Strategic management book @ bec doms bagalkot

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Strategic-Management

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CONTENTSUnits

Unit 1

Lesson 1.1 The business systemLesson 1.2 Objectives of the businessLesson 1.3 Mission – vision – goalsLesson 1.4 strategic analysis of functional areasLesson 1.5 Analyzing corporate capabilitiesLesson 1.6 SWOT

Unit 2

Lesson 2.1 Corporate strategyLesson 2.2 Process of strategic planningLesson 2.3 Formulation of strategyLesson 2.4 Project life cycleLesson 2.5 Portfolio analysisLesson 2.6 Strategic decision making

Unit 3

Lesson 3.1 stability strategyLesson 3.2 Growth strategyLesson 3.3 Retrenchment strategyLesson 3.4 Turnaround strategyLesson 3.5 Diversification

Unit 4

Lesson 4.1 Mergers & acquisition

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Lesson 4.2 Amalgamation strategyLesson 4.3 joint venture strategyLesson 4.4 Organizational structure and corporateDevelopmentLesson 4.5 Line and staff functionsLesson 4.6 Management of change

Unit 5

Lesson 5.1 Implementation of strategyLesson 5.2 Elements of StrategyLesson 5.3 Leadership And Organisational ClimateLesson 5.4 Planning And Control or Implementation

Unit 6

Lesson 6.1 ERPLesson 6.2 ERP Package : BaaNLesson 6.3 ERP Package : MARSHALLLesson 6.4 ERP Package : SAPBibliographyModel Test Paper

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STRATEGIC MANAGEMENT

Unit -1THE BUSINESS SYSTEM

1.1.1.Introduction :

The McKinsey analysis discovered four quite distinct phasesof strategic management evolution .in phase I, financial planning,management focuses on the preparation of budgets with anemphasis on functional operation. Most organization has abudgeting process, in at least rudimentary from, as a way ofallocating resources among functional units, subsidiaries, orproject. The second, forecast- based planning follows naturallyfrom the first as managers project budget requirements beyond theone –year cycle. This phase represents an effort to extendmanagers’ attention beyond the immediate future as scenarios aredeveloped which describe their expectations about future timeperiods. Budgets are often constructed for several years at a timeand are rolled over annually so that the appropriateness of abudgeted amount can be reviewed several times before it isoperationalzed. Phase 2 planning is very “now” oriented. Currentoperations and characteristics are stressed in analyses of the firmand there is little attention to or patience for consideringoperational options or development of strategic changes. Thebusiness portfolio of a phase 2 firm is often viewed as the finalexpression of strategy rather than as an input to the strategyformulation process. Current structure and business activities maybe considered fixed, not as strategic variables.

Phase 3, external oriented planning requires a significantchange in management viewpoint. Planners are required to aboutan external orientation and tools and procedures for environmentaland internal assessment. Concern centers on understanding theorganization’s environment and competitive position and

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generating ideas about how the company might better fit itsenvironment. Several choices, contingency plans, are often devisedfor how the company might fit its environment. Lower levelplanners and managers are often involved in the process ofgenerating choices, an activity that soon puts top management inthe position of choosing a plan in which it had little involvement indeveloping.

Phase 4, strategic management, evolves as top managementsenses the need to more heavily invest in the planning processbecause of its lack of understanding of or involvement in thedetails of earlier plan development. strategic management is themeshing of Phase 3 planning and operational management into oneprocess. It is analysis and conclusion that takes place year- roundand ties performance evaluation and motivational programs tostrategy.

1.1.2 Deliberateness of Strategy:

Sometimes outsiders impute strategy to the behavior of firms.Obviously, students analyzing case studies are placed in thisposition when they impute strategy from the data they are able togenerate on the firm’s operations. Similarly, journalists and themanagers of competing firms may impute strategy to a firm’sbehavior; and it may or may no0t accurately reflect the real strategyin place. Outsiders may also imply intent to an imputed strategy.That is; they assume not only that the strategy they imputed fromthe firm’s behavior’s is the real strategy its employees areimplementing, but they imply that this strategy is the one intendedfor the firm by its management. Seldom is this the case.

Mintzberg developed a taxonomy which is useful fordiscussing the realism and deliberateness of strategy. First, hedistinguished between strategy that is the result of a plan, and of apattern of behavior. He referred to them as “strategy as plan” and

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“strategy as pattern”, respectively. Strategy as pan is a chosencourse of action; it could be a real strategy (one intended forimplementation) or a ploy (a tactical move whereby a competitormay be influenced into making a mistake). Some people think thatCoca-Cola’s rumored change in Coke’s formula in ht emid-1980swas such a poly. The implication is that Coca-Cola had notintended to really change the formula. The implication is thatCoca-Cola had not intended to really change the formula,introduced a new product with a different formula that tasted a lotlike a competitor’s product, and finally graciously conceded tocontinue producing the old formula product when the publicdemonstrated a preference for it over the new--"similar to acompetitor’s – “formula. (Incidentally, if this was in fact a poly, ithas to rank among the top marketing moves ever attempted by anybusiness. Coca-Cola reaped an immediate increase in market shareof about 15 percent that thrust them once again into unquestioneddominance in the huge U.S. soft drink market). Strategy as plan,when implemented, may or may not be what the firm ends up with.That is, the planned strategy could ultimately be either realized orunrealized. If it is realized, then the entire process would be atextbook case of strategy formulation and implementation in thesense that the firm successfully implemented what was intended.

But what happens if he planned strategy is implemented and,for some reason, the strategy that is realized is not the intendedone? We might say that the planned strategy was unrealized, andthe realized strategy (the one that seems to describe what thecompany is actually doing) arises out of some consistency in thebehavior of the company. Mintzberg and Waters call thisunintended realized strategy, “strategy as pattern,” or a pattern in aseries of actions by the organization. Strategy as pattern is whatyou will end up with when you impute strategy to the behavior of acompany you are analyzing in a case study, or what journalistsproduce when they attribute a strategy to a company based only onits actions.

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“Thus, a realized strategy could be either a deliberatestrategy as plan, or an “unelaborated” strategy as pattern. If therealized strategy was planned and also accurately the firm’s actions,then strategy as pattern and strategy as plan would be synonymous.However, when realized strategy is not intended strategy (that is, itwas either not what was intended by management when theydrafted a planned strategy, or they drafted a planned strategy, orthey drafted no strategy at all ), then it simply “grew” out of theactivities of the company. In Mintzberg’s terms it “emerged” as apattern of behavior in the absence of intention, or despiteunrealized intention.

A realized strategy is what a company is actually doing. If it is theone intended by management then it is deliberate. If not, then theintended strategy was undrealized, and the realized strategy isemergent. An emergent strategy is, by definition, not deliberate.However, a manager may choose nor to consciously formulatestrategy and, instead, “go with” the emergent one. But even here,the resultant emergent strategy could not have been deliberate inthe same way an intended strategy would have been. Often it isconvenient to distinguish between intended and emergentstrategies. When management performs no strategic managementat all, they still will have a realized strategy that is emergent. Thisemergent strategy could be recognized by outsiders (and insidersfor that matter) even though it may not have been intended mymanagement.

Question:

1. What is business policy? Why it is important for companies?2. Under what circumstances strategic management is useful?3. What are the commitment of top management in strategic

outlook?

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LESSON 1.2 OBJECTIVES OF THE BUSINESS

1.2.1. Introduction

The objective is the starting point of the marketing plan. Onceenvironmental analyses and marketing audit have been conducted,their results will inform objectives. Objectives should seek toanswer the question “Where do we want to go?” The purposes ofobjectives include:

To enable a company to control its marketing plan.To help to motivate individuals and teams to reach acommon goal.To provide an agreed, consistent focus for all functions of anorganization.

All objectives should be SMART i.e. Specific, Measurable,Achievable, Realistic, and Timed.

Specific – Be precise about what you are going to achieveMeasurable – Quantify you objectivesAchievable – Are you attempting too much?Realistic – Do you have the resource to make the objectiveshappen (men, money, machines, materials, minutes?)Timed – State when you will achieve the objectives (within amonth? By February 2010?)

1.2.2. Examples of SMART objectives:

Some examples of SMART objectives follow:

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1. Profitability Objectives

To achieve a 20% return on capital employed by August 2007.

2. Market Share ObjectivesTo gain 25% of the market for sports shoes by September 2006

3. Promotional Objectives

To increase awareness of the dangers of AIDS in India from 12% to25% by June 2004.

To insure trail of X washing powder from 2% to 5% of our targetgroup by January 2005.

4. Objectives for Growth

To survive the current double-dip recession.

5. Objectives for Growth

To increase the size of out German Brazilian operation from$200,000 in 2002 to $400,000 in 2003

6. Objectives for Branding

To make Y brand of bottled beer the preferred brand of 21-28 yearold females in North America by February 2006.

These are many examples of objectives. Be careful not to confuseobjectives with goals and aims. Goals and aims tend to be morevague and focus on the longer-term. They will not be SMART.However, many objectives start off as aims or goals and thereforethey are of equal importance.

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1.2.3 Objectives of growth:

Ansoff Matrix as a marketing tool was first published in theHarvard Business Review (1957) in an article called ‘Strategic forDiversification’. It is used by marketers who have objectives forgrowth.

Ansoff’s matrix offers strategic choices to achieve theobjectives. There are four main categories for selection.

Market Penetration

Here we market our existing products to our existing customers.This means increasing our revenue by, for example, promoting theproduct, repositioning the brand, and so on. However, the productis not altered and we do not seek any new customers.

Market development

Here we market our existing product range in a new market. Thismeans that the product remains the same, but it is marketed to anew audience. Exporting the product, or marketing it in a newregion are examples of market development.

Product development

This is a new product to be market to our existing customers.Here we develop and innovate new product offering to replaceexisting ones. Such product are then marketing to our existingcustomers. This often happens with the auto markets whereexisting models are updated or replaced and then marketed to

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existing customers. this often happens with the auto marketswhere existing models are updated or replaced and thenmarketed existing customers.Diversification

This is where we market completely new products to newcustomers there are to type of diversification, namely related andunrelated diversification. Related diversification means that weremain in a market or industry with which we are familiar. Forexample, a soup manufacturer diversifies into cake manufacture(i.e. the food industry ). Unrelated diversification is where we haveno previous industry nor market experience for example a soupmanufacturer invests in the roil business

Ansoffs matrix is one of the most will know frameworks fordeciding upon strategies for growth.

1. 2. 4. Setting objectives based on competition:

Five forces analysis helps the marketer to contrast acompetitive environment. It has similarities with other toolsfor environmental audit, business or SBU (Strategic BusinessUnit) rather than a single product or range of products. Forexample. Dell would analyses the market for businesscomputers i.e. one of its SBUs.

Five forces looks at five key areas namely the threat ofentry, the power of buyers, the power of substitutes, andcompetitive rivalry

The threat of entry

Economies of scale e.g. the benefits associated withbulk purchasing

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The high or low cost of entry e. g. how much will itcost for the latest technology.Ease of access to distribution channels e.g. Do ourcompetitors have the distribution channels sewn up?Cost advantages not related to the size of thecompany e.g. personal contracts or knowledge thatlarger companies do not own or learning curve effects.Will competitors retaliate?Government action e.g. will new laws be introducedthat will weaken our competitive position?How important is differention? e.g. The Champagnebrand cannot be copied. This desensitizes theinfluence of the environment.

This power of buyers

This is high where there a few, large players in amarket e.g. the large grocery chains.If there are a large numbers of undifferentiated, smallsuppliers e.g. small farming businesses supplying thelarge grocery chains.The cost of switching between suppliers is low e.g.from one fleet suppliers of trucks to another.

The power of suppliers

The power of suppliers tends to be a reversal of thepower of buyers.Where the switching costs are high e.g. Switching fromone software supplier to another.

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Power in high where the brand is powerful e.g.Cadillac, Pizza Hut, Microsoft.There is a possibility of the supplier integratingforward e.g. Brewers buying bars.Customers are fragmented (not in clusters) so thatthey have little bargaining power e.g. Gas/Petrolstations in remote places.

The threat of substitutes

Where there is product-for-product substitution e.g.email for fax. Where there is substitution of need e.g.better toothpaste reduces the need for dentists.Where there is generic substitution (competing for thecurrency in your pocket) e.g. Video suppliers competewith travel companies.We could always do without e.g. cigarettes.

Competitive Rivalry

This is most likely to be high where entry is likely; there isthe threat of substitute products, and suppliers and buyers inthe market attempt to control. This is why it is always seen inthe center of the diagram.

Bewman’s Strategy Clock

The ‘Strategy Clock’ is based upon the work of Cliff Bowman. It’sanother suitable way to analyse a company’s competitive positionin comparison to the offering of competitors. As with Porter’sGeneric. Strategies, Bowman considers competitive advantage in

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relation to cost advantage or differentiation advantage. There a sixcore strategic options.

Option one-low price/low added value

Likely to be segment specific.

Option two-low price

Risk of price war and low margins/need to be ‘cost leader’.

Option three-Hybrid

Low cost base and reinvestment in low price anddifferentiation

Option four – Differentiation

(a) without a price premium

Perceived added value by user, yielding market sharebenefits.

(b) with a rice premium

Perceived added value sufficient to bear price premium

Option five-focused differentiation

Perceived added value to a ‘particular segment’ warranting apremium price.

Option Six – increased price/standard

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Higher margins if competitors do not value follow/risk oflosing market share

Option Seven – increased price/low values

Only feasible in a monopoly situation

Option eight – low value/standard price

Loss of market share

1.2.5 Objectives of delivering Value:

The value chain is systematic approach in examining thedevelopment of competitive advantage. It was created by M.E.Porter in his book, Competitive Advantage (1980). The mainconsists of a series of activities that creat and build value. Theyculminate in the total value delivered by an organization. The‘margin’ depicted in the diagram is the same as added value. Theorganization is spit into ‘primary activities’ and ‘support activities’.

Primary Activities

Inbound Logistics

Here goods are received from a company’s suppliers. They arestored until they are needed on the production/assembly line.Goods are moved around the organization.Operations

This is where goods are manufactured or assembled. Individualoperations could include room serviced in an hotel, packing ofbooks/videos/games/ by an online retailer or the final tune for anew car’s engine.

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Outbound Logistics

The goods are now finished, and they need to be sent along thesupply chain to wholesalers, retailers or the final consumer.

Marketing and Sales

In true customer orientated fashion, at this stage the organizationprepares the offering to meet the needs of targeted customers.This area focuses strongly upon marketing communications andthe promotions mix.

Service

This includes all areas of service such as installation, after-salesservice, complaints handling, training and so on.

Support Activities

Procurement

This functions is responsible for all purchasing of goods, servicesand materials. The aim is to secure the lowest possible price forpurchases of the highest possible quality. They will be responsiblefor outsourcing (components or operations that would normally bedone in- house are done by other organizations), and Purchasing(using IT and web-based technologies to achieve procurementaims).

Technology Development

Technology is in important source of competitive. Companies needto innovate to reduce costs and to protect and sustain competitiveadvantage. This could include production technology, internet

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marketing activities, lean manufacturing, customer Relationshipmanagement (CRM), and many other technological developments.

Human resource management (HRM)Employees are an expensive and vital resource. An organizationwould manage recruitment and selection, training and development,and rewards and remuneration. The mission and objectives of theorganization would be driving force behind the HRM strategy.

Firm Infrastructure

This activity includes and is driven b corporate or strategicplanning. It includes the Management Information System (MIS),and other mechanisms for planning and control such as theaccounting department.

Question:

1. Write a note a Value chain.2. What are the methods of deciding the objectives of abusiness?

3. How competition is playing a role in deciding the objectives?

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LESSON 1.3 MISSION – VISION – GOALS

1.3.1 Mission

Mission is the description of an organization’s reasons forexistence, its fundamental purpose. It is the guiding principle thatdrives the processes of goal and action plan formulation, “apervasive, although general, expression of the philosophicalobjectives of the enterprise.” Mission should focus on “long-rangeeconomic potentials, attitudes toward customers, product andservice quality, employee relations, and attitudes toward owners.” Itprovides identity, continuity of purpose, and overall definition, andshould convey the following categories of information.

1. Precisely why the organization exists, its purpose, in terms (a)its basic product or service, (b) its primary markets, and (c)its major production technology.

2. The moral and ethical principles that will shape thephilosophy and charter of the organization.

3. The ethical climate within the organization.

Thus mission outlines the firm’s identity and provides a guide forshaping strategies at all organizational levels. The role played bymission in guiding the organization is an important one.Specifically it.

1. serves as a basis for consolidation around the organization’spurpose.

2. provides impetus to and guidelines for resource allocation.3. defines the internal atmosphere of the organization, itsclimate.

4. serves as a set of guidelines for the assignment of jobresponsibilities.

5. facilitates the design of key variables for a control system.

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Deal and Kennedy claim that a strong culture is the key tolong-term corporate success and that culture has five elements:

1. Business Environment,2. Values,3. Heroes (People Who Personify Values),4. Rites And Rituals (Routines of Day-To-Day Corporate Life),5. The Cultural Network (Communication Systems).

The mission statement describes primarily the second of thesecultural factors, corporate values. The strong cultural companiesstudies by Deal and Kennedy all had “a rich and complex systemmust be believable in that the company’s behavior shouldcorrespond to it over both the short and long term. In this way itcan serve as the foundation for the development of respect for andpride in the firm by management, owners, customers, suppliers,and others who interact with it.

Broad-based acceptance of the values represented by mission canlead to three characteristics of firms that accomplish thisacceptance:

1. They stand for something—the way in which business is tobe conducted is widely understood.

2. From the topmost levels of management down through thefirm’s organization structure to the lowest level ofproduction jobs, the values are accepted by all employees.

3. “Employees fees special because of a sense of identity whichdistinguishes the firm from other firms.”

Many examples of firms that have these characteristics as a resultof a finely honed sense of cooperation and value acceptance arepresented by Deal and Kennedy. A few of these are listed here,along with the slogans that have come to represent their valuesystems.

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Dupont: “Better things for better living through chemistry—abelief that product innovation, arising out of chemicalengineering…Sears, Roebuck: “Quality at a good price—the massmerchandiser from Middle America.Dana Corporation: “Productivity Through people—enlistingthe ideas and commitment of employees at every level insupport of Dana’s strategy of competing largely on cost anddependability rather than product differentiation…Chubb Insurance Company: “Underwriting excellence—anoverriding commitment to excellence in a critical function.Price Waterhouse and Company: “Strive for technicalperfection” (in accounting).PepsiCo’s overall mission is to increase the value of ourshareholder’s investment. We do this through sales growth,cost controls and wise investment of resources. We believeour commercial success depends upon offering quality andvalue to our consumers and customers; providing productsthat are safe, wholesome, economically efficient andenvironmentally sound; and providing a fair return to ourinvestors while adhering to the highest standards of integrity.SBI ‘s mission is “To retain the bank’s position as the premierIndian financial services group, with world class standardsand significant global business, committed to excellence incustomer, shareholder and employee satisfaction, and to playa leading role in the expanding and diversifying financialsector, while continuing emphasis on its developmentbanking role.BPL’s service mission is to support the vision of the companybecoming the most customer-oriented company in thecountry, by building a proactive service organization thatcontinuously strives to create customer satisfaction, byinternalizing the best practices of customer relationshipsmanagement.

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Reliance’s mission is to evolve into a significant internationalinformation technology company offering cost-effective,superior quality and commercially viable software servicesand solutions. Reliance will adhere to strong internal valuesystems such as pursuit of excellence, integrity and fairness,and these principles will manifest themselves in all ofReliance’s interactions with its clients, partners andemployees.The Videocon Group is committed to create a better qualityof life for people and furthering the interests of society, bybeing a responsible corporate citizen.

CREATING HAPPINESS

We will bring happiness into every home, offering high qualityconsumer durables at affordable prices, spreading the culture ofconvenience, entertainment and comfort, far and wide.

ACHIEVING PROGRESS

We will pursue innovative technologies in the fields of Electronicsand Energy, create products and services that will improve thequality of life, realize the goals of the world community and protectthe environment.

SUSTAINIG PROGRESS

We will be a source of pride to our business associates by ensuringmutual prosperity and growth through the implementation offorward-looking corporate strategies, aimed at identifyingopportunities and responding intelligently to the dynamics ofchange.

PURSUING EXCELLENCE

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We will provide a conducive environment for enabling ouremployees to develop their potential and make a significant.Contribution to the Group’s success.

Mission typically is not considered a part of a firm’s strategy set. Itreflects the essential preferences of owners and managers for whatthe firm will do. Strategy will accomplish the task of reducingmission to operational terms. As such mission is somewhat apersonal choice of a firm’s dominant group of actors and is aninput to the strategy formulation process. Mission should addressthe basic purpose of the firm, the reasons for which it exists.Statements of mission can be made up of goals and descriptions ofthe means for achieving them. However, mission-related goals areoften qualitative as opposed to quantitative. Some owner groupsprefer to state broad goals as the organization’s purpose and deferto management to set strategy as the way to achieve them.

In some organizations questions about purpose are left solely toowners, whether widely dispersed stockholders acting through aboard of directors, the small group of owners of a closely heldcorporation, or the sole owner of a small business. In these casesmanagers are informed of the owners’ expectations and thesegoals serve as overriding constraints or guidelines on the activitiesand operations of managers. In other firms managers mayparticipate in the process of deciding on purpose, along withowners or their representatives. Managers may eve be called uponto submit basic purpose choices to owners for affirmation or veto.

The importance of a generally understood and accepted notion ofpurpose cannot be overstressed. The sole owner of a $30million-a-year industrial supply firm decided, upon reaching fiftyyears of age, that he no longer saw the purpose of his company asprimarily a generator of cash flow for him and his family. Insteadhe decided its purpose was to generate wealth ultimately throughacquisition by a larger company. The change in purpose from ashort-term cash generator to a well-groomed acquisition target

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necessitated a set of dramatic alterations in the way business wasconducted on a day-to-day basis by key managers. Things that hadbeen previously assigned low priority-market development,product development, asset reinvestment, development of careercommitments by employees and managers, and so on-suddenlybecame essential goals, the achievement of which, over time, wouldserve the new mission.

Although many managers tend to develop qualitative missionstatements, they can be expressed as a set of quantitative goalsstated in financial terms. As such they specify the major financialoutcomes expected by owners and managers from operation of theorganization. Examples include market share, market growth, cashflow, stock performance, and dividend payout.

Sapphire Infotech Ltd:

To play a vital role in bringing the Global Revolution in IT enabledservices with out unidirectional efforts (integrating People, Processand Technology, giving a face-lift to small medium enterprises,while being conducive for the betterment and upliftment of oursociety; and be a leader for world class IT solutions. Suchlike-mindedness and the attitude to be conducive in making theworld a global village, made the minds unidirectional. Minds of theseasoned SAP & ERP (Enterprise Resource Planning) Consultantswith hands on experience in IT, Telecom or related industries tostud the corona of Indian industries with a SAPPHIRE INFOTECH (P)LTD. Was formally launched on the 12th of April, 1999.

Vision 2000 of SBIICM

The Institute plans to introduce specialized courses onwindows-based application software and RDBMS shortly.

Plans have been finalized for completing the “Annexe” building, toaugment training capacity and to meet the long felt requirements

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of larger class rooms, a Conference Hall, an Auditorium and largePC laboratories. This would help to enlarge the activities of theInstitute.

The Institute to become “Think-Tank” for the Bank and itsAssociates. The Institutes to open up eventually its training,software development and Consultancy services to other banks inIndia and for developing countries in South East Asia and Africa.

1.3.3 Goals and objectives:

1. A goal in an expected result. Synonyms for goal include thewords aim, end, and objectives.

2. A qualitative goal is an aspiration toward which effort isdirected; a goal to be reached for but not necessarily grasped,rather than a quantitative level of a certain variable. Thus, afirm might aspire to be a good corporate citizen.

3. A quantitative goal is one intended to be reached, aquantified expected result. There are two types: (1) A hurdlegoal value is a certain level of a quantitative goal that is to beexceeded (synonyms include instrumental and interim goal);(b) a final or overall quantitative goal is a value that shouldbe achieved. A final goal could be established withouthurdles have been reached. Achieving a ten percent increasein total revenue within three years would be a final goal.Hurdle goals would be the targeted revenue increaseintended at the end of Years 1 and 2.

Exhibit : Relationships Among Types of Goals

Goals Qualitative Final Values

Objectives

Aims Quantitative Hurdle (Interim)Values

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Exhibit : Examples of Types of Strategic Goals and TheirDefinitions

Goal Type Definition Examples

Qualitative An aspiration “Good corporate citizenship”“Ethical practices”‘Improved quality of life”“Heightened awareness”

Quantitative(Final Goal)

Numerical aim “6 percent increase in sales”“Raise ROI by percent”

Hurdle goal Minimum to bereached win atimeframe

“Increase sales by percent peryear for there

Andrews suggested that breaking up the system of corporate goalsand the character-determining major (actions) for attainment leadsto narrow and mechanical conceptions of strategic managementand endless logic-chopping. According to the other view, goalsetting and the formulation of means for achieving goals aredistinct activities that call for the stabilization of goals followed byselection of the proper strategic alternatives. The ultimateseparation of goals and strategy results in applying the wordstrategy only to statements about the means for achieving goals. Aset of goals would be established first and then discussions aboutstrategy would focus on deciding the best ways to achieve them.However, this view can result in semantic confusion. If the wordstrategy applies to means, then what word will be used to refer togoals plus the means for achieving them? In practice goals plusmeans are often also called strategy.

Goal set A collection of quantitative and qualitative goals for aparticular organizational level.

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Action plan A description of the means by which activity isexpected to be directed toward striving for specifiedgoals.

Strategy A set of goals and their action plans for a particularstrategy level.

Organizational goals manifested as either qualitative orquantitative values would be tied to action plans that identify theappropriate ways to work toward them. A single-line businesswould thus have a set of goals and related action plans thattogether define how it should compete within its business segment.This set of goals and action plans would be called itsbusiness-level strategy. It could also have strategies, still made upof goals and action plans, for other strategy levels. This point iscovered in the next action.

“Policy” and “tactic” are other terms that have been defined in manydifferent ways. We use policy to refer to standing directions,instructions that vary little with changes in strategy. Thusorganization can have vacation policy, a policy on absenteeism,affirmative action policy, and so on. Policy tends to have fewercompetitive implications than strategy when used in this way.However, in many curricula the management course is calledbusiness policy. A tactic is a short-term action taken bymanagement to adjust to internal or external perturbations. Theyare formulated and implemented within a strategic effort, usuallywith the intention of keeping the organization on its strategic track.

Societal Goals

Societal goals (also called enterprise goals), in organizations thatemploy societal strategy, would occupy the topmost levels of anorganization’s hierarchy of goals. In those that to not develop aseparate societal strategy, these goals would be woven intocorporate-, business-, and functional-level strategies. Societal

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goals mainly address expectations about the firm’s societallegitimacy. Sometimes included in statements called creeds orguiding philosophies, societal goals identify the major ways inwhich the organization will operate so as to stay within the legal,ethical, and cultural constraints placed on it by society. Althoughthey guide the behavior of people at all levels of the organization,they have particular relevance for the decisions of key managersrelated to balancing the claims on the firm of society’s interestgroups and institutions, owners, and managers (which we refer togenerally as the firm’s stakeholders).

Legitimacy goals should address the overall role of the firm in thedaily functioning of society. They should include goals that pertainto the major social issues and legislation of the day. “Someexamples are pollution standards, the firm’s antidiscriminationposition, safety in working conditions, and sexual harassment.

Corporate levels Goals

Corporate-level goals consist of quantitative and qualitativeoutcomes that encompass management’s expectations about theoptimal combination and types of business that make up thecompany. They direct the integration of the particular collection ofbusinesses that makes up the overall organization and they serveas behavior specifications for staff members at the corporate level.

Business-Level Goals

Goals at the business level specify the anticipated performanceresults of each SBU. Their values are intended to balance with thoseof equivalent variables for other SBUs and thereby contribute to theachievement of corporate level goals. For example, acorporate-level final goal of sales growth of 5 percent in one year

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could be achievable partly by acquisition or divestiture moves, butprimarily through the contributions of sales increases by present.SBUs. Therefore, in this case an average cross SBU sales increase of5 percent could satisfy the corporate-level target and one wouldexpect each business-level strategy to contain a sales growthelement that defines that SBUs “contribution” so to speak, to thecorporate level sales growth goal.

Business-level goals integrate the activities of the SBUs functionaldepartments and guide the behavior of business unit managers. Inother words business satrategy defines the role of each functionalarea relative to each other and to resource requirements andavailability. One might say that business-level strategy balancesthe roles of organizational functions within each business unit interms of their contributions toward reaching higher level goals.

Functional-Level Goals

At this level goals are set for each of the functional departmentsinto which each SBU is organized. The point of functional-levelgoals is to defined several aims for each department in such a waythat their achievement would result in achievement ofbusiness-level goals. Thus to reach a business-level target of 5percent sales growth, it might be necessary for the personneldepartment to recruit and screen twenty-five production workersand three more clerical people; for marketing to raise advertisingcosts by a certain amount increase the number of salesrepresentatives by a specified number within a certain region, andhire one more inside salesperson; and so on. These functionalrequirements become, either directly or indirectly, goals of therespective functional departments to e achieved within appropriatetime frames.

Goal Formulation

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Four sets of factors affect the nature of an organization’s collectionof goals: (1) The present goals (and action plans); (2) the set ofstrengths weaknesses, threats, and opportunities that result fromenvironmental and internal analysis; (3) the set of politicalinfluences within which individual compete over goal preferences;and (4) the personal values of the organization’s key managers thatshape their preferences.

Present Goals and Action Plans

The degree of success experienced by an organizaatio in reachingpast or present goals and in implementing related action plansprovides insight into the need for new or modified goals. Failure tomeet the goal of retired Chairman Willard Rockwell, Jr., to build a$1 billion Rockwell International consumer products division ledcompany managers, under the leadership of new chairman and CEORobert Anderson, to adopt a new goal: $1 billion in foreign sales.This change seems to have been precipitated by the widespreadrealization that the previous consumer products goal was not likelyto be achieved.

Direction for goal formulation at any organizational level alsoexists in the strategy of the next highest organizational level.These higher levels’ goals have the effect of partially defining thecontext within which goals are to be set at lower levels. Forexample, when corporate goals are stated in terms of long-termprofitability and sales growth, then business-level goals should beconsistent with them. Of course, more information would berequired about the other factors that affect goal formulation, but atleast corporate goals serve significantly to define the goal choicesavailable for the business level. Similarly, business-level goals canstructure the formulation of goals at the functional level andthereby define the context of functional-level goals. Think for amoment of the difficulties that might be encountered by afunctional department manager, say, the marketing director, in

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trying to manage the department without any idea of whatbusiness-level goals were important to top management.

The Data Set

The contents of an organization’s environmental and internal dataset provide major clues for goal formulation. Threats andopportunities (determined by analysis and forecasts of theorganization’s external circumstances), along with weakness andstrengths (of the organization’s internal state of affairs, in thepresent and future time frames), can be transformed into goal setsat appropriate organizational levels.

At the corporate level, goals are formulated to define the optimalcollection of types of businesses in which the organization isengaged. The firm’s data set can be the primary source ofinformation about what types of businesses would be mostconducive to future success. The internal portion of the data sethighlights problems with existing operations; the external partpoints out merger possibilities as well as types of operations toavoid. Forecasts can identify potential problems with the presentcollections of businesses.

Existing business-level goals can e evaluated against the contentsof the data set as well. Since business-level goals address businessunit performance and competition, such factors as performanceshortcomings, competitive position, latent capabilities, potentialobstacles, and new opportunities can be discovered through theenvironment and internal analysis and their respective parts of theresultant data set.

The data set is also intended to provide major inputs into decisionsabout the appropriateness of functional-level goals. At this levelthe portions of the data set that reflect internal strengths andweaknesses play a critical role in goal setting. One might find, forexample, during financial analysis that the firm’s selling and

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administrative expenses are excessively high as a percentage ofsales. Further analysis might show that sales growth has slowedand that turnover of salespeople is high. Goals could be set for themarketing department that reflects more desirable performancealong these dimensions. Marketing action plans would then bemodified to achieve the new goals.

Goal Formulation Theories

Many explanations have been offered in the management literaturefor how organizational goals are formulated. Mintzberg notes that,during this century, organizational goal formulation theories haveundergone a complete reversal form the “rational man” view (onegoal setter setting a single organizational goal) through thecoalition bargaining view (many goals, many goal setters) to thepolitical arena view no organizational goals, power games amongindividuals).

Some examples of the influential goal formulation theories thathave appeared over the past several decades follow, inchronological order:

Barnard (1938): Organizational goals are formed by a“trickle-up” process in which subordinatesexpectations are adopted by aconsensus-based acceptance process.

Papandreou (1958) A top manager forms the organization’sgoals as a multivariate function of thepreferences of influential actors.

Cyert and March(1963):

Multiple goals emerge from the bargainingamong various coalitions that form out ofthe parrying for control and personal powerby key actors.

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Simon (1964): Goals are constraints on profit maximizationimposed by decision makers boundedrationality.

Granger (1964): Hierachy of gals results from a process ofscreening, filtering, and narrowing broadexpectations to more focused, specificsubgoals in a reasonably logical fashion.

Ansoff (1965) New organization goals are tried outiteratively as means for closing gapsbetween present goals and hoped-forresults.

Allison (1971) (1) Organization process modes-reasonablystable goals emerge as incompatibleconstraints the represent thequasi-resolution of conflict among internaland external interest groups; (2)bureaucratic politics modes – key playersplay” politics to product goals they agreewith as individuals.

Georgiou (1973): Personal goals of individual come and go asorganizational goals according to theshort-term victories of key managers as theyengage in political combat. There are noorganizational goals as such.

Hall (1978) Goals are set according to three processes,the appropriateness of which depends upontwo contingencies, concentration of powerand amount of goal-preference conflict:problem solving – concentrated power, no

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balanced power, preferences in conflict.

MacMillan (1978) Organizational coalition members demandcoalition commitment to personal goals; thecoalition responds by developingcommitment to generalized versions ofindividual members’ goals. Thesegeneralized goals (not the specific goals ofindividuals) become the organization’s goals.

Questions:

1. What are the methods of developing a mission statement?2. Write the vision statement of Infosys and analyze the

same.3. What are the various methods of deciding the goal of

companies?

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LESSON 1.4 STRATEGIC ANALYSIS OF FUNCTIONAL AREAS

1.4.1 LEVELS OF STRATEGY:

There is wide diversity in strategic management literature of levelsattached to the different levels of strategy that may exist in a firm.For example, Thompson and Strickland propose four levels:corporate strategy, business strategy, functional area supportstrategy, and operating-level strategy. They go on to say, “Eachlayer [is] … progressively more detailed to provide strategicguidance of the next level of subordinate managers.” Lorangedefines three levels for a typical divisionalized corporation:Portfolio strategy (corporate level), business strategy (division level),and strategic programs (functional level). He defines the focus ofeach as follows:

1. Portfolio strategy: Developing the desired risk/return balanceamong the businesses of the firm.

2. Business strategy: Source of competitive advantage of aparticular business relatie to its competition.

3. Strategic programs: Bringing to bear functional managers’specialized skills on the development of programs.

He notes that smaller firms may involve only the last two of these,but in any firm there rarely would be more than three. Hofer, et.allist four levels of strategy for business organizations. First, strategyat the societal level is concerned with the definition of a firm’s rolein society. It would specify the nature of corporate governance,political involvement of the firm, and trade-offs nature of corporategovernance, political involvement of the firm, and trade-offssought between economic and social objectives. The secondstrategy level is corporate strategy which addresses (1) the natureof the firm’s business and (2) management of the set of businessesnecessary to achieve its goals. Third, business strategy addresseshow the firm should be positioned and managed so as to compete

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in a given business how the firm should be positioned andmanaged so as to compete in a given business or industry. Finally,functional area strategy is the lowest level of corporate strategy. Itis concerned with their respective functional area environments.Newman and Logain present two levels-business strategy andfunctional policy—for non diversified firms, and a total of three(with the addition of corporate strategy) for diversified firms.Higgins identifies for levels of strategy: societal response strategy(enterprise strategy), mission determination strategy (corporatelevel), primary mission strategy (business level), and missionsupportive strategy (functional level).

He defines their contents as follows:

1. Societal response strategy: how the firm relates to its societalconstituents.

2. Mission determination strategy: the organization’s field ofendeavor.

3. Primary mission strategy: how the organization will achieveits primary mission.

4. Mission supportive strategies: how primary mission strategywill be supported.

Another model proposes five level of strategy but the levels are nottied to organizational structure. Glueck, et al suggest that thelevels of planning activity consist of corporate, sector, sharedresource unit (SRU), natural business unit (NBU), and productmarket unit (PMU). The advantages of this system are (10 itseparates the strategic management process from organizationstructure to a large degree and (2) pushes it father down theorganization than traditional systems do. These characteristicsstem from focusing planning level selection on strategic issues orproblems shared by the organization’s activities rather than on theorganization levels of its business activities.

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Corporate level planning is that which involved identifying trendsand formulating strategy in global, technical, and market arenas,responsibility for which rests with corporate headquarters in mostcases. Sector level planning, where sectors represent national andtechnological boundaries, may involve several SBU’s productcategories, or even product/service-based division of anorganization. Shared resources unit planning calls for thedevelopment of strategic for activities of the business that areshared by SBU’s or the various product-market focuses which thecompany might have.

Natural business units, “…are largely self-contained businesseswith control over the key factors that govern their success in themarketplace-their market position and cost structure”. Finally,product-market unit planning is the lowest level at which planningtakes place and those activities that directly relate the company’soutput to its markets.

There are many other interpretations of the levels of strategy. Theydiffer primarily in terms of the organizational levels to which theyapply. Those discussed above and most of the others have anumber of commonalities. First, the uppermost levels in eachscheme tend to concern the problem of fitting the organization toits environment; lower levels address the problem of integratingfunctional areas in ways consistent with upper-level strategy.Second, the topmost level tends to involve structuring the set ofacquisitions of divisionalized firms and is usually calledcorporate-level strategy. Third, they contain a business or strategicbusiness unit (SBU) level of strategy that applies almost equally to afirm comprised of only one line of business and to the individualsubsidiaries of multibusiness corporations.

Finally, the various schemes include a functional level of strategythat represents the ways in which functional departments areexpected to respond to business-level and, in turn, corporate-levelgoals and action plans.

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During the mid-1980s some authors began to include the fourthlevel: enterprise or socictal goals and action plans. Societal strategywas intended to capture the essential ways in which the firm wasexpected to respond to goals related to the major social issuesconfronting it.

Interpreted fundamentally, then, there are four primary levels ofstrategy: societal-level, corporate-level, business-level, andfunctional-level. The concerns of societal, corporate, andbusiness-level strategy are clearly cross-functional. That is, theycontain implications for each of a firm’s functional areas (althoughmore distantly removed in the case of societal-and corporate-levelstrategy), whatever they may be and regardless of the type of firm.By contrast, functional area strategies are more operationallyfocused than the others. The process of determining how eachfunctional area should be managed is a more specialized problem,defined largely by the practice and theory applicable to eachfunctional (or operational) area. That is, the content of marketingstrategy is the subject of marketing texts and courses, financestrategy can be found in finance texts and courses, personalstrategy in personal texts and courses, and so on.

1.4.2 Functional-Level Strategy:

In contrast with the other levels of strategy, functional strategiesserve as guidelines for the employees of each of the firm’ssubdivisions. Which ones of these segments or functional areas areincluded in a firm’s functional strategy set is itself a matter ofstrategy. For example, whether to have an R & D department ornot in the first place is a strategic decision. Functional goals andaction plans are developed for each of he functional parts of thefirm to guide the behavior of people in a way that would put theother strategies into motion. If part of a firm’s business-levelstrategy were a target of a 10 percent increase in sales to bebrought about by market penetration, for example, marketing

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strategy might include a change in compensation policy forsalespersons and a specified increase in the advertising budget. Inthat way marketing strategy would provide some detail about howthe marketing aspects of the market penetration action plan wouldbe implemented. Similarly, financial strategy would consist of a setof guidelines on how the financial elements of the firm would beput into effect. Personal strategy, production strategy, research anddevelopment strategy, and appropriate other functional strategyareas would do the same.

1.4.3 Process of Internal Analysis

There are two fundamental ways to conduct an internal analysis:vertical end horizontal. For the vertical approach, strengths andweaknesses are identified at each organizational level. Thehorizontal analysis corresponds to the functional areas of the SBUs.Strength and weaknesses are identified for each function. We preferthe horizontal approach because it seems to be more universallyapplicable. Analysis can be focused on functional departments, orwhatever basis of departmentalization has been used in a particularorganization.

The major dimensions of each area are outlined and discussed inthe subsections that follow. They are intended as beginning pointsfor analysis to formulate their own evaluation systems for eachcase study or organization analyzed. Stevenson found thatmanagers seem to use three types of criteria in identifyingstrengths and weaknesses: historical, competitive, and normative.Analyzing functional areas by historical criteria means comparingpresent values with their historical counterparts and identifyingstrength and weaknesses on the basis of those comparisons.Competitive comparisons involve assessing similarities anddissimilarities with successful competitors and finding strengthsand weaknesses accordingly. Similarly normative comparisons arethose where present characteristics are compared with ideal valuesas perceived by the analyst or an expert opinion. In practice the

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process of identifying strengths and weaknesses can be one of themost educational top managers can have especially enlighteningare the enumeration and discussion of weaknesses. Sinceresponsibility for the performance of SBUs and functional oftenrests with single manager, identification of weaknesses at theselevels can be painful and embarrassing for these people. Thesediscussions must be handled carefully to prevent alienation and tobring about constructive solutions to whatever problems arerevealed. However, the analyst must make sure that all weaknessesare identified, even though some feeling may be hurt.

The process of internal analysis involves the following steps:

1. Perform a complete financial analysis.2. Comprehensively identify the major functional areas that

make up SBU operations.3. Enumerate the critical operational factors of each

functional area.4. Identify both qualitative and quantitative variables to

describe performance of the SBU on each operationalfactors.

5. Conduct research to assign either qualitative orquantitative values to the variables identified in (4).

6. Organize findings by function according to whether theyrepresent strengths or weaknesses.

1.4.4 Identification of Major Functional Areas:

Whatever organization is analyzed, the analyst should select acomprehensive set of categories that define the firm’s operations.These categories, or functional areas, can vary from oneorganization to another, and depend upon whether the analyst isconducting a vertical or a horizontal analysis. We have selected fordiscussion of horizontal analysis the common functional areas ofmarketing, personnel, production, and R&D, along withorganization structure, present and past strategies, and external

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relations (in addition to finance, which was discussed earlier).Although most organizations will have these functions in operation,the analyst should not restrict the internal analysis to them. Theparticular set of functions for which data are gathered should betailored to the firm in question. The key characteristic of the set offunctions selected must be comprehensiveness. Analysis shouldmake sure that all pertinent are covered.

Operational Factors of Each Functional Area

After identifying the appropriate functional areas to study in theinternal analysis, the next step is to decide what aspects of eachone to analyze. By the time most students take a course in strategicmanagement, they have completed course in each functional areaand topics related to them. Those courses and the texts used inthem are the best sources of evaluative criteria for the functions oforganizations.

Marketing: Consistent with marketing convention, this function isanalyzed by examining the operqating characteristics of theorganizations’ products/services, price, promotion, distribution,and new product development systems. Interest is focused on allaspects of each of these systems that have not already beenidentifies as part of the financial analysis. Examples of checkpointsfor each factor are as follows:

1. Products/services

a. Market shareb. Penetrationc. Quality leveld. Market sizee. Market expansion rate

2. Price

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a. Relative position (leader or follower)b. Imagec. Relationships to gross profit margin

3. Promotion

a. Effectivenessb. Appropriateness of emphasesc. Budget as percent of salesd. Is return measurable, acceptable?

4. Distribution

a. Delivery recordb. Are other methods more appropriate?c. Unfilled ordersd. Costs

5. New product development

a. New product introduction rateb. Sources of ideas effective?c. Extent of market feedbackd. Success rate

The problem is not to identify simply what the organization’smarketing department is doing, but instead what it is doingparticularly well or poorly.

Personnel and Union Relations: The overall purpose of hepersonnel function is to manage the relationship betweenemployees and the organization. Therefore, internal analysis of thepersonnel function is an assessment of the strengths andweaknesses of that relationship. This function can be analyzed byexamining the following factors and questions or others tailored tothe organization:

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1. Job analysis factors

a. Are necessary skills present?b. Are all necessary jobs present?c. Are selection and placement systems effective?d. Recruiting capabilitye. Training effectiveness

2. Job evaluation factors

a. Pay scales appropriate?b. Image of pay scale within labor marketc. Do pay differential reflect job content differences?d. Adequacy of benefits

3. Turnover/absenteeism4. Turnover rate5. Absenteeism rate6. Attitude of employees, managers7. Seasonality a factor?8. Performance evaluation

a. Reliabilityb. Validity

9. Union-management relations

a. Unions representing employeesb. Bargaining positionsc. Quality of relationsd. Negotiation schedule

Production: The production or manufacturing area’s strengths andweakness relate to the origination’s ability to produce itsproducts/services at the desire quality level on time at the

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planned-for-costs. Examples of evaluative factors for productionare the following:

1. Facilities and equipment

a. Capacity levelb. Per-unit costs of manufacturingc. Obsolescence; today, futured. Level of technology appliede. Process optimalityf. Replacement, maintenance

2. Quality level

a. Defective unitsb. Inspection costsc. Remanufacturing costsd. Competitive positione. Consistency

3. Inventory

a. Level, turnoverb. Costs and trendsc. Is inventory rationally maintained?

4. Procurement

a. Sourcesb. Quality of inputsc. Constant lead times

5. Planning, scheduling

a. Formal systemb. Is demand smoothed?

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c. Excessive overtime charges?d. Productivity

For most service organizations, the process of providing the servicecan be roughly equated to the production of a product. Costs ofproviding the service, as well as quality of the service delivered, canbe the focus of analysis. Wheelwright suggests evaluatingproduction strategy by analyzing its consistency and emphasis.First, the analyst should evaluate the consistency of productionstrategy with business strategy, other functional strategies, andwith the overall business environment. The categories withinproduction strategy itself should exhibit a high level of consistencyas well. Then, the extent to which production strategy is focusedon factors of success should be evaluated. This involves makingsure that priorities among production activities are appropriate tobusiness strategy, that business level opportunities have beenaddressed, and that production strategy is communicated,understood, and integrated with other functional strategymanagers.

Research and Development: Research and development (R&D)provides technical analysis and support to other departments, anddesigns products or processes to meet market needs and therebygenerate a profit. Operation of R&D must strike a balance betweenpracticality and creativity in order to contribute successfully toprofit goals. Overemphasis on practical matters can impair futureprofitability because few innovations will be generated.Overemphasis on creativity could result in generation of fewmarketable product ideas while researchers explore the frontiers oftheir scientific disciplines. The correct balance between creativityand practicality for a particular firm is a strategic issue that cannotbe decided absolutely. That is, this balance is a function of theextent to which the organization required either innovation ormarket emphasis and that issue is a function of business-levelgoals and action plans.

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Conducting an internal analysis of the R&D function involvesidentifying strengths and weaknesses in R&D activities such as thefollowing:

1. Demand for R&D

a. Is demand for R&D services stable?b. Is R&D funding stable?c. Is R&D funding vulnerable to profit variations?

2. Facilities and equipment

a. Are facilities and equipment state-of-the-art?b. Is obsolete equipment expendable?c. Is space a problem?

3. Market and production inputs

a. Does market information get fed into the R&D process?b. Does production information influence the R&Dprocess?

c. Are marketing and production influences balanced?

4. Planning and scheduling

a. Are jobs planned and scheduled?b. Are costs effectively monitored?c. Are human resource needs planned?

5. Is the level of uncertainty associated with the type of R&Dactivity is which the organization is involved appropriate forthe intended level of risk?

Organization: Organization structure must support strategies andfacilitate their successful implementation. To do so, structure mustprevent a certain set of problems from materializing. These

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problems are the characteristics that are searched for to determinethe appropriateness of a change in structure. Changing structure isrisky. Therefore, it should not e tampered with unless there iseither a problem present that must be corrected or one that canreasonably be expected to develop if a change is not made. Ineither case, though, organization structure should be changes onlybecause of specific problems. That is, there is no absolutely beststructure, but only the structure that minimizesorganization-related problems.

Some of the criteria that can be used to analyze organizationstructure are as follows:

1. Does structure make sense?

a. Is it confusing?b. Are there too many levels?c. Are there horizontal communication channels?d. Does it expedite communication?e. Are the forms of organization used appropriate?

2. Accountability and control

a. Does structure fix responsibility?b. Are there single functions assigned to more than oneperson?

c. Are there too many committees?

Present strategies

Whether present strategies are stated explicitly or must be inferredfrom behavior of the organization, the goals and action planscurrently applicable must e identified and analyzed. The idea is todetermine which strategies are working (that is, which action plansare being implemented in such a way that their associated goalsare being met) and which ones are not. Information about the

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relative success of current strategy can the e fed into the process offormulating and implementing new strategies. In this way problemsassociated with existing strategies can e corrected by formulatingmodification or replacements for them and effective strategies cane improved upon, retained as is, or extended so what strategicsuccess is facilitated.

The following steps can be followed to evaluate current strategy atan of the four levels of strategy:

1. Select strategy levels for analysis.2. Identify present goals and action plans at each level.3. Determine extent to which short- and long-term goals haveor have not been met.

4. determine which action plans have and have not beeneffective.

Of course, a strategy successfully carried out constituted a positiveattribute of the firm, and one unsuccessfully implemented is aproblem to be deal with. For an internal analysis, however, thepoint is to identify strategies that are particularly effective – theybecome strengths. Examples include McDonald’s consistency,Coca-Cola’s distribution strategy, Miller Lite’s marketing strategy,and Nissan’s production strategy. Weaknesses are strategies thathave been especially unsuccessful in their operation.

Questions:

1. Why functional area strategies are considered crucial?2. What are the reasons for the strategies to go by functionalareas?

3. Give examples of Indian companies soley practicing based onfunctional areas?

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LESSON 1.5 ANALYZING CORPORATE CAPABILITIES

1.5.1 Introduction:

A great deal must be learned about an organization so thatstrategy formulation decisions can be based upon appropriateinformation. It almost goes without saying that strategists mustunderstand all there is to know about the internal operations of anorganization before strategy can e effectively formulated andimplemented. The external influences acting on the firm also mustbe analyzed, documented, and understood to mange the strategyprocess effectively. This chapter focuses on conducting bothexternal and internal analysis for the purpose of generatinginformation for strategy formulation.

An organization’s environment consists of two parts: The industrywithin which it operates (for multibusiness firms, the industry isusually considered the activity’ in which the firm generates themajority of its revenue), and other environmentaldimensions—economic, political/legal, social and technological.The section of this chapter devoted to internal analysis firstaddresses financial analysis—the process of learning about thefinancial performance of the firm or organization. Very oftenfinancial analysis will bring to light several financial strengths andweakness that are indicative of strategic or operating capabilitiesand problems within the various strategy levels and withinfunctional areas.

Financial analysis is typically followed by internal diagnosis offunctional areas. This process identifies strengths and weaknesseswithin such areas as marketing, personnel, research anddevelopment, and others.

Together these four analytical activities-environmental, industry,and financial analysis and internal diagnosis of functionalareas—are undertaken to generate a data set consisting of

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strengths, weaknesses, threats, and opportunities thatcomprehensively descries the internal and external characteristicsof the organization. This information is then used as input to thestrategy formulation process. It is factored with data about paststrategies, mission, corporate culture, and managers’ values, andso on to evaluate the success or failure of present strategies. As aresult present strategies can be modified, left as they are orreplaced as necessary in a particular situation.

The key to effective strategic management is to make majormanagerial decisions that shape actions by the firm that willcorrespond positively with the context within which those actionsultimately take place. On the other hand, the action context isdictated to a great degree by conditions external to the firm. Theseconditions constitute the firm’s operating “environment.” To someextent the firm can shape the overall environment to its advantage.Henry Ford’s introduction of mass production of automobilesstimulated the U.S. economy in a manner that invigoratedconsumer markets of his products. Genentech, the recombinantDNA research firm, made biotechnical advances that had profoundimpacts, not just on Genentech’s operating circumstances, but onthe future of humankind as well. Nonetheless, few firms enjoy ascale of impact that allows major shaping of the overall climate inwhich they operate, particularly over the long run. Insteadwe4ll-managed business enterprises adapt to environmentalchange so that they can take advantage of opportunities that ariseand minimize the otherwise adverse impacts of environmentalthreats. This involves assessment of present environmentalcircumstances (for reaction) and the forecasting of futureconditions (for proaction).

A data set has both present and future time frames as internal andexternal, positive and negative factors are forecast into futureperiods. Environmental and industry analysis involves filling theright-hand sectors of the data set with information pertiment to aparticular firm.

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Analysis of the internal operations of the organization results in acollection of strength and weaknesses that would fill the left-handcells of the data set model.

Environmental conditions affect the entire strategic managementprocess. Management’s perceptions of present and futureoperating environments and internal strengths and weaknessesprovide inputs to goal and actions plan choices. They can alsoaffect the manner in which implementation and internalcircumstances will dictate the effectiveness of strategies as they areimplemented (including alternation in the environment itself).

Both environmental and industry analysis procedures consist offour interrelated processes:

1. Developing an assessment taxonomy to outline majorenvironmental dimensions.

3. Defining environmental boundaries (the “relevancy envelope”)5. Monitoring and forecasting change in key variables.7. Assessing potential impacts on the firm (or industry) in termsof whether they are treats of opportunities.

1.5.2 Formal Versus Informal Scanning:

Sensing the pulse of environmental threats and opportunities is anatural and conditions process in business planning. In manyorganizations it is done on an informal basis. The construction firmexecutive who learns from a golfing colleague of a request for bidson a major construction project is gaining information that couldaffect the performance of his firm—information that would be notmore valuable had it been acquired through more systematicmeans. Discovering changes in tax statues by perusing the WallStreet Journal is not less important than learning about themthrough a well-established monitoring system within the firm’s taxaccounting office. Indeed, the talent for acquiring valuable

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information through informal means often marks the successfulentrepreneur and manager.

To rely totally on informal means, however, increasingly exposesthe firms to missed opportunities and unforeseen threats. Areined-out golf game or an overlooked column in the Wall StreetJournal can have profound implications, even if the implicationthemselves go unnoticed. Therefore, a systematic approach toenvironmental assessment is important for the management ofuncertainty and risk.

One formal approach to generating data about environmentalconditions is survey research. The use of both original andcontracted survey research for purposes of evaluating the presentcorporate environment offers a lot of promise for strategists. Foranalysis of external concern in the present, survey research is away to accurately identify the attitudes of selected populationgroups toward the company. In fact, virtually any externalconstituency’s attitudes toward the organization can be assessedthrough survey research methods.

The dimensions of environment can be generally classifies by set ofkey factors that describe the economic, political/legal,technological, and social surroundings. These, in turn, can beoverlaid by the various constituents of the firm, includingshareholders, customers, competitors, suppliers, employees, andthe general public (Exhibit 2-3). To assess environmentalconditions, concern is focused on opportunities and threats thatexist, or may arise, through impacts on and by the firm’sconstituents.

Key Economic Variables

Firms that anticipate economic change and identify the constituentsthrough which that change will be applied; can better adapt goalsand action plans. By the late-1990s, major oil producing firms has

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shifted their source of supply form middle-eastern countries toVenezuela because of uncertainties about the political andeconomic environment of the Middle East. Shareholderexpectations of financial return are dictated in part by alternativeinvestments and their associated return and risks. Interest rates,tax policies, shareholder incomes, availability of funds formargin-purchased equity investments, and expectations of futureeconomic circumstances will shape changes in equity investorprofiles and/or the financial performance expectations of the firm’sowners. In the early 1980s, high returns on money marketinstruments (representing corporate and government debt) led tomassive shifts from equity holding s by private investors to thoseshorter-term debt instruments. In many cases this disturbedlong-standing shareholder composites (making more room forinstitutional investors to those shorter-term debt instruments. Inmany cases this described long-standing shareholder composites(making more room for institutional investors, for example) andpressured management to focus more closely on generating highershort-term returns. Personal income, savings, employment, andprice-level trends can have dramatic effects on the attractivenessof a firm’s products or services in output markets—not only finalmarkets, but intermediate markets as well. In efforts to reducecosts during inflationary periods, automotive manufactures duringhe 1980’s reduced their reliance on outside suppliers forautomobile components. This, in turn, led many componentmanufactures to retrench or redirect their marketing effortselsewhere (e.g. replacement parts).

Similarly, total sectoral outputs, movements in private-sectorcapital replacement and expansion, government spending, and theallocation of the consumer dollar can have dramatic impactsbetween and within industrial sectors. Each can be set offmacroeconomic changes well outside the control of the firm, yetmay be buffered by appropriate strategic action. Twenty years ofinflation, for example, increased consumer use of $50 and $100bills in retain trade. Among other implications, this meant that

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many retailers had to replace cash drawers, or entire cash registers,to accommodate these denominations. More significantly, thecollapse of he Soviet Union has led to decreased governmentspending in the U.S. on defense items. Many thousands of primedefense contractors and their subcontractors spent theearly-1990s trying to develop new strategies based onnon-military products.

Economic conditions faced by competitors can play a large part inshaping a firm’s strategies and policies. The movement ofmanufactures out of the “snow belt” to areas of the country withlower energy costs could provide decisive competitive advantagesvis-avis those who remain. Transportation costs, on the other hand,could reduce those savings. Competitors selling to diverse marketsmight realize less volatility in their capital bases and abilities tocompete across economic cycles than might a firm with a narrowproduct/market scope. In any case it is important to recognize thatthe economic conditions faced by the competition may be differentin form and substance from those faced by the target firm.

The capacity, reliability, and, in some case, the survivability ofsuppliers are largely a function of their economic climate. Bothdebt and equity capital markets often realize significant swings asa result of overall economic conditions. The firm accessing thesemarkets experiences the repercussions. Federal discount rates andchange in reserve requirements have both short-term andlong-term implications in primary capital markets, and often affectthe private sector borrower through secondary markets. Theavailable supply of goods and services can be affected by theoverall economic health of suppliers, including their productivity,alternative markets, and cost structures. To the extent that thetarget firm represents a major market for a supplier. To the extentthat the target firm represents a major market for a supplier, thatfirm becomes a significant factor in the economic climate thesupplier experiences. The choice of multiple versus singularsources of supply might be dictated by assessments of suppliers’

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economic bases as well as by the degree of control the buying firmcan maintain over them. Though could also provide buyingleverage for the firm or represent new opportunities for backwardintegration.

The economic climate of the firm is also manifested throughemployees. Wage and benefit escalations are often as much afunction of he overall econimci circumstances employees face asthey are unilateral policy set forth by employers. Rising consumerprices are usually translated into expectations and/or demands forincreased compensation. Shifts in employment status, includingsocietal and regional unemployment levels, can increase ordecrease these pressures. Economic conditions usually affectemployees unevenly, thus requiring creative policy adaptation.Depression of gousing markets in the early 1980s’ for example, leda number of large employers to buy homes from transferredexecutives, who were unable to sell them at reasonable prices, if atall. This inadvertently put a number of these firms into the realestate “business” (albeit on a relatively small scale), typing upcapital and effort.

Clearly, economic conditions have wide-reaching effects on thegeneral public. These can be as abstract as an alteration in highbirth rate rends or as direct as changes in personal income.Conversely, public expectations and behavior substantiallydetermine the health or inadequacy of the economy, throughearning, spending, and saving patterns. In any case the generalpublic is so interwined in the mechanics and psychology of a firm’seconomic climate that movement by one can have dramaticimplications for the other. Kinder-Care Learning Centers, Inc., achain of child care centers, both profited by the economic (andsocial) trend toward working mothers and contributed to the trendby providing necessary child care at reasonable cost. The overallimpact was synergistic.

Finally, in assessing he economic dimension of a firm’s

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environment, it is important to recognize the interrelated nature ofthe participants. The multiplier effect in macroeconomics has itsmicro counterpart. Raw data on prices, wages, savings, governmentspending, manufacturers’ shipments, and the like are valuable inthemselves but represent only the front line of a trulycomprehensive analysis.

Key Political/Legal Variables

Business firms, like people, are touched directly and indirectly bypolitical/legal influences at all levels of government (federal, state,and local). These influences run the alphabetic gamut fromantitrust to zoning. The scale of facteral intervention in business ismatched only by its turbulence. The Center for the Study ofAmerican Business concluded that fedral regulation of business“cost the American economy more than $100 billion on 1980.Approximately $5 billion represented the administrative costs ofthe major regulatory agencies, and the balance, compliance costs.”

In addition to serving as regulatory bodies, governments alsorepresent a major factor in the private sector through fiscal policy.Taxation and government spending can represent bothopportunities and threats, depending upon the nature, timing, andposition of the impacted enterprise. And, of course, fiscal policycan have dramatic impacts on the overall economic climate of thefirm.

Shareholders are affected by governments in a variety of ways.Changes in tax structures can affect tax exposure on corporatepayouts when treatments of capital recovery versus earningsdistributions are considered. To the extent that corporationsthemselves are shareholders, intercorporate shareholding can becan affect the “tradability” of shares as well as dictate corporatedisclosures. Laws dealing with pension funds and other forms ofinstitutional investing can exhilarate or impair changes in investorprofiles. Incorporation laws often constrain flexibility in capital

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restructuring. All of these impositions, in turn, requirements.Governments-mandated sales prohibitions (e.g., on certainfirearms) can limit markets. Similarly, export restrictions (nationaland interstate can impose market constraints. Conversely, publicpolicies targeting industries for rejuvenation or expansion canopen up a host of market opportunities (such as trade-adjustmentprograms in energy and steel). Social legislation (e.g.,environmental protection, health, consumer protection) can createmarkets for new classes of products and services as well as limitthose where noncompliance exists.

Politics and law are influenced by, and have an impact on,competitors. Antitrust can sustain or impair industry structures andthereby affect the nature of present and future competition. Importrestriction can limit foreign competitions. Patent laws providecompetitive protection for patent holders. Governments themselvescan be suppliers (e.g., mineral rights). And, of course the viabilityof suppliers as a whole can be affected by all forms ofpolitical/legal influences. During mid-1993, hospitaladministrators in the state of maine estimated that they were abouta 20 percent vacancy for a large number of facilities. Retrenchmentbecome necessary to survival for a large number of facilities. Themaine legisilature asset-sharing among institutions. This minorlegal change alone may save countless millions of dollars in miane’s health care industry by eliminating unnecessary duplication ofequipment purchases and operations. Cooperation among hospitalis no longer an antitrust violation. Similarly, state legislaturesadopting mandatory automobile insurance laws have had dramaticaffects on their states’ insurance industries.

Protection of employees is clearly a major matter in any firm. Wagelaws, labor statutes, equal employment opportunity, accupationalsafety and health, employee privacy,and pension funds controls allrepresent areas of strategy concern. Further the public sectorcompetes with the private sector for employees. through support ofeducation and training programs, the public sector also represents

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a source of labor.

Finally,the political/legal climate is both a function and adeterminant of public sentiments. Federal regulatory reform(including deregulation ) is a prime example. Public expectations ofbusiness behavior can cause, and be caused by, shifts in partitionpolitics, which in turn can affect the overcall socioeconomic climatein which private sector enterprises operate. Expansionary andtechnologically aggressive moods on the part of the general publichave their counterparts in business and industry, though they neednot always be similarly timed (wall street, the public, andWashington are occasionally out of phase in this regard ).

Assessing and forecasting the political/legal environmentrequire creativity and sensitivity to industry-specific matters. Unlikethe economic environment, the political/legal environment requireslargely “soft” calculus where numerical relationships andextrapolations are often unavailable or inappropriate.

Key Technological Variables

Electronics, bioengineering, chemicals, energy, medicine, andspace are but a few of the fields in which major technologicalchange have opened new areas to private enterprise. In some casesentire industries have emerged seemingly overnight (such asgenetic engineering), bringing with them new opportunities, andnew threats, in the marketplace. In other cases technologicalchanges within industries have brought new forms of productcompetition (e.g. micro technologies in electronics) have led todifferent competitive advantages in production costs and productquality. In all instances the firm subject to technologicalobsolescence or intent on maintaining some form of technologicalleadership must stay abreast of technological innovation, and tothe extent possible, forecast future technological change and itspotential for acceptance. That Timex vastly underestimated marketacceptance of the digital watch early in its life cycle is but one of

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many instances of technological displacement having adverseeffects on those caught unaware.

Technological change has had implications for shareholders,primarily through communications and information processing.High-speed, computer-based market reports are reachingincreasingly larger proportions of stock market participants.On-line office and in-the-home displays mean quicker reactiontime in market “plays,” and the proliferation of FAX machines andworldwide e-mail systems make round-the-clock real-timecommunications commonplace.

New products and process resulting from technological innovationcan result in redefinition of customer bases or customer demands.The design of new, relatively lightweight diesel engines opened upa host of opportunities in the passenger-car industry.Computer-aided design and computer-aided manufacturing(CAD/CAM) have led to the expectation of shorter lead times andmuch closer tolerances in many industrial and consumer productsindustries (e.g., aerospace and automobiles). The homeinformation revolution not only may expand markets for consumerproduct retailers, but may well lead to better informed, morediscerning retail customer.

So too the nature of competition can be redefined as technologicaladvances unfold. In the oil-well wire-line (or “logging”) industry,new techniques sallow in-the-well sensing of critical geophysicalcharacteristics (temperatures, pressures, etc.) while drilling gear isin place. Older technologies require expensive andtime-consuming removeal of the gear before these measurementscan be made. Thus those firms with access to the new technologyhave a marked, competitive advantage. Price is no longer asignificant factor when the competition for business is betweenthose with and those without the technology.

In acquiring the advantages of new technology, a firm might rely

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heavily on its suppliers. Manufacturers may turn to equipmentsuppliers for the latest in robotics, or food processors topharmaceutical or chemical firms for the latest in preservatives. Ineach case technological advantage is passed through theproduction chain, with competitive differentials possible at eachstage.

Sources of supply can also be redefined with technologicalinnovation. Fiber optics, for example, may well displace metal wireas a primary medium in telecommunications. Telecommunicationsfirms thus would turn to the glass industry instead of the wireindustry for this critical material.

Employees continually experience the impact of technology byvirtue of changes in requisite skills and job assignments.Automation has led to the conversion of hand labor to higher skillsneeded in machine design, operation, and maintenance. Even workroutines are affected. As telecommunicating attracts ever-greaterinterest, more and more types of work may be accomplished moreeffectively and efficiently away from the traditional workplace (athome or at local offices).

Finally, technological change looms large in the overall picture ofpublic experiences and expectations. Dissatisfaction withtechnological lags in the steel industry led to governmentinvestigations. Fear about runaway advances in bioengineeringhave resulted in self-imposed restring among firms involved.Expectations of technological solutions to serious socioeconomicproblems (e.g., energy may have implication for public policy andfor strategic adaptations within affected industries. And of courseeveryday life is changed permanently by technology. The spread ofAutomatic Teller Machines in banking has dramatically changed ourbanking habits. Not many people under-thirty remember thepre-ATM day when consumer had difficulty accessing their cash onweekends because the banks were closed. The time we savepreparing food by microwave oven we now lose by watching

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video-taped movies at home!

Few firms are left untouched by technological change, althoughsome may be more severely or rapidly affected than others. To theextent that technological innovation is a key factor of success in agiven industry, it must be monitored and forecast aggressively. Inal cases at least a general sensitivity to the technologicalenvironment is a primary component of successful strategicplanning.

Envoronmentsl boundaries can be at least generally established byexamining the firm’s strategic postures regarding:

1. Geographic diversity3. Product/market scope5. Sources of supply7. Sources of capital9. Technology/innovation11.Regulatory vulnerability13.Return horizon on fixed commitments15.Overall flexibility

The depth and breadth of environmental scanning also areconstrained by available resources. Larger firms can often makesubstantial resource commitments within planning units to conductformalized scans on a continual basis. Smaller enterprises, however,rarely can make such communications and must rely onintermittent or more closely focused analysis.

FORECASTING

In many cases the environmental forecaster needs in make multipleforecast so that contingency goals and action plans can bedeveloped. For example, a single-point forecast of interest ratesone year hence may be a dangerous premise upon which to baseon expansion strategy. Instead well reasoned multiple forecasts of

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interest rates can lead to contingency expansion strategies, one ofwhich could be implemented as certain economic conditions unfold.

Forecasts can be made in the context of reasonable ranges. Herethe analyst is less concerned with anticipation of precisely what thefuture will bring useful when the forecasting horizon is moredistant. For example, one might predict a decrease in federaldefense spending in the range of 5-10 percent per year over thenext five years or continued Japanese investment in U.S. industry,but at a level not to exceed that of, say, 1989. The generaldirection of change is addressed within the confines of anticipatedlimits.

Forecasting Techniques

Though a multitude of forecasting techniques might be catalogued,only a few have received recognition in strategic management circle.These techniques can often be used in conjunction with each otherto identify opportunities and threats.

Trend extrapolation is probably the most widely used. Most simplyput, this involves picking a tracking factor or environmentalvariable, noting its trend (statistically or otherwise), and extendingthat trend into the future. Lead and lag correlates often are used inthe process. Linear and nonlinear statistical models and techniquescan be used when hard numerical data exist. This normally involvesline fitting to historical data, and extending the line into futureperiods. Most spreadsheet programs and some operating systemshave easy-to-use trend line extrapolation routines build into them.Of course, more sophisticated packages like SPSS (StatisticalPackage for the Social Sciences) and SAS (Statistical AnalysisSoftware), installed on most computer mainframe systems and alsoavailable in microcomputer versions, allow detailed trend lineanalysis.

As with other forecasting techniques, the validity and reliability of

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trend extrapolation must be carefully evaluated in each application.Parameters must be appropriately selected, and intrinsic orenvironmental constraints identified. If this is not done, incorrectforecasts can result – extrapolating the growth of a young blade ofgrass could easily yield a tree.

Forecasting by analogy is another widely used technique, althoughit is not a formal forecasting method. It involves identification ofprecursor or concurrent events and simple recognition of therelationship. For example, one might have been able to forecast adecline in public interest in the Space Shuttle program after thefirst launch since there was a similar decline reaction to Columbus’unspectacular second voyage to the New World. In this case theforecaster is really examining series of analogous (though notidentical) events. Because forecasting by analogy is used wherehistorical data are inadequate for the more formal trendextrapolation, its validity and reliability are open to challenge.

Delphi represents yet another forecasting procedure. Developed bythe Rand Corporation, it basically involves the use of expertopinion through anonymous, miterative, controlled feedbackamong a group of participants (the expert panel). Normally thepanel is polled bgy questionnaires in a search for opinions onreasonably well-defined issues. Each member responds with aforecast and reasons for it. These responses are then satisticallycompiled and fed back anonymously to al member fo the panel.This routine continues through subsequent iterations as theinformation is reprocessed by the experts and new forecasts aregenerated. Ideally the composite results will move toward aconsensus. Though this technique is employed fairly widely inpublic and private sector planning, it would be of limited use to thestudent case analyst.

Simulations and econometric models are designed as numericalinterpretations of real-world systems (e.g., national economies,ecologies, production systems). They involve the estimation of

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theoretical and empirically based relationships, which, when takentogether interact quantitatively to produce forecast outcomes.Computers are normally use to make the calculations.

A particular advantage of these techniques is the ability toperformance sensitivity analysis. Here the analyst changesassumptions or estimation within the model to generate varyingoutcomes. For example, in a dynamic population forecasting model,one might wish to assess the impact of changes in personal incomeon population mobility. By varying the income variables in themodel, the analyst examines this impact on whatever mobilityvariables the model contains, thus assessing their sensitivity toincome changes. In doing so the analyst is able to evaluate themodel itself, as well as gain some understanding of contingencyoutcomes.

Cross-impact analysis is a forecasting technique designed toassess the interactions among future environmental conditions.The analyst begins by assuming that a set of future environmentalcircumstances will come true (e.g., four new industry entrants, eachholding a 5 percent market share within six years). Through theuse of matrix analysis, the analyst then attempts to assess theimpact of these circumstances on the possibility and timing ofothers (such as price competition). If nothing else, the analyst isable to expose forecasting inconsistencies and to clarify underlyingassumptions in the forecasts themselves.

Finally, scanning and monitoring are forecasting methods insofaras they involve future thinking. The scan is the equivalent of a360-degree radar sweep, but monitoring is the choice for specificenvironmental variables or factors that are tracked over time. Thelatter marely helps refine the make the gathering and processing ofenvironmental information more efficient. For example, anenvironmental scan may identify a somewhat subtle shift in thepackaging industry toward paper containers for liquid consumerproducts. A firm interested in this matter might then choose to

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monitor industry shipments in that product category closely, andultimately generate a forecast of future volume. The forecast couldinvolve any of the other techniques.

1.5.3 Industry Analysis

Industry analysis complements analyses of the other dimensions ofa firm’s environment. It focuses on the industries in which the firmcompetes. The breadth and depth of industry analysis and theboundaries for information gathering are defined by theseindustries. Thus industry analysis involves the same processes asthose identified earlier for environmental analysis, except that itlogically must be preceded by identification of the appropriateindustries for analysis along with descriptions of the variouscharacteristics of those industries.

Industry analysis is relevant in any of these situations:

1. The firm’s strategy defines the business in terms of specificindustries.

3. The firm is facing new forms of extra-industry competition.5. The firm is contemplating entry into a new industry.

An industry perspective is also useful for the student case analystin that it provides the basis for gaining familiarity with the products,competition, resource requirements, and constraints peculiar to aline of business.

The industry perspective must be use cautiously since an individualfirms or business unit can hardly be considered completelyprotected from direct extra industry, influences. For example,relaxation in occupational safety and health standards for anindustry may come at the same time that an individual firm issingled out for stricter compliance enforcement. The analyst,therefore, is cautioned to assess direct environmental influences aswell as the portion of the environment that affects overall industry

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conditions. Michael E. Proter developed an assessment model foranalyzing industry structure that focuses on the forces imposed onthe process of competing by five influences: The intensity of rivalryamong competitors, the threat of new entrants, the threat ofsubstitute products the bargaining power of suppliers, and thebargaining power of buyers or customers.

Defining an Industry

In general an industry is nothing more than cluster of economicunits (firms or business units within firms) that are groupedtogether for analytical or cooperative purposes. Trade associationsthemselves define criteria for membership and establish networksfor information sharing and cooperation. Thus the American BoardBuilders and Repairers Association defines its own industry scopeand becomes a private sector information depository (among otherfunctions) within the confines of the scope.

A more universal taxonomy for analytical purpose is that providedby the U.S. Government’s Standard Industrial Classification (SIC)scheme. It is designed ot furnish a common framework forgathering, tabulating, analyzing, and cross-referencing data in auniform fashion. The SIC clusters “establishments” (as opposed tolegal entities or firms) together on the basis of the primary type ofactivity in which they are engaged (normally defined by product orservice category). These clusters are named and coded to providethe needed uniformity and comparability. The more digits in thecode, the more narrowly defined is the cluster. The coding schemeresults in a nesting arrangement of “divisions,” “major groups,”“groups,” and “industries”. Industries are assigned a four-digitcode. Additional digits are used for subdivisions within industries.

Porter’s Five Forces Model of Competition

The nature of competition in an industry in large part determinesthe content of strategy, especially business-level strategy. Based as

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it is on the fundamental economics of the industry, the very profitpotential of an industry is determined by competitive interactions.Where these interactions are intense, profits tend to be whittledaway by the activities of competing. Where they are mild andcompetitors appear docile, profit potential tends to be high. Yet afull understanding of the elements of competition within anindustry is easy to overlook and often difficult to comprehend.

Porter has identified five basic forces that collectively describe thestate of competition in an industry:

1. The intensity of rivalry among competitors.3. The threat of new entrants to the market.5. The amount of bargaining power possessed by the firm’s/industry’s suppliers.

7. The amount of bargaining power possessed by the firm’s/industry’s customers

9. The extent that substitute products present a threat to afirm’s/industry’s products

These forces assist in identifying the presence or absence ofpotential high returns. The weaker are Porter’s five forces, thegreater is the opportunity for firms in an industry to experiencesuperior profitability. More generally, understanding how theseforces affect competition within an industry allows the strategist toidentify the most advantageous strategic position.

The actors within an industry on whom these forces exert pressureare, respectively, the industry’s competing firms themselves,potential new entrants to the industry’s markets, suppliers(vendors), customers, and makers of substitute products.

Obviously, the starting point for conducting an analysis of the fiveforces of competition is to identify all the competitors, potentialnew entrants, and major suppliers, the demographic of customers,and makers of and nature of substitute products. ‘Competitors

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would not only have to be identified, but various distinguishingdata about the industry would also have to be specified. For eachcompetitor this data would include market share, product linedifferences/similarities, market segments served, price/qualityrelationships represented by products, growth/decline trends,financial strength differences, and any other information that willhelp describe the industry.

Using Porter’s model to analyze an industry for a particular firms,involves estimating the strength of each force, identifying itsunderlying source, and then formulating a strategy that will createan advantage for the firm. An advantage could be established bydefining a position from which to defend itself against strongforces somewhere in the model. Drafting an offensive posture totake advantages of weak forces in the industry, or designing a wayto favorably alter the forces.

The key task of the analyst is to understand the underlying causesof each of the competitive forces at work. With this knowledge, acompany’s strengths or weaknesses can be clarified, and the mostfertile areas for drafting competitive thrusts can be defined. Also,knowing the magnitude of competitive forces allows the strategistto identify the most important trends that are emerging asopportunities and threats.

Next, we’ll identify typical characteristics of each competitive force,and the kinds of factors that can create strength for the five sets ofcompetitors.

Industry of Rivalry among Competitors

Some industries appear “sleepy” because of a low level of rivalryamong competitors. An example might be industrial fasteners, themanufacturers of nuts and bolts and other devices used to connectthe components of products. A large number of quite smallmanufacturers accept low levels of profitability as a cost of staying

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in business. Competition is low key with little effort and expensedevoted to differentiating brands or single products. Such firmsoften product a catalog and send representative to trade shows todemonstrate products, or use sales forces or independent salesrepresentatives for selling. They usually compete on the basis ofprice, delivery times, or the convenience of either large or small lotsizes. There are virtually no screw machine companies advertisingon television!

On the other hand, some industries are characterized by high levelof competitive activity. For example, the brewing industry has manycompetitors who battle fiercely with each other over market share.There is little natural differentiability in beer, so brewing firmsdevelop complex promotional and advertising programs to try togain the upper hand in consumer awareness. We have seen ads,appeals, posters, jingles, demonstrations, sales and many othertypes of promotional and advertising program by beer brewers anddistributors to differentiate their product on the basis of taste,brewing process, alcohol content, social acceptance, ingredients,price, “naturalness,” similarly to foreign beer brads, dissimilarity toforeign beer brands, strength of flavor, weakness of flavor, and soon; Lately, small retail location-based breweries have been poppingup all over the country who make their own beer.

For breweries of given revenue size, capital investment is large soexit barriers are high. There are few alternative uses of a defunctbrewery. So participants fight it out intensely for a share of thehuge beer market.

1 Relative equilibrium in size and power among a large numberof competitors

3 Slow or stagnant growth of industry demand such thatexpansion of one competitor would come at the expense ofothers.

5 Undifferentiated products and low switching costs.7 High fixed costs of product perishability

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9 Even small capacity additions generate large volumeincreases which raise pressure to cut prices.

11 High exit barriers causing firms to bear low or negativereturns on investments

13 Wide spectrum of strategies and types of firms whichgenerates confusion and frequent “collisions” in the market.The opposite case might be an oligopoly like the automobileindustry where most actions are reactions to anothercompetitor and rivalry is somewhat orderly, albeit intense.

Buyers

For an industry, buyers can usually be broken into three categories:Consumer, industrial, and commercial customers. Consumers, orpurchasers of the firm’s service or product for their own use, arefurther divided into “bundles” of demographics which collectivelyidentify all the various market segments that are present. Firestone,for example, sells tires directly to the people who will be driving onthem through its own retain outlets. The various products thatmake up its line cater to the needs of different sets of demographicdescriptions of people.

Industrial buyers are companies that purchase the firm’s product orservice to be used as a component in its product. Continuing withthe Firestone example, automobile manufacturers who putFirestone tires on new cars, would be one group of its set ofindustrial buyers. By contrast, commercial buyers would be othercompanies that sell Firestone’s products to consumers. AS examplewould be any of the large discount stored chains that handleFirestone tires, like Wal-Mart, K-Mart, Sears, etc.

Buyers, whether consumer, industrial, or commercial, can enjoypositions of strength over the firm from which they purchaseproducts by superior bargaining power. For example, a largeretailer (“commercial buyer” to its supplier) with a loyal customerbase and high volume of sales of the product in question, may be

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able to virtually dictate price, shipping arrangements, orderquantity, quality level, and other factors to its vendors.

Similarly, an automobile manufacturer could have a powerfulbargaining position over a fire maker or the entire tire industry if alarge volume of tires was sought for installation on a popular autoline. (Of cours, the wise tire maker would prevent itself frombecoming too dependent on one buyers by strenuously soucing”—buying from several producers of the same components—toprevent dependency on too few suppliers. Thus it has a strongbargaining position on matters of price, quality, delivery times, etc.,as its suppliers compete with one another to gain favor with itsbuyers.

An industry’s buyers tend to be powerful relative to the firms theyare buying from when the conditions listed below apply (keep inmid that these factors apply as well to a group on consumers andto industrial and commercial buyers)

1 Buyers are concentrated as in cooperatives, or they accountfor a large volume of purchases.

3 Products are undifferentiated or standardized.5 The seller’s component represents a large portion of the totalcost of the buyer’s finished product. When the seller’sproduct has a small cost share, buyers tend to be lessprice-sensitive.

7 Buyers are earning low profits and are thus more pricesensitive than if they were highly profitable.

9 The sellers’ product is not critical in one way or another tothe buyer. If it’s critical to the quality, price, appeal, etc., ofan industrial buyer group’s finished product, for example,then the sellers will have power over the buyers.

11 There is a threat that buyers can integrate backward to makethe suppliers’ product.

An industry’s commercial buyers (retailers) have, in some cases, an

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additional source of bargaining power over their manufacturingvendors. They can influence customers’ purchase decision. Thiscapability allows retailers to gain price, delivery time, orderquantity, and other concessions from their suppliers that otherclasses of buyers might not receive.

Suppliers

Providers of goods and services to an industry have power overtheir customers through their ability to set price and control quality,delivery time, and order quantity. If these customers cannotsuccessfully play off one supplier against another to protectthemselves, then the industry’s profits can be drained off bysuppliers.

1 The power of suppliers is high in the following situations:3 There are few suppliers who are more concentrated thantheir customers

5 Suppliers’ product is differentiated7 Customers! Switching costs are high.9 There is little pressure on suppliers to protect themselvesfrom substitutes or replacements for their product.

11 When suppliers have the capability to integrate forward. Asupplier of engines to a manufacturer of lawnmowers wouldhave a strong bargaining position if the mower companyrealized the engine supplier’s ability to make thewhole-lawnmower.

13 The industry is not one of the major customers of thesupplier. Important customers would be protected fromaggressive moves by the supplier because of their mutualinterests: unimportant customers would not enjoy thisposition.

An interesting example of the power of suppliers is the unusualrelationship between the growers of seed shrimp and the growersof mature shrimp in the shrimp mariculture industry in the country

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of Ecuador. The preferred seed stock (baby shrimp placed ingrowth ponds to grow to a marketable size) are wild post-larvalshrimp (called “PLs”) netted in the country’s estuarine areas byfishermen. These PL shrimp are much hardier than theirhatchery-grown substitutes—as many as 80 percent of thehatchery-grown PLs die before reaching maturity compared with amortality rate of about 20 percent for the wild ones.

The problem is that the supply of wild PLs fluctuates dramaticallyfrom year-to-year with climatic conditions. In some years there arenot enough wild PLs to stock all the growth farms. In other yearsthere is an oversupply of wild PLs. During the years of wild PLundersupply, the price of hatchery-grown PLs skyrockets and thePL hatchery operators thrive. Indeed, they have the power duringthese years to control the profitability of the much larger (in termsof revenue) mature shrimp mariculture industry. But during the wildPL oversupply years, they may receive no revenue at all. ForEcuadorian shrimp hatchery operators, periods of extremely highbargaining power and virtually no bargaining power may beseparated by only a few months.

Substitute Products

The shrimp industry example above also demonstrates the plight ofan industry facing a substitute for its product. Although it is anextreme case, seed shrimp hatchery operators really only have anindustry an all during the years when their product’s substitute,wild seed shrimp, are in short supply. Hatchery operators arespending heavily on research to increase the survival rate of theirproduct. If they are successful in this endeavor, then they may beable to displace the wild seed shrimp industry altogether.

During years when there are not quite enough wild seed shrimp togo around, shrimp growers use some hatchery grown seed stock.Their availability limits the price that the wild PL fishermen cancharge for their product. This price ceiling is typical of all

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industries facing substitutes.

Manufacturers of products and suppliers of services mustconstantly scan their environments for the potential emergence ofsubstitutes. The most dangerous substitute are those that showpotential for improving price-performance trade-offs and thosemade by firms or industries earning high profits. In these cases,strategies must be formulated to protect against displacement bythe substitute product/service.

Potential Entrants

New entrants to an industry pose several threats to existingcompetitors. New competitors can reduce the market share of allparticipants by dividing the “pie” into more pieces. They also maybring new technology or greater resources not available to presentcompetitors and achieve a high market share position quickly tothe determent of al existing participants.

Corporate parent firms that diversify into an industry by acquisitionare especially dangerous to existing competitors both because oftheir “deep pockets” and potential management expertise. Arestaurant in the tourism-driven town of Newport, Rhode Island,rapidly gained market share from other restaurants in town when itwas acquired by a large international corporation. The parent madecapital available to the restaurant and after a major facilitiesoverhaul, hiring of professional management, and implementationof other profit oriented moves, the restaurant quickly became of“industry leader” in Newport. Although corporate ownership doesnot guarantee success of a restaurant this example points out thethreat to current participants presented by corporate diversificationinto their industry.

The threat of new entrants to an industry is high when barriers toentry are low. Low entry barriers would apply in the followingsituations:

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1 Low economies of scale. That small independent pizzaparlors exists side by-side with the units of national chainsof pizza stores indicates the there are few economies of scalein his industry. Thus, one finds and would expect frequentappearance of new pizza places in just about every town andneighborhood.

3 Undifferentiated products in an industry leads’ to newentrants. Most Americans can’t tell a good shrimp from a badone. As a result, Ecuador’s dominant market position in thelucrative U.S. shrimp market is under attack by shrimpgrowers from al over the world.

5 Low capital requirements for start-up in an industry leads tonew entrants. An extreme example is the house paintingbusiness where capital coasts are minimal. Every communitysees the appearance of a large number of new house paintersevery year.

7 Low switching costs leads to new entrants becausecustomers sense little incentive to stay with current suppliers.Homeowners frequently change rubbish pickup companiesbecause there is little incentive to stay with current provider.Compare this situation with the costs of changing from an oilheating system to gas, or visa versa.

9 Easy access to distribution channels11 Low familiarization costs-where “learning the ropes” in theindustry easy or inexpensive for new entrants.

Conducting an industry analysis following Porter’s model involvecollecting data and developing explanations for the ways in whichindustries competition is affected by the five forces.

1.5.4 Financial analysis

Financial statements can reveal much about a firm’s operatingstrength and weaknesses. They also serve as a basis for predicting

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future financial developments. To the extent that the performanceof all parts of an organization is ultimately reflected in themagnitude of entries in a firm’s financial statement financialanalysis can structure or bound the question of how well a strategyworking.

Comprehensive financial analysis consists of four elements: ratioanalysis of the firm’s historical financial performance,interpretation of cash flow position, analysis of retained earningsposition, and predictions of future financial statements.

All findings of the financial analysis should be reduced to strengthsand weaknesses of the firm and located accordingly in the data setfor the present time frame. Then expected changes in each itemcan be forecast.

Financial Ratio Analysis

Financial ratio analysis (FRA) is a process whereby the analyst ormanager determines the degree of financial health represented bythe firm’s financial statements. Toward that goal there are anumber of ways in which FRA can be useful.

First, it can aid in interpreting and evaluating income statementsand balance sheets by reducing the amount of data contained inthem to a workable amount. After computing several key ratioswhose numerators and denominators are made up of selecteditems from the statements, a comprehensive analysis of the firm’sfinancial position can be conducted by evaluation the resultingratio.

Second, FRA can make financial data more meaningful. Any ratiostrikes a relationship between the numbers in its numerator anddenominator. By selecting sets of numbers that are logically related,only a few ratios may be necessary to comprehensively analyze aset of financial statements.

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Third, ratios help to determine relative meningitides to financialquantities. For example, the magnitude of a firm’s debt has littlemeaning unless it, is compared with the owner’s investment in thebusiness. Thus the debt/equity ratio strikes a relationship betweenthese quantities such that their relative magnitudes can beestablished.

Because of these advantages, FRA can help managers or externalanalysis make effective decisions about the firm’s credit worthiness,potential earnings, and financial strengths and weaknesses. Itinvolves simply selecting the financial entities to be compared fromeither the income statement or the balance sheet, dividing one bythe other, and comparing the product with a base. Thiscomparative base could be a history of ratios for the firm (trendanalysis), average ratio values from past periods computed fromfinancial statements of other firms in the same industry (industryaverage comparison), or a combination of the two.

To use the first of these approaches, a ratio’s historical values arecomputed to determine whether its trend is increasing, decreasing,or constant. The second approach requires availability of industryaverage financial ratios that were computed in the same way asthose of the firm under analysis. There are several publishedsources of data for such comparisons.

Financial Dimensions

The financial structure of a business has several dimensions. Eachfinancial dimension may be measure by several ratios, but thefinancial dimensions themselves normally are not directlymeasurable. To analyze a firm’s financial structurecomprehensively, then, one must select a set of ratios made up ofsubsets, each of which represents a dimension. In this sectionfinancial dimensions are explained first. Then the ratios thatcollectively measure each dimension are discussed. The method of

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computation for each one is presented, followed by itsinterpretation.

Liquidity: The liquidity of a firm is its ability to pay currentliabilities as they come due (current liabilities are debts due withinone year). The only funds available for payments of short-termdebt are either cash or other current assets readily convertible tocash. Consequently liquidity is measured by ratios that strike arelationship between current liabilities and selected current assets.

Current assets are those normally expected to into cash in thecoure of a merchandising cycle. Ordinarily they include short-termnotes and accounts receivable (due within the next twelve month ),inventory, and marketable securities (at current realizable values).

Current liabilities are short-term obligation for the payment of cashdue on demand or within a year. Ordinarily they include short-termnotes and account payable for merchandise, current portion oflong-term debt, taxes due, and other accruals.

Interpretation: This ratio is a rough indention of a firm’s ability toservice its current obligations. Generally the higher the currentratio, the greater is the “cushion” between current obligations anda firm’s ability to pay them. The stronger ratio reflects a numericalsuperiority of current assets over current liabilities. However, thecomposition and quality of current assets are a critical factor in theanalysis of an individual firm’s liquidity.

Interpretation: Also known as the “acid test” ratio, that is arefinement of the current ratio and is s more conservative measureof liquidity. The ratio expresses the degree to which a company’scurrent liabilities are covered by the most liquid current assets.Generally any value of less than one to open implies a reciprocal“dependency” on inventory to liquidate short-term debt.

Coverage: Coverage refers to a firm’s ability to service debt that

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involves interest or premium payments. Ratios that measurecoverage consist of one component to estimate flow of funds intothe firm and another for periodic payments on debt.

Interpretation: This ratio is a measure of a firm’s ability to meetinterest payments. A high ratio may indicate that a borrower wouldhave little difficulty in meeting the interest obligations of a loan.This ratio also serves as an indicator of a firm’s capacity to take onadditional debt.

Profitability: This familiar dimension of a company’s financialstructure concerns managements ability to control expenses and toearn a return on committed funds. Ratios that measure profitabilityusually consist of a profit element and one that represents theamount of funds invested in whatever aspect of the firm is ofinterest to the analyst.

Net profit can be calculated either before or after taxes. RobertMorris Associates and the following explanation use net profitbefore taxes. The analyst should ensure that the ratio elementsused to compute the profitability ratios (and other as well) are thesame as those used to compute the industry average against whichthe ratio’s value will be compared. Also note that the following tworatios are converted to and reported as percentages.

Interpretation: This ratio expresses the rate of return on tangiblecapital employed (called net worth or capital or owners’ equity lessintangibles). While it can serve as an indicator of managementperformance, the analyst is cautioned to use it in conjunction withother ratios. A high return, normally associated with effectivemanagement, could indicate and undercapitalized firm. A lowreturn usually an indicator of inefficient management performancecould reflect a highly capitalized, conservatively operated business.

Interpretation: This ratio expresses the return on total assets andmeasures the effectiveness of management in employing the

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resources available to it. If a specific ratio varies considerably fromthe ranges found in published sources, the analyst will need toexamine the makeup of the assets and take a closer look at theearnings figure. A heavily depreciated plant and a large amount ofintangible assets or unusual income or express items will causedistortions of this ratio.

Leverage: The extent to which the firm relies on debt as opposedto owner’s capital (net worth) is its leverage position. A highlyleveraged firm is one with a high proportion of debt relative toowner’s investment.

Interpretation: This ratio expresses the relationship between capitalcontributed creditors and that contributed by owners. It expressesthe degree of protection provided by the owners for the creditors.A lower ratio generally indicates greater long-term financial safety.A firm with a low debt/worth ratio usually has greater flexibility toborrow inb the future. A more highly leveraged company has morelimited debt capacity. Generally the order or preference given tothis ratio is arranged on a continuum such that a low negative ratiois characterized as a weak debt/worth position and a high positiveratio value is perceived as a strong debt/worth position.

Interpretation: This ratio measures the extent to which owner’swhich owner’s (net worth) has been invested in plant andequipment (fixed assets). A lower ration indicates a proportionatelysmaller investment in fixed assets in relation to net worth, and abetter “cushion” for creditors in case of liquidation. Similarly, ahigher ratio would indicate the opposite situation. The presence ofsubstantial leased fixed assets (not shown on the balance sheet)may lower this ration deceptively. The order of preference normallygiven this ratio is the same as debt/worth.

Activity: Activity ratios, also called “efficiency” or “turnover” ratios,measure how effectively a firm’s assets are managed. Examiningthe relationship between a measure of sales and an asset account

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is their purpose.

Interpretation: This ratio measures the number of times inventoryis turned over during the year. High inventory turnover can indicatebetter liquidity or superior marketing. Conversely it can indicate ashortage of needed inventory for sales. Low inventory turnover canindicate poor liquidity, possible overstocking, obsolescence, or, incontrast to these negative interpretations, a planned inventorybuildup in reparation for future material shortages. A problem withthis ratio is that it compares one day’s inventory (at the end of theaccounting period) with cost of goods sold and does not takeseasonal fluctuations into account. One way to resolve this problemwhen sufficient data are available is to calculate cost of sales andaverage inventory by month to develop turnover ratios for eachmonth. Further, it may prove extremely useful to break up cost ofsales and inventory by different classes of products.

Predicting Financial Performance

The financial impact on the firm of a strategic change is presentedin pro forma (predicted) financial statements. These statementsinclude a cash budget, an income statement, and a balance sheetprepared over the appropriate planning periods. Typically theincome statement and balance sheet are projected furs tot showexpected sales and expenses (income statement), the level ofassets necessary to generate those sales (left side of the projectedbalance sheet), and the way in which assets will be financed (theright side of the projected balance sheet). Then a funds flowstatement is prepared to give more detail on cash or workingcapital transactions expected to be necessary for operations toproceed as planned (although one approach calls for constructingthe cash budget first).

There are four approached to projecting financial statements: Thepresent-of-sales method, the statistical-relationship method, thebudgets-and-ratios method, and the breakeven sales method. All

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require a sales forecast as a foundation for predicting othercomponents.

Questions:1. What is the need for environmental scanning?2. Under what circumstances the companies have to go by theircorporate capabilities?

3. What is core competence? Give examples.4. Explain Micheal Porter’s generic model.

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LESSON 1.6 SWOT

1.6.1 Introduction:

SWOT analysis is a tool for auditing an organization and itsenvironment. It is the first stage of planning and helps marketers tofocus on key issues. Once key issues have been identified, theyfeed into marketing objectives. It can be used in conjunction withother tools for audit and analysis, such as PEST analysis and Pouter’s five-forces analysis. It is very popular tool with marketingstudents because it is quick and easy to learn. SWOT stands forstrengths, weaknesses, opportunities, and threats. Strength andweaknesses are internal factors. For example, a strength could beyour specialist marketing expertise. A weakness’ could be the lackof a new product. Opportunities and threats are external factors.For example, an opportunity could be a developing market such asthe internet. A thereat could be new competitor in your homemarket. During the SWOT exercise, list factors in the relevant boxes.SWOT analysis can be very subjective. So not rely on it too much.Two people rarely come-up with the same final version of SWOT.TOWS analysis is extremely similar. It simply looks at the negativefactors first in order to turn them into positive factors. So use it asguide and not a prescription. In order to succeed, business needsto understand what their strengths are and where they arevulnerable.

Successful businesses build on their strengths, correct weaknessesand protect against vulnerabilities and threats. Just as important,they have an eye on their overall business environment and spotnew opportunities faster than competitors. SWOT analysis standsfor Strengths, Weaknesses, Opportunities and Threats Analysis. Thetechnique looks at where the company has an advantage comparedto its industry and where it is weak.

1.6.2 Effective SWOT analysis

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To be effective SWOT analysis needs a methodical and objectiveapproach. It is too easy for a company to look at itself – and fail tosee any problems, or to see strengths that are not real. We can helpcombat this by providing a fully objective view – which can then beused to support and enhance your business and marketingplanning.

SWOT analysis are undertaken by businesses at the start ofplanning – to identify organizational strengths, weaknesses,opportunities and threats. They should not be seen as a process inisolation – ant it is important that decisions are taken based on thefindings. A SWOT starts with an external analysis of the businessenvironment, often called a PEST analysis, and then looks at theorganization’s internal strength and weaknesses, relative tointernal factors such prior performance and also to external factors,which may have been highlighted in the PEST analysis. The finalstage is to combine the analyses to look at opportunities andthreats facing the organization and to draw up plans to takeadvantage of the opportunities and to counter the threats.

When examining political factors, you need to look at any politicalchanges that could effect your business. What laws are beingdrafted? What global change is occurring? Legislation on maternityrights, data protection health & safety, environmental policy,should be considered, for example. As an example, take a companyemploying a large number of women. Changes in maternity rightsmay have a major impact on such a business – the aware businesswill keep an eye out for changes in such legislation.

Often the political factors spill over into economic factors.For example, tax is usually decided by politicians, based on amixture of political and economic factors. Interest rates, in manycountries are decided by a central bank, but political factors maystill be important. The fall of the Soviet Union caught mostbusinesses and Western Governments by surprise – but not all.Some companies – notably Shell Petroleum – had picked up signals

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that all was not well in Russia. Many of these were related toeconomic problems within the oviet Union. Other economic factorsinclude exchange rates, inflation levels income growth, debt &saving levels (which impact available money) and consumer &business confidence. The current state of world stock markets is atypical example of the volatility of economic factors.

These areas are global, but it is also important to look atfactors affecting individual industries. Are paper costs rising? For abook, magazine or newspaper publisher, the price of paper is acrucial economic measure. The UK software industry is currentlycomplaining of a shortage of computer programmers – which isdriving up wage costs. Again – the global picture can be important.Some companies are now using programmers in countries like Indiafor software development. This helps them keep costs down – andleads to competitive advantage over companies with higher costs.

Advances in technology can have major impact on businesssuccess – with companies that fail to keep up often going out ofbusiness. Technological change impacts social-cultural attitudes.For example the way people spend their leisure has changeddramatically over the last 30 or so years. As well as advances inyour own industry, think about the likely impact of newtechnologies – the Internet, EDI, mobile phones, and the increasingadvances in computing and computers. Look out for anytechnology that could make producing your product easier. Andwatch out for the technology that could make your productobsolete.

Finally, all this influences and is influenced by social factors –the elements ath build society. Social factors influence people’schoices and include the beliefs, values and attitudes of society. Sounderstanding changes in this area can be crucial. Such changescan impact purchasing behavior. Typical things to look at for eachof these follow : consumer attitudes to your product & industry –environmental issues (especially if your involves hazardous or

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potentially damaging production processes) – the role of women inSociety – attitudes to health – attitudes to wealth – attitudes to age(children, the elderly, etc.)

Added complication when looking at social and culturalfactors are differences in ethnic and social groups. Not all groupshave the same attitudes – and this impacts how they view productsand services. Demographic changes can also play a major part.

1.6.3 Compiling a PEST analysis:

On way of compiling a PEST analysis for your business is totake a LARGE sheet of paper. In the top left corner, put the headingPolitical; in the top right corner, Economic; bottom left = Socio –cultural; bottom right = technological.

For each heading, think of every factor that possibly have animpact on your business. Think laterally – just because somethingseem unlikely does not mean that it will not have and influence inthe future. Having compiled a list of key factors, think ofinter-relationships between factors. For example, the rise of theInternet (technological factors) is likely to influence consumerpurchasing (social factors) – while an awareness of prices in othermarkets through electronic commerce may lead to a narrowing ofcross-border price difference (economic). Connect up alinter-related factors. You will find that some areas have moreconnections than others. These are often the areas that some areashave more connections than others. These are often the areas thatwill have the greatest potential impact on your company. These arethe aspects that you most need to be aware of, in your marketingplanning – and represent future opportunities and threats.

The final stage in a PEST, analysis is to use the results, -Prepare contingency plans to prepare for nay threats identified. – Itthere are factors that lead to businedd opportunities, then include

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these in your planning. For example, your target customer groupmay be growing faster than other sectors. This is an opportunity toincrease production to take advantage of more potential customers.However before the results are used effectively, you should alsodevelop an understanding of your own companies capabilities. Thiscomes from a SWOT analysis.

1.6.4 Developing SWOT analysis:

A SWOT analysis builds on the results of the PEST analysis,which looks at the company’s external environment. Its purpose isto identify company strengths and weaknesses so that strengthscan be maintained or increased and weaknesses corrected. Afurther purpose is to identify opportunities and threats resultingfrom external factors – especially those that have an impact on thecompany’s strengths and weaknesses. Company strengths andweaknesses need to be identified in all aspects of the business.

- relative to the rest of the market (i.e. compared tocompetitors)

- relative to previous performance or expected performance- relative to customer demand (for example all companies inan industry may fail to satisfy a particular customer need.This is a weakness – and the first company to match thiscustomer need will have a strength relative to the othercompanies in the industry.

It is also important to realize that opportunities arise out ofweaknesses. Correcting a weakness presents a marketingopportunity. Similarly, failing to maintain a strength is a threat tohe company. A preliminary approach for carrying out a SWOTanalysis is to list perceived company strengths, weaknesses,opportunities and threats under each of these headings. Ensurethat no weaknesses cancel out company strengths and potentialthreats to the company strength or opportunities that could arise

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out of correcting weaknesses.

On the above list, highlight key areas of concern or areasthat require action. These become the focus for future planning.This approach is preliminary – as it does not evaluate the relativeimportance of each issue. A further approach is to list key aspectsin a table – and score them out of 5, where 5 is a major strengthand 1 a major weakness. Scoring can be based on the followingfactors – relative to the overall industry – relative to majorcompetitors or the next largest competitor – relative to expectedperformance – relative to previous performance.

An item that won on all 4 categories would be a majorstrength and vice versa for weaknesses. Areas where the companyhas better performance than competitors, but where performanceis below expectations would receive a higher score than whereperformance has improved but still is weaker than competitors.

The following is list of some of the things that should beconsidered:

Marketing Aspects

Market share and market segments addressed – CompetitiveStructure Customer base (quality size, loyalty, etc). – Demandforecasts – Product range and quality. Services provided –Distribution capabilities and costs – Sales effectiveness –Promotional effectiveness. Image and reputation – Pricing options –Speed to market – Customer service – R&D and Innovation / Newproducts. Marketing skills and experience – International / exportmarket capabilities.

Operational / Manufacturing Aspects

Production / Manufacturing facilities (age, quality, speed…) –Economies of scale – Skills (Employee, technical, etc.) – Product

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failure rate – Flexibility – Costs – Supply / raw material availability.

Human Resource Aspects

- Employees skills, motivation, dedication and experience –Employee satisfaction – Employee costs – Work environment – Staffturnover rate – Management and Organisational AspectsManagement skills and experience – Leadership and team skills –Ability to respond to market change – Flexibility and adaptability

Financial Aspects

Cost of capital – Profitability / Return on investment – FinancialStability – Sales / Employee – Cash availability

This scheme allows the company to identify where it is strongestagainst competitors – the company’s competitive advantage – andagainst previous and expected performance.

Finally after compiling the list, management should start toconsider whether action is needed regarding each identified item. Away forward here is to rank each item on importance to thecompany.

Low performance (i.e. a score of 1 or 2) and high importanceshould be the major priority. Similarly, high performance (4 or 5score) and high importance indicates areas where performanceneeds to be maintained.

Conversely, low importance and low performance can be given alower priority, while low importance items that are viewed asstrengths can be ignored. It is better to spend time and moneyimproving or maintaining areas that matter to the company thanworrying about perceived strengths that do not add anythingworthwhile to the company. This can be summarized as:

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1. Low priority – monitor for changes. Focus on only if financesand time allow.

2. Medium priority – focus on after the high priority items havebeen looked at, or if finances allow.

3. High priority – main focus. Ensure adequate finance toaddress issues. The results of this analysis then feed into amarketing or organization strategic plan.

A SWOT Analysis is an effective way of analyzing your company’spotential by identifying your Strengths and Weaknesses, and toexamine the Opportunities and Threats which may affect you.

Carrying out an analysis using the SWOT tool will be enough toreveal changes which can be implemented easily and gain results.

To carry out a SWOT Analysis effectively, get a team together fromthe various departments of your company for a brain stormingsession. If possible use a whiteboard and write down all ideas andcomments that might be raised. Later you can edit each one anddelete anything not relevant.

The best method is to split the whiteboard into a 4 sections asfollows:

Strengths Weaknesses

Opportunities Threats

List down answers to the following questions:

Strengths:

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What are your advantages?What do you do well?What makes you different from your competition?

Consider this from your own point of view and from the point ofview of the people you deal with. It’s important to be honest andrealistic. Ensure your team feels comfortable and understands thepurpose.

Weakness:

What could be done better?What is done badly?What should be avoided?What causes problems or complaints?

It is important to be realistic not and face any unpleasant truths assoon as possible.

Opportunities

Where are the good chances facing you?What are the interesting trends?

Examples of opportunities can be:

Changes in technology and marketsChanges in government policy or regulationsChanges in social patterns, population, lifestyle changes,economicalLocal and global events

Threats

What obstacles do you face?

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What is your competition doing?Are the specifications for your products or services changing?Is changing technology threatening your business?Do you have bad debt or cash-flow problems?

Once the SWOT analysis has been completed, mark each point withthe followings:

Things that MUST be addressed immediatelyThings that can be handled nowThings that should be researched furtherThings that should be planned for the future.

Now that each point has been prioritized, set an action point foreach and assign it to a person, add a deadline.

Although the SWOT analysis will assist in identifying issues, theaction plan will ensure that something is done about each one.With complicated issues a further brainstorming session might bedone to analyze it further and decide what action to take.

1.6.5 SWOT Analysis of Indian Pharmaceutical Sector:

Strengths

Cost CompetitivenessWell Developed Industry with Strong Manufacturing BaseWell Established Network of Laboratories and R&DinfrastructureAccess to pool of highly trained scientists, both in India andabroadStrong marketing and distribution networkRich BiodiversityCompetencies in Chemistry and process development

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Weakness

Low investments in innovative R & DLack of resources to compete with MNCs for New DrugDiscovery Research and to commercialize molecules on aworldwide basis.Lack of strong linkages between industry and academia.Lack of culture of innovation in the industryLow medical expenditure and healthcare spend in the countryInadequate regulatory standardsProduction of spurious and low quality drugs tarnishes theimage of industry at home and abroad

OpportunitiesSignificant export potentialLicensing deals with MNCs for NCEs and NDDS.Marketing alliances to sell MNC products in domestic marketContract manufacturing arrangements with MNCsPotential for developing India as a centre for internationalclinical trialsNiche player in global pharmaceutical R&D

Threats

Product patent regime poses serious challenge to domesticindustry unless it invests in research and development.R&D efforts of Indian pharmaceutical companies hamperedby lack of enabling regulatory requirement. For instance,restrictions on animal testing outdated patent office.Drug Price Control Order puts unrealistic ceilings on productprices and profitability and prevents pharmaceuticalcompanies from generating investible surplus.Export effort hampered by procedural hurdles in India as wellas non-traiff barriers imposed abroad.Lowering of tariff protection

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Questions:

1. What is PEST analysis?2. Write a note on TOWS Matrix?3. Explain the need to undertake SWOT analysis in the Indiancontext.

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Lesson 2.1 Co Strategy

2.1.1 Evolution of Strategic

It has increased both in its level of detail and in its importance asthe complexity of the environment has increased. Between WorldWar II and the early 1960s, business policy, following the so-calledprostrate paradigm, addressed the problem of coordinating heoperations of the various functional departments of the firm.Policies were established by top management to integrate activitiesthat each department was to carry out. Thus policy served tostandardize and specify behavior within functional departments.Strategy was usually viewed as an implicit concept reserved for thetopmost managers. In the top manager’s mind, this concept,reserved for the top, most managers. In the top manager’s mind,this concept, environmental characteristics, certain organizationalgoals, and political circumstances, along with years of managementexperience, all came together ot reduce what was hoped would bethe right collection of policies. Strategy was seldom analyzed onceit was decided on by top management, and rarely changed. Whenoperations did not meet expectations, it was policy that typicallywas analyzed and modified. Most firms were single-line businesses;business policy making was conducted in large part at what isknown today as the business level.

The rapid rise during the 1950s and early 1960s in the number ofinterest groups making demands on organizations of all kinds,along with the proliferation of mergers and acquisitions, began tostrain the applicability of the relatively simple business-policyapproach to management. Divisional zed firms no longer had asingle line of business. Thus a different set of policies was neededfor each subsidiary and managers sought a common thread that

Xerox not clear of L.S. 2Paragraphs. Please refer the

book

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might bind them together. The internal complexity of firms hadincreased in an attempt to deal with the complexity of a pluralisticsociety. Davis and Bloodstream describe social pluralism as asociety “in which diverse groups maintain autonomousparticipation and influences in the social system.” Business ismerely one such influence (interest group) and competes withmany other groups for time, money, interest, allegiance, orattention. Increasingly organization that were operated without anunderstanding of, or respect for, the various interest-groupinfluence have been subjected to successful attacks by thesegroups. Electric utilities were forced by many interest groups tocease or radically change the nature of nuclear power plantconstruction projects. Through the pressure of consumer groups,automobile manufactures have been made to correct deficiencies intheir products. Industrial polluters were required by environmentalgroups to clean up or stop harmful discharges. Product labelingrequirements were tightened, Equal Employment Opportunityassurances became stricter and product safety standards wereimproved. These changes, and hundreds of others, were boughtabout largely by the political actions of interest groups. Theiractivities often resulted in enactment of legislation that todayregulates the conduct of business.

In response to this growth in the dimensions of firms’environments, and also to the growth in the number of Divisionalzed firms, strategy increasingly became interpreted as the linkbetween an organization and its environment. All of the “policy”problems remained, but they were compounded by a baffling set ofexternal claims, and also by the needs imposed by multiple productlines and business-level activities.

Because of its inability to deal with these factors, thebusiness-policy model underwent several evolutionary changes andemerged as what was later called strategic planning. Dubbed theinitial strategy paradigm, this view of corporate managementfocused heavily on the process of strategy formulation with

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emphasis on environmental pressures, yet it had four majorshortcomings. First it did not clearly differentiate betweencorporate-level strategy (question related to the collection ofbusiness activities a divisional zed company owned) and businesslevel strategy (how to compete within a particular business activity).

Second, the initial strategy paradigm was unclear about the natureof relationships between strategy and the operation of the variousfunctional areas of business. How does the task of marketingmanagement, for example, change with different strategic focusesand how can the functional areas be integrated into an effectivewhole? Such questions largely went unanswered.

Third, this paradigm was incomplete in its discussion of the role ofgeneral management. Some authors contended that strategicplanning was the province of only top managers, whereas othersclaimed that all mangers should be involved in strategic planning.

Finally, there was disagreement about whether strategy includedboth goals and action plans, or just action plans.

The strategic management paradigm, although still in its infancy, isthe third step in the evolution of thought about strategy, and itaddresses the shortcomings of strategic planning. As initiallycodified by Schedule and Hofer, strategic management is far fromrepresenting a consensus. Yet there is perceptible movementtoward consolidation around many of its principles. In particular,there is now a widely accepted distinction between corporate-levelbusiness-level, and functional-level strategy. A fourth strategylevel, enterprise strategy, has been proposed by An off, but theconcept has not endured (enterprise strategy was defined asdescribing the interaction of a firm with its environment—it is nowfelt by many that this interaction is best incorporated in each of theother strategy levels and not reserved only for a separate categoryof strategy.) In some ways related to Ansoff’s concept of enterprisestrategy, a more global strategic orientation is described by

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Magazines and Reich; they call it international strategy. Here too,during the early 1990s the idea of isolating global issues anddirection in a separate strategy level has given way to the practiceof incorporating international competitive matters into all levels ofstrategic decision making.

The strategic management paradigm not only distinguishes amongdifferent levels of strategy but is sufficiently adaptable toaccommodate the need for this expanded scope of strategicthinking.

Next, strategic management address the issue of functionalintegration by identifying various functional strategies. At the sametime, responsibility for strategic thinking is viewed within thisparadigm as the responsibility of manager’s not just top-levelexecutives. Although there is much work to be done in learninghow best to integrate functional strategy with other strategy levels,the strategic management paradigm lays the groundwork for theconduct of such research.

Finally, by separating the steps of goal formulation and strategy(action plan) formulation, this paradigm is more objective, moreteachable, and less mysterious than earlier interpretations. It mayhelp to continue the increase in popularity of strategy-focusedmanagement and thus expand the competitiveness of U.S. businessin the international marketplace.

2.1.2 Researching Strategic Management’s Effectiveness:

The weight of numbers tends to favor the studies that havesupported the positive effects of strategic management. Only a fewhave not supported it. In 1957 the Stanford Research Instituteanalyzed some 400 firms and concluded that those that planoutperform those that do not in terms of sales and profit growth.One of the most convincing studies was undertaken by Thune andHouse in 1970. They identified two groups, formal planners and

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informal planners, among eighteen matched pairs of companies insix industries. The two groups were then compared by sales, returnon stockholders’ equity and total capital, earnings per share andstock prices. One result that is important for our purposes is thatthe formal planners were significantly better performers on thethree profit-related ratios that were the informal planners. Anothertest of the formal planners compared their performance beforeplanning with their performance after planning was begun.After-planning performance was superior to preplanningperformance. Also in 1970, East lack and McDonald showedcorrelation between planning and performance.

In a replication of the Thune and House study by Harold in 1972,the previous findings were upheld—formal planners continued tooutperforms informal planners. Another often-cited study, by Rueand Fulmer in 1972, also lends support to theplanning-performance relationship, at least for producers ofdurable goods. However, for businesses in service and nondurableproduct industries, planners were not significantly betterperformers than no planners.

In 1974 Wood and Lafarge found that banks that planned formallyperformed better than those that did not. More support was offeredby Karger in learning how best to integrate functional strategy withother strategy levels; the strategic management paradigm lays thegroundwork for the conduct of such research.

Finally, by separating the steps of goal formulation and strategy(action plan) formulation, this paradigm is more objective, moreteachable, and less mysterious than earlier interpretations. It mayhelp to continue the increase in popularity of strategy-focusedmanagement and thus expand the competitiveness of U.S businessin the international marketplace.

2.1.2. Researching Strategy Management’s Effectiveness:

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The weight of tends to favor the studies the have supported thepositive effect of strategic management. Only a few have notsupported it. In 1957 the Stanford Research Institute analyzedsome 400 firm and concluded that those that plan outperformthose that do not in term of sales and profit growth. One of themost convincing studies was undertaking by Thune and house in1970. They identified to groups, formal planners and informalplanners, among eighteen matched pairs of accompanies in sixindustries. The two groups were then compared by sales, return onstock prices. One result that is important for our purposes is thatthe formal planners were significantly better performers on thethree profit- related ratio that were the informal planners. Anothertest of the formal planners compared their performance beforeplanning with their performance after planning was begun.After-planning performance was superior to preplanningperformance. Also in 1970, East lack and Mc Donald showedcorrelation between planning and performance.

In a replication of the Thune and House study by Harold in 1972,the pervious finding were upheld-formal planners continued tooutperform informal planners. Another often-cited study, by rueand Fulmer in 1972, also lends support to theplanning-performance relationship, at least for producers ofdurable goods. However, for business in service and nondurableproduct industries, planners were not significantly betterperformance then no planners.

In 1947 wood and Lafarge found that banks that planned formallyperformed better then those that did not. More support was offeredby karger and Alkalis in 1975, when they showed the same resultfor the machinery, chemicals, drugs, and electronics industries.However, drug and electronic firms in their sample did not show asstrong a relationship between planning and performance as did theother two types.

Later studies in this area have tended not to support the findings of

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the earlier work. In research conducted by kallman and Shapiro andkudla, and Plenitudes and tezel during 1980, no positiverelationship was seen between planning and performance. The onlystudy since the mid-1979s we found which showed a positiverelationship was one by Burt in Australia in 1979. He showed thatthe higher the quality of the planning program, the better wasperformance.

2.1.3 The rise and fall of corporate strategy:

EARLY 1960S: Harvard professors ken Andrews and C. RolandChristensen articulate the concept of strategy as a tool to linktogether the functions of a business and assess a company’sstrength and weaknesses against competitors.

EARLY 1960S: General Electric emerges as the pioneer in strategicplanning, crating a large, centralized staff of planners to ponderthe future. Consultant Mc Kinsey & Co. helps GE view its productsin terms of strategic business units, identify competitors for each,and evaluate its position against them.

1963: Under founder Bruce D. Henderson, Boston Consulting Groupbecomes the first of many strategic boutiques. BCG pioneers aseries of concepts that tack Corporate America by storm, includingthe “experience curve” and the “growth and market-share matrix.”

1980: Harvard professor Michael E. Porter’s book CompetitiveStrategy provides a generation of MBA- trained executives with newmodels to plot strategy based on economic theories.

1983: New GE Chairman Jack Welch slashes the corporate planninggroup and purges scores of planners from GE’s operating units.Numerous companies follow his lard.

EARLY 1980S:Battered by global competition, turn away fromstrategic planning and begin to focus on operational improvement.

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Executives embrace the total Quality movement and the teachingsof guru Edward Deming.

LATE 1980S: Corporate America begins massive downsizing andreengineering of operations to increase efficiency and productivity.Guru Michael Hammer leads the reengineering revolution.

NOW: A bevy of new books are out from a new group of strategygurus who are capturing the attention of corporate executives andredefining the process of strategy creation.

2.1.4 Contribution by Management Groups:

2.1.4.1 Gary Hamel:

Of the new generation of strategy gurus, no one is in greaterdemand these days than Gary Hamel. Within that past 18 months,the lanky 41-year-old academic has delivered nearly 75 speechesand built a consulting company that is generating revenues of $20million year.

Together with University of Michigan professor C.K. Prahalad,Hamel has redefined the world of corporate strategy. For decades,strategists spent much of their time figuring out how to positionproducts and businesses within an industry. Instead, Hamel arguesstrategy should be Wal-Mart Stores Inc. did in retailing or CharlesSchwab did in the brokerage and mutual-fund businesses.

Hamel urges managers to determine their company’s “corecompetencies,” or key corporate skills, and to create “strategicintent” based on these skills and the development of others toinvent a new future. “Strategy has to be subversive, “he declares. “Ifit’s challenging internal company rules or industry rules, it is notstrategy.”Hamel also urges clients to “democratize” the strategy-creatingprocess “It is imagination and not resources that is scarce, “he says.

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“So we have to involve hundreds, if not thousands, of new voices inthe strategy process if we want to increase the odds of seeing thefuture.”

Hamel changes his own future in 1978 when he quit a job as ahospital administrator and went to the University of Michingan for aPhD in international business. At Michigan, be met Prahalad. “Weshared a deep dissatisfaction with the mechanistic way strategywas carried out, “Hamel says. The pair wrote a series of influentialessays published in the Harvard Business Review and put theirideas into a book, competing for the Future, in late 1994. It hasbecome gospel to managers around the world, many of whom seekadvice from Hamel’s firm, Strategos Inc. in Menlo Park, Calif.

2.1.4.2 Abrian Slywotsky:

While other strategic-planning gurus start with the capabilities andskills of a company, Abrian J. Slywotsky begins with customers. Afounding partner of Boston-based Corporate Decisions Inc.,Stywotsky maintains that too much of strategy has been based on amindset that failed to understand what customers want and need.

He urges managers to begin the strategy process by studyingwhere stock market value is migrating in an industry. Shifts invalue-for example, front Sears, Roebuck & Co. to Wal-Mart StoresInc.-usually reflect shifting customer priorities. By falling out oftouch with those needs, one U.S. company after another has lostground to new, aggressive rivals. Companies such as MicrosoftNucor, and Starbucks have captures growth and stock market valueby having what Slywotsky says are “superior business designs”-configuring resources and going to market based on a keenunderstanding of customers’ priorities “Strategy is about or adifferent one? How are any customers and prospects changing? Ifany business model was good for yesterday’s customers how doesit have to change to keep them?

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A Harvard-trained lawyer, Slywotsky returned to the university forhis MBA in 1978. After a three-year stint with consultant Bain & Co.,he founded corporate Decisions in 1983. His novel views ofstrategy, detailed in his book Value Migration, have won audiencesat such major companies as Sears, Philips Electronics, and ScarlePharmaceuticals.

Slywotsky’s corporate fans find much appeal in his notion thatstrategy has paid for too much attention to simple gains in marketshare. By instead examining the business designs that arecapturing stock-market value, Slywotsky says, managers can findtemplates for changes within their own organizations.

2.1.4.3 James Moore:

James F, Moore, founder and chairman of Cambridge-basedGeoPartners Research Inc., is an unlikely corporate strategist. Forone thing, his PhD is in cognitive paychology. For another, he oncetaught art and photography in a New Haven high school-hardlytypical training for any would-be counselor to Corporate America.

But with the recent publication of The Death of Competitions, the47-years old Moore has quickly distinguished himself as anoriginal thinker and hot New Age strategist. Moore relives heavilyon metaphors from biology and ecology to help managers betterunderstand the dynamics of competition and create successfulstrategy.

He urges clients at such companies as AT&T, ABB Asea BrownBoveri, Royal Dutch/Shell Group, and Hewlett-Packard to viewthemselves as part of a “business ecosystem. “Why? “The newparadigm requires thinking in terms of whole systems,” he says.“Seeing your business as part of a wider environment.”

That demands viewing business opportunities not simply from theperspective of a solo player but as one player among many, each

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“co-evolving”. With the others. That’s sharply different from theconvential idea of competition, in which companies work only withtheir own resources and do not extend themselves using thecapabilities of others.

Among other things, Moore favors seeking out partners to createsomething of value, achieve market coverage, and block alternativeecosystems. In later stages of the business ecosystem, membersmust look beyond their community for new ideas and work toprevent partners and customers from defecting. And all the while,be says, companies must reach out to customers to predict howmarketplace change may occur. “The major challenge for manycompanies is to get other to co-evolve with their wision of thefuture, “says Moore, “In a global market, you want to make use ofthe other players—for capacity, innovation, and capital. “In thecorporate Golapagos, It’s co-evolve—or die.

2.1.5 Evolution of market related strategies:

Markets are shifting, today’s competitor is tomarrow’s collaborator,and products and services are developed and sold in Internet time.Old generation strategy, marked by fixed goals, reliableassumptions, and a “point A to point B” approach is obsolete. Itfails to accommodate relentless change—the one constant thataffects every aspect of business. Managers spend too much timeforecasting, analyzing, and measuring strategies for a fuzzy guessat “what could be” and not enough time acting on the here and now.Competing on the edge changes all that. Instead of locking into atoo structured approach to strategy, companies that compete onthe edge create a constant flow of large and small competitive witha loosely formed organization where most planning happens at theenough freedom—to adapt, change, and ultimately reinvent thefirm time and again. Moves are complicated and unpredictable andthey allow the company to developing strategy today, as isrecognizing patterns of change. A competing-on-the-edgestrategy achieves this by relying on five key activities: improvisation,

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coadaptation, regeneration, experimentation, and time pacing.

Questions:

1. What are the contributions to corporate strategy byManagement gurus?

2. What are the important aspects of corporate strategy?3. Trace the evolution of corporate strategy.

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LESSON 2.2 PROCESS OF STRATEGIES PLANNING

2.2.1 Introduction

Strategic planning is a management tool, period. As with anymanagement tool, it is used for one purpose only: to help anorganization do a better job – to focus its energy, to assess andadjust the organization’s direction in response to a changingenvironment . In short strategic planning is a disciplined effort toproduct fundamental decisions and actions that shape and guidewhat an organization is, what is does, and why is does it, with afocus on the future.

The process is strategic because it involves preparing the best wayto respnd to the circumstances of the organization’s environment,whether or not its circumstances are know in advance; nonprofitsoften must respond to dynamic and even hostile environments.Being strategic, then means being clear about the organization’sobjectives, being aware of the organizatio’s resources, andincorporation both into being consciously responsive to a dynamicenvironment. The process is about planning because it involvesintentionally setting goals (i.e., choosing a desired future) anddeveloping an approach to achieving those goals. The process isdisciplined in that it calls for a certain order and pattern to keep infocused and productive. The process raises a sequence ofquestions that helps planners examine experience, testassumptions, gather and incorporate information about the present,and anticipate the environment in which the organization will beworking in the future.

Finally, the proves is about fundamental decisions and actionsbecause choices must be made in order to answer the sequence ofquestions mentioned above. The plan is ultimately no more, and noless, then a set of decisions about what to do, why to do it, andhow to do it. Because it is impossible to do everything that needsto be done in this world, strategic planning implies that some

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organizational decisions and actions are more important thanothers – and that much of the strategy lies in making the toughdecisions about what is most important to achieving organizationalsuccess.

2.2.2. Values That Support Successful Strategic Planning:

Successful strategic planning:

Leads to actionBuilds a shared vision that is values-basedIs an inclusive, participatory process in which board and stafftake on a shared ownershipAccepts accountability to the communityIs externally focused and sensitive to the organization’senvironmentIs based on quality dataRequires and openness to questioning the status quo.Is a key of effective management

2.2.3 Difference between strategic planning and long rangeplanning

The major difference between strategic planning and long rangeplanning is in emphasis. Long range planning is generallyconsidered to mean the development of a plan of action toaccomplish a goal or set of goals over a period of several years.The major assumption in long range planning as that currentknowledge about future conditions is sufficiently reliable to unablethe development of these plans. For example, in the late fifties andearly sixties, the American economy was relatively stable andtherefore predictable. Long range planning was very much infashion, and it was a useful exercise. Because the environment isassumed to be predictable, the emphasis is on the articulation of

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internally focused plans to accomplish agreed upon goals.

The major assumption in strategic planning, however, is that anorganization must be responsive to a dynamic, changingenvironment. Some would argue that this was always the case.Nonetheless, in the nonprofit sector a wide agreement hasemerged that the environment is indeed changing in dynamic andoften unpredictable ways. Thus, the emphasis in strategic planningis on understanding how the environment is changing and willchange, and in developing organizational decisions which areresponsive to these changes.

2.2.4 Strategic Planning Model:

Many books and articles describe how best to do strategic planning,and many to go much greater lengths than this planning responsesheet, but our purpose here is to present the fundamental stepsthat must be taken in the strategic planning process. Below is abrief description of the five steps in the process. These steps are arecommendation, but nto the only recipe for creating a strategicplan; other sources may recommend entirely different steps orvariations of these steps. However, the steps outlined belowdescribe the basic work that needs to be done and the typicalproducts of the process. Thoughtful and creative planners will addspice to the mix or elegance to the presentation in order to developa strategic plan that best suits their organization!

Step One-Getting Ready

To get ready for strategic planning, an organization must firstassets if it is ready. While a number of issues must be addressed inassessing readiness, the determination essentially comes down towhether an organizatin’s leaders are truly committed to the effort,and whether they are able to deveote the necessary attention to the“big picture”. For example, if a funding crisis looms, the founder isabout to depart, or the environment is turbulent, then it does not

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make sense to take time out for strategic planning effort at thattime.

An organization that determines it is indeed ready to beginstrategic planning must perform five tasks to pave the way for anorganized process:

Identify specific issues or choices that the planning processshould addressClarify roles (who does what in the process)Created a Planning CommitteeDevelop an organizational profileIdentify the information that must be collected to help makesound decisions.

The product developed at the end of the Step One is a Workplan.

Step Two – Articulation Mission and Vision

A mission statement is like an introductory paragraph: it lets thereader know where the writer is going, and it also shows that thewriter knows where he or she is going. Likewise, a missionstatement must communicates the essence of an organization tothe reader. An organization’s ability to articulate its missionindicates its focus and purposefulness. A mission statementtypically describes an organization’s in terms of it:

Purpose – why the organization exists, and what it seeks toaccomplishBusiness – the main method or activity through which theorganization this it fulfill this purposeValues – the principles or beliefs that guide an organization’smembers as they purpose the organization purpose.

Whereas the mission statement summarizes the what, how, and

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why of an organization’s work, a vision statement presents animage of what success will look like. For example, the missionstatement of the Support Centers of America is as follows:

The mission of the Support Centers of America is to increase theeffectiveness of the nonprofit sector by providing managementconsulting, training and research. Our guiding principles are:promote client independence, expand cultural proficiency,collaborate with others, ensure our own competence, act as oneorganization.

We envision an ever increasing global movement to restore andrevitalize the quality of life in local communities. The SupportCenters of America will be recognized contributor and leader inthat movement.

With mission and vision statements in hand, an organization hastaken an important step towards creating a shared, coherent ideaof what it is strategically planning for.

At the end of Step Two, a draft mission statement and a draft visionstatement is developed.

Step Three – Assessing the Situation

Once an organization has committed to why it exists and what itdoes, it must take a clear-eyed look at its current situation.Remember, that part of strategic planning, thinking andmanagement is an awareness of resources and an eye to the futureenvironment, so that an organization can successfully respond tochanges in the environment. Situation assessment, therefore,means obtaining current information about the organization’sstrengths, weaknesses, and performance – information that willhighlight the critical issues that the organization faces and that itsstrategic plan must address. These could include a variety ofprimary concerns, such as funding issues, new program

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opportunities, changing regulations or changing needs in the clientpopulation, and so on. The point is to choose the most importantissues to address. The Planning Committee should agree on nomore than five to ten critical issues around which to organize thestrategic plan.

The products of Step Three include: a data base of qualityinformation that can be used to make decision; and a list of criticalissues which demand a response from the organization – the mostimportant issues the organization needs to deal with.

Step Four – Developing Strategies, Goals, and Objectives

Once an organization’s mission has been affirmed and itscritical issues identified, it is time to figure out what to do aboutthen: the broad approaches to be taken (strategies), and thegeneral and specific results to be sought (the goals and objectives).Strategies, goals and objectives may come from individualinspiration, group discussion, formal decision-making techniques,and so on – but the bottom line is that, in the end, the leadershipagrees on how to address the critical issues.

This can take considerable time and flexibility: discussions atthis stage frequently will require additional information or areevaluation of conclusions reached during the situationassessment. It is even possible that new insights will emerge whichchange the thrust of the mission statement. It is important thatplanners are not afraid to go back to an earlier step in the processand take advantage of available information to create the bestpossible plan. The product of Step Four is an outline of theorganization’s strategic directions – the general strategies,long-range goals, and specific objectives of its response to criticalissues.

Step Five – Completing the Written Plan

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The missions has been articulated, the critical issues identified, andthe goals and strategies agreed upon. This step essentially involvesputting all that down on paper. Usually one member of thePlanning Committee, the executive director, or even a planningconsulatant wil draft a final planning document and submit it forreview to all key decision makers (usully the board and senior staff).This is alos the time to consult with senior staff to determinewhether the document can be translated into operating plans (thesubsequent detailed action plans for accomplishing the goalsproposed by the strategic plan) and to ensure that the plan answerany questions about proposed by the directions in sufficient detailto sere as a guide. Revisions should not be dragged out for months,but action should be taken to answer any important question thatis raised at this step. It would certainly be a mistake to bury conflictat this step just to wrap up the process more quickly, because theconflict, if serious, will inevitably undermine the potency of thestrategic directions chosen by the planning committee.

2.2.5. The MacMillan Matrix for Competitive Analysis ofPrograms:

The MacMillan Matrix is an extraordinarily valuable tool that wasspecifically designed to help nonprofits assess their programs inthat light. The matrix is based on the assumption that duplicationof existing comparable services (unnecessary competition) amongnonprofit organization can fragment the limited resources available,leaving all providers too weak to increase the quality andcost-effectiveness of client services. The matrix also assumes thatquality and cost-effectiveness of client services. The matrix alsoassumes that instead, to be all things to all people can result inmediocre or low-quality service instead, nonprofits should focus ondelivering higher –quality service in a tgerfgd focused (and perhapslimited way. The matrix therefore helps organization think aboutsome very pragmatic questions:

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Are we the best organization to provide this service?Is competition good for out clientsAre we spreading ourselves too thin, without the capacity tosustain ourselves?Should we work cooperatively with another organization toprovide services?

Using the MacMillan Matrix is a fairly straightforward process ofassessing each current (or prospective) program according to fourcriteria, described below.

1. Fit

Fit is the degree to which a program “belongs” or fits within anorganization. Criteria for “good fir” include:

Congruence with the purpose and mission of theorganization;Ability to draw on existing skills in the organization; andAbility to share resources and coordinate activities withprograms.

2. Program attractiveness

Program attractiveness is the degree to which a program isattractive to the organization from an economic perspective, as aninvestment of current and future resources (i.e., whether theprogram easily attracts resources). Any program that does not havehigh congruence with the organization’s purpose should beclassified as unattractive. No program should be classified ashighly attractive unless it is ranked as attractive on a substantialmajority of the criteria below:

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High appeal to groups capable of providing current andfuture supportStable fundingMarket demand from a large client baseAppeal to volunteersMeasurable, reportable program resultsFocus on prevention, rather than cure.Able to discontinue with relative ease, if necessary (i.e., lowexit barriers)Low client resistance to program servicesIntended to promote the self-sufficiency orself-rehabilitation of client base.

3. Alternative CoverageAlternative coverage is the extent to which similar services areprovided. If there are no other large, or very few small, comparableprograms being provided in the same regions, the program isclassified as “low coverage.” Otherwise, the coverage is “high.”

4. Competitive Position

Competitive position is the degree to which the organization has astronger capability and potential to deliver the program than otheragencies – combination of the organization’s effectiveness, quality,credibility, and market share of dominance. Probably no programcan be classified as being in a strong competitive position unless ithas some clear basis for declaring superiority over all competitorsin that program category. Criteria for strong competitive positioninclude:

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Good location and logistical delivery system;Large reservoir of client, community, or support grouployalty;Past success securing funding;Superior track record (or image) of service delivery;Large market share of the target clientele currently served;Gaining momentum or growing in relation to competitors;Better quality service and/or service delivery thancompetitors;Ability to raise funds, particularly for this type of programs;Superior skill at advocacy;Superiority of technical skills needed for the program;Superior organization skills;Superior local contacts;Ability to conduct needed research into the program and/orproperly monitor program performance;Superior ability to communicate to stakeholders; andMost cost effective delivery of service.

After each program is assessed in relation to the above four criteria,each is placed in the MacMillan matrix, as follows. For example, aprogram that is a good fit is deemed attractive and strongcompetitively, but for which there is a high alternative coveragewould be assigned to Cell No. 1, Aggressive Competition.

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HighProgram Attractiveness:“Easy” Program

Low ProgramAttractiveness:“Difficult” Program

AlternativeCoverageHigh

AlternativeCoverageLow

AlternativeCoverageHigh

AlternativeCoverageLow

GOODFIT

StrongCompetitivePosition

1.AggressiveCompetition

2.AggressiveGrowth

5.Build upthe BestCompetitor

6“Soul oftheAgency”

WeakCompetitivePosition

3.AggressiveDivestment

4.BuildStrengthor Get out

7.OrderlyDivestment

8.“ForeignAid” orJointVenture

POORFIT

9. Aggressive Divestment 10. Orderly Divestment

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Once all programs have been placed in the appropriate positionson the matrix, an organization can review its mix of programs,sometimes called a “program portfolio,” and decide if anyadjustments need to be made. Ideally, an organization would haveonly two types of programs. The first would be attractive programs(performs that attract resources easily), in areas that theorganization performs well and can compete aggressively for adominant position.

These attractive programs can be used to support the secondprogram type: the unattractive programs with low coverage. Theunattractive program is considered unattractive by founders, withlow alternative coverage, but makes a special, unique contributionand in which the organization is particularly well qualified. Theseprograms typically fall under Cell No. 6, the should of the agency.These programs are known as the “soul of the agency” because theorganization is committed to delivering the program even at thecost of subsidizing it from other programs. An organization cannotafford to fund unlimited “souls,” and might have to fact somedifficult decision about how to develop a mix of programs thatensure organizational viability as well as high-quality service toclients.

For example, five years ago there was little funding for casemanagers by AIDS Services Organizations. Unwilling to let clientsfend for themselves in getting the help they needed, manyorganizatins devoted staff time to this service. At the time this wasa “soul of the agency” program. These days, this alternativecoverage. Therefore, organizations in a strong position to serve theclients well, with cultural competence and program expertise,should aggressively compete: those in a weal competitive positionshould get out of the business.

2.2.6 Standard Format for a Strategic Plan:

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A strategic plan is a simply a document that summarizes, in aboutten pages of written text, why an organization exists, what it istrying to accomplist and how it will go about doing so. Its“audience” is anyone who wants to know the organization’s mostimportant ideas, issues, and priorities: board member staff,volunteers, clients, funders, peers at other organizations, the press,and the public. It is a document that should offer edification andguidance – so, the more concise and ordered the document, thegreater the likelihood that it will be useful, that is will be used, andthat it will be helpful in guiding the operations of the organization.Below is an example of a common format for strategic plans, aswell as brief descriptions of each component listed, which mighthelp writers as they begin trying to organize their thoughts andtheir material. This is just an example, however, not the one andonly way to go about this task. The point of the document is toallow the best possible explanation of the organization’s plan forthe future, and the format should serve the message.

TABLE OF CONTENTS:

The final document should include a table of contents. These arethe sections commonly included in a strategic plan:

I. Introduction by the President of the Board

A cover letter from the president of the organization’s boardof directors introduces the plan to readers. The letter gives a“stamp of approval” to the plan and demonstrates that theorganization has achieved a critical level of internalagreement.

II. Executive Summary

In one to two pages, this section should summarize thestrategic plan: it should reference the mission and vision;highlight the long-range goals (what the organization is

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seeking to accomplish); and perhaps not the process fordeveloping the plan, as well as thank participants involved inthe process. From this summary, readers should understandwhat is most important about the organization.

III. Mission and Vision Statements

These statements can stand alone without any introductorytext, because essentially they introduce and definethemselves.

IV. Organization Profile and History

In one or two pages, the reader should learn the story of theorganization (key events, triumphs, and changes over time)so that he or she can understand its historical context (justas the planning committee needed to at the beginning of theplanning process)

V. Critical Issues and Strategies

Sometimes organization omits this section, choosing insteadto “cut to the chase” and simply present goals and objectives.However, the advantage of including this section is that itmakes explicit the strategic thinking behind the plan. Boardand staff leaders may refer to this document to check theirassumptions, and external readers will better understandorganization’s point of view. The section may be presentedas a brief outline of ideas or as a narrative that covers severalpages

VI. Program Goals and Objectives

In many ways the program goals and objectives are the heartof the strategic plan. Mission and vision answer the bigquestion about why the organization exists and how it seeks

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to benefit society, but the goals and objectives are the planof actions – what the organization intends to “do” over thenext few years. As such, this section should serve as a usefulguide for operational planning and a reference for evaluation.For clarity of presentation, it makes sense to group the goalsand objectives by program unit if the organization has only afew programs if some programs are organized into largerprogram groups (e.g., Case Management Program in theDirect Services Program Group), the goals and objectives willbe delineated at both the group level and the individualprogram level.

VII. Management Goals and Objectives

In this section the management functions are separated frothe program functions to emphasize the distinction betweenservice goals and organization development goals. This givesthe reader a clearer understanding both of the difference andthe relationship between the two sets of objectives, andenhances the “guiding” function of the plan.

VIII. Appendices

The reason to include any appendices is to provide neededdocumentation for interested readers. Perhaps no appendicesare truly necessary (many organizations opt for brevity). Theyshould e included only if they will truly enhance readersunderstanding of the plan, not just burden them with moredata or complication factors.

Questions:

1. What are the key elements of strategic planning?2. What is short term planning?

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3. Why long range planning is important for organizations?4. Explain the steps in strategic planning.

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Lesson 2.3 Formulation of Strategy

2.3.1 Resource for formulation strategy:

1. Companies “go international” for many reasons, includingreactive ones, such as international competition, tradebarriers, trade barriers, and customer demands. Proactivereasons include seeking economies of scale, newinternational markets, resources access, cost savings, andlocal incentives.

2. International expansion and the resulting realized strategy ofa firm is the result of intentions from both rational planningand responding the emergent opportunities.

3. The steps in the rational planning process for developing aninternational corporate strategy comprise defining themission and objectives of the firm, scanning the environmentfor threats and opportunities, assessing the internalstrengths and weaknesses of the firm, considering alternativeinternational entry strategies, and deciding on strategy. Thestrategic management process is compelted by putting intoplace the operational plans necessary to implement thestrategy, and then setting up control and evaluationprocedures.

4. Competitive analysis is an assessment of how a firm’sstrengths and weaknesses, vis-à-vis those of its competitors,affect the opportunities and threats in the internationalenvironments. Such assessment allows the firm to determinewhere the company has distinctive competencies that withgive it strategic advantage, or where problem areas exist.

5. Corporate-level strategic approached to internationalcompetitiveness include globalization and regionalization.Many MNCs have developed to the point of using anintegrative global strategy. Entry and ownership strategiesare exporting, licensing, franchising, contract manufacturing,turnkey operations, management contracts, joint ventures,

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and fully owned subsidiaries. Critical environment andoperational factors for implementation must be taken intoaccount.

2.3.2. Success of Wal-Mart:

If one looked back at the hurable beginnings of Wal-Mart stores,the question would be answered with a resounding YES. Wall-marthas grown from a small town store to over 1600 stores and MegaCenters. The company has expanded its operations unemotionallyto Puerto Rico, Mexico, Canada, Brazil, Argentina, China, andIndonesia. The chain reported net sales for the year ended January31, 1997 as $104.4 billion. Sam’s Clubs reported earnings for thesame period of $19.6 billion.

Sam Walton was focused and had a retail strategy that isunmatched by any U.S. Corporation. Even the computer giant IBMcould not reach the $100 billion mark (and they have had moreyears experience, and operate in more countries that any other firmin the world. In the retail industry, Wal-Mart surpassed K-Mart,Target, and Scars stores to take the number one spot. The mainstrategy in consistently low prices and high customer service.Wal-Mart is also a good corporate citizen making sure that they sellenvironmentally safe products, contribute to the community, focuson training, control inventory, and locate in areas where theyreceive high visibility and find the opportunity for growth.

A strategy is a comprehensive plan of action that sets criticaldirection and guides the allocation of resources to achievelong-term organizational objectives. There are give steps in theStrategic Planning Process, which include.

Identify organizational purpose and objectives. Questions toask here are “what business are we in?” and “where do wewant ot be in that future.

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Access current performance vis-à-vis purpose and objectives,making, “how well are we currently doing?”Create strategic plans to accomplish purpose and objectives.Ask, “How can we get where we really want to be?”Implement the strategic plans, asking, “Has everything thatneeds to be done been done?”Evaluate resulting and renew the strategic planning processas necessary. Questions ask here are, “are things working outas planned, and what can be improved?”

When planned and implemented properly, strategic managementcan be used by organizations to gain a significant competitiveadvantage. For example: Target does not attempt to compete headto head with Wal-Mart. Instead, the company attempts to gain acompetitive advantage serving department store shoppers througha emphasis on fashion apparel bargains, while matching otherdiscounters on prices of everyday household items. Althoughlargely a top management responsibility, managers at all levels inthe organization must participate in, and support the process.

Strategic Management is accomplished through a) Strategyformulation, and b) Strategy implementation. In strategyformulation current situations are analyzed, and strategies areselected that best fit the organization’s needs. After strategies areselected they are put into actions. A good example of this would bea company whose top management decides that they want to growrevenue by 20% per year over the next then years. They will in turnset objectives based on the internal and external environment.Planning sessions will be assigned what is considered a fair shareof the responsibility to achieve the organization’s objectives. Afterdeciding what resources are needed, the strategy is implemented.The plan is managed through strategic management to ensure thatstrategies are well implemented and are sufficient to meet theorganization’s long term organizational success.

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Before an organization can focus on the strategic management ofits objectives, there must be a mission. An organization’s missionis referred to as its reasons for existence, and reflects theorganization’s basic purpose as a supplier of goods and/or services.There are official objectives which state the basic purpose of theorganization as a supplier of goods and/or services; and operatingobjectives which state specified ends toward which organizationalresources are actually allocated, identifying key results that arepursued in the organizations day to day activities.

Several common operating objectives for managers are:profitability, market share, human talent, financial health, costefficiency, product quality, innovation, and social responsibility. Ifyou look at an annual report of any organization, you will see theseitems referenced in almost 100 percent of them. Organizationswant to product a net profit; they want to gain and hold the highestpossible market share; recruit the most highly talented workers;they are interested in earning positive returns, while usingresourced in way that lowers operating costs; product high qualitygoods and services in order to remain competitive; they must findinnovative ways to product new products; and be a good corporatecitizen by making positive contributions to the community.

There are different levels of strategies used by organizations.Corporate Strategy sets overall strategic directions and answersthe question, “What business should we be in?” Business strategysets direction for a strategic business unit (SBU) and answers thequestion “How do we compete in this particular business area?”Functional strategy guides activities within specific functional areaand answers the question, “How can we best apply functionalexpertise to serve the needs of the business unit ororganization?”

The four Grand strategies use by organizations include: 1) Growth– the pursuit to increased organizational size through expandedoperations. Specific growth strategies include concentration and

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diversification 2) Retrenchment – reduced organizational sizethrough operations cutbacks. Types of retrenchment strategiesinclude Turnaround, Divestiture, and liquidation. 3) Stability –Pursuit of present course of actions. Also known as “low risk.” 4)Combination – two or more strategies at the same time. Acompany can have different strategies for different divisions.

Major elements of the strategic management process are, Analysisof Mission – including the domain in which the organizationintends to operate including its customers, products, locations, andphilosophy. Analysis of Values – which defines the corporateculture, values, beliefs, and ethical guidelines. Analysis of theOrganization - pointing out the organization’s strengths andweaknesses through SWOT Analysis, and DistinctiveCompetencies. Finally an Analysis of Environment – the secondpart of the SWOT analysis, showing the opportunities and threats tothe organization. Varying environmental conditions have differentimplications on strategic planning. When operating in a stableenvironment, strategies are more stable. When the environment isdynamic, strategic become more flexible; and when theenvironment is uncertain, organizations use contingency strategy.

Keys to successful/effective strategy implementation are:Management Systems and Practices - having the support of theentire organization. This requires the complete Managementprocess of effective planning, organizing, leading, and controlling;and Incrementalism – incremental changes as managers learn wereaccomplished.

In order to avoid some of these pitfalls some basic questionsshould be asked in an effort to double check a strategy.

1. Is the strategy consistent with the organizational mission &purpose?

2. Is the strategy feasible, given strengths and weaknesses?3. Is the strategy responsive to opportunities and threats?

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4. Does the strategy offer a sustainable competitive advantage?5. Is the risk in the strategy a “reasonable” risk?6. Does the strategy have an appropriate time horizon?7. Is the strategy flexible enough?

In studying Entrepreneurship we find that it is someone who iswilling to take the risk that results in the creation of newopportunities for individuals and/or organizations. An entrepreneuris an individual who takes a risk and action to pursue opportunitiesand situations that others may fail to recognize. Mostentrepreneurs have the following characteristics: Internal focus ofcontrol, high need for achievement, tolerance for ambiguity,self-confidence and are action oriented. Entrepreneurs play a veryimportant role in the formation of small business. Small businessoffers two major economic advantages. They create jobopportunities, and are the sources of many new goods and services.However, small businesses have a high failure rate (50 to 60 precent within the first five years). It has been determined that smallbusiness without a business plan are the most likely to fail. Largeorganizations also depend on entrepreneurial managers who arewilling to assume risk.

Questions:

1. What are the reasons for formulating strategy?2. Why there is a need to evaluate the requirement of strategyformulation?

3. What are the reasons for the success of Wal-Mart?

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LESSON 2.4 PROJECT LIFE CYCLE

2.4.1 Introduction:

The Guide to the Project Management Body of Knowledge (1996)defines a project as “a temporary endeavor undertaken to create aunique product or service” and proceeds into a fairly detailedexplanation of the terms “temporary” and “unique product orservice”. For details, peruse their we site at www.pmi.org andfollow the links for PMBOK (Project Management Body ofKnowledge). Our textbook, Shrub, Bard, & Globerson (1994), p.l.,provide a similar definition: “a project is an organized endeavoraimed at accomplishing specific non-routine or low volume task.”They cite, on p. 5, Archibald (1996) who defined a project as “theentire process required to product a new products, new plant, newsystem, or other specified results”, and General Electric (1977), “anarrowly defined activity which is planned for a finite duration witha specific goal to be achieved.”

Each of these definitions and others than can be identified in theliterature, have strong and weak points. A project is defined andcarried out to fulfill the need of a user, a client… It implies a goaland actions to be carried out with given resources. Any complexactivity directed toward the productions of goods or services whichwill gather resources, the management of which is without stronglink with the rest of the organization.

Project Life Cycle (PLC) is the name given to the steady progressionof a project from its beginning to its completion. The word “cycle”suggests a circular movement, but the progression is sequential.Iteration is a distance series of activities designed to float ideas orsamples for review. It could be modules and components fortesting before solidifying then into the final working product. Theessence of iteration is to repeat the sequence to yield resultssuccessively closer to the required product. Projects can beclassified on the basis of risk, business value, length, complexity

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and cost.

At its most basic, it is generally accepted that

A typical project life span consists of two broad periods each of twophases (i.e. four in all)

The first period involves conceptualizing, validating and planning.

The second period involves implementation, i.e. actual constructionof the product followed by its transfer to the intended customer.

Please phases are known by different names in differentenvironment.

2.4.2 Attributes of the phases of PLC:

The U.S. Department of Defense directive 5000.2 (1993) includes avery specific set of phases to be used in defense acquisitionprojects:

1. concept exploration and definition2. demonstrate and validation3. engineering and manufacturing development4. production and deployment5. operations and support

Locking at the construction industry, (Morris (1981), identified fourphases:

1. feasibility2. planning and design3. production4. turnover and startup

Whitten and Bentely (1998) look at the life cycle of information

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systems development and identify five stages or phases:

1. planning2. analysis3. design4. implementation5. support

Although not immediately apparent by scanning the bullet-pointsof the phases above, these life cycle models maintain somecharacteristic similarities.

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Phase 2: Develop the idea into a practical plan (D)

Listening, analysis, alignment, planning, commuitment

Phase 3: Execute the plan (E)

Production work, coordination, cooperation, testing

Phase 4 : Finish the project (F)

Transfer of product and information, review, closureFollow the sequence C-D-E-FIn general:Requiring different levels of management attentionAnd different skill setsIn additionThe transition between one phase and the next shouldrepresent a “control gate”That is, you don’t move to the next phase until you aresatisfied with the current one.

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Depending on the size, complexity, risk, sensitivity and so on,these typical phases may be broken down into sub-phases,and a variety of different stages or iterations depending onthe project and its type.These will be specific to the project, andWill depend on the overall strategy for accomplishment.

2.4.3 Types of projects:

Type A: expected to have a very high business value, highcomplexity (some tasks require a technical solution not yetknown)? High risk (ex: some (R&D projects), duration severalyears, large or small group, significant investment for theorganizationType B: shorther in lengths, technologically challenging butno research, still significant investment for the organiaation,good expected business value.Type C: use only established technology (5 persons, about 6months)

Some special features of an internationals project

Participants do not have the same cultural background(various nationalities, cultures, value system, constraints…)Necessity to have coordinating language (internationalEnglish in our case)Participants are geographically dispersed (distance, timelag…)

Persons involved in Project

Project member (managers + engineers)Future users of results (client)Experts

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Subcontractors

Technical performances

One is looking performance of quality level.One is looking to fulfill precise specificationsDesire to achieve a higher level of performance than before.

Time constraint (deadline)

Fundamental characteristic of the projectAny overshooting of the deadline could be fatal to the wholeproject.Ex: in a software company to create a new software to rununder WindowsIn all European companies: to be ready for the new Eurocurrency

Cost objective

Budget must be respected:o The contract is fix costo The objective is to decrease production cost (new unitof production for microprocessors, electronic marketplace in a B to B)

2.4.4. Typical Project Management Life Cycle:

A typical project life cycle consists of the following steps:Scope of the project

State problemIdentify problemIdentify goalIdentify success criteria

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Develop planIdentify activitiesResources requirementsConstruct /analyze network

Execute planRecruit project teamEstablish rulesExecute tasks

Monitor / control

Progress reporting systemsMonitor progress

Close our projectProvide deliverablesObtain client acceptance

Task of project controlMotivate participantsControl realization of tasks (budget, time, quality)Project schedulingEstimate consequences of incidents (rescheduling…)

2.4.5. The four C’s project management:

CommunicateCoordinateCooperateControl

Communicate and motivateTo generate a common desire to reach the objectiveTo transform the goal into reality

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To provide a reward system coherent with project goals

Need to coordinate (organize)To avoid the dispersion of efforts (bad use of resources)To define the task of each project participantTo have clear responsibility for the project and for each tasksright from the beginningTo plan the necessary resources in terms of manpower,competencies equipment, finance.

How to coordinateAnswer the question:Who does what?When?Where?How?Remark: to answer the above questions you must know whichtasks have to be carried out. This is a knowledge questionnot a management question!

Styles of Decision Process

Directive: project manager for the project and activitymanager for the activity makes the decisionParticipative: everyone in the team contributes to thedecision making process.Consultative: the person in authority make the decision, butonly after consulting all members of project team.

2.4.6 Standard Project Problem:

Lack of a particular competence, needed to achieve the goal,in the team membersLack of an equipment or componentTechnical solution not known

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Individual tack of motivation to achieve project goal (theproductivity of a workgroup seems to depend on how thegroup members see their own goals in relation to the goalsof the organization.)Project member does not communicate his difficulties(hopcreep)A task ever-run the task deadline(work but no progress)Conflicts between project membersTeam member add features or functions to the deliverables…

Reasons for IT project failure (based on 1000 IT managers,Standish Group 1995)

Incomplete requirementsLack of user involvementLack of resourcesUnrealistic expectationsLack of executed supportChanging requirement and specificationsLack of planningElimination of need for the projectLack of IT managementTechnology illiteracy

Question:

1. What are the C’s in project management”2. What are the stages in project life cycle? Give reasons3. Identify the reasons for the success and failure of projects.4. Explain the various types of projects.

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LESSON 2.5 PORTFOLIO ANALYSIS

2.5.1 Introduction

Portfolio analysis plays a vital role in the analysis, planningimplementation of various strategic business units of theorganization as a whole. Portfolio planning is best advised fordiversified companies than a more product coherent ones. Portfolioplanning hence recognizes that diversified companies are acollection of businesses, each of which makes a distinctcontribution to the overall corporate performance and which shouldbe managed accordingly. Such companies are expected to redefinebusinesses for strategic business units (SBU), which may or may notdiffer from operating units. They then classify these SBUs on aportfolio grid according to the competitive position andattractiveness of a particular product market. Based on these, theyuse that framework to assign each a ‘strategic mission’ withrespect to its growth and financial objectives and allocate resourcesaccordingly. Companies can that theoretically assess the strategicposition of each of their enterprises and compare these portionusing cash flow a s the common variable. The four components ofstrategy can be seen as influences on the firm’s effectiveness andefficiency. The firm’s effectiveness is determined y the combinedinfluences of scope, distinctive competence and competitiveadvantages.

2.5.2. Objective of Resources Development:

1. Implementing Corporate Level Strategy

Resources development is very helpful implement corporate levelstrategy. Corporate level strategy is to determine what business togo into the relative allocation of resource and management ofsynergies among them.

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2. Direct Interaction with Scope and Resources Deployment

They should three fore be considered at the corporate level shouldnot be treated as functional area policy decisions to be decided atlower levels. Business level strategy focuses on how to compete ina particular product market segment or industry. Competitiveadvent ages and distinction competencies thus become dominantstrategic concerns at this level. At functional level, the primaryfocus of strategy is efficiency.

2.5.3 Types of portfolio planning:

Following are ht possibilities of various types of portfolio planningundertaken by companies.

Table 9.1 Types of portfolio planning

Types ExplanationsAnalyticplanning

Portfolio planning is only inthe stage of planning tooland traditional administrativetools are used

Processplanning

Portfolio planning as acentral part of the ongoingmanagement process andstrategic mission is explicit inactivities.

2.5.4 Benefits of portfolio planning:

Since the road to portfolio planning is a long one, companies oftenget stack, trying to implement it and cannot realize the fullpotential of the approach. In implementation portfolio planning,companies often write in biases the black its usefulness, including

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the tendency to focus on capital investment rather than resourceallocation In spite of such limitations, portfolio planning a offeringthe following benefits to companies is implemented properly.

1. It promotes substantial improvement in the quality ofstrategies developed at both the business and the corporatelevel.

2. It provides a guideline for adopting their overall managementprocess to the needs of each business.

3. It provides selective resources allocation to the various SBUs.4. It furnishes companies with a greatly improved capacity forstrategic cannot when portfolio planning is appliedintelligently and with attention to its limitations andproblems.

2.5.5. Peter Drucker on portfolio planning:

Peter Drucker suggests a mechanism of portfolio analysis ofproducts within the company. He suggests that all products can beclassified into five groups as follows:

Tomorrow’s breadwinners:

These are either modification or improved versions of what onecompany has got as their major products or new products.

Today’s breadwinners:

These may exist today but they really are the innovations ofyesterday.

Yesterday’s breadwinners:

These are old hat hut eat up all that they earn.

“Problem children”

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Difficult to live with perhaps but better parental control shouldmake the difference between a healthy child and a potential deviantchild.

“Also-rains:”

These are otherwise known as “me-too” products in the marketwhose existence itself is a question mark.

2.5.6 Boston Consulting Group Matrix

The business policy portfolio models are most popular useful tounderstand the firms strategic concerns and choices. They definedthe firm’s scope or domain by highlight the inter-relatedness ofdiverse factors such as

1. Market growth2. Market share3. Cash and Cash flow patterns4. Capital intensity5. Product maturity etc.

Table BCG Growth/Share Matrix

Relative market share

MarketGrowth

High Low

High Star Questionmark

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Low Cash cow Dog

Star

Star are high growth – High market share business which may ormay not be self sufficient in term flow. This cell correspondsclosely to the growth phase or product life cycle.

Cash cows

As the term indicates, cash cows are business which generate largeamounts of cash but their rate of growth is show In terms of PLC,these are generally mature business which are reaping the benefitsof experience curve. The cash generation exceeds the reinvestmentthat could profitably the made into ‘cash cows.”

Question Marks

Business with high industry growth but low market share forcompanies are question marks or problem children. They requiredlarge amount of cash to maintain or gain market share. Questionmark is usually new products or services, which have a goodcommercial potential.

DogsThose businesses, which are related to slow growth industries andwhere a company has a low relative market share, are termed as‘dogs’. They neither generate nor require large amounts of cash. Interms of PLC, the ‘dogs’ are usually products in the late maturity ordeclining stage.

The firm should hold its dominant market position by reducingprices and thus keeping away the high cost competitors. Cashflows are likely to be negative during the growth phase in adominant market since the firm will have to keep in investing to

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maintain its competitive edge. Dominant position generatespositive cash flows, during the mentioned stage of life cycle.

The BCG matrix makes it very clear that a firm for its ultimatesuccess needs a balanced portfolio of products or businesses. Theindividual businesses commit the firm’s resource. Portfolio, whichshould act as a guide to commit the firm’s resource. Portfolioshould be balanced in terms of profit, cash flows, and overallcorporate risk.

2.5.7 GE Nine Cell Matrix:

Another corporate portfolio analysis technique is based on thepioneering effort of general electric (GE) company of the unitedstate supported by the consulting firm of Mckinsey & Company.

The vertical axis represents industry attractiveness, which is aweighted composite rating based on eight different factors. Thesefactors are-

1. Market size and growth rate2. Industry profit margins3. Competitive intensity4. Seasonably5. Cyclically6. Economics of Scale7. Technology and8. Social, environmental, legal and human impacts.

The horizontal axis represents business strength competitiveposition, which is again; a weighted composite rating based onseven factors. These factors are

1. Relative market share2. Profit margins3. Ability to compete on price and quality

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4. Knowledge of customer & market5. Competitive strength and weakness6. Technological capability and7. Caliber of management

Table GE Nine Cell MatrixIndustry attractiveness

BusinessStrengths

High Medium Low

High InvestmentGrowth

Selectivegrowth

Selectivity

Medium Selectivegrowth

Selectivity Harvest

Low Selectivity Harvest Harvest

The two composite values for industry attractiveness and businessstrength/competitive position are plotted for each business in acompany’s portfolio. The PIE (Circles) denotes the proportional sizeof the industry and the dark segments represent the company’smarket share.

The nine cells of the GE matrix are grouped on the basis of low tohigh industry attractiveness and were to thrown business strengththree zones of three cells cash are made denoting differentconditions represented by green yellow and red colors for thisreason, the matrix is also known as the stoplight strategy matrix.Based not the three zone, the signal is go ahead to grow and buildindicating expansion strategies business in the green zone attractmajor investment for the yellow zone, the signal, “Wait and See”indicate hold and maintain type of strategies aimed at stability andconsolidation for the red zone the signal is top indicate

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achievement strategies of divestment and liquidation or rebuildingapproach for adopting turnover strategies.

Advantages

1. It compared to the BCG matrix it offers intermediateclassification of medium and average rating.

2. It incorporates a large variety of strategies variables likemarket there & industry size.

Draw Back

In only provides broad strategic prescriptions rather that thespecific or business strategy.

2.5.8. Directional policy matrix (DPM)

The DPM is a method of business portfolio analysis formulated byShell International Chemical Company. It has nine cells in whichbusiness are located depending upon their scores on each of thetwo axes: Expected marker profitability and competitive positions.The horizontal axis, labeled “business actor prospects” or“prospects for market sector profitability,” is a measure similar toindustry attractiveness used in the GE planning grid.

A firm is rated on a scale from “unattractive,” through “average,” to“attractive” depending upon an evaluation of its industry’s marketgrowth, market quality, and environmental aspects. Similarly, itslocation on a scale that has from a “weak,” through “average,” to“strong” competitive position is determined by answering questionsabout as market shares position, production capabilities, and R&Dstrongly.

The cell labels represent possible strategic activities or types ofresource deployments most appropriate, for the firm, given itsscore on cach of the two axes. More specifically these cell label’s

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have the following implications:

Disinvest (1.1): Likely already iosing money; net cash flow,negative over time. Losses may be minimized by divestitureor even liquidation.Phased Withdrawal (1,2) and (2,1) : Probably not generatingsufficient cash to justify continuation; assets can bereconloyed.Cash Generator (3,1): Equivalent to a “cash cow” in the GEplanning grid. A firm or product would occupy this cell inlater stages of the life cycle that does not warrant heavyinvestment. But can be “milked” of cash due to its strongcompetitive position.Proceed with Care (2,2): Similar to a “question mark,” firmsfalling in this sector may require some investment supportbut heavy investment should be extremely riskyGrowth (upper-3.2) and (lower – 2.2): Similar to a GEplanning grid “green light” strategy. A firm, product, or SBUin these sectors would call ford investment support to allowgrowth with the market. It should generate sufficient cash onits own.Double or Quit (1.3): Units is this sector should become “highfliers” in the not too distant future. Consequently these in theupper rightmost corner of cell (1,3) should be singled out forfull support. Others should be abandoned.Try Harder 2.3): External financing may be justified to push aunit in this sector to a leadership position. However, such amove will require judicious application of funds.Leader (3.3) (lower – 3.2): The strategy for this segment is toproject this position by external investment (funds beyondthose generated by the unit itself – occasionally), earningsshould be quite strong and a major focus may bemaintaining sufficient capacity to capitalize on strongdemand.

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Table Directors’ Policy Matrix

Insepects for sector profitability

\Company’sCompetitiveCapabilities

Unattractive Average Attractive

Weak Disinvest PhasedWithdrawal

Double orQuit

Average PhasedWithdrawal

CustodialGrowth

Try harder

Strong Cashgeneration

GrowthLeader

Leader

The DF can thus be used to identify strategies for single businessas well as for plotting combinations of units in multi business ormulti products firms. Locating competitors on the DPM can provideuseful insights into the nature of corporate-level strategicconfigurations. However, there is room for crror in the positioningof a firm or product on the two axes, and thus DPM location shouldbe interpreted with an upon mind and not in isolation. TheDirectional Policy Matrix (DPM) developed by Shell Chemicals; U.K.uses the two parameters of “business sector prospects” and“company’s competitive abilities.

A number of factors such as marked growth, market quality,market supply, etc. are used to rate the business sector prospectsas unattractive, attractive or average. A company’s competitiveubilities ar similarly judged weak, average, or strong non the basisof several factors. The 3 x 3 matrix when plotted from the bassi forrecommientind baseline strategies. One advantage on DPM it thatone of its extension; “risk matrix” provides alternative way toanalyze environmental risk. In a risk matrix, environmental risk istaken as the third dimension and is divided into four categories

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from categories from low risk to very high risk. Each risk position isdetermined on the basis of environmental threats and theprobability of their occurrence.

2.5.9. Business Profile matrix:

This matrix is more flexible than the growth/share matrix and usescompetitive position and industry maturity as the two dimensions.It uses twenty cells for clearity of resources allocation. Empiricaldetermination of the correlates of the two dimensions is superior tothe growth/share matrix.

Table Business Profile Matrix

Stage of Industry maturity

CompetitivePosition

Embryonic Growth Maturity Aging

Dominant

Strong

Favourable

Tenable

Weak

2.5.10. Designing a portfolio:

In order to design a portfolio, the following guidelines aresuggested by Yoram Wind and Vijay Mahajan:

Establishing the level and unit of analysis and determiningwhat links connect them.

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Identifying the relevant dimensions, including single-variableand compositeDetermining the relative importance of the dimensionsTo the extent that two or more dimensions are viewed asdominant, constructing a matrix based on them.Locating the products or businesses on the relevant portfoliodimensionsProjecting the likely position of each product or business onthe dimensions if (a) no changes are expected inenvironmental conditions, competitive activities, or thecompany’s strategies and if (b) changes are expected.Selecting the desired position for each existing and newproduct and developing how resources might best beallocated among these products.

In order to establish a matrix our of the available information fromboth the company and the market, the GE matrix can beconstructed using the following steps:

1. Identify the factors making for an attractive market.2. Establish the business position factors3. Give agreement among managers to factors.4. Make priority list and give each a weightage as in thefollowing table 9.6.

5. Measure each factor – by market research, internal discussionor external information.

6. Apply the weightage to the measurement and arrive at a total.7. Apply the totals to the matrix and8. Start a discussion on what the figures show.

Table Market attractiveness and business position measurement

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Factors Weight(%) Measurement Value

Marketattractiveness

Overall size .20 4.00 0.80

Annual growth .20 5.00 1.00

Competitiveintensity

.15 4.00 0.60

Technologyrequirements

.15 2.00 0.30

Inflationarypressures

.15 3.00 0.45

Energy need .05 2.00 0.10

Historical margins .10 1.00 0.10

Social/legal/Economic/Political/Technological impact

Must beacceptable

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1.00 3.35

Business Strengths

Market share 0.10 2.00 0.20

Share growth 0.15 4.00 0.60

Product quality 0.10 4.00 0.40

Brand reputation 0.10 5.00 0.50

Distributionstrength

0.05 3.00 0.15

Promotionaleffectiveness

0.05 2.00 0.10

Productioncapability

0.05 3.00 0.45

Unit costs 0.15 5.00 0.75

R&D strength 0.10 4.00 0.40

Managementeffectiveness

0.05 4.00 0.60

Using the above, a, cash of Digital theater system (dts) product tobe sold in the theatres of Mumbai, the following done to done tofind out about the investment proposition:

Product Digital theatre system

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market Recommended for investment Mumbaitheatres

Attractivenessfactors scale

Informationavailable

importance

Market size Yes 1

Current coverage No 2

Competition Yes 3

Current systems Yes 4

Social aspects No 5

Legal aspects No 6

Businessstrengthfactors

Five-pointmeasure

Witghtage Value

Market share 2 5 10

Productquality

4 15 60

Brandreputation

5 10 50

Distributionnetwork

5 15 75

Promotionaleffectiveness

2 10 20

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Costs 3 5 15

Managerialpersonnel

2 10 20

70 250

Possible Total 350

Marketattractivenessfactors

Five-pointmeasure

Weightage Value

Market Size 5 15 75

Coverage 4 15 60

Competition 2 5 10

Currentsystems

4 10 40

Social aspects 2 5 10

Legal aspects 2 5 10

60 10

Possible Total 275

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Table Investment matrix scales:Industry attractiveness

0 300 200 100

350 High Medium Low

233 High +

BusinessStrengths

Medium

117 Low

0

The next stage was to use the matrix to compare the presentmarkets with Mumbai as a potential investment by using the samebasis. Hence the + in the matrix clearly gives evidence forinvestment in the market concerned.

Questions:

1. What are the constraints of portfolio analysis?2. Why SBU concept is used for portfolio analysis?3. Classify the various matrices and explain their significance?4. Trace the developing of GE matrix.

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LESSON 2.6 STRATEGIC DECISION MAKING

2.6.1 Introduction:

Although the process of creating strategy is often discussed as if itwere an unconstrained design process, keep in mind that whilestrategists evaluate strategy, the firm is operating. This evaluationinvolves assessing the extent to which present strategy is meetingexpectations. It may be the case that only a small part of, any,marketing strategy would have to be changed to correct acorporate – and business-level strategy, and also of he firm’sfunctional strategy performance is les than satisfactory, the reasonoften is a functional strategy shortcoming. One might say that a“good” business-level strategy would have been poorlyimplemented by part of its functional strategy set. For this simpleexample, a change in marketing strategy could improveperformance while other levels of strategy would remainunchanged.

Alternatively, a problem with nature of a firm’s or SBU’s businessbrough about by a major environmental opportunity or threat, achange in that level’s goals set, or the development of someinternal capability or weakness could necessitate a business-levelstrategy change. The new strategy would probably include vestigesof the old along with some unfamiliar elements. In most cases awhole new functional strategy set would likely have to be designedand put into effect to implement the new business-level strategy.

More generally, one could conceivably change parts of a firm’sfunctional strategy set without changing business-level strategy.However, rarely would one expect to encounter the case in which achange in business-level strategy did not trigger the necessity toalter functional-level strategy in some way, at least not in asuccessfully managed business.

There is a risk of incorrectly identifying the strategy level at which a

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problem exists. A tendency exists in business to changefunctional-level strategies or organizational structure in a attemptto remedy any problem. Of course, if the problem existed withinthe firm’s corporate-or business-level strategy, for example,changing functional-level strategy would not correct it. In fact, thismove would most akely agggaeitv the situation. The reason for thistendency is probabley that functions, strategy chages arepotentially less disruptive then changes in the other levels. Theycertainly would offedct fewer people thatn modifications or thecorporate or business levels.

The result of trying to solve-business-level strategic problem witha functional-level solution is well inlnnn by the “big four” U.S.automobile companies. With overseas competo’s exportingfier-effective automobiles to the United States, and with widelyacknowledged shrankages of fossil fuel suppliers,. they stillstubbornly tried to retrun their old business and corporatestratregies, well into the 1970s, by changing market stretety only.A set of major environemntsal threats, particualry at the

Strategies thinking is that which generates (1) creative,environmentally relevant ideas and (2) concepts about how to turnthem into systematically managed action plans. It has the followingprerequisites:

1. Input information is based on facts and logical data.2. Previously unquestioned assumptions are sought out andexamined.

3. A burning desire for resource conservation, and4. In direct, spontaneous, and unexpected thought processeswhich are hard for competitors to predict.

These requirements of strategic thinking set it apart from otherkinds of decision making. First, strategic thinking required factualand logical input data because it is competitively dangerous to

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base strategy formulation on erroneous information. The stakes aretoo high to “hoof it.” Second, long-held assumptions should beidentified and analyzed to make sure they still apply. This isespecially true about goals which are in force, understandingsabout the environments and competitors, market acceptance andimage, etc. Third, the manager attempting to thing strategicallyshould be committed to conservation of the organization’sresources, rather than expecting that a good idea will precipitate acornucopia of funds, people and support. It is easy to be creativewhile assuming that most resource requirements can be taken careof. A grater degree of creativity is required when one mustconserve resources.

Finally, strategic thinking must be done without setting patternswhich competitors can identify and anticipate. The problems ofpredicatable strategic thinking are analogous to the football coachscnding in plays to his quarterback using hand signals that areunderstood by the opposing term’s coaches.

2.6.3 Complexity of decision making:

Many people still remain in the bondage of self-incurred tutelage.Tutelage is a person’s inability to make his/her own decisions.Self-incurred is this tutelage when its cause lies not in lack ofreason but in lack of resolution and courage to use it withoutwishing to have been told what to do by something or somebodyelse. Sapere aude! “Have courage to use your own reason!”, was themotto of the Enlightenment era. During this period, Franciso Goyacreated his well-known “The sleep of reason produces monsters”masterpiece.

Through the Enlightenment era’a struggle and much suffering, “theindividual” finally appeared. Eventually human beings gained theirnatural freedom to think for themselves. However, this has been atoo heavy a responsibility for many people to carry. There has beenan excess of failure. They easily give up their natural freedom to

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any cults in exchange for an easy life. The difficulty in life is thechoice. They do not been have the courage to repeat the veryphrases which our founding fathers used in the struggle forindependence. What an ironic phenomenon it is that you can getmen to die for the liberty of the world who will not make the littlesacrifice that it takes to free themselves from their own individualbondage.

Good decision-making brings about a better life. It gives you somecontrol over your life. In fact, many frustrations with oneself arecaused by not being able to use one’s own mind to understand thedecision problem, and the courage to act upon it. A bad decisionmay force you to make another one, as Harry Truman said,“Whenever I make a burn decision, I go out and make another one.”

A good decision is never and accident; it is always the result ofhigh intention, sincere effort, intelligent direction and skillfulexecution; it represents the wise choice of many alternatives. Onemust appreciate the difference between a decision and an objective.A good decision is the process of optimally achieving a givenobjectives.

When deciding is too complex or the interests at stake are toimportant, quite often we do not know or are not sure what todecide and, in many substances, we resort to an informal decisionsupport techniques such as tossing a johoiu, asking an oracle,visiting an astrologer, etc. However formal decision support froman expert has many advantages. This web site focuses on theformal model-driven decision support techniques such asmathematical programs for optimization, and decision tree analysisfor risky decisions. Such techniques are now part of our everydaylife. For example, when a bank must decide whether a given clientwill obtain credit or not, a technique, called credit scoring, it oftenused.

Rational decisions are often made unwillingly, perhaps

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unconsciously, we may start the process of consideration. It is bestto learn the decision making process for complex, important andcritical decisions. Critical decisions are those that cannot and mustnot the wrong. Ask yourself the objectives. What is the mostimportant thing that I am trying to achieve here?

The decision-maker’s style and characteristics can be classified as:The thinker, the cowboy (snap and uncompromising), Machiavellian(ends justifies the means) the historical (how others did it), thecautious (even nervous), etc. For example, political thinkingconsists in deciding upon the conclusion first and then findinggood arguments for its.

The decision-making process is as follows:

1. What is the goal you wish to achieve? Select the goal thatsatisfies your “values”. Everyone (including organizations) hasa system of values by which one lives one’s life. The valuesmust be expressed on a numerical and measurable scale.This is needed in order to find the ransks among values. Thequestion “what do I want?” can be unbearably difficult(because of the conflicts among our desires) that we oftencan hardly bear to ask it. Winning a big money lottery has leftmost people wishing they had never brought the successfulticket. The goals follow from the values, and from ourcapacity (i.e., our personal abilities, and physical resources)to achieve goals. On the other hand, if there were no conflictamong our desires, each desire would be unchecked and wewould go careening without limit from one direction toanother. Abraham Maslow formalized general human desiresinto a hierarchy of wants, with the biological-genetic needsat the bottom and “self-realization” for creativity at the top.

2. Find out the set of possible actions youi can take and thengather reliable information aoutr each one of them.Information can be classified as explicit and tacit forms. Theexplicit information can be explained in structured form,

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while tacit information is inconsistent and fuzzy to explain.

The explicit information bout the course of actions may alsoexpand your set of alternatives. The more alternatives yourdevelop the better decisions you may make. Creativity in thedecision-making process resides in the capacity for evaluationof uncertain, hazardous, and conflicting information. You mustbecome a creative person to expand your set of alternatives.Creativity, arises out of thinking hard (i.e., becoming of athinker) rather than working hard (i.e. becoming of aworkaholic). A bulldozer must work hard, a human being mustthink hard.

A deep immersion in your decision-making process makes youmore creative. The roots of creativity lie in consciousnessincubation, and in the unconscious aesthetic selection of ideas thatthereby pass into consciousness, by the usage of mental images,symbols, words, and logic. The blocks to creativity are Saturation ortoo Narrow thinking, Inability to incubate (this, one must learnfrom cows), and the Fear of standing alone doing something new.Most people treat knowledge as a liquid to be swallowed easilyrather than as a solid to be chewed, and then wonder why itprovides so little nourishment. Aristotle noted, “We call in others toaid us in deliberation on important questions, distrusting ourselvesas not being equal deciding.”

Be objectives about yourself and your business. More than half ofmy students semester after semester, raise their hands when I ask“Is your judgment better than that of the average person?” It isimportant to identify your weaknesses as well as your strengths.

There is no such thing as a creative/non-creative persons. It is thecreative process which makes you more creative. Pablo Picassorealized this fact and said about himself: “All human beings areborn with the same creative potential. Most people squander theirsaway on million superfluous things. I expend mine on one thing

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and one thing only: my art.” Creative decision alternatives areoriginal, relevant, and practical.

3. Predict the outcome for each individual course of action bylooking into the future

4. Choose the best alternative with the least risk in achievingyour goal.

5. Implement your decision. Your decision means nothingunless you put at into action. A decision without an actionplan is a daydream.

The logic of worldly success rests on a fallacy: the strange errorthat our perfection depends on the thoughts and opinions andapplause of other men! A weird life it is, to be living always insomebody else’s imagination, as if that were the only place inwhich one could a last become real!

On a daily basis a manager has to make many decisions. Some ofthee4 decision are routine and inconsequential, while others havedrastic impacts on the operations of the firm for which he/sheworks. Some of these decision could involve large sums of moneybeing gained or lost, or could involve whether or not the firmaccomplishes its mission and its goals. In our increasingly complexworld, the tasks of decision-makes are becoming more challengingwith each passing day. The decision-maker (i.e., the responsiblemanager) must respond quickly to events that seem to take placeat an ever-increasing pace. In addition, a decision-maker mustincorporate a sometimes-bewildering array of choices andconsequences in this or her decision. Routine decisions are oftenmade quickly, perhaps unconsciously without the need for adetailed process of consideration. However, for complex, critical orimportant managerial decisions it is necessary to take time todecide systematically. Management means making critical decisionsthat cannot and must not be wrong or fail. One must trust one’sjudgment and accept responsibility. There is a tendency to look forscapegoats or to shift responsibility.

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Decisions are at the heart of any organization. At times there arecritical moments when these decisions can be difficult, perplexingand nerve-wracking. Making decisions can be hard for a variety ofstructural, emotional, and organizational reasons. Doubling thedifficulties are factors such as uncertainties, having multipleobjectives, interactive complexity, and anxiety.

Strategic decisions are purposeful actions. Making good strategicdecisions is learnable and teachable through and effective, efficient,and systematic process known as the decision-making process.This structured and well-focused approach to decision-making isachieved by the modeling process, which helps in reflecting in thedecisions before taking any actions. Remember that: one must notonly be consisious of his/her purposeful decision, one must alsofind out the causes for which they are made. There is no such thingas “free will.” Those who believe in their free wills are in factignorant to the causes that impel them to their decisions. There isnot such thing as arbitrary in any activity of man, least of all in hisdecision-making, and just as be has learned to be guided byobjectives criteria in making his physical tools, so he is guided byunconscious objectives criteria in forming his decision in mostcases.

The simplest decisions model with only two alternatives, is knownas Manicheanism, which was adapted by Zarathustra and thentaken by other organized religions. Manidheanism is the qualityconcept, which divides everything in the world into discreteeither/or and opposite polar, such as good and evil, black andwhite, night and day, mind (or soul) and body, etc. This dualityconcept was a sufficient model of reality for those old days in orderto make their world manageable and calculateable. However,nowdays we very well know that everything is becoming and has awide continuous spectrum. There are not real opposites in nature.We have to see the world through our colorful mind’s eyes;otherwise we do not understand complex ideas well.

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The Industrial Revolution of the 19th century probably did more toshape life in the modern industrialized world than any event inhistory. Large factories with mass production created a need formanaging them effectively and efficiently. The field of DecisionScience (DS) also known as Management Science (MS), OperationsResearch (OR) in a more general sense, started with the publicationof The Principles Scientific Management in 1911 by Frederick W.Taylor. His approach relied on the measurement of industrialproductivity and on time/movement studies in the factories. Thegoal of his scientific management was to determine the bestmethod for performing tasks in the least amount of time, whileunfortunately using the stopwatch in an inhumane manner.

A basic education in OR/MS/DS for managers is essential. They areresponsible for leading the business system and the lives in thatsystem. The business system is dynamic in nature and will respondas such to disturbances internally and externally.

The OR/MS/DS approach to decision making includes the diagnosisof current dicision making and the specification of changes in thedecision process. Diagnosis is the identification of problems (oropportunities for improvement) in current decision behavior; itinvolves determining how decisions are currently made, specifyinghow decision should be made, and understanding why decisionsare not made as they should be, Specification of changes indecision process involves choosing what specific improvement indecision behavior are to be achieved and thus defining theobjectives.

Nowadays, the OR/MS/DS approach has been providing assistanceto managers in developing the expertise and tools necessary tounderstand the decision problems, put them in analytical terms andthen solve them. The OR/MS/DS analysis are, e.g., “chief of staff forthe president”, “advisors”, “R&D modelers” “systems analysis”, etc.Applied Management Science is the science of solving business

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problems. The major reason that MS/OR has evolved are quickly asit has is due to the evolution in computing power.

2.6.4 Foundations of Good Decision-Making Process:

When one talks of “foundations,” usually it includes historical,psychological, and logical aspects of the subject. The foundation ofOR/MS/DS is built on the philosophy of knowledge, science, logic,and above all creativity. In this web site the decision “problem”,does not refer to prefabricated exercises or puzzles with whichmost educators continually confront students, such as the problemof finding a solution to a system of equations, without giving anymotivation for its need-to-know.

Science some decision problems are so complicated and soimportant, the individuals who analyze the problem are nto thesame as the individuals who are responsible for making the finaldecision. Therefore, this site distinguishes between a managementscientist, someone who studies what decision to make and adecision maker, someone responsible for making the decision.

When deciding to make good decisions there are possibilities to beconfronted with decision problems. It means real problems, theeffective handling of which can make a significant difference.Almost all decision problems have environments with similarcomponents as follows:

1. The decision-maker. The term decision-maker refers to anindividual, not a group.

2. The analyst who model the problem in order to help thedecision maker,

3. Controllable factors (including your personal abilities andphysical resources).

4. Uncontrollable factors,5. The possible outcomes of the decisions,6. The environment/structural constraints,

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7. Dynamic interactions among these components.

2.6.5 Deterministic versus Probabilistic Models:

All the decisions models can be classifies as either deterministicor probabilistic models. In deterministic models your gooddecisions bring about good outcomes. You get that which youexpect, therefore the outcome is deterministic (i.e., risk-free).However, in probabilistic decision models, that outcome isuncertain, therefore making good decisions may not product goodoutcome is uncertain, therefore making god decisions may notproduce good outcomes. Unlike deterministic models where gooddecisions are judged by the outcome alone, in probablilistic models,the decision maker is concerned with both the outcome value andthe amount of risk each decision carries. When the outcome of yourdecision is rather certain and all the important consequence occurwithin a single period, then your decision problem is classified as adeterministic decision. However, in many instances, these types ofmodels are encumbered with the two most difficult factors –uncertainty and delayed effects. Both difficulties can be overcomeby probabilistic modeling which includes the time discountingfactor. We will over both deterministic and probabilisticdecision-making models.

After recognizing this no-nonsense classification ofdecision-making components, the OR/MS/DS analyst performs thefollowing sequence with some possible feedback loops between itssteps:

1. Understanding the Problem: It is critical for a good decisionmaker to clearly understand the problem, the objective, andthe constraints involved.

2. Constructing an Analysis Model: This step involves the“translation” of the problem into precise mathematicallanguage in order to make calculations and comparison ofthe outcomes under different possible scenarios.

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3. Finding a good Solution: It is important here to choose theproper solving technique, depending on the specificcharacteristics of the model. After the model is solvedvalidatin of the obtained results must be done in order toavoid an unrealistic solution.

4. Communicating the Results with the Decision-Maker: Theresults obtained by the OR/MS/DS analyst have to beproperly communicated to the decision-maker. This is the“sale” part. If the decision-maker does not buy theOR/MS/DS analyst recommendations, he/she will notimplement any of them.

Problem understanding encompasses a problem structure, and adiagnostic process to assist us in problem formulation (i.e., givinga From to a complex situation) and representation. This stage is themost important aspect of the decision-making process. Problemunderstanding is an interactive process between the decisionmaker and the OR/MS/DS analyst. The decision maker may beunfamiliar with the analyst details of the problem formulation suchas what elements to include in the model, and how to include themas variables, constraints, indexes, etc.

Since the strategic solution to any problem involves making certainassumptions, it is necessary to determine the extent to which thestrategic solution changes when the assumptions change. You willlearn this by performing the “what-if” scenarios and the necessarysensitivity analysis.

Gathering reliable information at the right time is a component ofgood decisions. It is helpful to understand the nature of theproblem by asking “who?”, “what”, “why”, “when”, “where” and“how”. Finally, break them into three input groups, namely:Parameters Controllable, and Uncontrollable inputs. Uncontrollablefactors are the main components of decision-making which mustbe dealt with, by, e.g. forecasting. In making conscious decisions,we all make forecasts. We may not think that we are forecasting,

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but our choices will be directed by our anticipation of results of ouractions or omissions.

One must evaluate the various courses of actions within thecontrollable inputs, consider various scenarios for uncontrollableinputs, and then decide the best course of action. As you know, thewhole process of managerial decision-making is synonymousfunctions. Planning, for example, involves the following decisions:What should be done? How? Where? By whom? As shown in thefollowing diagram:

2.6.6. Structural Modeling

The structured modeling process is at the heart of OR/MS/DSactivities. The main question then becomes, “How close is themodel to the real world?” Know that a model is not reality, but itdoes contain some parts of reality. The question is: “Does it containthe important parts relevant to the decision problem?”

Modeling is a structured process is consecutive –focused –strategicthinking for understanding reality for utilitarian purposes. Theconnection between partitioning a circle into 360 degrees and ayear into a number of days in an interesting example. This desirefor a mathematical model of the universe and its processingdifficulties is apparent. Some analogous ones exited in music,architecture, etc. these mathematical models to represent realityrequired fitting between small integer number (for ease ofrepresentation ), and complex phenomena whose numericalparameters did not exactly fit in the integer –based scheme. It iscredible that the 360-system and the 6-8-9-12 scheme in musicwere the result of this conflict; these example are mathematicallysuitable models and semantically justified. As bill Gates side, “Ifyou, re any good at math at all, you understanding business. It’snot its own deep, deep subject.”

With mathematics as a language we can explain the mysteries of

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the universe or the secrets of DNA. We can understand the forcesof planetary motion, or discover cures for catastrophic diseases.Mathematics is not just for calculus majors. It’s for all of us. And it’s not just about making good strategic decisions.

Mathematics is part of human culture because it does not existoutside of the human mind. Symbolic reasoning and calculationswith symbols are central to analytical (i.e. mathematical) modeling.Therefore, like any foreign language you must develop anunderstading of mathematics, which si the language of all sciences,including the OR/MS/DS modeling process aimed at assisting thedecision-maker. Here is an example of the usefulness ofmathematical symbols. Suppose you wish to buy a shirt for $50(tax included), the tax is 5%, what is to original price of your shirt?Let x and y be the amount of the tax and the original pricerespectively, therefore, the mathematical modes is 50 = x + y, andx = 0.05y. This gives, 50 = 0.05y + y = 1.05y. Therefore, theoriginal price is 50/1.05 = $47.62. How much is the tax? How doyou generalize this result? You may ask, what is this x, inmathematics? Well, whatever we do not know we call it x (or anyother latter from the end of alphabet series). X also has a politicalsignificance as in Malcom X.

A mental model is a representation of your thoughts about reality.Therefore, it is an objectification of reality, which in turn meansthe subjective begetting of the reality. Mathematical models employsymbols and notations, including numbers. Thus, there are threedistance concepts: the reality, the mental model, and therepresentation. In its many different forms, analytical modeling is aprocedure that recognized and verbalizes and problem and thenquantifies it by turning the words into mathematical expressions.Modeling is a structured consecutive-focused-strategic thinkingfor understanding the decision problems and actions.

In all high schools around the world mathematics is used to

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translate Word or Story Problems into symbolic representations (i.e.,mathematical models). After solving, the results are translated backinto the original language in which the problem was stated.

OR/MS/DS is a systematic approach to problem solving in that itconsiders the context of the problem as important as the problemitself. It utilizes, a team approach by capitalizing on the talent of anOR/MS/DS analyst to asses, coordinate, and incorporate knowledgerelevant to solving a certain decision problem from experts in otherfields, (known also as think-tank approach). The difficulties in clearcommunication among the team members in any OR/MS/DSproject can increase with the size of the team. Span ofmanagement refers to the numbers of employees supervised by asingle person. The term itself has nothing to do with a desired sizeof the span. In other words, whether the one supervise twoemployees or one hundred, span of management is the ternapplied to the number. In the three-person group (i.e., onesupervisor and two employees), the six possible relationships orinteractions may exist.

By applying a scientific approach, managers are also able to makeaccurate predictions for what is not under their control. OR/MS/DSmodeling process is a scientific approach in that it uses measurableand numerical scales to translate observed phenomena. If ‘Godgeometrizes’ as Plato says, man certainly arithmetizes. The world isqualitative. However, human can understand compare, andmanipulate numbers only. Qualitative information may becharacterized and processed by assigning numbers. Therefore, weuse some measurable, numerical scales to quantify the world. Thisenables us to understand the world by finding any relationship, andusing manipulation comparison, calculation, etc. Then we use thesame scale to qualify it back to the world. This is the essence of the“human understanding structured process”.

Quantative analysis tends to rive out qualitative analysis, even inthe Liberal Arts areas of study, such as organization science,

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sociometrics, and psychometrics. The “fuzzy set theory” has evenbeen developed to quantify qualitative terms that we use toexpress out feelings. However, it is questionably whether theinternal world of one’s experience can also be subjected toanalytical modeling. Just like the external world. The following is aparaphrase of what Adam Smith said about the main difficulty inrepresentation of feeling “It is not an easy task to constructanalytical model for feeling, become our senses will never informus of what, e.g. somebody is in suffering as long as we ourselvesare at our cases. “However, in the medical professions it is commonto be questioned, “on a scale of one to ten, one being the worst,how do you feel? This elicits subjective answers from the patients.

Mathematical modeling can claim to be the most original creationof mankind. The originality of modeling lies in the fact that inmodel building connections between things are exhibited which,apart from the agency of human reason, are extremely unobvious.This the ideas, now in the minds of modeling lie very remote fromany notions that can be immediately derived by perceptive throughthe senses; unless it is perception stimulated and guided by anantecedent modeling process.

2.6.7 Advantages of using the modeling approach to problemsolving:

A question for you: “When a management scientist goes to work,does he/she wait for problem to be assigned or does he/she gofind problems?” Do not create problems for yourself and others.Wait for the problem to be assigned to you. The problem owner(s)and the management scientist consultant are two different parties.

A management scientist provides and and/or facts to the decisionmaker in order to make a better decision. The managementscientist should not attempt to make these decisions or toinfluence the decisions. As such, the management scientist and thedecision maker should not be the same person. The management

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scientist, therefore, is to serve as an objective voice to interpret amanagerial decision problem that cannot be solved internallybecause of proximity or bias.

A mathematical (i.e, analytical) model is the one whoserelationships are expressed in the rigorous language ofmathematics. In this way, a mathematical model is abstract becauseone cannot visualize the system it is supposed to portray by merelylooking at it.

Defining the system boundaries: Often, in modeling process theanalysts do not model “systems” – rather, they model specificproblems that the decision makers (i.e., the managers) wish tounderstand. It is important and necessary to clearly define theboundaries of the system’s decision problem under investigation.In this context a system is the restricted portion of the universeunder consideration and its boundaries are the limits that separatethe system from the remainder of the universe. Boundaries isolatethe system from its surrounding. Often it may turn out that theinitial choice of boundaries is too restrictive. Therefore, to fullyanalyze a given system it may be necessary to expand the systemboundaries to include other substems that strongly affect thedecision strategy. Suppose you are to study and make a descriptivemodel of an international airport, what are the boundaries for sucha large system?

Components of Analytical ModelingProcess

Classification ofKnowledge

Knowledge about Objects, Events,Processes, Relations

Types ofComprehension

Understand, Interpret, Relate, Select,Recall, Compare

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Types of Analysis Relate, Compare, Interpolate,Extrapolate, Generalize, Specify

Results of ModelEvaluations

Accept, Reject, Possible, Irrelevant

Know that analytical modeling is more than a collections ofconcepts and skills to be mastered; it includes methods ofinvestigation and reasoning, and the means of communications (i.e.,making common what is individually experienced). Depending onthe audience of the report, the mathematical model may or may notbe included. It is the task of the management science team to writea report that is understandable by all that will read it.

2.6.8. Analytical Modeling Process for Decision - Making

A decision is a reasoned choice among alternatives. Makings adecision is part of the broader subject of problem solving.Although the management science approach cn be used toconstruct a mathematical model, it is useless if the result is toocomplex to be communicated to the decision maker. Regarding theimportance of communication in the OR/MS/DS modeling process, Ihave found that people tend to overcomplicate and issue. Theworst offense seems to be in written reports. There is a general“fear” of appearing unsophisticated or even unintelligent if onewrites in a a straightforward, simplistic manners. The end result isa product that is incomprehensible to the decision maker. To avoidsuch an outcome, the analysis should be done in stages. You mustever come the communication barriers. Depending on the audienceof the report, the mathematical model may or may not be included.It is the task of the management sciences team to write a reportthat is understandable by all that will read it.

Decisions deserve appropriate time. As a decisions scientist, you

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want the opportunity to see a decision unfold, revealingopportunities for study and assessment. The general procedurethat can be used in the process cycle of decision- making containsthe following similar steps: (1) describe the problem, (2) prescribe asolution, and (3) control the problem by assessing/ updating thestrategic solution continuously in the face of changing businessconditions. Clearly, there are always feedback loops among thesegeneral steps.The general steps in this process are analogous to the structuredprocess of treating an illness. When a patient has a health problem,the patient goes to see the doctor to solve the problem. In order todo so, the doctor, with the participation of the patient, describesthe problem by taking a blood test or x-ray, to diagnose the illness.Then the doctor prescribes medications (prescribing medicine).There are also follow-up visits to make sure the prescriptionactions are effective in curing the patient; otherwise the doctorchanges the medications. That is possible why what the doctors tothey call it “practice”. Remember that, here there are two distinctparties because if patients wanted to talk diagnosis, they talk drugs.If they wanted to talk symptoms, they talk drugs. They talk aboutsolutions before understanding the problem. In this analogy, thedoctor is the management scientist while the patient is the decisionmaker (the owner of the problems.)

Descriptive modeling process is using OR/MS/DS techniques todescribe how people see their worlds. A god descriptive modelcomes from good observation and representation that is validatedand verified against evidence. This increases confidence in thedescriptive model, and then could be used for prescriptivepurposes.

Description of he Problem: As soon as you detect a problem, thinkabout and understand it in order to adequately describe theproblem in writing. Develop a mathematical model or framework tore-present reality in order to devise possible solutions to theproblem. The model must be validated before you offer a solution.

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Clearly, one needs to be skilled at having many differentperspective to get closer to reality. When different models arecombined using different perspective, we get a betterunderstanding of reality. That’s why OR/MS/DS modeling processutilizes a team approach by capitalizing on the talent of individualsto assess, coordinate, and incorporate knowledge relevant tosolving a certain decision from experts of other fields, (known alsoas thing-tank approach). Describing all components of a problem isalso called inverse-engineering in the field of cognitive science.

The most important part of decision-making is to understand theproblem. An excellent example is, “name a former president of theUnited States who is not buried in the USA.” This is a wonderfulexample of the need to understand the question before attemptingto answer. Remember that the formulation of the problem is oftenmore essential that its solution. In fact, if you understand theproblem, it usually tells you how to solve the problem. Here isanother example for problem understanding: give the number ofautomobiles produced in America during the year of your choice.

Prescription of a Solution: This is an identification of a strategicsolution and its implementation stage. Search for a strategicsolution using OR/Ms/DS modeling process solution techniques.Any given managerial decision problem has several solutions. Asatisfactory strategic solution, also called a “good decision”, isdesired. There is no such thing as the solution for real-lifeproblems. Choose an appropriate solution. One size does not fit all.Solutions depend on budget, time, and many other constraints andconditions. Think of the design process as involving first thegeneration of alternative and then the testing of these alternativeagainst a whole array of requirements and constraints. Here is aquestion for you: does a good decision always result in the goodoutcome? Why not? Give an example.

Managerial Interpretations and Communication: The decisionproblem is often stated by the decision maker in non-technical

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terms. When you think over the problem and find out what moduleof the software to use, you will use the software to get the solution.The strategic solution should also be presented to the decisionmaker in the same style of language which is understandable bythe decision maker. Therefore, do not just giver her/him thecomputer printout. You must also provide managerialinterpretations of the strategic solution in some non-technicalterms while preparing a business report or presentation.

Post-prescription: Change is the norm in most organizations.Business cycles and management philosophies change,demographic factors shift, sales and profits increase or decrease,employees come and go, technology is introduced and technologybecomes obsolete, some changes occur quickly, whereas others arealmost imperceptible. The speed and duration of change may varyconsiderabley, but nevertheless change in continuous. Thereforeyou must allow for revising the model as necessary. This stage ofproblem solving is practiced in the free-based economy societies incontract to the programmed-based economy societies where themodel (i.e. the programs) is taken more seriously than reality itself!

The model is in the service to reality, not the other way around.George Bernard Shaw said “The only man who behaved sensiblywas my tailor; he took my measurements a new every time he sawme, while all the rest went on with their old measurements andexpected them to fit me.”

Monitoring Activities: These activities include updating thestrategic solution in order to control the problem. A dictionary tellsas that “to manage” means “to control.” On the other hand,“everything changes” except the fact that “everything changes”.Everything flows; nothing remains unchanged. In thisever-changing world of ours, it is crucial to periodically updatesolutions to any given problem. Good decision-making process is acreative idea; it can only be effective in changing forms of creativeideas. Monitor that progress of the implementation. A model that

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heretofore was valid may lose validity due to changing conditions.Thus becoming and inaccurate representation of reality andadversely affection, the ability of the decision-maker to make goddecisions. The model you create should be able to cope withchanges. Unlike mathematical puzzles (e.g., solving equation 2X –6 = 0 where there is one and only one correct solution), real lifeproblems do not have a single, correct solution. They cannot be“solvent once and forever.” One must learn to live with dynamicnature, that is, to update he solutions. Therefore, in this sense, theOR/MS/DS modeling process to problem solving is not an exactscience such as Mathematics, but one where decisions mustultimately be made by the decision maker.

The Importance of Feedback and Controls: It is necessary toemphasize more on the importance of strategic thinking about thefeedback and control aspects of a decision problem. It would be amistake in discussing the context of the OR/MS/DS decisionprocess to ignore the fact that one can never expect to find anever-changing, immutable solution to a business decisionproblem. The very nature of the environment in whichdecision-making takes place is change, and therefore feedback andcontrol are an important part of the context of the OR/MS/DSmodeling process.

Questions:

1. What is strategic decision making?

3. Explain the models used in strategic decision making.

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UNIT 3

Lesson 3.1 Stability Strategy

3.1.1 Introduction

Strategy means “the basic programmes of actions chosen to reachthese goals and objectives and major patterns of resourceallocation used to relate the organization to its environment”.According to Alfred Chandler, the strategy means thedeterminations of the basic long-term goals and objectives ofenterprise and the adoption of courses of action and the allocationof resources necessary for carrying out these goals.

Strategic decision making, at the corporate level, is related to theorganization wide policies and is most useful in the case ofmultidivisional companies having wide range of business.Corporate strategy means financial policy decision involvingacquisition, diversification and structural redesigning of the firmsassets. At the business levels, the decision makers are primarilyconcerned with immediate product, market issues and the policiesbearing on the integration of the functional units. Among otherthings, strategic decision at this level include policies regardingdeveloping new product, marketing mix, research and development,etc.

The following are the features of strategy:

It is top level management decisionAllocation of Resources.Forecasting of future strategies.Strategies are concerned with long range planning.Strategic decisions will have implications for multiplefunctions, product divisions and operating units.Strategic decision will have environmental factors.

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The Corporate level generic strategic pertain to the question whichbusinesses the company shall be in? The generic strategies areconcerned with the portfolio strategy. (These generic strategies realso applicable to SBUs when they confront the question of thebusinesses they shall be in)

A stable strategy arises out of a basic recognition by managementthat the firm should concentrate on using it’s present resources fordeveloping it’s competitive strengths in particular in particularmarket area. In simple words, stability strategy refers to thecompany’s policy of continuing the same business and with thesame objectives.

3.1.2 The need for Stability strategy:

As Jauch and Glueck observe, a stability strategy is a strategy that afirm pursues when:

It continues to serve the customers in the same product orservice, market and functional sectors as defined in itsbusiness definition, or in very similar sectors.Its main strategic decisions focus on incrementalimprovement of functional performance.The focus is on maintaining and developing competitiveadvantages consistent with the present resources and marketrequirements.

In an effective stability strategy, a company will utilize its resourcesfor its competitive advantages. A stability strategy may lead todefensive movies such as taking legal action or obtaining a patentto prevent unethical competition by others. Stability usuallyinvolves keeping track of new developments to make sure thestrategy continues to make sense. The stability approach is neithera ‘do nothing’ approach nor does it mean that profit growth are

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abandoned. The stability strategy can be designed to increaseprofits through such approaches as improving efficiency in currentoperations.

Godrej, the umbrella brand for things ranging from steel to shavingcreates its one of the top most brand in soaps is Old Cinthol and itis being the stable among the most customers. The other soapsfrom the HLL, the major competitor Old Cinthol plays a dominantrole in the market and also the trusted brand.

G’axe Smithkline’s Horlicks is doing remarkable well in the market.Hurlicks is a widely regarded 130 years old brand. It makes in tothe top 10 brands in the segment. Rural areas, housewives, youngfemales and lower income household continue to back the brandstrongly.

In order to understand how stability strategy works, here are thetwo examples to illustrate how organization could aim at stabilityin each of the two dimensions of customer groups, customerfunctions respectively.

1. Coca Cola Company provides a separate service to itsinstitutional buyers apart from its consumer sales throughmarket intermediaries to order to encourage bulk buying andthis improve its marketing efficiency

2. Hero Honda Company provides better after-sales servicethrough their dealers to its existing customers to improve itscompany, product image and increase the sale of accessoriesand consumables.

However, when a new motorcycle is brought from the HeroHonda, free 5 times service is provided by the company and alsotwo year guarantee for the motorcycle purchased.

Note that all the companies here do not go beyond what theyare presently doing, they serve the same market with thepresent products using the existing technology. The strategies

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aim at stability by causing the companies to marginally improvetheir performance, or at least letting them remain where theyare in case they face a volatile environment and a highlycompetitive market. The essence of stability strategies is,therefore, not doing anything but sustaining a moderate growthin line within the existing trends.

2.1.3. Advantages of Stability strategy:

The firm’s executives pursue the stability strategy: as there aremore advantages. They are:

The firm is successfully run and the objectives are achievedand there is satisfactory performance. Therefore themanagement may want to continue with the same activities.A stability strategy is less risky. Unless the conditions arereally bad, a firm need not take any additional risk.The management doesn’t foresee any change in theenvironment, or opportunity in the market or any threat.When pursuing this strategy, there is no disruption in routinework.

By pursuing stability strategy, the executives normally aim at stablegrowth. Stability strategy is therefore called the stable growthstrategy. Stability strategy is adopted with different designsdepending on the circumstances in which such a strategy ispreferred.The stability strategy is not a “do nothing” strategy. As indicatedabove, it may involve incremental improvements. It also requiredadoption of appropriate competitive strategies to remain successfulin the business. It may also have to make offensive and defensivemoves vis-à-vis the competitors.

Long term stability also requires reinvestment, R&D and innovation.However, the business definition remains the same.

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In short this “do-the-same thing” strategy endeavors to“do-the-same thing better.”

3.1.4 Reasons for Stability Strategy:

The important reasons for pursuing stability strategy are thefollowing:

The company is doing fairly well and it is hopeful of the samein future.A family dominated or private company may not like toexpand its business if it amounts to diluting the control or ifeffective supervision is not possible by the family members.The feeling that sticking to the known business is alwaysbetter and safe.The company may not have the resources and capabilities forexpansion.

3.1.5 Examples:

In southern part of Tamil Nadu, Kalimark Industries for Soft drinkplaying a major role in soft drinks, particularly among the lowermiddle class people and the company have a brand name for longtime. For the company, the competitors are Pepsi and Coca Colaand there are not capabilities for expansion.

The company may not want to take risks of growth and expansionTortoise, the mosquito repellent manufactures only mosquito coilsand the company does and expand his business with otherrepellent like mosquito mats and liquidators. The company may notwant to take risk of growth and expansion.

The company which has core competence in the existing businessdoes not want to take the risk of losing sufficient attention to the

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current business by going for the diversification. The managementdoes not have the mind-set of a strategist to analyses theenvironmental opportunities and seize the opportunities.

3.1.6. Types Of Stability Strategy

NO-CHANGE STRATEGY:

This stability strategy is a conscious decision to do nothing new,that is to continue with the present business definition. Taking nodecision is sometimes a decision too.

When faced with the predictable and certain external environment astable organizational environment, a firm decides to continue withits present strategy. Because,

The firm does not find it worthwhile to alter the presentsituation by changing the strategy.No significant opportunities or threats operating in theenvironment.No major new strengths and weaknesses within theorganization.No new competitors.No obvious threat of substitute products.

Taking into account the external and internal environmentalsituation, the firm decides not to do anything new.

Several small and medium sized firms operating in a familiarmarket – more often a niche market that is limited in scope andoffering products or services through a time-tested technology relyon the no-change strategy.

PROFIT STRATEGY

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This strategy is adopted in large firms. Firms would be generatingcash flow as primary concern for ensuring durable stability durablestability of the organization. Under the following circumstance, aprofit strategy may arise:

If there is a decline of sales of the product in the market.Expansion became impossible due to heavy cost.Contribution of the unit to the total sales in less.Exchange the market as and when possible.To step out from the market where the product has lost itsvalue.

A frequent method to tide over temporary difficulties and to keepafloat through a profit strategy is to sell off assets such a primeland in a commercial locality and move out to the suburbs. Othershave hived off some division in non-core businesses to raisemoney, while few have resorted to provide services to otherorganization which need outsourcing facilities.

PAUSE/PROCEED-WITH-CAUTION STRATEGY

Pause/proceed-with-caution strategy is such a tactic. It isemployed by firms that wish to test ground before moving aheadwith a full-fledged grand strategy. It is a temporary strategy justlike the profit strategy. It defers in the way of objectives are defined.The Pause/proceed-with-caution strategy is a deliberate andconscious attempt to adjourn major strategic changes to a moreopportune time or when the firm is ready to move on with rapidstrides again.

Example:

In the Indian shoe market dominated by the Bata and Liberty, notmany of them might be aware that Hindustan Levers, better knownfor FMCGs, produces substantial quantities of shoe uppers for the

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export markets. In late 2000, it started selling a few thousand pairsin the cities unobtrusively to gauge market reaction. This couldpossibly be a proceed-with-caution strategy before it goes fullstream into another FMCG sector that has a lot of potential.

Question:

1. Under what circumstances stability strategy is followed?

2. Why stability strategy is found to be an important aspect?

3. Give examples of stability strategy followed in India.

4. Trace the various types of stability strategy.

Lesson 3.2 Growth Strategy

3.2.1. Introduction:

Analysis of company failures from the late 1980s is instructive inthat it reveals the significant extent to which individual corporatefailure is caused by management rather then external factors.Commentators, depending on their allegiances, place differentweightings on the various factors which appear to have causedcorporate problems.

Factors blamed include:

Deregulation of the banking system and the subsequentover-supply of available money for lending:Widespread community expectations of continuing inflationin asset prices encouraging speculation rather thanproductions;The bias towards higher gearing ratios caused by the taxdeductibility of interest and asset price speculation;

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More favourable treatment of capital gains as opposed toincome by the taxation system;Poor bank-lending practices;Bad management on the part of borrowers;Inadequate corporate regulation and poor corporate morality;andGovernment management of macro-economic policy

There is little doubt that each of these factors contributed to anenvironment in which we cold expect a higher-than-normalcompany failure rate. But they do not explain why some companiesfail while others do not. The inability of a particular company towithstand major setbacks without becoming insolvent can usuallybe traced back to the quality of management. Most of thehigh-profile corporate failure in the last two or three years haveinvolved bad management, either in the sense of a flawed businessstrategy inappropriate speculation with borrowed funds or a lack ofbusiness morality in acting as custodian of shareholders’ interests.Many of them have involved a high-profile, domineering chiefexecutive – which is itself a warning signal of potentialmanagement problems – or a board where there is a majority ofexecutive directors.

Some of the corporate failure have had within their structure somevery successful and well managed business.

2.3.2. Lesson for Management

The Importance of Planning

From an individual company’s point of view the first basic lessonfrom the failures of the 1980s is in relation to the importance ofplanning. Success sometimes occurs in spite of lack of planning,but normally in any commercial enterprise the only way to ensuresuccess is to draw up plans based on achievable assumptions

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about turnover, et cetera, and to work those plans through to makesure that if everything goes according to plan, the results will besatisfactory. This does not mean that every business strategyshould be profitable in the short term. It may be that a discountingperiod is a justified management decision, but before making thedecision, management should be aware of the expected impact oncash flow and profit. Management can only be sure of this by usingfinancial budgeting. Plans or budgets should be produced bymanagement (or consultants, if necessary) and then ratified by theboard as being budgets with which, if they were achieved, theboard (and, presumably, the shareholders) would be pleased.

The planning process also involves business risk assessment. Allbusiness are subject to risks due to variables beyond their control,but many of these risks can actually be identified. For example,speculators in the property industry in the 1980s were subject tothe risk that asset prices would level off or actually decline. It is upto speculators to decide whether to accept that risk in view of theirassessment of the potential for gain.

In a company’s case, the planning adopted by a board of directorsshould not expose the company to failure merely because a quiteidentifiable risk moves against the company. Directors need to askthemselves “What if” questions relevant to their particular business.Examples are “What if interest rates remain high?”, What ifexchange rates move against us?”, “What if budgeted turnover isnot achieved?”, “What if property prices fall?”, et cetera, and if theanswers are that the business would not survive, the business plansneed to be adjusted to reduce the company’s exposure to theparticular risk involved.

The Need for a Strong Financial Function

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The second lesson from the 1980s is in relation to the need forgood financial reporting systems. There is a tendency for those ofus trained in financial management to assume that businessmanagers have some basic understanding of finance andaccounting skills, which we can presume without furtherexplanation. We are wrong to make that assumption. There are avariety of other skills involved in running a business successfully,including selling skills, marketing skills, administrative ability andpersonnel management. Good technical skills (for example,actuarial) often result in promotion to senior management, but theydo not guarantee good management skills. Some successfulbusiness people are able to combine all of their necessary skillsand run a business personally. A more common occurrence,however, is that successful business people to not hold all thenecessary skills personally, but instead make judicious use of theirown skills and the skills of others (whether employees or outsideconsultants) as the need arises.

The lack of finance and accounting skills is obvious in manycorporate failures. Some of our more flamboyant Australiandirectors apparently believed that it is possible to run a businesswith scant regard to conventional financial practice. Typicalexamples are the total inability to distinguish between cash andprofit, failure to use budgeting as a planning tool, and failure touse regular reporting of actual results to adjust business strategies.Even worse, and surprisingly common, is the failure to keep properbooks and records. How can directors expect to make goodplanning decisions if they are unable to determine their company’scurrent position, or the effect that previous decisions have had?The lesson for directors is that they must ensure that theircompany has a strong financial function capable of producingup-to-date financial reports and forward budgets on a timely basisand the directors must make use of an analysis of those reports toenable them to monitor and assess the success of the companyvarious activities. Monthly reporting is almost universally acceptedas good business practice, and many larger businesses in fact now

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report more frequently. Monthly reports allow management toassess how their plans and budgets are in fact working out, and totake whatever remedial action asperse to be necessary beforeproblems become critical. Of course, in order for the monthlyreports to be useful, they must be analyzed and compared with theexpected results. Financial trends need to be explained, particularlyif they are unfavorable. The only reason for taking no action wouldthen be because the unfavorable trend has been explained andaccepted as a temporary aberration. Some readers might thing thisis all terribly basic, but it is ignored surprisingly often. Insolvencypractitioners often take charge of companies with turnovermeasured to millions, where the company records show no sign ofmonthly budgeting or cash flow planning, and where financialreports were only available to the board on an annual basis.

Goal-Setting for Competitive Performance

Good planning and reporting systems are not only essential forsurvival, they are also essential for competitive performance andgrowth.

Future survival depends on being able to match thecompetition,Cost efficiency is a necessary but not sufficient condition forcompetitiveness. The aim must be to improve product quality,reliability, service, customer awareness, innovation andtechnology.Our standards of quality and service are below the worldaverage.Management and employees must change their goals to aimat world-best performance.

Expansion Strategies

The expansion grand strategy is followed when an organization

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aims at high growth by substantially broadening the scope of oneor more of its businesses in terms of their respective customergroups, customer functions, and alternative technologies – singlyor jointly – in order to improve its overall performance.

Because of the many reasons for which they are adopted,expansion strategies are quite popular. Given below are threeexamples to show how companies can aim at expansion either interms of customer groups, customer functions or alternativetechnologies.

A chocolate manufacturer expands its customer groups toinclude middle-aged and old persons among its existingcustomer comprising of children and adolescents.A stockbroker’s firm offers personalized financial services tosmall investors apart from its normal functions of dealing inshares and debentures in order to increase the scope of itsbusiness and spread its risks.A printing firm changes from the traditional latter-pressprinting to desk-top publishing in order to increase itsproduction and efficiency.

In each of the above cases, the company moved in one or the otherdirection so as to substantially alter its present business definition.Expansion strategies have a profound impact on a company’sinternal configuration customer extensive changes in almost allaspects of internal functioning. AS compared to stability, expansionstrategies are more risky.

Expansion Strategies

(a) Expansion through concentration(b) Expansion through integration(c) Expansion through diversification(d) Expansion through cooperation

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(e) Expansion through internationalization.

Expansion Strategies

Growth is a way of life. Almost all organization s plans to expand.This is why expansion strategies are the most popular corporatestrategies Companies aim for substantial growth. A growingeconomy, burgeoning markets, customers seeking new ways ofneed satisfaction and emerging technologies offer ampleopportunities for companies to seek expansion.

In this section, we will try to cover a lot of ground by describingtypes of expansion strategies.

(a) Expansion through concentration(b) Expansion through integration(c) Expansion through diversification(d) Expansion through cooperation(e) Expansion through internationalization

(a) Expansion through concentration

Concentration is a simple, first –level type of expansion grandstrategy. It involves converging resources in one or more of a firm’sbusinesses in terms of their respective customer needs, customerfunctions, or alternative technologies, either singly or jointly, insuch a manner that it results in expansion. In business policyterminology concentration strategies are know variously asintensification, focus or specialization strategies.

In practical terms, concentration strategies involve investment ofresources in a product line for an identified market with the help ofproven technology. This may be done by various means. A firmmay attempt focusing intensely on existing markets with itspresent products by using a market penetration type ofconcentration. Or it may try attracting new users for existing

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products resulting in a market development type of concentration.Alternatively it may introduce newer products in existing marketsby concentration on product development.

For expansion, concentration is often the first – preference strategyfor a firm, for the simple reason that it would like to do more ofwhat it is already doing. A firm that is familiar with an industrywould naturally like to invest more in known businesses rather thanunknown ones. Each industry is unique in the sense that there areestablished ways of doing things. Firms that have been operating inan industry for long are familiar with these ways. So they prefer toconcentrate on these industries.

( b) Expansion through integration

Recall that we referred to the horizontal and vertical dimensions ofgrand strategies in the first section. These dimensions are used todefine what are known as integration strategies. The pivot aroundwhich integration strategies are designed in the present set ofcustomer functions and customer groups. In other words acompany attempts to widen the scope of its business definition insuch a manner that it results in serving the same set of customers.The alternative technology dimension of the business definitionundergoes a change.

A value chain is a set of interlinked activities performed by anorganization right from the procurement of basis raw materialsdown to the marketing of finished products to the ultimateconsumers. So a firm may move up to down the value chain toconcentrate more comprehensively on the customer groups andneeds than it is already serving. A firm that adopts integration asthe expansion strategy commits itself to adjacent businesses.

Integration is an expansion strategy as its adoption results in awidening of the scope of the business definition of a firm.Integration is also a subset of diversification strategies as it

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involves doing something different from what the firm has beendoing previously. Several process-based industries, such as,petrochemicals, steel, textiles or hydrocarbons, have integratedfirms. These firms deal with products with a value chain extendingfrom the basic raw materials to the ultimate consumer. Firmsoperating at one end of the value chain attempt to move up ordown in the process while integrating activities adjacent to theirpresent activities.

(d) Expansion through Cooperation

Much of strategy literature assumes competition to be a naturalstate of existence for companies to operate in. Several strategyexperts, notably Michael Porter, have based their work on theassumption that companies compete in the market for a limitedmarket share. One company can benefit at the cost of others. It is awin-lose situation where if one wins then one or several othershave to lose.

A contrary view has been expressed by thinkers such as JamesMoore, Ray Noorda, Barry J. Nalebuff and Adam M. Brandenburgerthat competition could co-exist with cooperation. Corporatestrategies could take into account the possibility of mutualcooperation with competitors while competing with them at thesame time, so that the market potential could expand. The term‘co-operation’ expresses the idea of simultaneous competition andcooperation among rival firms for mutual benefit. The central pointis of complementarity among the interests of rival firms.

This sections deals with the strategic alternatives based oncooperation among firms. As we will shortly see, such cooperationcould take place in various ways.

Cooperative strategies could of the following types:

1. Mergers

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2. Takeovers (or acquisitions)3. Joint Ventures4. Strategic Alliances

Merger and takeover (or acquisition) strategies essentially involvethe external approach to expansion. Basically two, or occuasionallymore than two, entities are involved. There is not much differencein the three used for such types of strategies and they arefrequently used synonymously. But a subtle distinction can bemade. While mergers take place when the objectives of the buyersfirm and the seller firm are matched to a large extent, takeovers oracquisitions usually are based on the strong motivation of thebuyer firm to acquire.

Takeover is a common way for acquisition and may be defined as“the attempt (often sprung as a surprise) of one firm ot acquireownership of control over another firm against the wishes of thelatter’s management (and perhaps some of its stock-holders)”. Butthis definition need not be taken very seriously as in practice, manytakeovers may not have any element of surprise, and may notnecessarily be against the wishes of the acquired firm. In fact,takeovers are frequently classifies as hostile takeovers (which areagainst the wishes of the acquired firm), and friendly takeovers (bymutual consent in which case they could also be described asmergers). Without being too fastidious, one can use these termssynonymously. Recall that strategic management is in anevolutionary phase and such confusion in terms has often to betaken in one’s stride.

Joint ventures occur when an independent firm is created by atleast two other firms. In an era of globalization, joint ventures haveproved to be an invaluable strategy for companies looking forexpansion opportunities globally.

Strategic alliances are partnerships between firms whereby theirresources, capabilities, and core competencies are combined to

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pursuer mutual interests to develop, manufacture, or distributegods or services. Like joint ventures, strategic alliances havebecome quite popular as strategic alternatives for firms looking forcooperation among national as well as international partners.

Before we mover further, another important point to point is thatthese strategies are very often used as a means of diversification.Recall, for instance, the example in the previous section related tohorizontal integration. Spartek took over Neycer in order tointegrate horizontally. Hi Beam Electronics merged with two otherunits to form Tristar Electronics, subsequently name as SolidaireIndia Ltd. Merger, takeover, joint venture, and strategic alliancestrategies are, therefore, also the means of achieving diversificationand integration.

(e) Expansion through Internationalization

In this subsection, we first have a look at the context –international and national – in which firms adopt internationalstrategies for expansion. Then we explain the term ‘internationalstrategies’. A brief description of the types of internationalstrategies is followed by a reference to the international entryoptions available to a firm.

Questions:

1. Why expansion strategies are important for companies?

2. What is expansion through cooperation? Give examples.

3. When and why expansions through integration need to befollowed? Give examples.

4. Give justification for strategic alliances.

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LESSON 3.3 RETRENCHMENT STRATEGY

3.3.1. Introduction

Retrenchment can actually serve as a turnaround strategy, meaningthe business gains new strength by streamlining its operations andeliminating waste. If you really want to know what ano-holds-barred lay-off feels like, recall the Titanic scenes. Theship doesn’t sink silently or swiftly into obscurity. Instead, inagonizing detail you hear the scream of tortured metal, thewrenching sounds of the hull breaking, the sickening churn thatthreatens to drown everything in sight, and the last lingeringgroans as the ship finally sinks into its final journey to the bottomof the ocean.

That’s the kind of anguish that swirls around a corporate in themiddle of a retrenchment. Now, this was no fly-by-night operation:it was the India operations of a global dotcom brand, which haslaunched operation with much fanfare last year. Interestingly, noneof the laid-off employees expressed shock that they had lost theirjobs. All were outraged at the manner in which the message wasrelayed to them: at noon, in walked a suit from the USA into theMumbai head-office. He bluntly announced that the operationswere being shut down from that moment on, and on a note ofgallows humor concluded: “Don’t come back after lunch”.

Moreover, any management which believes that itssoon-to-be-ex-employees deserve no time and attention will soonsee that strategy boomerang. The most immediate impact is nemployees who are still on the rolls: the harsher the treatment toretrenched employees, the greater the insecurity in those leftbehind. Instead of being a highly-motivated lot who should befocusing on how to bring the company out of the doldrums intocalmer waters, these employees not live under constant fear of thesword. Instead of pushing on productivity, they are not focused onpolishing resumes, scanning the classifieds and hunting for a more

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secure job in a more trustworthy company.

This isn’t just the worm’s eye view-smart companies know thatthey need to minimize the damage control retrenchment bring bybeing open, sensitive and values-led while planning a layoff.Scrolling down the f—edcompany.com postings, I found a memo toCisco employees in the first weak of April 2000, which highlightshow retrenchment need not be more painful than it. Firmly focusedon the long-term health and reputation of the company, the Cisconote shows event in this difficult time the company is clinging tothe “core values of trust, open communication and integrity”.

A formal transition support strategy has been worked out andshared with all employees. Each affected employee is to receive twomonths’ pay and benefits continuation to seek a new assignment orother employment outside of Cisco. Those who sign a severanceagreement get an additional four months’ pay and benefitscontinuation.

To ensure that information is freely and fully available andTransition Website has been set up. Then, displace employees arebeing offered extensive outplacement support: right from careercounseling to resume writing. Finally, Cisco partners and customerhave been offered the chance to interview and hire affectedemployees as a first preference. Clearly, smart companies retrenchwith brains – and a heart.

3.3.2 Retrenchment strategy in schools:

Now that we’ve covered the potential market size, and have seenthe opportunities that await us…we must act. The following plandescribes the general course of action and recommendations with abrief discussion of the organizational strategies and the four P’s ofthe marketing mix. It is also segmented by product marketing,channel marketing, on-line marketing, public relations andadvertising.

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Before determining the appropriate product marketing mix we firsthave to consider whether we should attempt either a growth or aconsolidation strategy for each existing product (olderdiscontinued products and eval releases are not considered).Currently the company produces the following products:

Imagine the educational options that may be available for childrenin 2010.

Charter technology schools – private, but publicly funded(could also be funded by a software or Internet company).Religious schools – private, perhaps publicly funded forsecular curricula.Charter Cultural/ethnicity schools—publicly or globallyfunded schools for children whose parents want them toretain their heritage or learn about another.Home schools—private, publicly funded, many selectionsfrom the cable/Interned channel. Instructional sites could beanywhere in the world, such as Sydney, Australia; Palo Alto,Calif.; or Bali.Public-university collaboration – publicly funded forcollege-track 5-year-olds.Private-industry charter schools—public, designed to offsetthe shortage of electricians, carpenters, plumbers, and othercraftspersons.And, of course, the local public schools—publicly funded forthe remainder of the school-age population.

With the rise of charter schools, school choice, and wirelesscommunication, the reality of such a list is closer than many maythink. Add to these developments the general concerns voiced bypublic officals about the quality of public schools, and the realitybecomes closer still. It is clear, then, that leaders of public schoolsneed to create a competitive strategy to survive the intense rivalry

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for dollars inherent in these diverse educational options.

Public schools no longer have a monopoly on public education, andto survive, they must compete more effectively. They must choosetheir strategy and develop congruent internal mechanisms toeffectively implement that strategy.

Broadly speaking, schools may compete either on costleadership or through differentiation. The nettlesome question is,what would it take for this generic competitive - strategy modelpopularized by the Harvard Business: School’s Michael E. Porter towork for U.S. public schools.

A school competing on cost leadership premises to offerstandard education at a minimal cost. Characteristics of this schoolwould include basic educational curricula (the there R’s), large classsize, low administrative component and other overhead costs,intensive screening of budget requests, and employee participationin cost-control efforts.

Public schools no longer have a monopoly on publiceducation, and to survive, they must compete more effectively.

Efficiency is the primary focus in organizational decisionmaking at this kind of school. Management’s role is tocontinuously standardize curricula and pedagogy and to installvolume “resource procurement” strategic to deriveeconomies-of-scale benefits. Management also will periodicallyre-engineer tasks and activities for efficiency, and will creativelytighten the value-adding chain to minimize waste. In publiceducation, cost leadership may become the retrenchment strategyfor districts devastated by a deluge of exiting students, taking their“voucher” funds with them.

On the other hand, public schools may find success byimitating schools of choice and charter schools through

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differentiation strategies. Differentiators create value for theirproducts by distinguishing them from rivals’. They meet or exceedcustomer expectations for products and services offered.Differentiators may offer, besides the basics, specialized subjectssuch as foreign languages, informational technology, businessmanagement, and global economics, all areas that have singularvalue for some students.

Schools may compete either on cost leadership or throughdifferentiation.

Tomorrow’s successful schools will be build on the shiftingsands of competition. They will consciously elect to compete forstudent and staff resources based on price or productdifferentiation. Choosing a strategy will require schools to analyzetheir internal resources, to identify and appropriate competency,and to select a choice that is congruent with that competency.Schools will systematically evaluate customer needs and likebusiness, make internal modification to meet those needs.Essential to the success of tomorrow’s schools will beadministrators who understand and demonstrate strategicleadership.

During the early and mid-1990s, schools allocated a largeportion of their resources to embrace strategic planning. Theywrote mission statements, belief statements, and organizationalphilosophies for their schools. They scanned their external andinternal environments using so-called SWOT analysis (Strengths,Weaknesses, Opportunities, and Threats) to gain insight into theirterrain. Choosing a competitive strategy was not on the agenda.Now, with increasing globalization and the emergence of choice asa dominant theme in social and economic matters, schools musttake that next step in strategic planning. Public school leadersmust offer a choice to a public that demands it, and they must beable to implement that choice more effectively than theircompetitors.

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3.3.3 Retrenchment strategy in service sector:

The role envisaged for the Employment Services within thenew Skills Development Strategy embraces a range of functionswhich include:

Broadening the vision of employment to include developmentprogrammes, service programmes and small businessinitiatives. Activities would include directing individuals tojob opportunities where they occur in these initiatives andassisting other to begin such ventures on their own;Assisting individuals and communities to put togetherproject proposals to the SETOs for learning programmeslinked to local economic initiatives.Advising people about the range of support services availableto them. These may be welfare or insurance schemes such asUIF, assessment of existing capabilities which may have beeninformally acquired, as well as information regardinglearning opportunities linked to career objectives whichpeople are assisted to develop.Targeting those people facing retrenchment. Where largenumbers of people are involved, the Employment Servicesagents would aim to assist both employers and workers toplan how to achieve the best package of measures to relievethe hardship that unemployment could bring. This would bean integral part of what have become known as “Social Plan”measures;Assisting the most vulnerable groupings to acquire the basiccapabilities required to take advantage of the supportdetailed above. This includes laying foundation for personaldevelopment and social responsibility. Of particularimportance is assistance with learning which enable peopleto interview skills, job search skills, time management,communication skills and the like.

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The Department of Labour proposes of offer an integratedset of advice services through Local Employment Services Centres.The Centres will offer advice on the following services toindividuals, trade unions or companies who are involved in theprocess of retrenchment:

Where skills assessment and accreditation may be accessed(including recognition of prior learning)Counseling and carrer guidance (this service may be directlyprovided or in the event of large retrenchments, referral toother agencies may be required.Re-training programmes – where they may be accessed andwhat public financial support is available.Where possible, placement in other jobs and industries.

Somewhere along the road to prosperity the utilitydiversification bandwagon overturned. Out of the wreck tumbleda number of smart and well reached companies that hadexpected diversification to lead to better financial results. As thewreckage was being cleared a second bandwagon rolled up, thisone jammed with enthusiasts heading in the opposite direction,towards retrenchment.

The road between diversification and retrenchment has beenwell traveled—traveled—in both direction—by US utilities for morethan a decade. In the late 1980s Pinnacle West Capital Corp lostmillions of dollars when its savings and loss unit failed. In 1994Pacific Enterprises paid $45-mil to ease shareholders ire after thecompany embarked on what ultimately proved to be a failedventure in discount drug and sports equipment retailing. In 1990FPL Groups wrote off $689-mil from its unsuccessful forays intocable TV, insurance and citrus fruit.

More recently Connective Communication was sold by its parent

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utility holding company at a loss of $100-mil to $125-mil. ReliantEnergy Communications was put on the block after it made lessthan acceptable levels of revenue growth, and Touch America,which recently spun away from its parent Montana Power, has sinceseen its stock value drop dramatically.

Researchers a decade ago looked at 20 utilities that diversifiedduring the 1980s. Of the $6.5-bil invested in those ventures, theaverage return was 1.1%. The returns in general have not improvedover the years. Diversification is almost always a wealth destroyer,said R Charles Moyer, dean of the Babcock School of Managementat Wake Forest University, an expert in utility finance.

3.3.4. Retrenchment in non-profit organization:

This strategy may work for two reasons. First, the currentscale of operations may be inefficiently large – economists wouldsay that diseconomies of scale can occur in some cases. Forexample, the unit cost of production day care may rise for groupsabove a certain size because of variable costs that increase withscale such as supervision or security. Cutting back, whileeliminating services for some children, could achieve savings,permitting the organization to remain solvent under existing feeschedules and rising costs of certain inputs. Second, theorganization may have certain fixed sources of revenue, such asgrants or annual contributions, that would not change substantiallyif services are cut back. If these are revenue are stable, cutting backcould eliminate costs without commensurate losses in revenue,again permitting the maintenance of solvency.

Rising costs of particular inputs are nothing new to thenonprofit sector. In the 1980s, for example, many nonprofit had tocurtail programs because of rising premiums for liability insurance.Following a retrenchment strategy, some YMCAs and YWCAs closedtheir pools. Overall, however, nonprofit have a number of differentways to cope with the rising costs of insurance, space, talented

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staff or other specific inputs to their operations. A systematicexamination of these options ensures that all possibilities willconsidered in thee difficult situations now promoted by a boomingeconomy.

Questions:

1. Why retrenchment is adopted by companies?

2. How retrenchment is practiced in Indian companies?

3. Give justification for some of the recent practices ofretrenchment.

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LESSON 3.4 TURNAROUND STRATEGY

3.4.1. Introduction:

A strategic turnarounds is a more serious form of externalretrenchment and leads to divestment or liquidation. Turnaroundstrategies derive their name from the actions involved, that is,reversing a negative trend. There are certain conditions orindicators which point out that a turnaround is needed if theorganization has to survive. These danger signs are:

1. Persistent negative cash flow2. Negative profits3. Declining market share4. Deterioration in physical facilities5. Overmanning in physical facilities6. Overmanning, high turnover of employees, and low morale7. Uncompetitive products or services.8. Mismanagement.

An organization which faces one or more of these problems isoften referred to as a ‘stick’ company.

3.4.2. The elements in a Turnaround Strategy:

Ten comparable Indian companies, in five groups of two each,were selected for study. In each group, one company seemed tohave been more successful while the other less successful inadopting the turnaround strategy. Based on a set of 10 elementsthat contribute to a turnaround, the case studiers of these 10companies were analyzed.

First, it is important to not what these 10 elements are:

1. Changes in the top management

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2. Initial credibility – building actions

3. Neutralizing external pressures

4. Initial control

5. Identifying quick payoff activities6. Quick cost reductions

7. Revenue Generation

8. Asset liquidation for generating cash

9. Mobilization of the organizations

10. Better internal coordination

The comparative analysis of the actins taken by moresuccessful companies and less successful companies revealedthat no significant differences was there as far as the first threeelements were considered. The crucial difference lies in the waythe companies attempted a turnaround on the basis of initialcontrol of operation by the new management, quick costreductions through various means, mobilizing the organizationfor improving motivation and morale, and better internalcoordination.

3.4.3 Recent Industrial Sickness – Turnaround Strategies

The last five years in the Indian corporate world has been oneof the most difficult times in this history. Industrial growthhas decelerated. New jobs are not being created. Smallindustry has suffered to the point of extinction. Exportgrowth fell in 1998 and 1999. Infrastructural bottlenecksperist. The environment of political instability, coupled with

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nuclear tests and sectarian violence, has not providedatmosphere conductive to domestic and foreign investment.There has been real recession in many sectors of the industryand sickness as we understand has been endemic across theindustry.The seeds of the industrial sickness were sown around tenyears ago by processes beyond our control. The reasons aremany and it is important to understand some of them beforewe attempt to chart out the turnaround strategies.This round of sickness is not only about management ortechnology failure. It has occurred due to the changing wayswe do business, the phenomena of globaliasation,liberalization, the evolution of e-Commerce, theTelecommunication revolution, Lower Tariff Regime, WTO areall responsible for re-aligning our business needs. Thesehave permanently impacted value of businesses in thiscountry. There is an urgent need for business restructuringin the changed environment and financial restructuring tomatch current valuation s of business. Unless this is donemany businesses as we know may has to be closed in thenext five years.In the early 1990s, there was a dream which seemed to betantalizing within reach the dream of becoming a new tiger, afast growing economy, of finding just one decade of GDPgrowth at 8 per cent per year, so that poverty can be wipedout. The dream continues to be elusive.First a few numbers:

The Background

A few frequently asked questions on this round of Industrialsickness have to be answered before attempting to work out theturnaround strategies. The following are the excerpts of theinterview with the Finance minister of India during 1998.

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Is the Globalization and Liberalization responsible for therecessionary trends in the Industry? Globalization andLiberalization are two different phenomena.Globalization refers to the integration of the worldmarkets into a seamless single market, without artificialbarriers created by nations on tariff, physical restrictionson movement on labour and services and restrictions oninvestments in selected areas.Liberalisaitn refers to the domestic response to theglobalization process, where our nation responded to thepressures of global forces. Definitely, the path of openingthe economy is fraught with difficulties and the sicknesscan be attributed to the liberalization process.How did we liberalize?We have permitted foreign direct investment in manyareas hitherto un – thought of. We have reduced(rationalized) duty structures to permit import of manyfinished goods. We are opening up service sectors toforeign competition. We have introduced regulatorybodies to match international standards of regulation andsupervision.Did we have to liberalize?Communications are integrating global markets like neverbefore and it is important to note that thiscommunications revolution is mostly responsible for thephenomena we are witnessing. We do not have a choicebut to liberalise. There could be a debate on degrees andon the pace but in the long run there is no place forinsular economies.Did the conditionality of the loan from the IMF trigger therecessionary process?Every lender comes with his conditions. This is to beexpected. Political wisdom and expert negotiating skillsare needed to soften the blows of this borrowing. It mustbe understood that the first tranche of loan came in when

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the forex reserves of out country were at a low of $2Billion, hardly enough to finance a month of imports. Wecould not have been at a commanding position to dictateterms to the creditor to determine what we wanted. Whilemost of the conditions are relevant in a globalisedeconomy, what could have been delayed and implementedin stages were hurried. The pains of transition onlyincreased. We were not prepared enough.Did the South East Asian crisis impact our economy? Thecollapse of the Asian economies plunged the area into anera of high interest rates, high inflation; large scale dropsin asset values, high unemployment and high devaluationof currencies. There is definitely a domino effect on outcountry; through we were largely insulated from the ills ofthe collapse. The effect resulted in cheaper impost intothe country. The South Asian crises did impact ForeignDirect Investment into this country. Our rupee did notdevalue at the same rate as the other currencies in thisregion. Even now, four years after the collapse, exportsfrom India in Textiles and Consumer Goods are lesscompetitive than from these economies.While we undertook the painful transition from acommand economy to a liberalized one in these years, itis unfortunate that the collapse happened at the sametime rubbing salt into the wounds. Definitely the fires ofthe recession in the economy were fuelled by the SouthAsian collapse.Is the loss of protection a reason for recession? Of course,yes for two reasons.1. The domestic capital goods industry was inefficient.

a. The industry was not technologicallycontemporary to enable efficient processes.

b. The costs were definitely higher than similargoods in the west

c. The capacities in the capital goods industry

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were small in comparison to global sizesmaking it that much inefficient in productionlevels and costs.

The capital goods industry was unable to compete

The high tariffs for imports in the earlier years cloudedmany of the inefficient processes of the domesticindustries. These cost were passed on to the customers.On liberalization, these cost inefficiencies were exposed.Better quality goods could be imported and were availableat lesser prices. The consumer was in no mood to pardonsub-standard quality and also was willing to pay a higherprice in exchange of quality or aesthetics. Thisfundamental change happened only because consumerwas exposed to these products unlike never before.Did the collapse of the capital market impact? The capitalmarkets were waiting to collapse. Valuations were highand unjustified and unrelated to performance. Companieswere accessing the markets without adequate asset basesor without underlying business plans. The confidence ofthe investor was shattered many times. This can largely beattributed to poor appraisal skills, poor regulation andgreed of the investor. The collapse took the primarymarket into a deep coma with not signs of revival exceptin the IT sector. There is a lesson here for all of us.Naturally, a vagrant economy depends hagiology on anactive capital market. With the Government slowlywithdrawing from supporting Financial Institutions andInvestment introduces through state funded agenciesdrying up it has become increasingly important for anactive primary capital market as the basis for revival.Did the Banking Sector help? The high Non PerformingAssets of the banking sector impacted credit growth intwo ways.

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(a) The higher, rather stricter provisioningnorms impacted profits of the bankingsector.

(b) Bankers shifted from cautious lending toNon-lending to save their jobs. Risk takingwhich is the core of a lending exercise wasgiven a go by.

(c) There are definitely a shift credit toinvestments with most banks taking to“safe investments” resulting in low creditexpansion.

(d) The slow response of the bankers to thedifficult times, creating sickness in manyindustries which otherwise could havebeen prevented.

Did the high borrowing to fund fiscal deficit inducesickness? The high revenue and fiscal deficits of thegovernment did not help the situation either. Thegovernment extensive borrowing programme largelyinvolves borrowing to finance deficits and interestpayments. This results in “crowding out” the investments.Money earlier available to the Government to fundDevelopment Financial Institution was going to meetrevenue deficits. This fiscal profligacy does not helpcapital formulation. Stricter fiscal discipline has to beconformed if the government wants to at the forefront ofthe restructuring process. The resource building done bythe government for decades has definitely shrunk andimpacted the recessionary process.

3.4.4 Turnaround Strategies:

The solution to these problems, however, lies within.Understanding the impact of the above phenomena is integral toany turnaround strategy.

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Any turnaround strategy or restructuring exercise (and I amusing these terms in this paper interchangeably) involves

Organizational RestructuringPortfolio Restructuring andFinancial Restructuring

3.4.4.1 Organizational restructuring:

The response from within companies have to redesign theiroperations for a variety of reasons. The text book prescription isto align company structure with strategy. This includesredrawing of divisional boundaries, flattening of hierarchiclevels, spreading of spans of control, reducing productdiversification revising compensation streamlining process andreforming governance. Some of the response will take years toachieve. The core of restructuring seems to be to hastehdecision making processes – without affecting quality.

Employee compensation does play an important role in theturnaround strategy. It pays to unlock the entrepreneurial spiritof the employees by offering them stock options in exchange ofperformance. Results could be dramatic it the employees knowthat they could be pare owners of the company.

The new emphasis on improved corporate governance is notmisplaced. The rules of running the company at an apex levelmust lend itself to more transparent processes if lenders haveto have confidence in the way the company rules itself. Thiswould include broad basing the Board with independentdirectors, working Audit Committees, transparent compensationpackages etc.

3.4.4.2. Portfolio Restructuring

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The second part of the turnaround strategy is the shedding ofunrelated assets, identifying slow and non moving stocksshifting emphasis within the current assets portfolio and maybeeven outsourcing production if it results in reduction of costs.

The restructuring need not be one way. If it makes sense toacquire businesses, say, raw material production companies forefficient process, such acquisition should be considered.

Is the era of diversification as a strategy as a strategy over?Diversification as a growth strategy was relevant in the permitraj. The diversified conglomerate is seen as a relic of the licenceraj when strict MRTP controls forced corporates to venture intonew areas in order to grow. The first four decades saw the riseof conglomerates like Century Textiles, JK Corp, Indian Rayon.But what was a panacea for growth became brimstone in theneck under the liberalized regime of the nineties. Lacking infocus and saddled with un-remunerative assets, the erstwhilegiants were not equipped to combat the emergence of globalsized competitors. Many a blue chip fell by the wayside in thisdecade. Recessionary pressures forced restructuring processesvery often cutting down and hiving out businesses which werenot relevant to the corporate growth strategy.

The classic case of a diversified company unable to respond tothe liberalization processes will be Voltas. The company was themanufacturer of Air Conditioners, refrigerators, Turnkeyprojects engineering services, washing machine, fruits drinksthe list goes on. The strategy of diversification worked till theadvent of liberalization. The lack of focus, limited accountabilityacross dispersed facilities, high employee cost and high degreeof inoperative assets required a surgical response.

The core of the strategy of turnaround in Voltas seems to be:

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To identify the businesses in which the company has inbuilt strengthsTo hive off non core businessesTo relocate excess labour due to the down sizing ofoperations.To fund voluntary retirement schemes (VRS) to shift theexcess labour

These are obviously painful but he restructuring exercise is beinggeared to meet the changing market competition. Voltas, really hasno choice.3.2.5.3 Financial restructuring process:

This involves

a) Identifying value drivers in cash flowsb) Developing cost consciousnessc) Driving qualityd) Understanding impact of information technologies on thebusiness processe) Understanding tax structures and the direction tax structurewould takef) Understanding capital needs for financial restructuring betweendebt and equity

3.4.5 Understanding Value as a turnaround strategy:

Fundamental to financial restructuring, is understandingvaluation of businesses. There are many techniques of valuation.But there is not superior method to understanding the cash flow ofthe business. In a scenario where there is widespread crosion inbusiness more due to global forces rather than die to managementfailures it is important to understand Value and adjust capitalstructures and cost to the changed value.

The early nineties witnessed a spate of Aqua Culture

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companies dotting the coast line. These companies were set upshifting production from the coast links of Thailand, South Koreaand Malaysia. Without understanding the dynamics of this shifting,there was large scale investment in facilities. However, stricterenvironment conditions imposed on these units rendered the unitsun-viable. In fact many of them had to close down. What has beenmissed in this is the act that small farms continue to thrive well.Capital costs did not take into account the cost of degradation ofland. Values were permanently affected by the global trends inprotection of environment.

The case in Granite is slightly different. The late eighties sawa spate of industries being set up to convent the raw blocks intofinished stones. However the industry was over capitalized andpoor management practices saw the death of the industry. Excesscapacities were built up not related to the mining rights. Capitalcosts were justified on Institutional interest not on real values. Thecrash was bound to happen. The survivors are slowly building upmarkets a reduced capital costs.

This would involve

a) Understanding cash flows of the existing businessesb) Estimating future free cash flows in the changed scenarioc) Shedding surplus assets and hiving off unrelated assets

Lee Iacocca, when he took over Chrysler noticed that thecompany was bleeding cash made the remark that “there is noexpenditure which cannot go down by 10%”.

The significant development in the last five years on theperformance of corporates has been in the area of cost control.Earlier, in an era of growth (during the period 1980-1992)acquisition of capital and growth in assets was driving corporates.However, this was done independent of costs of such acquisitionand indifferent to whether the costs of capital matched the returnson assets. The slump in the stock market coupled with cost and

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time overruns in these project, resulted in increasing dependencefor debt funds to complete projects and a consequent increase ininterest costs. The changing demand patterns also left companieswith huge inventories and excess capacities. Interest cost rosesignificantly. Sickness was natural in such a scenario with costs faroutstripping revenues.

The past three years has changed all that. Costconsciousness has pervaded every aspect of the organization. It issignificant that the success of many turnaround stories in thecountry has centred around cost control. There should be noexpense which cannot be questioned. The good old Zero basedbudgeting techniques should find a place in every turnaroundstrategy.

Another major turnaround response is the time tested firefighting exercise – better working capital management. Managingworking capital irrespective of the industry has been the focus formost Indian companies.

The lower credit expansion in the banking sector and also astudy of the working capital rations indicate sharper workingcapital management practices. The belt tightening has happenedacross industries including cement, FMCG sector, industrialproducts and capital goods. Continuous re engineering ofoperations results in effective use of working capital over the years.This includes lowering raw material inventory holding levels.Hindustan Levers, Britannia Industries, Cadbury, Bata have allachieved almost negative working capital through rightmanagement of inventory and receivables. This needs someparticipation of large industries in the supply chain management ofits vendors.

Current technology permits banking systems to transferfunds instantly at costs which are lower than the interest costs duethe delayed transit times. Customers must be enthused to use bang

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technologies for quicker transfer of funds.Identifying slow moving and non moving stores at the factory

and shop floor and disposing them is a must.

Some freight consolidation may help. It should be possible tosave costs on freight if that local customers can be serviced locallyby exchange of information between companies across variousstates. Standardization of products and quality orientation permitsthis. With states very soon achieving rationalization of sales taxstructures, freight saving provides a tremendous opportunity incommodity products.

There can be no better response to a difficult situation thanto make the customer notice that ultimately you have a betterproduct, and a product which one can product with consistencyover a period of time. Quality is an attitude which most of the timecosts little in material but more in behavioral costs. Every employeemust be able to feel for the quality of work he is delivering to theorganization. Quality does net also merely mean that of theproduct but also of the delivery system and relationshipmanagement of the customer. Documentation, service and qualityof warranty will definitely influence the customer to stick to theproduct. Introduction of Total Quality management, ISO 9000 mustbe initiated even in small enterprises. The customer derivescomfort if the system of the vendor is driven to quality.

The IT sector and consequently e-Commerce will change theway of businesses are run in the next twenty years. The impact willbe as significant as the use of the electricity and the motor car inthe beginning of this millennium. Business will be totallytransformed and no turn around strategy can be complete withoutunderstanding the impact of IT on the business processes.

The benefits are well known. It is still worth recounting someobvious ones.

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Larger amount of information and analysis of thisinformation as available with the corporate for decisionmaking processes.Implementation of ERP related systems lends theorganization to respond as a organic whole. This definitelymakes the organization more efficient and definitely paysback the investment.Wider interaction with customers, vendors, users of thecorporate is possibleInternal decision making processes can be more efficient andeffectiveTop quality management time can be devoted toorganisatinal responses and not merely to data validation.

A debt restructuring process will usually include one or more of thefollowing:

The deferment of payment of interest to be repaid over aperiod of timeThe deferment of payment of principal to be repaid over aperiod of timeThe lowering of interest rates to match available cash flow.This is done by reworking interest rates from the date ofdeclaration of the unit as an NPA. This is unrelated to thevalue of the business but gives comfort to the banker indecision banking.Waiver of penal interest and liquidated damagesThe conversion of interest or principal dues into risk bearingequity/preference shares not a popular method, but anobvious one.Settlement with trade creditors either at a reduced level ofpayment over a period of time-maybe even exchanges it withequity.One Time Settlement of dues with the institutions and banksto result in reduction of debt burden of the company.

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Issue of fresh equity to rationalize the debt equity structureand the funding capital requirements.Issues of Sales tax, Excise Duty concessions which areusually granted through the BIFR.

Any deferment of interest or principal payments is only a mannerof readjusting debt and adjusting the repayment ability on futurecash flows. It is not a solution to reduction of debt, which canhappen through waivers.

A particular mention must be made of One Time Settlement(OTS) of dues with the financial institutions and banks. Asunderstood, this refers to the ability to settle the dues of thecorporate at a discounted value to the outstanding. Usually thesepayments are made over a period of time between 3 – 36 months.The discount will enable write backs in the balance sheet which willstrengthen the debt equity structure. The banks, though have totake a write of on their books but is makes sense to them totransfer risk to a new lender or a risk taker. The new lender maydecide to support the unit based on the rationalization of thecapital structure. Banks are increasingly resorting to OTS as amethod of recovering bad loans. However, the system is still notgeared to fund these OTS and there is still reluctance amongst thenationalized banks to fund the dues at a discounted values. Thescene is steadily changing. This however still a difficult decision totake as the banker has to judge the amount of write off he iswilling to take on his balance sheet. This needs a throughunderstanding of the value of the business and a fairunderstanding of future cash flows. Most banker s may not beendowed with the knowledge of valuation or with the courage tounderstand erosion and admit a write off. For instance, a moderntextile mil of 25000 spindles which would have cost Rs 40 crores toestablish is now available at half the price within this country. Themills are competing with similar capacities established in South andSouth East Asia. These economies have experience a dramatic fall

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in exchange rates. The recession in the capital goods industry hasalso impacted the prices of machinery. This twin impact wouldmean that the capacities in these nations will become morecompetitive for exports.

It is here that Trade Associations play an important role to sensitizethe institutions and lenders to the altered rules of the game. Thepower of negotiating as a group is obviously must more and it isImportant for the banker and institutions to distinguish betweenmanagement failures and failure due to the changed economicsituations. The former should be punished. The latter should havea response in restructuring.

3.4.6 Turnaround Management Process:

5-Step Process

Below is Turnaround Central’s 5-step process to successfullyget your business back on track.

Assessment Phase (2 weeks)

1. Evaluate the firm’s condition and future viability, and developnext steps

2. Conduct the Alignment Meeting with the management andother stakeholders to present assessment results, discuss theaction plan and determine who will lead the turnaround.

Implementation Phase (6-18 months)

3. Create a detailed Business Plant based on the short-term andlong-term considerations.

4. Stabilize the Business – Take immediate steps to increaseliquidity, improve creditor relations, and reduce costs.

5. Restructure the business including recorganizing finance,executing the business plan, improving employee morale,

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empowering the management team, building consensus, andincreasing communications throughout the company. Inaddition, accountabity and control processes are put intoplace including robust financial reporting. Balancedscorecards, budgets and monthly sales and expense reviews.If necessary identify strategic investors, tenders and buyersto recapitalize or sell the firm.

Questions:

1. What is turnaround management? Give examples.2. Explain the process of turnaround management.3. Explain understanding value as a turnaround strategy4. Write a note on portfolio restructuring

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LESSON 3.5 DIVERSIFICATION

3.5.1 Introduction

In this corporate world, organizations strive very hard toreach top positions. The organizations tend to follow various typeof strategies and get good results out of it. In the era of heavycompetitions organization think in different ways and try to bringnew innovative strategies. One among the strategies is thediversification strategy which is widely implemented by majorcompanies. Diversification strategy offers high rewards if steps aretaken for their proper implementation. In this section the variouscase studies of different companies are presented which showshow success has touched their doorsteps through diversificationstrategy.

Diversification is a much-used and much-talked about set ofstrategies. These strategies involve all the dimensions of strategicalternatives. Diversification may involve internal or external, relatedor unrelated, horizontal or vertical, and active or passivedimensions – either singly or collectively. Essentially, diversificationinvolves a substantial change in the business definition – singly orjointly – in terms of customer functions, customer groups, oralternative technologies of one or more of a firm’s businesses.

3.5.2 Different types of diversification strategies:

1) Concentric diversification

When an organization takes up an activity in such a mannerthat is related to the existing business definition of one or more ofa firm’s businesses, either in terms of customer groups, customerfunctions or alternative technologies, it is called concentricdiversification.

Concentric diversification may be of three types:

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1. Marketing – related concentric diversification2. Technology – related concentric diversification3. Market and technology – related concentric diversification

2) Conglomerate diversification

When an organization adopts a strategy which requirestaking up of those activities which are unrelated to the existingbusiness definiti of one or more of its businesses, either in termsof their respective customer groups, customer functions oralternative technologies, it is called conglomerate diversification.

The idea whether diversification is an effective strategy hasassumed significance in view of the fact that ideas of corecompetence and focus (what we call concentration here) havegained greater acceptability among companies, investors.Consultants and academicians in the developed countries,Diversifications, specially unrelated ones, seem to be out of favor.But there is a divergent and interesting view of which strategiccould be better for companies in developing countries like India.

The case study of various companies are given below:

1. The Essar Group:

All the major business newspaper headlines in India on 21July 1999, were screaming, “Essar creates history, defaults onFRN $250 million”. Essar group has defaulted on its loanrepayment of $250 million of floating rate notes ifinternational markets. It became the first Indian Company todefault in International market raising fears in Indiancorporate sector regarding future fund raising capabilities inthe international market.

For last one year, it had been frantically trying to avoid the

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unavoidable and in the process, rolling itself in manycontroversies. During 1998, steel consumers has accusedGovernment of India in media of creating import barriers tofavor and bail out Essar. This created a political controversyand caused embarrassment to the government. Essar becameuntouchable for government controlled financial institutions.The financial institutions which had major exposure in Essar,backed off and left Essar in the lurch when it came todisburse sanctioned land for the ongoing projects of Essar. Itwas not only a financially disastrous year for the group butits public image also suffered major setback.

Ruia brothers, Shashi, 55 and Ravi, 50 who had stunnedIndian corporate sector with their vision and daringentrepreneurship were today in a quagmire of their ownmaking. While on diversification spree, entering one businessafter another, they were obviously not aware that very soonthe group would become a case study at the managementschool.

Today Essar group is considering various options toconsolidate, sell companies that it had nurtured with heavydebt exposure in past few years. Its major companies are incore infrastructure areas with strict regulations, controls andmajor companies are in core infrastructure areas with strictregulations, controls and major government role andinterventions. Essar is wondering what went wrong in itsdreams and their executions. Was it safe, Pokharn nucleartests in 1998, continuing recession in Indian and worldmarket, stock market depressions in India or was itstructured to doom.

Group Profile

Nand Kishore Ruia, a marwari businessmen settled in Madras in1956, founded the Essar group. Essar started off by exporting iron

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ore. In 1956, it acquired a stevedoring contract for bringing ironfrom the mine heads and loading it onto sheds. Sahsi (ESS) and Ravi(AR) diversified from family business of trading and ventured intoshipping in 1969. After shipping Essar moved into constructionactivity and then into the supply critical support services for the oiland gas sector. Their major breakthrough came in the form of adrilling contract awarded by ONGC. From these successfulmedium-sized business in marine and port constructions,oil-drilling, and shipping, Essar first took the opportunity providedby the gas pipeline to start a very successful sponge iron business.

It has been the entrepreneurial sprit and opportunism that hasbeen driving the group from a Rs. 150 core shipping company to aRs. 4000 core conglomerate. The group was slowly adding onebusiness after another until late eighties.

In 1990’s Government of India started economicliberalization programme that promised growth and vision ofcatching up with the late industrializing economies of Southeast.Capital markets were opened up and reaising finances becamemuch easier and it became a prime facilitator of rapid growth. Theincredible rate of growth of Essar group during this period sawthem in virtually all the core sectors.

Ruia brothers had a resplendent vision of creating a hugeempire and they exploited every opportunity that same theirway and created many new avenues to realize their vision. Mr,Shashi Ruia engineered Essar’s conquests and they were wellcapitalized by his younger brother Ravi. Essar restructureditself in 1994 to include senior professional managers fromleading public sector undertakings to manager their growing,diversified businesses. These professionals were given freehad for running independent units. Mr. Sashi Ruia kept thegroup’s external environment & business developmentactivities with himself. Ravi Ruia ws given charge of the

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operations & overseas businesses. The second generationalso started making their way in family business. TodayPrashant Ruia is the director-in-charge of Essar’s Power, Oil& Steel businesses along with communications and personnel.Anshuman Ruia looks after Shipping.

Essar group entered in global business bycommissioning a $90 million cold rolled steel plant, EssarDhananjaya (ED), in Indonesia in 1994 of 150,000 tonnescapacity fed by HRC from Essar Gujarat Limited in a joiningventure with the Garama group of Indonesia. ED was toimport hot rolled coils from Essar Gujarat’s Steel plant inIndia. During that period Ruias had been working up onsetting more such ventures in Bangladesh, Saudi Arabia orPakistan. The focus for such expansions was to beat possibledownturs in domestic demand. Essar also acquired athree-year-old textile mill Woventex Ltd. in Mauritius.Through this they wanted to move in Africa which theybelieed would soon see and economic upsurge.

On Essar new business strategy Sashi Ruia commented, “Wewill get into any new business that will make us more money”.

Ravi Ruia commented on Essar’s global strategy in 1994, “Wewill get into any new business that will make us more money”.

Ravi Ruia commented on Essar’s global strategy in 1994, “Weare looking at impact of globalization on existing businesses incountry. Next we are looking for opportunities opening up overseas.Not just those with synergies with our existing operations, but alsothose that have potential for us”. Commenting on newopportunities he said, “Today the canvas is wide open. We musthave an open mind. We should have basic synergies with what wedo, but we must not miss a major opportunity just because it doesnot fit in with our basic operations”.

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According to Prashant Ruia, Chairman of ESSMCO for reasonsof fast acquisition by Essar shipping limited is “… buying ships hasbecome easier now: it takes less time and the access to funds useasier”.

This philosophy became their prime motivator for a rapidexpansion and acquisition. Their strategy hinged on a simplepremise – one project will nurture another project & co on. In mid90’s the joke at the corporate headquarters of Essar group at EssarHouse, Mumbai used to be that which new company has the groupopened today.

Essar group wanted increase its assets to Rs. 31,300 crore,income to Rs.19,400 crore and gross profit to Rs.7,500 crore bythe year 2001-02. In this process they went on an expansion spreeeven at high cost debt to reap benefits from the post liberalizationgrowth in India. However the economy growth which theyenvisaged didn’t last long. Their steel project was delayed. It wasplague and then floods in Sturat, Gujarat (their plant location) thattook their tool on project. But major factors ere their planning andproject management skills. They had changed the project plan andbasic technology number of times. Because of this they could notexploit the price boom in steel sector and could not repay the loansto the financial institutions. When they came on stream with steelplant, Indian economy started cooling off, Southeast Asian criseshappened, overcapacity in steel sector led to a global glut and pricerecession in steel, all working against their risky debt strategy.

Today, it has assets worth Rs. 14,530 crore, income of Rs.4,030 crore and gross profit of Rs. 1,150 crore. Essar is one ofIndia’s leading business groups and has phenomenal presence inSteel, Shipping, Oil & Gas, Power Telecom and few financial servicescompanies besides other small businesses. Steel accounts for70.30 percent of the group’s turnover, while shipping accounts for

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17.30 percent. The portfolio is rather diverse with very littlesynergy amongst them, except that all big companies coreindustries.

Tamilnadu Mercantile Bank

Essar group had mastered the art of diverting funds, and didnot limit itself to the manufacturing or trading activities. They hada long association with Tamil Nadu and had been eyeingacquisition of Tamil Nadu Mercantile Bank, a Tuticorin-basedleading bank. During 1994, Essar group acquired 71 percent stakecontrolling stake in TNMB, at a cost of Rs. 70 crore. TMB is bankrun by Nadar community of Tamil Nadu. The Nadar’s held 80percent of the bank’s Rs.1044.04 crore deposits.

The takeover however entered into controversy when Nadarcommunity protested against the transfer. There was an18-months long tussle to gain control Law Board approved it. TheNadar community, which promoted the Bank, tried to ensure thatthe control of the bank did not pass out of its hands. Thecommunity floated the Nadar Mahajan Bank Share Investros Forumand tried to buy back Essar’s stake through its Share Retrieval Trust.The fight starting from RBI, CLB finally went o Supreme Court ofIndia. Essar demanded Rs. 90 crore from Nadar community forbuyback of shares in an out of court settlement. The Esar group bythen had given up its hopes to acquire the Tamilnadu MercantileBank Ltd. (TNMB). Nadar community could not muster the muchneeded funds to buyback the shares. Essar then sold its stake forRs. 130 crore to Mr. C Sivasankaran, and NRI businessman. Thegroup achieved good returns on its investments of Rs. 70 croremade in TNMB to acquire majority stake two years ago.

Besides all these companies Essar holding included twofinancaial companies and investments of $50 million in Afro-AsianSatellite Company. There are numerous companies and ventureswhere Essar holds equity shares and future participation strategy.

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Essar group is having a strong step in diversification strategy, it issure to reach success.

2. Britannia Industries

Repositioning of Britannia Industries looks at the issuesrelating ot Britannia’s repositioning and diversification exercise.Britannia kicked off its repositioning exercise in 1997 when itchanged its logo and corporate slogan to transform itself from abakery business to a food business. Subsequently as a part of itsdiversification plans it entered the dairy business. But, it has notgot so much name in this field, and it is not able to compete withAmul.

3. Fairness Wars

Fairness Wars focuses on the fierce competition among themajor players in the fairness products segment of the personal caremarket. The case deals with HLL’s Fair & Lovely, Cavin Kare’sFairever, and Godrej’s Fair Glow. The case also talks about how thefairness formula was not more restricted to creams, but was alsoextended to soaps and talcum powders. It has followed concentricdiversification strategy and it is striving to achieve victory in thefairness wars.

4. Tanishq’s Success

Tanishq’s Success Story talks about Tanishq’s initial failure,the recovery process and the eventual success. The branded jewelryline from Titan Industries was not very successful when it was firstlaunched in 1995. The company followed a concentricdiversification strategy which was a failure in the starting and thenit has started to pick up.

Amul: Spreading Wide through diversification

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The Gujarat Co-operative Milk Marketing Federation (GCMMF)is India’s largest food marketing body and is the apex body of milkco-operatives in Gujarate. Amul, promoted by GCMMF entered intothe areas of ice creams, curd, panner, cheese and condensed milkin 1996, based n the recommendations of IMRB, which conducteda consumer survey to identify the products that customers wantedfrom Amul. In 1999, Amul launched its branded “yoghurt” andentered the instant coffee market in 2001 through a tie-up withTata coffee.

Many multinational food corporations backed byliberalization and economic reforms in the country, flooded theIndian market with a variety of food products, thereby forcing achange in the lifestyles and food tastes of the people in India. Amultook advantage of this by introducing its branded “pizzas” into themarket, thereby diversifying its portfolio. In 2001, Amul launchespizzas in the Indian market in the Rs. 20-25 price range. This pricewas significantly lower than those of the Pizza Hut and Domino’s.

The case study focuses on the entry of Amul into the fastfood segment and provides an insight into Amul’s diversificationstrategy behind introducing the pizzas into the market.

Boeing’s diversification strategy

Since moving its corporate headquarters to Chicago inSeptember, Boeing has weathered one difficulty after another. Adownturn in the aviation industry took a turn for the worse withSeptember’s terrorist attacks. The company announced its plans tolay off 30,000 commercial jet workers; the company’s 2001delivery projection of 538 aircraft for Boeing Commercial Airplaneswas reduced to 500 and 2002 could see deliveries in the low 400s.In mid-November, Boeing Co. CEO Phil Condit estimated it wouldtake 28 to 42 months for airline traffic to recover from 9/11, aspan in which Boeing should lose production of more than 1,000airplanes.

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The hard luck didn’t end there, though. The company cut its2002 sales forecast by $1 billion after the Pentagon awarded thelargest military contract in history, $200 billion.

Shriram Group is an organization with a strong corporatepersonality. A multi-locational, multi-dimensional Rs. 2.7 billionconcern serving 2.7 million customers, Shriram today has acquireda significant national presence in the field of financial services, witha leadership position in many segments. Our Policy is to achieveservice exclusivity; corporate identity and customer care qualitythrough our vast Network Structure, Collection Centres andNetwork Management.

We have also successfully diversified into transport andproperty development. It’s hard to imagine that we started off as asingle operation in a single town. With a vibrant and youngmanagement team heading each activity, the group is always onthe lookout for associations and opportunities, both internationallyand in India.

Despite all our enthusiasm of progress, however ourmanagement has never forgotten that they have a specialresponsibility towards the service provided.

Voltas, a Tata group company, has embarked, upon an exercise tochare out a long-tern strategy for the various businesses in its fold.This has been christented as Project Eagle.

Ishaat Hussain, chairman, Voltal said in a statementdistributed at he 48th annual general meeting. “The title is apt; thepanoramic and all encompassing field of vision of that sharp-eyedbird reflects the long range perspective, which we have alsoattempted. The exercise seeks to ascertain what could be theeventual future of each line of business in year to come. In all ofthese, the broad trend is to move towards being a ‘total solutionsprovider’.

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This role promises a better utilization of Voltas’ technologicalcapabilities and its global alliances and agencies as well as betterprospects of sustained relationships and interactions with ourclientele, Hussain said.

The company has decided to strengthen and establish itscore businesses. Some businesses include electrical and mechanicalbusiness, central air conditioning and refrigeration, mining andconstruction equipment, textile machinery, cooling appliancesamong others.

Over the past few years, the company has been divesting itsinterests in non-core subsidiaries, while certain subsidiaries suchas Voltas International have been merged with the parent.

Hussain said these measures have been taken to maximizethe potential of our chosen businesses, to sharpen our edge andincrease our competitiveness.

The company had undertaken a financial restructuring whichhas bought down the debt-equity ration to 0.52 : 1. The companyis targeting a turnover of over Rs. 1,000 crore in the current fiscal.

The company’s electrical and mechanical projects andservices is expanding its business by establishing marketing officesin Qatar, Singapore and Egypt.

Also, with the company entering into a joint venture forparticipating in the queen mary II project, will provide an entry anentry into more such marine businesses in Europe.

The company is also planning to bid for large infrastructureprojects in India. The central air conditioning and refrigeration willpursue its growth strategy by offering total customized coolingsolutions. The company is also planning to expand into mining

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services related to operations and maintenance contracts formining equipment with large mining companies in coal and otherminerals such as iron ore. Voltas corporate strategy includesmanufacturing world-class products, whereby it can penetrate andnew overseas regions for many of its diverse businesses. Especiallyin areas such as forklift trucks, room air conditioners, water coolers,pumps and water purification and sewage equipment.

Questions:

1. Write a note on the types of diversification2. “Diversification is the order of the day” – Discuss.3. “Diversification is done for short term gains” – Evaluate thestatement.

4. Explain how Voltas undertook diversification strategy.

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UNIT 4

LESSON 4.1 MERGERS & ACQUISITION STRATEGY

4.1.1 Introduction:

The single larges impact globalization has made on oureconomy is on size. Gone are the days when it was possible toserve domestic markets with local sized capacities. Capacitycreation in the country was also concentrated on serving domesticmarkets (this was not small). But the globalized export driveneconomies demanded size and efficiencies, which these capacitiescould not match. The disadvantages of serving markets infragmented capacities created inefficiencies that were waiting to becorrected. Corporates must seriously look into developing size as astrategy. The cement industry has been a spate of mergers in thepast one year. Pharmaceutical industry is in the business ofconsolidating. Textiles should not be far behind and onlyconsolidation will make this industry strong in the wake of globalcompetition. Banking Sector mergers have just begun.

What does this mean for the small company? Can an SSImerge as efficiently as a large corporate? Isn’t this strategyirrelevant for the thousands of sick small companies?

The difficulty in finding “associated” entities in the SSI sectoris appreciated.

Mergers impact performance in the many ways

Marketing becomes efficient with the company able to offer awider range of products under one roof. Customers arebenefited from not having to go to different producers fortheir needs.Purchasing is definitely more efficient. Increase in size of

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purchases will imply more discounts and hence lesser costs.Administrative and marketing expenses will come down on aper unit of cost basis.Interest costs also will come down if the lenders view thegrowth as an efficient process giving more leverage to theborrower to bargain on interest rates.Implementation of quality standards is easier across a widerrange of production. Once again, the costs of implementingthe demanding standards of quality especially in the wake ofinternational competition are high. To survive in such anenvironment, it is important to be able to implement thesestandardsThese are only some of the benefits of larger sizes

4.1.2 Dangers of M & A:

Control: The possible loss of control consequent to a mergerprocess would be the single largest stumbling block in goingahead with this strategy. There are issues related tosentiment, family ownership, leadership status in the limitedarea of operations, control over resources and finally controlover the decision making processes.Competition: Mergers with the competitors as a strategy mayalso imply that suddenly one day we find discussing strategywith our biggest competitor. Confidential information of thecontrol of which give status in the company may now have toshare with competition whose interests is not clear.Employment: Inherent in a merger process is downsizingemployment. More often than not, there is wide scaleretrenchment as there is a definite economy of labourachieved due to scale and duplication of effort. The moralhazard of instigating retrenchment is an issue.Culture: More mergers come to naught on culturaldifferences. These would typically cover work styles,information flow patterns levels of transparency, differences

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in compensation packages etc.

4.1.3 Examples of M&A in India:

Tata Teleservices and Hughes Tele.com have signed amemorandum of understanding (MoU) to merge their basictelephony operations in a deal valued at more than $1 billion. TheTat as will be the single largest shareholder in the merged entitythat covers the Andhra Pradesh and Maharashtra circles with asubscriber base of over 160,000. The other equity partners in theventure will be Hughes, Networks, the Mittals of the Ispat groupand Tlltel Corporation. The enterprise value has been arrived at onthe basis of the two firms’ business earnings and total investments.The merger with Hughes Tele.com in aimed at enhancing the Tatas’ presence in the key Maharashtra and Mumbai circles. Bymerging their basic operations, the two plan to eliminatecompetition and save costs.

HLL’ grew rapidly through its acquisitions of Lakme and BrookeBond. In 1999 alone, $2.3 trillion worth or mergers andacquisitions were announced.

4.1.4 Growth based on M&A:

At Kearney has recently looked at 24,000 companies across53 countries in 24 different industries. These companies accountfor 98 per cent of the words market capitalization. And we lookedat them over a 12-year period, from 1988-2000. We were askingthe question: Are these companies creating shareholder value? Wefound that 44 per cent of them were under-performers, adding toneither their top line nor their shareholder wealth. Only one out offive companies was a value grower, adding to both their top line(by about 20 per cent) as well as the shareholder wealth (by about22 per cent). In these companies, 60 per ent of the growthyear-on-year was driven by internal growth. The balance growthcame from M & As.

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Most companies fail to execute M&As. In fact, seen out of 10companies emerge failures. They don’t create any shareholdervalue above the industry average. And we have studied companiesfor long periods, starting three months prior to acquisition and upto two years after, to judge success. The reason for failure is notlack of strategy. The fault lies with distinguish their vast majorityfrom the minority of successes. Lack of speed in implementation isone.

Similarly, successful mergers exhibit a number ofcharacteristics or best practices – mostly around rigorous execution.

In fact, for an M & A to succeed issues like size of the dealand the relative size of the acquiring company, mostly perceived tobe the key, do not count. Nor are successes or failureindustry-specific. For an M&A activity follows an ‘S’ curve thattakes approximately 20 years, going from a stage ofdeconcentration on to accumulation and focus and then closingwith alliances. M&A is at its peak in the accumulation state. Thestudy AT Kearney did with 24,000 companies showed the top threeplayers held about 30 percent market share in the first stage. Thisis the time when government deregulation and technical innovationmay happen. The next stage shows a flurry of activity in M&A.Companies build scale, achieve core competence, build economiesof scale and avoid hostile takeover. Following that is the focusstage where the top three players have up to 60 percent marketshare. Here too, there is ample M&A activity. However, companiesnot slow down, pick and choose carefully and strengthen their truecore competence. In the final alliance stage, M&A drop down. Thetop three companies have 70 percent market share now. Megamergers become unlikely as the government steps in or theanti-trust laws come in. In fact, AT Kearney will soon be releasingthis study.

The integration process has to be planned and executed

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carefully. For an a acquisition to be a success, the post-mergerscenario requires that the acquiring company dose not behave likea conqueror. Where economies of scare are involved, layoffs areinevitable and they have to be handled as humanely as possible. Oncross border acquisition extra care is required in the due diligenceprocess with regard to tax laws, political stability, repatriation ofdividends, company law, cultural fit, post merger managementstructure among other things. Cross border acquisitions like somedone recently in India are used to gain entry into a market.

4.1.5. Size and M & A

Size is said to lead a virtuous cycle, Larger projects, higherbilling rates, greater value addition all help grow a company./Foreign customers are also reported to have becomescale-sensitive, preferring to work with big players.

Size is thought to be a factor behind the relatively superiorperformance of frontline players vis-à-vis. Tier-II players in the ITservices industry. Against this backdrop, Tier-II players haveunveiled strategies to readdress the handicap. It is also beingsuggested that venture capital companies have also been forcingthe management of Tier-II players to become bigger to survive.

The traditional approach in addressing the issue of size hasbeen to merge or acquire. A few Indian companies have done thisroute. In fact, in the heyday of 2000, when the larger softwareplayers were only talking about acquisitions, Tier-II players hadalready put through a few acquisitions. The acquisitions ofcompanies operating abroad made by erstwhile BFL. Software,Trigyn Technologies, Silver line Technologies, DSQ Software, SSIand Aptech are some examples.

However, the mergers, put through in 2000 and 2001, didlittle to enhance these companies’ prospects. The mergers mayhave even acted as a setback to their fortunes. Only for BFLSoftware the acquisition appears to have made sense. In its case,

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the merger with Emphasis may even have been godsend.Nevertheless, the cost paid for the acquisition has for long peggedback the stock’s valuation. The deal was valued at a price to salesmultiple of around / times compared to acquisitions that are madenow at a price to sales multiple of less than 2.

In Silver line Technologies’ case, the acquisitions ofcompanies only increased the head count with little to show interms of increased sales growth. Similarly, for SSI, thehighly-publicized acquisition did not bring in the expected benefitsas the transfer of projects from onsite to offshore was slower thananticipated. The second wave of acquisitions activity in thissegment evolved the merger of group companies operating fromIndia. Aptech decoupled its software business from its trainingbusiness and merged its with another service company from thesame group – Hexaware.

PSI Data systems, which was acquired by Indian Rayon ofBirla group, was merged with Birla Technologies, a wholly-ownedsubsidiary of Greasim Industries, CMC’s acquisition by the Tata’smay set off a wave of re-organisaion within the Tata group afterthe listing of Tata Consultancy Services. A third wave involvingmergers of unrelated. Tier-II players may happen. However,possibilities for that seem limited given the objectives of thevarious promoter groups that are apparently incompatible.However, over the medium-term, it may boil down to merging tosurvive.

Another distinct possibility appears to be the acquisition ofTier-II players by overseas services companies. There is increasingdemand for India-based services from end-customers abroad.

The values proposition offered by India development centresis now well accepted. Against this backdrop, overseas servicescompanies may be on the look out for acquiring Indian companies.

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Some among the Tier-II players are also adopting the routeof alliances address the size handicap. Alliances cannot strictly beseen as an alternative to mergers and acquisitions. In fact, somecompanies such as Mastek are adopting two-pronged approachinvolving alliances and acquisitions.

For the Indian companies, these alliances are in the nature ofsub-contracting of work. Since the Indian companies lack theresources to address the customer directly, they have to work as asub-contracting partner with larger player.

Understandably, this kind of partnership has implications forthe companies’ operating margins. In the normal course, themargins are unlikely to be high given that the volumes areguaranteed.

Such combinations look set to be in vogue at least in themedium-term. How the combinations will evolve over thelong-term remains clouded.

These partnerships quickly develop trouble over theincompatible objectives of the two partners. Many such ventureshave collapsed in the past and the future is unlikely to be anydifferent. Now withstanding such risks, some have already adoptedthe alliances route. These include Mastek, Hex aware, Aztec, andZensar. For example, Mastek has a joint venture with DeloitteConsulting aimed at offering India-based services to the elementsof Deloitte Consulting. According to Aztec, it is also allying with aconsulting firm. In Haxaware’s case, a partnership ahs been struckwith Valtech with the setting up of offshore development centersthat will service the customers of Valtech and its subsidiaries. Forits part, Zensar has started a venture with Han Consulting of Chinato address the Chinese market. INDIA Cements, one of the primeplayers in the market for acquisitions has done a backtracking ofsorts by pulling out of a company it acquired in 1999-2000. Thesale of Sri Vishnu Cements by India Cements is driven mainly by the

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need to generate cash flows and but the company’s debt burden.The deal highlights the need for a beer flow of information toshareholders and would-be investors on the financial implicationsof acquisitions – big of small. In the last three-and-half years, IndiaCements has been one of the most aggressive buyers of cementunits. A spate of deals – Raasi Cement, Sri Vishnu Cements andunits of the Cement Corporation of India – added to its capacityand made it one of the five major layers with a capacity of around10.5 million tones. But this came at a stiff price as the companytook on a debt burden of Rs. 1,800 crore.

Questions:

1. What re the circumstances under which M&A takes place?

2. What are the benefits of M&A?

3. What are the dangers of M&A?

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LESSON 4.2 AMALGAMATION STRATEGY

4.2.1 Introduction

An amalgamation refers to the merger of two or existingcompanies into a single new company. It indicates either merger ofone or more Companies with another Company or the merger oftwo or more Companies to form one company. According tosection 2(1B) of the Income-tax Act, 1961 (hereinafter referred toas the Act), amalgamation in relation to companies means themerger of one or more companies with another company or themerger of two or more companies to form one company (thecompany or companies which so merge being referred to as theamalgamating company or companies and the company with whichthey merge or which is formed as a result of the merger, as theamalgamated company) in such a manner that:

1. All the property of the amalgamating company or companiesimmediately before the amalgamation becomes the propertyof the amalgamated company by virtue of amalgamation.

2. All the liabilities of the amalgamating company or companiesimmediately before the amalgamation become the liabilitiesof the amalgamated company by virtue of amalgamation,

3. Shareholders holding not less than 3/4th in value of theshares in amalgamating company or companies (other thanshares held therein immediately before the amalgamation orby a nominee for the amalgamated company or thissubsidiary) become shareholders of the amalgamatedcompany by virtue of the amalgamation otherwise than as aresult of the acquisition of the property of one company byanother company pursuant to the purchase of such propertyby the other company or as a result of distribution of suchproperty to the other company after the winding up of firstmentioned company.

4.2.2 Tax Concession:

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If any amalgamation takes place within the meaning ofsection 2(1B) of the Act, the following tax concession shall beavailable.

1. Tax concession to amalgamating company2. Tax concession to shareholders of the amalgamatingcompany

3. Tax concession to amalgamated company

(i) Tax Concession to Amalgamating company:Capital gains tax not attracted: According to section47(vi) where there is a transfer of any capital assetin the scheme of amalgamation, by anamalgamating company to the amalgamatedcompany, such transfer will not be regarded as atransfer for the purpose of capital gain provided theamalgamated company, to whom such assets havebeen transferred, is an Indian company.

(ii) Tax concessions to the shareholders of anamalgamating company section 47(vii) : where asshareholder of an amalgamating company transfershis shares, in a scheme or amalgamation, suchtransaction will not be regards as a transfer forcapital gain purposes, if following conditions aresatisfied.

The transfer of shares is made in considerationof the allotments to him of any share or sharesin the amalgamated company andThe amalgamated company is an Indiancompany.

Cost of acquisition such shares of the amalgamated company arelater on transferred.

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The cost of acquisition of such shares of the amalgamatedcompany shall be the cost or acquisition of the shares in theamalgamating company. Further, for computing the period ofholding of such shares, the period for which such share were heldin the amalgamating company shall also be includes.

(iii) Tax concessions to the amalgamated company: Theamalgamated company shall be eligible for taxconcession only if the following two condition aresatisfied.

The amalgamation satisfies all the three conditions laid downin sections 2(1B) andThe amalgamation company is an Indian company

If the above conditions are satisfied the amalgamated companyshall be eligible for following tax concessions.

(a) Expenditure on Scientific Research Section 35(5): Where anamalgamation company transfer any asset represented by capitalexpenditure on the scientific research to the amalgamated Indiancompany in a schedule of amalgamation, the provisions of section35 which were applicable to the amalgamating company shallbecome applicable to the amalgamated company consequently.

Unabsorbed capital expenditure on scientific research of theamalgamating company will be allowed to be carried forwardand set off in the hands of the amalgamated company.If such asset ceases to be used in a previous year forscientific research related to the business of amalgamatedcompany and is sold by the amalgamated company withouthaving being used for other purposes, the sales prices, in theextent of the cost of the asset shall be treated as businessincome other amalgamated company. The excess of the saleprice over the cost of the asset shall be subject to the

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provisions of the capital gains.

(b) Expenditure on acquisition of patent rights or copy rights orcopy rights Section 35A(6) : Where the patent or copyrightsacquired by the amalgamating company is transferred to anyamalgamated Indian company, the provisions of section 35A whichwere applicable to the amalgamating company shall becomeapplicable in the same manner to the amalgamated companyconsequently.

The expenditure on patents copyrights not yet written offshall be allowed to the amalgamated company in the samenumber or balance installments.Where such rights are later on sold by the amalgamatedcompany, the treatment of the deficiency/surplus will besame as would have been in the case of the amalgamatingcompany.

However, if such expenditure is incurred by the amalgamatingcompany after 31-3-1998, deduction under section 35A is notallowed, as such expenditure will be eligible for depreciation asintangible asset to this case, provisions of depreciation shall apply.

(c) Expenditure of know-how Section 35AB(3): With effect fromassessment year 2000-01, where there is a transfer of anundertaking under a scheme of amalgamation, the amalgamatedcompany shall be entitled to claim deduction under section 36AB inrespect of such undertaking to the same extent and in respect ofhe residual period as it would have bee allowable to theamalgamating company, had amalgamation not taken place.

However, if such expenditure is incurred by theamalgamating company after 31-3-1998, deduction under section35AB is not allowed, as such expenditure will be eligible fordepreciation as intangible asset. In case provisions of depreciation

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shall apply.

(d) Treatment of preliminary expenses Section 35D(5): Where anamalgamating company merges in a scheme of amalgamation withthe amalgamated company, the amount of preliminary expenses ofthe amalgamating company, which are not yet written off, shall beallowed as deduction to the amalgamated company in the samematter as would have been allowed to the amalgamating company.

(e) amortization of expenditure in case of amalgamating Section35DD: Where an assessee, being an Indian company, incurs anyexpenditure, on or after the 1st day of April, 1999, wholly andexclusively for the purposes of amalgamation or demerger of anundertaking, the assessee shall be allowed a deduction of anamount equal to one-fifth of such expenditure for each of the fivesuccessive previous year beginning with the previous year in whichthe amalgamation or demerger or takes place.

(f) Treatment of capital expenditure on family planning Section35(1))(ix): Where the asset representing the capital expenditure onfamily planning is transferred by the amalgamating company to theIndian amalgamated company, in a scheme of amalgamation, theprovisions of section 36(a)(ix) to the amalgamating company shallbecome applicable in the same manner, the amalgamated company.Consequently

Such transfer shall not be regarded as transfer by theamalgamating company.The capital expenditure on family planning not yet written offshall be allowable to the amalgamated company in the samenumber of balance installments.Where such assets are sold by amalgamated company, thetreatment of the deficiency/surplus will be same as wouldhave been in the case of amalgamating company.

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(g) Treatment of bad debts Section 36(1)(vii): Where due toamalgamation, the debts of amalgamating company have beentaken over by the amalgamated company and subsequently suchdebt or part of the debt becomes bad, such bad debt will beallowed a deduction to the amalgamated company.

(h) Deduction available under section 801A to 801B: Where anundertaking which is entitled to deduction under section801A/801B is transferred in the scheme of amalgamation beforethe expiry of the period of deduction under section 80-1A or 801B.

No-deduction under section 80-1A or 80-1B shall beavailable to the amalgamating company for the precious yearin which amalgamation take place andThe provisions of section 80-1A or 80-1B shall apply to theamalgamated company in such manner in which they wouldhave applied to the amalgamating company.

(i) Carry forward and set off of business losses and unabsorbeddepreciation of the amalgamating company: Under the newprovision of Section 72A of the Act, the amalgamated company isentitled to carry forward the unabsorbed depreciation and broughtforward loss of the amalgamating company provided the followingconditions are fulfilled.

The amalgamation should be of a company owing anindustrial undertaking or shipThe amalgamated company holds at least 3/4the of the bookvalue of fixed assets of the amalgamating company for acontinuous period of 5 years from the date of amalgamation.The amalgamated company continuous the business of theamalgamating company or to ensure that the amalgamationis for genuine business purposes.

It may be noted that in case of amalgamation, the amalgamated

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company gets a fresh lease of 8 years to carry forward and set offthe brought forward loss and unabsorbed depreciation for theamalgamating company.

4.2.3. Areas of concern for Amalgamations:

`The new Act allows two or more companies to beamalgamated. When this is done these companies become fused orconsolidated as a single corporate entity. This fused entity isentitled to all of the properties, rights, benefits and assets fo all ofthe former companies. It is also subject to all of the liabilities andobligations of the former companies. These provisions are amongthe most practical and useful features of the new Act. Key featuresof amalgamation are that: it avoids the necessity and expense oftransferring assets to a single entity; and pre-existing contractsremain in place and do not need to be assigned. Amalgamation intherefore a very desirable mechanism to effect the reconstructionof conglomerates or to create a union of companies for operationalreasons. In some situations it can also facilitate effective taxplanning.

The first step in carrying out an amalgamation is to draw up anagreement incorporating the terms and means of effecting theamalgamation including the form of the proposed by-laws andmeans of effecting the amalgamation including the form of theproposed by-laws. It is desirable that the by-law of one of theamalgamation companies by adopted as the by-laws of theamalgamated entity. After the amalgamation agreement has beendrawn up, it must be approved by the Boards of Directors of theamalgamating companies and must be submitted to theshareholders of each of the amalgamating companies for approval.If the shareholders approve of the amalgamation, then Articles ofAmalgamation in the prescribed form must be filed with theRegistry accompanied by a declaration of solvency; particulars ofdirectors and the registered office.

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A holding company which seeks to amalgamate with one or moreof its wholly-owned subsidiaries is not required to prepare andsubmit an amalgamation agreement for the approval ofshareholders if:

The directors of each company approve the amalgamation;andThe resolutions of each Board provide that:o The shares of each amalgamating subsidiary will becancelled without repayment of capital;

o The articles of amalgamation will be the same as thearticles of incorporation of the bolding company; and

o No shares or debentures will be issued by theamalgamated company in connection with theamalgamation.

A fairly similar short-form mechanism is available to enable two ormore wholly-owned subsidiaries of a common parent body toamalgamate. A directors of officer of each amalgamating companyis required to make a statutory declaration establishing to thesatisfaction of the Register that:

Each amalgamating company is and the amalgamatedcompany will be able to pay its liabilities as they become due;The realizable value of the amalgamated company’s assetswill not be less than the aggregate of its liabilities and statedcapital of all classes; andEither that no creditor will be prejudiced by theamalgamation or that adequate notice has been given to allknown creditors and no creditor objects except on groundsthat are frivolous or vexatious.

4.2.4 Procedural Aspects of amalgamation:

Mergers and acquisitions have become a symbol of the neweconomic world. Almost every day one reads of a new merger or

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acquisition doing the rounds of the corporate circles. It also bringswith it complex issues relating to laws and regulations impactingsuch M & A decisions.

In today’s business scenario all companies are possibletargets for acquisitions or mergers. As a result a knowledge of thelaws relating to them is extremely useful. At the same time they arecritical to the health of the businesses and thereby theshareholders.

Hence this subject is assuring greater importance in today’sbusiness world. The author has attempted to bring out thefundamental issues under the companies Act, 1956 and theimplications under the Income tax Act, 1961.

4.2.5 Reasons for amalgamation:

There is not one single reason for a amalgamation but a multitudeof reasons, namely

There is not one single reason for a amalgamation but a multitudeof reasons, namely

(i) Synergy in operating economies: When two or moreundertakings combine their resources and effortsthey may with combined efforts produce betterresuls than two separate undertakings because ofthe savings in operating costs viz. Combined salesoffices, staff, staff facilities, plant management etc.Synergy is also possible in areas of production,finance, technology etc.

(ii) Taxation advantages: Mergers take place to havebenefits of tax laws and company havingaccumulated losses may merge with profit earningcompany that will shield the income from taxation.Section 72A of the Income Tax Act provides this

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incentive.(iii) Other advantages:

GrowthDiversificationProduction capacity reductionOperating efficienciesProcurement of suppliesFinancial Strengths (because of larger size ofmerged assets)

One significant cost disadvantage could be the implication ofStamp Duty which is applicable on transfer of assets from oneowner to another. In some states the rate of duty is significant andhence may to some extent neutralize the cost advantages ofsavings in tax.

One significant cost disadvantage could be the implication ofStamp Duty which is applicable on transfer of assets from oneowner to another. In some states the rate of duty is significant andhence may to some extent neutralize the cost advantage of savingsto tax.

4.2.6 Amalgamation Evolution in India:

Compelled by the present economic scenario and market trends,corporate restructuring through mergers, amalgamations,takeovers and acquisitions, has emerged as the best form ofsurvival and growth. The opening up of the Indian economy and thegovernment’s decision to disinvest, has made corporaterestructuring more relevant today.

To the last few years, India has followed the worldwide trends inconsolidation amongst companies through mergers andacquisitions. Companies are being taken over, units are being hivesoff, joint ventures tantamount to acquisition in the last few years

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must be more than the corresponding quantum in the four and ahalf decades post independence.

Supreme Court of India in the landmark judgment of HLL-TOMCOmerger has said that “in this era of hypercompetitive capitalism andtechnological change, industrialists have realized thatmergers/acquisitions are perhaps the best route to reach a sizecomparable to global companies so as to effectively compete withthem. The harsh reality of globalization has dawned thatcompanies which cannot compete globally must sell out as aninevitable alternative:.

4.2.7 Example of Amalgamation:

Broke bond India ltd. which did its operations separately in theirbusiness. Same like Lipton India Ltd. also in the market, they werein a same business holding major share in their market. Later dueto heavy competition by many players they planned to joinedtogether to strengthen their business.

In the year 1994 they merger together and the newamalgamated company is called by Broke Bond Lipton India Ltd.

Now they pay a vital role in their market. It shows positive resultsfor amalgamation. And it helps in many aspects.

Questions:

1. What are the requisites for amalgamation in India?2. What are the legal constraints of amalgamation?3. Identify the difficulties faced in amalgamation.4. Bring out with some examples of amalgamation.

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LESSON 4.3 JOINT VENTURE STRATEGY

4.3.1 Introduction

After World War II, many countries adopted the socialisticgoal of state ownership of productive activities in their economies.This led to a confrontation between the multinationals anddeveloping countries, particularly in extractive industries, andmany expropriations. As a result, new contractual forms dealingwith mineral-based participation with foreign firms. In case of themanufacturing sector multinationals felt that it was not necessaryto have 100 cent ownership to exercise control.

A joint venture is an enterprise which is jointly owned andmanaged by a local entrepreneur and a foreign entrepreneur. Insome cases, there are more than two parties involved. For example,Pepsi’s Indian Joint Venture involves Voltas and Punjab AgroIndustries Corporation.

A joint venture may be brought about by:

(i) Both the foreign and local entrepreneurs jointly setting up a newfirm

Foreign firm buying an interest in a local firmA local firm acquiring shares in an existing foreign firm.

It is also a common practice to split the local share holdingbetween a partner and various public participation (includingpublic sector firm or industrial development organization). Bythem term joint venture what is generally referred to is theIndian Joint Venture Abroad.

4.3.2 Types of Joint Ventures:

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Joint Venture are common within industries and in variouscountries. But they are specially useful for entering internationalmarkets. From the point of view of Indian organization, thefollowing types of joint ventures are possible.

Between two firms in one industryBetween two firms across different industries.Between an Indian firm and a foreign company in India.Between an Indian firm and a foreign company in thatforeign country.Between an Indian firm and a foreign company in a thirdcountry.

4.3.3 Indian joint Venture’s Abroad:

At the beginning of 1977, there were 189 joint ventures witha total equity of Rs.209 crores in operation and 520 with totalinvestment of Rs. 1917 crores under implementation. The largestnumbers of the Indian joint ventures are in Asia, mostly inSouth-East Asia. Europe and America have a good number. There isalso a significant number in Africa. The Indian joint ventures aremostly in engineering industries, construction, consultancy,shipping, trading, textiles, electrical and chemicals. The totalbenefit accrued to the country from the joint ventures till the endof 1991 was only Rs. 451.73 crores. This included dividend of Rs.42.45 crores; other repatriations of Rs. 72.3 crores and Rs. 337.98crores from additional investments. The new economic policy ofIndia is expected to encourage foreign investment by Indiancompanies. The curbs on growth, even by mergers and acquisitions,have been removed, financing restrictions have been eased, areasof business opened to the private sector companies have beensubstantially enlarged and foreign tie up policies have beenliberalized. Further, domestic market is becoming increasingcompetitive. All these factors should encourage the Indiancompanies to invest in other countries and take advantage of he

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economic liberalization in many foreign countries.

Indications are that several Indian companies are drawing upplans for establishing subsidiaries or joint ventures abroad. The1990s was a decade of real test for Indian companies in thisrespect.

The following are the some joint venture companies in India.

1. L&T Info city Ltd., the Rs. 71 crores joint venture betweenL&T and Andhra Pradesh Industrial Infrastructure CorporationLtd., (APIIC).

2. HDFC Standard Life Insurance Co., Ltd., the 74:26 jointVenture between HDFC Ltd. and Europe’s leading mutual lifecompany, Standard Life Assurance Company.

3. Birla Sun Life Insurance Company Ltd. (BSLICL) is an jointventure between the Aditya group and the Canada based SunLife Financial.

4. Lusas-TVS is a joint venture between TVS and sons, India andLucas plc. UK.

5. Commins Engine Company and Tata Engineering andLocomotive Company formed a joint venture to manufactureTalco engines

6. Tata Industrial and Bell Canada, Ashok Leyland andSingapore Telecom are some of the joint venture companies.

4.3.4 Advantage

Strategic advantages are important for joint ventures to be set upand sustained. The important reasons or advantages of jointventure are the following:

1. In countries where fully foreign owner firms are not allowedor favored joint venture is the alternative if the internationalmarketer is interested in establishing an enterprise in the

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foreign market. Many foreign companies entered thecommunist, socialist and other developing countries by jointventuring.

2. One important advantage of joint venturing is that it permitsa firm with limited resources to enter more foreign marketsthan might be possible under a policy of forming whollyowner subsidiaries.

3. In some cases, it is also possible to swap know-how (such aspatent rights for equity) in forming joint venture as a meansof securing ownership in foreign operations.

4. Partnership with local firms has certain specific advantages.The local partner would be in a better position to deals withthe government and the publics.

Further, there would not be much public hostility when there isa local partner; it would be much less when there is equity holdingby the government sector and the public.

Other benefits areo Minimizing risko Reducing an individual company’s investmento Having access to foreign technologyo Broad-based equity participationo Access to governmental and political supporto Higher profitabilityo Opprotunities for regular technology up gradationo Entering new fields of business and synergisticAdvantages.

A right local partner for a joint venture can have majorimpact on firm’s competitiveness because such a partner can serveas a cultural bridge between the company and the market.

4.3.5 Disadvantages:

1. India was not able to make much progress in investing

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abroad due to various reasons like government control, lackof competition in the domestic market etc.

2. There is no goal convergence between the shareholders ofthe Indian companies.

3. MRTP and IRDA are some acts restrict the foreign companiesto enter into joint venture strategy. So, foreign companiesnot like to enter joint venture in India.

4. Example, IRDA guidelines specify a maximum stake of 26percent for the foreign joint venture partners.

5. Some companies after creating the joint venture, they feltindividual benefit. So they want to call off venture.

6. Example Prolease, a process solutions provider in the US,entered into a tie-up with KGISL in October 2001 to cover theentire gamut of IT service including software development,testing, systems integration, application development andR&D service. But Porlease had not invested any sum in KGISL,so for, and with the partners deciding to call off the venture,Prolease’s investment decision would not hold good anymore.

7. Other disadvantages are,i. Problems in equity participationii. Foreign exchange regulationsiii. Lack of proper coordination among participating

firmsiv. Cultural and behavioral differences

4.3.6 Motivation for Joint Venture Formation:

There are basically three perspective to explain themotivations for forming joint ventures:

Transaction costsStrategic behaviour, andOrganizational learning

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Transactions costs theory views joint ventures as an efficientmethod to reduce both transactions costs and the hazards ofeconomic transaction. In the strategic behaviour, jointventures represent a form of defensive investment by whichfirms hedge against uncertainty, deter entry throughpreemptive patenting, and enhance competitive power in thecontext of competitive rivals and collusive agreement. In theorganizational learning view point, a joint venture is used totransfer organizationally embedded knowledge that cannoteasily be blueprinted or packed through licensing or markettransactions. Joint ventures are used as a vehicle to exchangean imitate knowledge, though controlling and delimiting theprocess of exchange to limit the dissipation of firm-specificadvantages can itself be a cause of instability.

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LESSON 4.4 ORGANISATIONAL STRUCTURE AND CORPORATEDEVELOPMENT

4.4.1 Introduction:

Corporate culture refers to a company’s values, benefits,business principles, traditions, ways of operating, and internalworks environment. An organization’s culture is bred from acomplex combination of sociological forces operating within itsboundaries. An organization’s culture is either an importantcontributor or an obstacle to successful strategy execution. Strongcultures promote good strategy execution when there’s fir and hurtexecution when there’s little fit. A deeply rooted culture wellmatched to strategy is a powerful lever for successful strategyexecution. In a strong-culture company, values and behavioralnorms are like crabgrass: deeply rooted and difficult to weed out. Astrong culture is a valuable asset when it matches strategy and adreaded liability when it doesn’t. Adaptive cultures are a valuablecompetitive asset-sometimes a necessity-in fast-changingenvironments.

Today’s dot-com companies are classic examples of adaptivecultures. Once a culture is established, it is difficult to change. Awards ceremonies, role models, and symbols are a fundamentalpart of culture-shaping and reshaping efforts. An ethical corporateculture has a positive impact on a company’s long-term strategicsuccess; an unethical culture can undermine, it. Values and ethicalstandards must not only be explicitly stated but must also beingrained into the corporate culture. A results-oriented culture thatinspires people to do their best is conducive to superior strategyexecution. MBWA is one of the techniques effective leaders use tostay informed on how well strategy implementation and executionare proceeding. It’s a task that can’t be delegated to others. Whatorganizational leaders say and do plants the seeds of culturalchange. Only top management has the power and organizationalinfluence to bring about major change in a company’s culture. The

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faster a company’s business environment changes, the moreattention managers must pay to keeping the organizationinnovative and responsive. Identifying and empowering championshelps promote an environment of innovation and experimentation.It’s a constant organization-building challenge to broaden, deepen,or modify organization capabilities and resource strengths inresponse to ongoing customer-market changes. High ethicalstandards cannot be enforced without the open and unequivocalcommitment of the chief executive. Managers are an organization’sethics teachers-what they do and say sends signals and what theydon’t do and don’t say sends signals. Corrective adjustments in thecompany’s approach to executing strategy are normal and have tobe made as needed.

4.4.2 Developing corporate culture:

Building a strategy-supportive corporate culture is importantto successful strategy execution because it produces a workclimate and organizational esprit de corps that thrive on meetingperformance targets and being part of a winning effort. Anorganization’s culture emerges from why and how it does thingsthe way it does, the values and beliefs that senior managersespouse, the ethical standards expected of organization members,the tone and philosophy underlying key policies, and the traditionsthe organization maintains. Culture thus concerns the atmosphereand feeling a company has and the style in which it gets thingsdone. Very often, the elements of company culture originate with afounder or other early influential leaders who articulate the values,beliefs, and principles to which the company should adhere, andthat then get incorporated into company policies, a creed of valuesstatement, strategies, and operating practices. Over time, thesevalues and practices become shared by company employees andmanagers. Cultures are perpetuated as new leaders act to reinforcethem, as new employees are encouraged to adopt and follow them,as stories of people and events illustrating core values andpractices are told and retold, and organization members are

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honored and rewarded for displaying cultural norms.

Company cultures vary widely in strengths and in makeup.Some cultures are strongly embedded, while others are weak andfragmented. Some cultures are unhealthy; these are oftendominated by self-serving politics, resistance to change, andinward focus. Such cultural taints are often precursors to decliningcompany performance. In fast-changing business environments,adaptive cultures are best because people tend to accept andsupport company efforts to adapt to environmental change; thework climate in adaptive-culture companies is receptive to newideas, experimentation, innovation, new strategies, and newoperating practices provided such change are compatible with corevalues and beliefs. One significant defining trait of adaptivecultures is that top management genuinely cares about thewell-being off all key constituencies-customers, employees,stockholders, major suppliers, and the communities where itoperates-and tries to satisfy all their legitimate interestssimultaneously.

The philosophy, goals, and practices implicit or explicit in anew strategy may or may not be compatible with a firm’s culture. Aclose strategy-culture alignment promotes implementation andgood execution; a mismatch poses real obstacles. Changing acompany’s culture, especially a strong one with traits that don’t fita new strategy’s requirements, is one of the toughest managementchallenges. Changing a culture requires competent leadership atthe top. It requires symbolic actions and substantive actions thatunmistakably indicate serious commitment on the part of topmanagement. The stronger the fit between culture and strategy,the less managers have to depend on policies, rules, procedures,and supervision to enforce what people should and should not dorather, cultural norms are so well observed that they automaticallyguide behavior.

Because each instance of executing strategy occurs under

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different organizational circumstances, a strategy implementer’sactions agenda always need to be situation-specific-there’s noneat generic procedure to follow. And, as we said at the beginning,executing strategy is an action-oriented,make-the-right-things-happen task that challenges a manager’sability to lead and direct organizational change, create or reinventbusiness processes, manage and motivate people, and achieveperformance targets.

Healthy corporate culture are also grounded in ethicalbusiness principles, moral values, and socially responsible decisionmaking. Such standards connote integrity, “doing the right thing,”and genuine concern for stakeholders and for how the companydoes business. To be effective, corporate ethics and valuesprograms have to become a way of life through training, strictcompliance and enforcement procedures, and reiteratedmanagement endorsements. Moreover, top managers must practicewhat they preach, serving as role models for ethical behavior,values-driven decision making, and a social conscience.

Successful managers do a number of things to exercisestratregy-executing leadership. They keep a finger on theorganization’s pulse by spending considerable time outside theiroffices, listening and talking to organization members, coaching,cheerleading, and picking up important information. They takepains to reinforce the corporate culture through the things they sayand do. They encourage people to be creative and innovative inorder to keep the organization responsive to changing conditions.Alert to new opportunities and anxious to pursue fresh initiatives.They support champions of new approaches or ideas who arewilling to stick their necks out and try something innovative. Theywork hard at building consensus on how to proceed, what tochange, and what not to change. They enforce high ethicalstandards and insist on socially responsible corporate decisionmaking. And they actively push corrective actions to improvestrategy execution and overall strategic performance.

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4.4.3 Adapting to changing environment:

The major focus of corporate strategy is to present a method bywhich any business can adapt to a changing envoronemnt. Thefocus of corporate strategy is to enable a business to improve it’scompetitive advantage.

Corporate strategy theory presents us with the following questions:

Where are we now?Where do we want to be?How do we get there?

Corporate Self Analysis

Corporate self analysis is about answering the first question, whereare we now?

The logic is to examine the current status of the business. Areas tolook at within corporate self analysis include:

Is the business aware of who it’s stakeholders are?Does your business have a mission statement?What are the long term objectives of your business?What are your current business strategies? – Are they simpleto understand and communicate to the workforce?, or Arethey difficult to understand and communicate?What is the state of the marketplace? – Is it ingrowth/decline?, Who are your biggest competitors?Review your business internally, look at your business – Doesit support growth and adaptability to change? How effectiveare your production processes? How well doSales/Personnel/Marketing/Finance perform?How well does the business control its internal reasons?

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Formulating Strategy

When devising any business strategy, you need to consider:

The reasoning behind the strategy, what are your objectives?– Achieve x amount of growth/cost reduction?What are all your options? – does it have to be done in acertain manner?Examine all options, when strategy is going to the mostfeasible in terms of acceptance?

When evaluating the different strategic direction a business cantake there are several routes a business can explore:

DO NOTHING – In this scenario, the business does little interms of reaching to changes in the marketplace.DEVELOPMENT – Spend vast amounts of money on research,the developing new product ranges.INTEGRATION – Integrate in a backward manner by goingback and buying up your business suppliers to achievegrowth by getting lower priced raw materials. Integrate in aforward manner by buying your product distributors, sellyour product direct to the consumers, thereby generatingincreased profits. Integrate in a horizontal manner, by buyingyour competitors to gain increased market shares.STRATEGIC ALLIANCES- join forces with one of yourcompetitors to develop a stronger position in yourmarketplace.NEW MARKETS- the business decides to embark onpositioning itself into new markets.

The overriding logic of formulating strategy is – that any strategymust be in line with business objectives, ensuring stakeholdersneeds are maintained and that needs of the surrounding

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environment are adhered to.

After developing several potential strategies, the next step in theprocess is to look at the different strategies to see which one themost suitable:

What is the cost of each potential strategy likely to be?Does the business have the correct current machiningcapabilities(if applicable?)

In terms of evaluating any potential strategy, two key elementsneed to be observed, the first in the financial viability of thestrategy, how soon will the costs be recouped?, and will thebenefits to the business be long-term?. The second element mustbe the effect of a strategy on the current facilities and resources,does the business require additional employees to both implementthe strategy and maintain it?

Implementing Strategy

There is no clear cut advice that can be given on how toimplement a strategy. The only advice we can give is to keep itsimple, clear, precise. But above all make sure everyoneunderstands what is expected of them.

Studies of how to implement a strategy by Nutt showed that thesuccess rate for strategies was greater when the strategicmanagers sent more time looking at how implementation issues, asopposed to merely forcing a strategy, questions raised by Nutt onimplementing a strategy include:

Does implementation exceed the manager’s authority to set?Does a technically sound plan exist?Can the manager shape the plan so it falls under his/her

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control?Does the plan deal with a recurring problem?Can plan acceptance be negotiated with the affected parties?Should consultants be used?Do time constraints exist?

When looking at the implementing strategy it is advisable thatyou keep the aim and text of the strategy as simple as possible.

From the outline of the strategy, the next step is to definethe processes and tasks which are needed to implement thestrategy. From identifying the tasks for implementation the nextphase will be identify who will be responsible to carry out theimplementation stages, and finally to ensure the review of thestrategy:

1. Break the aim of the strategy into clear implementation tasks2. Decide who will be responsible for implementing the strategy3. Ensure regular review and adjustments to the targets setwithin the strategy as and when necessary.

If a business is to remain competitive in an ever changingenvironment, then strategic reviews need to take place from themanagement of the business to assess the business in relationto it’s environments, accordingly adjusting the strategic focus ofthe business.

Questions:

1. What are the requirements of joint venture?2. Under what circumstances joint venture in useful?3. Mention the difficulties faced by joint nature players in India.4. Give some examples of joint venture in India under differentcategories.

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LESSON 4.5 LINE AND STAFF FUNCTIONS

4.5.1 Introduction:

Business enterprise at their inception are primarily economicentities but as they grow the emphasis shifts towards a moresocial character. Its actions are to be justifiable in terms of spiritin which society allows it to function. Organizations are alsocradled of power games and political behavior hence cannot betotally divorce from political governance. Unless the politicalculture of organization changes, responsible corporategovernance will come about. Corporate governance is not blindadherence to externally imposed norms and codes only but acommitment to the spirit of internally developed managementethos. Management is not a mere discipline but a culture withits own values, beliefs, tools. In today’s complex environment amanager can hardly thrive on native brilliance and intuitiveunderstanding of the situation he confronts. Management isinterdisciplinary by nature: an engineer manager knowing onlyengineering is not enough; he has to have understanding of thesocial, political, legal and economic environment within whichhe has to operate. He is also required to know behavioralscience, information technology, the way finances is managed,the way the structures and systems operate within the firm, thestrategic implication of his actions and inactions and so on andso forth. To groom managers to be fit to survive is necessary.

The impact of technology is actually more difficult to predictthan most other factors. Economic and social prophets have thedismal record ad predicators to technology and its impact.Therefore, once the technology become effective carefulmonitoring of the actual impact (both beneficial and detrimental)is essential. Monitoring is a managerial responsibility andrequires to be exercised.

4.5.2. Developments in Line-Staff functions:

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1. To be multi-functional2. To be multi-disciplinary3. To be multi-sector think-tank4. To be disperse rapidly new knowledge5. To be disperse rapidly new capabilities6. To have distilled knowledge reservoir about place and people

To the coming age of the new technology worker, workcannot be organized if planning is divorce form doing. The moreplanning a worker does and the more responsibilities he takesfor what he does, the more productive be can be. A worker whodoes only as instructed can do only harm. One needs amanagement structure which magnifies and indeed respects theroots of a person and yet a true team with diversities is made.Binding between employer and worker can be achieved eitherthrough life-time employment (as in Japan) or throughpartnership in time of profit and loss.

Predictability of behavior and action is required Rules andlaws help make behavior predictable but total adherence is not agood way to assure success. Framing of rules must includeorganizational culture. Redundancy may be in the skills ofworkmen and also in the total learning available with managers.If redundancy is present the CEO is to leave his cocoon of“Deciding & Directing” to “Managing Organizational Learning”.Top team must examine and improve its own ability to learn.People today don’t want to be “used” by the organization as“Victims” or “Pawn”. Rather they want.

“Melting pot’ assimilation of culture is out; “Salad bowl”, conceptis in. Culturally diverse workers want to be “themselves” andretain their cultural identities, they resist conforming to the “onesize fits all” organizational culture. Empowerment involves trustand demands true leadership. Effective delegation no longermeans delegation only but release of authority as well as giving

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of responsibility. Hierarchies are replaced by self-managingstructures like networks multidisciplinary teams etc., if not doneto do it in order to match with development. The time has cometo choose between capacity and transparency. Opacity means aplethora of complex rules, compartmentalization, andinformation limited to very few. Transparency means establishedsimple norms, massive flow of information across the interfaces.Transparency returns good dividends.

Broadly speaking, the overall profile of the business scenariois as follows:

1. In family enterprise top post in inherited2. In private sector, it is centralized control and closed systembased on divide-&-rule policy.

3. In public sector top heavy administration; limited tenure ofchief executives and a multilevel and slow decision makingprocess.

4. In multinationals a highly specialized management; stiffcompetition, deadline and frequent mergers, trimming offstaff etc.

4.5.3 Strategic for different levels:

Core Level1. Be proactive instead of reactive2. Integral Management approach contrary to fire fighting3. To grow core areas.

Structural Level

1. De-staffing, staffing and re-staffing wherever requiredonly for business strategy point of view.

2. Matrix of Responsibility, Authority and Accountablity3. Team of self-propelled managers (not those ‘look busy’,‘pensioner’, type)

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4. Scientific Monitoring

Implementation Level

1. To change mind-set2. Awareness of objective and compare data at all levels3. Clarity of customers, what they want for others4. Ensuring shop-flow employees capable of implementingtop decision

Questions:

1. What re the developments in line and stag functions?2. What are the various levels at which functions are decided?

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LESSON 4.6 MANAGEMENT OF CHANGE

4.6.1 Introduction:

Change is the Law of Nature. It is necessary way of life inmost organization for their survival and growth through there manymay be some discontentment, during the early days of the change,persons learn to meet the change and adopt themselves to thechanging situation here resistance to change would be short – termphenomenon.

Man has to mould himself continuously to meet new demandand face new situations. Despite the fact that change is persistentphenomenon, it is a common experience that people resist change,whether in the context of their pattern of life or in the context oftheir work situation in an organization.

Change could be both reactive and proactive. A Proactivechange has necessarily to be planned to attempt to prepare foranticipated future challenges. A reactive change may be anautomatic response or a planned response to change taking placein the environment conditions change in Managerial personnel.Deficiency in existing organizational pattern, Technological andPsychological reasons, Government policy, size of the organization.

Types of Change

Changes can be broadly divided into

Work changeOrganisational change

Work change includes change in Machinery, working hours,Method of work, job enlargement and enrichment, jobredesign or re-engineering. Change may working hours and

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shift change.

a. Radical changeb. Fundamental changec. Factors to be considered for the changemanagement are:

i. Triggers for changeii. Type of change needediii. Extent of resistance encounterediv. Extent of Urgency createdv. Reasons for choice of change strategiesvi. Reason for resistancevii. Factors which helped most in over coming

resistanceviii. Factors given most consideration during

changeix. Methods used most to activate peoplex. Methods used most to support people during

changexi. Most important implementation actions taken.

While a research was undertaken to get additional informationapart from the closed ended responses in the questionnaires, itrevealed the following:

Triggers for Change

Triggers Number of respondents Opting

Increased competition 4

Financial Loss None

Drop in profit None

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An opportunity (or) Eventforeseen

1

Improper utilization of staff None

Additional Information

Other triggers were,

RBI guidelines (for banking organizations)

Over size.

Inferences

We find that the most important, trigger as perceived bymajority of the respondents is, Increased competition

Type of Change Needed.

Triggerstypes ofChange

MajorModification

MinorModification

ImmediateChange

MinorTransformation

MajorTransformation

No. ofRespondents

- 3 2 - -

Additional Information

The others type of change needed was,

Structural change

Inference

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Most of the respondents have preferred a ‘minormodification’ followed by an ‘immediate change’.

Amount of resistance Encountered

Extent of Resistance Number of RespondentsPreferring

High 1

Low 2

Medium 2Inference

Most of the respondents have encountered either medium (or)moderate resistance, or low resistance. In fact one among therespondents, did not encounter nay resistance, as the change wasneeded.

Amount of UrgencyExtent of Urgency High Low

No. of respondents 3 2Inferences

3 of the respondent have perceived that the change in theirorganization was very urgently needed.

Majority have taken the changes in their organization to bevery urgent.

Reasons for choosing a specific change strategy

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Reasons EmployeesParticipation

EmployeeMotivation

Confidentability

CulturalFit

Postchange

motivationNo. of

Respondents- 2 1 - 1

Additional Information

For educational institutions it was necessary to provide a strongbase to students for a best career.

Inferences

2 unit of the 5 respondents have considered ‘employeemotivation’, while 1 respondents each have considered‘confidentiality’ and ‘Post change motivational’.One among the 5 respondents did not give his opinion in thisaspect.

Reasons for ResistanceReasons Fear of

changePersonalcompact

Resentmentof change

Lack offaith

Emotionalhang-up

No. ofrespondents

2 - 1 - 1

Inferences

Majority have considered ‘fear of change’ as a main reason forresistances, followed by ‘resentment of change’ and ‘emotionalhang up’.

Factors which helped to overcome resistanceFactor Employee Communication Training Motivation Education

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Participation

No. ofRespondents

1 3 2 3 1

Additional Information

The trade unions decision to uphold the organization premierposition.

Inferences

Majority of respondents consider ‘motivating employees’ and‘Communication of change philosophy’ to be more important,followed by ‘Training’, ‘Education’ and ‘Employee participation’.

Factor Most considered in changeFactor Reward

SystemOrganizationculture

OrganisationStructure

People inthe

Organisation

IntendedResult

No. ofRespondentsChoosingthe factor

1 1 2 1 2

Inference

The major factors considered by most of the respondents are‘organisation structure’ and ‘intended result’ followed by ‘reward

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system’, culture of the organization and ‘people in the organization.

Method used most to activate peopleMethod Training Public

relationsPersonalcontact

Workshopand

conference

Communicatingwith employees

No. ofRespondents

3 - 3 2 1

Inferences

Most of the respondents have used ‘Training’ and ‘Personalcontact’ mainly to activate people. This is followed by ‘workshop &conferences’ and ‘Communicating with Employees’.

Additional Information

One of the respondents opined that the employee must be made torealize that he can assist the organization realize it position it’s apremier.Most used support methodSupportMethod

ExpressionConfidence

ProvidingCoaching

EmpoweringKey people

HavingEmpathy

UsingRewards

No ofrespondents

3 2 1 2 1

Additional Information

The frictionless assignment of work would prevent egoism amongemployees.

Inferences

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The most used support method as per the majority of‘respondents’ opinion is ‘expressing confidence working withemployee’, which is followed by ‘providing coaching’, ‘havingempathy with people’, ‘empowering key people’ and ‘usingrewards’.

Most Important Implementation ActionAction Project

ManagementShorttermPlansBudgets

Strategiesto

Implementvision

Monitoringchange

Controllingchanges

No. ofRespondents

- 2 2 2 2

Additional Information

Devising new systematic procedure through R & D.

Procedures to improve customer service throughcomputerization

Plans to achieve set goals are to be implemented slowly andsteadily.Inferences

There is a equal consideration given for the action, “ProjectMa” Short Term Plans & Budgeting”, “Strategies to implementvision”, “Monitoring change” and “Controlling change”.

Findings

Normally, it is thought that all changes will have to encountera resistance. But in certain situations similar to the one as

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described by one of the respondents, there was no resistance tothe change process. In fact, the change was expected by theorganization.

The changes needed in response to increases competition,are to be very urgently done,

Fear of Change’ as normally perceived is the major cause forresistance.

‘Employee Motivation’ and ‘Effective Communication of ideas ofchange’ are more important to overcome resistance.

‘Organistion Structure’ and ‘Intended Result’ are the mostimportant factors considered while brining about the change.

‘Training’ and ‘ Personal contact’ are most used to activate people.

‘Expressing Confidence with employees’ is the most used supportactivity

Budgets, short terms plans, Strategies, Monitoring and controllingchange process are considered equally in importance.

The trade unions, employees should be convinced of vitality oftheir role in the organization prosperity.

4.6.2 Phases and level of organizational change:

Stages of Organisational Change:

Denying Dodging Doing Sustaining

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1 2 3 4

First Stage : Denying :

Theme – This does not affect India

It starts with a presentation of he date supporting a changeinto an organization. It centres on processing information its value,relevance or timeliness.

The change agent may be any where in the organization andwill meet the denial from above and below:

Second Stage :Dodging:

Theme – Ignore this. Don’t get involved

It begins when the accumulated evidence shows that the changeprocess is likely to take place. It is agreed that a small amount ofchange is needed, but what is questioned is whether it is critical tochange or not.

As the change is coming from outside, dodging is the equivalent oforganizational anger. This anger is expressed in a passive –aggressive non-participation.

A sub-ordinate can confuse the issue by pretenting the weaknessof the approach to the change.

Another method to subvert is to change the form, if the discussion

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is on work – flow change, change it to personnel. If it is onpersonnel, change it to bulk capital budget funding or to theexpense budget.

In fact, quiet behaviour, sometimes indicating agreement, is read atthis phase as disagreement and insubordination. The need for theteam to adapt the process and approach is essential in this stage tomake in their own.

Third Stage : Doing :

Theme – This is very important. We have got to do it now.

This stage occurs quickly and sometimes startles the observes inits contrast. It is earmarked by energy used in going for the change.As the specific change is worked on, things are uncovered thatrequire change. Minor moves, such as budgeting, restructuring,hiring, emerge.

For the manager, the general tendency is to let the momentum takeover. The difficult part of gaining consent and involvement is overto sit back and let it happen

This is dangerous for two reasons.

a) If the team labour is not divided well between teamsand individuals this can were the relationships anddestroy the whole change process.

b) The dangers of overloading the change process withtrying too may things.

At this stage the focus phones from ‘changegenerators’ to the ‘change implementers’. There needsto be bargaining as to what can or cannot be put intothe change.

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There are two outcomes to the issues of this stage

(i) One is death, where the whole thing collapsesunder its own weight.

(ii) The other is a focusing of energy.

What required is an accurate drawing of the force fields of thechange to that the critical elements in the change are pinpointedand appropriate goals are set.

Fourth Stage : Sustaining :

Theme – We have a way of proceeding

This stage is less well defined but is a key stage of any change butis a key stage of any change process. It is the focusing of energy tofollow through an programmes and projects. This is the refreezingstage and the ‘change adopters’ come into prominence. Thesuccessful come completion of this stage is the integration of thechange into the habitual patterns of behaviour and structure.

Questions:

1. What is resistance to change?2. Why change management is important in the present context?3. What are the difficulties in management if change?4. What is the process of management of change?

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UNIT 5

LESSON 5.1 IMPLEMENTATION OF STRATEGY

5.1.1 Introduction:

The Strategy will be implemented through the concertedactions of all staff working within a partnership framework.The Board will set objectives and parameters, for theimplementation of the strategy, and will review progress inachieving objectives. Management will tae ownership, giveleadership and agree with staff clearly defined roles andresponsibilities in achieving targets and milestones. It is alsorecognized that resources issues may affect the fullimplementation of the strategy. The following actions havebeen identified which will help to achieve the eight PriorityGoals, outlined above, and which will drive and complementbusiness planning activities.

5.1.2 The Strategy Implementation Process:

It is done through:

Action PlansTimelines, Critical pathsResouces requirementsLinkages to budget

“The Strategy Implementation Process provides a comprehensive,manageable approach to organizational alignment.”

Phase I – Data Collection and Analysis

Workshops on Strategic Alignment and interviews with selectedexecutive and employees provide the key to uncovering hidden

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obstacles standing in the way of implementation:

Perceptions of management, the business, and the polities orthe organizationConflicting programs, goals, directives and policies.Unsupported dimensions of he organization’s strategy

Phase 2 – Facilitation

The management teams derives clear, consistent, compatibleobjectives:

Future state of the organization required for strategicsuccessCongruent, focused organizational goals whose achievementwill implement the strategy

Phase 3 – Implementation

Strategic Alignment is accomplished by deploying constructiveprogress and policies:

Communication of the organization’s purpose and strategyTraining of missing skills and knowledgeCollection of essential measurementsSetting of customer-derived unit goalsCreating of strategy-driven incentive pay

5.1.4 Internal Implementation

1. To assist management in carrying out its role in deliveringthe strategy and whatever may evolve in the future, andintegrated management development programme, with aparticular focus on business planning and performancemanagement, will a particular focus on business planning

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and performance management, will be provided. In addition,project groups will be established to bring forward detailedproposals in respect of issues arising from the eight PriorityGoals.

2. It is anticipated that other issues will emerge as the processevolves. The project groups will comprise of managementand staff, at all levels, who have expressed an interest, andwho have some expectise/knowledge, in the topic areas.

3. A Steering Group will be established, through the PartnershipFramework, to set terms of reference, to agree resources anddeadlines, to monitor and support progress and to ensurethe integration of project group activity and outputs intoprogressing the organization’s strategy.

4. At Unit, Regional and Divisional level, annual business planswill be developed and these will also draw on the work of theproject groups. These plans will be directly related to thePriority Goals and overall organizational strategy.

The job of strategy execution is to convert strategies plans intoactions and good results. The rest of successful strategy executionis whether actual organization performance matches or exceeds thetargets spelled out in the strategic plan. Shortfalls in performancesignal weak strategy, weak execution, or both.

In deciding how to implement a new or revised strategy, managershave to determine what internal conditions are needed to executethe strategic plan successfully, Then they must create theseconditions as rapidly as practical. The process of implementing andexecuting strategy involves:

Building an organization with the competencies,. Capabilities,and resource strengths to carry out the strategy successfully.Developing budgets to steel ample resources into those valuechain activities critical to strategic success.Establishing strategy – supportive policies and procedures.

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Instituting best practices and pushing for continuousimprovement in how value chain activities are performed.Installing support systems that enable company personnel tocarry out their strategies roles successfully day in and dayour.Tying rewards and incentives to die achievement ofperformance objectives and good strategy execution.Reating a strategy-supportive work environment andcorporate culture.Exerting the internal leadership needed to driveimplementation forward and to keep improving on how thestrategy is being executed.Exerting the internal leadership needed to driveimplementation forward and to keep improving on how thestrategy is being executed.

The challenge is to create a series of right fits (1) betweenstrategy and the organization’s competencies, capabilities, andstructure; (2) between strategy and budgetary allocations; (3)between strategy and policy; (4) between strategy and internalsupport systems; (5) between strategy and the reward structure;and (6) between strategy and the corporate culture. The tighter thefits, the more powerful strategy execution becomes and the morelikely targeted performance can actually be achieves.

Implementing strategy is not just a top-managementfunction; it is a job for the whole management team. All managersfunction as strategy implementers in their respective areas ofauthority and responsibility. All managers have to consider whatactions to take in their areas to achieve the intended results-theyeach need an action agenda.

The three major organization-building actions are (1) fillingkey positions with able people, (2) building the core competenciesand organizational capabilities need to perform value chain

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activities proficiently, and (3) structuring the internal work effortand melding it with the collaborative efforts of strategic allies.Selecting able people for key position tends to be one of theearliest strategy implementation steps because it takes a fullcomplement of capable managers and employees to get changes inplace and functioning smoothly.

Building strategy –critical core competencies and competitivecapabilities not easily imitated by rivals is one of the best ways togain a competitive advantage. Core competencies emerge fromskills and activities performed at different points in the value chainthat, when linked, create unique organizational capability. The keyto leveraging a company’s core competencies into long-termcompetitive advantage is to concentrate more effort and moretalent than revivals competitive advantage is to concentrate moreefforts and more talent than revivals of on strengthening anddeepening organizational competencies and capabilities.

The multiskill, multiactivity character of core competenciesand capabilities makes achieving dominating depth an exercise in(1) managing human skills, knowledge bases, and intellect, and (2)coordinating and networking the efforts of different work groups,departments, and collaborative allies. It is a task that seniormanagement must lead and be deeply involved in chiefly becausesenior managers who are in the best position to guide and enforcethe necessary networking and cooperation among individuals,groups departments, and external allies.

Building organizational capabilities means more than juststrengthening what a company already does. There are times whenmanagement has to be proactive in developing new competenciesto complement the company’s existing resource base and promotemore proficient strategy execution. It is useful hare to think ofcompanies as a bundle of evolving competencies and capabilities,with the organization-building challenge being one of developingnew capabilities and strengthening existing ones in a fashion

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calculated to achieve competitive advantage through superiorstrategy execution. One capability-building issue is whether todevelop the desired competencies and capabilities internally orwhether is makes more sense to outsource them by partnering withkey suppliers or forming strategic alliances. Decisions aboutwhether to outsource or develop in-house capability often turn onthe issues of (1) what can be safely delegated to outside suppliersversus what internal capabilities are key to the company’slong-term success and (2) whether noncritical activities an beoutsourced more effectively or efficiently than they can beperformed internally. Either way, though, calls, for action.Outsourcing means launching initiative relationships. Developingthe capabilities in-house means hiring new personnel withs skillsand experience relevant to he desired organizationalcompetence/capability, then linking the individual skills/know-howto form organizational capability.

Matching structure to strategy centers around makingstrategy-critical activities the main organizational building blocks,finding effective ways to bridge organizational lines of authorityand coordinate the related efforts of separate internal units andindividuals, and effectively networking the efforts of internal unitsand external collaborative partners. Other big considerationincludes what decisions to centralize and what decisions todecentralize.

All organization structures have strategic advantages anddisadvantages; there is no one best way to organize. Functionallyspecialized organization structures have traditionally been themost popular way to organize single-business companies.Functional organization works well where strategy-critical activitiesdlosely match discipline-specific activities and minimalinterdepartmental cooperation is needed. But it has significantdrawbacks: functional myopia, empire building, interdepartmentalrivalries, excessive process fragmentation, and vertically layeredmanagement hierarchies. In recent years, business process

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reengineering has been used to circumvent may of thedisadvantages of functional organization.

Whatever basic structure is chosen, it usually has to besupplemented with interdisciplinary task forces, incentivecompensation schemes tied to measures of joint performance,empowerment of cross-functional and/or self-directed work teamsto perform and unity fragmented process and strategy-criticalactivities, special project teams, relationship managers, and specialtop management efforts to knit the work of different individualsand groups into valuable competitive capabilities. Building corecompetencies and competitive capabilities emerges fromestablishing and nurturing collaborative working relationshipsbetween individuals and groups in different departments andbetween a company and its external allies, not from how the boxesare arranged on an organization chart.

New strategic priorities like short design-to-market cycles,multiversion production, personalized customer service, aggressivepursuit of e-commerce opportunities, and winning the race forpositions of leadership in global markets and/or industries of thefuture have prompted increasing numbers of companies to createlean, flat, horizontal structures that are responsive and innovative.Such designs for matching structure to strategy involve fewer layersof management authority, managers and workers empowered toact on their own judgment, reengineered work processes to reducecross-department fragmentation, collaborative partnerships withoutsiders (suppliers, distributors/dealers, companies withcomplementary products/services and even select competitors),increased outsourcing of selected value chain activities, leanerstaffing of internal support functions, and rapidly growing use ofe-commerce technologies and business practices.

A change in strategy nearly always calls for budgetreallocations. Reworking the budget to make it morestrategy-supportive is a crucial part of the implementation process

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because every organization unit needs to have the people,equipment, facilities and other resources to carry out its part of thestrategic plan (but no more than what it really needs).Implementing a new strategy often entails shifting resources fromone area to another-downsizing units that are overstaffed andoverfunded, upsizing those more critical to strategic success, andkilling projects and activities that are no longer justified.

Anytime a company alter its strategy, managers are welladvised to review existing policies and operating procedures,deleting or revising those that are out of sync and deciding ifadditional ones are needed. Prescribing new or freshly revisedpolicies and operating procedures aids the task of implementation(1) by providing top-down guidance to operating managerssupervisory personnel, and employees regarding how certain thingsneed to be done; (2) by putting boundaries on independent actionsand decisions; (3) by promoting consistency in how particularstrategy-critical activities are performed in geographically scatteredoperating units; and (4) by helping to create a strategy supportivework climate and corporate culture. Thick policy manuals areusually unnecessary. Indeed, when individual creativity andinitiative are more essential to good execution than standardizationand conformity, it is better to give people the freedom to do thingshowever they see fit and hold them accountable for good resultsrather tan try to control their behavior with policies and guidelinesfor every situation? Hence, creating a supportive fit betweenstrategy and policy can mean many policies, few policies, ordifferent policies.

Competent strategy execution entails visible, unyieldingmanagerial commitment ot best practices and continuousimprovements. Bendhmarking, the discovery and adoption of bestpractices, reengineering core business processes, and total qualitymanagement programs all aim to improved efficiency, lower costs,better products quality, and greater customer satisfaction. All thesetechniques are important tools for learning how to execute a

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strategy more proficiently. Benchmarkign provides ad realistic basisfor setting performance targets. Instituting “best-in-industry” or“best-in-world” operating practices in most or all value chainactivities provide a means for taking stratregy execution to a higherplateau of competence and nurturing a high-performance workenvironment. Reengineering is a way to make quantum progresstoward becoming a world-class organization, while TQM unstills acommitment to continuous improvement. Effective use of TQM andcontimuous improvement techniques is a valusable competitiveasset in a company’s resource portfolio-one than can productimportant competitie capabilities (in reducing costs, speeding newproducts to market, or improving product quality, service, orcustomer satisfaction) and be a source of competitive advantage.

Company strategies can’t be implemented or executed willwithout a number of support systems to carry on businessoperations. Well-conceived state-of-the-art support systems notonly facilitate better strategy exaction is to make strategicallyrelevant measures of performance the dominating basis fordesigning incentives, evaluating individual and group effort, andhanding out rewords. Positive motivation practice generally workbetter than negative ones, but there is a place for booth. There’salso a place both monetary and no monetary incentives.

For an incentive compensation system to work well (1) themonetary payoff should be a major percentage of thecompensation package,(2) the use of incentives should extend toall managers and workers,(3) the system should be administeredwith care and fairness, (4) the incentives should be linked toperformance target spelled out in the strategic plan, (5) eachindividual’s performance targets should involve outcomes theperson can personally effect,(6) rewards should promptly follow thedetermination of good performance.(7) monetary rewards shouldbe supplemented with liberal use of no monetary rewards, and (8)skirting the system to reward non-performers should bescrupulously avoided.

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Questions:

1. What are the phases of strategy implementation process?2. What is benchmarking?3. What are the techniques for effective implementation ofstrategy?

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LESSON 5.2 ELEMENTS OF STRATEGY

5.2.1 Introduction:

Examples of strategy elements include:Customer focusCustomization capabilityThe highest functionality products and/or serviceThe most robust product or serviceThe bets processFastest time to marketValue-adding EngineeringLowest-cost competitorRe-useThe widest range of products and servicesAutomationStandardizationFlexibilityReduce to core Engineering activitiesMinimize Engineering costsPartneringSkilled workforce/UL

5.2.2. How elements are used for corporate strategies?

Corporate – level strategies are basically about the choice ofdirection that a firm adopts in order to achieve its objectives. Therecould be a small business firm involved in a single business, or alarge, complex and diversifies conglomerate with several differentbusinesses. The corporate strategy in both these cases in about thebasic direction of the firm as a whole. In the case of the small firmit could mean the adoption of courses of action that would yield abetter profit for the firm. In the case of the large firm the corporate– level strategy is also about managing the various businesses tomaximize their contribution to the overall corporate objectives.

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Corporate-level strategies are basically about decisionsrelated to allocating resources among the different business of afirm, transferring resources from one set of business to others, andmanaging and nurturing a portfolio businesses in such a way thatthe overall corporate objectives are achieved. An analysis based onbusiness definition provides a set of strategic alternative that anorganization can consider.

“Strategic alternative revolve around the question or whetherto continue or change the business the enterprise is currently in orimprove the efficiency and effectiveness with which the firmachieves its corporate objectives in its chosen business sector”.According to Glueck, there are four grant strategic alternatives:stability, expansion, retrenchment, and any combination of thesethree. These strategic alternatives are termed as grand strategies.Other authors refer to them as basic strategies or genericstrategies. We will shortly see what each of these grand strategiesmean and why they are called as such.

Expansion Strategies

The expansion grand strategy is followed when anorganization aims at high growth by substantially broadening thescope of one or more of its businesses in terms of their respectivecustomer groups, customer functions, and alternative technologies– singly or jointly – in order to improve its overall performance.

Because of the many reasons for which they are adopted,expansion strategies are quite popular. Given below are threeexamples to show how companies can aim at expansion either interms of customer groups, customer functions or alternativetechnologies.

A chocolate manufacturer – expands its customer

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groups to include middle-aged and old persons amongits existing customers comprising of children andadolescents.A stockbroker’s firm offers personalized financialservices to small investors apart from its normalfunctions of dealing in shares and debentures in orderto increase the scope of its business and spread itsrisks.A printing firm changes from the traditionalletter-press printing to desk-top publishing in order toincrease its production and efficiency.

In each of the above cases, the company moved in oneor the other directions so as to substantially later its presentbusiness definition. Expansion strategies have a profoundimpact on a company’s internal configuration causingextensive changes in almost all aspects of internalfunctioning. As compared to stability, expansion strategiesare more risky.

Sometimes strategies, like army commanders, do thinkit better to retreat that to advance. It is in such situationsthat retrenchment is a feasible strategic alternative.

Expansion Strategies

Growth is a way of life. Almost all organizations plan toexpand. This is why expansion strategies are the mostpopular corporate strategies. Companies aim for substantialgrowth. A growing economy, burgeoning markets customersseeking new ways of need satisfaction, and emergingtechnologies offer ample opportunities for companies toseek expansion.

In this section, we will try to cover a lot of ground by

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describing five types of expansion strategies.

a) Expansion through concentrationb) Expansion through integrationc) Expansion through diversificationd) Expansion through cooperatione) Expansion through internationalization

a) Expansion through Concentration

Concentration is a simple, first – level type of expansiongrand strategy. It involves converging resources in one or ore of afirm’s businesses in terms of their respective customer needs,customer functions, or alternative technologies, either singly orjointly, in such a manner that it results in expansion. In businesspolicy terminology concentration strategies are known variously asintensification, focus or specialization strategies.

In practical terms concentration strategies involve investmentof resources in a product line for an identified market with the helpof proven technology. This may be done by various means. A firmmay attempt focusing intensely on existing markets with itspresent products by using market penetration types ofconcentration. Or it may try attracting new users for existingproducts resulting in a market development type of concentration.Alternatively it may introduce newer products in existing marketsby concentration on product developments.

For expansion, concentration is often the first – preferencestrategy for a firm, for the simple reason that it would like to domore of what it is already doing. A firm that is familiar with anindustry would naturally like to invest more in known businessesrather than unknown ones. Each industry is unique in the sensethat there are established ways of doing things. Firms that havebeen operation in an industry for long are familiar with these ways.

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So they prefer to concentrate on these industries.

ASHOK LEYLAND

Key Factors for an Organisation

One of the most successful “invasions” in the post-SecondWorld War era has been that of Japanese companies in theAmerican market. They had two strong motive impulses: a nationalmission to redeem the pride suffered at the World War and a verylimited domestic market. These organization reflected values. Theorganizations had the self-confidence not to abandon theirmanagement and manufacturing systems, which made theirproducts good value propositions. The products were different andanswered latent needs of foreign markets. In fact, they transformedthe market.

The success formula stays the same in the current low tariffregime: firstly, there should be a strong urge – both need andmission – to succeed. This should be backed by globalcompetencies in technology, manufacture, management andcustomer servicing, with distinct competitive advantage in at leastone of these.

The robust forays made by Indian IT companies in foreign marketsvalidate this premise. Attracted by ready and remunerative foreignmarkets, these companies – young, confident and ambitious –entered into foreign markets. All of them have a huge competitiveadvantage in one quintessential factor, namely, high caliber andlow cost human resource.

External and Internal environment to build world classcompetitiveness

A clear distinction has to be drawn between knowledge-basedindustries and others. The traditional industries operate in an

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environment with greater dependence on various external factors.In knowledge industries, the essential factors of competitivenessare more company-dependent. The capabilities that make up thecompetencies are individual rather than collective. Within thismajor difference, the external factors range from governmentpolicies, cost of finance, availability of infrastructure, competitionand the state of the domestic market. How mature the domesticmarket is will determine the ability and readiness of theorganization to service a foreign market. In industry segmentsbarring a few exceptions like automobiles, the dominant domesticmarket segments are not in the same stage of evolution as mostglobal markets.

Irrespective of the industry segment, export orientation wouldpresuppose organizational leadership that has the vision to lookbeyond national boundaries and set up recci missions even as theyfight battles in the domestic market. An organizational culture oflearning and daring is an equally important precondition.

Comment on the steps taken by Ashok Leylond to bring in WorldClass Competitiveness.

We have always invested in evolving technology appropriate to themarket, in order to offer better value to the customer and therebycreate and retain a competitive advantage. The industry’ssubsequent acceptance of these new technologies as norms andthe ongoing gains in our market share are only confirmativecorollaries of this strategy.

In the early 90s, in anticipation of economic reforms, we set globalbenchmarks of products and process technologies and qualitystandards. Accordingly, we have secured technology tie-ups withglobal technology leaders and put the organization and thesystems through assessments for a series of international qualitynorms. Our make or buy decisions have been guided bymaximization of value addition. We chose for ourselves the route of

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technology driven growth. During the slowdown of the mid-90s,we concentrated on enhancing our internal efficiencies. Our initialfocus area was materials, which constitute close to 70% or outproduct cots. The processes covering he entire supply chain havesince been rationalized, aided by IT connectivity covering vendors,manufacturing units, sales and marketing office, warehouses anddealerships.

We have always been a learning organization given thecomplexities of technology. The learning culture has been furtherintensified. Simultaneously, the HR systems have beenstrengthened to facilitate performance management along withquite few people intensive processes, which have heightenedemployee participation in the efficiency improvement programmes.

Company MD View on how Indian companies can enhance theircompetitiveness to match other successful MNCs.

Most Indian companies have a long distance to go beforethey level up on product quality, productivity and internalefficiencies. In process industries where productivity and qualityare build into the equipment, we have intrinsic advantage, but thecaveat is that they re capital intensive. In mass production throughassembly operations, we are comparatively weaker due to poorshop floor managerial material and make the carrot and stickcombination work at the shop floor.

India’s best chance in the manufacturing sector lies inleveraging its natural resources. Industries based on minerals andagri-products will have a competitive advantage.

Restructuring, size rationalization and technologicalself-sufficiency apart, there are at least three areas where Indiancompanies can learn from the success of MNCs. One reason for thesuccess of MNCs is that they are market driven. The second

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distinguishing feature is that they are long term players. The thirdfactor is one of size. Whether we like it or not – and more thanegos will be hurt – consolidation is the key. Consolidation withinthe domestic industry and in some cases transnational alliances.

(b) Expansion through Integration

Recall that we referred to the horizontal and vertical dimensions ofgrand strategies in the first section. These dimensions are used todefine what are known as integration strategies. The pivot aroundwhich integration strategies are designed is the present set ofcustomer functions and customer groups to other words acompany attempts to widen the scope of its business definition insuch a manner that it results in serving the same set of customers.The alternative technology dimension of the business definitionundergoes a change.

A value chain is a set of interlinked activities performed by anorganization right from the procurement of basic of raw materialsdown to the marketing of finished products to the ultimateconsumers. So a firm may movie up or down the value chain toconcentrate more comprehensively on the customer group andneeds than it is already serving. A firm that adopts integration asthe expansion strategy commits itself to adjacent businesses.

Integration is an expansion strategy as its adoption results ina widening of the scope of the business definition of a firm.Integration is also a subset of diversification strategies as itinvolved doing something different from what the firm has beendoing previously. Several process-based industries, such as,petrochemicals, steel, textiles or hydrocarbons, have integratedfirms. These firms deal with products with a value chain extendingfrom the basic raw materials to the ultimate consumer. Firmsoperating at one end of the value chain attempt to more up ordown in the process while integrating activities adjacent to theirpresent activities.

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(d) Expansion through Cooperation

Much of strategy literature assumes competition to be anatural state of existence for companies to operate in. Severalstrategy experts, notably Michael Porter, have based their work onthe assumption that companies compete in the market for a limitedmarket share. One company can benefit at the cost of others. It is awin-lose situation where if one wins then one or several othershave to lose.

A contrary view has been expressed by thinkers such asJames Moore, Ray Noorda, Barry J. Nalebuff and Adam M.Brandenburger that competition could co-exist with cooperation.Corporate strategies could take into account the possibly of mutualcooperation with competitors while competing with them at thesame time, so that the market potential could expand. The term‘co-operation’ expresses the idea of simultaneous competition andco-operation among rival firms for mutual benefit. The centralpoint is of complementarily among the interests of rival firms.

Cooperative strategies could of the following types:

1. Mergers and Takeovers (or acquisitions)2. Joint Ventures3. Strategic Alliances

Merger and takeover (or acquisition) strategies essentiallyinvolve the external approach to expansion. Basically two, oroccasionally more than two, entities are involved. There is notmuch difference in the three terms used for such types ofstrategies and they are frequently used synonymously. But a subtledistinction can be made. While mergers take place when theobjectives of the buyer firm and the seller firm are matched to alarge extent, takeovers or acquisition usually are based on the

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strong motivation of the buyer firm to acquire.

Takeover is a common way for acquisitioj and may bedefined as “the attempt (often sprung as a surprise) of one firm toadquire ownership of control over another firm against the wishesof the latter’s management (and perhaps some of itsstock-holders)”. But this definition need not be taken very seriouslyas in practice, many takeovers may not have any element ofsurprise, and may not necessarily be against the wishes of theacquired firm. In fact, takeovers are frequently classifies as hostiletakeover (which are against the wishes of the acquired firm), andfriendly takeovers (by mutual consent in which case they could alsobe described as mergers). Without being too fastidious, one canuse these terms synonymously. Recall that strategic management isin an evolutionary phase and such confusion in terms has often tobe taken in one’s stride.

Joint ventures occur when an independent firm is created byat least two other firms. In an era of globalization, joint ventureshave provided to be an invaluable strategy for companies lookingfor expansion opportunities globally. Strategic alliances arepartnerships between firms whereby their resources, capabilities,and core competencies are combined to pursue mutual interest todevelop, manufacture, or distribute goods or services. Like jointventures, strategic alliances have become quite popular as strategicalternative for firms looking for cooperation among national as wellas international partners.

Spartek took over Neyeer in order to integrate horizontally.Hi Beam Electronics merged with two other units to form TristarElectronics, subsequently named as Solidaire India Ltd., Merger,takeover, joint venture, and strategic alliance strategies are,therefore, also the means of achieving diversification andintegration.

(e) Expansion through Internationalization

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In this subsection, we first have a look at the context –international and national – in which firms adopt internationalstrategies for expansion. Then we eddgdg the terms ‘internationalstrategy’. A brief description of the types of international strategiesis followed by a reference to the international entry optionsavailable to a firm.

Context for International Strategies

International economic dynamics, accompanied by geopoliticalchanges, over the past several years, particularly since the oil crisisof 1973, have changed the paradigms of international business.Globalisatin has emerged as a potent force owing to globalintegration – the intensification of economic linkages amongnations – and the internationalization of markets, trade, finance,technology labour, communication, transportation and theeconomic institutions. In the context of a changing internationalenvironment, nations need to identify the industries and businessthat their firms need to firms need to focus upon to gain acompetitive edge

Porter, in The Competitive Advantage of Nations, has extended hisidea of the competitive advantage of firms to the analysis ofcompetitive advantage of nations. In his opinion, four nationalcharacteristics create an environment that is conducive to creatingglobally competitive firms in particular industries.

1. Factor conditions: The special factors or inputs of productionsuch as natural resources, new materials, labour, and so onthat a nation is specially endowed with.

2. Demand condition: The nature and size of the buyer’s needsin the domestic market.

3. Related and supporting industries: The existence of relatedand supporting industries to the ones in which a nationexcels.

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4. Firm strategy structure and rivalry: The conditions in thenation determining how firms are created, organized, andmanaged and the nature of domestic competition.

On the basis of an analysis of these four sets of factors, a countrycan determine the industry or industry niche in which a cluster ofcompanies that are globally competitive can be developed. Butdoing so is a task that requires concerted and coordinated actionon the part of the national government and the business firms.

Questions:

1. What are the elements of strategy? Give examples.2. Under what context expansion strategies are planned?3. What are cooperative strategies? How to plan them?4. What circumstances force an organization to planinternational strategies?

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LESSON 5.3 LEADERSHIP AND ORGANIZATIONAL CLIMATE

5.3.1 Introduction:

A person may be both a manager and a leader. On the job, a formalleaders is one who is appointed, but an informal leader emerges frothe work group. Abraham Zeleznik of the Harvard business schoolargues that leaders and managers are very different kinds ofpeople. They differ in motivation, personal history and how theythink and act.

John Koller, a colleague of Zaleznile at Harvard, also argues thatleadership is different from management but for other reasons.Management he proposes, in about coping with complexity goodmanagement brings about order and constituency by drawing upformal plans, designing rigid structures and monitoring resultsagainst the plans. Leadership in contrast, in about coping withchange. Leader establish direction by developing a vision of thefuture, then they align people by communicating this vision andinspiring them to overcome huddles.

He claims use need to forces more on developing leadership inorganization because the people in charge today are too concernedwith keeping things on time and on budget and with doing whathas done yesterday, only doing it 5 percent better. Leadership maybe defined as both a process and a property. As a process,leadership is the use of non coercive influence to shape to directthe activities of a group towards group goals. As a property,leadership is the set of characteristics attributed to thoseindividuals who are perceived to use that influence successfully. Inother words, leaders are those who have the ability to influence thebehavior of other without the use of force.

5.3.2. Theories of Leadership

Trait Theories:

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This theory sought the personality, social, physical or intellectualtraits that differentiated leaders from non leaders. The firstleadership researches sought a unique set of traits thatdistinguished leaders like Gandhi and Lincoln from their peers.Gary yoki (1981) summarized the research by identifying thefollowing traits and skills that are found to be.

Characteristics of successful leaders:

Traits characteristics of successful leaders.

Adaptable to situationsAlert to the social envieAmbitions and achievement orientedAssertiveCo-operativeDependableDecisiveDominant (the desire to influence others)Energetic (high activity level)PersistentSelf-confidentJolyant of stressWilling to assume responsibility

Skills of characteristics of successful leaders:

Cleuer (intelligent)Conceptually skilledCreativeDiplomatic and tactfulFluent in speakingKnowledge abut the group taskOrganized (administrative ability)

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PersuasiveSocially skilled

In the early 1980s kotter (1982) conducted in depth studies ofsuccessful general managers and found cutain characteristics morehelpful than others. He devised the helpful personalitycharacteristics into four categories.

Needs / Motive of Successful leaders:

Linked powerLinked achievementAmbitions

Cognitive orientation of Successful leader:

Above – average intelligenceModerately – strong analycallyAmbitions

Temperament of Successful Leaders:

Emotional stable and evenOptimistic

Interpersonal:Personable – good at developing relationship with peopleUnusual set of intervals that allowed them to relate easily toa broad set of business specialists.

Knowledge of successful leaders:Knowledge about their businessKnowledge about their organizations

Behavioural Theories:

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The behavioral approach was designed to determine those behaviorthat were associated with successful leadership. The leadership wasassociated with three fundamental leadership behavior.

Task performanceGroup maintenanceEmployee participation in decision making

Task performance

* Task PerformanceIf leadership is to be successful the leader must get the job

done. The necessary task performance behavior refers to thethings the leader does to ensure that the group reaches itsobjectives. The most common task performance factor i) fastwork speed ii) good quality / high accuracy iii) high quality iv)observation at the rules.

Group maintenance:

Maintenance oriented behavior are those taken by the leaderto ensure the social stability of the group to develop andmaintain harmonious work relationships and to maximize thesatisfaction of group member i) feeling ii) comfort iii) stressreduction iv) appreciation.

Participation:

The successful leader knows that employees ward to art inmaking decisions that will have an impact on their workenvironment. Thus the decision participation dimension ofleadership behavior can range from autocratic to democratic.Autocratic leaders make the decisions by themselves andthen communicate them to group members or even turn the

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decision making role over to the group.

Michigan Leadership Studies:

The Michigan leadership studies were conducted at theUniversity of Michigan under the direction Rens’s likert todetermine the pattern of behavior. Two basic forms of leaderbehavior were identified.

a) Job Centered Leader Behavior:

It includes paying dose attention to the work ofsubordinates explaining work procedures and being concernedabout performance.

b) Employee Centered Leader Behavior:

It includes developing a cohesive work group andensuring that subordinated are fundamentally satisfied with theirjob.

Ohio State Studies:

The Ohio State University leadership studies conducted in thelate 1940s and early 1950s also identified to major types ofleadership behavior.

a) Initiating Structure:

The extent to which a leader is likely to define andstructure his or her role and those of subordinates in the search for

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goal attainment.

b) Consideration:

The extent to which a leader is likely to have job relationshipcharacterized by mutual trust, respect for subordinates ideas andregards for their feelings.

In conclusion the Ohio State Studies suggested that the‘high-high’ style generally resulted in positive outcomes butenough exceptions were found to indicate that situational factorsneeded to be integrated into the theory.

Managerial Grid:

The leadership style was developed by Blake and Mouton.They proposed a managerial grid based on the styles of “concernfor people” and “concern for production” which essentiallyrepresent the Ohio state dirhensions of considerations andinitiating structure or the Michigan dimensions of employeeoriented and production oriented.

Based on the findings of Blake and Mouton managers werefound to perform best under 9.9, style. Since there is littlesubstantine and evidence to support the conclusion that a 9.9,style is most effective in all situations.

iii) Contingency Theories:

a) Fiedler Model:

The theory that effective groups depend upon a proper upona proper match between a leaders style of interacting withsubordinated and the degree to which the situation gives controland influence to the leader.

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Fiedler developed an instrument which he called the leastpreferred co-work questionnaire that purports to measure whethera person is task or relationship oriented.

Task Vs Relationship Motivation:

The task motivation is similar to the job-centered andinitiating structure behavior.

Relationship motivation is similar to the employee centeredand considering behavior.

One major difference in fielders approach is that task versusrelationship motivation is seen as a trait that remains fairlyconstant.

b) Path Goal Theory:

The path-goal theory of leadership as developed by evansand house is a direct extension of the expectancy theory ofmotivation. The path goal theory of leadership is a contingencyapproach arguing that the principal function of a leader is to makevaluable organizational awards available in the work place and toclarify for the subordinate the kinds of behavior that will lead togoal accomplishment and valued awards.

It stipulates four kind of leader behavior i) directive ii)supportive iii) participative and achievement oriented.

Situational Factors:* locus of control* perceived abilityCharacteristics

Leader behavior* Directive* Supportive* Participative* Achievementoriented

Subordinate’smotivationto perform

Situational factors:Environment characteristics* Task structure

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i) Directive Leadership:

Informal subordinates as to what is expectedOffering directive on what to do and howEstablishing schedules for the work to be doneMaintaining specific standards of performanceClarifying the leaders role in the group

ii) Supportive Leadership:

Making the work and the work environment more pleasantTreating group members as equalsBeing friendly and approachableDemonstrating concern for the status, well being and needsof subordinates.

iii) Participative Leadership:

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Getting subordinates involved in decision makingConsulting with subordinatesAsking subordinates for suggestionConsidering those suggestions seriously before makingdecision.

iv) Achievement Oriented Leadership:

Establishing challenging goalsExpecting subordinate to perform these high levelsDemonstrating confidence that continued improvement inperformanceStressing excellence and continued improvement inperformance

Path goal theory makes the assumption that the same leadermay display any or all of these leadership styles depending onthe situation.

The theory suggests that there are two basic types of situationalfactor influencing how a leader related to subordinatesatisfaction.

Locus of ControlPerceived Ability

c) The Uroom-Yetton Jago Model:

This model of leadership describes a leadership style for agiven salutation and it assumes that a manager is capable ofvarious leadership styles. It deals with the aspect of leadershipbehavior-subordinate participation in decision making. It is adecision free approach which allows the leader to assess the

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situation in terms of a variety of variables and based on thesevariables to follow the path through the decision-free to arecommended course of action.

This model contains the following five decision styles:

The manager makes the decision alone.The manager asks subordinates for information but makesthe decision aloneThe manager shares the situation with subordinates askingfor their information and evaluation. Subordinates to notmeet as a group. The manager takes the decision alone.The manager and the subordinate meet as a group, discussthe situation but manager makes the decisionThe manager and subordinates meets as a group, discussthe situation and the group makes the decision.

The attribution theory model show that in order to select theproper course of action, the leader most their deal with three typesof information.

the consistency of the employees performancethe dist inclutienses of the taskWhether there is high or low coarseness among subordinatesrelate to the task

Charismatic Leadership:

Charismatic leadership assumes as the trait theories, thatcharisma is an individual characteristic of the leader. Charisma isan individual characteristic of the leader. Charisma is a mysterioushuman quality that is hard to describe but inspires follows to grantalmost unquestioned allegiance to the leader possessing it.

House (1977) developed a theory of charismatic leadership

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that attributed charisma to the following characteristics:

followers trust the correctness of leader’s beliefsfollowers beliefs are similar to the leader’s belieffollowers accept the leader unquestioninglyfollowers feel affection for the leaderfollowers obey the leader willinglyfollowers have heightened performance goals

Characteristics:

Self – confidenceA visionAbility to ultimate the visionBehavior that in our of ordinaryPerceived as being of change agentEnvironment sensitivity

(iii) Transactional Leader’s Vs Transformational Leader:

Transactional Leader:

Leaders who guide or motive their followers in the direction ofestablished goals by classifying role and taste requirements.

Characteristics:

Contingent Reward:

Contracts exchange of rewards for effort, promises rewardsfor good performance, recognizes accomplishments.

Management by Exception (active):

Watches & searches for deviations from rules and standards,

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takes collective action.

Management by Exception (passive)

Intervenes only of standards are not met

Ldissy- faire:

Abdicates responsibilities, avoid making decisions.

iv) Life Cycle Theory:

The Hussy and Blanchard life cycle theory of leadershipcontents that the most effective leadership style depends on thematurity of subordinates. The theory defines maturity, not as ageor emotional stability, but as a desire for achievement a willingnessto accept responsibility and task-related experience and ability.The appropriate leadership style is described by a prescriptivecurve that follows the association between superior andsubordinates through a ‘life cycle’ at four phases:

a) Tellingb) Sellingc) Participatingd) Delegating

a) Telling:

In the initial phase of the life cycle, when subordinates firstenter the work group, the manager uses a telling leadershipstyle, as subordinates must be instructed in their tasks andworking environment. During this introductory stage, themanager must assume responsibility for subordinates,because workers at this level cannot take responsibility and

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have not matured enough emotionally to want responsibility.

b) Selling:

At the second level of workers, maturity managers tend touse selling leadership, style of support, by direction in aneffort to get workers to ‘buy into’ the desired performancelevel. Often subordinates at this level of maturity are willingbut unable to assure responsibility for their own workbehavior.

c) Participating:

The leader and follower share in decision making with themain role of the leader being facilitating and communicating.

d) Delegating:

The leader provides little direction or support.

5.3.3 The Most Recent Approaches to Leadership

There are an attribution theory of leadership. Charismaticleadership, transactional versus transformational leadership andvisionary leadership.

Transformational Leaders:

Leaders who provide individualized consideration andintellectual stimulation and who posses Charisma.

Characteristics:

CharismaInspiration

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Intellectual StimulationIndividualized Consideration

iv) Visionary Leadership

The ability to create and articulate a realistic, credible,attractive vision of the future for an organization or organizationalunit that grows our of improves upon the present. This vision ofproperty selected and implemented in so energizing that it “ineffecting starts the future by calling forth the skills talents, andresources to make it happen.”

Leadership profile for the next century:

1. First and foremost of the next century need to radicallychange their mindset because the leadership traits andqualities which were very important till now may not standthe test of time in the years to come. In keeping withchanging times it is improvement that leaders develop theiradaptive capabilities.

2. For a leader to be successful, integrity of character the mostimportant attribute. As a former head of New York StockExchange once said “The public may be wiling to forgive usfor the mistake in judgment, but it will not forgive us for themistakes in motive.” According to Joseph Badaracco &Richard Ellsworth (1989) “Leadership in a world of dilemmasis not fundamentally, a matter of style, charisma orprofessional management techniques. In is s difficult dailyquest for integrity Commitment to leadership throughintegrity can help managers through the inevitable periods ofanxiety, doubt, and trial, and give them a sense of prioritiesto guide them through an uncertain world”.

3. Leaders should have a clear ‘vision’ of how things should be.They should also be able to communicate the vision becomes

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a shared vision and everybody willingly contributes towardsfulfilling the vision.

4. A leader’s credibility should be based on the six criteria, alsoknown as the six C’s Conviction, Character, Care, Courage,Composure and Competence (Bornstein & Smith, 1997)

5. To be able to deal effectively with the complexities of changein a more flexible manner, leaders of the future shouldposses cross-functional rather than narrow functionalknowledge and expertise. In other words you must continueto gain expertise, but avoid thinking like an expert.Acquisition of knowledge should be viewed as a lifelongexperience do not a collection of facts or skills. Not ling agowhat you learned in school and college was largely enoughfor the rest of your life. With knowledge expandingexponentially this is no longer true.

6. Some of the key words a leader of the future is required toput into action are: options not plans, the possible ratherthan the prefect, involvement instead of obedience (Handy,1997).

7. Leaders need to realize that while setting the vision, values,mission and major goals the pyramid should be uprightwhere the boss is responsible and the subordinates areresponsive. But when it comes to implementation thepyramid needs to be turned upside down so that the rolesare reversed – the people become responsible and themanagement responsive to them (Blanchard, 1997).

8. As Benjamin Disraeli once stated that, “In a progressivecountry, change is constant… Change is inevitable”. Thesame is true for effective organization. Change will remain acore consideration for 21st century leaders. The process ofchange starts with self-change. You cannot expect yourpeople to change without you your-self being willing tochange. With accelerated pace of change in the economic,political and socio-cultural environment leaders not onlyneed to acquire new knowledge and skills but they also needto unlearn many of the things that have outgrown their

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purpose.9. Leaders need to realize what motivates the knowledgeworkforce. Their needs are of a higher order than justphysiological and safety needs. Leaders could possiblymotivate people by following the PRIDE System (smith, 1997)which stands for: P. Provide for a positive workingenvironment R-Recognise everyone’s efforts l-Involveeveryone D-Develop skills and potential E-Evaluate andmeasure continuously.

10. The leader of the next century would to well to viewresponsibility form a different perspective. As Stephen Covey(1989) defines responsibility in his own way: Response –ability i.e., the ability to choose your response. Higherproactive people recognize their responsibility and do notblame circumstances, conditions or conditioning for theirbehavior. Their behavior is a product on values, rather than aproduct of their conditions, based on feelings.

11. Leaders need to have a deep insight into the realititesof the world and be receptive to the changes taking placeand opportunities that these changes offer.

12. Leaders need to have high level of commitment to theorganizational goal and the perseverance to achiever the goalin spite of all the impediments.

13. As the tasks become to complex and information toowidely distributed, leaders need to involve others and elicittheir participation in problem solving and decision – making.

14. in large organization the leader should be willing toshare power and control so that leadership is encourages atvarious levels.

15. Leaders should test the assumptions and be preparedto change them but at the same time they should stick totheir conventions.

16. Some of the implements on the road to excellencewhich leaders need to overcome are following the path ofmediocrity and relying on conventional wisdom.

17. Successful leaders set their own standards and

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compete with themselves, and not with others.18. Leaders should learn to depend on them selves and noton other people, material rewards, prestigious position etc.for their self-worth as this is not long-lasting. Self-respectwhich comes from within cannot be taken away by anyone.

19. Innovation is the need of the hour. Only when a leaderis innovative can be find opportunity in every crisis.Innovation is also to do with finding new application for oldideas that cannot be discarded. Innovativeness will help theleaders to view the world not for what it is, but for what itcould be.

20. Leaders should be capable of taking calculated risks asmaintaining status quoleads to complacency and mediocrity.As he old proverb goes “You must learn from your pastmistakes, but not lean on your past successes,” It has beenfound that low and high achievers behave quite differentlywhen taking risks (McClelland, 1961). Low achievers do oneof the two things: either they minimize risk as much aspossible or they take wile. Irrational risks. High achievers, bycontrast, typically take moderate risks but the nub of it isthat they calculate risks against circumstances and their ownabilities.

21. To encourage teamwork within organizationsmechanism have to be created to broaden the concept ofindividual competence to include working with others andbuilding trusting relationship by breaking brriers ofcommunication across bound arises and encouragingcollaborative rather than competitive behavior.

22. The corporate environment had become increasinglyunstable and unpredictable and vulnerable to outside forcesand pressures. Managers must learn to cop with non-linearforces (Toffler, 1985). These observations have become everymore relevant in the present day. Ross Nisbett (1991) puts itthis way: “tinkering, testing piloting, experimenting – theseare the strategic tools of the leaders of the twenty-firstcentury. You cannot control the future, you can’t really

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predict it, put you can experiment; you can flex the business;you can rearrange management teams. Remember, leavingthings as they are can be just as predictable as changingeverything. You lose (or win) both ways.”

5.3.4 Organization culture:

Organization culture could be defined as the set ofphilosophies ideologies, values, assumption, beliefs etc that joinstogether are organization and are shared by its employees.

The Characteristics which help to understand the nature ofculture better are:

Individual Initiative : The degree of responsibility freedom andindependence that individuals have.

Risk Tolerance : The degree of which employees areencouraged to be aggressive, innovativeand risk seeking.

Direction : The degree to which the organizationcreates clear objectives and performanceexpectations.

Integration : The degree to which units within theorganization are encouraged to operate ina coordinated manners

Control : The number of rules and regulation, andthe amount of direct supervision that isused to oversees and control employeebehavior.

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Selectivity : The degree to which members identifywith the organization as a whole ratherthen with their particular work group orfield of professional expertise.

Reward System : This degree to which reward allocationsall based on employees performancecriteria in contract to seniority, favoritism,and so on.

Conflict Tolerance. : The degree to which employees areencouraged o air conflicts and criticismopenly.

CommunicationPattern

: The degree to which organizationalcommunications are restricted to theformal hierarch of authority.

How Culture is formed:

In order to understand how culture is formed, lets take up anexamples:

Imagine a company beginning its operations for the first time.So, each day people come in to work and product are needs andsold. The company operates in the traditional business manner.Since the company is started for the first time, there is no existingtradition, history or culture. All these are to created.

And within days of starting, quite district behavioral normsbegin it develop. People called each other by their names, asdistrict form having a Mr. or Mrs. The people cane to and left ontime, punctuality was valued, Mea breakers however, were rarelyadhered to and workers routinely absented themselves fro the

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shops floor without consulting supervisors. From the outset,production was uneven, there was month end syndrome, as peoplestruggled to catch upon their output targets.

These behavioral norms of formality, punctuality, disciplineand output were accompanied by similar norms relating to almostevery other types of behavior.

The development of expectation through over behavior onethinks about the consequent result and will expect certain things tohappen.

Now suppose a couple of years have passed, and people havegone through the “Expectation” loop quite number of times, andlater we will find that a new factor has emerged called as attitude.

Expectation arise quickly where as, attitude take much morelonger time to form. And one is aware about expectation, but muchless about the attitude. And with the attitude are will take thingsfor granted.

Now that the company has been working for a couple ofyears, and people have been through the two loops, will findanother element emerging called “Culture”.

Attitudes arose over months / a year, and are dimly aware of it,where as culture arrived over many years, and we would be entirelyunaware of culture.

How Culture is Sustained

Once a culture is created, there were practices within theorganization that help keep it alive. Three each practices areselection process, actions of top management, and socializationmethods.

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Selection

The main purpose of selections process is to have right people forright jobs. When, for a given job, two or more candidate, withidentical skills and abilities, are available, final selection isinfluenced by how well the candidate fits into the organization. Byidentifying candidate who can culturally match the organizationalculture.

Top Management

The actions of top management have a major impact on theorganization’s culture. Through what they say and how they behave,senior executive establish norms that filter down through theorganization as to whether risk taking is desirable; how muchfreedom managers should give their subordinates etc.

Socialization

No matter how good job the organization does in hiring people,new employees are not fully indoctrinated in the organizationsculture. This way be because they re not familiar with the culture.Therefore the organization has to help new employees adapt to itsculture.

Impact of Culture on Organisations’s Effectiveness:

Impact of culture on organization’s effectiveness could be bothfunctional as well as dysfunctional culture makes are organization aclass.

Among culture could put considerable pressure on employees toconfirm. But modern organization is known for diversity ofworkforce. Workforce diversity is being accepted, and evenencouraged.

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Culture acts as a barrier to mergers and acquisitions. If there is amismatch acquisitions are likely to fail.

On the positive side, culture has an impact on control, normative,order, and employee performance and satisfaction.

Effective Control

Organisaion culture serves as a control mechanism in directingbehavior. As the culture is diffused through out the organization.People understand what they ar supposed to do and what theyshould not do, when individuals are not in accordance with thebelief and values of the culture, managers and co-workers will stepin and insists on corrective action. A strong culture is characterizedby shared belief and expectations to which all must adhere.

Normative Order

Closely linked to effective control is the use of norms to guidebehaviors. These expectations regarding appropriate andinappropriate behavior are greatly influenced by culture, and strongculture have both consensus and intensity regarding these norms.In weak cultures, consensus may be present but intensity is no.

Performance and Satisfaction

Organizational culture has its impact on performance andsatisfaction of organizational members, but not in equalproportions. There is relatively strong relationship betweencultures and satisfaction, but this is moderated by individual needsand culture satisfaction will be the highest when there iscongruence between the individual needs and the culture.

If the culture is informal, creative and supports risk taking andconflict, performance will be higher if the technology isnon-routine. The more formally structured organizations that are

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risk averse, that seek to eliminate conflict, and that are prove tomore task oriented leadership will achieve higher performancewhen routine technology is utilized.

How Culture is Analysed

The culture could be analyzed by a method developed by Harry C.Miller, professor of the Dept. of Educational leadership at SouthernIllinious University. It is a three-step process known as:

Trade Winds : The organization’s purpose people are broughttogether and actions co-ordinated to achievesome purpose.

Temperature : The hotness or coldness of morale relative toeach person’s perception or work “hot”individuals feel good about what is happeningin the organization, and ‘cold’ individuals don’tfeel okay about their work.

Ceiling Level : The level of desire, commitment and energy fororganizational goals. This depends on theorganization’s history, traditions and norms.

This measure indicates the fit between the prevailing cultureand the individual values and needs. If the employees adopt thevalues of the prevailing culture, the climate is said to be “good”; ifit is “poor and morale, motivation and productivity are expected todrop.

The Creation and Change of Organization culture:

One would say that people working in factories and offices in anarea would being to the same industrial culture. They would all bethe member of the came organizational society. Their work and life

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experience would be qualitatively different from those ofindividuals living in more traditional societies. Organizations aremini-societies that have their over distinction pattern of cultureand sub culture. Different organizational cultures form aroundvarying corporate purposes, founder styles, industry norms ofbehavior and environmental contingencies.

Culture: A social learning process

Culture is formed out of a serial learning process. A foundercreates a culture from a pre-conceived cultural paradigm: and theorganization, there leaves about this paradigm. This learning couldbe based on both positive reinforcement (repeating what works)and avoidance learning (avoiding painful experiences). In thecultural learning, the organization might face the problems of nothaving a common language or a common set of rules for relating tothe environment and to each other.

Once people in the organization learn set of assumptions,beliefs and values that work the handle internal and externalcontingencies, the uncertainly and the stimular overload would bereduced. This is why cultures resist change. A stable cultureproducers a feeling of safety.

Changing the Culture

As an organization changes and grows through its life cycle,its culture needs to change as well, to meet new realities. Even apositive culture can become dysfunctional if ignored.

The culture should be changed if its guiding beliefs areinadequate to meet present and future competitive needs. That is ifan organisation’s initial beliefs and values are no longer assets to it,a cultural change is indicated.

How Culture can be changed

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The true change must begin at the top, because leadershipinitially creates cultural norms and boundaries. With topmanagement commitment, several strategies can be used to createmore effective cultures.

Mergers often provide the space for a change. Facingpotential conflict between the different cultures of two companies,a merged organization can create a new joint culture. To create thisnew “partnership” these steps could be taken up:-

Create a new, single culture that is appropriate for all theentities that have become part of the merged organization.Define its purpose, what it stands for, why it exists.Define norms, rituals etc that will enhance unity of spirit,result orientation.

Example:

XEROX has gone thrugh three different types of culturesduring its life. The first wars created under Joseph Wilson, anentrepreneur who has CEO of Xerox from 1961 to 1968. UnderWilson, Xerox and a typical entrepreneurial environment, with aninformal, Rick-taking culture. Virtually everyone knew everyoneelse, and this made for a highly motivated workforce.

C. Peter Mc Collough took over as CEO in 1968, and began the eraof professional management. Growth led to bureaucratic controls,and culture became formal. This culture of risk aversion andbureaupathic behavior hindered new product development.

In 1982 David Kearns took over as CEO. Kerans trimmed Xeroxdown, stressed quality and delegated power downward in theorganization. Rules and policies became less important, and theinnovative spirit returned.

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A culture that prevents a company from addressing competitivepressures or adapting to changing economic contingencies canlead to stagnation and demise.

Example:

Pepsico had faced the above problem. Pepsi’s cultural emphasishad changed from passivity to aggressiveness; once the companywas content to be ‘Number 2’ offering Pepsi as a cheaperalternative to coke. But today as a new Pepsico employee learns,beating Coke is the path to success. Pepsi marketing now takes onCoke directly. In recent year’s consumer have been asked tocompare the tastes of the two colas.

This direct confrontation is reflected inside the company as wellmanagers are pitted against each other for market share to workharder, and to bring more profit out of their business. Becausewinning is a key value a Pepsico, losing has its penalties.Employees feel the pressure of this culture.

Questions:1. It the leader born or made? Justify2. What are the various leadership theories?3. How organization culture plays a vital role in shaping anorganization?

4. How organization culture is changed and maintained?5. Bring out the culture aspects of Xerox.

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LESSON 5.4 PLANNING AND CONTROL OF IMPLEMENTATION

5.4.1 Introduction:

In the old days in science, the universe was fairly simple,Nearly every science museum had a huge, old model of the solarsystem win which all the movements of the planets were controlledwith clockwork gears, Then we realized that reality was much morecomplex. Al motion was relative.

Business has also entered an age of new realities, it isessential to understand and take advantage of the dynamic motionand flux of out global markets and technological breakthroughs.Moreover, a fundamental shift in thinking is necessary for copingwith these changes, while companies have struggled to try tosustain their advantages, in fact, no organization can build acompetitive advantage that is sustainable. Every advantage erodes.So in this hypercompetitive environment, companies must activelywork to disrupt their own advantages and the advantages ofcompetitors. To cope with this new reality, managers must employa new 7S’s framework that can be used to analyze industries andcompetitors and to identify one’s own strengths and weaknesses inmeeting the challengers of hypercompetition.

We have seen giants of American industry, such as General Motorsand IBM, shaken to their cores. Their competitive advantages, onceconsidered unassailable, have been ripped and torn in the fiercewinds of competition. Technological wonders appear overnight.Aggressive global competitors arrive on the scene. Organizationsare restructured. Markets appear and fade. The weathered rulebooks and generic strategic once used to plot our strategies nolonger work as well in this environment.

The traditional sources of advantages no longer provide long-termsecurity. Both GM and IBM still have economies of scale, massive

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advertising budgets, the best distribution systems in theirindustries, cutting-edge R&D, deep pockets, and many otherfeatures that give them power over buyers are suppliers and thatraise barriers to entry that seem impregnable. But these are notenough any more. Leadership in price and quality is also notenough to assure success. Being first is not always the same asbeing best. Entry barriers are trampled down or circumvented.Goliaths are brought down by clever Davids with slingshots.

5.4.2. Hypercompetition

Hypercompetition results from the dynamics of strategicmaneuvering among global and innovative combatants. It is acondition of rapidly escalating competition based on price-qualitypositioning, competition to create new know-how and establishfirst-mover advantage, competition to protect or invadeestablished product or geographic markets, and competition basedon deep pockets and the creating of even deeper pockets dalliances.In hyupercompetitions the frequency, boldness, and aggressivenessof dynamic movement by the players accelerates to create acondition of constant disequilibrium and change. Market stability isthreatened by short product life cycles, short product design cycles,new technologies, frequent entry by unexpected outsiders,repositioning by incumbents, and radical redefinitions of marketboundaries as diverse industries merge. In other words,environments escalate toward higher and higher levels ofuncertainty, dynamism, heterogeneity of the players, and hostility.

It is not just fast-moving, high-tech industries, such ascomputers, or industries shaken by deregulation, such as theairlines, that are facing this aggressive competition. There isevidence that competition is heating up across the board, even inwhat once seemed the most sedate industries. From software tosoft drinks, from microchips to corn chips, from package deliveryservices, there are few industries that have escapedhypercompetition. As Jack Welch, CEO of General Electric,

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commented, “It’s going to be brutal. When I said a while back thatthe 1980s were going to be a white-knuckle decade and the 1990swould be even tougher, I may have understated how hard it’s goingto get.” (4)

There are few industries and companies that have escapedthis shift in competitiveness. Even such seemingly comatoseindustries as hot sauces of such commodity strongholds as U.S.grain production have been jolted awake by the icy waters ofhyperdompetition.

Competition American corporations have traditionally soughtestablished markets wherein sustainable profits were attainable.They have done so by looking for low or moderate levels ofcompetition. Low and moderate-intensity competition occurs if acompany has a monopoly (or quasi monopoly protected by entrybarriers) or if competitors implicitly or explicitly collude, allowingeach other to “sustain” an advantage in one or more industries ormarket segments. Collusions or cooperation, while it can be usefulin limiting aggressiveness, is limited because there in incentive tocheat on the collusive agreement and gain advantage. Entry andmobility barriers are destroyed by firms seeking the profit potentialof industries or segments with low or moderate levels ofcompetition. Gentlemanly agreements to stay out of each othre’sturf fall apart as firms learn how to break the barriers inexpensively.As competition shifts toward higher intensity, companies begin todevelop new advantages rapidly and attempt to destroycompetitors’ advantages. This leads to a further escalation ofcompetitions into hypercompetition, at which stage companiesactively work t string together a series of temporary movers thatundermine competitors in an endless cycle of jockeying for position.Just one hypercompetitive player (often from abroad) is enough totrigger this cycle.

At each point firms press forward to gain new advantages ortear down those of their rivals. This movement, however, takes the

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industry to faster and more intense levels of competition. The mostinteresting aspect of this movement is that, as firms maneuver andoutmaneuver each other, they are constantly pushing towardperfect competition, where no one has an advantage. However,while firms push toward perfect competition, they must attempt toavoid it because abnormal profits are not at all possible in perfectlycompetitive markets. In hypercompetitive markets it is possible tomake temporary profits. Thus, even though perfect competition istreated as the “equilibrium” state in static economic models, it isneither a desired nor a sustainable state from the perspective fcorporations seeking profits. They would prefer low and moderatelevels of competition but often settle for hypercompetitive markersbecause the presence of a small number of aggressive foreigncorporations won’t cooperate enough to allow the old, moregenteel levels of competition that existed in the past.

5.4.3 The new 7S’s :

Paraphrasing George Bernard Shaw, while reasonable peopleadapt to the world, the unreasonable ones persist in trying to adaptthe world to themselves. This, all progress depends upon theunreasonable person. In hypercompetition the reasonable strategicthat focus on sustaining advantages do not lead to progress. It isnot enough to merely adapt to the environment. Companies makeprogress in hypercompetition by the unreasonable approach ofactively disrupting advantages of other to adapt the world tothemselves. These strategies are embodied in the New 7S’s.

Unlike the old 7S framework, originally developed byMcKinsey and Company, the new framework in based on a strategyof finding and building temporary advantages through marketdisruption rather than sustaining advantage and perpetuating an

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equilibrium. It is designed to sustain the momentum through aseries of initiatives rather than structure the firm to achieve internalfit or fit with today’s external environment as if today’s externalcondition will persist for a long period of time.

The New 7S’s are:

superior stakeholder satisfactionstrategic soothsayingpositioning for speedpositioning for surpriseshifting the rules of the gamesignaling strategic intentsimultaneous and sequential strategic thrusts.

Because of the nature of the hyper competitive environment, theNew 7S’s are not presented as a series of generic strategies or arecipe of success. Instead, these are key approaches that can besued to carry the firm in many different directions. They arefocused on disrupting the status quo through a series oftemporary advantages rather than maintaing equilibrium bysustaining advantages. The exact strategic actions formulatedunder this system will depend on many variables wihtihn theindustry and the firm. Many types of strategic initiatives can becarried out using the New 7S’s, and there are many variations.

Successful firms learn how to disrupt the status quo. A key totheir choice of a disruption is the realization that not alldisruptions are good. The disruptions that work are those thatinvolve the first S-the creating of a temporary ability to servethe customer better than competitors can.

Before the Pentium chip, Intel rarely asked customers whatthey wanted, but now they have instituted a process of concurrentengineering to get customers (and internal manufacturing) involved

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as early as possible. Now, when designing new chips, Inteldesigners visit every major customer and major software housed toask them what they want in a chip. Intel has also provided earlysoftware simulations of its new chips to computer makers, allowingthem to get a jump on designing their new machines, and hasproduced software compliers to help software companies use thenew chip.

CEO Andrew Grove holds regular meeting with employeesfrom all parts of the organization to brainstorm about the future,competitive challenges, and customer needs. Employees aremotivated and empowered to serve customers’ priorities abovetheir own. Employees have a right to demand AR—“action required”– of any executive. Over the years Intel has also worked to avoidlayoffs through asking staff to put in overtime or cut back on hours,so employees remain motivated to serve customers.

Disruptions that satisfy current customer needs are notenough. Constantly improving customer satisfaction is now sostandard that firms that once led the pack on customer satisfactionnow find themselves without nay lead at all. Thus, the key toachieving real advantage from customer satisfaction is to :

identify customer needs that even the customer cannotarticulate for him/herselffind new, previously unserved customer s to serve.Create customer needs that never existed beforePredict changes in customer needs before they happen.

To do this, firms are now engaging in the second S, strategicsoothsaying. This allows firms to see and create future needsthat they can serve better than any competitor does, even ifonly temporarily. The ability to see and create these futureneed depends upon the firm’s ability to predict future trends,

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to control the development of key technologies and otherknow-how that will shape the future, and to createself-fulfilling prophecies.

Intel CEO Grove has quipped that the company bets millionson science fictions. (5) As pressure builds from clone makers andrival systems, engineers are brought together to consider theemerging technological capabilities nd the performance needed tokeep ahead of competitors. Intel has also expanded into otherareas such as supercomputers, flash memories, video chips, andnetworking boards. Its sales in these areas are climbing at anaverage rate of 68 percent per year. (6) It has gained 85 percent ofthe emerging market for flash memory chips and practically ownsone third of the market for massively parallel computers. Thisexperience provides knowledge that Intel can then apply tostandard chips, adding features such as video.

The second S, strategic soothsaying, is concerned withunderstanding the future evolution of markets and technology thatwill proactively create new opportunities to serve existing or newcustomers. This also contributes to the firm’s vision of where thenext advantage will be discovered and where the company shouldfocus its disruption.

To act on this vision, companies need two key capabilities:speed and surprise. As in fencing, speed and surprise are keyfactors in gaining an advantage before competitors are able to doso and in delaying competitor reactions to the new advantages.

If two companies recognize the opportunity to create a newadvantage at the same time, the company that can create theadvantage faster will win. Because success depends on the creationof a series of temporary advantages, a company’s ability to movequickly from one advantage t the next is crucial. Speed allowscompanies to maneuver to disrupt the status quo, erode the

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advantage of competitors, and create new advantages beforecompetitors are able to preempt these moves.

Intel used to bring out one or two new chips each year and anew microprocessor family every three or four years. In 1992 itdrove out nearly thirty new variations on its 486 chip andintroduced the next generation of chip, the Pentium. To stay aheadof clonemakers, Intel plans to create new families of chips everyyear r two throughout the 1990s.(7) Instead of waiting until thecurrent generation of chip is rolled out before working on the nextone, Intel now develos several generations of chips at one. It isalready working on making its chips obsolete before they haveeven hit the market. Intel has created design-automation softwarethat allows it to add two or three times the transistors to each newchip design with no increase in development time. It also hasachieved a breakthrough in modeling systems that promises to cutthe four-year product – development cycle by six months. The newQuick turn system will allow Intel to perform engineering tests upto thirty thousand times faster.

If a competitor is unaware of the opportunity to create a newadvantage surprise can maintain that lack of awareness. While thisis not a source of sustainable advantage (once the competitorrecognizes the advantage, it can usually move quickly to duplicateit), surprise allows the company to create the advantage and toextend the period in which the advantage in unique. Surprise alsoallows companies to act to undermine competitor advantagesbefore the competitors can take defensive actions.

Intel’s multiple capabilities – with strengths inmicroprocessors, other chips, flash memories, personal computers,and supercomputers-keep competitors guessing about its nextmove. Since its early days, it has often pursued a strategy ofsimultaneously pursuing alternative technology, and it currentlyhas its own versions of the competing RISC-based chip (ReducedInstruction-Set Computing) although it continues to defend its

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stronghold of CISE (Complex Instruction-Set Computing), whichoffers more software. Not wanting to compete with its customers,Intel hasn’t entered the personal computer market under its ownname, but it has developed the capabilities to do so as the onlysupplier to computer manufacturers with a brand name—socompetitors never know when it might decide to enter the PCmarket.

Intel has used advance in modeling and design of new chipsto surprise competitors. Its new modeling system gave it a strategicvictory over a competing RISC – based chip. At a technology forumin 1991, An Intel executive demonstrated a working model of hePentium chips, using a link to the model, before and actual chipwas ready. In what may have been a response to Intel’s signal, sixmonths later Compaq Computer corporation canceled plans tolaunch a RISC-based personal computer(8) And it is still unclearwhether new research efforts in RISC chips will surprise Intel.

Intel also maintains a flexible workforce, shifting employeesto different projects and keeping operations lean. Despite itscontinued growth in revenues, the number of Intel employeesdeclined between 1984 and 1992 to maintain flexibility.

Capabilities for speed and surprise are therefore keyelements for successfully disrupting the status quo and creatingtemporary advantages. These capabilities are flexible in that theycan be deployed across a wide range of specific actions.

Tactics for Disruption: The Last Three S’s

The final three S’s-shifting the rules of he game, signalingand simultaneous and sequential strategic thrusts-are concernedwith the tactics used in delivering a company’s disruption,especially tactics that influence the flow of future dynamic strategicinteraction among competitors. These three S’s follow the visions

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developed by the first two S’s and use the potential for speed andsurprise from the third and fourth S’s.

In contrast to strategic approaches to strategy, these finalthree S’s are concerned with a dynamic process of creations andinteractions. Most planning is concerned with the company’s nextmore to gain advantage. It usually analyzes potential competitiveresponses but doesn’t shape those responses to its advantage.

The view presented here is a set of tactics designed todisrupt the status quo and create temporary advantage. Tacticssuch as actions that shift the rules of competition create a suddenand discontinuous move in the industry, reshaping the competitiveplaying field and confusing the opponent.

Intel’s move into new areas such as supercomputers,interactive digital video, and flash memory has helped shift therules of competition. Flash memory provides an alternatives to thestandard memory market, where Intel lost out to Japanesecompetitors. Intel is adding ancillary products, such as networkingcircuit boards and graphic chips that make it easier for computermakers to add these features. It has also designed a personalcomputer with workstation power, the Panther, which it is licensingto computer makers. This shifts the rules by creating a machinethat Intel is not marketing itself. The purpose of the design is totake full advantage of Intel’s Pentium chip.

Signaling can delay or dampen the competitor’s actions tocreate advantage, throw the competitor off balance, or createsurprise. Grove has signaled Intel’s intent to flight the clonemakers“with everything we’ve got.”(9) It has also stated a vision of makingthe company the center of al computing, from palmtops tosupercomputers. Its precise strategy for doing this is less visible.Although it has clearly revealed that it has 686 and 786 chips in theworks, what these chips will be able to do is still open tospeculation. As discussed, Intel used signaling to shift the rules of

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competition by transforming computer chips from a hiddencommodity to a marketing asset through its Intel Inside campaign.By making the chip visible and using branding in marketing PCs, itmade major gains in its battle against the clones. But the brand isonly as powerful at the computer chip behind it.

Competitive thrusts in this environments are rapid-either asequence of moves or a set of simultaneous actions-to upset theequilibrium of the industry, disrupt the status quo, and openopportunities for new advantaged. As an example of a set ofsimultaneous thrust, a company might feint a mover in onedirection and then move forcefully in another direction, creatingsurprise and temporary advantage from the misdirection of theopponent. One can think of sequential thrust as being akin to thesequence of plays used in a football game. One team ay run theball several times until the defense is conditioned to expect a runplay. Then the offense switches to the long bomb at a time thatshould call for a run. The sequence of actions create surprise andtemporary advantage, since once the play is used, the defense willwatch out for the long bomb in future plays.

Intel has used a variety of simultaneous and sequentialstrategic thrusts to seize the initiative. In the late 1970s, strugglingwith its 8086 microprocessor chips, Intel launched an all-outassault-code-named. Operation Crush-against Motorola and othercompetitors, Intel set up war roomed to work toward making the8086 the industry standard. It was this effort to simultaneouslyattack several segments of the market that helped lead to IBM’sdecision to adapt the 8088 as the center of its personal computer.(10) Intel rode the wave of the PC’s growth to dominance in themicroprocessor industry.

Intel also participated in both the memory andmicroprocessor markets at various points in time. In a way, Intel’sretreat from the memory chip market and return with flash memorymight be seen as a sequential set of moves skin to a strategic

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retreat followed by regrouping and counterattack. It has usedmultiple exploratory attacks to develop a variety of know-how andtechnology capabilities and gauge competitor and customerreactions (for example, its simultaneous development of RISC andCISC technology). It has also explored promising markets (such asvideo and massively parallel computing) and moved into those withthe highest potential for growth. It has built its businesses by usinga sequential strategy, moving from memory chips tomicroprocessors, to boards, to building personal computers(although not marketing them).

These three tactics reflect the increasing speed and intensityof hypes competitions. Although these actions sometimes pushcompanies into the gray areas of antitrust because the behaviorscould be construed as exclusionary or anticompetitive actions,companies are increasingly seeing them as necessary forcompetitive survival.

As suggested earlier, while the traditional 7S’s are concernedwith capitalizing on creating a static strategic fir among internalaspects of he organization, the New 7S’s are concerned with fourkey goals that are based on understanding dynamic strategicinteractions over long periods of time.

1. Disrupting the status quo. Competitors disrupt the statusquo by identifying new opportunities to serve the customer,signaling, shifting the rules, and attacking throughsequential band simultaneous thrusts. These moves end theold pattern of competitive interaction between rivals. Thisrequires speed and surprise; otherwise, me company’scompetitors simply change at the same rate.

2. Creating temporary advantage. Disruption creates temporaryadvantages. These advantages are based on betterknowledge of customers, technology, and the future. Theyare derived from customer orientation and employee

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empowerment throughout the entire organization. Theseadvantages are short-lived, eroded by fierce competition.

3. Seizing the initiative. By moving aggressively in each arena,acting to create a new advantage or undermine a competitor’s old advantage, the company seizes the initiative. Thisthrows the opponent off balance and puts it at adisadvantage of for a while. The opponent s forced to playcatch-up; reacting rather than shaping the future with itsown actions to seize the initiative. The initiator is proactive,while competitors are forced to be reactive.

4. Sustaining the momentum. Several actions in a row to seizethe initiative create momentum. The company continues todevelop new advantages and doesn’t wait for competitors toundermine them before launching the next initiative. Forexample, while U.S. manufacturers are dong remedial work inquality improvement, Japanese manufacturers are nowbuilding key advantages in flexibility. This successions ofaction sustains the momentum. This is the only source ofsustainable competitive advantage in hypercompetitiveenvironments.

In hyper competition it is not enough to build a static set ofcompetencies. Good resources are not enough. They must be usedeffectively. This is precisely why successful firms pay attention totactics as well as capabilities and vision in an environment oftraditional competition and to competencies in an environment ofhypercompetition. In slower and less aggressive competitiveenvironments, companies could concentrate primarily on makinggreat swords. In hypercompetition, they have been forced toconcentrate much more on the skills of fencing. It is these dynamicskills that re the most significant competencies of the firm. Thus, acompany’s success depends equally upon its swords and itsfencing skills, and the New 7S’s are intended to guide firmstowards making the right swords, learning how to fence, andpointing them in the right direction.

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Some Tradeoffs

One final analysis can be done using the New 7S’s. Inchoosing which to concentrate on, companies are forced to maketradeoffs among them. This makes it difficult for companies to doall seven equally well. Companies choose among the seven toconfront different challenges and opportunities that presentthemselves.

Thus, it is possible to analyze a competitor (or one’s own company)to see what types of tradeoffs have been made. Once these areidentified, the weakness of the competitor (or one’s own company)is apparent. Furthermore the tradeoff means that the competitorcan’t plug the weakness without giving up something else. Thus, itis possible to identify weakness, which, if attacked, forces thecompetition to be slow to respond or to give up some otherstrength in order to respond. Either way the competitor loses.

Among the tradeoffs implied by the New 7S’s are the following:

Tradeoffs at the expense of stakeholder satisfaction (S-1)can be undermined by speed (S-3), as companies maysacrifice product or service quality to gain speed or pushemployees to work harder and faster. Speeding products tomarket with little testing could also reduce customersatisfaction. Similarly surprise (S-4), shifting the rules (S-5),signaling (S-6), and simultaneous and sequential strategicthrusts (S-7) also have the potential to confuse customers,employees and shareholders as well as competitors.Tradeoffs at the expense of future orientation/soothsaying,Strategic soothsaying (S-2) can be hurt by speed (S-3), whichoften eaves little time for reflecting on what lies ahead, andsurprise (S-4), which is sudden and unpredictable enough tomake prognosticating irrelevant or impossible. Shifting therules (S-5) often reshapes competition in a way that

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unpredictably changes future opportunities so thatsoothsaying becomes difficult. To the extent that competitorreactions are not anticipated,. Simultaneous and sequentialstrategic thrusts (S-7) sometime make soothsaying moredifficult.Tradeoffs at the expense of speed. Speed (S-3) can beeroded through the slowness of decision making in anorganization such as the ones used to increase stakeholderssatisfaction (S-1). Also, strategic alliances used to shift therules (S-5) sometimes reduces speed because of negotiations.Shifting the rules of competitions (S-5) may require atradeoff with speed. It can temporarily reduce sped (S-3), forexample, because of the confusion and time it takes toregroup and retool to create the new rules. Simultaneous andsequential strategic thrusts (S-7) can reduce speed (S-3)because they require more effort than single thrusts.Tradeoffs at the expense of surprise. The flexibility andstealth of surprise (S-4) can be eroded by strategies toincrease capabilities for speed. For example, just in timesystem could decrease the company’s flexibility whileincreasing speed. Alliances to shift the rules sometimes alsodecrease surprise because the alliances are usually public.Signaling can also reduce the element of surprise because itoften involves revealing the strategic intent of the company.Sequential thrusts can reduce surprise (S-4) by committingthe company to a clear set of actions.

These tradeoffs mean that firms can’t always do all of the New 7S’sequally well even if they are above a reasonable threshold on eachone of them. Thus, a competitor can do a tradeoff analysis toidentify the maneuvers it can do through use of the S’s that theopponent can’t do well because the opponent can’t respondwithout depleting its strengths in one of the other S’s. Other firmswill creatively switch among the New 7S’s to shift the rules of

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competition. Sometimes focusing on the opponent’s weaker S’ssometimes using several in concert.

Moreover, firms have limited resources, so they can’t acquire allseen of he New S’s at once. They must prioritize them and maketradeoffs. Thus, it will be rare that a firm is equally good at all ofthe New 7S’s. This will create opportunities for a new type ofhypercompetitive behavior whereby firms use the resourceinvestment tradeoffs made by a competitor to determine which ofhe New 7S’s should be invested in first. Finally, trulyhypercompetitive firms, like Intel, will find ways to eliminate thetradeoffs. Tradeoffs exist only if firms believe that tradeoffs renecessities and stop looking for ways to do both alternatives. Afterall, it was once said that firms could not achieve low cost and highquality at the same time. Now it is not just a reality but a necessityfor survival in many industries.

Like all know-how, knowledge of how to use the New 7S’s mighteventually be expected to erode as it becomes widely assimilated.As knowledge using them-this is already taking place-one mightexpect that any advantage would be neutralized. In particular, thiserosions my be seen in the temporary advantages of a customerfocus. As customer by the total quality movement and other forces,it has become less of an advantage and more of a requisite tosucceed in business.

While the impact of the New 7S’s may be diminishedsomewhat by their widespread adoption, there are several factorsthat promise to continue to make them a source advantage eventafter they are widely used. First, the New 7S’s have some inherentflexibility so that different companies using the new 7S’s can takevery different strategies. The use of simultaneous and sequentialstrategic thrusts (S-7) present a wide range of options andvariation. There are many other trusts that can be designed forspecific opportunities, making it difficult for firms to exactlyreplicate a competitor’s use of New 7S’s

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Second, the New 7S’s are dynamic. Companies use them indifferent ways over time. Stakeholder satisfaction changes,competitive opportunities change, sourced of temporary advantagechange. The New 7S’s and their goals of creating disruption andseizing the initiative remain constant, but the methods companiesuse to achieve these goals constantly change. In this way, even if allcompetitors in an industry are using the New 7S’s, their moves willcontinue to be unpredictable.

Third, companies usually cannot use all of the New 7S’s atonce because of inherent. Tradeoffs among the 7S’s. Companiesperform a balancing act in weighing these tradeoffs. This adds tothe unpredictability of competitive movers, because companies canuse any of the New 7S’s in developing their next strategic move,and the tradeoffs may make in difficult to respond.

XEROX NOT CLEARED IN ONLY ONE PARA.

The one certain impact is that as the New 7S’s become morewidespread, competition will become more aggressive. Instead ofhaving one or two competitors seeking to disrupt the status quo,every competitors will be looking for the next source of temporaryadvantage. With this father intensification of hyper competition,one might expect and increased interest in alliances and otherforms of cooperation to dampen the intensely of competition (ashas already been seen.) Ultimately, however, the only way our orthis dilemma is for companies to become more aggressive inseizing the initiative. Cooperative attempts to end this cycle ofaggression will be seen as either illegal (collusive antitrustviolations), or futile, since it is like shoveling sand against the tide.Leading firs will be wary of cooperative efforts that ask them to beless aggressive and give up their temporary advantage. Laggingfirms with the fire in their bellies to be number one will not besatisfied with their permanent status as second-class citizens. So

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the New 7S’s will be used more aggressively and more frequently inthe future world of hypercompetition.

While the New 7S’s will continue to be important, especiallywith the intensifying competitions of the future, there may be evennewer 7S’s that emerge as key so competitive success.Hypercompetitive companies will continue to monitor and definethese new strategic approached in new attempts to providetemporary advantages and sustain momentum with a series ofsuccessful short-term advantages.

The recommendations of this new framework for increasingspeed and targeting disruption make sense to those of us who haveplayed different roles during major organizational upheavals andchange. Given the choice of participating in the group that plannedthe change versus being in the group on which the bomb is to bedropped, most of us chose the former. Despite our lack of skills,we preferred positioning ourselves “behind the wheel”.

D’Aveni’s examples also hit close to home. He could haveused Motorola just as easily as Intel for the article. While positionedas the dominant U.S. player in two-way radios and systems in the1970s and 1980s, Motorola chose not to try and shield itself fromemerging technologies, but rather quickly moved to develop theseinto paging and cellular communications products-products thatwere in direct competition with those in its core businesses. WhenJapanese electronic firms showed signs of capturing the growingcellular phone market with better quality, smaller products,Motorola launched its Six Sigma quality program, driving itselftoward unheard of quality goals on a timetable accelerated beyondwhat is considered rapid by most industry standards. Motorola’sworldwide success today clearly supports D’Aveni’s position.

There are some question to be raised, however. The fact thatMotorola’s experience fits so well causes me to wonder if the new7S’s framework is appropriate for organizations operating in more

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slowly changing markets. Like a cash cow, might it not be better tomilk a moderately competitive situation as long as possible whilebuilding organizational capability to launce into the new 7S’smodel at the first sign of hypercompetition?

Another issue that concerns me involves the notion of thisnew framework as a replacement for the original one. When readingthe article, I saw many of the new “S’s” as an expansion of thestrategy “S” in the McKinsey model. It would be easy to make theargument that in order to effectively implement D’Aveni’srecommendations, you should evaluate your organization in lightof the other 6 S’s. Does your company have the systems, style,staff, shared values, skills and structure needed to pull off the new7S’s? Back to the brakeless car metaphor given that slowing downis not an option, wouldn’t you want to make sure the rest of the carwas ready for higher speeds? The power and handlingcharacteristics of a Ferrari would no doubt be preferred over aheavily loaded 65 Volkswagen bus with bald tires. It also won’t hurtto have taken emergency driver’s training and have a passenger onboard who was a master map reader. This means you want to havea change management strategy and dome professional internal orexternal expertise to guide the change process. As a finalrecommendation for driving accelerated change, I’d advocatetelling our passengers (our employees what, we have in mindbefore we slam down that accelerator; their screaming andgrabbing at the wheel could be downright distracting.

Hypercompetition is reality in many markets. The failure tofully address the original 7S’s may make the new frameworkdifficult if not impossible to execute, especially for larger firmswith technically complex product lines requiring lengthydevelopmental cycles. This is not to imply that the new 7S’s areless valuable; the new framework provides substances food forthought for business leaders trying to maintain their company’scompetitive edge in hypercompetitive environments. On the otherhand, organizational leaders may e deluding themselves if they

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attempt to utilize the new 7S’s theory before they have fullyattended to those in the original one.

It may be useful to reflect on the likelihood if a general witha eleve strategy achieving victory in a battle in light of the fact thathis troops are poorly trained, have inadequate logistical support, ordon’t know why they are fighting. As the old saying goes, “for wantof a nail the battle was lost.” Even the most brilliantly conceivedstrategies will be of little consequence if a company fails to correctfundamental problems stemming form marginal alignment.

Questions:

1. What are the impediment of strategy implementation?2. What is the new 7s framework?3. What are the characteristics of hyper competition? Giveexample.

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UNIT 6Lesson 6.1 ERP

6.1.1 Introduction

Enterprise resource planning software, or ERP attempts tointegrate all departments and functions across a company onto asingle computer system that can serve all those differentdepartments’ particular needs. That is a tall order, building a singlesoftware program that serves the needs of people in finance as wellas it does the people in human resources and in the warehouse.Each of those departments typically has its own computer systemoptimized for he particular ways that the department does its work.But ERP combines them all together into a single, integratedsoftware program that runs off a single database so that he variousdepartments can more easily share information and communicatewith each other. That integrated approach can have a tremendouspayback if companies install the software correctly. Take acustomer order, for example. Typically, when a customer placesand order, that order begins a mostly paper-based journey form inbasket to in-basket around the company, often being keyed andrekeyed into different departments’ computer systems along theway. Al that lounging around in in-baskets causes delays and lostorders, and all the keying into different computer systems inviteserrors. Meanwhile, no one in the company truly knows what thestatus of the order is at any given point because there is no way forthe finance department, for example, to get into the warehouse’scomputes system to see whether the item has been shipped. ERPvanquishes the old standalone computer systems in finance, HR,manufacturing and the warehouse, and replaces them with a singleunified software program divided into software modules thatroughly approximate the old standalone systems. Finance,manufacturing and the warehouse all still get their own software,except not the software in linked together so that someone infinance can look into the warehouse software to see if an order hasbeen shipped. Most vendors’ ERP software is flexile enough that

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you can install some modules without buying the whole package.Many companies, for example, will just install an ERP finance or HRmodule and leave the rest of the functions for another day.

6.1.2 Benefits of ERP:

ERP’s best hope for demonstrating value is as a sort of batteringram for improving the way your company takes a customer orderand processes it into an invoice and revenue – otherwise known asthe order fulfillment process. That is why ERP is often referred to asback-office software. It doesn’t handle the up-front selling process(although most ERP vendors have recently developed CRM softwareto do this); rather, ERP takes a customer order and provides asoftware road map for automating the different steps along thepath to fulfilling it.

When a customer service representative enters a customerorder into an ERP system, he has all the information necessary tocomplete the order (the customer’s credit rating and order historyfrom the finance module, the company’s inventory levels from thewarehouse module and the shipping dock’s trucking schedule frothe logistics module, for example). People in these differentdepartments al see the same informant and can update it. Whenone debarment finished with the order it is automatically routed viathe ERP system to the next department. To find out where the orderis at any point, you need only log in to the ERP system and track itdown. With luck, the order process moves like a bolt of lightningthrough the organization, and customers get their orders fasterand with fewer errors than before. ERP can apply that same magicto the other major business processes, such as employee benefitsor financial reporting.

With ERP, the customer service representatives are no longerjust typists entering someone’s name into a computer and hitting

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the return key. The ERP screen makes tem businesspeople. Itflickers with the customer’s credit rating from the financedepartment and the product inventory levels from the warehouse.Will the customer pay on time? Will we be able to shi the order ontime? These are decisions that customer service representativeshave never had to make before, and the answers affect thecustomer and every other department in the company. But it’s notjust the customer service representatives have to wake up. Peoplein the warehouse who used to keep inventory in their heads or onscraps of paper now need to put that information online. If theydon’t customer service reps will see low inventory levels on theirscrcens and tell customers that their requested item is not in stock.Accountability, responsibility and communication have never beentested like this before.

To do ERP right, the ways you do business will need tochange and the ways people do their jobs will need to change too.And that kind of change doesn’t come without pain. Unless, ofcourse, your ways of doing business are working extremely well(orders all shipped on time, productivity higher than all yourcompetitors, customer s completely satisfied), in which case thereis no reason to even consider ERP.

The important thing is not to focus on how long it willtake—real transformational ERP efforts usually run between oneand three years, on average --- but rather to understand why youneed it and how you will use it to improve your business.

6.1.3 Reasons for ERP implementation:

There are five major reasons may companies undertake ERP.Integrate financial information – As the CEO tries to understand thecompany’s overall performance, he may find many differentversions of the truth. Finance has its own set of revenue numbers,sales has another version, and the different business units mayeach have their own version of how much they contributed to

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revenues. ERP creates a single version of the truth that cannot bequestioned because everyone is using the same system.

Integrate customer order information – ERP systems can becomethe place where the customer order lives from the time a customerservice representative receives it until the loading dock ships themerchandise and finance sends an invoice. By having thisinformation in one software system, rather than scattered amongmany different systems that can’t communicate with one another,companies can keep track of orders more easily, and coordinatemanufacturing, inventory and shipping among many differentlocations at the same time.

Standardize and speed up manufacturing process –Manufacturing companies – especially those with an appetite formergers and acquisition-often find that multiple business unitsacross the company make the same widget using different methodsand computer systems. ERP systems come with standard methodsfor automating some of the steps of a manufacturing process.Standardizing those processes and using a single integratedcomputer systems can save time, increase productivity and reducehead count.

Reduce inventory – ERP helps the manufacturing process flowmore smoothly, and it improves visibility of the order fulfillmentprocess inside the company. That can lead to reduced inventoriesof the stuff used to make products (work-in-progress inventory),and it can help users better plan deliveries to customers reducingthe finished good inventory at the warehouses and shipping docks.To really improve flow of your supply chain, you need supply chainsoftware but ERP helps too.

Standardize HR information – Especially in companies withmultiple business units, HR may not have a unified, simple methodfor tracking employees’ time and communicating with them aboutbenefits and services. ERP can fix that. In the race to fix these

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problems, companies often lose sight of the fact that ERP packagesare nothing more than generics representations of the ways atypical company does business. While most packages areexhaustively comprehensive, each industry has its quirks that makeit unique. Most ERP system were designed to be used by discretemanufacturing companies (that make physical things that can becounted), which immediately left all the process manufacturers (oil,chemical and utility companies that measure their products by flowrather than individual units) out in the cold. Each of theseindustries has struggled with the different ERP vendors to modifycore ERP programs to their needs.

6.1.4 The cost of ERP:

Meta Group recently did a study looking at the total cost ofownership (TCO) of ERP, including hardware, software, professionalservices and internal staff costs. The TCO numbers include gettingthe software installed and the two years afterward, which is whenthe real costs of maintaining, upgrading and optimizing the systemfor your business are felt. Among the 63 companies surveyed –including small, medium and large companies in a range ofindustries – the average TCO was $15 million (the highest was$300 million and lowest was $400,000). While it’s hard to draw asolid number fro that kind of range of companies and ERP efforts,Meta come up with one statistic that process that ERP is expensiveno matter what kind of company is using it. The TCO for a“heads-down” user over that period was a staggering $53,320.Meta Group study of 63 companies found that it tool eight monthsafter the new system was in (31 months total) to see any benefits.But the medium annual savings from the new ERP system were $1.6million.

Although different companies will find different land mines in thebudgeting process, those who have implemented ERP packagesagree that certain costs are more commonly overlooked orunderestimated than others. Armed with insights from across the

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business, ERP pros vote the following areas as most likely to resultin budget overrun.

1. Training

Training is the near-unanimous choice of experienced ERPimplements as the most underestimated budget item.Training expenses are high because workers almostinvariably have to learn a new set of processes, not just anew software interface. Worse, outside training companiesmay not be able to help you. They are focused on tellingpeople how to use software, not on educating peopleabout the particular ways you do business. Prepare todevelop a curriculum yourself that identifies and explainsthe different processes that will be affected by the ERPsystem.

One enterprising CIO hired staff from a local businessschool to help him develop and teach the ERPbusiness-training course to employee. Remember thatwith ERP, finance people will be using the same softwareas warehouse people and they will both enteringinformation that affects the other. To do this accurately,they have a much broader understanding of how others inthe company do their jobs than they did before ERP camealong. Ultimately, it will be up to your IT andbusinesspeople to provide that training. So take whateveryou have budgeted for ERP training and double or triple itup front. It will be the best ERP investment you ever make.

2. Integration and testing

Testing the links between ERP packages and othercorporate software links that have to be built n a

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case-by-case basis is another often-underestimated cost.A typical manufacturing company may have add-onapplications form the major – e-commerce and supplychain – to the minor – sales tax computation and barcoding. All require integration links to ERP. If you can buyadd-ons from the ERP vendors that are pre-integrated,you’re better off. If you need to build the links yourself,expect things to get ugly. As with training, testing ERPintegrating has to be done from a process-orientedperspective. Veterans recommend that instead ofplugging in dummy data and moving it from oneapplication to the next, run a real purchase order throughthe system, form order entry through shipping and receiptof payment—the whole order-to-cash banana-preferablywith the participation of the employees who willeventually do those jobs.

3. Customization

Add-ons are only the beginning of the integration costsor ERP. Much more costly, and something to be avoided ifat all possible, is actual customization of the core ERPsoftware itself. This happens when the ERP software can’thandle one of your business processes and you decide tomess with the software to make it do what you want. You’re playing with firs. The customizations can affect everylinked together. Upgrading the ERP package-no walk inthe park under the best of circumstances-becomes anightmare because you’ll have to do the customization allover again in the new version. Maybe it will work, maybeto won’t. No matter what, the vendor will not be there tosupport you. You will have to hire extra staffers to do thecustomization work, and keep them on for good tomaintain it.

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4. Data conversion

It costs money to move corporate information, such ascustomer and supplier records, product design data and thelike, from old system to new ERP homes. Although few CIOswill admit it, most data in most legacy systems is of little use.Companies often deny their data is dirty until they actuallyhave to move it to the new client/server setups that popularERP packages require. Consequently, those companies aremore likely to underestimate the cost of the move. But evenclean data may demand some overhaul to match processmodifications necessitated – or inspired – by the ERPimplementation.

5. Data analysis

Often, the data from the ERP system must be combined withdata from external systems for analysis purposes. Users withheavy analysis needs should include the cost of a datawarehouse in the ERP budget-and they should expect to doquite a bit of work to make it run smoothly. Users are in apickle here: Refreshing al the ERP data every day in a bigcorporate data warehouse is difficult, and ERP systems do apoor job of indicating which information has changed fromday to day, making selective warehouse updates tough. Oneexpensive solution is custom programming. The upshot isthat the wise will check all their data analysis need beforesigning off on the budget.

6. Consultants and infinitum

When users fail to plan for disengagement, consulting feesrun wild. To avoid this, companies should identify objectivesfor which its consulting partners must aim when traininginternal staff. Include metrics in the consultants contract; forexample, a number of the user company’s staff should be

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able to pass a project-management leadership test-similar towhat Big Five consultants have to pass to lead an ERPengagement.

7. Replacing your best and brightest

It is accepted wisdom that ERP success depends on staffingthe project with the best and brightest from the business andIS divisions. The software it too complex and the businesschanges too dramatic to trust he project to just anyone. Thebad news is a company must be prepared to replace many ofthose people when the project is over. Though the ERPmarket is not as hot as it once was, consultancies and othercompanies that have lost their best people will be houndingyour HR policies permit. Huddle with Hr early on to develop aretention bonus program and create new salary strata for ERPveterans. If you let them go, you’ll wind up hiring them-orsomeone like them-back as consultants for twice what youpaid tem in salaries.

8. Implementation teams can never stop

Most companies intend to treat their ERP implementation asthey would any other software project. Once the software isinstalled, they figure the team will be scuttled and everyonewill go back to his or her day job. But after ERP, you can’t gohome again. The implementers are to valuable. Because theyhave worked intimately with ERP, they know more about thesales process than the salespeople and more about themanufacturing process tan the manufacturing people.Companies can’t afford to send their project people back intothe business because there’s so must to do after the ERPsoftware is installed. Just writing reports to pull informationout of the new ERP software is installed. Just writing reportsto pull information out of the new ERP system will keep the

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project team busy for a year at least. Ant it is in analysis –and, one hopes, insight-that companies make their moneyback on an ERP implementation. Unfortunately, few ISdepartments plan for the frenzy of post-ERP instillationactivity, and fewer still build it into their budgets when theystart their ERP projects. Many are forced to beg for moneyand staff immediately after the go-live date, long before theERP project has demonstrated any benefit.

9. Waiting for ROI

One of the most misleading legacies of traditional softwareproject management is that the company expects to gainvalue from the application as soon as it is installed, while theproject team expects a break and maybe a pat on the back.Neither expectation applies to ERP. Most of the systems don’treveal their value until after companies have had themrunning for some time and can concentrate on makingimprovements in the business process that are affected bythe system. And the project team is not going to be rewardeduntil their efforts pay off.

10. Post-ERP depression

ERP systems often weak cause have in the companies thatinstall them. In a recent Deloitte Consulting survey of 64Fortune 500 companies, one in your admitted that theysuffered a drop in performance when their ERP system wentlive. The true percentage is undoubtedly much higher. Themost common reason for the performance problems is thateverything look and works differently from the way it didbefore. When people can’t do their jobs in the familiar wayand haven’t yet mastered the new way, they panic, and thebusiness goes into spasms.

6.1.5 Reasons for possible failure of ERP:

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At its simplest level, ERP is a set best practices forperforming different duties in your company, includingfinance, manufacturing and the warehouse. To get the bestmost from the software, you have to get people inside in thedifferent departments that will use ERP don’t agree that thework methods embedded in the software are better than theone they currently use, they will resist using the software orwill want IT to change the software to match the ways theycurrently do things. This is where ERP projects break down.Political fights break out over how-or-even whether-thesoftware will be installed. IT gets bogged down in long,expensive customization efforts to modify the ERP softwareto fit with powerful business barons’ wishes. Customizationsmake the software more unstable and harder to maintainwhen it finally does come to life. The horror stories you hearin the press about ERP an usually be traced to the changesthe company made in the core ERP software to fit its ownwork methods. Because ERP covers so much of what abusiness does, a failure in the software can bring a companyto a halt, literally.But IT can fix the bugs pretty quickly in most cases, andbesides, few big companies can avoid customizing ERP insome fashion – every business is different and is bound tohave unique work methods that a vendor cannot account forwhen developing its software. The mistake companies makeis assuming that changing people’s habits will be easier thancustomizing the software. It’s not. Getting people inside,your company to use the software to improve the ways theydo their jobs is by far the harder challenge. If your companyis resistant to change, then your ERP project is ore likely tofail.

6.1.6 Organizing ERP projects:

There are three commonly used ways of installing ERP

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The Big Bang – In this, the most ambitious and difficult ofapproaches to ERP implementation, companies cast off alltheir legacy system at once and install a single ERP systemacross the entire company. Though this method dominatedearly ERP implementations, few companies dare to attempt itanymore because it calls for the entire company to mobilizeand change at once. Most of the ERP implementation horrorstories from the late 90’s warn us about companies that usedthis strategy. Getting everyone to cooperate and accept anew software system at the same time is a tremendous effort,largely because the new system will not have any advocates.No one within the company has any experience using it, sono one is sure whether its will work. Also, ERP inevitablyinvolves compromises. Many departments have computersystems that have been honed to match the ways they work.In most cases, ERP offers neither the range of functionalitynot the comfort of familiarity that a custom legacy systemcan offer. In many cases, the speed of the new system maysuffer because it is serving the entire company rather than asingle department. ERP implementation requires a directmandate from the CEO.

Franchising strategy – This approach suits large or diversecompanies that do not share many common processes acrossbusiness units. Independent ERP systems are installed ineach unit, while linking common processes, such as financialbookkeeping, across the enterprise. This has emerged as themost common way of implementing ERP. In most cases, thebusiness units each have their own “instances” of ERP-that is,a separate system and database. The systems link togetheronly to share the information necessary for the corporationto get a performance big picture across al the business units(business unit revenues, for example), or for processes thatdon’t vary much from business unit to business unit (perhapsHR benefits).Usually, these implementations begin with a

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demonstration or pilot installation in a particularlyopen-minded and patient business unit where the corebusiness of the corporation will not be disrupted ifsomething goes wrong. Once the project team gets thesystem up and running and works out all the bugs, the teambegins selling other units on ERP, using the firstimplementation as a kind of in-house customer reference.Plan for this strategy to take a long time.

Slam dunk – ERP dictates the process design in this method,where the focus is on just a few key processes, such as thosecontained in an ERP system’s financial module. The slamdunk is generally for smaller companies expecting to grow inERP. The goal here is to get ERP up and running quickly andto ditch the fancy reengineering in favor of the ERP system’s“canned” processes. Few companies that have approachedERP this way can claim much payback from the new system.Most use it as an infrastructure to support more diligentinstillation efforts down the road. Yet many discover that aslammed-in ERP system is little better than a legacy systembecause it doesn’t force employees to change any of their oldhabits. In fact, doing the hard work of process reengineeringafter he system is in can be more challenging than if therehad been no system at all because at that point few people inthe company will have felt much benefit.

6.1.7. Fitting ERP with e-commerce:

ERP vendors were not prepared for the onslaught ofe-commerce. ERP is complex and not intended for publicconsumption. It assumes that the only people handling orderinformation will be your employees, who are highly trainedand comfortable with the tech jargon embedded in thesoftware. But now customers and suppliers are demandingaccess to the same information your employees get throughthe ERP system. – things like order status, inventory leaves

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and invoice reconciliation – except they want to get all thisinformation simply, without all the ERP software jargon,through your website.

E-commerce means IT departments need to build two newchannels of access in to ERP systems-one for customers(otherwise know as business-business consumer) and onefor suppliers and partners (business-to-business). These twoaudiences want two different types of information from yourERP system. Consumers want order status and billinginformation, and suppliers and partners want just abouteverything else. Traditional ERP vendors are having a hardtime building the m\links between the Web ant their software,though they certainly all realize that they must do it and havebeen hard at work at it for years. The bottom line, however,is that companies with e-commerce ambitions fact a lot ofhard integration work to make their ERP systems availableover the Web. For those companies that were smart-orlucky-enough to have bought their ERP systems from avendor experienced in developing e-commerce wares,adding easily integrated applications from that same vendorcan be a money-saving option. For those companies whoseERP systems came for vendors that are less experienced withe-commerce development, the best-and possiblyonly-option might be to have a combination of internal staffand consultants back through a custom integration. But nomatter what the details are solving the difficult problem ofintegrating ERP and e-commerce requires careful planningwhich is key to getting integration off on the right track.

One of the most difficult aspects of ERP and e-commerceintegration is that the Internet never stops. ERP applicationsare big and complex and require maintenance. The choice isstark if ERP is linked directly to the Web-take down your ERPsystem for maintenance and you take down your website.Most e-commerce veterans will build flexibility into the ERP

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and e-commerce links so that they can keep the newe-commerce applications running on the Web while they shutdown ERP for upgrades and fixes. The difficulty of gettingERP and e-commerce applications to work together-not tomention the other application together –not to mention theother applications that demand ERP information such assupply chain and CRM software-has led companies toconsider software knows alternatively as middleware and EAIsoftware. These applications act as software translators thattake information from ERP and convent it into a format thate-commerce and other applications can understand.Middleware has improved dramatically in recent years, andthough it is difficult to sell and prove ROI on the softwarewith businesses leaders-it is invisible to computer users-itcan help solve many of the biggest integration woes thatplague IT these days.

Questions:

1. Write a not on the evolution of ERP.2. What are the benefits of ERP?3. What are the software of ERP?4. What are implementation difficulties of ERP?5. How ERP can be fitted with e-commerce?

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6.2 ERP PACKAGE : BAAN

6.2.1 Introduction:

Baan was founded in 1978 in the Netherlands. Since then,Baan has built on its early expertise in software for themanufacturing industry to become a leading enterprise applicationprovider. Today it supplies innovative, increasingly integratedsoftware solutions and services for every major are a of business.The salient features of the company are:

Worldwide headquarters in the NetherlandsPart of the Production Management division of Invensys plc.More than 15,000 customer sites worldwideDomain expertise in target industry environments

More than 200 alliances including Microsoft, IBM etc.

Baan helps industrial operations optimize their enterpriseperformance strategic and compete in the knowledge-drivennetworked economy, with us ever-increasing demands forinformation, integration, and collaboration. Through its open andpowerful iBaan suite of Internet-enabled solutions,. Baan is ideallyplaced to support organizations in the manufacturing, logistics,services and engineering industries. Baan can help them as theymove towards tighter integration of their complex processes, closercollaboration throughout their value chain, and greater accessibilityof cross-enterprise transactional and analytical information.

6.2.2. iBaan:

The relationship between companies and their customers ischanging. The customer is moving closer to every player in the‘value chain’, and the Internet is central to that change. iBaan is theonly internet-enabled family of solutions based on a

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comprehensive framework of open, flexible, easy-to-configurecomponents that address manufactures’ growing demands fortighter integration and full visibility throughout the supply chain.These solutions address every phase of an enterprise: form thefactory, to the warehouse, to the service center, to the onlinebusiness presence. iBaan can help bring companies, partners,suppliers and end-users together into a virtual, collaborativeworking environment that brings down costs and reduces waste,without having to abandon existing IT investments. With asynchronized enterprise everything can be more efficient, moreagile and more profitable.

6.2.3. Baan Consulting:

Baan Consulting helps customers get measurable businessresults from Baan solution. By helping you realize capabilities andadd value to your business, the Baan Consulting approach isdesigned to help you improve your business agility.

It’s collaborative, with a strong emphasis on knowledgetransfer from our consultants to your people on the front line.We provide a single point of contact and responsibility for allissues relating to your implementation.Most of all, our industry and technology consultants have‘been there’ – so you get the benefit of our experience aswell as our knowledge of Baan business tools.

6.2.4 Services and resources:

Baan Consulting services span the full range of BaanSolutions – iBaan CRM, iBaan Planning, iBaan Services, iBaanManufacturing, iBaan Distribution, iBaan Finance, and iBaanProcurement- as well as the Baan architecture and commoncomponents for collaboration and e-commerce; information;

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iBaan Business Intelligence; and integration; iBaan OpenWorld.

Baan Consulting Customers: Some of our better-knownclients include Boeing, Andersen Windows, Snecma, Elcoteq,Nortel, Flextronics, Hermann Miller, Dana, Solar Turbines,Siemens and B&O.

Baan consultants have the longest and most in-depthexposure to the Baan products through involvement in betatesting, product release programs and implementations atcustomer sites. This experience, combined with theknowledge of Baan processes and a deep involvement in theBaan network, enables Baan consultants to provideauthoritative process and technical recommendations. Theywill assist your project team in resolving process-relatedissues, having dealt with the same or related scenarios in thepast.

As a rule, Baan functional consultants are hired withextensive industry backgroundMost have 10 to 15 years of experience working in functionalpositons in finance, manufacturing, distribution and serviceMost have experience implementing software systems whilein those positions

Baan’s technical consultants are most familiar with Baan’s technicalarchitectures. When it comes to difficult decisions aboutconfiguration of a multi-dimensional environment, Baanconsultants play a central role in establishing softwarerequirements and managing set-up and use.

This knowledge is available not only through the consultantsthemselves and their colleagues, but also through Baandevelopment and the support organizations. Baan Consulting

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draws upon a wealth of experience, leveraging pastinvolvement in numerous complex implementations.Their familiarity with Baan’s business object interface (BOI)development and Data Access Layer (DAL) technologiesallows for unique insight and quicker turn-around time forinterfaces, data migration, customizations, softwarearchitecture design another technical problem solving.The unique to leverage DCS (Development ConsultingServices) resources in situations involving complex technicalissues compliments the strength of our technical teams.

Baan Consulting Solution Packs are crafted to address multiplebusiness needs, may be tailored to your specific situation, and willvary according to your needs – so you get the results you want, asquickly as possible. Just some of the features and benefits include.

Reduced risk, on-time, low budget implementationsCost-effective solution and services bundlingAccess to experienced Baan consultantsSingle point of contact and responsibilityAccess to a huge network of Baan resourcesTargeted implementation with measurable goals andmilestones.

Baan Consulting Solution Packs embrace a broad range of iBaansolutions. We encourage the use of solution packs to help improveyour company’s efficiency, and open up new possible in the wayyou use Baan software.

Baan Consuldng’s project and program management methodologyfocuses on Goal Directed Project Management, or GDPM, and issupervised by the Baan Project Management Office.

6.2.5 Benefit of Baan:

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Support for any project

Our Resource Management Office has access sot experiencedpeople and resources across the globe to provide you withlocal support.

Helps reduce risk

Experience in Baan back-office applications, industryknowledge, strong project management capabilities – and thefact that we are the software developer – helps reduce therisks inherent in any software implementation project.Program and project reviews complement ourimplementation services to help further reduce risks.

Single point of contact and responsibility

We provide customers with a single point of contract andresponsibility for business, software, integration,implementation, and measurement issues related to yourstated business goals.

Baan network

Baan consultants have unique access to a global network ofresources within Baan – consulting service lines,documentation database/libraries, development, InternetKnowledge Bases, sandbox environments and personalnetworks – so benefit from our knowledge of applicationdevelopment and migration, and gain a way to influencefuture releases.

6.2.6 Application management

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Application Management offerings help customers with thecontrol and management of Baan-related production systems.Ban is able to offer a range of different services, from purelytechnically oriented to conceptually or functionally oriented.

System Control

System Control helps customers reduce the complexity andeffort associated with the maintenance of their businesssystem. This service offers and extended systems review andperiodic analysis of the system environment, includingtechnical functional and user aspects. In addition, adedicated Support Account Executive will take responsibilityfor planning, as well as coordination and management of asystem-control plan for the customer. This plan will includethe installation of updates and service packs on thecustomer’s system. To do this, Baan will set up and organizea customer-specific test, involving both customer users andBaan experts who will apply Baan’s automated test tools. Thecontrol plan includes data archiving.

System Help

System help is a contract-based service that’s intended totake over some or all of the customer’s daily system andapplication management tasks. It includes activities such asreport changes, user definitions and back-ups. System helpis designed to support customers in addressing thesignificant knowledge management problems that can arisefrom the increasing number of technologies being introducedin the industry. It brings first-line support activity to acustomer’s internal organization and managescommunications with second-or even third party supportorganizations. As a result, System Help can help customerssolve these knowledge management problems whilesimultaneously reducing costs.

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Customization Care

Customization care is intended to take over the care, support,maintenance, and release management of customizedsoftware applications. System Control is mandatory for thisservices.

In addition to Support & Application Management, Baan canprovide a number of Optimization Services to customersupon request. Optimization Services deliver ad-hoc servicesthat fall outside the scope of the Support & ApplicationManagement agreements. Optimization Services are based onyears of experience with different versions of Baanapplications, which are already applied to various types ofcustomers all over the world. The staff deployed has accessto all necessary resources. This ranges from BaanDevelopment, Porting, Performance and Benchmarking, tocompetence centers from our strategic alliances It’s allgeared to help customers ‘get to the point’ to solving aparticular issue or problem.

Questions:

1. What is Baan?2. What are the benefits of Baan?

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LESSON 6.3 ERP PACKAGE : MARSHALL

6.3.1 Introduction:

In an age when focus is all the range the Rs 200 crore RamcoIndustries is an oddball, a little like Wipro. It consists really oftwo disparate companies bundled into one. One makesasbestos building materials. The other, known as RamcoSystem and currently a division of the parent, is well knownfor its enterprise resource planning (ERP) software that waslaunched and endorsed by Microsoft chairman Bill Gates in1997. The ERP product, originally called Ramco Marshalland now renamed Ramco e.Applications, is considered bymany to be India’s only truly world-class software product. In1998-99 Ramco Systems’ sales were about Rs. 71 crore. Thefigure is expected to grow to about Rs. 100 crore this year.This average market capitalization of good softwarecompanies in India is nto less than eight times the salesfigure. By this reckoning, Ramco Systems’ value is about Rs.800 crore. A total of 2,200 man years has been invested indeveloping Ramco Marshall. In the international ERP marketthe cost per year is into less than $70,000. At this rate,Marshall can be valued at about $164 million or over Rs. 650crore. Unlike most Indian software firms, it is not active insoftware services, having placed most of its eggs in the ERPbasket. A second difference is that being a software product.Marshall cost a lot of money to develop and nto yielded muchprofit; last year the software division probably lost money.But its development costs are mostly in the past whereasrevenues lie in the future. An accurate valuation will have towait until December when the hive-off –-formulated byKPMG – is completed. Ramco Systems will then be listed asseparate company by allotting. Ramco Systems shares toRamco industries shareholders in the ratio of 1:1.Someanalysts say Ramco’s intellectual property, technologicalcompetence and human resources –all intangibles –should

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be valued at close to Rs 1000 crore The ERP arena isdominated by big foreign players like SAP, BaaN, People softand initially no one gave Ramco any chance. But Ramco hassurvived with Marshall and now promises a lot with its latestupgrade, e.Applications. The proof of the pudding is thatmany are cating it. Ramco’s ERP product today has 120customers, including Hyundai, Migros and NEC. It is workingto ensure that e.Applications is Net-enabled and is alreadypart of the way there. The next version of e.Applications,which will be a completely web-based product is due forrelease 12-18 months from 2002.

Another major development is that Ramco Systems recentlyadded two new lines of business – e-commerce and rapidapplication development – thereby product – based businessmodel. It has an advantage in rapid application developmentbecause it is in the forefront of a revolution in softwaredevelopment; component-based architecture. Here, acustomized application is developed merely by assemblingcomponents. This reduces the cost of and time taken todevelop software and gives the user the flexibility to changeanything he wants. These two added revenue streams – fromhigh-end e-commerce and other services and customizednon-product based software development projects –will helpRamco System software development costs and let it have thebest of both words: software services and products. RamcoSystems provides complete enterprise solutions (ERP, RAM &HR) form development to implementation and support.

6.3.2 e-Applications:

Ramco’s ERP, EAM & HR suite – Ramco e.ApplicationTMprovides business solutions to over 15 industries in four broadareas – ERP or manufacturing and service industries, EAM(enterprise asset management) for asset intensive industries,Human Resources Management, and E-commerce solutions.

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Ramco ERP, EAM & HR solutions are built up form over 35applictions. Added to this are seven Web products that get youInternet ready and running. A number of functions and industryspecific complementary solutions held integrate the ERP solution tosolutes-partner solutions. Development practices are ISO 9001 andY2K certified. Ramco does the ERP, EAM & HR implemntatins formost customers. Ramco does the ERP, EAM & HR implementationsfor most customer demonstrating our commitment to make thesolution work for you. Our global help desk is available forround-the-clock support.The organization like Sunkist Growers, Intel, ICICI and ColumtiaHelicopters accepted effective enterprise solutions (ERP, EAM & HR)– On budget, within schedule. Ramco e.Applications comprise over35 crore business applicatiosn. These applications can becombined with functions and industry specific add-ons to delivereither generic enterprise solutions or focused industry andorganization specific solutions. The Ramco e-applicationapplications are enabled for the Internet, ecommerce and EDI.

6.3.4 Enterprise Intelligence:

Enterprise intelligence – more than data or information – is anorganization’s most important resource. Organizations todayoperate in a highly competitive environment characterized by astate of flux – accurate business information is critical for success.Ramco Enterprise Intelligence (REI) uses the capability of OLAPtools which are built into relations database systems to provide youa user-friendly data warehousing solution that integrates withexisting business process and enterprise applications. REI enablesyou to flexibly analyze a number of dimensions, measures, and thelevels of dimensions of business, through a simple dread and dropinterface. The information required for decision making a usuallyavailable within an organization enterprise applications system oronline transaction processing (OLTP) system. However, theinformation may not be available in the required form, may be

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inaccessible in the required level of detail, or may be analyzeddifferently by different functional departments in the enterprise.

Conventionally, information for decision making is retrievedthrough an OLTP system. However, this method has i\limitationsconsidering the hierarchy of information needs for effectivedecision making. OLTP typically supports lower level informationreporting – it helps generate operational and statutory reports andprovides a basic level of data drill down. But in addition to this,managers need to analyze multi-dimensions and to splice and dicedata for better consolidation. In a typical enterprise application,only two-dimension analysis can be carried – data subsets cannotbe spliced and diced. Further, the performance of the operatingsystem deteriorates under pressure from the volume of datainvolved and the complex joins required across tables in databases.REI solution used online analytical processing to provide you theflexibility to use various combinations of dimensions to analyze thedata quickly and more efficiently than having a large number ofreports.

Main features

1. Calculations and modeling applied across multi-dimensionsthrough hierarchies and/or across members

2. Trend analysis over sequential time periods3. Slicing and dicing subsets for on-screen viewing4. Drill-down to deeper levels of consolidation5. Proven tools for building and delivering customizedanalytical application

6. Architecture that enables effective exploration using SQLquery

7. Allows access of data vis the Internet or intranet8. Rigorous security9. Access rights can be defined for users at different levels10. Easy and quick administration

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11. Integrated models with conformed dimensions provideconsistent “snapshot” of information across multiplefunctions of organizations

12. Integrated infrastructures built on multi-tierarchitecture to facilitate efficient sharing and distribution ofinformation

13. Data loaded from any source or system, including thirdparty and legacy applications.

REI is a complete solutions that gathers data from disparatesources, and combines and delivers it in the from of cube. Thisprovides the ideal platform to retrieve and analyze organizationperformance metrics. You can choose various dimensionsdepending on your information or analysis needs. Considerprofitability analysis, for example. Business organization need toanalyze profitability to determine pricing, promotional activities,allocation of resources or product development. Profitability,therefore, can be considered from various perspectives – a region,a product, a product category, a customer or a customer segment.REI delivers an integrated solution that helps you to measure andanalyze profitability from all these different perspectives and bycombinations of them across time periods.

6.3.5 Enterprise Asset Management Solutions:

The business environment for asset intensive enterprises isvery challenging today – the regulatory environment is changing,new capacity addition is expensive output demand is fluctuating,and customers expect service at Internet speed. This is whereRamco Enterprise Asset (EAM) Management solutions help. RamcoEAM solutions – part of the Ramco e-Applications TM family ofenterprise solutions – are designed on the basis of two criticalprinciples:

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The enterprise solution needs of maintenance intensiveindustries are distinct and different from the enterprise solutionneeds of manufacturing centric industries. In today’s Interneteconomy organizations must use IS solutions to transit fromconventional ‘brick and mortar” business models to informationage business models that will enable them to stay agile andrespond effectively to higher customer expectations. Ramco EAMsolutions comprehensively cover operations, maintenance,logistics, HR and financials to mobile computing and e-commercecapabilities.

Questions:

1. What is the applications of Marshall?2. Why e-Applications are different from Marshall?3. Mention the EAM of Ramco Systems4. Mention the main features of e-applications.

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LESSON 6.4 ERP PACKAGE : SAP

6.4.1 Introduction

SAP the company was founded in Germany in 1972 by fiveex-IBM engineers. In case you’re ever asked, SAP stands forSusteme, Andwendugen, Produckte in her Datenverarbeitungwhich – translated to English – means systems, Applications,Products in Data Processing. So now you know! Being incorporatedin Germany the full name of the parent company is SAP AG. It islocated in WAlldorf, Germany which is close to the beautiful tows ofHeidelberg. SAP has subsidiaries in over 50 countries around theworld from Argentina to Venezuela (and pretty much everything inbetween). SAP America (with responsibility for North Amerca, SouthAmerica and Australia – go figure!) is located just outsidePhiladephia, PA. the original five founders have been so successfulthat they have multiplied many ties over such that SAP AG is nowthe third largest software maker in world, with over 17,500customers (including more than half of the world’s 500 topcountries). SAP employs over 27,000 people worldwide today, andhad revenues of $7.34 billion and Net Income of $581 millions inFY01. SAP is listed in Germany (where it is one of the 30 stockswhich make up the DAX) and on the NYSE (ticker-SAP). There arenow 44,500 installatins of SAP, in 120 countries, with more then 10million users. Badk in 1979 SAP released SAP R//2 was the firstintegrated, entrrprise wide package and was an immediatedsuccess. For years SAP stayed within the German borders until ithad panetreated practically every large German Company. Lookingfor more growth, SAP expanded into the remainder or Europeduring the 80’s. Towards the end of the 80’s, client-serverarchitecture became popular and SAP responded with the release ofSAP R/3 (in 1992). This turned out to be a killer app for SAP,especially in the American region into which SAP expanded in 1988.

The success of SAP R/3 in North America has been nothingshort of stunning. Within a 5 year period, the North American

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market went from virtually zero to 44% of total SAP worldwide sales.SAP America alone employs more than 3,000 people and has addedthe names of many of the Fortune 500 to it’s customer list (8 of thetop 10 semiconductor companies, 7 of the top 10 pharmaceuticalcompanies etc). SAP today is available in 46 country-specific

Of course that there is someone around who understands how theywork!). Sweeping them away and replacing them with an integratedsystem such as SAP can save much money in support. Of course, ifyou have a burning platform as well the question becomes eveneasier.

2. Enabling business process change – From the start, SAPwas built in a foundation of process best practices.Although it sounds absurd, it is probably easier (and lessexpensive) to change your companies processes to adoptto SAP than the other way around. Many companies havereported good success from combining a SAPimplementation with a BPR project.

3. Competitive advantage – The CFO types around haveheard this old saying form the CIO types for many yearsnow. The question still has to be asked … can you gaincompetitive advantage from implementing SAP? Theanswer, of course, depends on the company. It seems tous however, that:

being able to accurately provide delivery promise dated formanufacturing products (and meet them) doesn’t hurt … andbeing able to consolidate purchase decisions from aroundthe globe and use that leverage when negotiating withvendors has gotta help … andbeing able to place kiosks in stores where individualcustomers can enter their product specifications and them

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feed this data directly into it’s production planning process ispretty neat, etc.

6.4.3 The cost of SAP:

Implementing SAP is expensive. But the potential rewards candwarf the costs (and have for many existing customers already).One customer reportedly made enough savings on the procurementof a single raw material to pay for the entire enterprise-wide SAPimplementation! Of course these are hard to substantiate, but visitSAP’s website and take a look at the customer testimonials.

SAP sells it’s R/3 product on a ‘price per user basis’. Theactual price is negotiated between SAP and the customer andtherefore depends on numerous factors which include number ofusers and modules (and other factors which are present in anynegotiation). You should check with SAP, but for a ballparkplanning number your could do worse than starting with $4000 peruser. There is also an annual support cost of about 10% whichincludes periodic upgrades. Again, check with SAP.

Then there is the implementation cost. It is about now that youneed to get the business case out again and remind yourself whyyou need to do this. The major drivers of he total implementationcost are the Timeframe, Resource Requirements and Hardware.

1. Timeframe- The absolute quickest implementation we haveever heard of is 45 days … but this was for a tiny companywith very users and no changes to the delivered SAPprocesses. At the other end of the scale you get the multi-national who are implementing SAP over 5 to 10 years. Theseare not necessarily failures …. Many of them are planned assuccessive global deployments (which seem to roll aroundthe globe forever ). Of course the really expensive ones arethose we don’t beat about! For the most part, you should beable to get your (single instance) project completed in a 9 to18 months period.

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2. People – The smallest of SAP implementations can get doneon a part-time basis without outside help. The largestswallow up hundreds of people (sometimes over a thousand)and include whole armies of consultants. This adds up fast.Again, get that business case out. The types of people youwill need rung the range from heavy duty techies to projectmanagers.

3. Hardware – The smallest of SAP implementations probablyuse only three instances (boxes) … one for the productionsystem, one for test, and one for development. The largestimplementations have well over 100 instances, especially ifthey involve multiple parallel projects (otherwise known as aprogram)

6.4.4 The Software:

Companies both large and small traditionally utilized multiplesoftware- applications from various vendors or developed theirown applications in-house to process their critical businesstransactions Prior to the proliferation of SAP, most companiessupported a full staff of program developers who wrote theirnecessary business applications from scratch or developers whowrote their necessary business applications from scratch ordeveloped highly complicated interfaces to allow pre-packagedapplications from several vendors to pass data back and forth asnecessary to complete any full cycle business transactions. Thisprocess was extremely costly, time-consuming, and error prone. Italso made it very difficult for business managers and executive toget a timely, comprehensive view of how their business managersand executives to get a timely, comprehensive view of how theirbusiness was doing at any given time. SAP was the first and, to date,the most successful company to integrate nearly all businessprocesses into one software solution for use in any business in anycountry in the world. Not only did SAP’s applications reduce the

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need for complex and redundant in-house development, but it alsocreated new business efficiencies by automating many tasks acrossa corporation and incorporating business’ best practices into eachupdated version of its software.

Using SAP’s products, companies can now integrate theiraccounting, sales, distribution, manufacturing, planning,purchasing, human resources, analysis and other transactions intoone application. SAP applications thus provide an environmentwhere “transactions are synchronized throughout the entiresystems, meaning a sales-order entry triggers action’s within eachapplication that related and is relevant to the transaction.

Although SAP is recognized as the ERP market leader, severalcompetitors have found their footing in this arena. Oracle, perhapsSAP’s most significant competitor, has set its sites on SAP’sprestigious ERP leadership position. Other competitors includePeople Soft, JD Edwards, and a range of mid-market ERP vendorswho all provide similar packaged ERP application.

Questions:

1. Trace the evolution SAP.2. Explain how SAP is different from other software3. Identify the purpose of SAP4. How SAP is different on account of the cost?

Model Question PaperPaper 3.2 : Strategic Management

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Time : 3 hours MaximumMarks : 100

PART – A (5 X 8 = 40)

Answer any Five questions

1. Define Mission and give examples2. What constituted core competency?3. What do your mean by turnaround? Give examples4. How the diversification strategies are undertaken bycompanies?

5. Illustrate with examples the need for corporate strategy.6. What is management of change?7. What are the leadership qualities needed for corporatesuccess?

8. Write a note BaaN

PART – B (4 X 15 =60)

Answer any Four questionsQuestion No. 15 is Compulsory

9. Evaluate the role played by business policy in organizationalsuccess.

10. Critically evaluate the growth strategies adopted byIndian organizations.

11. Mention the of importance for organization to succeedin new areas of operations.

12. Describe the various portfolio models and illustratetheir limitations

13. Discuss the various elements of corporate strategy.14. Elucidate the 7’s framework with its uses to Indiancompanies.

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15. Read the following case carefully and answer thequestions at the end of the case.

All the major business newspaper headlines in India on 21st July1999 were screaming ,”Essar creates history, defeats on FRN $250million”. Essar group had default on its loan repayments of $250million of floating rate notes in international markets. It becamethe first Indian Company to default in International market raisingfears in Indian corporate sector regarding future fund raisingcapabilities in the international market.

For last on year it had been frantically trying to avoid theunavoidable, and in the process, rolling itself in many controversies.During 1998, steel consumers had accused Government of India inmedia of creating import barriers to favour and bail our Essar. Thiscreated a political controversy and caused embarrassment to thegovernment. Essar became an untouchable for governmentcontrolled financial institutions. The financial institutions, whichhad major exposure in Essar, backed off the left Essar in the lurchwhen it came to disastrous year for the group but its public imagealso suffered a major setback.

Ruia brothers, Sashi, 55 and Ravi, 50 who had stunned Indiancorporate sector with their vision and daring entrepreneurship weretoday in a quagmire of their own making. While on diversificationspree. Entering one business after another, they were obviously notare that very soon the group would become a case study at themanagement school.

Today Essar group is considering various options to consolidate,sell companied that it had nurtured with heavy debt exposure inpast few years. Its major companies are in core infrastructure areaswith strict regulations, controls and major government role

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intervention. Essar is wondering what went wrong in its dreams andtheir executions. Was it fate, Pokhran nuclear tests in 1998,continuing recessions in Indian and world market, stock marketdepression in India or was it structured to doom.

Group Profile

Nand Kishore Ruia, a marwari businessmen settled in Madras in1956, founded the Essar group. Essar started off by exporting ironore. In 1956, it acquired a stevedoring contract for bringing ironfrom the mine heads and loading it onto sheds. Sahsi (ESS) and Ravi(AR) diversified from family business of trading and ventured intoshipping in 1969. After shipping Essar moved into constructionactivity and then into the supply critical support services for the oiland gas sector. Their major breakthrough came in the form of adrilling contract awarded by ONGC. From these successfulmedium-sized business in marine and port constructions,oil-drilling, and shipping, Essar first took the opportunity providedby the gas pipeline to start a very successful sponge iron business.

It has been the entrepreneurial sprit and opportunism that hasbeen driving the group from a Rs. 150 core shipping company to aRs. 4000 core conglomerate. The group was slowly adding onebusiness after another until late eighties.

In 1990’s Government of India started economicliberalization programme that promised growth and vision ofcatching up with the late industrializing economies of Southeast.Capital markets were opened up and raising finances became mucheasier and it became a prime facilitator of rapid growth. Theincredible rate of growth of Essar group during this period sawthem in virtually all the core sectors.

Ruia brothers had a resplendent vision of creating a hugeempire and they exploited every opportunity that came their wayand created many new avenues to realize their vision. Mr. Sashi

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Ruia engineered Essar’s conquests and they were well capitalizedby his younger brother Ravi, Essar restructured itself in 1994 toinclude senior professional managers from leading public sectorundertakings to manage their growing, diversified businesses.These professionals were given free hand for running independentunits. Mr. Sashi Ruia kept the group’s external environment &business development activities with himself. Ravi Ruia was givencharge of the operations & overseas businesses. The secondgeneration also started making their way in family business. TodayPrashant Ruia is the director-in-charge of Essar’s Power, Oil & Steelbusiness along with communications and personnel. AnshumanRuia looks after shipping.

Essar group entered in global business bycommissioning a $90 million cold rolled steel plant, EssarDhananjaya (ED), in Indonesia in 1994 of 150,000 tonnescapacity fed by HRC from Essar Gujarat Limited in a joiningventure with the Garama group of Indonesia. ED was toimport hot rolled coils from Essar Gujarat’s Steel plant inIndia. During that period Ruias had been working up onsetting more such ventures in Bangladesh, Saudi Arabia orPakistan. The focus for such expansions was to beat possibledownturns in domestic demand. Essar also acquired athree-year-old textile mill Woventex Ltd. in Mauritius.Through this they wanted to move in Africa which theybelieved would soon see and economic upsurge.

On Essar new business strategy Sashi Ruia commented, “Wewill get into any new business that will make us more money”.

Ravi Ruia commented on Essar’s global strategy in 1994, “Wewill get into any new business that will make us more money”.

Ravi Ruia commented on Essar’s global strategy in 1994, “Weare looking at impact of globalization on existing businesses incountry. Next we are looking for opportunities opening up overseas.

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Not just those with synergies with our existing operations, but alsothose that have potential for us”. Commenting on newopportunities he said, “Today the canvas is wide open. We musthave an open mind. We should have basic synergies with what wedo, but we must not miss a major opportunity just because it doesnot fit in with our basic operations”.

According to Prashant Ruia, Chairman of ESSMCO for reasonsof fast acquisition by Essar shipping limited is “… buying ships hasbecome easier now: it takes less time and the access to funds useasier”.

This philosophy became their prime motivator for a rapidexpansion and acquisition. Their strategy hinged on a simplepremise – one project will nurture another project & co on. In mid90’s the joke at the corporate headquarters of Essar group at EssarHouse, Mumbai used to be that which new company has the groupopened today.

Essar group wanted increase its assets to Rs. 31,300 crore,income to Rs.19,400 crore and gross profit to Rs.7,500 crore bythe year 2001-02. In this process they went on an expansion spreeeven at high cost debt to reap benefits from the post liberalizationgrowth in India. However the economy growth which theyenvisaged didn’t last long. Their steel project was delayed. It wasplague and then floods in Sturat, Gujarat (their plant location) thattook their tool on project. But major factors ere their planning andproject management skills. They had changed the project plan andbasic technology number of times. Because of this they could notexploit the price boom in steel sector and could not repay the loansto the financial institutions. When they came on stream with steelplant, Indian economy started cooling off, Southeast Asian criseshappened, overcapacity in steel sector led to a global glut and pricerecession in steel, all working against their risky debt strategy.

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Today, it has assets worth Rs. 14,530 crore, income of Rs.4,030 crore and gross profit of Rs. 1,150 crore. Essar is one ofIndia’s leading business groups and has phenomenal presence inSteel, Shipping, Oil & Gas, Power Telecom and few financial servicescompanies besides other small businesses. Steel accounts for70.30 percent of the group’s turnover, while shipping accounts for17.30 percent. The portfolio is rather diverse with very littlesynergy amongst them, except that all big companies coreindustries.

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