SM

STRATEGIC MANAGEMENT

STRATEGIC MANAGEMENT (6.1)

STUDY MATERIAL DESIGNED FOR TY B.COM (B&I)

MODULE – I RAM

1

STRATEGIC MANAGEMENT

STRATEGY FORMULATION

“Whatever action is performed by a great man, common men

following his footsteps and whatever standards he sets by exemplary acts, all the world pursues.” - Bhagwad Gita

Perform External Audit

Develop vision and mission statements

Establish long term objectives

Generate, Evaluate and Select Strategies

Implement Strategiesmanagement issues

Implement StrategiesMarketing, Finance, Accounting , R&D, MIS Issues

Perform Internal Audit

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Full length questions which can be used for 7 marks or 8 marks A

( Total weightage for this part is 8/60) 1. Define strategic management? Explain the relevance of strategic management for an organization.

RAM

2

Measur Evaluat Perform

STRATEGIC MANAGEMENT 2. What are the various levels of strategic management in an organization. Give suitable example. 3. What is strategic management? Illustrate and explain the strategic management process with the example of a leading nationalized bank. 4. Describe the various steps involved in the strategic management process. Illustrate & explain with suitable examples. 5. Explain the term ‘environment’ with reference to business and discuss why environmental analysis is necessary in strategic management. 6. Identify various components of environment that affect the management of an organisation. 7. What is strategy formulation. Explain the factors to be taken into consideration while formulating the strategy. B.

(Total weightage for this part is 12/60) 8. “Business must be run in a socially responsible manner”. Comment on the statement in the context of Indian business. 9. What are the social responsibilities of business? 10. What are the critical components of the social environment of business? Explain each element with examples. 11. Evaluate the historic role and emerging role of government on the business. 12. Describe the impact of technology on business. 13. “Economic environment impacts business” Critically analyse. 14. What factors have made the management of the technology at enterprise level important? Explain. 15. How does the economic environment impinge upon business management? Explain with suitable examples. 16. How do social factors play a role in strategy formulation? Explain with examples.

C ( Total weightage for this part is 15/60) C (1) 17. Distinguish between mission, vision and goals.

RAM

3

STRATEGIC MANAGEMENT 18. Bring out the importance of organizational assessment and environmental information in strategic management. 19. What is SWOT analysis? How it is useful in strategy formulation? 20. How do mission, vision and goals drive an organization? Design mission, vision and goal for any foreign insurance company operating in India.

INTRODUCTION TO STRATEGIC MANAGEMENT OVERVIEW

RAM

4

STRATEGIC MANAGEMENT Strategic management or business policy or corporate strategy refers to those set of perspective management measures taken with a view to ensuring the survival and success of enterprise in a competitive environment. The word “strategy” is derived from the ancient Greek word strategia, which connoted the art and science of directing military forces. Strategy is thus, a well thought out systematic plan of action to defend one self or to defeat rivals. Strategy is formulated in anticipation of the possible positions, moves, actions and reactions of the rivals. It is very relevant to point out in this context that in business the term rivalry is commonly used to refer competition. Going by the origin of the word strategy, business strategy is a well thought out systematic plan of action for survival and success, formulated by due consideration of the possible positions and defensive and offensive moves, and the relative strengths and weakness of the rival vis-à-vis those of the company. DEFINITION OF STRATEGIC MANAGEMENT Strategic management can be defined as “the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives.” As this definition implies, Strategic management focuses on integrating management, marketing, finance, productions, research and development, and computer information systems to achieve organizational process. The term Strategic management is used synonymously with the term strategic planning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term Strategic management is used to refer to Strategic planning referring only to strategy formulation. The purpose of Strategic management is to exploit and create new and different opportunities for tomorrow, long range planning, in contrast, tries to optimize for tomorrow the trends of today. The term Strategic planning originated in the 1950s and was very popular between the mid-1960s to mid-1970s. During these years, Strategic planning was widely believed to be the answer of all problems. At the time, much of corporate America was “obsessed” with strategic planning. Following that boom however strategic planning was cast aside during 1980s and various planning models did not yield higher returns. The 1990s however brought the revival of Strategic planning and the process is widely practiced in business world. LEVELS OF STRATEGY In a multi business enterprise, having several SBUs, there would be three levels of strategy, viz, corporate strategy, SBU strategy and functional strategy. In enterprise that does not have SBUs, there will be only two levels of strategy.

RAM

5

STRATEGIC MANAGEMENT



Corporate Strategy

Corporate strategy is the long-term strategy encompassing the entire organization. Corporate strategy addresses fundamental questions such as what is the purpose of the enterprise, what business it wants to be in and how to expand. In other words, “corporate level strategic management is the management of activities which define the overall character and mission of the organization, the product/segments it will enter and leave, and the allocation of resources and management of synergy among its SBUs. Corporate strategy is formulated by the top-level corporate management (board of directors, CEO, and chiefs of functional areas). 

SBU Strategy

SBU-level strategy, sometimes called business strategy is concerned with decision pertaining to the product mix, market segments and maneuvering competitive advantages for the SBU. While corporate strategy decides the business profile the competitive strategy decides the strategy to succeed in the chosen business. SBU strategy has to confirm obviously to the corporate philosophy and strategy. In short, “the SBU level strategic management of a SBUs effort to compete effectively in a particular line of business and to contribute to the overall organizational purposes.” The responsibility of the SBU strategy is with the top executives of the SBU who are normally second-tier executives in the corporate hierarchy. In single SBU organizations senior executives have both corporate and SBU level responsibilities. 

Functional Strategy

Functional level strategies are strategies for different functional areas like production, finance, personnel, marketing etc. in other words, “functional level strategic management is the management of relatively narrow areas of activity, which are of vital, pervasive, or continuing importance to the total organization.”

RAM

6

STRATEGIC MANAGEMENT

Corporate

Strategic Business Unit

Functional

RAM

7

STRATEGIC MANAGEMENT

Characteristics

Corporate Strategy

Scope

Entire organization

Source and motivation

Board of directors/CEO

Responsibility

Top level business managers

Time horizon

Long-term

Specificity

General statements of overall direction and intent

Business Strategy SBU or single business company

Corporate strategy Top level SBU managers or top level single business company managers Medium to long-term

Concrete and operationally oriented

Functional Strategy

Functional area

SBU strategy or single business company strategy

Functional level managers

Short to longterm Action and implementation oriented.

The strategic management model or process The strategic management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, a shift in the economy could represent a major opportunity and require a major change in the long-term objectives and strategies; a failure to accomplish annual objectives could require a change in strategy could require a change in the firm’s mission. Therefore, strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not just at the end of the year or semi-annually. The strategic management process never really ends.

RAM

8

STRATEGIC MANAGEMENT The strategic management process is not as cleanly divided and nearly performed in practice as the strategic management model suggests. Application of the strategic management process is typically more formal in larger and well-established organizations.

Perform External Audit

Develop vision and mission statements

Establish long term objectives

Generate, Evaluate and Select Strategies

Implement Strategiesmanagement issues

Implement StrategiesMarketing, Finance, Accounting , R&D, MIS Issues

Measure and Evaluate Performance

Perform Internal Audit

Strategy Formulation

Strategy Implementation

Strategy Evaluation

THE PROCESS OF DEVELOPING A MISSION STATEMENT What is mission? “A mission statement is an enduring statement of purpose that distinguishes one business from other similar firm. A mission statement identifies the scope of firms operations in product and market terms." According to Mc Ginnis a mission statement

RAM

9

STRATEGIC MANAGEMENT • • •

Should define what the organization is and what the organization aspires to be. Should be limited enough to exclude some ventures and broad enough to allow for creative growth. Should distinguish a given organization from all others.

Goals and Objectives Objectives may be defined as “the ends which the organization seeks to achieve by its existence and operations.” A goal is defined as “an intermediate result to be grand plan. A plan can, therefore have many goals.” Objectives are particularly important in strategy formulation. According to the strategic management model, a clear mission statement is needed before alternative strategies can be formulated and implemented. It is important to involve as many managers as possible in the process of developing a mission statement, because though involvement, people become committed to an organization. For developing a mission statement first we select several articles about mission statements and ask all managers to read these as background information. Then ask managers themselves to prepare mission statement for the organization. A facilitator, or committee of top managers, should then merge these statements into a single document and distribute this draft mission statement to all managers. A request for modification, additions and deletions is needed next, along with the meeting to revise the document. To the extent that all managers have input and support the final mission statement document, organizations can more easily obtain managers support from other strategy formulation, implementation, and evaluation activities. Thus, a process of developing a mission statement represents a greater opportunity for strategies to obtain needed support from all managers in the firm. During the process of developing a mission statement, some organization use discussion group of managers to develop and modify the mission statement. Some organization hires an outside consultant to manage the process and help draft the language. Sometimes an outside person with expertise in developing mission statements and unbiased views can manage the process more effectively then an internal group or committee of managers.

THE PROCESS OF PERFORMING AN EXTERNAL AUDIT

RAM

10

STRATEGIC MANAGEMENT To perform an external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal and technological trends. Individuals can be asked to monitor various sources of information, such as key magazines, trade journals, and newspapers. These persons can submit periodic scanning reports to a committee of managers charged with performing the external audit. This approach provides a continuous stream of timely strategic information and involves many individuals external-audit process. The Internet provides another source of gathering strategic information, as do corporate, university, and public libraries. Suppliers, distributors, customers, salesperson and competitors represent another source of vital information. Once information is gathered it should be assimilated and evaluated. A meeting of managers is needed to collectively identify the most important opportunities and threats facing the firm. THE PROCESS OF PERFORMING AN INTERNAL AUDIT The process of performing an Internal Audit closely parallels the process of performing an external Audit. Representative Managers end employees from through out the firm’s strength and weaknesses. The internal audit requires gathering and assimilating information about the firm’s management, marketing, finance, production, research and development and management information systems. Key factors should be prioritized as described so that the firm most important strengths and weakness can be determined collectively. Compared to the external audit, the process of performing an internal audit provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organizations. This is a great benefit because managers and employees perform better when they understand how their work affects other areas and activities of the firm. For example, when marketing and manufacturing managers jointly discuss issues related to internal strengths and weakness, they gain a better appreciation of the issues, problems, concerns, and needs of all functional areas. In organizations that do not use strategic management, marketing, finance, manufacturing managers often do not interact with each other in significant ways. Performing an internal audit is thus is an excellent vehicle for improving the process of communication in the organization. Communication may be the most important word in management. Performing an internal audit requires gathering, assimilating and evaluating information about the firms operations. ESTABLISH LONG-TERM OBJECTIVES Long-term objectives represent the result expected from pursuing certain strategies. Strategies represent the actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should be consistent, usually for two to five years.

RAM

11

STRATEGIC MANAGEMENT

THE NATURE OF LONG-TERM OBJECTIVES Objectives should be quantitative, realistic, understandable, challenging, hierarchical, obtainable and congruent among organizational units. Each objective should also be associated with a time line. Objectives are commonly stated in terms such as growth in assets, growth in sales, profitability, market share, degree and nature of diversification, degree and nature of vertical integration, earnings per share and social responsibility. Clearly established objectives offer many benefits. They provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, and stimulate exertion and aid in both the allocation of resources and the design of jobs. Long-term objectives are needed at corporate, divisional and functional levels of an organization. They are an important measure of managerial performance. V.

THE PROCESS OF GENERATING AND SELECTING STRATEGIES Identifying and evaluating alternative strategies should involve many of the managers and employees who earlier assembled the organizational vision and mission statements, performed the external audit and conducted the internal audit. Representatives from each department and division of the firm should be included in the process. All participants in the strategy analysis and choice activity should have the firm’s external and internal audit information by their sides. This information, coupled with the firm’s mission statement, will help participants crystallize in their own minds particular strategies that they believe could benefit the firm most. Creativity should be encouraged in this thought process. Alternative strategies proposed by participants should be considered and discussed in the meeting. Proposed strategies should be listed in writing. When all feasible strategies identified by participants are given and understood, the strategies should be ranked in order of attractiveness by all participants, with 1= should not bee implemented, 2= possibly implemented, 3= probably should be implemented and 4= definitely should be implemented. The process will result in a prioritized list of best strategies and reflect the collective wisdom of the group.

VI.

IMPLEMENT STRATEGIES: MANAGEMENT ISSUES The strategic management process does not end when the firm decides what strategy or strategies to pursue. There must be a translation of strategic thought in to strategic action. This translation is much easier if managers and employees of the firm understand the business, feel a part of the company, and through involvement in strategy formulation activities have become committed to helping the organisation succeed. Without understanding and commitment, strategy-implementation efforts face major problems. Implementing strategy affects an organization from top to bottom; it affects all the functional and divisional areas of a business. It is beyond the purpose and scope of

RAM

12

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

IMPLEMENT STRATEGIES- MARKETING, FINANCE, ACCOUNTING, R&D, MIS ISSUES Strategy implementation directly affects the lives of plant managers, division managers, department managers, sales managers, supervisors, and all employees. In some situations, individuals may not have participated in the strategy-formulation process at all and may not appreciate, understand, or even accept the work and thought that went in to strategy formulation. There may be foot dragging or resistance on their part. Managers and employees who do not understand the business and are not committed to the business may attempt to sabotage strategy-implementation efforts in hopes that the organization will return to its old ways.

VIII.

PROCESS OF EVALUATING THE STRATEGIES

Strategy evaluation is necessary for all sizes and kinds of organizations. Strategy evaluation should initiate managerial questioning of expectations and assumptions, should trigger a review of objectives and values, and should stimulate creativity in generating alternatives and formulating criteria of evaluation. Evaluating strategies on a continuous rather then on a periodic basis allows benchmarks of progress to be established and more effectively monitored. Some strategies take years to implement; consequently, associative result may not become apparent for years.

ORGANIZATIONAL STRATEGIES Organizational strategies are classified in to four types of strategies and they are as follows: Integration Strategies  Forward integration  Backward integration  Horizontal integration 



Intensive Strategies

RAM

13

STRATEGIC MANAGEMENT  Market penetration  Market development  Product development Diversification Strategies  Concentric diversification  Horizontal diversification 

Defensive Strategies  Retrenchment  Divestiture  Liquidation 

EXPLANATION: 

Integration strategies:

1. Forward integration: It involves gaining ownership or increased control over distribution or retailers. Increasing numbers of manufacturers today are pursuing a forward integration strategy by establishing web sites to sell products directly to consumers. This strategy is causing turmoil in some industries. 2. Backward integration: It is a strategy of seeking ownership or increased control of a firm’s suppliers. This strategy can be especially appropriate when a firm’s current suppliers are unreliable, too costly, or cannot meet the firm’s needs. 3. Horizontal integration: It refers to a strategy of seeking ownership of or increased control over a firm’s competitors. One of the most significant trends in strategic management today is the increased use of the horizontal integration as a growth strategy. 

Intensive Strategies:

1. Market penetration: It seeks to increase market share for present products or services in present markets through greater marketing efforts. This strategy is widely used alone and in combination with other strategies. 2. Market development: It involves introducing present products or services in to new geographic areas. The climate for international market development is becoming more favorable. 3. Product development: It is a strategy that seeks increased sales by improving or modifying present products or services. Product development usually entails large research and development expenditures. 

Diversification strategies:

RAM

14

STRATEGIC MANAGEMENT

1.

Concentric Diversification: It adds new but relative products or services.

2.

Horizontal diversification: It adds new unrelated products and services for present customers. 

Defensive strategies:

1. Retrenchment: It occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits. 2. Divestiture: Selling a division or part of an organization is called divestiture. 3. Liquidation: Selling a company’s entire asset in parts for there tangible worth is called liquidation. STRATEGIC IMPLEMENTATION The activation or implementation steps in the strategic management encompass the operational details to translate the strategy in to effective practice. A good strategy by itself does not ensure success. The success depends, to a very large extent, on how it is implemented. Many strategies fail to produce the expected results because of the failure in properly implementing the strategy. Features of Strategic Implementation  Strategy implementation is more operational in character.  Strategy implementation requires special skills in motivating & managing others.  Strategy implementation permeates all hierarchical levels.  Another very important fact to be noted is that “in all but the smallest organization, the transition from strategy formulation to strategy implementation requires a shift in responsibility from strategists to divisional & functional managers.  Strategy implementation, often described as the action phase of the strategic management process, covers strategy activation & evaluation & control. Some writers break the Strategy implementation phase in to three components, viz. 1. Operationalising the strategy [communicating strategy, setting annual objectives, developing divisional strategies, & policies, & resource allocation]. 2. Institutionalizing the strategy [organizational structuring & leadership implementation]. 3. Evaluation & control of the strategy.

RAM

15

STRATEGIC MANAGEMENT Strategy Formulation

Strategy Implementation

1

It is positioning forces before the action.

It is managing forces before the action.

2

It focuses on effectiveness.

It focuses on efficiency.

3

It is primarily an intellectual process.

It is primarily an operational process.

4

It requires good intuitive and analytical skills.

It requires good leadership and motivation skills.

5

It requires coordination among a few individuals.

It requires coordination among many individuals.

Successful Strategy Formulation Does Not Guarantee Successful Strategy Implementation

BUSINESS ENVIRONMENT A number of factors outside the firm influence a firm’s choice of direction and action. This in turn, affects organization’s structure and internal process. These factors or forces can be broadly divided into two categories See the following figure.

RAM

16

STRATEGIC MANAGEMENT

Macro Environment

Technological Factors

Price

Product

Political Factors

Sociocultural Factors

Co. Promotion

Place

Legal Factors

Economic Factors Micro Environment

Micro environment or Operating environment Macro environment or Remote environment Business environment has decisive influence on opportunities as well as threats to the organization. In developing alternative strategies and choosing the best strategy, an in-depth analysis of environmental scanning. Micro environment consists of the following - Creditors, customers, vendor’s competitors, market and general public. Macro environment consists of a number of forces like political, economical, social and cultural, demographic and geographic, technological, and ecological, regulatory and international. Micro environment is popularly known as “Operating environment” because this provides the immediate environment in which the firm operates. Some authors prefer to refer this as “Competitive environment” or “Task Environment” Operating environment has much more interaction with business than remote environment. There are many forces; prominent they are listed down:    

Competition Market forces Vendors/Suppliers and Creditors Public

RAM

17

STRATEGIC MANAGEMENT  Customers/consumers Proper assessment of competitive position will enable business firm to develop realistic strategy. In doing so, Key result areas (KRA) can be prefixed based on nature of business. A newcomer faces stiff competition while entering market, from existing competitors. In order to overcome the same extra efforts are needed. It is a fact, that none can hold sway over a given market for a long time. There re number of barriers to new products/firms. These are discussed here briefly: Economies of scale: Economies of scale may occur in many fields like production, R& D, or marketing efforts like promotion/ advertisement, etc. Customer loyalty: New products break the customer loyalty of old products and reinforce desire for the new one. This is an involved process based on behaviormodification theory. Another way to overcome this problem is by product differentiation and using advertising techniques. Capital requirement: Heavy capital requirement is needed to establish new capacity, set-up new distributional channels, advertisements, ware housing, inventory holding, transportation and other promotional steps. Distributional Channels: Existing channels of distribution of existing products are not accessible to new ones. This may results in the creation of new channels which may increase cost and make new products. Two other important aspects of are the following: Marketing efforts vis-à-vis compétitions, price, products, etc. Substitution possibility of products. Firms depend on vendors on creditors for the supply of raw materials, equipment and other input – services. Firm depends on creditors for their financial support for easy credits. Vendors: In regards to vendors, following are important aspects: Price advantage Quality discounts Shipping expenses Quality standards Rejection rates Quality of services Abilities and reputation Dependability, especially in emergency situation Creditors: In regards to creditors following are the important aspects giving competitive Advantage: RAM 18

STRATEGIC MANAGEMENT Willingness to value stocks fairly Readily accepting stocks as collateral security for credits The Favorable credits rating of the firms by creditors Favorable record of leverages and working capital management by the firm Favorable current loan terms Timely availability of loan at sufficient level

(1)

Economic Environment

The economic environment is by far the most significant and pervasive component of the external environment. It is therefore very necessary for the firm to appreciate how the economy works currently and how it will behave in future. For the purpose of the discussion we have classified the economic environment into three main groups, namely, 1. General Economic Conditions 2. Industrial Condition 3. State of Supply of Resources for Production. The corporate planner should also pay attention to the pattern of income distribution in the country because that determines the type of products needed by people of different income groups. Demand of products is also influenced by savings and debt patterns. Industrial condition: A perceptive assessment of the dynamic environment of the industry the enterprise serves and of the industry it plans to enter also provides a strong basis from which strategy can be developed. Among the various aspects which must receive due attention from a corporate planner for studying the industrial environment, major ones are long term growth or decline of industry, stability of demand for products and stage in product life cycle. The needs of customers undergo a change over a period of time not only because of shifts on economic and social conditions but also due to development of technology. An in-depth analysis of these changes provides useful clues about the expansionary tendency of the industry. The life cycle of industrial products also helps in predicting demand. The product life cycle indicates distinct stages in the sales history of the product. Specific opportunities and problems are entailed in these stages. Scanning of the natural environment also influences managerial decision regarding location of the firm. It will always be desirable for an organisation, which depends

RAM

19

STRATEGIC MANAGEMENT heavily on natural resources, to be set up in the region where the resources are available in plenty. Capital: Availability of adequate funds to satisfy fixed capital as well as working capital needs is since quo-non for a business organisation. New organisation has to depend on capital & money market institutions for their financial needs. However, existing organizations finance a portion of their requirements out of their own funds which they have built by ploughing back their earnings. The management must analyze the existing structure of financial market & financial policies of different institutions operating in these markets & assess its impact on the cost obtaining capital. This will prove to be a very helpful exercise in taking capital expenditure decisions. Emergence of broad based institutional structure of money & capital markets & pursuance’s of subsidized landing policies of various financial institutions in India offer a great scope for Indian businessman to set up or expand their organizations to seize opportunities. Labour: Adequate supply of labour force with the ability & skills require to perform the task involved in translating strategy in to action is vital for the success of an organisation. Without people being able to use them effectively sophisticated technology, capital & materials are of little value. The price of labour is also an extremely important economic unit for an enterprise. High wages create cost problems for producers. Thus, while deciding about the type of product to be manufactured, the corporate planner must consider the availability, quality & price of labour. Managers: Availability of highly qualified managers is also a critical economic input for an organisation. It is skilled management that makes optimum utilization of resources & ensures successful functions of the organizations. Entrepreneurs, while contemplating to choose a business field, must see if qualified managers are available. 2) Technological Environment Corporate planners must scan the technology environment & the nuances of technology because new technological developments affect the efficiency with which products can be manufactured & sold. They must be able to perceive how technological change will affect customer’s demand of product. The pace of technological change in different parts of the world has been astounding. In India too there has been rapid technological development, particularly in the field of electronics, automobiles, electricity, machine building, and information technology and there is every possibility of this tendency to persist in the following years. These developments have brought about breakthroughs in operating procedures, product line, customer’s taste and fashion. The management must, therefore, be on the look out for what is new in the technological environment that offers opportunity or entails

RAM

20

STRATEGIC MANAGEMENT risk to the organisation. The management which possesses an active imagination and analytical faculties can foresee long-term consequences of new technology. There are many sophisticated techniques of technological forecasting such as ‘Delphi’. Many of the techniques of economic forecasting can also be used for forecasting technological changes. Generally, Research and Development (RD) department is assigned the responsibility of undertaking the task of forecasting developments on the future state of technology and assessing their impact on the company’s products, processes or markets. However, only large organisation can afford to set up separate RD department. Even small establishments with a few scientists or engineers can make such a forecast. Furthermore, small organisation can sometimes get information pertaining to results of research and engineering ideas from leading concerns particularly major customers or suppliers 3) Political Environment The political atmosphere of a country is significantly is relevant to business organisation. No organisation can think of expanding or decertifying its activity of the political atmosphere is charged with turmoil and instability. Where the ruling party is strong and stable and relations between central and state governments are cordial role of opposition party is constructive, decisions-making powers are reasons ably distributed among different social groups and government has clear-cut fiscal, financial and trade policies, the business organisation will find it conducive to expand their operations. The climate in our country presents a mixed picture. On the one hand, we have the democratic and federal system of government in which there is a strong and stable central government with equally strong state governments working in harmony with each other and businessmen have freedom to operate within the prescribed limits. These aspects are quite encouraging for the growth of private sector business enterprises. However, emerging regionalism at the political level, occasional communal disturbances, linguistic problem and politicalisation of trade unions present threats to business enterprises. Through the regulatory role the government enacts various laws. In India as well as other democratic countries, until recently both consumers and business firms had great freedom to pursue their course of action. However, owing to social and political pressures and growing complexity of technology and business practices, the government has enacted a web of laws and regulations to constrain and regulate business activities. Some of these laws currently in vogue in India are the Industries (Development and Regulation) Act, Monopolies and Restrictive Trade Practices Act, Contract Act, The Companies Act, Imports and Exports (control) Act, Foreign Exchange and Regulations Act, and Essential Commodity Act, besides, there are innumerable Labour laws, taxation laws and state and local laws. 4) Demographic Environment

RAM

21

STRATEGIC MANAGEMENT Corporate planner should also study the demographic environment and identify the broad characteristics of the population that effect the organisation. An alter management will have plenty of advance notice of potential changes in demographic factors and can start searching for new product lines and more attractive markets. Major factors in the demographic environment relevant to business organisation are trends in size, ageing, geographical shifts and literacy of population. Growth in population has significance for the government as well as for business organisation. A growing population means increasing human need which, in turn, results in the expansion of product markets if there is sufficient purchasing power. Where growth size of population exceeds the availability of food supply and resources there will be rise in costs which will, in turn depress profit margins of businessmen. The ageing pattern of the population should also be analyzed because that affects product demand. For instance, an increase in the population of the age of 18 to 24 will result in surging sales for motor cycles. Sports products, clothes and accessories, cosmetics, magazines etc. Shrinking population of old persons is likely to result in decline in the demand of certain medical goods and services, certain magazines read exclusively by older people etc. Geographical shifts of population also affect business enterprises. Migration of people from rural areas to urban areas will result in the rise in demand of consumable products in urban areas. Organisation engaged in production of such goods after estimating such development will adopt the expansion strategy so as to exploit the opportunities. Owing to the development of quick modes of transportation, sizeable sections of the working population may move from their places of work to the suburbs. This will certainly increase the demand station wagons, home workshops equipment, garden furniture, lawn and gardening tools and supplies and outdoor cooking equipment in addition to consumer goods of daily use. 5) Social-Cultural environment A business organisation can survive in the long run only when it is responsive to the socio-cultural environment of the society in which it operates and aims at promoting social welfare. The management must, therefore, understand the existing environment of the society and visualize future changes therein before long-range plans are formulated to accomplish corporate objectives. T h e socio-cultural environment is concerned with analysis of the attitudes, values, desires, expectations, degrees of intelligence and education, beliefs and customs of people in a society, traditions and social institutions, class structure and social group pressure and dynamics. Some of the beliefs and values are much more important to people.

RAM

22

STRATEGIC MANAGEMENT For example, most Indians believe in work, getting married and living a simple life. These beliefs shape and colour more specific attitudes and behaviors found in everyday life. People also hold secondary beliefs and values that are liable to change in the- wake of new social forces. For example; belief in. early marriage is a secondary one. Management must note that it would be unwise to change core beliefs and values and should avoid formulating a business strategy that violates these beliefs. Socio-cultural factors also influence the products to be manufactured by an organisation. An organisation has to produce that type of product which meets the requirements of the people. A demand for high quality readymade garments will lead to modification of product strategy by those in the business. Increasing awareness of better standards of living and good nutrition have brought about a proliferation of products and services such as high quality products, vitamin..-; supplements, efficient automobiles, decent housing and better educational facilities. In order to survive successfully in the long run, the management must consider the socio-cultural factors while formulating objectives and product-market strategy. SIGNIFICANCE OF ENVIRONMENTAL SCANNING a) Environmental scanning also referred to as the basic monitoring system is the process of monitoring economic, competitive, technological, socio-cultural, demographic and political setting to determine opportunities for threats to the firms. b) Firms can set its future direction and targets of performance and formulate the most suitable strategy only when it has been able to visualize and perceive the opportunities and constraints in store for it. c) The environment may offer major profit opportunities due to anticipated economic, socio-political and industrial trends and new opportunities in the market/ product / customer segment which the company can readily exploit particularly in the case of technological advances. d) The entire environmental framework and its component parts as noted above are dynamic and the pace of changes is tumultuous and such a change affects the markets for firm’s present products, the prospects for future products, success of products and Markey choices. The environmental changes may threat on the establish strategies and call upon the management to be alert to the possibility that the opportunity they have seized will soon expire. e) Environmental appraisal enables the firm to get clear idea about the existing competitors, their current operation, and future plan. f) Environmental appraisal enables the management to predict future development to make the invisible more visible and thus, lessen the uncertainty about the future in the face of spectacular, powerful and rapid environmental changes.

RAM

23

STRATEGIC MANAGEMENT g) Input-output relationship between a firm and environment also necessitates environmental scanning. A firm, in order to function, must procure various inputs such as human, capital, managerial, and technical from the environment. h) The management must also scan the environment so as to find out what are the diverse claims and expectations of opportunities of different section of the society which the firm has to fulfill in order to be socially acceptable. i) While scanning environment the management should remember that such an appraisal facilitates spotting of opportunities at the level of an industry rather than at firm’s or product’s level. As a result of this aggregation, management decisions lose the sharpness needed for choosing a particular product-market. END OF STRATEGY FORMULATION MODULE(I)

MODULE – II STRATEGY IMPLEMENTATION “If the 1980’s were about quality and the 1990;s were about re-engineering, then the 2000’s will be about velocity. About how quickly the nature of business will change. Business is

RAM

24

STRATEGIC MANAGEMENT

going to change more in next ten years than, it has in the last fifty” - Bill Gates, Chairman Microsoft Corporation

Perform External Audit

Develop vision and mission statements

Establish long term objectives

Generate, Evaluate and Select Strategies

Implement StrategiesMarketing, Finance, Accounting , R&D, MIS Issues

Implement Strategiesmanagement issues

Perform Internal Audit

Strategy Formulation

Strategy Implementation

Strategy Evaluation

C (2) 21. What is BCG matrix? In what context it is used by an organization? 22. Illustrate and explain BCG matrix. Explain its utility. 23. What is GE planning grid? How can you use GE grid in a business organization? Illustrate and explain. 24. What is Mc Kinsey 7- S framework? How can you use Mc Kinsey framework when a new bank is being launched. 25. Explain the Product Life Cycle concept with illustration. How does it affect the Strategy? 26. Compare BCG matrix with product life cycle matrix

RAM

25

Measur Evaluat Perform

STRATEGIC MANAGEMENT

D (Total weightage for this part is 25/60) D (1) 27. “Structure follows strategy” Explain with suitable examples. 28. Do you think strategy drives structure? Elaborate. D3 29. Explain the role of leadership in strategic management? 30. “Leadership and motivation are key drivers of strategy”. Substantiate with examples. D4 31. Explain the role of creativity and innovation in strategic management SA.

NOTE: SOME OF THE TOOLS OF STRATEGIC MANAGEMENT ARE IN THE ATTACHMENT FILE

TOOLS OF CORPORATE LEVEL STRATEGIC MANAGEMENT BCG MATRIX The Boston Consulting Group (BCG) matrix provides a graphical representation for an organization to examine the different business in its portfolio on the basis of their relative market shares and industry growth rate.

RAM

26

STRATEGIC MANAGEMENT

Business could be classified on the BCG matrix as either low or high according to their industry growth rate and relative market share. The vertical axis denotes the growth rate in sales in percentage for a particular industry. The horizontal axis represents the relative market share, which is the ratio of a company’s sales to sales of the industry’s largest competitor or market leader. The result of combining the industry growth rate and relative market share, each along a high and low dimension, is a four-cell matrix. Each cell of this matrix has been given an interesting and appropriate name by the Boston Consulting Group. The four cell of BCG matrix has been termed as stars, cash cows, question marks(or problem children), and dogs. Each of these cells represents a particular type of businesses. STARS: Stars are high-growth-high-market business which may or may not be selfsufficient in terms of cash flow. The cell corresponds closely to the growth phase of the Product Life Cycle (PLC). A co. generally pursues an expansion strategy to establish a strong competitive position with regard to a ‘star’ business. E.g. Petrochemicals, fast food, electronics and communications. CASH COWS: As the term indicates, cash cows are business which generates large amounts of cash but their rate of growth is slow. These businesses can adopt mainly stability strategies. The cash generated by ‘cash cows’ is reinvested in ‘stars’ and ‘question marks’. E.g.: toothpaste for Colgate, decorative paints for Asian Paints. QUESTION MARKS: Businesses with high industry growth rate but low market share for a co. are ‘question marks’ or ‘problem children’. They require large amounts of cash to maintain or gain market share. ‘Question marks are usually new products or services which have a good commercial potential. No single set of strategies can be recommended here. ‘Question marks’ , therefore, may become ‘stars’ if enough investment is made, or become ‘dogs’ if ignored. E.g.: holiday resorts, light commercial vehicles. DOGS: Those industries which are related to slow-growth industries and where a company has a low relative market share are termed as ‘dogs’. They neither generate nor require large amount of cash. Her, retrenchment strategies are normally suggested. E.g.: cotton textiles, jute, shipping. GE 9 GRID APPROACH: REFER TO PPT (ATTACHMENT) PRODUCT LIFE CYCLE(PLC): Life cycle is a conceptual model that suggests that products, markets, businesses, and industries evolve through sequential stages of introduction, growth, maturity and decline. From the viewpoint of strategic analyses it is important to note that as life cycles moves from one stage to the next, the strategic conditions too change. PLC is a S-shaped curve which exhibits the relationship of sales with respect to the time it takes for a product to pass through the four successive stages of: introduction

RAM

27

STRATEGIC MANAGEMENT (slow sales growth), growth (rapid market acceptance), maturity (slow down in growth rate), and decline (sharp downward drift). If markets, business or industries are substituted for a product, the concepts of PLC could work just as well. The main advantage of the life cycle concept is that it can be used to diagnose a portfolio of products (or markets, businesses, or industries) in order to establish the stage at which each of them exists. The life cycle concept provides a useful framework for carrying out an analysis to formulate business level strategies. Essentially the benefit of the life cycle concept lies in its ability to provide strategists with a convenient method of devising a broad approach to business strategy formulation, on the basis an understanding of the stage of the life cycle a business is in at a particular period of time. Here it is significant to note that the life cycle concept is not to be used as a guide to when a change will occur in the life cycle. Rather it is a useful guide to what changes might occur over a period of time, with regard to the market or industry conditions. Further, it is also important to remember that the life cycle can sometime be reversible, as seen in the case of products that are revived after a declining trend. Products, markets, businesses, and industries sometimes experience reverse trends as often happens in the case of fashion when discarded clothing fashion come into vogue again. Strategists need to be aware of the possibility of such reverse trends in the life cycle. The PLC is one of the best known models of marketing. It is useful because it illustrates clearly that change is inevitable as an offering moves through its life in the market. Each of the stages of the cycle is characterized by different conditions of demand and supply. To get the best returns from a product at all times the manager must be able to change the marketing mix, at the different stages. For example, a high price may be appropriate for a newly launched innovative product with few competitors. The ‘skimming’ strategy will generate high profits early in the product’s life, but once challenged by competitors in the growth stage, prices need to fall if market share is to be won. Similarly, promotional activities must change from awareness generating, through persuasion to reminder as the product matures. One reason for portfolio analysis is to ensure that managers have located each product on its life cycle before strategies are developed for them. Product life cycle

Introduction

Growth

Maturity

Decline

Sales Volume Revenue During Maturity, Profit Growth slows down and Levels off Loss

Profit Time

RAM

Note: Whilst there are various classic PLC shapes covering, for example, fashion goods, the principal Stages apply, and the value of the model is to encourage managers to see how dynamic business is.

28

STRATEGIC MANAGEMENT

There are a number of practical limitations to the use of the product life cycle and some pitfalls to be avoided, but it does demonstrate the reason for developing a balanced portfolio and shows managers why products at the height of their revenue – generating life are not popular with the owners, because profit growth has levelled off. Most owners expect to see profit growth. To achieve that the business needs growing products or must find strategies for extending the life of already mature products – for example, boosting sales by opening up new markets, new distribution channels or modifying the existing product to encourage repeat purchases. MCKINSEY 7’S FRAMEWORK According to McKinsey and company, strategy is only one seven elements in successful business practice. The first three elements- strategy, structure, and systems- are considered “hard- ware” of success. The next four – style, skills, staff, and shared values- are the “soft- ware”. The first “soft” element, style, means that company employees share a common way of thinking and behaving. The second, skills, means that the employees have the skills to carry out the company’s strategy. The third, staffing, means that the company has hired able people, trained them well and assigned them to the right jobs. The fourth, shared values, means that the employees share the same guiding values. When these elements are present, companies are usually more successful at strategy implementation.

ORGANISATIONAL STRUCTURE An organization structure is the ways in which the tasks and subtasks are required to implement a strategy are arranged. STRUCTURES FOR STRATEGIES

RAM

29

STRATEGIC MANAGEMENT Entrepreneurial Structure The entrepreneurial structure as shown in Exhibit 1, is the most elementary form of structure and is appropriate for an organization that is owned and managed by one person. Owner-Manager Employees

Exhibit 1

The advantages that an entrepreneurial structure offers are:   

Quick decision-making, as power is centralized Timely response to environmental changes Informal and simple organizational systems

The disadvantages of the entrepreneurial structure are:  Excessive reliance on the owner-manager and so proves to be demanding for the owner-manager  May divert the attention of the owner-manager to day-to-day operational matters and ignore strategic decision  Increasingly inadequate for future requirements if volume of business expands Functional Structure As the volume of business expands, the entrepreneurial structure outlives its usefulness. The need arises for specialized skills and delegation of authority to managers who can look after different functional areas. A typical functional structure is shown in Exhibit 2. Exhibit 2

CEO

Finance

PR

Legal

Marketing

Personnel

Production

Note that specialization of skills is both according to the line and staff functions. The functional structure seeks to distribute decision-making and operational authority along functional lines.

RAM

30

STRATEGIC MANAGEMENT

The advantages that a functional organization offers are:   

Efficient distribution of work through specialization Effective delegation of day-to-day work Providing time for the top management to focus on strategic decisions

The disadvantages of a functional structure are:  Creates difficulty in coordination among different functional areas  Creates specialists, which results in narrow specialization, often at the cost of the overall benefits of the organization.  Leads to functional and line and staff conflicts Despite the disadvantages, the functional structure is quiet common and exists in its original or modified form as the organization evolves from the initial to the mature stages of development. Divisional Structure The structural needs of expansion and growth are satisfied by the functional structure but only up to a limit. There comes a time in the life of organization when growth and increasing complexity in terms of geographic expansion, market segmentation, and diversification make the functional structure inadequate. Some form of divisional structure is necessary to deal with such situations. Basically, work is divided on the basis of product lines, type of customers served, or geographical area covered, and then separate divisions or groups are created and placed under the divisional-level management. Within divisions, the functional structure may still operate. CEO Corporate Finance

Corporate Legal / PR

General Manager

General Manager

Marketing

Marketing

Operations

Operations

Personnel

Personnel

Exhibit 3 The advantages that a divisional structure offers are:

RAM

31

STRATEGIC MANAGEMENT  Enables grouping of functions required for the performance of activities related to a division.  Generates quick response to environmental changes affecting the businesses of different divisions.  Enables the top management to focus on strategic matters. The disadvantages of the divisional structure are:  Problems in the allocation of resources and corporate overhead costs; particularly if the business and corporate objectives are ill-defined.  Inconsistency arising from the sharing of authority between the corporate and divisional levels.  Policy inconsistencies between different levels. Strategic Business Unit Strategic Business Unit (SBU) has been defined by Sharplin as “any part of business organization which is treated separately for strategic management purposes”. When organizations face difficulty in managing divisional operations due to an increase in diversity, size, and number of divisions, it becomes difficult for the top management to exercise strategic control. Here, the culture of SBU is helpful in creating an SBUorganizational structure. Conceptually, an SBU is “a discrete element of the business serving specific productsmarkets with readily identifiable competitors and for which strategic planning can be constructed.” Essentially, SBUs can be created by adding another level of management in a divisional structure after the divisions have been grouped under a divisional top management authority on the basis of common strategic interests. Exhibit 4 SBU Organization Structure

CEO

Group Head SBU 1

Group Head SBU 2

Group Head SBU 3

Divisions ABC

Divisions DEF

Divisions GHI

The advantages that the SBU-organization structure offers are:   

Establishes coordination between divisions having common strategic interests. Facilitates strategic management and control of large, diverse organizations. Fixes accountability at a level of distinct business units.

RAM

32

STRATEGIC MANAGEMENT

The disadvantages of the SBU-organization structure are:   

There are too many different SBUs to handle effectively in a large, diverse organization. Difficulty in assigning responsibility and defining autonomy for SBU heads. Additional of another level of management between corporate and divisional management. Matrix Structure

In large organizations, there is often a need to work on major products or projects, each of which is strategically significant. The result is the requirement of matrix type of organizational structure. Essentially, such a type of structure is created by assigning functional specialists to work on a special project or a new product or service. For the duration of the project, specialists from different areas form a group or team and report to the team leader. Simultaneously, they may also work in their respective parent departments. Once the project is completed, the team members revert to their respective departments. Exhibit6 Matrix CEO

Finance

Project Manager A

Marketing

Personnel

Operations

Functional Specialists

Project Manager B

Organizational Structure

Project Manager C

The advantages that the Matrix structure offers are:   

Allows individual specialists to be assigned where their talent is most needed. Fosters creativity because of pooling of diverse talents. Provides good exposure to specialists in general management.

The disadvantages of the Matrix structure are:   

Dual accountability creates confusion and difficulty for individual team members. Requires a high level of vertical and horizontal combination. Shared authority may create communication problems.

Network Structure The increasing volatility of the environment, coupled with the emergence of knowledge based industries, has lead to the creation of a network structure. Also known as the “spider’s web structure” or the “virtual organization”, the network structure is

RAM

33

STRATEGIC MANAGEMENT “composed of a series of project groups or collaborations linked by constantly changing non-hierarchical cobweb networks”. This structure is highly decentralized and organized around customer groups or geographical regions. Rather than being located in one place, the business functions are scattered far and wide. The core organization is only a shell with a small headquarters acting as a “broker” connected to the suppliers and the specialized functions performed by autonomous teams & workforce. The network structure is most suited to organizations that face a continually changing environment requiring quick response, high level of adaptability, and strong innovations skills. This structure makes extensive use of the outsourcing of support services required to produce and market products or services. There are few internal resources and a network structure firm relies heavily on outsiders who are specialized in their respective areas. Project A

Project Group M

Function X

CORPORATE HEADQUATERS Project B

Project Group N

Function Y

Exhibit 7 Network Organization Structure The advantages that the network structure offers are:  High level of flexibility to change structural arrangements in line with business requirements  Permits concentration on core competencies of the firm  Adaptability to cope with rapid environment change The disadvantages of a network structure are:   

Loss of control and lack of coordination as there are several partners Risks of overspecialization as most tasks are performed by others High costs as a duplication of resources could be there STRUCTURE FOLLOWS STRATEGY?

Q.

Do you think Strategy drives structure? Elaborate.

RAM

34

STRATEGIC MANAGEMENT

Ans:- “Structure is static, Strategy is dynamic” seems to be more applied statement in the present day scenario, where organizations are striving for excellence in everything they do. Competition is ‘getting’ intense, and organizations have no other choice, but either to PROSPER or PERISH! Organisational structures have also undergone tremendous makeovers in the recent years. Tall structures have given way to FLAT STRUCTURES. Decision making is speedier in flat than tall structures. HMT watches lost to TITAN watches in this aspect. Strategy is usually developed at three levels – Corporate level, SBU level & Departmental level. Every big organization has a Strategic Management Group (SMG) which develops the Strategies for the organization to achieve in the years to come. This team works on the changes in the Environment which can impact and affect the business. New Ventures, expansion, turnaround, new product development, diversifications, divestures, etc. Strategies are prepared by organizations to fight competition. With the Malhotra Committee Reforms recommendations to privatize Insurance business in India in 1991 in place, the Government opened up Insurance Sector for private participation. IRDA (Insurance Regulatory Development Authority) was set up as an apex body to look into the ethical business practices of the Insurance Sector. Around 18 private players entered the Insurance Sector in India like ICICI, HDFC, TATAS, BIRLAS, BAJAJ, RELIANCE, etc. LIC, the Government player which enjoyed a virtual monopoly had to wake up to beat the competition. All the players had big – money and great marketing skills. LIC was a mammoth player in the Insurance Sector and was literally an undisputed player. LIC came to know that, if it doesn’t revamp its strategy, it cannot protect its leadership status. It took a series of steps, to combat competition from the private players. LIC believed that being a Government body, decision making was literally slow and this would hamper the fighting spirit. So, LIC overhauled its entire Organisation Structure. A lot of changes were initiated to bring in more transparency and faster decision making. From a tall hierarchical structure, LIC worked on various departments of the organization and tried to bring flat structures, where flexibility is there and would ultimately lead to faster decision making. LIC also initiated massive promotional plans. They created new advertisements mostly through outdoors. They also – unveiled their new punchline “Jeevan ke sath bhi, jeevan ke baad bhi”. If LIC did not wake up to the increasing competition, it would have died a natural death. To drive the Strategy, LIC did make slight structural adjustments in their organizational structure to make the smooth flow of their strategy. A record 10 million policies were sold by LIC in March 2006, earning a premium income of Rs. 6,000 crore. LIC’s first premium from new policies rose 48.5 percent to Rs. 18,085 crore, from Rs. 12,170 crore last year, thus proclaiming its market leadership.

RAM

35

STRATEGIC MANAGEMENT The above example, signifies that Strategy should always try to fit into the Structure. An organization cannot change its structure, just to meet its strategy requirements. However, if the need arises, a slight change in the structure can also power the strategy. But, in many instances, Structures follow the Strategy. LEADERSHIP IN STRATEGIC MANAGEMENT Who is the leader? A leader is someone who has the authority to tell a group of people what to do. A leader can also represent a group of people. Good leaders are made not born. If you have the desire and willpower, you can become an effective leader. Good leaders develop through a never ending process of self-study, education, training, and experience. Define leadership: Leadership is a process by which a person influences others to accomplish an objective and directs the organization in a way that makes it more cohesive and coherent. Leaders carry out this process by applying their leadership attributes, such as beliefs, values, ethics, character, knowledge, and skills. Although your position as a manager, supervisor, lead, etc. gives you the authority to accomplish certain tasks and objectives in the organization, this power does not make you a leader...it simply makes you the boss. Leadership differs in that it makes the followers want to achieve high goals, rather than simply bossing people around. How it influences a strategy?  Influential leaders are adept at building teams and partnerships that rise above personal interests and cultural differences within organizations and between countries.  Develop critical leading and influencing skills necessary to sustain longterm organizational success through a combination of lecture, discussion, simulation and self-assessment.  Understand regulatory and cultural challenges and see how commercialization has been accomplished globally.  Understand how new technology can revolutionize established industries, presenting challenges for participants and opportunities for new entrants.  Strengthen your position in the global marketplace by understanding how knowledge is generated Leadership Implementation Leadership implementation refers to ensuring the right people in positions responsible for implementation of the strategy. It encompasses the chief executive officer (CEO) and the key manager. The first dimension of Leadership implementation is to make sure that the right strategists are in the right position for the strategy chosen for the

RAM

36

STRATEGIC MANAGEMENT SBU or firm. The ability, integrity and commitment of the CEO and other top executives are very critical to the successful implementation of the strategy. The critical role of the leader in strategic management is clear from the fact that major changes in strategy are often preceded by or quickly followed by a change in the CEO. It is aptly said that in strategic management the nature of the CEO’s role is both symbolic and substantive. The symbolic role is very important to instill confidence and to inspire. The substantive nature of the CEO role will be reflected in the amount of interest the CEO has in the strategy and the amount of time he invested in implementing the strategy. Besides the CEO, other top executives have a critical role in the strategy implementation. It is, therefore, essential to ensure that such key position are held by the right people. CREATIVITY & INNOVATION IN STRATEGY: Human beings are relentlessly creative & crucial issues that creativity must have some tangible outcome in products, in services, in a new structure or strategy or more diffusely in a pervasive shift in corporate culture. An invention is the solution to a problem, often a technical one, where as innovations is the commercially successful use of the solution. Innovation starts after examining market needs, technical production and marketing requirements. Successful innovations result from a conscious, purposeful search for innovation opportunities. Innovations arise out of: • Unexpected occurrences • Incongruities • Precise needs • Industry and market changes • Demographic changes • Changes in perception • New knowledge. Innovation means change. Such changes can be incremental or radical, evolutionary or revolutionary. They can have different effects upon procedures and users. Innovation is not a technical term. Innovation creates new wealth or new potential of action rather than new knowledge. Organisations know that it is not something that takes place within an organization but a change outside. The measure of innovation is the impact on the environment. Innovation in a business enterprise therefore always be market focused. The most market focused innovator succeeds like business strategies, an innovative strategy starts out with the question “What is our business and what should it be?” The ruling assumption of an innovative strategy is that what ever exists is aging. Existing products lines and services, existing markets and distillation channels go

RAM

37

STRATEGIC MANAGEMENT down rather than up. The foundations of innovative strategy is planned and systematic sloughing of the old, the dying and the obsolete. Innovation is perhaps the single most important building block of competitive advantage. Successful innovations gives a company something unique – something that the competitors lack. This uniqueness may allow a company to differentiate itself from its rivals and change a premium price for its products. Alternatively, it may allow a company to reduce its unit costs for below those of competitors. END OF STRATEGIC IMPLEMENTATION MODULE (II)

MODULE – III STRATEGY CONTROLLING “Induce your competitors not to invest in those products, markets and services where you expect to invest the most. That is the most fundamental rule of strategy” – Bruce D. Henderson

Perform External Audit

Develop vision and mission statements

Establish long term objectives

Generate, Evaluate and Select Strategies

Implement Strategiesmanagement issues

Implement StrategiesMarketing, Finance, Accounting , R&D, MIS Issues

Perform Internal Audit

Strategy Formulation

Strategy Implementation

Strategy Evaluation

RAM

38

Measur Evaluat Perform

STRATEGIC MANAGEMENT

D5 32. Explain the meaning, nature and importance of controlling function. 33. Explain the meaning and various steps involved in the process of control with reference to strategic management. 34. Explain the process of evaluation and control of strategy. 35. What are the various tools that can be used for controlling a strategy? EVALUATION AND CONTROL OF STRATEGIES Once the Strategy is implemented, there is no guarantee that the Strategy generates the results as aimed at. Therefore, the Strategist has to evaluate the strategy to assess whether the implementation of the Strategy is as per the Strategic plan. Further, a number of deviations wither in the external environment or in organizational environment, may take place. These deviations may necessitate a change in the Strategy. These changes may require a Strategic evaluation and control. Definition: Controlling is the process of regulating organizational activities so that actual performance conforms to exposed organizational standards. It is the process of monitoring and adjusting organizational activities in such a way as to facilitate accomplishment of organizational objectives. There are two broad types of control: 1) Strategic control 2) Operational control 1.

Strategic Control:

Strategic control focuses on monitoring and evaluating the strategic management process to ensure that it functions in process to ensure that it functions in the right direction. The basic purpose of strategic control is to help top management to achieve Strategic goals as planned. There are 4 basic types of Strategic controls viz (a) premises control (b) implementation control (c) Strategic surveillance (d) speed alert control. a)

Premises control: Strategies are often based on premises, i.e. assumptions are predicted conditions. A strategy may be rated only as long as the planning premises remain valid. A strategy may be based on certain premises related to the industry and environmental factors like government policies and regulations. Changes in the vital premises may necessitate changes on strategy.

RAM

39

STRATEGIC MANAGEMENT b)

c)

d)

e)

Implementation control: In several cases, the implementation of a strategy may not progress as planned, or the cost, sales volume, revenue, etc. may be at considerable variance with the planned ones. The lessons of the first phase of the implementations could be helpful in the implementation of the subsequent phases. In short, implementations control is designed to asses whether overall strategy should be changed in the light of unfolding events and results associated with incremental steps and actions that implement the overall strategy. Strategic surveillance: Strategic Surveillance is designed to monitor a broad range of events inside and outside the company that are likely to threaten the course of the firm’s strategy. The strategy of a company could be defeated by certain such events. It is therefore, necessary that the company exercise surveillance for timely detections of such developments and corrective actions. Special alert control: Sudden and unexpected developments like alliance between competitors, takeover / mergers, a major competition move by a competitor, etc. could have serious impact on a firm’s strategy. Eg.: In the wake of the consolidation of the market by Hindustan Lever by taking over Tomco, Godrej Soaps felt insecure and forged an alliance with Proctor and Gamble. Operational Control: Operational control systems guide, monitor and evaluate progress in meeting annual objectives. With strategic control attempts to steer the company over an extended time period, operational controls provide post-action evaluation and control over short time periods.

The operational control system involves the following steps: a) Establishing criteria and standards b) Measuring and comparing performance c) Performance gap analysis d) Taking corrective measures a) Establishing criteria and standards: Criteria and standards provide the basis for evaluation. Selection of the criteria for evaluation depends on a number of factors. For example, the evaluation criteria appropriate for stability. Strategy may not be appropriate for growth strategy or retrenchment strategy. b) Measuring and comparing performance: One actual performance is measured and is compared with the standards to identify the shortfalls if any. c) Performance gap analysis: Performance gap is the difference between the actual performance of a given organizational unit and the planned performances of that unit. If there is any performance gap it is necessary to identify the reasons for the gap to determine the appropriate corrective measure. In other words, performance gap analysis is a diagnostic step. d) Corrective measures: Performance gap analysis will reveal the reasons for the gap and will help decide the corrective measures. Strategy evaluation and control process may be graphicalluy presented as under: Deciding criteria and standards for evaluation

Measuring and comparing performances

Performance gap analysis

Corrective measures

RAM

40

STRATEGIC MANAGEMENT

TOOLS FOR CONTROLLING STRATEGIES There are various evaluation and control tools like: a) Standards b) Bench marking c) Cost benefit analysis d) Performance gap analysis e) Responsibility centres f) Return on Investments g) Budgeting (a)

Standards: Standards are the basis for evaluation of performance and are related to the goals of an enterprise. They are the specific criteria which are required to be fulfilled by the workers. A standard is a desired outcome or expected event with which managers can compare subsequent activities, performance or change. Setting of standards is useful for an enterprise for the following reasons: (i) (ii)

(iii)

They enable the employees to know their limitations of work and the expectations that the managers have from them. They enable the employees to know as to whether or not they posses the necessary ability to perform the work, according to standards. If not, necessary training can increase the employee potential. They co-ordinate the individual goals with the organizational goals.

A company may set the following standards: • •

• •

Time Standard: these relate to the time that an employee should take to perform a particular activity. It may be a product produced or service rendered. Production Standard: Production standard specify the number of units of a product that should be produced within the time specified in the time standards. For example, the company can set production standard that each employee should produce 10 units of Product A in one hour. Cost standards: The products produced or services rendered must be cost effective so as to generate maximum profits for the firm. The cost standards specify the cost per unit of the products produced. Quality standards: The quality standards aim at maintaining the quality of products. Not only should the goods be cost effective, they must also be qualitative in nature.

RAM

41

STRATEGIC MANAGEMENT Once the standards have been set, the workers perform their activities according to these standards. The activities having been performed, how many units have actually been produced, at what cost, within what time period is monitored by the managers. (b)

Bench marking: A major focus in determining a firm’s resources and competitiveness is comparison with existing and potential competitor’s firms in the same industry often have different marketing skills, financial resources, operating facilities and locations, technical know-how, brand images, levels of integration and so on. These different internal resources can become relative strengths or weaknesses depending on the strategy the firm chooses. In choosing a strategy, managers should compare the firm’s key internal capabilities with those of its rivals, thereby isolating its key strengths and weaknesses. Bench marking, comparing the way ‘our’ company performs a specific activity with a competitor or other company doing the same thing has become a central concern of mergers in quality commercial companies worldwide. In structuring the internal analysis, managers seek to systematically benchmark the costs and results of the smaller value activities against relevant competitors on other useful standards because it has proven to be an effective way to continuously improve that activity. The ultimate objective in bench marking is to identify the “best practices” in performing an activity, to learn how to lower costs, fewer defects, or excellence are achieved. Companies committed to bench marking attempt to isolate and identify where their costs or outcomes are out of line with what the best practitioners of a particular activity experience and then attempt to change their activities to achieve the new best practices standard. (c)

Cost – benefit analysis: Business is done with an ultimate objective of profits. Therefore, the strategist should analyze the costs associated with a profit centre and the benefits accruing therefrom. Both direct and indirect costs are taken into consideration to arrive at the costs. Total income out of the product line is taken into consideration to arrive at the profits or benefits. The policy of transfer pricing is followed to arrive at indirect benefits. On the basis of costs and benefits arrived by such analysis strategy for a business line or product is pursued. (d)

Performance Gap Analysis: Over all plan of a business is arrived at based on divisional plans. The unit heads of each department’s branches in case of multi-locational business units are guided by the corporate goal. Business units contribute for achievement of corporate goals. Such goals are compared with the achievements periodically. If there is a gap in achievement by different units, such deficit of business is called as performance gap. It gives incite into projections and performance. Strategic manager takes corrective steps to improve the performance gap is reduced. Identification of performance gap is a valuable strategic control measure. Mid way, corrective measures can be suggested by identifying the performance gap. (e)

Responsibility Centres:

RAM

42

STRATEGIC MANAGEMENT The organization is usually divided into smaller units where each unit is headed by a manager who is responsible for achieving the targets of the unit. These units are called responsibility centres and the head of each responsibility centre is responsible for controlling the activities of his centre. There are four major types of responsibility centres: (i) Cost centre: these centres aim at achieving their goals within the given cost constraints. The various direct costs (raw material, labour, etc. and indirect costs (research and development) are determined in monitoring terms and the centre head strives to limit the expenses within the constraints of the budgeted expenses or costs. (ii) Revenue centres: The revenue to be carried out of sales is estimated and expressed in monetary terms and the actual sales figures are compared with the budgeted figures. This determines the efficiency of the revenue centre. Corrective action is taken if the estimated figures of revenue are not achieved. (iii) Profit centre: This centre is credited with the responsibility of earning desired level of profits, computed by finding out the difference between revenues and costs. These centres can be divisions, departments, or the organization as a whole. (iv) Investment centre: The profits that different centres earn depend upon the efficient use of assets. The investment centres take care to invest money in assets which will generate maximum revenue and profits for the enterprise as a whole. The efficiency of the investment centre is judged through the returns that these centres earn on their investments. (f)

Return on investments (ROI): Return on investment is a measure of control that measures financial performance of a firm in relative terms. Rather than measuring company’s performance on the basis of absolute figure of profit, ROI measures a rate of return that firms are able to earn on their capital employed. This technique of control was adopted by Du Pont company of USA in 1919. ROI is used to measure the efficiency of capital. Higher the efficiency of capital other factors remaining the same, higher will be the ROI and higher the financial performance of the firm. The ROI measure can be used to compare the firm on different products of the same department or different firms within the industry. A company, besides comparing its performance with other companies, can also compare its overall performance in the current year with reference to earlier years. A trend of ROI can help company in assessing the stability of earnings that it has been able to maintain over a period of time. A directing trend, for instance, calls for a corrective action or control. The ROI can be calculated by the application of the following formula: Sales earnings _____ x _______ capital sales Precisely, ROI measures the earnings of the firm as a percentage of its capital. (g)

Budgeting:

RAM

43

STRATEGIC MANAGEMENT A budget is a statement which reflects the future incomes, expenditures and profits that can probably be earned by a firm. It is a future projection of the firm’s financial position. Non-financial aspects like number of units produced, number of units sold, material and labour required per unit of output, etc. can also be important components of a budget. Budgeting control refers to comparison of actual performance with the planned or budgeted performance. It is a basic technique of control and is used at every level of organization. Purpose of budgets: The budget intends to serve the following purposes: (i) It provides a yard-stick for measuring and comparing the quantitative performance of different departments, at different levels and at different time periods. (ii) It facilitates co-ordination of various resources vis-à-vis projects undertaken by the business organizations. (iii) It provides guidelines about the resources and expectations of an organization. (iv) It facilitates intra and inter-management and divisional performance of an organization. Budget as controlling device: Budget is a single use plan which provides a standard for measurement of performance. Framing standards is an important feature of plans and a budget, therefore, can be rightly construed to mean a plan. It specifies anticipated results in financial terms which serves as a basis for controlling the future revenues, and expenses. As a controlling device, it provides a basis for feedback, evaluation and follow-up. It facilitates comparison of actual performance with planned performance and helps to detect and correct deviations in the actual performance vis-à-vis the planned performance. This comparison of performance and rectification of errors is the essence of control. A budget can, therefore, be viewed as both a plan and a device for control. END OF EVALUATION AND CONTROL OF STRATEGY MODULE(III)

CONCEPT QUESTIONS FOR STRATEGIC MANAGENT Concept questions which can be asked for short note for 5 marks 1. 2. 3. 4. 5. 6. 7.

Define Strategy Define Strategic management Integration Diversification and types of diversification Divestment. What is Disinvestment? Is India successful in disinvestment? Downsizing Levels of strategic management

RAM

44

STRATEGIC MANAGEMENT 8. Generic strategies 9. Question marks 10. Cash cows 11. Performance gap analysis 12. Responsibility centres 13. Return on investment(ROI) 14. Benchmarking 15. Standards 16. Cost-benefit analysis 17. Budgeting 18. Creativity and innovation 19. Political environment 20. Social responsibility of business 21. Future of strategic management 22. Role of leadership in strategic management 23. Role of Motivation in Strategic Management. 24. How can you mobilize the resources for Strategy? Explain them. 25. Role of Creativity and Innovation in Strategy formulation. NOTE: MOST OF THE CONCEPTS ARE FEATURING IN THE ABOVE 3 MODULES, THE LEFT OVERS ARE FEATURED HERE RESOURCE MOBILIZATION FOR STRATEGY Management can be viewed as a process where human resources are integrated and directed towards the achievement of the organizational goals. Any economic activity depends upon the availability and effective utilization of various resources like men, material, capital and technology. Market plays an important role in providing the resources and also for sale of the outputs of any enterprise. 1. Money: Capital is the basic resource for starting any business. Money means capital in economic sense. Capital provides the ability to borrow to the firm. Capital can buy other resources required for any business. Capital is generally brought by the entrepreneur in the form of equity. In a reasonable ratio debt is provided by the financial institutions like banks. Capital can be sourced by various modes. Generally initial capital is brought by the entrepreneur. Depending on the ownership pattern, capital can be sourced by offer of shares to the public, international investors, mutual funds, venture capitalists, high networth, individuals, etc. Capital market helps in mobilizing capital for a firm. Debt can be sourced as working capital from bank, external commercial borrowings from abroad, deferred payment, factoring, bill discounting, buyer’s credit, hire purchase, leasing and so on. Dividend is the cost of equity and interest is the cost for the debt. There are various debt instruments through which debt can be evidenced. The borrowing ratio indicates the component of equity and debt. Higher this ratio, riskier the form is a capital as acting as risk-absorbing mechanism.

RAM

45

STRATEGIC MANAGEMENT 2. Markets: Market provides the physical infrastructure for exchange of goods and services. Market plays an important role in providing the necessary inputs for production. It also helps to sell the outputs of goods and services provided by the business enterprise. Market behaviour is decided by the consumers. Consumers have needs and specific behaviour. Market provides competition, sustains some firms, allows disintegration of others. Market helps to discover price, level of consumptions and demand for goods and services. The art of understanding the customer behaviour and selling the goods and services is collectively called as marketing. This is one of the important management function in competitive market. 3. Machine: Machine represents technology used in any business. In a competitive environment the quality of the product decides the fact of the business. Quality depends on the technology used. Therefore, technology is an important deciding factor. Machine or technology can produce identical products in large numbers at reasonable speed. Machines are untiring and can work continuously standardization of products / components is possible in goods and services produced by machines. Machines reduce the cost and improve quality giving an edge to the business. Innovation helps to refine the products and machines help innovation. Machines are the outcomes of technological innovations. Machines require reviewers outputs i.e. power and fuel. Machines have to be maintained and need skilled persons to work on. Machines displace labour. Machines are made for mass production. 4. Material: All physical inputs which go into production can collectively termed as ‘material’. Material forms the inventory in the balance sheet of the firm. Inventory is an idle asset and therefore involves cost in the form of interest on working capital required to hold such inventory. Optional holding of inventory is called material management. Excessive holding of material can lead to increase in cost of the ultimate product. Effective materials management involves maximizing materials productivity. Modern material management attempts for zero inventory. Excessive material varieties and unpredictability of demand for materials and spares frustrate the attempt to minimize material on hand. Proper planning of stores, issuing policies, avoidance of pilferage can help reduce inventory holding. Standardization and codification are variety reduction methodologies for improving materials productivity. Minimisation of wastage is another aspect of improving efficiency. 5. Merit: Human resources forms only living input in resources. Human resources are characterized by emotions, skill levels, psychological aspect. Therefore, management of human resources is important in any organization. Unlike other resources, human resources can be motivated for improved performance.

RAM

46

STRATEGIC MANAGEMENT Depending on the job, human resources should provide the skill sets required. Human resource management involves recruitment, selection, inductions and orientation, training and development and also periodic performance appraisals which helps to review the contribution of each employee. Human resources are costly inputs and therefore it is necessary to intake just sufficient manpower. Manpower can bring success or failure in an organization by their contribution or otherwise. One art of handling manpower is most important in today’s businesses. COST-BENEFIT ANALYSIS (CBA) To ensure efficiency in resources allocation and to achieve maximum gains in social welfare, it may be necessary to use evaluation procedures that are based on systematic and careful assessment of all options under consideration. One such procedure is cost-benefit analysis (CBA). CBA is a method distinctively developed for the evaluation of public policy issues. Under the CBA methodology all potential gains and losses from proposal are identified, converted into monetary units and compared on the basis of decision rules to determine if the proposal is desirable from society’s stand point. CBA is particularly designed from the evaluation on the basis of public interest. Costs and benefits in CBA are measured in terms of welfare losses and gains rather than cash or revenue flows. CBA proceeds in four essential steps: a) identification of relevant costs and benefits b) measurement of costs and benefits. c) Comparison of cost and benefit streams accruing during the lifetime of a project and d) Project selection. CBA has been widely applied in under-developed countries to irrigators, hydro electric and transport investments. Creativity & Innovation in Strategy: Human beings are relentlessly creative & crucial issues that creativity must have some tangible outcome in products, in services, in a new structure or strategy or more diffusely in a pervasive shift in corporate culture. An invention is the solution to a problem, often a technical one, where as innovations is the commercially successful use of the solution. Innovation starts after examining market needs, technical production and marketing requirements. Successful innovations result from a conscious, purposeful search for innovation opportunities. Innovations arise out of: • Unexpected occurrences RAM 47

STRATEGIC MANAGEMENT • • • • • •

Incongruities Precise needs Industry and market changes Demographic changes Changes in perception New knowledge.

Innovation means change. Such changes can be incremental or radical, evolutionary or revolutionary. They can have different effects upon procedures and users. Innovation is not a technical term. Innovation creates new wealth or new potential of action rather than new knowledge. Organisations know that it is not something that takes place within an organization but a change outside. The measure of innovation is the impact on the environment. Innovation in a business enterprise therefore always be market focused. The most market focused innovator succeeds like business strategies, an innovative strategy starts out with the question “What is our business and what should it be?” The ruling assumption of an innovative strategy is that what ever exists is aging. Existing products lines and services, existing markets and distillation channels go down rather than up. The foundations of innovative strategy is planned and systematic sloughing of the old, the dying and the obsolete. Innovation is perhaps the single most important building block of competitive advantage. Successful innovations gives a company something unique – something that the competitors lack. This uniqueness may allow a company to differentiate itself from its rivals and change a premium price for its products. Alternatively, it may allow a company to reduce its unit costs for below those of competitors. BENCH MARKING : The process of measuring a firm’s performance against that of the top performers in its industry. After determining the appropriate bench marks a firm’s managers then set goals to meet or exceed the performance of the firm’s top competitors. Taken to its logical conclusions, competitive bench marking if practiced by all the firms in an industry – would result in increased industry-wide performance. Increasingly, companies may be bench-marking against the best on the world. Fortune magazine annually publishes the most and best admired U.S. corporations. Corporate dimensions are evaluated along the following lines: • Quantity of products and services • Quality of investment • Innovations • Long term investment value • Firm sounders • Community and environmental responsibility

RAM

48

STRATEGIC MANAGEMENT • •

Use of corporate assets. Ability to allocate, develop & keep initial productivity.

These can be used as bench marks or standards. GENERIC STRATEGIES Michael Porter has proposed three generic strategies that provide a good starting point for strategic thinking: overall cost leadership, differentiation, and focus. •

•

•

Overall cost leadership: The business works hard to achieve the lowest production and distribution costs so that it can price lower than its competitors and win a large market share. Firms pursuing this strategy must be good at engineering, purchasing, manufacturing, and physical distribution. They need less skill in marketing. Texas Instruments is a leading practitioner of this strategy. The problem with this strategy is that other firms will usually compete with still lower costs and hurt the firm that rested its whole future on cost. Differentiation: The business concentrates on achieving superior performance in an important customer benefit area valued by a large part of the market. The firm cultivates those strengths that will contribute to the intended differentiation. Thus the firm seeking quality leadership, for example, must make products with the best components, put them together expertly, inspect them carefully, and effectively communicate their quality. Intel has established itself as a technology leader by introducing new microprocessors at breakneck speed. Focus: The business focuses on one or more narrow market segments. The firm gets to know these segments intimately and pursues either cost leadership or differentiation within the target segment. Airwalk shoes came to fame by focusing on the very narrow extreme-sports segment.

DOWNSIZING: Where there is surplus workforce, trimming of labour force will be necessary. The trimming or downsizing plan shall indicate; 1. Who is to be made redundant and where and when; 2. Plans for re-development or re-training, where this has not been covered in the re-development plan; 3. Steps to be taken to help redundant employees find new jobs; 4. Policy for declaring redundancies and making redundancy payments; and 5. Programme for consulting with unions or staff associations and informing those affected. Another method of dealing with surplus labour is to retain all employees but reduce the work hours (thus realize payrolls savings) perhaps to a four day, 32- hour work week. In this way a company can spread a 20 percent decrease in demand (and in pay)

RAM

49

STRATEGIC MANAGEMENT equitably across the whole workforce, rather than keep 80percent of the employees full-time and lay-off 20 percent of them. Depending on the nature of the surplus, a firm may be able to transfer or reassign employees to jobs in parts of the organization that are still experiencing demand. Or if the firm expects the surplus to be short-lived and can afford to keep excess workforce on payroll, the company can use the slack time to provide cross training in related jobs to enhance workforce skills and flexibility. Alternatively, the surplus workers can perform equipment maintenance and overhaul or engage themselves in other activities that were postponed when demand was high. Offering high incentives for early retirement I another way of handling surplus labour. Euphemistically called as Voluntary Retirement Scheme (VRS), this method is widely practiced. But hr planners and trainers may be forced to scramble to deal with a sudden short fall of experienced staff, particularly when VRS is selected by a large number of employees. Laying-off is another strategy for dealing with surplus staff. This action is determinal to both employees and employers. For employers, lay-off means joblessness and for employees it means loss of reputation. Notwithstanding this, several firms are laying off their surplus employees. DISINVESTMENT 1. The action of an organization or government selling or liquidating an asset or subsidiary. Also known as "divestiture". 2. A reduction in capital expenditure, or the decision of a company not to replenish depleted capital goods. Investopedia Says: 1. A company or government organization will divest an asset or subsidiary as a strategic move for the company, planning to put the proceeds from the divestiture to better use that garners a higher return on investment. 2. A company will likely not replace capital goods or continue to invest in certain assets unless it feels it is receiving a return that justifies the investment. If there is a better place to invest, they may deplete certain capital goods and invest in other more profitable assets.

DIVERSIFICATION Main objectives of diversification;: 1.

Raising resources:

RAM

50

STRATEGIC MANAGEMENT The first main objective of disinvestment of public sector units is to raise resources from within public sector units to meet three categories of cost associated with transformation of public sector enterprises. They are as follows:  A part of the resources will be utilized to bear expenses related with Voluntary Retirement Scheme when sick public sector enterprises which cannot be revived will be closed down by the govt.  A part of the resources will be utilized to provide additional capital to public sector units which can be revived.  A part of the resources will be utilized to retrain the workers displaced from the closure of public sector enterprises. 2.

Autonomy to management:

The second important objective of disinvestment of public sector units is to provide autonomy to its management. The autonomy to the management in public sector enterprises will give freedom to management to take independent decisions and operate public sector enterprises on commercial lines. 3.

Reduce political interference:

The third important objective of disinvestment is to reduce political interference in day-to-day functioning of public sector enterprises. The disinvestment of public sector enterprises would make public sector units more accountable to shareholders. The govt. officials are thus expected to take more independent decisions rather than just serving the selfish interest of politicians. 4.

Generation of employment:

The fourth important objective of disinvestment of public sector enterprises is to increase employment opportunities’ in the country. The restructuring of the public sector enterprise through proceeds of disinvestment would improve efficiency and profitability of public sector enterprises. The increase in level of profitability would help public sector to expand and diversify its production activities. This would further generate employment opportunities in the country. 5.

Retiring of public debt:

The fifth important objective of disinvestment is to utilize the proceeds of disinvestment to retire the public debt. The retiring of public debt would help to reduce the burden of both massive public debt and huge interest payments on it. The decline in burden of debt servicing charges would also help the govt. to control the fiscal deficit. 6.

Building up of competitive environment:

RAM

51

STRATEGIC MANAGEMENT Finally the major objective of disinvestment was to build up healthy competitive environment in the economy. The govt. would ensure that the disinvestment does not result in creation of pvt. Monopolies .it would also develop suitable framework for regulation of companies beyond a particular size by in acting a competition act. INTEGRATION STRATEGIES:1) Forward Integration – Forward integration and horizontal integration are some time collectively referred to as vertical integration strategies. Vertical integration strategies allow a firm to control over distributors, suppliers, and competitors. Six guidelines for when forward integration may be an especially effective strategy are:   

 



When an organizations present distributors are specially expensive, or unreliable, or incapable of meeting the firms distribution needs. When the availability of quality distributors is so limited as to offer a competitive advantage to those firms that integrate forward. When an organization competes in an industry that is growing and expected to continue to grow markedly; this is a factor because forward integration reduces an organizations ability to diversify if its basic industry falters. When an organization has both the capital and human resources needed to manage the new business of distributing its own products. When the advantages of stable production are particularly high; this is a consideration because an organization can increase the predictability of the demand for its output through forward integration. When present distributors or retailers have high profit margins; this situation suggests that a company profitably could distribute its own products and price them more competitively by integrating forward. 2)

Backward Integration –

Both manufacturers and retailers purchase needed materials from suppliers. Backward integration is a strategy of seeking ownership or increased control of a firm’s suppliers. This strategy can be especially appropriate when a firm’s current suppliers are unreliable, too costly, or cannot meet the firm’s needs. Seven guidelines for when backward integration may be an especially effective strategy are:  When an organization present suppliers are especially expensive, or unreliable, or incapable of meeting a firms needs for parts, components, assemblies, or raw materials.  When the numbers of supplier’s are small and the number of competitors is large.  When an organization competes an industry that is growing rapidly; this is a factor because integrative type strategies reduce an organizations ability to diversify in a declining industry.

RAM

52

STRATEGIC MANAGEMENT  When an organization has both capital and human resources to manage the new business of supplying its own raw materials.  When the advantages of stable prices are particularly important; this is a factor because an organization can stabilize the cost of its raw materials and the associated price of its products through backward integration.  When present suppliers have high profit margins, which suggest that the business of supplying products or services in the given industry is a worthwhile venture.  When an organization needs to acquire a needed resource quickly. 3)

Horizontal Integration –

Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm’s competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisition, takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. Five guidelines when horizontal integration may be an especially effective strategy are: 

   

When an organization can gain monopolistic characteristics in a particular area or region without being challenged by a federal government for “tending substantially” to reduce competition. When an organization competes in a growing industry. When increased economies of scale provide major competitive advantages. When an organization has both the capital and human talent needed to successfully manage an expanded organization. When competitors are faltering due to a lack of managerial expertise or a need for particular resources that an organization possesses; note that horizontal integration would not be appropriate if competitors are doing poorly, because in that case overall industry sales are declining. DIVERSIFICATION STRATEGIES:There are three general types of diversification strategies: Concentric, Horizontal and Conglomerate. Overall, diversification strategies are becoming less popular as organizations are finding it difficult to manage diverse business activities. In the 1960’s and 1970’s, the trend was to diversify so as not to be dependent on any single industry, but the 1980’s saw a general reverse of that thinking. Diversification is now on the retreat. 1)

Concentric Diversification –

Adding new, but related, products or services is widely called as concentric diversification.

RAM

53

STRATEGIC MANAGEMENT Six guidelines for when concentric diversification may be an effective strategy are provided below: When an organization competes in a no growth or a slow growth

 industry.     

When adding new, but related, products would significantly enhance the sales of current products. When new, but related, products could be offered at highly competitive prices. When new, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys. When an organization’s products are currently in the declining stage of the product’s lifecycle. When an organization has a strong management team. 2)

Horizontal Diversification:

Adding new, unrelated products or services for present customers is called horizontal diversification. This strategy is not as risky as conglomerate diversification because a firm already should be familiar with its present customers. Four guidelines for when horizontal diversification may be an effective strategy are provided below: When revenues derived from an organization’s current products or services would increase significantly by adding the new, unrelated products.  When an organization competes in a highly competitive and/or a no growth industry, as indicated by low industry profit margin and returns.  When an organization’s present channels of distribution can be used to market the new products to current customers.  When the new products have counter-cyclical sales patterns compared to an organization’s present products. 

3) Conglomerate Diversification: Adding new, unrelated products or services is called conglomerate diversification. Six guidelines for when conglomerate diversification may be an especially effective strategy to pursue are listed below: When an organization’s basic industry is experiencing declining annual sales and profits.  When an organization has the capital and managerial talent needed to compete successfully in the new industry.  When the organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity.  When there exists financial synergy between the acquired and acquiring firm. 

RAM

54

STRATEGIC MANAGEMENT When the existing markets for an organization’s present products are

 saturated. 

When anti-trusts actions could be charged against an organization that historically has concentrated on a single industry. Gap analysis The concept: Another important step in strategic management is the gap analysis. Gap analysis is also a means for motivating top management to initiate steps for strategic management. Gap is the deviation between events which is perceived, planned or forecasted and that of actual. Based on the system analysis, the outcome is based on the objectives, which is conditioned by the criteria and constraints. Hence, broadly, gap analysis is classified under the following categories:    

Gap analysis on outcome Gap analysis on the objective Gap analysis on the constraints like environment Gap analysis on the criteria like planning promises and assumptions.

Based on existing strategy, organisation has evolved a particular way of planning to accomplish a given set of objectives. A formal evaluation must be made as to the way the existing strategy is working. Based on analysis of environment, anew set of opportunities is opened up. In order to take advantage of the new opportunities, a set of new strategies are contemplated. Therefore at a future date there are two sets of outcome, which are to be achieved. One set of outcome is those based on existing strategy, which is considered as “expected outcome.” Another set of outcome is that which comes out of the contemplated new strategy, considered as “desired outcome.” The analysis between the two outcomes is called gap analysis of the outcome. Gap analysis is an important technique in motivating top management to initiate strategic management process. The capability of gap analysis to do so depends upon three conditions they are as follows: 1. Significance: The gap itself can provide the “catalytic effect” of top management. This depends on the significance of the gap. Suppose the “expected outcome”, at a future date is the same or nearly the same as that of the “desired outcome”, there is no need to change the existing strategy. In other words, the gap acts as a “triggering agent” for initiating a new strategy, provided the gap is significant. 2. Importance: Gap analysis, can act as a motivation provided the gap is important. Suppose, the company finds that there is a scope for improving the market share from the present level of 10% to 25% in the next year. At the same time expected increase of share with existing strategy for the next year is only 15% then

RAM

55

STRATEGIC MANAGEMENT there will be a genuine motivation is generated because there is a gap between the expected and desired outcome in one of its objectives, viz, market share. 3. Reducibility: This is major important criterion of success. This is the belief of top management that the projected gap is reducible. In other words, this is the confidence level of top management in the capacity of the proposed strategy to reduce the gap. There are certain constraints, which are beyond the capacity of the organisation to correct. 4. Responsibility centers Control systems can be established to monitor specific functions, projects, or divisions. Budgets are one type of control system that is typically used to control the financial indicators of performance. Responsibility centers are used to isolate a unit so that it can be evaluated separately from the rest of the corporation. Each responsibility center, therefore, has its own budget and is evaluated on its use of budgeted resources. The manager responsible for the center’s performance heads it. The center uses resources to produce a service or a product. There are five major types of responsibility centers. The type is determined by the way the corporation’s control system measures these resources and services or products. 5. Standard cost centers: Primarily used in manufacturing facilities, standard costs are computed for each operation on the basis of historical data. In evaluating the center’s performance, its total standard costs are multiplied by the units produced. The result is the expected cost of production, which is then compared to the actual cost of production. 6. Revenue centers: Production, usually in terms of unit or dollar sales, is measured without consideration of resource costs. The center is thus judged in terms of effectiveness rather than efficiency. The effectiveness of a sales region, for example, is determined by comparing its actual sales departments have very limited influence over the cost of the products they sell. 7. Expense centers: Resources are measured in dollars without consideration for service or product costs. Thus budgets will have been prepared for engineered expenses and for discretionary expenses. Typical expense centers are administrative, service, and research departments. They cost organisation money but they only indirectly contribute to revenues. 8. Profit centers: Performance is measured in terms of the difference between revenues. A profit center is typically established whenever an organizational unit has control over both its resources and its products or services. By having such centers, a company can be organized in to divisions of separate product lines. The manager of each division is given autonomy to the extent that she or he is able to keep profits at a satisfactory level. 9. Investment centers: Because many divisions in large manufacturing corporations use significant assets to make their products, their asset base should be

RAM

56

STRATEGIC MANAGEMENT factored in to their performance evaluation. Thus it is insufficient to focus only on profits, as in the case of profit centers. Thus it is insufficient to focus only on profits, as in the case of profit centers. An investment center’s performance is measured in terms of the difference between its resources and its services or products. 10. ROI budgeting The most commonly used measure of corporate performance is return on investments (ROI). It is simply the result of dividing net income before taxes by total assets. Although ROI has several advantages, it also has several distinct limitations. Advantages: 1) ROI is a single comprehensive figure influenced by every thing that happens. 2) It measures how well the division manager uses the property of the company to generate profits. It is also a good way to check on the accuracy of capital investment proposals. 3) It is a common denominator that can be compared with many entities. 4) It provides an incentive to use existing assets efficiently. 5) It provides an incentive to acquire new assets only when doing so would increase the return. Limitations: 1) ROI is very sensitive to depreciation policy. Depreciation write-off variances between divisions affect ROI performance. Accelerated depreciation techniques increase ROI, conflicting with capital budgeting discounted cash-flow analysis. 2) ROI is sensitive to book value. Older plants with more depreciated assets have relatively lower investment bases than newer plants, thus increasing ROI. 3) In many firms that use ROI, one division sells to another. As a result, transfer pricing must occur. Expenses incurred affect profit. Since, in theory, the transfer price should be based on the total impact on firm profit, some investment center managers are bound to suffer. Equitable transfer prices are difficult to determine. 4) If one division operates in an industry that has favorable conditions and another division operates in an industry that has unfavorable conditions, the former division will automatically “look” better than the other. 5) The time span of concern here is short range. The performance of division managers should be measured in the long run. This is top management’s time span capacity. 6) The business cycle strongly affects ROI performance, often despite managerial performance. ADDITIONAL INPUTS FROM MR. K.G.BHATT

…THE END…

RAM

57