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STRATEGIC MANAGEMENT

STRATEGY FORMULATION/ALTERNATIVES
Strategic management process comprises four phases: environmental scanning, strategy
formulation, strategy implementation and strategy evaluation and control. Strategic
management is an ongoing process to develop and revise future-oriented strategies that
allow an organization to achieve its objectives, considering its capabilities, constraints,
and the environment in which it operates.
Once the environmental scanning is done the next step is strategy formulation.
ormulation produces a clear set of recommendations, with supporting justification, that
revise as necessary the mission and objectives of the organization, and supply the
strategies for accomplishing them. !n formulation, we are trying to modify the current
objectives and strategies in ways to ma"e the organization more successful. #his
includes trying to create $sustainable$ competitive advantages -- although most
competitive advantages are eroded steadily by the efforts of competitors.
#%&'' (')'(S O S#&*#'+, O&-.(*#!O/
#he following three aspects or levels of strategy formulation, each with a different focus,
need to be dealt with in the formulation phase of strategic management. #he three sets of
recommendations must be internally consistent and fit together in a mutually supportive
manner that forms an integrated hierarchy of strategy, in the order given.
Corporate Level Strategy: !n this aspect of strategy, we are concerned with broad
decisions about the total organization0s scope and direction. 1asically, we consider what
changes should be made in our growth objective and strategy for achieving it, the lines of
business we are in, and how these lines of business fit together. !t is useful to thin" of
three components of corporate level strategy: 2a3 growth or directional strategy 2what
should be our growth objective, ranging from retrenchment through stability to varying
degrees of growth - and how do we accomplish this3, 2b3 portfolio strategy 2what should
be our portfolio of lines of business, which implicitly re4uires reconsidering how much
concentration or diversification we should have3, and 2c3 parenting strategy 2how we
allocate resources and manage capabilities and activities across the portfolio -- where do
we put special emphasis, and how much do we integrate our various lines of business3.
Bu!"e Level Strategy #o$te" %alle& Co'pet!t!ve Strategy): #his involves deciding
how the company will compete within each line of business 2(O13 or strategic business
unit 2S1.3.
Fu"%t!o"al Strategy: #hese more localized and shorter-horizon strategies deal with how
each functional area and unit will carry out its functional activities to be effective and
maximize resource productivity.
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COR(ORATE LEVEL STRATEGIES
6orporate level strategies are basically about the choice of direction that a firm adopts in
order to achieve its objectives. #hey are basically about decisions related to allocating
resources among the different businesses of a firm, transferring resources from one set of
businesses to others, and managing and nurturing a portfolio of businesses in such a way
that the overall corporate objectives are achieved.
-ajor types of grand strategies:
'xpansion 2+rowth3 Strategies
Stability Strategies
&etrenchment Strategies
6ombination Strategies
GRO)T* STRATEGIES
+rowth is a way of life. *lmost all organizations plan to expand. #his strategy is
followed when an organization aims at higher growth by broadening its one or more of its
business in terms of their respective customer groups, customers functions, and
alternative technologies singly or jointly 7 in order to improve its overall performance.
E+g+: * chocolate manufacturer expands its customer groups to include middle aged and
old persons among its existing customers comprising of children and adolescents.
#here are five types of expansion 2+rowth3 strategies
'xpansion through concentration
'xpansion through integration
'xpansion through diversification
'xpansion through cooperation
E,pa"!o" t-roug- %o"%e"trat!o"
!t involves converging resources in one or more of firms businesses in terms of their
respective customer needs, customer functions, or alternative technologies either singly
or jointly, in such a manner that it results in expansions. * firm that is familiar with an
industry would naturally li"e to invest more in "nown business rather than un"nown
business. 6oncentration can be done through
Mar.et (e"etrat!o": !t involves selling more products to the same mar"et by focusing
intensely on existing mar"ets with its present products, increasing usage by existing
customers and increasing mar"et share and restructures a mature mar"et by driving out
competitors E+g+: (ow pricing strategies
Mar.et /evelop'e"t: !t involves selling the same products to new mar"ets by attracting
new users to its existing products. -ar"et development can be geographic wise and
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demographic wise. E+g+: 9'&O9 6ompany educated small business entrepreneurs to
create new mar"ets.
(ro&u%t /evelop'e"t: !t involves selling new products to the same mar"ets by
introducing newer products in existing mar"ets+ E+g+: the tourism industry in !ndia has
not been able to attract new customers in significant numbers. /ew products such as
selling !ndia as a golfing or ayuerveda-based medical treatment destination are some of
the product development efforts in the tourism industry to attract more tourists.

*/SO:S ;&O<.6#--*&='# -*#&!9
.
;resent /ew
;resent -ar"et
;enetration
;roduct
<evelopment
/ew -ar"et
<evelopment
<iversification
*dvantages of concentration strategies
!nvolves minimal organizational changes and is less threatening
'nables the firm to specialize by gaining the in-depth "nowledge of the
businesses.
'nables the firm to develop competitive advantage
<ecision-ma"ing can be made easily as there is a high level of productivity
Systems and processes within the firm become familiar to the people in the
organization.
<isadvantages of concentration strategies
!t is dependent on one industry if there is any worse condition in the industry the
firm will be affected.
actors such as product obsolescence, fic"leness of mar"et, emergence of newer
technologies are threat to concentrated firm
-angers may not be able to sustain interest and find the wor" less challenging
!t may lead to cash flow problems
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E,pa"!o" t-roug- I"tegrat!o"
!t is done where the company attempts to widen the scope of its business definition in
such a manner that it results in serving the same set of customers. #he alternative
technology of the business undergoes a change. !t is combing activities related to the
present activity of a firm. Such a combination may be done through value chain. * value
chain is a set of interrelated activity performed by an organization right from the
procurement of basic raw materials down to the mar"eting of finished products to the
ultimate customers.
E+g+: Several process based industry such as petro chemicals, steel, textiles of
hydrocarbons have integrate firm
* ma"e or buy decision is then made when firms wish to negotiate with the suppliers or
buyers. #he cost of ma"ing the items used in the manufacture of ones owns products are
to be evaluated against the cost of procuring them from suppliers. !f the cost of ma"ing is
less that the cost of procurement then the firm moves up the value chain to ma"e the item
itself. (i"e wise if the cost of selling the finished products is lesser than the price paid to
the sellers to do the same thing then the firm would go for direct selling.
*mong the integration strategies are of two type?s vertical and horizontal integration.
Vert!%al I"tegrat!o": when an organization starts ma"ing new products that serve its
own needs vertical integration ta"es place. )ertical integration could be of two types
1ac" ward and forward integration.
1ac"ward integration means moving bac" to the source of raw materials while forward
integration moves the organization nearer to the ultimate customer.
+enerally when firms vertically integrate they do so in a complete manner that is they
move bac"ward or forward decisively resulting in a full integration but when a firm does
not commit it fully it is possible to have partial vertical integration strategies too. #wo
such partial vertical integration strategies are @taper? integration and @4uasi? integration.
#aper integration re4uires firms to ma"e a part of their own re4uirements and to buy the
rest from outsiders. #hrough 4uasi integration strategies firm purchase most of their
re4uirements from other firms in which they have an ownership sta"e. *ncillary
industrial units and outsourcing through sub contracting are adapted forms of 4uasi
integration.
*or!0o"tal I"tegrat!o": when an organization ta"es up the same type of products at the
same level of production or mar"eting process, it is said to follow a strategy of horizontal
integration. Ahen a luggage company ta"es over its rival luggage company, it is
horizontal integration. %orizontal integration strategy may be fre4uently adopted with a
view to expand geographically by buying a competitors business, to increase the mar"et
share or to benefit from economics of scale.
B
E,pa"!o" t-roug- /!ver!$!%at!o"
<iversification is a much used and much tal"ed about set of strategies. !t involves a
substantial change in the business definition 7 singly or jointly- in terms of customer
groups or alternative technologies of one or more of a firm?s businesses. . #here are two
categories, concentric and conglomerate diversification.
<!'&'/# #,;'S O <!)'&S!!6*#!O/ S#&*#'+!'S
&elated #echnology .nrelated #echnology
Similar #ype of
;roduct
-ar"eting- technology related
concentric diversification
-ar"eting related
concentric diversification
/ew #ype of
;roduct
#echnology- related concentric
diversification
6onglomerate
diversification
Co"%e"tr!% /!ver!$!%at!o": when an organization ta"es up an activity in such a manner
that is related to the existing business definition of one or more of firms businesses, either
in terms of customer groups, customer?s functions or alternative technologies, it is called
concentric diversification. 6oncentric diversification may be of three types
-ar"eting related concentric diversification
#echnology- related concentric diversification
-ar"eting- technology related concentric diversification
-ar"eting related concentric diversification: when a similar type of product is offered
with a help of unrelated technology for e+g+1 a company in the sewing machine business
diversifies in to "itchen ware and household appliances, which are sold to house wives
through a chain of retails stores.
#echnology- related concentric diversification: when a new type of product or service is
provided with the help of related technology, for e+g+1 a leasing firm offering hire-
purchase services to institutional customers also starts consumer financing for the
purchase of durable sot individual customers.
-ar"eting- technology related concentric diversification: when a similar type of product
is provided with the help of related technology, for e+g+1 a rain coat manufacturer ma"es
other rubber based items, such as water proof shoes and rubber gloves sold through the
same retail outlets
Co"glo'erate /!ver!$!%at!o": when an organization adopts a strategy which re4uires
ta"ing of those activities which are unrelated to the existing businesses definition of one
C
or more of its businesses either in terms of their respective customer groups, customer
functions or alternative technologies. 'xample of !ndian company which have adopted
apart of growth and expansion through conglomerate diversification the %la!% e,a'ple
! of !#6, a cigarette company diversifying into the hotel industry
E,pa"!o" t-roug- Cooperat!o"
#he term cooperation expresses the idea of simultaneous competition and cooperation
among rival firms for mutual benefits. 6ooperative strategies could be of the following
types
5. -ergers
8. #a"eovers
>. Doint ventures
B. Strategic alliances
Merger Strateg!e: * merger is a combination of two or more organizations in which
one ac4uires the assets and liabilities of the other in exchange for shares or cash or both
the organization are dissolved and the assets and liabilities are combined and new stoc" is
issued. or the organization, which ac4uires another, it is an ac4uisition. or the
organization, which is ac4uired, it is a merger. !f both the organization dissolves their
identity to create a new organization, it is consolidation. #here are different types of
mergers they are horizontal merger, vertical merger, concentric merger and conglomerate
merger.
%orizontal -ergers: it ta"es place when there is a combination of two or more
organizations in the same business. E+g: * company ma"ing footwear combines with
another footwear company, or a retailer of pharmaceutical combines with another retailer
in the same businesses.
)ertical -ergers: !t ta"es place when there is a combination of two or more
organizations, not necessarily in the same business, which create complementarities
either in terms of supply of raw materials 2input3 or mar"eting of goods and services
2outputs3. E+g: * footwear company combines with a leather tannery or with a chain shoe
retail stores
6oncentric -ergers: !t ta"es place when there is a combination of two or more
organizations related to each other either in terms of customer functions, customer
groups, or the alternative technologies used. E+g: * footwear company combining with a
hosiery firm ma"ing soc"s or another specialty footwear company, or with a leather
goods company ma"ing purse, hand bags and so on
6onglomerate -ergers: !t ta"es place when there is a combination of two or more
organizations unrelated to each other, either in terms of customer functions, customer
groups, or alternative technologies used. E+g: * footwear company combining with a
pharmaceutical firm.
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&easons for mergers.
Ahy the buyer wishes to merge:
5. #o increase the value of the organization?s stoc"
8. #o increase the growth rate and ma"e a good investment
>. #o improve stability of earning and sales
B. #o balance, complete, or diversify product line
C. #o reduce competition
E. #o ac4uire needed resources 4uic"ly
F. #o avail tax concessions and benefits
G. #o ta"e advantages of synergy
Ahy the seller wishes to merge
5. #o increase the value of the owner?s stoc" and investment
8. #o increase the growth rate
>. #o ac4uire resources to stabilize operations
B. #o benefit from tax legislation
C. #o deal with top management succession problem
Ta.eover Strateg!e: #a"eover or ac4uisition is a popular strategic alternative adopted
by !ndian companies. *c4uisitions usually are based on the strong motivation of the
buyer firm to ac4uire. #a"eovers are fre4uently classified as hostile ta"eovers 2which are
against the wishes of the ac4uired firm3 and friendly ta"eovers 2by mutual consent3
riendly ta"eovers are where a ta"eover is not resisted or opposed, by the existing
management or professionals. E+g: #ata #ea?s ta"eover of 6onsolidated 6offee 2a grower
of coffee beans3 and *sian 6offee 2a processor3 is an example of a friendly ta"eover.
%ostile ta"eovers is where a ta"eover is resisted, or expected to be opposed, by the
existing management or professionals
*dvantages of #a"eovers
'nsure management accountability
Offer easy growth opportunities
6reate mobility of resources
*void gestation periods and hurdles involved in new projects
Offer a chance to sic" units to survive
Open up alternatives for selective divestment.
F
2o!"t Ve"ture Strateg!e: Doint ventures are a special case of consolidation where two
or more companies from a temporary form a temporary partnership 2also called a
consortium3 for a specified purpose. #hey occur when an independent firm is created by
at least two other firms. Doint ventures may be useful to gain access to a new business
mainly under these conditions
Ahen an activity is uneconomical for an organization to do alone
Ahen the ris" of business has to be shared
Ahen the distinctive competence of two or more organization can be
brought together.
Ahen the organization has to overcome the hurdles, such as import 4uotas,
tariffs, nationalistic 7 political interests, and cultural roadbloc"s
#ypes of Doin ventures
5. 1etween two firms in one industry
8. 1etween two firms across different countries
>. 1etween an !ndian firm and a foreign company in !ndia
B. 1etween an !ndian firm and a foreign company in that foreign country
C. 1etween an !ndian firma and a foreign company in a third country
Strateg!% all!a"%e: #hey are partnership between firms whereby their resources,
capabilities and core competencies are combined to pursue mutual interest to develop,
manufacture, or distribute goods or services. #here are various advantages:
#wo or more firms unite to pursue a set of agreed upon goals but remain
independent subse4uent to the formation of the alliances. * pooling of resources,
investment and ris"s occurs for mutual gain
#he partner firms contribute on a continuing basis in one or more "ey strategic
areas, for example, technology, product and so forth.
Strategic alliances offer a growth route in which merging one?s entity, ac4uiring
or being ac4uired, or creating a joint venture may not be re4uired
+lobal partners can help local firms by developing global 4uality consciousness,
creating adherence to international 4uality standards, providing access to state of
the art technology, gaining entry to world wide mass mar"ets, and ma"ing funds
available for expansions.
E+g: &anbaxy 6ompany went into strategic alliance with 'lilly of the .S to realize its
mission of becoming a research based international pharmaceutical company.
E+g: synergistic benefits arising out of strategic alliance is that of #aj %otels and 1ritish
*irways, where both create advantages for each other through complementarities of
airlines and hotel services
G
STABILITY STRATEGIES
#he stability grand strategy is adopted by an organization when it attempts at an
incremental improvement of its functional performance by marginally changing one or
more of its businesses in terms of their respective customer groups, customer functions,
and alternative technologies 7 either singly or collectively
E+g: * copier machine company provides better after sales service to its existing
customer to improve its company product image, and increase the sale of accessories and
consumables
#his strategy may be relevant for a firm operating in a reasonably certain and predictable
environment. Stability strategy can be of three types 7/o 6hange Strategy, ;rofit
Strategy, ;auseH ;roceed 7 with 7 caution Strategy.
No3C-a"ge Strategy
!t is a conscious decision to do nothing new. #he firm will continue with its present
business definition. Ahen a firm has a stable internal and external environment the firm
will continue with its present strategy. #he firm has no new strengths and wea"nesses
within the organization and there is no opportunities or threats in the external
environment. #a"ing into account this situation the firm decides to maintain its strategy.
Several small and medium sized firm operating in a familiar mar"et- more often a niche
mar"et that is limited in scope 7 and offering products or services through a time tested
technology rely on the /o 7 6hange Strategy.

(ro$!t Strategy
/o firm can continue with the /o 7 6hange Strategy. Sometimes things do change and
the firm is faced with the situation where it has to do something. * firm may assess the
situation and assume that its problem are short lived and will go away with time. #ill then
a firm tries to sustain its profitability by adopting a profit strategy
or instance in a situation when the profit is becoming lower firm ta"es measures to
reduce investments, cut costs, raise prices, increase productivity and adopt other
measures to solve the temporary difficulties.
#he problem arises due to unfavorable situation li"e economic recession, government
attitude, and industry down turn, competitive pressures and li"e. <uring this "ind of
situation that the firm assumes to be temporary it would adopt profit strategies
Some firms to overcome these difficulties would sell off assets such as prime land in a
commercial area and move to suburbs. Others have removed some of its non-core
business to raise money, while others have decided to provide outsourcing service to
other organizations.
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(aue/ (ro%ee& 4!t- Caut!o" Strategy
!t is employed by the firm that wish to test the ground before moving ahead with a full
fledged grand strategy, or by firms that have an intense pace of expansion and wish to
rest for a while before moving ahead. #he purpose is to allow all the people in the
organization to adapt to the changes. !t is a deliberate and conscious attempt to postpone
strategic changes to a more opportune time.
E+g: !n the !ndia shoe mar"et dominated by 1ata and (iberty, %industan (evers better
"nown for soaps and detergents, produces substantial 4uantity of shoes and shoe uppers
for the export mar"et. !n late 8JJJ, it started selling a few thousand pairs in the cities to
find out the mar"et reaction. #his is a pause proceed with caution strategy before it goes
full steam into another -6+ sector that has a lot of potential
RETRENC*MENT STRATEGIES
* retrenchment grand strategy is followed when an organization aims at a contraction of
its activities through substantial reduction or the elimination of the scope of one or more
of its businesses in terms of their respective customer groups, customer functions, or
alternative technologies either singly or jointly in order to improve its overall
performance. E+g: * corporate hospital decides to focus only on special treatment and
realize higher revenues by reducing its commitment to general case which is less
profitable.
#he growth of industries and mar"ets are threatened by various external and internal
developments 2'xternal developments - government policies, demand saturation,
emergence of substitute products, or changing customer needs. !nternal <evelopments 7
poor management, wrong strategies, poor 4uality of functional management and so on.3
!n these situations the industries and mar"ets and conse4uently the companies face the
danger of decline and will go for adopting retrenchment strategies.
E+g: fountain pens, manual type writers, tele printers, steam engines, jute and jute
products, slide rules, calculators and wooden toys are some products that have either
disappeared or face decline.
#here are three types of retrenchment strategies - #urnaround Strategies, <ivestment
Strategies and (i4uidation strategies.
Tur"arou"& Strateg!e

#urn around strategies derives their name from the action involved that is reversing a
negative trend. #here are certain conditions or indicators which point out that a
turnaround is needed for an organization to survive. #hey are
;ersistent /egative cash flows
/egative ;rofits
5J
<eclining mar"et share
<eterioration in ;hysical facilities
Over manning, high turnover of employees, and low morale
.ncompetitive products or services
-is management
*n organization which faces one or more of these issues is referred to as a @sic"?
company
#here are three ways in which turnarounds can be managed
#he existing chief executive and management team handles the entire turnaround
strategy with the advisory support of a external consultant.
!n another case the existing team withdraws temporarily and an executive
consultant or turnaround specialist is employed to do the job.
#he last method involves the replacement of the existing team specially the chief
executive, or merging the sic" organization with a healthy one.
1efore a turn around can be formulated for an !ndian company, it has to be first declared
as a sic" company. #he declaration is done on the basis of the Sic" !ndustrial 6ompanies
*ct 2S!6*3, 5IGC, which provides for a 4uasi judicial body called the 1oard of !ndustrial
and inancial &econstruction 21!&3 which acts as the corporate doctor whenever
companies fall sic".
/!vet'e"t Strateg!e
* divestment strategy involves the sale or li4uidation of a portion of business, or a major
division. ;rofit centre or S1.. <ivestment is usually a part of rehabilitation or
restructuring plan and is adopted when a turnaround has been attempted but has proved to
be unsuccessful. %arvesting strategies a variant of the divestment strategies, involve a
process of gradually letting a company business wither away in a carefully controlled
manner
&easons for <ivestment
#he business that has been ac4uired proves to be a mismatch and cannot be
integrated within the company. Similarly a project that proves to be in viable in
the long term is divested
;ersistent negative cash flows from a particular business create financial problems
for the whole company, creating a need for the divestment of that business.
Severity of competition and the inability of a firm to cope with it may cause it to
divest.
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#echnological up gradation is re4uired if the business is to survive but where it is
not possible for the firm to invest in it. * preferable option would be to divest
<ivestment may be done because by selling off a part of a business the company
may be in a position to survive
* better alternative may be available for investment, causing a firm to divest a
part of its unprofitable business.
<ivestment by one firm may be a part of merger plan executed with another firm,
where mutual exchange of unprofitable divisions may ta"e place.
(astly a firm may divest in order to attract the provisions of the -&#; *ct or
owing to oversize and the resultant inability to manage a large business.
E+g: #*#* group is a highly diversified entity with a range of businesses under its fold.
#hey identified their non 7 core businesses for divestment. #O-6O was divested and
sold to %industan (evers as soaps and a detergent was not considered a core business for
the #atas. Similarly, the pharmaceuticals companies of the #atas- -erind and #ata
pharma 7 were divested to Aoc"hardt. #he cosmetics company (a"me was divested and
sold to %industan (evers, as besides being a non core business, it was found to be a non-
competitive and would have re4uired substantial investment to be sustained.
L!5u!&at!o" Strateg!e
* retrenchment strategy which is considered the most extreme and unattractive is the
li4uidation strategy, which involves closing down a firm and selling its assets. !t is
considered as the last resort because it leads to serious conse4uences such as loss of
employment for wor"ers and other employees, termination of opportunities where a firm
could pursue any future activities and the stigma of failure
#he psychological implications
#he prospects of li4uidation create a bad impact on the company?s reputation.
or many executives who are closely associated firms, li4uidation may be a
traumatic experience.
(egal aspects of li4uidation
.nder the 6ompanies *ct 5ICE, li4uidation is termed as winding up. #he *ct defines
winding up of a company as the process whereby its life is ended and its property
administered for the benefit of its creditors and members. #he *ct provides for a
li4uidator who ta"es control of the company, collect its assets, pay it debts, and finally
distributes any surplus among the members according to their rights.
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Co'6!"at!o" #M!,e& Strateg!e7
#he combination grand strategy is followed when an organization adopts a mixture of
stability, expansion and retrenchment either at the same time in its different business or at
different times in the same business with the aim of improving its performance.
6omplicated situations generally re4uire complex solutions. 6ombination strategies are
the complex solutions that strategists have to offer when faced with the difficulties of real
life businesses.
E+g: * paint company augments its offering of decorative paints to provide a wider
variety to its customers 2stability3 and expands its product range to include industrial and
automotive paints 2expansion3. Simultaneously, it decides to close down the division
which underta"es large scale painting contract jobs 2retrenchment3.
!t would be difficult to find an organization that has survived and grown by adopting a
single pure strategy. #he complexity of doing business demands that different strategies
be adopted to suit the situational demands made upon the organization. *n organisaiton
which has followed a stability strategy for 4uite some time has to thin" of expansion. *ny
organization which has been on an expansion path for long has to pause to consolidate its
businesses.
BUSINESS LEVEL STRATEGIES
!n this second aspect of a company0s strategy, the focus is on how to compete
successfully in each of the lines of business the company has chosen to engage in. #he
central thrust is how to build and improve the company0s competitive position for each of
its lines of business.
A%5u!r!"g Core Co'pete"%!e
* company has competitive advantage whenever it can attract customers and defend
against competitive forces better than its rivals. 6ompanies want to develop competitive
advantages that have some sustainability. Successful competitive strategies usually
involve building uni4uely strong or distinctive competencies in one or several areas
crucial to success and using them to maintain a competitive edge over rivals. Some
examples of distinctive competencies are superior technology andHor product features,
better manufacturing technology and s"ills, superior sales and distribution capabilities,
and better customer service and convenience.
6ompetitive strategy is about being different. !t means deliberately choosing to perform
activities differently or to perform different activities than rivals to deliver a uni4ue mix
of value. 2-ichael '. ;orter3
;orter has advocated ;orter0s three +eneric 6ompetitive Strategies that can be
implemented at the business unit level to created a competitive advantage. #hey are 6ost
(eadership, <ifferentiation and ocus strategies
5>
(ORTER8S GENERIC BUSINESS STRATEGIES
6ost (eadership <ifferentiation
ocussed cost
(eadership
ocused
<ifferentiation
LO) COST LEA/ERS*I( STRATEGIES
(ow cost leadership strategies are based on a firm?s ability to offer a product or service at
a lower cost than its rivals. Ahen a firm is able to build a substantial cost advantage over
other competitors it can pass on its benefits to customers and gain a large mar"et share.
#his re4uires being the overall low-cost provider of the products or services 2e.g., 6ostco,
among retail stores, and %yundai, among automobile manufacturers3. !mplementing this
strategy successfully re4uires continual, exceptional efforts to reduce costs without
excluding product features and services that buyers consider essential. !t also re4uires
achieving cost advantages in ways that are hard for competitors to copy or match. Some
conditions that tend to ma"e this strategy an attractive choice are:
#he industry0s product is much the same from seller to seller
#he mar"etplace is dominated by price competition, with highly price-sensitive
buyers
#here are few ways to achieve product differentiation that have much value to
buyers
-ost buyers use product in same ways -- common user re4uirements
Switching costs for buyers are low
1uyers are large and have significant bargaining power
/IFFERENTIATION STRATEGIES
Ahen firm appeal to a broad cross-section of the mar"et through offering differentiating
features that ma"e customers willing to pay premium prices, e.g., superior technology,
4uality, prestige, special features, service, convenience 2examples are /ordstrom and
(exus3. Success with this type of strategy re4uires differentiation features that are hard
or expensive for competitors to duplicate. Sustainable differentiation usually comes from
advantages in core competencies, uni4ue company resources or capabilities, and superior
5B
management of value chain activities. Some conditions that tend to favor differentiation
strategies are:
#here are multiple ways to differentiate the productHservice that buyers thin" have
substantial value
1uyers have different needs or uses of the productHservice
;roduct innovations and technological change are rapid and competition
emphasizes the latest product features
/ot many rivals are following a similar differentiation strategy
FOCUS STRATEGIES
ocus strategies aim to sell good or services to narrow or specific target mar"et, niche or
segment. ocus builds competitive advantage through high specialization and
concentration of resources in a given niche.
irms can build focus in one of the two ways. ocussed 6ost (eadership and ocussed
<ifferentiation.
Fo%ue& %ot Lea&er-!p: * mar"et niche strategy, concentrating on a narrow
customer segment and competing with lowest prices, which, again, re4uires having lower
cost structure than competitors
Fo%ue& /!$$ere"t!at!o": a second mar"et niche strategy, concentrating on a narrow
customer segment and competing through differentiating features
e.g., a high-fashion women0s clothing bouti4ue
Some conditions that tend to favor focus 2either cost or differentiation focus3 are:
#he business is new andHor has modest resources
#he company lac"s the capability to go after a wider part of the total mar"et
1uyers0 needs or uses of the item are diverseK there are many different niches and
segments in the industry
1uyer segments differ widely in size, growth rate, profitability, and intensity in the
five competitive forces, ma"ing some segments more attractive than others
!ndustry leaders don0t see the niche as crucial to their own success
ew or no other rivals are attempting to specialize in the same target segment
5C
GLOBAL STRATEGIES
<eveloping strategies on a global scale is not an easy tas". -anagers have to learn other
languages, understand host country laws, deal with volatile currencies, face political
uncertainties, and redesign products to suit different customer needs and expectations.
GLOBAL E9(ANSION STRATEGIES
* firm can choose four types of strategies - +lobal Strategy, !nternational Strategy,
#ransnational Strategy and -ultidomestic Strategy
#wo sets of factors affect firm?s decision to adopt international strategies: extent of cost
pressures and the extent of pressures for local responsiveness. 6ost pressures denote the
demand on a firm to minimize its unit costs. ;ressures for local responsiveness ma"es a
firm tailor its strategies to respond to national-level differences in terms of variables li"e
customer preferences and tastes, government policies, or business practices

%igh
6ost
;ressure
(ow
(ow %igh
;ressure for local responsiveness
irms adopt an !"ter"at!o"al trategy when they create value by transferring products
and services to foreign mar"ets where these products and services are not available. #his
is a simple strategy in the sense that an international firm, by maintaining a tight control
over its overseas operations, offers standardized products and services in different
countries with little or no differentiation. -ost international companies, such as, 6oca
6ola, -c<onald, !1-, =ellogg, ;roctor and +amble, -icrosoft, and several others adopt
this strategy for the different countries they operate in.
irms adopt a 'ult!&o'et!% trategy when they try to achieve a high level of local
responsiveness by matching their products and services offerings to the national
conditions operating in the countries they operate in. !n this case, the multidomestic firm
attempts to extensively customize their products and services according to the local
conditions operating in the different countries. Obviously, this leads to a high-cost
+lobal
Strategy
#ransnational
Strategy
!nternational
Strategy
-ulti domestic
Strategy
5E
structure as functions, such as, research and development, production, and mar"eting
have to be duplicated.
irms adopt a glo6al trategy when they rely on a low-cost approach based on reaping
the benefits of experience-curve effects and location economies and offering standardized
products and services across different countries. #he global firm tries to focus
intensively on a low-cost structure by leveraging their expertise in providing certain
products and services, and concentrating the production of these standardized products
and services at a few favorable locations around the world. #hese products and services
are offered in an undifferentiated manner in all countries the global firm operates in,
usually at competitive prices.
irms adopt a tra""at!o"al trategy when they adopt a combined approach of low-cost
and high local responsiveness simultaneously for their products and services.
MAR:ET ENTRY STRATEGIES
Once the -/6 decides to target a particular country, it has to decide the best mode of
entry. -ode of entry means the manner in which the firm would commence its
international operations. #here are several entry modes, each with their own sets of
advantages and disadvantages. * firm would have to decide which mode suits its
circumstances best before it could be adopted.
#he different entry modes are:
#;7 E,port e"try 'o&e: .nder these modes, the firm produces in the home country and
mar"ets in the overseas mar"ets.
<irect exports do not involve home-country intermediaries and mar"eting is done
either through direct agentHdistributor or through direct branchHsubsidiary in the
overseas mar"ets.
!ndirect exports involving intermediaries in the home country and who are
responsible for exporting the firm?s products.
#<7 Co"tra%tual e"try 'o&e: #hese modes involve non-e4uity associations between an
international company and a company or any other legal entity in the overseas mar"ets.
(icensing is an arrangement where the international company transfers
"nowledge, technology, patent, and so on for a limited period of time to an
overseas entity in return for some form of payment, usually a royalty payment.
ranchising: ranchising involves the right to use a business format, usually a
brand name, in the overseas mar"et in return for the franchise receiving some
form of payment.
5F
Other forms of contractual arrangements, such as, technical agreements 2for
technology transfers3, service contracts 2for technical support or expertise
provision3, contract manufacturing, production sharing, turn"ey operations, build-
operate-transfer 21O#3 arrangements, etc.
#=7 I"vet'e"t e"try 'o&e: #hese modes involve ownership of production units in the
overseas mar"et based on some form of e4uity investment of direct foreign investment.
Doint venture and strategic alliances involve a cooperative partnership between
two or more firms with financial interests as the basis of cooperation, 2#hese entry
options have been discussed earlier under the heading of cooperative strategies.3
!ndependent ventures or wholly-owned subsidiaries are modes in which the parent
international company holds 5JJ percent e4uity and is in full control. Such
facilities may be created either through a new venture "nown as a +reenfield
venture or ac4uired through ta"eover strategies.
5G
STRATEGIC MANAGEMENT
STRATEGIC ANALYSIS AN/ C*OICE
Strategic *nalysis and 6hoice see"s to determine alternative courses of action that could
enable the firm to achieve its mission and objectives. Strategic *nalysis and 6hoice tries
to find out answers to three basic 4uestions:
%ow effective has the existing strategy beenL
%ow effective will that strategy be in futureL
Ahat will be the effectiveness of selected alternative strategy in futureL
(ort$ol!o A"aly!
;ortfolio *nalysis is analyzing elements of a firm0s product mix to determine the
optimum allocation of its resources. !t is used in -ulti 1usiness 6orporation to develop
corporate strategy. #he top management views its product lines and business units as a
series of investment from which it expects a return.
!t deals with how individual product lines and business units can gain competitive
advantage in the mar"etplace by using competitive and cooperative strategies. !t helps the
company to answer the following 4uestions:
%ow much of our time and money should we spend on our best products to ensure
that they continue to be successfulL
%ow much of our time and money should we spend developing new costly
products, most of which will never be successfulL
#he two best-"nown portfolio planning methods are the 1oston 6onsulting +roup
;ortfolio -atrix and the -c=insey H +eneral 'lectric -atrix.
BCG GRO)T*3S*ARE MATRI9
!t is based on the observation that a company0s business units can be classified into four
categories based on combinations of mar"et growth and mar"et share relative to the
largest competitor, hence the name $growth-share$. #he growth-share matrix thus maps
the business unit positions within these two important determinants of profitability
#he relative mar"et share serves as a measure of S1. strength in the mar"et. #he mar"et
growth rate provides a measure of mar"et attractiveness.
'ach of the corporation?s product lines or business units is plotted on the matrix
according to both the growth rate of the industry in which it competes and its relative
mar"et share
5I
T-e Boto" Co"ult!"g Group Bo, #>BCG Bo,>7
Star 3 Stars are high growth businesses or products competing in mar"ets where they are
relatively strong compared with the competition. #hey are typically at the pea" of their
product life cycle. Stars generate large amounts of cash because of their strong relative
mar"et share, but also consume large amounts of cash because of their high growth rate.
Often they need heavy investment to sustain their growth. 'ventually their growth will
slow and will become cash cows.
Ca- Co4 - 6ash cows are low-growth businesses or products with a relatively high
mar"et share. #hese are mature, successful businesses with relatively little need for
investment. #hey typically bring in far more money than is needed to maintain their
mar"et share. !n this decline stage of their life cycle, these products are Mmil"ed: for cash
that will be invested in new 4uestion mar"s.
?uet!o" 'ar. - Nuestion mar"s are businesses or products with low mar"et share but
which operate in higher growth mar"ets. Nuestion mar"s are growing rapidly and thus
consume large amounts of cash, but because they have low mar"et shares they do not
generate much cash. * 4uestion mar" 2also "nown as a $problem child$3 has the potential
to gain mar"et share and become a star, and eventually a cash cow when the mar"et
growth slows. !f the 4uestion mar" does not succeed in becoming the mar"et leader, then
after years of cash consumption it will degenerate into a dog when the mar"et growth
declines. -anagement have to thin" hard about $4uestion mar"s$ - which ones should
they invest inL Ahich ones should they allow to fail or shrin"L
/og - <ogs have low mar"et share and a low growth rate and thus neither generate nor
consume a large amount of cash. %owever, dogs are cash traps because of the money tied
up in a business that has little potential. Such businesses are candidates for divestiture.
8J
#he 1oston 6onsulting +roup ;ortfolio -atrix simplicity is its strength - the relative
positions of the firm0s entire business portfolio can be displayed in a single diagram. !ts
limitation is mar"et growth rate is only one factor in industry attractiveness, and relative
mar"et share is only one factor in competitive advantage. #he growth-share matrix
overloo"s many other factors in these two important determinants of profitability
GE BUSINESS SCREEN
!t is the business portfolio framewor" developed by +eneral 'lectric with the help of
-c=insey and 6ompany, a consulting firm. +' 1usiness Screen includes nine cells
based on long-term industry attractiveness and business strengthHcompetitive position
Fa%tor t-at A$$e%t Mar.et Attra%t!ve"e: #here are several factors which can help
determine attractiveness. #hese are listed below:
- -ar"et Size
- -ar"et growth
- -ar"et profitability
- ;ricing trends
- 6ompetitive intensity H rivalry
- Overall ris" of returns in the industry
- Opportunity to differentiate products and services
- Segmentation
- <istribution structure 2e.g. retail, direct, wholesale
Fa%tor t-at A$$e%t Co'pet!t!ve Stre"gt-: #here are several factors which can help
determine the business unit strength. #hese are listed below:
- Strength of assets and competencies
- &elative brand strength
- -ar"et share
- 6ustomer loyalty
- &elative cost position 2cost structure compared with competitors3
- <istribution strength
- &ecord of technological or other innovation
- *ccess to financial and other investment resources
(lott!"g t-e I"$or'at!o" 'ach business unit can be portrayed as a circle plotted on the
matrix, with the information conveyed as follows:
-ar"et size is represented by the size of the circle.
-ar"et share is shown by using the circle as a pie chart.
#he expected future position of the circle is portrayed by means of an arrow.
85
#he green zone indicates go ahead. !t includes the strong S1.?s in which the company
should invest and grow. #hey go for 'xpansion Strategies
#he yellow zone indicates wait and see. !t includes S1S?s that are medium in overall
attractiveness. #hey should maintain their level of investments. #hey go for Stability
Strategies
#he red zone indicates stop. !t includes S1.?s that are low in overall attractiveness. #hey
go for &etrenchment Strategies 2<ivestment and (i4uidation3.
#he shading of the above circle indicates a BJO mar"et share for the strategic business
unit. #he arrow in the upward left direction indicates that the business unit is projected to
gain strength relative to competitors, and that the business unit is in an industry that is
projected to become more attractive. #he tip of the arrow indicates the future position of
the center point of the circle.
Six-step approach for the implementation of the -c=insey -atrix
5. Specify drivers of each dimension. #he corporation must carefully determine
those factors that are important to its overall strategy.
8. <etermine the weight of each driver. #he corporation must assign relative
importance weights to the drivers.
>. Score the S1.0s on each driver.
B. -ultiply weights and scores for each S1..
C. )iew resulting graph and interpret it.
E. ;erform a reviewHsensitivity analysis. -a"e use of adjusted other weights and
scores 2there may be no consensus3.
88
S*ELL8S /IRECTIONAL (OLICY MATRI9 2* /ine 6elled directional ;olicy
-atrix3
#he Shell <irectional ;olicy -atrix is another refinement upon the 1oston -atrix. *long
the horizontal axis are prospects for business sector profitability, and along the vertical
axis is a company's competitive capability. *s with the +' 1usiness Screen the location
of a Strategic 1usiness .nit 2S1.3 in any cell of the matrix implies different strategic
decisions. %owever decisions often span options and in practice the zones are an irregular
shape and do not tend to be accommodated by box shapes. !nstead they blend into each
other.
'ach of the zones is described as follows:
/!vet: S1.0s running in losses with uncertain cash flows. #hey should be divested as
the situation is not li"ely to improve in the near future. #hese li4uidate or move thee
assets.
(-ae& 4!t-&ra4al: S1.0s with wea" competitive position in a low growth mar"et with
very little chance of generating cash flows. #hey should be phased out gradually. #he
cash realized should be invested in more profitable ventures.
/ou6le or 5u!t: +amble on potential major S1.0s for the future. 'ither invests more to
use the prospects presented by the mar"et or else better to 4uit the business.
Cuto&!al: S1.?s are just li"e a cash cow, mil" it and do not commit any more
resources. #he corporate has to bear with the situation by getting help from other S1.?s
or get out of the scene so as to focus more on other attractive business.
8>
Try -ar&er: S1.?s could be vulnerable over a longer period of time, but fine for now.
#hey need additional resources to strength their capabilities. #he corporate try harder to
exploit the business prospects thoroughly.
Ca- Ge"erator: 'ven more li"e a cash cow, mil" here for expansion elsewhere. S1.?s
-ay continue their operations, at least for generating strong cash flows and satisfactory
profits. /o further investments are made.
Gro4t-: +row the mar"et by focusing just enough resources here. #hese S1.?s need
funds to support product innovations, &P< activities etc.
Mar.et Lea&er-!p: -ajor resources are focused upon the S1.. !t must receive top
priority.
INTERNATIONAL (ORTFOLIO ANALYSIS
!nternational ;ortfolio *nalysis provides a good snapshot of collective S1.?s pursuing
global ventures. 6ountry attractiveness is measured against competitive strength. A
%ou"try8 attra%t!ve"e is composed of its mar"et size, the mar"et rate of growth, the
extent and type of government regulation, and economic and political factors. A
pro&u%t8 %o'pet!t!ve tre"gt- is composed of its mar"et share, product fit,
contribution margin, and mar"et support.
<epending on where a product fits on the matrix, it should either receive more funding or
be harvested for cash. ;ortfolio analysis might not be useful, however, to corporations
operating in a global industry rather than a multidomestic one. !n discussing the
importance of global industries, ;orter argues against the use of portfolio analysis on a
country-by-country basis.
;ortfolio -atrix for ;lotting ;roducts by 6ountry
8B
COR(ORATE (ARENTING
6orporate ;arenting is a strategy employed by highly centralized and diversified firms
with large resource pools. !t views the corporation in terms of resources and capabilities
that can be used to build business units value as well as generate synergies across
business units.
6orporate parenting generates corporate strategy by focusing on the core competencies of
the parent corporation and on the value create from the relationship between the parent
and its businesses
!f there is a good fit bHw the parent?s s"ills and resources and the needs and
opportunities of the business units corporation is li"ely to create value
!f there is not a good fit corporation is li"ely to destroy value
/evelop!"g a Corporate (are"t!"g Strategy
irst, examine each business unit 2or target firm in the case of ac4uisition3 in terms of it
critical success factors 26S 7 #hose elements of a company that determine its strategic
success or failure3
Second, examine each business unit 2or target firm3 in terms of areas in which
performance can be improved. #hese are considered to be parenting opportunities. or
'xample, two businesses can gain economies of scope by combining their sales forces or
share manufacturing and logistics s"ills
#hird, analyze how well the parent corporation fits with the business unit 2or target firm3.
6orporate head4uarters must be aware of its own strengths and wea"nesses in terms of
resources, s"ills, and capabilities
(are"t!"g @ F!t Matr!,
;arenting 7 it -atrix summarizes the various judgements regarding corporateHbusiness
unit fit for the corporation as a whole. #his matrix emphasizes their fit with the 6orporate
parent it. #his matrix composes of 8 dimensions: ;ositive contributions that the parent
can ma"e and the negative effects the parent can ma"e. #he combination of these two
dimensions create C different positions
%eartland 1usinesses
'dge-of-%eartland 1usinesses
1allast 1usinesses
*lien #erritory 1usinesses
)alue #rap 1usinesses
8C
(are"t!"g @ F!t Matr!,
*eartla"& Bu!"ee: %eartland 1usinesses should be at the heart of the corporation?s
future. #hese %eartland 1usinesses have opportunities for improvement by the parent,
and the parent understands their critical success factors well. #hese businesses should
have priority for all corporate activities
E&ge3o$3*eartla"& Bu!"ee: !n these businesses some parenting characteristics fit the
business, but other do not. #he parent may not have all the characteristics needed by a
unit, or the parent may not really understand all of the units strategic factors.
E+g+: a unit in this area may be very strong in creating its own image through advertising
7 a critical success factor in its industry. #he corporate may however not have this
strength and tends to leave this to its advertising agency. !f the parent forced the unit to
abandon its own creative efforts in favor of using the corporation?s favorite ad agency,
the unit may struggle.
Such business units are li"ely to consume much of the parent?s attention, as the parent
tries to understand them better and transform them into %eartland 1usinesses
Ballat Bu!"ee: 1allast 1usinesses fit very comfortably with the parent corporation
but contain very few opportunities to be improved by the parent. (i"e cash cows may be
important sources of stability and earnings. 1ut if environmental changes, ballast could
move to alien territory. #herefore corporate decision ma"ers should consider divesting
8E
this unit as soon as they can get a price that exceeds the expected value of future cash
flows. E+g+: !1-?s mainframe business
Al!e" Terr!tory Bu!"ee: *lien #erritory 1usinesses have little opportunities to be
improved by the corporate parent, and a misfit exists between the parenting
characteristics and the units strategic factors. #here is little potential for value creation
but high potential for value destruction on the part of the parent. #he corporation must
divest this unit while it still has value
Value Trap Bu!"ee: )alue #rap 1usinesses fit well with parenting opportunities, but
they are a misfit with the parent?s understanding of the units? 6S. #his is where the
corporate head4uarters can ma"e its biggest error. !t mista"es what it sees as
opportunities for ways to improve the business units? profitability or competitive
position.
E+g+: #o ma"e the unit a world-class manufacturer 2because the parent has world-class
manufacturing s"ills3 it may not notice that the unit is primarily successful because of its
uni4ue product development and niche mar"eting expertise
STRATEGIC IM(LEMENTATION
!mplementation involves actually executing the strategic game plan. #his includes setting
polices, designing the organization structure and developing a corporate culture to enable
the attainment of organizational objectives. Strategic implementation is a process by
which strategies and policies are put into action through the development of programs,
budgets, and procedures. Strategic implementation is mainly concerned regarding two
issues: Structural !ssues and 1havioural !ssues
STRUCTURAL ISSUES
'very organization has a uni4ue structure. *n organizational structure is the reflection of
the company?s past history, reporting relationships and internal politics. Ahen
implementing new strategies the management has to ta"e a very close loo" at the
organization structure and evaluate if it supports the formulated strategy. #he 6'O has to
customize the organizational structure to fit the strategy. #his would improve the
performance of the organization. <ifferent types of organizational structure involve in
response to strategic change.
Fu"%t!o"al Stru%ture: !n a functional structure, the division of labor in an organization
is grouped by the main activities or functions that need to be performed within the
organizationQsales, mar"eting, human resources, and so on. 'ach functional group
within the organization is vertically integrated from the bottom to the top of the
organization. or example, a )ice ;resident of -ar"eting would lead all the mar"eting
people, grouped into the mar"eting department.
'mployees within the functional divisions of an organization tend to perform a
specialized set of tas"s, for instance the engineering department would be staffed only
8F
with engineers. #his leads to operational efficiencies within that group. %owever it could
also lead to a lac" of communication between the functional groups within an
organization, ma"ing the organization slow and inflexible.
*s a whole, a functional organization is best suited as a producer of standardized goods
and services at large volume and low cost. 6oordination and specialization of tas"s are
centralized in a functional structure, which ma"es producing a limited amount of
products or services efficient and predictable. -oreover, efficiencies can further be
realized as functional organizations integrate their activities vertically so that products are
sold and distributed 4uic"ly and at low cost.
unctional Structure
/!v!!o"al Stru%ture: *lso called a $;roduct Structure$, the divisional structure groups
each organizational function into divisions. 'ach division within a divisional structure
contains all the necessary resources and functions within it.
or example, an automobile company with a divisional structure might have one division
for S.)s, another division for subcompact cars, and another division for sedans. 'ach
division would have its own sales, engineering and mar"eting departments.
6'O
inance -ar"eting
%uman
&esource
-anagement
;roduction
6'O
+eneral -anager
<ivision *
+eneral -anager
<ivision 1
-ar"eting
inance
%uman &esource
-anagement
;roduction
-ar"eting inance
%uman &esource
-anagement
;roduction
8G
Matr!, Stru%ture: -atrix structure groups employees by both function and product.
#his structure can combine the best of both separate structures. * matrix organization
fre4uently uses teams of employees to accomplish wor", in order to ta"e advantage of the
strengths, as well as ma"e up for the wea"nesses, of functional and decentralized forms.
#hese type of structure is created by assigning functional specialists to wor" on a special
project or a new product or service. or the duration of the project, specialists from
different areas form a group or team and report to a team leader. Simultaneously they
may wor" in their respective parent department. Once the project is completed, the team
members revert to their parent departments.
Strateg!% Bu!"e U"!t Orga"!0at!o" Stru%ture: * strategic business unit is a
distinctive business with its own set of competitors that can be managed reasonably
independently of other business within the organization. 'ach unit will have a clearly
defined strategy, based on the capabilities and overall organizational needs.
6'O
+roup
%ead S1.5
+roup
%ead S1.8
+roup
%ead S1.>
<ivision
*
<ivision
*
<ivision
*
<ivision
*
<ivision
*
<ivision
*
<ivision
*
<ivision
*
<ivision
*
8I
BE*AVIOURAL ISSUES
!t is vital to bear in mind that organizational change is not an intellectual process
concerned with the design of ever-more-complex and elegant organization structures. !t is
to do with the human side of enterprise and is essentially about changing people0s
attitudes, feelings and - above all else - their behaviour. #he behavioural of the
employees affect the success of the organization. Strategic implementation re4uires
support, discipline, motivation and hard wor" from all manager and employees
I"$lue"%e Ta%t!%: #he organizational leaders have to successfully implement the
strategies and achieve the objectives. #herefore the leader has to change the behaviour of
superiors, peers or subordinates. or this they must develop and communicate the vision
of the future and motivate organizational members to move into that direction
(o4er: it is the potential ability to influence the behaviour of others. (eaders often use
their power their power to influence others and implement strategy. ormal authority that
comes through leaders position in the organization 2%e cannot use the power to influence
customers and government officials3 the leaders have to exercise something more than
that of the formal authority 2'xpertise, charisma, reward power, information power,
legitimate power, coercive power3
E'po4er'e"t a a 4ay o$ I"$lue"%!"g Be-av!our: #he top executives have to
empower lower level employees. #raining, self managed wor" groups eliminating whole
levels of management in organization and aggressive use of automation are some of the
ways to empower people at various places.
(ol!t!%al I'pl!%at!o" o$ (o4er: organization politics is defined as those set of activities
engaged in by people in order to ac4uire, enhance and employ power and other resources
to achieve preferred outcomes in organizational setting characterized by uncertainties.
Organization must try to manage political behviour while implementing strategies. #hey
should
<efine job duties clearly
<esign job properly
<emonstrate proper behaviours.
;romote understanding
*llocate resources judiciously
Lea&er-!p Style a"& Culture C-a"ge: 6ulture is the set of values, beliefs, behaviours
that help its members understand what the organization stands for, how it does things and
what it considers important. irms culture must be appropriate and support their firm.
#he culture should have some value in it .
>J
#o change the corporate culture involves persuading people to abandon many of their
existing beliefs and values, and the behaviours that stem from them, and to adopt new
ones.
#he first difficulty that arises in practice is to identify the principal characteristics of the
existing culture. #he process of understanding and gaining insight into the existing
culture can be aided by using one of the standard and properly validated inventories or
4uestionnaires that a number of consultants have developed to measure characteristics of
corporate culture. #hese offer the advantage of being able to benchmar" the culture
against those of other, comparable firms that have used the same instruments. #he
wea"ness of this approach is that the information thus obtained tends to be more
superficial and less rich than material from other sources such as interviews and group
discussions and from study of the company0s history.
!n carrying out this diagnostic exercise, such instruments can be supplemented by surveys
of employee opinions and attitudes and complementary information from surveys of
customers and suppliers or the public at large.
Value a"& Culture: )alue is something that has worth and importance to an
individual. ;eople should have shared values. #his value "eeps the every one from the
top management down to factory persons on the factory floor pulling in the same
direction.
Et-!% a"& Strategy: 'thics are contemporary standards and a principle or conducts that
govern the action and behviour of individuals within the organization. !n order that the
business system function successfully the organization has to avoid certain unethical
practices and the organization has to bound by legal laws and government rules and
regulations
Ma"ag!"g Re!ta"%e to C-a"ge: To change is almost always unavoidable, but its
strength can be minimized by careful advance #op management tends to see change in its
strategic context. &an"-and-file employees are most li"ely to be aware of its impact on
important aspects of their wor"ing lives.
Some resistance planning, which involves thin"ing about such issues as: Who will be
affected by the proposed changes, both directly and indirectlyL rom their point of view,
what aspects of their wor"ing lives will be affectedL Who should communicate
information about change, when and by what meansL Ahat management style is to be
usedL
Ma"ag!"g Co"$l!%t: 6onflict is a process in which an effort is purposefully made by one
person or unit to bloc" another that results in frustrating the attainment of the others goals
or the furthering of his interests. #he organization has to resolve the conflicts.
L!".!"g (er$or'a"%e a"& (ay to Strateg!e: !n order to implement the strategies
effectively the organization has to align salary increases, promotions, merit pay, bonuses
etc., more closely to support the long term objectives of the organization.
>5
STRATEGIC LEA/ERS*I(+
Strategic leaders manage the strategic management process that is designed to help the
organisation achieve its objectives.
*mong the strategic leaders, we have managers operating at different levels of an
organisation: corporate-level, business-level, functional-level and operational-level.
6orporate-level managers include the chief executive officer 26'O3, senior
executives and the corporate staff. #he corporate-level managers manage the
strategic management process for the whole organisation. #hese managers may
carry designations such as 6'O, managing director, executive director or
president.
1usiness-level managers are the strategic leaders at the business, division or S1.
levels. #hese managers manage the strategic management process at the business-
level. #hese may carry designations such as general manager or vice-president.
unctional-level managers are the strategic leaders of specific functions such as
mar"eting or operations. #hey are called mar"eting managers or operations
managers. #he functional managers manage the strategic management process at
the functional level.
*t the operational-level, there are managers who are responsible for the
implementation of strategies within their assigned functional areas. #hey occupy
positions such as deputy manager of mar"eting or assistant manager of operations.
T-e Ta. o$ Strateg!% Lea&er
/eter'!"!"g Strateg!% /!re%t!o" One of the more crucial tas"s of a strategic leader
is to provide a sense of direction to the organisation. #he strategic direction is
concerned with the future shape of the organisation.
E$$e%t!vely Ma"ag!"g t-e Orga"!at!o"al Reour%e (ort$ol!o Strategic leaders are
called upon to manage effectively, the portfolio of organizational resources. Such a
portfolio includes financial capital, human capital, social capital and organizational
capital.
Suta!"!"g a" E$$e%t!ve Orga"!at!o"al Culture Strategic leaders try to build and
sustain an effective organizational culture.
E'p-a!!"g Et-!%al (ra%t!%e Strategic leaders emphasise on ethical practices in
word and deed when the strategies are being implemented.
Eta6l!-!"g Bala"%e& Orga"!at!o"al Co"trol Strategic leaders use a combination
of financial and non-financial controls to help the organisation achieve its objectives.
>8
T-e Role o$ Strateg!% Lea&er
Role o$ C-!e$ E,e%ut!ve O$$!%er
#he role of the ceo is evident through all the phases of the process of strategic
management.
* ceo performs the strategic tas"s: actions which are necessary to provide a direction
to the organisation so that it achieves its purpose. %e plays a pivotal role in setting the
mission of the organizations, deciding the objectives and goals, formulating and
implementing the strategy and, in general, seeing to it that the organisation does not
deviate from its pre-determined path, designed to move it from the position it is in to
where it wants to be.
Role o$ Se"!or Ma"ager #he senior 2or top3 management consists of managers at
the highest level of the managerial hierarchy. Senior managers perform a variety of
roles by assigning the board and the chief executive in the formulation,
implementation and evaluation of strategy. Organisationally, they come together in
the form of different types of committees, tas" forces, wor" groups, thin" tan"s,
management teams and the li"e, to play a very important role in strategic
management.
Role o$ Bu!"e3Level E,e%ut!ve #he rationale for organizing structure according
to the strategic business units 2S1.s3 is to manage a diversified company as a
portfolio of businesses 7 each business having a clearly defined product-mar"et
segment and a uni4ue strategy. #he business-level executives, also "nown as either
profit center or divisional heads are considered as chief executives of a special
business unit. #he business-level strategy formulation and implementation are the
primary responsibilities of the business-level executives.
Role o$ Fu"%t!o"al a"& Operat!o"al Ma"ager #he major role of functional and
operational managers, also called the middle-level managers to relate to functional
and operational matters and therefore they rarely play an active role in higher-level
strategic management. #hey may, at best, be involved as @sounding boards? for
departmental and operational plans, as implementers of the decision ta"en by the
corporate- and business-level managers, followers of policy guidelines and passive
receivers of communication of functional strategic plans.
>>
STRATEGY EVALUATION AN/ CONTROL
#he final stage in strategic management is strategy evaluation and control. *ll strategies
are subject to future modification because internal and external factors are constantly
changing. !n the strategy evaluation and control process managers determine whether the
chosen strategy is achieving the organization0s objectives. #he fundamental strategy
evaluation and control activities are: reviewing internal and external factors that are the
bases for current strategies, measuring performance, and ta"ing corrective actions.

Strategic 'valuation generally operates at two levels: strategic and operational. *t the
strategic level managers try to examine the consistency of strategy with environment. *t
the operational level, the focus is on finding how a given strategy is effectively pursued
by an organisation.
IM(ORTANCE: S'6 helps an organisation in several ways.
Fee&6a%.: S'6 offers valuable feedbac" on how well things are moving ahead. !t
also throws light on the relevance and validity of strategic choice. !t helps to
answer critical 4uestions such as: *re we moving in the proper directionL *re our
assumptions about major trends are correctL Should we adjust or abort strategyL
Re4ar&: S'6 helps in identifying rewarding behaviours that are in tune with
formulated strategies. !t helps in pinpointing responsibilities for failure as well.
Ahere people find it difficult to stic" to a planned course of action due to
circumstances beyond their control, managers can ta"e note of such things and
initiate suitable rectification steps immediately.
Future (la""!"g: S'6 offers a considerable amount of information and
experience to decision ma"ers than can be 4uite valuable in the formulation of
new strategic plans.
BARRIERS: #here are three types of barriers in evaluation the limits of control,
difficulties in measurement, and motivational problems.
T-e l!'!t o$ Co"trol: !t is not easy for strategists to decide the limits of control.
#oo much control prevents mangers from ta"ing initiative, experiment with their
creative ideas and gain through calculated ris" ta"ing. On the other hand, when
there is very little control people tend to go off the hoo", waste resources without
any fear of punishment and wor" at cross purposes 7 putting a big 4uestion mar"
on the very survival of the firm.
/!$$!%ult!e !" Meaure'e"t: !t is not easy to find measurement techni4ues that
are valid and reliable. )alidity is the extent to which an instrument measures
what it intends to measure 2for example measuring the speed and accuracy of a
typist in a typing test3. &eliability is the confidence that an indicator will measure
the same thing every time. !n the absence of reliability and validity, the control
>B
system gets distorted. !t may fail to measure results uniformly or measure
attributes that are not re4uired to be measured. Ahen people are not confident
about the measures used for judgement, they resist the whole process vehemently.
Mot!vat!o"al (ro6le': %aving ta"en a position while formulating and
implementing the strategy, strategists are often reluctant to admit their mista"es
when things go off the trac". #hey tend to shift the blame on others. #his may
also prevent them from hiving off unprofitable divisions, reversing wrong
decisions and go in search of more viable alternations 4uic"ly.
EVALUATION CRITERIA: #he critical factors that could help in evaluating a
strategy may broadly be classified into two categories: 4uantitative factors and 4ualitative
factors.
?ua"t!tat!ve Fa%tor: Nuantitative criteria commonly employed in evaluate strategies
are financial ratios, which strategists use to ma"e three important comparisons: 2i3
comparing the firm? s performance over different time periods 2ii3 comparing the firm?s
performance to competitors? and 2iii3 comparing the firm?s performance to industry
averages. Some "ey financial ratios those are particularly useful as criteria for strategy
evaluation may be stated thus:
&eturn on investment
&eturn on e4uity
R score
'mployee turnover
'mployee satisfaction index
&eturn on capital employed
;rofit margin
-ar"et share
<ebt to e4uity
'arnings per share
Sales growth
*sset growth
?ual!tat!ve Fa%tor: -any managers feel that 4ualitative organizational measurements
are best arrived at simply by answering a series of important 4uestions at revealing
important facets of organizational operations. Some 4ualitative 4uestions that are useful
in evaluating strategies.
5. !s the strategy internally consistentL
8. !s the strategy consistent with the environmentL
>. !s the strategy appropriate in view of available resourceL
B. <oes the strategy involve an acceptable degree of ris"L
C. <oes the strategy have an appropriate time framewor"L
E. !s the strategy wor"ableL
>C

STRATEGIC CONTROL
Strategic control focuses on the dual 4uestions of whether: 253 the strategy is being
implemented as plannedK and 283 the results produced by the strategy are those intended.$
Strategic control is $the critical evaluation of plans, activities, and results, thereby
providing information for the future action$. #here are four types of strategic control:
premise control, implementation control, strategic surveillance and special alert control
(re'!e Co"trol: ;lanning premisesHassumptions are established early on in
the strategic planning process and act as a basis for formulating strategies. ;remise
control has been designed to chec" systematically and continuously whether or not the
premises set during the planning and implementation processes are still valid. !t involves
the chec"ing of environmental conditions. ;remises are primarily concerned with two
types of factors:
'nvironmental factors 2for example, inflation, technology, interest rates,
regulation, and demographicHsocial changes3.
!ndustry factors 2for example, competitors, suppliers, substitutes, and barriers to
entry3.
*ll premises may not re4uire the same amount of control. #herefore, managers must
select those premises and variables that 2a3 are li"ely to change and 263 would a major
impact on the company and its strategy if the did.
I'ple'e"tat!o" Co"trol: Strategic implantation control provides an additional
source of feed forward information. $!mplementation control is designed to assess
whether the overall strategy should be changed in light of unfolding events and results
associated with incremental steps and actions that implement the overall strategy.$ #he
two basis types of implementation control are:
5. -onitoring strategic thrusts 2new or "ey strategic programs3 . #wo approaches are
useful in enacting implementation controls focused on monitoring strategic
thrusts: 2;3 one way is to agree early in the planning process on which thrusts are
critical factors in the success of the strategy or of that thrustK 2<3 the second
approach is to use stopHgo assessments lin"ed to a series of meaningful thresholds
2time, costs, research and development, success, etc.3 associated with particular
thrusts.
8. -ilestone &eviews . -ilestones are significant points in the development of a
programme, such as points where large commitments of resources must be made.
* milestone review usually involves a full-scale reassessment of the strategy and
the advisability of continuing or refocusing the direction of the company. !n order
to control the current strategy, must be provided in strategic plans.
>E
Strateg!% Surve!lla"%e: is designed to monitor a broad range of events
inside and outside the company that are li"ely to threaten the course of the firm0s strategy.
#he basic idea behind strategic surveillance is that some form of general monitoring of
multiple information sources should be encouraged, with the specific intent being the
opportunity to uncover important yet unanticipated information.
Strategic surveillance appears to be similar in some way to $environmental scanning.$
#he rationale, however, is different. 'nvironmental, scanning usually is seen as part of
the chronological planning cycle devoted to generating information for the new plan. 1y
way of contrast, strategic surveillance is designed to safeguard the established strategy on
a continuous basis.
Spe%!al Alert Co"trol: Special alert controls are the need to thoroughly, and
often rapidly, reconsider the firm0s basis strategy based on a sudden, unexpected event.
2i.e., natural disasters, chemical spills, plane crashes, product defects, hostile ta"eovers
etc.3. Special alert controls should be conducted throughout the entire strategic
management process.
#he characteristics of each control component are detailed in Table 6-4, including the
component0s purpose, mechanism used to implement it, the procedure to be followed,
degree of focusing, information sources, and organizationalHpersonnel to be utilized.
O(ERATIONAL CONTROL
Operational control systems are designed to ensure that day-to-day actions are
consistent with established plans and objectives. !t focuses on events in a recent period.
Operational control systems are derived from the re4uirements of the management
control system. 6orrective action is ta"en where performance does not meet standards.
#his action may involve training, motivation, leadership, discipline, or termination.
Evaluat!o" Te%-"!5ue $or Operat!o"al Co"trol:
)alue chain analysis: irms employ value chain analysis to identify and evaluate the
competitive potential of resources and capabilities. 1y studying their s"ills relative to
those associated with primary and support activities, firms are able to understand their
cost structure, and identify their activities through which they can create value.
Nuantitative performance measurements: -ost firms prepare formal reports of
4uantitative performance measurements 2such as sales growth, profit growth, economic
value added, ration analysis etc.3 that manager?s review at regular intervals. #hese
measurements are generally lin"ed to the standards set in the first step of the control
process. or example if sales growth is a target, the firm should have a means of
gathering and exporting sales data. !f the firm has identified appropriate measurements,
regular review of these reports helps managers stay aware of whether the firm is doing
what it should do. !n addition to there, certain 4ualitative bases based on intuition,
judgement, opinions, or surveys could be used to judge whether the firm?s performance is
on the right trac" or not.
>F
1enchmar"ing: !t is a process of learning how other firms do exceptionally high-4uality
things. Some approaches to bench mar"ing are simple and straightforward. or example
9erox 6orporation routinely buys copiers made by other firms and ta"es them apart to
see how they wor". #his helps the firms to stay abreast of its competitors? improvements
and changes.
=ey actor &ating: !t is based on a close examination of "ey factors affecting
performance 2financial, mar"eting, operations and human resource capabilities3 and
assessing overall organisational capability based on the collected information.
T*E CONTROL (ROCESS
&egardless of the type or levels of control systems an organization needs, control may be
depicted as a six-step feedbac" model3:
;+ /eter'!"e )-at to Co"trol: #he first step in the control process is
determining the major areas to control. -anagers usually base their major controls on the
organizational mission, goals and objectives developed during the planning process.
-anagers must ma"e choices because it is expensive and virtually impossible to control
every aspect of the organization0s
<+ Set Co"trol Sta"&ar&: #he second step in the control process is
establishing standards. * control standard is a target against which subse4uent
performance will be compared. Standards are the criteria that enable managers to
evaluate future, current, or past actions. #hey are measured in a variety of ways,
including physical, 4uantitative, and 4ualitative terms. ive aspects of the performance
can be managed and controlled: 5ua"t!ty1 5ual!ty1 t!'e %ot1 a"& 6e-av!or
Standards reflect specific activities or behaviors that are necessary to achieve
organizational goals. +oals are translated into performance standards by ma"ing them
measurable. *n organizational goal to increase mar"et share, for example, may be
translated into a top-management performance standard to increase mar"et share by 5J
percent within a twelve-month period. %elpful measures of strategic performance
include: sales 2total, and by division, product category, and region3, sales growth, net
profits, return on sales, assets, e4uity, and investment cost of sales, cash flow, mar"et
share, product 4uality, valued added, and employees productivity.
Nuantification of the objective standard is sometimes difficult. or example, consider the
goal of product leadership. *n organization compares its product with those of
competitors and determines the extent to which it pioneers in the introduction of basis
product and product improvements. Such standards may exist even though they are not
formally and explicitly stated.
Setting the timing associated with the standards is also a problem for many organizations.
!t is not unusual for short-term objectives to be met at the expense of long-term
>G
objectives. -anagement must develop standards in all performance areas touched on by
established organizational goals. #he various forms standards are depend on what is
being measured and on the managerial level responsible for ta"ing corrective action.
=+ Meaure (er$or'a"%e: Once standards are determined, the next step is
measuring performance. #he actual performance must be compared to the standards.
-any types of measurements ta"en for control purposes are based on some form of
historical standard. #hese standards can be based on data derived from the (IMS #pro$!t
!'pa%t o$ 'ar.et trategy7 program, published information that is publicly available,
ratings of product H service 4uality, innovation rates, and relative mar"et shares standings.
Strategic control standards are based on the practice of %o'pet!t!ve 6e"%-'ar.!"g - the
process of measuring a firm0s performance against that of the top performance in its
industry. #he proliferation of computers tied into networ"s has made it possible for
managers to obtain up-to-minute status reports on a variety of 4uantitative performance
measures. -anagers should be careful to observe and measure in accurately before ta"ing
corrective action.
A+ Co'pare (er$or'a"%e to Sta"&ar&: #he comparing step determines the
degree of variation between actual performance and standard. !f the first two phases have
been done well, the third phase of the controlling process - comparing performance with
standards - should be straightforward. %owever, sometimes it is difficult to ma"e the
re4uired comparisons 2e.g., behavioral standards3. Some deviations from the standard
may be justified because of changes in environmental conditions, or other reasons.
B+ /eter'!"e t-e Reao" $or t-e /ev!at!o": #he fifth step of the control process
involves finding out: $why performance has deviated from the standardsL$ 6auses of
deviation can range from selected achieve organizational objectives. ;articularly, the
organization needs to as" if the deviations are due to internal shortcomings or external
changes beyond the control of the organization. * general chec"list such as following can
be helpful:
*re the standards appropriate for the stated objective and strategiesL
*re the objectives and corresponding still appropriate in light of the current
environmental situationL
*re the strategies for achieving the objectives still appropriate in light of the
current environmental situationL
*re the firm0s organizational structure, systems 2e.g., information3, and resource
support ade4uate for successfully implementing the strategies and therefore
achieving the objectivesL
*re the activities being executed appropriate for achieving standardL
C+ Ta.e Corre%t!ve A%t!o": #he final step in the control process is determining the need
for corrective action. -anagers can choose among three courses of action: 253 they can
do nothing 283 they can correct the actual performance 2>3 they can revise the standard.
>I
Ahen standards are not met, managers must carefully assess the reasons why and ta"e
corrective action. -oreover, the need to chec" standards periodically to ensure that the
standards and the associated performance measures are still relevant for the future.
#he final phase of controlling process occurs when managers must decide action to ta"e
to correct performance when deviations occur. 6orrective action depends on the
discovery of deviations and the ability to ta"e necessary action. Often the real cause of
deviation must be found before corrective action can be ta"en. 6auses of deviations can
range from unrealistic objectives to the wrong strategy being selected achieve
organizational objectives. 'ach cause re4uires a different corrective action. /ot all
deviations from external environmental threats or opportunities have progressed to the
point a particular outcome is li"ely, corrective action may be necessary.
C*ARACTERISTICS OF AN EFFECTIVE CONTROL SYSTEM
'ffective control systems tend to have certain 4ualities in common. #hese can be stated
thus:
5. Su!ta6le: #he control system must be suitable to the needs of an organisation. !t
must conform to the nature and needs of the job and the area to be controlled. or
example, the control system used in production department will be different from
that used in sales department.
8. S!'ple: #he control system should be easy to understand and operate. *
complicated control system will cause unnecessary mista"es, confusion and
frustration among employees. Ahen the control system is understood properly,
employees can interpret the same in a right way and ensure its implementation.
>. Sele%t!ve: #o be useful, the control system must focus attention on "ey, strategic
and important factors which are critical to performance. !nsignificant deviations
need not be loo"ed into. 1y concentrating attention on important aspects,
managers can save their time and meet problems head-on in an effective manner.
B. Sou"& a"& e%o"o'!%al: #he system of control should be economical and easy to
maintain. *ny system of control has to justify the benefits that it gives in relation
to the costs it incurs. #o minimize costs, management should try to impose the
least amount of control that is necessary to produce the desired results.
C. Fle,!6le: 6ompetitive, technological and other environmental changes force
organizations to change their plans. *s a result, control should be necessarily
flexible. !t must be flexible enough to adjust to adverse changes or to ta"e
advantage of new opportunities.
E. For4ar&3loo.!"g: *n effective control system should be forward-loo"ing. !t
must provide timely information on deviations. *ny departure from the standard
BJ
should be caught as soon as possible. #his helps managers to ta"e remedial steps
immediately before things go out of gear.
F. Reao"a6le: *ccording to &obbins, controls must be reasonable. #hey must be
attainable. !f they are too high or unreasonable, they no longer motivate
employees. On the other hand, when controls are set at low levels, they do not
pose any challenge to employees. #hey do not stretch their talents. #herefore,
control standards should be reasonable-they should challenge and stretch people
to reach higher performance without being demotivating
G. O6De%t!ve: * control system would be effective only when it is objective and
impersonal. !t should not be subjective and arbitrary. Ahen standards are set in
clear terms, it is easy to evaluate performance. )ague standards are not easily
understood and hence, not achieved in a right way. 6ontrols should be accurate
and unbiased. !f they are unreliable and subjective, people will resent them.
I. Repo"!6!l!ty $or $a!lure: *n effective control system must indicate
responsibility for failures. <etecting deviations would be meaningless unless one
"nows where in the organisation they are occurring and who is responsible for
them. #he control system should also point out what corrective actions are
needed to "eep actual performance in line with planned performance.
5J. A%%epta6le: 6ontrols will not wor" unless people want them to. #hey should be
acceptable to chose to whom they apply, controls will be acceptable when they
are 2i3 4uantified, 2ii3 objective 2iii3 attainable and 2iv3 understood by one and all.
STRATEGIC ISSUES IN MANAGING TEC*NOLOGY
T-e Role o$ Ma"age'e"t: <ue to increased competition and accelerated product
development cycles, innovation and the management of technology is becoming crucial
to corporate success. #he importance of technology and innovation must be emphasized
by people at the very top and reinforced by people throughout the corporation.
-anagement has an obligation to not only encourage new product development, but also
to develop a system to ensure that technology is being used most effectively with the
consumer in mind.
E9TERNAL SCANNING: 6orporations need to continually scan their external societal
and tas" environments for new developments in technology that may have some
application to their current or potential products, Sta"eholders, especially customers, can
be important participant in the new product development process.
Te%-"olog!%al /evelop'e"t: ocusing one?s scanning efforts too closely on one?s own
industry is dangerous. -ost new developments that threaten existing business practices
and technologies do not come from existing competitors or even from within traditional
industries. * new technology that can substitute for an existing technology at a lower
cost and provide higher 4uality can change the very basis for competition in an industry.
B5
I'pa%t o$ Sta.e-ol&er o" I""ovat!o": * company should loo" to its sta"eholders,
especially its customers, suppliers, and distributors, for sources product and service
improvements. #hese groups of people have the most to gain from innovative new
products or services. .nder certain circumstances, they may propose new directions for
product development. Some of the methods of gathering information from "ey
sta"eholders are using lead users, mar"et research, and new product experimentation.
Lea& Uer: 6ompanies should loo" to lead users for help in product development,
especially in high technology industries where things move so 4uic"ly that a product is
becoming obsolete by the time it arrives on the mar"et. #hese lead users are Mcompanies,
organizations, or individuals that are well ahead of mar"et trends and have needs that go
far beyond those of the average user. #hey are the first to adopt a product because they
benefit significantly from its use-even if it is not fully developed.
Mar.et Reear%-: * more traditional method of obtaining new product ideas is to use
mar"et research to survey current users regarding what they would li"e in a new product.
#his method has been successfully used by companies such as ;rocter P +amble to
identify consumer preferences. !t is especially useful in directing incremental
improvements to existing products.
Ne4 (ro&u%t E,per!'e"tat!o": !nstead of using lead users or mar"et research to test
the potential of innovative products, by Mprobing: potential mar"ets with early versions
of the products, learning from the probes, and probing again.
INTERNAL SCANNING: !n addition to scanning the external environment, strategists
should also assess their company?s ability to innovate effectively by as"ing the following
4uestions:
5. %as the company developed the resources needed to try new ideasL
8. <o the managers allow experimentation with new products or servicesL
>. <oes the corporation encourage ris" ta"ing and tolerate mista"esL
B. *re people more concerned with new ideas or with defending their turfL
C. !s it easy to form autonomous project teamsL
!n addition to answering these 4uestions, strategists should assess how well company
resources are internally allocated and evaluate the organization?s ability to develop and
transfer new technology in a timely manner into the generation of innovative products
and services.
Reour%e Allo%at!o" Iue: #he 6ompany must ma"e available the resources necessary
for effective research and development. &esearch indicates that a company?s &P<
intensity 2its spending on &P< as a percentage of sales revenue3 is a principal means of
gaining mar"et share in global competition. #he amount of money spent on &P< often
varies by industry.
B8
T!'e to Mar.et Iue: !n addition to money, another important consideration in the
effective management of research and development is time to mar"et. * decade ago, the
time from inception to profitability of a specific &P< program was generally accepted to
be F to 55 years. #ime to mar"et is an important issue because EJO of patented
innovations are generally imitated within B years at E.CO of the cost of innovation.
STRATEGY FORMULATION: &esearch and development strategy deals not only
with the decision to be a leader or a follower in terms of technology and mar"et entry but
also with the source of the technology. Should a company develop its own technology or
purchase it from othersL #he strategy also ta"es into account a company?s particular mix
of basic versus applied and product versus process &P<. #he particular mix should suit
the level of industry development and the firm?s particular corporate and business
strategies. !n addition, &P< strategy in a large corporation deals with the proper balance
of its product portfolio based on the life cycle of the products.
(ro&u%t veru pro%e RE/: #he proportion of product and process &P< tends to
vary as a product moves along its life cycle. !n the early stages, product innovations are
most important because the product?s physical attributes and capabilities most affect
financial performance. (ater, process innovations such as improve manufacturing
facilities, increasing product 4uality, and faster distribution become important to
maintaining the product?s economic returns. +enerally product &P< has been "ey to
achieving differentiation strategies, whereas process &P< has been at the core of
successful cost leadership strategies. #o be competitive, companies must find the proper
mix of product and process &P<.
Te%-"ology Sour%!"g: #ypically a ma"e-or-buy decision, can be important in a firm?s
&P< strategy. *lthough in-house &P< has traditionally been an important source of
technical "nowledge for companies, firms can also tap the &P< capabilities of
competitors, suppliers, and other organizations through contractual agreements.
* company should buy technologies that are commonly available but should ma"e 2and
protect3 those that are rare, valuable, hard to imitate, and have no close substitutes. !n
additions, outsourcing technology may be appropriate when:
#he technology is of low significance to competitive advantage.
#he supplier has proprietary technology.
#he supplier?s technology is better andHor cheaper and reasonably easy to
integrate into the current system.
#he company?s strategy is based on system design, mar"eting, distribution, and
service-not on development and manufacturing.
#he technology development process re4uires special expertise.
#he technology development process re4uires new people and new resources.
(icensing technology to other companies may be an excellent &P< strategy-especially in
a turbulent high tech environment where being the first firm to establish the standard
dominant design may bring competitive advantage.
B>
I'porta"%e o$ Te%-"olog!%al Co'pete"%e: 6ompanies must have at least a minimal
&P< capability if they are to correctly assess the value of technology developed by
others. #hose corporations that do purchase an innovative technology must have the
technological competence to ma"e good use of it. Some companies that introduce the
latest technology into their processes do not ade4uately assess the competence of their
people to handle if. * corporation may ac4uire a smaller high technology company in
order to learn not only the new technology, but also a new way of managing its business.
ORGANIFING FOR INNOVATION: COR(ORATE ENTRE(RENEURS*I(:
6orporate entrepreneurship 2also called intrapreneurship3 is defined by +uth and
+insburg as Mthe birth of new business within existing organizations, that is, internal
innovation or venturingK and the transformation of organizations through renewal of the
"ey ideas on which they are built, that is, strategic renewal.
* large corporation that wants to encourage innovation and creativity within its firm must
choose a structure that will give the new business unit an appropriate amount of freedom
while maintaining some degree of control at head4uarters.
1urgelman proposes that the use of particular organizational design should be determined
by 253 the strategic importance of the new business to the corporation and 283 the
relatedness of the unit?s operations to those of the corporation. #he combination of these
two factors results in nine organizational designs for corporate entrepreneurship.
/e!g" $or Corporate E"trepre"eur-!p
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5. <irect !ntegration: * new business with a great deal of strategic importance and
operational relatedness must be a part of the corporation?s mainstream. ;roduct
champion-people who are respected by others in the corporation and who "now
how to wor" the system-are needed to manage these projects.
8. /ew ;roduct 1usiness <epartment: * new business with a great deal of strategic
importance and partial operational relatedness should be a separate department
organized around an entrepreneurial project in the division where s"ills and
capabilities can be shared.
>. Special 1usiness .nits: * new business with a great deal of strategic importance
and low operational relatedness should be a special new business unit with
specific objectives and time horizons.
B. -icro /ew )entures <epartment: * new business with uncertain strategic
importance and high operational relatedness should be a peripheral project, which
is li"ely to emerge in the operating divisions on a continuous basis. 'ach division
thus has its own new ventures department.
C. /ew )enture <ivision: * new business with uncertain strategic importance that
is only partly related to present corporate operations belongs in a new venture
division. !t brings together projects that either exist in various parts of the
corporation or can be ac4uired externally, sizable new businesses are built.
E. !ndependent 1usiness .nits: .ncertain strategic importance coupled with no
relationship to present corporate activities can ma"e external arrangements
attractive.
F. /urturing and 6ontracting: Ahen an entrepreneurial proposal might not be
important strategically to the corporation but is strongly related to present
operations, top management might help the entrepreneurial unit to spin off from
the corporation. #his allows a friendly competitor, instead of one of the
corporation?s major rivals, to capture a small niche.
G. 6ontracting: *s the re4uired capabilities and sills of the new business are less
related to those of the corporation, the parent corporation may spin off the
strategically unimportant unit yet "eep some relationship through a contractual
arrangement with the new firm. #he connection s useful in case the new firm
eventually develops something of value to the corporation.
I. 6omplete Spin-Off: !f both the strategic importance and the operational
relatedness of the new business are negligible the corporations is li"ely to
completely sell off the business to another firm or to the present employees in
some form of 'SO; 2'mployee Stoc" Ownership ;lan3. #he corporation also
could sell off the unit through a leveraged buy-out 2executives of the unit buy the
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unit from the parent company with money from a third source, to be repaid out of
the unit?s anticipated earnings.
STRATEGIC ISSUES IN NOT3FOR3(ROFIT ORGANIFATIONS
Not3$or3(ro$!t 2/;3: *n organization that provides some service or good with no
intention of earning a profit. /; includes ;rivate nonprofit corporations 2such as
hospitals, institutes, private colleges, and organized charities3 as well as ;ublic
governmental unitsHagencies 2such as welfare departments, prisons and state universities3
Type o$ Not3$or3(ro$!t Orga"!0at!o"
I'porta"%e o$ Reve"ue Sour%e: /;s are dependant on dues, assessments or donations
for their revenue sources. !n /; organizations there is li"ely to be a very different sort
of relationship between the organisations providing and the person receiving the service.
1ecause the recipient of the service typically does not pay the entire cost of the service,
outside sponsors are re4uired.
(atter" o$ I"$lue"%e o" Strateg!% /e%!!o" Ma.!"g: ;attern of influence is derived
from its source of revenues. #hose who fund the /; are li"ely to have significant
influence on its operations
Ue$ul"e o$ Strateg!% Ma"age'e"t a"& Te%-"!5ue: some strategic management
concepts can be e4ually applied to business and not for profit organizations whereas
others cannot. #he concept of competitive advantage is less useful to the typical not-for-
profit organizations than the related concept of !nstitutional advantage. * /;
organisation is said to have institutional advantage when it performs its tas"s more
effectively than other comparable organizations.
;ortfolio analysis may be more difficult to apply to /;s. Situation 2SAO#3 analysisK
mission statements, sta"eholder analysis, and corporate governance are all relevant to the
strategic assessment of /;s as they are to a profit ma"ing organizations
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Strategic management is difficult to apply where the output of an /; is difficult to
measure. #hus it is very li"ely that most of the /;s have not used strategic management
because its concepts, techni4ues and prescription does not lend themselves to situations
where sponsors, rather than the mar"et place determine the value. %owever the situation
is changing nowadays.
I'pa%t o$ Co"tra!"t o" trateg!% 'a"age'e"t: Several characteristics peculiar to the
not for profit organisation constrain its behavior and affects it strategic management. #he
constraints are as follows:
Service is often intangibleHhard to measure
6lient influence may be wea"
Strong employee commitments to professions
&esource contributors intrude on internal management
&estraints on use of rewards and punishments
I'pa%t o" Strategy For'ulat!o":
+oal conflicts with rational planning: because /;s typically lac"s a single clear cut
performance criterion, divergent goals and objectives are li"ely, especially with multiple
sponsors.
*n integrated planning process tends to shift from results to resources: because /;s
tend to provide services that are hard to measure planning becomes more concerned with
resource inputs, which can be easily measured than with service which cannot.
*mbiguous objectives create opportunities for internal politics and goal displacement: the
combination of vague objectives and heavy concerns with resources allows managers a
considerable scope in their activities. Such attitude created opportunities for politics.
;rofessionalization simplifies detailed planning but adds rigidity: !n /;s professional
values and traditions can prevent the organizations from changing its conventional
behviour patterns to fit new service mission tuned to changing social needs. +oals of the
professionals and their representative bodies may not align with organizational goals
I'pa%t o" I'ple'e"tat!o"
<ecentralization is complicated: the difficulty of setting objectives for an intangible
service complicates the decision ma"ing authority.
!ncreased re4uirement for an environmental buffer role: because of the heavy
dependence on outside sponsors a special need arises for people in buffer roles to relate
to both inside and outside organizations. #he job of a Mdean for external affairs: for
example consists primarily of wor"ing with the school alumnae and raising funds.
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Dob enlargement and executive development can be restrained by professionalism: in
organisations that employ large number of professionals, managers must design jobs that
appeal to prevailing professional norms.
I'pa%t o" Evaluat!o" E Co"trol
&ewards P penalties have little or no relation to performance: when results are vague and
the judgement of success is subjective, predictable and impersonal feedbac" cannot be
established.
!nputs rather than outputs are heavily controlled: because its inputs can be mneasured
much more easily than outputs, the not for profit organisation tends to focus more on the
resources going into performance than on the performance itself.
(opular Not $or (ro$!t Strateg!e
Strategic piggybac"ing: Strategic piggybac"ing refers to he development of a new
activity for the not-for-profit organization that would generate funds needed to ma"e up
the difference between revenues and expenses. !ts purpose is to help subsidize the
primary service programs. !t appears to be a form of concentric diversification but it is
engaged in only for its money generating value
-ergers: -erging with an organization with a similar mission can help to reduce
administration costs.
Strategic alliances: <eveloping cooperative ties with other /;s. #his will enhance their
capacity to serve clients or to ac4uire resources while enabling them to "eep their
identity.
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