COLLEGE OF BUSINESS AND MANAGEMENT

Prepared by: ANELYN A. JANABAN, DM

Preface
 Strategic Management: A Modular Approach is designed to supplement the
teaching of the Strategic Management which provide students with the necessary tools and
frameworks to enable them to make proactive strategic management decisions and
theories essential for learners, particularly those who are taking business courses like;
Office Administration, Operations Management, Marketing Management, Economics,
Entrepreneurship, Financial Management, and Hospitality Management, among others.

The objective of this modular approach in the study is to help the students explore
the concepts, scopes and implementation of Strategic Management to gain more
knowledge and skills that will help improve their strategic management skills to face up to
the new realities brought about by changes in the global business environment.

Course Description:
The course introduces students the value and process of strategic management.
Designed to explore an organization’s vision, mission, examine principles, techniques and
models of organizational and environmental analysis, explain the theory and practice of
strategy formulation and implementation such as corporate governance and business ethics
for the development of effective strategic leadership.
.
Course Learning Outcomes
On completion of this course students will be able to:

1. Appreciate the strategic decisions that organizations make and have an ability to
engage in strategic planning.
2. Discuss the basic concepts, principles and practices associated with strategy
formulation and implementation.
3. Apply knowledge gained in basic courses to the formulation and implementation of
strategy from holistic and multi-functional perspectives.
4. Evaluate company situations, present credible analysis and develop creative
solutions, using a strategic management perspective.
5. Understand the impact of social, economic and political forces on the design,
planning and implementation of organization's policy,
6. Use research methods, procedures and processes in the field of strategic
management and develop critical thinking and self-critical review.

The set of learning objectives presented in this module should be achieved at the
end of each lesson. Assessment test in the form of activity is given after every module to
measure the comprehension of the learners on the concepts or theories discussed.
Moreover, discussion questions, concept application and examples are also included.

TABLE OF CONTENTS

PAGES

Module 1: Introduction to Strategic Management 1-11

 Strategic Management: Defined
Dimensions of Strategic Management
Need for Strategic Management
Benefits of Strategic Management
Risks involved in Strategic Management
Strategic Management Process
Steps in Strategic Management Process
Activity /Performance Task 12-13

Module 2: Strategy Formulation, VMGO 14-33

Aspects of Strategy Formulation

Business Vision
Characteristics of Vision Statements
Formulating a Vision Statement
Mission
Characteristics of a Mission Statement
Products or Services, Markets and Technology
Survival, Growth and Profitability`
Company Philosophy
Formulation of Mission Statements
Concept of Goals and Objectives
Activity /Performance Task 34-35

Module 3- External Assessment 36-52

Concept of Environment
Porter’s Five Force Analysis
Forces that Shape Competition
Industry Analysis
Competitive Analysis
Environmental Scanning
PESTEL Analysis
SWOT Analysis
Forecasting Techniques
Activity /Performance Task 53-54

Module 4: Organizational Appraisal: The Internal Assessment 55-59

Importance of Internal Analysis Notes

SWOT Analysis
Carrying out SWOT Analysis
TOWS Matrix.
Critical Assessment of SWOT Analysis
Advantages and Limitations
Activity /Performance Task 60-61

Module 5- Organizational Appraisal: Internal Assessment 2 62- 72

Strategy and Culture

Value Chain Analysis
Organizational Capability Factors
Strategic Importance of Resources
Critical Success Factors
Benchmarking
Activity /Performance Task 73-74
Module 6: Corporate Level Strategies 75- 92

Expansion Strategies
Categories of Growth Strategies
Retrenchment Strategies
Turnaround Strategy
Combination Strategies
Internationalization
Cooperation Strategies
Strategic Alliances
Restructuring
Activity /Performance Task 93-94

Module 7: Business Level Strategies and

Strategy Implementation 95- 107

Industry Structure
Positioning of the Firm
Generic Strategies
Business Tactics
Barriers and Issues in Strategy Implementation
Model for Strategy Implementation
Alignment of the Framework
Resource Allocation
Activity /Performance Task 108-109

Module 8: Strategic Evaluation and Control 110- 121

Nature of Strategic Evaluation and Control
Types of General Control Systems
Basic Characteristics of Effective Evaluation and Control System
Strategic Control
Types of Strategic Control
Premise Control
Implementation Control
Approaches to Strategic Control Notes
Operational Control
Setting of Standards
Measurement of Performance
Taking Corrective Action
Techniques of Strategic Control
Role of Organizational Systems in Evaluation
Activity /Performance Task 122-123

Module 1: Introduction to Strategic Management

This module deals with strategy, nature and importance of strategic management. It
identifies and discusses dimensions and benefits, risk involved and process of strategic
management.
 At the end of this module students will be able to:
1. State the meaning, nature and importance of strategic management
2. Explain the dimensions and benefits of strategic management
3. Identify the risks involved in strategic management
4. Discuss the strategic management process.

In its simplest conception strategy is regarded as a unifying idea which links purpose and
action. For De Wit and Meyer (1998), in an intelligent treatment of the subject, strategy is any
course of action for achieving an organization’s purpose(s).

In the words of Alfred Chandler, the first modern business strategy theorist, strategy in the
area of business is defined as ‘the determination of the basic, long-term goals and objectives of
an enterprise, and the adoption of courses of action and the allocation of resources necessary
for those goals’ (Chandler, 1962: 13). Strategy combines the articulation of human goals and
the organization of human activity to achieve those goals. The setting of goals involves the
identification of opportunity. Strategy is a process of translating perceived opportunity into
successful outcomes, by means of purposive action sustained over a significant period of time.

Every aspect of the organisation plays a role in strategy – its people, its finances, its
production methods, and its customers and so on. Thus, Strategic Management is that set of
managerial decisions and actions that involves formulating and implementing strategies that will
help in aligning the organisation and its environment to achieve organisational goals. Strategic
management includes those management processes in organisations through which future
impact of change is determined and current decisions are taken to reach a desired future. In
short, strategic management is about visualising the future and recognizing it.

Strategic Management: Defined

To understand more on strategic management, it is important to begin with its
definitions from various authors;

1. To Alfred Chandler (1962), “Strategic management is concerned with the

determination of the basic long-term goals and the objectives of an enterprise,
and the adoption of courses of action and allocation of resources necessary for
carrying out these goals”.
 2. Glueck and Jauch (1984) defined Strategic management “as a stream of
decisions and actions which lead to the development of an effective strategy or
strategies to help achieve corporate objectives”.
3. Pearce and Robinson (1988) defined Strategic management “as the set of
decisions and actions resulting in the formulation and implementation of plans
designed to achieve a company’s objectives.”
4. Fed R David (1997) defined “Strategic management “ as a process of
formulating, implementing and evaluating cross-functional decisions that enable
an organisation to achieve its objective”.
5. To Johnson and Sholes ( 2002 ), “Strategic management includes understanding
the strategic position of an organisation, making strategic choices for the future
and turning strategy into action.”
6. According to Dess, Lumpkin & Taylor ( 2005 ) “Strategic management consists
of the analysis, decisions, and actions an organisation undertakes in order to
create and sustain competitive advantages.”

Chandler that we have quoted above is from the early 1960s, the period when strategic
management was being recognized as a separate discipline.
This definition consists of three basic elements:
1. Determination of long-term goals
2. Adoption of courses of action
3. Allocation of resources to achieve those goals

The definitions of Fred R. David, Pearce and Robinson, Johnson and Sholes and Dell,
Lumpkin and Taylor are some of the definitions of recent origin. Taken together, these definitions
capture three main elements that go to the heart of strategic management. The three on-going
processes are strategic analysis, strategic formulation and strategic implementation. These three
components parallel the processes of analysis, decisions and actions. That is, strategic management
is basically concerned with:
1. Analysis of strategic goals (vision, mission and objectives) along with the analysis
of the external and internal environment of the organisation.
2. Decisions about two basic questions:
 What businesses should we compete in?
 How should we compete in those businesses to implement strategies?
3. Actions to implement strategies. This requires leaders to allocate the necessary
resources
 and to design the organisation to bring the intended strategies to reality. This also
involves evaluation and control to ensure that the strategies are effectively
implemented.

The essence of strategic management is that how managers in the global

environment decide on strategies that can provide competitive advantage and can
sustained over time to their organizations.

Strategic Management can be defined as the art & science of formulating,

implementing, and evaluating, cross-functional decisions that enable an organisation to
achieve its objectives.
Strategic management is different in nature from other aspects of management. An
individual manager is most often required to deal with problems of operational nature. He
generally focuses on day-to-day problems such as the efficient production of goods, the
management of a sales force, the monitoring of financial performance or the design of
some new system that will improve the level of customer service.

Attention!
These are all very important tasks. But they are essentially concerned with
effectively managing resources already deployed, within the context of an existing
strategy. In other words, operational control is what managers are involved in most of
their time. It is vital to the effective implementation of strategy, but it is not the same
as strategic management.

Strategic management involves elements geared toward a firm's long term survival
and achievement of management goals. The components of the content of a strategy
making process include a desirable future, resource allocation, management of the firm-
environment and a competitive business ethics. However, some conflicts may result in
defining the content of strategy such as differences in interaction patterns among
associates, inadequacy of available resources and conflicts between the firm's objectives
and its environment.

Dimensions of Strategic Management

The characteristics of strategic management are as follows:
1. Top management involvement: Strategic management relates to several areas of a
firm’s operations. So, it requires top management’s involvement. Generally, only the
top management has the perspective needed to understand the broad implications
of its decisions and the power to authorize the necessary resource allocations.

2. Requirement of large amounts of resources: Strategic management requires

commitment of the firm to actions over an extended period of time. So they require
substantial resources, such as, physical assets, money, manpower etc.
Example: Decisions to expand geographically would have significant financial
implications in terms of the need to build and support a new customer base.

3. Affect the firm’s long-term prosperity: Once a firm has committed itself to a
particular strategy, its image and competitive advantage are tied to that strategy; its
prosperity is dependent upon such a strategy for a long time.

4. Future-oriented: Strategic management encompasses forecasts, what is anticipated

by the managers. In such decisions, emphasis is placed on the development of
projections that will enable the firm to select the most promising strategic options.
In the turbulent environment, a firm will succeed only if it takes a proactive stance
towards change.

5. Multi-functional or multi-business consequences: Strategic management has complex

implications for most areas of the firm. They impact various strategic business units
especially in areas relating to customer-mix, competitive focus, organisational
structure etc. All these areas will be affected by allocations or reallocations of
responsibilities and resources that result from these decisions.
 6. Non-self-generative decisions: While strategic management may involve making
decisions relatively infrequently, the organisation must have the preparedness to
make strategic decisions at any point of time. That is why Ansoff calls them “non-
self-generative decisions.”

Need for Strategic Management

Strategic management provides the route map for the firm. It makes it possible for the firm
to take decisions concerning the future with a greater awareness of their implications. It provides
direction to the company; it indicates how growth could be achieved.
The external environment influences the management practices within any organization.
Strategy links the organization to this external world. Changes in these external forces create both
opportunities and threats to an organization’s position – but above all, they create uncertainty.
Strategic planning offers a systematic means of coping with uncertainty and adapting to
change. It enables managers to consider how to grasp opportunities and avoid problems, to
establish and coordinate appropriate courses of action and to set targets for achievement.
Lastly, strategic management helps to formulate better strategies through the use of a more
systematic, logical and rational approach. Through involvement in the process, managers and
employees become committed to supporting the organization. The process is learning, helping,
educating and supporting activity.

An increasing number of firms are using strategic management for the following reasons:

1. It helps the firm to be more proactive than reactive in shaping its own future.
2. It provides the roadmap for the firm. It helps the firm utilize its resources in the
best possible manner.
3. It allows the firm to anticipate change and be prepared to manage it.
4. It helps the firm to respond to environmental changes in a better way.
5. It minimizes the chances of mistakes and unpleasant surprises.
6. It provides clear objectives and direction for employees.

Benefits of Strategic Management

Today’s enterprises need strategic management to reap the benefits of business
opportunities, overcome the threats and stay ahead in the race. The purpose of strategic
management is to exploit and create new and different opportunities for tomorrow; while long-term
planning, in contrast, tries to optimize for tomorrow the trends of today.
In the global environment top companies are involved in strategic management.
They are finding ways to respond to competitors, cope with difficult environmental
changes, meet changing customer needs and effectively use available resources. At a time
when the business environment is changing rapidly, even established firms are paying more
attention to strategy because they may face new competitors who threaten their core
business. Should a firm compete in all areas or concentrate on one area? Should a
company try to extend the brand to even more diverse areas of activity, or would it gain
more by building profits in the existing areas, and achieving more synergies across the
group? Should the company continue the current strategy as it is now, or would it initiate a
radical review of its strategy? These are just a few examples of the strategic part of the
management tasks.

Notes :
It is important to note that strategic planning goes far beyond the planning
process. Unlike traditional planning, strategic planning involves a long-range planning
under conditions of uncertainty and complexity such a planning involves:
l. Strategic thinking
2. Strategic decision-making
3. Strategic approach

A structured approach to strategy planning brings several benefits (Smith, 1995; Robbins,
2000)
1. It reduces uncertainty: Planning forces managers to look ahead anticipate change
and develop appropriate responses. It also encourages managers to consider the
risks associated with alternative responses or options.
2. It provides a link between long and short terms: Planning establishes a means of
coordination between strategic objectives and the operational activities that support
the objectives.
3. It facilitates control: By setting out the organisation’s overall strategic objectives and
ensuring that these are replicated at operational level, planning helps departments
to move in the same direction towards the same set of goals.
4. It facilitates measurement: By setting out objectives and standards, planning
provides a basis for measuring actual performance.

Strategic management has thus both financial and non-financial benefits:

1. Financial Benefits: Research indicates that organisations that engage in strategic

management are more profitable and successful than those that do not. Businesses
that followed strategic management concepts have shown significant improvements
in sales, profitability and productivity compared to firms without systematic planning
activities.
2. Non-financial benefits: Besides financial benefits, strategic management offers other
intangible benefits to a firm. They are;
  Enhanced awareness of external threats
 Improved understanding of competitors’ strategies
 Reduced resistance to change
 Clearer understanding of performance-reward relationship
 Enhanced problem-prevention capabilities of organisation
 Increased interaction among managers at all divisional and functional levels
 Increased order and discipline.

According to Gordon Greenley, strategic management offers the following benefits:

1. It allows for identification, prioritization and exploitation of opportunities.
2. It provides objective view of management problems.
3. It provides a framework for improved coordination and control of activities.
4. It minimizes the effects of adverse conditions and changes.
5. It allows decision-making to support established objectives.
6. It allows more effective allocation of time and resources to identified
opportunities.
7. It allows fewer resources and less time to be devoted to correcting erroneous
and ad hoc decisions.
8. It creates a framework for internal communication among personnel.
9. It helps integrate the behaviour of individuals into a total effort.
10. It provides a basis for clarifying individual responsibilities.
11. It encourages forward thinking.
12. It provides a cooperative, integrated enthusiastic approach to tackling problems
and opportunities.
13. It encourages a favourable attitude towards change.
14. It gives a degree of discipline and formality to the management of a business.

Risks involved in Strategic Management

Strategic management is an intricate and complex process that takes an organisation
into unchartered territory. It does not provide a ready-to-use prescription for success.
Instead, it takes the organisation through a journey and offers a framework for addressing
questions and solving problems.
Strategic management is not, therefore, a guarantee for success; it can be
dysfunctional
if conducted haphazardly. The following are its limitations:
1. It is a costly exercise in terms of the time that needs to be devoted to it by
managers. The negative effect of managers spending time away from their
normal tasks may be quite serious.
2. A negative effect may arise due to the non-fulfilment of the expectations of
the participating managers, leading to frustration and disappointment.
3. Another negative effect of strategic management may arise if those
associated with the formulation of strategy are not intimately involved in
the implementation of strategies.
The participants in formulation of the policy may shirk their responsibility for the decisions
taken.
As quoted by Fred R. David, some pitfalls to watch for and avoid in strategic
planning are:
1. Using strategic planning to control over decisions and resources
2. Doing strategic planning only to satisfy accreditation or regulatory requirements
3. Moving too hastily from mission development to strategy formulation
4. Failing to communicate the strategic plan to the employees, who continue
working
in the dark
5. Top managers making many intuitive decisions that conflict with the formal plan
6. Top managers not actively supporting the strategic planning process
7. Failing to use plans as a standard for measuring performance
8. Delegating strategic planning to a consultant rather than involving all managers
9. Failing to involve key employees in all phases of planning
10. Failing to create a collaborative climate supportive of change
11. Viewing planning to be unnecessary or unimportant
12. Becoming so engrossed in current problems that insufficient or no planning is
done
13. Being so formal in planning that flexibility and creativity are stifled.

Strategic Management Process

Developing an organisational strategy involves four main elements – strategic
analysis, strategic choice, strategy implementation and strategy evaluation and control.
Each of these contains further steps, corresponding to a series of decisions and actions that
form the basis of strategic management process.

1. Strategic Analysis: The foundation of strategy is a definition of organisational purpose.

This defines the business of an organisation and what type of organisation it wants to
be.Many organisations develop broad statements of purpose, in the form of vision and
mission statements. These form the spring – boards for the development of more specific
objectives and the choice of strategies to achieve them.
Environmental analysis – assessing both the external and internal environments is the next
step in the strategy process. Managers need to assess the opportunities and threats of the
external environment in the light of the organisation’s strengths and weaknesses keeping in
view the expectations of the stakeholders. This analysis allows the organisation to set more
specific goals or objectives which might specify where people are expected to focus their
efforts. With a more specific set of objectives in hand, managers can then plan how to
achieve them.

2. Strategic Choice: The analysis stage provides the basis for strategic choice. It allows
managers to consider what the organisation could do given the mission, environment and
capabilities – a choice which also reflects the values of managers and other stakeholders.
(Dobson et al. 2004). These choices are about the overall scope and direction of the
business.
Since managers usually face several strategic options, they often need to analyze
these in terms of their feasibility, suitability and acceptability before finally deciding on their
direction.

3. Strategy Implementation: Implementation depends on ensuring that the

organisation has a suitable structure, the right resources and competencies (skills, finance,
technology etc.), right leadership and culture. Strategy implementation depends on
operational factors being put into place.
4. Strategy Evaluation and Control: Organisations set up appropriate monitoring and
control systems, develop standards and targets to judge performance.
Steps in Strategic Management Process
 The above steps can also be depicted as a series of processes involved in strategic
management.

A General Framework of Strategic Management Process

The seven steps in the above model of strategy process fall into three broad phases
– formulation, implementation and evaluation – though in practice the three phases
interact closely. Good strategists know that formulation and implementation of strategy
rarely proceed according to plan, partly because the constantly changing external
environment brings new opportunities or threats, and partly because there may also be
inadequate internal competence. Since these may lead the management to change the
plan, there will be frequent interaction between the activities of formulating and
implementing strategy, and management may need to return and reformulate the plan.
MODULE 1 : Introduction to Strategic Management
MATERIALS : Activity Sheets
REFERENCES:
Books:
1. Rao,Paravathiswara Rao and Sivaramakrishna (2011), Strategic Management LPU Phgwara,
Produced & Printed by Excel Books Private Limited New Delhi-110028
2. Kumar, Suresh Department of Management Sciences
Sasurie College of Engineering Vijayamangalam – 638 056 BA 7032, Strategic Management PDF
File Adapted from Pearce JA and Robinson RB, Strategic Management, McGraw Hill, NY, 2000.
3. Fed R David, Strategic Management, New Jersey, Prentice Hall, 1997.
Hugh MacMillan and Mahen Tampoe, Strategic Management, Oxford University Press, 2000.
4. Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy, 6th Edition, Pearson Education
Ltd., 2002.
5. Richard Lynch, Corporate Strategy, Essex, Pearson Education Ltd., 2006.
6. Wheelen Thomas L, David Hunger J, Krish Rangarajan, Concepts in Strategic
Management and Business Policy, New Delhi, Pearson Education, 2006.
Online links:
 www.csuchico.edu/mgmt/strategy
 www.netmba.com/strategy
 www.quickmba.com/strategy
 www.wisegeek.com/what-is-the-strategic-management
 Name:___________________________ Year & Section____________Date__________Score:_____

Activity # 1 Comprehension: Using your own words,

explain the following: (5 points each item). Write your answer on the space provided.

1. Strategy:

2.Environmental
Analysis

3.Financial
Benefits:

Name:___________________________ Year & Section____________Date__________Score:_____

Activity # 2 – Hook Strategy: Arranged the jumbled letters to

arrive at the correct answers. Write your answer on the space provided.
(5 points each item)

1. P O F E R R A C N E M

Answer: __________________________________________________
2. N G A L P I N N

Answer: __________________________________________________

3. L E T E X R A N

Answer: __________________________________________________

4. T I R D I E C N O

Answer: __________________________________________________

5. N O O F R U M L A I T

Answer: _________________________________________________
Name:___________________________ Year & Section____________Date__________Score:_____

Activity # 3 Fill in the blanks.

Write your answer on the space provided.

1. Strategic management provides overall ________________ to the enterprise.

2. Strategic management is a question of interpreting, and continuously ______________, the
possibilities presented by______________ circumstances for advancing an organization’s objectives.
3. The foundation of strategy is a definition of organizational________________.
4. Organizations set up appropriate monitoring and control systems, develop standards and targets
to judge ________________.
5__________________and__________________ of strategy rarely proceed according to plan.
6. The first step in the strategic management process is to develop the corporate__________ and
__________________________.
7. Once a firm has committed itself to a particular strategy, its ______________
and_______________ are tied to it.
8. A _________________ can be defined as the overall goal of an organization that all business
activities and processes should contribute toward achieving.
9. Formulation and implementation of strategy must occur side-by-side rather than ___________.
10. When a strategy becomes internalized into a corporate culture, it can lead to_____________.
11. Strategic planning goes far beyond the___________________ process.
12. Generally, only the ________________ has the perspective needed to understand the broad
implications behind the strategic plans.
13. The real strategic goals are realized only along with the analysis of the______________ and
________________ environment of the organization.
14. Developing an organisational strategy involves ______________________ main elements.
15. Strategic planning is a ______________ exercise in terms of the time that needs to be devoted
to it by managers.
Name:___________________________ Year & Section____________Date__________Score:_____

Performance Task
Activity # 4 - Model Question (30 points)
Illustrate the model of strategic management and
explain its components.
Write your answer on the space provided.

Name:___________________________ Year & Section____________Date__________Score:_____

Performance Task Activity # 5 Reflections; Write on the space provided.

Two (2) things I found interesting

3 important things 1.
I learned in
Module I. 2.

1.
One thing I wish to
learn.
2. 1.

3. How can I maintain or improve my class rank?

_____________________________________
_____________________________________
_____________________________________
_____________________________________
_____________________________________
_____________________________________
Module 2: Strategy Formulation and Defining Vision, Mission, Goals and Objectives
This module deals with strategy formulation, VMGO. It identifies and discusses the
characteristics of VMGO.
At the end of this module students will be able to:

1. State the meaning of VMGO

2. Explain the importance of VMGO in Strategy Formulation
3. Identify the advantages of Vision
4. Formulate Vision and Mission Statement.

Strategy formulation is the process of determining appropriate courses of action for

achieving organizational objectives and thereby accomplishing organizational purpose.
Strategy formulation is vital to the well-being of a company or organization. It produces
a clear set of recommendations, with supporting justification, that revise as necessary the mission
and objectives of the organization, and supply the strategies for accomplishing them.
In formulation, we are trying to modify the current objectives and strategies in ways to
make the organization more successful. This includes trying to create "sustainable" competitive
advantages – although most competitive advantages are eroded steadily by the efforts of
competitors. A good recommendation should be: effective in solving the stated problem(s), practical
(can be implemented in this situation, with the resources available), feasible within a reasonable
time frame, cost-effective, not overly disruptive, and acceptable to key "stakeholders" in the
organization. It is important to consider "fits" between resources plus competencies with
opportunities, and also fits between risks and expectations.

There are four primary steps in this phase:

1. Reviewing the current key objectives and strategies of the organization, which
usually would have been identified and evaluated as part of the diagnosis
2. Identifying a rich range of strategic alternatives to address the three levels of
strategy
formulation outlined below, including but not limited to dealing with the critical issues
3. Doing a balanced evaluation of advantages and disadvantages of the alternatives
relative
to their feasibility plus expected effects on the issues and contributions to the success of the
organization.
4. Deciding on the alternatives that should be implemented or recommended.

In organizations, and in the practice of strategic management, strategies must be

implemented to achieve the intended results. Here it has to be remembered that the most
wonderful strategy in the history of the world is useless if not implemented successfully.
Aspects of Strategy Formulation
The following three aspects or levels of strategy formulation, each with a different focus,
need to be dealt with in the formulation phase of strategic management. The three sets of
recommendations must be internally consistent and fit together in a mutually supportive manner
that forms an integrated hierarchy of strategy, in the order given.
1. Corporate Level Strategy
2. Competitive Strategy
3. Functional Strategy

Let us understand each of them one by one.

1. Corporate Level Strategy: In this aspect of strategy, we are concerned with broad decisions
about total organization’s scope and direction. Basically, we consider what changes should
be made in our growth objective and strategy for achieving it, the lines of business we are
in, and how these lines of business fit together.

It is useful to think of three components of corporate level strategy:

(a) Growth or directional strategy (what should be our growth objective, ranging from
retrenchment through stability to varying degrees of growth - and how do we accomplish this)
(b) Portfolio strategy (what should be our portfolio of lines of business, which implicitly
requires reconsidering how much concentration or diversification we should have), and
(c) Parenting strategy (how we allocate resources and manage capabilities and activities
across the portfolio – where do we put special emphasis, and how much do we
integrate our various lines of business).
This comprises the overall strategy elements for the corporation as a whole, the grand strategy,
if you please. Corporate strategy involves four kinds of initiatives:

(a) Making the necessary moves to establish positions in different businesses and
achieve an appropriate amount and kind of diversification. A key part of corporate
strategy is making decisions on how many, what types, and which specific lines of
business the company should be in. This may involve deciding to increase or
decrease the amount and breadth of diversification. It may involve closing out some
LOB's (lines of business), adding others, and/or changing emphasis among LOB's.
(b) Initiating actions to boost the combined performance of the businesses the company
has diversified into: This may involve vigorously pursuing rapid-growth strategies
in the most promising LOB's, keeping the other core businesses healthy, initiating
turnaround efforts in weak-performing LOB's with promise, and dropping LOB's
that are no longer attractive or don't fit into the corporation's overall plans. It also
may involve supplying financial, managerial, and other resources, or acquiring
 and/or merging other companies with an existing LOB.

(c) Pursuing ways to capture valuable cross-business strategic fits and turn them into
competitive advantages – especially transferring and sharing related technology,
procurement leverage, operating facilities, distribution channels, and/or customers.

(d) Establishing investment priorities and moving more corporate resources into the
most attractive LOBs.

2. Competitive Strategy: It is quite often called as Business Level Strategy. This involves
deciding how the company will compete within each Line of Business (LOB) or Strategic
Business Unit (SBU). In this second aspect of a company's strategy, the focus is on how to
compete successfully in each of the lines of business the company has chosen to engage in.
The central thrust is how to build and improve the company's competitive position for each
of its lines of business. A company has competitive advantage whenever it can attract
customers and defend against competitive forces better than its rivals. Companies want to
develop competitive advantages that have some sustainability (although the typical term
"sustainable competitive advantage" is usually only true dynamically, as a firm works to
continue it). Successful competitive strategies usually involve building uniquely strong or
distinctive competencies in one or several areas crucial to success and using them to
maintain a competitive edge over rivals. Some examples of distinctive competencies are
superior technology and/or product features, better manufacturing technology and skills,
superior sales and distribution capabilities, and better customer service and convenience.

3. Functional Strategy: These more localized and shorter-horizon strategies deal with how
each functional area and unit will carry out its functional activities to be effective and
maximize resource productivity. Functional strategies are relatively short-term activities that
each functional area within a company will carry out to implement the broader, longer-term
corporate level and business level strategies. Each functional area has a number of strategy
choices, that interact with and must be consistent with the overall company strategies.

Three basic characteristics distinguish functional strategies from corporate level and
business level strategies: shorter time horizon, greater specificity, and primary
involvement of operating managers.
A few examples follow of functional strategy topics for the major functional areas of
marketing, finance, production/operations, research and development, and human
resources management. Each area needs to deal with sourcing strategy, i.e., what should
be done in-house and what should be outsourced?
Notes:
 Marketing strategy deals with product/service choices and features, pricing strategy,
markets to be targeted, distribution, and promotion considerations. Financial strategies
include decisions about capital acquisition, capital allocation, dividend policy, and
investment and working capital management. The production or operations functional
strategies address choices about how and where the products or services will be manufactured or
delivered, technology to be used, management of resources, plus
purchasing and relationships with suppliers. For firms in high-tech industries, Research
&Development strategy may be so central that many of the decisions will be made at the business
or even corporate level, for example the role of technology in the company's competitive strategy,
including choices between being a technology leader or follower. However, there will remain more
specific decisions that are part of R&D functional strategy, such as the relative emphasis between
product and process R&D, how new technology will be obtained (internal development vs. external
through purchasing, acquisition, licensing, alliances, etc.), and degree of centralization for R&D
activities. Human resources functional strategy includes many topics, typically recommended by the
human resources department, but many requiring top management approval.
Example: Job categories and descriptions
Pay and benefits
Recruiting
Selection and orientation
Career development and training
Evaluation and incentive systems
Policies and discipline
Management/executive selection processes
Business Vision
The first task in the process of strategic management is to formulate the organization’s
vision and mission statements. These statements define the organizational purpose of a firm.
Together with objectives, they form a “hierarchy of goals.”
A clear vision helps in developing a mission statement, which in turn facilitates setting of
objectives of the firm after analyzing external and internal environment. Though vision, mission
and objectives together reflect the “strategic intent” of the firm, they have their distinctive
characteristics and play important roles in strategic management.
Vision can be defined as “a mental image of a possible and desirable future state of the
organisation” (Bennis and Nanus). It is “a vividly descriptive image of what a company wants to
become in future”. Vision represents top management’s aspirations about the company’s
direction and focus. Every organisation needs to develop a vision of the future. A clearly
articulated vision moulds organisational identity, stimulates managers in a positive way and
prepares the company for the future.
“The critical point is that a vision articulates a view of a realistic, credible, attractive future for
the organisation, a condition that is better in some important ways than what now exists.”
Vision, therefore, not only serves as a backdrop for the development of the purpose and
strategy of a firm, but also motivates the firm’s employees to achieve it.
According to Collins and Porras, a well-conceived vision consists of two major components:
 1. Core ideology 2. Envisioned future

Core ideology is based on the enduring values of the organization (“what we stand for and
why we exists”), which remain unaffected by environmental changes. Envisioned future
consists of a long-term goal (what we aspire to become, to achieve, to create”) which
demands significant change and progress.
Defining Vision
Vision has been defined in several different ways.
Richard Lynch defines vision as “ a challenging and imaginative picture of the future role
and objectives of an organization, significantly going beyond its current environment and
competitive position.”
E1-Namaki defines it as “a mental perception of the kind of environment that an
organisation aspires to create within a broad time horizon and the underlying conditions for the
actualization of this perception”.
Kotter defines it as “a description of something (an organization, corporate culture, a
business , a technology, an activity) in the future.”
For Boal and Hooijberg, effective visions have two components:
1. A cognitive component (which focuses on outcomes and how to achieve them)
2. An affective component (which helps to motivate people and gain their commitment to it)
Definitions of Vision
1. Johnson: Vision is "clear mental picture of a future goal created jointly by a group
for the benefit of other people, which is capable of inspiring and motivating those
whose support is necessary for its achievement".
2. Kirkpatrick et al: Vision is "an ideal that represents or reflects the shared values to
which the organization should aspire".
3. Thornberry: Vision is "a picture or view of the future. Something not yet real, but
imagined. What the organization could and should look like. Part analytical and
part emotional".

4. Shoemaker: Vision is "the shared understanding of what the firm should be and how
it must change".
5. Kanter et al: Vision is "a picture of a destination aspired to, an end state to be achieved via
the change. It reflects the larger goal needed to keep in mind while
concentrating on concrete daily activities".
6. Stace and Dunphy: Vision is "an ambition about the future, articulated today, it is a
process of managing the present from a stretching view of the future".
Nature of Vision
A vision represents an animating dream about the future of the firm. By its nature, it is hazy
and vague. That is why Collins describes it as a “Big hairy audacious goal” (BHAG). Yet it is a
powerful motivator to action. It captures both the minds and hearts of people. It articulates a
view of a realistic, credible, attractive future for the organization, which is better than what now
exists. Developing and implementing a vision is one of the leader’s central roles. He should not
only have a “strong sense of vision”, but also a “plan” to implement it.
Example:
1. Henry Ford’s vision of a “car in every garage” had power. It captured the imagination of others and aided
internal efforts to mobilize resources and make it a reality. A good vision always needs to be a bit beyond a
company’s reach, but progress towards the vision is what unifies the efforts of company personnel.

2. One of the most famous examples of a vision is that of Disneyland “To be the happiest place on earth”.
Other examples are:
(a) Hindustan Lever: Our vision is to meet the everyday needs of people everywhere.
(b) Microsoft: Empower people through great software any time, any place and on any device.
(c) Britannia Industries: Every third Indian must be a Britannia consumer.

Characteristics of Vision Statements

As may be seen from the above definitions, many of the characteristics of vision given by
these authors are common such as being clear, desirable, challenging, feasible and easy to
communicate.
Nutt and Backoff have identified four generic features of visions that are likely to enhance
organizational performance:

1. Possibility means the vision should entail innovative possibilities for dramatic organizational
improvements.
2. Desirability means the extent to which it draws upon shared organizational norms and
values about the way things should be done.
3. Actionability means the ability of people to see in the vision, actions that they can take
that are relevant to them.
4. Articulation means that the vision has imagery that is powerful enough to communicate clearly
a picture of where the organization is headed.
According to Thompson and Strickland, some important characteristics of an effective vision
statement are:
1. It must be easily communicable: Everybody should be able to understand it clearly.
2. It must be graphic: It must paint a picture of the kind of company the management is trying
to create.
3. It must be directional: It must say something about the company’s journey or destination.
4. It must be feasible: It must be something which the company can reasonably expect to
achieve in due course of time.
5. It must be focused: It must be specific enough to provide managers with guidance in making
decisions.
6. It must be appealing to the long term interests of the stakeholders.
7. It must be flexible: It must allow company’s future path to change as events unfold and
circumstances change.

Importance of Vision
Having a strategic vision is linked to competitive advantage, enhancing organizational
performance, and achieving sustained organizational growth. Clear vision enables firms to
determine how well organizational leaders are performing and to identify gaps between the vision
and current practices. Organizations preparing for transformational change regularly undertake
“envisioning” exercises to help guide them into the future. The visioning process itself can enhance
the self-esteem of the people who participate in it because they can see the potential fruits of their
labors.
Conversely, a “lack of vision” is associated with organizational decline and failure. As
Beaver argues “Unless companies have clear vision about how they are going to be distinctly
different and unique in adding and satisfying their customers, they are likely to be the corporate
failure statistics of tomorrow”. Lacking vision is used to explain why companies fail to build their
core competencies despite having access to adequate resources to do so. Business strategies that
lack visionary content may fail to identify when change is needed. Lack of an adequate process for
translating shared vision into collective action is associated with the failure to produce
transformational organizational change.
Thus vision statements serve as:
1. A basis for performance: A vision creates a mental picture of an organization’s path and
direction in the minds of people in the organization and motivates them for high performance.
2. Reflects core values: A vision is generally built around core values of an organization, and
channelises the group’s energies towards such values and serves as a guide to action.
3. Way to communicate: A vision statement is an exercise in communication. A well-
communicated vision statement will bring the employees together and galvanize them into action.
4. A desirable challenge: A vision provides a desirable challenge for both senior and junior
managers.

While providing a sense of direction, strategic vision also serves as a kind of “emotional
commitment”. Thompson and Strickland point out the significance of “vision” which is broadly as
follows:

1. It crystallizes top management’s own view about firm’s long-term direction.

2. It reduces the risk of rudderless decision-making.
3. It serves as a tool for maximizing the support of organization members for internal changes.
4. It serves as a “beacon” to guide managers in decision-making.
5. It helps the organization to prepare for the future.

Vision poses a challenge and addresses the human need for something to strive for. It can
depict an image of the future that is both attractive and worthwhile.
Indeed, developing a strategic vision may be regarded as a managerial imperative in the strategic
management process. This is because strategic management presupposes the necessity to look
beyond today, to anticipate the impact of new technology, changes in customer needs and
market opportunities. Creating a well-conceived vision illuminates an organization’s direction and
purpose, and then using it repeatedly as a reminder of “where we are headed and why” helps keep
organization members on the chosen path.

Advantages of Vision
Several advantages accrue to an organization having a vision. Parikh and Neubauer point
out the following advantages:
1. Good vision fosters long-term thinking.
2. It creates a common identity and a shared sense of purpose.
3. It is inspiring and exhilarating.
4. It represents a discontinuity, a step function and a jump ahead so that the company
Knows what it is to be.
5. It fosters risk-taking and experimentation.
6. A good vision is competitive, original and unique. It makes sense in the market place.
7. A good vision represents integrity. It is truly genuine and can be used for the benefit
Of people.

Did u know? When does a vision fail? A vision may fail when it is:
1. Too specific (fails to contain a degree of uncertainty)
2. Too vague (fails to act as a landmark)
3. Too inadequate (only partially addresses the problem)
4. Too unrealistic (perceived as unachievable)

A.D. Jick observes that a vision is also likely to fail when leaders spend 90 percent of their
time articulating it to their staff and only 10 percent of their time in implementing it. There are two
other reasons for vision failure:
1. Adaptability of vision over time 2. Presence of competing visions

Formulating a Vision Statement

Generally, in most cases, vision is inherited from the founder of the organization who
creates a vision. Otherwise, some of the senior strategists in the organization formulate the vision
statement as a part of strategic planning exercise. Nutt and Backoff identify three different
processes for crafting a vision:
1. Leader-dominated Approach: The CEO provides the strategic vision for the organization.
This approach is criticized because it is against the philosophy of empowerment, which
maintains that people across the organization should be involved in processes and decisions
that affect them.
2. Pump-priming Approach: The CEO provides visionary ideas and selects people and groups
within the organization to further develop those ideas within the broad parameters set
out by the CEO.
3. Facilitation Approach: It is a “co-creating approach” in which a wide range of people
participate in the process of developing and articulating a vision. The CEO acts as a
facilitator, orchestrating the crafting process. According to Nutt and Backoff, it is this
approach that is likely to produce better visions and more successful organizational change
and performance as more people have contributed to its development and will therefore
be more willing to act in accordance with it.

Mission

“A mission statement is an enduring statement of purpose”. A clear mission statement is essential

for effectively establishing objectives and formulating strategies.
A mission statement is the purpose or reason for the organization’s existence. A well-
conceived mission statement defines the fundamental, unique purpose that sets it apart from other
companies of its type and identifies the scope of its operations in terms of products offered and
markets served. It also includes the firm’s philosophy about how it does business and treats its
employees.
In short, the mission describes the company’s product, market and technological areas of
emphasis in a way that reflects the values and priorities of the strategic decision makers.
As Fred R. David observes, mission statement is also called a creed statement, a statement
of purpose, a statement of philosophy etc. It reveals what an organization wants to be and whom
it wants to serve. It describes an organization’s purpose, customers, products, markets, philosophy
and basic technology. In combination, these components of a mission statement answer a key
question about the enterprise: “What is our business?”

Defining Mission
Thompson defines mission as “The essential purpose of the organization, concerning
particularly why it is in existence, the nature of the business it is in, and the customers it seeks to
serve and satisfy”.
Hunger and Wheelen simply call the mission as the “purpose or reason for the
organization’s existence”.

A mission can be defined as a sentence describing a company's function, markets and

competitive advantages. It is a short written statement of your business goals and philosophies. It
defines what an organization is, why it exists and its reason for being. At a minimum, a mission
statement should define who are the primary customers of the company, identify the products and
services it produces, and describe the geographical location in which it operates.
Example:
l. Ranboxy Petrochemicals: To become a research based global company.
2. Reliance Industries: To become a major player in the global chemicals business and
simultaneously grow in other growth industries like infrastructure.
3. Cadbury: To attain leadership position in the confectionery market and achieve a
strong national presence in the food drinks sector.
4. McDonald: To offer the customer fast food prepared in the same high quality worldwide,
tasty and reasonably priced, delivered in a consistent low key décor and friendly manner.

Most of the above mission statements set the direction of the business organization by
identifying the key markets which they plan to serve Missions have one or more of the five distinct
and identifiable components:
1. Customers, 2. Products or services, 3. Markets, 4. Concern for growth 5. Philosophy
Importance of Mission Statement
The purpose of the mission statement is to communicate to all the stakeholders inside and
outside the organization what the company stands for and where it is headed. It is important to
develop a mission statement for the following reasons:
1. It helps to ensure unanimity of purpose within the organization.
2. It provides a basis or standard for allocating organizational resources.
3. It establishes a general tone or organizational climate.
4. It serves as a focal point for individuals to identify with the organization’s purpose and direction.
5. It facilitates the translation of objectives into tasks assigned to responsible people within
the organization.
6. It specifies organizational purpose and then helps to translate this purpose into objectives
in such a way that cost, time and performance parameters can be assessed and controlled.
Developing a comprehensive mission statement is also important because divergent views
among managers can be revealed and resolved through the process.

According to Pearce (1982), vision and mission statements have the following value:

1. They provide managers with a unity of direction that transcends individual, parochial and
transitory needs.
2. They promote a sense of shared expectations among all levels and generations of
employees.
3They consolidate values over time and across individuals and interest groups.
4. They project a sense of worth and intent that can be identified and assimilated by company
outsiders.
5. Finally, they affirm the company’s commitment to responsible action, in order to preserve
and protect the essential claims of insiders for sustained survival, growth and profitability
of the firm.

According to Fred R. David, a mission statement is more than a statement of purpose. It is:
1. A declaration of attitude and outlook
2. A declaration of customer orientation
3. A declaration of social policy and responsibility

Characteristics of a Mission Statement

A good mission statement should be short, clear and easy to understand. It should therefore
possess the following characteristics:

1. Not lengthy: A mission statement should be brief.

2. Clearly articulated: It should be easy to understand so that the values, purposes, and goals
of the organization are clear to everybody in the organization and will be a guide to them.
3. Broad, but not too general: A mission statement should achieve a fine balance between
specificity and generality.
4. Inspiring: A mission statement should motivate readers to action. Employees should find
it worthwhile working for such an organization.
5. It should arouse positive feelings and emotions of both employees and outsiders about
the organization.
6. Reflect the firm’s worth: A mission statement should generate the impression that the
firm is successful, has direction and is worthy of support and investment.
7. Relevant: A mission statement should be appropriate to the organization in terms of its
history, culture and shared values.
8. Current: A mission statement may become obsolete after some time. As Peter Drucker
points out, “Very few mission statements have anything like a life expectancy of thirty, let
alone, fifty years. To be good enough for ten years is probably all one can normally
expect”. Changes in environmental factors and organizational factors may necessitate
modification of the mission statement.

9. Unique: An organization’s mission statement should establish the individuality and

uniqueness of the company.
10. Enduring: A mission statement should continually guide and inspire the pursuit of
organizational goals. It may not be fully achieved, but it should be challenging for managers
and employees of the organization.
11. Dynamic: A mission statement should be dynamic in orientation allowing judgments
about the most promising growth directions and the less promising ones.
12. Basis for guidance: Mission statement should provide useful criteria for selecting a basis
for generating and screening strategic options.
13. Customer orientation: A good mission statement identifies the utility of a firm’s products
or services to its customers, and attracts customers to the firm.
14. A declaration of social policy: A mission statement should contain its philosophy about
social responsibility including its obligations to the stakeholders and the society at large.
15. Values, beliefs and philosophy: The mission statement should lay emphasis on the values
the firm stands for; company philosophy, known as “company creed”, generally accompanies or
appears within the mission statement.

Components of a Mission Statement

Mission statements may vary in length, content, format and specificity. But most agree that
an effective mission statement must be comprehensive enough to include all the key components.
Because a mission statement is often the most visible and public part of the strategic management
process, it is important that it includes all the following essential components:
1. Basic product or service: What are the firm’s major products or services?
2. Primary markets: Where does the firm compete?
3. Principal technology: Is the firm technologically current?
4. Customers: Who are the firm’s customers?
5. Concern for survival, growth and profitability: Is the firm committed to growth and
financial soundness?
6. Company philosophy: What are the basic beliefs, values, aspirations and ethical priorities of
the firm?
7. Company self-concept: What is the firm’s distinctive competence or major competitive
advantage?
8. Concern for public image: Is the firm responsive to social, community and environmental
concerns?
9. Concern for employees: Are employers considered a valuable asset of the firm?
10. Concern for quality: Is the firm committed to highest quality?

Products or Services, Markets and Technology

An indispensable component of the mission statement is specification of the firm’s basic
product or service, markets and technology. These three components describe the company’s
activity.

Survival, Growth and Profitability

`Every firm has to secure its survival through growth and profitability. These three economic
goals guide the strategic direction of almost every business organization.
A firm that is unable to survive will be incapable of satisfying the aims of any of its
stakeholders.
Profitability is the mainstay goal of a business organization, and profit over the long term
is the
clearest indication of a firm’s ability to satisfy the claims and desires of all stakeholders. A firm’s
growth is inextricably linked to its survival and profitability.

Company Philosophy
The statement of a company’s philosophy (also called company creed) generally appears
within the mission statement. It specifies the basic values, beliefs and aspirations to which the
strategic decision-makers are committed in managing the company. The company philosophy
provides a distinctive and accurate picture of the company’s managerial outlook.

Company Self-concept
Both individuals and companies have a crucial need to know themselves. The ability of a
company to survive in a highly competitive environment depends on its realistic evaluation of its
strengths and weaknesses. Description of the firm’s self-concept provides a strong impression of
the firm’s self-image.

Public Image
Mission statements should reflect the public expectations of the firm since this makes
achievement of the firm’s goals more likely.
Example: “Johnson & Johnson make safe products” reflects the customer expectations of
the company in making safe products. Sometimes, a negative public image can be corrected by emphasizing
the beneficial aspects in the mission statements.

Concern for Employees

Mission statements should also emphasize their concern for improvement of quality of work
life, equal opportunity for all, measures for employee welfare etc.

Customers
“The customer is our top priority” is a slogan that would be claimed by most of the
businesses the world over. A focus on customer satisfaction causes managers to realize the
importance of providing an excellent customer service. So, many companies have made customer
service a key component of their mission statement.

Quality
The emphasis on quality has received added importance in many corporate philosophies.
Example: Motorola’s mission statement contains a statement that “dedication to quality
is a way of life at our company, so much so that it goes beyond rhetorical slogans.”

Formulation of Mission Statements

There is no standard method for formulating mission statements. Different firms follow
different approaches. As indicated in 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 through
involvement, people become committed to the mission of the organization.

Mission statements are generally formulated as follows:

1. In many cases, the mission is inherited i.e. the founder establishes the mission
which may remain unchanged down the years or may be modified as the conditions
change.
2. In some cases, the mission statement is drawn up by the CEO and board of directors
or a committee of strategists constituted for the purpose.
3. Engaging consultants for drawing up the mission statement is also common.
 4. Many companies hold brainstorming sessions of senior executives to develop a
mission
statement. Soliciting employee’s views is also common.
5. According to Fred R. David, an ideal approach for developing a mission statement
would
be to select several articles about mission statements and ask all managers to read these as
background information. Then ask managers to prepare a draft mission statement for the
organization. A facilitator or a committee of top managers, merge these statements into a
single document and distribute this draft mission statement to all managers. Then the
mission statement is finalized after taking inputs from all the managers in a meeting.
Thus, the process of developing a mission statement represents a great opportunity for
strategists to obtain needed support from all managers in the firm.
6. Decision on how best to communicate the mission to all managers, employees and
external constituencies of an organization are needed when the document is in its
final form. Some organizations even develop a videotape to explain the mission
statement and how it was developed.
7. The practice in Indian companies appears to be a consultative-participative route.
For
example, at Mahindra and Mahindra, workshops were conducted at two levels within the
organisation with corporate planning group acting as facilitators. The State Bank of India
went one step ahead by inviting labor unions to partake in the exercise. Satyam Computers
went one more step ahead by involving their joint venture companies and overseas clients
in the process.

Evaluating Mission Statements

For a mission statement to be effective, it should meet the following ten conditions:
1. The mission statement is clear and understandable to all parties involved. The organization
can articulate and relate to it.
2. The mission statement is brief enough for most people to remember.
3. The mission statement clearly specifies the purpose of the organization. This includes a clear
statement about:
(a) What needs the organization is attempting to fill (not what products or services are offered)?
(b) Who the organization’s target populations are?
(c) How the organization plans to go about its business; that is, what its primary technologies are?
4. The mission statement should have a primary focus on a single strategic thrust.
5. The mission statement should reflect the distinctive competence of the organization
(e.g., what can it do best? What is its unique advantage?)
6. The mission statement should be broad enough to allow flexibility in implementation,
but not so broad as to permit lack of focus.
7. The mission statement should serve as a template and be the same means by which the organization
can make decisions.
8. The mission statement must reflect the values, beliefs and philosophy of operations of the organization.
9. The mission statement should reflect attainable goals.
10. The mission statement should be worked so as to serve as an energy source and rallying point for the
organization (i.e., it should reflect commitment to the vision).
Concept of Goals and Objectives
Goals
The terms “goals and objectives” are used in a variety of ways, sometimes in a conflicting
sense.
The term “goal” is often used interchangeably with the term “Objective”. But some authors
prefer to differentiate the two terms.
A goal is considered to be an open-ended statement of what one wants to accomplish with
no quantification of what is to be achieved and no time criteria for its completion. For example, a
simple statement of “increased profitability” is thus a goal, not an objective, because it does not
state how much profit the firm wants to make. Objectives are the end results of planned activity.
They state what is to be accomplished by when and should be quantified. For example,
“increase profits by 10% over the last year” is an objective.
As may be seen from the above, “goals” denote what an organization hopes to accomplish
in a future period of time. They represent a future state or outcome of the effort put in now.

“Objectives” are the ends that state specifically how the goals shall be achieved. In this
sense, objectives make the goals operational. Objectives are concrete and specific in contrast to
goals which are generalized. While goals may be qualitative, objectives tend to be mainly
quantitative, measurable and comparable.
Some writers, however, have reversed the usage, referring to objectives as the desired long-
term results and goals as the desired short-term results. And still others use the terms
interchangeably, meaning one and the same. These authors view that, little is gained from semantic
distinctions between goals and objectives. The important thing is to recognize that the results an
enterprise seeks to achieve vary as to both scope and time-frame.
To avoid confusion, it is better to use the single term “objectives” to refer to the
performance targets and results an organization seeks to attain. We can use the adjectives long-
term (long-range) and short-term (short-range) to identify the relevant time-frame, and try to
describe their intended scope and level in the organization, by using expressions like broad
objectives, functional objectives, corporate objectives etc.

Some of the areas in which a company might establish its goals and objectives are:
1. Profitability (net profit)
2. Efficiency (low costs, etc)
3. Growth (increase in sales etc)
4. Shareholder wealth (dividends etc)
5. Utilization of resources (return on investment)
6. Market leadership (market share etc)

Stated vs. Operational Goals

Operational goals are the real goals of an organization. Stated goals are the official goals
of an organization. Operational goals tell us what the organization is trying to do, irrespective of
what the official goals say the aims are. Official goals generally reflect the basic philosophy of
the company and are expressed in abstract terminology, for example, ‘sufficient profit’, ‘market
leadership’ etc.
According to Charles Perrow, the following are the important operational goals:
1. Environmental Goals: An organization should be responsive to the broader concerns of
the communities in which it operates, and should have goals that satisfy people in then external
environment. For example, goals like customer satisfaction and social responsibility may be
important environmental goals.
2. Output Goals: Output goals are related to the identification of customer needs. Issues like what
markets should we serve, which product lines should be followed, etc. are examples of output
goals.
3. System Goals: These goals relate to the maintenance of the organization itself. Goals like
growth, profitability, stability etc. are examples.
4. Product Goals: These goals relate to the nature of products delivered to customers. They
define quantity, quality, variety, innovativeness of products.
5. Derived Goals: These goals relate to derived or secondary areas like contribution to political
activities, promoting social service institutions etc.

Objectives
Objectives are the results or outcomes an organization wants to achieve in pursuing its
basic mission. The basic purpose of setting objectives is to convert the strategic vision and mission
into specific performance targets. Objectives function as yardsticks for tracking an organization’s
performance and progress.
Characteristics of Objectives
Well – stated objectives should be:
1. Specific
2. Quantifiable
3. Measurable
4. Clear
5. Consistent
6. Reasonable
7. Challenging
8. Contain a deadline for achievement
9. Communicated, throughout the organisation

Role of Objectives
Objectives play an important role in strategic management. They are essential for strategy
formulation and implementation because:
1. They provide legitimacy
 2. They state direction
3. They aid in evaluation
4. They create synergy
5. They reveal priorities
6. They focus coordination
7. They provide basis for resource allocation
8. They act as benchmarks for monitoring progress
9. They provide motivation
Nature of Objectives
The following are the characteristics of objectives:

Hierarchy of Objectives
In a multi – divisional firm, objectives should be established for the overall company as well
as for each division.
Objectives are generally established at the corporate, divisional and functional levels, and as
such, they form a hierarchy. The zenith of the hierarchy is the mission of the organization. The
objectives at each level contribute to the objectives at the next higher level.

Long-range and Short-range Objectives

Organizations need to establish both long-range and short-range objectives (Long–range
means more than one year, and short–range means one year and less.) Short-range objectives
spell out the near – term results to be achieved. By doing so, they indicate the speed and the
level of performance aimed at each succeeding period. Short – range objectives can be identical
to long– range objectives if an organization is performing at the targeted long-term level (for
example, 20% growth - rate every year). The most important situation where short-range
objectives differ from the long-range objectives occurs when managers cannot reach the long-range
target in just one year, and are trying to elevate organizational performance. Short–range
objectives (one – year goals) are the means for achieving long range objectives. A company that
has an objective of doubling its sales within five years can’t wait until the third or fourth year of its
five-year strategic plan. Short range objectives then serve as stepping-stones or milestones.

Multiplicity of Objectives
Organizations pursue a number of objectives. At every level in the hierarchy, objectives are
likely to be multiple.
Example: The marketing division may have the objective of sales and distribution of
products. This objective can be broken down into a group of objectives for the product,
distribution, research and promotion activities. To describe a single, specific goal of an
organization is to say very little about it. It turns out that there are several goals involved.
 This may be due to the fact that the enterprise has to meet internal as well as external
challenges effectively. Moreover, no single objective can place the organization on a path of
prosperity and progress in the long run.
However, an organization should not set too many objectives. If it does, it will lose focus.
Too many objectives have a number of problems.

Examples: (a) They dilute the drive for accomplishment

(b) Minor objectives get highlighted to the detriment of major objectives
There is no agreement to the number of objectives that a manager can effectively handle.
But, if there are so many that none receives adequate attention, the execution of objectives
becomes ineffective; there is a need to be cautious. It will be wise to identify the relative
importance of each objective, in case the list is not manageable.
Network of Objectives
Objectives form an interlocking network. They are inter-related and inter-dependent. The
implementation of one may impact the implementation of the other. If there is no consistency
between company objectives, people may pursue goals that may be good for their own function
but detrimental to the company as a whole. Therefore, objectives should not only “fit” but also
reinforce each other. As observed by Koontz et al., “it is bad enough when goals do not support
and interlock with one another. It may be catastrophic when they interfere with one another.”

References :
Books:
1. A A. Thompson and AJ. Strickland, Strategic Management, Business Publications, Texas, 1984.
2. Adapted from Pearce JA and Robinson RB, Strategic Management, McGraw Hill, NY, 2000.
3. Fred R. David, Strategic Management – Concepts and Cases, Pearson Education Inc., 2005.
4. Ian Palmer, Richard Dunford and Gib Akin, Managing Organisational Change, Tata McGraw-Hill,
New Delhi, 1957.
Online links:
1. www.1000ventures.com/business.../strategy_formulation
2. www.articlesbase.com/.../strategy-formulation-and-implementation
3. www.birnbaumassociates.com/strategy-implementation
4. www.csun.edu/~hfmgt001/formulation
5. http://edweb.sdsu.edu/courses/edtec540/objectives/difference.html
6. www.missionstatements.com
7. http://sbinfocanada.about.com/od/businessplanning/g/missionstatemen.htm
Name ____________________________Year & Section____________Date:____________ Score:_____

Activity 1. Self -Assessment

Fill in the blanks: ( 2pts. each answer).

1. Strategy formulation is the process of determining appropriate courses of action for

achieving organizational _________________.
2. The most wonderful strategy in the history of the world is useless if not
________________ successfully.
3. Corporate strategy involves___________________ kinds of initiatives.
4. Strategy formulation includes defining the ____________________, specifying achievable
_______________, developing __________________ and setting policy guidelines.
5. Corporate vision is a short, succinct, and inspiring statement of what the organization
intends to ________________________and to ________________________
6. __________________ basic characteristics distinguish functional strategies from
corporate level and business level strategies.
7. Competitive Strategy is concerned with creating and maintaining a competitive
___________________ in each and every area of business.
8. Lack of vision is associated with organizational __________________ and
______________
9. __________________ of business vision means that it should include innovative
possibilities for dramatic organizational improvement.
10. A business vision should be________________ it should be able to paint a picture of the
kind of company the management is trying to create.
Name ____________________________Year & Section____________Date:____________ Score:_____

Activity 2. Review Questions: Answer the question

comprehensively. ( 10
pts. each).

1. Do you think business vision should be reviewed and upgraded after every few years?
Justify your answer by giving suitable opinions.
2. Do you think business vision should be reviewed and upgraded after every few
years? Justify your answer by giving suitable opinions.
3. When is a good time to formulate strategy? Explain with reasons according to
your understanding.
4. "Employees have a greater role to play in formulating strategy". Explain and cite example.
5. "Mission describes the present and vision the future". With this statement in
mind compare mission and vision statements.
6. Are goals and objectives the same thing? Justify your answer. Discuss the unique
characteristics of goals and objectives.
7. Suppose you are going to open a new mobile device manufacturing company. Prepare
a mission statement for your company. (Try and include as many elements mentioned in
the lesson as possible)

Name ____________________________Year & Section____________Date:____________ Score:_____

Activity # 3 Reflections

Two (2) things I found interesting in Module 3 . (Explain.)

How can I maintain or improve my class rank in this subject?

________________________________________________________
________________________________________________________
________________________________________________________
________________________________________________________
_________
Module 3- External Assessment
This module deals with external assessment, the concept of environment and industry
analysis and the use of Porter’s theory.
At the end of this module students will be able to:
1. Realize the concept of environment
2. Discuss porter's five forces theory
3. Explain the concept of industry analysis
4. Discuss environment scanning
Introduction

At a time of fast growth, rapid changes and cut throat comatetion as exists in about all
industries, it is a challenge for the companies to establish a strategic agenda for dealing with these
contending currents and to grow despite them.

A company must understand how the above currents work in its industry and how they
affect the company in its particular situation. For this a very useful tool is used by the analysts. The
name of this tool is external analysis.

External assessment is a step where a firm identifies opportunities that could benefit it and
threats that it should avoid. It includes monitoring, evaluating, and disseminating of information
from the external and internal environments to key people within the corporation.

3.1 Concept of Environment

Environment literally means the surroundings, external objects, influences or circumstances
under which someone or something exists. The environment of any organization is “the aggregate
of all conditions, events and influences that surround and affect it.” Davis, K, The Challenge of
Business, (New York: McGraw Hill, 1975), p. 43. Environment refers to all external forces which
have a bearing on the functioning of business.

Jauch and Gluecke has defined environment as “The environment includes factors outside
the firm which can lead to opportunities or a threat to the firm. Although there are many factors the
most important of the sectors are socio-economic, technological, supplier, competitor and govt.”
Example: Land Bank of the Philippines took advantage of the new takeover and
merger codes and acquired Postal Savings Bank besides many other small takeovers and mergers (ABSCBN
News,2017).
The new entrepreneurs of the Philippine business are those who predicted the changes in
the environment and reacted accordingly. Avin Ong Of the Fredly Group of Companies, Leandro
Leviste of Solar Philippines, Georgianna Carlos of Fetch! Naturals , Earl Patrick Forsales and Zahra
Halabizas Zanjani of Co- founders of Cubo are some of them(wwwTop10asiaorg, 2019).
 Even a small businessman who plans to open a small shop as a general merchant in his
town needs to study the environment before deciding where he wants to open his shop, the
products he intend to sell and what brands he wants to stock.
The relation between a business and an environment is not a one way affair. The business
also equally influences the external environment and can bring about changes in it. Powerful
business lobbies for instance, actively work towards changing government policies. The business
environment is not all about the economic environment but also about the social and political
environment.

Importance of Business Environment

1. Environment is Complex: The environment consists of a number of factors,

events, conditions and influences arising from different sources.
All these interact with each other to create new sets of influences.
2. It is Dynamic: The environment by its very nature is a constantly changing one.
The varied influences operating upon it impart dynamism to it and cause
it to continually change its shape and character.
3. Environment is multi -faceted: The same environmental trend can have
different effects on different industries. For instance, GATS is an
opportunity for some companies but a threat for others.
4. It has a far-reaching impact: The environment has a far-reaching impact
on organizations in that the growth and profitability of an organization
depends critically on the environment in which it exists.
5. Its impact on different firms with in the same industry differs: A change
in environment may have different bearings on various firms operating in
the same industry. In the pharmaceutical industry in India, for instance,
the impact of the new IPR (Intellectual Property Rights) law will different
for research-based pharmacy companies such as Ranbaxy and Dr.Reddy’s
Lab and will be different for smaller pharmacy companies.
6. It may be an opportunity as well as a threat to expansion: Developments
in the general environment often provide opportunities for expansion
in terms of both products and markets.

7. Changes in the environment can change the competitive scenario:

General environmental changes may alter the boundaries of an industry
and change the nature of its competition.

8. Sometimes developments are difficult to predict with any degree of accuracy:

Macroeconomic developments such as interest rate fluctuations, the rate
 of inflation, and exchange rate variations are extremely difficult to predict
on a medium or a long term basis. On the other hand, some trends
such as demographic and income levels can be easy to forecast.

3.2 Porter’s Five Force Analysis Notes

In 1979, the Harvard Business Review published the article “How Competitive Forces
Shape Strategy” by the Harvard Professor Michael Porter. It started a revolution in the
strategy field.
In subsequent decades, “Porter’s five forces” have shaped a generation of academic
research and business practice. This unit explores how competitive analysis can be done
using Porter’s five forces model.

3.2.1 The Five Forces

In essence, the job of the strategist is to understand and cope with competition.
However, managers define competition too narrowly, as if it occurs only among today’s
direct competitors. Yet competition for profits goes beyond established industry rivals. It
includes four other competitive forces as well: customers, suppliers, potential entrants and
substitutes.

The Five Forces model developed by Michnal E. Porter has been the most commonly
used analytical tool for examining competitive environment. According to this model, the
intensity of competition in an industry depends on five basic forces. These five forces are:
1. Threat of new entrants
2. Intensity of rivalry among industry competitors
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Threat of substitute products and services.
Each of these forces affects a firm’s ability to compete in a given market. Together,
they determine the profit potential for a particular industry. To understand industry
competition and profitability, one must analyze the industry’s underlying structure in terms
of the five forces, as shown in the Figure 3.1
 Figure 3.1
3.2.2 Forces that Shape Competition
The configurations of the five forces differ from industry to industry.
For example in the market for commercial aircraft, fierce rivalry among existing competitors
(i.e. Airbus and Boeing) and the bargaining power of buyers of aircrafts are strong, while the threat
of entry, the threat of substitutes, and the power of suppliers are more benign. Thus, the strongest
competitive force or forces determine the profitability of an industry and becomes the most important
to strategy formulation.

1. The Threat of New Entrants: The first of Porter’s Five Forces model is the threat of
new entrants. New entrants bring new capacity and often substantial resources to an
industry with a desire to gain market share. Established companies already operating in an
industry often attempt to discourage new entrants from entering the industry to protect
their share of the market and profits. Particularly when big new entrants are diversifying
from other markets into the industry, they can leverage existing capabilities and cash flows
to shake up competition. Pepsi did this when it entered the bottled water industry, Microsoft
did when it began to offer internet browsers, and Apple did when it entered the music
distribution business.
The threat of new entrants, therefore, puts a cap on the profit potential of an industry.
When the threat is high, existing companies hold down their prices or boost
investment to deter new competitors. And the threat of entry in an industry depends on the
height of entry barriers (i.e. factors that make it costly for new entrants to enter industry)
that are present and on the retaliation from the entrenched competitors. If entry barriers
are low and newcomers expect little retaliation, the threat of entry is high and industry
profits will be moderate. It is the threat of entry, not whether entry actually occurs, that
holds down profitability.

2. Barriers to entry: Entry barriers depend on the advantages that existing companies
have relative to new entrants. There are seven major sources:
 (a) Economies of scale: These are relative cost advantages associated with large volumes
of production that lower a company’s cost structure. The cost of product per unit declines as
the volume of production increases. This discourages new entrants to enter on a large scale.
If the new entrant decides to enter on a large-scale to obtain economies of scale, it has to
bear high risks associated with a large investment.

Example: In microprocessors, existing companies such as Intel are protected by economies

of scale in research, chip fabrication and consumer marketing.

(b) Product differentiation: Brand loyalty is buyer’s preference for the differentiated products of
any established company. Strong brand loyalty makes it difficult for new entrants to take market
share away from established companies. It reduces threat of entry because the task of breaking
down well-established customer preferences is too costly for them.
(c) Capital requirements: The need to invest large financial resources in order to compete can
deter new entrants. Capital may be necessary not only for fixed assets, but also to extend customer
credit, build inventories and fund start-up losses. The barrier is particularly great if the capital is
required for unrecoverable expenditure, such as up-front advertising or research and development.
While major corporations have the financial resources to invade almost any industry, the capital
requirements in certain fields limit the pool of likely entrants. It is important not to overstate the
degree to which capital requirements alone deter entry; if industry returns are attractive and are
expected to remain so, and if capital markets are efficient, investors will provide new entrants with
the funds they need.
For example, in airlines industry, financing is available to purchase expensive
aircrafts because of their resale value, and that is why there have been a number of new
airlines in almost every region.

(d) Switching costs: Switching costs are the one-time costs that a customer has to bear to switch
from one product to another. When switching costs are high, customers can be locked up in the
existing product, even if new entrants offer a better product. Thus, the higher the switching costs
are, the higher is the barrier to entry. Enterprise Resource Planning (ERP) software is an example of
a product with very high switching costs. Once a company has installed SAP’s ERP system, the costs
of moving to a new vendor are astronomical.

(e) Access to distribution channels: The new entrant’s need to secure distribution channel for
the product can create a barrier to entry. The established companies have already tied up with
distribution channels. For example, a new food item may have to displace others from the
supermarket shelf via price breaks, promotions, intense selling efforts or some other means. The
more limited the wholesale or retail channels are, tougher will be the entry into an industry.
Sometimes, if the barrier is so high, a new entrant must create its own distribution channels as
Timex did in the watch industry in the 1950s.
(f) Cost disadvantages independent of size: Some existing companies may have advantages
other than size or economies of scale. These are derived from:
(i) Proprietary technology
(ii) Preferential access to raw material sources
(iii) Government subsidies
(iv) Favorable geographical locations
(v) Established brand identities
(vi) Cumulative experience

New entrants may not have these advantages.

(g) Government policy: Historically, government regulations have constituted a major entry
barrier into many industries. The government can limit or even foreclose
entry into industries, with such controls as license requirements and limits on access
to raw materials. The liberalization policy of the Indian government relating to
deregulation, delicensing and decontrol of prices opened up the economy to many
new entrepreneurs.
3. Expected Retaliation: How new entrants believe that the existing companies may react will
also influence their decision to enter or stay out of an industry. If reaction is vigorous and
protracted enough, the profit potential in the industry can fall below the cost of capital for all
participants. Existing companies often use public statements to send massages to new entrants
about their commitment to defending market share.
4. Intensity of Rivalry among Competitors: The second of Porter’s Five-Force model is the
intensity of rivalry among established companies within an industry.
Rivalry means the competitive struggle between companies in an industry to gain market
share from each other. Firms use tactics like price discounting, advertising campaigns, new product
introductions and increased customer service or warranties. Intense rivalry lowers prices and raises
costs. It squeezes profits out of an industry.
The intensity of rivalry is greatest under the following conditions:
(a) Numerous competitors or equally powerful competitors: When there are many
competitors in an industry or if the competitors are roughly of equal size and power, the intensity of
rivalry will be more. Any move by one firm is matched by an equal countermove. In such situations
rivals find it hard to avoid poaching business.
(b) Slow industry growth: Slow industry growth turns competition into fight because the only
path to growth is to take sales away from a competitor.
(c) High fixed but low marginal costs: This creates intense pressure for competitors to cut
prices below their average costs even close to their marginal costs, to steal customers.
Example: Many paper and aluminum businesses suffer from this problem, especially if demand is
not growing.

(d) Lack of differentiation or switching costs: If products or services of rivals are nearly
identical and there are few switching costs, this encourages competitors to cut prices to win new
customers. Years of airline price wars reflect these circumstances in that industry.
(e) Capacity augmentation in large increments: If the only way a manufacturer can increase
capacity is in a large increment, such as building a new plant, it will run that new plant at full
capacity to keep its unit costs low. Such capacity additions can be very disruptive to the
supply/demand balance and cause the selling prices to fall throughout the industry.
(f) High exit barriers: Exit barriers keep a company from leaving the industry. Exit barriers can
be economic, strategic or emotional factors that keep firms competing even though they may be
earning low or negative returns on their investments. If exit barriers are high, companies become
locked up in a non-profitable industry where overall demand is static or declining. Excess capacity
remains in use, and the profitability of healthy competitors suffers as the sick ones hang on.

5. Bargaining power of buyers: The third of Porter’s five competitive forces is the bargaining
power of buyers. Bargaining power of buyers refers to the ability of buyers to bargain down prices
charged by firms in the industry or driving up the costs of the firm by demanding better product
quality and service. By forcing lower prices and raising costs, powerful buyers can squeeze profits
out of an industry.
Thus, powerful buyers should be viewed as a threat. Alternatively, if buyers are in a weak
bargaining position, the firm can raise prices, cut costs on quality and services and increase their
profit levels. Buyers are powerful if they have more negotiation leverage than the firms in the
industry, using their clout primarily to pressure price reductions. According to Porter, buyers are
most powerful under the following conditions:

(a) There are few buyers: If there are few buyers or each one does bulk purchases, then they
have more bargaining power. Large buyers are particularly powerful in industries like
telecommunication equipment, off-shore drilling, and bulk chemicals. High fixed costs and low
marginal costs increase the pressure on rivals to keep capacity filling through discounts.

(b) The products are standard or undifferentiated: If the products purchased from the firm
are standard or undifferentiated, the buyers can easily find alternative sources of supplies. Then
buyers can play one company against the other, as in commodity grain markets.
(c) The buyer faces low switching costs: Switching costs lock the buyer to a particular firm. If
switching costs are low, buyers can easily switch from one firm’s product to another.
(d) The buyer earns low profits: If the buyer is under pressure to trim its purchasing costs, the
buyer is price sensitive and bargains more.
(e) The quality of buyer’s products: If the quality of buyer’s product is little affected by
industry’s products, buyers are more prices sensitive. Most of the above sources of buyer power can
be attributed to consumers as a group as well as to industrial and commercial buyers. The buying
power of retailers is determined by the same factors, with one important addition. Retailers can
gain significant bargaining power over manufacturers when they can influence consumers.
Purchasing decisions as they do in audio components, jewellery, appliances, sporting goods etc.,
are examples.
6. Bargaining power of suppliers: The fourth of Porter’s Five Forces model is the bargaining
power of suppliers. Suppliers are companies that supply raw materials, components, equipment,
machinery and associated products. Powerful suppliers make more profits by charging higher
prices, limiting quality or services or shifting the costs to industry participants. Powerful suppliers
squeeze profits out of an industry and thus, they are a threat.
For example, Microsoft has contributed to the erosion of profitability among PC makers
by raising prices on operating systems. PC makers, competing fiercely for customers, have
limited freedom to raise their prices accordingly.

A supplier’s bargaining power will be high under the following conditions:

(a) Few suppliers: When the supplier group is dominated by few companies and is more
concentrated than the firms to whom it sells, an industry is called concentrated. The suppliers can
then dictate prices, quality and terms.
(b) Product is differentiated: When suppliers offer products that are unique or differentiated or
built-up switching costs, it cuts off the firm’s options to play one supplier against the other. For
example, pharmaceutical companies that offer patented drugs with distinctive medical benefits have
more power over hospitals, drug buyers etc.
(c) Dependence of supplier group on the firm: When suppliers sell to several firms and the
firm does not represent a significant fraction of its sales, suppliers are prone to exert power. In
other words, the supplier group does not depend heavily on the industry for revenues. Suppliers
serving many industries will not hesitate to extract maximum profits from each one. If a particular
industry accounts for a large portion of a supplier group’s volume or profit, however, suppliers will
want to protect the industry through reasonable pricing.
(d) Importance of the product of the firm: When the product is an important input to the
firm’s business or when such inputs are important to the success of a firm’s manufacturing process
or product quality, the bargaining power of suppliers is high.
(e) Threat of forward integration: When the supplier poses a credible threat of integrating
forward, this provides a check against the firm’s ability to improve the terms by which it purchases.
(f) Lack of substitutes: The power of even large, powerful suppliers can be checked if they
compete with substitutes. But, if they are not obliged to compete with substitutes as they are not
readily available, the suppliers can exert power.

7. Threat of substitute products: The fifth of Porter’s Five Forces model is the threat of
substitute products. A substitute performs the same or a similar function as an industry’s product.
Video conferences are a substitute for travel. Plastic is a substitute for aluminum.
E-mail is a substitute for a mail. All firms within an industry compete with industries
producing substitute products.
 For example, companies in the coffee industry compete indirectly with those in the tea and
soft drink industries because all these serve the same need of the customer for refreshment price
that companies in one industry can charge for their product. If the price of coffee rises too much
relative to that of tea or soft drink, coffee drinkers may switch to those substitutes.
(a) It offers an attractive price and performance: The better the relative value of the
substitute, the worse is the profit potential of the industry. For example, long distance telephone
service providers suffered with the advent of Internet-based phone services.

(b) The buyer’s switching costs to the substitutes is low: For example, switching from a
proprietary, branded drug to a generic drug usually involves minimum switching costs.

3.3 Industry Analysis

Each business operates among a group of firms that produce competing products or services
known as an “industry”. An industry is thus a group of firms producing similar products or services.
By similar products we mean products that customers perceive to be substitutes for one another.

Example: Firms that produce and sell textiles such as Reliance Textiles, Raymond,
S. Kumars etc. belong to the textile industry. Similarly, firms that produce PCs, such as
Apple, Compaq, AT&T, IBM, etc. belong to the microcomputer industry.

3.3.1 Framework for Industry Analysis

Industry analysis covers two important components:
1. Industry environment 2. Competitive environment
The following are the aspects to be covered in the above analysis:
Industry Analysis
1. Industry features
2. Industry boundaries
3. Industry environment
4. Industry structure
5. Industry performance
6. Industry practices
7. Industry attractiveness
8. Industry prospects for future
Competitive Analysis
Competitive analysis basically addresses two questions:
1. Which firms are our competitors?
2. What factors shape competition in industry?

1. Industry Features: Industries differ significantly. So, analyzing a company’s industrybegins

with identifying the industry’s dominant economic features and forming a picture of the industry
landscape. An industry’s dominant economic features include such factors as:
(a) Overall size
(b) Market growth rate
(c) Geographic boundaries of the market
 (d) Number and sizes of competitors
(e) Pace of technological change
(f) Product innovations etc.

Getting a handle on an industry features promotes understanding of the kinds of strategic

moves that managers should employ.
For example, in industries characterized by one product advance after another, a strategy of
continuous product innovation becomes a condition for survival. Example: Video games, computers
and pharmaceuticals.

2. Industry Boundaries: All the firms in the industry are not similar to one another. Firmswithin
the same industry could differ across various parameters, such as:
(a) Breadth of market
(b) Product/service quality
(c) Geographic distribution
(d) Level of vertical integration
(e) Profit motives
3. Industry Environment: Based on their environment, industries are basically of two types:
(a) Fragmented Industries: A fragmented industry consists of a large number of small or medium-
sized companies, none of which is in a position to determine industry price. Many fragmented
industries are characterized by low entry barriers and commodity type products that are hard to
differentiate.
(b) Consolidated Industries: A consolidated industry is dominated by a small number of large
companies (an oligopoly) or in extreme cases, by just one company (a monopoly). These
companies are in a position to determine industry prices. In consolidated industries, one company’s
competitive actions or moves directly affect the market share of its rivals, and thus their
profitability. When one company cuts prices, the competitors also cut prices. Rivalry increases as
companies attempt to undercut each other’s prices or offer customers more value in their products,
pushing industry profits down in the process. The consequence is a dangerous competitive spiral.

According to Michael Porter, industries can be categorized into:

Emerging industries: Are those in the introductory and growth phases of their life cycle.
Mature industries: Are those who reached the maturity stage of their life cycle.
Declining industries: Are those in the transition stage from maturity to decline.
Global industries: Are those with manufacturing bases and marketing operations in several
countries.
Competition varies during each stage of industry life cycle.
4. Industry Structure: Defining an industry’s boundaries is incomplete without an understanding
of its structural attributes. Structural attributes are the enduring characteristics that give an industry
its distinctive character.
Industry structure consists of four elements:
(a) Concentration, (b) Economies of scale, (c) Product differentiation, (d) Barriers to entry.
(a) Concentration: It means the extent to which industry sales are dominated by only a few
firms. In a highly concentrated industry (i.e. an industry whose sales are dominated by a handful of
firms), the intensity of competition declines over time.
High concentration serves as a barrier to entry into an industry, because it enables
the firms to hold large market shares to achieve significant economies of scale.
(b) Economies of scale: This is an important determinant of competition in an industry. Firms
that enjoy economies of scale can charge lower prices than their competitors, because of their
savings in per unit cost of production. They also can create barriers to entry by reducing their prices
temporarily or permanently to deter new firms from entering the industry.
(c) Product differentiation: Real perceived differentiation often intensifies competition among
existing firms.
(d) Barriers to entry: Barriers to entry are the obstacles that a firm must overcome to enter an
industry, and the competition from new entrants depends mostly on entry barriers.

5. Industry attractiveness: Industry attractiveness is dependent on the following factors:

(a) Profit potential
(b) Growth prospects
(c) Competition
(d) Industry barriers etc.

As a general proposition, if an industry’s profit prospects are above average, the industry
can be considered attractive; if its profit prospects are below average, it is considered unattractive.
If the industry and competitive situation is assessed as attractive, firms employ strategies to expand
sales and invest in additional facilities as needed to strengthen their long-term competitive position
in business. If the industry is judged as unattractive, firms may choose to invest cautiously, look for
ways to protect their profitability. Strong companies may consider diversification into more
attractive businesses. Weak companies may consider merging with a rival to bolster market share
and profitability.

6. Industry performance: This requires an examination of data relating to:

(a) Production
(b) Sales
(c) Profitability
(d) Technological advancements etc.

7. Industry practices: Industry practices refer to what a majority of players in the industry do
with respect to products, pricing, promotion, distribution etc. This aspect involves issues relating to:
(a) Product policy
(b) Pricing policy
(c) Promotion policy
 (d) Distribution policy
(e) R&D policy
(f) Competitive tactics.
8. Industry’s future prospects: The future outlook of an industry can be anticipated based on
such factors as:
(a) Innovation in products and services
(b) Trends in consumer preferences
(c) Emerging changes in regulatory mechanisms
(d) Product life cycle of the industry
(e) Rate of growth etc.

3.4 Competitive Analysis

The degree of competition in an industry is influenced by a number of forces. To establish a
strategic agenda for dealing with these forces and grow despite them, a firm must understand:
1. How these forces work in an industry?
2. How they affect the firm in its particular situation?

The essence of strategy formulation is coping with competition. Intense competition in an

industry is neither a coincidence nor a bad luck. It is rooted in its underlying economics. There are
two theories of economics – theory of monopoly and theory of perfect competition. These represent
two extremes of industry competition. In a monopoly context, a single firm is protected by barriers
to entry, and has an opportunity to appropriate all the profits generated in the industry.
In a “perfectly competitive” industry, competition is unbridled and entry to the industry is
easy. This kind of industry structure, of course, offers the worst prospects for long-run profitability.
The weaker the forces collectively, however, the greater the opportunity for superior performance
in terms of profit.
According to Porter, “each industry’s attractiveness or profitability potential is a direct
function of the interactions of various environmental forces that determine the nature of
competition”.
Buyers, suppliers, new entrants and substitute products are all competitive forces. The state
of competition in an industry is shaped by these forces. The collective strength of these forces
determines the ultimate profit potential of an industry. It ranges from intense in certain industries
to mild in certain industries.
Whatever their collective strength, the corporate strategist’s goal is to find a position in the
industry where his or her company can best defend itself against these forces or can influence them
in its favour. The strategist must delve below the surface and analyze the underlying sources of
competition. Knowledge of these underlying sources of competition helps:
1. To provide the groundwork for a strategic agenda.
2. To highlight the competitive strengths and weaknesses of the company.
3. To animate the positioning of the company in its industry.
4. To clarify the areas where strategic changes may yield the greatest payoff and
5. To highlight the sources of greatest significance, either as opportunity or thereat.
 Understanding these sources will also help in considering areas for diversification. The
strongest competitive forces determine the profitability of an industry; so, competitive analysis is of
crucial importance in strategy formulation.

3.5 Environmental Scanning

Environmental analysis or scanning is the process of monitoring the events and evaluating
trends in the external environment, to identify both present and future opportunities and threats
that may influence the firm’s ability to reach its goals. Strategists need to analyze a variety of
different components of the external environment, identify “ Key Players” within those domains, and
be very cognizant of both threats and opportunities within the environment. It is from such an
analysis that managers can make decisions on whether to react to, ignore, or try to influence or
anticipate future opportunities and threats discovered.
The main purpose of environmental scanning is therefore to find out the correct “ fit”
between the firm and its environment, so that managers can formulate strategies to take advantage
of the opportunities and avoid or reduce the impact of threats.

3.5.1 Features of Environmental Analysis

In the context of a changing environment, the process of environmental analysis is very well
comparable to the functions of radar. From this analogy, it is possible to derive three important
features of the process of environmental analysis (Ian Wilson).

Holistic Exercise
Environmental analysis is a holistic exercise in the sense that it must comprise a total view
of the environment rather than a piecemeal view of trends. It is a process of looking at the forest,
rather than the trees.

Continuous Activity
The analysis of environment must be a continuous process rather than a one – shot deal.
Strategists must keep on tracking shifts in the overall pattern of trends and carry out detailed
studies to keep a close watch on major trends.

Exploratory Process
Environmental analysis is an exploratory process. A large part of the process seeks to
explore the unknown terrain and the dimensions of possible future. The emphasis must be on
speculating systematically about alternative outcomes, assessing probabilities, questioning
assumptions and drawing rational conclusions.

3.5.2 Techniques of Environmental Scanning

 It was discussed that the constituents of macro and operating environment and how these
can become a threat or opportunity. In a firm a corporate strategist, has to identify the impact of
these environmental forces on firm’s choice of direction and action. Environmental analysis involves
two phases, viz; information gathering and evaluation. Glueck and Jauch mention the following
sources for environmental analysis:
1. Verbal and written information: Verbal information is generally obtained by direct talk with
people, by attending meetings, seminars etc, or through media. Written or documentary
information includes both published and unpublished material.
2. Search and scanning: This involves research for obtaining the required information.
3. Spying: Although it may not be considered ethical, spying to get information about competitor’s
business is not uncommon.
4. Forecasting: This involves estimating the future trends and changes in the environment.
There are many techniques of forecasting. It can be done by the corporate planners or consultants.
For the above purpose, firms use a number of tools and techniques depending on their
specific requirements in terms of quality, relevance, cost etc.
Some of the techniques which are generally used for carrying out environmental analysis
are:
1. PESTEL analysis, 2. SWOT analysis, 3. ETOP, 4. QUEST, 5. EFE Matrix, 6. CPM
7. Forecasting techniques
(a) Time series analysis
(b) Judgmental forecasting
(c) Expert opinion
(d) Delphi’s technique
(e) Multiple scenario
(f) Statistical modelling
(g) Cross-impact analysis
(h) Brainstorming
(i) Demand/hazard forecasting
The above techniques are briefly discussed below:

PESTEL Analysis
PESTEL Analysis is a checklist to analyse the political, economic, socio-cultural,
technological, environmental and legal aspects of the environment.
While doing PESTEL analysis, it is better to have three or four well-thought-out items that are
justified with evidence than a lengthy list. Although the items in a PESTEL analysis rely on past
events and experience, the analysis can be used as a forecast of the future. The past is history and
strategic management is concerned with future action, but the best evidence about the future may
derive from what happened in the past. It is worth attempting the task of deciphering this hidden
assumption anyway.
For example, when the Warner Brothers invested several hundred million dollars in the first
Harry Porter film, they made an assumption that the fantasy film market would remain attractive
throughout the world. A structured PESTEL analysis might have given the same outcome even
though it is difficult to predict.
SWOT Analysis

ETOP---Environmental Threats and Opportunities Profile (ETOP) gives a summarized picture

of environmental factors and their likely impact on the organization. ETOP is generally
prepared as follows.

1. List environmental factors: The different aspects of the general as well as relevant
environmental factors are listed. For example, economic environment can be divided into
rate of economic growth, rate of inflation, fiscal policy etc.
2. Assess impact of each factor: At this stage, the impact of each factor is assessed
closely and expressed in qualitative (high, medium or low) or quantitative factors (1, 2, 3).
It is to be noted that not all identified environmental factors will have the same degree of
impact. The impact is assessed as positive or negative.
3. Get a big picture: In the final stage, the impact of each factor and its importance is
combined to produce a summary of the overall picture.

Forecasting Techniques
Macro environmental and industry scanning and analysis are only marginally useful if
what they do is to reveal current conditions. To be truly useful, such analysis must forecast
future trends and changes. Forecasting is a way of estimating the future events that are
likely to have a major impact on the enterprise. It is a technique whereby managers try to
predict the future characteristics of the environment to help managers take strategic
decisions. Various techniques are used to forecast future situations. Important among these
are:
1. Time series analysis: Extrapolation is the most widely practiced form of forecasting.
Simply stated, extrapolation is the extension of present trends into the future. It rests on the
assumption that the world is reasonably consistent and changes slowly in the short run.
They attempt to carry a series of historical events forward into the future. Because
time series analysis projects historical trends into the future, its validity depends on the
similarity between past trends and future conditions.
2. Judgmental forecasting: This is a forecasting technique in which employees,
customers, suppliers etc., serve as a source of information regarding future trends.
For example, sales representatives may be asked to forecast sales growth in various product
categories based on their interaction with customers. Survey instruments may be mailed to
customers, suppliers or trade associations to obtain their judgments on specific trends.

3. Expert opinion: This is a non-quantitative technique in which experts in a particular

area attempt to forecast likely developments. Knowledgeable people are selected and asked
to assign importance and probability rating to various future developments. This type of
forecast is based on the ability of a knowledgeable person to construct probable future
developments on the interaction of key variables. The delphi technique is one such
technique.

4. Delphi Technique: This is a forecasting technique in which the opinion of experts in the
appropriate field is obtained about the probability of the occurrence of specified events. The
responses of the experts are compiled and a summary is sent to each expert. This process is
repeated until consensus is arrived at regarding the forecast of a particular event.
5. Statistical modelling: It is a quantitative technique that attempts to discover causal
factors that link two or more time series together. They use different sets of equations.
Regression analysis and other econometric methods are examples. Although very useful for
grasping historical trends, statistical modelling is based on historical data. As the patterns of
relationships change, the accuracy of the forecast deteriorates.
6. Cross-impact Analysis: By this analysis, researchers analyze and identify key trends
that will impact all other trends. The question is then put: “If event A occurs, what will be
the impact on all other trends”. The results are used to build “domino chains”, with one
event triggering others.
7. Brainstorming: Brainstorming is a technique to generate a number of alternatives by a
group of 6 to 10 persons. The basic ground rule is to propose ideas without first mentally
evaluating them. No criticism is allowed. Ideas tend to build on previous ideas until a
consensus is reached. This is a good technique to create ideas.
8. Demand/Hazard forecasting: Researchers identify major events that would greatly
affect the firm. Each event is rated for its convergence with several major trends taking
place in society and its appeal to a group of the public; the higher the event’s convergence
and appeal, the higher its probability of occurring.

REFERENCES

Books :
1. Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic Management–Creating
Competitive Advantage, McGraw-Hill, 2003.
2. Michael Porter, How Competitive Forces Shape Strategy, Harvard Business
Review, 1979.
3. John Parnell, Strategic Management – Theory and Practice, Atomic Dog Publishing. USA,
2003.
4. Pearce JA and Robinson RB, Strategic Management, Mc Graw Hill, NY, 2000.
5. VS Ramaswamy and S.Namakumari, Strategic Planning, Macmillan, New Delhi, 1999.

Online links:
1. www.businessballs.com/portersfiveforcesofcompetition.
2. www.investopedia.com/terms/i/industrylifecycleanalysis
3. www.iimcal.ac.in/community/consclub/reports/ITAndITES
 Name ___________________Year & Section_______Date:______ Score:_____

ACTIVITY #1 Self – Assessment

Fill in the blanks: write your answer on the space provided.

1. At the level of marketing strategy, a competitor has four variables: ____________,

______________, ____________ and _________________.
2. Competitors' reactions can be studied at________________ levels.
3. The five forces and strategic group models present a _____________picture of
competition while emphasizing the role of______________________.
4. The shakeout stage ends when the industry enters its __________________stage.
5. Under the shakeout stage,________________ are forced out, and a small number of
industry leaders emerge.
6. The ___________represents all the players in the game and analyses how their
interactions affect the firm's ability to generate and appropriate value.
7. Buyers, suppliers, new entrants and substitute products are all ___________forces.
8. A primary industry may be considered as a group of _____________, whereas a
secondary industry includes_____________,
9. ______________, ____________ and ____________are essential for conducting an
environmental survey.
10. Analyzing a company's industry begins with identifying the industry's dominant
________________features.

Name ___________________Year & Section_______Date:______ Score:_____

 ACTIVITY #2 Review Questions: Answer each question
comprehensively. ( 5 points each)

1. "The five forces model provides the rationale for increasing or decreasing
Resources Commitment".
2. Are there any disadvantages in using Porter's five forces model? Elucidate the pros
And cons of using the model.
3. "The five forces theory is a short-sighted theory". Why/why not?
4. Discuss Industry analysis using Porter's five forces theory.
5. Present at least 7 points to highlight the importance of industry analysis.

Activity # 3 Reflections

Two (2) things I found interesting in Module 3. ( Please support your answer.)

1.

How can I maintain or improve my class rank in

this subject?
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
______________________________________
 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

Module 4: Organizational Appraisal: The Internal Assessment

This module deals with internal analysis; it identifies and discusses the SWOT Analysis.
At the end of this module students will be able to:
1. State the importance of internal analysis
2. Discuss SWOT analysis
Introduction
Internal analysis is also referred to as “internal appraisal”, “organisational audit”,
“internal corporate assessment” etc. Over the years, research has shown that the overall
strengths and weaknesses of a firm’s resources and capabilities are more important for a
strategy than environmental factors. Even where the industry was unattractive and generally
unprofitable, firms that came out with superior products enjoyed good profits.
Managers perform internal analysis to identify the strengths and weaknesses of a
firm’s resources and capabilities. The basic purpose is to build on the strengths and
overcome the weaknesses in order to avail of the opportunities and minimize the effects of
threats. The ultimate aim is to gain and sustain competitive advantage in the marketplace.

4.1 Importance of Internal Analysis

Strategic management is ultimately a “matching game” between environmental
opportunities and organizational strengths. But, before a firm actually starts tapping the
opportunities, it is important to know its own strengths and weaknesses. Without this
knowledge, it cannot decide which opportunities to choose and which ones to reject. One of
the ingredients critical to the success of a strategy is that the strategy must place “realistic”
requirements on the firm’s resources.
The firm therefore cannot afford to go by some untested assumptions or gut
feelings. Only systematic analysis of its strengths and weaknesses can be of help. This is
accomplished in internal analysis by using analytical techniques like RBV, SWOT analysis,
Value chain analysis, Benchmarking, IFE Matrix etc.
Thus, systematic internal analysis helps the firm:
1. To find where it stands in terms of its strengths and weaknesses
2. To exploit the opportunities those are in line with its capabilities
3. To correct important weaknesses
4. To defend against threats
5. To asses capabilities gaps and take steps to enhance its capabilities.
This exercise is also the starting point for developing the competitive advantage
required for the survival and growth of the firm.

4.2 SWOT Analysis

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SWOT stands for strengths, weaknesses, opportunities and threats. SWOT analysis is
a widely used framework to summaries a company’s situation or current position. Any
company undertaking strategic planning will have to carry out SWOT analysis: establishing
its current position in the light of its strengths, weaknesses, opportunities and threats.
Environmental and industry analyses provide information needed to identify opportunities
and threats, while internal analysis provides information needed to identify strengths and
weaknesses.
These are the fundamental areas of focus in SWOT analysis. SWOT analysis stands
at the core of strategic management. It is important to note that strengths and weaknesses
are intrinsic (potential) value creating skills or assets or the lack thereof, relative to
competitive forces. Opportunities and threats, however, are external factors that are not
created by the company, but emerge as a result of the competitive dynamics caused by
‘gaps’ or ‘crunches’ in the market.
It was highlighted from the previous lesson the meaning of the terms opportunities,
threats, strengths and weaknesses. We revisit the same for purposes of SWOT analysis.

1. Opportunities: An opportunity is a major favorable situation in a firm’s environment.

Examples include market growth, favourable changes in competitive or regulatory
framework, technological developments or demographic changes, increase in demand,
opportunity to introduce products in new markets, turning R&D into cash by licensing or
selling patents etc. The level of detail and perceived degree of realism determine the extent
of opportunity analysis.

2. Threats: A threat is a major unfavorable situation in a firm’s environment.

Examples include increase in competition; slow market growth, increased power of
buyers or suppliers, changes in regulations etc. These forces pose serious threats to a
company because they may cause lower sales, higher cost of operations, higher cost of
capital, inability to make break-even, shrinking margins or profitability etc. Your competitor’s
opportunity may will be a threat to you.

3. Strengths: Strength is something a company possesses or is good at doing.

Examples include a skill, valuable assets, alliances or cooperative ventures,
experienced sales force, easy access to raw materials, brand reputation etc. Strengths are
not a growing market, new products, etc.

4. Weaknesses: A weakness is something a company lacks or does poorly.

Examples include lack of skills or expertise, deficiencies in assets, inferior capabilities
in functional areas etc. Though weaknesses are often seen as the logical ‘inverse’ of the
company’s threats, the company’s lack of strength in a particular area or market is not
necessarily a relative weakness because competitors may also lack this particular strength.
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4.2.1 Carrying out SWOT Analysis

The first thing that a SWOT analysis does is to evaluate the strengths and
weaknesses in terms of skills, resources and competencies. The analyst then should see
whether the internal capabilities match with the demands of the key success factors. The
job of a strategist is to capitalize on the organization’s strengths while minimizing the effects
of its weaknesses in order to take advantage of opportunities and overcome threats in the
environment.

4.2.2 Steps in SWOT Analysis

The three important steps in SWOT analysis are:
1. Identification, 2. Conclusion 3. Translation

1. Identification:
(a) Identify company resource strengths and competitive capabilities
(b) Identify company resource weaknesses and competitive deficiencies
(c) Identify company’s opportunities
(d) Identify external threats
2. Conclusion:
(a) Draw conclusions about the company’s overall situation
3. Translation: Translate the conclusions into strategic actions by acting on them:
(a) Match the company’s strategy to its strengths and opportunities
(b) Correct important weaknesses
(c) Defend against external threats

In devising a SWOT analysis, there are several factors that will enhance the quality
of the material:
1. Keep it brief, pages of analysis are usually not required.
2. Relate strengths and weaknesses, wherever possible, to industry key factors for
success.
3. Strengths and weaknesses should also be stated in competitive terms, that is, in
comparison with competitors.
4. Statements should be specific and avoid blandness.
5. Analysis should reflect the gap, that is, where the company wishes to be and
where it is now.
6. It is important to be realistic about the strengths and weaknesses of one’s own
and competitive organizations.

TOWS Matrix.
TOWS matrix is just an extension of SWOT matrix. TOWS stand for threats,
opportunities, weaknesses and strengths. This matrix was proposed by Heinz Weihrich as
a strategy formulation – matching tool.
TOWS matrix illustrates how internal strengths and weaknesses can be matched with
external opportunities and threats to generate four sets of possible alternative strategies.
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This matrix can be used to generate corporate as well as business strategies. To generate a
TOWS matrix, the following steps are to be followed:
1. List external opportunities available in the company’s current and future
environment, in the ‘opportunities block’ on the left side of the matrix.
2. List external threats facing the company now and in future in the “threats block”
on the left side of the matrix.
3. List the specific areas of current and future strengths for the company, in the
“strengths block” across the top of the matrix.
4. List the specific areas of current and future weaknesses for the company in the
“weaknesses box” across the top of the matrix.
5. Generate a series of possible alternative strategies for the company based on
particular combinations of the four sets of factors.

The four sets of strategies that emerge are:

SO Strategies
SO strategies are generated by thinking of ways in which a company can use its
strengths to take advantage of opportunities. This is the most desirable and advantageous
strategy as it seeks to mass up the firm’s strengths to exploit opportunities. For example,
Hindustan Lever has been augmenting its strengths by taking over businesses in the food
industry, to exploit the growing potential of the food business.

ST Strategies
ST strategies use a company’s strengths as a way to avoid threats. A company may
use its technological, financial and marketing strengths to combat a new competition.
For example, Unilever has been employing this strategy to fight the increasing
competition from companies like Colgate and Palmolive Co., Procter & Gamble etc.

WO Strategies
WO Strategies attempt to take advantage of opportunities by overcoming its
weaknesses.
For example, for textile machinery manufacturers in Philippines the main weakness
was dependence on foreign firms for technology and the long- time taken to execute an
order. The strategy followed was the thrust given to ABC Marketing to develop indigenous
technology so as to be in a better position to exploit the opportunity of growing demand for
textile machinery.

WT Strategies
WT Strategies are basically defensive strategies and primarily aimed at minimizing
weaknesses and avoiding threats.
For example, managerial weakness may be solved by change of managerial
personnel, training and development etc. Weakness due to excess manpower may be
addressed by restructuring, downsizing, and delayering and voluntary retirement schemes.
External threats may be met by joint ventures and other types of strategic alliances.
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4.2.3 Critical Assessment of SWOT Analysis

SWOT analysis is one of the most basic techniques for analyzing firm and industry
conditions. It provides the “raw material” for analyzing internal conditions as well as external
conditions of a firm. SWOT analysis can be used in many ways to aid strategic analysis.
For example, it can be used for a systematic discussion of a firm’s resources and
basic alternatives that emerge from such an analysis. Such a discussion is necessary
because strength to one firm may be a weakness for another firm, and vice-versa. For
example, increased health consciousness of people is a threat to some firms (e.g. tobacco)
while it is an opportunity to others (e.g. health clubs).
According to Johnson and Sholes (2002), a SWOT analysis summarizes the key
issues from the business environment and the strategic capability of an organization that
impacts strategy development. This can also be useful as a basis for judging future courses
of action. The aim is to identify the extent to which the current strengths and weaknesses
are relevant to, and capable of, dealing with the changes taking place in the business
environment. It can also be used to assess whether there are opportunities to exploit further
the unique resources or core competencies of the organization. Overall, SWOT analysis
helps focus discussion on future choices and the extent to which the company is capable of
supporting its strategies.

4.2.4 Advantages and Limitations

Advantages
1. It is simple.
2. It portrays the essence of strategy formulation: matching a firm’s internal strengths and
weaknesses with its external opportunities and threats.
3. Together with other techniques like Value Chain Analysis and RBV, SWOT analysis
improves the quality of internal analysis.
Limitations
1. It gives a static perspective, and does not reveal the dynamics of competitive
environment.
2. SWOT emphasizes a single dimension of strategy (i.e. strength or weakness) and ignores
other factors needed for competitive success.
3. A firm’s strengths do not necessarily help the firm create value or competitive advantage.
4. SWOT’s focus on the external environment is too narrow.

REFERENCES
Books:
1. AA. Thompson and AJ. Strickland, Strategic Management, Business Publications,
Texas, 1984.
2. Francis Cherunilam, Strategic Management, Himalaya Publishing Home, 1998.
3. Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy, 6th Edition, Pearson
Education Ltd., 2002.
4. Michael Porter, Competitive Advantage, Free Press, New York.
Online links:
1. mystrategicplan.com/resources/internal-and-external-analysis
2. www.quickmba.com/strategy/swot
 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

Name ___________________Year & Section_______Date:______

Score:_____

ACTIVITY #1 Self – Assessment

Fill in the blanks: Write your answer on the space provided

1. SWOT stands for _______________, ____________, ___________and

______________.
2. An ______________ is a major favorable situation in a firm's environment.
3.____________ is something a company possesses or is good at doing.
4. SWOT Analysis provides the "raw material" for analyzing ______________and
_________________ conditions of a firm.
5. _________________portrays the essence of strategy formulation.

Name ___________________Year & Section_______Date:______ Score:_____

ACTIVITY #2 Review Questions: Answer each question

comprehensively. ( 5 points each)

1. Suppose you are newly appointed CEO of Insurance Company. How would you
perform the internal analysis to identify the resources and capabilities of the firm?
2. Examines the role of internal analysis in strategy formulation.
3. What points would you keep in mind to enhance the quality of the material while
Devising a SWOT Analysis?
4. "SWOT Analysis portrays the essence of strategy formulation". Expound.
5. How would you carry out SWOT analysis for a software and electronic media
company?
6. Critically assess the significance of SWOT Analysis in Strategic Management.
7. Is it not enough for a company to analyze its own strengths and weaknesses?
Justify
Your answer
8. "SWOT analysis stands at the core of strategic management". Substantiate
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Name ___________________Year & Section_______Date:______ Score:_____

ACTIVITY #3 Case Study: Answer by applying the theories learned

in the lesson.

You are the CEO of a footwear manufacturing company. Your company

manufactures shoes and sandals for both the sexes. The designs of the shoes and
sandals have not changed over the years. Your shoes sold like hot cakes in early
2000s but now the sales have declined heavily. Analyze the situation and suggest
appropriate solutions to get the company back on track.

Activity # 4 Reflections

Two (2) things I found interesting in Module 4. ( Please support your answer.)

1.

How can I maintain or improve my class rank in

this subject?
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
______________________________________
 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

Module 5- Organizational Appraisal: Internal Assessment 2

This module deals with Organizational Appraisal discusses the strategy and culture,
value chain analysis, organizational capability factors and the concept of benchmarking.
At the end of this module students will be able to:
1. Realize the concept between strategy and culture
2. Discuss value chain analysis
3. Identify organizational capability factors
4. Describe the concept of benchmarking

Introduction
In the previous unit, we discussed about SWOT analysis which is a very important
tool of carrying out internal analysis. In this unit we are going to learn the other tools that
help a company conduct their internal analysis. The corporate level internal analysis is about
identifying your businesses value proposition or core competencies. These are sometimes
referred to as your core capabilities; strategic competitive advantages or competitive
advantage these terms all represent essentially the same thing. The reason for completing
an internal analysis is to allow you to create an exclusive market position.
5.1 Strategy and Culture
An organization’s culture can exert a powerful influence on the behaviour of all
employees. It can, therefore, strongly affect a company’s ability to adopt new strategies. A
problem for a strong culture is that a change in mission, objectives, strategies or policies is
not likely to be successful if it is in opposition to the culture of the company. Corporate
culture has a strong tendency to resist change because its very existence often rests on
preserving stable relationships and patterns of behaviour.
For example, the male-dominated Japanese cantered corporate culture
of the giant Mitsubishi Corporation created problems for the company when it implemented
its growth strategy in North America. The alleged sexual harassment of its female
employees by male supervisors resulted in lawsuits and a boycott of the company’s
automobiles by women activists.

‘FIT’ between Strategy and Culture

A culture grounded in values, practices and behavioural norms that match what is
needed for good strategy implementation; helps energize people throughout the company to
do their jobs in a strategy supportive manner. But when the culture is in conflict with some
aspects of the company’s direction, performance targets, or strategy, the culture becomes a
stumbling block.
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Thus, an important part of managing the strategy implementation process is

establishing and nurturing a good ‘fit’ between culture and strategy.

Assessing Strategy – Culture Match

When implementing a new strategy, a company should take time to assess strategy-
culture compatibility by considering the following questions:
1. Is the planned strategy compatible with the company’s current culture? If not,
2. Can the culture be easily modified to make it more compatible with the new
strategy? If not,
3. Is management willing and able to make major organisational changes and likely
increase in costs? If not,
4. Is management still committed to implement the strategy? If not,
5. Formulate a different strategy. If yes,
6. Manage cultural change.

Matching Strategy with Culture

When matching strategy with culture, it is important to understand:
1. There is no ‘best’ and ‘worst’ culture. The issue is how well the culture matches
and supports the strategy of the organization. Cultural mismatches are likely to occur
when organizations are trying to adapt a new strategy.
2. This matching of strategy and culture is likely to become embedded over a period
of time. That is, key elements of the strategy and the culture will reinforce each
other gradually. In other words, the relationship between strategy and culture is
usually self-perpetuating, each matching and reinforcing the other over a period of
time.
3. In many organizations, cohesiveness of culture is found at levels below the
corporate entity. There is a continuing debate about the extent to which
cohesiveness or diversity of culture is strength or a weakness of the organizations.

5.7.2 Value Chain Analysis

Every organization consists of a chain of activities that link together to develop the
value of the business. They are basically purchasing of raw materials, manufacturing,
distribution, and marketing of goods and services. These activities taken together form its
value chain. The value chain identifies where the value is added in the process and links it
with the main functional parts of the organization.
It is used for developing competitive advantage because such chains
tend to be unique to an organization. It then attempts to make an assessment of the
contribution that each part makes to the overall added value of the business.
Essentially, Porter linked two areas together:
1. The added value that each part of the organisation contributes to the whole
organization; and
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2. The contribution that each part makes to the competitive advantage of the whole
organization.

In a company with more than one product area, the analysis should be conducted at
the level of product groups, not at corporate strategy level.
Value Chain thus views the organization as a chain of value-creating activities. Value
is the amount that buyers are willing to pay for what a product provides them. A firm is
profitable to the extent the value it receives exceeds the total cost involved in creating its
products. Creating value for buyers that exceeds the cost of production (i.e. margin) is a key
concept used in analyzing a firm’s competitive position.

According to Porter, customer value is derived from three basic sources.

1. Activities that differentiate the product
2. Activities that lower its costs
3. Activities that meet the customer’s need quickly.

Competitive advantage, argues Michael Porter (1985), can be understood only by

looking at a firm as a whole, and cost advantages and successful differentiation are found in
the chain of activities that a firm performs to deliver value to its customers.

5.8 Analysis
According to Porter, value chain activities are divided into two broad categories,
1. Primary activities 2. Support activities

1. Primary activities contribute to the physical creation of the product or service, its sale
and transfer to the buyer and its service after the sale.
2. Support activities include such activities as procurement, HR etc. which either add
value by themselves or add value through primary activities and other support activities.
Advantage or disadvantage can occur at any one of the five primary and four secondary
activities, which together form the value chain for every firm.

1. Primary Activities
Inbound Logistics
These activities focus on inputs. They include material handling, warehousing,
inventory control, vehicle scheduling, and returns to suppliers of inputs and raw
materials.
Operations
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These include all activities associated with transforming inputs into the final
product, such as production, machining, packaging, assembly, testing, equipment
maintenance etc.

Outbound Logistics
These activities are associated with collecting, storing, physically distributing
the finished products to the customers. They include finished goods warehousing,
material handling and delivery, vehicle operation, order processing and scheduling.
Marketing and Sales
These activities are associated with purchase of finished goods by the
customers and the inducement used to get them buys the products of the company.
They include advertising, promotion, sales force, channel selection, channel relations
and pricing.
Services
This includes all activities associated with enhancing and maintaining the
value of the product. Installation, repair, training, parts supply and product
adjustment are some of the activities that come under services.

Support Activities
Procurement
Activities associated with purchasing and providing raw materials, supplies and other
consumable items as well as machinery, laboratory equipment, office equipment etc.
Porter refers to procurement as a secondary activity, although many purchasing
gurus would argue that it is (at least partly) a primary activity. Included are such activities
as purchasing raw materials, servicing, supplies, negotiating contracts with suppliers,
securing building leases and so on.
Technology Development
Activities relating to product: Example HP, R&D, process HP,R&D, process design
improvements, equipment design, computer software development etc.
Human Resource Management
Activities associated with recruiting, hiring, training, development, compensation,
labor relations, development of knowledge-based skills etc.
Firm Infrastructure
Activities relating to general management, organizational structure, strategic
planning, financial and quality control systems, management information systems etc.
Johnson and Sholes (2002) observe that few organizations undertake all activities from
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production of raw materials to the point–of–sale of finished products themselves. But, the
value chain exercise must incorporate the whole process, that is, the entire value system.
For example, that even if an organization does not produce its own raw materials,
it must nevertheless seek to identify the role and impact of its supply sources on the final
product. Similarly, even if it is not responsible for after-sales service, it must consider
how the performances of those who deliver the service contribute to overall
product/service cost and quality.
5.9 Conducting a Value Chain Analysis
Value chain analysis involves the following steps.

1. Identify Activities
The first step in value chain analysis is to divide a company’s operations into specific
activities and group them into primary and secondary activities. Within each category, a firm
typically performs a number of discrete activities that may reflect its key strengths and
weaknesses.
2. Allocate Costs Allocate Costs
The next step is to allocate costs to each activity. Each activity in the value chain
incurs costs and ties up time and assets. Value chain analysis requires managers to assign
costs and assets to each activity. It views costs in a way different from traditional cost
accounting methods. The different method is called activity-based costing.

3. Identify the Activities that Differentiate the Firm

Scrutinizing the firm’s value chain not only reveals cost advantages or disadvantages,
but also identifies the sources of differentiation advantages relative to competitors.
4. Examine the Value Chain
Once the value chain has been determined, managers need to identify the activities
that are critical to buyer satisfaction and market success. This is essential at this stage of
the value chain analysis for the following reasons:
1. If the company focuses on low-cost leadership, then managers should keep a strict vigil
on costs in each activity. If the company focuses on differentiation, advantage given by each
activity must be carefully evaluated.
2. The nature of value chain and the relative importance of each activity within it, vary from
industry to industry.
3. The relative importance of value chain can also vary by a company’s position in a broader
value system that includes value chains of upstream suppliers and downstream distributors
and retailers.
4. The interrelationships among value-creating activities also need to be evaluated.
The final basic consideration in applying value chain analysis is the need to use a
comparison when evaluating a value activity as a strength or weakness. In this connection,
RBV and SWOT analysis will supplement the value chain analysis.

To get the most out of the value-chain analysis, as already noted, one needs to view
the concept in a broader context. The value chain must also include the firm’s suppliers,
customers and alliance partners. Thus, in addition to thoroughly understanding how value is
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created within the organization, one must also know how value is created for other
organizations involved in the overall supply chain or distribution channel in which the firm
participates. Therefore, in assessing the value chains there are two levels that must be
addressed.

1. Interrelationships among the activities within the firm.

2. Relationships among the activities within the firm and with other organizations
that are a part of the firm’s expanded value chain.

5.9.1 Usefulness of the Value Chain Analysis

The value chain analysis is useful to recognize that individual activities in the overall
production process play an important role in determining the cost, quality and image of the
end-product or service. That is, each activity in the value chain can contribute to a firm’s
relative cost position and create a basis for differentiation, which are the two main sources
of competitive advantage.

Porter identified the following as the most important cost and value drivers:
Cost Drivers
1. Economies of scale
2. Pattern of capacity utilization (including the efficiency of production processes and labor
productivity)
3. Linkages between activities (for example, timing of deliveries affect storage costs, just-in
-time system minimizes inventory costs)
4. Interrelationships (for example, joint purchasing by two units reduces input costs)
5. Geographical location (for example, proximity to supplies reduces input costs)
6. Policy choices (such as the choices on the product mix, the number of suppliers used,
wage costs, skills requirements and other human resource policies affect costs)
7. Institutional factors (which include political and legal factors, each of which can have a
significant impact on costs).

Value Drivers
Value drivers are similar to cost drivers, but they relate to other features (other than
low price) valued by buyers. Identifying value derivers comes from understanding customer
requirements, which may include:
1. Policy choices (choices such as product features, quality of input materials, provision of
customer services and skills and experience of staff).
2. Linkages between activities (for example, between suppliers and buyers; sales and after
sales staff).
The cost and value drivers vary between industries. The value chain concept shows
that companies can gain competitive advantage by controlling cost or value drivers and/or
reconfiguring the value chain, that is, a better way of designing, producing, distributing or
marketing a product or service. For example, Philippine Airlines has become one of the
most profitable airlines in the Philippines through concentrating on the parts of its value
chain, such as ticket transaction costs, no frills etc.
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5.9.2 Organizational Capability Factors

Organizations capabilities lie in its resources. The resources are the means by which
an organization generates value. It is this value that is then distributed for various purposes.
Resources and capabilities of a firm can be best explained with the help of Resource
Based View (RBV) of a firm which is popularized by Barney. RBV considers the firm as a
bundle of resources – tangible resources, intangible resources, and organizational
capabilities. Competitive advantage, according to this view, generally arises from the
creation of bundles of distinctive resources and capabilities.

5.9.3 Resources
A ‘resource’ can be an asset, skill, process or knowledge controlled by an
organization. From a strategic perspective, an organization’s resources include both those
that are owned by the organization and those that can be accessed by the organization to
support its strategies. Some strategically important resources may be outside the
organization’s ownership, such as its network of contacts or customers.
Typically, resources can be grouped into four categories:
1. Physical resources include plant and machinery, land and buildings, production
capacity etc.
2. Financial resources include capital, cash, debtors, creditors etc.
3. Human resources include knowledge, skills and adaptability of human resources.
4. Intellectual capital is an intangible resource of an organization.

This includes the knowledge that has been captured in patents, brands, business
systems, customer databases and relationships with partners. In a knowledge-based
economy, intellectual capital is likely to be the major asset of many organizations.

Capabilities
Resources are not very productive on their own. They need organizational
capabilities. Organizational capabilities are the skills that a firm employs to transform inputs
into outputs. They reflect the ability of the firm in combining assets, people and processes
to bring about the desired results.
Prahalad and Hamel describe an organizational competence as a “bundle of skills and
technologies”, which are integrated in people skills and business processes. Capabilities are,
therefore a function of the firm’s resources, their application and organization, internal
systems and processes, and firm specific skill sets. Capabilities are rarely unique, and can be
acquired by other firms as well in that industry. Some of these capabilities may become
“distinctive competencies”, when a firm performs them better than its rivals.

Core Competence
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Superior performance does not merely come from resources alone because they can
be imitated or traded. Superior performance comes by the way in which the resources are
deployed to create competences in the organization’s activities. For example, the knowledge
of an individual will not improve an organization’s performance unless he or she is allowed
to work on particular tasks which exploit that knowledge.
Core competences are activities or processes that are critically required by an
organization to achieve competitive advantage. In order to achieve this advantage, core
competences must fulfill the following criteria. It must be:
1. an activity or process that provides customer value in the product or service
features.
2. an activity or process that is significantly better than competitors.
3. an activity or process that is difficult for competitors to imitate.

Using Resources to Gain Competitive Advantage: Grant proposes a five-step resource

based approach to strategy analysis.
1. Identify and classify the firm’s resources in terms of strengths and weaknesses.
2. Combine the firm’s strengths into specific capabilities.
3. Appraise the profit potential of these resources and capabilities.
4. Select the strategy that best exploits the firm’s resources and capabilities relative to
external opportunities.
5. Identify resource gaps and invest in overcoming weaknesses.

5.9.4 Strategic Importance of Resources

Johnson and Sholes (2002 ) explain the strategic importance of resources with the
concept of ‘strategic capability’. According to them, strategic capability is the ability of an
organization to put its resources and capabilities to the best advantage so as to enable it to
gain competitive advantage. There are three type of resources:

Available Resources
Strategic capability depends on the resources available to an organization because it
is the resources used in the activities of the organization that create competences. As
already explained above, resources can be typically grouped under four headings: Physical
resources, human resources, financial resources and intellectual capital.

Threshold Resources
A set of basic resources are needed by a firm for its existence and survival in the
marketplace. These resources are called ‘threshold resources’. But this threshold tends to
increase with time. So, a firm needs to continuously improve this threshold resource base
just to stay in business.
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Unique Resources
Unique resources are those resources that are critically required to achieve
competitive advantage. They are better than competitors’ resources and are difficult to
imitate. The ability of an organization to meet the critical success factors in a particular
market segment depends on these unique resources.
To illustrate unique resources, Johnson and Sholes quote the example of some
libraries having unique collection of books, which contain knowledge not available
elsewhere, and the example of retail stores located in prime locations, which can charge
higher than average prices. Similarly, some organizations have patented products or services
that are unique, which give them advantage.
5.9.5 Critical Success Factors
Critical Success Factors (CSFs) are defined as the resources, skills and attributes of
an organization that are essential to deliver success in the market place. CSFs are also called
“Key Success Factors” (KSFs) or “Strategic Factors”. They are the key factors which are
critical for organizational success and survival.
Critical success factors will vary from one industry to another.
For example, in the perfume and cosmetics industry, the critical success factors
include branding, product distribution and product performance, but are unlikely to
include low labor costs, which is a very important CSF for steel companies. CSFs can be
used to identify elements of the environment that are particularly worth exploring.

Importance of Critical Success Factors

The Japanese strategist Kenichi Ohamae, the former head of the management
consultants Mc Kinsey, in Japan, has suggested that the CSFs (or key success factors, as he
calls them) are likely to deliver the company’s objectives. He argues that, when resources of
capital, labor and time are scarce, it is important that they should be concentrated on the
key activities of the firm, that is, those activities that are considered most important to the
delivery of whatever the organization
regards as success.
Ohamae treats CSFs as a basic business strategy for competing wisely in any
industry. He suggests identifying the CSFs in an industry or business and then to “inject
resources into the most important business functions.” The aim is to invest in the parts of
the company that matter most for its success.
Rockart (1979) has applied the CSFs approach to several organizations through a
three step process for determining CSFs. These steps are:
1. Generate CSFs (asking, What does it take to be successful in business?)
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2. Convert CSFs into objectives (asking, “What should the organization’s goals and
objectives be with respect to CSFs)
3. Set Performance standards (asking “How will we know whether the organization has
been successful in this factor?”) Rockart has also identified four major sources of CSFs:
1. Structure of the industry: Some CSFs are specific to the structure of the industry. For
example, the extent of service support expected by the customers. Automobile companies
have to invest in building a national network of authorized service stations to ensure service
delivery to their customers.
2. Competitive strategy, industry position and geographic location: CSFs also arise
from the above factors. For example, the large pool of English-speaking manpower makes
Filipino an attractive location for outsourcing the BPO needs of American and British firms.
3. Environmental factors: CSFs may also arise out of the general/business environment
of a firm, like the deregulation of Indian Industry. With the deregulation of
telecommunications industry, many private companies had opportunities of growth.
4. Temporal factors: Certain short-term organizational developments like sudden loss of
critical manpower (like the charismatic CEO) or break-up of the family owned business, may
necessitate CSFs like “appointment of a new CEO” or “rebuilding the company image”.
Temporarily such CSFs would remain CSFs till the time they are achieved.

5.9.5 Benchmarking
Benchmarking is the process of comparing the business processes and performance
metrics including cost, cycle time, productivity, or quality to another that is widely
considered to be an industry standard benchmark or best practice.
Essentially, benchmarking provides a snapshot of the performance of a business and
helps one understand where one is in relation to a particular standard. The result is often a
business case and "Burning Platform" for making changes in order to make improvements.
Also referred to as "best practice benchmarking" or "process benchmarking", it is a
process used in management and particularly strategic management, in which organizations
evaluate various aspects of their processes in relation to best practice companies' processes,
usually within a peer group defined for the purposes of comparison.
This then allows organizations to develop plans on how to make improvements or
adapt specific best practices, usually with the aim of increasing some aspect of performance.
Benchmarking may be a one-off event, but is often treated as a continuous process in which
organizations continually seek to improve their practices.
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Types of Benchmarking
Benchmarking can be of following types:
1. Process benchmarking: the initiating firm focuses its observation and investigation of
business processes with a goal of identifying and observing the best practices from one or
more benchmark firms. Activity analysis will be required where the objective is to
benchmark cost and efficiency; increasingly applied to back-office processes where
outsourcing may be a consideration.
2. Financial benchmarking: performing a financial analysis and comparing the results in
an effort to assess your overall competitiveness and productivity.
3. Benchmarking from an investor perspective: extending the benchmarking universe
to also compare to peer companies that can be considered alternative investment
opportunities from the perspective of an investor.
4. Performance benchmarking: allows the initiator firm to assess their competitive
position by comparing products and services with those of target firms.
5. Product benchmarking: the process of designing new products or upgrades to current
ones. This process can sometimes involve reverse engineering which is taking apart
competitors’ products to find strengths and weaknesses.
6. Strategic benchmarking: involves observing how others compete. This type is usually
not industry specific, meaning it is best to look at other industries.
7. Functional benchmarking: a company will focus its benchmarking on a single function
in order to improve the operation of that particular function. Complex functions such as
Human Resources, Finance and Accounting and Information and Communication Technology
are unlikely to be directly comparable in cost and efficiency terms and may need to be
disaggregated into processes to make valid comparison.
8. Best-in-class benchmarking: involves studying the leading competitor or the company
that best carries out a specific function.
9. Operational benchmarking: embraces everything from staffing and productivity to
office flow and analysis of procedures performed.

The following is an example of a typical benchmarking methodology:

1. Identify your problem areas
2. Identify other industries that have similar processes
3. Identify organizations that are leaders in these
4. Survey companies for measures and practices
5. Visit the "best practice" companies to identify leading edge practices
6. Implement new and improved business practices

REFERENCES
Books:
1. AA. Thompson and AJ. Strickland, Strategic Management, Business Publications,
Texas, 1984.
2. Francis Cherunilam, Strategic Management, Himalaya Publishing Home, Mumbai,
1998.
3. Johnson Gerry and Sholes Kevan, Exploring Corporate Strategy, 6th Edition, Pearson
Education Ltd., 2002.
4. Michael Porter, Competitive Advantage, Free Press, New York.
Online links:
1. humanresources.about.com/.../organisationalculture/.../culture
2. www.isixsigma.com/me/benchmarking
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Name _______________________Year & Section_______Date:______ Score:_____

ACTIVITY #1 Self – Assessment

Fill in the blanks: Write your answer on the space provided.

1. An organization’s _____________________ can exert a powerful influence on the behavior

of all employees.
2. An optimal culture is one that best supports the__________ and___________ of the
company.
3. A culture grounded in ____________, ____________ and ___________ norms that match
what
is needed for good strategy implementation.
4. An important part of managing the strategy implementation process is establishing
And nurturing a good 'fit' between ____________ and____________.
5. When implementing a new strategy, a company should take time to assess
__________________.
6. Once a strategy is established, it is difficult to__________________.
7. Changing a company's culture to align it with______________ is one of the toughest
management tasks.
8. Changing culture requires both_______________ actions and_______________ actions.
9. Leaders must emphasize ___________ values through internal company communications.
10. The greater the gap between the cultures of the two firms, the__________ the
executives
in the acquired firm quit their jobs.

Name ___________________Year & Section_______Date:______ Score:_____

ACTIVITY #2 Review Questions: Answer each question

comprehensively. ( 5 points each)

1. As a strategy manager, what would you do if you find that the culture of your organization
is in conflict with company's direction and performance targets?
2. "Organization does not have a "best" or a "worst" culture". Substantiate.
3. To be a good manager, one must expertly use symbols, role models, and ceremonial
occasions to achieve the strategy culture fit. Why/why not?
4. "Integration of culture remains atop challenge in majority of mergers and acquisitions".
Why?
5. Explain the rationale behind benchmarking with the help of suitable examples.
6. Do you think that each activity in the value chain can contribute to a firm's relative cost
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position and create a basis for differentiation? Why/why not?

7. Explain the concept of value chain with the help of figure and suitable examples.
8. Conduct a value chain analysis for a computer system manufacturing company.
9. "Resources alone can't do any good for a company. " Elucidate
10. Discuss the organizational resources from a strategic point of view.

Activity # 3 Reflections

Two (2) things I found interesting in Module 5. ( Please support your answer.)

1.

How can I maintain or improve my class rank in

this subject?
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_______________________________________
_______________________________________
_______________________________________
_______________________________________
______________________________________
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Module 6: Corporate Level Strategies

This module deals with Corporate Level Strategies. It identifies and discusses the
expansion strategies: concentration, integration and diversification, internationalization, and
concept of cooperation and restructuring.

At the end of this module students will be able to:

1. Discuss the expansion strategies: concentration, integration and
diversification
2. Explain the retrenchment and combination strategies
3. State the concept of internationalization
4. Describe the concept of cooperation and restructuring

Introduction
Corporate strategy is primarily about the choice of direction for the corporation as a
whole. The basic purpose of a corporate strategy is to add value to the individual businesses
in it. A corporate strategy involves decisions relating to the choice of businesses, allocation
of resources among different businesses, transferring skills and capabilities from one set of
businesses to others, and managing and nurturing a portfolio of businesses in such a way as
to obtain synergies among product lines and business units, so that the corporate whole is
greater than the sum of its individual business units.
Managers at the corporate level act on behalf of shareholders and provide strategic
guidance to business units. In these circumstances, a key question that arises is to what
extent and how might the corporate level add value to what the businesses do; or at least
how it might avoid destroying value.
Corporate strategy is thus concerned with two basic issues:
1. What businesses should a firm compete in?
2. How can these businesses be coordinated and managed so that they create “Synergy.”
Synergy means that the whole is greater than the sum of its parts. In organizational
terms, synergy means that as separate departments within an organization co-operate and
interact, they become more productive than if each were to act in isolation. In strategic
management, the corporate parent has to create synergy among the separate business units
by effectively coordinating their activities, so that the corporate whole is greater than the
sum of the independent units.
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Synergy is said to exist for a multi-divisional corporation if the return on investment

(ROI) of each division is greater than what the return would be if each division were an
independent business.

According to Goold and Campbell, synergy can take place in one of the six forms:
1. Shared Know-how: Combined units often benefit from sharing knowledge and
skills. This is also called a leveraging of core competencies.
2. Coordinated Strategies: Aligning the business strategies of two or more business units
may provide a company with synergy by reducing competition, and developing a
coordinated response to common competitors.
3. Shared Tangible Resources: Combined units can sometimes save money by sharing
resources, such as a common manufacturing facility or Business lab.
4. Economies of Scale or Scope: Coordinating the flow of products or services of one unit
with that of another unit can reduce inventory, increase capacity utilization and improve
market access.
5. Pooled Negotiating Power: Combined units can combine their purchasing to gain
bargaining power over common suppliers to reduce costs and improve quality. The same
can be done with common distributors.
6. New Business Creation: Exchanging knowledge and skills can facilitate new products
or services by combining the separate activities in a new unit or by establishing joint
ventures among internal business units.

6.1 Expansion Strategies

Growth strategies are the most widely pursued corporate strategies. Companies that
do business in expanding industries must grow to survive. A company can grow internally by
expanding its operations or it can grow externally through mergers, acquisitions, joint
ventures or strategic alliances.

Reasons for Pursuing Growth Strategies

Firms generally pursue growth strategies for the following reasons:
1. To obtain economies of scale: Growth helps firms to achieve large-scale operations,
whereby fixed costs can be spread over a large volume of production.
2. To attract merit: Talented people prefer to work in firms with growth.
3. To increase profits: In the long run, growth is necessary for increasing profits of the
organization, especially in the turbulent and hyper–competitive environment.
4. To become a market leader: Growth allows firms to reach leadership positions in the
market. Companies such as Reliance Industries, TISCO etc. reached commanding heights
due to growth strategies.
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5. To fulfill natural urge: A healthy firm normally has a natural urge for growth. Growth
opportunities provide great stimulus to such urge. Further, in a dynamic world characterized
by the growth of many firms around it, a firm would have a natural urge for growth.
6. To ensure survival: Sometimes, growth is essential for survival. In some cases, a firm
may not be able to survive unless it has critical minimum level of business. Further, if a firm
does not grow when competitors are growing, it may undermine its competitiveness.

Categories of Growth Strategies

Growth strategies can be divided into three broad categories:
1. Intensive Strategies
2. Integration Strategies
3. Diversification Strategies

Concentration Strategies
Without moving outside the organization’s current range of products or services, it
may be possible to attract customers by intensive advertising, and by realigning the product
and market options available to the organization. These strategies are generally referred to
as intensification or concentration strategies.
By intensifying its efforts, the firm will be able to increase its sales and market share
of the current product-line faster. This is probably the most successful internal growth
strategy for firms whose products or services are in the final stages of the product life cycle.
Most of the approaches of intensive strategies deal with product-market realignments. Thus,
there are three important intensive strategies:
1. Market penetration 2. Market development 3. Product development
1. Market penetration: Market penetration seeks to increase market share for existing
products in the existing markets through greater marketing efforts. This includes activities
like increasing the sales force, increasing promotional effort, giving incentives etc. Market
penetration is generally achieved through the following three major approaches:

(a) Increasing sales to the current customers: This can be done through:
(i) Increasing the size of the purchase
(ii) Advertising other uses
(iii) Giving price incentives for increased use

For example, if customers of toothpaste who brush once a day are convinced to
brush twice a day, the sales of the product to the current consumers might almost
double.
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(b) Attracting competitor’s customers: If the firm succeeds in making the customers to
switch from the competitor’s brands to the firm’s brands, while maintaining its existing
customers intact, there will be an increase in the firm’s sales. This can be done through:
 Increasing promotional effort
 Establishing sharper brand differentiation
 Offering price cuts
(c) Attracting non-users to buy the product: If there are a significant number of non-users
of a product who could be made users of the product, there will be an opportunity to
increase market share. This can be done through:
 Inducing trial use through sampling, price incentives etc.
 Advertising new uses

2. Market Development: Market development seeks to increase market share by selling
the present products in new markets. This can be achieved through the following
approaches:
(a) By entering new geographic markets: A company, which has been confined to some part
of a country, may expand to other parts and foreign markets. Thus, market development
can be achieved through:
 Regional expansion
 National expansion
 International expansion

Example: Dunkin Donut, which was confined to local markets or some parts of the country
in the beginning, later expanded to the regional market and then to the national market.

 (b) By entering new market segments: This can be achieved through:

 Developing product versions to appeal to other segments
 Entering other channels of distribution
 Advertising in other media
Example: A Colgate and Palmolive Corp entered the low price shampoo segment by
introducing a low-priced shampoo called “Palmolive” to compete with “Sunsilk”. This
strategy will be effective when:
 New untapped or unsaturated markets exist
 New channels of distribution are available
 The firm has excess production capacity
 The firm’s industry is becoming rapidly global
 The firm has resources for expanded operations
3. Product Development: Product development seeks to increase the market share by
developing new or improved products for present markets.
This can be achieved through:
 Developing new product features
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 Developing quality variations

 Developing additional models and sizes (product proliferation)
Example: Procter and Gamble keeps on adding new brands or improved versions of
consumer products from time to time to maintain its market share. This strategy will be
effective when:

(a) The firm’s products are in maturity stage

(b) The firm witnesses one of the rapid technological developments in the industry
(c) The firm is in a high growth industry
(d) Competitors bring out improved quality products from time to time
(e) The firm has strong R&D capabilities.

Integration basically means combining activities relating to the present activity of a

firm. Such a combination can be done on the basis of the industry value chain. A company
performs a number of activities to transform an input to output.
These activities include right from the procurement of raw materials to the
production of finished goods and their marketing and distribution to the ultimate consumers.
These activities are also called value chain activities; the value chain activities of an industry
are a firm that adopts integration may move forward or backward the industry value chain.
Supply of raw materials and components, manufacturing and, Distribution and retail
network.
Expanding the firm’s range of activities backward into the sources of supply and/or
forward into the distribution channels is called “Vertical Integration”.
Thus, if a manufacturer invests in facilities to produce raw materials or component
parts that it formerly purchased from outside suppliers, it remains in the same industry, but
its scope of operations extend to two stages of the industry value chain. Similarly, if a
manufacturer opens a chain of retail outlets to market its products directly to consumers, it
remains in the same industry, but its scope of operations extend from manufacturing to
retailing.

Vertical integration can be:

1. Full integration: participating in all stages of the industry value chain.
2. Partial integration: participating in selected stages of the industry value chain.

A firm can pursue vertical integration by starting its own operations or by acquiring a
company already performing the activities it wants to bring in house. Thus, integration is
basically of two types:
1. Vertical integration and
2. Horizontal integration
Vertical Integration
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As already explained above, vertical integration involves gaining ownership or

increased control over suppliers or distributors. Vertical integration is of two types:
1. Backward Integration: Backward integration involves gaining ownership or increased
control of a firm’s suppliers. For example, a manufacturer of finished products may take over
the business of a supplier who manufactures raw materials, component parts and other
inputs. Brooke Bond’s acquisition of tea plantations is an example of backward integration.
Backward Integration increases the dependability of the supply and quality of raw materials
used as production inputs. This strategy is generally adopted when:
(a) Present suppliers are unreliable, too costly or cannot meet the firm’s needs.
(b) The firm’s industry is growing rapidly.
(c) The number of suppliers is small, but the number of competitors is large.
(d) Stable prices are important to stabilize cost of raw materials.
(e) Present suppliers are getting high profit margins.
(f) The firm has both capital and human resources to manage the new business.

2. Forward Integration: Forward integration involves gaining ownership or increased

control over distributors or retailers. For example, textile firms like Reliance, Bombay
Dyeing, JK Mills (Raymond’s) etc. have resorted to forward integration by opening their own
showrooms.

Forward Integration is generally adopted when:

 The present distributors are expensive, or unreliable or incapable of meeting
the
 firm’s needs.
 The availability of quality distributors is limited.
 The firm’s industry is growing and will continue to grow.
 The advantages of stable production are high.
 Present distributors or retailers have high profit margins.
 The firm has both the capital and human resources needed to manage the
new business.

Advantages of Vertical Integration: The following are the advantages of vertical

integration:
 Present distributors or retailers have high profit margins.
 The firm has both the capital and human resources needed to manage the
new business.

Advantages of Vertical Integration: The following are the advantages of vertical

integration:
1. A secure supply of raw materials or distribution channels.
2. Control over raw materials and other inputs required for production or distribution
channels.
3. Access to new business opportunities and technologies.
4. Elimination of need to deal with a wide variety of suppliers and distributors.
Risks
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1. Increased costs, expenses and capital requirements.

2. Loss of flexibility in investments.
3. Problems associated with unbalanced facilities or unfulfilled demand.
4. Additional administrative costs associated with managing a more complex set of
activities.

Disadvantages of Vertical Integration: The following are the disadvantages of vertical

integration
1. It boosts the firm’s capital investment.
2. It increases business risk.
3. It denies financial resources to more worthwhile pursuits.
4. It locks a firm into relying on its own in-house sources of supply.
5. It poses all kinds of capacity-matching problems.
6. It calls for radically different skills and capabilities, which may be lacked by the
manufacturer.
7. Outsourcing of component parts may be cheaper and less complicated than in-house
manufacturing.

Most of the world’s automakers, despite their expertise in automobile technology and
manufacturing, strongly feel that purchasing many of their key parts and components from
manufacturing specialists result in:
1. Higher quality
2. Lower costs
3. Greater design flexibility

Diversification Strategies
Diversification is the process of adding new businesses to the existing businesses of
the company. In other words, diversification adds new products or markets to the existing
ones. A diversified company is one that has two or more distinct businesses. The
diversification strategy is concerned with achieving a greater market from a greater range of
products in order to maximize profits. From the risk point of view, companies attempt to
spread their risk by diversifying into several products or industries.
Example: An air-conditioning company may add room-heaters in its present
product lines, or a company producing cameras may branch off into the manufacturing of
copying machines.

Diversification can be achieved through a variety of ways:

1. Through mergers and acquisitions.
2. Through joint ventures and strategic alliances.
3. Through starting up a new unit (internal development)

Thus, the first concern in diversifying is what new industries to get into and whether
to enter by starting a new business unit or by acquiring a company already in the industry or
by forming a joint venture or strategic alliance with another company. A company can
diversify narrowly into a few industries or broadly into many industries. The ultimate
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objective of diversification is to build shareholder value i.e., increasing value of the firm’s
stock.
Reasons for Diversification: The important reasons for a company diversifying their
business are:
1. Saturation or decline of the current business: If the company is faced with
diminishing market opportunities and stagnating sales in its principal business, it may
become necessary to enter new businesses to achieve growth.
2. Better opportunities: Even when the current business provides scope for further
growth, there may be better opportunities in new lines of business. A firm in a “sunset
industry” may be tempted to enter a “sunrise industry.”
3. Sharing of resources and strengths: Diversification enables companies to leverage
existing competencies and capabilities by expanding into businesses where these resources
become valuable competitive assets. By sharing production facilities, technological
capabilities, managerial expertise, distribution channels, sales force, financial resources etc.,
synergy can be obtained.
4. New avenues for reducing costs: Diversifying into closely related businesses opens
new avenues for reducing costs.
5. Technologies and products: By expanding into industries, the company can obtain
new technologies and products, which can complement its present businesses.
6. Use of brand name: Through diversification, the company can transfer its powerful and
well-known brand name to the products of other businesses.
7. Risk minimization: The big risk of a single-business firm is having all its eggs in one
industry basket. If the market is eroded by the appearance of new technologies, new
products or fast–changing consumer preferences, then a company’s prospects can quickly
diminish.
Example: Digital cameras have diminished markets for film and film processing; CD
and DVD technology has replaced cassette tapes and floppy disks and mobile phones are
dominating landline phones. Thus, there are substantial risks to single-business companies,
and diversification into other businesses minimizes this risk. But diversification itself can
become risky.

Risks of Diversification: Diversification has several risks. They are:

1. There is no guarantee that the firm will succeed in the new business. In fact, many
diversifications have been failures.
2. If the new lines of business result in huge losses, that adversely affects the main business
of the company.
3. Diversification may sometimes result in neglect of the old business.
4. Diversification may invite retaliatory moves by competitors, which may adversely affect
even the old businesses.

Types of Diversification: Broadly, there are two types of diversification:

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1. Concentric diversification. 2. Conglomerate diversification.

1. Concentric Diversification: Adding a new, but related business is called concentric

diversification. It involves acquisition of businesses that are related to the acquiring firm in
terms of technology, markets or products. The selected new business has compatibility with
the firm’s current business. The ideal concentric diversification occurs when the combined
profits increase the strengths and opportunities and decrease the weaknesses and threats.
Thus, the acquiring firm searches for new businesses whose products, markets, distribution
channels and technologies are similar to its own, and whose acquisition results in “Synergy’’.
This is possible with related diversification because companies strive to enter product
markets that share resources and capabilities with their existing business units.
Diversification must create value for shareholders. But this is not always the case.
Acquiring firms typically pay premiums when they acquire a target firm. Besides, the risks
and uncertainties are high. Why do firms still go in for diversification? The answer, in one
word, is “Synergy”.
In related diversification, synergy comes from businesses sharing tangible and
intangible resources. Additionally, firms can enhance their ‘market power’ through pooled
negotiating power. There are other advantages of concentric diversification.
Advantages
 Increases the firm’s stock value.
 Increases the growth rate of the firm.
 Better use of funds than ploughing them back into internal growth.
 Improves the stability of earnings and sales.
 Balances the product line when the life cycle of the current products has peaked.
 Helps to acquire a needed resource quickly (e.g. technology or innovative
management etc.)
 Achieves tax savings.
 Increases efficiency and profitability through synergy.
 Reduces risk.

2. Conglomerate diversification: Adding a new, but unrelated business is called

conglomerate diversification. The new business will have no relationship to the company’s
technology, products or markets. For example, ITC which is basically a cigarette
manufacturer has diversified into hotels, edible oils, financial services etc.
Similarly, Reliance Industries, which is basically a textile manufacturer, has diversified
into petro chemicals, telecommunications, retailing etc.
Unlike concentric diversification, conglomerate diversification does not result in much of
synergy. The main objective is profit motive. But it has important advantages.
Advantages
 Business risk is scattered over diverse industries.
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 Financial resources are invested in industries that offer the best profit
prospects.
 Buying distressed businesses at a low price can enhance shareholder wealth.
 Company profitability can be more stable in economic upswings and
downswings.
Disadvantages
 It is difficult to manage different businesses effectively.
 The new business may not provide any competitive advantage if it has no
strategic fits

Diversification into both Related and Unrelated Businesses: Some companies may
diversify into both related and unrelated businesses. The actual practice varies from
company to company.
There are three types of enterprises in this respect:
1. Dominant business enterprises: In such enterprises, one major “core” business
accounts for 50 to 80 per cent of total revenues and the remaining comes from small related
and unrelated businesses.
2. Narrowly diversified enterprise: These are enterprises that are diversified around a
few (two to five) related or unrelated businesses.
3. Broadly diversified enterprises: These enterprises are diversified around a wide-
ranging collection of related and unrelated businesses e.g. ITC, Reliance Industries.
Means to Achieve Integration or Diversification: Profitable growth is one of the prime
objectives of any business firm. Growth can be achieved internally or externally.
Internal growth in assets, sales and profits takes place when the firm introduces a
new product or increases the capacity for the existing products through setting up a new
plant. Increasing the capacities through internal growth takes time and involves lot of risk.
Alternatively, business firms can suddenly increase their growth rate by acquisitions,
mergers, etc. These strategies are often referred to as cooperation strategies.
As already mentioned, growth especially by way of integration or diversification can
be achieved through four basic means:
1. Mergers and acquisitions
2. Joint ventures
3. Strategic alliances
4. Internal development

5.2 Retrenchment Strategies

They are the last resort strategies. A company may pursue retrenchment strategies
when it has a weak competitive position in some or its entire product lines resulting in poor
performance – sales are down and profits are dwindling. In an attempt to eliminate the
weaknesses that are dragging the company down, management may follow one or more of
the following retrenchment strategies.
1. Turnaround 2. Divestment 3. Bankruptcy 4. Liquidation
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6.2.1 Turnaround Strategy

A firm is said to be sick when it faces a severe cash crunch or a consistent
downtrend in its operating profits. Such firms become insolvent unless appropriate internal
and external actions are taken to change the financial picture of the firm. This process of
recovery is called “turnaround strategy”.
Any successful turnaround strategy consists of three inter-related phases:
1. The first phase is the diagnosis of impending trouble. Many authors and research studies
have indicated distinct early warning signals of corporate sickness.
2. The second phase involves analyzing the causes of sickness to restore the firm on its
profit track. These measures are of both short-term and long-term nature.
3. The third and final phase involves implementation of change process and its monitoring.

John M Harris has listed a dozen danger signals of impending sickness.

1. Decreasing market share: This is the most significant symptom of a major sickness. A
company which is losing its market share to competition needs to sit up and take careful
note. Regular monitoring of market share helps companies to keep a tag on their
performance in the market vis-à-vis their competitors. Any indication of declining market
share should trigger off immediate corrective action.
2. Decreasing constant rupee sales: Sales figures, to be meaningful, should be adjusted
for inflation. If constant rupee sales figures are showing a declining trend, then this is a
danger signal to watch out.
3. Decreasing profitability: Profit figures are a good indication of a company’s health.
Care must be taken to interpret the profit figures correctly, so as to avoid any
misjudgments. Decreasing profitability can show up as smaller profits in absolute terms or
lower profits per rupee of sales or decreasing return on investment or smaller profit
margins.
4. Increasing dependence on debt: A company overly reliant on debt soon gets into a
tight corner with very few options left. A substantial rise in the amount of debt, a lopsided
debtto- equity ratio and a lowered corporate credit rating may cause banks and other
financial institutions to impose restrictions and become reluctant to lend money. Once
financial institutions are hesitant to lend money, the company’s rating on the stock market
also slides down and it becomes very difficult for the company to raise funds from the public
too.
5. Restricted dividend policies: Dividends frequently missed or restricted dividends signal
danger. Often, such companies may have earlier paid substantially higher proportion of
earnings as dividends when in fact they should have been reinvesting in the business.
Current inability to pay dividends is an indication of the gravity of the situation.
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6. Failure to reinvest sufficiently in the business: For a company to stay competitive

and keep on the fast growth track, it is essential to reinvest adequate amounts in plant,
equipment and maintenance. When a business is growing, the combination of new
investments and reinvestments often warrants borrowing. Companies which fail to recognize
this fact and try to finance growth with only their internal funds are applying brakes in the
path of growth.
7. Diversification at the expense of the core business: It is a well-observed fact that
once companies reach a particular level of maturity in the existing business, they start
looking for diversification. Often this is done at the cost of the core business, which then
starts to deteriorate and decline. Diversification in new ventures should be sought as a
supplement and not as a substitute for the primary core business.
8. Lack of planning: In many companies, particularly those built by individual
entrepreneurs, the concept of planning is generally lacking. This can often result in major
setbacks as limited thought or planning go into the actions and their consequences.
8. Lack of planning: In many companies, particularly those built by individual
entrepreneurs, the concept of planning is generally lacking. This can often result in major
setbacks as limited thought or planning go into the actions and their consequences.
9. Inflexible chief executives: A chief executive who is unwilling to listen to fresh ideas
from others is a signal of impending bad news. Even if the CEO recognises the danger
signals, his unwillingness to accept any proposal from his subordinates further blocks the
path towards recovery.
10. Management succession problems: When nearly all the top managers are in their
mid-fifties, there may be a serious vacuum at the second line of command. As these older
managers retire or leave because of perception of decreasing opportunities, there is bound
to be serious management crisis.
11. Unquestioning boards of directors: Directors, who have family, social or business
ties with the chief executive or have served very long on the board, may no longer be
objective in their judgment. Thus, these directors serve limited purpose in terms of
questioning or cautioning the CEO about his actions.
12. A management team unwilling to learn from its competitors: Companies in
decline often adopt a closed attitude and are not willing to learn anything from their
competitors. Companies which have survived tough competitive times continuously analyses
their competitors’ moves.
Types of Turnaround Strategies
Slater has classified the turnaround strategies into two broad categories. These are
strategic turnaround and operating turnaround. Whether a sick business needs strategic or
operating turn-around can be ascertained by analyzing the current strategic and operating
health of the business. The operating turnarounds are easier to carry out and can be applied
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only when there are averages to strong strategic strengths (product-market relationship) in
the business.
The operating turnaround strategies are of four types. These are:
1. Revenue-increasing strategies
2. Cost-cutting strategies
3. Asset-reduction strategies
4. Combination strategies

Turnaround Process
The process of turning a sick company into a profitable one is rather complex and
difficult. It is complex because a successful turnaround strategy demands corrective actions
in many deficient areas of the firm. It is necessary that all these actions are integrated and
do not contradict each other. The turnaround process is difficult because it involves
perceptual and attitudinal changes at all levels as far as employees are concerned. These
human change processes tend to become very sensitive when the firm is in a crisis situation.
Therefore, many a time, a change in the leadership or even an active intervention from
outside is suggested for bringing about such changes in the organization.
6.2.2 Divestment
Selling a division or part of an organization is called divestiture. This strategy is often
used to raise capital for further strategic acquisitions or investments. Divestiture is generally
used as a part of turnaround strategy to get rid of businesses that are unprofitable, that
require too much capital or that do not fit well with the firm's other activities.
Divestiture is an appropriate strategy to be pursued under the following circumstances:
1. When a business cannot be turned around
2. When a business needs more resources than the company can provide
3. When a business is responsible for a firm's overall poor performance
4. When a business is a misfit with the rest of the organization
5. When a large amount of cash is required quickly
6. When government's legal actions threaten the existence of a business.

Reasons for Divestitures

1. Poor fit of a division: When the parent company feels that a particular division within
the company cannot be managed profitably, it may think of selling the division to another
company. This does not mean the division itself is unprofitable. The other firm with greater
expertise in the line of business could manage the division more profitably.
This means the division can be managed better by someone else than the selling
company.
2. Reverse synergy: Synergy refers to additional gains that can be derived when two firms
combine. When synergy exists, the combined entity is worth more than the sum of the parts
valued separately. In other words, 2 + 2 = 5. Reverse synergy exists when the parts are
worth more separately than they are within the parent company's corporate structure. In
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other words, 2 + 2 = 3. In such a case, an outside bidder might be able to pay more for a
division than what the division is worth to the parent company.
3. Poor performance: Companies may want to divest divisions when they are not
sufficiently profitable. The division may earn a rate of return, which is less than the cost of
capital of the parent company. A division may turn out to be unprofitable due to various
reasons such as increase in the material and labour cost, decline in the demand etc.
4. Capital market factors: A divestiture may also take place because the post divestiture
firm, as well as the divested division, has greater access to capital markets. The combined
capital structure may not help the company to attract the capital from the investors. Some
investors are looking at steel companies and others may be looking for cement companies.
These two groups of investors are not interested in investing in combined company, with
cement and steel businesses due to the cyclical nature of businesses. So each group of
investors is interested in stand-alone cement or steel companies. So divestitures may
provide greater access to capital markets for the two firms as separate companies rather
than the combined corporation.
5. Cash flow factors: Selling a division results in immediate cash inflows. The companies
that are under financial distress or in insolvency may be forced to sell profitable and
valuable divisions to tide over the crisis.
6. To release the managerial talent: Sometime the management may be overburdened
with the management of the conglomerate leading to inefficiency. So they sell one or more
divisions of the company. After the divestiture, the existing management can concentrate on
the remaining businesses and can conduct the business more efficiently.
7. To correct the mistakes committed in investment decisions: Many companies in
the Philippines diversified into unrelated areas during the pre-liberalization period.
Afterwards they realized that such a diversification into unrelated areas was a big mistake.
To correct the mistake committed earlier, they had to go for divestiture. This is because
they moved into product market areas with which they had less familiarity than their existing
activities.
8. To realise profit from the sale of profitable divisions: This type of divestiture
occurs when a firm acquires under-performing businesses, makes it profitable and then sells
it to other companies. The parent company may repeat this process to make profit out of it.
9. To reduce the debt burden: Many companies sell their assets or divisions to reduce
their debt and bring the balance in the capital structure of the firm.
10. To help to finance new acquisitions: Companies may sell less profitable divisions
and buy more profitable divisions in order to increase the profitability of the company as a
whole.
Types of Divestitures
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1. Spin-off: It is a kind of demerger when an existing parent company distributes on a

prorate basis the shares of the new company to the shareholders of the parent company
free of cost. There is no money transaction, subsidiary's assets are not revalued, and
transaction is treated as stock dividend. Both the companies exist and carry on their
businesses independently after spin-off. During spin-off, a new company comes into
existence. The shareholders of the parent company become the shareholders of the new
company spun off.
The motivations for a spin-off are similar to that of divestitures.
(a) Involuntary Spin-off: When faced with an adverse regulatory ruling, a firm may be
forced to spin-off to comply with the legal formalities.
(b) Defensive Spin-off: Defensive spin-off is a takeover defence. Company may choose ton
spin-off divisions to make it less attractive to the bidder.
(c) Tax consequences of Spin-off: Shares allotted to the shareholders during spin-off is
not taxed as capital gain or as dividend. Example: ITC has spun-off hotel business from the
company and formed ITC Hotels Ltd.
2. Sell-off: It is a form of restructuring, where a firm sells a division to another company.
When the business unit is sold, payment is received generally in the form of cash or
securities.
3. Voluntary corporate liquidation or bust-ups: It is also known as complete sell-off.
The companies normally go for voluntary liquidation because they create value to the
shareholders. The firm may have a higher value in liquidation than the current market value.
Here the firm sells its assets/divisions to multiple parties which may result in a higher value
being realized than if they had to be sold as a whole. Through a series of spinoffs or sell-offs
a company may go ultimately for liquidation.
4. Equity carveouts: It is a different type of divestiture and different form of spin-off and
selloff. It resembles Initial Public Offering (IPO) of some portion of equity stock of a wholly
owned subsidiary by the parent company.
5. Leveraged buyouts (LBO's): A leveraged buyout is an acquisition of a company in
which the acquisition is substantially financed through debt. Debt typically forms 70-90% of
the purchase price. Much of the debt may be secured by the assets of the company (asset
based lending). Firms with assets that have a high collateral value can more easily obtain
such loans. So LBOs are generally found in capital intensive industries. Debt is obtained on
the basis of company's future earnings potential.

6.2.3 Bankruptcy
This is a form of defensive strategy. It allows organizations to file a petition in the court
for legal protection to the firm, in case the firm is not in a position to pay its debts. The
court decides the claims on the company and settles the corporation's obligations.
6.2.4 Liquidation
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Liquidation occurs when an entire company is dissolved and its assets are sold. It is a
strategy of the last resort. When there are no buyers for a business which wants to be sold,
the company may be wound up and its assets may be sold to satisfy debt obligations.
Liquidation becomes the inevitable strategy under the following circumstances:
1. When an organization has pursued both turnaround strategy and divestiture strategy, but
failed.
2. When an organization’s only alternative is bankruptcy. A company can legally declare
bankruptcy first and then wind up the company to raise needed funds to pay debts.
3. When the shareholders of a company can minimize their losses by selling the assets of a
business.

6.3 Combination Strategies Notes

A company can pursue a combination of two or more corporate strategies
simultaneously. But a combination strategy can be exceptionally risky if carried too far. No
organization can afford to pursue all the strategies that might benefit the firm. Difficult
decisions must be made. Priorities must be established. Organizations like individuals have
limited resources, so organizations must choose among alternative strategies.
In large diversified companies, a combination strategy is commonly employed when
different divisions pursue different strategies. Also, organizations struggling to survive may
employ a combination of several defensive strategies.

6.4 Internationalization
When the focus of a business is its domestic operations, but a portion of its activities
are outside the home country, it is called an "International Company". In other words, an
international company is one that is primarily based in a single country but that acquires
some meaningful share of its resources or revenues from other countries.
For example, a small company engaged in exporting some of its products beyond
its home country, is called "international" in its operations.

Internationalization involves creating an international division and exporting the

products through that division. The firm really focuses on the domestic market, and exports
what is demanded abroad. All control is retained at home office regarding product and
marketing strategies. As a firm becomes more successful abroad, it might set up
manufacturing and marketing facilities in the foreign country, and allow a certain degree of
customization. Country units are allowed to make some minor adaptations to products to
suit local needs. But they have far less independence and autonomy compared to multi-
domestic companies. All sources of core competencies are centralized.
The disadvantages of this strategy are:
1. By concentrating most of its activities in one location, it fails to take advantage of the
benefit of an optimally distributed value chain.
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2. It is susceptible to higher levels of currency risks, because the company is too closely
associated with a single country and increase in the value of currency may suddenly make
the product unattractive abroad.

Exporting
This means selling the products in other countries through an agent or a distributor.
This choice offers avenues for larger firms to begin their international expansion with a
minimum investment.
There are merits and demerits.
1. Less expensive
2. No need to set up manufacturing facilities abroad
Demerits
1. Not suitable for bulky, perishable or fragile goods
2. Import duties make the product expensive
3. High transportation costs
4. Cannot avail lower production costs in host country

6.5 Cooperation Strategies

Cooperative strategies such as strategic alliance and joint ventures are a logical and
timely response to intense and rapid changes in economic activity, technology and
globalization. Apart from alliances between the firms operating within the same country,
cross border alliances have also become increasingly popular these days. Alliances generally
come in three basic types’ joint ventures, strategic alliance, and consortia.
6.5.1 Joint Ventures
In a joint venture, two firms contribute equity to form a new venture, typically in the
host country to develop new products or build a manufacturing facility or set up a sales and
distribution network (Eg. Maruti Suzuki). The commonly cited advantages are:
1. Improvement of efficiency
2. Access to knowledge
3. Dealing with political risk factors
4. Collusions may restrict competition
Merits
1. Two partners bring complementary expertise to the new venture
2. Both parties share capital and risks.
3. Helps to meet host country regulations
Demerits
1. Two partners may fail to get along
2. The firm has to share profits with the partner
3. Host country culture may pose problems

6.5.2 Strategic Alliances

This is a collaborative partnership between two or more firms to pursue a common
goal. Each partner in an alliance brings knowledge or resources to the partnership. Such an
alliance is generally formed to access a critical capability not possessed in-house.
Example: Boeing and Airbus formed a strategic alliance to develop a bigger
aircraft. Merits and demerits are same as joint ventures, which are also a form of
strategic alliance.
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6.5.3 Consortia
Consortia are defined as large interlocking relationships, cross holdings and equity
stakes between businesses of an industry. There could be two forms of consortia:
1. Multipartner Consortia: These are multi-partner alliances intended to share an
underlying technology. One of the most important European based consortiums to date is
Air Bus Industries. Airbus brings together four European aerospace firms from Britain,
France, Germany and Spain.
2. Cross-holding Consortia: These include large Japanese Keiretsus (Sumitomo,
Mitsubishi, and Mitsui) and Korean Chaebols (Daewoo, LG, Hyundai, and Samsung). Two
important features of cross-holding consortia are building long-term focus and gaining
technological critical mass among affiliated member companies.

6.6 Restructuring: Restructuring is another means by which the corporate office can add
substantial value to a business. Here, the corporate office tries to find either poorly
performing business units with unrealized potential or businesses on the threshold of
significant, positive change. The parent intervenes, often selling off the whole or part of the
businesses, changing the management, reducing payroll and unnecessary expenses,
changing strategies, and infusing the business with new technologies, processes, reward
systems, and so forth. When the restructuring is complete, the company can either "sell
high" and capture the added value or keep the business in the corporate family and enjoy
the financial and competitive benefits of the enhanced performance.
For the restructuring strategy to work, the corporate office must have insights to
detect businesses competing in industries with a high potential for transformation.
Additionally, of course, they must have the requisite skills and resources to turn the
businesses around, even if they may be in new and unfamiliar industries. Restructuring can
involve changes in assets, capital structure or management.
1. Assets restructuring involves the sale of unproductive assets, or even whole lines of
businesses, that are peripheral. In some cases, it may even involve acquisitions that
strengthen the core businesses.
2. Capital restructuring involves changing the debt-equity mix or the mix between
different classes of debt or equity.
3. Management restructuring involves changes in the composition of top management
team, organizational structure, and reporting relationships. Tight financial control, rewards
based strictly on meeting performance goals, reduction in the number of middle-level
managers are common steps in management restructuring. In some cases, parental
restructuring may even result in changes in strategy as well as infusion of new technologies
and processes.
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Name ___________________Year & Section_______Date:______

Score:_____

ACTIVITY #1 Self – Assessment Fill in the blanks:

1. ________means the extent to which industry sales are dominated by only a few
firms.
2. Competitive positioning gives_________________advantage to the firms.
3. ___________are the tools used for meeting the goals and objectives as designed
by
the strategy.
4. A company focuses only the production of ladies shoes. This is an example
of_________.

Name ___________________Year & Section_______Date:______ Score:_____

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ACTIVITY #2 Review Questions: Answer each question

comprehensively. ( 5 points each)

1. Suppose you are the CEO of a cosmetic firm. Under what situations would you choose a
low-cost, differentiation, or speed-based strategy?
2. Illustrate how a firm can pursue both low-cost and differentiation strategies.
3. Identify requirements for business success at different stages of industry evolution.
4. Discuss the good business strategies in fragmented and global industries.
5. “Diversification is a double edged sword”. Comment
6. There are many risks in cost leadership strategy. What are they and how would it affect
you as a manager?
7. Under what condition(s) do you think would the cost leadership strategy work better?
8. In which situations do you think that the neither a low cost nor a differentiation
Strategy would be possible for an organization?
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Activity # 3 Reflections

Two (2) things I found interesting in Module 6. (Explain.)

1.

How can I maintain or improve my class rank in

this subject?
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
______________________________________

Module 7: Business Level Strategies and Strategy Implementation

This module deals with business level strategies and implementation. It identifies and
discusses the industry structure, generic strategies, business tactics, nature and barriers in
strategy implementation and the concept of resource allocation.
At the end of this module students will be able to:
1. Define industry structure and describe the positioning of firm
2. Discuss the generic strategies and identify the business tactics
3. Explain how strategies are activated
4. State the nature and barriers in strategy implementation
5. Discuss the model of strategy implementation
6. Describe the concept of resource allocation

Introduction
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Each business should have its own business strategy. A business strategy is basically
a competitive strategy and is concerned more with how a business competes successfully in
the chosen market.
The strategic decisions at business-level revolve around choice of products and
markets, meeting the needs of customers, protecting market share, gaining advantage over
competitors, exploiting or creating new opportunities and earning profit at the business unit
level. In short, a business strategy outlines the competitive posture of its operations in the
industry.
Business strategy is guided by the direction set by the corporate strategy. It takes
the cue from the priorities set by the corporate strategy. It translates the direction and
intent generated at the corporate level into objectives and strategies for individual business
units.
Example: A multi-business corporation like ITC assigns priorities in its corporate
strategy to its various businesses like cigarettes, vegetable oils, hotels, agro-based
products, financial services etc. The business strategies of these units are formulated in
accordance with those priorities. Business-level decisions also help bridge decisions at
the corporate level and functional levels.

7.1 Industry Structure

An industry is a collection of firms offering goods or services that are close
substitutes of each other. Alternatively, an industry consists of firms that directly compete
with each other. For the purpose of industry analysis, an industry can be defined rather
broadly (the beverage industry) or more precisely (the carbonated soft drink industry). How
one defines and circumscribes an industry depends on the kinds of analysis to be performed.
In “industry analysis”, it is generally better to define an industry as precisely as possible.

Example: In discussing companies like Coca-Cola and Pepsi, one would want to define
the boundaries of the “carbonated soft drink industry” rather than that of the “beverage
industry”.

The term “industry structure” refers to the number and size distribution of firms in an
industry. The number of firms in an industry may run into hundreds or thousands. The
existence of a large number of firms in an industry reduces opportunities for coordination
among firms in the industry. Thus, the level of competition in an industry rises with the
number of firms in the industry. The size distribution of firms in an industry is important
from the perspective of both business policy and public policy.
Industry structure consists of four elements:
(a) Concentration
(b) Economies of scale
(c) Product differentiation
(d) Barriers to entry.
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(a) Concentration: It means the extent to which industry sales are dominated by only a
few firms. In a highly concentrated industry, i.e. an industry whose sales are dominated by
a handful of firms, the intensity of competition declines over time. High concentration serves
as a barrier to entry into an industry, because it enables the firms to hold large market
shares to achieve significant economies of scale.
(b) Economies of Scale: This is an important determinant of competition in an industry.
Firms that enjoy economies of scale can charge lower prices than their competitors, because
of their savings in per unit cost of production. They also can create barriers to entry by
reducing their prices temporarily or permanently to deter new firms from entering the
industry.
(c) Product differentiation: Real perceived differentiation often intensifies competition
among existing firms.
(d) Barriers to entry: Barriers to entry are the obstacles that a firm must overcome to
enter an industry, and the competition from new entrants depends mostly on entry barriers.
These features determine the strength of the competitive forces operating in the industry.
Trends affecting industry structure are important considerations in strategy formulation.

7.1.2 Positioning of the Firm

When starting a new firm or launching new product, a prime strategic decision is to
identify the target audience. But even though a useful segment has been identified, this
does not in itself resolve the organization’s strategy. The competitive position within the
segment then needs to be explored, because only this will show how the organization will
compete within the segment. Competitive positioning is thus the choice of differential
advantage that the product or services will possess against its competitors.
Competitive positioning allows an organization to compete and survive in a market
place or in a segment of a market place. To develop positioning, it is useful to follow a two-
stage process-first identify the segment gaps, second identify positioning within segments.

7.1.3 Identification of Segment Gaps and their Competitive Positioning

Implications
From a strategy viewpoint, the most useful strategy analysis often emerges by
exploring where there are gaps in the segments of an industry. The starting point for such
work is to map out the current segmentation position and then place companies and their
products into the segments; it should then become clear where segments exist that are not
served or are poorly served by current products.

7.1.4 Identifying the Positioning within the Segment

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From a strategy perspective, some gaps may be more attractive than others. For
example, they may have limited competition or poorly supported products. In addition, some
gaps may possess a clear advantage in terms of competitive positioning. Others may not.
The process of developing positioning runs as follows:
1. Perceptual mapping: In-depth qualitative research on actual and prospective
customers on the way they make their decisions in the market place, e.g. strong versus
weak, cheap versus expensive, modern versus traditional.
2. Positioning: Brands or products are then placed on the map using the research
dimensions.
3. Options development: Take existing and new products and use their existing strengths
and weaknesses to devise possible new positions on the map.
4. Testing: First with simple statements with customers, then at a later stage in the
marketplace. It will be evident that this is essentially a process, involving experimentation
with actual and potential customers.

7.1.4. Generic Strategies

Generic strategies were first outlined in two books from Michael Porter of Harvard
Business School. These were “Competitive Strategy” in 1980 and “Competitive Advantage’’
in 1985. The second book contained a small modification of the concept. The original
version is explored here. Michael Porter made the bold claim that there are only three
fundamental strategies that any business can undertake. During the 1980s, they were
regarded as being at the forefront of strategic thinking. Arguably, they still have a
contribution to make in the new century in the development of strategic options.
Professor Porter argued that the three basic strategies open to any business are:
1. Cost leadership, 2. Differentiation, 3. Focus.

Each of these generic strategies has the potential to overcome the five forces of
competition and allow the firm to outperform rivals within the same industry. These are
called ‘generic’ because they can be used in a variety of situations, across diverse industries
at various stages of development.

Cost Leadership
Cost leadership is a strategy whereby a firm aims to deliver its product or service at
a price lower than that of its competitors. Overall cost leadership is achieved by the firm by
maintaining the lowest costs of production and distribution within an industry and offering
“no-frills” products. This strategy requires economies of scale in production and close
attention to efficiency and operating costs. The firm places a lot of emphasis on minimizing
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direct input and overhead costs, by offering no-frills products. Example: Deccan Airways and
Timex

A cost leadership strategy is likely to work better where the product is standardized,
competition is based mainly on price and consumers can switch easily between different
suppliers. However, a low cost base will not in itself bring competitive advantage. The
product must be perceived as comparable or acceptable by consumers. Firms pursuing this
strategy must be effective in engineering, purchasing, manufacturing, and physical
distribution. Marketing can be considered as less important, as the consumer is familiar with
the product attributes.

Focus Strategy
A focus strategy occurs when a firm focuses on a specific niche in the market place
and develops its competitive advantage by offering products especially developed for that
niche. It targets a specific consumer group (e.g. teenagers, babies, old people etc.) or a
specific geographic market (urban areas, rural areas etc.).
Risks in Competitive Strategies
No one competitive strategy is guaranteed for success. Some companies that have
successfully implemented one of Porters’ competitive strategies have found that they could
not sustain the strategy. Each of these generic strategies has its own risks.

7.1.5 Business Tactics

Tactics should work with a firm’s strategy and they are the set of requirements need
for the plan to take place. A tactic is a device used by the firm for meeting your goals set by
your strategy. Strategy and tactics should always be relative to one another because the
tactics are the set of actions needed to fulfill your strategy.
1. Tactics are the tools used to achieve goals.
2. Tactics include things like advertising and marketing.
3. Tactics are the steps taken to achieve goals.

Brand Management
One tactic that almost every firm employs is strategic brand management. Firms
must find a way to communicate their products and corporate philosophy to potential
customers. Over time, a business can establish a reputation that gives its brand name an
advantage over the lesser known competitors.
Brand management includes good advertising and public relations to present an
image of that is consistent with the mission and vision of the company. A company may also
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conduct research or poll the general public to learn about how it is perceived and what
changes are necessary.
Diversification and Specialization
Two different business strategies that deal with the scope of a company are
diversification and specialization. A business can diversify by simply expanding its products
and services, such as adding a new division, or through merging or acquiring another
business.
Specialization is the opposite of diversification. It refers to narrowing a business’s
products to focus on a more specific type of product. By focusing limited resources on a
smaller product line, a business may hope to improve the quality of its remaining products,
or simply divest itself of an unprofitable product.
Research and Development
Some firms use investments into research and development as a major tactic to get
ahead of competitors. This is particularly true in the manufacturing field, where new product
technologies can save money and produce products that will excite consumers. Smaller
businesses may lack the money or in-house talent to invest directly in research and
development, but for larger companies the ability to innovate can be the difference between
success and failure.
Risk Management
Managing risk is a tactic that every firm employs in its own way. The simple act of
founding a business is itself a risk, since market trends and customer behavior can be
difficult to predict. For an established business, managing risk means making good decisions
about where to invest funds and what types of products to focus on.

BCG Matrix: Most popular and the simplest matrix to describe a corporation’s portfolio of
businesses or products.
Display Matrices: Frameworks in which products or business units are displayed as a
series of investments from which top management expects a profitable return.
Market Growth Rate: The percentage of market growth, that is, the percentage by which
sales of a particular product or business unit have increased.
Portfolio strategy approach: A method of analyzing an organization’s mix of business in
terms of both individual and collective contributions to strategic goals.
Relative Market Share: The ratio of the market share of the concerned product or
business unit in the industry divided by the share of the market leader.
Strategic Choice: Selection of a strategy that will best meet the firm’s objectives.

7.2 Strategy Implementation

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Strategy implementation is the process of putting organization’s various strategies

into action by setting annual or short-term objectives, allocating resources, developing
programs, policies, structures, functional strategies etc. Even the best strategic plan will be
useless unless it is implemented properly. The strategy implementation is, therefore, the
most difficult element of the strategic management process. This is so because there has to
be a “fit” between the strategy and the organization.

Activating Strategies
There is no guarantee that a well- designed strategy is likely to be approved and
implemented automatically. The strategic leader must, therefore, defend the strategy from
every angle, communicate how the strategy when implemented would benefit the whole
organization and secure the wholehearted support of employees working at various levels.
To keep things on track, he can list out priorities, program implementation process, budgets,
etc. on paper so that nothing is left to chance.
While giving a concrete shape to the strategy, he should also take note of regulatory
mechanisms that govern business activity and see that everything is in order. Some of the
important things to be kept in order are:
1. Formation of a company: This must be in line with provisions of the Companies,
covering issues such as formation of a company, its registration, obtaining suitable licenses
before commencing operations, raising funds from various sources in accordance with the
law.

2. Operations of a company: The Company must compete in a fair way and earn the
profits through legally blessed routes only observing the (a) provisions of competition law;
(b) Import/export restrictions, (c) regulations (d) Patent, trademark, copyright , etc.
(e) Labor Laws (regarding employment of women, children, payment of wages,
providing welfare amenities, keeping healthy industrial relations etc.); (f) environmental
protection (The Environment Protection Act 1986), (g) pollution control requirements;
(h) consumer protection measures etc.

3. Winding up operations: Even when the company decides to get out of a

venture/business, the rules of the game need to be followed scrupulously (whether in
offering golden handshake to employees or asking all the employees to quit in one go).
After the institutionalization of strategy in the above manner, action plans could be
formulated.

7.3 Nature of Strategy Implementation

A successful strategy formulation does not guarantee successful strategy
implementation. It affects an organization from top to bottom; it affects all divisional and
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functional areas of business. It requires the right alignment between the strategy and
various activities, processes within the organization.
The complexities in the task of implementation arise from a number of organizational
adjustments that are required over an extended period of time and the need to match them
all to the strategy. Key people need to be added or reassigned, resources have to be
mobilized and allocated, functional strategies and policies are to be designed, organizational
structure may have to be changed, a strategy- supportive culture may have to be
developed, reward and incentive plans are to be revised and if necessary, restructuring, re-
engineering and redesigning becomes imperative.
Implementation moves responsibility from the corporate level to operational levels.
This shift in responsibility from strategists to divisional, functional and operational managers
may cause implementation problems especially when strategic decisions come as a surprise
to middle and lower-level managers. Therefore, strategic decisions must be communicated
and understood throughout the organization. It is also essential that divisional and
functional managers be involved as much as possible in strategy formulation activities and,
likewise strategists are involved in strategy implementation activities.

7.3.1 Barriers and Issues in Strategy Implementation

Management must keep in mind the following key issues that arise in implementing
strategy and how empowering systems might relate to such issues.
1. Time Horizon: Such systems have both long-term and short-term dimensions. For
example, rewards like productivity bonus should be based on quantitative measures of
performance related to the short-term. On the other hand, it is appropriate to link long-
term rewards with qualitative measures and a few relevant quantitative measures.
2. Risk Considerations: When risk-prone behavior is desired, qualitative measures of
performance may be more beneficial, for example, rewards like bonus or stock options.
This is because quantitative measures may lead to risk-averse behavior to avoid failure
rather than risk prone behavior to achieve results.
3. Bases of Individual Rewards: Reward systems should be linked to an individual’s
capability, effort and job satisfaction. If rewards are geared to only one aspect, it may have
a negative effect on performance in other aspects.
4. Bases of Group Rewards: An important issue in reward systems is whether to have
individual rewards or group rewards. Rewarding individuals for effort and performance may
be difficult unless the organizational structure permits individual performance to be isolated
from that of others.
Thus, for example, with respect to managerial contribution to corporate
performance, individual rewards may be beneficial and appropriate because individual’s
contribution is relatively independent of others. On the other hand, if individual’s
contributions are relatively interdependent, it would be appropriate to adopt schemes
based on group performance. Again, rewarding individuals may be necessary where
entrepreneurial or creative behaviors are sought to be encouraged. On the contrary, if
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greater co-operation and team work is sought to be rewarded, group reward schemes
would be more desirable.

5. Corporate and Strategic Business Unit (SBU) Perspectives: In multi-divisional

organizations, reward systems with a balanced approach towards corporate interests and
the interests of the Strategic Business Units (SBUs) should be designed, where business
units have greater autonomy and independence. Likewise, if the SBUs are not likely to
influence corporate performance, unit-based reward schemes would be more beneficial. But
in the case of directors and general managers, placed in the units, who have dual
responsibility of achieving unit as well as corporate objectives, due care must be taken to
design balanced empowering environment.

7.3.2 Model for Strategy Implementation

According to Steiner and Miner, “the implementation of policies and strategies is
concerned with the design and management of systems to achieve the best integration of
people, structures, processes and resources in reaching organizational purposes”.
Implementation of strategy therefore involves a number of interrelated decisions,
choices, and a broad range of activities. It requires an integration of people, structures,
processes etc.
Mc Kinsey’s 7-S model is good at capturing the importance of all these elements in
the implementation of strategy.

7-S Framework
This framework basically deals with organizational change. The main thrust of
change is not connected only with the organization’s strategy. It has to be understood by
the complex relationships that exist between strategy, structure, systems, style, staff,
skills and super-ordinate goals. These are called the 7-S of the organization.
The 7-S framework suggests that there are several factors that influence an
organization’s ability to change. The variables involved are interconnected so that altering
one element may well impact other connected elements. Hence, significant changes cannot
be achieved in any variable without making changes in all the variables.
There is no starting point or implied hierarchy in the shape of the diagram, so it is
not obvious which of the 7 factors would be the driving force in changing a particular
organization at a particular point of time. All the elements are equally important. The critical
variables of change could be different across organizations. They could
also be different in the same organization. Fundamentally, the framework makes the point
that effective strategy implementation is more than an individual subject, but is coupled with
skills, styles, structures, systems, staff and super-ordinate goals.
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1. Super-ordinate Goals: “Super-ordinate goals” mean the “goals of a higher order which
express the values, vision and mission that senior management brings to the organization”.
These can be considered as the fundamental ideas around which a business is built.
Hence, they represent the main values and aspirations of an organization. They are the
broad notions of future direction. They can be considered to be equivalent to “organizational
purposes”.
For example, the super-ordinate goal of IBM has been “customer service”, while
that of Hewlett- Packard was “innovative people at all levels in the organization”. When
properly articulated, super-ordinate goals can provide a strong basis for organization’s
stability in a rapidly changing environment by providing a basic meaning to people
working for the organization.

2. Structure: “Structure” means the organizational structure of the company. The design of
organizational structure is a critical task of top management. Organizational structure refers
to the relatively more durable organizational arrangements and relationships. It prescribes
the formal relationships among various positions and activities, communication channels,
roles to be performed by various members of an organization.
3. Systems: “Systems” mean the procedures that make the organization work. They
include the rules, regulations and procedures, both formal and informal, that complement
the organizational structure. Systems include production planning and control systems, cost
accounting procedures, capital budgeting systems, performance evaluation systems etc.
Often, changes in strategy require changes in systems.
4. Style: “Style” means the way the company conducts its business. Top managers in
organizations can use style to bring about change. Organizations differ from each other in
their “styles” of working. The style of an organization, according to the McKinsey framework,
becomes evident through the patterns of actions taken by the top management team over a
period of time. Thus, an important part of managing change is establishing and nurturing a
good ‘fit’ between culture and strategy.
5. Staff: “Staff” refers to the pool of people who need to be developed, challenged and
encouraged. It should be ensured that the staff has the potential to contribute to the
achievement of goals.
Three important aspects about staff are:
1. Selecting meritorious people for specific organizational positions.
2. Developing abilities and skills in them, to take up challenging assignments.
3. Motivating them to give their best to achieve strategic goals.

6. Skills: “Skills” are the most crucial attributes or capabilities of an organization. Skills in
the 7-S framework can be considered as an equivalent of “distinctive competencies”.
For example, Procter and Gamble is known for its marketing skills, TELCO for its
engineering skills, IBM for its customer service, SAS for its research and development
skills and Sony for its new product development skills. Skills are developed over a period
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of time and are a result of a number of factors. Hence, to implement a new strategy, it is
necessary to build new skills.

7. Strategy: “Strategy” is the long-term direction and scope of an organization. It is the

route that the company has chosen to achieve competitive success.
7.3.3 Alignment of the Framework
Successful implementation of strategy requires the right alignment of different
elements within the organization. The Mc Kinsey consultants call strategy, structure, and
systems as the “hard elements” of the organization and the other 4 Ss i.e. style, skills, staff
and super-ordinate goals as the “soft elements” of the organization. The hard elements are
more tangible and definite, and so they are often the ones that gain the greater attention,
however, the soft elements are equally important, even if they are less easy to measure,
assess and plan.
7.3.4Resource Allocation
Most strategies need resources to be allocated to them if they are to be implemented
successfully.
Resource allocation deals with the procurement and commitment of financial,
physical and human resources to strategic tasks for achievement of organizational
objectives. This involves the process of providing resources to particular business units,
divisions, functions etc for the purpose of implementing strategies. All organizations have at
least five types of resources:
1. Physical Resources
2. Financial Resources
3. Human Resources
4. Technological Resources
5. Intellectual Resources
These resources may already exist in the organization or may have to be acquired.
Resource allocation decisions are very critical in that they set the operative strategy for the
firm.
Resource allocation decisions about how much to invest in which areas of business
reinforce the strategy and commit the organization to the chosen strategy.

7.3.5 Importance of Resource Allocation

A company’s ability to acquire sufficient resources needed to support new strategic
initiatives and steer them to the appropriate organizational units has a major impact on the
strategy implementation process. Too little funding arising from constrained financial
resources or from sluggish management action slows progress and impedes the efforts of
organizational units to execute their part of the strategic plan effectively.
At the same time, too much funding wastes organizational resources and reduces
financial performance. Both these extremes emphasize the need for managers to be careful
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about resource allocation. Resource allocation becomes a critically important exercise when
there are major shifts from the past strategies in terms of product/market scope.
For example, if the firm’s strategy is expansion in one line, withdrawal from
another and stability in the rest of the products, then greater resources will have to flow
to the first and lesser to the second and the third. Similarly, if the strategy is to develop
competitive edge through product development, greater resources will have to be
committed to Research & Development.
Resource allocation is a powerful means of communicating the strategy in the
organization as it gives the signals to all concerned. It will demonstrate what strategy is
really in operation.
Resource allocation decisions should be taken judiciously because using a formula approach
(i.e. allocating funds as a percentage of sales or profits), may be inappropriate and
counterproductive. Care should be taken to see that the resources are not allocated or
withdrawn because of easy availability or paucity.
Example: Cutting down R&D budget in view of sudden fall of profitability should
be avoided as such expenditure may be most critical for developing future competitive
advantage. The resource allocation decisions are generally linked to the objectives. For
example, decision about dividend payment is linked to the ability of the company to
attract capital. How to distribute the expected profits among investors, employees and
the company’s own needs is an important resource allocation decision from the viewpoint
of long-term implications of the strategy.

7.3.6 Managing Resource Conflict

The common approach to resource allocation is through budgetary system. There
are however, many other tools, which can be used for this purpose. Some of the important
tools used for resource allocation are discussed below:
1. BCG Matrix - The BCG matrix, which is generally used for portfolio analysis, can also be
used as a guideline for resource allocation. The surplus resources from “cash cows” can be
reallocated to “stars” or “question marks”. In so far as businesses categorized as “dogs” are
concerned, with low growth and low market share, they may not need any thrust, and
resources can be gradually withdrawn from such businesses and invested in other promising
businesses.
The BCG matrix is a useful tool because it impresses upon a portfolio approach to
resource allocation. It helps in averting over-investment in any particular type of business
and underinvestment in promising businesses from the long-term perspective. Despite the
utility of the BCG matrix, however, it should be used with care and only as a guideline. It
does not provide a concrete measure for making a finer choice, particularly among the
businesses of the same nature.
2. PLC-based Budgeting- Resource allocation can also be linked to different stages of a
Product Life Cycle (PLC). A product in introductory and growth stages may require more
resources than a product in mature and decline stages.
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3. Zero-based Budgeting (ZBB)- The key differences between ZBB and traditional
budgeting is that ZBB requires managers to justify their budget requests in detail from the
scratch, without relying on the previous budget allocations. Therefore, instead of taking the
last year’s budget as the base for projecting the future allocations, ZBB forces the managers
to review the objectives and operations.

7.3.7 Criteria for Resource Allocation Process

In large, diversified companies, the corporate office plays a major role in allocating
resources among various strategies proposed by its operating units or divisions. In many
cases, product groups, business units or functional areas may bid for funds to support their
strategic proposals.

There are three criteria which can be used when allocating resources.
1. Contribution towards fulfillment of organizational objectives: At the center of the
organization, the resource allocation task is to steer resources away from areas that are
poor at delivering the organization’s objectives and towards those that are good at
delivering the organization’s objectives.
2. Support of key strategies: In many cases, the problem with resource allocation is that
the requests for funds usually exceed the funds normally available. Thus, there needs to be
some further selection mechanism beyond the delivery of the organization’s mission and
objectives. This second criterion relates to two aspects of resource analysis:
(a) Support of core competencies: Resources should develop and enhance core
competencies which, in turn, help achieve competitive advantage.
(b) Enhancement of value chain activities: Resources should assist particularly those
activities of the value chain which help the organization to achieve low cost or
differentiation and thereby enhance and sustain competitive advantage of the firm.
(c) Risk-acceptance level of the organization: Clearly, if the risk is higher, there is a
lower likelihood that the strategy will be successful. Some organizations will be more
comfortable with accepting higher levels of risk than others. So, the criterion in this
case needs to be considered in relation to the risk-acceptance level of the
organization.

7.3.8 Difficulties in Resource Allocation

The resource allocation process can sometimes become fairly complex, and may
even create several difficulties to the strategists. Some of the difficulties that can create
problems are:
1. Scarcity of Resources: Resources are hard to find. Even if finance is available, the cost
of capital could be a constraint. Non-availability of highly skilled people could be another
problem.
2. Restrictions on Generating Resources: Within organisations, the new units which
have greater potential for growth in the future, may not be able to generate resources in the
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short run. Allocation of resources on par with existing SBUs, divisions and departments
through the usual budgeting process, will put them at a disadvantage.
3. Bloated Demands: Unit managers may sometimes submit inflated or overstated
demands for funds to guard against any budget-cuts. This subverts the decision process.
4. Negative Attitude: Units, which do not get the desired allocations, may develop a
negative attitude towards the corporate managers. They may work at cross purposes, which
may obstruct the implementation of the intended strategy.
5. Budget Battles: The actual allocation of funds to any unit has a major effect on the
work environment of the unit and the career of the manager concerned. If a manager loses
the ‘budget battle’, his subordinates feel that the manager has failed them, and may not
cooperate with him.
6. Budgetary Process: The budgetary process itself can lead to problems if it is not tied to
the strategic plans of the firm. If top management fails to communicate the shifts in the
strategic plans and the lower levels are unaware of the shifts, any intended strategy is
unlikely to succeed.
7. New SBUs: The budgetary process is tied to the way units and divisions are arrange
organizationally. New SBUs can be at a disadvantage if they are unaware of the intricacies
of the budget procedures used in their organizations.
To avoid the above difficulties, strategists should pay maximum attention to resource
allocation, and ‘prioritize’ budgeting allocations in the initial stages taking overall objectives
into account.

References:
Books:
1. Adapted from Pearce JA and Robinson RB, Strategic Management, McGraw Hill,
NY, 2000.
2. W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy, Harvard Business
School
Press, 2005.
3. Wheelen Thomas L, David Hunger J, Krish Rangarajan, Concepts in Strategic
Management and Business Policy, New Delhi, Pearson Education, 2006.
Online links:
1. www.1000ventures.com/.../im_diversification_strategies
2. www.balancedscorecard.org/.../AbouttheBalancedScorecard
3. www.marketingteacher.com/.../lesson_generic_strategies.
4. www.netmba.com/strategy/turnaround

Name ___________________Year & Section_______Date:______ Score:_____

ACTIVITY #1 Self – Assessment- Fill in the blanks:

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1. ____________are the core values of the company that are evidenced in the
corporate
culture and the general work ethic.
2. ___________represents the competencies of the employees working for the
company.
3. Resource allocation deals with the ______________and _________ of financial,
physical and human resources to strategic tasks.
4. __________ budget specifies materials, labor overheads and other costs.
5. _____________ and ‘political’ considerations are inevitable in a typical
organization.
6. The common approach to resource allocation is through________________
system.
7. In BCG Matrix, the __________ represent low growth and low market share.
8. ___________budgeting system provides for transfer of funds from one unit to
another if a fall is expected in actual activity level in a particular unit.
9. ____________budgeting techniques can be used for long-term commitment of
resources.
10. The problem with resource allocation is that the requests for funds usually
____________ the funds normally available.

Name ___________________Year & Section_______Date:______ Score:_____

ACTIVITY #2 Review Questions: Answer each question

comprehensively. ( 5 points each)

1. Does a successful strategy formulation guarantee a successful implementation? Why/

why not?
2. “Strategic decisions to be communicated and understood throughout the organization”.
Elucidate.
3. Why is it said that using a formula approach in resource allocation may be
counter -productive. Discuss with reasons accompanied with examples.
4. “There has to be a “fit” between the strategy and the organization.” Substantiate
5. “Formulation and implementation are inextricably linked”. Discuss
6. Bring out the differences between formulation and implementation of strategy.
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7. Discuss the relevance of McKinsey’s 7-S model in modern business organizations.

8. Critically evaluate the McKinsey’s 7-S Model.
9. “Resource allocation is a powerful tool to communicate the strategies of the organization”.
Justify.

Activity # 3 Reflections

Two (2) things I found interesting in Module 3. ( Please support your answer.)

1.

How can I maintain or improve my class rank in

this subject?
_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
______________________________________

Module 8 - Strategic Evaluation and Control

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This module deals with the nature of strategic evaluation and control. It identifies
and discusses the concept of strategic control and operational control, the techniques for
strategic control management and identifies the role of organisational systems in evaluation
At the end of this module students will be able to:
1. State the nature of strategic evaluation and control
2. Discuss the concept of strategic control and operational control
3. Explain the techniques for strategic control
4. Identify the role of organisational systems in evaluation

Strategic evaluation and control is the final phase in the process of strategic
management. Its basic purpose is to ensure that the strategy is achieving the goals and
objectives set for the strategy. It compares performance with the desired results and
provides the feedback necessary for management to take corrective action.
According to Fred R. David, strategy evaluation includes three basic activities (1)
examining the underlying bases of a firm’s strategy, (2) comparing expected results with
actual results, and (3) taking corrective action to ensure that performance conforms to
plans. Sometime, the best formulated strategies become obsolete as a firm’s external and
internal environments change.
Managers should, therefore, identify important milestones and set strategic
thresholds to assist them in knowing the changes in the underlying assumptions of a
strategy and, if necessary alter the basic strategic direction. The evaluation process thus
works as an early warning system for the organisation.
Strategic evaluation generally operates at two levels – strategic and operational
level. At the strategic level, managers try to examine the consistency of strategy with
environment. At the operational level, the focus is on finding how a given strategy is
effectively pursued by the organisation. For this purpose, different control systems are used
both at strategic and operational levels.

8.1 Nature of Strategic Evaluation and Control

Strategic evaluation and control is defined as the process of determining the
effectiveness of a given strategy in achieving the organizational objectives and taking
corrective actions wherever
required.
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According to Pearce and Robinson, strategic control is concerned with tracking a

strategy
as it is being implemented, detecting problems or changes in its underlying premises, and
making necessary adjustments. In contrast to post-action control, strategic control seeks to
guide action on behalf of the strategies,. as they are taking place and when the end result is
still several years off .
Strategic control in an organization is similar to what the “steering control” is in a
ship. Steering keeps a ship, for instance, stable on its course. Similarly, strategic control
systems sense to what extent the strategies are successful in attaining goals and objectives,
and this information is fed to the decision-makers for taking corrective action in time.
Strategic managers can steer the
organization by instituting minor modifications or resort to more drastic changes such as
altering
the strategic direction altogether. Strategic control systems thus offer a framework for
tracking,
evaluating or reorienting the functioning of the firm’s strategy.

8.1.1 Types of General Control Systems

Basically, there are three types of general control systems:
1. Output control (i.e. control on actual performance results)
2. Behaviour control (i.e. control on activities that generate the performance)
3. Input control (i.e. control on resources that are used in performance)
Output Control
Output controls specify what is to be accomplished by focusing on the end result.
This control is done through setting objectives, targets or milestones for each division,
department, section and executives, and measuring actual performance. These controls are
appropriate when specific output measures haven’t been agreed on. Often rewards and
incentives are linked to performance goals. Example: Sales quotas, specific cost reduction
or profit targets, milestones or deadlines for completion of projects are examples of output
controls.
Behavior Control
Behavior controls specify how something is to be done. This control is done through
policies, rules, standard operating practices and orders from superiors. These controls are
the most
appropriate when performance results are hard to measure. Rules standardize the behavior
and make outcomes predictable. If employees follow rules, then actions are performed and
decisions handled the same way time and again. The result is predictability and accuracy,
which
is the aim of all control systems. The main mechanisms of behavior control are:
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1. Operating budgets, 2. Standard operating practices 3. Rules and procedures

Example: One example of an increasingly popular behavior control is the ISO Standards
Series on quality management and assurance developed by the International Standards
Association of Philippines. The ISO is a way of documenting a company’s quality operations,
and strictly complying with it. Many corporations worldwide view certification as assurance
that the firm sells quality products.

Input Control
Input controls specify the amount of resources, such as knowledge, skills, abilities, of
employees to be used in performance. These controls are most appropriate when output is
difficult to measures.
8.1.2 Basic Characteristics of Effective Evaluation and Control System
Effective strategy evaluation systems must meet several basic requirements. They must be:
1. Simple: Strategy evaluation must be simple, not too comprehensive and not too
restrictive.
Complex systems often confuse people and accomplish little. The test of an effective
evaluation system is its simplicity not its complexity.
2. Economical: Strategy evaluation activities must be economical. Too many controls can
do
more harm than good.
3. Meaningful: Strategy evaluation activities should be meaningful. They should specifically
relate to a firm’s objectives. They should provide managers with useful information about
tasks over which they have control and influence.
4. Timely: Strategy evaluation activities should provide timely information. For example,
when a firm has diversified into a new business by acquiring another firm, evaluative
information may be needed at frequent intervals. Time dimension of control must coincide
with the time span of the event being measured.
5. Truthful: Strategy evaluation should be designed to provide a true picture of what is
happening. Information should facilitate action and should be directed to those individuals
who need to take action based on it.
6. Selective: The control systems should focus on selective criteria like key important
factors
which are critical to performance. Insignificant deviations need not be focused.
7. Flexible: They must be flexible to take care of changing circumstances.
8. Suitable: Control systems should be suitable to the needs of the organization. They must
conform to the nature and needs of the job and area to be controlled.
9. Reasonable: Control standards must be reasonable. Frequent measurement and rapid
reporting may frustrate control.
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10. Objective: A control system would be effective only if it is unbiased and impersonal. It
should not be subjective and arbitrary. Otherwise, people may resent them.
11. Acceptable: Controls will not work unless they are acceptable to those who apply
them.
12. Foster Understanding and Trust: Control systems should not dominate decisions.
Rather
they should foster mutual understanding, trust and common sense. No department should
fail to cooperate with another in evaluating and control of strategies.
13. Fix Responsibility for Failure: An effective control system must fix responsibility for
failure. Detecting deviations would be meaningless unless one knows where they are
occurring and who is responsible for them. Control system should also pinpoint what
corrective actions are needed.
There is no ideal strategy evaluation and control system. The final design depends
on the unique characteristics of an organization’s size, management style, purpose,
problems and strengths.
8.2 Strategic Control
Strategic control is a type of “steering control”. We have to track the strategy as it is
being implemented, detect any problems or changes in the predictions made, and make
necessary adjustments. This is especially important because the implementation process
itself takes a long time before we can achieve the results. Strategic controls are, therefore,
necessary to steer the firm through these events.
8.2.1 Types of Strategic Control
There are four types of strategic controls:
1. Premise control
2. Strategic surveillance
3. Special alert control
4. Implementation control
Premise Control
Strategy is built around several assumptions or predictions, which are called planning
premises.
Premise control checks systematically and continuously whether the assumptions on
which the strategy is based are still valid. If a vital premise is no longer valid, the strategy
may have to be changed. The sooner these invalid assumptions are detected and rejected,
the better are the chances of changing the strategy. The premise control is concerned with
two types of factors:
1. Environmental factors 2. Industry factors
1. Environmental Factors: The performance of a firm is affected by changes in
environmental factors like the rate of inflation, change in technology, government
regulations, demographic and social changes etc. Although the firm has little or no control
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over environmental factors, these factors have considerable influence over the success of
the strategy because strategies are generally based on key assumptions about them.
Example: A firm may assume massive increase in demand, and embark on an expansion
plan. If suddenly there is recession and demand for the products of the firm fall down, it
may
have to change its strategic direction.

2. Industry Factors: Industry factors also affect the performance of a company.

Competitors, suppliers, buyers, substitutes, new entrants etc. are some of the
industry factors about which assumptions are made. If any of these assumptions go
wrong, strategy may have to be changed.
Strategic Surveillance
Strategic surveillance is a broad-based vigilance activity in all daily operations both
inside and outside the organization. With such vigilance, the events that are likely to
threaten the course of a firm’s strategy can be tracked. Business journals, trade
conferences, conversations, observations etc. are some of the information sources
for strategic surveillance.
Special Alert Control
Sudden, unexpected events can drastically alter the course of the firm’s
strategy. Such events trigger an immediate and intense reconsideration of the firm’s
strategy.
Example: The tragic events of September 11, 2001, created havoc in many US companies,
especially the airline and hotel industry. Sudden acquisition of a leading competitor or an unexpected
product difficulty (like defective tyres of Firestone) etc. may shatter a firm’s strategy and require a
rapid reconsideration of the strategy. Generally, firms develop contingency plans along with crisis
teams to respond to such sudden, unexpected events.

Implementation Control
Strategy implementation takes place as a series of steps, programs,
investments and moves that occur over an extended period of time. Resources are
allocated, essential people are put in place, special programs are undertaken and
functional areas initiate strategy related activities.
Implementation control is aimed at assessing whether the plans, programs
and policies are actually guiding the organization towards the predetermined
objectives or not. Implementation control assesses whether the overall strategy
should be changed in the light of the results of specific units and individuals involved
in implementation of the strategy. Two important methods to achieve
implementation control are:
1. Monitoring strategic thrusts 2. Milestone reviews
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1. Monitoring Strategic Thrusts: Strategic thrusts are small critical projects that
need to be done if the overall strategy is to be accomplished. They are critical
factors in the success of strategy.
One approach is to agree early in the planning process on which thrusts are
critical factors in the success of the strategy. Managers responsible for these -
implementation controls will single them out from other activities and observe them
frequently. Another approach is to use stop/go assessments that are- linked to a
series of these thresholds (time, costs, success etc.) associated with a particular
thrust.

2. Milestone Reviews: Milestones are critical events that should be reached during
strategy implementation. These milestones may be fixed on the basis of.
(a) Critical events
(b) Major resource allocations
(c) Time frames etc.

Strategic controls are, thus, designed to systematically and continuously

monitor the
implementation of the strategy over long periods to decide whether the strategic
direction
should be changed in the light of unfolding events. However, for post-action
evaluation and
control over short periods, the firm needs operational controls.
8.2.2 Approaches to Strategic Control Notes
According to Dess, Lumpkin and Taylor, there are two approaches to strategic
control.
Traditional Approach
Traditional approach to strategic control is sequential:
1. Strategies are formulated and top management sets goals
2. Strategies are implemented
3. Performance is measured against goals
4. Corrective measures are taken, if there are deviations.

Control is based on a feedback loop from performance measurement to

strategy formulation. This process typically involves lengthy time lags and often tied
to a firm’s annual planning cycle. This reactive measure is not sufficient to control a
strategy. As already explained, this is because a strategy takes a long period for
implementation and to produce results. The uncertain future requires continuous
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evaluation of the planning premises and strategy implementation. There is a better

contemporary approach for strategic control.
Contemporary Approach
Under this approach, adapting to and anticipating both internal and external
environment change is an integral part of strategic control. This approach addresses
the assumptions and premises that provide the foundation for the strategy. The key
question addressed here is: do the organization’s goals and strategies still fit within
the context of the current environment?
This involves two key actions:
1. Managers must continuously scan and monitor the external and internal
environment
2. Managers must continuously update and challenge the assumptions underlying
the
strategy.
This may even need changes in the strategic direction of the firm. While
strategic control requires the contemporary approach, operational control is
generally done through traditional approach.
8.3 Operational Control
Operational control provides post-action evaluation and control over short
periods.
They involve systematic evaluation of performance against predetermined
objectives.
To be effective, operational control systems, involve four steps common to all post-
action
controls:
1. Set standards of performance
2. Measure actual performance
3. Identify deviations from standards set
4. Initiate corrective action

8.3.1 Setting of Standards

The first step in the control process is setting of standards. Standards are the
targets against which the actual performance will be measured. They are broadly
classified into quantitative standards and qualitative standards.
Quantitative
These are expressed in physical or monetary terms in respect of production,
marketing, finance etc. They may relate to:
1. Time standards
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2. Cost standards
3. Productivity standards
4. Revenue standards

Qualitative
Qualitative criteria are also important in setting standards. Human factors
such as high absenteeism and turnover rates, poor production quality or low
employee satisfaction can be the underlying causes of declining performance. So,
qualitative standards also need to be established to measure performance.
8.3.2 Measurement of Performance Notes
The second step in operational control is the measurement of actual
performance. Here, the actual performance is measured against the standards fixed.
Standards of performance act as the benchmark against which the actual
performance is to be compared. It is important, however, to understand how the
measurement of performance actually takes place. Operationally measuring is done
through accounting, reporting and communication systems. A variety of evaluation
techniques are used for this purpose, which are explained in the next section. The
other important aspects of measurement relates to:
Difficulties in Measurement
There are several activities for which it is difficult to set standards and
measure performance.
Example: Performance of a worker in terms of units produced in a day, week or month
can easily be measured. On the other hand, it is not easy to measure the contribution of a
manager or to assess departmental performance. The solution lays in developing
verifiable
objectives, stated in quantitative and qualitative terms, against which performance can
be
measured.

Timing of Measurement
Timing refers to the point of time at which measurement should take place.
Delay in measurement or measuring before time can defeat the very purpose of
measurement. So measurement should take place at critical points in a task
schedule, which could be at the end of a definable activity or the conclusion of a
task.
Example: In a project implementation schedule, there could be several critical points at
which measurement would take place.

Periodicity in Measurement
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Another important issue in measurement is “how often to measure”,

Generally, financial statements like budgets, balance-sheets, and profit and loss
accounts are prepared every year. But there are certain reports like production
reports, sales reports etc. which are done on a daily, weekly, monthly basis.
8.3.3 Identifying Deviations
The third step in the control process is identifying deviations. The
measurement of actual performance and its comparison with standards of
performance determines the degree of deviation or variation between actual
performance and the standard. Broadly, the following three situations may arise:
1. The actual performance matches the standards
2. The actual performance exceeds the standards
3. The actual performance falls short of the standards

The first situation is ideal, but sometimes may not be realistic. Generally, a
range of tolerance limits within which the results may be accepted satisfactorily, are
fixed and deviations from it are considered as variance.
The second situation is an indication of superior performance. If exceeding
the standards is considered unusual, a check needs to be made to test the validity of
tests and the measurement system.
The third type of situation, which indicates shortfall in performance, should be
taken seriously and strategists need to pinpoint the areas where the performance is
below standard and go into the causes of deviation.
The analysis of variance is generally presented in a format called ‘variance
chart’ and submitted to the top management for their evaluation. After noting the
deviations, it is necessary to find the causes of deviation, which can be ascertained
through the following questions: (Thomas)
1. Is the cause of deviation internal or external?
2. Is the cause random or expected?
3. Is the deviation temporary or permanent?

Analysis of variance leads to a plan for corrective action.

8.3.4 Taking Corrective Action
The last and final step in the operational control process is taking corrective
action. Corrective action is initiated by the management to rectify the shortfall in
performance.
If the performance is consistently low, the strategists have to do an in depth analysis
and
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diagnosis to isolate the factors responsible for such low performance and take
appropriate
corrective actions.
There are three courses for corrective action:
1. Checking performance
2. Checking standards
3. Reformulating strategies, plans and objectives.

Checking Performance
Performance can be affected adversely by a number of factors such as
inadequate resource allocation, ineffective structure or systems, faulty programs,
policies, motivational schemes, inefficient leadership styles etc. Corrective actions
may therefore include the change in strategy, systems, structure, compensation
practices, training programs, redesign of jobs, replacement of personnel, re-
establishment of standards, budgets etc.
Checking Standards
When there is nothing significantly wrong with performance, then the
strategist has to check the standards. A manager should not mind revising the
standards when the standards set are unreasonably low or high level. Higher
standards breed discontentment and frustration. Low standards make employee
unproductive. So, standards check may result in lowering of standards if it is
concluded that organizational capabilities do not match the performance
requirements. It may also lead to elevation of standards if the conditions have
improved to allow better performance. For example, better equipment, improved
systems, upgraded skills etc. need modification in existing standards.

Reformulating Strategies, Plans and Objectives

A more radical and infrequent corrective action is to reformulate strategies,
plans and objectives. Strategic control, rather than operational control, generally
leads to changes in strategic direction, which will take the strategist back to the
process of strategy formulation and choice. Techniques like total quality
management (TQM) and ISO 9000 standards series are examples of very good
control mechanisms.
8.4 Techniques of Strategic Control
Organizations use many techniques or mechanisms for strategic control.
Some of the important mechanisms are:
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1. Management Information systems: Appropriate information systems act as

an effective control system. Management will come to know the latest performance
in key areas and take appropriate corrective measures.
2. Benchmarking: It is a comparative method where a firm finds the best practices
in an area and then attempts to bring its own performance in that area in line with
the best practice.
3. Balanced scorecard: It is a method based on the identification of four key
performance measures i.e. customer perspective, internal business perspective,
innovation and learning perspective, and the financial perspective. This method is a
balanced approach to performance measurement as a range of financial and non-
financial parameters are taken into account for evaluation.
4. Key factor rating: It is a method that takes into account the key factors in
several areas and then sets out to evaluate performance on the basis of these. This
is quite a comprehensive method as it takes a holistic view of the performance areas
in an organization.
5. Responsibility Centres: Control systems can be established to monitor specific
functions, projects or divisions. Responsibility centers are used to isolate a unit so
that it can be evaluated separately from the rest of the corporation. There are five
major types of
responsibility centers: Cost centers, Revenue centers, Expense centers, Profit
centers and
Investment centers. Each responsibility center has its own budget and is evaluated
on the
basis of its performance.
6. Network techniques: Network techniques such as Programme Evaluation and
Review
Technique (PERT), Critical Path Method (CPM), and their variants, are used
extensively
for the operational controls of scheduling and resource allocation in projects. When
network techniques are modified for use as a cost accounting system, they become
highly effective operational controls for project costs and performance.
7. Management by Objectives (MBO): It is a system proposed by Drucker,
which is based on a regular evaluation of performance against objectives which are
decided upon mutually by the superior and the subordinate. By the process of
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consultation, objective-setting leads to the establishment of a control system that

operates on the basis of commitment and self-control. Thus, the scope of MBO to be
used as an operational control is quite extensive.
8. Memorandum of Understanding: This is an agreement between a PSU and
the administrative ministry of the government in which both specify their respective
commitments and responsibilities. The system works as an effective control on the
performance of the PSU.
8.5 Role of Organizational Systems in Evaluation
There are six types of organizational system involved in evaluation.
Information System
Organizations evaluate by comparing actual performance with standards.
Purpose of information management system is to enable managers to keep the track
of performance through control reports. Whether strategic surveillance or financial
analysis, are based on information system to provide relevant & timely data to
managers to allow them to evaluate performance & strategy & initiate corrective
action
Control System
The control system is core of any evaluation process & is used for setting
standards, measuring performance, analyzing variances, & taking corrective action.
Appraisal System
This is the system that actually evaluates performance. When measuring the
performance of managers, it is contribution to the organizational objectives which is
sought to be measured. The evaluation process through appraisal system, measure
the actual performance and provides for the control system to work.

Motivation System
The primary role of the motivation system is to induce strategically desirable
behavior so that managers are encouraged to work towards the achievement of
organizational objectives. This system plays an important role in ensuring that
deviations of actual performance with standards. Performance checks, which are a
feedback in the evaluation process, are done through the motivation process.
Development System
The development system prepares the managers for performing strategic &
operational tasks. Among the several aims of development, the most important is to
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match a person with the job to be performed. This in other words is matching actual
performance with standards. This matching can be done provided it is known what a
manager is required to do and what is deficient in terms of knowledge, skills &
attitude. Such a deficiency is located through the appraisal system. The role of
development system in evaluation is to help the strategists to initiate & implement
corrective action.
Planning System
The evaluation process also provides feedback to planning systems for the
reformulation of strategies, plans & objectives. Thus planning system closely
interacts with the evaluation process on a continual basis.

RFERENCES
Books
1. Fed R David, Strategic Management, New Jersey, Prentice Hall, 1997.
2. Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic Management – Creating
Competitive Advantage, McGraw-Hill, NY, 2003.
3. Pearce JA and Robinson RB, Strategic Management, McGraw Hill, NY, 2000.
4. Vipin Gupta, Kamala Gollakota and R. Srinivasan, Business Policy and Strategic
Management,, 2005.
5. Wheelen Thomas L, David Hunger J, Krish Rangaraja, Concepts in Strategic
6. Management and Business Policy, Pearson Education, 2006.
7. C Appa Rao, B Paravathiswara Rao and K Sivaramakrishna. 2011
Produced & Printed by EXCEL BOOKS PRIVATE LIMITED
Online links
1. www.strategicevaluation.info/se/documents/104f.html
2. www.oldham.gov.uk/strategic_evaluation
3. ec.europa.eu/regional_policy/sources/.../evaluation/pdf/strategic
4. www.aegis-marketing.com/StrategicEval

Name ______________________________Year & Section_______Date:______ Score:_____

ACTIVITY #1 Self – Assessment:

Fill in the blanks- Write your answer on the space provided.

1. ____________________control focuses on finding how a given strategy is effectively

pursued
by the organization.
2. _____________control is concerned with tracking a strategy as it is being implemented.
3. _______________control is done through policies, rules, standard operating practices
and orders from superiors.
4. Assumptions or predictions around which a strategy is built are referred to
as_____________.
5. PERT and CPM are techniques of_________________control.
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6. Control is based on a _________from performance measurement to strategy formulation.

7. The analysis of variance in performance is generally presented in a format called
_____________________.

Name ___________________Year & Section_______Date:______ Score:_____

ACTIVITY #2 Review Questions: Answer each question

comprehensively. ( 5 points each).

1. Comment on the nature of strategic control and evaluation.

2. According to you, what should be the criteria for an effective evaluation system?
3. In evaluating a strategy, it is important to examine whether an organization has
the
abilities, competencies, skills and talents needed to carry out a given strategy. Why?
4. If you were a strategist making evaluation, what would you do if you find
something
wrong though nothing is wrong with the performance?
5. Suggest some corrective actions that you would undertake if the performance is
being
affected adversely by inadequate resource allocation and ineffective systems.
6. How would you check whether a strategy can be implemented within the
resources of an
enterprise?
7. “Strategic control is a type of steering control”. Discuss
8. Discuss the general approaches to strategic control.
9. Discuss the steps in implementing effective operational control system.
10. Analyse the role of organisational systems in evaluation.
 Republic of the Philippines
GUIMARAS STATE COLLEGE
Mc Lain, Buenavista, Guimaras

Activity # 3 Reflections

Two (2) things I found interesting in Module 8. (Explain.)

1.

How can I maintain or improve my class rank in

this subject?
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