Strategy

STRATEGIC MANAGEMENT

Course Outline:

1. Introduction: Concept and Role of Corporate Strategy. Levels of Strategy. BasicModel of Strategic Management. Approaches to Strategic Decision Making.Strategic Role of Board of Directors and Top Management. Strategic implicationsof social and ethical issues.

2. Strategic Analysis: Analysis of Broad Environment - Environmental Profile;Constructing Scenarios. Analysis of Operating Environment - Michael PortersModel of Industry Analysis. Analysis of Strategic Advantage – Resource Audit;Value Chain Analysis; Core Competencies; SWOT Analysis. Analysis of Stakeholder Expectations – Corporate Mission, Vision, Objectives and Goals.

3. Strategic Choice: Generating Strategic Alternatives. Strategic options at Corporate Level – Stability, Growth and Defensive Strategies. External Growth Strategies – Merger, Acquisition, Joint Venture and Strategic Alliance. Evaluation of Strategic Alternatives – Product Portfolio Models. Selection of a suitable Corporate Strategy – Concept of Strategic Fit. Strategic options at SBU Level - Michael Porters’ Competitive Strategies; Operationalising Competitive Strategies.

4. Strategic Implementation: Strategic implementation issues. Planning and allocating resources. Organization Structure and Design. Functional Strategies – Production, Human Resource, Finance, Marketing and R. & D. Managing Strategic Change. Strategic Control.

5. Strategic Review: Evaluating Strategic Performance – Criteria and Problems.Concept of Corporate Restructuring.

1. Introduction: Concept and Role of Corporate Strategy. Levels of Strategy. Basic Model of Strategic Management. Approaches to Strategic Decision Making. Strategic Role of Board of Directors and Top Management. Strategic implications of social and ethical issues.

INTRODUCTIONWithout a strategy the organization is like a ship without a rudder. Joel Ross and Michael Kami Strategic management is not a box of tricks or a bundle of techniques. It is analytical thinking and commitment of resources to action. Peter Drucker

WHAT IS A STRATEGY

A typical dictionary will define the word strategy as something that has to do with war and deception of an enemy. In business organizational context the term is not much different. Businesses have to respond to a dynamic and often hostile environment for pursuit of their mission. Strategy seeks to relate the goals of the organization to the means of achieving them. A company’s strategy is the game plan management is using to stake out market position, conduct its operations, attract and please customers, compete successfully, and achieve organizational objectives.

A company’s strategy consists of the combination of competitive moves and business approaches that managers employ to please customers, compete successfully and achieve organizational objectives. We may define ‘strategy’ as a long range blueprint of an organization's desired image, direction and destination what it wants to be, what it wants to do and where it wants to go.

Strategy is consciously considered and flexibly designed scheme of corporate intent and action to achieve effectiveness, to mobilise resources, to direct effort and behaviour, to handle events and problems, to perceive and utilise opportunities, and to meet challenges and threats to corporate survival and success. In corporate strategy, the set of goals has a system of priorities; the combination, the sequence and the timing of the moves, means and approaches are determined in advance, the initiative and responses have a cogent rationale behind them, are highly integrated and pragmatic; the implications of decisions and action programmes are corporate wide, flexible and contingent.

The very injection of the idea of strategy into business organizations is intended to unravel complexity and to reduce uncertainty of the environment. To the extent the term strategy is associated with unified design and action for achieving major goals, gaining command over the situation with a long-range perspective and securing a critically advantageous position. Its implications for corporate functioning are obvious.

Strategy is meant to fill in the need of organizations for a sense of dynamic direction, focus and cohesiveness. Objectives and goals alone do not fill in the need. Strategy provides an integrated framework for the top management to search for, evaluate and exploit beneficial opportunities, to perceive and meet potential threats and crises, to make full use of resources and strengths, to offset corporate

weaknesses and to make major decisions in general. Top management operates in an environment of partial ignorance and uncertainty.

In general, a corporate strategy has the following characteristics:

It is generally long-range in nature, though it is valid for short-range situations also and has short-range implications.

It is action oriented and is more specific than objectives.

It is multipronged and integrated.

It is flexible and dynamic.

It is formulated at the top management level, though middle and lower level managers are associated in their formulation and in designing sub-strategies.

It is generally meant to cope with a competitive and complex setting.

It flows out of the goals and objectives of the enterprise and is meant to translate them into realities.

It is concerned with perceiving opportunities and threats and seizing initiatives to cope with them. It is also concerned with deployment of limited organizational resources in the best possible manner.

It gives importance to combination, sequence, timing, direction and depth of various moves and action initiatives taken by managers to handle environmental uncertainties and complexities.

It provides unified criteria for managers in function of decision making.

Strategies are formulated at the corporate, divisional and functional level. Corporate strategies are formulated by the top managers. They include the determination of the business lines, expansion and growth, vertical and horizontal integration, diversification, takeovers and mergers, new investment and divestment areas, R & D projects, and so on. These corporate wide strategies need to be operationalized by divisional and functional strategies regarding product lines, production volumes, quality ranges, prices, product promotion, market penetration, purchasing sources, personnel development and like.

However, strategy is no substitute for sound, alert and responsible management. Strategy can never be perfect, flawless and optimal. It is in the very nature of strategy that it is flexible and pragmatic; it is art of the possible; it does not preclude second-best choices, trade-offs, sudden emergencies, pervasive pressures, failures and frustrations. However, in a sound strategy, allowances are made for possible miscalculations and unanticipated events.

Strategy According to Michael PorterAnother Harvard Business School professor, Michael Porter is the undisputed guruof “competitive strategy”. Michael Porter has argues that competitive strategy is“about being different.” He adds, “It means deliberately choosing a different set of

activities to deliver a unique mix of value.” In short, Porter argues that strategy isabout competitive position, about differentiating yourself in the eyes of the customer, about adding value through a mix of activities different from those used by competitors.In his earlier book competitive Strategy, Porter defines competitive strategy as “acombination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there.” Thus, Porter seems to embrace strategy as both plan and position.

STRATEGIC MANAGEMENT

In a hyper competitive marketplace, companies can operate successfully by creating and delivering superior value to target customers and also learning how to adopt to a continuously changing business environment. So to meet changing conditions in their industries, companies need to be farsighted and visionary, and must develop long-term strategies. Strategic planning, an important component of strategic management, involves developing a strategy to meet competition and ensure long-term survival and growth. The overall objective of strategic management is two fold:

♦ To create competitive advantage, so that the company can outperform the competitors in order to have dominance over the market.

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

The present organizational operations are highly influenced by the increasing rate of change in the environment and the ripple effect created on the organization. Changes can be external to the firm or it may be change introduced to the firms by the managers. It may manifest in the blurring of industry and firm boundaries, driven by technology, deregulation, or, through globalization. The tasks of crafting, implementing and executing company strategies are the heart and soul of managing a business enterprise.

Strategic management starts with developing a company mission (to give it direction), objectives and goals (to give it means and methods for accomplishing its mission), business portfolio (to allow management to utilize all facets of the organization), and functional plans (plans to carry out daily operations from the different functional disciplines).

Importance of Strategic Management Strategic management provides the framework for all the major business decisions of an enterprise such as decisions on businesses, products and markets, manufacturing facilities, investments and organizational structure. In a successful corporation, strategic planning works as the pathfinder to various business opportunities; simultaneously, it also serves as a corporate defence mechanism, helping the firm avoid costly mistakes in product market choices or investments. Strategic management has the ultimate burden of

providing a business organization with certain core competencies and competitive advantages in its fight for survival and growth. It is not just a matter of projecting the future. It is not just a forecasting job; it is concerned with ensuring a good future for the firm. It seeks to prepare the corporation to face the future and even shape the future in its favour. Its ultimate burden is influencing the environmental forces in its favour, working into the environs and shaping it, instead of getting carried away by its turbulence or uncertainties. It is environmental uncertainty that makes strategy and strategic conduct essential in a business. The more intense the environmental uncertainty, more critical is the need for strategic management.

Quite naturally, considerable thought, expertise and effort goes into the process of strategic management. The success of the efforts and activities of the enterprise depends heavily on the quality of strategic management, i.e. the vision, insight, experience, quality of judgment and the perfection of methods and measures.

Strategic planning and implementation have become a must for all organizations for their survival and growth in the present turbulent business environment. ‘Survival of fittest ‘as propagated by Darwin is the only principle of survival for organization, where ‘fittest’ are not the ‘largest’ or ‘strongest’ organization but those who can change and adapt successfully to the changes in business environment. Just like the extinction of the dinosaurous who ruled the earth one time but failed to survive in change condition of earth natural environment many organizational giants have also followed the path of extinction failing to manage drastic changes in the business environment. Also business follows the war principle of ‘win or lose’, and not necessarily win-win situation arises in business world. Hence the organization has to build its competitive advantage over the competitors in the business warfare in order to win. This can be done only following strategic analysis, formulation and implementation.

STRATEGIC DECISION MAKING

Decision making is a managerial process and function of choosing a particular course of action out of several alternative courses for the purpose of accomplishment of the organizational goals. Decisions may relate to general day to day operations. They may be major or minor. They may also be strategic in nature. Strategic decisions are different in nature than all other decisions which are taken at various levels of the organization during day-to-day working of the organizations. The major dimensions of strategic decisions are given below:

♦ Strategic issues require top-management decisions: Strategic issues involve thinking in totality of the organizations and also there is lot of risk involved. Hence, problems calling for strategic decisions require to be considered by top management.

♦ Strategic issues involve the allocation of large amounts of company resources: It may require huge financial investment to venture into a new area of business or the organization may require huge number of manpower with new set of skills in them.

♦ Strategic issues are likely to have a significant impact on the long term prosperity of the firm: Generally the results of strategic implementation are seen on a long term basis and not immediately.

♦ Strategic issues are future oriented: Strategic thinking involves predicting the future environmental conditions and how to orient for the changed conditions.

♦ Strategic issues usually have major multifunctional or multi-business consequences: As they involve organization in totality they affect different sections of the organization with varying degree.

♦ Strategic issues necessitate consideration of factors in the firm’s external environment: Strategic focus in organization involves orienting its internal environment to the changes of external environment.

THE TASK OF STRATEGIC MANAGEMENT

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

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

♦ Setting objectives: Converting the strategic vision into specific performance outcomes for the company to achieve.

♦ Crafting a strategy to achieve the desired outcomes.

♦ Implementing and executing the chosen strategy efficiently and effectively.

♦ Evaluating performance and initiating corrective adjustments in vision, long-term direction, objectives, strategy, or execution in light of actual experience, changing conditions, new ideas, and new opportunities.

Corporate strategy is exciting and challenging. It makes fundamental decisions about the future direction of an organisation: its purpose, its resources and how it interacts with the world in which it operates.Every aspect of the organisation plays a role in this strategy – its people, its finances, its production methods and its environment (including its customers).

The essence of corporate strategyCorporate strategy can be described as the identification of the purpose of the organization and the plans and actions to achieve that purpose.

STRATEGIC LEVELS IN ORGANISATIONS

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

An organization is divided into several functions and departments that work together to bring a particular product or service to the market. If a company provides several different kinds of products or services, it often duplicates these functions and creates a series of self-contained divisions (each of which contain its own set of functions) to manage each different product or service. The general managers of these divisions then become responsible for their particular product line. The overriding concern of general managers is for the health of the whole company or division under their direction; they are responsible for deciding how to create a competitive advantage and achieve high profitability with the resources and capital they have at their disposal. Figure ‘levels of strategic management’ shows the organization of a multidivisional company that is, a company that competes in several different businesses and has created a separate self-contained division to manage each of these. As you can see, there are three main levels of management: corporate, business, and functional. General managers are found at the

first two of these levels, but their strategic roles differ depending on their sphere of responsibility. The corporate level of management consists of the chief executive officer (CEO), other senior executives, the board of directors, and corporate staff. These individuals occupy the apex of decision making within the organization. The

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

Level of Strategic Management

Consider General Electric (GE) as an example. GE is active in a wide range of busi-nesses, including lighting equipment, major appliances, motor and transportation equipment, turbine generators, construction and engineering services, industrial electronics, medical systems, aerospace, aircraft engines, and financial services. The main strategic responsibilities of its CEO, Jeffrey Immelt, are setting overall strategic objectives, allocating resources among the different business areas, deciding whether the firm should divest itself of any of its businesses, and determining whether it should acquire any new ones. In other words, it is up to Immelt to develop strategies that span individual businesses; his concern is with building and managing the corporate portfolio of businesses to maximize corporate profitability.

It is not his specific responsibility to develop strategies for competing in the individual business areas, such as financial services. The development of such strategies is the responsibility of the general managers in these different businesses or business level managers. However, it is Immelt's responsibility to probe the strategic thinking of business-level managers to make sure that they are pursuing robust strategies that will contribute toward the maximization of GE's long-run profitability and to hold them into account for their performance.

Besides overseeing resource allocation and managing the divestment and acquisition processes, corporate-level managers provide a link between the people who oversee the strategic development of a firm and those who own it (the shareholders). Corporate-level managers, and particularly the CEO, can be viewed as the guardians of shareholder welfare. It is their responsibility to ensure that the corporate and business strategies that the company pursues are consistent with maximizing shareholder wealth. If they are not, then ultimately the CEO is likely to be called to account by the shareholders.

A business unit is a self-contained division (with its own functions-for example, finance, purchasing, production, and marketing departments) that provides a product or service for a particular market. The principal general manager at the business level, or the business-level manager, is the head of the division. The strategic role of these managers is to translate the general statements of direction and intent that come from the corporate level into concrete strategies for individual businesses. Thus, whereas corporate-level general managers are concerned with strategies that span individual businesses, business-level general managers are concerned with strategies that are specific to a particular business. At GE, a major corporate goal is to be first or second in every business in which the corporation competes. Then the general managers in each division work out for their business the details of a strategy that is consistent with this objective.

Functional-level managers are responsible for the specific business functions or operations (human resources, purchasing, product development, customer service, and so on) that constitute a company or one of its divisions. Thus, a functional manager's sphere of responsibility is generally confined to one organizational activity, whereas general managers oversee the operation of a whole company or division. Although they are not responsible for the overall performance of the organization, functional managers nevertheless have a major strategic role: to develop functional strategies in their area that help fulfill the strategic objectives set by business- and corporate-level general managers.

In GE's aerospace business, for instance, manufacturing managers are responsible for developing manufacturing strategies consistent with the corporate objective of being first or second in that industry. Moreover, functional managers provide most of the information that makes it possible for business- and corporate-level general managers to, formulate realistic and attainable strategies. Indeed, because they are closer to the customer than the typical general manager is, functional managers themselves may generate important ideas that subsequently may become major strategies for the company. Thus, it is important for general managers to listen closely to the ideas of their functional managers. An equally great responsibility for managers at the operational level is strategy implementation: the execution of corporate and business-level plans.

Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of businesses in which the company should compete and with the development and coordination of that portfolio of businesses.

Corporate level strategy is concerned with:

Reach - defining the issues that are corporate responsibilities; these might include identifying the overall goals of the corporation, the types of businesses in which the corporation should be involved, and the way in which businesses will be integrated and managed.

Competitive Contact - defining where in the corporation competition is to be localized. Take the case of insurance: In the mid-1990's, Aetna as a corporation was clearly identified with its commercial and property casualty insurance products. The conglomerate Textron was not. For Textron, competition in the insurance markets took place specifically at the business unit level, through its subsidiary, Paul Revere. (Textron divested itself of The Paul Revere Corporation in 1997.)

Managing Activities and Business Interrelationships  -  Corporate strategy seeks to develop synergies by sharing and coordinating staff and other resources across business units, investing financial resources across business units, and using business units to complement other corporate business activities. Igor Ansoff introduced the concept of synergy to corporate strategy.

Management Practices - Corporations decide how business units are to be governed: through direct corporate intervention (centralization) or through more or less autonomous government (decentralization) that relies on persuasion and rewards.

Corporations are responsible for creating value through their businesses. They do so by managing their portfolio of businesses, ensuring that the businesses are successful over the long-term, developing business units, and sometimes ensuring that each business is compatible with others in the portfolio.

Business Unit Level Strategy

A strategic business unit may be a division, product line, or other profit center that can be planned independently from the other business units of the firm.

At the business unit level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced. At the business level, the strategy formulation phase deals with:

positioning the business against rivals

anticipating changes in demand and technologies and adjusting the strategy to accommodate them

influencing the nature of competition through strategic actions such as vertical integration and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage and defend against the adverse effects of the five forces.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions and departments. The strategic issues at the functional level are related to business processes and the value chain. Functional level strategies in marketing, finance, operations, human resources, and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively.

Functional units of an organization are involved in higher level strategies by providing input into the business unit level and corporate level strategy, such as providing information on resources and capabilities on which the higher level strategies can be based. Once the higher-level strategy is developed, the functional units translate it into discrete action-plans that each department or division must accomplish for the strategy to succeed.

Strategic management model

The strategic management process can best be studied and applied using a model. Every model represents some kind of process. The model illustrated in the Figure: Strategic management model is a widely accepted, comprehensive. This model like any other modal of management does not guarantee sure-shot success, but it does represent a clear and practical approach for formulating, implementing, and evaluating strategies. Relationships among major components of the strategic management process are shown in the model.

Identifying an organization's existing vision, mission, objectives, and strategies is the starting point for any strategic management process because an organization present situation and condition may preclude certain strategies and may even dictate a particular course of action. Every organization has a vision, mission, objectives, and strategy, even if these elements are not consciously designed, written, or communicated. The answer to where an organization is going can be determined largely by where the organization has been.

The strategic management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, a shift in the economy could represent a major opportunity and require a change in long-term objectives and strategies; a failure to accomplish annual objectives could require a change in policy; or a major competitor's change in strategy could require a change in the firm's mission. Therefore, strategy formulation, implementation, and evaluation activities should be

performed on a continual basis, not just at the end of the year or semi-annually. The strategic management process never really ends.

Figure: Strategic Management Model

The strategic management process is not as cleanly divided and neatly performed in practice as the strategic management model suggests. Strategists do not go through the process in lockstep fashion. Generally, there is give-and-take among hierarchical levels of an organization. Many organizations conduct formal meetings semi-annually to discuss and update the firm's vision/mission, opportunities/threats, strengths/weaknesses, strategies, objectives, policies, and performance. Creativity and candour from participants are encouraged in meeting. Good communication and feedback are needed throughout the strategic management process.

Application of the strategic management process is typically more formal in larger and well-established organizations. Formality refers to the extent that participants, responsibilities, authority, duties, and approach are specified. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly changing environments, such as technology companies, tend to be more formal in strategic planning. Firms that have many divisions, products, markets, and technologies also tend to be more formal in applying strategic-management concepts. Greater formality in applying the strategic management process is usually positively associated with the cost, comprehensiveness, accuracy, and success of planning across all types and sizes of organizations.

Strategic Role of Board of Directors and Top Management

Strategic decisions consist of several areas of organisation like marketing, production, finance, accounting, human resource management and research and development operations. Top management involves in decision making is an obvious factor for business activities of the organisation. Only at this level is for understanding and anticipating broad analysis, implication and ramification and power to authorize the resource allocations necessary for implementation of strategic issues.

Top management’s views and conclusions about the company’s attribute towardsthe products, services, customer, market and technology, these are focusing and constitute a strategic vision for the company.Efficiency and effectiveness is core responsibilities of the strategic managers, top management will be having the primary responsibilities towards the efficiency and effectiveness to highlights the main orientation of the organization.

Leadership role is vital for formulation, implementation and control of strategy in anorganization. Leadership roles are provided new opportunities, challenges, development of existing and new strategies in an organization. Strategic leaders are effectively and able to use the strategic management process for design the strategic programme for formulation of strategy and implementation of strategy in an organization.Strategic leaders are those who refers to top management in an organization, itconsists of board of directors and chief executive officer in company and also consist of strategic business units division managers in an organization.

Role of CEOThe chief executive officer is the catalyst in strategic management. CEO is most closely identified with and ultimately accountable for a strategy’s success. In most corporate world, particularly larger ones, CEOs spend into 80 percent of their time developing and guiding strategy.The nature of the CEO role is both a symbolic and substantive in strategy implementation as follow:• The CEO is a symbol of the new strategy. CEO actions and the perceived seriousness of his other commitment to a choosen strategy, particularly if the strategy represents a major change, except a significant influence on the intensity of subordinate managers commitment to implementation.• The organization mission, strategy and key long term objectives are strongly influenced by the personal goals and values of its CEO. To the extent that the CEO invests time and personal values in the choosen strategy. He or she representsan important source for clarification, guidance and adjustment during implementation.• Major changes in strategy are often quality followed by a change in CEO. Successful strategy implementations directly linked to the unique characteristics, orientations and actions of the CEO

2. Strategic Analysis: Analysis of Broad Environment - Environmental Profile;Constructing Scenarios. Analysis of Operating Environment - Michael PortersModel of Industry Analysis. Analysis of Strategic Advantage – Resource Audit;Value Chain Analysis; Core Competences; SWOT Analysis. Analysis of Stakeholder Expectations – Corporate Mission, Vision, Objectives and Goals.

Analysis is the critical starting point of strategic thinking. Kenichi Ohmae

If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal. George Salk

The idea is to concentrate our strength against our competitor’s relative weakness. Bruce Henderson

STRATEGIC ANALYSES

Strategy formulation is not a task in which managers can get by with opinions, good instincts, and creative thinking. Judgments about what strategy to pursue need to flow directly from solid analysis of a company's external environment and internal situation. The two most important situational considerations are (1) industry and competitive conditions and(2) a company's own competitive capabilities, resources, internal strengths and weaknesses, and market position.

Accurate diagnosis of the company's situation is necessary managerial preparation for deciding on a sound long-term direction, setting appropriate objectives, and crafting a winning strategy. Without perceptive understanding of the strategic aspects of a company's external and internal environments, the chances are greatly increased that managers will concoct a strategic game plan that doesn't fit the situation well, that holds little prospect for building competitive advantage, and that is unlikely to boost company performance.

Issues to consider for strategic analyses

Strategy evolves over a period of time: There are different forces that drive and constrain strategy and that must be balanced in any strategic decision. An important aspect of strategic analyses is to consider the possible implications of routine decisions. Strategy of a business, at a particular point of time, is result of a series of small decisions taken over an extended period of time. A manager who makes an effort to increase the growth momentum of an organization is materially changing strategy.

Balance: The process of strategy formulation is often described as one of the matching the internal potential of the organization with the environmental opportunities. In reality, as perfect match between the two may not be feasible, strategic analyses involve a workable balance between diverse and conflicting considerations. A manager working on a strategic decision has to balance opportunities, influences and constraints. There are pressures that are driving towards a particular choice such as entering a new market. Simultaneously there are constraints that limit the choice such as existence of a big competitor. These constraining forces will be producing an impact that will vary in nature, degree, magnitude and importance. Some of these factors can be managed to some extent, however, there will be several others that are beyond the control of a manager.

Risk: In the strategic analyses the principle of maintaining balance is important. However, the complexity and intermingling of variables in the environment reduces the strategic balance in the organization. The lives that we lead is uncertain and the business is no exception. Competitive markets, liberalization, globalization, booms, recessions, technological advancements, inter-country relationships all affect

businesses and pose risk at varying degree. An important aspect of strategic analysis is to identify potential imbalances or risks and assess their consequences. A broad classification of the strategic risk that requires consideration in strategic analyses is given below:

External risk is on account of inconsistencies between strategies and the forces in the environment. Internal risk occurs on account of forces that are either within the organization or are directly interacting with the organization on an routine basis.

Analysis of Broad Environment - Environmental ProfileWhen the company ceases to adjust the environment to its strategy or does not react to the demands of the environment by changing its strategy, the result is lessened achievement of corporate objectives. From environmental analysis strategists get time to anticipate opportunities and to plan to take optional responses to these opportunities. It also helps strategists to develop an early warning system to prevent threats or to develop strategies which can turn a threat to the firm's advantage. It is clear that because of the difficulty to assessing the future, not all future events can be anticipated. But some can and are. To the extent that some or most are anticipated by this analysis and diagnosis, managerial decisions are likely to be better. And the process reduces the time pressures on the few which are not anticipated. Thus, the managers can concentrate on these few instead of having to deal with all the environmental influences.

In general, environmental analysis has three basic goals as follows:

First, the analysis should provide an understanding of current and potential changes taking place in the environment. It is important that one must be aware of the existing environment. At the same time one must have a long term perspective about the future too.

♦ Second, environmental analysis should provide inputs for strategic decision making. Mere collection of data is not enough. The information collected must be useful for and used in strategic decision making.

♦ Third, environment analysis should facilitate and foster strategic thinking in organizations-typically a rich source of ideas and understanding of the context within which a firm operates. It should challenge the current wisdom by bringing fresh viewpoints into the organization.

CHARACTERISTICS OF BUSINESS ENVIRONMENT

Business environment exhibits many characteristics. Some of the important – and obvious – characteristics are briefly described here.

♦ Environment is complex: the environment consists of a number of factors, events, conditions and influences arising from different sources. All these do not exist in isolation but interact with each other to create entirely new sets of influences. It is difficult to comprehend at once what factors constitute a given environment. All in all, environment is a complex that is somewhat easier to understand in parts but difficult to grasp in totality.

♦ Environment is dynamic: the environment is constantly changing in nature. Due to the many and varied influences operating, there is dynamism in the environment causing it to continuously change its shape and character.

♦ Environment is multi-faceted: What shape and character an environment assumes depends on the perception of the observer. A particular change in the environment, or a new development, may be viewed differently by different observers. This is frequently seen when the same development is welcomed as an opportunity by one company while another company perceives it as a threat.

♦ Environment has a far reaching impact: The environment has a far reaching impact on organizations. The growth and profitability of an organization depends critically on the environment in which it exists. Any environment change has an impact on the organization in several different ways.

COMPONENTS OF BUSINESS ENVIRONMENT

The environment in which an organization exists could be broadly divided into two parts the external and the internal environment. Since the environment is complex, dynamic, multi- faceted and has a far reaching impact, dividing it into external and internal components enables us to understand it better. Here we deal with the appraisal of the external environment. We start with gaining an understanding of the concept of environment. This is done through a description of four important characteristics of the environment, dividing the environment into its external and internal parts, observing how a systematic approach can help in environmental appraisal, and classifying the external environment into two parts, the general and the relevant environment. Next, we see how the external environment can be divided into different components.

Figure: A Company’s Business Environment

The external environment (Macro Environment) includes all the factors outside the organization which provide opportunity or pose threats to the organization. The internal environment (Micro Environment) refers to all the factors within an organization which impart strengths or cause weaknesses of a strategic nature.

The environment in which an organization exists can, therefore, be described in terms of the opportunities and threats operating in the external environment apart from the strengths and weaknesses existing in the internal environment. The four environmental influences could be described as follows:

♦ An opportunity is a favourable condition in the organization's environment which enables it to consolidate and strengthen its position. An example of an opportunity is growing demand for the products or services that a company provides.

♦ A threat is an unfavourable condition in the organization's environment which creates a risk for, or causes damage to, the organization. An example of a threat is the emergence of strong new competitors who are likely to offer stiff competition to the existing companies in an industry.

♦ A strength is an inherent capacity which an organization can use to gain strategic advantage over its competitors. An example of a strength is superior research and development skills which can be used for new product development so that the company gains competitive advantage.

♦ A weakness is an inherent limitation or constraint which creates a strategic disadvantage. An example of a weakness is over dependence on a single product line, which is potentially risky for a company in times of crisis.

An understanding of the external environment, in terms of the opportunities and threats, and the internal environment, in terms of the strengths and weaknesses, is crucial for the existence, growth and profitability of any organization.

A systematic approach to understanding the environment is the SWOT analysis. Business firms undertake SWOT analysis to understand the external and internal environment. SWOT, which is the acronym for strengths, weaknesses, opportunities and threats. Through such an analysis, the strengths and weaknesses existing within an organization can be matched with the opportunities and threats operating in the environment so that an effective strategy can be formulated. An effective organizational strategy, therefore, is one that capitalises on the opportunities through the use of strengths and neutralises the threats by minimizing the impact of weaknesses. The process of strategy formulation starts with, and critically depends on, the appraisal of the external and internal environment of an organization. We will learn SWOT analysis in the third chapter.

RELATIONSHIP BETWEEN ORGANIZATION AND ITS ENVIRONMENT

In relation to the individual corporate enterprise, the external environment offers a range of opportunities, constraints, threats and pressures and thereby influences the structure and functioning of the enterprise. As a sub-system, the corporate enterprise draws certain inputs of resources, information and values from the larger environmental system, transforms them into outputs of products, services, goals and satisfactions and exchanges with or transmits them

into the external environment. In the process, it generates energy and sustains itself.

The relationship between the organization and its environment may be discussed in terms of interactions between them in several major areas which are outlined below:

♦ Exchange of information: The organization scans the external environmental variables, their behaviour and changes, generates important information and uses it for its planning, decision-making and control purposes. Much of the organizational structure and functioning is attuned to the external environmental information. Information generation is one way to get over the problems of uncertainty and complexity of the external environment. Information is to be generated on economic activity and market conditions, technological developments, social and demographic factors political-governmental policies and postures, the activities of other organizations and so on. Both current and projected information is important for the organization.

Apart from gathering information, the organization itself transmits information to several external agencies either voluntarily, inadvertently or legally. Other organizations and individuals may be interested in the organization and its functioning and hence approach the organization for information. It is also possible to glean information from the behaviour of the organization itself, from its occasional advertisements, and from annual reports. Also, the organization

may be legally or otherwise bound to supply information on its activities to governmental agencies, investors, employees, trade unions, professional bodies and the like.

♦ Exchange of resources: The organization receives inputs—finance, materials, manpower, equipment etc., from the external environment through contractual and other arrangements. It sustains itself by employing the above inputs for involving or producing output of products and services. The organization interacts with the factor markets for purposes of getting its inputs; it competes sometimes and collaborates sometimes with other organizations in the process of ensuring a consistent supply of inputs.

The organization is dependent on the external environment for disposal of its output of products and services to a wide range of clientele. This is also an interaction process—perceiving the needs of the external environment and catering to them, satisfying the expectations and demands of the clientele groups, such as customers, employees, shareholders, creditors, suppliers, local community, general public and so on. These groups tend to press on the organization for meeting their expectations, needs and demands and for upholding their values and interests.

♦ Exchange of influence and power: Another area of organizational-environmental interaction is in the exchange of power and influence. The external environment holds considerable power over the organization both by virtue of its being more inclusive as also by virtue of its command over resources, information and other inputs. It offers a range of opportunities, incentives and rewards on the one hand and a set of constraints, threats and restrictions on the other. In both ways, the organization is conditioned and constrained. The external environment is also in a position to impose its will over the organization and can force it to fall in line. Governmental control over the organization is one such power relationship. Other organizations, competitors, markets, customers, suppliers, investors etc., also exercise considerable collective power and influence over the planning and decision making processes of the organization.

In turn, the organization itself is sometimes in a position to wield considerable power and influence over some of the elements of the external environment by virtue of its command over resources and information. The same elements which exercise power over the organization are also subject to the influence and power of the organization in some respects. To the extent that the organization is able to hold power over the environment it increases its autonomy and freedom of action. It can dictate terms to the external forces and mould them to its will.

In delineating the relationship between the organization and the environment, one has to be clear on the diversity of both these entities. On the one hand, the nature of relationship depends on the size of the organization, its age, the nature of business, the nature of ownership, degree of professionalization of management, etc. On the other hand, the relationship depends on the fact whether the external environmental elements behave in a random or structured manner (uncertainty v. predictability), whether such elements are placid or turbulent, whether they are slow-changing or fast changing, whether they are simple or complex, and so forth. The degree of interaction between the organization and the external environment is set by the above characteristics. It follows therefore that all organizations do not

behave in the same way in relation to their external environment. Their structures and functions are shaped in tune with the demands of the external environment.

STRATEGIC RESPONSES TO THE ENVIRONMENT

The business organization and its many environments have innumerous interrelationship that at times, it becomes difficult to determine exactly where the organization ends and where its environment begins. It is also difficult to determine exactly what business should do in response to a particular situation in the environment. Strategically, the businesses should make efforts to exploit the opportunity ad thought the threats.

In this context following approaches may be noted:

(i) Least resistance: Some businesses just manage to survive by way of coping with their changing external environments. They are simple goal-maintaining units. They are very passive in their behaviour and are solely guided by the signals of the external environment. They are not ambitious but are content with taking simple paths of least resistance in their goal-seeking and resource transforming behaviour.

(ii) Proceed with caution: At the next level, are the businesses that take an intelligent interest to adapt with the changing external environment. They seek to monitor the changes in that environment, analyse their impact on their own goals and activities and translate their assessment in terms of specific strategies for survival, stability and strength. They regard that the pervasive complexity and turbulence of the external environmental elements as ‘given’ within the framework of which they have to function as adaptive-organic sub-systems. This is an admittedly sophisticated strategy than to wait for changes to occur and then take corrective-adaptive action.

(iii) Dynamic response: At a still higher sophisticated level, are those businesses that regard the external environmental forces as partially manageable and controllable by their actions. Their feedback systems are highly dynamic and powerful. They not merely recognise and ward off threats; they convert threats into opportunities. They are highly conscious and confident of their own strengths and the weaknesses of their external environmental ‘adversaries’. They generate a contingent set of alternative courses of action to be picked up in tune with the changing environment.

COMPETITIVE ENVIRONMENT

The essence of strategy formulation is coping with competition. Intense competition is neither a coincidence nor bad luck. All organizations have competition. Multinationals and large organizations clash directly on every level of product and service. Mid-sized and small business also chase same customers and find that prices and product quality are bounded by the moves of their competitors. Even large public sector monopolies are gradually getting privatised and facing competition. The monopolies enjoyed by the Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd have faded away after entry of private players. For a single business organization the competition spells out freedom of entry and exit in the market and affects its prices and scale of operations

The nature and extent of competition that a business is facing in the market is one of the major factors affecting the rate of growth, income distribution and consumer

welfare. Businesses have to consider competitors’ strategies, profits levels, costs, products and services when preparing and implementing their business plans.

While formulating strategies, organizations have to separately identify and concentrate on the competitors who are significantly affecting the business. Lesser attention may be given to smaller competitors who have little or no impact the business. There can be several competitors vying to satisfy same needs of customers. Competition is not necessarily restricted to same product or services. Coke and Pepsi may be obvious competitors. At the same time they have to compete with other companies such as Hindustan Lever Ltd whose Kisan squashes will be directed towards same needs. They have to also compete with natural juices such as Real.

A better understanding of the nature and extent of competition may be reached by answering the following questions:

(i) Who are the competitors?

(ii) What are their product and services?

(iii) What are their market shares?

(iv) What are their financial positions?

(v) What gives them cost and price advantage?

(vi) What are they likely to do next?

(vii) Who are the potential competitors?

Environmental Scanning

Environmental scanning also known as Environmental Monitoring is the process of gathering information regarding company’s environment, analysing it and forecasting the impact of all predictable environmental changes. Successful marketing depends largely on how a company can synchronise its marketing programmes with its environmental changes.

The environmental scan includes the following components:

Internal analysis of the firm Analysis of the firm's industry (task environment)

External macroenvironment (PEST analysis)

The internal analysis can identify the firm's strengths and weaknesses and the external analysis reveals opportunities and threats. A profile of the strengths, weaknesses, opportunities, and threats is generated by means of a SWOT analysis

An industry analysis can be performed using a framework developed by Michael Porter known as Porter's five forces. This framework evaluates entry barriers, suppliers, customers, substitute products, and industry rivalry.

Framework of Strategic AnalysisStrategic analysis is the starting point of strategic management as shown in the figure below:

Michael Porters Model of Industry Analysis

Porter's Five Forces MODEL FOR INDUSTRY ANALYSIS

The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

Diagram of Porter's 5 Forces

SUPPLIER POWER Supplier concentration

Importance of volume to supplier Differentiation of inputs

Impact of inputs on cost or differentiation

Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration

Cost relative to total purchases in industry

BARRIERSTO ENTRY

Absolute cost advantages Proprietary learning curve

Access to inputs Government policy Economies of scale

Capital requirements Brand identity

Switching costs Access to distribution

Expected retaliation Proprietary products

THREAT OFSUBSTITUTES -Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitutes

BUYER POWER Bargaining leverage

Buyer volume Buyer information

Brand identity Price sensitivity

Threat of backward integration Product differentiation

Buyer concentration vs. industry Substitutes available

Buyers' incentives

DEGREE OF RIVALRY -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes

 I. Rivalry

In the traditional economic model, competition among rival firms drives profits to zero. But competition is not perfect and firms are not unsophisticated passive price takers. Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry among firms varies across industries, and strategic analysts are interested in these differences.

Economists measure rivalry by indicators of  industry concentration. The Concentration Ratio (CR) is one such measure. The Bureau of Census periodically reports the CR for major Standard Industrial Classifications (SIC's). The CR indicates the percent of market share held by the four largest firms (CR's for the largest 8, 25, and 50 firms in an industry also are available). A high concentration ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated. With only a few firms holding a large market share, the competitive landscape is less competitive (closer to a monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive. The concentration ratio is not the only available measure; the trend is to define industries in terms that convey more information than distribution of market share.

If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct. Explicit collusion generally is illegal and not an option; in low-rivalry industries competitive moves must be constrained informally. However, a maverick firm seeking a competitive advantage can displace the otherwise disciplined market.

When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or weak, based on the firms' aggressiveness in attempting to gain an advantage.

In pursuing an advantage over its rivals, a firm can choose from several competitive moves:

Changing prices - raising or lowering prices to gain a temporary advantage. Improving product differentiation - improving features, implementing innovations in

the manufacturing process and in the product itself.

Creatively using channels of distribution - using vertical integration or using a distribution channel that is novel to the industry. For example, with high-end jewelry stores reluctant to carry its watches, Timex moved into drugstores and other non-traditional outlets and cornered the low to mid-price watch market.

Exploiting relationships with suppliers - for example, from the 1950's to the 1970's Sears, Roebuck and Co. dominated the retail household appliance market. Sears set high quality standards and required suppliers to meet its demands for product specifications and price.

The intensity of rivalry is influenced by the following industry characteristics:

1. A larger number of firms increases rivalry because more firms must compete for the same customers and resources. The rivalry intensifies if the firms have similar market share, leading to a struggle for market leadership.

2. Slow market growth causes firms to fight for market share. In a growing market, firms are able to improve revenues simply because of the expanding market.

3. High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry.

4. High storage costs or highly perishable products cause a producer to sell goods as soon as possible. If other producers are attempting to unload at the same time, competition for customers intensifies.

5. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers.

6. Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry.

7. Strategic stakes are high when a firm is losing market position or has potential for great gains. This intensifies rivalry.

8. High exit barriers place a high cost on abandoning the product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity. When the plant and equipment required for manufacturing a product is highly specialized, these assets cannot easily be sold to other buyers in another industry. Litton Industries' acquisition of Ingalls Shipbuilding facilities illustrates this concept. Litton was successful in the 1960's with its contracts to build Navy ships. But when the Vietnam war ended, defense spending declined and Litton saw a sudden decline in its earnings. As the firm restructured, divesting from the shipbuilding plant was not feasible since such a large and highly specialized investment could not be sold easily, and Litton was forced to stay in a declining shipbuilding market.

9. A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense. The hospital industry, for example, is populated by hospitals that historically are community or charitable institutions, by hospitals that are associated with religious organizations or universities, and by hospitals that are for-profit enterprises. This mix of philosophies about mission has lead occasionally to fierce local struggles by hospitals over who will get expensive diagnostic and therapeutic services. At other times, local hospitals are highly cooperative with one another on issues such as community disaster planning.

10. Industry Shakeout. A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply. The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures.

BCG founder Bruce Henderson generalized this observation as the Rule of Three and Four: a stable market will not have more than three significant competitors, and the largest competitor will have no more than four times the market share of the smallest. If this rule is true, it implies that:

o If there is a larger number of competitors, a shakeout is inevitable o Surviving rivals will have to grow faster than the market

o Eventual losers will have a negative cash flow if they attempt to grow

o All except the two largest rivals will be losers

o The definition of what constitutes the "market" is strategically important.

Whatever the merits of this rule for stable markets, it is clear that market stability and changes in supply and demand affect rivalry. Cyclical demand tends to create cutthroat competition. This is true in the disposable diaper industry in which demand fluctuates with birth rates, and in the greeting card industry in which there are more predictable business cycles.

II. Threat Of Substitutes

In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices.

The competition engendered by a Threat of Substitute comes from products outside the industry. The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not rivals in the aluminum can industry. To the manufacturer of automobile tires, tire retreads are a substitute. Today, new tires are not so expensive that car owners give much consideration to retreading old tires. But in the trucking industry new tires are expensive and tires must be replaced often. In the truck tire market, retreading remains a viable substitute industry. In the disposable diaper industry, cloth diapers are a substitute and their prices constrain the price of disposables.

While the treat of substitutes typically impacts an industry through price competition, there can be other concerns in assessing the threat of substitutes. Consider the substitutability of different types of TV transmission: local station transmission to home TV antennas via the airways versus transmission via cable, satellite, and telephone lines. The new technologies available and the changing structure of the entertainment media are contributing to competition among these substitute means of connecting the home to entertainment. Except in remote areas it is unlikely that cable TV could compete with free TV from an aerial without the greater diversity of entertainment that it affords the customer.

III. Buyer Power

The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony - a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers. The following tables outline some factors that determine buyer power.

Buyers are Powerful if: Example

Buyers are concentrated - there are a few buyers with significant market share

DOD purchases from defense contractors

Buyers purchase a significant proportion of output - distribution of purchases or if the product is standardized

Circuit City and Sears' large retail market provides power over appliance manufacturers

Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival

Large auto manufacturers' purchases of tires

Buyers are Weak if: Example

Producers threaten forward integration - producer can take over own distribution/retailing

Movie-producing companies have integrated forward to acquire theaters

Significant buyer switching costs - products not standardized and buyer cannot easily switch to another product

IBM's 360 system strategy in the 1960's

Buyers are fragmented (many, different) - no buyer has any particular influence on product or price

Most consumer products

Producers supply critical portions of buyers' input - distribution of purchases

Intel's relationship with PC manufacturers

IV. Supplier Power

A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. The following tables outline some factors that determine supplier power.

Suppliers are Powerful if: Example

Credible forward integration threat by suppliers

Baxter International, manufacturer of hospital supplies, acquired American Hospital Supply, a distributor

Suppliers concentrated Drug industry's relationship to hospitals

Significant cost to switch suppliersMicrosoft's relationship with PC manufacturers

Customers Powerful  Boycott of grocery stores selling non-

union picked grapes

Suppliers are Weak if: Example

Many competitive suppliers - product is standardized

Tire industry relationship to automobile manufacturers

Purchase commodity products Grocery store brand label products

Credible backward integration threat by purchasers

Timber producers relationship to paper companies

Concentrated purchasersGarment industry relationship to major department stores

Customers Weak Travel agents' relationship to airlines

V. Barriers to Entry / Threat of Entry

It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition. In theory, any firm should be able to enter and exit a market, and if free entry and exit exists, then profits always should be nominal. In reality, however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. These are barriers to entry.

Barriers to entry are more than the normal equilibrium adjustments that markets typically make. For example, when industry profits increase, we would expect additional firms to enter the market to take advantage of the high profit levels, over time driving down profits for all firms in the industry. When profits decrease, we would expect some firms to exit the market thus restoring a market equilibrium. Falling prices, or the expectation that future prices will fall, deters rivals from entering a market. Firms also may be reluctant to enter markets that are extremely uncertain, especially if entering involves expensive start-up costs. These are normal accommodations to market conditions. But if firms individually (collective action would be illegal collusion) keep prices artificially low as a strategy to prevent potential entrants from entering the market, such entry-deterring pricing establishes a barrier.

Barriers to entry are unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining a level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm's competitive advantage. Barriers to entry arise from several sources:

1. Government creates barriers. Although the principal role of the government in a market is to preserve competition through anti-trust actions, government also restricts competition through the granting of monopolies and through regulation. Industries such as utilities are considered natural monopolies because it has been more efficient to have one electric company provide power to a locality than to permit many electric companies to compete in a local market. To restrain utilities from exploiting this advantage, government permits a monopoly, but regulates the industry. Illustrative of this kind of barrier to entry is the local cable company. The franchise to a cable provider may be granted by competitive bidding, but once the

franchise is awarded by a community a monopoly is created. Local governments were not effective in monitoring price gouging by cable operators, so the federal government has enacted legislation to review and restrict prices.

The regulatory authority of the government in restricting competition is historically evident in the banking industry. Until the 1970's, the markets that banks could enter were limited by state governments. As a result, most banks were local commercial and retail banking facilities. Banks competed through strategies that emphasized simple marketing devices such as awarding toasters to new customers for opening a checking account. When banks were deregulated, banks were permitted to cross state boundaries and expand their markets. Deregulation of banks intensified rivalry and created uncertainty for banks as they attempted to maintain market share. In the late 1970's, the strategy of banks shifted from simple marketing tactics to mergers and geographic expansion as rivals attempted to expand markets.

2. Patents and proprietary knowledge serve to restrict entry into an industry. Ideas and knowledge that provide competitive advantages are treated as private property when patented, preventing others from using the knowledge and thus creating a barrier to entry. Edwin Land introduced the Polaroid camera in 1947 and held a monopoly in the instant photography industry. In 1975, Kodak attempted to enter the instant camera market and sold a comparable camera. Polaroid sued for patent infringement and won, keeping Kodak out of the instant camera industry.

3. Asset specificity inhibits entry into an industry. Asset specificity is the extent to which the firm's assets can be utilized to produce a different product. When an industry requires highly specialized technology or plants and equipment, potential entrants are reluctant to commit to acquiring specialized assets that cannot be sold or converted into other uses if the venture fails. Asset specificity provides a barrier to entry for two reasons: First, when firms already hold specialized assets they fiercely resist efforts by others from taking their market share. New entrants can anticipate aggressive rivalry. For example, Kodak had much capital invested in its photographic equipment business and aggressively resisted efforts by Fuji to intrude in its market. These assets are both large and industry specific. The second reason is that potential entrants are reluctant to make investments in highly specialized assets.

4. Organizational (Internal) Economies of Scale. The most cost efficient level of production is termed Minimum Efficient Scale (MES). This is the point at which unit costs for production are at minimum - i.e., the most cost efficient level of production. If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry or cost parity with rivals. For example, in long distance communications roughly 10% of the market is necessary for MES. If sales for a long distance operator fail to reach 10% of the market, the firm is not competitive.

The existence of such an economy of scale creates a barrier to entry. The greater the difference between industry MES and entry unit costs, the greater the barrier to entry. So industries with high MES deter entry of small, start-up businesses. To operate at less than MES there must be a consideration that permits the firm to sell at a premium price - such as product differentiation or local monopoly.

Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a firm to leave the market and can exacerbate rivalry - unable to leave the industry, a firm must compete. Some of an industry's entry and exit barriers can be summarized as follows:

Easy to Enter if there is: Common technologyLittle brand franchiseAccess to distribution channelsLow scale threshold

Difficult to Enter if there is: Patented or proprietary know-howDifficulty in brand switchingRestricted distribution channelsHigh scale threshold

Easy to Exit if there are: Salable assetsLow exit costsIndependent businesses

Difficult to Exit if there are: Specialized assetsHigh exit costsInterrelated businesses

SWOT Analysis

A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan:

SWOT Analysis Framework

Environmental Scan

          / \           

Internal Analysis       External Analysis

/ \                  / \

Strengths   Weaknesses       Opportunities   Threats

|

SWOT Matrix

Strengths

A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:

patents strong brand names

good reputation among customers

cost advantages from proprietary know-how

exclusive access to high grade natural resources

favorable access to distribution networks

Weaknesses

The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses:

lack of patent protection a weak brand name

poor reputation among customers

high cost structure

lack of access to the best natural resources

lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.

Opportunities

The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:

an unfulfilled customer need arrival of new technologies

loosening of regulations

removal of international trade barriers

Threats

Changes in the external environmental also may present threats to the firm. Some examples of such threats include:

shifts in consumer tastes away from the firm's products emergence of substitute products

new regulations

increased trade barriers

The SWOT Matrix

A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.

To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below: \

SWOT / TOWS Matrix

  Strengths Weaknesses

Opportunities S-O strategies W-O strategies

Threats S-T strategies W-T strategies

S-O strategies pursue opportunities that are a good fit to the company's strengths.

W-O strategies overcome weaknesses to pursue opportunities.

S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.

W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.

Analysis of Strategic Advantage – Resource Audit

Value Chain Analysis

To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value-creating activities. Michael Porter identified a set of interrelated generic activities common to a wide range of firms. The resulting model is known as the value chain and is depicted below:

Primary Value Chain Activities

InboundLogistics

> Operations >OutboundLogistics

>Marketing& Sales

> Service

The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin.

Inbound logistics include the receiving, warehousing, and inventory control of input materials. Operations are the value-creating activities that transform the inputs into the final product.

Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc.

Marketing & Sales are those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc.

Service activities are those that maintain and enhance the product's value including customer support, repair services, etc.

Any or all of these primary activities may be vital in developing a competitive advantage. For example, logistics activities are critical for a provider of distribution services, and service activities may be the key focus for a firm offering on-site maintenance contracts for office equipment.

These five categories are generic and portrayed here in a general manner. Each generic activity includes specific activities that vary by industry.

Support Activities

The primary value chain activities described above are facilitated by support activities. Porter identified four generic categories of support activities, the details of which are industry-specific.

Procurement - the function of purchasing the raw materials and other inputs used in the value-creating activities.

Technology Development - includes research and development, process automation, and other technology development used to support the value-chain activities.

Human Resource Management - the activities associated with recruiting, development, and compensation of employees.

Firm Infrastructure - includes activities such as finance, legal, quality management, etc.

Support activities often are viewed as "overhead", but some firms successfully have used them to develop a competitive advantage, for example, to develop a cost advantage through innovative management of information systems.

Value Chain Analysis

In order to better understand the activities leading to a competitive advantage, one can begin with the generic value chain and then identify the relevant firm-specific activities. Process flows can be mapped, and these flows used to isolate the individual value-creating activities.

Once the discrete activities are defined, linkages between activities should be identified. A linkage exists if the performance or cost of one activity affects that of another. Competitive advantage may be obtained by optimizing and coordinating linked activities.

The value chain also is useful in outsourcing decisions. Understanding the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiation advantage.

The Value System

The firm's value chain links to the value chains of upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value system. The development of a competitive advantage depends not only on the firm-specific value chain, but also on the value system of which the firm is a part.

In Competitive Advantage, Michael Porter introduces the value chain as a tool for developing a competitive advantage. Topics include:

Sharing of value chain activities among business units. Using value chain analysis to develop low-cost and differentiation strategies.

Interrelationships between value chains of different industry segments.

Applying the value chain to understand the role of technology in competitive advantage.

The book concludes by considering the implications for offensive and defensive competitive strategy, including how to identify vulnerabilities and initiate an attack on the industry leader.

Core Competencies

In their 1990 article entitled, The Core Competence of the Corporation, C.K. Prahalad and Gary Hamel coined the term core competencies, or the collective learning and coordination skills behind the firm's product lines. They made the case that core competencies are the source of competitive advantage and enable the firm to introduce an array of new products and services.

According to Prahalad and Hamel, core competencies lead to the development of core products. Core products are not directly sold to end users; rather, they are used to build a larger number of end-user products. For example, motors are a core product that can be used in wide array of end products. The business units of the corporation each tap into the relatively few core products to develop a larger number of end user products based on the core product technology. This flow from core competencies to end products is shown in the following diagram:

Core Competencies to End Products

End Products

 1   2   3   4   5   6   7   8   9  10 11 12

Business1

Business2

Business3

Business4

        Core Product 1        

        Core Product 2        

Competence1

Competence2

Competence3

Competence4

The intersection of market opportunities with core competencies forms the basis for launching new businesses. By combining a set of core competencies in different ways and matching them to market opportunities, a corporation can launch a vast array of businesses.

Without core competencies, a large corporation is just a collection of discrete businesses. Core competencies serve as the glue that bonds the business units together into a coherent portfolio.

Developing Core Competencies

According to Prahalad and Hamel, core competencies arise from the integration of multiple technologies and the coordination of diverse production skills. Some examples include Philip's expertise in optical media and Sony's ability to miniaturize electronics.

There are three tests useful for identifying a core competence. A core competence should:

1. provide access to a wide variety of markets, and 2. contribute significantly to the end-product benefits, and

3. be difficult for competitors to imitate.

Core competencies tend to be rooted in the ability to integrate and coordinate various groups in the organization. While a company may be able to hire a team of brilliant scientists in a particular technology, in doing so it does not automatically gain a core competence in that technology. It is the effective coordination among all the groups involved in bringing a product to market that results in a core competence.

It is not necessarily an expensive undertaking to develop core competencies. The missing pieces of a core competency often can be acquired at a low cost through alliances and licensing agreements. In many cases an organizational design that facilitates sharing of competencies can result in much more effective utilization of those competencies for little or no additional cost.

To better understand how to develop core competencies, it is worthwhile to understand what they do not entail. According to Prahalad and Hamel, core competencies are not necessarily about:

outspending rivals on R&D sharing costs among business units

integrating vertically

While the building of core competencies may be facilitated by some of these actions, by themselves they are insufficient.

The Loss of Core Competencies

Cost-cutting moves sometimes destroy the ability to build core competencies. For example, decentralization makes it more difficult to build core competencies because autonomous groups rely on outsourcing of critical tasks, and this outsourcing prevents the firm from developing core competencies in those tasks since it no longer consolidates the know-how that is spread throughout the company.

Failure to recognize core competencies may lead to decisions that result in their loss. For example, in the 1970's many U.S. manufacturers divested themselves of their television manufacturing businesses, reasoning that the industry was mature and that high quality, low cost models were available from Far East manufacturers. In the process, they lost their core competence in video, and this loss resulted in a handicap in the newer digital television industry.

Similarly, Motorola divested itself of its semiconductor DRAM business at 256Kb level, and then was unable to enter the 1Mb market on its own. By recognizing its core competencies and understanding the time required to build them or regain them, a company can make better divestment decisions.

Core Products

Core competencies manifest themselves in core products that serve as a link between the competencies and end products. Core products enable value creation in the end products. Examples of firms and some of their core products include:

3M - substrates, coatings, and adhesives

Black & Decker - small electric motors

Canon - laser printer subsystems

Matsushita - VCR subsystems, compressors

NEC - semiconductors

Honda - gasoline powered engines

The core products are used to launch a variety of end products. For example, Honda uses its engines in automobiles, motorcycles, lawn mowers, and portable generators.

Because firms may sell their core products to other firms that use them as the basis for end user products, traditional measures of brand market share are insufficient for evaluating the success of core competencies. Prahalad and Hamel suggest that core product share is the appropriate metric. While a company may have a low brand share, it may have high core product share and it is this share that is important from a core competency standpoint.

Once a firm has successful core products, it can expand the number of uses in order to gain a cost advantage via economies of scale and economies of scope.

Implications for Corporate Management

Prahalad and Hamel suggest that a corporation should be organized into a portfolio of core competencies rather than a portfolio of independent business units. Business unit managers tend to focus on getting immediate end-products to market rapidly and usually do not feel responsible for developing company-wide core competencies. Consequently, without the incentive and direction from corporate management to do otherwise, strategic business units are inclined to underinvest in the building of core competencies.

If a business unit does manage to develop its own core competencies over time, due to its autonomy it may not share them with other business units. As a solution to this problem, Prahalad and Hamel suggest that corporate managers should have the ability to allocate not only cash but also core competencies among business units. Business units that lose key employees for the sake of a corporate core competency should be recognized for their contribution.

Analysis of Stakeholder ExpectationsCorporate Mission, Vision, Objectives and Goals.

A Strategic vision is a road map of a company’s future – providing specifics about technology and customer focus, the geographic and product markets to be pursued, the capabilities it plans to develop, and the kind of company that management is trying to create.

Top management’s views and conclusions about the company’s direction and the product-customer-market-technology focus constitute a strategic vision for the company. A strategic vision delineates management’s aspirations for the business, providing a panoramic view of the “where we are going” and a convincing rationale for why this makes good business sense for the company. A strategic vision thus points an organization in a particular direction, charts a strategic path for it to follow in preparing for the future, and molds organizational identity. A clearly articulated strategic vision communicates management’s aspirations to stakeholders and helps steer the energies of company personnel in a common direction. For instance, Henry Ford’s vision of a car in every garage had power because it captured the imagination of others, aided internal efforts to mobilize the Ford Motor Company’s resources, and served as a reference point for gauging the merits of the company’s strategic actions.

The three elements of a strategic vision:

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

2. Using the mission statement as basis for deciding on a long-term course making choices about “Where we are going?”

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

How to develop a strategic vision

♦ The entrepreneurial challenge in developing a strategic vision is to think creatively about how to prepare a company for the future.

♦ Forming a strategic vision is an exercise in intelligent entrepreneurship.

♦ Many successful organizations need to change direction not in order to survive but in order to maintain their success.

♦ A well-articulated strategic vision creates enthusiasm for the course management has charted and engages members of the organization.

♦ The best-worded vision statement clearly and crisply illuminate the direction in which organization is headed.

Mission

According to Glueck & Jauch mission is answer to the question ‘what business are we in’ that is faced by corporate-level strategist. Analysis shows that in actual practice many business firms fail to conceptualise and articulate the mission and business definition with the required clarity. And such firms are seen to fumble in the selection of opportunities and the choice of strategies. Firms wedded to the idea of strategic management of their enterprise cannot afford to be lax in the matter of mission and business definition, as the two ideas are absolutely central to strategic planning.

Why organization should have mission?

♦ To ensure unanimity of purpose within the organization.

♦ To provide a basis for motivating the use of the organization’s resources.

♦ To develop a basis, or standard, for allocating organizational resources.

♦ To establish a general tone or organizational climate, for example, to suggest a businesslike operation.

♦ To serve as a focal point for those who can identify with the organization’s purpose and direction, and to deter those who cannot form participating further in the organization’s activities.

♦ To facilitate the translation of objective and goals into a work structure involving the assignment of tasks to responsible elements within the organization.

♦ To specify organizational purposes and the translation of these purposes into goals in such a way that cost, time, and performance parameters can be assessed and controlled.

A company’s Mission statement is typically focused on its present business scope – “who we are and what we do”; mission statements broadly describe an organizations present capabilities, customer focus, activities, and business makeup.

Mission should contain elements of long-term strategy as well as desired out comes they often basic values and the philosophy of the organizations that is perceived by the senior managers at the senior level who write them. A good mission statement should be of precise, clear, feasible, distinctive and motivating. It should indicate major components of strategy. Following points are useful while writing mission of a company :

♦ The mission is not to make a profit.

♦ One of the roles of a mission statement is to give the organization its own special identity, business emphasis and path for development – one that typically sets it apart form other similarly situated companies.

♦ A company’s business is defined by what needs it trying to satisfy, by which customer groups it is targeting and by the technologies and competencies it uses and the activities it performs.

♦ Technology, competencies and activities are important in defining a company’s business because they indicate the boundaries on its operation.

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

Mission is also an expression of the vision of the corporation, its founder/ leader. To make the vision come alive and become relevant, it needs to be spelt out. It is through the mission that the firm spells out its vision.

It represents the common purpose, which the entire firm shares and pursues. A mission is not a confidential affair to be confined at the top; it has to be open to the entire company. All people are supposed to draw meaning and direction from it. It adds zeal to the firm and its people. A mission is not a fad-it is a tool to build and sustain commitment of the people to the corporation's policies. A mission is not rhetoric - it is the corporation's guiding principle.

A mission does not represent a specific target. At the same time it is not all euphoria either. It represents the whole thrust of the firm. To quote Thomas Watson, Jr., former chairman of IBM, "The basic philosophy, spirit, and drive of an organization have far more to do with its relative achievements than technological or economic resources, organizational structure, innovation and timing. It also expresses the core values and beliefs of the firm”.

Objectives and Goals

Business organization translate their vision and mission into objectives. As such the term objectives is synonymous with goals, however, we will make an attempt to distinguish the two. Objectives are open-ended attributes that denote the future states or outcomes. Goals are close-ended attributes which are precise and expressed in specific terms. Thus the goals are more specific and translate the objectives to short term perspective. However, this distinction is not made by several theorists on the subject. Accordingly, we will also use the term interchangeably. All organizations have objectives. The pursuit of objectives is an unending process such that organizations sustain themselves. They provide meaning and sense of direction to organizational endeavour. Organizational structure and activities are designed and resources are allocated around the objectives to facilitate their achievement. They also act as benchmarks for guiding organizational activity and for evaluating how the organization is performing.

Objectives are organizations performance targets – the results and outcomes it wants to achieve. They function as yardstick for tracking an organizations performance and progress.Objectives with strategic focus relate to outcomes that strengthen an organizations overall business position and competitive vitality. Objective to be meaningful to serve the intended role must possess following characteristics:

♦ Objectives should define the organization’s relationship with its environment.

♦ They should be facilitative towards achievement of mission and purpose.

♦ They should provide the basis for strategic decision-making

♦ They should provide standards for performance appraisal.

♦ Objectives should be understandable.

♦ Objectives should be concrete and specific

♦ Objectives should be related to a time frame

♦ Objectives should be measurable and controllable

♦ Objectives should be challenging

♦ Different objectives should correlate with each other

♦ Objectives should be set within constraints

EXAMPLE:

BSES Vision and Mission Statement

“Let me elaborate on BSES' Vision and Mission statement that charts out our future growth path in the backdrop of the enormous growth opportunities arising from legislation of the Electricity Act, 2003,” Anil Ambani

Vision Statement

To be amongst the most admired and most trusted integrated utility companies in the world, delivering reliable and quality products and services to all customers at competitive costs, with international standards of customer care - thereby creating superior value for all stakeholders.

To set new benchmarks in standards of corporate performance and governance, through the pursuit of operational and financial excellence, responsible citizenship and profitable growth.

BSES Mission: Excellence in Energy

To attain global best practices and become a world-class utility. To provide uninterrupted, affordable, quality, reliable, safe and clean power,

to millions of customers.

To achieve excellence in service, quality, reliability, safety and customer care.

To earn the trust and confidence of all customers and stakeholders, exceeding their expectations, and making the company a respected household name.

To work with vigour, dedication and innovation, with total customer satisfaction as the ultimate goal.

To consistently achieve high growth with the highest levels of productivity.

To be a technology driven, efficient and financially sound organisation.

To be a responsible corporate citizen nurturing human values and concern for society, the environment and above all, people.

To contribute towards community development and nation building.

To promote a work culture that fosters individual growth, team spirit and creativity to overcome challenges and attain goals.

To encourage ideas, talent and value systems.

To uphold the guiding principles of trust, integrity and transparency in all aspects of interactions and dealings.

ITC’s Vision & Strategy:

Envisioning a larger societal purpose ('a commitment beyond the market') has always been a hallmark of ITC. The Company sees no conflict between the twin goals of shareholder value enhancement and societal value creation. The challenge lies in fashioning a corporate strategy that enables realisation of these goals in a mutually reinforcing and synergistic manner

ITC is committed to sustain its position as one of India's most valuable corporations through world-class performance, creating growing value for the Company's stakeholders and the Indian economy

Importance of Vision and Mission Statements

In their 1996 article entitled Building Your Company's Vision, James Collins and Jerry Porras provided a framework for understanding business vision and articulating it in a mission statement.

The mission statement communicates the firm's core ideology and visionary goals, generally consisting of the following three components:

1. Core values to which the firm is committed 2. Core purpose of the firm

3. Visionary goals the firm will pursue to fulfill its mission

The firm's core values and purpose constitute its core ideology and remain relatively constant. They are independent of industry structure and the product life cycle.

The core ideology is not created in a mission statement; rather, the mission statement is simply an expression of what already exists. The specific phrasing of the ideology may change with the times, but the underlying ideology remains constant.

The three components of the business vision can be portrayed as follows:

Core Values

     Core

Purpose

    BusinessVision

    VisionaryGoals

Core Values

The core values are a few values (no more than five or so) that are central to the firm. Core values reflect the deeply held values of the organization and are independent of the current industry environment and management fads.

One way to determine whether a value is a core value to ask whether it would continue to be supported if circumstances changed and caused it to be seen as a liability. If the answer is that it would be kept, then it is core value. Another way to determine which values are core is to imagine the firm moving into a totally different industry. The values that would be carried with it into the new industry are the core values of the firm.

Core values will not change even if the industry in which the company operates changes. If the industry changes such that the core values are not appreciated, then the firm should seek new markets where its core values are viewed as an asset.

For example, if innovation is a core value but then 10 years down the road innovation is no longer valued by the current customers, rather than change its values the firm should seek new markets where innovation is advantageous.

The following are a few examples of values that some firms has chosen to be in their core:

excellent customer service pioneering technology

creativity

integrity

social responsibility

Core Purpose

The core purpose is the reason that the firm exists. This core purpose is expressed in a carefully formulated mission statement. Like the core values, the core purpose is relatively unchanging and for many firms endures for decades or even centuries. This purpose sets the firm apart from other firms in its industry and sets the direction in which the firm will proceed.

The core purpose is an idealistic reason for being. While firms exist to earn a profit, the profit motive should not be highlighted in the mission statement since it provides little direction to the firm's employees. What is more important is how the firm will earn its profit since the "how" is what defines the firm.

Initial attempts at stating a core purpose often result in too specific of a statement that focuses on a product or service. To isolate the core purpose, it is useful to ask "why" in response to first-pass, product-oriented mission statements. For example, if a market research firm initially states that its purpose is to provide market research data to its customers, asking "why" leads to the fact that the data is to help customers better understand their markets. Continuing to ask "why" may lead to the revelation that the firm's core purpose is to assist its clients in reaching their objectives by helping them to better understand their markets.

The core purpose and values of the firm are not selected - they are discovered. The stated ideology should not be a goal or aspiration but rather, it should portray the firm as it really is. Any attempt to state a value that is not already held by the firm's employees is likely to not be taken seriously.

Visionary Goals

The visionary goals are the lofty objectives that the firm's management decides to pursue. This vision describes some milestone that the firm will reach in the future and may require a decade or more to achieve. In contrast to the core ideology that the firm discovers, visionary goals are selected.

These visionary goals are longer term and more challenging than strategic or tactical goals. There may be only a 50% chance of realizing the vision, but the firm must believe that it can do so. Collins and Porras describe these lofty objectives as "Big, Hairy, Audacious Goals." These goals should be challenging enough so that people nearly gasp when they learn of them and realize the effort that will be required to reach them.

Most visionary goals fall into one of the following categories:

Target - quantitative or qualitative goals such as a sales target or Ford's goal to "democratize the automobile."

Common enemy - centered on overtaking a specific firm such as the 1950's goal of Philip-Morris to displace RJR.

Role model - to become like another firm in a different industry or market. For example, a cycling accessories firm might strive to become "the Nike of the cycling industry."

Internal transformation - especially appropriate for very large corporations. For example, GE set the goal of becoming number one or number two in every market it serves.

While visionary goals may require significant stretching to achieve, many visionary companies have succeeded in reaching them. Once such a goal is reached, it needs to be replaced; otherwise, it is unlikely that the organization will continue to be successful. For example, Ford succeeded in placing the automobile within the reach of everyday people, but did not replace this goal with a better one and General Motors overtook Ford in the 1930's.

3. Strategic Choice: Generating Strategic Alternatives. Strategic options at Corporate Level – Stability, Growth and Defensive Strategies. External Growth Strategies – Merger, Acquisition, Joint Venture and Strategic Alliance. Evaluation of Strategic Alternatives – Product Portfolio Models. Selection of a suitable Corporate Strategy – Concept of Strategic Fit. Strategic options at SBU Level - Michael Porters’ Competitive Strategies; Operationalising Competitive Strategies.

Chance favors the prepared mind. Louis Pasteur

Far better an approximate answer to the right question, which is often vague, than an exact answer to the wrong question, which can be made precise. John Tukey, Statistician

Strategy is a deliberate search for a plan of action that will develop a business competitive advantage and compound it. Bruce D. Henderson

Corporate strategy is basically the growth design of the firm; it spells out the growth objective of the firm - the direction, extent, pace and timing of the firm's growth. It also spells out the strategy for achieving the growth. Thus, we can also describe corporate strategy as the objective-strategy design of the firm. And, to arrive at such an objective-strategy design is the basic burden of corporate strategy formulation.

Nature, scope and concerns of corporate strategy

Corporate strategy is basically concerned with the choice of businesses, products and markets. The following points will clarify the corporate strategy.

♦ It can also be viewed as the objective-strategy design of the firm.

♦ It is the design for filling the firm's strategic planning gap.

♦ It is concerned with the choice of the firm's products and markets; it actually denotes the changes / additions / deletions in the firm's existing product-market

postures. It spells out the businesses in which the firm will play, the markets in which it will operate and the customer needs it will serve.

♦ It ensures that the right fit is achieved between the firm and its environment.

♦ It helps build the relevant competitive advantages for the firm.

♦ Corporate objectives and corporate strategy together describe the firm's concept of business.

GENERIC STRATEGIC ALTERNATIVESStability, Growth and Defensive Strategies

According to William F Glueck and Lawrence R Jauch there are four generic ways in which strategic alternatives can be considered. These are stability, expansion, retrenchment and combinations.

Stability strategies: One of the important goals of a business enterprise is stability − to safeguard its existing interests and strengths, to pursue well established and tested objectives, to continue in the chosen business path, to maintain operational efficiency on a sustained basis, to consolidate the commanding position already reached, and to optimise returns on the resources committed in the business.

A stability strategy is pursued by a firm when:

♦ It continues to serve in the same or similar markets and deals in same products and services.

♦ The strategic decisions focus on incremental improvement of functional performance

Stability strategies are implemented by approaches wherein few functional changes are made in the products or markets. It is not a ‘do nothing’ strategy. It involves keeping track of new developments to ensure that the strategy continues to make sense. This strategy is typical for mature business organizations. Some small organizations will also frequently use stability as a strategic focus to maintain comfortable market or profit position.

Expansion Strategy: Expansion strategy is implemented by redefining the business by adding the scope of business substantially increasing the efforts of the current business. Expansion is a promising and popular strategy that tends to be equated with dynamism, vigor, promise and success. An enterprise on the move is a more agreeable stereotype than a steady-state enterprise. It is often characterised by significant reformulation of goals and directions, major initiatives and moves involving investments, exploration and onslaught into new products, new technology and new markets, innovative decisions and action programmes and so on. Expansion also includes diversifying, acquiring and merging businesses. The strategy may take the enterprise along relatively unknown and risky paths, full of promises and pitfalls.

Expansion through diversification: Diversification is defined as entry into new products or product lines, new services or new markets, involving substantially different skills, technology and knowledge. When an established firm introduces a

new product which has little or no affinity with its present product line and which is meant for a new class of customers different from the firm's existing customer groups, the process is known as conglomerate diversification. Both the technology of the product and of the market are different from the firm's present experience.

Innovative and creative firms always look for opportunities and challenges to grow, to venture into new areas of activity and to break new frontiers with the zeal of entrepreneurship. They feel that diversification offers greater prospects of growth and profitability than expansion.

For some firms, diversification is a means of utilising their existing facilities and capabilities in a more effective and efficient manner. They may have excess capacity or capability in manufacturing facilities, investible funds, marketing channels, competitive standing, market prestige, managerial and other manpower, research and development, raw material sources and so forth. Another reason for diversification lies in its synergistic advantage. It may be possible to improve the sales and profits of existing products by adding suitably related or new products, because of linkages in technology and/or in markets.

Expansion through acquisitions and mergers: Acquisition of or merger with an existing concern is an instant means of achieving the expansion. It is an attractive and tempting proposition in the sense that it circumvents the time, risks and skills involved in screening internal growth opportunities, seizing them and building up the necessary resource base required to materialise growth. Organizations consider merger and acquisition proposals in a systematic manner, so that the marriage will be mutually beneficial, a happy and lasting affair.

Apart from the urge to grow, acquisitions and mergers are resorted to for purposes of achieving a measure of synergy between the parent and the acquired enterprises. Synergy may result from such bases as physical facilities, technical and managerial skills, distribution channels, general administration, research and development and so on. Only positive synergistic effects are relevant in this connection which denote that the positive effects of the merged resources are greater than the some of the effects of the individual resources before merger or acquisition.

Retrenchment Strategy: A business organization can redefine its business by divesting a major product line or market. Retrenchment or retreat becomes necessary or expedient for coping with particularly hostile and adverse situations in the environment and when any other strategy is likely to be suicidal−'Strategic retreat' is often resorted to in military engagements. In business parlance also, retreat is not always a bad proposition to save the enterprise's vital interests, to minimise the adverse effects of advancing forces, or even to regroup and recoup the resources before a fresh assault and ascent on the growth ladder is launched.

The nature, extent and timing of retrenchment are matters to be carefully decided by management, depending upon each contingency. The enterprise has several options open to it in designing and acting upon its strategy. In cases of temporary and partial setbacks, the enterprise can endeavour to cut back on its capital and revenue expenditures-new administrative blocks, replacement of worn-out machinery, advertising, R & D activities, employee welfare subsidies, community development projects, executives perks, and so on. In somewhat more serious cases of hard times, inventory levels, manufacturing level, manpower, plant maintenance, dividend to shareholders and interest on deposits, are some of the

areas for slashing or postponement as the case may be. In the next stage, the enterprise may think of withdrawing from some marginal markets, withdrawal of some brands and sizes of products, withdrawal of even some slow moving products, winding up some branch offices, abolition of some executive positions and so on. In the fourth stage, the enterprise may resort to sale of some manufacturing facilities and individual product divisions which are a drag on the enterprise's resources. It may also seek retirement either from the production or the marketing stage. It is also possible to think of offering itself for take-over by another more viable enterprise. As a last option an enterprise may seek liquidation which means corporate death. This is the difficult solution, an answer to all problems of existence and a liberation from the fetters of frustration.

Combination Strategies: The above strategies are not mutually exclusive. It is possible to adopt a mix of the above to suit particular situations. An enterprise may seek stability in some areas of activity, expansion in some and retrenchment in the others. Retrenchment of ailing products followed by stability and capped by expansion in some situations may be thought of. For some organizations, a strategy by diversification and/or acquisition may call for a retrenchment in some obsolete product lines, production facilities and plant locations.

Strategic options at SBU Level - Michael Porters’ Competitive Strategies STRATEGIC BUSINESS UNITSSome organizations encounter difficulty in controlling their divisional operations asthe diversity, size, and number of these units continues to increase. And corporatemanagement may encounter difficulty in evaluating and controlling it’s numerous,often multi industry divisions. Under these conditions, it may be come necessary toadd another layer of management to improve strategy implementation, promotionsynergy, and gain greater control over the diverse business interests. It can be achievedby grouping various divisions’ in terms of common strategic elements. These groupscommonly called strategic business units (SBUs)• Strategic business unit begin to identifying key businesses also termed asstrategic business unit.• SBU is a unit of the company. It has a separate mission and objectives.• It can be planned independently of its mission, vision and objectives from othercompany businesses.• The SBU can be a division of a company, it has a product line within a divisionor even a single product or brand.• SBUs are common in organizations; these units are located in multiple countrieswith independent manufacturing and marketing setups.Characteristics of SBUs• Single business or collection of related businesses which can be planned forseparately in different division in across global.• It has consists of competitors in market.• Division strategic manager is responsible person for strategic planning andprofit of the company.Advantages of SBUs Organizational StructureIt improves coordination between divisions with similar strategic concerns and product/market environment.

• It tightens the strategic management and control of large, diverse business enterprises.• It facilitates distinct and in depth business planning at the corporate and business levels.• It Channels accountability to distinct business unit.

Disadvantages of Strategic Business Unit Organizational StructureIt places another layer of management between the divisions and corporate management.• Its dysfunctional competition for corporate resource may increase.• The role of the group vice president can be difficult to define.• It is difficulty in defining the degree of autonomy for the group vice presidents and division managers

STRATEGIC BUSINESS UNITS AND CORE COMPETENCEStrategic business units and core competence are outlined as:• Strategic business units are playing significant role in multinational organization.

• Most of the modern organizations are organized their business into appropriatestrategic business units in world.• It is the relevant, suitable to multiproduct and multibusiness enterprise.• It provides separate strategic planning treatment to each one of its products and businesses.• It is a grouping of related business activities in an enterprise that is amenable to composite planning treatment to all business activities in an organization.• In scientific sense, it is a multibusiness enterprise groups its multitude of businesses into a few distinct business units.• It is to provide effective strategic planning treatment to each one of its productsor business offered by an enterprise.• Strategic business units firms are handling business planning on a territorial basis since their structure was territorial; this structure is the outcome of a manufacturing or distribution logistics. Characteristics of Strategic Business UnitsThere are three most important characteristics of strategic business units are outlined:• It is a single business or collection of related businesses which offer scope forindependent planning and that feasibly stand alone form the rest of the organization.• It has own set of competitors in market.• Strategic managers in SBUs who has responsible for strategic planning and profit performance and control of unnecessary activities which are harmful to strategic business units.Strategic Business Units Planning DifficultiesStrategic business units in territory planning rise to two kinds of difficulties are listed below:• A number of territorial units handled the same products; the same product was getting varied strategic planning treatments in an enterprise.• A given territorial planning unit carried different and unrelated products,

products and dissimilar characteristics are getting identical strategic planning treatment in organisation.Concepts of Strategic Business Units• It is underlying the grouping principle that relating all products and services falling under one strategic business units.• It helps to a multibusiness corporation in scientifically grouping its businessesinto a few distinct business process units.• It provides the right direction to strategic planning by removing the vague and confusion often experienced in multibusiness grouping enterprise.Strategic Business Units and Its Benefits• Strategic business units help to organization for strategic planning that is based on the scientific method of grouping the business activities.• It brings improvement in territorial grouping of business and these units based on strategic planning.• It is the grouping of related businesses which can be taken into for strategic planning that distinct from the rest of the businesses. Each unit in strategic groupswill be getting equal priority among the products and services in an organization.• It task is relating to anglicizing and segregating the assortment of business orportfolios and regrouping them into few, well defined, distinct and scientifically demarcated business units . If product or businesses are related from the standpointof ‘function’ are assembled together as consider as distinct SBUs.• In the case, unrelated products, businesses is any group are separated from the main business, if they assigned to any other SBU that applying the criterion of functional relation, these are assigned accordingly. Otherwise, these are made into separate SBUs.• In removing the vagueness and confusion from the strategic business units and its products and services in an enterprise.• It also provides right facilities to set correct strategic planning to each unit in strategic business units.• SBU is separate businesses from the strategic planning point of view. It means each strategic business units mission, objectives, competition, and strategy will be distinct from one to another.• Each strategic units will have own set of competitors and its own distinct strategy in an enterprise.• Each SBU CEO is responsible for strategic planning for their Strategic businessunit and its performance in terms of profitability, growth, development and also considers controlling factors in an organization.Strategic Issues in Strategic Business UnitsStrategic issues in strategic business units at corporate levels are first whether thecorporate body wishes to have a related set of SBUs or not ; and if so, on what basis.Strategic issues are relatedness in turn has direct implications on decisions aboutdiversification relatedness may exist in different ways as listed way:• Strategic business units may build on similar technologies or all provide similar sorts of products and services offered to customers.• It can be served to similar or different market even if different technologies or products and different customer.• Competences and competitive advantages in SBUs are different and similar tostrategic business units.

External Growth Strategies: Merger, Acquisition, Joint Venture and Strategic Alliance.

External growth is said to take place as a result of a merger, a takeover, or through a partnership with another organization.External growth strategies develop actual company size and asset worth. External strategies focus on strategic mergers or acquisitions, increasing the number of mutual relationships through third parties, and may even include franchising the business model. The larger the number of business partners and/or franchisees, the greater the networth of the company and throughput of cash. The goals of external growth strategies are to provide larger opportunities to increase the worth of the company, and for this reason external growth strategies tend to produce immediate return on investment.

MERGERS & ACQUISITIONAn acquisition is when both the acquiring and acquired companies are still left standing as separate entities at the end of the transaction.

A merger results in the legal dissolution of one of the companies, and a consolidation dissolves both of the parties and creates a new one, into which the previous entities are merged.

Corporate takeovers were started by Swaraj Paul when he tried to takeover Escorts. The other major takeovers are that of Ashok Leyland by the Hindujas Shaw Wallace, Dunlop, and Falcon Tyres by the Chabbria Group; Ceat Tyres by the Goenkas; and Consolidated Coffee by Tata Tea. The BIFR arranged for the takeover of companies by giants like ITC, McDowells, Lakshmi Machine Works, and the Somani Group.

The motivation to pursue a merger or acquisition can be considerable; a

company that combines itself with another can experience boosted economies of

scale, greater sales revenue and market share in its market, broadened

diversification and increased tax efficiency. However, the underlying business

rationale and financing methodology for mergers and acquisitions are substantially

different.

A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of

two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity.

MERGER:-

Mergers involve the mutual decision of two companies to combine & become

one entity. The combined business can cut cost of operation & increase profit which

will boost shareholders value for both groups of shareholders. In Merger of two

corporations, shareholders usually have their shares in the old organization & are

exchanged for an equal numbers of shares in the merged entity.

According to the Oxford Dictionary “merger” means “combining of two companies

into one”. Merger is a fusion between two or more enterprises, whereby the identity

of one or more is lost and the result is a single enterprise. In merger the assets and

liabilities of the companies get vested in another company, the company that is

merged losing its identity and its shareholders becoming shareholders of the other

company. All assets, liabilities and the stock of one company are transferred to

Transferee Company in consideration of payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,

Cash, or

A mix of the above modes.

In the pure sense, a merger happens when two firms, often of about the same size,

agree to go forward as a single new company rather than remain separately owned

and operated. This kind of action is more precisely referred to as a "merger of

equals." For example, both Daimler-Benz and Chrysler ceased to exist when the two

firms merged, and a new company, Daimler Chrysler, was created.

Conglomerate merger:-

Conglomerate mergers means mergers between firms engaged in unrelated types

of business activity. The basic purpose of such combination is utilization of

financial resources. Such type of merger enhances the overall stability of the

acquirer company and creates balance in the company’s total portfolio of diverse

products and production processes and thereby reduces the risk of instability in the

firm’s cash flows.

Conglomerate mergers can be distinguished into three types:

I. Product extension mergers These are mergers between firms in

related business activities and may also be called concentric

mergers. These mergers broaden the product lines of the firms.

II. Geographic market extension mergers: These involve a merger

between two firms operating in two different geographic areas.

III. Pure conglomerates mergers: These involve mergers between

two firms with unrelated business activities. They do not come under

product extension or market extension.

Congeneric Merger: In these mergers, the acquirer and the target companies arerelated through basic technologies, production processes or markets. The acquiredcompany represents an extension of product-line, market participants or technologies of the acquirer. These mergers represent an outward movement by the acquirer from its current business scenario to other related business activities.

Horizontal Merger:-

This type of merger involves two firms that operate & compete in a similar kind of a

business. Horizontal merger is based on the assumptions that it will provide

economies of scale from the larger combined unit. The economies of scale are

obtained by the elimination of duplication of facilities, broadening the product line,

reduction in the advertising cost. Horizontal mergers also have potentials to create

monopoly power on the part of the combined firm enabling it to engage in anti-

competitive practices.

Examples: -

Mumbai - Glaxo India Limited and Smith Kline Beecham Pharmaceuticals

(India) Limited have legally merged to form GlaxoSmithKline

Pharmaceuticals Limited in India (GSK). A merger would let them

pool their research & development funds and would give the merged

company a bigger sales and marketing force.

Merger of Centurion Bank & Bank of Punjab.

Merger between Holicim & Gujarat Ambuja Cement ltd

Vertical Merger:-

A vertical Merger involves merger between firms that are in different stages of

production or value chain. A company involved in vertical merger usually seeks to

merge with another company or would like to takeover another company mainly to

expand its operations by backward or forward integration. The acquiring company

through merger of another units attempt to reduce inventory of raw materials and

finished goods. The basic purpose of vertical merger is to eliminate cost of

searching raw materials. Vertical merger takes place when both firm plan to

integrate the production process and capitalize on the demand for the product. A

company decides to get merged with another company when it is not in a position

to get strong position in a market because of imperfect market of intermediary

product, scarcity of resources.

Example: - Among the Indian corporate that have emerged as big international

players is the Videocon group. The group became the third largest colour picture

tube manufacturer in the world when it announced the purchase of the colour

picture tube business of France-based Thomson SA, which includes units in Mexico,

Poland and China, for about Rs 1260 crore.

REASONS AND RATIONALE FOR MERGERS AND ACQUISITIONSThe most common reasons for Mergers and Acquisition (M&A) are:• Synergistic operating economies• Diversification• Taxation• Growth• Consolidation of production capacities and increasing market power

ACQUISITION AND TAKEOVER

Acquisition in general sense is acquiring the ownership in the property. In the

context of business combinations, an acquisition is the purchase by one company of

a controlling interest in the share capital of another existing company.

On the other hand, Acquisition means the purchase of a smaller company by much

larger one. A larger company can initiate an Acquisition of smaller firm which

essentially amounts to buy the company in the face of resistance from smaller

company’s management. Unlike Mergers in an Acquisition the acquiring firm usually

offers a cash price per share to target firm’s shareholders.

Acquisition means an attempt by one firm to gain majority interest in the another

firm called target firm &dispose-off it‘s assets or to take the target firm private by

small group of investors.

A company can buy another company with cash, stock or a combination of the two.

Another possibility, which is common in smaller deals, is for one company to acquire

all the assets of another company.

An acquisition may be affected by;

(a) agreement with the persons holding majority interest in the company

management like members of the board or major shareholders commanding

majority of voting power;

(b) purchase of shares in open market;

(c) to make takeover offer to the general body of shareholders;

(d) purchase of new shares by private treaty;

(e) Acquisition of share capital through the following forms of considerations viz.

means of cash, issuance of loan capital, or insurance of share capital.

Acquisition: This refers to the purchase of controlling interest by one company in the share capital of an existing company. This may be by:(i) an agreement with majority holder of Interest.(ii) Purchase of new shares by private agreement.(iii) Purchase of shares in open market (open offer)(iv) Acquisition of share capital of a company by means of cash, issuance of shares.(v) Making a buyout offer to general body of shareholders.

When a company is acquired by another company, the acquiring company has two choices either to merge both the companies into one and function as a single entity and the another is to operate the takenover company as an independent entity with changed management and policies. The first choice is termed as ‘Merger’, whereas the second choice is known as ‘takeover’.

An acquisition by purchase of a controlling interest in the share capital of another existing company is takeover, another term for acquisition. The two types of takeovers are:• Friendly takeover. Takeover through negotiations and with willingness and consent of the acquired company’s Board of directors.• Hostile takeover. An acquirer company may not offer to target company the proposal to acquire its undertaking but silently and unilaterally pursue efforts to gain control in it against the wishes of the management.

TAKE OVER STRATEGIES

Other than tender offer the acquiring company can also use the following techniques:

Street Sweep: this refers to the technique where the acquiring company accumulates larger number of shares in a target before making an open offer. The advantage is that the target company is left with no choice but to agree to the proposal of acquirer for takeover.

Bear Hug: When the acquirer threatens the target to make an open offer, the board of target company agrees to a settlement with the acquirer for change of control.

Strategic Alliance: This involves disarming the acquirer by offering a partnership rather than a buyout. The acquirer should assert control from within and takeover the target company.

Brand Power: This refers to entering into an alliance with powerful brands to displace the target’s brands and as a result, buyout the weakened company.

TAKEOVER BY REVERSE BIDIn ordinary case, the company taken over is the smaller company; in a 'reverse takeover', a smaller company gains control of a larger one. The concept of takeover by reverse bid, or of reverse merger, is thus not the usual case of amalgamation of a sick unit which is nonviable with a healthy or prosperous unit but is a case whereby the entire undertaking of the healthy and prosperous company is to be merged and vested in the sick company which is non-viable. A company becomes a sick industrial company when there is erosion in its net worth. This alternative is also known as taking over by reverse bid.

DEFENDING A COMPANY IN A TAKEOVER BIDThe speed with which a hostile takeover is attempted puts the target Company at adisadvantage. One of observations on the prevailing regulations pertaining to takeover is that, there is very little scope for a target company to defend itself in a takeover battle. Due to the prevailing guidelines, the target company without the approval of the shareholder cannot resort to any issuance of fresh capital or sale of assets etc., and also due to the necessity of getting approvals from various authorities. In the past most companies who wanted to resist a takeover, did so, either by getting a White Knight to support the Company or by refusing to transfer shares acquired by the Acquirer, followed by long protracted legal battle. Now under the guidelines, the target company cannot refuse transfer of shares without the consent of shareholders in a general meeting.

Defensive TacticsA target company can adopt a number of tactics to defend itself from hostile takeover through a tender offer.• Divestiture In a divestiture the target company divests or spins off some of itsbusinesses in the form of an independent, subsidiary company. Thus, reducing theattractiveness of the existing business to the acquirer.

• Crown jewels When a target company uses the tactic of divestiture it is said to sell the crown jewels. In some countries such as the UK, such tactic is not allowed once the deal becomes known and is unavoidable.• Poison pill Sometimes an acquiring company itself becomes a target when it isbidding for another company. The tactics used by the acquiring company to make itself unattractive to a potential bidder is called poison pills. For instance, the acquiring company may issue substantial amount of convertible debentures to its existing shareholders to be converted at a future date when it faces a takeover threat. The task of the bidder would become difficult since the number of shares to having voting control of the company increases substantially.• Poison Put In this case the target company issue bonds that encourage holder to cash in at higher prices. The resultant cash drainage would make the target unattractive.• Greenmail Greenmail refers to an incentive offered by management of the targetcompany to the potential bidder for not pursuing the takeover. The management of the target company may offer the acquirer for its shares a price higher than the market price.• White knight In this a target company offers to be acquired by a friendly company to escape from a hostile takeover. The possible motive for the management of the target company to do so is not to lose the management of the company. The hostile acquirer may change the management.• White squire: This strategy is essentially the same as white knight and involves sell out of shares to a company that is not interested in the takeover. As a consequence, the management of the target company retains its control over the company. • Golden parachutes When a company offers hefty compensations to its managers if they get ousted due to takeover, the company is said to offer golden parachutes. This reduces their resistance to takeover.• Pac-man defence: This strategy aims at the target company making a counter bid for the acquirer company. This would force the acquirer to defend itself and consequently may call off its proposal for takeover.It is needless to mention that hostile takeovers, as far as possible, should be avoided as they are more difficult to consummate. In other words, friendly takeover are better course of action to follow.

REASONS FOR MERGERS & ACQUISITIONS:-

There are many reasons or factors that motivate companies to go for mergers and

acquisitions such as growth, synergy, diversification etc.

Growth: One of the most common reason for mergers is growth. There are two

broadways a firm can grow. The first is through internal growth. This can be slow

and ineffective if a firm is seeking to take advantage of a window of opportunity in

which it has a short-term advantage over competitors. The faster alternative is to

merge and acquire the necessary resources to achieve competitive goals. Even

though bidding firms will pay a premium to acquire resources through mergers, this

total cost is not necessarily more expensive than internal growth, in which the firm

has to incur all of the costs that the normal trial and error process may impose.

While there are exceptions, in the vast majority of cases growth through mergers

and acquisitions is significantly faster than through internal means. Mergers can

give the acquiring company an opportunity to grow market share without having to

really earn it by doing the work themselves - instead, they buy a competitor's

business for a price. Usually, these are called horizontal mergers. For example, a

beer company may choose to buy out a smaller competing brewery, enabling the

smaller company to make more beer and sell more to its brand-loyal customers.

Example- RPG group had a turnover of only Rs. 80 crores in 1979, which has

increased to about Rs.5600 crores in1996. This phenomenal growth was due to the

acquisitions of several companies by the RPG group. Some of the companies

acquired are Asian Cables, Calcutta Electricity Supply and Company, etc.

Synergy: Another commonly cited reason for mergers is the pursuit of synergistic

benefits. The most commonly used word in Mergers & Acquisitions is synergy, which

is the idea of combining business activities, for increasing performance and

reducing the costs. Essentially, a business will attempt to merge with another

business that has complementary strengths and weaknesses. This is the new

financial math that shows that 1 + 1 = 3. That is, as the equation shows, the

combination of two firms will yield a more valuable entity than the value of the sum

of the two firms if they were operating independently.

Value (A + B) > Value (A) + Value (B)

Although many merger partners cite synergy as the motive for their transaction,

synergistic gains are often hard to realize. There are two types of synergy one is

derived from cost economies and other one is derived from revenue enhancement.

Cost economies are the easier to achieve because they often involve eliminating

duplicate cost factors such as redundant personnel and overhead. When such

synergies are realized, the merged company generally has lower per-unit costs.

Revenue enhancing synergy is more difficult to predict and to achieve. An example

would be a situation where one company’s capability, such as research process, is

combined with another company’s capability, such as marketing skills, to

significantly increase the combined revenues.

Diversification : Other reasons for mergers and acquisitions include diversification.

A company that merges to diversify may acquire another company engaged in

unrelated industry in order to reduce the impact of a particular industry's

performance on its profitability. The track record ofdiversifying mergers is generally

poor with a few notable exceptions. A few firms, such as General Electric, seem to

be able to grow and enhance shareholders wealth while diversifying. However, this

is the exception rather than a norm. Diversification may be successful, but it needs

more skill and infrastructure than some firms have.

Economies of scale: Yes, size matters. Whether it's purchasing stationery or a

new corporate it system, a bigger company placing the orders can save more on

costs. Mergers also translate into improved purchasing power to buy equipment or

office supplies - when placing larger orders, companies have a greater ability to

negotiate prices with their suppliers. This refers to the fact that the combined

company can often reduce duplicate departments or operations, lowering the costs

of the company relative to theoretically the same revenue stream, thus increasing

profit.

Increase Market Share & Revenue: This reason assumes that the company will

be absorbing a major competitor and increasing its power (by capturing increased

market share) to set prices. Companies buy companies to reach new markets and

grow revenues and earnings. A merge may expand two companies' marketing and

distribution, giving them new sales opportunities. A merger can also improve a

company's standing in the investment community: bigger firms often have an easier

time raising capital than smaller ones.

Example-Premier and Apollo Tyres,

Increase Supply-Chain Pricing Power : By buying out one of its suppliers or one

of the distributors, a business can eliminate a level of costs. If a company buys out

one of its suppliers, it is able to save on the margins that the supplier was

previously adding to its costs; this is known as a vertical merger. If acompany buys

out a distributor; it may be able to sale its products at a lower cost.

Eliminate Competition: Many mergers and acquisitions deals allow the acquirer

to eliminate future competition and gain a larger market share in its product's

market. The downside of this is that a large premium is usually required to convince

the target company's shareholders to accept the offer. It is not uncommon for the

acquiring company's shareholders to sell their shares and push the price lower in

response to the company paying too much for the target company.

Acquiring new technology: To stay competitive, companies need to stay on top

of technological developments and their business applications. By buying a smaller

company with unique technologies, a large company can maintain or develop a

competitive edge and vice versa.

Procurement of production facilities: Procurement of production facilities may

be the reason for acquiring company to go for mergers and acquisition. It is a kind

of backward integration. Acquiring Firms will take the decision of merging with

another firm who supplies raw material to acquiring firm in order to safeguard the

sources of supplies of raw material or intermediary product. It will help acquiring

firm to bring economies in purchasing of raw material. It will also help to cut down

the transportation cost.

Example- Videocon takes over Thomson picture tube in China to procure supply of

picture tube required for producing television sets.

Market expansion strategy: Many firms go for mergers and acquisitions as a

part of market expansion strategy. Mergers and acquisitions will help the company

to eliminate competition and to protect existing market. It will also help the firm to

obtain new market for promoting their existing or obsolete products.

For example, Lenovo takes over IBM in India to increase market for

Lenovo products like desktops, laptops in India.

Financial synergy: Financial synergy may be the reason for mergers and

acquisitions. Following are the financial synergy available in case of mergers and

acquisitions;

I. Better credit worthiness- This helps companies to purchase good on

credit, obtain bank loan and raise capital in the market easily.

II. Reduces cost of capital- The investors consider big firms as safe and

hence they expect lower rate of return for the capital supplied by

them. So the cost of capital reduces after merger.

III. Increase debt capacity- After the merger the earnings and cash

flows become more stable than before. This increase the capacity of

the firm to borrow more funds.

IV. Rising of capital- After the merger due to increase in the size of the

company, better credit worthiness and reputation the company can

easily raise the capital at any time.

Own development plans: The purpose of mergers & acquisition is backed by the

acquiring company’s own developmental plans. A company thinks in terms of

acquiring the other company only when it has arrived at its own development plan

to expand its operation having examined its own internal strength where it might

not have any problem of taxation, accounting, valuation, etc. but might feel

resource constraints with limitations of funds and lack of skill managerial personnel.

It has to aim at suitable combination where it could have opportunities to

supplement its funds by issuance of securities; secure additional financial facilities

eliminate competition and strengthen its market position.

Corporate friendliness: Although it is rare but it is true that business houses

exhibit degrees of cooperative spirit despite competitiveness in providing rescues to

each other from hostile takeovers and cultivate situations of collaborations sharing

goodwill of each other to achieve performance heights through business

combinations. The combining corporate aims at circular combinations by pursuing

this objective

General gains:

I. To improve its own image and attract superior managerial talents to

manage its affairs.

II. To offer better satisfaction to consumers or users of the product.

Taxes: A profitable company can buy a loss maker to use the target's loss as their

advantage by reducing their tax liability. In the United States and many other

countries, rules are in place to limit the ability of profitable companies to "shop" for

loss making companies, limiting the tax motive of an acquiring company.

Ahmadabad Cotton Mills Merged with Arvind Mills ( Rs =3.34 crores)

Sidhaper Mills merged with Reliance Industries Ltd.(Rs. 3.34 crores)

1) ADVANTAGES-

Mergers and acquisitions is the permanent combination of the business which

vest management in complete control of the business of merged firm.

Shareholders in the selling company gain from the mergers and acquisitions as

the premium offered to induce acceptance of the merger or acquisitions. It offers

much more price than the book value of shares. Shareholders in the buying

company gain premium in the long run with the growth of the company.

Mergers and acquisitions are caused with the support of shareholders, managers

and promoters of the combing companies. The advantages, which motivate the

shareholders and managers to give their support to these combinations and the

resulting consequences they have to bear, are briefly noted below.

From shareholders point of view: - Shareholders are the owners of the

company so they must get be benefited from the mergers and acquisitions.

Mergers and acquisitions can affect fortune of shareholders. Shareholders expect

that investment made by them in the combining companies should enhance

when firms are merging. The sale of shares from one company’s shareholders to

another and holding investment in shares should give rise to greater values.

Following are the advantages that would be generally available in each merger

and acquisition from the point of view of shareholders;

1. Face value of the share is increased.

2. Shareholders will get more returns on the investments made by

them in the combining companies.

3. Sale of shares from one company’s shareholder to another is

possible.

4. Shareholders get better investment opportunities in mergers

and acquisitions.

From managers point of view: - Managers are concerned with improving

operations of the company, managing the affairs of the company effectively for

all round gains and growth of the company which will provide them better deals

in raising their status, perks and fringe benefits. Mergers where all these things

are the guaranteed outcome get support from the managers.

From Promoters point of view: -

5. Mergers offer company’s promoters advantages of increase in

the size of their company, financial structure and financial

strength.

6. Mergers can convert closely held and private limited company

into public limited company without contributing much wealth

and losing control of promoters over the company.

From Consumers point of view: - Consumers are the king of the market so

they must get some benefits from mergers and acquisitions. Benefits in favour of

the consumer will depend upon the fact whether or not mergers increase or

decrease competitive economic and productive activity which directly affects the

degree of welfare of the consumers through changes in the price level, quality of

the products and after sales service etc.

Following are the benefits that consumers may derive from mergers

and acquisitions transactions;

7. Low price & better quality goods: - The economic gains

realized from mergers and acquisitions are passed on to

consumers in the form of low priced and better quality goods.

8. Improve standard of living of the consumers: - Low priced

and better quality products directly improves standard of living

of the consumers.

2) DISADVANTAGES-

Merger or acquisition of two companies in the same field or in diverse field may

involve reduction in the number of competing firms in an industry and tend to dilute

competition in the market. They generally contribute directly to the concentration of

economic power and are likely to lead the merger entities to a dominant position of

market power. It may result in lesser substitutes in the market, which would affect

consumer’s welfare. Yet another disadvantage may surface, if a large undertaking

after merger because of resulting dominance becomes complacent and suffers from

deterioration over the years in its performance. Following are some disadvantages

of mergers and acquisitions;

Creates monopoly- when two firms merged together they get dominating

position in the market which may lead to create monopoly in the market.

Leads to unemployment-Raiders shouldn’t have the right to buy up firms

they have no idea how to run – the employees who have spent their lives

building up the firm should be making the decisions.

Raiders become filthy rich without producing anything, at the expense of

hardworking people who do produce something.

M&A damages the morale and productivity of firms.

Corporate debt levels have risen to dangerous levels.

Managers pressured to forego long-term investment in favour of short-term

profit.

Shareholders may be payed lesser dividend if the firm is not making profits.

There may be a possibility that shareholders would be paid less returns on

investment if the company is not earning enough profit.

Corporate raiders use their control to strip assets from the target, make a

quick profit, destroying the company in the process, throwing people out of

work.

SYNERGYSynergy is based on the notion that merger of two companies can create greater shareholder value than if they are operated separately. The two types of synergy are operating synergy and financial synergy. Operating efficiency is improved by economies of scale or economies of scope.

Economies of scale refer to the reduction of average cost with increase in volume. They can be important in any business with substantial fixed overhead expenses such as steel, pharmaceutical, chemical and aircraft manufacturing. They may be realised when the merging companies are in the same line of business. Such horizontal mergers eliminate duplication and concentrate a greater volume of activity into a given facility. Vertical mergers can be envisaged in the context of corporate value chain. Vertical mergers where a company expands forwards towards the consumer or backwards toward the source of raw material by giving the acquiring company control over distribution and purchasing bring in economies of scale. Combining firms at different stages of an industry may acquire more efficient co-ordination of the different levels. Costs of communication, various forms of bargaining and opportunistic behaviour can be avoided by vertical integration.

Economies of scope refer to using a specific set of skills or an asset currently employed in producing a specific product or service to produce related products or services. Hindustan Lever the consumer products giant uses its highly regarded

consumer marketing skills to market a full range of personal care as well as packaged food and tea. Operating synergy arises from improved operating efficiencies through economics of scale or scope by acquiring a customer, supplier or competitor.Financial synergy refers to the impact of merger on the cost of capital of acquiring firms or the newly formed firm. Cost of capital can be reduced with financial synergy. If the merged firms have unrelated cash flows, realize financial economies of scale in capital issues from lower interest rate (on debentures) and transaction costs and result in better matching of investment opportunities with internally generated funds, the cost of capital can be lowered. Mergers can help in correcting and evolving a balanced capital structure and make the companies attractive investment. If too much equity or debt was raised in the past a merger with a group company will correct the imbalance. The strategy was adopted by B.M. Khaitan Group by merging McLeod Russel (pre-merger turnover Rs. 180 crores) with Eveready Industries (pre-merger turnover Rs. 430 crores). McLeod Russel funded the purchase of 51 per cent equity for Rs. 290 crores in 1994-95 through borrowings.Later a 3:1 rights issue at Rs. 190 was made to raise Rs. 265 crores to repay the loans. The move raised its equity from Rs. 10 crores in 1993-94 to Rs. 29.83 crores in 1994-95 and outstanding debt from Rs. 30 crores to Rs. 227 crores.The merger helped to restructure the capital with a swap ratio of three McLeod Russel shares for two of Eveready. Equity of the merged company at Rs. 36 crores is well below the pre-merger equity of Rs. 62 crores. The balance sheet for 1995-96 of the merged company has a turnover of Rs. 614 crores and net profits of Rs. 72.78 crores on an equity of Rs. 36 crores, with an EPS of Rs. 20.02. Both promoters and shareholders benefit when a company derives major benefits from financial synergy.Mergers also offer an effective way to ensure smooth cash flows. A major reason for merger of Brooke Bond India Ltd. (BBIL) with Hindustan Lever Ltd. (HLL) in 1996 was to ensure the free flow of funds from one to the other. The investment plans of BBIL in the packaged food markets required Rs. 350 crores in three year period, which was met by Hindustan Lever’s surplus cash. The capital expenditure yielded tax benefits besides generating higher returns. Mergers enable profitable redeployment of financial resources.

DIVERSIFICATIONDiversification, or acquiring a different line of business, is sometimes a motive for mergers. Such mergers reduce the instability of earnings. If the two firms have cash flows that are unrelated their combined cash flow may be less volatile than their cash flows viewed separately. Investors may require a lower rate of return to invest in the combined firms securities referred to as coinsurance. But the impact on share price depends on whether investors are able to diversify their portfolio efficiently. Investors evaluate risk in an overall market context, not just in terms of total risk of

the firm. However, diversification by reducing relative variability of cash flows, benefits debt holders in having a more credit worthy claim. Diversification is also undertaken to shift from the acquiring company’s core product lines or markets into those that have higher growth prospects.Empirical research reveals that investors do not benefit from diversification. Investors perceive companies diversified in unrelated areas as riskier becausethey are difficult for management to understand. Studies also show that unrelated acquisitions are four times more likely to be divested than those related to the acquirer’s core business. The increase in market value of firms spinning off business in unrelated industries was substantially greater than for firms getting rid of businesses operating in the same industry as the parent firms core business. Improvement in operating performance occurs mainly in firms that increase their focus.

Joint Venture A joint venture is a partnership with a key difference. While a partnership concerns

ongoing business in all regards, a joint venture only concerns a single project or a

related series of transactions. Here are some other characteristics of joint ventures:

Profits and expenses - Unless otherwise agreed to, joint venturers share profits

and losses equally

Duration - Unless otherwise specified, a joint venture terminates upon the

completion of the project or series of transactions

Termination - Unlike a partnership, a joint venture does not terminate upon the

death or incapacitation of one joint venturer. A joint venturer does have the power

to terminate the relationship at any time once the project or transaction is

complete.

EXAMPLESony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones. 

Virgin Mobile India Limited is a cellular telephone service provider company which is a joint venture between Tata Tele service and Richard Branson's Service Group. Currently, the company uses Tata's CDMA network to offer its services under the brand name Virgin Mobile, and it has also started GSM services in some states. 

Mahindra & Renault: This JV is the market entry strategy for Renault. The JV will manufacture Renault’s Logan cars in India. Renault will gain market knowledge - while Mahindra’s will learn how to make good cars, and leverage its dealership network to additional profits.

Strategic Alliance

A strategic alliance is a form of affiliation that involves a mutual sharing of resources or “partnering.” In strategic alliances, there is a “sharing” of resources and more than a passive investment by one party in another. Rather than seeking a change in control, the “sharing” of resources is to be mutual among the parties, focusing on the strengths of each.

Strategic alliances take many forms, from outsourcing a function by one party to another (especially to jumpstart one party’s business, pursuant to a marketing, warehousing or distribution agreement) to jointly performing a function pursuant to a joint agreement (such as researching or developing a product or marketing products) to its most developed form, a joint venture or partnership as a separate organization. The common theme among alliances is that each party does something better than the other, and the alliance allows each party to focus on what it does best.

The traditional growth strategy for an emerging or mid-size business is to “develop it or buy it.” “Developing it” requires raising capital in a capital transaction that, whether in the form of a public offering or a private placement, consumes time and resources, diverting both from otherwise doing business. “Buying it” through a traditional merger or acquisition also consumes time and resources, and the assimilation required following the buy further diverts time and resources from doing business. As a result, the current wave in alliance formations is with emerging and mid-size businesses that are looking to partner with larger businesses to accelerate both parties’ growth and profitability.

If strategic alliances are managed properly they can give the benefits of mergers and acquisitions. Alliances, if properly structured, naturally lead to acquisitions. The benefits are listed below:

Market Entry: A strategic alliance can ease entry into a foreign market. First, the local firm can provide knowledge of markets, customer preferences, distribution networks, and suppliers. This is especially true in Eastern Europe. Bestfoods is a food-processing firm that sells products such as Mazola corn oil. Bestfoods has formed strategic alliances with firms in several Eastern European countries that, in turn, market its products. A strategic alliance between British Airways and American

Airlines was created in 1993 and designed to give the two airlines increased access to North American and European markets, respectively.

Sometimes, foreign countries require that a certain percentage of ownership remain in the hands of its citizens. For example, in Mexico, foreign investment is limited by law to 49 percent in specified areas, including bonding companies, firms that print and publish periodicals for national distribution, engine and car repairs, and operation of railway terminals. Thus, foreign firms cannot enter such markets alone; a joint venture is required.

Sharing Risks and Expenses: Another major benefit of a strategic alliance is that the firms involved can share risks. For example, in the early 1990s, film manufacturers Kodak and Fuji joined with camera manufacturers Nikon, Canon, and Minolta to create cameras and film for an "Advanced Photo System." The strategic alliance was terminated in 1996 after the film and camera were developed. But it benefited the parties, because, by developing a common product for the market, they shared expenses and they minimized the risks that would have been involved if two or more of them had developed new, but noncompatible, formats. They avoided the potential for the kinds of losses suffered by the Sony Corp. when its Betamax format for videocassette recorders was rejected by the public in favor of the VHS format.

Synergistic Effects of Shared Knowledge and Expertise: A strategic alliance can help a firm gain knowledge and expertise. Further, when partners contribute skills, brands, market knowledge, and assets, there is a synergistic effect. The result is a set of resources that is more valuable than if the firms had kept them separate. For example, in the early 1990s, Motorola initiated an alliance among various partners, including Raytheon, Lockheed Martin, China Great Wall, and Nippon Iridium, to develop and build a global satellite-based communications network. This new network, called Iridium, allowed the partners to develop and implement a worldwide, space-based communications network.

Gaining Competitive Advantage: Similarly, a strategic alliance can help a firm gain a competitive advantage. For example, a strategic alliance can be used to take advantage of a favorable brand image that has been established by one of the partners. (Establishing a brand image is a lengthy, expensive process.) It can also be used to gain shelf space for products. For example, PepsiCo formed a joint venture with the Thomas J. Lipton Co. to market readyto-drink teas throughout the United States. Lipton contributed brand recognition in teas and manufacturing expertise. PepsiCo, as the world's second-largest soft-drink manufacturer, shared its extensive distribution network.

This involves disarming the acquirer by offering a partnership rather than a buyout. The acquirer should assert control from within and takeover the target company.

Strategic Alliance is a significant long/term partnership and collaborative agreement entered into by two or more companies to pursue a set of agreed upon critical goals while remaining (legally) independent organizations.These collaborations can come in many shapes and sizes, including contractual and equity forms. It normally is a synergistic arrangement whereby the participating organizations each brings different strengths and capabilities to the alliance.

Types of Strategic AllianceLicensing – the sale of a right to use certain proprietary knowledge in a defined wayFranchising – a method of doing business wherein a franchisor licenses trademarks and tried and proven methods of doing business to a franchiseeJoint R&D – two or more organizations agree to combine their technologicalknowledge to create new innovative products Turnkey Project – a project in which a separate entity is responsible for setting up a plant or equipment and putting it into operationsRisks of Strategic Alliances Strategic alliances can lead to competition rather than cooperation, to loss of competitive knowledge, to conflicts resulting from incompatible cultures and objectives, and to reduced management control . A study of almost 900 joint ventures found that less than half were mutually agreed to have been successful by all parties

Selection of a suitable Corporate Strategy: Concept of Strategic Fit

Strategic fit express the degree to which an organization is matching

its resources and capabilities with the opportunities in the external environment.

The matching takes place through strategy and it is therefore vital that the

company have the actual resources and capabilities to execute and support the

strategy. Strategic fit can be used actively to evaluate the current strategic

situation of a company as well as opportunities as M&A and divestitures of

organizational divisions. Strategic fit is related to the Resource-based view of the

firm which suggests that the key to profitability is not only through positioning and

industry selection but rather through an internal focus which seeks to utilize the

unique characteristics of the company’s portfolio of resources and capabilities [1]. A

unique combination of resources and capabilities can eventually be developed into

a competitive advantage which the company can profit from. However, it is

important to differentiate between resources and capabilities. Resources relate to

the inputs to production owned by the company, whereas capabilities describe the

accumulation of learning the company possesses. Resources can be classified both

as tangible and intangible:

Tangible:

Financial (Cash, securities)

Physical (Location, plant, machinery)

Intangible:

Technology (Patents, copyrights)

Human resources

Reputation (Brands)

Culture

Strategic Fit is the extent to which the activities of a single organization or of organizations working in partnership complement each other in such a way as to contribute to competitive advantage. The benefits of good strategic fit include cost reduction, due to economies of scale, and the transfer of knowledge and skills.

The success of a merger, joint venture, or strategic alliance may be affected by the degree of strategic fit between the organizations involved.

Classification of Strategic FitClassification of Strategic Fit

 Nestle – Drive Towards WellnessNestle – Drive Towards Wellness

Nestlé is the world’s biggest food and beverage company and produces a wide range of products. Many of its best known brands are household names.

In 2001, Nestlé’s Chief Executive set out the company’s vision when he stated: ‘We want to grow from the respected and trustworthy food company that we are known as now, into a respected and trustworthy food, nutrition and Wellness company’.

Nestle’s Strategic FitNestle’s Strategic Fit

The EVR FIT E Match the strategy to the prevailing Environment, in which the

business operates. In this case, it is a social environment, in which consumers are seeking nutritional products to complement a healthy lifestyle.

V Ensure the strategy is consistent with the organization's Values. One key principle is that of meeting consumers’ needs for nutrition, enjoyment and quality they can trust.

R Ensure the company has the necessary Resources to support the strategy. With its science and technology base, Nestlé is well equipped to develop the required science-based improvements to existing products. It can also handle the development of new products that contribute to Wellness.

The StrategyThe Strategy

Using this approach, over the next five years Nestlé developed or reformulated over 700 products so that they have a lower fat, sugar and salt content.

In addition, the Company looks to educate consumers about healthy lifestyles and proper nutrition.

Nestlé is one of the world’s leading food companies and intends to remain so.

The company’s Wellness strategy is carefully geared to delivering to customers what they now clearly want in relation to the foods they eat; a high nutritional value and a positive contribution to their general Wellness

Strategic fit can also be used to evaluate specific opportunities like M&A

opportunities. Strategic fit would in this case refer to how well the

potential acquisition fits with the planned direction (strategy) of the acquiring

company. In order to justify growth through M&A transactions

the transaction should yield a better return than Organic growth. The Differential

Efficiency Theory states that the acquiring firm will be able increase its efficiency in

the areas where the acquired firm is superior. In addition the theory argues that

M&A transactions give the acquiring firm the possibility of achieving

positive synergy effects meaning that the two merged companies are worth more

together than the sums of their parts individually. This is because merging

companies may enjoy from economics of scale and economics of scope. However, in

reality many M&A transactions fails due to different factors, one of them being lack

of strategic fit. A CEO survey conducted by Bain & Company showed that 94% of

the interviewed CEO’s considered the strategic fit to be vitally influential in the

success or failure of an acquisition. A high degree of strategic fit from can

potentially yield many benefits for an organization. Best case scenario a high

degree of strategic fit may be the key to a successful merger, an efficient

organization, synergy effects or cost reductions. It is a vital term and it should be

taken into consideration when evaluating a company’s strategy and opportunities.

Operationalising Strategy

Operational zing the strategy requires transcending the various components of the strategy to different level, mobilization and allocation of resources, structuring authority, responsibility, task and information flows, establishing policies and evaluation and control.

Strategy is a blue print indicating the courses of action to achieve the desired objective. The objectives are achieved by proper activation of the strategy or implementation steps in the strategic management encompass the operational details to translate the strategy in for effective practice. Strategy formulation is a intellectual process, whereas strategy implementation is more operational in character. Strategy formulation requires good conceptual, integrative and analytical skills but strategy implementation requires special skills in motivating and

managing others. Strategy formulation occurs primarily at the corporate level of the organization while strategy implementation permeates all hierarchical levels.

Strategy activation encompasses communicating and motivating, setting goals, formulating policies and functional strategies, organizational stunting, leadership implementation and resource allocation.

Strategy implementation phase is divided into three components are,

a) Operationlising the strategy (communicating strategy, setting annual objectives, developing divisional strategies and policies, and resource allocation)

b) Institutionalizing the strategy :(organizational structuring and leadership implementation.

c) Evaluation & control of the strategy : 4. Strategic Implementation: Strategic implementation issues. Planning and allocating resources. Organization Structure and Design. Functional Strategies :Production, Human Resource, Finance, Marketing and R. & D. Managing Strategic Change. Strategic Control.

Winning companies know how to do their work better – Michael Hammer and James Champy A management truism says structure follows strategy. However, this truism is often ignored. Too many organizations attempt to carry out a new strategy with an old structure. – Dale McConkey

Strategic-management process does not end when the firm decides what strategies to pursue. There must be a translation of strategic thought into strategic action. Translation requires support of all managers and employees of the business. Implementing strategy affects an organization from top to bottom; it affects all the functional and divisional areas of a business.

INTERRELATIONSHIPS BETWEEN STRATEGY FORMULATION AND IMPLEMENTATION

Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy into place. Strategy execution deals with the managerial exercise of supervising the ongoing pursuit of strategy, making it work, improving the competence with which it is executed and showing measurable progress in achieving the targeted results. Strategic implementation is concerned with translating a decision into action, with presupposes that the decision itself (i.e., the strategic choice) was made with some thought being given to feasibility and acceptability. The allocation of resources to new courses of action will need to be undertaken, and there may be a need for adapting the organization’s structure to handle new activities as well as training personnel and devising appropriate system.

The basic elements of strategic management are summarized in the figure below:

A summary model of the elements of strategic management

Many managers fail to distinguish between strategy formulation and strategy implementation. Yet, it is crucial to realize the difference between the two because they both require very different skills. Also, a company will be successful only when the strategy formulation is sound and implementation is excellent. There is no such thing as successful strategic design per se. This sounds obvious, but in practice the distinction is not always made. Often people, blame the strategy model for the failure of a company while the main flaw might lie in failed implementation. Thus organizational success is a function of good strategy and proper implementation. The matrix in the figure below represent various combination of strategy formulation and implementation:

The Figure shows the distinction between sound/flawed strategy formulation and excellent/ weak strategy implementation. Square B is the ideal situation where a company has succeeded in designing a sound and competitive strategy and has been successful in implementing it. Square A is the situation where a company apparently has formulated a very competitive strategy, but is showing difficulties in implementing it successfully. This can be due to various factors, such as the lack of experience (e.g. for startups), the lack of resources, missing leadership and so on. In such a situation the company will aim at moving from square A to square B, given they realize their implementation difficulties. Square D is the situation where the strategy formulation is flawed, but the company is showing excellent implementation skills. When a company finds itself in square D the first thing they have to do is to redesign their strategy before readjusting their implementation/execution skills. Square C is reserved for companies that haven't succeeded in coming up with a sound strategy formulation and in addition are bad at implementing their flawed strategic model. Their path to success also goes through business model redesign and implementation/execution readjustment.

Taken together all the elements of business strategy it is to be seen as a chosen set of actions by means of which a market position relative to other competing enterprises is sought and maintained. This gives us the notion of competitive position. It needs to be emphasized that 'strategy' is not synonymous with 'long-term plan' but rather consists of an enterprise's attempts to reach some preferred future state by adapting its competitive position as circumstances change. While a series of strategic moves may be planned, competitors' actions will mean that the actual moves will have to be modified to take account of those actions. In contrast to this view of strategy there is another approach to management practice, which has been common in many organizations. In organizations that lack strategic direction there has been a tendency to look inwards in times of stress, and for management to devote their attention to cost cutting and to shedding unprofitable divisions. In other words, the focus has been on efficiency (i.e. the relationship between inputs and outputs, usually with a short time horizon) rather than on effectiveness (which is concerned with the organization's attainment of goals - including that of desired competitive position). While efficiency is essentially introspective, effectiveness highlights the links between the organization and its environment. The responsibility for efficiency lies with operational managers, with top management having the primary responsibility for the strategic orientation of the organization.

An organization that finds itself in cell 1 is well placed and thrives, since it is achieving what it aspires to achieve with an efficient output/input ratio. In contrast, an organization in cell 2 or 4 is doomed, unless it can establish some strategic direction. The particular point to note is that cell 2 is a worse place to be than is cell 3 since, in the latter, the strategic direction is present to ensure effectiveness even if rather too much input is being used to generate outputs. To be effective is to survive whereas to be efficient is not in itself either necessary or sufficient for survival.

In crude terms, to be effective is to do the right thing, while to be efficient is to do the thing right. An emphasis on efficiency rather than on effectiveness is clearly wrong. But who determines effectiveness? Any organization can be portrayed as a coalition of diverse interest groups each of which participates in the coalition in order to secure some advantage. This advantage (or inducement) may be in the form of dividends to shareholders, wages to employees, continued business to suppliers of goods and services, satisfaction on the part of consumers, legal compliance from the viewpoint of government, responsible behaviour towards society and the environment from the perspective of pressure groups, and so on.

Even the most technically perfect strategic plan will serve little purpose if it is not implemented. Many organizations tend to spend an inordinate amount of time, money, and effort on developing the strategic plan, treating the means and circumstances under which it will be implemented as afterthoughts! Change comes through implementation and evaluation, not through the plan. A technically imperfect plan that is implemented well will achieve more than the perfect plan that never gets off the paper on which it is typed.

Successful strategy formulation does not guarantee successful strategy implementation. It is always more difficult to do something (strategy implementation) than to say you are going to do it (strategy formulation)! Although inextricably linked, strategy implementation is fundamentally different from strategy formulation. Strategy formulation and implementation can be contrasted in the following ways:

Strategy formulation Strategy implementation Strategy formulation is positioning forces before the action.

Strategy implementation is managing forces during the action.

Strategy formulation focuses on effectiveness.

Strategy implementation focuses on efficiency.

Strategy formulation is primarily an intellectual process

Strategy implementation is primarily an operational process.

Strategy formulation requires good intuitive and analytical skills.

Strategy implementation requires special motivation and leadership skills

Strategy formulation requires coordination among a few individuals

Strategy implementation requires combination among many individuals

Forward Linkages: The different elements in strategy formulation starting with objective setting through environmental and organizational appraisal, strategic alternatives and choice to the strategic plan determine the course that an organization adopts for itself. With the formulation of new strategies, or reformulation of existing strategies, many changes have to be effected within the organization. For instance, the organizational structure has to undergo a change in the light of the requirements of the modified or new strategy. The style of leadership has to be adapted to the needs of the modified or new strategies. In this way, the formulation of strategies has forward linkages with their implementation.

Backward Linkages: Just as implementation is determined by the formulation of strategies, the formulation process is also affected by factors related with 'implementation. While dealing with strategic choice, remember that past strategic actions also determine the choice of strategy. Organizations tend to adopt those strategies which can be implemented with the help of the present structure of resources combined with some additional efforts. Such incremental changes, over a period of time, take the organization from where it is to where it wishes to be.

lt is to be noted that while strategy formulation is primarily an entrepreneurial activity, based on strategic decision -making, the implementation of strategy is mainly an administrative task based on strategic as well as operational decision-making. The next section focuses on the various issues involved in the implementation of strategies.

Communicating the Strategy:

Strategy implementation involves a number of people at different levels. Many of them might not have taken part in the strategy formulation. This highlights the importance of communicating the strategy. Even those who are not directly involved in strategy implementation need to be informed about the strategy because everybody in the organization should know what are the future plans for the organization, what changes are affecting the organization, why these changes or strategy, what are the objectives and implications. It is essential to instill a feeling of belongingness to the organization. Absence of such communication would create a feeling of alienation in the employees causing morale and motivation to dampen and would also cause resistance to the strategy.

Communication should go to all stake holders including marketing, customers, shareholders, suppliers etc. It helps every person to get link to the whatever task is at hand to the Co. Certain business secrets and figures are not divulged in the interest of the Company.

ISSUES IN STRATEGY IMPLEMENTATION

The different issues involved in strategy implementation cover practically everything that is included in the discipline of management studies. A strategist, therefore, has to bring to his or her task a wide range of knowledge, skills, attitudes, and abilities. The implementation tasks put to test the strategists' abilities to allocate resources, design structures, formulate functional policies, and take into account the leadership styles required, besides dealing with various other issues.

The strategic plan devised by the organization proposes the manner in which the strategies could be put into action. Strategies, by themselves, do not lead to action. They are, in a sense, a statement of intent: implementation tasks are meant to realise the intent. Strategies, therefore, have to be activated through implementation.

Strategies should lead to plans. For instance, if stability strategies have been formulated, they may lead to the formulation of various plans. One such plan could be a modernization plan. Plans result in different kinds of programmes. A programme is a broad term, which includes goals, policies, procedures, rules, and steps to be taken in putting a plan into action. Programmes are usually supported by funds allocated for plan implementation. An example of a programme is a research and development programme for the development of a new product.

Programmes lead to the formulation of projects. A project is a highly specific programme for which the time schedule and costs are predetermined. It requires allocation of funds based on capital budgeting by organizations. Thus, research and development programmes may consist of several projects, each of which is intended to achieve a specific and limited objective, requires separate allocation of funds, and is to be completed within a set time schedule.

Projects create the needed infrastructure for the day-to-day operations in an organization. They may be used for setting up new or additional plants, modernising the existing facilities, installation of newer systems, and for several other activities that are needed for the implementation of strategies.

Implementation of strategies is not limited to formulation of plans, programmes, and projects. Projects would also require resources. After that is provided, it would be essential to see that a proper organizational structure is designed, systems are installed, functional policies are devised, and various behavioural inputs are provided so that plans may work.

Given below in sequential manner the issues in strategy implementation which are to be considered:

♦ Project implementation

♦ Procedural implementation

♦ Resource aIIocation

♦ Structural implementation

♦ Functional implementation

♦ Behavioural implementation

But it should be noted that the sequence does not mean that each of the foIIowing activities are necessarily performed one after another. Many activities can be performed simultaneously, certain other activities may be repeated over time; and there are activities, which are performed only once.

In all but the smallest organizations, the transition from strategy formulation to strategy implementation requires a shift in responsibility from strategists to divisional and functional managers. Implementation problems can arise because of this shift in responsibility, especially if strategy-formulation decisions come as a surprise to middle and lower-level managers. Managers and employees are motivated more by perceived self-interests than by organizational interests, unless the two coincide. Therefore, it is essential that divisional and functional managers be involved as much as possible in strategy-formulation activities. Of equal importance, strategists should be involved as much as possible in strategy-implementation activities.

Management issues central to strategy implementation include establishing annual objectives, devising policies, allocating resources, altering an existing organizational structure, restructuring and reengineering, revising reward and incentive plans, minimizing resistance to change, matching managers with strategy, developing a strategy-supportive culture, adapting production/operations processes, developing an effective human resource function and, if necessary, downsizing. Management changes are necessarily more extensive when strategies to be implemented move a firm in major new direction.

Managers and employees throughout an organization should participate early and directly in strategy-implementation decisions. Their role in strategy implementation should build upon prior involvement in strategy-formulation activities. Strategists’ genuine personal commitment to implementation is a necessary and powerful motivational force for managers and employees. Too often, strategists are too busy to actively support strategy-implementation efforts, and their lack of interest can be detrimental to organizational success. The rationale for objectives and strategies should be understood clearly communicated throughout an organization. Major competitors' accomplishments, products, plans, actions, and performance should be apparent to all organizational members. Major external opportunities and threats should be clear, and managers and employees' questions should be answered. Top-down flow of communication is essential for developing bottom-up support.

Firms need to develop a competitor focus at all hierarchical levels by gathering and widely distributing competitive intelligence; every employee should be able to be benchmark her or his efforts against best-in-class competitors so that the challenge becomes personal. This is a challenge for strategists of the firm. Firms should provide training for both managers and employees to ensure that they have and maintain the skills necessary to be world-class performers.

Strategic Management LinkagesStrategic management linkages are very important for purpose of orderly studyin organization. In real scenario of strategic formulation and implementation processes are interlinked with each other. There are two types of linkages exist between the strategy formulation and implementation phase as listed below:I. Forward LinkagesII. Backward LinkagesForward Linkages• It deals with the impact of the formulation on implementation of strategies in enterprise.• There are different elements are required for strategy formulation that startingwith the mission and vision setting through environmental and organizational appraisal, strategic alternatives and choice to the strategic plan which determineand applicable to organization .• It involves formulation of new strategies or reformulation of existing strategies,which may changes and have to be effected within the organization.• For example, when organization structure undergone change, this time, formulation of new strategies are crucial otherwise undergone reformulation of existing strategies and try to make changes for dramatic improvement in organization structure for implementation of strategy.

Backward Linkages• It concerned with the impact in terms of opposite directions in organization.i.e., Implementation is determined by the formulation of strategies. In this scenario, the formulation process is also affected by factors which are relating with implementation.• It dealing with strategic choice, in this circumstance, strategist remembers the past strategic actions and process which determine and choose best choicestrategy.• Strategist tends to adopted past strategies which already implemented in organization. In this case, strategist take help from implemented strategy and design the appropriate strategies as per meet present requirement of the organization along with added special features in these strategies. These type of incremental changes helpful to organization for very long time survival in the market.

Organization Structure and Design

The ideal organizational structure is a place where ideas filter up as well as down, where the merit of ideas carries more weight than their source, and where participation and shared objectives are valued more than executive order. – Edson Spencer

Changes in strategy lead to changes in organizational structure. Structure should be designed to facilitate the strategic pursuit of a firm and, therefore, follows strategy. Without a strategy or reasons for being (mission), companies find it difficult to design an effective structure. Chandler found a particular structure sequence to be often repeated as organizations grow and change strategy over time. There is no one optimal organizational design or structure for a given strategy or type of

organization. What is appropriate for one organization may not be appropriate for a similar firm, although successful firms in a given industry do tend to organize themselves in a similar way. For example, consumer goods companies tend to emulate the divisional structure-by-product form of organization. Small firms tend to be functionally structured (centralized). Medium-size firms tend to be divisionally structured (decentralized). Large firms tend to use an SBU (strategic business unit) or matrix structure. As organizations grow, their structures generally change from simple to complex as a result of linking together of several basic strategies.

Chandler’s Strategy-Structure Relationship

Numerous external and internal forces affect an organization; no firm could change its structure in response to every one of these forces, because to do so would lead to chaos. However, when a firm changes its strategy, the existing organizational structure may become ineffective. Symptoms of an ineffective organizational structure include too many levels of management, too many meetings attended by too many people, too much attention being directed toward solving interdepartmental conflicts, too large a span of control, and too many unachieved objectives. Changes in structure can facilitate strategy-implementation efforts, but changes in structure should not be expected to make a bad strategy good, to make bad managers good, or to make bad products sell.

Structure undeniably can and does influence strategy. Strategies formulated must be workable, so if a certain new strategy required massive structural changes it would not be an attractive choice. In this way, structure can shape the choice of strategies. But a more important concern is determining what types of structural changes are needed to Implement new strategies and how these changes can best be accomplished.

We examine this Issue by focusing on seven basic types of organizational structure: functional, divisional by geographic area, divisional by product, divisional by customer, divisional process, strategic business unit (SBU), and matrix.

The Functional Structure

The most widely used structure is the functional or centralized type because this structure is the simplest and least expensive of the seven alternatives. A functional structure groups tasks and activities by business function, such as production/operations, marketing, finance/accounting, research and development, and management information systems. Besides being simple and inexpensive, a functional structure also promotes specialization of labour, encourages efficiency, minimizes the need for an elaborate control system, and allows rapid decision making. Some disadvantages of a functional structure are that it forces accountability to the top, minimizes career development opportunities, and is sometimes times characterized by low employee morale, line/staff conflicts, poor delegation of authority, and inadequate planning for products and markets. Most large companies abandoned the functional structure in favour of decentralization and improved accountability.

Figure: Functional Organization Structure

A competitive advantage is created when there is a proper match between strategy and structure. Ineffective strategy/structure matches may result in company rigidity and failure, given the complexity and need for rapid changes in today's competitive landscape. Thus, effective strategic leaders seek to develop an organizational structure and accompanying controls that are superior to those of their competitors.

Selecting the organizational structure and controls that result in effective implementation of chosen strategies is a fundamental challenge for managers, especially top-level managers. This is because companies must be flexible, innovative, and creative in the global economy if they are to exploit their core competencies in the pursuit of marketplace opportunities. Companies must also maintain a certain degree of stability in their structures so that day-to-day tasks can be completed efficiently.

Access to reliable information is imperative if executives are to reach decisions regarding the selection of a structure that is sufficiently flexible and stable. Useful information contributes to the formation and use of effective structures and controls, which yield improved decision making.

To coordinate more complex organizational functions, companies should abandon the simple structure in favour of the functional structure. The functional structure is used by larger companies and by companies with low levels of diversification.

The functional structure consists of a chief executive officer or a managing director and limited corporate staff with functional line managers in dominant functions such as production, accounting, marketing, R&D, engineering, and human resources. The functional structure enables the company to overcome the growth-related constraints of the simple structure, enabling or facilitating communication and coordination.

However, compared to the simple structure, there also are some potential problems. Differences in functional specialization and orientation may impede communications and coordination. Thus, the chief executive officer must integrate functional decision-making and coordinate actions of the overall business across functions. Functional specialists often may develop a myopic (or narrow) perspective, losing sight of the company's strategic vision and mission. When this happens, this problem can be overcome by implementing the multidivisional structure.

The Divisional Structure

As a small organization grows, it has more difficulty managing different products and services in different markets. Some form of divisional structure generally becomes necessary to motivate employees, control operations, and compete successfully in diverse locations. The divisional structure can be organized in one of four ways: by geographic area, by product or service, by customer, or by process. With a divisional structure, functional activities are performed both centrally and in each separate division.

Cisco Systems discarded its divisional structure by customer and reorganized into a functional structure. CEO John Chambers replaced the three-customer structure based on big businesses, small business, and telecoms, and now the company has centralized its engineering and marketing units so that they focus on technologies such as wireless networks. Chambers says the goal was to eliminate duplication, but the change should not be viewed as a shift in strategy. Chambers' span of control in the new structure is reduced to 12 managers reporting directly to him from 15.

Kodak reduced its number of business units from seven by-customer divisions to five by-product divisions. As consumption patterns become increasingly similar worldwide, a by-product structure is becoming more effective than a by-customer or a by geographic type divisional structure. In the restructuring, Kodak eliminated its global operations division and distributed those responsibilities across the new by-product divisions.

Figure : Divisional StructureA divisional structure has some clear advantages. First and perhaps foremost accountability is clear. That is, divisional managers can be held responsible for sales and profit levels. Because a divisional structure is based on extensive delegation of authority, managers and employees can easily see the results of their good or bad performances. As a result, employee morale is generally higher in a divisional structure than it is in centralized structure. Other advantages of the divisional design are that it creates career development opportunities for managers, allows local control of local situations, leads to a competitive climate within an organization, and allows new businesses and products In be added easily.

Functional Strategies :Production, Human Resource, Finance, Marketing and R. & D.

“Most of the time, strategists should not be formulating strategy at all; they should be getting on with implementing strategies they already have”

Reasons for Functional Strategies Are Needed to FirmsThe development of functional strategies is formulated by the top-level anagement of the firm’s. The functional level involves the execution of policy which made by the top level management. Strategic managers need to be segregated into viable functional plans and policies and avoid non viable functional plans and polices

which are compatible with each other in business. In this way, strategic managers in functional areas have discharge their role relating with functions in business. Strategic managers have study on environmental factors which affected to and relevancy to firms. Organization strategies which are affected the choice of functional strategies. Finally, the actual process of choice is influenced by objectives as well as subjective factors in different functions. Major reasons for functional strategies are needed to firms are listed below:• The strategic decisions are implemented by all parts of a firm’s/ organization.• There is a standard basis available for controlling activities in the different functional areas of the business.• When plans are clearly lay down that time functional managers to take decisionsin flexible and short time and what is to be done and executive policies providethe discretionary framework within which decisions are needed to be taken by functional managers in each functions of business.• Routine and similar situations are happened in different functional areas that are handled in a consistent manner by the functional managers in business.• Each functional manager in business should be taken into coordination to all functional managers; it must takes place in different functional areas in business.

FINANCIAL STRATEGY FORMULATIONThe financial management strategies are related to several finance and accountingfunctions in organization. Finance and accounting concepts are to be considered ascentral for strategy implementation. Financial information are; acquiring, neededcapital, sources of fund, developing projected financial statements, budgets, management, usage of funds and evaluating the worth of business, ratio analysis,cash flow statement, maintain of books of accounts etc. strategist need to formulate financial strategies relating above mentioned issues in finance areas forimplementation in organization.

Finance and Accounting PoliciesFinance and accounting policies are outlined:• Ability to raise short term and long-term capital: either debt or equity.• To maintain good corporate level resource.• To know the cost of capital relative to industry and competitors• Tax consideration• To build up effective relationship with owners, investors, financial institution and stock holders.• To know the leverage position: capacity to utilization financial strategies, like lease or sale and lease back.• To aware of the cost of entry and barriers of the entry.• To know the price earning ratio• Present working capital position of the organization.• Effective cost control and ability to minimize cost of expenditure for productionof goods and service.• Financial size of the organization.• Efficient and effective accounting system for cost, budget, and profit planningof the organization.• To determine liquid position in the organization and determine the cash flow and fund flows and ratio analysis in organization.

• Account receivables and account payables, cost center, types of cost and standardand actual cost performance in organization.

Acquiring Capital to Implement Strategies / Sources of Funds• Successful strategy implementation often requires and brings additional capitalto business organization.• Organization capital acquiring is based on the two important components suchas equity and debt• Capital structure is the combination of debt and equity, it is very vital to company for successful of business operations in this way maximize the benefits to company.• Companies have enough debt in its capital structure to boost its return on investment by applying debt to products and projects earning more than the cost of the debt.• In low earning periods, too much debt in capital structure components of an organization can endanger to stock holders return and jeopardize to organizationsurvival.• Fixed debt is very important to company to keep its financial status in constantmanner and avoid to overpaying to debt holders due to pay fixed percentage of return to debt holder in business.• If company is earning more profit, this company collects too much debt frompublic and reduces equity ratios in capital structure. It is more impact to business to maximize the benefits to business operations.• Mergers, takeovers, acquisitions are the serious issues in today’s scenario in acquiring capital.

Major Factors Regarding Financial Strategy• Capital structure.• Procurement of capital and working capital borrowings.• Reserves and surplus as source of funds relating with lenders, banking and financial institutions.• Source of funds is the important to implementation of the financial strategiesin organization.• Organizations having the different range of source of funds alternatives in the form that a company may rely on external borrowing and anothercompany can be followed the internal policy of finance.Projected Financial Statements/Budget• Projected financial statement analysis is a central strategy implementation technique.• It allows an enterprise to examine the expected results of various actions andapproaches relating the finance and accounting.• This analysis is used for estimation of future and impact of various implementation decisions in organization.• Financial institutions request the projected financial statement when an organization seeks capital from the financial institutions.• For this, an enterprise should prepare ratio analysis, fund flow statement and financial statements which are computed projected financial ratios under various strategy implementation scenarios.

• Financial statements and ratio have been providing the insight feasibility of company or enterprise for past years and current years for various strategy implementation approaches.

Projected Financial Budget• Financial budget is the statement of income and expenditure for the particularperiod.• It is document which provides details how funds will be obtained and spent for a specified period of time.• Annual budget are most common. Budget period range from one day to morethan ten years. It is depending upon the firm’s decisions.• Financial budget will specify the needs and requirement for implementation of financial budget in company.• It is not a tool for limiting expenditure but rather as a method for obtaining the most productive and profitable use of an organization core resources.• It can be viewed as the planned allocation of firm resources which are based on forecasts of the future.

PRODUCTION STRATEGY FORMULATION• The production strategies are relating to production system, operational planning and control, and research and development.• Production strategies are adopted which are affected to firm’s nature of productsor services, how these served to market, and the manner in which these strategies are served in markets.• All theses influence to firm’s production operations systems structure and objectives which are used to determine the operations plans and policies relatingwith the production.• The operation system structure is concerned with the manufacturing or service and supply or delivery system , and operations system objectives , these are related to customer services and resource utilization which are determine the operations, plans and policies are set in firm’s activities.Production/Operation/Technical IssuesProduction or operation or technical issues are as follows:• To know the present raw material cost and availability• Inventory control system of the organization.• Location facilities; layout and utilization facilities.• Technical efficiency and effective utilization of technical resource in the organization.• Effective use and implementation of subcontracting.• Degree of vertical integration in terms of value added and profit margin of theproduct.• To know the efficient and cost benefit of production techniques.• Effective utilization and implementation of operation control procedure: design,scheduling, purchasing, quality control and efficiency.• To know the costs and technological competencies relative to industry and competitors.• Research development, innovative, advance ethnological development.• Patents, trademarks and similar legal protection for their organization products/service.Production System

• Production system is concerned with the capacity, location, layout, product orservices design, work systems, degree of automation, extent of vertical integration.• Production strategies are significant and play vital issues which are affecting the capability of the organization goals and objectives for achievement of both.Formualtion of Functional Strategy 207• Production strategy implementation are considered into account in the production system and used for decisions which are long term in nature. These are influence not the only operations capability of an organization. Apart from the ability to implement strategies and achieve strategic objective in company.

Operations Planning and Control• Strategies are related to operations planning and control is concerned with aggregate production planning, materials supply, inventory cost and quality management and maintenance of plant and equipment in firm’s level.• It is the aim of strategy implementation, for this purpose, we have to see howefficiently resources are utilized and in what manner the day to day operations can be managed in the light of long term objectives.• Operations planning and control provides to plan and control production process in company.• It deals with the centralized the operations planning and decentralized the operationplanning. It involves the testing, standardization and fabricating the equipment.• Few companies are using the quality which is considered as the strategic tool.It helpful to design the test the quality inspection, standardization in terms of quality engineering.

RESEARCH AND DEVELOPMENT STRATEGY• Research and development can play significant role and integrated with partof strategy implementation.• It refers to development of new products and improving the old products byadding new features to old products and services.• Effective research and development strategy implementation results ensurethat the quality products, quality services, and reduced the cost of products and services, satisfying the customer needs and requirements.• Research and development department is one of the valuable department in firms, this department consists skillful resource persons who are perform tasks like transferring complex technology, adjusting processes to local raw materials, adapting process to local markets, and altering products to particular tastes and specifications.• Product development, market penetration and concentric diversification strategies are required to develop new products and services successfully developed and also significantly improved to old products into new version products and bring effective and excellence of research development is required to all types of business operations in market.• Technological developments are affected to company’s products and serviceswhich are offered to the ultimate customers. It is affected to consumer and industrial products and services shorten product life cycles.• Technological advancement will be taken by the company in form of increasing

the profitability and enhance the customer base including existing and old and new customers in market, able to rival to rivalries in market.• Majority of the survey shows that effective research and development strategythat ties external opportunities to enhance the internal strengths and these things linked with the objectives of firms.

Well Formulated Research Development Strategy ResultsWell formulated research development strategy results enhance the opportunities from internal and externally from the company environment. The major results are outlined:• It emphasis on product or process improvements• It is basic or applied research• To be leaders or followers in R&D• It develop to robotics or manual type processes• To perform R&D within the firm or to contract R&D to outside of firms.• To use universal researchers or private sector researchers.

There must be effective interactions between R&D department and other functional departments in implementing different types of generic business strategies like focus strategy, leadership strategy and grand strategy. Avoid and minimize theconflicts between marketing, finance or accounting, R&D and information systemsdepartments and make clear policies and objectives of company.

Proper Guidelines for Research and Development StrategiesProper guidelines for research and development strategies are listed below:• In the case, the company’s technical progress slow, its result in market rate is moderate and significant barriers to possible new entrants, it can be clarified to company in house R&D is preferred for solution. In the case, research and development strategies are successful; it will result in a temporary products and process monopoly that can be exploiting by the company.• In the case, the technology change is rapidly and the market is growing slowlyin this case the research and development involves very risk due to lead to new development of an ultimately obsolete technology or one for which there is no market for products and services which offered by company.• In the case, technology change is slow in spite of the market is growing quickly,in this case, there is not enough time for in house development. In this prescribed approach, it is to obtain R&D expertise on an exclusive or non exclusive basis from an outside firm.• In the case, both technical progress and market growth are very fast. These circumstances, R&D expertise should be obtained through acquisition of a well established firm in the industry.

HUMAN RESOURCE STRATEGYHuman resources management refers to recruitment, hiring, training, developmentand compensation of the employees of the organization. Human resource management activities are as follows:• Activities• Costs• Assets associated with the recruitment, hiring training, development, and compensation of all types of personnel.

• Labor relations activities• Developed of knowledge based skills and core competencies.The human resource function ensures that the company or organization has theright mix of skill people to perform its value creation activities effectively.• Human resource strategy play significant role in implementation of strategy in company.• The job of human resource manager is changing rapidly as there companies that downsize and recognize employees requirements for projects.• Strategic responsibilities of the human resource manager as listed below:• Assessing the staffing needs• And costs for alternative strategies proposed during strategy formulation and developing in firms.• Staffing plan for effectively implementing strategies in firms. This plan must consider how best to manager calculated to the individual costs in firm.• The plan must also include how to motivate employees and managers firms.• The human resource department must develop performance incentives that clearly link between the performance and pay to employees in this way to achieve human resource strategies. • It is process of empowering to implement human resource strategies; it is responsibilities of managers and employees in firm and their involvement in strategic management activities that yields the greatest benefits when all organizational members can be understood clearly and to know how they will benefit personally if the firm does well.• It clearly linking between company duties and responsibilities and personal benefits is a major new strategic responsibility of human resource managers.• Other new responsibilities for human resource managers may include:establishing and Administering an Employee Stock ownership plan (ESOP), instituting an effective childcare policy, and providing leadership for managers and employees in this way to allow them balance to work and family.

Human Resource Strategies Problems• Well designed strategic management system can be failed if sufficient attentionis not given to human resource dimension in firms.• Human resource problems arises when business implement strategies can usually traced to three causes as listed below:I. Disruption of social and political structuresII. Failure to match individuals aptitudes with implementation tasksIII. Inadequate top management support for implementation activitiesHuman Strategy implementation poses a threat to many managers and employees in organization due to new power and status management relationships are anticipated and realized in firms. New formal and informal groups, values, beliefs,and priorities may be largely unknown by managers and employees, these things may become engaged in resistance behavior as their roles prerogatives and power in the firm change. Disruption of social and political structures that accompany withstrategy execution, it must be anticipated and considered during strategy formulation and managed during strategy implementation process.

Major Tasks of Human Resource StrategyHuman resource strategies are concerning with matching managers with strategyspecify that jobs have specific and relatively static responsibilities, although people

are dynamic in their personal development it is commonly used methods that willbe matched managers with strategies to be implemented in firm’s. It includes thetransferring managers task and duties for this purpose developing leadership workshops, offering career development activities, promotions, job enlargements and job enrichment to employees of the firm’s.

According to Charles Greer“In a growing number organizations, human resource are now viewed as source ofcompetitive advantage, there is greater advantage that distinctive competencies are obtained through highly developed employed skills, distinctive organizational cultures management processes and systems”.The role of human resource enabling the organization effectively deals with theexternal environment challenges. The human resource management function hasbeen accepted as a strategic partner in the formulation of organizations strategies,implementation of such strategies through human resource planning employment,training, appraisal, and compensation practices of employees, these are stronglyinfluence on employee competence is very important to business enterprise.

The following points should be kept and focused in mind:1. Recruitment and selection: in this process, the workforce will be more competent if a firm can successfully identity, attracts, and select and most competent applicants on market.2. Training: in this process, the workforce will be more competent if employeesare well trained to perform their job property.3. Appraisal of performance: it refers to the performance appraisal is to identify and performance deficiencies experienced due to lack of competences.Such deficiencies, once identified, can often be solving through counseling, coaching or training in business enterprise.4. Compensation: it refers in a firm can usually increase the competency of itsworkforce by offering pay and benefit packages that are more attractive than those of there competitors, this proactive enables organizations to attract and retain the most capable people in jobs.Strategy and Human Resource Management• The human resource strategy of business should reflect and support the corporate strategy.• An effective human resource strategy include way in which the organization plans to develop its employees and provide them suitable opportunities and better working conditions so that their optional contribution is ensured .• It implies to be selecting the best available personnel, in this ensuring a fit between the employees and the job and retaining, motivating, and empoweringemployees to perform well in direction of corporate objectives.Strategic human resource management may be defined as the linking of humanresource management with strategic goals and objectives to improve businessperformance and develop organizational culture that fosters innovation and flexibility.The success of an organizational depends on it human resource. This refers to howthey are acquired, developed, motivated and retained. Organizational play an important role for organizational success. The pre supposes is an integrated approach towards human resource functions and overall business functions of an organization.

The human resource management practice of an organization may be importantsource of competitive advantage. Human resource strategy is focussed to the following points:• Pre selection practices including human resource planning and job analysis in business enterprise.• Selection practice refers to staff various positions in the organizations and predefined requirement and selection policies and procedures should be designedkeeping in view the mission and the purpose of an organization.• Post selection practices is to maintain and improve the workers job performancelevels, human resources decisions that related to training and development, performance appraisal, compensation and motivation should be based on corporate strategy of the organization.

Strategic Role of Human Resource ManagementThe prominent areas where human resource manager can play strategic role are asfollows:1. Providing Purposeful Direction• The human resource management must be able to lead people and the organization towards the desired direction.• It is involving right people for right job from the beginning.• The most important tasks of professional management is to ensure that the object of an organization has been internalized by each individual working in the organization.• Goals of an organization state the clear purpose and justification of its existence in business enterprise.2. Creating Competitive Atmosphere• Presents globalize market maintaining a competitive gain is the object of any organization.• There are two important ways of business can be achieved a competitive advantage over the others. The first is cost leadership which refers to the firm aims to become a low cost leader in the industry. The second competitive strategy is differentiation under which the firm seeks to be unique in the industry in terms of dimensions that are highly valued by the customers.• Putting these strategies into implementations that effect carries a heavy premium on having a highly committed and competent workforce.

3. Facilitation of Change• The human resource will be more concerned with substance rather than form, accomplishments rather than activities, and practice rather than theory.• The personnel function will be responsible for furthering the organization not just maintaining it.• Human resource management will have to devote more time to promote changes than to maintain the status quo in business operations.4. Diversion of workforce• In the modern organization management refers to diverse workforce is a great challenge.• Workforce diversity can be observed in terms of male and female workers.Young and old workers, educated and unrelated workers. Unskilled and professional employees act.

• Moreover, many organizations also have people of different castes, religious and nationalities.• The workforce in future will comprise more of educated and self conscious workers. They will ask for high people of degree of participation and avenues for fulfillment.• Money will no longer be the sole motivating force for majority of the worker. Non financial incentives will also play an important role in motivating the workforce.5. Empowerment of human resource• Empowerment means authorizing every number of a society or organization to take of his/her own destiny realizing his/her full potential.• It involves to be given more power to those who, at present, have little control what they do and little ability to influence the decisions being made around them.6. Building core competency• The human resource manager has a great role to play in developing core competency by the firm.• A core competency is a unique strength of an organization which may not be shared by others.• This may be in the form of human resource, marketing capacity, or technological capability.• If the business is organized on the basis of core competency, it is likely to generate competitive advantage. Because of this reason, many organizations have restructuring their businesses around by divesting those businesses which do not match core competences implies leveraging the limited resources of a firm.• It needs creative, courageous and dynamic leadership having faith in organizations human resource.7. Development of works ethics and culture;• Greater efforts will be needed to achieve cohesiveness because workers will have transient commitment to groups.• As changing work ethic requires increasing emphasis on individuals, job will have to be redesigned to provide challenge.• Flexible starting and quitting times for employees may be necessary.• Focus will shift from extrinsic to intrinsic motivation. A vibrant work culture will have to be developed in the organizations to create an atmosphere of trust among people and to encourage creative ideas by the people.• It is far reaching changes with the help of technical knowledge will be required for this purpose.

MARKETING STRATEGY FORMULATIONMarketing strategy formulation is one of major task to business firms. Ordinarymarketing strategy formulation is not risk factor to firms; it is not created valuableimpact to firms. Therefore, the present scenario, marketing strategy formulationthat is considered to be the activities which are related to identifying the needs ofcustomers and taking such actions which are satisfying them and inform of somereturn consideration from business. In marketing, it is more important to do what isright to do and what is immediately profitable venture to business to firms.Relationship to marketing and other functions in business can be understood by the following mentioned factors:• Single marketing department cannot produce superior value for the customer.All company departments must work together to accomplish and satisfy customerneeds and requirements.

• Each department is a link in the value chain of firms.• A company value chain is only as strong as the weakest link to firms.• Marketers are challenged to find ways to get all departments to think customersand search knowledge about customers.• Marketing competitive advantage and value chain gains should be taken purposekeep well partnering will produce a value delivery network; it consists of suppliers, distributors and ultimately customers.

Market is connecting customersToday’s market scenario is the competitive marketplace, companies must be customer oriented towards the products and services. Companies must win customers and win competitors and keep them by delivering greater value goods and services. Since companies have to failure to satisfy all customer requirements and needs in market.Companies must divide the total market on the basis segmentation and choose thebest segments like market targeting and design strategies for profit oriented ser

DEVELOPING THE MARKETING MIXMarketing mix is the combination of 4 P’s i.e. product, price, place and promotion.Company is decided to overall its competitive strategy. Firm’s ready to begin planning the details of the marketing mix. The marketing mix is the set of controllable marketing variables in firm. Firms are using 4 P’s and to produce valuable products and services and delivery to ultimate users of the product and services. The marketing mix is consisting of everything that the firm ready to do and influence the demands for products and services from the customers.Product• Product stands for the goods and service combination which offered by the company to the target market.• Strategies are required for adding new products and removing the failure products from markets.• Strategic decisions are relating with the branding, packaging, and other productfeatures like guarantee and warranty.Price• Price refers to amount of money which is paid by customers for obtaining theproduct and services from company.• Price strategies are pertaining to the location of the customers, price flexibility,related items within a product line and terms of sale.• Pricing strategies are useful to company for entering into market especially with a new product that designed by the company.Place• Place refers to the company activities that make the product and services areavailable to target consumers.• Strategist should be taken the responsibility for distribution of goods and services to ultimate customers. In many cases, the ownership is transferred from company to customers.• Strategies applicable to middlemen like wholesalers, retails, must be designedby the company.Promotion• Promotion refers to the activities that communicate the merits of the productand persuade target consumers to buy it from the company.

• Strategies are needed to combine individual methods like advertising, personnelselling, and sales promotion into a coordinated campaign.• Promotional strategies must be adjusted as a product move from an earlier stages form latest stage of its life.

For effective marketing program design purpose, it blends all the marketing mixelements into a coordinated program that in this way to achieve the company’smarketing objectives by delivering value to consumers in business. The 4 P’s seemsto take the seller’s view rather than the buyer’s view and perhaps a better classificationcan be the 4 C’s as outlined:a. Product = Customer Solutionb. Price = Customer Costc. Place = Convenienced. Promotion = Communication

DEALING WITH THE MARKETING ENVIRONMENTA company must carefully analyze its environmental factors and in order to avoid the threats from external environment and take advantage of the opportunities.Environmental areas to be analyzed as listed below:• Environment forces are to close the company like ability to serve customers, other company departments, channel members, suppliers, competitors and publics.• Environmental broader forces like demographic and economic forces, politicaland legal forces, technological and ecological forces and social and cultural forces.

Managing Strategic Change

ORGANISATION AND STRATEGY IMPLEMENTATIONNature of Strategic Change ManagementTo change is to move from the present to the future, from known information torelatively unknown information. Therefore, change can be defined as “to make orbecome different, give or begin to have a different form”. For example post war recovery of Iraq and Afganistan. Change also refers to dissatisfaction with the old values, beliefs and systems and hence adapts to new values, beliefs and systems. The deficiency also reflects the inability of the system to respond to environmental changes. Change signifies a qualitatively different way of perceiving, thinking and behaving to make improvement over the past and present trends of the business management. Change line context of an organization can be termed as a process of bringing about relatively enduring alteration in the present status of an organization or itscomponents or interrelationships among the components and their differentiated and integrated functions in totally or partially. Therefore, changes in organization have attained greater adaptability and viability with reference to the current and emerging environmental developments in the world.Strategic change in organization has signifies alteration in the objectives, goalsand strategies, procedures for converting input into outputs, its specified features,structures and human resource. Changes in these are, however, inter-related inorganization. Thus, it may include product and process restructuring, mergers andalliances, diversification and installing new systems. It may also mean change in

attitudes and skills of organizational human resource, tasks and technology of theenterprise, alteration in customs responsive, norms and culture. These changes areessential and needed to business enterprise.In view of its pervasive nature, change at anyone level is interrelated with changesat other levels of the enterprise. Therefore, it is essential for the management toassess organization with wide implications of any change is going to be affected.Further, these changes need to be reviewed on continuous basis to cope with everchanging environmental developments in business enterprise.All changes are happened either in reaction to it as driving forces or a proactive.Changes have been planned and initiated by an organization. Therefore, reactivechange happens in response to an event or series of events relating to business. The failure of existing process or system is a powerful mode for change in business.Reactive change being unplanned is hardly welcomed because it usually results inpoorly coordinated, inefficient management. It plays havoc with virtually any strategic plan. Proactive changes take place when an organization‘s managers have concluded that a change would be beneficial to business. Proactive change is more orderly, more efficient because it is planned, structured and organized.A change in organization is directed at the micro level. It focused on units /subunits/components with in an organization and brought in gradually are incremental changes. It is beneficial to an organization and built new skills and beliefs in theorganization. These changes are efficient and acceptable by an organization. Manyargue that such incremental development can be proactively managed; organization will keep in touch with the environment development and anticipate needs for change.This can be achieved through process of changing of current operating business system.

Others argue that while it is not always possible to anticipate the need for majorstrategic changes, therefore, organizations react to external competitive orenvironmental pressures. Corporate managers may not perceive the need for major changes. In addition, adapt the existing paradigms and extent ways of operations.However, incremental time changes may not be beneficial to the organization.Because such changes are based on the condition by the existing paradigms androutines of the organization even when the environmental developments are socataclysmic and forceful systems and procedures in terms of basic assumptions,culture, technology etc. of the organization. These changes are transformational incharacter. Therefore, transformational change refers to change that cannot be handled within the existing paradigms and organizational change; it may be taken from the granted assumptions. Transformational change may also take from as result of either reactive or proactive process. If strategic drift has occurred or if external stakeholders are not happy due to the adequacy of current objective and strategy to meet external threat of the organization. For this situation, management may be in a forced transformational position. Likewise, if other changes happened in the organizational environment are very powerful to the business issues. The organization is constrained to go for transformation change. Where managers anticipate the need for transformational change, meanwhile they get time to act upon the desired change.

Change can be distinguished on basis of the degree of innovative is previously done in the organization. Innovation is brought changes in the organization.Innovation is different from change. Innovation occurs when an organization is thefirst time or early user of an innovative idea among its set of similar organizations in the business. Change brings modification of operating system of organization. Since innovation provides more excitement in change management. It is highly organized and systematic approach. It is exclusively concerned with reasoning what triggers change in the existing operating system and how affect the change in business. The management process programme is proactive, it monitors the continuously environmental developments for identifying the emerging opportunities and find out the suitable existing policies, strategies and programmes to exploit of these opportunities.Another distinguishing characteristic of change management programme, it is engagement of the entire organization in the change process because people havealways been and will remain important. Organization wide involvement of organizational people is crux of change management.

IMPLEMENTING STRATEGIC CHANGE: STEPS IN THE CHANGING PROCESSThe management of strategic change involves serious steps that managers must follow if the change process is to be succeeding. The major important steps are listed below:

Figure : Stages in the Change Process

Figure indicates the stages in the change process:• Determining the need for change• Determining the obstacles to change• Implementing change• Evaluating changeDetermining the Need for ChangeAccording to Sunbeam’s turnaround suggests, the first step in the change process

involves determining the need for change, analyzing the organisation current position and determining the ideal future state that strategic managers would like it to attain, we are conduct swot analysis, first we examine strengths and weakness. Once identified strength, weakness then determine the change of the management.Figure : Indicated That a Model Change

Figure indicates the model of change that discussed as below:

Determining Obstacles to ChangesThe second step in the change processes is determining the obstacles to change.Strategist must analyses the factors such as corporate, divisional, functional andindividual. These factors are causing organization inertia and preventing the companyfrom reaching its ideal future state at the corporate level strategy seemingly trivialways may significantly affect company’s behavior some corporate culture are easierto change than others.Implementing ChangeImplementing change stage is introducing and managing changes raises severalquestions generally, a company can take two main approaches to change. They arelisted below:• Top down change• Bottom up changeIn the case of Top down change approach CEO implementing change in theorganization. Bottom up change approach, in the case low level management response to top level made changes in the organizational decision-making.Evaluating ChangeThis is the last step in the changes process. It is to evaluate the effects of the changes in strategy and structure on organization performance. It is more difficult however, to assess the effects of changes in structure on company performance.

What is Structure?Structure is the basic and simple concept: it is the division of task for efficiency andclarity of purpose in organization. It is coordination between the interdependentfunctional parts of the organization to ensure organizational effectiveness.Organization structure balances is to the need for specialization with the need forintegration. It is providing for decentralizing and centralizing that consistent withthe organizational and control needs of the strategy.

Reasons for Organization StructureThere are two reasons for organization structure due to changes in strategy as listed below:(1) Organization structure largely explains how objectives and policies will be established.(2) Why changes in strategy often require changes in structures that organizationstructure explains how resources will be allocated in an organization.

Chandler’s Strategy - Structure RelationshipChandler’s strategy structure is very important to design the strategy and structurein organization. It is design in a different organization structure and its shows therelationship between strategy and organization structure to evaluate the differentchanges in strategy in different organizational structure.Figure 6.7: Chandler’s Strategy Structure Relationship

Figure 6.7 indicates the Chandler’s strategy - structure relationship found a particular structure sequence to be often repeated as organizations grow and change strategy overtime. In this figure clearly highlights the there is no one optimal organization design or structure for given strategy or type of organization.When we shall implement new strategy, it create so many administrative problems are emerged in terms of internal and external forces in environment. When an organization neglects its problems and mission and objects that time organizational performance is declined due to improper design of strategy – structure relationship. Strategist take care and design proper organization structure and suitable strategy structure relationship, it will be brought a new organizational structure should be established in enterprise. Well defined strategy and structure relationship creates very good work environment in this way organizational performance is improved in business.

What is Organizational Design?Designing an organization’s structure is the task of management who have theresponsibility of designing, implementing and achieving the organization’s mission.This is accomplished by dividing the work of the organization and then coordinatingthe various responsibilities. It defines how the organization’s goals will be reachedand how work will be done. This is a complex task, to assemble or alter a system.Designing an organization’s frame work involves issues like complexity, formalization, centralization and determines what level of each will be required. It

considers advance technology and environment to determine the appropriate structure to achieve organizational strategy.Organizational structure is the company’s formal configuration; it describes the roles, procedures, governance mechanisms, authority, and decision makingprocess, responsibility, delegation of authority. It influence to an organization andits age and size and nature of businesses. These factors are influenced to strategistto form a new strategy and implement strategy in functional division. It acts as adesign a strategic framework which applicable to functional division in organization.Organization structure is very essential to form strategy implement strategy andcontrol strategy in an organization. Stable organization structure is required by thecompanies to discharge their day to day tasks in an organization to finish task completely. Effective strategic leaders should seek to develop an organization structure and to provide a control tool to strategist to manage the functions in an organization.Strategic Control.

“Winning companies know how to do their work better” Michael Hammer and James Champy“Leader lives in the field with his troops” H – Ross Perot

Strategic control is the process of establishing the appropriate types of control system at the corporate, business and functional levels in a company which allow the strategic managers for guiding and evaluating the strategy in the organization.

Control strategy can be characterized as a form of ‘steering control’ ordinarily, a significant time span occurs between initial implementation of a strategy and achievement of its intended results. During that time, numerous projects are undertaken, investments are made, and actions are undertaken to implement the new strategy. In addition, during that time, both the environmental situation and firm’s internal situation are developing and evolving. Strategic control is necessary to steer the firm through these events. They must provide the basis for correcting the actions and directions of the firm in implementing its strategy to development and changes in its environment and internal situation take place.

Strategic Control SystemStrategic control systems are vital aspect of implementing strategy of an organization. The primary function of strategic control systems is to provide information for management. Information needs to control its strategy and structure. Strategic control systems are the formal target setting, monitoring, and evaluation and feedback systems. It provides information to management aboutthe organization’s strategy and structure. Both are meeting strategic performanceand mission and vision of an organization.

Process in Designing an Effective Control System in Organization

Figure 6.30 highlights the steps or process in designing in effective control systemin organization. There are four stages involved for designing an effective controlsystem of an organization. They are as follows:• Establish standards and targets• Create measuring and monitoring system• Compare actual performance against the established targets• Evaluate result and take action if necessary

Establish Standards and TargetsEstablish standard and targets is the first stage in design an effective control system. Company managers select standard targets to evaluate its performance. Standard targets are major objectives and goals of the company. It is accomplished and monitoring by managers of company or organization.Create Measuring and Monitoring SystemsThis is the second stage of the establishing strategic control systems. Company hasestablished procedures for assessing work goals at all levels in the organization. Either work goal achieved or not achieved. Organization task is the difficult task to measure and monitoring task force of an organization.Compare Actual Performance Against the Established TargetsStrategic management is to select the best decision out of the set of decisions.Therefore, strategist should estimate future targets on the basis past and presentperformance the organization. Therefore, in this stage, comparison is essentially needed to the past, present and future performance of the organization.Evaluate result and Take Action if NecessaryEvaluate result and take action if necessary is the last stage of the evaluating,monitoring and guided to the strategy to the CEO, managers and finally responsefrom the low level employees of the organization. Top managers spent huge time for policy making and monitoring to overall project of the organization. Strategy always leads to achievement even with difficult external environment. This goal is to continually enhance an organization‘s competitive advantage.Levels of ControlOrganization performance is measured at four levelsFigure 6.31: Levels of Organizational Control

Figure 6.32 indicates the level of organizational control. There are four levels areinvolved to control organizational structure. They are as follows:• Corporate level managers• Divisional level managers• Functional level managers• First level managersManagers at the corporate level are most concerned with overall and abstract measures of organizational performance like profit, return on investment or totallabor force turnover. The main aim is to choose performance standards. It measureoverall corporate performance. Similarly, managers at the other levels are mostconcerned with developing a set of standards to evaluate business or functional level performance. These measures should be closely tied with possible task force activities and accomplishment of the corporate objectives.

Types of Strategic ControlThere are six types of strategic control. They are as listed below:• Premise control• Implementation control• Strategic surveillance• Special alert control• Market control• Output control

Premise ControlStrategy is based on assumed or predicted conditions. These predictions or assumptions are planning premises. Company’s strategy can be designed around these predicted conditions. Premise control can be designed to check systematically and continuously.Whether premises set during the planning and implementation process are still valid or not valid. If a vital premise is no longer valid, therefore, then the strategy may have to be changed and premise can be recognized and revised for the better changes and acceptable.Premises are primarily concerned with two factors are listed below:• Environmental factors• Industry factors

Environmental FactorsA company has little or no controllable over environmental factors. But these factors exercise considerable influence over the success of the strategy. Environmental factors like Inflation, technology, interest rates, regulation, demography and social changes etc. These factors are influenced to strategy formulating, implementation and control and monitoring of premises.Industry FactorsIndustry factors like competitors, suppliers, substitutes and barriers to entry. Theseare a few examples to affect the performance of industry. Industry factor differ from one industry to another industry. A company should aware of the factors that influence to success for particular industry.Premises are some major and some minor. Premises are often make about numerous environmental and industry variables, therefore, to attempt to track every premise may be must select premises and variables on the basis likely to change and would have a major impact on the company and its strategy.The key premises should be identified during the planning process. The premisesshould be recorded and responsibly for monitoring, then should be assigned to thepersons to departments who are qualified sources of information.

Implementation ControlThe implementation control phase is an important phase of strategic management. It locates in the series of steps, programmmes, investments and moves undertaken over a period to implement to strategy. In this stage, special programmes are undertaken by company to implement and control for accomplishment of objectives. A company function areas initiate several strategies that are relating to managers convert broad strategic plans into concrete actions and results for specific units and individuals for implementing strategy.Implementation control can be designed to assess whether the over all strategyshould be changed in light of unfolding events and results associated with incremental steps and actions. There are two basic factors involved for implementation control.They are listed below:• Monitoring strategic thrusts/projects• Milestone reviewsMonitoring Strategic Thrusts /projectsIt involves implementation of strategies in companies that undertaking several newstrategic projects or thrusts. These projects or thrusts provide a source of information to manager. Strategic manager can obtain the information from the feedback. It helps to determine either the overall strategy can be progressed as planned or it needs to be adjusted to change.There are two important approaches are useful in enacting implementation control.It focuses on monitoring strategic projects. They are as listed below:• The planning process of projects or thrusts.• Monitoring strategic projects or thrusts.Milestone ReviewsManagers are attempted to identify critical milestone in organization. It will occurover the time period. Strategy can be implemented in a critical milestone like majorresource allocations. In each critical case, it review and full-scale reassessment of the strategy and advisability of continuing or refocusing the direction of the organization or company.

Strategic SurveillanceStrategic surveillance can be designed to monitor a broad range of events inside and outside the company or organization. They are likely to threaten the course of the company’s or organization’s strategy. It should be encouraged in form of monitoring a source of information.Special Alert ControlAnother type of strategic controls is a special alert control. A special alert controlcan be needed to thoroughly and often rapidly reconsider the company’s or organization basic strategy. It is based on a sudden and unexpected event.Market ControlIt is an important objective of output control. It is helpful to strategist to analysis,monitoring the marketing performance of organization. Market control focus on theperformance of one company to compare with another company in terms of stockmarket price and return on investment. These things help to appraise financialperformance of the company or organization.Output ControlThis is the last type of control system designs of the company or organization.Output control concentration on output like divisional goals, functional goals, individual goals which monitoring, evaluating and guided by the strategic managers. Strategic manager aims to establish projects with execution of different types of control systems for measuring and improving efficiency of the organizational strategic objectives.

5. Strategic Review: Evaluating Strategic Performance – Criteria and Problems.Concept of Corporate Restructuring.

Evaluating Strategic Performance

Another important strategy-evaluation activity is measuring organizational performance. This activity includes comparing expected results to actual results, investigating deviations from plans, evaluating individual performance, and examining progress being made toward meeting stated objectives. Both long-term and annual objectives are commonly used in this process. Criteria for evaluating strategies should be measurable and easily verifiable. Criteria that predict results may be more important than those that reveal what already has happened. For example, rather than simply being informed that sales last quarter were 20 percent under what was expected, strategists need to know that sales next quarter may be 20 percent below standard unless some action is taken to counter the trend. Really effective control requires accurate forecasting.

Failure to make satisfactory progress toward accomplishing long-term or annual objectives signals a need for corrective actions. Many factors, such as unreasonable policies, unexpected turns in the economy, unreliable suppliers or distributors, or ineffective strategies, can result in unsatisfactory progress toward meeting objectives. Problems can result from ineffectiveness (not doing the right things) or inefficiency (doing the right things poorly).

Determining which objectives are most important in the evaluation of strategies can be difficult. Strategy evaluation is based on both quantitative and qualitative criteria. Selecting the exact set of criteria for evaluating strategies depends on a particular organization's size, industry, strategies, and management philosophy. An organization pursuing a retrenchment strategy, for example, could have an entirelydifferent set of evaluative criteria from an organization pursuing a market-development strategy. Quantitative criteria commonly used to evaluate strategies are financial ratios, which strategists use to make three critical comparisons:

(1) comparing the firm's performance over different time periods, (2) comparing the firm's performance to competitors', and (3) comparing the firm's performance to industry averages.

Some key financial ratios that are particularly useful as criteria for strategy evaluation are as follows:

1. Return on investment2. Return on equity3. Profit margin4. Market share5. Debt to equity6. Earnings per share7. Sales growth8. Asset growth

But there are some potential problems associated with using quantitative criteria for evaluating strategies.First, most quantitative criteria are geared to annual objectives rather than long-term objectives. Also, different accounting methods can provide different results on many quantitative criteria. Third, intuitive judgments are almost always involved in deriving quantitative criteria. For these and other reasons, qualitative criteria are also important in evaluating strategies. Human factors such as high absenteeism and turnover rates, poor production quality and quantity rates, or low employee satisfaction can be underlying causes of declining performance. Marketing, finance/accounting, R&D, or computer information systems factors can also cause financial problems. Seymour Tilles identified six qualitative questions that are usefulin evaluating strategies:1. Is the strategy internally consistent?2. Is the strategy consistent with the environment?3. Is the strategy appropriate in view of available resources?4. Does the strategy involve an acceptable degree of risk?5. Does the strategy have an appropriate time framework?6. Is the strategy workable?5

Some additional key questions that reveal the need for qualitative or intuitive judgments in strategy evaluation are as follows:1. How good is the firm's balance of investments between high-risk and low-risk projects?2. How good is the firm's balance of investments between long-term and short-term projects?3. How good is the firm's balance of investments between slow-growing markets and fast-growing markets?4. How good is the firm's balance of investments among different divisions?5. To what extent are the firm's alternative strategies socially responsible?6. What are the relationships among the firm's key internal and external strategic factors?7. How are major competitors likely to respond to particular strategies?

Taking Corrective ActionsThe final strategy-evaluation activity, taking corrective actions, requires making changes to reposition a firm competitively for the future. Examples of changes that may be needed are altering an organization's structure, replacing one or more key individuals, selling a division, or revising a business mission. Other changes could include establishing or revising objectives, devising new policies, issuing stock to raise capital, adding additional salespersons, allocating resources differently, or developing new performance incentives. Taking corrective actions does not

necessarily mean that existing strategies will be abandoned or even that new strategies must be formulated.The probabilities and possibilities for incorrect or inappropriate actions increase geometrically with an arithmetic increase in personnel. Any person directing an overall undertaking must check on the actions of the participants as well as the results that they have achieved. If either the actions or results do not comply with preconceived or planned achievements, then corrective actions are needed.

No organization can survive as an island; no organization can escape change. Taking corrective actions is necessary to keep an organization on track toward achieving stated objectives. In his thought-provoking books, Future Shock and The Third Wave, Alvin Toffler argued that business environments are becoming so dynamic and complex that they threaten people and organizations with future shock, which occurs when the nature, types, and speed of changes overpower an individual's or organization's ability and capacity to adapt. Strategy evaluation enhances an organization's ability to adapt successfully to changing circumstances. Brown and Agnew referred to this notion as corporate agility.

Taking corrective actions raises employees' and managers' anxieties. Research suggests that participation in strategy-evaluation activities is one of the best ways to overcome individuals' resistance to change. According to Erez and Kanfer, individuals accept change best when they have a cognitive understanding of the changes, a sense of control over the situation, and an awareness that necessary actions are going to be taken to implement the changes.

Strategy evaluation can lead to strategy-formulation changes, strategy-implementation changes, both formulation and implementation changes, and no changes at all. Strategists cannot escape having to revise strategies and implementation approaches sooner or later. Hussey and Langham offered the following insight on taking corrective actions:Resistance to change is often emotionally based and not easily overcome by rational argument. Resistance may be based on such feelings as loss of status, implied criticism of present competence, fear of failure in the new situation, annoyance at not being consulted, lack of understanding of the need for change, orinsecurity in changing from well-known and fixed methods. It is necessary, therefore, to overcome such resistance by creating situations of participation and full explanation when changes are envisaged. Corrective actions should place an organization in a better position to capitalize upon internal strengths; to take advantage of key external opportunities; to avoid, reduce, or mitigate external threats; and to improve internal weaknesses. Corrective actions should have a proper time horizon and an appropriate amount of risk. They should be internally consistent and socially responsible. Perhaps most importantly, corrective actions strengthen an organization's competitive position in its basic industry. Continuous strategy evaluation keeps strategists close to the pulse of an organization and provides information needed for an effective strategic-management system.

Measuring organizational performanceTo determine that which objectives are most important in the evaluation of strategies can be difficult. Strategy evaluation is based on both quantitative and

qualitative criteria. Selecting the exact set of criteria for evaluating strategies depends on a particular organization's size, industry, strategies, and managementphilosophy. An organization pursuing a retrenchment strategy, for example, could have an entirely different set of evaluative criteria from an organization pursuing a market-development strategy.

Quantitative criteria commonly used to evaluate strategies are financial ratios, which strategists use to make three critical comparisons: (1) Comparing the firm's performance over different time periods, (2) comparing the firm's performance to competitors', and (3) comparing the firm's performance to industry averages. Some key financial ratios that are particularly useful as criteria for strategy evaluation are as follows:1. Return on investment2. Return on equity3. Profit margin4. Market share5. Debt to equity6. Earnings per share7. Sales growth8. Asset growth

But there are some potential problems associated with using quantitative criteria for evaluating strategies.First, most quantitative criteria are geared to annual objectives rather than long-term objectives. Also, different accounting methods can provide different results on many quantitative criteria. Third, intuitive judgments are almost always involved in deriving quantitative criteria. For these and other reasons,qualitative criteria are also important in evaluating strategies. Human factors such as high absenteeism and turnover rates, poor production quality and quantity rates, or low employee satisfaction can be underlying causes of declining performance. Marketing, finance/accounting, R&D, or computer information systems factors can also cause financial problems. Seymour Tilles identified six qualitative questions that are usefulin evaluating strategies:1. Is the strategy internally consistent?2. Is the strategy consistent with the environment?3. Is the strategy appropriate in view of available resources?4. Does the strategy involve an acceptable degree of risk?5. Does the strategy have an appropriate time framework?6. Is the strategy workable?

Some additional key questions that reveal the need for qualitative or intuitive judgments in strategy evaluation are as follows:1. How good is the firm's balance of investments between high-risk and low-risk projects?2. How good is the firm's balance of investments between long-term and short-term projects?3. How good is the firm's balance of investments between slow-growing markets and fast-growing markets?4. How good is the firm's balance of investments among different divisions?5. To what extent are the firm's alternative strategies socially responsible?

6. What are the relationships among the firm's key internal and external strategic factors? 7. How are major competitors likely to respond to particular strategies?

Qualities of good evaluation systemA Good evaluation system must posses various qualities. It must meet several basic requirements to be effective. First, strategy-evaluation activities must be economical; too much information can be just as bad as too little information; and too many controls can do more harm than good. Strategy-evaluation activities also should be meaningful; they should specifically relate to a firm's objectives. They should provide managers with useful information about tasks over which they have control and influence.Strategy-evaluation activities should provide timely information; on occasion and in some areas, managers may need information daily. For example, when a firm has diversified by acquiring another firm, evaluative information may be needed frequently. However, in an R&D department, daily or even weekly evaluative information could be dysfunctional. Approximate information that is timely is generally more desirable as a basis for strategy evaluation than accurate information that does not depict the present. Frequent measurement and rapid reporting may frustrate control rather than give better control. The time dimension of control must coincide with the time span of the event being measured.

Strategy evaluation should be designed to provide a true picture of what is happening. For example, in a severe economic downturn, productivity and profitability ratios may drop alarmingly, although employees and managers are actually working harder. Strategy evaluations should portray this type of situation fairly. Information derived from the strategy-evaluation process should facilitate action and should be directed to those individuals in the organization who need to take action based on it. Managers commonly ignore evaluative reports that are provided for informational purposes only; not all managers need to receive all reports. Controls need to be action-oriented rather than information-oriented.The strategy-evaluation process should not dominate decisions; it should foster mutual understanding, trust, and common sense! No department should fail to cooperate with another in evaluating strategies. Strategy evaluations should be simple, not too cumbersome, and not too restrictive. Complex strategy evaluationsystems often confuse people and accomplish little. The test of an effective evaluation system is its usefulness, not its complexity.

Large organizations require a more elaborate and detailed strategy-evaluation system because it is more difficult to coordinate efforts among different divisions and functional areas. Managers in small companies often communicate with each other and their employees daily and do not need extensive evaluative reporting systems. Familiarity with local environments usually makes gathering and evaluating information much easier for small organizations than for large businesses. But the key to an effective strategy evaluation system may be the ability to convince participants that failure to accomplish certain objectives within a prescribed time is not necessarily a reflection of their performance.There is no one ideal strategy-evaluation system. The unique characteristics of an organization, including its size, management style, purpose, problems, and strengths, can determine a strategy-evaluation and control system's final design.

Robert Waterman offered the following observation about successful organizations' strategy-evaluation and control systems:Successful companies treat facts as friends and controls as liberating. Morgan Guaranty and Wells Fargo not only survive but thrive in the troubled waters of bank deregulation, because their strategy evaluation and control systems are sound, their risk is contained, and they know themselves and the competitive situation so well. Successful companies have a voracious hunger for facts. They see information where others see only data. They love comparisons, rankings, anything that removes decision-making from the realm of mere opinion. Successful companies maintain tight, accurate financial controls. Their people don't regard controls as an imposition of autocracy, but as the benign checks and balances that allow themto be creative and free.

Contingency PlanningA basic premise of good strategic management is that firms plan ways to deal with unfavorable and favorable events before they occur. Too many organizations prepare contingency plans just for unfavorable events; this is a mistake, because both minimizing threats and capitalizing on opportunities can improve a firm's competitive position.Regardless of how carefully strategies are formulated, implemented, and evaluated, unforeseen events such as strikes, boycotts, natural disasters, arrival of foreign competitors, and government actions can make a strategy obsolete. To minimize the impact of potential threats, organizations should develop contingency plans as part of the strategy-evaluation process. Contingency plans can be defined as alternative plans that can be put into effect if certain key events do not occur as expected. Only high-priority areas require the insurance of contingency plans. Strategists cannot and should not try to cover all bases by planning for all possible contingencies. But in any case, contingency plans should be as simple as possible.

Some contingency plans commonly established by firms include the following:1. If a major competitor withdraws from particular markets as intelligence reports indicate, what actions should our firm take?2. If our sales objectives are not reached, what actions should our firm take to avoid profit losses?3. If demand for our new product exceeds plans, what actions should our firm take to meet the higher demand?4. If certain disasters occur—such as loss of computer capabilities; a hostile takeover attempt; loss of patent protection; or destruction of manufacturing facilities because of earthquakes, tornados, or hurricanes—what actions should our firm take?5. If a new technological advancement makes our new product obsolete sooner than expected, what actions should our firm take?

Too many organizations discard alternative strategies not selected for implementation although the work devoted to analyzing these options would render valuable information. Alternative strategies not selected for implementation can serve as contingency plans in case the strategy or strategies selected do not work.

When strategy-evaluation activities reveal the need for a major change quickly, an appropriate contingency plan can be executed in a timely way. Contingency plans can promote a strategist's ability to respond quickly to key changes in the internal and external bases of an organization's current strategy.

For example, if underlying assumptions about the economy turn out to be wrong and contingency plans are ready, and then managers can make appropriate changes promptly.In some cases, external or internal conditions present unexpected opportunities. When such opportunities occur, contingency plans could allow an organization to capitalize on them quickly. Linneman and Chandran reported that contingency planning gave users such as DuPont, Dow Chemical, Consolidated Foods, and Emerson Electric three major benefits: It permitted quick response to change, it prevented panic in crisis situations, and it made managers more adaptable by encouraging them to appreciate just how variable the future can be. They suggested that effective contingency planning involves a seven-step process as follows:1. Identify both beneficial and unfavorable events that could possibly derail the strategy or strategies.2. Specify trigger points. Calculate about when contingent events are likely to occur.3. Assess the impact of each contingent event. Estimate the potential benefit or harm of each contingent event.4. Develop contingency plans . Be sure that contingency plans are compatible with current strategy and are economically feasible.5. Assess the counter impact of each contingency plan. That is, estimate how much each contingency plan will capitalize on or cancel out its associated contingent event. Doing this will quantify the potential value of each contingency plan.6. Determine early warning signals for key contingent events. Monitor the early warning signals.7. For contingent events with reliable early warning signals, develop advance action plans to take advantage of the available lead time.AuditingA frequently used tool in strategy evaluation is the audit. Auditing is defined by the American Accounting Association (AAA) as "a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria, and communicating the results to interested users." People whoperform audits can be divided into three groups: independent auditors, government auditors, and internal auditors. Independent auditors basically are certified public accountants (CPAs) who provide their services to organizations for a fee; they examine the financial statements of an organization to determine whether they have been prepared according to generally accepted accounting principles (GAAP) and whether they fairly represent the activities of the firm. Independent auditors use a set of standards called generally accepted auditing standards (GAAS).

The Nature of Strategy EvaluationThe strategic-management process results in decisions that can have significant, long-lasting consequences. Erroneous strategic decisions can inflict severe penalties and can be exceedingly difficult, if not impossible, to reverse. Most strategists agree, therefore, that strategy evaluation is vital to an organization's well-being;

timely evaluations can alert management to problems or potential problems before a situation becomes critical. Strategy evaluation includes three basic activities:

(1) examining the underlying bases of a firm's strategy, (2) comparing expected results with actual results, and (3) taking corrective actions to ensure that performance conforms to plans.

Adequate and timely feedback is the cornerstone of effective strategy evaluation. Strategy evaluation can be no better than the information on which it operates. Too much pressure from top managers may result in lower managers contriving numbers they think will be satisfactory.

Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis on evaluating strategies may be expensive and counterproductive. No one likes to be evaluated too closely! The more managers attempt to evaluate the behavior of others, the less control they have. Yet, too little or no evaluation can create even worse problems. Strategy evaluation is essential to ensure that stated objectives are being achieved.In many organizations, strategy evaluation is simply an appraisal of how well an organization has performed. Have the firm's assets increased? Has there been an increase in profitability? Have sales increased? Have productivity levels increased? Have profit margin, return on investment, and earnings per-share ratios increased? Some firms argue that their strategy must have been correct if the answers tothese types of questions are affirmative. Well, the strategy or strategies may have been correct, but this type of reasoning can be misleading, because strategy evaluation must have both a long-run and short-run focus. Strategies often do not affect short-term operating results until it is too late to make needed changes.ConclusionStrategy-evaluation framework that can facilitate accomplishment of annual and long-term objectives. Effective strategy evaluation allows an organization to capitalize on internal strengths as they develop, to exploit external opportunities as they emerge, to recognize and defend against threats, and to mitigate internal weaknesses before they become detrimental.Strategists in successful organizations take the time to formulate, implement, and then evaluate strategies deliberately and systematically. Good strategists move their organization forward with purpose and direction, continually evaluating and improving the firm's external and internal strategic position. Strategy evaluation allows an organization to shape its own future rather than allowing it to be constantly shaped by remote forces that have little or no vested interest in the well-being of the enterprise.Although not a guarantee for success, strategic management allows organizations to make effective long term decisions, to execute those decisions efficiently, and to take corrective actions as needed to ensure success. Computer networks and the Internet help to coordinate strategic-management activities and to ensure that decisions are based on good information. A key to effective strategy evaluation and to successful strategic management is an integration of intuition and analysis.

A potentially fatal problem is the tendency for analytical and intuitive issues to polarize. This polarization leads to strategy evaluation that is dominated by either

analysis or intuition, or to strategy evaluation that is discontinuous, with a lack of coordination among analytical and intuitive issues.Strategists in successful organizations realize that strategic management is first and foremost a people process. It is an excellent vehicle for fostering organizational communication. People are what make the difference in organizations.The real key to effective strategic management is to accept the premise that the planning process is more important than the written plan, that the manager is continuously planning and does not stop planning when the written plan is finished. The written plan is only a snapshot as of the moment it is approved. If the manager is not planning on a continuous basis—planning, measuring, and revising—the written plan can become obsolete the day it is finished. This obsolescence becomes more of a certainty as the increasingly rapid rate of change makes the business environment more uncertain.

Concept of Corporate Restructuring

Restructuring of business is an integral part of modern business enterprises. Theglobalization and liberalization of Control and Restrictions has generated new waves of competition and free trade. This requires Restructuring and Re-organisation of business organization to create new synergies to face the competitive environment and changed market conditions.Restructuring usually involves major organizational changes such as shift in corporate strategies. Restructuring can be internally in the form of new investments in plant and machinery, Research and Development of products and processes, hiving off of non-core businesses, divestment, sell-offs, de-merger etc. Restructuring can also take place externally through mergers and acquisition (M&A) and by forming joint-ventures and having strategic alliances with other firms.

The aspects relating to expansion or contraction of a firm’s operations or changes in its assets or financial or ownership structure are known as corporate re-structuring. While there are many forms of corporate re-structuring, mergers, acquisitions and takeovers, financial restructuring and re-organisation, divestitures de-mergers and spin-offs, leveraged buyouts and management buyouts are some of the most common forms of corporate restructuring. These forms are discussed herein as follows:

DEMERGERS OR DIVISIONSThere are various reasons for divestment or demerger viz.,(i) To pay attention on core areas of business;(ii) The Division’s/business may not be sufficiently contributing to the revenues;(iii) The size of the firm may be too big to handle;(iv) The firm may be requiring cash urgently in view of other investment opportunities.Different ways of divestment or demerger are as follows:

Sell off: A sell off is the sale of an asset, factory, division, product line or subsidiary by one entity to another for a purchase consideration payable either in cash or in the form of securities.

Spin-off: In this case, a part of the business is separated and created as a separate firm. The existing shareholders of the firm get proportionate ownership. So there is no change in ownership and the same shareholders continue to own the newly created entity in the same proportion as previously in the original firm. The management of spun-off division is however, parted with. Spin-off does not bring fresh cash. The reasons for spin off may be:(i) Separate identity to a part/division.(ii) To avoid the takeover attempt by a predator by making the firm unattractive to him since a valuable division is spun-off.(iii) To create separate Regulated and unregulated lines of business.

Split-up: This involves breaking up of the entire firm into a series of spin off (by creating separate legal entities). The parent firm no longer legally exists and only the newly created entities survive. For instance a corporate firm has 4 divisions namely A, B, C, D. All these 4 division shall be split-up to create 4 new corporate firms with full autonomy and legal status. The original corporate firm is to be wound up. Since de-merged units are relatively smaller in size, they are logistically more convenient and manageable. Therefore, it isunderstood that spin-off and split-up are likely to enhance shareholders value and bring efficiency and effectiveness.

Carve outs: This is like spin off however, some shares of the new company are sold in the market by making a public offer, so this brings cash. In carve out, the existing company may sell either majority stake or minority stake, depending upon whether the existing management wants to continue to control it or not.

Sale of A Division: In the case of sale of a division, the seller company is demerging its business whereas the buyer company is acquiring a business. For the first time the tax laws in India propose to recognise demergers. The broad principles of the tax principles relating to demerger are :• Demergers should be tax neutral and should not attract any additional liability to tax.• Tax benefits and concessions available to any undertaking should be available to the said undertaking on its transfer to the resulting company.• Tax benefits should be limited to the transfer of business as a going concern and not to the transfer of specific assets.• The accumulated losses and unabsorbed depreciation should be allowed to be carried forward by the resulting company if these are directly relatable to the undertaking proposed to be transferred. Where it is not possible to relate these to the undertaking such losses and depreciation shall be apportioned between the

demerged company and the resulting company in proportion of the assets coming to the share of each.• The Central Government may prescribe certain guidelines or conditions to ensure that demergers are made for genuine business purposes.• The benefits available for demergers will be extended to Authorities or Boards set up by Central or State Governments.• The transfer of assets will not attract capital gains tax if the demerged company is an Indian company.• The book value of the transferred assets will be deducted from the block for thepurpose of depreciation.• Depreciation on the assets transferred will be allowed pro-rata, on the basis of thenumber of days of use.• No profit or loss will be recognised on transfer of patent rights or copyrights or telecom licence.• Demerger expenses shall be allowed as a deduction equally over five years.• A new ship acquired by a shipping company from a tax free reserve will be permitted to be transferred without attracting tax.• Any transfer or issue of shares by the resulting company to the shareholders of the demerged company will not attract capital gains tax.• The deduction for amortisation of know-how or preliminary expenses will continue in the hands of the resulting company.• The resulting company will be liable for tax in respect of recoupment of loss orremission of liability incurred by the demerged company.• If oil prospecting or exploration business is acquired, the special deduction for such business will be allowed to the resulting company• The actual cost of any transferred capial assets will be the same as in the case of the demerged company but shall not exceed the written down value in the hands of the demerged company.• The written down value of any block of assets will be the book value in the accounts of the demerged company, but shall not exceed the written down value in the hands of the demerged company.• The holding period of shares acquired on demerger shall include the holding period of the shares in the demerged company.• The cost of acquisition of shares in the demerged company will be spread over theshares in the demerged company and the shares in the resulting company,proportionate to the net book value of the assets transferred.• In the case of GDRs and FCCBs, the concessional tax provisions will continue to apply.• Any distribution of shares by the resulting company will not be considered as dividend. The brought forward losses will not lapse in spite of change in shareholding, subject to certain conditions.

CORPORATE CONTROLS

Going Private: This refers to the situation wherein a listed company is converted into a private company by buying back all the outstanding shares from the markets.

Equity buyback: This refers to the situation wherein a company buys back its own shares back from the market. This results in reduction in the equity capital of the company. This strengthen the promoter’s position by increasing his stake in the equity of the company.

Restructuring of an existing business: An existing business in the face of impending onslaught of international competition, or even otherwise, may require restructuring. Such restructuring may involve, for instance, downsizing and closing down of some unprofitable departments. So also, trimming the number of personnel. There may also arise a case of restructuring of a company where for instance, there has been a failure of management, or, for the matter of that, to overcome a wrong business or financial decision. In such a situation, the company may sell or close certain divisions, pay off debt, focus on more promising lines of business and focus hard to enhance shareholder value. Restructuring may also involve a long-drawn process. The interesting part is that the process of changehas affected stock prices of these companies. And the same can be expected of their domestic subsidiaries after a while unless business dynamics or holding structure widely differ.

Buy-outs: This is also known as Management buyouts (MBO). In this case, themanagement of the company buys a particular part of the business from the firm and then incorporates the same as a separate entity. Sometimes, the existing management is short of funds to pay for buyout and therefore resort to heavy debt financing nearly 90-95% from investors, banks, Financial Institutions etc. In such a situation the buyout is termed as leveraged Buy-out (LBO). The LBO involves participation by third party (lenders) and the management no longer deals with different shareholders, but instead with the lenders only.

However, heavy debt financing in LBO leads to dramatic increase in the debt ratio posing heavy risk. However, LBO is still acceptable in view of Tax benefits accrued on interest, it being tax deductible.A very important phenomenon witnessed in recent times is one of buy-outs. The majority of buy-outs are management buy-outs and involve the acquisition by incumbent management of the business where they are employed. Typically, the purchase price is met by a small amount of their own funds and the rest from a mix of venture capital and bank debt.

Management buy-ins are a similar form of transaction but differs in that the entrepreneurs leading the transaction come from outside the company. The Buy-ins is a hybrid form involving both existing and new managements. The late 1990s saw

the developments of investor buy-outs where venture capital groups initiated and lead transactions, with managements playing a marginal role.Internationally, the two most common sources of buy-out operations are divestment of parts of larger groups and family companies facing succession problems. Corporate groups may seek to sell subsidiaries as part of a planned strategic disposal programme or more forced reorganistion in the face of parental financing problems. Public companies have, however, increasingly sought to dispose of subsidiaries through an auction process partly to satisfy shereholder pressure for value maximisation.

In recessionary periods buy-outs can play a big part in restructuring of failed or failing businesses and in an environment of generally weakened corporate performance often represent the only viable purchasers when parents wish to dispose of subsidiaries. Buy-outs are one of the most common forms of privatisation, offering opportunities for enhancing the performances of parts of the public sector, widening employee ownership and giving managers and employees incentives to make best use of their expertise in particular sectors.

Buy-outs will typically be financed by a mixture of senior secured debt and a range of equity and quasi-equity instruments. For larger buy-outs, especially when auctions and buoyant conditions mean that prices well in excess of the security value of assets have to be paid, subordinated (mezzanine debt) may be used. Quasi-equity instruments, such as cumulative convertible participating preferred ordinary shares, are important both in ensuring the venture capitalist obtains a regular dividend and in putting pressure on managers to perform and/or seek to realise an investment in a timely fashion.

Interestingly, capital markets have generally shown an obvious bias in favour of large companies; small and medium-sized companies, the chief generators of jobs in the economy, have suffered neglect by investors. While smaller companies produce superior earnings and higher share prices during bull markets, there is usually, during bear markets, a flight to quality. Investors divert funds towards the large, more stable companies that tend to have stronger balance sheets. The recent development is that private individuals are increasingly reducing their direct exposure to equities in order to take advantages of tax privileged forms of ownership in favour of an institutionalised market. This result in concentration of funds in the hands of professional managers. But they, too, are biased in favour of large-cap stocks. This anomaly in the capital market needs to be corrected urgently if restructuring of various industrial sectors has to be completed with quicker pace.

Full buy-out : The Bhagwati Committee noted, in its Final Report, that the new 1997 Takeover Code has finally created a transparent environment for taking over the ownership and control of companies. This is to be welcomed, because takeovers play an important role in building corporate synergy, in raising shareholder value

and in keeping companies on their toes. However, there is an important element that has been missed out by the new code, which ought to be rectified as soon as possible. This has to do with full buy-out. Since the term ‘full buy-out’ is not well understood in India, it requires, according to the Bhagwati Panel, some explanation. In many OECD countries, when a person, group, or body corporate acquires over 90% or 95% of the equity of a public listed company, it is incumbent upon the residual shareholders to sell their shares to the buyer at a fair price that is set bythe regulatory authority. This is not legislated in India.A key feature of shareholder democracy is that all shareholders who own a given class of equity are alike. Without full buy-out provisions, the residual shareholders face one of two options, both of which are inimical to this aspect of shareholder democracy. First, they may hold out for a higher offer, which is probably unfair vis-a-vis the other shareholders who sold their stake. Or, second (and more likely if the company gets delisted) these shareholders may get squeezed by the buyer to accept a lower price, which is unfair to them. Therefore, in the interest of shareholders and companies, the Bhagwati Panel has recommended that, in the event of any person, group or body corporate acquiring 95% of the shares of a public listed company — either through a takeover or otherwise — and the company getting delisted, residual shareholders should sell their shares to the 95% owner at a price based upon SEBI guidelines.