitive advantage based on cost leadership.

Firms that succeed in cost leadership often have the following internal strengths:

• Access to the capital required making a significant investment in production assets;

this investment represents a barrier to entry that many firms may not overcome.

• Skill in designing products for efficient manufacturing, for example, is having a

small component count to shorten the assembly process.

• High level of expertise in manufacturing process engineering.

• Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example,

other firms may be able to lower their costs as well. As technology improves, the competition

may be able to leapfrog the production capabilities, thus eliminating the competitive

advantage. Additionally, several firms following a focus strategy and targeting various narrow

markets may be able to achieve an even lower cost within their segments and as a group

gain significant market share.

Differentiation Strategy

A differentiation strategy calls for the development of a product or service that

offers unique attributes that are valued by customers and that customers perceive to be

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better than or different from the products of the competition. The value added by the

uniqueness of the product may allow the firm to charge a premium price for it. The firm

hopes that the higher price will more than cover the extra costs incurred in offering the

unique product. Because of the product’s unique attributes, if suppliers increase their prices

the firm may be able to pass along the costs to its customers who cannot find substitute

products easily.

Firms that succeed in a differentiation strategy often have the following internal strengths:

• Access to leading scientific research.

• Highly skilled and creative product development team.

• Strong sales team with the ability to successfully communicate the perceived

strengths of the product.

• Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors

and changes in customer tastes. Additionally, various firms pursuing focus strategies may

be able to achieve even greater differentiation in their market segments

Focus Strategy

The focus strategy concentrates on a narrow segment and within that segment

attempts to achieve either a cost advantage or differentiation. The premise is that the needs

of the group can be better serviced by focusing entirely on it. A firm using a focus strategy

often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages

other firms from competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have lower

volumes and therefore less bargaining power with their suppliers. However, firms pursuing

a differentiation-focused strategy may be able to pass higher costs on to customers since

close substitute products do not exist.

Firms that succeed in a focus strategy are able to tailor a broad range of product

development strengths to a relatively narrow market segment that they know very well.


NOTES


Some risks of focus strategies include imitation and changes in the target segments.

Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in

order to compete directly. Finally, other focusers may be able to carve out sub-segments

that they can serve even better.

Generic Competitive Strategies

Three of the most widely read books on competitive analysis in the 1980s were

Michael Porter’s Competitive Strategy, Competitive Advantage, and Competitive

Advantage of Nations. In his various books, Porter developed three generic strategies

that, he argues, can be used singly or in combination to create a defendable position and to

outperform competitors, whether they are within an industry or across nations. Porter

states that the strategies are generic because they are applicable to a large variety of

situations and contexts. The strategies are (1) overall cost leadership; (2) differentiation;

and (3) focus on a particular market niche. The generic strategies provide direction for

firms in designing incentive systems, control procedures, and organizational arrangements.

Following is a description of this work.

Overall Cost Leadership Strategy

Overall cost leadership requires firms to develop policies aimed at becoming and

remaining the lowest-cost producer and/or distributor in the industry. Company strategies

aimed at controlling costs include construction of efficient-scale facilities, tight control of

costs and overhead, avoidance of marginal customer accounts, minimization of operating

expenses, reduction of input costs, tight control of labor costs, and lower distribution

costs. The low-cost leader gains competitive advantage by getting its costs of production

or distribution lower than those of the other firms in its market. The strategy is especially

important for firms selling unbranded commodities such as beef or steel.

Figure- Competitive Advantage through Low Cost Leadership

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The above Figure shows the competitive advantage firms may achieve through

cost leadership. C is the original cost of production. C is the new cost of production. SP is

the original selling price. SP is the new selling price. P is the original profit margin. P is the

new profit margin.

If we assume our firm and the other competitors are producing the product for a

cost of C and selling it at SP, we are all receiving a profit of P. As cost leader, we are able

to lower our cost to C while the competitors remain at C. We now have two choices as to

how to take advantage of our reduced costs.

Department stores and other high-margin firms often leave their selling price as SP,

the original selling price. This allows the low-cost leader to obtain a higher profit margin

than they received before the reduction in costs. Since the competition was unable to

lower their costs, they are receiving the original, smaller profit margin. The cost leader

gains competitive advantage over the competition by earning more profit for each unit

sold.

Discount stores such as Wal-Mart are more likely to pass the savings from the

lower costs on to customers in the form of lower prices. These discounters retain the

original profit margin, which is the same margin as their competitors. However, they are

able to lower their selling price due to their lower costs (C). They gain competitive advantage

by being able to under-price the competition while maintaining the same profit margin.

Overall cost leadership is not without potential problems. Two or more firms

competing for cost leadership may engage in price wars that drive profits to very low

levels. Ideally, a firm using a cost leader strategy will develop an advantage that is not

easily copied by others. Cost leaders also must maintain their investment in state-of-the-

art equipment or face the possible entry of more cost-effective competitors. Major changes

in technology may drastically change production processes so that previous investments in

production technology are no longer advantageous. Finally, firms may become so concerned

with maintaining low costs that needed changes in production or marketing are overlooked.

The strategy may be more difficult in a dynamic environment because some of the expenses

that firms may seek to minimize are research and development costs or marketing research

costs, yet these are expenses the firm may need to incur in order to remain competitive.


NOTES


Differentiation Strategy

The second generic strategy, differentiating the product or service, requires a firm

to create something about its product or service that is perceived as unique throughout the

industry. Whether the features are real or just in the mind of the customer, customers must

perceive the product as having desirable features not commonly found in competing products.

The customers also must be relatively price-insensitive. Adding product features means

that the production or distribution costs of a differentiated product may be somewhat

higher than the price of a generic, non-differentiated product. Customers must be willing to

pay more than the marginal cost of adding the differentiating feature if a differentiation

strategy is to succeed.

Differentiation may be attained through many features that make the product or

service appear unique. Possible strategies for achieving differentiation may include:

• warranties (e.g., Sears tools)

• brand image (e.g., Coach handbags, Tommy Hilfiger sportswear)

• technology (e.g., Hewlett-Packard laser printers)

• features (e.g., Jenn-Air ranges, Whirlpool appliances)

• service (e.g., Makita hand tools)

• quality/value (e.g., Walt Disney Company)

• dealer network (e.g., Caterpillar construction equipment)

Differentiation does not allow a firm to ignore costs; it makes a firm’s products less

susceptible to cost pressures from competitors because customers see the product as

unique and are willing to pay extra to have the product with the desirable features.

Differentiation can be achieved through real product features or through advertising that

causes the customer to perceive that the product is unique.

Differentiation may lead to customer brand loyalty and result in reduced price

elasticity. Differentiation may also lead to higher profit margins and reduce the need to be

a low-cost producer. Since customers see the product as different from competing products

and they like the product features, customers are willing to pay a premium for these features.

As long as the firm can increase the selling price by more than the marginal cost of adding

the features, the profit margin is increased. Firms must be able to charge more for their

differentiated product than it costs them to make it distinct, or else they may be better off

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making generic, undifferentiated products. Firms must remain sensitive to cost differences.

They must carefully monitor the incremental costs of differentiating their product and make

certain the difference is reflected in the price.

Firms pursuing a differentiation strategy are vulnerable to different competitive

threats than firms pursuing a cost leader strategy. Customers may sacrifice features, service,

or image for cost savings. Customers who are price sensitive may be willing to forgo

desirable features in favor of a less costly alternative. This can be seen in the growth in

popularity of store brands and private labels. Often, the same firms that produce name-

brand products produce the private label products. The two products may be physically

identical, but stores are able to sell the private label products for a lower price because

very little money was put into advertising in an effort to differentiate the private label product.

Imitation may also reduce the perceived differences between products when

competitors copy product features. Thus, for firms to be able to recover the cost of marketing

research or R&D, they may need to add a product feature that is not easily copied by a

competitor.

A final risk for firms pursuing a differentiation strategy is changing consumer tastes.

The feature that customers like and find attractive about a product this year may not make

the product popular next year. Changes in customer tastes are especially obvious in the

apparel industry. Polo Ralph Lauren has been a very successful brand in the fashion industry.

However, some younger consumers have shifted to Tommy Hilfiger and other youth-oriented

brands.

Ralph Lauren, founder and CEO, has been the guiding light behind his company’s

success. Part of the firm’s success has been the public’s association of Lauren with the

brand. Ralph Lauren leads a high-profile lifestyle of preppy elegance. His appearance in

his own commercials, his Manhattan duplex, his Colorado ranch, his vintage car collection,

and private jet have all contributed to the public’s fascination with the man and his brand

name. This image has allowed the firm to market everything from suits and ties to golf balls.

Through licensing of the name, the Lauren name also appears on sofas, soccer balls, towels,

table-ware, and much more.


NOTES


Combination Strategies

Can forms of competitive advantage be combined? Porter asserts that a successful

strategy requires a firm to aggressively stake out a market position, and that different

strategies involve distinctly different approaches to competing and operating the business.

An organization pursuing a differentiation strategy seeks competitive advantage by offering

products or services that are unique from those offered by rivals, either through design,

brand image, technology, features, or customer service. Alternatively, an organization

pursuing a cost leadership strategy attempts to gain competitive advantage based on being

the overall low-cost provider of a product or service. To be “all things to all people” can

mean becoming “stuck in the middle” with no distinct competitive advantage. The difference

between being “stuck in the middle” and successfully pursuing combination strategies merits

discussion. Although Porter describes the dangers of not being successful in either cost

control or differentiation, some firms have been able to succeed using combination strategies.

Research suggests that, in some cases, it is possible to be a cost leader while

maintaining a differentiated product. Southwest Airlines has combined cost cutting measures

with differentiation. The company has been able to reduce costs by not assigning seating

and by eliminating meals on its planes. It has then been able to promote in its advertising

that one does not get tasteless airline food on its flights. Its fares have been low enough to

attract a significant number of passengers, allowing the airline to succeed.

Another firm that has pursued an effective combination strategy is Nike. When

customer preferences moved to wide-legged jeans and cargo pants, Nike’s market share

slipped. Competitors such as Adidas offered less expensive shoes and undercut Nike’s

price. Nike’s stock price dropped in 1998 to half its 1997 high. However, Nike reported

a 70 percent increase in earnings for the first quarter of 1999 and saw a significant rebound

in its stock price. Nike achieved the turn-around by cutting costs and developing new,

distinctive products. Nike reduced costs by cutting some of its endorsements. Company

research suggested the endorsement by the Italian soccer team, for example, was not

achieving the desired results. Michael Jordan and a few other “big name” endorsers were

retained while others, such as the Italian soccer team, were eliminated, resulting in savings

estimated at over $100 million. Firing 7 percent of its 22,000 employees allowed the

company to lower costs by another $200 million, and inventory was reduced to save

additional money. While cutting costs, the firm also introduced new products designed to

differentiate Nike’s products from those of the competition.

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Some industry environments may actually call for combination strategies. Trends

suggest that executives operating in highly complex environments such as health care do

not have the luxury of choosing exclusively one strategy over the other. The hospital industry

may represent such an environment, as hospitals must compete on a variety of fronts.

Combination (i.e., more complicated) strategies are both feasible and necessary to compete

successfully. For instance, DRG-based reimbursement (diagnosis related groups) and the

continual lowering of reimbursement ceilings have forced hospitals to compete on the basis

of cost. At the same time, many of them jockey for position with differentiation based on

such features as technology and birthing rooms. Thus, many hospitals may need to adopt

some form of hybrid strategy in order to compete successfully, according to Walters and

Bhuian.

Focus Strategy

The generic strategies of cost leadership and differentiation are oriented toward

industry-wide recognition. The final generic strategy, focusing (also called niche or

segmentation strategy), involves concentrating on a particular customer, product line,

geographical area, channel of distribution, stage in the production process, or market niche.

The underlying premise of the focus strategy is that a firm is better able to serve a limited

segment more efficiently than competitors can serve a broader range of customers. Firms

using a focus strategy simply apply a cost leader or differentiation strategy to a segment of

the larger market. Firms may thus be able to differentiate themselves based on meeting

customer needs, or they may be able to achieve lower costs within limited markets. Focus

strategies are most effective when customers have distinctive preferences or specialized

needs.

A focus strategy is often appropriate for small, aggressive businesses that do not

have the ability or resources to engage in a nationwide marketing effort. Such a strategy

may also be appropriate if the target market is too small to support a large-scale operation.

Many firms start small and expand into a national organization. For instance, Wal-Mart

started in small towns in the South and Midwest. As the firm gained in market knowledge

and acceptance, it expanded through-out the South, then nationally, and now internationally.

Wal-Mart started with a focused cost leader strategy in its limited market, and later was

able to expand beyond its initial market segment.


NOTES


A firm following the focus strategy concentrates on meeting the specialized needs

of its customers. Products and services can be designed to meet the needs of buyers. One

approach to focusing is to service either industrial buyers or consumers, but not both.

Martin-Brower, the third-largest food distributor in the United States, serves only the eight

leading fast-food chains. With its limited customer list, Martin-Brower need only stock a

limited product line; its ordering procedures are adjusted to match those of its customers;

and its warehouses are located so as to be convenient to customers.

Firms utilizing a focus strategy may also be better able to tailor advertising and

promotional efforts to a particular market niche. Many automobile dealers advertise that

they are the largest volume dealer for a specific geographic area. Other car dealers advertise

that they have the highest customer satisfaction scores within their defined market or the

most awards for their service department.

Firms may be able to design products specifically for a customer. Customization

may range from individually designing a product for a customer to allowing customer input

into the finished product. Tailor-made clothing and custom-built houses include the customer

in all aspects of production, from product design to final acceptance. Key decisions are

made with customer input. However, providing such individualized attention to customers

may not be feasible for firms with an industry-wide orientation.

Other forms of customization simply allow the customer to select from a menu of

predetermined options. Burger King advertises that its burgers are made “your way,”

meaning that the customer gets to select from the predetermined options of pickles, lettuce,

and so on. Similarly, customers are allowed to design their own automobiles within the

constraints of predetermined colors, engine sizes, interior options, and so forth.

Potential difficulties associated with a focus strategy include a narrowing of

differences between the limited market and the entire industry. National firms routinely

monitor the strategies of competing firms in their various submarkets. They may then copy

the strategies that appear particularly successful. The national firm, in effect, allows the

focused firm to develop the concept, then the national firm may emulate the strategy of the

smaller firm or acquire it as a means of gaining access to its technology or processes.

Emulation increases the ability of other firms to enter the market niche while reducing the

cost advantages of serving the narrower market.

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Market size is always a problem for firms pursing a focus strategy. The targeted

market segment must be large enough to provide an acceptable return so that the business

can survive. For instance, ethnic restaurants are often unsuccessful in small U.S. towns,

since the population base that enjoys Japanese or Greek cuisine is too small to allow the

restaurant operator to make a profit. Likewise, the demand for an expensive, upscale

restaurant is usually not sufficient in a small town to make its operation economically feasible.

Another potential danger for firms pursuing a focus strategy is that competitors

may find submarkets within the target market. In the past, United Parcel Service (UPS)

solely dominated the package delivery segment of the delivery business. Newer competitors

such as Federal Express and Roadway Package Service (RPS) have entered the package

delivery business and have taken customers away from UPS. RPS contracts with

independent drivers in a territory to pick up and deliver packages, while UPS pays unionized

wages and benefits to its drivers. RPS started operations in 1985 with 36 package terminals.

By 1999 it was a $1 billion company with 339 facilities.

2.6 CAPABILITIES AND COMPETENCIES

Definition of capability

Capability represents the identity of your firm as perceived by both your employees

and your customers. It is your ability to perform better than competitors using a distinctive

and difficult to replicate set of business attributes. Capability is a capacity for a set of

resources to integrative performs a stretch task.

2.6.1 Capabilities – The Basis Of Your Competitive Advantage

Through continued use, capabilities become stronger and more difficult for

competitors to understand and imitate. As a source of competitive advantage, a capability

“should be neither so simple that it is highly imitable, nor so complex that it defies internal

steering and control.”4 Capabilities grow through use, and how fast they grow is critical to

your success.

According to the new resource based view of the company, sustainable competitive

advantage is achieved by continuously developing existing and creating new resources and

capabilities in response to rapidly changing market conditions. Among these resources and

capabilities, in the new economy, knowledge represents the most important value-creating

asset.


NOTES


Distinctive and Reproducible Capabilities

The opportunity for your company to sustain your competitive advantage is

determined by your capabilities of two kinds – distinctive capabilities and reproducible

capabilities - and their unique combination you create to achieve synergy. Your distinctive

capabilities – the characteristics of your company which cannot be replicated by competitors,

or can only be replicated with great difficulty - are the basis of your sustainable competitive

advantage. Distinctive capabilities can be of many kinds: patents, exclusive licenses, strong

brands, effective leadership, teamwork, or tacit knowledge.

Reproducible capabilities are those that can be bought or created by your

competitors and thus by themselves cannot be a source of competitive advantage. Many

technical, financial and marketing capabilities are of this kind. Your distinctive capabilities

need to be supported by an appropriate set of complementary reproducible capabilities to

enable your company to sell its distinctive capabilities in the market it operates.

2.6.2 Creating a Culture for Innovation

The first step is to understand where the greatest deficiencies lie, and which levers

will deliver the most impact. For many organizations, the most critical levers to assess

initially include structure and metrics, though establishing innovation processes and providing

employees with new skill sets are also critical drivers of culture. The act of visibly sponsoring

(let alone personally driving) specific initiatives focused on creating new organizational

capabilities that promote innovation serves to send a message and establish new symbols

and stories that reinforce a culture of innovation ….more.

Seven Dimensions of Strategic Innovation

The Strategic Innovation framework weaves together seven dimensions to produce

a range of outcomes that drive growth.

Core Technologies and Competencies is the set of internal capabilities

1. Organizational competencies and assets that could potentially be leveraged to deliver

value to customers, including technologies, intellectual property, brand equity

2. Strategic relationships

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3. Strategies of Market Leaders

4. Innovative Organization

5. Growth Culture

6. Winning Leaders

7. Team

2.6.3 Building Capability Through Leadership Attributes

Leaders are responsible for building organizational capability. You need the ability

to translate organizational direction into road maps, vision into action, and purpose into

process. To do so, you must demonstrate at least five abilities7:

• To build your organizational infrastructure

• To leverage diversity

• To deploy teams

• To design human resource systems

• To make change happen.

Inspirational Leadership: Roles

Inspirational leaders create an inspiring culture within their organization. They

supply a shared vision and inspire people to achieve more than they may ever have dreamed

possible. They are able to articulate a shared vision in a way that inspires others to act.

People do what they have to do for a manager; they do their best for an inspirational

leader...More

Organizational Capability Approach vs. Traditional Functional Paradigm

“In the capability model, senior managers are predominantly concerned with issues

about the quality of products and services provided to customers (external and internal),

the flow of value-added work, and roles and responsibilities.

The dominant view on performance measurement shifts from the traditional focus

of actual-vs.-budget to a more balanced model that includes the timeliness, quality, and

cost of providing products and services to customers.


NOTES


Allocation and budgeting of resources moves from the traditional practice of

individual units vying for resources based on their own needs toward cross group -teams

that jointly assess resource needs based on the flow of work needed to create value for

customers. Problem solving would seldom involve situations in which unit managers had to

compete with each another; instead, organizations would adapt to departmental

interdependence, recognizing that issues are best addressed through cross-group problem-

solving sessions focused on providing services to customers and the required flow of work.

2.7 CORE COMPETENCIES AND DISTINCTIVE COMPETENCIES

In their 1990 article entitled, The Core Competence of the Corporation, C.K.

Prahalad and Gary Hamel coined the term core competencies, or the collective learning

and coordination skills behind the firm’s product lines. They made the case that core

competencies are the source of competitive advantage and enable the firm to introduce an

array of new products and services.

According to Prahalad and Hamel, core competencies lead to the development of

core products. Core products are not directly sold to end users; rather, they are used to

build a larger number of end-user products. For example, motors are a core product that

can be used in wide array of end products. The business units of the corporation each tap

into the relatively few core products to develop a larger number of end user products

based on the core product technology. This flow from core competencies to end products

is shown in the following diagram:

2.7.1 Core Competencies to End Products

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The intersection of market opportunities with core competencies forms the basis

for launching new businesses. By combining a set of core competencies in different ways

and matching them to market opportunities, a corporation can launch a vast array of

businesses.

Without core competencies, a large corporation is just a collection of discrete

businesses. Core competencies serve as the glue that bonds the business units together

into a coherent portfolio.

2.7.2 Developing Core Competencies

According to Prahalad and Hamel, core competencies arise from the integration

of multiple technologies and the coordination of diverse production skills. Some examples

include Philip’s expertise in optical media and Sony’s ability to miniaturize electronics.

There are three tests useful for identifying a core competence. A core competence should:

• provide access to a wide variety of markets, and

• contribute significantly to the end-product benefits, and

• be difficult for competitors to imitate.

Core competencies tend to be rooted in the ability to integrate and coordinate

various groups in the organization. While a company may be able to hire a team of brilliant

scientists in a particular technology, in doing so it does not automatically gain a core

competence in that technology. It is the effective coordination among all the groups involved

in bringing a product to market that result in a core competence.

It is not necessarily an expensive undertaking to develop core competencies. The

missing pieces of a core competency often can be acquired at a low cost through alliances

and licensing agreements. In many cases an organizational design that facilitates sharing of

competencies can result in much more effective utilization of those competencies for little

or no additional cost.

To better understand how to develop core competencies, it is worthwhile to

understand what they do not entail. According to Prahalad and Hamel, core competencies

are not necessarily about:


NOTES


• outspending rivals on R&D

• sharing costs among business units

• integrating vertically

While the building of core competencies may be facilitated by some of these actions,

by themselves they are insufficient.

The Loss of Core Competencies

Cost-cutting moves sometimes destroy the ability to build core competencies. For

example, decentralization makes it more difficult to build core competencies because

autonomous groups rely on outsourcing of critical tasks, and this outsourcing prevents the

firm from developing core competencies in those tasks since it no longer consolidates the

know-how that is spread throughout the company.

Failure to recognize core competencies may lead to decisions that result in their

loss. For example, in the 1970’s many U.S. manufacturers divested themselves of their

television manufacturing businesses, reasoning that the industry was mature and that high

quality, low cost models were available from Far East manufacturers. In the process, they

lost their core competence in video, and this loss resulted in a handicap in the newer digital

television industry.

Similarly, Motorola divested itself of its semiconductor DRAM business at 256Kb

level, and then was unable to enter the 1Mb market on its own. By recognizing its core

competencies and understanding the time required building them or regaining them, a

company can make better divestment decisions.

Core Products

Core competencies manifest themselves in core products that serve as a link

between the competencies and end products. Core products enable value creation in the

end products. Examples of firms and some of their core products include:

• 3M - substrates, coatings, and adhesives

• Black & Decker - small electric motors

• Canon - laser printer subsystems

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• Matsushita - VCR subsystems, compressors

• NEC - semiconductors

• Honda - gasoline powered engines

The core products are used to launch a variety of end products. For example,

Honda uses its engines in automobiles, motorcycles, lawn mowers, and portable generators.

Because firms may sell their core products to other firms that use them as the basis

for end user products, traditional measures of brand market share are insufficient for

evaluating the success of core competencies. Prahalad and Hamel suggest that core product

share is the appropriate metric. While a company may have a low brand share, it may

have high core product share and it is this share that is important from a core competency

standpoint.

Once a firm has successful core products, it can expand the number of uses in

order to gain a cost advantage via economies of scale and economies of scope.

Implications for Corporate Management

Prahalad and Hamel suggest that a corporation should be organized into a portfolio

of core competencies rather than a portfolio of independent business units. Business unit

managers tend to focus on getting immediate end-products to market rapidly and usually

do not feel responsible for developing company-wide core competencies. Consequently,

without the incentive and direction from corporate management to do otherwise, strategic

business units are inclined to under invest in the building of core competencies.

If a business unit does manage to develop its own core competencies over time,

due to its autonomy it may not share them with other business units. As a solution to this

problem, Prahalad and Hamel suggest that corporate managers should have the ability to

allocate not only cash but also core competencies among business units. Business units

that lose key employees for the sake of a corporate core competency should be recognized

for their contribution.


NOTES


2.8 GENERIC STRATEGIES AND THE INTERNET

Porter asserts that these generic competitive strategies were not only relevant for

the old economy, but are just as vital today. Indeed, he goes on to say that terms such as

“old economy” and “new economy” may be misguided, and the concept of a firm’s Internet

operation as a stand-alone entity preclude the firm from garnering important synergies.

Furthermore, the Internet may enhance a firm’s opportunities for achieving or strengthening

a distinctive strategic positioning. Therefore, effective strategy formulation at the business

level should pay off, not in spite of the Internet, but in concert with it.

Porter describes how companies can set themselves apart in at least two ways:

operational effectiveness (doing the same activities as competitors but doing them better)

and strategic positioning (doing things differently and delivering unique value for customers).

“The Internet affects operational effectiveness and strategic positioning in very different

ways. It makes it harder for companies to sustain operational advantages, but it opens new

opportunities for achieving or strengthening a distinctive strategic positioning.” Although

the Internet is a powerful tool for enhancing operational effectiveness, these enhancements

alone are not likely to be sustained because of copying by rivals. This state of affairs

elevates the importance of defining for the firm a unique value proposition. Internet technology

can be a complement to successful strategy, but it is not sufficient. “Frequently, in fact,

Internet applications address activities that, while necessary, are not decisive in competition,

such as informing customers, processing transactions, and procuring inputs. Critical

corporate assets—skilled personnel, proprietary product technology, efficient logistical

systems—remain intact, and they are often strong enough to preserve existing competitive

advantages.”

Consistent with the earlier discussion regarding combination strategies, Kim, Nam,

and Stimpert found in their study of e-businesses that firms pursuing a hybrid strategy of

cost leadership and differentiation exhibited the highest performance. These authors

concluded that cost leadership and differentiation must often be combined to be successful

in e-business.

Porter’s generic business strategies provide a set of methods that can be used

singly or in combination to create a defendable business strategy. They also allow firms

that use them successfully to gain a competitive advantage over other firms in the industry.

Firms either strive to obtain lower costs than their competitors or to create a perceived

difference between their product and the products of competitors. Firms can pursue their

strategy on a national level or on a more focused, regional basis.

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Clearly, Michael Porter’s work has had a remarkable impact on strategy research

and practice. The annual Porter Prize, akin to the Deming Prize, was established in 2001

in Japan to recognize that nation’s leading companies in terms of strategy. Porter’s ideas

have stood the test of time and appear to be relevant both for profit-seeking enterprises

and not-for-profit institutes in a variety of international settings. Torgovicky, Goldberg,

Shvarts, and Bar Dayan have found a relationship between business strategy and

performance measures in an ambulatory health care system in Israel, strengthening Porter’s

original theory about the non-viability of the stuck-in-the-middle strategy, and suggesting

the applicability of Porter’s generic strategies to not-for-profit institutes.

When a firm sustains profits that exceed the average for its industry, the firm is said

to possess a competitive advantage over its rivals. The goal of much of business strategy

is to achieve a sustainable competitive advantage.

2.9 MICHAEL PORTER COMPETITIVE ADVANTAGE

Competitive Advantage have identified two basic types of competitive advantage:

• cost advantage

• differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits

as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those

of competing products (differentiation advantage). Thus, a competitive advantage enables

the firm to create superior value for its customers and superior profits for itself.

Cost and differentiation advantages are known as positional advantages since

they describe the firm’s position in the industry as a leader in either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and capabilities

to create a competitive advantage that ultimately results in superior value creation. The

following diagram combines the resource-based and positioning views to illustrate the

concept of competitive advantage:


NOTES


A Model of Competitive Advantage

Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage

the firm must have resources and capabilities that are superior to those of its competitors.

Without this superiority, the competitors simply could replicate what the firm was doing

and any advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation

advantage and that few competitors can acquire easily. The following are some examples

of such resources:

• Patents and trademarks

• Proprietary know-how

• Installed customer base

• Reputation of the firm

• Brand equity

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Capabilities refer to the firm’s ability to utilize its resources effectively. An example

of a capability is the ability to bring a product to market faster than competitors. Such

capabilities are embedded in the routines of the organization and are not easily documented

as procedures and thus are difficult for competitors to replicate.

The firm’s resources and capabilities together form its distinctive competencies.

These competencies enable innovation, efficiency, quality, and customer responsiveness,

all of which can be leveraged to create a cost advantage or a differentiation advantage.

Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve

either a lower cost structure or a differentiated product. A firm positions itself in its industry

through its choice of low cost or differentiation. This decision is a central component of the

firm’s competitive strategy.

Another important decision is how broad or narrow a market segment to target.

Porter formed a matrix using cost advantage, differentiation advantage, and a broad or

narrow focus to identify a set of generic strategies that the firm can pursue to create and

sustain a competitive advantage.

Value Creation

The firm creates value by performing a series of activities that Porter identified as

the value chain. In addition to the firm’s own value-creating activities, the firm operates in

a value system of vertical activities including those of upstream suppliers and downstream

channel members.

To achieve a competitive advantage, the firm must perform one or more value

creating activities in a way that creates more overall value than do competitors. Superior

value is created through lower costs or superior benefits to the consumer (differentiation).

In Competitive Advantage, Michael Porter analyzes the basis of competitive

advantage and presents the value chain as a framework for diagnosing and enhancing it.

This landmark work covers:


NOTES


• The 10 major drivers of the firm’s cost position

• Differentiation with the buyer’s value chain in mind

• Buyer perception of value and signals of value

• How to defend against substitute products

• The role of technology in competitive advantage

• Competitive scope and its impact on competitive advantage

• Implications for offensive and defensive competitive strategy

Summary

Any organization before they begin the work of strategy formulations,it must scan

the external environment to identify possible opportunities and threats and its internal

environment for strengths and weaknesses. Environmental scanning is the monitoring,

evaluating, and disseminating of information from the external and internal environment to

key people within the corporation. Michael Porter provided a framework that models an

industry as being influenced by five forces. The strategic business manager seeking to

develop an edge over rival firms can use this model to better understand the industry

context in which the firm operates. The existence of such an economy of scale creates a

barrier to entry. The greater the difference between industry MES and entry unit costs, the

greater the barrier to entry. So industries with high MES deter entry of small, start-up

businesses. To operate at less than MES there must be a consideration that permits the

firm to sell at a premium price - such as product differentiation or local monopoly.

The existence of such an economy of scale creates a barrier to entry. The greater

the difference between industry MES and entry unit costs, the greater the barrier to entry.

So industries with high MES deter entry of small, start-up businesses. To operate at less

than MES there must be a consideration that permits the firm to sell at a premium price -

such as product differentiation or local monopoly. Strategists often use a two dimensional

grid to display the position of each company along to the two most important dimensions.

Strategy is the Direction and scope of an organization over the long term which achieves

advantages for the organization.

A firm positions itself by leveraging its strengths. Michael Porter has argued that a

firm’s strengths ultimately fall into one of two headings: cost advantage and differentiation.

By applying these strengths in either a broad or narrow scope, three generic strategies

result: cost leadership, differentiation, and focus. These strategies are applied at the

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business unit level. They are called generic strategies because they are not firm or industry

dependent To achieve a competitive advantage, the firm must perform one or more value

creating activities in a way that creates more overall value than do competitors. Superior

value is created through lower costs or superior benefits to the consumer (differentiation).

Short Questions

1. Identify the variables involved in each of the environmental factors.

2. How the resources and capabilities can be identified by the companies?

3. What is differentiation?

4. What is called as cost leadership?

5. What is called as core competencies?

6. Which strategy is called as focus strategy?

Review Questions

7 Explain the porter’s five forces model.

8 Discuss the role of resources and capabilities in the competitive world.

9 Discuss the porter’s generic model of strategy to meet the industry analysis.

10 Explain the porter’s Gaining Competitive Advantage Model.


NOTES


UNIT III

STRATEGIES

INTRODUCTION

Strategies for an organization may be categorized by the level of the organization

addressed by the strategy. Corporate-level strategies involve top management and address

issues of concern to the entire organization. Business-level strategies deal with major business

units or divisions of the corporate portfolio. Business-level strategies are generally developed

by upper and middle-level managers and are intended to help the organization achieve its

corporate strategies. Functional strategies address problems commonly faced by lower-

level managers and deal with strategies for the major organizational functions (e.g., marketing,

finance, and production) considered relevant for achieving the business strategies and

supporting the corporate-level strategy. Market definition is thus the domain of corporate-

level strategy, market navigation the domain of business-level strategy, and support of

business and corporate-level strategy by individual, but integrated, functional level strategies.

Business-level strategies thus support corporate-level strategies. Corporate-level

strategies attempt to maximize the wealth of shareholders through profitability of the overall

corporate portfolio, but business-level strategies are concerned with (1) matching their

activities with the overall goals of corporate-level strategy while simultaneously (2) navigating

the markets in which they compete in such a way that they have a financial or market edge-

a competitive advantage-relative to the other businesses in their industry. A competitive

strength assessment is superior to a BCG matrix because it adds more variables to the mix.

In addition, these variables are weighted in importance in contrast to the BCG matrix’s

equal weighting of market share and market growth. Regardless of these advantages,

competitive strength assessments are still limited by the type of data they provide. A

diversification strategy entails moving into different markets or adding different products to

its mix. If the products or markets are related to existing product or service offerings, the

strategy is called concentric diversification. If expansion is into products or services unrelated

to the firm’s existing business, the diversification is called conglomerate diversification.

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The balanced scorecard has evolved from its early use as a simple performance

measurement framework to a full strategic planning and management system. The “new”

balanced scorecard transforms an organization’s strategic plan from an attractive but passive

document into the “marching orders” for the organization on a daily basis. It provides a

framework that not only provides performance measurements, but helps planners identify

what should be done and measured. It enables executives to truly execute their strategies.

3.1 BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL

LEVEL STRATEGIES

3.1.1 Functional level strategies.

Functional-level strategies are concerned with coordinating the functional areas of

the organization (marketing, finance, human resources, production, research and

development, etc.) so that each functional area upholds and contributes to individual

business-level strategies and the overall corporate-level strategy. This involves coordinating

the various functions and operations needed to design, manufacturer, deliver, and support

the product or service of each business within the corporate portfolio. Functional strategies

are primarily concerned with:

Efficiently utilizing specialists within the functional area.

Integrating activities within the functional area (e.g., coordinating advertising,

promotion, and marketing research in marketing; or purchasing, inventory control, and

shipping in production/operations).

Assuring that functional strategies mesh with business-level strategies and theoverall corporate-level strategy.

Functional strategies are frequently concerned with appropriate timing. For

example, advertising for a new product could be expected to begin sixty days prior to

shipment of the first product. Production could then start thirty days before shipping begins.

Raw materials, for instance, may require that orders are placed at least two weeks before

production is to start. Thus, functional strategies have a shorter time orientation than either

business-level or corporate-level strategies. Accountability is also easiest to establish with

functional strategies because results of actions occur sooner and are more easily attributed

to the function than is possible at other levels of strategy. Lower-level managers are most

directly involved with the implementation of functional strategies.


NOTES


Strategies for an organization may be categorized by the level of the organization

addressed by the strategy. Corporate-level strategies involve top management and address

issues of concern to the entire organization. Business-level strategies deal with major business

units or divisions of the corporate portfolio. Business-level strategies are generally developed

by upper and middle-level managers and are intended to help the organization achieve its

corporate strategies. Functional strategies address problems commonly faced by lower-

level managers and deal with strategies for the major organizational functions (e.g., marketing,

finance, and production) considered relevant for achieving the business strategies and

supporting the corporate-level strategy. Market definition is thus the domain of corporate-

level strategy, market navigation the domain of business-level strategy, and support of

business and corporate-level strategy by individual, but integrated, functional level strategies.

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This chapter focuses on the four ways to achieve competitive advantage at the

functional level: Increasing efficiency, improving quality, sustaining innovation, and improving

customer responsiveness.

Some of the modern strategic approaches in functional level strategies:

• Achieving Superior Efficiency:

• Economies of scale:

• Learning effects and the experience curve:

• Flexible manufacturing:

• Marketing, human resource management and infrastructure:

• JIT issues

• IT issues

While this chapter is entitled, “Functional-level strategy”, it is important to note

that a commitment to improving efficiency is not something that can be tackled on a function

by function basis, but requires an on-going involvement throughout the entire organization.

I- Achieving Superior Innovation

Superior innovation is difficult to achieve, for a variety of reasons, only one of

which is a lack of technical ability. H & J identify five primary reasons why product

innovations fail:

• Uncertainty:

• Poor commercialization:

• Poor positioning:

• Technological myopia:

• Slowness to market:

Think of examples for each of these reasons for failure. What can be done to

improve the innovation process?


NOTES


II-Achieving Superior Customer Responsiveness.

Think of a positive and negative experience you’ve had with customer service or

after sales product support. How can companies make customer satisfaction important to

all employees?

III- Achieving superior quality: TQM

This section focuses solely on total quality management (TQM) for improving

quality. TQM is most often associated with W. Edwards Deming. The central idea,

continuous evaluation and improvement of production processes was embraced more

quickly and widely by the Japanese, but have gained notoriety in the U. S. in the last two

decades. Deming writes that TQM is based on five integrated steps:

Improved quality leads to decreased costs through less rework, fewer mistakes,

fewer delays, and more efficient use of time and materials. This in turn leads to increased

productivity. Higher quality brings greater market share through increased customer

satisfaction and opens the possibility for differentiation based on quality. Such differentiation

is associated with higher prices. The combination of higher prices and lower costs increases

profitability. Finally, this allows the company to hire more employees. In the final analysis,

everybody wins! By the following ways:

• Implementing TQM

• Build an organizational commitment to quality:

• Focus on the customer:

• Measure quality:

• Set goals and create incentives:

• Solicit input employees:

• Identify defects and find the source:

• Build relationships with suppliers:

• Design with production in mind:

• Break down cross-functional barriers:

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3.2 BUSINESS-LEVEL STRATEGIES

Business-level strategies are similar to corporate-strategies in that they focus on

overall performance. In contrast to corporate-level strategy, however, they focus on only

one rather than a portfolio of businesses. Business units represent individual entities oriented

toward a particular industry, product, or market. In large multi-product or multi-industry

organizations, individual business units may be combined to form strategic business units

(SBUs). An SBU represents a group of related business divisions, each responsible to

corporate head-quarter for its own profits and losses. Each strategic business unit will

likely have its’ own competitors and its own unique strategy. A common focus of business-

level strategies are sometimes on a particular product or service line and business-level

strategies commonly involve decisions regarding individual products within this product or

service line. There are also strategies regarding relationships between products. One product

may contribute to corporate-level strategy by generating a large positive cash flow for new

product development, while another product uses the cash to increase sales and expand

market share of existing businesses. Given this potential for business-level strategies to

impact other business-level strategies, business-level managers must provide ongoing,

intensive information to corporate-level managers. Without such crucial information,

corporate-level managers are prevented from best managing overall organizational direction.

Business-level strategies are thus primarily concerned with:

• Coordinating and integrating unit activities so they conform to organizational

strategies (achieving synergy).

• Developing distinctive competencies and competitive advantage in each unit.

• Identifying product or service-market niches and developing strategies for

competing in each.

• Monitoring product or service markets so that strategies conform to the needs of

the markets at the current stage of evolution.

In a single-product company, corporate-level and business-level strategies are

the same. For example, a furniture manufacturer producing only one line of furniture has its

corporate strategy chosen by its market definition, wholesale furniture, but its business is

still the same, wholesale furniture. Thus, in single-business organizations, corporate and

business-level strategies overlap to the point that they should be treated as one united

strategy. The product made by a unit of a diversified company would face many of the

same challenges and opportunities faced by a one-product company. However, for most


NOTES


organizations, business-unit strategies are designed to support corporate strategies. Business-

level strategies look at the product’s life cycle, competitive environment, and competitive

advantage much like corporate-level strategies, except the focus for business-level strategies

is on the product or service, not on the corporate portfolio.

Business-level strategies thus support corporate-level strategies. Corporate-level

strategies attempt to maximize the wealth of shareholders through profitability of the overall

corporate portfolio, but business-level strategies are concerned with (1) matching their

activities with the overall goals of corporate-level strategy while simultaneously (2) navigating

the markets in which they compete in such a way that they have a financial or market edge-

a competitive advantage-relative to the other businesses in their industry.

Analysis of Business-Level Strategies- Contribution by Porter’s Generic

Strategies.

Harvard Business School’s Michael Porter developed a framework of generic

strategies that can be applied to strategies for various products and services, or the individual

business-level strategies within a corporate portfolio. The strategies are (1) overall cost

leadership, (2) differentiation, and (3) focus on a particular market niche. The generic

strategies provide direction for business units in designing incentive systems, control

procedures, operations, and interactions with suppliers and buyers, and with making other

product decisions.

Cost-leadership strategies require firms to develop policies aimed at becoming

and remaining the lowest cost producer and/or distributor in the industry. Note here that

the focus is on cost leadership, not price leadership. This may at first appear to be only a

semantic difference, but consider how this fine-grained definition places emphases on

controlling costs while giving firms alternatives when it comes to pricing (thus ultimately

influencing total revenues). A firm with a cost advantage may price at or near competitors

prices, but with a lower cost of production and sales, more of the price contributes to the

firm’s gross profit margin. A second alternative is to price lower than competitors and

accept slimmer gross profit margins, with the goal of gaining market share and thus increasing

sales volume to offset the decrease in gross margin. Such strategies concentrate on

construction of efficient-scale facilities, tight cost and overhead control, avoidance of marginal

customer accounts that cost more to maintain than they offer in profits, minimization of

operating expenses, reduction of input costs, tight control of labor costs, and lower

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distribution costs. The low-cost leader gains competitive advantage by getting its costs of

production or distribution lower than the costs of the other firms in its relevant market. This

strategy is especially important for firms selling unbranded products viewed as commodities,

such as beef or steel.

Cost leadership provides firms above-average returns even with strong competitive

pressures. Lower costs allow the firm to earn profits after competitors have reduced their

profit margin to zero. Low-cost production further limits pressures from customers to

lower price, as the customers are unable to purchase cheaper from a competitor. Cost

leadership may be attained via a number of techniques. Products can be designed to simplify

manufacturing. A large market share combined with concentrating selling efforts on large

customers may contribute to reduced costs. Extensive investment in state-of-the-art facilities

may also lead to long run cost reductions. Companies that successfully use this strategy

tend to be highly centralized in their structure. They place heavy emphasis on quantitative

standards and measuring performance toward goal accomplishment.

Efficiencies that allow a firm to be the cost leader also allow it to compete effectively

with both existing competitors and potential new entrants. Finally, low costs reduce the

likely impact of substitutes. Substitutes are more likely to replace products of the more


NOTES


expensive producers first, before significantly harming sales of the cost leader unless

producers of substitutes can simultaneously develop a substitute product or service at a

lower cost than competitors. In many instances, the necessity to climb up the experience

curve inhibits a new entrant’s ability to pursue this tactic.

Differentiation strategies require a firm to create something about its product that

is perceived as unique within its market. Whether the features are real, or just in the mind

of the customer, customers must perceive the product as having desirable features not

commonly found in competing products. The customers also must be relatively price-

insensitive. Adding product features means that the production or distribution costs of a

differentiated product will be somewhat higher than the price of a generic, non-differentiated

product. Customers must be willing to pay more than the marginal cost of adding the

differentiating feature if a differentiation strategy is to succeed.

Differentiation Strategies.

Differentiation may be attained through many features that make the product or

service appear unique. Possible strategies for achieving differentiation may include warranty

(Sears tools have lifetime guarantee against breakage), brand image (Coach hand bags,

Tommy Hilfiger sportswear), technology (Hewlett-Packard laser printers), features (Jenn-

Air ranges, Whirlpool appliances), service (Makita hand tools), and dealer network

(Caterpillar construction equipment), among other dimensions. Differentiation does not

allow a firm to ignore costs; it makes a firm’s products less susceptible to cost pressures

from competitors because customers see the product as unique and are willing to pay

extra to have the product with the desirable features.

Differentiation often forces a firm to accept higher costs in order to make a product

or service appear unique. The uniqueness can be achieved through real product features

or advertising that causes the customer to perceive that the product is unique. Whether the

difference is achieved through adding more vegetables to the soup or effective advertising,

costs for the differentiated product will be higher than for non-differentiated products.

Thus, firms must remain sensitive to cost differences. They must carefully monitor the

incremental costs of differentiating their product and make certain the difference is reflected

in the price.

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Focus, the third generic strategy, involves concentrating on a particular customer,

product line, geographical area, channel of distribution, stage in the production process, or

market niche. The underlying premise of the focus strategy is that the firm is better able to

serve its limited segment than competitors serving a broader range of customers. Firms

using a focus strategy simply apply a cost-leader or differentiation strategy to a segment of

the larger market. Firms may thus be able to differentiate themselves based on meeting

customer needs through differentiation or through low costs and competitive pricing for

specialty goods.

A focus strategy is often appropriate for small, aggressive businesses that do not

have the ability or resources to engage in a nation-wide marketing effort. Such a strategy

may also be appropriate if the target market is too small to support a large-scale operation.

Many firms start small and expand into a national organization. Wal-Mart started in small

towns in the South and Midwest. As the firm gained in market knowledge and acceptance,

it was able to expand throughout the South, then nationally, and now internationally. The

company started with a focused cost-leader strategy in its limited market and was able to

expand beyond its initial market segment.

3.3 STRATEGY IN THE GLOBAL ENVIRONMENT

Firms utilizing a focus strategy may also be better able to tailor advertising and

promotional efforts to a particular market niche. Many automobile dealers advertise that

they are the largest-volume dealer for a specific geographic area. Other dealers advertise

that they have the highest customer-satisfaction scores or the most awards for their service

department of any dealer within their defined market. Similarly, firms may be able to design

products specifically for a customer. Customization may range from individually designing

a product for a customer to allowing the customer input into the finished product. Tailor-

made clothing and custom-built houses include the customer in all aspects of production

from product design to final acceptance. Key decisions are made with customer input.

Providing such individualized attention to customers may not be feasible for firms with an

industry-wide orientation.


NOTES


Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of businesses

in which the company should compete and with the development and coordination of that

portfolio of businesses.

Corporate level strategy is concerned with:

Reach - defining the issues that are corporate responsibilities; these might include identifying

the overall goals of the corporation, the types of businesses in which the corporation should

be involved, and the way in which businesses will be integrated and managed.

Competitive Contact - defining where in the corporation competition is to be localized.

Take the case of insurance: In the mid-1990’s, Aetna as a corporation was clearly identified

with its commercial and property casualty insurance products. The conglomerate Textron

was not. For Textron, competition in the insurance markets took place specifically at the

business unit level, through its subsidiary, Paul Revere. (Textron divested itself of The Paul

Revere Corporation in 1997.)

Managing Activities and Business Interrelationships - Corporate strategy seeks to

develop synergies by sharing and coordinating staff and other resources across business

units, investing financial resources across business units, and using business units to

complement other corporate business activities. Igor Ansoff introduced the concept of

synergy to corporate strategy.

Management Practices - Corporations decide how business units are to be governed:

through direct corporate intervention (centralization) or through more or less autonomous

government (decentralization) that relies on persuasion and rewards.

Corporations are responsible for creating value through their businesses. They do

so by managing their portfolio of businesses, ensuring that the businesses are successful

over the long-term, developing business units, and sometimes ensuring that each business

is compatible with others in the portfolio.

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3.3.1 Portfolio Planning Experiences In Global Environment

One of the most famous portfolio planning matrices is referred to as the growth

share matrix. This was developed by the Boston Consulting Group (BCG), principally to

help senior managers identify the cash flow requirements of different businesses in their

portfolio and to help determine whether they need to change the mix of businesses in the

portfolio. We review the growth-share matrix in order to illustrate both the value and the

limitations of portfolio planning tools. The growth-share matrix has three main steps: (1)

dividing a company into strategic business units (SBUs); (2) assessing the prospects of

each SBU and comparing them against each other by means of a matrix; and (3) developing

strategic objectives for each SBD.

Identifying SBUs According to the BCG, a company must create an SBU for each

economically distinct business area that it competes in. Normally, a company defines its

SBUs in terms of the product markets they are competing in. For example, Ciba Geigy,

Switzerland’s largest chemical and pharmaceutical company and an active user of portfolio

planning techniques, has identified thirty-three strategic business units in areas such as

proprietary pharmaceuticals, generic pharmaceuticals, seed treatments, reactive dyes,

detergents, resins, paper chemicals, diagnostics, and composite materials (see Strategy in

Action 10.1).

Assessing and Comparing SBUs Having defined SBUs, top managers then assess each

according to two criteria: (1) the SBU’s relative market share and (2) the growth rate of

the SBU’s industry.

Relative market share is the ratio of an SBU’s market share to the market share held by

the largest rival company in its industry. If SBU X has a market share of 10 percent and its

largest rival has a market share of 30 percent, SBU X’s relative market share is 10/30, or

0.3. Only if an SBU is a market leader in its industry will it have a relative market share

greater than 1.0. For example, if SBUY has a market share of 40 percent and its largest

rival has a market share of 10 percent, then SBU Y’s relative market share is 40/10, or

4.0. According to the BCG, market share gives a company cost advantages from economies

of scale and learning effects.


NOTES


An SBU with a relative market share greater than 1.0 is assumed to be farther

down the experience curve and therefore to have a significant cost advantage over its

rivals

.

By similar logic, an SBU with a relative market share smaller than 1.0 is assumed

to lack the scale economies and low-cost position of the market leader.

The growth rate of an SBU’s industry is assessed according to whether it is faster

or slower than the growth rate of the economy as a whole. BCG’s position is that high-

growth industries offer a more favorable competitive environment and better long-term

prospects than slow-growth industries.

Given the relative market share and industry growth rate for each SBU, management

compares SBUs against each other by way of a matrix similar to that illustrated in Figure

10.1. The horizontal dimension of this matrix measures relative market share; the vertical

dimension measures industry growth rate. The center of each circle corresponds to the

position of an SBU on the two dimensions of the matrix.

The size of each circle is proportional to the sales revenue generated by each

business in the company’s portfolio. The bigger the circle, the larger is the SBU’s revenue

relative to total corporate revenues.

Portfolio Planning at Ciba-Geigy

Ciba-Geigy is a large Swiss-based company with interests in chemicals and

pharmaceuticals and annual revenues in excess of $25 billion. Since1984, the company

has been using portfolio planning techniques as a tool to assist corporate management the

process of strategic planning, resource allocation, and performance assessment. Although

the company looked closely at the growth-share matrix devised by the Boston Consulting

Group, it decided to develop a customized portfolio planning tool that would better suit its

needs.

ciba had divided the company into thirty-three separate strategic business units,

such as proprietary pharmaceuticals, generic pharmaceuticals, seed treatments, reactive

dyes, detergents, resins, paper chemicals, diagnostics, and composite materials. At Ciba,

each SBU is assessed according to two main criteria: the likely future growth rate of its

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industry, and the competitive position of the SBU relative to its rivals. In deriving a measure

of competitive position, Ciba looks at relative market-share, but unlike the original BCG

growth-share matrix, the company also considers arrange of other competitive factors,

such as cost structure, product quality, core competencies, and relative profitability.

Using these data, Ciba classifies its SBUs into one of five categories: development,

growth, pillar, niche, and core. Development businesses are in the early stage of their life

cycle and usually require substantial R&D investments. Growth businesses are competitive

SBUs based in large and/or growing markets. Ciba will commit substantial funds in order

to build the competitive position of such a business. Pillar businesses are market leaders

that are based in attractive industries, such as Ciba’s pharmaceutical businesses. They

typically receive a high priority in R&D funding and resource allocation in order to maintain

their pillar status. Niche businesses are market leaders that are constrained because they

serve a relatively small market (Ciba’s animal health business, for example, was defined as

a niche business). Core businesses are large SBUs that compete in mature industries (Ciba’s

dyes, polymers, and pigments SBUs are all classified as core). Core businesses are seen

as generating excess cash that can be used to fund investments elsewhere within the

company.

What is interesting about Ciba’s approach is that these classifications are not taken

as gospel. The company is quite willing to violate the investment rules associated with the

different categories if that seems appropriate. For example, in 1994Ciba committed itself

to major new investments in its pigments SBU to upgrade its U.S. production facilities,

even though its portfolio planning categories suggest that this was a mature low-growth

core business that should be used to generate funds for investment elsewhere within the

company. Ciba’s view appears to be that the utility of portfolio planning lies not so much in

its role as a guide to resource allocation, as it does in helping top managers set reasonable

strategic expectations and objectives for the different SBUs within the company.

Thus, Ciba’s corporate managers will assign very different strategic and financial

objectives to SBUs classified as growth businesses compared with those classified as

pillars. Pillars would be expected to earu a higher return on assets, generate greater cash

flow, and contribute more of their earnings to the corporate bottom line than businesses

would be expected to grow their revenues and earnings at a faster rate than pillars. The

performance of managers running these SBUs is then compared against these different

expectations.4


NOTES


The matrix is divided into four cells. SBUs in cell 1 are defined as stars, in cell 2 as

question marks, in cell 3 as cash cows, and in cell 4 as dogs. BCG argues that these

different types of SBUs have different long-term prospects and different implications for

cash flows.

Stars. The leading SBU’s in a company’s portfolios are the stars. Stars have a high relative

market share and are based in high-growth industries. Accordingly, they offer attractive

long-term profit and growth opportunities.

3.4 CORPORATE-LEVEL STRATEGY

Corporate-level strategies address the entire strategic scope of the enterprise.

This is the “big picture” view of the organization and includes deciding in which product or

service markets to compete and in which geographic regions to operate. For multi-business

firms, the resource allocation process—how cash, staffing, equipment and other resources

are distributed—is typically established at the corporate level. In addition, because market

definition is the domain of corporate-level strategists, the responsibility for diversification,

or the addition of new products or services to the existing product/service line-up, also

falls within the realm of corporate-level strategy. Similarly, whether to compete directly

with other firms or to selectively establish cooperative relationships—strategic alliances—

falls within the purview corporate-level strategy, while requiring ongoing input from

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Table 3.1.2 Corporate, Business, and Functional Strategy

For Business-level managers some critical questions answered by corporate-level

strategists thus include:

• What should be the scope of operations; i.e.; what businesses should the firm be

in?

• How should the firm allocate its resources among existing businesses?

• What level of diversification should the firm pursue; i.e., which businesses represent

the company’s future? Are there additional businesses the firm should enter or are

there businesses that should be targeted for termination or divestment?

• How diversified should the corporation’s business be? Should we pursue related

diversification; i.e., similar products and service markets, or is unrelated

diversification; i.e., dissimilar product and service markets, a more suitable approach

given current and projected industry conditions? If we pursue related diversification,

how will the firm leverage potential cross-business synergies? In other words,

how will adding new product or service businesses benefit the existing product/

service line-up?

• How should the firm be structured? Where should the boundaries of the firm be

drawn and how will these boundaries affect relationships across businesses, with

suppliers, customers and other constituents? Do the organizational components

such as research and development, finance, marketing, customer service, etc. fit

together? Are the responsibilities or each business unit clearly identified and is

accountability established?

• Should the firm enter into strategic alliances—cooperative, mutually-beneficial

relationships with other firms? If so, for what reasons? If not, what impact might

this have on future profitability?


NOTES


As the previous questions illustrate, corporate strategies represent the long-term

direction for the organization. Issues addressed as part of corporate strategy include those

concerning diversification, acquisition, divestment, strategic alliances, and formulation of

new business ventures. Corporate strategies deal with plans for the entire organization and

change as industry and specific market conditions warrant.

Top management has primary decision making responsibility in developing corporate

strategies and these managers are directly responsible to shareholders. The role of the

board of directors is to ensure that top managers actually represent these shareholder

interests. With information from the corporation’s multiple businesses and a view of the

entire scope of operations and markets, corporate-level strategists have the most

advantageous perspective for assessing organization-wide competitive strengths and

weaknesses, although as a subsequent section notes, corporate strategists are paralyzed

without accurate and up-to-date information from managers at the business-level.

3.4.1 Corporate Portfolio Analysis

One way to think of corporate-level strategy is to compare it to an individual

managing a portfolio of investments. Just as the individual investor must evaluate each

individual investment in the portfolio to determine whether or not the investment is currently

performing to expectations and what the future prospects are for the investment, managers

must make similar decisions about the current and future performances of various businesses

constituting the firm’s portfolio. The Boston Consulting Group (BCG) matrix is a relatively

simple technique for assessing the performance of various segments of the business.

The BCG matrix classifies business-unit performance on the basis of the unit’s relative

market share and the rate of market growth as shown in Figure 3.2.

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Figure 3.2

BCG Model of Portfolio Analysis

I-Question Mark (Market growth is high and Market share is low)

Products and their respective strategies fall into one of four quadrants. The typical

starting point for a new business is as a question mark. If the product is new, it has no

market share, but the predicted growth rate is good. What typically happens in an

organization is that management is faced with a number of these types of products but with

too few resources to develop all of them. Thus, the strategic decision-maker must determine

which of the products to attempt to develop into commercially viable products and which

ones to drop from consideration. Question marks are cash users in the organization. Early

in their life, they contribute no revenues and require expenditures for market research, test

marketing, and advertising to build consumer awareness.

II-Stars (Market growth is high and Market share is high)

If the correct decision is made and the product selected achieves a high market

share, it becomes a BCG matrix star. Stars have high market share in high-growth markets.

Stars generate large cash flows for the business, but also require large infusions of money

to sustain their growth. Stars are often the targets of large expenditures for advertising and

research and development to improve the product and to enable it to establish a dominant

position in the industry.


NOTES


III-Cash Cows (Market growth rate is low and market share is low)

Cash cows are business units that have high market share in a low-growth market.

These are often products in the maturity stage of the product life cycle. They are usually

well-established products with wide consumer acceptance, so sales revenues are usually

high. The strategy for such products is to invest little money into maintaining the product

and divert the large profits generated into products with more long-term earnings potential,

i.e., question marks and stars.

IV-Dogs (Market growth rate is low and Market share is low)

Dogs are businesses with low market share in low-growth markets. These are

often cash cows that have lost their market share or question marks the company has

elected not to develop. The recommended strategy for these businesses is to dispose of

them for whatever revenue they will generate and reinvest the money in more attractive

businesses (question marks or stars).

Despite its simplicity, the BCG matrix suffers from limited variables on which to

base resource allocation decisions among the business making up the corporate portfolio.

Notice that the only two variables composing the matrix are relative market share and the

rate of market growth. Now consider how many other factors contribute to business success

or failure. Management talent, employee commitment, industry forces such as buyer and

supplier power and the introduction of strategically-equivalent substitute products or services,

changes in consumer preferences, and a host of others determine ultimate business viability.

The BCG matrix is best used, then, as a beginning point, but certainly not as the final

determination for resource allocation decisions as it was originally intended. Consider, for

instance, Apple Computer. With a market share for its Macintosh-based computers below

ten percent in a market notoriously saturated with a number of low-cost competitors and

growth rates well-below that of other technology pursuits such as biotechnology and medical

device products, the BCG matrix would suggest Apple divest its computer business and

focus instead on the rapidly growing iPod business (its music download business). Clearly,

though, there are both technological and market synergies between Apple’s Macintosh

computers and its fast-growing iPod business. Divesting the computer business would

likely be tantamount to destroying the iPod business.

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A more stringent approach, but still one with weaknesses, is a competitive

assessment. A competitive assessment is a technique for ranking an organization relative to

its peers in the industry. The advantage of a competitive assessment over the BCG matrix

for corporate-level strategy is that the competitive assessment includes critical success

factors, or factors that are crucial for an organizational to prevail when all organizational

members are competing for the same customers. A six-step process that allows corporate

strategist to define appropriate variables, rather than being locked into the market

share and market growth variables of the BCG matrix, is used to develop a table that

shows a businesses ranking relative to the critical success factors that managers identify as

the key factors influencing failure or success. These steps include:

• Identifying key success factors. This step allows managers to select the most

appropriate variables for its situation. There is no limit to the number of variables

managers may select; the idea, however, is to use those that are key in determining

competitive strength.

• Weighing the importance of key success factors. Weighting can be on a scale

of 1 to 5, 1 to 7, or 1 to 10, or whatever scale managers believe is appropriate.

The main thing is to maintain consistency across organizations. This step brings an

element of realism to the analysis by recognizing that not all critical success factors

are equally important. Depending on industry conditions, successful advertising

campaigns may, for example, be weighted more heavily than after-sale product

support.

• Identifying main industry rivals. This step helps managers focus on one of the

most common external threats; competitors who want the organization’s market

share.

• Managers rating their organization against competitors.

• Multiplying the weighted importance by the key success factor rating.

• Adding the values. The sum of the values for a manager’s organization versus

competitors gives a rough idea if the manager’s firm is ahead or behind the

competition on weighted key success factors that are critical for market success.

A competitive strength assessment is superior to a BCG matrix because it adds

more variables to the mix. In addition, these variables are weighted in importance in contrast

to the BCG matrix’s equal weighting of market share and market growth. Regardless of

these advantages, competitive strength assessments are still limited by the type of data they

provide. When the values are summed in step six, each organization has a number assigned


NOTES


to it. This number is compared against other firms to determine which is competitively the

strongest. One weakness is that these data are ordinal: they can be ranked, but the

differences among them are not meaningful. A firm with a score of four is not twice as good

as one with a score of two, but it is better. The degree of “betterness,” however, is not

known.

3.4.2 Corporate Grand Strategies

As the previous discussion implies, corporate-level strategists have a tremendous

amount of both latitude and responsibility. The myriad decisions required of these managers

can be overwhelming considering the potential consequences of incorrect decisions. One

way to deal with this complexity is through categorization; one categorization scheme is to

classify corporate-level strategy decisions into three different types, or grand strategies.

These grand strategies involve efforts to expand business operations (growth strategies),

decrease the scope of business operations (retrenchment strategies), or maintain the status

quo (stability strategies).

I-Growth Strategies

Growth strategies are designed to expand an organization’s performance, usually

as measured by sales, profits, product mix, market coverage, market share, or other

accounting and market-based variables. Typical growth strategies involve one or more of

the following:

With a concentration strategy the firm attempts to achieve greater market penetration

by becoming highly efficient at servicing its market with a limited product line (e.g.,

McDonalds in fast foods).

By using a vertical integration strategy, the firm attempts to expand the scope

of its current operations by undertaking business activities formerly performed by one of

its suppliers (backward integration) or by undertaking business activities performed by a

business in its channel of distribution (forward integration).

A diversification strategy entails moving into different markets or adding different

products to its mix. If the products or markets are related to existing product or service

offerings, the strategy is called concentric diversification. If expansion is into products or

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services unrelated to the firm’s existing business, the diversification is called conglomerate

diversification.

II-Stability Strategies

When firms are satisfied with their current rate of growth and profits, they may

decide to use a stability strategy. This strategy is essentially a continuation of existing

strategies. Such strategies are typically found in industries having relatively stable

environments. The firm is often making a comfortable income operating a business that

they know, and see no need to make the psychological and financial investment that would

be required to undertake a growth strategy.

III-Retrenchment Strategies

Retrenchment strategies involve a reduction in the scope of a corporation’s activities,

which also generally necessitates a reduction in number of employees, sale of assets

associated with discontinued product or service lines, possible restructuring of debt through

bankruptcy proceedings, and in the most extreme cases, liquidation of the firm.

Firms pursue a turnaround strategy by undertaking a temporary reduction in

operations in an effort to make the business stronger and more viable in the future. These

moves are popularly called downsizing or rightsizing. The hope is that going through a

temporary belt-tightening will allow the firm to pursue a growth strategy at some future

point.

A divestment decision occurs when a firm elects to sell one or more of the businesses

in its corporate portfolio. Typically, a poorly performing unit is sold to another company

and the money is reinvested in another business within the portfolio that has greater potential.

Bankruptcy involves legal protection against creditors or others allowing the firm

to restructure its debt obligations or other payments, typically in a way that temporarily

increases cash flow. Such restructuring allows the firm time to attempt a turnaround strategy.

For example, since the airline hijackings and the subsequent tragic events of September

11, 2001, many of the airlines based in the U.S. have filed for bankruptcy to avoid liquidation

as a result of stymied demand for air travel and rising fuel prices. At least one airline has


NOTES


asked the courts to allow it to permanently suspend payments to its employee pension plan

to free up positive cash flow.

Liquidation is the most extreme form of retrenchment. Liquidation involves the

selling or closing of the entire operation. There is no future for the firm; employees are

released, buildings and equipment are sold, and customers no longer have access to the

product or service. This is a strategy of last resort and one that most managers work hard

to avoid.

3.5 DIVERSIFICATION AND STRATEGIC ALLIANCES

‘Market Penetration’—increase market share of the same market. This is a

more aggressive option and usually involves investing in product improvement, advertising,

or channel development. Acquiring the businesses of competitors who are withdrawing

from the market may be a necessary related resource option. Other possible options (which

involve moving out of the front left-hand top cell of are either to develop or acquire new

products (product development) or to address new market needs (market development).

These two options are easy to understand at the generic level but clearly have to be spelt

out in detail before they have any practical meaning for a real discussion in a particular

context.

3.5.1 Diversification Strategy

Diversification is entry into new markets with new products. Diversification may

be of two kinds—related and unrelated. Related diversification again divides into backward,

forward, and horizontal integration. Backward integration is a move towards suppliers and

raw materials in the same overall business. An example of this would be a brewer acquiring

malting facilities or growing hops. Forward integration is a move towards the market place

or customers in the same overall business. An example of this would be a manufacturer

acquiring retail outlets or a hop grower beginning to brew his own beer. Horizontal integration

is a lateral move into a closely related business such as selling by-products.

Diversification which is not of any of the above types is ‘unrelated’. Even unrelated

diversification usually has (or is thought to have) some degree of synergy (or fit) with the

original business. Examples of synergy are the ability to share facilities—a sales force, for

instance—or a balance in the timing of cash flow. Often the fit is less than expected, so less

synergy is achieved than was anticipated.

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There is a long history of research into how successful diversification has been.

Diversification was a particularly popular strategy in the 1960s when there were a number

of very well-known and apparently successful conglomerates. Porter, for example, studied

the 1950–86 diversifications of thirty-three leading US companies and concluded (Porter

1987) that the track record of diversification was poor and that in many cases acquisitions

were subsequently divested. More generally, it seems that diversified businesses grow

faster and growth tends to be greatest if the diversification is unrelated. However, related

diversification tends to be more profitable. In general, there is less fit than anticipated so

that the benefits expected are often not fully realized. While research may measure how

successful different forms of market or product development are in general, the management

choice has to focus on the relative attractiveness of available options. If the present position

is bad enough, even relatively risky alternatives may be preferable to doing nothing.

3.5.2 Strategic alliances and partnerships

Strategic alliances and partnerships have come into vogue over the last ten years.

While there may be contracts between the parties, there is a wider intention to cooperate

at a strategic level, to share information, and to work together in a way that goes beyond

a clear contractual arrangement. It is argued that in a rapidly changing world, strategic

alliances are the only way in which the necessary speed of response and global spread can

be achieved. There are dangers in strategic alliances in that the objectives of the two

parties may drift apart over time and the arrangement is hard to terminate neatly because

of the lack of firm contracts. The Rover–Honda alliance is an example of an arrangement

that seemed to work well for a time but ended messily when Rover was acquired by

BMW.

3.6 STRATEGIC CHOICE

3.6.1 Importance Of Choice In The Strategy Formulation Process

Strategic choice is the third logical element of the strategy formulation process.

Choice is at the centre of strategy formulation. If there are no choices to be made, there

can be little value in thinking about strategy at all. On the other hand, there will always, in

practice, be limits on the range of possible choices. In general, small enterprises tend to be

limited by their resources, whereas large enterprises find it difficult to change quickly and

so tend to be constrained by their past. In large corporations, managers may find their


NOTES


range of choice limited because some choices are made at a higher level or in another

country. In the public sector, the genuine strategic choices may be made by politicians so

that the role of the manager is limited to devising how best to implement strategies rather

than to ponder fundamental choices of future direction for themselves.

Even when managers are apparently free to make strategic choices, results may

eventually depend as much on chance and opportunity as on the deliberate choices of

those managers. When considering future strategies, it may seem that there are clear choices

to be made. When reflecting on outcomes in retrospect, it is often clear that events, and

particularly unexpected events, played a major role in determining results. When considering

choice, it is necessary to take a prescriptive view. Descriptive ways of thinking may help to

explain the outcomes after the event.

In a tidy logical world, any process of choice could be rationally divided into four

steps—identify options, evaluate the options against preference criteria, select the best

option, and then take action. This suggests that identifying and choosing options can be

done purely analytically. In practice, it may be difficult to identify all possible options with

equal clarity or at the same time. Unexpected events can create new opportunities, destroy

foreseen opportunities, or alter the balance of advantage between opportunities. Identifying

and evaluating options is a useful approach but it has limitations. It is necessary to remember

that the future may evolve differently from any of the options.

Good strategic choices have to be challenging enough to keep ahead of competitors

but also have to be achievable. Analysis has an important role in making strategic choice

but judgement and skill are also critical. For instance, sometimes it may be better to delay

making a decision whereas at other times a wrong decision may be better than no decision.

Strategic choices that keep options open may be preferable in an uncertain future to defined

strategies that depend for their success on uncertain events happening. Such judgements

require wisdom as much as analytical skill.

These words of caution lay the ground for this chapter that might otherwise seem

to make the process of strategic choice sound too mechanistic.

Since strategic choice tends to be so fuzzy, it is useful to define the words being

used. We shall adopt the following definitions.

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3.6.2 Choice and strategic choice-Refer to the process of selecting one option for

implementation. An option is a course of action that it appears possible to take. The

simplest form of choice is therefore between taking an option and not taking it—doing it or

not doing it. Most choices have more shades of possibility than this.

A strategic option is a set of related options (typically combining options for product/

markets and resources) that form a potential strategy. For instance, it might be an option to

enter a new market in a new country. The entry to that market with a chosen method of

distribution and known way of acquiring necessary distribution resources—in fact, a

complete business plan of how to enter the new market successfully—would become a

strategic option._ Chosen Strategy is the strategic option that has been chosen. The

nature of this forms the content of strategy and is addressed in Part IV.

3.6.2 Structure of strategic choice

Above Figure shows how the three logical elements of the strategy formulation

process interlock. The shaded background is a reminder of the importance of context as

determining the issues to be resolved by strategic choice. Figure expands the detail to


NOTES


illustrate the significance of the overlaps. The common ground between any two circles is

of some interest but it is only where all three circles overlap that logically viable options

exist. The chosen strategy emerges as the chosen viable option. It is where the differing

requirements of intent and assessment are most fully met—that is, where the three logical

elements overlap.

The areas where any two circles overlap are also of interest. The criteria for choice

derive from intent and assessment. Feasible options may exist which are not aligned to

strategic intent. This, of course, may raise the question of whether the strategic intent

should be changed. Infeasible options may seem highly attractive and may have powerful

supporters, so the reasons why they are infeasible may need to be carefully argued with

clear evidence in support. Choices of what not to do may sometimes be as important as

choosing what to do. In practice, the process for choosing a strategy may be structured

something like in Figure although the reality is likely to be much messier. The structure of

this chapter is also based on this figure.

The process of choice starts by identifying available options. The chosen strategy

will have to answer the questions ‘what’, ‘how’, ‘why’, ‘who’, and ‘when’, so each option

will provide provisional answers to each of these questions. There are likely to be different

kinds of options. Figure shows three types—products/services/markets, resources/

capabilities, and method of progress—that are typical but not necessarily exhaustive.

3.6.3 Options For Markets And Products/Services

The most obvious type of option relates to which products or services to offer in

which markets. Igor Ansoff was the first to suggest for structuring this decision. The axes

of the diagram are product (including services and any form of offering), market need

(which can be any group of potential customers whether defined by their needs, inclinations,

or income bracket), and market geography (geographical location). The model defines

four cells for the present market geography. The top-left of these cells represents the

present status of the business. The possible future choices about products and markets

can be represented as movements within or away from this cell. One set of choices is

possible within the existing product/market set.

‘Do nothing’—that is, continue present strategies. This strategy is important as it is

usual to compare any proposed change with the ‘do nothing’ option as a baseline. The ‘do

nothing’ option is rarely viable for the long term as it is likely that competitors will gradually

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take the market by improving their products, their processes, or their relationships.

‘Withdraw’—leave the market by closing down or selling out. This appears to be a negative

option but may be necessary to focus available resources into areas of greater strength. It

is common in declining markets to see some of the competitors selling out to others who

can operate the combined operation more cheaply.

‘Consolidate’—attempt to hold market share in existing markets. Ford announced

the agreed acquisition of Kwik Fit. Ford had therefore made a strategic choice. Ford has

a strategic intent to move into automotive services. A strategic assessment of Ford should

show that its existing resources of large plants and skills in design, marketing, finance, and

assembly of new cars are inadequate to support a service business. The decision to acquire

Kwik fit would then be made from options about:

1. _ what types of services to offer and in which markets;

2. _ what resources and capabilities are needed to support these services;

3. _ how to acquire or build these resources.

Clearly there are multiple options in response to each question and there are links

between the questions. A strategic option for Ford would be a set of options that seem to

make sense together.

With out any detailed knowledge of the deliberations within Ford, it would seem

that could be used to illustrate the structure of the decision. It is important to notice that in

practice the decision will also have been influenced by irrational elements. For instance, it

happens that Alex Trotman, the recently retired Chairman of Ford, and Tom Farmer, the

Chairman and majority shareholder of Kwik Fit, are both natives of Edinburgh. It is likely

that they have known each other for some time.

We have no evidence that this had any relevance to Ford’s decision in this case.

The point is that people and events often influence strategic choices. Structured diagrams

only show part of the truth. Positive option which usually involves cutting costs and perhaps

prices. It is more common in markets that are mature or beginning to decline.

3.6.4 Options For Building Resources, Capabilities, And Competence

Just as strategic assessment was necessarily concerned with both the internal and

external perspectives, so strategic choice has to consider options about resources,


NOTES


capabilities, and competencies as well as those for markets and products. It may well be,

therefore, that the strategic assessment has identified strengths and weaknesses in existing

resources and capabilities in comparison with competitors. This may lead to identifying the

improvements needed either to shore up weakness or to build on existing strengths. It is

also likely that potential market/product options will require supporting changes in resources

and capabilities..

The time-scales for developing resources and capabilities may be very long and

may be longer than the time-scale for market entry. For instance, people are a major

resource, but changing the overall mix of people in a company is likely to take years or

decades. Strategic options about building skills and experience may therefore have to

precede choices to enter new markets or to develop individual products. Similarly, computer

systems usually take several years to develop and install and then may be in place for a

decade or more. Information technology investments may therefore have to be seen as

much as a strategic building of future capability as being justified on immediate cost-benefit

grounds.

It may be, of course, that the thinking should be about capability options first and

market options second, so that we are looking for ways to build unique competencies and

then to seek markets and products to demonstrate them.

There are likely to be multiple links between market/product options and resource/

capability options. Entry into new markets is likely to require acquiring access to new

distribution channels and product support. New products may require a fundamental rethink

of development resources and field staff skills. While the resource needs are the most

obvious, the capabilities needed to succeed may be much more subtle. For instance, the

resources may need to be world-class and all the pieces may have to fit into a working

whole.

3.6.5 Options In Methods Of Implementation

There are likely to be options in methods of implementation. There are four main

methods by which companies can grow their capabilities—internal development, acquisition,

contractual arrangements and strategic alliances.

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I-Internal development

Internal development is perhaps the most obvious approach to growth. It involves

developing the necessary skills among existing staff and acquiring the necessary production

capacity piecemeal. The main disadvantage of internal development is that it takes time

during which competitors may move faster or opportunities may be lost. On the other

hand, the risks may be lower than for other methods.

II-Acquisition

Acquisition is a very common implementation option, particularly in countries such

as the UK and USA where the structure of financial markets and equity ownership makes

take-overs relatively easy to achieve. Take-overs and mergers have sometimes been so

dominant as the means of implementing strategies that ‘M&A’ has sometimes become

almost a synonym for ‘strategy’. There can be real advantages to acquisition, particularly

if there is a good fit with what is acquired. Synergy (by which the whole is greater than the

sum of the parts) can occur, although less often than expected. The disadvantages of

mergers are that they can cause deep operational and psychological turmoil which can

distract the people who have to make them work. Competitors can take advantage of this

turmoil, as they are free to concentrate on customers rather than on internal changes. One

real problem is that the thinking about mergers and acquisitions is often less than objective.

Senior managers and professional advisers tend to benefit from mergers in the short term

whatever the long-term outcome. There is also a tendency for the strategic rationale for the

merger to be lost in the excitement of the chase. Often, too, pressure from competing

acquirers can cause the price to rise to too high a level. Many acquisitions may be beneficial

at the right price but may destroy shareholder value at too high a price.

3.6.6 Contractual Arrangements

Contractual arrangements come in many different forms. Consortia are groups of

companies that form a joint entity for a specific purpose—such as building the channel

tunnel. When the project is finished, the consortium breaks up and the separate partners

may find themselves competing, possibly in different consortia, for the next project. This

form is common in the civil engineering and defence industries. Franchising is another

form of contractual arrangement and is commonest in retailing. Well known


NOTES


High Street names such as the Body Shop and McDonalds are franchises. The

franchisee pays the franchiser a fee for services and royalties, typically for use of the

company name, business approaches, and central advertising. The franchisee is halfway

between an employee and an independent entrepreneur with his risk limited by the success

of the brand name and by the support and advice provided by the franchiser.

III-Licensing- is a third form of contractual arrangement. A common example is when a

small inventive company licenses its product or patent to be manufactured and marketed

by others. This can allow quick growth by avoiding the need to build manufacturing or

distribution capability. At the same time, the intellectual property rights for the invention are

retained. Licensing is probably most frequent in high technology businesses and the creative

arts.

IV. Agents- are a long-standing means of doing business, particularly in foreign countries

or specialized markets where volumes of business may be too low to justify a permanent

presence. The agent is familiar with local requirements and calls for additional support

from the principal when opportunities arise. The difficulties with agents include conflicts of

interest when the same agent acts for competing principals or is simply inert.

All the above arrangements have in common the need for a written contract which

binds the two or more parties into a clear agreement as to who will do what and pay what.

Such contracts will normally have a defined duration. The contracts can be very varied to

suit the needs of each individual. Disputes can be handled through the courts, by agreed

arbitration procedures, or by not renewing the contract at the expiry of the contracted

term.

3.7 GROUPING OPTIONS INTO STRATEGIC OPTIONS

Options about product/markets, resources/capabilities, and the method of

implementation have to be combined into a much smaller number of strategic options. This

may be a bottom-up or top-down process. The bottom-up approach implies linking what

might be done in detail into potential strategies that seem to make wider sense. The top-

down approach means testing general ideas of future direction against detailed options. In

practice, the process is likely to combine top-down and bottom-up thinking.

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3.7.1 General Tests Of Strategic Options

Each strategic option has then to pass two tests based on the logic of, it must be:

_ Aligned in that it conforms to the strategic intent. This test answers the question ‘Does

this option take us towards where we want to go?’

_ Feasible in that the capabilities and resources necessary for success can be made

available. This answers the question: ‘Will it work?’ This test is likely to draw on the

analysis of the strategic assessment. The tests of feasibility require serious consideration of

what will be required to implement the necessary changes.

A third test goes beyond logic to answer the question: ‘Will this option be

acceptable?’ Acceptable means that it will win the approval of both those who will have to

approve it and those who will have to implement it.

Any strategic option has to pass all three tests to be viable. If more than one

strategic option passes these tests, they may have to be compared with each other to

choose the ‘best’. The judgement has to take into account both tangible characteristics

such as risk and return and less tangible matters such as match to values and culture.

In practice, the number of strategic options is rarely large. The tests, though

important, cannot be completely objective.

3.7.2 Who Should Be Involved With The Choice?

Strategic choice is as much a political as a logical process. In a book it is easier to

describe the logic than the politics. Each context will have its own pattern of politics which

will be important in determining both how and what strategic decisions are made. Questions

that may help to reveal the political reality include:

• Who stands to gain or lose from a particular strategic choice?

• What existing coalitions exist and how will these be affected?

• Who may be seen to have originated or supported particular choices or arguments?

Ultimately it is likely that a strategic choice will need approval by the board but this

may well be the formal confirmation of a decision that has been made before the actual

meeting. For a clear and realistic exposition of how to influence committees, see Parkinson


NOTES


(1960). His advice, in summary, is to focus attention on the members of the committee

who are undecided or even perhaps fail to understand the issues.

Formal approval is necessary but no strategy will be effective unless it also has the

active support of a far wider range of people who both understand the proposals and are

prepared to work to make the necessary changes happen. This issue will be addressed but

one way of achieving this support is to involve these people in the process of making the

decision. Both the logic and politics of the choice may be heavily dependent on the context.

In some cases, strategy is driven solely by competitive advantage. In other cases,

there may be a strategic intent or vision that determines long-term direction so that the

strategic choices are about means rather than direction.

3.7.3 Theoretical Frameworks For Assisting Strategic Choice

Several attempts have been made to provide theoretical frameworks for making

strategic choices. One that was highly influential when first devised was the concept of

Generic Strategies (Porter 1985). Porter suggested that the most fundamental choices

facing any business are the scope of the markets that it attempts to serve and how it

attempts to compete in these chosen markets. The scope can either be broad—tackling

the whole market—or narrow—tackling only a particular part of the market. He also

suggested that there were only two effective ways of competing in a market.

Companies achieve competitive advantage either by having the lowest product

cost (note: this is not the same as having the lowest price) or by having products which are

different in ways which are valued by customers. Therefore the scope of the chosen market

and the chosen basis of competition.

The four quadrants of four possible generic strategies. If the scope is narrow, the

distinction between cost and differentiation becomes unimportant so Porter defined just

three ‘generic’ strategies—cost leadership, differentiation, and focus (which combined the

two lower squares in the diagram). Note that differentiation implies a difference in the

perception by clients of the product, whereas focus implies a difference in target market.

In the Porter view of generic strategy, the worst crime (weakest strategy) is being ‘stuck in

the middle’, that is, being muddled in either of the two dimensions.

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Practicing managers were initially enthusiastic about generic strategies when first

published and the ideas were used extensively. Gradually, however, it became clear that

reality was less black and white in its distinction between differentiation and cost. There

are very few companies that can ignore cost however different their product. Equally,

there are very few who will admit that their product is the same as all the others. David

Sainsbury, in a public discussion with Michael Porter, pointed out that the Sainsbury’s

slogan ‘Good food costs less at Sainsbury’s’ was a clear statement of being stuck in the

middle but had also proved a successful strategy for Sainsbury’s over a long period of

time.

Porter used the car industry as an example of generic strategies in practice. Toyota

is (or was at the time) the low cost producer in the industry. Toyota achieves its cost

leadership strategy by adopting lean production, careful choice and control of suppliers,

efficient distribution, and low servicing costs from a quality product. Note how the cost

leadership must be in all aspects of the business (or value chain).

BMW is an example of a differentiation strategy. BMW still serves a relatively

wide range of the total market but its cars are differentiated in the eyes of the customer

who is prepared to pay a higher price for a BMW than for a Toyota, for instance, of similar

specification..

Morgan is an example of a Focus strategy. It only addresses a very small part of

the market—(i.e. those who enjoy getting wet and like the sound of an engine more than

conversation!). Each of these three companies has been successful by pushing a particularly

generic strategy successfully.

B

The important addition is the ‘hybrid’ strategy that is an optimal balance between

price and the added value perceived by the customer. This coincides with experience

when purchasing household goods. The offerings may often fall into three broad categories.

There are ‘cheap’ offerings which give minimal facilities and appeal to customers

to whom price is the most important issue. At the other end of the scale are the ‘luxury’

offerings that have demonstrably high quality or numerous features and appeal to customers

who want the best and the most differentiated. In the middle are the ‘good-value’ offerings

that compromise between the two extremes by offering a good trade-off between price

and value. This category often accounts for a sizeable percentage of the total market. The

Sainsbury’s slogan ‘Good food costs less at Sainsbury’s’ can be seen as an attempt to


NOTES


capture this middle segment. Sainsbury’s was the leading food retailer in southern England

for many years. If it has lost this position this would seem to be because its original strategy

has been successfully imitated rather than because it was a poor strategy.

3.7.4 Strategic Choices In The Case Examples

The ICL case example illustrates how a strategic choice was made in a period of

a few months. It gives some indications of the strategic options open to ICL at the time and

also how the crisis broadened the options that could be considered. The case example

also shows how creditors, potential partners, the government, and a new management

team were all relevant both to the choice that was made and to how that choice was made.

The relevance of different stakeholder groups to making strategic choice is also

clear in the Nolan, Norton case example. In this case, the strategic choice about general

future direction was made over a period of years but the eventual choice of a specific

partner was necessarily made in a period of just a few weeks. Marks & Spencer clearly

have a large number of options for markets and products on a global basis. This does not

necessarily make their strategic choice any easier as, with such a high performance record

from the past, options will have to meet rigorous tests of feasibility and acceptability both

in terms of financial performance and fit with values.

3.8 BALANCE SCORE CARD

The balanced scorecard is a strategic planning and management system that is

used extensively in business and industry, government, and nonprofit organizations

worldwide to align business activities to the vision and strategy of the organization, improve

internal and external communications, and monitor organization performance against

strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and

David Norton as a performance measurement framework that added strategic non-financial

performance measures to traditional financial metrics to give managers and executives a more

‘balanced’ view of organizational performance. While the phrase balanced scorecard

was coined in the early 1990s, the roots of the this type of approach are deep, and include

the pioneering work of General Electric on performance measurement reporting in the

1950’s and the work of French process engineers (who created the Tableau de Bord –

literally, a “dashboard” of performance measures) in the early part of the 20th century.

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The balanced scorecard has evolved from its early use as a simple performance

measurement framework to a full strategic planning and management system. The “new”

balanced scorecard transforms an organization’s strategic plan from an attractive but passive

document into the “marching orders” for the organization on a daily basis. It provides a

framework that not only provides performance measurements, but helps planners identify

what should be done and measured. It enables executives to truly execute their strategies.

This new approach to strategic management was first detailed in a series

of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses

and vagueness of previous management approaches, the balanced scorecard approach

provides a clear prescription as to what companies should measure in order to ‘balance’

the financial perspective. The balanced scorecard is a management system (not only a

measurement system) that enables organizations to clarify their vision and strategy and

translate them into action. It provides feedback around both the internal business processes

and external outcomes in order to continuously improve strategic performance and results.

When fully deployed, the balanced scorecard transforms strategic planning from an academic

exercise into the nerve center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

“The balanced scorecard retains traditional financial measures. But financial measures

tell the story of past events, an adequate story for industrial age companies for which

investments in long-term capabilities and customer relationships were not critical for success.

These financial measures are inadequate, however, for guiding and evaluating the journey

that information age companies must make to create future value through investment in

customers, suppliers, employees, processes, technology, and innovation.”


NOTES


The balanced scorecard suggests that we view the organization from four

perspectives, and to develop metrics, collect data and analyze it relative to each of these

perspectives:

3.8.1 The Learning & Growth Perspective

This perspective includes employee training and corporate cultural attitudes related

to both individual and corporate self-improvement. In a knowledge-worker organization,

people — the only repository of knowledge — are the main resource. In the current

climate of rapid technological change, it is becoming necessary for knowledge workers to

be in a continuous learning mode. Government agencies often find themselves unable to

hire new technical workers, and at the same time there is a decline in training of existing

employees. This is a leading indicator of ‘brain drain’ that must be reversed. Metrics can

be put into place to guide managers in focusing training funds where they can help the

most. In any case, learning and growth constitute the essential foundation for success of

any knowledge-worker organization.

Kaplan and Norton emphasize that ‘learning’ is more than ‘training’; it also includes

things like mentors and tutors within the organization, as well as that ease of communication

among workers that allows them to readily get help on a problem when it is needed. It also

includes technological tools; what the Baldrige criteria call “high performance work systems.”

The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this

perspective allow the managers to know how well their business is running, and whether its

products and services conform to customer requirements (the mission). These metrics

have to be carefully designed by those who know these processes most intimately; with

our unique missions these are not something that can be developed by outside consultants.

In addition to the strategic management process, two kinds of business processes

may be identified: a) mission-oriented processes, and b) support processes. Mission-

oriented processes are the special functions of government offices, and many unique

problems are encountered in these processes. The support processes are more repetitive

in nature and hence easier to measure and benchmark using generic metrics.

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The Customer Perspective

Recent management philosophy has shown an increasing realization of the

importance of customer focus and customer satisfaction in any business. These are leading

indicators: if customers are not satisfied, they will eventually find other suppliers that will

meet their needs. Poor performance from this perspective is thus a leading indicator of

future decline, even though the current financial picture may look good.

In developing metrics for satisfaction, customers should be analyzed in terms of kinds of

customers and the kinds of processes for which we are providing a product or service to

those customer groups.

The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data. Timely

and accurate funding data will always be a priority, and managers will do whatever necessary

to provide it. In fact, often there is more than enough handling and processing of financial

data. With the implementation of a corporate database, it is hoped that more of the

processing can be centralized and automated. But the point is that the current emphasis on

financials leads to the “unbalanced” situation with regard to other perspectives.

There is perhaps a need to include additional financial-related data, such as risk

assessment and cost-benefit data, in this category.

3.8.2 The Balanced Scorecard And Measurement-Based Management

The balanced scorecard methodology builds on some key concepts of previous

management ideas such as Total Quality Management (TQM), including customer-defined

quality, continuous improvement, employee empowerment, and — primarily —

measurement-based management and feedback..

Double-Loop Feedback

In traditional industrial activity, “quality control” and “zero defects” were the

watchwords. In order to shield the customer from receiving poor quality products, aggressive

efforts were focused on inspection and testing at the end of the production line. The problem

with this approach — as pointed out by Deming — is that the true causes of defects could


NOTES


never be identified, and there would always be inefficiencies due to the rejection of defects.

What Deming saw was that variation is created at every step in a production process, and

the causes of variation need to be identified and fixed. If this can be done, then there is a

way to reduce the defects and improve product quality indefinitely. To establish such a

process, Deming emphasized that all business processes should be part of a system with

feedback loops. The feedback data should be examined by managers to determine the

causes of variation, what are the processes with significant problems, and then they can

focus attention on fixing that subset of processes.

The balanced scorecard incorporates feedback around internal business process

outputs, as in TQM, but also adds a feedback loop around the outcomes of business

strategies. This creates a “double-loop feedback” process in the balanced scorecard.

Outcome Metrics

You can’t improve what you can’t measure. So metrics must be developed based

on the priorities of the strategic plan, which provides the key business drivers and criteria

for metrics that managers most desire to watch. Processes are then designed to collect

information relevant to these metrics and reduce it to numerical form for storage, display,

and analysis. Decision makers examine the outcomes of various measured processes and

strategies and track the results to guide the company and provide feedback.

So the value of metrics is in their ability to provide a factual basis for defining:

• Strategic feedback to show the present status of the organization from many

perspectives for decision makers

• Diagnostic feedback into various processes to guide improvements on a continuous

basis

• Trends in performance over time as the metrics are tracked

• Feedback around the measurement methods themselves, and which metrics should

be tracked

• Quantitative inputs to forecasting methods and models for decision support systems

3.8.3 Management By Fact

The goal of making measurements is to permit managers to see their company

more clearly from many perspectives and hence to make wiser long-term decisions. The

Baldrige Criteria (1997) booklet reiterates this concept of fact-based management:

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“Modern businesses depend upon measurement and analysis of performance.

Measurements must derive from the company’s strategy and provide critical data and

information about key processes, outputs and results. Data and information needed for

performance measurement and improvement are of many types, including: customer, product

and service performance, operations, market, competitive comparisons, supplier, employee-

related, and cost and financial. Analysis entails using data to determine trends, projections,

and cause and effect — that might not be evident without analysis. Data and analysis

support a variety of company purposes, such as planning, reviewing company performance,

improving operations, and comparing company performance with competitors’ or with

‘best practices’ benchmarks.

A major consideration in performance improvement involves the creation and use

of performance measures or indicators. Performance measures or indicators are measurable

characteristics of products, services, processes, and operations the company uses to track

and improve performance. The measures or indicators should be selected to best represent

the factors that lead to improved customer, operational, and financial performance. A

comprehensive set of measures or indicators tied to customer and/or company performance

requirements represents a clear basis for aligning all activities with the company’s goals.

Through the analysis of data from the tracking processes, the measures or indicators

themselves may be evaluated and changed to better support such goals.”

The steps to success of balance score card:


NOTES


The balanced scorecard is a strategic planning and management system that helps

everyone in an organization understand and work towards a shared vision. A completed

scorecard system aligns the organization’s picture of the future (shared vision), with business

strategy, desired employee behaviors, and day-to-day operations. Strategic performance

measures are used to better inform decision-making and show progress toward desired

results. The organization can then focus on the most important things that are needed to

achieve its Vision and satisfy customers, stakeholders, and employees. Other benefits

include measuring what matters, identifying more efficient processes focused on customer

needs, improving prioritization of initiatives, improving internal and external communications,

improving alignment of strategy and day-to-day operations, and linking budgeting and cost

control processes to strategy.

The components of the management system are shown in the figure above. Starting

at “high altitude”, Mission, Vision, and Core Values are translated into desired Strategic

Results. The organization’s “Pillars of Excellence”, or Strategic Themes, are selected to

focus effort on the strategies that matter the most to success. Strategic Objectives are used

to decompose strategy into actionable components that can be monitored using Performance

Measures. Measures allow the organization to track results against targets, and to celebrate

success and identify potential problems early enough to fix them. Finally, Strategic Initiatives

translate strategy into a set of high-priority projects that need to be implemented to ensure

the success of strategy. Engaged leadership and interactive, two-way communication are

the cornerstones of a successful management system. Once the strategic thinking and

necessary actions are determined, annual program plans, projects and service level

agreements can be developed and translated into budget requests.

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The balanced scorecard management system is built by the organization’s leaders,

managers, and other employees. Facilitated workshops, led by our senior consultants,

keep employees at all levels of the organization engaged, on track and on schedule. Our

award-winning balanced scorecard framework, Nine Steps to Success, is a disciplined,

practical approach to developing the management system. We have used this framework

to train over 5000 people and have consult with over 100 companies in 15 countries.

The Nine Steps in Balance Score Card:

Step One of the scorecard building process starts with an assessment of the

organization’s Mission and Vision, challenges (pains), enablers, and values. Step One also

includes preparing a change management plan for the organization, and conducting a focused

communications workshop to identify key messages, media outlets, timing, and messengers.

In Step Two, elements of the organization’s strategy, including Strategic Results,

Strategic Themes, and Perspectives, are developed by workshop participants to focus

attention on customer needs and the organization’s value proposition.


NOTES


In Step Three, the strategic elements developed in Steps One and Two are

decomposed into Strategic Objectives, which are the basic building blocks of strategy and

define the organization’s strategic intent. Objectives are first initiated and categorized on

the Strategic Theme level, categorized by Perspective, linked in cause-effect linkages

(Strategy Maps) for each Strategic Theme, and then later merged together to produce one

set of Strategic Objectives for the entire organization.

In Step Four, the cause and effect linkages between the enterprise-wide Strategic

Objectives are formalized in an enterprise-wide Strategy Map. The previously constructed

theme Strategy Maps are merged into an overall enterprise-wide Strategy Map that shows

how the organization creates value for its customers and stakeholders.

In Step Five, Performance Measures are developed for each of the enterprise-

wide Strategic Objectives. Leading and lagging measures are identified, expected targets

and thresholds are established, and baseline and benchmarking data is developed.

In Step Six, Strategic Initiatives are developed that support the Strategic Objectives.

To build accountability throughout the organization, ownership of Performance Measures

and Strategic Initiatives is assigned to the appropriate staff and documented in data definition

tables.

In Step Seven, the implementation process begins by applying performance

measurement software to get the right performance information to the right people at the

right time. Automation adds structure and discipline to implementing the Balanced Scorecard

system, helps transform disparate corporate data into information and knowledge, and

helps communicate performance information. In short, automation helps people make better

decisions because it offers quick access to actual performance data.

In Step Eight, the enterprise-level scorecard is ‘cascaded’ down into business and

support unit scorecards, meaning the organizational level scorecard (the first Tier) is

translated into business unit or support unit scorecards (the second Tier) and then later to

team and individual scorecards (the third Tier). Cascading translates high-level strategy

into lower-level objectives, measures, and operational details. Cascading is the key to

organization alignment around strategy. Team and individual scorecards link day-to-day

work with department goals and corporate vision. Cascading is the key to organization

alignment around strategy. Performance measures are developed for all objectives at all

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organization levels. As the scorecard management system is cascaded down through the

organization, objectives become more operational and tactical, as do the performance

measures. Accountability follows the objectives and measures, as ownership is defined at

each level. An emphasis on results and the strategies needed to produce results is

communicated throughout the organization.

In Step Nine, an Evaluation of the completed scorecard is done. During this

evaluation, the organization tries to answer questions such as, ‘Are our strategies working?’,

‘Are we measuring the right things?’, ‘Has our environment changed?’ and ‘Are we

budgeting our money strategically?’

Summary

Functional-level strategies are concerned with coordinating the functional areas of

the organization (marketing, finance, human resources, production, research and

development, etc.) so that each functional area upholds and contributes to individual

business-level strategies and the overall corporate-level strategy.

Strategic choice is the third logical element of the strategy process and has a central

role. The process of choice can only be described as deciding between different options

but this makes the process neater and tidier than it really is. This chapter focuses on the

four ways to achieve competitive advantage at the functional level: Increasing efficiency,

improving quality, sustaining innovation, and improving customer responsiveness.

Business-level strategies are similar to corporate-strategies in that they focus on

overall performance. In contrast to corporate-level strategy, however, they focus on only

one rather than a portfolio of businesses. There are likely to be possible options about

product and services and about market segments defined by both customer need and

geography. There will also be options on what resources and capabilities are needed and

how to build these—implementation options. Indicators of what is possible and what is

required may well follow from the results of a strategic assessment.

One way to deal with this complexity is through categorization; one categorization

scheme is to classify corporate-level strategy decisions into three different types, or grand

strategies. These grand strategies involve efforts to expand business operations (growth

strategies), decrease the scope of business operations (retrenchment strategies), or maintain

the status quo (stability strategies).


NOTES


The process of choice starts by identifying available options. The chosen strategy

will have to answer the questions ‘what’, ‘how’, ‘why’, ‘who’, and ‘when’, so each option

will provide provisional answers to each of these questions. There are likely to be different

kinds of options. Figure shows three types—products/services/markets, resources/

capabilities, and method of progress—that are typical but not necessarily exhaustive

The various options are likely to be inter-related so it is necessary to identify a

small number of strategic options made up of appropriately related options. Strategic choice

involves comparing strategic options both logically and politically. Strategic options have

to be aligned, acceptable, and feasible. If there is more than one strategic option that meets

these tests, they will need to be compared. It is simplistic to treat strategic choice just as

the logical comparison of strategic options. The process of decision is also political. It is

important that those who will be crucial to implementing the strategy support the choice

made.

Short Question

1. Identify the functional level strategies.

2. List out the types of business level strategies.

3. Define vertical integration

4. What is called as diversification?

5. What is called as strategic alliances?

6. What are the benefits of balance score card?

Review Question

7. Explain the functional level strategies.

8. Discuss the types of business level strategies.

9. Describe the nature and scope of corporate level strategies.

10. Explain the functions and scope of balance score card.

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NOTES


UNIT IV

STRATEGY IMPLEMENTATION

& EVALUATION

Introduction

The reorganisation often has as objective to improve the effectiveness and/or

efficiency. It also may be initiated to enhance the ability of the organisation to adapt itself to

changing environments, to become more flexible. Reorganisations are often initiated to

enhance the capacity of the organisation to sustain its activities.

The structure of the organisation describes the functions, tasks and authorities of

the departments, divisions and individual employees and the relationships between them

(line of command, communication and procedures). It also describes the number of

employees in each division, unit and department.

On the one hand the structure divides departments, divisions and individuals on

basis of tasks, functions and authorities. On the other hand the structure coordinates these

units through lines of communication and command. Only when the different units work in

conjunction, the organisation is able to function as a whole. The organisation structure has

to facilitate the different processes in the organisation. A general rule of the thumb is that

the organisation structure should enhance the progress of the processes. It is not

recommendable to breakdown processes unnecessarily because of the structure of the

organisation. The structure has to provide coordination mechanism if the process is divided

over more units.

This document provides descriptions of typical structures and some guidelines for

designing structures.

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This chapter will not by itself change your view or way of acquiring power and

effectively exercising influence. It does provide an opportunity to think differently about

power, politics and influence, and it can refocus your attention on organizational issues and

problems. For strategic leaders in most organizations the key to successfully implementing

organizational change and improving long term performance rests with the leader’s skill in

knowing how to make power dynamics work for the organization, instead of against it.

Advances in management thinking have observed that managers in organisations

carry out two types of activity that are intended to ‘control’ the performance and behaviour

of an organisation; Strategic Control and Operational Control (sometimes referred to as

Management Control). Each type of activity introduces particular requirements of an

organisation and its associated measurement and feedback systems.

Financial performance control, or simply referred to as financial control, is relevant

for those aspects of business operations whose outcomes are expressed in monetary terms.

Financial control is exercised at operative level as well as at overall organisation level

though techniques involved are different.

Social responsibility is a part of overall business objectives of an organisation.

Most of the organisations set their social objectives either explicitly or implicitly depending

on organisational practices.

Learning Objectives

On completion of this chapter you should be able to:

1. Know the factors influencing the organization structure

2. Influences of structure of organization in implementing the strategies

3. Design the strategic control system

4. Understand the types of control systems in strategic implementation

5. Influences of power and politics in strategic issues.

6. ?6. Understand the financial performance controls.

7. ?Understand the budgetary, ratio analysis and ROI.

8. 8.?Understand the Social Performance Control.


NOTES


4.1 DESIGNING ORGANIZATIONAL STRUCTURE

Evolving Organizations

Organisation structures are seldom designed from scratch. An organisation usually

starts small and hopefully becomes more successful and grows. Because it grows, it needs

to structure itself. Most organisations do not grow from a one-person operation to a

hundred-person operation overnight. They evolve and so does the

organisation structure. The larger organisations are able to take larger expansion-

steps. These steps may have more impact on the organisation structure. However after

some time most organisations conclude that something went seriously wrong with its structure

and decides to reorganise it. Because reorganisations are often associated with staff

reductions they are very sensitive processes. A part of the sensitivity can be overcome to

reorganise during years with low unemployment rates and to work actively to find job

prospects elsewhere. Why reorganizations





Basic functions of organisations

Besides earlier given considerations the structure should reserve place for all the

organisation functions. Henry Mintzberg’s identified 5 main functions that each organisation

has to fulfill. The so-called Basic Parts are:

Mintzberg’s Basic Parts

1. Core Operations

2. Support Operations

3. Technostructure

4. Strategic Apex;

5. Middle Line Management

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Typical Structures

Organisations can be structured in different ways. Usually the structure is based

on splitting and grouping of tasks. The grouping of tasks can be done on basis of 6 different

criteria and the final structure is often a combination of these six criteria:

1. Outputs (goods/services)

2. Functions

3. Target groups

4. Skills

5. Geographical areas

6. Work shifts

Grouping criteria

The method of grouping depends on a number of issues. First of all the grouping

should facilitate the processes in the organisation and not disturb them. The faster the

processes progress and the cheaper the organisation can produce the better. Progress

may stagnate and result in cost overruns due to inappropriate coordination of activities.

The structure should facilitate coordination to reduce problems between officers who needs

each other’s work. Ideally the structure would fully utilise every officer and piece of

equipment. The structure influences the motivation of the staff. If the staffs feel that their

work is monotonous or they have to carry out to many tasks below their level, they may

become dissatisfied with their work. The nature and level of activities should match as

close as possible with the capacities of the employees. Furthermore the span of control of

the managers is not unlimited. In other words the span of control affects the number of

units. The output and function grouping are the most common form of grouping forms.

Output, target group and geographical area structure primarily groups tasks on basis of the

connections between activities. All activities are combined in one group that produces the

output, or related to meet the demands of the target group or take place at a specific

location. A typical example of grouping on output is presented below.

The university is organised in faculties. Each faculty representing a group of outputs

(study programs). Grouping on function has the major advantage that it standardises the

processes. The officers are grouped on basis of similarity in activities.


NOTES


The production process is split up in sub processes. Each sub process produces a

semi-finished product and requires a group of people and equipment with specific skills,

education and personal characteristics that are of little use to the other groups. Each group

tends to operate more or less independently of each other. A typical example of functional

grouping is the provincial road agency. These agencies are often organised in five

departments, each with their specific functions. Standardisation of the process can also be

achieved through grouping on skills. In a way grouping of skills is variation of functional

grouping. Each unit provide specialised skills and work on a specific process. For example:

Structuring the organisation on basis of functions or skills/knowledge has a number of

advantages and disadvantages: Because of the economics of scale, it is more likely that the

utilisation degree of staff and equipment of function and skill oriented groups is high. This

means that these forms of structures are more conducive to investments in expensive

specialists, up-to-date skill development programs and the latest technology. Furthermore

the officers become more efficient in their operation, as they develop routines and do not

have start and ending difficulties. However the officers may perceive the tasks as

monotonous.

Disadvantages of grouping

The main disadvantage of the functional structures is that because of the independent

character of each unit, the units tend to operate as independent companies with little

interaction with the other units. This may result in mismatches between the expectations of

the semi-finished product producing and –receiving unit. The utilisation degree of equipment

or personnel in output based structures like universities are usually lower, but these structures

have also a number of advantages:

o Faster progression of production due to optimal location of equipment and persons

o Less problems due to easier communication between the different individuals of

different backgrounds

I-Coordination

Organisations structures not just group tasks and functions in units, divisions or

department, but also regulate the coordination between them. There are basically three

ways of coordination:

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1. Mutual adjustment

2. Supervision

3. Standardisation

Mutual adjustment

• Mutual adjustment coordinates work by (informal) communication. Mutual

adjustment can be regulated through horizontal and diagonal links.

Supervision

• Supervision achieves coordination by having one person take responsibility for the

work of others. The manager thinks how to use the hands of others, give the

workers instructions and monitor their performance. The vertical lines of command

present supervision.

Standardisation

• It is also possible to coordinate the work through standardisation. Standardisation

allows coordination to take place on the drawing board, before the action takes

place. Standardisation cannot be presented in an organisation structure.

• Organizing: the process of coordinating and allocating a firm’s resources so

that the firm can carry out its plans and achieve its goals (one of the four activities

of management)

What are the structural building blocks that managers use to design organizations?

• Division of labour

• Process of dividing work into separate jobs

• Assigning tasks to workers

• Departmentalization

• Managerial hierarchy

• Levels of management within the organization

• Managerial span of control

• Number of employees the manager directly supervises

• Amount of centralization and decentralization in the organization


NOTES


• Deciding at which level in the organization decisions should be made

• Centralization is degree to which formal authority is concentrated in one area or

level of the organization

• Structural Building Blocks

1. Division of Labor

2. Departmentalization

3. Managerial Hierarchy

4. Span of Control

5. Centralization of Decision-Making

I- Division of labour: the process of dividing work into separate jobs and assigning

tasks to workers

II-Departmentalization: the process of grouping jobs together so that similar or associated

tasks and activities can be coordinated

What are the five types of departmentalization?

Functional– based on primary functions performed within an organizational unit

Product– based on the goods or services produced or sold by the organizational unit

Process– based on the production process used by the organizational unit

Customer– based on the primary type of customer served by the organizational unit

Geographic– based on geographic segmentation of organizational units

4.1.1 The Essentials Checklists Of Organization Structure Design

Before entering into the control system brush up the hierarchy level of the management

I-Managerial Hierarchy: the levels of management within an organization; typically

includes top, middle, and supervisory levels

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Fig: Managerial

Pyramid

1. Top Management

2. Middle Management

3. Supervisory Management

4. Power

5. Number of Employees

II- Span of Control:

The number of employees a manager directly supervises:

Factors Determining Span of Control

• Nature of the task

• Location of the workers

• Ability of manager to delegate

• Amount of interaction and feedback between manager and workers

• Level of skill and motivation of the workers


NOTES


III-Centralization and Decentralization

Centralization- the process of grouping jobs together so that similar or associated tasks

and activities can be coordinated

Decentralization Pushing decision-making authority down the organizational hierarchy,

giving lower-level workers more responsibility –

How can the degree of centralization/decentralization be altered to make an organization

more successful?

• Centralization allows top managers

• To develop a broad view of operations

• To exercise tight financial controls

• Highly decentralized organizations give lower-level personnel

• More responsibility

• Power to make and implement decisions

• Decentralization can result in

• Faster decision-making

• Increased innovation and responsiveness to customer preferences

IV-Types of Organization

I-Mechanistic Organization

• Relatively high degree of work specialization

• Rigid departmentalizatn

• Many layers of management

• Narrow spans of control

• Centralized decision making

• Long chain of command

• Results in a tall organizational structure

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II-Organic organization.

• Relatively low degree of work specialization

• Loose departmentalization

• Few levels of management

• Wide spans of control

• Decentralized decision making

• Short chain of command

• Results in a flat organizational structure

V-Line and staff position Line organisations

I-Line Organization

The line organisation is the most basic form of organisation. The line organisation

present all the management levels and operational functions of the organisation, but does

not contain advisory functions.

The lines of command and communication in a line organisation are typically vertical

lines. However the structure may have developed in several layers, resulting in long

communication lines. The top of the organisation also has to take many decisions for the

low level echelons. In many organisations the managers of the different units or their

subordinates have to consult each other about specifics. The hierarchical lines will become

overloaded, when all communication would flow over these lines. The line organisations

may develop horizontal and diagonal contact lines in the organisation to facilitate the

consultation and coordination process. The fat lines present the horizontal and diagonal

relationships between the different Design & Implementation divisions. When the consultation

process does not result in positive results the different units may pursue the hierarchical

lines to get a workable solution.

Line positions- Directly involved in the processes used to create goods and services,

typically found in areas such as:

• Production

• Marketing

• Finance


NOTES


II-Staff Organization

Another form of organisation is the staff organisation. The staff organisation is

similar to the line organisation but includes units which role is only to advice. These advisory

units do not have hierarchical responsibilities and authorities. The advisory units are usually

experts with regard to policy development. They are authorised to issue advice at all times

and are not limited to requests. But only the line units can transform the advice in action.

The advisory units are usually expensive and often it is cheaper to procure expertise

externally. An important precondition is that the advisory unit keeps in contact with the line

units and is able to sell their ideas to the line agencies.

A special form of advisory unit is a unit that gives binding advice to line agencies.

The binding advice is often operational of nature and formulated in legal documents like

procedures, by-laws, the law, etc. These advisory units do not direct the line units but tell

them if they want to pursue in a certain direction they have to do the following….And often

these advisory units not only provide the binding advice but also implement it. Typical

examples are the admin & financial departments and the human resource departments.

Unfortunately quite a few of these advisory units have translated their role into a controlling

one. They no longer provide advice to the line units and do not implement it. These additional

control lines frustrate many line units. The more the binding advisory unit is involved in

implementation, the higher the acceptance of its role. In the chart below presents the human

resource development department as an advisory unit.

Staff positions- Provide the administrative and support services that line employees need

to achieve the firm’s goals

• Found in areas such as

• Legal counseling

• Managerial consulting

• Public relations

• Human resource management

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What is the difference between line positions and staff positions?

Common Organizational Structures

• Line organization clear chain of command

• Line-and-staff organization line positions & staff positions

• Committee structure groups

• Matrix structure combines functional and product departmentalization

III-Functional Organization

A more complex structure is the functional organisation. Where the advisory unit in

the staff organisation is only able to advice in the functional organisation these specialists

have a limited, clearly defined scope of authority and are able to give directions. In 1999

the International Labour Organisation worked with this structure. Technical backstoppers

at headquarters or in the so-called Multi-Disciplinary Teams had to direct technical activities

of all operational offices.

This structure is often misunderstood and result in power conflicts between the

traditional line-managed units and these specialists.

IV- Project and matrix organisations

One of the characteristics of a project is the limited duration in which a particular

output has to be created or problem has to be solved. Large projects, like donor-funded

projects may last several years before it is completed. Such projects may set up a full-time

project team for the duration of the project. The members of the project team may be

permanently employed and seconded to the project from the department or division or

may be specially recruited for the project and given a fixed term contract.

There are also organisations that continuously carry out a range of smaller projects.

The composition of the project team may vary during the duration of the projects and often

the team members tend to work on several projects at the time. These organisations often

adopt a matrix structure. The specialist sections become resource pools and the project

manager and the head of the resource pool make agreements about the resource allocation

to specific projects. The specialist section may also have sanction authority over the project


NOTES


result. However this authority often leads to conflicts with the project managers. The

manager of the specialist section usually has to develop the capacities of his/her staff.

Charts and descriptions It is seldom enough to present the organisation on a chart. The

chart does not provide information about the contents of the function of each unit, the tasks

that have to be carried out, the authorities of the unit and a description of the relationships

with other units. If the unit is not an individual, it also needs description about the number

and composition of its staff members and a description of its intra structure.

V-Reengineering- The complete redesign of business structures and processes in order

to improve operations what is the goal of reengineering?

Reengineering is the complete redesign of business structures and processes in order to

improve operations

• Goal of reengineering

• Redesign business processes to achieve improvements in:

• Cost control

• Product quality

• Customer service

• Speed

How does the informal organization affect the performance of a company?

V-Informal organization

Informal organization - The network of connections and channels of communication

based on the informal relationships of individuals inside an organization

Functions of the Informal Organization

• Friendships & social contact

• Information & sense of control over work environment

• Source of status & recognition

Give employees more control over their work environment by delivering a

continuous stream of company information, helping employees stay informed Informal

relationships can be:

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NOTES


• Between people at the same hierarchical level

• Between people at different levels and in different departments

VI-Social network analysis: the mapping of social relationships among individuals in an

organization

VII-Virtual corporations

• Network of independent companies linked by information technology to share

skills, costs, and access to one another’s markets

• Allows companies to come together quickly to exploit rapidly changing opportunities

• Key attributes are technology, opportunism, excellence, trust, and no borders

Trends in affecting organizational structure

• Increase in the Virtual Corporation

• More prevalent need to structure for global mergers

Virtual Company Example

General Life; a virtual life insurance company reduces fixed costs (80% of traditional

company costs) by subcontracting:

application processing, underwriting, commission accounting, policyholder service,

agent appointments, technology development, illustration design & support, policy filing

and licensing, and assert management

4.2 DESIGNING STRATEGIC CONTROL SYSTEMS

Overview

Advances in management thinking have observed that managers in organisations

carry out two types of activity that are intended to ‘control’ the performance and behaviour

of an organisation; Strategic Control and Operational Control (sometimes referred to as

Management Control). Each type of activity introduces particular requirements of an

organisation and its associated measurement and feedback systems. This briefing outlines

Strategic Control as a concept, and considers the implications for managers looking to

apply this concept in their daily activities.


NOTES


A complex system

Operational Control systems are management processes used to track and respond

to progress towards targets at for defined situations, typically at ‘lower levels’ of the

organisation. The context for what needs to be managed has often been made explicit by

decisions ‘higher’ in the organisation, and often the corrective action for poor performance

has already been specified. However, they are only one part of the management toolkit

required to manage an organisation effectively. While they are effective mechanisms for

controlling defined situations they do not often consider the ‘big strategic picture’ concerning

the context of why organisations are moving in a particular direction, what they need to do

to get there and controlling progress and responses toward delivering strategic goals.

This is the role of the Strategic Control system.

Strategic Control systems deal with complex often loosely defined issues and have

to consider not only simple performance feedback (Did we do what we said we were

going to do?) but also the ‘why’ elements (Why are we doing this in the first place? Is this

still the correct course of action?). To illustrate this issue consider this simple non-business

situation:

Manchester United is a well-known UK football (soccer) team. During the season

they play at least one football matches every week (and sometimes two). To assess their

performance in each game they will undoubtedly use performance metrics and will have

targets for the team and maybe each individual player. The system might look something

like this:

A simple operational system they might use would involve looking at several key

indicator used to assess performance based on key things that Manchester United would

generally want to see on the pitch for example:

• Possession

• Shots on goal

• Opposition shots on goal

• Tackles made

• Tackles won etc…

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NOTES


On an operational level if the % Possession is low then the team will try to work

together to ‘hold onto the ball longer’ as practiced in training. The players will know that

they have a particular strategy to employ (through instructions from the manager / coach)

and will work to execute that game plan. This type of control relates to operational control:

• we know what is supposed to happen on the pitch;

• if it fails, we know what to do to fix it (the pre-defined problem resolution plan);

• and most importantly will be able to tell when it is fixed again.

However, strategic control introduces the requirement of thinking about what is

really going on and making changes if required (the second feedback loop in the system).

In the game this might be:

• Do we stick to the same plan or do we change something?

• Do we hold onto the lead we have or push for more goals?

In the longer term:

• What kind of style do Manchester United wants to play?

• What targets do they expect?

• Are they a team that attacks slowly holding the ball or, a team that defends and

counter attacks quickly?

• How are they going to change their style if it is required?

• Do they develop young players or buy in expertise?

• Do they put out weaker sides for less important games?

Although some football fans may argue, even with this simple example where options

for changing strategy are limited, both processes (strategic and operational control) have

to work effectively if the desired result is to be achieved (and even then it might not!). But,

it is hopefully clear from this example that the two processes have quite different

characteristics and that very often it is the ability of management to make and effect change

quickly that dictates success.


NOTES


4.2.1 Characteristics Of A Strategic Control System

Strategic Control systems are primarily concerned with monitoring and managing

strategy implementation, part of which will be determining and calibrating the focus of

related operational control systems. One main characteristic differentiates Strategic Control

from other forms of control exercised by managers (e.g. the management of operational

processes). Managers exercise strategic control when they work with an organisation to

ensure that it achieves the strategic aims they have set for it But to be able to do this the

managers must have some discretion either to decide what needs to be achieved, or how

to achieve it: such discretion is not necessarily a characteristic of other management

processes. This difference becomes significant when looking at the design of strategic

management processes and support systems.

Applying Strategic Control ideas in organizations Strategic control processes should

ensure that strategic aims are translated into action plans designed to achieve these aims,

and that the effectiveness of these plans is monitored. An effective strategic control process

should ensure that an organisation is setting out to achieve the right things, and that the

methods being used to achieve these things are working. Within this arena, traditionally

there has been emphasis on strategic planning activities (ensuring we have the right aims,

and the right action plans) –but control systems have reduced the need for strategic planning;

indeed it has been long argued by some that distinct planning activities are not required at

all. e.g.: “The function of control now becomes closely linked with planning, and it

serves little purpose to conceive them as separate functions.” (Arthur E. Mills in

“The Dynamics of Management Control Systems”, London Business Publications

Ltd.; 1966).

This implies that a strategic control process should instead set the agenda / goals

for management processes, and monitor if the operational activities chosen to do this are

delivering what is required.

Accordingly, an effective strategic control process needs to both communicate

information about what outcomes need to be achieved, and be able to monitor how well

these activities are working to achieve the strategic aims of the organisation. One way of

doing this is to introduce management processes built around the deployment of 3rd

Generation Balanced Scorecard.

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NOTES


4.3 MATCHING STRUCTURE AND CONTROL TO STRATEGY

I-Evolving Organizations

Organisation structures are seldom designed from scratch. An organisation usually

starts small and hopefully becomes more successful and grows. Because it grows, it needs

to structure itself. Most organisations do not grow from a one-person operation to a

hundred-person operation overnight. They evolve and so does the

organisation structure. The larger organisations are able to take larger expansion-

steps. These steps may have more impact on the organisation structure. However after

some time most organisations conclude that something went seriously wrong with its structure

and decides to reorganise it. Because reorganisations are often associated with staff

reductions they are very sensitive processes. A part of the

sensitivity can be overcome to reorganise during years with low unemployment

rates and to work actively to find job prospects elsewhere. Why reorganizations





II-Suitable design of organizations design for Core operations

The core operations are the actual production processes. It contains activities like

purchasing, operating machines, assembling, sales and shipping. Support operations

Support operations facilitate the core operations. For example: legal counselling,

public relations, Industrial relations, research & development, pricing, pay roll, reception,

mailroom and cafeteria. Techno structure The Techno structure maintains and develops

the efficiency and effectiveness of primary and support operations, including development,

standardisation, monitoring and evaluation. Typical technostructure units are; strategic

planning, controller, Personnel training, Operations Research, Production Scheduling, and

work-studies. Strategic Apex


NOTES


The Strategic Apex formulates and controls strategies for the whole organisation.

Typical examples of the strategic apex are board of directors, president, and executive

committees.

III-Middle Line Management

The middle line management connects the strategic apex with the rest of the

organisation. Typical examples of middle line managers are plant managers, regional sales

managers, foremen and district managers.

In smaller organisations one unit may carry out more than one of these functions,

but nonetheless every organisation has to carry out these functions.

Goods & services

The starting point for the design of the organisation process is typically the

identification of the main outputs that the organisation intends to deliver and the locations

of delivery. Where do the costumers live or operate. Do the costumers go to the sales

point or does the organisation go to the costumers? If the costumers go to the sales point

the sales points should be as close as possible to the costumers. If the sales point is too far

and competitors have sales points closer to potential costumers the organisation may lose

a part of its market.

However each sales point should attract enough costumers to be feasible. Large

organisations often have several sales departments at different locations. Depending on the

production process (technology) and the transport costs for both inputs and outputs, the

organisation may also geographically distribute the production units. This is common for

service providing organisations. The services are produced at same location as they are

distributed.

Certain organisations depend on others for the delivery of their outputs and

realisation of their objectives. For example the projects of the International Labour

Organisation (ILO) are paid for by donor organisations. The employees working on these

projects have fixed term contracts for the duration of the project and are laid off after the

project is completed. The core operation of the ILO in the countries is to formulate and

mobilise funding for project proposals and to supervise the projects. The ILO has chosen

for this set up in order to be able to provide assistance as many member states as possible

and to be as flexible as possible.

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NOTES


Breakdown production process For the design of the structure it is necessary to

analyse the production process of each output. It may be possible to identify sub-outputs

that break the production process like semi-finished products that are produced in-house

and are an input in one of the outputs. Activities Subsequently all the activities to produce

and deliver the outputs have to be identified. Furthermore the activities lead times and

possible links need to be described. The linkages will be limited due to a number of factors

like;

• Procedures of organisation

• Previous investments in equipment and buildings

• Available technology on the market

In particular public organisations have to follow certain procedures. The procedures

often affect the (decision) processes and therefore affect the activities and there linkages.

Organisations will only offer expensive equipment items and buildings for an organisation

structure when the organisation structure results in higher returns. Because these comparisons

are extremely difficult, most organisations adapt their structure to the existing equipment

and building items.

The available technology is not only concerned with the hardware like equipment

and tools but is also concerned with human ware like skills and knowledge. The structure

should not be based on unreal equipment items or human resources. After all there are not

many civil engineers that also have a degree in social science. Resources In addition it is

necessary to identify for every activity the inputs in terms of manpower and equipment,

expressed both in quantity and quality. Finally the required support operations are identified

and similarly analysed.

These activities are repeated for the Strategic Apex and the Techno-structure.

After collecting and analysing of all the necessary data, the design process starts. The

design process is often similar to a planning process. The activities are put in a time frame

and connected with relationships. While doing so, the designer assigns tasks to certain

persons. The designer may adjust the planning to accommodate the available human

resources and equipment. After all the designer want to avoid that resources are overloaded

or under-utilised and want to create interesting job descriptions for the different officers.


NOTES


Locating Authority

An important question is who receives the authority to take decisions and about

which issues? To answer the question the organisation has to answer the following sub-

questions:

• Who has the information to take the decision and who can obtain such information

quickly?

• Who has the skills and knowledge to take the decision?

• Does the issue relate to an emergency and is the decision urgent?

• Is coordination with other locations or other units, divisions or departments

required?

• What is the impact of the decision?

• What is workload of the qualified officers?

• Is it possible to motivate employees by giving them decision authority?

Hierarchical problems

If the authorities are not well divided it may result in a number of problems. For example:

• Capacities of units and persons are under-utilised

• The authority goes beyond the capacity of the person

• The control over the resources is insufficient to carry out the tasks efficiently

• The unit has more control of the resources than its tasks/function requires

• Conflict over the allocation of resources if two or more units have control over

them

• Conflict between formal and informal powers & responsibilities

• The decision process takes too long

• The decisions miss out on particular interests

4.4 STRATEGY IMPLEMENTATIONS

Implementing strategy involves the following points:

• Creating fits between way things are done & what it takes for effective strategy

execution

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• Executing strategy proficiently & efficiently

• Producing excellent results in timely manner

• Most important FITS are between strategy AND

• Organizational capabilities

• Reward structure

• Internal support systems

• Organizational culture

4.4.1 Fourth Task Of Strategic Management In Strategy Implementation

Strategy implementation is an internal, operations-driven activity involving organizing,

budgeting, motivating, culture-building, supervising, and leading to “make the strategy work”

as intended.

What does strategy implementation include?

• Building a firm capable of carrying out strategy successfully

• Allocating ample resources to strategy-critical activities

• Establishing strategy-supportive policies

• Instituting best practices & programs for continuous improvement

• Installing support systems

• Tying reward structure to achievement of results

• Creating a strategy-supportive corporate culture

• Exerting strategic leadership

4.4.2 Strategic Implementation and Evaluating Performance

I-Some of the important factors to be considered are as follows:

• None of the tasks of strategic management are a one-time only exercise

• Times & conditions change

• Events unfold

• Better ways to do things become evident

• New managers with different ideas take over

• Managers must

• Constantly evaluate performance


NOTES


• Monitor situation & decide how well things are going

• Make necessary adjustments

• Corrective adjustments can entail

• Altering firm’s long-term direction

• Redefining the business

• Raising or lowering performance objectives

• Modifying the strategy

• Improving strategy execution

II-Characteristics of strategic management implementation process

• Need to perform tasks never goes away because changes occur regularly

• Boundaries among tasks are blurry

• Doing the 5 tasks is not isolated from other managerial activities

• Time required to do tasks comes in lumps & spurts

• Pushing to get best strategy-supportive performance from each employee,

perfecting current strategy, & improving strategy execution

III-Who performs the five strategic management tasks?

• Chief Executive Officer & Other Senior Corporate Level Executives

• Managers of Subsidiary Business Units

• Functional Area Managers Within a Subsidiary Business Unit

• Managers of Major Operating Departments & Geographic Units

IV-Role of Strategic Planners

• COLLECT INFORMATION needed by strategy managers

• Conduct BACKGROUND ANALYSES as needed

• Establish & administer an ANNUAL STRATEGY REVIEW CYCLE

• COORDINATE review & approval process of strategic plans

• ASSIST all managers to focus on strategic issues

• WARNING!

• Planners should NOT make strategic decisions or do strategic thinking for line

managers

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V-Why planners should not be strategy makers?

• Planners know less about situation, placing them in weaker position than line

managers to devise workable action plan

• Separates responsibility & accountability for strategy-making from implementing

• Allows managers to toss decisions to planners & avoid doing own strategic thinking

• Implementers have no “buy in” to strategy

VI-Strategic roles of a board of directors

• See that five strategic management tasks are performed adequately

• Review important strategic moves & officially approve strategic plans

• Ensure strategic proposals are adequately analyzed & superior to alternatives

• Evaluate caliber of top management’s strategy-making & implementing skills

VII-Benefits of strategic approach to managing

• Guides entire firm regarding “what it is we are trying to do & to achieve”

• Lowers management’s threshold to change

• Provides basis for evaluating competing budget requests & steering resources to

strategy-supportive, results-producing areas

• Unites numerous strategy-related decisions of managers at all organizational levels

• Creates a PROACTIVE, rather than REACTIVE, atmosphere

• Enhances LONG-RANGE performance

4.5 POLITICS, POWER AND CONFLICT INFLUENCES IN STRATEGIC

IMPLEMENTATION

Strategic Leadership and Decision Making to- Leverage the power and Politics

The challenges faced by strategic leaders in implementing complex and long-range

consequential decisions demand that they be sophisticated with respect to issues of

leadership, power and influence. The changes that are shaping the nature of work in today’s

complex organizations require that we develop the political will, expertise and personal

skills to become more flexible, innovative and adaptive. Without political awareness and

skill, we face the inevitable prospect of becoming immersed in bureaucratic infighting,


NOTES


parochial politics and destructive power struggles, which greatly retard organizational

initiative, innovation, morale and performance (Kotter 1985)

Making organizations more innovative, responsive and responsible requires focusing

on a number of leadership, power and influence issues. These issues are critical in coping

with the strategic environment with all its VUCA characteristics, and strategic leader

performance requirements in that environment. The issues influence developing teams at

the strategic level, as well as managing organizational processes linked to values and ethics,

organizational culture, visioning and the management of change.

Such issues include:

• Implementing strategic or adaptive change in the face of formidable resistance.

• Fostering entrepreneurial and creative behavior despite strong opposition.

• Gaining resources and support from bosses whose personal agendas might include

organizationally harmful political games.

• Avoiding destructive adversarial relationships with others whose help and

cooperation are paramount to your success, but who are outside your chain of

command and your direct control, and who may suspect your motives.

• Building and developing effective teams in an internal environment where the natural

tendency is to conflict with each other and engage in “turf battles”.

• Avoiding becoming a victim or casualty of destructive power struggles.

• Avoiding the numerous traps that generate power misuses and ultimately power

loss.

• Fostering organizational excellence, innovation and creativity, and not getting mired

in bureaucratic politics or dysfunctional power conflicts.

The concepts of power and organizational politics

John Gardner, writing about leadership and power in organizations, notes, “Of

course leaders are preoccupied with power! The significant questions are: What means do

they use to gain it? How much do they exercise it?” To what ends do they exercise it? He

further states, “Power is the basic energy needed to initiate and sustain action or, to put it

another way, the capacity to translate intention into reality and sustain it.” In a similar vein,

Richard Nixon wrote, “The great leader needs the capacity to achieve Power is the

opportunity to build, to create, to nudge history in a different direction.” Dahl writing about

the pervasiveness of the concept of power states, “The concept of power is as ancient and

ubiquitous as any that social theory can boast.” He defined power “as a relation among

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social actors in which one actor A, can get another social actor B, to do something that B

would not otherwise have done.” Hence, power is recognized as “the ability of those who

possess power to bring about the outcomes they desire” (Salancik and Pfeffer 1977).

The concept of organizational politics can be linked to Harold Lasswell’s (1936)

definition of politics as who gets what, when and how. If power involves the employment

of stored influence by which events, actions and behaviors are affected, then politics involves

the exercise of power to get something done, as well as to enhance and protect the vested

interests of individuals or groups. Thus, the use of organizational politics suggests that

political activity is used to overcome resistance and implies a conscious effort to organize

activity to challenge opposition in a priority decision situation. The preceding discussion

indicates that the concepts of power and organizational politics are related.

The political frame - Bolman and Deal describe four “frames” for viewing the

world: structural, human resources, political, and symbolic. The political frame is an excellent

tool for examining the concept of organizational politics and makes a number of assumptions

about organizations and what motivates both their actions and the actions of their decision

makers.

Organizations are coalitions of individuals and interest groups, which form because

the members need each others’ support. Through a negotiation process, members combine

forces to produce common objectives and agreed upon ways to utilize resources thus

aggregating their power. Power bases are developed that can accomplish more than

individual forces alone.

There are enduring differences among individuals and groups in values, preferences,

beliefs, information, and perception of reality. Such differences change slowly, if at all.

Most of the important decisions in organizations involve allocation of scarce

resources: they are decisions about who gets what. Scarcity exacerbates political behavior.

In government at present, the competition is for personnel spaces and funding. Mission is

the means to gain both, because resources tend to follow mission. For this reason, the

Services compete for strategic mission (e.g., the omnipresent roles and missions debate),

and thus make the job of the Chairman of the Joint Chiefs more challenging. In the

government as a whole, agencies compete for significance in the national/international picture,

because significance means public approval and that means resources. (The two dominant


NOTES


political parties also attempt to present the American public with different views of what is

significant.)

Because of scarce resources and enduring differences, conflict is central to

organizational dynamics and power is the most important resource. Conflict is more likely

in under-bounded systems (less regulation and control). In an over-bounded system with

power concentrated at the top (e.g., pre-Glasnost Russia), politics remains, but underground.

Jefferies makes the point that organizations play the political game within the broader

governmental context, but those individuals also play politics within organizations. So both

influences are at work. And power is key in both cases, because it confers the ability both

to allocate resources- in itself a way to increase power-and to consolidate power by

bringing others with similar goals and objectives into the inner decision making core.

Organizational goals and decisions emerge from bargaining, negotiating, and

jockeying for position among members of different coalitions. Bolman and Deal offer the

space shuttle program as an example of a strategic effort backed by a complex coalition

consisting of NASA, contractors, Congress, the White House, the military, the media, and

even portions of the public. The difficulty in the Challenger disaster was that different

members of the coalition were in disagreement about how to balance technical and political

concerns. These became increasingly salient as the enormously expensive shuttle program

encountered one delay after another for safety-related technical reasons. At the time of the

Challenger shuttle disaster, both Thiokol and NASA were under increasing pressure to

produce on schedule at programmed cost. The decision to launch on that fateful day was

made when political forces overcame technical considerations. But, of course, this only

illustrates the decision maker’s difficulty in weighing one kind of consideration against

another-subjective assessment of constituency demands versus rational data that may

nonetheless lack substantiated cause-and-effect relationships with downside outcomes-

under conditions of great time pressure.

The five propositions of the political frame do not attribute organizational politics

to negative, dysfunctional or aggrandizing behavior. They assert that organization diversity,

interdependence, resource scarcity, and power dynamics will inevitably generate political

forces, regardless of the players. Organizational politics cannot be eliminated or fantasized

away. Leaders, however, with a healthy power motive can learn to understand and manage

political processes.

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Power as a motive- Power is attractive because it confers the ability to influence

decisions, about who gets what resources, what goals are pursued, what philosophy the

organization adopts, what actions are taken, who succeeds and who fails. Power also

gives a sense of control over outcomes, and may in fact convey such enhanced control.

Particularly as decision issues become more complex and outcomes become more uncertain,

power becomes more attractive as a tool for reducing uncertainty.

Power and the ability to use it are essential to effective leadership. Strategic leaders

who are uncomfortable with either the presence of great power in others or its use by

themselves are probably going to fail their organizations at some point. The critical issue is

why the leader seeks power and how it is used. Some see power as a tool to enhance their

ability to facilitate the work of their organizations and groups. Others value power for its

own sake, and exercise power for the personal satisfaction it brings. There can be good

and bad in both cases. However, the leader who uses power in the service of his/her

organization is using power in the most constructive sense. The leader who seeks power

for its own sake and for personal satisfaction is at a level of personal maturity that will

compromise his/her ethical position, risk his/her organization’s effectiveness, and perhaps

even jeopardize the long-term viability of the organization(Jacobs 1996).

Power competition exists at two levels. Individuals compete for power within

agencies and organizations; agencies and organizations compete for power within the

broader governmental context. The mechanics of power competition are much the same.

In both cases, power accrues when an individual or an organization achieves control of a

scarce commodity that others need. And in both cases, the operations are essentially political.

Even when compelling physical force is the means, the mechanism is political. The scarce

commodity is the means of inflicting harm on others. So dictators, by hook or by crook,

gain a monopoly on the means for inflicting harm on others. During the course of the Cold

War, the massive build-up of armaments was aimed at maintaining a “balance of forces” so

as to prevent intimidation by either side. Even after Glasnost, the level of armaments on

both sides was carefully negotiated so as to preclude imbalance that might tempt one side

or the other toward risky moves.

Power competition within an organization or agency is generally for resources-

personnel spaces or funding, or both, in governmental agencies. And the basis for the

competition can be constructive as well as destructive. If the top-level leadership is wise

and capable, the basis for competition can be defined as meritorious performance of either


NOTES


individual or group. In that case, performance becomes the basis for determining who

accumulates power. The process is still political, but it is also constructive because the

organization as a whole benefits.

So, the political process can be either destructive or constructive, depending on

the resource to be accumulated, the means by which the competitors seek to accumulate

it, and the value that accrues to all competitors by virtue of the competition.

However, internal politics can also be detrimental in ways not readily apparent.

Sub-units within agencies may develop objectives and goals at odds with those of the

agency. For example, a given “desk” owes its stature in its own agency to the constituency

needs it serves. An extremely important constituency is the nation it represents within its

own agency and with which it deals. The “desk” therefore may find it valuable to promote

the needs of that constituency over the needs of the agency by “selling” important positions

or programs that benefit the constituency-thereby unwittingly becoming co-opted and

increasingly vulnerable to manipulation by that constituency.

Organizations also play a political game. Organizations seek influence. Influence

increases autonomy (freedom to control own assets); organizational morale (the ability

to maintain cohesion and effectiveness); essence (sanctity of essential tasks and functions);

roles and missions (exclusion of options that would challenge these); and budgets

(increased roles and missions will always favor larger budgets) (Jefferies).

Because key leaders who form the centralized circle at the top of the policy making

apparatus have different viewpoints, particularly with something as uncertain as strategic

policy, they are obligated to fight for what they consider right. Thus, decision making is not

a unitary process, but also “a process of individuals in politics reacting to their own

perceptions of national, organizational, and personal goals” (Jefferies 1992). Because the

scope and scale are too great for one person to master, the president must persuade in

order to develop the consensus required for broad support of decision outcomes. (Those

who wind up executing must be product champions for these decisions, or they are not

likely to implement them.) The president is also open to persuasion, because the various

branches or agencies may also build power bases outside government or outside the

executive branch.

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While our focus has been on establishing a legitimate context for understanding

organizational politics, a countervailing view to the political frame is the rational frame of

organizational decision making

The rational frame. By definition, rational processes are different from political

processes. Rational decisions rest heavily on analytic process. An analytic process can be

defined as one in which there are agreed-upon methods for generating alternative solutions

to problems, and for assigning values to the benefits and costs expected from each of the

alternatives. And sophisticated computational methods are readily available for calculating

benefits/costs ratios once these values are assigned. The essence of rational process is the

belief that, “All good persons, given the same information, will come to the same

conclusion.” Those seeking to employ the rational process to the exclusion of political

process thus seek open communication, perhaps through more than just formal (vertical)

organizational channels.

The rapid expansion of electronic mail systems that permits anyone in an organization

to address anyone else probably rests on a rationality premise-that transcending

organizational channels by allowing all members to address directly even the highest official

will give that official more complete information and thus enable higher quality decisions.

This is very difficult for some people to understand especially those with narcissistic power

needs and maturity issues. There is also a trust assumption: that members can be trusted

not to abuse the privilege and that high officials will not misuse the information. A political

process would view valuable information as a commodity to be traded for influence

(Jacobs).

There is another important difference between rational and political views of

appropriate operations both within and between organizations. The political frame does

not depend on trust between persons. In the preceding example, both trust assumptions

would be discounted as unrealistic. Trust in the probable future actions of coalition members

is based on perception of gain to be expected from not violating agreements on which a

coalition is based, for example. The intrinsic morality of being trustworthy is not particularly

useful as a concept.

Trust probably is not particularly a part of the rational frame, either, except that a

strong rationalist believes in and trusts the logic of the process by which information is

converted into decision outcomes. So a strong rationalist will trust others to be similarly


NOTES


logical. This leads to important postulates about rational communication within a system.

For a rationalist, systems are information-consuming engines. Particularly at the strategic

level, the unimpeded flow of information is crucial to the health of the system as a whole.

However, politics and power dynamics strongly influence communication processes. To

the extent organizations and the people in them are motivated by political gain and power

dynamics, rational processes are inevitably shortchanged.

Power dynamics and the rational frame. -The National Security Strategy

apparatus exists to support the formulation of policy and implementing strategy and thus

presidential decision making. George writes insightfully about both the demands of these

processes, and obstacles to their effective operation-particularly those attributable to

bureaucratic politics. He comments that political scientists of an earlier generation “were

intrigued by the possibility that an overburdened executive might be able to divide his

overall responsibilities into a set of more manageable subtasks to be assigned to specialized

units of the organization. It was hoped and expected that division of labor and specialization

within the organization, coupled with central direction and coordination, would enable the

modern executive to achieve the ideal of ‘rationality’ in policy making.

Nature of strategic leader power

A number of authors writing in Strivastva’s Executive Power (1992) argue that

power at the strategic organization level is manifested and executed through three

fundamental elements: consensus, cooperation, and culture.

“An organization is high in consensus potential when it has the capacity to synthesize

the commitment of multiple constituencies and stakeholders in response to specific challenges

and aspirations.” In this area, strategic leader power is derived from the management of

ideas, the management of agreement, and the management of group and team decision

making processes.

“Cooperative potential refers to an organization’s capacity to catalyze cooperative

interaction among individuals and groups.” Power is employed by a strategic leader in the

management of organization structures, task designs, resource allocation, and reward systems

that support and encourage this behavior.

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“Cultural/spiritual potential refers to a sense of timeless destiny about the

organization, its role in its own area of endeavor as well as its larger role in its service to

society.” Strategic leaders use power in this area to manage and institutionalize organizational

symbols, beliefs, myths, ideals and values. Their strategic aim is to create a strong culture

that connects the destiny of the organization to the personal goals and aspirations of its

members.

Individual skills and attributes as sources of power- Pfeffer’s (1992) research and

observations emphasize the following characteristics as being especially important for

acquiring and maintaining strategic power bases:

• High energy and physical endurance is the ability and motivation to work long

and often times grueling hours. Absent this attribute other skills and characteristics

may not be of much value.

• Directing energy is the ability and skill to focus on a clear objective and to

subordinate other interests to that objective. Attention to small details embedded

in the objective is critical for getting things done.

• Successfully reading the behavior of others is the ability and skill to understand

who are the key players, their positions and what strategy to follow in communicating

with and influencing them. Equally essential in using this skill is correctly assessing

their willingness or resistance to following the Strategic Leader’s direction.

• Adaptability and flexibility is the ability and skill to modify one’s behavior. This

skill requires the capacity to re-direct energy, abandon a course of action that is

not working, and manage emotional or ego concerns in the situation.

• Motivation to engage and confront conflict is the ability and skill to deal with

conflict in order to get done what you want accomplished. The willingness to take

on the tough issues and challenges and execute a successful strategic decision is a

source of power in any organization.

• Subordinating one’s ego is the ability and skill to submerge one’s ego for the

collective good of the team or organization. Possessing this attribute is related to

the characteristics of adaptability and flexibility. Depending on the situation and

players, by exercising discipline and restraint an opportunity may be present to

generate greater power and resources in a future scenario.


NOTES


The skills and attributes are grouped as:

Conceptual skills and attributes and positive attributes.

I-Conceptual Skills and Attributes

Professional Competence is one of the many ways leaders “add value” by grasping the

essential nature of work to be done and providing the organizing guidance so it can be

done quickly, efficiently, and well.

Conceptual Flexibility is the capacity to see problems from multiple perspectives. It

includes rapid grasp of complex and difficult situations as they unfold, and the ability to

understand complex and perhaps unstructured problems quickly. It also includes tolerance

for uncertainty and ambiguity.

Future Vision reflects strategic vision, appreciation of long-range planning, and a good

sense of the broad span of time over which strategic cause and effect play out.

Conceptual Competence relates to conceptual flexibility in that both are essential for

strategic vision. It has to do with the scope of a person’s vision and the power of a person’s

logic in thinking through complex situations.

Political Sensitivity is being skilled in assessing political issues and interests beyond

narrow organizational interests. It means possessing the ability to compete in an arena

immersed in the political frame to ensure that your organization is adequately resourced to

support your stated organization interests and those of the nation.

II-Positive attributes.

Interpersonal Competence is essential for effectiveness in influencing others outside

your chain of command, or negotiating across agency lines. It suggests high confidence in

the worth of other people, which is reflected in openness and trust in others.

Empowering Subordinates goes beyond simple delegation of tasks and is crucial for

creating and leading high performing organizations. It involves the personal capacity to

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NOTES


develop meaningful roles for subordinates and then to encourage initiative in the execution

of these roles.

Team Performance Facilitation includes selecting good people in assembling a team,

getting team members the resources to do a job, providing coordination to get tasks done

and moving quickly to confront problem individuals.

Objectivity is the ability to “keep one’s cool” and maintain composure under conditions

that might otherwise be personally threatening.

Initiative/Commitment is the ability to stay involved and committed to one’s work, get

things done, be part of a team effort and take charge in situations as required.

Understanding the character of strategic leader power and the requisite personal

attributes and skills sets the stage for employing power effectively. We need to know more

than the conceptual elements that constitute power in organizations at the strategic level.

III-Leading with power

The acquisition and use of strategic leader power involves managing a sequential process

that is described below:

1. The first task is to decide what it is the leader is trying to achieve that necessitates

the use of power.

2.With the goal in mind, the leader must assess the patterns of dependence and

interdependence among the key players and determine to what extent he or

she will be successful in influencing their behavior. It is critical that the leader

develop power and influence when the key players have expressed a differing point of

view. It is important to remember there is more interdependence at the strategic level

of the organization where task accomplishment is more complex.

3.Getting things done means the leader should “draw” a political map of the terrain

that shows the relative power of the various players to fully understand the

patterns of dependence and interdependence. This involves mapping the critical

organization units and sub-units and assessing their power bases. This step is very


NOTES


important because a leader needs to determine how much power these

units have to leverage influence either in support or opposition to their

effort. For example, if a leader is proposing to introduce a consensus team decision

making process in a joint interdependent environment, this implementation decision

could change power relationships among the players. In this case, the leader needs

to know the opposing players and the depth of their power bases. This move will

likely require the mobilization of allies and the neutralization of resisters.

4.Developing multiple power bases is a process connected to those

personalattributes and skills previously discussed and to structural sources of

power. Structural sources of power comes from the leader’s creation and control

over resources, location in communication and information networks, interpersonal

connections with influential others, reputation for being powerful, allies or supporters,

and the importance of leading the “right” organization.

5.Recognizing the need for multiple power bases and developing them is not enough.

The strategic leader must have an arsenal of influence strategies and tactics

that convert power and influence into concrete and visible results. Research on

strategies and tactics for employing power effectively suggests the following range of

influence tactics

Framing/Reframing tactics establishes the context for analyzing both the decision and

the action taken. By framing the context early in the process, the strategic leader is positioned

to influence what looks reasonable or inappropriate in terms of language and the overall

process for generating the decision itself. Framing and reframing decision making is an

important tactic for influencing organizational behavior. This process sensitizes the leader

to the context of organizational decision making by increasing his or her self-awareness of

history-the history of past relationships and past choices. Framing and reframing tactics

thus give the leader the ability to set a context within which present and possible future

decisions are evaluated, and an important perceptual lens that provides leverage for

producing innovative ideas for getting things done.

Interpersonal influence tactics recognizes that power and influence tactics are

fundamental to living and operating in a world where organizations are characterized as

interdependent social systems that require getting things done with the help of other people.

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A leader employing interpersonal influence tactics typically demonstrate behaviors that

include: understanding the needs and concerns of the other person, managing constructive

relationships with superiors, peers and subordinates, using active listening skills, asking

probing questions to understand a countervailing power position, anticipating how individuals

may respond to ideas or information, thinking about the most effective means to influence

the individual and crafting appropriate tactics to the needs and concerns of the other person,

and maintaining a broad network of individual contacts.

Timing tactics involve determining not only what to do but when to move out. These

types of action include: initiating action first to catch your adversary unprepared, thereby

establishing possible advantage in framing a context for action, using delay tactics to erode

the confidence of proponents or opponents as it relates to setting priorities, allocating

resources and establishing deadlines, controlling the agenda and order of agenda items to

affect how decisions are made. The sequencing of agenda items is very critical where

decisions are interdependent.

Empowerment tactics create conditions where subordinates can feel powerful, especially

those who have a high need for power. Leaders empower their followers and subordinates

through a process that provides direction, intellectual stimulation, emotional energy,

developmental opportunities and appropriate rewards. Typical behaviors of a leader using

these tactics include: high involvement and participation in the decision making process,

modifying and adapting one’s ideas to include suggestions from others, involving others in

the strategy formulation and implementation process, looking for creative and innovative

solutions that will benefit the total organization, and instilling confidence in those who will

implement the solutions.

Structural tactics can be employed to divide and dominate the opposition. They

can be used to consolidate power by putting a leader or his or her subordinates and allies

in a position to exercise more control over resources, information, and formal authority.

Re-aligning organizational structure can also be used to co-op others to support a leader’s

ideas, initiatives and decisions. Effective employment of structural tactics is accomplished

when leaders aggressively use their formal power to consolidate, expand and control the

organizational landscape.

Logical persuasion tactics requires using logical reasons, facts, and data to influence

others. Employment of a leader’s expert power base can be used to support logical


NOTES


persuasion. Effective use of these tactics include the following behaviors: persuading others

by emphasizing the strengths and advantages of their ideas, developing more than one

reason to support one’s position, using systems thinking to demonstrate the advantages of

their approach, and preparing arguments to support their case.

Bargaining tactics involve leader behaviors that attempt to gain influence by offering

to exchange favors or resources, by making concessions, or by negotiating a decision that

mutually advances the interests of all participants. These influence tactics are typically

effective in a political environment involving opposing or resisting forces; when a leader is

in a position to do something for another individual or group; or when the collective interests

of all can be served.

Organizational mapping tactics focus the leader’s sight on possible power-dependent

and interdependent relationships. The critical task is to identify and secure the support of

important people who can influence others in the organization. Leaders using these tactics

will employ behaviors that include: determining which actors are likely to influence a decision,

getting things done by identifying existing coalitions and working through them, garnering

support by bringing together individuals from different areas of the organization, isolating

key individuals to build support for a decision, linking the reputations of important players

to the decision context and working outside formal organization channels to get the support

of key decision makers.

Impact leadership tactics include thinking carefully about the most profound, interesting

or dramatic means to structure a decision situation to gain the support of others. Behaviors

include: presenting ideas that create an emotional bond with others, using innovative and

creative ways to present information or ideas, finding and presenting examples that are

embedded in the political and cultural frames such as language, ceremonies and propitious

events, and lastly, consistently demonstrating high energy and physical stamina in getting

the job done.

Visioning tactics demonstrate how a leader’s ideas and values support the organization’s

strategic goals, beliefs and values. Leader behaviors in executing these tactics include:

articulating ideas that connect the organization’s membership to an inspiring vision of what

the organization can become, appealing to organization core values or principles, linking

the work of the organization to the leader’s vision and broader goals, creating and using

cultural symbols to develop both individual pride and team identity.

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Information and analysis tactics suggest that leaders in control of the facts and analysis

can exercise substantial influence. Leaders will use unobtrusive behaviors to disguise

their true intention, which is to effectively employ influence tactics that seemingly appear

rational and analytical. Facts and data are manipulated and presented to appear rational

and help to make the use of power and influence less obvious. Another ploy used by

leaders is to mobilize power by bringing in credible outside experts who can be relied on to

support a given strategy and provide the answers they are expected to give. Lastly, under

conditions of VUCA which characterizes strategic decision making, leaders will selectively

advocate decision criteria that support their own interests and organizations. In these cases,

leaders typically do what works best and make decisions based on criteria that are most

familiar to them.

Coercive tactics are the least effective in influencing strategic decisions. These tactics

involve employing threats, punishment, or pressure to get others to do what a leader wants

done. Typical leader behaviors include: using position power to demand obedient compliance

or blind loyalty, making perfectly clear the costs and consequences of not “playing the

game”, publicly abusing and reprimanding people for not performing, and punishing

individuals who do not implement the leader’s requests, orders or instructions.

This chapter has addressed what strategies and tactics are required for leading

with power at the highest organizational level. In a micro context, it is about managing

power, which translates as being personally effective in knowing how to get things done

and having the political will to do so. At a macro level, it means coping effectively with the

strategic environment and dealing with innovation and organizational change.

How power is lost?

In a general sense power is lost because organizations change and leaders don’t.

Organizational dynamics create complex conditions and different decision situations that

require innovative and creative approaches, new skill sets and new dependent and

interdependent relationships. Leaders who have learned to do things a specific way become

committed to predictable choices and decision actions. They remain bonded and loyal to

highly developed social networks and friendships, failing to recognize the need for change,

let alone allocating the political will to accomplish it. Ultimately, power may be lost because

of negative personal attributes that diminish a leader’s capacity to lead with power effectively.


NOTES


The SLDI identifies a number of negative attributes that when linked to certain organizational

dynamics will generate potential loss of power:

Technically Incompetent describes leaders who lack the conceptual skills needed to

develop vision and be proactive in managing organizational change.

Self-Serving/Unethical leaders abuse power and use it for their own self aggrandizement,

take special privileges, and exploit peers and subordinates by taking credit for contributions

done by others. Self-serving leaders contaminate the ethical climate by modeling power-

oriented behavior that influence others to replicate their behavior. Over the long run, these

leaders engender divisiveness and are not trusted.

Micromangement of subordinates destroys individual and team motivation. Leaders who

over-supervise their subordinates have strong control needs, are generally risk averse and

lack conceptual understanding of power sharing and subordinate development.

Arrogant leaders are impressed with their own self-importance, and talk down to both

peers and subordinates thereby alienating them. If empowering others is about releasing

purposeful and creative energy, arrogance produces a negative leadership climate that

supresses the power needs of others. Arrogant leaders makes it almost impossible for

subordinates to acquire power as a means to improve their own performance as well as to

seek new ways to learn and grow.

Explosive and Abusive leaders are likely to be “hot reactors” who use profanity

excessively, have inadequate control of temper, and abuse subordinates. They may also

lack the self-control required to probe for in-depth understanding of complex problems

and so may consistently solve them at a superficial level. Explosive and abusive leaders

may self-destruct repeatedly in coalition building and negotiating situations.

Inaccessible leaders are out of touch with their subordinates particularly when they need

access for assistance. Peers typically “write the individual off.” Leaders are generally

inaccessible because they don’t place great value on building interpersonal relationships,

they may have weak interpersonal skills or they may be self-centered.

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4.6 TECHNIQUES OF STRATEGY EVALUATION AND CONTROL

4.6.1 Financial Performance Control




though techniques involved are different. Financial control techniques are grouped into

three categories from strategic management point of view:

1. Budgetary control,

2. Financial ratio analysis, and

3. Return on investment.

I-Budgetary Control

Budgetary control is derived from the concept and use of budgets. Budget is the

financial expression of various organisational operations and the way in which budgets are

prepared as tools for planning. Thus, budgetary control is a system which uses budgets as

a means for planning and controlling entire aspects of organizational activities or parts

thereof Terry has defined budgetary control as follows:

“Budgetary control is a process of comparing the actual results with the

corresponding budget data in order to approve accomplishments or to remedy differences

by either adjusting the budget estimates or correcting the cause of the difference.”

Brown and Howard have defined budgetary control as follows:

“Budgetary control is a system of controlling costs which includes the preparation

of budgets, coordinating the departments and establishing responsibility, comparing actual

performance with budgeted and acting upon results to achieve maximum profitability.”

However, the scope of budgetary control extends beyond cost control with the

introduction of several types of budgeting.


NOTES


Features of Budgetary Control

1. Budgetary control establishes a plan or target of performance which becomes the

basis of measuring progression of activities in the organisation.

2. It tries to measure the outcomes of activities in quantified terms so that actual

performance can be compared with budgeted performance.

3. It tries to focus attention of the management on deviation between what is planned and

what is being achieved so that necessary actions are taken to correct the situation and

to achieve the objectives of the activities. Thus, it does not control the activities directly

but points out where control and corrective actions are required.

Benefits of Budgetary Control

Budget and budgetary control leads to maximum utilisation of resources with a

view to ensure maximum returns because it provides aid to managerial planning and control.

Besides, it also helps in coordination. Thus, budgetary control can play three roles in an

organisation. These are: budgetary control as a tool for planning, budgetary control as a

tool for control, and budgetary control as an aid to coordination. Let us see how budgetary

control performs these three roles.

Budgetary Control as a Tool for Planning

The system of budgetary control, by preparing budgets before the activities are

actually undertaken, facilitates the planning function of management in the following ways:

1. Budgetary control forces managers to plan their activities. Since budget allocation

is based on the nature of activities undertaken in a department or section, the

managers have to define what activities they plan for future. Thus, planning becomes

an integral part of total managerial functions.

2. Since budgetary control is duly concerned with concrete numerical goals, it does

not leave any ambiguity regarding the targets. Thus, every manager in the organisation

is sure about what he is expected to do. This offers the opportunity of objective

appraisal of performance, self-examination and even self-criticism.

3. It leads to a cautious utilisation of resources since it keeps a rigid check over

activities in the organisation. This system acts both ways. It spurs efforts to achieve

the goals and yet keeps them within the well defined boundaries. It focuses on

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NOTES


rational use of organizational resources so as to promote ahigher standard of

performance and efficiency. 4. It also contributes indirectly to the managerial planning

at higher levels. Budgetary control provides an effective means by which

management can delegate authority without sacrificing overall control. The budget

limits the area of activities to be trodden by the manager on their own. Thus,

managers at higher levels can delegate the authority to their

Subordinates for the performance of assigned activities and they will be free for strategic

thinking and planning.

Budgetary Control as a Tool for Control

Budgetary control acts as a tool of control in the following ways:

1. Budgetary control, as a control device, is very exact, accurate, and precise. A

budget provides standards against which control activities are undertaken. Thus,

managers can keep a watch whether their efforts are proceeding in the right directio

2. Budgetary control pinpoints any deviation between budgeted standards and actual

achievement. This is communicated very quickly and managers can take suitable

actions to overcome the deviations so as to achieve organisational objectives.

3. Budgetary control system also points out the reasons which may be responsible

for deviation between budget and actual. Thus, it provides direction for necessary

control actions. Thus, it can be seen that with the constant help of the budgetary

control system, attempts can be made to keep performance parallel with the

estimated one.

Budgetary Control as an Aid to Coordination

Budgetary control system provides aid in coordination in the organization. It helps

to achieve coordination in the following ways:

1.Budgetary control system promotes cooperation among various sub-units in the

organisation. Since it is an instrument of planning, it brings activities of various departments

under overall perspective. This inspires team spirit and promotes cooperation. For

example, the wellplanned sales and production budgets lead to better purchasing and

the labour requirement for timely recruitment by personnel department, etc.


NOTES


2.The system encourages exchange of information among various units of the organisation.

The preparation of specific functional budget inevitably needs the free flow of information

among the various departments of the organisation. This free flow of information helps in

achieving coordination. 3. The system promotes balanced activities in the organisation.

Volume of each activity depends upon the objectives of the organisation. Therefore,

each activity should be performed in proportion to other activities. Thus, estimates of

operations like sales, production, purchasing, etc., can be well checked against each

other and likewise, the activities can be programmed. Thus, budgetary control system is

a vital and important device for planning, controlling and coordinating the activities in an

organisation thereby contributes to attain higher standard of performance and efficiency.

Problems in Budgetary Control

Though budgetary control helps a lot the managers in planning, controlling and

coordinating the activities of an organisation, it is not a fool-proof system. It has its own

limitations. Therefore, managers should be well aware about these problems so as to take

adequate precautions to minimise the impact of these. Problems in budgetary control system

emerge from two sources: problems because of planning limitations and operational

problems.

Planning Problems

Planning activity has its own limitations. Since budget is an outcome of planning

activity, it cannot remain free from the limitations of planning. In this context, following

problems are likely to emerge:

1.The biggest problem in budgetary control comes because of uncertainty of future. It is

a well-known fact that budgets are prepared on the assumptions of future happenings

in a certain way. But due to change in situations, budgets do not remain reliable and

meaningful and do not help in achieving control.

2.Budgetary control, sometimes, may jeopardise the basic and important functions in

the organisation. Once budgets are prepared, they become the basis for further course

of action. The budgets of future years are prepared on the basis of previous budgets.

Meanwhile, situations may change to such an extent, that many functions unimportant

few years ago may become very important but budgets may not reflect that. This

problem, however, can be overcome by periodic review of importance of various

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NOTES


activities and incorporating their importance in budgeting. Zero-base budgeting does

this to a very great extent.

3.The role of budgetary control system in the planning function is sometimes over-

emphasised. Budgets become end in themselves and any deviation from budgeted

figures is looked upon with contempt. This inflexibility contributes negatively to the

organisational objectives. For example, in government departments, substantial portion

of amount is spent in the last month of the financial year so as to keep the budget intact.

This may result into avoidable inefficiency.

Operational Problems

Besides many planning problems, some operational problems also come in the

way of effective budgetary control system. Following problems are the major ones:

1. A budget is just a sophisticated guesswork, so question can be raised about its

usefulness for being used as standard against which to measure the performance and

to take action. Apart from control actions relating to materials and things, control

actions may be directed towards personnel in the organisation. This may work against

the morale of the people in the organisation specially if the budgetary control system

does not operate properly.

2. Budgetary control may affect organisational morale adversely in another way. There

is every likelihood that department managers may adopt a defensive attitude as soon

as unfavourable variances are brought to their notice. To save themselves from

criticisms, they may pass on the blame on other managers. This may create many

types of problems and conflicts in the organisation.

3. Budgetary control system requires a lot of paper work which the technical personnel

always resent. In fact, this does not fit with their areas of specialisation. To the

extent, the applicability of budgetary control system, particularly in its

control aspect, may be limited. Inspite of these problems and limitations, budgets

are the most important tools for planning and control. Therefore, precautions should be

taken so that the negative aspects of budgets and budgetary control are minimised. Exhibit

presents the example of budgetary control system in Baroda


NOTES


Rayon Corporation Limited.

Exhibit

Budgetary Control in Baroda Rayon Corporation

Baroda Rayon Corporation is located at Surat with its head office at Mumbai. It

produces rayon filament yarn, polyster filament yarn, and nylon tyre cord. It has adopted

a comprehensive budgetary control system. It prepares its budget on annual basis to coincide

with its financial year, April to March. There is a separate Budget Control and Cost Accounts

(BCCA) department which coordinates the activities of budgetary control.

Budget Preparation

The company prepares its master budget along with budgets for major important

functions like sales, production, cash, labour, etc. The budget is prepared by BCCA

department in consultation with the chief executive, departmental heads. After the initial

budget preparation, it is approved by budget committee and finally, it is sent for the approval

of Board of Directors at its head office at Mumbai. Normally the standards of last year are

used as the basis for budget preparation with suitable adjustment. For example, rates of

materials are adjusted according to the prevailing rates in the market. Similarly adjustment

is made in labour cost depending on the rate of dearness allowance payable to workers for

the budget period. Dearness is paid on the basis of All India Cost of Living Index. Overheads

are charged on percentage basis. When budgets are prepared and approved, these are

communicated to respective heads of departments/sections for implementation.

Budgetary Control

For control purposes, variance analysis is made. Factors for variance between

budgeted and actuals are identified. For taking further course of action, various factors

have been divided into two parts: controllable and non-controllable. Controllable factors

are like utilisation of plant capacity, unit consumption ratios of various raw materials, utilisation

of auxiliary materials, labour utilisation, etc. Uncontrollable factors are like price of raw

materials, price of the final products, etc. Budget deviations are calculated every month

and for some sections every day. Deviations due to controllable factors are communicated

to

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respective personnel for corrective actions. In case of deviations due to

uncontrollable factors, these are communicated to the chief executive who in consultation

with marketing people decides about a change in product mix specially if the deviation is

due to price of final products. Usually a deviation below 5 per cent is ignored.

II-Financial Ratio Analysis

Financial ratio analysis identifies the relationship between two financial variables in

order to derive meaningful conclusion about their behaviour. Metcalf and Titard have defined

financial ratio analysis as “a process of evaluating relationship between component parts of

financial statements to obtain a better understanding of a firm’s position and performance.

The type of relationship to be investigated depends on the objective and purpose of

evaluation. In the case of measurement of overall performance, generally, four groups of

ratios are considered: liquidity ratios, activity ratios, leverage ratios, and profitability ratios.

A brief description of these ratios is presented here.

Liquidity Ratios

Liquidity ratios indicate the organisation’s ability to pay its short term debts. These

ratios are generally expressed in two forms: current ratio and quick ratio. Current ratio

shows the relationship between current assets and current liabilities. This indicates the

extent to which current assets are adequate to pay current liabilities. Quick ratio indicates

the relationship between liquid assets (cash in hand and with bank and short-term debtors)

and current liabilities. It helps in identifying the organisation’s ability to pay its current

liabilities without considering inventory in hand.

Activity Ratios

Activity ratios show how funds of the organisation are being used. These ratios are

in the form of inventory turnover ratio, receivable turnover ratio, and assets turnover ratio.

Inventory turnover ratio indicates the number of times inventory is replaced during the year

and shows how effectively inventory has been managed. Receivable turnover ratio shows

how promptly the organisation is able to collect dues from its debtors. Assets turnover

ratio indicates how effectively assets have been used to generate sales.


NOTES


Leverage Ratios

Leverage ratios indicate the relative amount of funds in the business supplied by

creditors/financiers and shareholders/owners. These ratios are in the form of debt-equity

ratio, debt total capital ratio, and interest coverage ratio. Debt-equity ratio indicates the

proportion of debt in relation to equity and indicates the financial strength of the organization.

Debt-total capital ratio shows the proportion of debt to total capital employed. This also

indicates the financial strength. Interest coverage ratio shows the interest burden being

borne by the organisation in relation to its profit.

Profitability Ratios

Profitability ratios show the ability of an organisation to earn profit in relation to its

sales and/or investment. Profitability ratios are expressed in terms of profit margin as well

as return on investment. Profit margin, net profit or gross profit, is expressed in the form of

relationship between profit and sales and indicates the degree of profitability of the business.

Return on investment is measured by relating profit to investment. Return on investment is

the most comprehensive technique for controlling overall performance. Therefore, somewhat

more elaborate discussion is presented.

Return on Investment

The efficiency of an organisation is judged by the amount of profit it earns in relation

to the size of its investment, popularly known as ‘return on investment’ (ROI). This approach

has been an important part of the control system of Du Pont Company, U.S.A., since

1919, though it was actually devised by Donaldson Brown in 1914. Since its successful

operation in DuPont, a larger number of companies have adopted it as their key measure

of overall performance.

This technique does not emphasise absolute profit for judging the efficiency of an

organisation as a whole or a division thereof, rather the amount of profit is related with the

amount of facilities or capital invested in the organisation or the division.

The goal of a business, accordingly, is not to optimise profit, but to optimise returns

on capital invested for business purposes. This standard recognises the fundamental fact

that capital is a critical factor in almost any business and its scarcity puts limit on progress.

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NOTES


The system of control through return on investment can be seen from Figure as

operating in DuPont Company. Figure: Relationship of factors affecting return on

investment The rate of return is calculated by dividing the profit by total investment. It can

be computed in respect of historical data so s to reveal the rate of return realised or it may

be applied to budgeted data to give a projected rate of return. In the DuPont system, the

investment includes total fixed and current assets without reducing liabilities or reserves.

The basis is that such a reduction would result in fluctuations in operating investments as

liabilities or reserves fluctuate, which would distort the rate of investment and render it

meaningless. On the other hand, many business organisations adopt a different view of

investment. Accordingly, the amount of the investment should be taken by deducting

depreciation from the assets. The argument is simple. Depreciation reserves represent a

write-off of initial investment and that funds made available

through such charges are reinvested in other fixed assets or used as working capital.

The argument seems to be realistic as it puts heavier burden on return on new assets, as

compared to old and obsolete assets. Moreover, the amount of investment thus calculated

is further reduced by the amount of current liabilities.

Advantages

The return on investment is an integral part of the productivity and efficiency

accounting. It gives following advantages:

1.The technique offers a sound basis for inter-organisation comparison. Such comparison

can be made among the different divisions, departments, or products of the same

organisation. It places high values on the effective and efficient use of organisational

resources. It is a mirror which reflects the entire image of the operating activity. As

such, suitable action can be taken for removing inefficiency.

2.It provides success to budgetary planning and control by putting restraint on the

managers’ demand for higher allocation of resources for their departments even if

these are not actually needed. Thus, the resource allocation in an organisation is made

on more rational basis.

3.This system is helpful in authority decentralisation. Each manager, in-charge of a

department or section, is responsible for earning certain rate of return, but enjoys

complete freedom in running his department. Such autonomy gives additional incentive

to managers for higher efficiency.


NOTES


4.It can be treated as a total control system in the sense that rate of return reflects the

objective of the organisation. If this rate is satisfactory, other control systems like

budgetary, costing, ratios, reports may be taken as satisfactory.

Limitations

There are some limitations of the rate of return as a control tool:

1.The use of rate of return is associated with the fixation of a standard rate of return

against which the actual is compared. What should be this standard return is often

questionable. Comparisons of rates of return are hardly enough because they do not

tell what the optimum rate of return should be.

2.Another problem comes in the way of valuation of investment. The question is at what

cost the assets should be valued: at original cost, depreciated cost, or replacement

cost. In an inflationary economy, the problem of price adjustment becomes more acute,

whatever basis of valuation is adopted.

3.The rate of return on investment sometimes hampers diversification if it has no flexibility.

This is because of the fact that the rate of return is determined by the amount of risk;

higher the risk, higher the desirable rate of return.

4.Many times, the return on investment is followed so rigorously that expenditure such

as research and development which can contribute to the profitability in the long run

are curtailed to show impressive results in terms of rate of return. This practice, however,

is detrimental to the organisation in the long run.

5.As is the case with any system of control based on financial data, return on investment

can lead to excessive emphasis on financial factors. This emphasises that capital is the

only scarce resource in the organisation leaving aside the role and availability of competent

managers, good industrial relations and good public relations.

4.6.2 Social Performance Control

Social responsibility is a part of overall business objectives of an organisation.

Most of the organisations set their social objectives either explicitly or implicitly depending

on organisational practices. Social performance control deals with assessing the extent to

which an organisation is achieving its social objectives. This requires defining the basis on

which social performance should be evaluated and identifying the degree to which social

performance is effective. Thus, social performance control involves two aspects:

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NOTES


1. Approaches for measuring social performance and

2. Social audit.

Approaches for Measuring Social Performance

Measurement of social performance is quite fluid because of its qualitative nature.

In order to overcome the problem of fluidity, a separate branch of accounting, known as

social accounting, has been developed. Robert Elliot has defined social accounting as

“systematic assessment and reporting on those parts of a company’s activities that have a

social impact-the impact of corporate decisions on environmental pollution, consumption

of non-renewable resources, and ecological factors; the rights of individuals and groups;

maintenance of public services; health, safety, education and many other social concerns.”

In social accounting, three approaches are used for measuring social performance:

1. Social cost-benefit analysis,

2. Social indicators, and

3. Social goal setting.

4.6.3 Social Cost-Benefit Analysis

Social cost-benefit analysis is based on evaluating benefits that accrue to the society

and the costs through which these benefits accrue. While costs can be measured in terms

of money, same is not the case with benefits. Since social benefits cannot be defined in

monetary term, the concept of consumer surplus is applied to measure these. Consumer

surplus is the difference between what a consumer would be willing to pay for a given

product or service and the actual price charged. Thus, this willing price may be used for

measuring social benefits.

However, the willing price to be paid by a consumer is subjective and varies from

situation to situation for the same consumer or may be interpreted differently by various

persons. For exmple, what is the willing price to be paid by a consumer for a packet of

food who has been de-rooted from his home due to natural calamity such as flood,

earthquake, etc. Cost-benefit analysis may be undertaken either on the existing price system

or discounted rate of costs and benefits. In the latter case, social costs and benefits are

discounted at social discount rate to determine the present value of net social benefits.


NOTES


Social-cost-benefit analysis, though suffers from the limitation of precise measurement, is

useful in evaluating the alternative social programmes that an organisation can undertake.

Social Indicators

Social indicators approach of social performance measurement consists of

developing social indicators and measuring an organisation’s performance on these

indicators. Brumet has prescribed five broad indicators in which the contribution of an

organisation should be measured. These are as follows:

1.Net income contribution-earning enough to provide for the present and future costs of

the organisation’s continued existence but limited to legitimate socially desirable profit;

2.Human resource contribution-development of system of human resource accounting

to measure the impact of the organisational decisions on human asset value.

3.Creation of jobs and providing employment opportunities to backward and socially

handicapped population,contributing towards educational development, relief of people

in distress caused by natural calamities, rural upliftment, etc.

4.Environmental contribution-environmental improvement through pollution abatement,

conservation of scarce natural resources, maintenance of ecological balance, and so

on.

5.Product or service contribution-ensuring quality, durability, safety and serviceability of

products; customer satisfaction, truthfulness in advertising, etc.

Social indicators approach measures social performance of an organisation in the

context of various factors. Many organisations follow this approach because it indicates

the areas in which they have to work. However, one basic problem in this approach is the

determination of expectations of various indicators and the way it can be fulfilled.

Summary

The larger organisations are able to take larger expansion-steps. These steps may

have more impact on the organisation structure. However after some time most organisations

conclude that something went seriously wrong with its structure and decides to reorganise

it. Because reorganisations are often associated with staff reductions they are very sensitive

processes

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NOTES


What are the key learning points in this chapter and what are the practical

implications for strategic leaders and decision makers. Pfeffer has described learning about

power most succinctly: “it is one thing to understand power—how to diagnose it, what are

its sources, what are the strategies and tactics for its use, and how it is lost. It is quite

another thing to use that knowledge in the world at large...In corporations, public agencies,

universities, and government, the problem is how to get things done, how to move forward,

how to solve the many problems facing organizations of all sizes and types. Developing

and exercising power require having both will and skill. It is the will that often seems to be

missing.”

Operational Control systems are management processes used to track and respond

to progress towards targets at for defined situations, typically at ‘lower levels’ of the

organisation. The context for what needs to be managed has often been made explicit by

decisions ‘higher’ in the organisation, and often the corrective action for poor performance

has already been specified.




though techniques involved are different


NOTES


UNIT V

OTHER STRATEGIC ISSUES

INTRODUCTION

The business world is innovative, frequently experimenting with new structures

and relationships. Traditional strategies for growth and diversification that focused on mergers

and acquisitions have been supplemented by a variety of joint-venture arrangements,

leveraged investments, licensing and royalty agreements, and so on. Over the last 10 years,

a new business relationship has become popular: strategic alliances.

To explain the goals and expectations of the two companies that undertake a

strategic alliance, it is easiest to first state what the relationship is not. It is not primarily an

equity investment. There are many instances where a large corporation takes a minority

position in a start-up venture believed to have a technological edge in a promising new

product or process. These investments are usually made by the finance department and

have as their objective a high return on investment for a recognized high risk. Typically,

many pension managers set aside a small percentage of their portfolio for these types of

higher-risk investments. In almost all cases these relationships are financial, not strategic

Nonprofit organizations (NPOs) continue to be a major focus from a variety of

disciplines. This interdisciplinary aspect of NPO is a reflection

Of the distinctive nature of NPOs, the complexity of their operations and their

relationships with their environment, the difficulties of defining the boundaries of NPO

activity and determining, categorically, what is and what is not an NPO. These different

dimensions of NPO activity have also defied analysis by standard approaches to investigation

as applied to “for-profit” organizations.

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Typically, strategic alliances are an attractive option when a large firm has identified

a significant opportunity in one of its existing markets. In general, the large firm has most of

the capacity needed to address the opportunity but lacks one critical element: technology.

By teaming with a world-class small partner, the large firm hopes to participate quickly in

the emerging market and gain a competitive advantage.(1)

The large company does not seek the small company’s technology, nor does it

want to involve itself in the operations of the small firm. At most, the large company will

place someone on the Board of Directors to protect its investment. What is absent is an

agreement to jointly exploit the success of the small company’s research and development

and the interaction of operating personnel in both firms.

If a corporate decision is made to pursue the strategic alliance option, exploratory

discussions begin. The interests of the two parties are both complementary and conflicting.(2)

They both want the technology, which brought them together, to succeed and become a

marketable commercial product or process. Generally, each recognizes its own strength

and weakness and the benefits of a synergistic relationship. On the other hand, there are

clearly interests that are different. The small company wants various types of financial and

non-financial assistance, yet wants to retain maximum independence. The large company

wants to cautiously dole out funding and maintain close monitoring if not control of the

effort it is supporting. These issues must be discussed and resolved or they will threaten the

alliance.

A number of other issues are important as well. A thorough understanding and

agreement by key management people of both companies on the objectives and ground

rules for the alliance is a necessary prerequisite for success.(3) These discussions must

deal with hard issues such as who will be in charge of R&D, production, marketing, and

other functions; which decisions are to be made by each company; which decisions must

be approved by both companies; and how disputes should be resolved. If there are either

basic differences or too many minor differences, the whole question of whether to proceed

with the alliance needs to be re-examined.

It is worthwhile to review the evolution of strategic alliances. Not too many years

ago when an established large company wanted to enter a new product line quickly or

rapidly acquire a new technology it would “buy into” that technology by acquiring a small

company that had successfully developed it. The process was standard and simple. The


NOTES


founders of the small company, who were also the key employes and owners, were made

offers they couldn’t refuse. They sold their companies and became rich employees of the

large company. Within a short time the former entrepreneurs became frustrated with the

bureaucracy of the large company and left. In too many cases the objective of the acquisition

was not realized, primarily because the entrepreneurial spirit and incentives of the small

company were incompatible with the culture of the large firm.

The desire of large companies to get into new fields quickly remains and strategic

partnering provides an alternative to the acquisition approach. This alternative is particularly

attractive when the large entity is interested in only a subset of the skills and resources of

the small firm.

In a strategic alliance, the small company remains independent. The entrepreneurs

work in their own culture, driven by their own incentive system. However, by teaming up

with a large company the small firm has access to capital and organizational resources that

are unavailable in the marketplace, such as an in-place manufacturing and/or marketing

organization, distribution channels, and regulatory groups with years of governmental

experience.(4) To be sure, entrepreneurs must give up some rights and opportunities.

These may include the loss of marketing rights in select industry sectors or in certain parts

of the world. Alternatively, they may share the production responsibilities or even give up

production rights completely. However, the trade-off may be unavoidable because many

of the needed resources cannot be acquired elsewhere. Each case is unique and each case

is a trade-off. In the best situation the relationship is truly symbiotic; what each gives up is

small compared to what each hopes to gain.

This thinking and its conclusion are not universally accepted. Many large companies

reject the option of teaming with a small startup company and prefer to build their own in-

house technical capability, particularly if the small firm is a new venture organized around a

small group of technical experts. The in-house attitude is usually presented as “give us the

R&D dollars and we can build as strong or stronger a technical capability as that handful of

‘experts’.” This form of “not-invented-here-syndrome” is quickly giving way to multi-

company cooperative arrangements as the cost of technology rises and the lead time to

gain a competitive advantage shrinks.(5)

Another alternative to partnering is licensing a small firm’s technology. While

licensing has many advantages, it has one major shortcoming; it is an after-the-fact activity.

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Simply stated, a firm can only license existing technology. Licensing precludes large firm

involvement in the direction of development or the technical characteristics emphasized.

More important, it is often difficult to transfer the technology between the scientists of

small firms and large firms. Partnering overcomes these obstacles by allowing the large

firm to actively participate in all phases of the research.

Learning Objectives


• Understand the strategic issues involved in technology management

• Analyze the strategic issues influences in innovation

• Explain the strategic scope of entrepreneurial skills

• Describe the role of strategy involvement in small business

• Understand the strategic issues involved in non-profit organizations

5.1 MANAGING TECHNOLOGY AND INNOVATION

5.1.1 Managing Toward Success

While alliances can be a powerful tool for achieving a company’s strategic goals,

not all strategic alliances are successful. In one case, familiar to the authors, the large firm

repositioned its strategic focus away from the alliance’s product, rendering the alliance

obsolete. In another instance, the large firm experienced financial difficulties and cut off

funding even though the alliance was a technological success. In a third situation, a key

executive at the large firm was promoted and transferred out of the alliance. Without his

mentoring the relationship quickly deteriorated. In each of these cases, technological synergy

was undermined by some other factor. Our point is simple: synergy is not enough.

Collaborative management, mutual need, and the ability to work in the culture of another

organization are factors that must be present if the alliance is to succeed.

Once a corporate decision has been made to pursue the strategic partnering option,

what small-firm characteristics should the large firm look for and how can the chance of

success be maximized? The remainder of this article will examine three key events in the

life of alliances and suggest options for better managing these events. Specifically, we will

discuss choosing the partner, negotiating the alliance, and managing the collaborative process.


NOTES


5.1.2 Choosing a Partner

The basic foundation of a good relationship is the choice of the right partner. But

what are the characteristics of the right partner? First, the partner selection process should

identify organizations whose needs, skills, and resources are completely complementary

to those of the large firm. This point cannot be over-emphasized. All too often, what seems

like a perfect fit turns out to be a mismatch. In one case, a small firm with a promising

medical device entered into a relationship with a large pharmaceutical firm. The large

companies’ in-hospital sales force was thought to be an excellent marketing outlet for the

device. However, once the relationship was under way, it became obvious that a mismatch

had occurred. While the sales force had a tremendous ability to contact individual doctors

and sell drugs on a one-on-one basis, the medical device needed a marketing group that

could influence department heads and hospital administrators to commit a substantial amount

of funds and back the introduction of the new equipment. The mismatch resulted in lackluster

sales, and the relationship terminated.

A second selection criterion is the choice of a partner that is financially stable and

well managed. It can be a source of frustration when large-firm executives become involved

in a combination alliance and turnaround situation. All too often, large-firm executives

working with poorly capitalized partners are drawn into non-partnership related issues

such as venture capital funding and negotiations with suppliers. These problems draw

energy away from the common goal and divert attention from the activities of the alliance.

In addition to these obvious criteria, some of the more subtle small-firm

characteristics also require attention. Relationships as complex as these benefit from

experience. A small firm that has been engaged in previous alliances has moved up the

learning curve at the expense of an earlier partner. One president of a small electronics

company freely admits that his initial alliances could have been more effective if he and his

partner had been more experienced in cooperative management. Fortunately, many

entrepreneurial firms have a great deal of experience in this area. One biotechnology

company with 130 employees is currently engaged in 13 alliances. That firm considers

cooperative management the norm not the exception, and views partnering as a core

competency of the firm.

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NOTES


5.1.3 Negotiating the Alliance

As mentioned, there are many variations to any strategic alliance agreement. Each

bilateral arrangement is different and depends on each partner’s needs. The common

denominator for all successful agreements is the willingness of each side to openly describe

its requirements, both those that are fundamental and those that are nice to have, but not

essential. A complete understanding of what each is expected to contribute, and a realistic

assessment of each party’s ability to deliver is a prerequisite to a successful relationship.

This point is emphasized because the authors believe that many of the conflicts that occur

during implementation could have been identified during the negotiations. It is here that

differences, be they of substance or style, should either be resolved or the negotiations

terminated.

The terms and conditions of any agreement are the result of the perceived

requirements of the parties negotiating as well as their skill. As in all negotiations, both

sides must be convinced that their key needs are being satisfied and that the agreement is

fair, otherwise the alliance is at risk from the start. There must be clauses in any agreement

that stipulate when and how the alliance is to be terminated, but the emphasis in negotiations

should be on structuring the alliance to succeed. Therefore, most of the effort should be

spent on defining who is responsible for what, when, and how. Equally important is the

issue of who pays what and when, and who is entitled to the benefits of the alliance.

Ultimately, the best assurance that a relationship will be long and mutually beneficial is

when both parties are convinced that they really need each other to achieve their goals.

That must be the core of any agreement.

The following are two examples of the shapes that alliance arrangements can take;

each is a situation in which one of the authors participated. The terms and conditions

described are not meant to be a model for all strategic alliances. Rather, they are presented

to make the point that alliances benefit from negotiations based on a clear understanding of

both firms’ needs, expectations, and goals. When both firms understand the objectives

and constraints of the other, a truly “win-win” alliance can be formed.

The first was an alliance that was successfully implemented and continued until the

business was divested by the parent corporation more than two years later. The decision

to seek a strategic partner was made when the scientific sector of a multi-billion dollar

corporation decided to participate in the then emerging field of human diagnostics. The


NOTES


parent corporation had considerable biotechnology experience but lacked the specialized

talent to perform R&D in genetic-based diagnostics. After evaluating and rejecting a number

of alternatives, including developing an in-house capability, it was decided to seek a small

but highly competent R&D-oriented biotechnology firm for a partnering arrangement.

Following the evaluation of about a dozen candidates, a potential partner was

identified. The initial discussions were frank and uninhibited but cordial. The large company

representative explained their objectives and expressed their willingness to structure an

arrangement that would benefit both parties. In return for the opportunity to tap the research

potential of the small firm’s scientists, the large company would provide the financial

resources plus the production and marketing capabilities to exploit any promising

development.

The small, technically sophisticated company also discussed its strength and

weakness. It wanted to become a significant player in the biotechnology field but realized

that it would take years and financial resources beyond its means to build the manufacturing

and marketing infrastructure necessary. The smaller company made it clear from the outset

that it wanted to remain independent and focus its activities on what it knew best, research

and development.

After many meetings, an Outline of Understanding was prepared and signed by

the managements of both companies. It was only at this point that lawyers were introduced.

The agreement included the following key provisions:

1. The multi-billion dollar firm agreed to buy a 16% equity position for $10 million.

2. The small firm agreed to initiate an R&D program in human diagnostics using

genetic technology. This R&D would be funded by the large corporation for a

minimum of three years at a designated dollar amount. There were options for

each party to renew or terminate the R&D at the end of three years.

3. The selection of specific R&D projects was a joint responsibility, as was the decision

to redirect or cancel any R&D project.

4. The large corporation had an exclusive license to all technology in the field of

human diagnostics resulting from the R&D effort.

5. If and when the large corporation commercialized and sold products that were

derived from the R&D program, it would pay a royalty rate which varied and was

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NOTES


based on a number of factors including patent rights, sales volume, and elapsed

time.

6. The agreement included the conditions under which each company could give

notice of termination.

7. A final and important provision defined the process for resolving disagreements.

This included mediation and arbitration procedures that would minimize any cost

and stress of litigation. Once the final agreement had been reviewed and properly

signed, the cooperative venture proceeded with only normal start-up clarifications.

In the second example, a start-up company initiated alliance discussions with a

large established firm. The founders of the entrepreneurial firm were highly experienced

technologists who had built a worldwide reputation in a special but important niche and

had been granted scores of patents. They established their company to develop state-of-

the-art equipment for semiconductors, and they made two basic decisions when creating

the firm. First, they did not want to seek traditional venture capital funding as their primary

financing. Second, they did not want to become a production company. The founders had

been engaged in R&D all their lives and were confident of their abilities in this area; they

were less sure of their manufacturing and marketing skills. Consequently, they decided to

transfer the know-how of any new product or process to a major electronics corporation

that had appropriate production and marketing capabilities. Furthermore, they would assist

the latter to become self sufficient and exploit the full potential of the research in the

marketplace. With this strategy, they searched for partners who could manufacture and

effectively market advanced semiconductor devices. The start-up is currently in the initial

stages of negotiating with a major international firm whose strengths in manufacturing and

marketing complement its technical expertise

The arrangement being discussed calls for the small firm to initiate the necessary

development and design effort and achieve specific technical objectives. Once this has

been accomplished, the small firm will transfer all documentation, equipment and know-

how to the partner. In addition, adequate training will be provided to assure efficient

operation by the recipient company. In return, the large international corporation agrees 1)

to contract and fund the development and design effort for at least two years; 2) to negotiate

a licensing agreement for royalty payments to the small company for all products it

manufactures with the advanced technology; 3) and to invest in the start-up company, the

dollar value and equity position to be determined during negotiations. It is understood,

however, that the equity position will be relatively small (less than 20%).


NOTES


These are the key elements in a management document of about six pages currently

being reviewed. Even though the outcome is unknown at this time, the important point is

that the relationship is being structured to be mutually beneficial as well as to protect both

sides.

5.1.4 Managing Toward Collaboration

Once the corporate decision has been made to exercise the alliance option,

managing the relationship becomes the focus. Setting the goals and milestones should be a

joint activity involving operating managers from both firms(7) - an exercise serving a number

of functions. First, it acts as an initial cooperative exercise for the managers and assures

that all key operating people are aware of informal as well as formal agreements made

during negotiations. This can be important because operating managers are not always

involved in the negotiations and can be unaware of informal agreements. In addition, setting

goals and milestones gives the operating managers an opportunity to develop a personal

rapport important to success.(8) Time and again our study has shown that the personal

relationships that develop between the key managers is central to the success of the

relationship.(9)

Managing toward collaboration includes managing conflict. In the course of every

alliance conflict occurs and can be seen as a breakdown or a breakthrough for the

relationship. Unfortunately, few managers have been trained in the art of conflict resolution.

Fewer still understand that the best time to resolve conflict is while the issue is small and

still resolvable.

In an effort to learn how to resolve conflict in a cooperative relationship one of the

authors spent time with a marriage counselor. One of the main causes of conflict in marriages

is different sets of expectations. This is a key contributor to conflicts in alliances as well.

What are Company A’s expectations? What are Company B’s? When these expectations

track one-to-one the alliance is on a strong foundation. The further expectations diverge,

the greater the risk.

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NOTES


5.1.5 Managing Innovation

Open Innovation

Innovation and entrepreneurship are at the heart of “creative destruction”. In his

book, Open Innovation, Henry Chesbrough describes a new paradigm of open innovation

that is in contrast to the traditional closed model. To understand open innovation, it is

worthwhile to review the older model of closed innovation.

The Closed Innovation Model

Under the concept of innovation that prevailed during most of the 20th century,

companies attained competitive advantage by funding large research laboratories that

developed technologies that formed the basis of new products that commanded high profit

margins that then could be plowed back into research. This vertical integration of the

research function meant that firms that could not afford such research were at a disadvantage.

The vertically integrated concept of the research and development pipeline is depicted in

the following diagram:

Closed Innovation Concept

In the above diagram, the red lines represent completed research projects, some

of which may have resulted in patents, but that never made it to development. This often is

the situation if the innovation is not useful to the company’s core business. Such completed

research projects often are shelved until a market opportunity arises to use them, if such an

opportunity arises at all.

Chesbrough observed that this closed model began to change in the 1990’s, when

firms such as Cisco Systems competed very effectively with research-endowed companies

such as Lucent Technologies (which inherited most of Bell Labs).

Erosion of the Closed Innovation Paradigm

There now are many famous cases in which companies have developed disruptive

technologies but have nonetheless failed to capitalize on them. One reason for failure is that

managers often wrongly assume that just because customers are fascinated by an innovation,


NOTES


there also exists a corresponding business model. Henry Chesbrough used the Xerox Palo

Alto Research Center (PARC) as an example. The research from PARC spawned many

successful products, but the shareholders of Xerox did not benefit as much as others did.

Employees who worked on promising technologies departed to form start-up companies,

many of which, such as 3Com and Adobe, acheived much success. In fact, the market

capitalization of Xerox’s spin-offs exceeded that of Xerox itself.

The Xerox PARC example raises questions about the viability of the closed

innovation model going forward in the 21st century. According to Chesbrough, the closed

innovation paradigm has eroded due to the following factors:

• Increased mobility of skilled workers

• Expansion of venture capital

• External options for unused technologies

• Increased availability of highly-capable outsourcing partners

Open Innovation Paradigm

Rather than being held closely within the firm, under the concept of open innovation

research results are able to traverse the firm’s boundaries. Other companies that are able

to utilize a technology can license it, creating a win-win situation. Similarly, the firm may be

able to license the technologies created by other firms. This concept of open innovation is

illustrated in the following diagram:

Open Innovation Concept

This diagram uses dashed lines to illustrate that the boundaries of the firm are

porous. The lines exiting the firm represent technologies that are licensed to other firms and

that otherwise would have gone unutilized (they were the red lines in the closed innovation

diagram). The lines entering the firm represent outside technologies that are licensed to the

firm. These are technologies that did not originate in the firm’s own research laboratories

but nonetheless are useful in the firm’s core business.

Internal Ventures

Established companies often view entrepreneurs and the venture capitalists who

fund them as a threat. Chesbrough argues that they should be viewed as laboratories that

test market real products to real customers. In a dynamic entrepreneurial economy, such

DBA 1703

NOTES


information can be more useful than more hypothetical marketing research. Some large

firms have taken the open innovation model further by forming alliances with start-ups or

even acquiring them. The more progressive firms have formed their own internal venture

groups to power their own innovation process.

Operating an internal new ventures group provides the firm with the following benefits:

• It allows the monetization of technologies that otherwise would go unused in the

firm’s own business.

• The venture process brings the technologies to market quicker.

• It provides valuable feedback by applying the technology to different uses in

different markets.

• When there is innovation in the business model itself, a ventures group is a tool for

rapidly protoyping new business models.

Business Model for Innovation

Technology only has value when it is commercialized by means of a business model.

The dot-com boom and bust illustrates this concept well, as there was much innovation but

relatively few business models that could capture the potential value of the new technologies.

According to Chesbrough, a firm can capture value from an innovation in the following

three ways:

• Using the technology in its existing business

• Licensing the technology to other firms

• Launching a new venture that uses the technology

Given the complexities of products, markets, and the environment in which the

firm operates, very few individuals, if any, fully understand the organization’s tasks in their

entirety. The business model serves to connect the entrepreneurial inputs to the economic

outputs.

Intellectual Property and Open Innovation

In the historical model of vertically integrated research, new technologies were

used in the firm’s core business. Other potential uses of the technology did not unfold.


NOTES


Under the model of open innovation, the same intellectual property can be applied

to different markets. The firm creating the IP may license it to one firm for use in one

market, and other firms for use in their respected markets.

Chesbrough used Millennium Pharmaceuticals as an example of a young company

that built its business model around the concept of open innovation for the licensing of

intellectual property. Millennium supplies information and analysis of biological compounds

useful to large pharmaceutical firms in drug development.

Previous business models for such firms involved contracting the services. Those

firms are known as contract research organizations, and they essentially performed the

work on a contract basis with the pharmaceutical firms owning the resulting intellectual

property. Two disadvantages of this model are:

• the potential value of the intellectual property would not be unlocked since it would

be confined to the market of the pharmaceutical firm paying for the services, and

• the growth of such a pay-per-service firm is somewhat limited since there are few

economies of scale.

Millennium Pharmaceuticals developed a business model whereby Millennium

retained ownership of the IP that it developed and licensed the IP to the larger

pharmaceuticals. Exclusivity was given for specific markets, but each biological target that

resulted could be licensed to different firms for use in different markets, with exclusivity

given for each market. The full potential value of the IP could be unleashed since it would

not be hoarded for use in the core business of one firm. This model created a win-win

situation whereby the potential value of the IP was distributed to both Millennium and the

pharmaceuticals as follows:

• Millennium retained ownership of the IP and therefore could generate additional

revenue by licensing it to other firms for use in other markets.

• The large pharmaceutical firms gained the intellectual property they needed at a

cost lower than they would have incurred had they acquired complete ownership

of it.

The example of Millennium Pharmaceuticals illustrates both the benefits of open

innovation and the importance of the business model in unleashing value.

DBA 1703

NOTES


5.2 ENTREPRENEURIAL VENTURES & SMALL BUSINESS STRATEGIC

ISSUES

5.2.1 Entrepreneurship

A process where established ways of doing things are destroyed by the creation of

new and better ways of getting things done.

A Definition of Entrepreneurship

The concept of entrepreneurship has a wide range of meanings. On the one

extreme an entrepreneur is a person of very high aptitude who pioneers change, possessing

characteristics found in only a very small fraction of the population. On the other extreme

of definitions, anyone who wants to work for him or herself is considered to be an

entrepreneur.

The word entrepreneur originates from the French word, entreprendre, which

means “to undertake.” In a business context, it means to start a business. The Merriam-

Webster Dictionary presents the definition of an entrepreneur as one who organizes,

manages, and assumes the risks of a business or enterprise.

Schumpeter’s View of Entrepreneurship

Austrian economist Joseph Schumpeter’s definition of entrepreneurship placed an emphasis

on innovation, such as:

• new products

• new production methods

• new markets

• new forms of organization

Wealth is created when such innovation results in new demand. From this viewpoint,

one can define the function of the entrepreneur as one of combining various input factors in

an innovative manner to generate value to the customer with the hope that this value will

exceed the cost of the input factors, thus generating superior returns that result in the

creation of wealth.


NOTES


Entrepreneurship: According to PETER DRUCKER -Entrepreneurship is purposeful

innovation aimed at creating customers

• By creating utility

• By pricing

• By adaptation to the customers social and economic reality

• By delivering what represents true value to the customer

Peter Drucker on Entrepreneurship:

Innovation can be defined from the supply side (changing the yield of resources)

or from the demand side (changing the value and satisfaction obtained from the resources

by the consumer) . Systematic innovation consists in the purposeful and organized search

for changes, and in the systematic analysis of the opportunities such changes might offer for

economic or social innovation.

Entrepreneurship Innovation are as follows;

• Utility

• Pricing

• Customers

• Innovation

• Entrepreneurship

• Social & economic impact

• Value

• Demand side

Other Definitions on Entrepreneurship

The assumption of risk and responsibility in designing and implementing a business

strategy or starting a business. The activity of assuming, organizing and managing risks of a

business enterprise leading to:

• Wealth creation

• Innovation

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NOTES


Entrepreneurial Success Stories

• Arun Jain, Chairman & CEO of Polaris Software Lab Limited, emphasizes that it

is quality consciousness which has made him one of the most highly successful first

generation entrepreneurs.

• Madhuri Mathur, made the life of ladies in kitchen easier by bringing out the idea of

a kitchen machine that would blend, chop, mince and grind that culminated into

sumeet mixer.

• Shahnaz Husain introduced herbal cosmetics to the world. Her creams and lotions

have found their way into salons in different parts of the globe. She has 650 salons

at 104 countries.

• As the inventor of Hotmail, Sabeer Bhatia strengthened India’s IT revolution.

Hotmail went from strength to strength as the Web email address of choice for an

estimated 200 million users worldwide.

• The Chandraprabhu Raingun is an innovation of Shri Anna Saheb Udgave, a 70-

year old sugarcane farmer in Chandraprabhu, India.

• By studying commonly available sprinkler systems, he developed his own design

to suit the irrigation requirements of sugarcane.

• While it was developed with sugarcane in mind, the Rain gun can also be used to

a number of other crops such as groundnut, tapioca, onion, and potato.

Entrepreneurship – Highlights

• Diversity - Entrepreneurship principle is applicable in diverse settings.

• Great potential - Mostly entrepreneurial ventures are started as small enterprises

but grow rapidly

• Creative thinking - Entrepreneurs identify opportunities creatively.

Myths of Entrepreneurship

• Entrepreneurs are gamblers.

• Entrepreneurial ventures require huge capital investments.

• Entrepreneurs can not hold on to their business in the long run


NOTES


Entrepreneurial Strengths

• Risk - the unpredictability of outcomes is inherent and recognized

• Confidence - the confidence level entrepreneurs have in their own ideas is

substantial.

• Framework - progresses from environmental to individual

Economic Relevance

Entrepreneurial ventures are essential to the economy.

• Entrepreneurial ventures contributes to personal reward

• Entrepreneurial ventures substantiate social welfare.

Entrepreneurial Environment

• Society that encourages personal freedom

• Respect for business and business people

• Resource availability

• Socio-demographics

• Appropriate business

Corporate employment Vs. Entrepreneuship

• Entrepreneurial freedom / Corporate rigidity

• Inflexible schedule

• No Supervisory evaluation

• Flexible business policy

• Flexible business solution

• Corporate & Entrepreneurial Demands

• Customer demands

• Government taxes an

• Need for long hours, hard work

• Employee expectations

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NOTES


The Motivation for Entrepreneurship

• Corporate refugee - Escape from corporate tensions

• Parental refugee - Emphasis self worth

• Feminist refugee - Escaping gender discrimination

• Housewife refugee- Time utility after household responsibilities

• Society refugee - express social belongingness

• Educational refugee - Leave academic pursuit for venture into business

The Motivation for Entrepreneurship

• Enjoy a satisfying life (personal fulfillment)

• Pride of ownership, self-esteem, and a sense of achievement

• Chance to help the community in some way.

• Enjoy a satisfying life (personal fulfillment)

• Pride of ownership, self-esteem, and a sense of achievement

• Chance to help the community in some way.

Competitive Advantages of Entrepreneurial Firms

• Customer focus — These firms can achieve greater customer satisfaction and

loyalty by their flexibility.

• Quality performance - These firms can outperform large scale operations of

large undertakings by closely managing operations.

• Integrity and responsibility — These firms can foster a reputation for honesty

and reliability in their dealings and thereby win business.

• Innovation — Entrepreneurs are innovators, and this mindset is more likely to

surface in the activities of the firm.

• Low cost production - These firms can sometimes be more efficient than large

firms, especially in small markets.

Competitive Advantages for the entrepreneur

• Customer Focus Quality

• Integrity Customer

• Few Managerial Responsibility


NOTES


• Satisfaction Tasks

• Honesty Focus on

• Reliability Customer Loyalty

• Productivity Innovation

• Low-Cost Production Innovative Operation

• Cost efficient Innovative Business

• Few Operations Tools

Some of the Successful Entrepreneurs

• Innovative ideas help successful entrepreneurs

• Determination and the ability to conceive innovative business propositions

materializes these ideas into business ventures.

• Bill Gates, Narayan Murthy, Azim Premji and Henry Ford, Dhirubhai Ambani etc.

Successful Entrepreneurial Ventures

DAN HOLTSHOUSE of “Xerox” said, “Try to anchor the idea in as many places

inside the company and with as many customers that are important to the company as

possible.”

The business idea guides even after it has achieved success. It is like the light that

shows the future plan and direction of the business.

Narayan Murthy started “Infosys” at a time when ‘computer software’ was an

unfamiliar phrase (in India), which today is a billion dollar company and a house-hold

name. A large amount of its success could be attributed to the thought of building software

company decades ago.

Attributes of Successful Entrepreneurs

• Successful entrepreneurs seem to have a feel for the effectiveness of the idea.

• Hard word is much more pertinent than dreams to turn an innovative idea into a

successful business enterprise.

• Self assessment helps in identifying the business idea that can help entrepreneurs

achieve their desired result.

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NOTES


• Differentiation seems to the most important attribute of a successful venture, not

only to stand out in a crowd, but to do the little things inside the company in a

competitive way.

• Entrepreneurs seem to take in their stride failure and continue to strive towards

success.

Entrepreneurship – Highlights

• Entrepreneurs emphasize more on aspects such as self realization, quality, etc.,

than reaping profits. Money is not the only objective.

• Entrepreneurship involves more of tackling head on business activities than desiring

to be one’s own boss.

• Entrepreneurship need not necessarily be a way for self-employment but a means

to create and identity in society and business circles.

• Entrepreneurial business success rate may not be more than 10 per cent.

• Entrepreneurs thrive on problems and find solutions without losing heart.

Entrepreneurial Nature

• Entrepreneurs recognize business opportunities, help people to work together and

utilize the knowledge, capital and other resources in a productive endeavor.

• Entrepreneurs recognize business opportunities, help people to work together and

utilize the knowledge, capital and other resources in a productive endeavor.

5.2.2 Entrepreneurship vs. Small Business

Many people use the terms “entrepreneur” and “small business owner”

synonymously. While they may have much in common, there are significant differences

between the entrepreneurial venture and the small business.

Entrepreneurial ventures differ from small businesses in these ways:

Amount of wealth creation - rather than simply generating an income stream that replaces

traditional employment, a successful entrepreneurial venture creates substantial wealth,

typically in excess of several million dollars of profit.


NOTES


Speed of wealth creation - while a successful small business can generate several million

dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid; for example,

within 5 years.

Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive of

sure profits many entrepreneurs would be pursuing the idea and the opportunity no longer

would exist.

Innovation - entrepreneurship often involves substantial innovation beyond what a small

business might exhibit. This innovation gives the venture the competitive advantage that

results in wealth creation. The innovation may be in the product or service itself, or in the

business processes used to deliver it.

The Business Model

To extract value from an innovation, a start-up (or any firm for that matter) needs

an appropriate business model. Business models convert new technology to economic

value.

For some start-ups, familiar business models cannot be applied, so a new model

must be devised. Not only is the business model important, in some cases the innovation

rests not in the product or service but in the business model itself.

In their paper, The Role of the Business Model in Capturing Value from

Innovation, Henry Chesbrough and Richard S. Rosenbloom present a basic framework

describing the elements of a business model.

Given the complexities of products, markets, and the environment in which the

firm operates, very few individuals, if any, fully understand the organization’s tasks in their

entirety. The technical experts know their domain and the business experts know theirs.

The business model serves to connect these two domains as shown in the following diagram:

DBA 1703

NOTES


Role of the Business Model

A business model draws on a multitude of business subjects, including economics,

entrepreneurship, finance, marketing, operations, and strategy. The business model itself is

an important determinant of the profits to be made from an innovation. A mediocre

innovation with a great business model may be more profitable than a great innovation with

a mediocre business model.

In their research, Chesbrough and Rosenbloom searched literature from both the

academic and the business press and identified some common themes. They list the following

six components of the business model:

Value proposition - a description the customer problem, the product that addresses the

problem, and the value of the product from the customer’s perspective.

Market segment - the group of customers to target, recognizing that different market

segments have different needs. Sometimes the potential of an innovation is unlocked only

when a different market segment is targeted.

Value chain structure - the firm’s position and activities in the value chain and how the

firm will capture part of the value that it creates in the chain.

Revenue generation and margins - how revenue is generated (sales, leasing,

subscription, support, etc.), the cost structure, and target profit margins.

Position in value network - identification of competitors, complementary, and any network

effects that can be utilized to deliver more value to the customer.

Competitive strategy - how the company will attempt to develop a sustainable competitive

advantage, for example, by means of a cost, differentiation, or niche strategy.


NOTES


Business Model vs. Strategy

Chesbrough and Rosenbloom contrast the concept of the business model to

that of strategy, identifying the following three differences:

Creating value vs. capturing value - the business model focus is on value creation.

While the business model also addresses how that value will be captured by the firm,

strategy goes further by focusing on building a sustainable competitive advantage.

Business value vs. shareholder value - the business model is an architecture for

converting innovation to economic value for the business. However, the business model

does not focus on delivering that business value to the shareholder. For example, financing

methods are not considered by the business model but nonetheless impact shareholder

value.

Assumed knowledge levels - the business model assumes a limited environmental

knowledge, whereas strategy depends on a more complex analysis that requires more

certainty in the knowledge of the environment.

Business Model for the Xerox Copier

Chesbrough and Rosenbloom illustrate the importance of the business model with

a case study of Xerox Corporation’s early days in the copy machine business with its

Xerox Model 914 copier. (Before changing its name to Xerox Corporation, the company

was known as the Haloid Company and then Haloid Xerox Inc.)

The Model 914 used the relatively new electro-photography process, which is a

dry process that avoids the use of wet chemicals. In seeking potential marketing partners,

Haloid repeatedly was turned down by the likes of Kodak, GE, and IBM, who had

concluded that there was no future in the technology as seen through the lens of the then-

prevalent business model. While the technology was superior to earlier copy methods, the

cost of the machine was six to seven times more expensive than alternative technologies.

The model of selling the equipment below cost and making up the difference by large

margins in the sale of supplies was not viable because the cost of the supplies was about

the same as that of the alternatives, so there was little room to maneuver.

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Xerox then decided to market the new product itself and developed a new business

model to do so. The new model leased the equipment to the customer at a relatively low

cost and then charged a per copy fee for copies in excess of 2000 copies per month. At

that time, the average business copier produced an average of only 15-20 copies per day.

For this model to be profitable to Xerox, the use of copies would have to increase

substantially.

Fortunately for Xerox, the quality and convenience of the new copy technology

proved itself and companies began to make thousands of copies per day. As a result,

Xerox sustained a compound annual growth rate of 41% over a 12 year period. Without

this business model, Xerox might not have been successful in commercializing the innovation.

The Entrepreneurial Advantage

Chesbrough and Rosenbloom observe that a successful business model such as

that of Xerox tends to build momentum and the company becomes confined to its successful

model. However, new technologies often require new business models.

Because start-up companies are free to choose or develop a new business model,

in this regard start-ups have an advantage over more established firms. In addition to the

risk incurred in the technological and the economic domains, an unproven business model

adds additional risk, and entrepreneurial ventures usually are more prepared to accept this

risk than would be a large, well-entrenched firm.

In fact, many venture capitalists see themselves as investing in a business model.

Consequently, it often is the VC that pushes for a change in the business model when it

becomes apparent that the original model is not working.

Attracting Stakeholders

A new business requires resources such as funds for R&D, equipment, marketing,

and inventory. These funds are obtained by attracting stakeholders. Financial stakeholders

are most at risk - these include banks, bond holders, investors, and venture capital firms.

However, employees, customers, and suppliers of a business also are at risk. Employees

may not receive some of their pay if the business fails, and they may have given up lucrative

positions to which they no longer can return. Customers may find that they are stuck with


NOTES


a non-supported product, and suppliers may lose the opportunity to recoup their

development costs or to receive their accounts receivable. Because of the risk of failure,

attracting stakeholders is more difficult for a new venture than for an established, successful

company.

Minimizing Downside Exposure

One way to make a new venture more attractive to potential stakeholders is to

minimize their downside exposure to the fullest extent possible. For example, non-

transferable R&D costs can be reduced by using off-the-shelf technology wherever possible.

Investment in capital equipment can be made somewhat reversible by using more general

machines that can be used for other purposes, thereby enhancing their liquidation value.

The initial marketing expenditures can be reduced by marketing to people who are in a

position to influence the opinions of many other decisions makers, thus reducing promotion

cost. Employee risk can be reduced by using standard tools of the trade so that they easily

can be out-placed, and by choosing a location that has many opportunities for the employees

should they need to find another job. Customer risk can be reduced by designing a product

to use standard components and to be compatible with other products. Taking such measures

to reduce stakeholder risk may increase variable costs and compromise the product - this

is a tradeoff that must be considered when making such decisions.

Finding Risk-Tolerant Stakeholders

Stakeholders must be found who are willing and able to accept the downside risk.

Such stakeholders tend to be diversified, have experience with start-ups, have excess

capacity, and are risk-seeking. Diversified financiers are those who invest in multiple

businesses. Diversified distributors are those who carry many other products. Diversified

customers are those who use multiple suppliers on whom they can fall back if necessary.

Those stakeholders who have experience with start-ups are more comfortable with the

downside and better understand the potential rewards. Stakeholders with excess capacity

incur less opportunity cost and therefore have less risk from participating in the start-up. A

engineer who has time in the evening or a manufacturing firm that has upgraded its production

capacity are examples of stakeholders with excess capacity. Finally, risk seekers who

enjoy the uncertainty associated with start-ups are potentially good candidates for

stakeholders; however, if a start-up portrays too strong of a risk-taking image, more

conservative stakeholders will be scared away.

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Selling Potential Stakeholders on the Venture

Once potential stakeholders are identified, they must be sold on the venture. To

do this, the entrepreneur must have faith in the venture and show enthusiasm for it. A

record of success helps, but the main thing is that he has honored past promises and has

not abandoned a venture in mid-stream when it encountered difficulties. A common problem

for start-ups is securing the commitment from stakeholders who are waiting for other

stakeholders to sign on first, or “ham and egging”. The ideal way to do this is to convince

each of the stakeholders simultaneously that the others have signed-on or are very close to

signing on. An alternative method is to get a small commitment from one stakeholder and

use that to get a small commitment from another and so forth. It helps to have a “bell cow”

- someone who has the reputation of being a leader with foresight. When acquiring the

commitment of stakeholders, one needs to have a schedule, know what the start-up needs,

be able to anticipate and handle objections, and deal with withdrawals after sign-on. A

schedule is important so that the entrepreneur can measure whether the stakeholders really

have committed to the venture as evidenced by the intermediate milestones. The

entrepreneur needs to understand the actual needs of the venture in order to negotiate for

that and only that.

Potential stakeholders may voice objections and concerns before committing. Many

of these can be dealt with by openly discussing issues such as the “fume date” (the date at

which the venture is to run out of cash) and by presenting well-thought-out contingency

plans.

Maintaining Stakeholder Commitment

There may be cases in which a stakeholder wants to back-out of a commitment.

For example, a talented employee who signed-on to the venture may have a counter-offer

to remain with his employer. The entrepreneur constantly must follow up with the stakeholders

to prevent such problems and to deal with them when they occur.

5.3 STRATEGIC ISSUE OF NON- PROFIT ORGANIZATION

This subject seeks to take stock of the state of the art into NPOs in two ways. In

the first instance we explore how the traditional contrasting disciplines of economics and

sociology have contributed to our understanding of NPOs. We then focus on the dominant


NOTES


challenge facing NPOs – the need to move from amateur administration to professional

management. This challenge of management to NPOs is of particular

Significance in areas of fund-raising by NPOs, therefore we focus on marketing

as the ultimate management challenge for NPOs, and we review the state of the art in

NPO marketing research.

NPO ‘s Contrasting Models: Economics and Sociology

Economic Rationales and Models

Although there are numerous contributions of economic theory devoted to NPOs,

most of them are confined to the very important questions of definition of NPOs, demand

for NPOs, or supply of NPOs. We just mention the well-known and well-documented

concepts of the non-distribution constraint, market failure, public goods provision, contract

failure, government failure, and information asymmetries between buyers and sellers to

characterize this strand of the literature. The internal functioning of NPOs, as well as other

r aspects, has received far less attention: “issues of internal organization of non-profit

organizations are played down” and “the NPO ?firm was treated as a black box”

(Ortmann, 1996, p. 471). In the present section we well try to bring together the

scattered economic literature on NPO-management. We start with an elaboration on the

more general insights in the internal functioning of NPOs, focused on the micro-economic

principal agent theory and the related contributions on NPO “corporate governance.”

Next, we will deal with some functional managerial domains which have traditionally been

heavily informed by economic thought: strategic planning, accounting and auditing, and

finance.

Principal-Agent Theory and NPO “Corporate Governance”

Principal-agent theory (PAT) has by now become a standard component of

microeconomic theory. It deals with very frequently occurring situations: “an agency relation

[is] a contract under which one or more persons (the principal[s]) engage another person

(the agent) to perform some service on their behalf which involves delegating some decision

making authority to the agent… there is good reason the believe that the agent will not

always act in the best interests of the principal” (Jensen and Meckling, 1976, p.308),

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NOTES


giving rise to “agency costs” which are in fact welfare losses resulting from the differences

in objectives pursued by principals and agents.

Appropriate instrument to implement a sound “corporate governance” policy,

balancing all relevant stakes and objectives, and imposing them as purely as possible to

NPO management. Also in this domain, an extensive literature exists as far as profit oriented

firms are concerned, but “much less is known about governance in nonprofit corporations

Strategic Planning As far as NPO strategic management is concerned; it comes

as no surprise, given the situation described with respect to NPO corporate governance,

that there is no body of economic theory underpinning NPO strategic choices. Theoretical

contributions are scarce, and deal with specific aspects of NPO strategy, such as the

difference between NPO strategy and a competing profit firm strategy when exposed to a

common exogenous shock (Banks et al., 1997), strategy differences between NPOs and

profit oriented firms following mergers.

Accounting and Auditing

Because of an “ideological rejection of commercial values and practices” in NPOs

accounting and auditing have been not very popular in NPO circles, let alone as a research

topic for NPO scholars. Even now about one third of a sample of large and medium sized

NPOs in the United States does not employ staff with an accounting education. An important

study by demonstrates how an NPO can operate effectively in a situation in which accounting

is virtually invisible in the mainstream operations of the NPO.

A first attempt towards a comprehensive, principal-agent based theory for

accounting and auditing in NPOs, who explains the absence or presence of accounting

and auditing in NPOs in the context of mitigating agency cost between the NPO board and

its management. The problem of compliance with accounting rules by NPOs. Accounting

choices, a popular topic in the for profit accounting and economics literature because of

their potential effects on managerial remuneration, is shown by Chase and Coffman (1994)

to have a potential influence on the level of subsidies obtained, which is nothing else than

another example of how agents try to exploit their contractual relations with their principals

(here the subsidizing authorities).


NOTES


Financial Management

Although the techniques of financial management in NPOs do not fundamentally

differ from those in profit oriented firms, there are some peculiarities documented by the

economic literature. They all pertain to the specific way NPOs are funded, and more

specifically the diversity of sources of equity, which is clearly more important than for profit

oriented firms, and its consequences for the financial vulnerability of NPOs.. The direct

link with the financial economics literature is to be found in the treatment of the “cost of

capital,” the average cost of using the funds present in the organization, be it debt or other

funds (Jegers, 1997; Wedig, 1994; Wedig et al., 1996).

Again, this problem can be cast in a principal-agent framework, the principal being

the funder, and the agent the organization (board or management). At first sight, NPOs

should aim at minimizing debt, as the required financial returns on debt is higher than on

other funds, but agency considerations may justify some level of indebtment (Jegers and

Verschueren, 2004), if monitoring management by creditors results in a reduction of the

overall agency costs.

Sociological Explanations and Models

In this section of this paper we examine how sociological theories have informed

research in NPOs. A major departure from economic thought is the sociological treatment

of concepts of rationality. Rational actions – the evaluation of alternatives, the determination

of the most desirable outcome and the consequent actions of the decision maker – are

implicit in the economic model, referred to above. These norms of rationality are not present

in sociological models, which dwell on the power and politics of rationality and the social

construct ion of meaning. We proceed by briefly examining institutional theories, structuration

theory, and resource dependency, and then considering the findings of case studies and

field studies of NPO practices which deploy these theories to explain the practices of

NPOs.

Institutional Theory

The importance of shared social realities was advanced by Berger and Luckmann

(1967). They emphasized the importance of human construction and social interaction in

the emergence of shared realities. They defined the process by which actions become

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repeated over time and are assigned similar meanings by self and others as institutionalization.

These ideas are developed further by Meyer and Rowan (1977) in their seminal article

which analyses the roles of formal structures in organizations, particularly the deployment

of rational models, tools, and techniques as myths and in particular they stress the relationship

of the organization to its external environment in understanding organizational behavior.

Meyer and Rowan (1977) and DiMaggio and Powell (1983) identified the existence

of institutional isomorphism, in which organizations seek to mimic each other, as key strands

of institutional theory. This perspective has been employed in studies of NPOs.

Thus, Arnaboldi and Lapsley (2004) studied the adoption of activity-based costing

in a health care NPO. Despite the fact that activity-based costing was not required by any

government mandate (the key influencing factor in the adoption of accounting techniques in

health care [Jackson and Lapsley, 2003]), this NPO had chosen to adopt activity-based

costing. However, on closer examination, this NPO had “adopted,” but not “implemented,”

activity-based costing. This study demonstrated the manner in which techniques for “rational

management,” such as activity-based costing, had been “adopted,” not for use, but so this

NPO could present itself as up -to-date and modern to its external controlling environment

by the mimicry of the practices of private sector businesses. The institutional theory

perspective was also adopted by Covaleski and Dirsmith (1988a, 1988b), in their classic

study of a major NPO – a university. This research revealed the significance of language –

specifically the accounting language of budgeting – could be deployed in the power and

politics of an organization experiencing a period of decline to shape expectations within

and beyond the entity being studied. This interplay of organizational and societal explanations

and expectations was played out with the apparently neutral accounting members being

used to articulate budgeting alternatives.

This relationship of the organization to its environment has also been studied in

other research into NPOs. Another notable example of this is the Christensen and Molin

(1995) study of the Danish Red Cross. At first sight, the findings of this study appear to

contradict the institutional theory’s view that organizations reflect their external environments

(Meyer and Rowan, 1977; Scott, 1992). However, on closer inspection, Christensen and

Molin depict an organization that retains its form over its “lengthy” life. However, according

to Christensen and Molin, the resilience of the Danish Red Cross is attributable to the

manner in which this organization has conformed closely to wider institutional requirements

from the outset of its existence, thereby increasing their legitimacy and increasing their


NOTES


resources and survival capabilities (Meyer and Rowan, 1977). Institutional theory continues

to be used in research into NPOs. However, there are unanswered questions within this

framework about the actions of agents in these socially constructed spaces – organizations.

This matter is addressed in structuration theory, to which we turn, next. Structuration

Theory

Structuration theory was first formulated by Giddens (1979, 1984). It has been

used widely to investigate social phenomena across the entire spectrum of life and daily

living. It has similarities to institutional theory in its focus on the “social” and its use of key

concepts such as legitimation – although Giddens uses this differently from, e.g., Meyer

and Rowan (1977). Giddens’ structuration theory emphasizes the importance of time and

space in understanding organizations. In his view, similar social practices are reproduced

over large spans of time and space. While institutional theorists such as Meyer and Rowan

(1977) stress the relationship of organizations to their external environment, Giddens has

identified the key role played by individuals (agents), who Giddens represents as

knowledgeable, intelligent, and resourceful in organizational life. In structuration theory,

institutional forms are upheld by three structural properties: signification, domination, and

legitimation. These three structural properties are interdependent and provide mechanisms

which shape social systems. Signification is concerned with language and communication.

Domination is power. Legitimation is the manner in which sanctions operate in social relations.

All three of these properties are interdependent and all interactions are through language,

power, and sanction. Giddens’ structuration theory has proved to be a very popular

framework for researchers in a wide variety of disciplines, although it has also been criticized

as being an oversimplified statement of agency–structure relationships. This model has

been used in the study of NPOs. Mouritsen and Skaerbek (1995) studied a national

theatre using structuration theory. This study reflected on the different contributions of

accounting and art to modern life, concluding that both legitimated theatre as a part of

modern civilization. In this study, legitimating of the theatre was bound up with concerns

for rationality in the management of this NPO. Art and accounting are, prima facie, mutually

contradictory, but, in this study, were shown to be co-producers of theatre and integral

elements of the legitimating of mechanisms of reproduction of theatre. The structuration

approach is also used by van de Pijl and Sminia (2004) in an interesting study of strategic

management in an NPO in this issue of Voluntas. Resource Dependency Resource

dependency also focuses on the relationship of institutions and their environment. Resource

dependency theorists argue that orga nizations are limited by a variety of external pressures

(Pfeiffer and Salancik, 1978; Pfeiffer, 1981). Resource dependency theorists also point to

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NOTES


the interconnections between the environment and organizations. In this theory, organizations

must be responsive to external demands and expectations to survive. This theory differs

from the institutional theory perspective in its use of ideas of power and control in the

pursuit of stability and legitimacy. In this way, formal control systems are not merely technical

or neutral in nature, but instead constitute “power.” Agents within organizations can deploy

such mechanisms to suit their own ends.

This issue of resource dependency is of obvious interest to NPOs which are so

dependent on donors and do not have recourse to capital markets for funding. Studies of

NPOs from this perspective include Boland and Pondy’s (1986) study of resource allocation

in a university. These investigations showed the dependency of the university on its principal

sponsor (the state) for resources, and the deployment of power within the organization to

shift assigned priorities. The university was allocated resources according to the priorities

of the state. However, this resource dependency was undermined by the flexibility used at

the micro-organizational level to shift funds from one program to another, regardless of the

wishes of the sponsor on which the university was dependent for resources. However, for

NPOs, another dimension of resource dependency which has attracted the attention of

sociologists is the nature of the gift relationship between donors and charities. This may

involve reciprocity as well as altruism (Berking, 1999). Another interesting example of this

perspective is Jonsson’s (1998) study of a religious organization. This study is of particular

interest because of the manner in which it seeks to integrate the ideas of institutional theorists,

structuration theory, and resource dependence. This approach – a holistic, combined and

integrated approach – is of increasing relevance as researchers seek to explain the

complexities of NPO activities.

Marketing and the NPO as the new commercial entity

The use of marketing in NPOs began in the late 1960s but this has accelerated in

recent years and has in the meantime been widely accepted and practiced (Kotler and

Andreasen, 1991; Helmig, 2004a). There are various ways in which NPO marketing

differs from marketing in for-profit organizations (e.g., Helmig, 2004b). One of the main

aspects of NPO marketing is the need to market products and services to a wide range of

target groups. Marketing strategies help to attract resources (e.g., time from volunteers,

money from government and the public) as well as to allocate resources (e.g., running a

campaign to persuade people to stop smoking) (Helmig, 2004c). In the for-profit sector,

which faces multiple markets as well, this is usually a minor problem because success in


NOTES


marketing to customers serves the interests of most of these publics. Another problem of

NPO marketing is that marketing activities are still perceived as undesirable, too expensive,

and a waste of stakeholders’ money. This attitude still persists in the NPO area (Tscheulin

and Helmig, 1998). Against this background the following section aims to analyze: whet

her marketing – as a managerial function beside others (e.g., accounting and auditing,

financial management) – plays an important role in the NPO specific research literature;

and which marketing-topics are frequently discussed in the NPO specific marketing research

literature.

Non-Profit Organizations, Strategic Resources and Social Capital

While intangible strategic resources are important for all organizations, developing

and leveraging social capital is critical for non-profit organizations (NPOs) (King, 2004).

Leaders in non-profit organizations develop social capital to achieve a wide range of relevant

activities, including recruitment and development of board members, fundraising, engaging

in advocacy and creating a shared strategic vision and mission (King, 2004). However, in

NPOs staff and volunteers play key roles in strategy implementation, so their social capital

is important as well. Thus, the role of employees’ and volunteers’ social capital in creating

strategic resources to pursue strategic goals is key. This paper pulls together the literature

from strategy, social capital and non-profits, and a case study to understand this process.

5.4 CASES IN STRATEGIC MANAGEMENT

Guide to Case Analysis-The Ten Commandments of Case Analysis:.

As a way of summarizing our suggestions about how to approach the task of case

analysis, we have compiled what we like to call “The Ten Commandments of Case

Analysis.” They are shown in Table . If you observe all or even most of these commandments

faithfully as you prepare a case either for class discussion or for a written report, your

chances of doing a good job on the assigned cases will be much improved. Hang in there,

give it your best shot, and have some fun exploring what the real world of strategic

management is all about.

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Ten Commandments for Case analysis

To be observed in written reports and oral presentations, and while participating

in class discussions.

1. Read the case twice, once for an overview and once to gain full command of the

facts; then take care to explore every one of the exhibits.

2. Make a list of the problems and issues that have to be confronted.

3. Do enough number crunching to discover the story told by the data presented in

the case. (To help you comply with this commandment, consult to guide your

probing of a company’s financial condition and financial performance.)

4. Look for opportunities to apply the concepts and analytical tools in the text chapters.

5. Be thorough in your diagnosis of the situation (either make a one- or two-page

outline of your assessment or work through the exercises on Strat-Tutor).

6. Support any and all opinions with well-reasoned arguments and numerical evidence;

don’t stop until you can purge “I think” and “I feel” from your assessment and,

instead, are able to rely completely on “My analysis shows.”

7. Develop charts, tables, and graphs to expose more clearly the main points of your

analysis.

8. Prioritize your recommendations and make sure they can be carried out in an

acceptable time frame with the available skills and financial resources.

9. Review your recommended action plan to see if it addresses all of the problems

and issues you identified.

10. Avoid recommending any course of action that could have disastrous consequences

if it doesn’t work out as planned; therefore, be as alert to the downside risks of

your recommendations as you are to their upside potential and appeal.

Case study-I

India Tobacco Company {ITC}

ITC defines Corporate Governance as a systemic process by which companies

are directed and controlled to enhance their wealth generating capacity. Since large

corporations employ vast quantum of societal resources, we believe that the governance

process should ensure that these companies are managed in a manner that meets

stakeholder’s aspirations and societal expectations.


NOTES


Core principles

ITC’s Corporate Governance initiative is based on two core principles. These are:

(i) Management must have the executive freedom to drive the enterprise forward

without undue restraints;

(ii) This freedom of management should be exercised within a framework of effective

accountability.

ITC believes that any meaningful policy on Corporate Governance must provide

empowerment to the executive management of the Company, and simultaneously create a

mechanism of checks and balances which ensures that the decision making powers vested

in the executive management is not only not misused, but is used with care and responsibility

to meet stakeholder aspirations and societal expectations.

Cornerstones

From the above definition and core principles of Corporate Governance emerge

the cornerstones of ITC’s governance philosophy, namely trusteeship, transparency,

empowerment and accountability, control and ethical corporate citizenship. ITC believes

that the practice of each of these leads to the creation of the right corporate culture in

which the company is managed in a manner that fulfills the purpose of Corporate Governance.

Trusteeship:

ITC believes that large corporations like itself have both a social and economic

purpose. They represent a coalition of interests, namely those of the shareholders, other

providers of capital, business associates and employees. This belief therefore casts a

responsibility of trusteeship on the Company’s Board of Directors. They are to act as

trustees to protect and enhance shareholder value, as well as to ensure that the Company

fulfils its obligations and responsibilities to its other stakeholders. Inherent in the concept of

trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders,

large or small, are protected.

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Transparency:

ITC believes that transparency means explaining Company’s policies and actions

to those to whom it has responsibilities. Therefore transparency must lead to maximum

appropriate disclosures without jeopardising the Company’s strategic interests. Internally,

transparency means openness in Company’s relationship with its employees, as well as the

conduct of its business in a manner that will bear scrutiny. We believe transparency enhances

accountability.

Empowerment and Accountability:

Empowerment is an essential concomitant of ITC’s first core principle of governance

that management must have the freedom to drive the enterprise forward. ITC believes that

empowerment is a process of actualising the potential of its employees. Empowerment

unleashes creativity and innovation throughout the organisation by truly vesting decision-

making powers at the most appropriate levels in the orgaganizational hierarchy.

ITC believes that the Board of Directors are accountable to the shareholders, and

the management is accountable to the Board of Directors. We believe that empowerment,

combined with accountability, provides an impetus to performance and improves

effectiveness, thereby enhancing shareholder value.

Control:

ITC believes that control is a necessary concomitant of its second core principle

of governance that the freedom of management should be exercised within a framework of

appropriate checks and balances. Control should prevent misuse of power, facilitate timely

management response to change, and ensure that business risks are pre-emptively and

effectively managed.

Ethical Corporate Citizenship :

ITC believes that corporations like itself have a responsibility to set exemplary

standards of ethical behaviour, both internally within the organisation, as well as in their

external relationships. We believe that unethical behaviour corrupts organisational culture

and undermines stakeholder value.


NOTES


Question

Critically evaluate the above case and present your view

Case-2

AMD-Strategic Management Competitiveness and Globalization

Abstract

Hector Ruiz, Chief Executive Officer of Advanced Micro Devices (AMD) has

strong reason to believe that AMD will give Intel a run for its money in the 64-bit

microprocessor market. Itanium I, Intel’s first 64-bit microprocessor has failed. Itanium II

has also elicited a lukewarm response from the market. But Opteron, AMD’s 64-bit

microprocessor, released in mid-2003 is receiving strong performance reviews. Many

companies that shied away from AMD’s products in the past such as Hewlett Packard,

Sun, IBM have started using Opteron. AMD has grabbed 7% of the low-end server

market, up from almost nothing a few years back. Is AMD finally ready to catch up with

Intel? The case covers the leadership of Ruiz, market response and features of Opteron

and the battle between AMD and Intel

Introduction

In 2004, Hector Ruiz (Ruiz), CEO of Advanced Micro Devices (AMD), was

reflecting on how his company was faring in its battle with Intel in the 64-bit microprocessor

market. Itanium I, Intel’s first 64-bit microprocessor had failed. Itanium II had also elicited

a lukewarm response from the market. But Opteron, AMD’s 64-bit microprocessor,

released in mid-2003 was still receiving strong performance reviews. By 2004, many

companies such as Microsoft, IBM and HP, which had been staunch supporters of Intel,

had started using Opteron.

Even Sun Microsystems (Sun), a company that traditionally used its own SPARC

chips, had started using Opteron. These companies saw AMD as a means to increase their

market share by offering high-quality but low-priced products. As a result, by 2004, AMD

had become a major supplier of microprocessors in the server market. Historically, AMD

had ranked a distant second in PC microprocessors with a market share of about 15%,

compared to Intel, which had about 80%. In the past, AMD had made inroads into Intel’s

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market share only to see Intel strike back with steep price cuts and faster introduction of

new models. As 2004 got underway, analysts wondered whether AMD was finally ready

to come out of Intel’s shadow.

Opteron

Designed to run existing 32-bit applications and offer customers a smooth transition

to 64-bit computing, Opteron promised a dramatic improvement in performance. It also

reduced the total cost of ownership (TCO) . Opteron came in three versions: the 100

series (1-way), the 200 series (1 to 2-way), and the 800 series (up to 8-way).AMD had

positioned Opteron as a microprocessor with a scalable architecture designed to meet

current and future business needs. Opteron was designed to scale from one to eight

processors. This aided system designers by reducing the cost and complexity of building

servers and workstations. It also reduced cost and increased server scalability.

One of the most important features of Opteron was HyperTransport Technology,

which aimed at removing I/O bottlenecks , increased bandwidth/speed, and reduced latency

. For workstation users, this meant increased graphics throughput (up to 8x AGP), quicker

loading of applications and large data sets, better multi-tasking, and smoother transition

across applications. Hyper Transport technology was useful for any application where

high speed, low latency and scalability were necessary. This technology reduced the number

of buses while providing a high-performance link for PCs, workstation and servers, as

well as numerous embedded applications and highly scalable multiprocessing systems

AMD had designed the new microprocessor to allow customers to migrate to 64-

bit computing without any significant sacrifice of the existing code base. The technology

aimed at providing full speed support for x 86 code bases, offering high performance

levels for existing 32-bit applications. It provided a large memory, which was useful for

computationally intensive applications, such as databases, ERP, decision support, scientific

and technical modeling, etc. It also helped lower TCO and network management complexity

through a unified architecture for desktop, notebook, workstation and server, and platform

flexibility. Opteron’s target segments included companies that required faster database

transactions, customers needing quick graphics response such as in the CAD industry,

which had computationally intensive tasks for modeling and scientific applications.


NOTES


Though Opteron was designed for high-end servers it could also run like 32-bit

(Pentium and Athlon) processors in most PCs. A PC version of Opteron was also expected

to be available unlike Intel’s Itanium 2. Opteron prices ranged from $283 to $794, compared

to Itanium 2’s $1,338 to $4,226.

Opteron’s design made it fully backward compatible with existing 32-bit

applications. That differentiated it from Itanium 2, which used a different architecture.

By offering both 64-bit and 32-bit operation with the same chip, AMD believed

that Opteron systems would be the perfect upgrades for aging servers that used Intel’s

Pentium and Xeon processors. AMD also had plans to introduce a 64-bit processor for

home computers in 2003. The Athlon 64, due for release in September 2003, would be

the first such chip aimed at the consumer market.

In early 2003, there were no 64-bit applications for consumers, but AMD believed

that once Athlon 64 machines were available, multimedia and game software companies

would write programs to take advantage of their power.

David vs Goliath

For more than 30 years, AMD had been challenging Intel in the semiconductor

industry. Intel had been able to control x86 microprocessor and PC system standards and

dictate the type of products the market required of competitors. Intel’s financial muscle

allowed it to market its products aggressively, offer special incentives and to wean away

customers who did business with AMD. Intel had longstanding partnerships with both

software developers and hardware manufacturers. Intel exerted substantial influence over

PC manufacturers and their distribution channels through the “Intel Inside” brand and other

marketing programs, Intel spent substantially greater amounts on R&D than AMD did.

For instance, Intel was expected to generate revenues of $34 billion in 2004 with projected

profits of $7.35 billion. This meant Intel earned in 11 days what AMD made in a year. In

January 2005, Intel had a $14 billion cash reserve compared to AMD’s reserves of about

$1.1 billion.The microprocessor market was characterized by short product life cycles

and migration to ever-higher performance microprocessors. To compete successfully against

Intel, AMD realized the need to make the transition to new process technologies at a rapid

pace and offer higher-performance microprocessors significantly greater volumes. Things

had started looking up for AMD since the late 1990s. The Internet boom had increased

DBA 1703

NOTES


the appetite of consumers and businesses’ for microprocessors. But this time, Intel had

finalized plans to make a paradigm shift in its architecture by tying-up with HP to make the

Itanium series of microprocessors.

Question

Analyze the case

Case-3

Sony - Exploring Corporate Strategy

Abstract:

The case discusses the organizational restructuring carried out by the Japanese

electronics and communication giant, Sony Corporation (Sony) between 1994 and 2003.

Sony’s business operations were restructured five times within nine years. The

case describes each of the five restructuring exercises in detail and examines their implications

for

Sony.It also discusses the impact of these structural changes on the financial

performance of Sony

Introduction

For the first quarter ending June 30, 2003, Japan-based Sony Corporation (Sony)2

stunned the corporate world by reporting a decline in net profit of 98%. Sony reported a

net profit of ¥9.3 million (mn)3 compared to ¥1.1 billion (bn) for the same quarter in 2002.

Sony’s revenues fell by 6.9% to ¥1.6 trillion for the corresponding period. Analysts

were of the opinion that Sony’s expenditure on its restructuring initiatives had caused a

significant dent in its profitability. In the financial year 2002-03, Sony had spent a massive

¥100 bn on restructuring. Moreover, the company had already announced in April 2003

about its plans to spend another ¥1 trillion on a major restructuring initiative in the next

three years. Analysts criticized Sony’s management for spending a huge amount on frequent

restructuring of its consumer electronics business, which accounted for nearly two-thirds


NOTES


of Sony’s revenues. In 2003, the sales of the consumer electronics division fell by 6.5%.

Notably, Sony’s business operations were restructured five times in the past nine years.

Analysts opined that Sony’s excessive focus on the maturing consumer electronics

business (profit margin below 1% in 2002-03), coupled with increasing competition in the

consumer electronics industry was severely affecting its profitability. However, Sony’s

officials felt that the restructuring measures were delivering the desired results. According

to them, the company had shown a significant jump in its profitability in the financial year

2002-03.

Sony reported a net income of ¥115.52 bn in the fiscal 2002-03 compared to

¥15.31 bn in 2001-02 (Refer Table I for Sony’s key financials in past 13 years). A statement

issued by Sony said, “The improvement in the results was partly due to the restructuring of

its electronics business, especially in the components units. At the beginning of the new

millennium, Sony faced increased competition from domestic and foreign players (Korean

companies like Samsung and LG) in its electronics and entertainment businesses. The

domestic rivals Matsushita and NEC were able to capture a substantial market share in the

Internet-ready cell phones market. Analysts felt that the US based software giants like

Microsoft & Sun Microsystems and the networking major Cisco Systems posed a serious

threat to Sony’s home entertainment business

By 1994, Sony’s businesses were organized into three broad divisions - Electronics,

Entertainment and Insurance and Finance (Refer Table II). Each business division was in

turn split into product groups.

The electronics business division was split into four product groups, which produced

a wide variety of products. The entertainment division, which consisted of the music group

and the pictures group, made music videos and motion pictures.The finance division consisted

of Sony’s life insurance and finance business. The company’s growth was propelled by the

launch of innovative products and by its foray into the music and films business.

Restructuring of Electronics Business (1994)

Under Ohga’s leadership, Sony witnessed negligible growth in sales during 1990

and 1994. Sales and operating revenues improved by only 2% during that period.

DBA 1703

NOTES


However, the net income and operating income registered a drastic fall of 87%

and 67% respectively. Analysts felt that the stagnation in the electronics industry coupled

with factors such as the recession in the Japanese economy and the appreciation of the yen

against the dollar led to the deterioration in the company’s performance. It was noticed

that in the electronics business (Refer Table III), the revenues of the video and audio

equipment businesses were coming down or were at best stagnant, while the television and

‘Others’ group were showing signs of improvement. The ‘Others’ group, which consisted

of technology intensive products such as computer products, video games, semiconductors

and telecom equipments, was performing very well and had a growth rate of nearly 40%...

The Ten-Company Structure (1996)

In January 1996, a new ten-company structure was announced, replacing the previous

eight company structure (Refer Table V).

Under the new structure, the previous Consumer Audio & Video (A&V) company

was split into three new companies - The Display Company, the Home AV Company and

the Personal AV Company. A new company, the Information Technology Company, was

created to focus on Sony’s business interests in the PC and IT industry. The Infocom

Products Company and the Mobile Electronics Company were merged to create the

Personal & Mobile Communications Company. The other companies formed were the

Components & Computer Peripherals Company (formerly called the Components

Company), the Recording Media & Energy Company, the Broadcast Products Company,

the Image & Sound Communications Company (formerly called the Business & Industrial

Systems Company) and the Semiconductor Company...

The Implications

From 1995 to 1999, Sony’s electronics business (on which the restructuring efforts

were focused) grew at a compounded annual growth rate (CAGR) of 8.55% (Refer Table

VI).

The music business had a CAGR of 10.5% while the pictures business had a

CAGR of 17%. Significant gains were, however, recorded by the games and insurance

business. The games business registered a CAGR of 215%, while the insurance business

registered a CAGR of 31%. In the late 1990s, Sony’s financial performance deteriorated.


NOTES


For the financial year 1998-99, its net income dropped by 19.4%. During that period,

Sony was banking heavily on its PlayStation computer game machines. It was estimated

that the PlayStation (Games business) accounted for nearly 42% of Sony’s operating profits

and 15% of total sales for the quarter-ended October-December 1998. In the late 1990s,

many companies across the world were attempting to cash in on the Internet boom...

The Unified-Dispersed Management Model

In April 1999, Sony announced changes in its organization structure. Through the

new framework, the company aimed at streamlining its business operations to better exploit

the opportunities offered by the Internet.

Sony’s key business divisions - Consumer Electronics division, Components

division, Music division and the Games division - were re-organized into network businesses.

This involved the reduction of ten divisional companies into three network companies,

Sony Computer Entertainment (SCE) Company and the Broadcasting & Professional

Systems (B&PS) Company (Refer Exhibit I). SCE Company was responsible for the

PlayStation business while the B&PS Company supplied video and audio equipments for

business, broadcast, education, industrial, medical and production related markets. The

restructuring aimed at achieving three objectives - strengthening the electronics business,

privatizing three Sony subsidiaries, and strengthen the management capabilities...

Restructuring Efforts in 2001

Sony announced another round of organizational restructuring in March 2001.

The company aimed at transforming itself into a Personal Broadband Network Solutions

company by launching a wide range of broadband products and services for its customers

across the world. Explaining the objective of the restructuring, Idei said, “By capitalizing

on this business structure and by having businesses cooperate with each other, we aim to

become the leading media and technology company in the broadband era.” The restructuring

involved designing a new headquarters to function as a hub for Sony’s strategy, strengthening

the electronics business, and facilitating network-based content distribution.

DBA 1703

NOTES


Case.4

Uni-lever -Global Strategic Management

Abstract:

The case discusses a five-year long organisational restructuring exercise undertaken

by Unilever, a leading global fast moving consumer goods (FMCG) company. It examines

in detail the important elements of the restructuring programme named the ‘Path to Growth

Strategy’.

The case focuses on the changes made with respect to the organisational structure,

various Unilever businesses, branding strategies, operational processes and the supply

chain management practices. Finally, it discusses the results of the restructuring exercise

and examines the company’s future prospects in the light of its falling share price and the

sluggish growth of many of its leading brands.

Issues:

» Gain an insight into the internal and external factors which force a large multi-product

multi-national company to restructure its operations

A Troubled Giant

In September 1999, Unilever, one of the largest consumer goods companies in the

world, announced plans to restructure its brand portfolio by end of 2004.

The plan involved cutting down on its unwieldy portfolio of 1,600 brands and

focusing on the top 400 brands. This move was read by the market as an indication that

the company was unable to manage its brands and so was scaling back growth plans. This

development, coupled with the fact that the growing popularity of Internet and telecom

stocks was luring investors away from old economy stocks, resulted in Unilever finding

itself in deep trouble - its stock price plummeted rapidly during 1999. According to reports,

Unilever’s market capitalization of about £51 billion ($82 billion) in June 1999 shrank by

almost £20 billion by January 2000. As a result, the company lagged far behind its

competitors like Nestle and Procter & Gamble (P&G) in market capitalization.


NOTES


The fact that Unilever had failed to meet its performance expectations for 1999

added to its problems. Analysts attributed this failure to the sluggish growth of its top line

brands. They said that the company’s existing brand strategy framework had lost its focus.

They also criticized Unilever for investing less in strengthening its leading brands during the

1990s (as a majority of its investments went into business restructuring and acquisitions).

Meanwhile, the competitors had begun eating into Unilever’s market share in a

major way. Unilever realized that it had to restructure its brand portfolio and operations to

meet the challenges brought about by the changing market conditions. In February 2000,

the company announced a •5 billion five-year growth strategy, aimed at bringing about a

significant improvement in its performance. The initiative was named the ‘Path to Growth’

Strategy (PGS). The exercise involved a comprehensive restructuring of operations and

businesses. While many industry observers welcomed the move, some were skeptical

about the slow-moving old economy giant’s ability to regain its momentum in time to meet

the intensifying competition.

Background Note

Unilever (called the Unilever Group) functioned as the operational arm of Unilever

NV (Netherlands), and Unilever Plc., (UK), its two parent companies.

Though the parent companies operated as separate legal entities (with separate

stock exchange listings), they functioned as a single business, with a single set of financials

and a common board of directors (See Exhibit I for the group’s structure). Unilever was

formed in 1930 when a Dutch margarine company, Margarine Unie, and a British soap

company, Lever Brothers merged (See Exhibit II for a brief timeline of Unilever).While,

Margarine Unie had been formed by merging many margarine companies during the 1920s

and was a leading global player in the business, Lever Brothers was a name worth reckoning

with in the worldwide soap market and had soap factories across the world

Lever Brothers, diversified into many other businesses (primarily related to foods).

At the time of the merger, Margarine Unie and Lever Brothers, together, had operations in

over 40 countries. In the 1930s and 1940s, Unilever strengthened its presence in the US

by acquiring Thomas J. Lipton (1937) and Pepsodent (1944).While the company’s

competitive position was adversely hit when its arch rival P&G launched Tide, a synthetic

detergent, in 1946, it continued to prosper in Europe.

DBA 1703

NOTES


This was because of the post-war boom in the demand for consumer goods, the

growing popularity of margarine and personal care products, and the new detergent

technologies. During the 1960s and 1970s, Unilever rapidly expanded its operations through

vertical and horizontal integration, emerging as a diversified conglomerate by the early

1980s.Diversification into different businesses was prompted in one way or the other by

the existing business lines. For instance, oilseeds crushed for use in the margarine and soap

businesses, yielded a by-product called ‘cattle cake,’ and this led the company into the

animal feeds business.

Likewise, by-products such as glycerine and fatty acids, formed from processing

oil for use in margarine and soap production, prompted its entry into the chemicals business.

The company operated 24 packaging plants (for its consumer products) in six European

countries, from where goods were distributed worldwide. This activity made the company

one of the largest truckers in Britain and one of the largest shipping company owners...

EXCERPTS

What ‘PGS’ is all About

To achieve the objectives of the PGS, Unilever decided to concentrate on the

following areas - modify the existing organizational structure, focus on leading brands,

support these leading brands with strong innovation and focused marketing strategies;

rationalize the supply chain; simplify business processes; and restructure or weed-out under-

performing businesses and brands (See Exhibit III for the key drivers of value creation in

the PGS).

Unilever expected the PGS to result in annual cost savings of •1.5 billion by 2004.

An additional •1.6 billion in savings was to come from global procurement by the end of

2002.

Apart from this, the PGS was to involve laying off over 25,000 employees

(approximately 10% of the employee base) by 2004, on account of divestments or site

closures, and restructuring and simplification of processes.

The company announced that though the restructuring would be worldwide, it

would mainly focus on the US and Europe...


NOTES


Results of PGS (Till 2003)

In 2000, the company witnessed a dramatic increase in its turnover with sales

increasing by 16% to •47.6 billion. This was mainly attributed to the acquisition of the

Bestfoods, Slim-fast, Ben & Jerry’s and Amora Maille businesses.Since the announcement

of the PGS, Unilever’s share price had recovered by 30% to $59 in August 2001, and this

seemed to highlight the positive results of its restructuring exercise.

By July 2002, Unilever’s 400 leading brands accounted for 88% of the sales, up

from 75% in 1999.

By then, over 30,000 employees had been laid-off. Commenting on the positive

results of the PGS in mid-2002, FitzGerald said, “We have now reached the mid-point in

the PGS and we continue to be confident about delivering our program

Brand focus continues apace with 88% of our turnover now attributable to leading

brands. These brands are showing great resilience in a tough economic environment and

will drive accelerating top line growth...”

Unilever’s Future Prospects

In August 2003, Unilever announced its half-yearly results for the year - sales

dropped by 15% and profits fell by 13%. During this time, the company reduced its growth

forecasts to 4% from the 5%-6%, it had promised its investors in the early 2003, stating

that it was struggling with a more challenging business environment - poor sales in the

dietary and food service markets, and the sluggish growth in the retail market on account

of slower economic growth, worldwide

In October 2003, Unilever’s share price fell by 7% (to 487 pence) on the London

Stock Exchange, immediately after it announced that it was lowering its growth forecasts

for its leading brands to below 3% for 2003.





DBA 1703

NOTES
















The company attributed this move to the waning popularity of its famous fragrance

and dieting products (including Calvin Klein, Eternity, Prestige and Slim-Fast), and the

poor performance of its other health and wellness products. This was the second time in

2003, that the company had reduced its growth forecasts for its leading brands. FitzGerald

blamed himself for the fall in the company’s share price, after the announcement of reduced

growth rates. According to him, the market had misunderstood Unilever’s growth forecasts

previously as the company had failed to communicate them clearly to its investors...

Case 5

e-Bay -Entrepreneurship - Successfully launching new ventures,

Abstract:

The case examines the managerial and leadership skills of Meg Whitman, the CEO

of eBay, the leading US-based online auction site. EBay’s business model and its growth

since its inception in 1995 upto the entry of Whitman in 1998 are discussed. The case also

traces Whitman’s rapid rise up the corporate ladder and examines the circumstances that


NOTES


led her to join eBay. Whitman’s managerial and leadership capabilities are also discussed

in detail. The case also examines the reasons for Whitman’s emphasis on customers and

describes the various strategies she formulated to make eBay a global online company.

The case also examines the criticism leveled against Whitman and explores the future

prospects of Whitman and eBay.

Issues:

» How the eBay business model was leveraged by Whitman to make the company the

undisputed leader in the online auction market.

At The Helm of Success

In October 2002, Fortune Magazine ranked Meg Whitman (Whitman), CEO of

online auction major eBay, as the world’s third most powerful women in business, after

Carly Fiorina and Oprah Winfrey. According to Fortune, Whitman ‘ruled the Internet,’

and under her leadership, eBay’s revenues and profits doubled every year. Reportedly,

eBay’s stock grew by 30% during 2001, even as the technology sector across the world

experienced a severe downturn.

Such recognition was nothing new for Whitman; she received many accolades for

her contribution to eBay and for her managerial abilities. Whitman was ranked number one

on the Worth Magazine’s list of the Best CEOs in 2002.

Since 2000, she had been continuously named as one of the 25 most powerful

business managers in the world by BusinessWeek magazine. eBay also won many awards

under her leadership (Refer Exhibit I for a list of awards received by Whitman and eBay).

Reportedly, Whitman was an old-fashioned, low-key manager, who did not possess the

‘star-quality’ of Carly Fiorina, CEO of Hewlett-Packard, or the electric energy and charisma

of Jeff Bezos, the founder of Amazon.com. But still, Whitman had succeeded where many

had failed. While many dotcom businesses crashed in the late 1990s and early 2000s,

Whitman steered eBay towards success. According to analysts, eBay was the only Internet

company that had registered continuous growth and profits since its inception in 1995.

Industry observers felt that Whitman’s trust in eBay’s business model and her business

acumen were the major reasons for the company’s growing revenues.

DBA 1703

NOTES


Revenues increased from $4 million in early 1998 (when she joined eBay) to $1

billion by late 2002 (See Exhibit II for eBay’s Income Statement). This was attributed to

her strong belief in eBay’s business model and its customers. In fact, such was her belief in

this model that in September 2000, at the depths of the dot-com depression, she set a

target of earning $3 billion in revenues by 2005.

Commenting on this in early 2003, Whitman said, “I think people thought we were

nuts because we set that in the middle of 2000 when we did $425 million in revenues.

Now it seems very reasonable and we are absolutely standing by it.”

eBay

In September 1995, Pierre Omidyar (Omidyar), a software programmer in his

early 20s, founded eBay as Auction Web (the site’s domain name was ebay.com). The

idea reportedly originated from the difficulty that Omidyar’s fiancee faced when trying to

collect Pez dispensers2 from the San Francisco Bay area. Auction Web enabled people to

trade through auctions on Internet.

Omidyar aimed at leveraging the vast potential of the Internet by developing an

online marketplace that allowed person-to-person trading in the auction format.

He created a simple business model which allowed buyers and sellers to decide

the value of items and connect with others, for a small commission for every item placed

and sold on the site.3 Using this model, Auction Web soon became one of the leading

online sites in the world. Omidyar wanted the power of the market to stay with individuals

and not with companies. He felt that it was important to let users take responsibility for

building the eBay community. Omidyar encouraged users to communicate directly with

him through email so that he could incorporate their suggestions and fix the problems they

faced on the site. This type of customer focus reportedly gave users a sense of ownership

and participation.

In 1996, Omidyar introduced the Feedback Forum, a sort of credit reporting

system, to eliminate the problems caused by anonymity and the physical distance between

buyers and sellers, viz, fraud and cheating. Under this system, buyers and sellers were

encouraged to rate each transaction positive, negative or neutral, thus offering their perception

of the credibility of the buyer or seller. These ratings helped users determine whether a


NOTES


buyer or seller was trustworthy. Commenting on this, Peter Kollock, sociology professor,

University of California, Los Angeles (UCLA) said, “As high tech as eBay is, the closest

analogue to what they have created is the original small-town market. It is a market that

relies on identity and reputation for risk management”4...

Excerpts

Meg Whitman

Born in August 1956, Margaret C. Whitman, popularly known as Meg Whitman, was the

youngest child of a Wall Street executive. Whitman, who grew up in Long Island, New

York, was a studious and clever student.

An exceptionally academically oriented person, she graduated in Economics from

Princeton University.

She had The Wall Street Journal delivered to her dormitory at Princeton University,

which was unusual during the disco era of the 1970s...

Whitman - An Exceptional Manager

Whitman found eBay akin to a ‘den of geeks’ who were handpicked by Omidyar.

She knew that she was brought into the company to build the eBay ‘brand’ and to bring

some professionalism into the company, which was soon to be listed on the stock exchange.

Her first job was to prepare eBay for its first IPO. However, before she made any changes

at eBay, she focused on gaining a comprehensive understanding of eBay’s business

model.Whitman said, “I came in and I said Pierre has created something incredibly important

here that is growing very rapidly and has clearly struck the consumer nerve. My objective

is to find out as much as I possibly can about what he has created and what is wonderful

about what he has created.”...

Whitman & Customer Focus

The eBay community was always Whitman’s first priority as she credited it with

the company’s success. Commenting on the community’s role, she said, “We provide the

marketplace, but it is the users who build the company. They bring the product to the site,

they merchandise the product and they distribute it once sold.”

DBA 1703

NOTES


The lessons she learned from her experience at leading consumer companies such

as P&G and Hasbro also made her focus strongly on consumers...

Whitman - Leading eBay

In the early 21st century, Whitman emerged as one of the most popular leaders in

dotcom world on account of eBay’s phenomenal success.

Commenting on her journey from a novice to a leader in the dotcom world, Whitman

said, “In the beginning, I was certainly not an entrepreneur who came up with the idea, but

I think I was fairly entrepreneurial in trying to figure out how to bring that idea to life and

build a backbone for the company that could take it to the next level.”...

Criticism of Whitman

Despite Whitman’s focus on eBay’s community, she received criticism from the

community on account of her focus on high priced products and big companies.Many of

eBay’s old customers complained that doing business on eBay had become an unhappy

experience in the early 21st century and that eBay was ignoring small customers for bigger

ones...

Problems Facing Whitman

Many customers remained loyal to eBay despite the above problems since it allowed

them to get the highest prices for their auctions. However, the increasing number of customers

registering with other auction sites was a worrying trend for eBay.

Analysts felt that if this trend picked up momentum, eBay might soon become just

one of the many choices for customers. They observed by alienating the customers, Whitman

was placing eBay at risk...

Marching Ahead

By early 2003, eBay was offering more product categories than ever before. Some

of its new categories were computers, books, CDs, electronic goods and

automobiles.According to reports, eBay accounted for nearly 1% of total used car sales in


NOTES


the US. Commenting on the growth of the eBay community, Whitman said that if eBay

were a country, it would have been the fifteenth largest nation in the world since it had 75.3

million registered users (in mid- 2003)...

Case-6

Strategic Marketing: Creating Competitive Advantage

Abstract

The case explores Samsung’s brand building initiatives for transforming itself into a

global brand. The company’s product initiatives and advertising campaigns for boosting its

brand image worldwide are described in detail. The case also explains the steps taken by

Samsung to consolidate its presence in global markets. The case concludes with an analysis

of Samsung’s position in the consumer electronics market vis-à-vis Sony

EMERGING GIANT?

.

In 1998, South Korea’s leading consumer electronics major, Samsung Electronics

Corporation (Samsung), entered into an agreement with the International Olympic

Association to sponsor the 1998 Seoul Olympics. According to company sources, Samsung

wanted to sponsor Olympics to establish itself as a global brand. Analysts felt that by

associating itself with the Olympics, Samsung would increase its brand visibility and brand

recall among its consumers worldwide. They also pointed out that to become the next

Sony (Refer Exhibit I) of the consumer electronics market, Samsung would have to invest

heavily in marketing.

In the late 1990s, Samsung entered into various marketing alliances with companies

worldwide and sponsored events to enhance its brand awareness. Due to its marketing

efforts, its brand value appreciated by 200% from $3.1 billion in 1999 to $8.3 billion in

2002. Consequently, in 2002, Samsung emerged as the only non-Japanese brand from

Asia to be listed in the global top 100 brands valued by Interbrand Inc (Refer Table I).

The company was ranked 34th in Interbrand’s list of the world’s top 100 brands.

In spite of the worldwide downturn in 2002, Samsung posted a net profit of 1.7 trillion

DBA 1703

NOTES


won for the third quarter of 2002-03, which was much higher than its net profit of 425

million won in 2001 for the same period.

In 2002-03, Samsung emerged as the number three player in the global cell phone

market after Motorola and Nokia. It also emerged as the world leader in the $24.9 billion

memory chip market. According to industry sources, Samsung’s innovative advertising

strategies, improvements in product design and focus on global markets helped it achieve

an increase in earnings over the years.

BACKGROUND NOTE

Samsung was established in 1969 as the flagship company of Samsung Corporation

(Refer Exhibit II). It was the third largest player in the Korean electronics market after

Lucky Goldstar (LG) and Daewoo. Samsung achieved fast growth through exports, which

constituted around 70% of its total production. Most of the exports were to the USA on

Original Equipment Manufacturer (OEM) basis. It supplied components for high tech

industries in the USA. In the early 1970s, Samsung decided to venture into the television

market, and in 1972 it started production of black & white television sets for the local

market. After its success in the television market, Samsung set up its home appliances

plant in 1973. By 1974 it started manufacturing refrigerators and washing machines.

By the mid 1970s, Samsung started production of color TVs (CTVs) and energy

efficient high cold refrigerators.

By the late 1970s, the company’s exports to the US markets exceeded US $100

million. During the same period, it established a marketing subsidiary in the USA. In the

1980s, it started manufacturing microwave ovens and air conditioners. In 1980, it acquired

Korea Telecommunications Corp, which was renamed Samsung Semiconductor &

Telecommunications Co in 1982.

In the same year, Samsung established a sales subsidiary in Germany and its first

overseas plant in Portugal to cater to European markets. In 1986, research labs were

established in Santa Clara (California) and Tokyo to improve the product line. In 1988,

the Samsung Semiconductor business was merged with Samsung. By the end of 1989,

Samsung was ranked 13th in semiconductor sales worldwide.


NOTES


Though Samsung was able to establish its brand image in the Korean market, it

was regarded as an OEM in global markets. Since Samsung had a poor brand image in

global markets and its products had a high defect rate, many consumers associated

Samsung’s products with poor quality.

To change this perception of its products, Samsung Corporation initiated a

restructuring process across the group in 1994. Samsung Electronics, the flagship company

of the group (contributing around 90% of the group’s profits), was the main focus of this

restructuring. In 1994, a business restructuring process - ‘New Management’ - was initiated

to transform Samsung into a global brand. This process identified three major focus areas:

quality, globalization and multifaceted integration. The company shifted its focus from

quantity to quality, and set up manufacturing units across the world to bring down costs,

tap global markets efficiently and employ the best talent. The group also implemented

various quality initiatives such as Six Sigma and manufacturing initiatives such as assembly

manufacturing to enhance output through the optimum utilization of resources....

More...

TABLE I : BRAND VALUE OF SAMSUNG

TABLE II : PRODUCT PROFILE OF SAMSUNG ELECTRONICS

TABLE III : GLOBAL NETWORK OF SAMSUNG*

THE MAKING OF A GLOBAL BRAND

FIGURE I

PRODUCT INITIATIVES

CONSOLIDATING PRESENCE IN DIFFERENT MARKETS

ADVERTISING AND PROMOTIONAL STRATEGIES

FIGURE II

BEATING SONY?

TABLE IV : MOBILE PHONE VENDOR MARKET SHARE FOR 3Q 2002

QUESTIONS FOR DISCUSSION:

EXHIBIT I : SONY CORPORATION

EXHIBIT II : ABOUT SAMSUNG CORPORATION

EXHIBIT III : MARKET POSITION OF SAMSUNG IN VARIOUS PRODUCT

CATEGORIES WORLDWIDE*

EXHIBIT IV : INCOME STATEMENTS OF SAMSUNG ELECTRONICS FROM

1997-2001

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EXHIBIT V : SAMSUNG - DIGITALL ADVERTISEMENTS

ADDITIONAL READINGS & REFERENCES

Case-7

Strategic Management: Concepts and Cases

Abstract:

Coca-cola has a presence in over 200 countries worldwide and is acknowledged

as the most recognized brand in the world. This case explains Coca Cola’s entry and

growth strategies in China and the reasons for its success in this market. The case discusses

its strategy for re-entry into the Chinese market and its long-term localization strategy.

The case also looks at how Coke cooperated with the Chinese government in

order to soften the impact of the restrictive policies regarding Foreign Direct Investment in

China, and how it designed its marketing and promotion strategies to suit the Chinese

market

Issues:

• Understand the re-entry strategy of a multinational beverage company

• Understand how a multinational company can work with the government in a

situation where policies are restrictive of FDI

• Understand the long-term localization strategy of a multinational company

• Understand how a multinational company adapts its distribution, marketing and

promotion to the new market that it enters

Introduction

The Coca-Cola Company (Coke) re-entered China in 1979. Today it is recognized

as one of China’s most trusted brands according to Interbrand.3 It was voted number 5 of

the top 10 multinational companies doing business in Asia in the 2003 Review 200,4 a

survey conducted by Far Eastern Economic Review (FEER).5


NOTES


Since 1990 it has been making profits in China and according to AC Nielsen6 it

had a market share of over 50 percent share of the Chinese beverages market in 2002.

How did Coke achieve this success in China? Coke’s top managers and industry observers

too believe that it is the company’s winning approach of “Think local, act local” that has

enabled it to capture markets outside of the United States. This is particularly true of the

Asian markets where the diversity of cultures and income levels makes for a rather diverse

consumer base. Coke encourages local managers to develop strategies that are best suited

for their areas, and regional offices have the freedom to approve local initiatives. From the

very beginning, Coke’s strategy for re-entry into the Chinese market has been based on

localization of the entire Coca-Cola system.

In order to achieve this, Coke had to work closely with Chinese state-owned

enterprises and develop strong relationships with the Chinese government. Since China

had just opened up to foreign investment at the time of its re-entry, Coke had to deal with

its restrictive policies.

It brought its technology and equipment to China and built bottling plants, which it

then handed over to the Chinese government. Later it formed joint ventures with state-

owned enterprises to set up more bottling plants. Coke formed joint ventures with local

Chinese companies as well. Even though initially it had to import certain inputs for the

production process, Coke eventually sourced them from Chinese companies. Coke

developed its own infrastructure for distribution but gradually came to mainly rely upon

state-owned distribution companies and local Chinese distribution companies. This strategy

of localization of the Coca-Cola system in China proved to be a success and China grew

to be its second largest market in Asia in 2003 (in terms of volume).

Background Note

In the early 1920s, Coke made its entry into China with bottles imported from its

plant in the Philippines. In an effort to localize production, two bottling plants were opened

in 1927. These plants were located in Shanghai and Tianjin, and in 1930 another was

opened in Qingdao.

Coke faced setbacks during the World War II when the Japanese occupied China

and took over its plants. However, in 1946, after the war ended Coke opened a bottling

plant in Guangzhou. The Shanghai plant had the distinction of being the most up-to-date

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and fastest bottling line in China, and in 1948 became the first overseas plant to make

annual sales of more than 1 million cases. This was great progress for Coke, even though

the customers in Shanghai were mostly expatriates. When the People’s Republic of China

(PRC) was formed in 1949, all foreign companies were asked to cease operations and

leave the country. Coke shut down operations in China and its bottling plants were

nationalized by the government.

State owned companies were formed to produce beverages and some of these

companies used the former Coke plants to produce soft drinks. In case of the Shanghai

plant, the equipment was shipped to Beijing to be re-installed in a factory there.

For almost 30 years after the PRC was formed, foreign direct investment and

direct production activity by a foreign company were not allowed. Only the state-owned

foreign trade corporations were allowed to have contact with foreign businesses and to

carry out exporting and importing of goods.

Coke’s Re-Entry in ChinaIn December 1978, Deng Xiaoping (Deng)7

announced the ‘open door policy’. This policy was part of Deng’s larger plan for economic

reforms in China. An open door policy meant that China would allow foreign trade and

investment...

Localisation Strategies

Long before Coke was given permission to sell its products to the Chinese people,

it began developing production capabilities through various joint ventures with the Chinese

government.

In sharp contrast to its strategies in the past (in China and other countries as well),

initially Coke did not own any bottling plants in China. It imported the concentrate and

sold it to bottling plants. The bottling plants (that it sold the concentrate to) had been built

by Coke and handed over to the Chinese government. The first of these plants was built in

Beijing and was operational in 1981. According to an agreement between Coke and the

state-owned China National Cereals, Oils, and Foodstuffs Import and Export Corporation

(COFCO) in 1980, Coke agreed to build a plant and hand it over to the government in

exchange for approval to expand distribution and sales in China. The second bottling plant

was built in Guangzhou and was also handed over to the Chinese government in 1982...


NOTES


China, Coca-Cola’s Second Largest Market in Asia

Coke has enjoyed great success in China and in the Asian markets on the whole. According

to the 2003 Annual report, Coke’s Asian operating segments boosted its revenues when

growth in its US market was slowing down.

In terms of volume, China was Coke’s second largest market in Asia in 2003

(Refer to Exhibit II) and Coke estimates that China will beat Japan to the top position in

2004. Encouraged by its success in big cities and towns, Coke wants to reach more

customers in rural areas. “We’d grown well by reaching the top 100 cities, but how many

people were we reaching? Rather than continuing to focus solely on those highly competitive

urban areas, Coke must push aggressively into the rest of China and India”, said Patrick

Siewert, Coke’s East and South Asia group president. In early 2004, Coke announced

plans to build two new bottling plants in China’s western provinces to tap the market

potential of China’s rural areas...

Change Management Concepts and Applications

The case examines the global delivery model (GDM) of the leading India based

software company - Infosys Technologies. Infosys used GDM as a strategic outsourcing

tool; using it, the company could take the work to the place where it could be best performed

at lowest cost with minimum risk.

By using GDM, Infosys delivered the highest process and quality standards, while

leveraging differences in cost, quality and skill sets of manpower in different global locations.

The case presents an in-depth information on the operational aspects of GDM and its

benefits to Infosys.

It also discusses the challenges faced by the company from foreign and Indian

software companies like Accenture, IBM Global Services, EDS, TCS and Wipro who

had already adopted or were in the process of adopting a similar model like Infosys’

GDM.

Issues:

• Study and analyze the operational aspects of the Global Delivery Model of Infosys

• Analyze how GDM emerged as a source of competitive advantage to Infosys

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• Understand the factors that contributed to the success of GDM

• Examine the challenges faced by Infosys from foreign and Indian software companies

The ‘Leader’

In February 2006, Gartner3, a research firm focused on technology industries,

published its ‘Magic Quadrant for Offshore Application Services, 2006’.

This report assessed 30 leading offshore application service providers. For its

magic quadrant, Gartner evaluated service providers on the basis of parameters such as

completeness of vision and their ability to execute4.

India-based Infosys Technologies (Infosys) was placed in the ‘leaders’ quadrant,

signifying clear vision of the market direction and building competencies to sustain its

leadership position in the market

(Refer Exhibit I for the criteria used in the Magic Quadrant, and Exhibit II for traits of the

companies placed in the ‘Leaders’ quadrant).

Gartner’s magic quadrant analyzed the competencies of the service providers based

on their Global Delivery Model (GDM). Gartner said that Infosys’ ‘strong management

capability relative to the other pure-play offshore providers’ was one of the key

demonstrated capabilities of the company.

S. Gopalakrishnan (Gopalakrishnan), Chief Operating Officer and Deputy

Managing Director of Infosys, said, “I am happy to see Infosys being recognized as a

leader in this Offshore Application Services Magic Quadrant, the first time that Gartner

has published one to focus on this area. This is an important indicator for the mainstream

acceptance of GDM by clients.”5

GDM provided a superior value proposition at higher quality and lower cost. The

companies adopting this model leveraged their own global resources and strengths to

achieve higher profitability.


NOTES


The ‘Leader’ Contd..

Infosys used GDM as a strategic outsourcing tool; using it, the company could

take the work to the place where it could be best performed at lowest cost with minimum

risk. For a GDM to be efficient, the work had to be broken into logical components and

distributed to locations where they could generate maximum value. By using GDM, Infosys

delivered the highest process and quality standards, while leveraging differences in cost,

quality and skill sets of manpower in different locations. The ultimate objective was to pass

on these benefits to its clients.

The major part of Infosys’ revenues was derived from GDM based application

services.

The company had decided to enhance its GDM capabilities by applying it to new

services and adding in new global delivery locations. Commenting on the GDM, Manjari

Raman, a Boston based management writer said, “What made Infosys’ GDM disruptive

was its framework for distributed project management - the ability to deploy multi-location,

multi-time-zone teams to execute projects efficiently and at low cost.”6

Background Note

Infosys was incorporated as Infosys Consultants Private Limited7 on July 02, 1981

by a group of seven professionals8. From the beginning, Infosys relied heavily on overseas

projects. One of the founders, Narayana Murthy, stayed in India, while the others went to

the US to carry out onsite programming for corporate clients. One of Infosys’ first clients

was the US-based sports shoe manufacturer Reebok. Infosys hired its first set of employees

in 1982 from the Indian Institute of Technology, Chennai. These employees were provided

training and were sent abroad for onsite projects.

The Global Delivery Model

In the GDM, large scale software development projects were divided into different

categories. Falling under the first category were the tasks that were to be carried out at the

location of the client. Under the second category were the tasks, which needed to be

carried out closer to the client. The third category consisted of tasks that could be done in

remote locations, where process-driven technology centers with highly skilled manpower

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were easily available (Refer Exhibit IV for details of the tasks carried out onsite, near-site

and at offshore locations). The work on projects was carried out 24 hours a day, with

teams located at different locations across the world, working round-the-clock on the

project.

Nandan Nilekani, President, CEO and Managing Director of Infosys, commented,

“The work can be moved anywhere. This allows for a degree of freedom in the way a

business is conducted. The work can be moved depending on where it would be cheaper

to do so, or to a place that has unutilized capacity, or special skills. This is the kind of

innovation (GDM) for which we are taking credit for.”...

GDM - Making the Model Work

For an offshore development project, a team from Infosys visited the client in

order to determine the requirements of the project. After obtaining the required

specifications, some of the team members stayed back with the client to coordinate and

determine any changes that the client demanded in the project, while the project managers

returned to the GDCs.

At the clients’ location, there was an on-site coordinator who communicated with

the PDCs and ODCs regularly...

Expanding GDM

In 2003, Infosys launched GDM Plus, an enhanced service delivery model, a

combination of more services and excellence in execution. Infosys defined GDM Plus as

an integrated delivery model that encompassed vertical solutions, expanded vertical footprint

and execution excellence. According to Infosys, GDM Plus was its strategic response to

changing market conditions and the competitive landscape to deliver high volumes to

customers. Execution excellence was to be achieved through business solutions, technology,

domain expertise, quality, operational efficiency and people development...

The Benefits

According to analysts, GDM was cited as one of the key factors behind the rapid

growth of Infosys’ revenues. In a span of 25 years, the company grew to generate revenues

of US$ 2 billion in 2005-06. Infosys’ revenues grew almost four-fold in the past four years


NOTES


(Refer Exhibit VII for five year revenues of Infosys). The company continued attracting a

talented workforce in India and other countries. The number of employees of Infosys grew

to 52,700 as of March 2006 against 10,700 in 2002. In the fiscal year 2005-06, Infosys

derived more than 40% of its revenues through new GDM based services like package

implementation, independent validation, business process management, infrastructure

management and systems integration...

The Road Ahead

Realizing the potential of GDM, several other Indian IT companies also began

providing offshore services. Indian companies could charge a premium of 10-20% for

their offshore services. But with these services becoming mainstream, there was competition

among major players and customers became less willing to pay a premium. It was not long

before multinationals also entered the fray. Several MNCs like Accenture , IBM Global

Services , Electronic Data Systems , have started operating from India and began offering

the same offshore rates as Indian companies.

But Infosys remained confident that consultants and companies abroad could not

match their GDM capabilities. They would need to build the model from scratch, by

retrenching the manpower in their countries and hire equally talented employees in other

locations with cost advantages. The multinationals would need to redesign their operations

in order to replicate Infosys’ GDM, which would be a very difficult task...

Exhibits

Exhibit I: Magic Quadrant – Criteria

Exhibit II: Traits of Companies in ‘Leaders’ Quadrant

Exhibit III: Infosys – Milestones

Exhibit IV: Project Components - Onsite, Near-Site, OffshoreExhibit V: Advantages of

Global Delivery ModelExhibit VI: Infosys - GDCs Located Outside India

Exhibit VII: Infosys - Five Year Financial Highlights (US GAAP)

Summary

Cooperative strategies are becoming increasingly important for large corporations

because technology continues to drive many important markets. The rapid advance of

knowledge in many fields and the growing technical sophistication of our customers are

driving us to cooperate with specialist firms. Strategic alliances represent one of the more

innovative methods of cooperation, and they are being actively exploited.

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Large companies with an existing market position have a great deal to gain from

these relationships. Benefits may take the form of product line extensions or the improvement

of existing products. Another type of large firm that finds these relationships effective is the

company seeking to develop new sources of raw materials using the small firm’s technology.

Many of our biotechnology alliances are devoted to the creation of new sources of high-

quality raw materials for the large firm’s production processes.

Other uses of alliances may be less successful. Large firms who enter alliances

primarily for equity investment or as a window on technology may find them disappointing.

This may be particularly true when the small firm sees the relationship as a commercialization

opportunity. Simply stated, the goals of the small firm may be very different from the goals

of the large firm. When the partners are working toward different goals, the likelihood of

success is small.

After weighing the costs and benefits of alliances, a decision to proceed should be

tempered by what we argue are the best tactics for managing these cooperative relations.

In summary, partner selection methods should maximize compatibility and complementarity.

Tailor-made contracts negotiated specifically for the alliance should provide milestones

that establish clear objectives even though they are likely to be modified or possibly

abandoned. Developing conflict resolution techniques that can help managers resolve

problems while they are small and still solvable is an important collaborative step. Finally,

the managerial process must be a collaboration in which the large corporation is neither a

dictator nor a silent partner but rather an active participant in most if not all areas of the

venture. Implementing such design rules for managing alliances is likely to improve their

chance for success, especially in high technology areas.

Visualizing a business proposition also includes looking at its practicability and

conducting a preliminary investigation. If the results are satisfactory, an investigation has to

be conducted and the objectives of the business are decided.

The topic of NPO management has been well researched from a variety of

disciplinary perspectives over the years. The existence of NPOs can be explained by their

deviations from the standard economic model of the firm – NPOs do not have access to

equity capital, they do not distribute resources to owners, their presence is often attributed

to individuals or groups who perceive market or government failure in specific services.

However, given that this is so, there remain substantive issues of how economic

modeling can assist the management of NPOs. Here we advance the case that for internal


NOTES


functioning, economic theorists, and those disciplines which are heavily influenced by

economic thought, have failed to explain the micro-economic internal functioning of NPOs.

We also suggest that sociological theories which suggest NPOs may indulge in mimicry of

public or private sector bodies in the pursuit of legitimacy may have validity.

However, the actual issue of agents within NPOs is critical to our understanding of

effective NPO management. To date, most sociological contributions have focused on the

interface of the organization and its environment.

While the above perspectives continue to be deployed in scholarly works to explore

further the complexities of NPOs, we detect a strong recent trend to focus on management,

and, in particular, marketing, as a tool of management as the major focus of NPO research.

This observation is substantiated not only by the volume of publication of research effort in

this area, but also by the needs of NPOs as they seek to raise additional funds in the face

of increased competition – from other NPOs principally – for the quantum of funds which

donors are willing to give for charitable efforts. This new focus is not without its difficulties.

This paper sets the scene for a continuing research effort aimed at improving the professional

management of NPOs, given their distinctive nature and complex setting. There is also

scope for further research adopting the different perspectives set out above. However, we

also raise the prospect of holistic, inter- and multi-disciplinary studies as the most rewarding

way forward in the study of NPOs. An example of this is the Jonsson 1998 study which

draws on institutional theory, resource dependency and structuration theory.

Short Questions

1. Define technology.

2. Define innovation.

3. Who is a entrepreneur?

4. Identify the goals of small business.

5. What are the objectives of non-profit organization?

Review Questions

6 Discuss the issues involved in managing the technology and innovation.

7 Discuss the strategic issues influences the entrepreneurial ventures.

8 Describe the strategic issues involved small business management.

9 Explain the strategic issues involved non profit organization.

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NOTES

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business policy and strategic management notes

Business

vandallur chennai

strategic management

strategic alliances

strategy concept

concept of strategy

strategy formation

magesh author

author mr