MB0052 - Strategic Management and Business Policy.docx

MB0052 –Strategic Management and Business Policy Q1. Explain the corporate strategy in different types of organization. Ans:- A well-formulated strategy is vital for growth and development of any Organization —whether it is a small business, a big private enterprise, a public sector company, a multinational corporation or a non-profit organization. But, the nature and focus of corporate strategy in these different types of organizations will be different, primarily because of the nature of their operations and organizational objectives and priorities. CORPORATE STRATEGY is the direction an organization takes with the objective of achieving business success in the long term. Recent approaches have focused on the need for companies to adapt to and anticipate changes in the business environment, i.e. a flexible strategy. The development of a corporate strategy involves establishing the purpose and scope of the organization's activities and the nature of the business it is in, taking the environment in which it operates, its position in the marketplace, and the competition it faces into consideration; most times analyzed through a SWOT analysis. Small businesses, for example, generally operate in a single market or a limited number of markets with a single product or a limited range of products. The nature and scope of operations are likely to be less of a strategic issue than in larger organizations. Not much of strategic planning may also be required or involved; and, the company may be content with making and selling existing product(s) and generating some profit. In many cases, the founder or the owner himself forms the senior/top management and his (her) wisdom gives direction to the company. In large businesses or companies—whether in the private sector, public sector or multinationals — the situation is entirely different. Both the internal and the external environment and the organizational objectives and priorities are different. For all large private sector enterprises, there is a clear growth perspective, because the stakeholders want the companies to grow, increase Market share and generate more revenue and profit. For all such companies, both strategic planning and strategic management play dominant roles. Multinationals have a greater focus on growth and development, and also diversification in terms of both products and markets. This is necessary to remain internationally competitive and sustain their global presence. For example, multinational companies like General Motors, Honda and Toyota may have to decide about the most strategic locations or configurations of plants for Manufacturing the cars. They are already operating multi location (country) strategies, and, in such companies, roles of strategic planning and management become more critical in optimizing manufacturing facilities, resource allocation and control. In public sector companies, objectives and priorities can be quite different from those in the private sector. Generation of employment and maximizing output may be more important objectives than maximizing profit. Stability rather than growth may be the priority many times. Accountability system is also very different in public sector from that in private sector. There is also greater focus on corporate social responsibility. The corporate planning system and Management have to take into account all these factors and evolve more balancing strategies. In non-profit organizations, the focus on social responsibilities is even greater than in the public sector. In these organizations, ideology and underlying values are of central strategic significance. Many of these organizations have multiple service objectives, and the beneficiaries of service are not necessarily the contributors to revenue or resource. All these make strategic planning and management in these organizations quite different from all other organizations.

Q2. What is the role consultants play in the strategic planning and management process of a company? Is it an essential role? In a broad sense, the strategic planning consultant will endeavor to clarify organizations objectives and the outcomes required for all key stakeholders including customers, shareholders, staff and community. The strategic plan will be formulated within a given framework of corporate policies and procedures and against economic and regulatory backdrops Management consultants can play very useful roles in the strategic planning process of a company. Consultants render services in different functional areas of management including the strategic planning and management process. In companies with no separate planning division or unit, consultants can fill that gap. They can undertake planning and strategy exercises as and when the company management feels the need for such exercises or consultancies. Even in companies with a corporate planning division/unit, consultants may provide specialized inputs or insights into identified management or strategy areas. Top strategic consultants like McKinsey & Company use or develop latest tools, techniques or models to work out solutions to specific strategic management problems or issues—be it productivity, cost efficiency, restructuring, long-term growth or diversification. Consultants bring with them diversified skills (most of the consulting companies are multidisciplinary) and experience from various companies which may not be available internally in a single company. This is the reason why even large multinational companies hire consultants for achieving their goals or objectives. There are many international consultants who are in demand in different countries. There are also national consultants. Leading international consultants, in addition to McKinsey & Company, are Boston Consulting Group (BCG), Arthur D Little and Accenture (formerly Anderson Consulting). Prominent Indian consulting companies are A F Ferguson, Tata Consultancy Services (TCS) and ABC Consultants. Consultants, sometimes have a difficult or delicate role to play. In many companies, a situation develops when the chief executive or the top management needs to bank upon the support of an external agency like a consultant to push through a strategic change in the organizational structure or management system of the company. It may be for growth and development or downsizing. In both cases, many companies face internal resistance to change. The resistance is more if it is downsizing even when it is required for turning around a company. This happens particularly in public sector companies where implementing change is always difficult. Consultants are engaged to support or substantiate the company’s point of view (in the form of their recommendations) so that change is more easily acceptable to the internal stakeholders of the company. Consultants’ role may become delicate and, sometimes, tricky in such cases, and they should carefully weigh the ethical implication of their participation. Strategic planning is driven at the highest levels of an organization, usually formulated by a board of directors with input from expert third parties and executed by the executives. These are the men and women who strategic planning consultants work with organization.

Q3. What is strategic audit? Explain its relevance to corporate strategy and corporate governance. Ans:Strategic audit is a formal strategic-review process, which imposes its own discipline on both the board and the management very much like the financial audit process8. But, it is different from management audit, which is undertaken in many companies by the senior/top management on the progress and outcome of important corporate activities. To understand strategic audit in the correct perspective, one needs to analyse this in terms of its various elements. Donaldson has specified five elements of strategic audit. These are: 1. Establishing criteria for performance 2. Database design and maintenance 3. Strategic audit committee 4. Relationship with the CEO 5. Alert to duty (by board members) The performance criteria should be simple, well-understood and wellaccepted measures of financial performance. A number of measures of financial performance are available. One common measure, used by many companies, is return on investment (ROI). The ROI can be analysed like this: profit per unit of sales (profit margin); sales per unit of capital employed (asset turnover); and, capital employed per unit of equity invested (leverage). If these three ratios are multiplied together, the resultant ratio will give profit per unit of equity. This criterion would fulfil two objectives: first, sustainable rate of return on shareholder investment, and, second, to decide whether the return is less, or equal to or more than returns on alternative investments with comparable risk, i.e., whether the company’s chosen strategy is justifiable or not. To calculate different performance ratios and monitor performance criteria, a proper database is essential. This involves both database design and maintenance. This has to be a regular and an ongoing process. Data on financial performance can sometimes be sensitive to the managers/ employees of a company. It is, therefore, suggested that financial and related data design, maintenance and analyses should be entrusted to the auditors of the company or outside consultants. For effective strategic audit, a strategic audit committee should be constituted. According to Donaldson, outside directors should select three of their own members to form the committee. This will impart regularity and more commitment to the strategic audit process. The committee would decide on the frequency of their meeting, periodicity of interaction with the CEO or top management of the company and, also when they should make presentation to or hold discussion with the full board. A sensitive issue is the strategic audit committee’s relationship with the CEO. Any CEO would be generally apprehensive of such a committee. The strategic audit committee needs to create and maintain an atmosphere of mutuality. It is true that whenever a question or a discussion on the strategic direction of a company comes up in a board meeting, it is perceived by many CEOs as an implicit criticism of the current strategy and leadership of the company. It is also true that regular strategic process involving the CEO reduces chances of unpleasant or confronting situations. In fact, ideally, the functioning of the strategic audit committee should be seen as a low-key operation, positive in approach, designed to lend support and credibility to company leadership and management.

The strategic audit committee and also the board should always be alert and vigilant to ensure that there are no slippages. Business cycles indicate that period of success may be followed by a period of slump. The strategic audit committee and the board should be alert enough to get signals so that they can act in time. This is necessary because complacence develops after success both in the board and in the management. If properly conceived, designed and conducted, strategic audit, more than management audit, can be a powerful tool for monitoring the strategic process of a company and also strike a good balance between corporate strategy and corporate governance.

Q4. What is Corporate Social Responsibility(CSR) ? Which are the issues involved in analysis of CSR? Name three companies with high CSR rating. Ans:Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business/ Responsible Business) is a form of corporate selfregulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. In some models, a firm's implementation of CSR goes beyond compliance and engages in "actions that appear to further some social good, beyond the interests of the firm and that which is required by law. CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders. As mentioned above, external stakeholders of an organization are too many and varied and many of them represent different sections or social groups. This implies that organizations should be socially responsible; that is, in addition to the interests of the shareholders, businesses or companies should also serve the society. This is corporate social responsibility (CSR). Corporate social responsibility can be defined as the alignment of business operations with social values. The conflict between internal and external stakeholders can go much further than mentioned so far. Some feel that this is the most problematic issue in deciding company responsibility. External stakeholders argue that internal stakeholders’ demand be made secondary to the greater need of the society; that is, greater good of the external stakeholders. Many of them feel that issues like pollution, waste disposals, environmental safety and conservation of natural resources should be the overriding considerations for formulation of policy and strategic decision making. Internal stakeholders, on the other hand, think that the competing or social claims of external stakeholders should be balanced in such a way that it protects the company mission, objectives and profitability. The debate continues. Strong exponents of CSR also talk of social policy for companies. They feel that social responsibilities of companies should be clearly enunciated and declared as social policy. Social policies may directly affect a company’s products and services, technology, markets, customers and self-image. According to these thinkers, an organization’s social policy should be integrated into all management activities including the mission statement and objectives. Many feel that corporate social policy should be articulated during strategy formulation, administered during strategy implementation and reaffirmed or changed during strategy evaluation.7 Worldwide, companies are trying to integrate corporate social responsibility into their business operations and strategies. Microsoft, Coca-Cola, McDonald’s, FedEx, IBM and Johnson & Johnson are some of the leading companies. In India also, many companies are integrating CSR into their business practices and

making significant contributions to society. Companies like Infosys, Wipro, Hero Honda, ITC, Dr. Reddy’s, Godrej, Mahindra & Mahindra and Tata Steel are the foremost among them. Some of these companies have also established foundations to cater to the needs of society.

Q5. Distinguish between core competence, distinctive competence, strategic competence and threshold competence. Use examples. Ans:- Core Competence Core competence of a company is one of its special or unique internal competences. Core competence is not just a single strength or skill or capability of a company; it is ‘interwoven resources, technology and skill’ or synergy culminating into a special or core competence. Core competence gives a company a clear competitive advantage over its competitors. Sony has a core competence in miniaturization; Xerox’s core competence is in photocopying; Canon’s core competence lies in optics, imaging and laser control; Honda’s core competence is in engines (for cars and motorcycles); 3M’s core competence is in sticky tape technology; JVC’s in video tape technology; ITC’s in tobacco and cigarettes and Godrej’s in locks and storewels. Hamel and Prahalad, two of the greatest exponents of core competence, argue in ‘The Core Competence of the Corporation’ (HBR, 1990) that the central building block of the corporate strategy is core competence. Hamel and Prahalad defined core competence as the combination of individual technologies and production skills that underlie a company’s product lines. According to them, Sony’s core competence in manufacturing allows the company to make everything from the Sony walkman to video cameras to notebook computer. Canon’s core competence in optics, imaging and microprocessor controls have enabled it to enter markets as seemingly diverse as copiers, laser printers, cameras and image scanners. To achieve core competence, a particular competence level of a company should satisfy three criteria: (a) It should relate to an activity or process that inherently underlies the value in the product or service as perceived by the customer. This is important because managers often take an internal view of value and either miss or deliberately overlook the customer perspective. (b) It should lead to a level of performance in a product or process which is significantly better than those of competitors. Benchmarking is a good way and is generally recommended for undertaking performance standard and also for differentiating between good and bad performance. (We will be discussing benchmarking in Unit 11). (c) It should be robust, i.e., difficult for competitors to imitate. In a fast changing world, many advantages gained in different ways (like a superior product feature, a new marketing campaign or an innovative price policy/strategy) are not robust and are likely to be short lived. Core competence is not about such incremental changes or improvements, but, about the whole process through which continuous change and improvement take place which lead to or sustain clearly differentiated advantage.1 Distinctive Competence Core competence may not be enough, because it focuses predominantly on the product or process and technology, or, as Hamel and Prahalad put it; ‘The combination of individual technologies and production skills’. There are two problems with this. First, strong and aggressive competitors may develop, either through parallel innovations or imitations, similar products or processes which are highly competitive. This is what Japanese companies have done in the fields of electronics and automobiles, and now South Korea is doing to Japanese electronics; IBM’s core computer technology is also facing the same problem. Second, to secure competitive advantage, only product, process or technology or technological innovation

may not be enough; this has to be amply supported by special capabilities in the related vital areas like resource or financial management, cost management, marketing, logistics, etc. Hamel and Prahalad themselves have said later (1994): We have to look at the organization as a portfolio of competencies, of underlying strengths, and, not just a portfolio and business unit.... We must also identify those core competencies that would allow us to create new products; and we must ask ourselves what we can leverage as we move into the future, and what we can do that other companies might find difficult.2 Distinctive competences may provide an answer to some of these points. Distinctive competence is based on the assumption that there are different alternative ways to secure competitive advantage and not only special technical and production expertise as emphasized by core competence. Distinctive competence includes core competence as one of the alternatives. But, there are other alternatives that are also based on organizational capabilities. So, distinctive competence is more broad based. Thompson and Strickland (1992) have defined distinctive competence as: ‘Distinctive competence is the unique capability that helps an organization in capitalizing upon a particular opportunity; the competitive edge it may give a firm in the marketplace.’3 So, the focus in distinctive competence is on exploiting a market opportunity. And, depending on the market or competitive situation, one or some of the alternative competences may work; for example, product or process superiority (core competence), product differentiation (situational or adaptability), cost effectiveness or cost efficiency to support a price strategy, special capability in marketing or distribution, etc. Under given circumstances, one of these, or a combination of some of these, will produce a distinctive competence which would be appropriate or best suited to exploit the opportunity and produce desired results. Since resources are limited, identification of distinctive competence may also help efficient allocation of resources. Reliance Industries, for example, has developed its distinctive competence in ‘conceiving, implementing and managing large scale projects’ and mobilizing requisite resources for that. They do not think in terms of core competence. Mukesh Ambani, Chairman and MD, has described it like this: ‘We do not believe in core competence; we believe in building competence around people and processes to create value’.4 Strategic Competence Strategic competence coexists with, or supports, core competence and distinctive competence. Strategic competence is the competence level required to formulate, implement and produce results with a particular strategy, for example, to outwit competitors. Hindustan Unilever did this. In the mid- and the late 80s, they used their strategic competence to out manoeuvre Nirma (which was launched very aggressively) and re-establish their leadership in the detergent market. Strategic competence may also involve combination or convergence of different capabilities as in the case of Hindustan Unilever. Threshold Competence Threshold competence is the competence level required just for survival in the market or business. The competence level of a company may be weaker than many of its competitors. Threshold competence may be adopted by No. 5 or No. 6 player in the market or those struggling to survive. Companies with threshold competence can, over time, graduate to a higher level of competence. But, continued threshold competence can also lead to closure of business. Multi-product or multi-SBU companies may often possess a portfolio of competences. In some product or business, they may have core competence, but, not in all. ITC’s core competence is in tobacco and

cigarettes, but, they have distinctive competence in hospitality business and agri-business. Hindustan Unilever has distinctive competence and strategic competence in many businesses. But, they had been surviving with threshold competence in vanaspati business (Dalda) for some time, and finally, they exited from that business. A conceptual portfolio of organizational competence consisting of core competence, distinctive competence, strategic competence and threshold is shown in Figure 6.1. Core Competence Distinctive Competence

Organizationa competence c Threshold Competence

Strategic Competence

Figure 6.1 Portfolio of Organizational Competence

Q6. What is global industry? Explain with examples, international strategy, multi-domestic strategy, global strategy and transnational strategy.

Ans:- Global industry In global industry, the strategic positions of companies in different countries or national markets are governed by their overall global positions. For example, IBM’s strategic position in competing for computer sales in France and Germany has improved significantly because of technology and marketing skills developed in other countries, and a worldwide manufacturing system which is well coordinated. To be called a global industry, an industry’s economics and competitors in different national markets should be considered jointly rather than individually.4 Distinction should be made between an international industry and a global industry. An industry in a country may be international if it comprises a number of multinational companies. But, industries with multinational competitors are not necessarily global industries. To be a global industry, as explained above about IBM, an industry should have multi-locational manufacturing facilities, and, compete worldwide to secure global synergy or competitive advantage. International strategy can be adopted for those products and services which are not available in some countries and can be transferred from other countries. These are standard products with

little or no differentiation. International strategies are not very common or popular. Some examples are: Kellogg’s, Indian software, and Indian handicrafts. Multidomestic strategy is almost opposite of international strategy. Multidomestic strategy involves high degree of local responsiveness or local content. Products are highly customized to suit local requirements or conditions. Because of high customization, cost pressure is less; cost effectiveness may be also difficult to achieve because of lack of scale economies. Examples : Asian Paints (paints in general), Indian garments. Global strategy suits companies which make highly standardized sophisticated products, and, are in a position to reap benefits of economies of scale and experience effects. These also include high technology products which have universal applicability and hardly require any local adaptation. Examples are: Intel, Motorola, Microsoft, Texas Instruments. Global retail chains like Wal-Mart and Marks & Spencer also come under this category. Transnational strategy is the most difficult strategy to follow because this is based on a combination of two apparently contradictory factors, i.e., cost effectiveness and local adaptation. But, this may be a ‘true’ global strategy because, in global business, there is always a price pressure or cost pressure; and, also the need to make the product as close to a particular country’s expectation as possible to maximize value offerings. In fact, many, including Bartlett and Ghoshal (1989), feel that the transnational strategy is the only viable competitive strategy in global business. Many companies are adopting this approach to become successful. Some good examples are: Caterpillar (taking on Komatsu and Hitachi), McDonald’s, Coca-Cola, Pepsi and Domino’s Pizza. Many multinational FMCG companies like Unilever and Procter & Gamble follow transnational strategies through their fully owned subsidiaries in different countries.