Business Policy Full Subject 110 Slides

Learning Take Away

• What is Strategic Management?

• Why is Strategic Management important?

• Who is involved with Strategic Management?

• Strategic Management today?

• Goal directed decisions and actions in which capabilities and resources are matched with the opportunities and threats in the environment.

• Military influences in strategy“Strategos” referred to a general in command of an army

• Gives everyone a role

• Makes a difference in performance levels

• Provides systematic approach to uncertainties

• Coordinates and focuses employees

Strategy Strategic Management

A series of goal – directed decisions and actions matching an organization’s skills and resources with the opportunities and threats in its environment

• Analyze current situation• Develop appropriate strategies• Put strategies into action• Evaluate, modify, or change strategy

Strategy involves:• Organization’s goals• Goal – oriented action• Related decisions and actions• Internal strengths• External opportunities & threats

Strategic Management involves:• Planning• Organizing• Implementing• Controlling

Four aspects that set Strategic Management apart

• Interdisciplinaryo Capstone of the Management Degree

• External Focuso Competition

• Internal Focus

• Future Direction

• Corporate: (What direction are we going and what business are we in or do we want to be in this business?)

•Competitive – (How are we going to compete in our chose business?)

• Functional - (What resources and capabilities do we have to support the corporate and competitive strategies?)

• Strategy implementationo Process of putting strategies into actiono Consider implementation at each level

• Strategy evaluationo Was the strategy effective, if not what next?o Feedback and corrective action

• Board of Directorso Elected representative of the company’s stockholderso Legally obligated to represent and protect stockholders

• Top Managemento Responsible for decisions and actions of every employeeo Providing effective leadership

• Employeeso Implement – put the strategies into action and monitor

performanceo Evaluate – do the actual evaluations and take necessary

actions

• Effective strategy – making begins with a Vision of where the organization needs to head!

• Define current business activities

• Highlights boundaries of current business

• Conveyso Who we are?o What we do?o Where we are now?

• Company specific, not generic – so as to give a company its own identity

• A company’s mission is not to make a profit!

• The real mission is always – “What will we do to make a profit?”

• Microsoft Corporation – Empower people through great software anytime, anyplace and on any device.

• Otis Elevator – Our mission is to provide any customer a means of moving people and things up, down and sideways over short distances with higher reliability than any similar enterprise in the world.

• American Red Cross – The mission of the American Red Cross is to improve the quality of human life; to enhance self – reliance and concern for others; and to help people avoid, prepare for and cope with emergencies.

• Charts a company’s future strategic course

• Defines the business makeup for 5 years or more

• Specifies future technology – product – customer focus

• Challenges and motivates workforce

• Provokes strong sense of organizational purpose

• Induces employee buy –in

• Galvanizes people to live the business

• Crystallizes long term direction

• Reduces risk of rudderless decision making

• Conveys organizational purpose and identity

• Keeps direction related actions of lower level managers on common path

• Helps organization prepare for the future

• In today’s world, it take less and less time for one product or technology to replace another, companies are finding that there is no such thing as a permanent competitive advantage.

• So, every company needs to make sure that it keeps evolving as per the environment it operates in & achieve success by correctly implementing the business strategy.

Learning Take Away• What is Environmental Scanning ?

• What external environment variables should be scanned?

• How to identify External Strategic Factors?

• How to measure external strategic factors?

• What is Michael Poter’s Five Force Driving Model for Industry Analysis?

• Environmental Scanning is the monitoring, evaluating and disseminating of information from the external and internal environment to key people within the corporation.

• Every corporation must be aware about the different variable within a corporation’s internal and external environment in order to manage, lead and foresee changes to ensure long term health.

• Societal Environment: Forces that do not directly affect the short run activities of an organization but that can influence its long run decisions.

• Economic Factors –regulate the exchanges of money, materials, energy & information

• Technological Factors –generate problem solving inventions

• Political & Legal Factors – allocate power & provide constraining & protecting laws & regulations.

• Sociocultural Factors – regulate the values, morals & customs of society

• Task Environment (Industry): Forces that directly affect the corporations & in turn are affected by it. A corporation’s task environment can be thought of as the industry within which it operates.

• Task Environment includes factors like Governments, Local Communities, Suppliers, Trade Associations, Competitors, Customers, Creditors, Employees, Labor Union etc.

Identifying & Measuring Strategic Factors

• Companies respond differently to the same environmental changes because of differences in the ability of managers to recognize & understand external strategic issues & factors.

• Strategic Myopia: Management decide which external factors are tracked, missed or ignored depending upon the personal values, success of current strategies & perception of what is important.

Issue Priority MatrixOne way to identify & analyze development is to use the issues priority matrix as follows:

• Identify a number of likely trends emerging in the societal & task environments affecting various companies in a particular industry.• Assess the probability (from Low to High) of these trends or events actually occurring.• Attempt to ascertain the likely impact (from Low to High) of each of these trends on the company.

Michael Porter’s approach to Industry Analysis

• The collective strength of these forces determine the ultimate profit potential in an industry.

• The stronger force can be regarded as threat because it limits company’s ability to raise prices or earn greater profits.

• On the contrary, weaker force can be regarded as opportunity because it may allow the company to earn greater profits.

• It may be possible, in the long run a company can convert stronger forces into an advantage through its choice of strategy.

Threat of New Entrants – New entrants are newcomers to an existing industry. The threat of entry depends on the presence of entry barriers. High entry barriers create obstructions for a new company to enter an industry whereas low barriers make the entry easy for newcomers.

Some possible entry barriers Economics of ScaleProduct DifferentiationCapital RequirementSwitching CostAccess to Distribution ChannelsGovt. Policy

Rivalry Among Existing Firms – A competitive move by one firm can be expected to have a noticeable effect on its competitors & thus may cause retaliation or counter efforts.

Intense rivalry happens due to following factorsNumber of CompetitorsRate on Industry GrowthProduct or Service CharacteristicsAmount of Fix Cost or CapacityHigh exit barriersDiversity of Rivals (different ideas to compete)

Threat of Substitute Products or Services – Substitute products are those products that appear to be different but can satisfy the same need as another products. (e.g. Tea & Coffee)

Substitutes limits the potential return of an industry by placing a ceiling on the prices firms in the industry can charge to customers as switching cost is very low.

If the price of coffee goes up high enough, slowly coffee drinker will start switching to tea, as the price of tea puts a price ceiling on the prices of coffee.

Bargaining Power of Buyers – Buyers affect an industry through their ability to force down prices, bargain for better quality or high standard of services.

A buyer become powerful if the following factors are present

Purchase a large proportion of Seller’s goods or services

Buyers can integrate backwardsSuppliers are many, buyers are fewSwitching suppliers cost very littlePurchase product is unimportant to final

product

Bargaining Power of Suppliers – Suppliers can affect an industry through their ability to raise prices or reduce quality of goods or services.

A suppliers become powerful if the following factors are present

Buyers are many, Suppliers are fewProvide unique product or serviceSwitching cost is very high & substitutes are

not availableSupplier can integrate forwardBuyer only buys a small portion of the

Suppliers goods or services (e.g. sale of lawn mover tiers to tire industry)

Bargaining Power of Stakeholders – Stakeholders like government, local communities, creditors, shareholders, trade association, unions etc. can affect the entire industry. Stakeholders can force to company to absorb additional cost or reduce profit, sales etc.

What is a Strategic group?

A strategic group is a set of business firms that pursue similar strategies with similar resources. Categorizing firms in any one industry into a set of strategic groups is very needed in order to understand the competitive environment.

The business units belonging to a particular strategic groups within the same industry tend to be strong rivals & more similar to each other than to competitors in other strategic groups within the same industry.

Different Strategic Types According to Miles & Snow, competing firms within a

single industry can be categorized on the basis of their general strategic orientation into one of four basic types defenders, prospectors, analyzers & reactors. This distinction among firms operating with a single industry will explain us why companies facing similar situations behave differently.

Defenders – are companies with a limited products line that focus on improving the efficiency of their existing operations. Being cost oriented these firms are unlikely to innovate in new areas.

Prospectors – are companies with fairly broad product lines that focus on products innovation & market opportunities. Being sales oriented these firms are somewhat inefficient as they give more emphasize on creativity over efficiency.

Analyzers – are companies that operate in at least two different product-market area, one stable & one variable. In the stable area, efficiency is emphasized whereas in the variable area, innovation is emphasized.

Reactors – are companies that lack a consistent strategy – structure – culture relationship. Due to their passive approach their responses are often ineffective to environmental pressures

Internal Environment

Learning Take Away

• Define internal environment?• What determines competitive advantages?• Resource based approach to strategy analysis?• What factors determine competitive advantage?• What is Value chain Analysis?

Internal Environment

Scanning & Analyzing the external environment for opportunities & threats is not enough to provide an organization a competitive advantage. Managers must also look within the corporation itself to identify internal strategic factors: those critical strengths & weaknesses that are likely to determine if the firm will be able to take advantage of opportunities while avoiding threats.

What determines competitive advantage?

Any company’s competitive advantage is primarily determined by the firm’s resource endowments.

According to R.M. Grant resource based approach to strategy analysis contains five steps:

Identify & classify the firm‘s resources in terms of strengths & weaknesses

Combine the firm’s strengths into specific capabilities. These are core competencies: the things that a corporation can do exceedingly well.

• Evaluate the profit potential of these resources & competencies in terms of their potential for sustainable competitive advantage & the ability to produce the profit form the use of these resources & capabilities.

• Select the strategy that best exploits the firm's resources & competencies relative to external opportunities.

• Identify resource gap & invest in upgrading weaknesses.

When an organization’s resources are combined into capabilities they form a number of core competencies.

Factors that sustain a competitive advantage of a firm?

An organization can develop the core competencies by using its resources & capabilities, but there are two basic characteristics determine the sustainability of these competencies.

Durability - is the rate at which a firm’s underlying resources & capabilities (core competencies) depreciate or become obsolete. E.g. New technology can make a company’s core competency old-fashioned or irrelevant.

Imitability – is the rate at which a firm’s underlying resources & capabilities (core competencies) can be duplicated by others.

A core competency can be easily imitated to the extent that it is transparent, transferable & replicable.

Transparency – the speed at which the competitors can understand the relationship between the firm’s resources & capabilities supporting a firm’s strategy successfully.

Transferability – competitors ability to gather resources & capabilities necessary to create their own competitive advantage. E.g. Its not easy for any wine maker to replicate a French Wine.

Replicability – competitors ability to duplicate resources & capabilities to imitate the other firm’s success.

Level of Resource Sustainability

High Low

Slow Cycle Standard Cycle Fast Cycle Resources Resources

ResourcesStrongly Shielded Standardized mass Easily duplicatedPatents, Brand Name Production Idea driven

Economics of Scale

Value Chain AnalysisA value chain is a liked set of value creating activities

beginning with basic raw materials coming from suppliers, moving on to a series of value adding activities involved in producing & marketing a product or services and ending with distributors getting the final goods into the hands of the ultimate consumers.

Industry Value Chain – The value chain can to divided into two segments upstream & downstream. In the petroleum industry upstream refers to oil exploration, drilling & moving the crude oil to refinery whereas downstream refers to refining the oil, transporting & marketing of gasoline & refined oil to distributors & gas station

Raw Material Primary ManufacturingFabrication Product Producer Distributor

RetailerCorporate Value Chain – every firm has its own

value chain of activities, because most corporations make several different products & services an internal analysis of the firms involves analyzing a series of different value chain.

Examine each product’s vale chain & determine which activities can be considered as strength & weaknesses?

Examine linkages between different value activities are performed within a product line.

Explore potential synergies among the value chain of different product lines or business units.

Strategy FormulationStrategy formulation is often referred to as Strategic

Planning or long range planning & is concerned with developing corporation’s mission, objective, strategies & policies.

It begins with situation analysis, the process of finding a strategic fit between external opportunities & internal strengths while working around external threats & internal weaknesses.

SWOT Analysis assist not only in identifying company’s distinctive competencies, but also in identification of opportunities that the firm is unable to take advantage of due to lack of required skills & resources

Internal Factors Analysis Summary (IFAS)

External Factors Analysis Summary (EFAS)

Strategic Factor Analysis Matrix (SFAS)

Corporate StrategyCorporate Strategy deals with three key issues

facing the company as a whole:

• The firm’s overall orientation towards growth, stability or retrenchment (directional strategy).

• The industries or markets in which the firms competes through its products & services (portfolio strategy).

• The manner in which management coordinates activities, utilizes resources & cultivates capabilities (Corporate Parenting)

Directional StrategyRefers to choice of direction the firm should take, be it

SSI or MNC. Eg. Consider a situation where a firm is facing intense

competition in the markets it serves. What do you think the organization should do?

• Reduce Price – Cost Advantage• Improve Quality – Differentiation Advantage• A mix of both the above factors• Improve Distribution Network• New Promotional & Marketing Activities.• Merger, Acquisition, Joint Venture, Disinvestment,

etc.

Corporate Directional Strategies

Concentration StrategyGrowth can be via Vertical Integration by taking over

a function previously provided by suppliers (backward integration) or by distributor (forward integration).

Backward Integration can help the business to

produce critical inputs for the main product. Eg. RELIANCE

Forward Integration can help the business to take advantage of closer contact with the customers and ensure a control over retail price of their product. Eg. FUTURE GROUP.

RELIANCE - PRODUCT FLOW

Horizontal Integration refer to the degree to which a firm operates in multiple geographic locations at the same point in an industry’s value chain.

Growth can be achieved by expanding the firm’s products & services into other geographic locations or by increasing the firm’s products or services offered to current markets.

A company can acquire market share, production facilities or distribution outlets through internal development or externally through acquisition, merger or joint venture.

Diversification StrategyIf a company’s current product does not have potential

to grow, management can decide to diversify. There are two basic diversification strategy:

Concentric Diversification – Growing the company by expanding into related industry.

This is a appropriate strategy when a firm has strong competitive position in the industry it operates in.

By concentrating on its distinctive competence firm uses the strength, as its means of diversification.

The products are related and the idea is to take advantage of synergies (common thread between different products).

Conglomerate Diversification – Diversifying into an industry unrelated to its current one. Management realizes its current industry is unattractive & the company has no distinctive competence or the skills developed by the firm can be easily be transferred into related products or services in other industries.

Eg. A cash rich company with few opportunities for growth on its industry might move into another industry where opportunities are great but cash is hard to find.

Stability StrategyA corporation may choose stability over growth

by continuing its current activities without any significant changes. The following are stability strategies:

Proceed with Caution - Sometimes its appropriate as a temporary strategy to enable a company to consolidate its resources after prolonged rapid growth in an industry that faces an uncertain future. In effect, it means timeout take by the company to rest before continuing a growth or retrenchment strategy.

• This strategy was adopted by Dell Computer Corp in 1993 after their growth strategy result in so much business that company was unable to hand it.

• Michael Dell says “We grew 285% in 2 years, and we’re having some growing pains”. Dell was not giving up on its growth strategy but merely putting temporary brakes so that company can hire human resource and improve infrastructure & facilities.

• No Change - Decision to do nothing new, just continue with current operation & policies. The relative stability created by the firm’s competitive position in an industry facing little or no growth, encourages the company to continue doing business just making small adjustment for inflation in sales & profit.

• In US, most small business player follow this strategy before Wal - Mart enter into their territory.

Retrenchment Strategies

• A firm may pursue retrenchment strategies when the company has a weak competitive position in some or all its product lines resulting in poor performance, when sales are down & profit are becoming losses.

• In an attempt to eliminate the weaknesses which are dragging the company down, management may follow one of several retrenchment strategies.

• Turnaround - Focuses on improving operational efficiency of the firm & is appropriate when a corporation’s problem are pervasive but not yet critical.

• Turnaround strategy include two phases Contraction & Consolidation.

• Contraction - is the initial effort to quickly “stop the bleeding” with a overall across the board cutback in size & cost.

• Consolidation - implement improvement program to stabilize the new leaner corporation. To streamline the company, management develops plans to reduce overhead & unnecessary functional cost.

• This is a very crucial time for the firm, if the consolidation is not done properly the key people will leave the organization, on the other hand if the employees are motivated to participate in the consolidation program. The firm will emerge as a much stronger player with an improved competitive position which will help the company to once again expand the business.

• Captive Strategy - means becoming another company’s sole supplier or distributor in exchange for a long term commitment form the other company. In other words the firm gives up independence in exchange for security.

• A company with a weak competitive position may offer to be captive company to one of its larger customers in order to guarantee the company’s continued existence with a long term contract. This way the firm is able to reduce some of it functional cost like marketing, advertising, promotional, etc. expenses.

• Eg: In order to become the sole supplier to General Motors, Simpson Industries from Michigan agreed to have its engine part factory & financial books inspected by the GM employees. In return, 80 % company’s production was sold to GM.

Disinvestment Strategy - If the firm with a weak competitive position in the industry is unable either to pull itself up from the problem or to find a customer to which it can become a captive company. The only other choice it has now is to sell out or leave the industry completely.

• The sell out or disinvestment strategy make sense when the company can still obtain a good price by selling the entire company to another firm. Sometimes if the firm has multiple business lines, it may choose to disinvestment strategy by selling a business line.

• Bankruptcy or Liquidation Strategy - If a firm finds itself in the worst possible situation with poor competitive position then it has limited alternative at disposal. Because no one is interested in buying a weak business in an unattractive industry, the firm pursues a bankruptcy or liquidation strategy.

• Bankruptcy involves giving up management of the firm to the court in return for some settlement of the corporation’s obligation. Top management thinks that after the court decides & settles the claims of the company, the remaining new firm will be stronger & in a better position to compete in a more attractive industry.

• Bankruptcy gives perpetuate to the firm whereas Liquidation Strategy means selling the firm assets in parts. As the industry is unattractive & company is weak, the top management decides to convert as many saleable assets into cash as possible, which is then distributed to stock holder after settling all the obligations of the firm.

• The benefit of liquidation over bankruptcy is that Board of Directors as representative of stock holder along with the top management make the decisions instead of turning them over to the court, which may choose to ignore the stockholder completely.

Portfolio AnalysisCompanies with multiple product lines or business units must ask

themselves how these various products & business units should be managed to boost overall corporate performance.

• How much of our time & funds should be spend on our best products & business units to ensure that hey continue to be successful?

• How much of our time & funds should be spend on developing new costly products, most of which will never be successful?

Top management must juggle with various product lines & business units to ensure profitable return on the funds invested.

Two of the most popular approaches for Portfolio Management are:1. The Boston Consulting Group (BCG) Growth – Share Matrix2. General Electric Business Screen

BCG Growth Share Matrix

Each of the firm’s product lines or business units is plotted on the matrix according to both the growth rate of the industry in which it competes & its relative market share.

• Question Marks – are new products with the potential for success but that need a lot of cash for development. If any of these product have enough potential to gain market share to become a market leader then money must be taken from more mature products & spent on a question mark.

• Stars – are market leaders typically at the peak of their product life cycle & are usually able to generate enough cash to maintain their high share of the market. When their market rate slows, start become cash cow products.

• Cash Cows – are typically those products which bring in far more money than is needed to maintain their market share. As these products move along the decline

stage of their life cycle, they are ‘milked’ for cash that will be invested in new question mark products.

• Dogs – are those products with low market that do not have the potential to bring in much cash. Thus such products should be either sold off or managed carefully for the small amount of cash they generate.

Underlying, BCG growth-share matrix is based upon experience curve. They key to success is assumed to be market share. Firms with highest market share tend to have a cost leadership position based on economies of scale, among other things. If a company uses the experience curve to its advantage, it should be able to manufacture & sell new products at a price low enough to garner early market share leadership. When a product become a start is destined to be very profitable, considering its inevitable future as a cash cow.

General Electric Business Screen – Developed by GE, a more complicated matrix with assistance of the McKinsey & Co. GE Business Screen includes nine cells based on long-term industry attractiveness & business strength & competitive position.

The individual product lines or business units are identified by a letter & are plotted as circles on the GE Business Screens.

The area of each circle is in proportion to the size of the industry in terms of sales. The pie slices within the circles depicts the market share of each product line or business unit.

To plot product lines or business units on the GE Business Screen, the following four steps are recommended:

Step1: Select criteria to rate the industry for each product line or business unit. Assess overall industry attractiveness for each product line or business unit on a scale from 1 (very unattractive) to 5 (very attractive).

Step2: Select the key factors needed for success in each product line or business unit. Assess business strength & competitive position for each product line or business unit on a scale from 1 (very weak) to 5 (very strong).

Step3: Plot each product line’s or business unit's current position on a matrix as shown in the diagram earlier.

Step4: Plot the firm’s future portfolio, assuming that present corporate & business strategies remain unchanged. Is there a performance gap between projected & desired portfolios? If so, this gap should serve as a stimulus for them to seriously review the corporation’s current mission, objectives, strategies & policies.

Corporate Parenting• Which business should this company own & why?• Which organizational structure, management processes &

philosophy will foster superior performance from the company’s business units?

Portfolio Analysis attempts to answer the above questions. Unfortunately portfolio analysis fails to deal with the question of what industries a corporation should enter or with how a corporation can attain synergy among its product lines & business units.

Corporate Parenting views the corporation in terms of resources & capabilities that can be used to build business unit value as well as generate synergies across business units.

Corporate Parenting generates corporate strategy by focusing on the core competencies of the parent corporation & on the value created from the relationship between the parent & its businesses.

If there is a good fit between the parent company’s skills & resources and the needs & opportunities of the business units, the corporation is likely to create value. If there is not a good fit, the corporation is likely to destroy value.

The primary job of corporate headquarters is to obtain synergy among the business units by providing needed resources to units, transferring skills & capabilities among the units & by coordinating the activities of shared unit functions to attain economies of scope.

Steps recommended to develop appropriate corporate strategy involves three analytical steps:

• Examine each business unit in terms of its critical success factor which determines its success or failure.

• Examine each business unit in terms of areas in which performance can be improved. These are considered to be parenting opportunities. For eg: two business units might be able to gain economies of scope by combining their sales forces. In other instance, a unit may have average manufacturing & logistics skills. A parent company having world class expertise in these areas can improve that unit’s performance. People from the corporate headquarter may be able to spot areas of improvement, due to there vast industries experience.

Examine how well the parent corporation fits with the business unit – Corporate headquarter must be aware of its own strengths & weaknesses in terms of resources, skills & capabilities. To do this, the corporate parent must ask if it has the characteristics that fit the parenting opportunities in each business unit.

FUNCTIONAL STRATEGY

Functional strategy is the approach a functional area takes in order to achieve business objectives.

It is concerned with developing & nurturing a distinctive competence to provide a company with a competitive advantage.

A multidivisional corporation has many business units with its own strategy, each unit will have its own departments, each with its own functional strategy.

Key Strength v\s Distinctive CompetenciesKey strength is something that a corporation can do exceedingly well,

where as distinctive competencies is something that is unique to the corporation or superior from competition.

To be considered a distinctive competencies three criteria should be fulfilled: Customer Value, Competitor Unique & Extendibility.

A distinctive competency is certainly a key strength, however key strengths are not always considered as distinctive competencies. As competition tries to imitate another company’s strength, what was once considered as a key strength becomes a minimum level entry requirement in the industry.

MARKETING STRATEGIES

It deals with pricing, selling &distribution of company’s products.

Market Development Capture a larger share of an existing market Develop new markets for current products

P&G, Colgate – Palmolive, Unilever – increase product life cycle through new & improved variations of products & packaging that appeal to market niches.

Product Development Development new products for existing markets Develop new products for new markets

Pull & Push Method Push Products by spending larger amount of money on

trade promotions in order to gain self space in retail stores or push products through distribution system. Trade discounts, in store special offers, etc.

Pricing Strategy: Skim Pricing – offers opportunity to skim the top of the

demand curve with high curve especially when the product is new & competitors are less.

Penetration – introduce products with low price to gain market share. Depending on the corporate strategy either pricing strategy is

desirable. However, penetration strategy is more profitable in the long run.

FINANCIAL STRATEGIES

It examines financial implications and identifies the best financial course of action.

It can provide competitive advantage, by keeping the cost of capital low or by raising capital to support a business strategy.

Debt v\s Equity – manage desired level of debt equity to keep the overall cost of capital low.

Leverage Buy Out – company is acquired by debts take from third party. Debt servicing is debt through the profits generated by the business.

Dividend Policy – analyze whether to distribute to excess funds or keeps them for future growth activities.

Human Resource Management Strategy

It tries to find a best fit between people & organizations. Recruitment, Training & Development – hire a large number

of low skill people with low pay scale to perform repetitive jobs (McDonald’s) or employ skilled people with high scale pay & cross trained to participate in self managed teams (Google). Reduce cost by using temporary, part time or contractual employees.

Team & Workforce Diversity – hire diverse workforce (age, race, nationality, etc) can provide competitive advantage. DuPont – African American employees, create new market by focusing on black farmers.

Selecting best Strategy

After assessing the pros & cons of different strategy, one alternatives must be chosen.

Most important criterion in selecting a strategic alternative should be its ability to achieve predetermined corporate objective with least use of resources & with no or few side effects.

A tentative execution plans should be made to address the difficulties that management is likely to face while actually implementing the strategy, using situation based scenarios simulation models.

Construct Corporate Scenarios

For every alternative strategic program sample pro forma balance sheet & income statement should be create to calculate the return on investment.

For every alternative, set of assumption should be made and three scenarios must be constructed Optimistic, Pessimistic & Most Likely.

Construct detailed pro forma financial statement using current year financial figures and record the optimistic, pessimistic & most likely financial figures over a extended time frame. The ideal is to get detailed figures of Net Profit, Cash Flow, Working Capital, etc. for each strategic alternative. In order to choose the right alternative “what if” analysis should be used for reasoning.

Regardless of the quantifiable pro & cons, actual decision will be influenced by several other factors.

Management’s attitude towards RISK

The attractiveness of a particular strategic alternative depends not only, upon the probability that it will be effective but also on the amount of resources allocated to that alternative & for what time duration.

The greater the amount of asset involved & the longer they are committed, then top management wants a higher probability of success.

Pressure from External Environment - The attractiveness of a strategic alternative is affected by its compatibility with the key stakeholders like creditors, employee union, stockholders, etc. Management must consider the following while deciding upon the strategic alternative – identify most crucial stakeholder, assess their needs & chances of meeting those needs, actions stakeholder will take if needs are not met & the probability of stakeholder taking these actions.

Pressure from Corporate Culture – If a strategy is incompatible wit the corporate culture, it will probably not succeed. Management must assess the compatibility of the available strategic alternatives wit the corporate culture. If there is little fit, management must decide what actions should be taken – ignore the culture, manage around & modify the implementation, try to change the culture, change the strategy to fit the culture, etc.

Needs & Desire of Key Employees – Even the most attractive strategic alternative will not get selected if it does not fulfill the needs & desire of the key managers in the corporations. They key managers can influence the management decision in the favor of a particular alternative or to ignore disadvantages of a particular alternative.

Managers may ignore a negative information about a particular decision, as they want to show that they are committed & consistent in their performance. Sometimes it take a unlikely event or some form of crisis in order to attract attention from the strategic decision makers towards the ignored facts. Eg. ConAgra – Healthy Foods Products.

Strategic Choice – is the evaluation of alternatives strategies & selection of the best alternative after debating all the aspects of that alternative. GM – CEO Alfred E. Sloan, use to call for the meeting with top managers to propose a controversial decision. When asked for comment, each executive responded in agreement to support the decision taken. After getting the agreement with all the executives, CEO decided not to proceed with the decision. Either the executives are agreeing to avoid upsetting the boss or they have not assessed the pro & cons of the alternative completely.

Strategy ImplementationStrategy Formulation & Implementation are two sides

of the same coin. Although implementation is usually considered after strategy has been formulated, but it is the key part of strategic management.

To begin the implementation of the chosen strategic alternative management must look into the following matter:

Identify people who will implement the strategy Develop Program, Budget & Procedure Organize for action – how to implement the strategy.

Challenges faced by the corporation when they attempt to implement a strategic choice:

Slower implementation than originally planned Unanticipated major problem Ineffective coordination of activities Competing activities & & crises that distract attention away from

implementation Insufficient capabilities of the involved employees Inadequate training & instruction of lower level employees Uncontrollable external factors Inadequate leader ship & direction by department managers Poor definition of key implementation tasks & activities Inadequate monitoring of activities by the information system

Identify people who will implement the strategy – Depending upon the size of the corporation, people involved in

implementing a strategic choice will probably be much more diverse group as compared to those who formulated the strategic plans.

Implementers consists of everyone from top management to first line managers as well as all the employees in some way or the other for implementing the corporate, business & functional strategies.

Most of the people vital for making the strategy successful probably had little to do with the development of the corporate & even business strategy. Therefore they might be completely ignorant about the formulation process like analyzing the larger amount of data. It is necessary to make sure that middle level managers are involved in the strategy formulation.

Develop Programs, Budgets & Procedures –

A program is a statement of activities or steps needed to accomplish a single –use plan.

A budget is a statement of corporation’s program in money terms. After programs are developed, the budgets process begins. Planning a budget is the last real check a corporation has on the feasibility of its selected strategy.

Procedures or SOP are system of sequential steps that describe in detail how a particular task should be completed.

Achieve synergy between function & business units, especially after mergers or acquisition.

Organize for Action - How is Strategy Implemented?

Before the top management starts implementation of the selected strategy, it must ensure that organization is appropriately organized for action i.e. adequate staff is present, activities and programs are proper aligned to achieve desired objective, etc.

A change in corporate strategy will likely require some sort of change in organization's structure and skill set in order make sure that strategy is get implemented successfully.

Organization Structure & StrategyWhich comes first?Structure follows strategy as well as reverse proposition is also

possible.Strategy, Structure and environment should be closely aligned,

otherwise the organizational performance will suffer. Organizations following similar strategies in similar industries will have

similar structure.DuPont – had a centralized structure suited for producing & selling

limited product rage, as the company expanded need was felt to change the organizational from centralized to decentralized.

General Motors – had a centralized policy making and decentralized implementation. This approach helped because decentralized multidivisional structure allowed (Chevrolet, Buick etc.) freedom necessary for product development, financial control etc.

Different types of Organization Structure & decision making :

Simple Structure – Suitable for small (entrepreneur) firms. Decision is centralized, greatest advantage is flexibility & dynamism in decision making process.

Functional Structure – A team of managers having specialized functional knowledge take all the decisions, greatest advantage is concentration & specialization in decision making process.

Divisional Structure - Suitable for large organization managing diverse product lines in numerous industries. Decision making is decentralized and resources are plenty, greatest disadvantage is organization become inflexible.

Matrix Structure – as called as Strategic Business Unit is simply a more advance form of divisional structure. Horizontal linkages are made for related product division so that organization can manage the changing product, market environment better.

Network Structure – also called as Virtual Organization Structure, suitable for company operating in the unstable environment where innovation & quick response is necessary for survival. The company draws long term contract with its suppliers & distributors and only concentrates on its distinctive competencies taking advantage from other firms efficiencies & expertise. Example: NIKE, REEBOK, BENETTON use network structure, by subcontracting production function to suppliers from low cost countries.

Organizational Life Cycle

The organizational life cycle describes how organizations grown, develop & eventually decline.

Sometimes company’s strategy may still be good, however its old structure, culture & processes may be such that they prevent the strategy from being executed properly, thus company moves into decline sate if revival does not happen.

STAGE I STAGE II STAGE III STAGE IV STAGE V

DOMINANT ISSUE BIRTH GROWTH MATURITY DECLINE DEATH

POPULAR STRATEGIES

CONCENTRATION IN A NICHE

MARKET

HORIZONTAL & VERTICAL

INTERGRATION

CONCENTRIC & CONGLOMERATE DIVERSIFICATION

PROFIT STRATEGY FOLLOWED BY

RETRENCHMENT

LIQUIDATION OR BANKRUPTCY

LIKELY STRUCTURE ENTREPRENEUR - DOMINATED

FUNCTIONAL MANAGEMENT

EMPHASIZED

DECENTRALIZATION INTO PROFIT OR

INVESTMENT CENTERS

STRUCTURAL SURGERY

DISMEMBERMENT OF STRUCTURE

Managing Change & Strategy Implementation

Managing Staffing needs of the organization. Staffing includes selection & utilization of employees.

In order to implement new strategy, new people may need to be hired with appropriate skills and firing (retrenchment) people with inappropriate skill or provide training to them.

Promoting experienced people with necessary skill set in order to implement the strategy successfully.

Hiring & Training Changes – Once new strategy is formulated, either different kind of people may be needed or the current employees will be retrained to implement the new strategy.

Managerial skills needed to implement the strategy – the most appropriate type of manager needed to implement the strategy will depend upon the strategic direction the organization chooses. For example: organization implementing diversification will choose analytical portfolio manager who is highly knowledgeable in other industries & can manage diverse product lines.

Succession Planning & Management Development

Managing Corporate Culture

An organization's culture has a powerful influence on the behavior of all employees. Thus it can strongly affect the company’s ability to shift its strategic direction.

Any organization with a strong culture can have problem if changes are required or made in the mission, objectives, strategies & policies are not compatible with the corporate culture.

There is no best corporate culture. An optimal culture is one that best supports the mission & strategy of the company of which it is a part.

McKinsey 7 S Model

The 7 S frame work of McKinsey Model describes how management should holistically & effectively organize a company. Together these factors determine the way in which a corporation operates.

Shares Values: The interconnecting center of McKinsey’s model is Shared Values. What does the organization stands for & what it believes in. Central belief & attitudes

Strategy – Plans for the allocation of a firms scare resources, over time, to reach identified goals. Environment, Competition, Customer, etc.

Structure – The way the organization's units relate to each other: Centralized, Functional Divisions (top down), Matrix, Network, etc.

System – The procedures & routines that characterize how important work is to be done, Financial System, Hiring, Promotion, Performance Appraisal, information systems, etc.

Staff – Number & types of personnel within the organization.

Style – Cultural style of the organization & how key managers behave in achieving the organization's goal.

Skill – Distinctive capabilities of personnel or of the organization as a whole.

EVALUATION & CONTROLThe evaluation process is designed to ensure that the

organization is achieving its goals & objectives. It compares performance with the desired result & provides the management with a feedback to evaluate results & take necessary corrective action. It works as an early warning system for the organization.

Evaluation & Control is not easy. Especially where measuring important activities & output is difficult.

Steps should be taken in order to develop system that measures the output through a series of agreed performance indicators (PIs). Performance Indicators should such which gives the actual picture of the performance.

Strategy Evaluation Process

Effective Strategic Control System Establish the standards or targets against which

performance is to be evaluated, Create the measuring or monitoring system that

indicate whether the targets are being achieved. Compare actual performance against the established

targets Initiate corrective action when it is decided that the

target is not being achieved.

Evaluation & Control Tools: Standard, Bench Marking, Cost Benefit Analysis, Performance Gap Analysis, Responsibility Center, Return on Investment, Budgeting, etc.

Important Measures of PerformanceReturn on Investment (ROI): it is a measure of profit and is derived by

dividing net income before taxes by total assets. Earning Per Share (EPS): It is obtained by dividing net earnings by the

amount of common stock.Return on Equity (ROE): It is obtained by dividing net income by total

equity.Economic Value Added (EVA): It is obtained by After tax operating

profit minus the total annual cost.Market Value Added (MVA): Total Value of all the outstanding stock

add Debt minus Capital Invested

Reference Books:

(1) Essentials of Strategic Management – by J. David Hunger & Thomas L. Wheelen

(2) Strategic Management – by K.G. Bhatt(3) Strategic Management Concepts & Cases–

by Upendra Kachru(4) Understanding Business Strategy – by

Ireland, Hoskisson, Hitt